Baker Hughes-GE talks come after difficult time for both companies

Fri Oct 28, 2016 4:31pm EDT
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By Jessica Resnick-Ault

NEW YORK (Reuters) - Industrial giant General Electric Co and oilfield services company Baker Hughes, both beset by difficulties during oil's two-year price rout, may have a clear path out of the doldrums: join forces.

GE (GE.N: Quote) said Thursday it was in discussions with Baker Hughes Inc (BHI.N: Quote) but not to acquire the company outright. Baker Hughes said Friday talks were ongoing. Both companies declined to comment on the talks beyond official statements.

GE's oil and gas division has fought to get the scale the conglomerate enjoys in other industries. Despite efforts to grow through a series of acquisitions, the division has faced weaker revenues during oil's downturn than other units of GE. Organic growth in oil and gas has lagged other sectors.

Baker Hughes had its own growth difficulties, spending a year and a half stuck in limbo amid a $28-billion merger with Halliburton that was ultimately scrapped after opposition from antitrust regulators.

Following the termination of the Halliburton merger, Baker Hughes CEO Martin Craighead has said the company is well positioned to focus on developing products that lower costs and maximize production for operators in the oil and gas industry.

Baker Hughes shares gained 8.4 percent Friday to $59.12, valuing the company at about $25 billion.

With oil prices rebounding to $50 a barrel, M&A activity could tick up as investors see the two-year rout in crude ending. A partnership with Baker Hughes could allow GE's oil and gas division to transform itself into a larger player in the sector to better compete with oilfield services leader Schlumberger Inc (SLB.N: Quote), and could give Baker Hughes a chance to redefine itself following the failed merger.

“If there’s a time to double down on the sector, now is the time given the prices we’ve seen,” said Jonathan Garrett, principal analyst for U.S. upstream research at Wood Mackenzie. The partnership would be formed at a time GE has been shrinking its capital markets division and is returning to its industrial roots, he said.   Continued...

Idle oil equipment is seen in a Baker Hughes yard in Williston, North Dakota April 30, 2016. Picture taken April 30, 2016.  REUTERS/Andrew Cullen