It wasn’t the dusty old oilfield machinery that drew General Electric Co. to make its play for Baker Hughes Inc. It was the chance to digitize.
As today’s oil patch is increasingly stocked with underwater robots, remote sensors and electronic underground pumps that help lift crude in sagging wells, the world’s biggest oil service companies are turning to partnerships that will give them an edge in the technology arms race.
To survive a world of lower oil prices for a longer period of time, explorers are looking to use technology to better map where the oil is underground and to then get more crude with fewer wells. A major transformation is underway as companies look to digitalization to harness mountains of data coming from the wells and the rigs in the field, James West, an analyst at Evercore ISI said.
"It has always been our belief that the oil and gas industry would be an early adopter of analytics," GE Chief Executive Officer Jeffrey Immelt told analysts and investors Monday on a conference call. "It was this notion that the industry was going to become more technically sophisticated as time went on. Customers were going to demand broader solutions. That’s what we’ve been betting on all along."
In partnering with Baker Hughes, GE gets access to a company that was in the process of slimming itself down and promoting more technology as a necessity to cut drilling costs and make explorers more efficient at sucking crude from a mile underground. GE itself was transforming into more of a startup culture and recently moved to Boston to help boost its technology offerings.
One of GE’s goals is to disseminate the use of its Predix platform in the oil world. The system, which uses the concept of Internet of Things to optimize large-scale industrial operations, can help drillers interconnect everything from offshore wellhead sensors to warehouse inventories to back-office spreadsheets.
The digital transformation comes as customers slashed spending by an unprecedented amount over the past two years to survive the worst crude-market crash in a generation. Oil service and equipment companies were the hardest hit, contributing the largest chunk of the more than 350,000 jobs slashed globally.
"The GE-BHI tie up supports our thesis that the future of the oilfield will be driven by optimization of drilling, completions and production through vertical integration, digitalization and unlocking the power of Big Data," West wrote Monday in a note.
GE wasted no time in going after what it wanted. On May 1, the same day that Baker Hughes aborted a deal to be acquired by Halliburton Co., Lorenzo Simonelli, the head of GE’s oil and gas business, e-mailed Baker Hughes CEO Martin Craighead.
He introduced Craighead to Predix, discussed the complementary nature of the two companies and the concept of the GE Store, which uses technologies from all the other industries under the GE umbrella, Simonelli said in a phone interview.
"Customers have been looking for productivity and after the failure of Halliburton-Baker Hughes, I took the opportunity to reach out to Martin and really start to look at ways in which we could collaborate to provide the customers what they were asking for, which was productivity and a lower cost per barrel," Simonelli said.
With the deal, Baker Hughes will become the world’s second-largest oil services provider, surpassing Halliburton and making it stronger to compete with the industry’s No. 1, Schlumberger Ltd.
Schlumberger itself has strengthened its lead by buying equipment maker Cameron International Corp., while oilfield manufacturers FMC Technologies Inc. and Technip SA are merging. Various other partnerships developed, including equipment provider National Oilwell Varco Inc.’s commercial pact with GE for large, floating production equipment.
The GE-Baker Hughes deal could accelerate bids by Halliburton and National Oilwell Varco for their own deals, Thomas Curran, analyst at FBR & Co., wrote Monday in a note to investors. Yet, Weatherford International Plc, the Baar, Switzerland-based oil services provider, "strikes us as the odd man out, as GE was likely the only potential strategic suitor that could’ve absorbed the company’s leverage," Curran wrote.
The race to partner up during the downturn has helped service companies wring out costs and integrate technologies across a broader spectrum, Rob Desai, an analyst at Edward Jones & Co. in St. Louis, said in a phone interview.
"Before, a lot of things were more analog and manual," Desai said. "Whereas now, if the data can talk between the different stages of drilling production, there’s obvious efficiencies there for the customer. Having all that in-house allows them to maybe charge more or to have a sticky relationship with their customers."