Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Baker Hughes, having slipped through Halliburton's fingers, has landed in the arms of General Electric. One company would have preferred the first marriage to go through: Weatherford International Plc.

Two years ago, when Halliburton Co. announced its intentions for Baker Hughes Inc., Weatherford was viewed as a potential side beneficiary. Two things were supposed to happen. First, it was pretty clear Halliburton and Baker Hughes would be forced to divest assets to appease competition regulators. Second, their combination would have taken the oilfield services industry's big three -- including Schlumberger Ltd. -- to a big two.

So, the thinking went, Weatherford could pick up some new business lines dropped from Halliburton-Baker and then use them to service E&P clients, who would be throwing the company more business anyway just to preserve competitive pressure in contract bids.

As it turned out, of course, those competition regulators just weren't into the whole Halliburton-Baker thing at all. So now, six months after that deal collapsed, General Electric Co. is merging its oilfield services division with Baker Hughes.

Weatherford has much less reason to cheer this one.

There likely won't be much in the way of choice morsels falling out of this new deal. GE and Baker Hughes only really overlap in the area of artificial lift -- squeezing more oil to the surface -- and even with that their product lines use different technologies. Monday morning's call had a notable lack of questions about potential antitrust issues, in marked contrast to the Halliburton call in November 2014.

Jilted
Intraday times are displayed in ET.

Moreover, while any deal in the sector does of course reduce competition, GE wasn't considered a top-tier player anyway. So merging its assets with one of the big three leaves the oilfield services industry with a big three.

It's just that one of those big three is now bigger, surpassing Halliburton in size and, at least in terms of scope, becoming a more credible rival to Schlumberger.

Far from offering Weatherford a chance to move up the ranks, this deal merely pushes it further behind.

One of the rationales for Monday's deal is that, if oil prices are going to stay lower for longer, then services firms need to both cut costs and offer a more integrated approach to bidding on and delivering projects for cash-constrained E&P companies. This thinking underlies other recent deals, such as Schlumberger's acquisition of Cameron International Corp. and Technip SA's merger with FMC Technologies Inc.

GE aims to cut $1.2 billion from the combined cost base of the new Baker Hughes. And besides pairing up its various business lines with Baker's, GE wants to overlay other technologies such as its industrial internet platform Predix and power-management systems. It is factoring in a gloomy oil-price outlook of just $45 to $60 a barrel over the next few years.

Weatherford can hope that, as so often happens with M&A, the integration of two big companies with their own well-established cultures will not go quite as smoothly as planned.

But this is small comfort, especially as Weatherford's capacity to capitalize on any fumbles has weakened considerably in the past two years. Third-quarter results, released last week, missed expectations spectacularly, both in terms of earnings and free cash flow. The latter is especially important as Weatherford's leverage has jumped during the downturn (in marked contrast to Baker Hughes):

Stormy Weather
Weatherford's net debt to capital has increased by 24 percentage points in the past 2 years
Source: Bloomberg
Note: Net debt divided by (net debt plus shareholder equity).

This leaves Weatherford's equity story relying ever more on a cyclical upswing in oil prices. This would not only raise investors' spirits in general -- benefiting highly leveraged stocks first -- but also give a direct boost to Weatherford's North American business. This in turn would give the company the cash flow and better financing options needed to reduce leverage as quickly as possible.

For that to happen, though, Weatherford has to hope GE and Baker Hughes -- along with bigger voices in the industry -- are wrong in thinking oil's recovery will be shallow and uncertain in the next few years. Watching its peers pair up to cope with that harsher environment can hardly bolster Weatherford's confidence.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net