Creating a Fullstream Company: How BHGE Offers Value for E&P

For the past year, the energy world has eagerly followed a historic event in the oil and gas industry involving the first coalescence of all three oil and gas sectors (upstream, midstream and downstream) under one services industry roof.

On July 3, 2017, GE Oil and Gas combined with Baker Hughes, a GE company, to create a new entity: BHGE. By merging the downstream operations held by GE with the upstream and midstream operations already handled by Baker Hughes, BHGE officially became the world’s first and only fullstream company.

Oil and Gas: A Difficult Industry to Service

The oil industry has always been complex. For as long as there has been an industry in the U.S. and abroad, there have typically been three distinct sectors of production. Upstream, midstream, and downstream are categorized separately specifically because each sector has different needs which cannot easily be satisfied using all of the same types of techniques, equipment, or technologies. One certainly has no need of drill bits in the downstream, while there you aren’t likely to find refining capabilities occurring in the upstream (at least not yet—we won’t count out the advancement of E&P technology).

With but a few exceptions, companies that operate in these sectors, whether in oil and gas production or in oil industry services, typically specialize their operations in one, or at most two, sectors. Additionally, across those three sectors, companies have vied to out-produce and out-innovate each other, all while keeping an eye on the sometimes dramatic market shifts in oil and gas.

But behind all of it, oil and gas producers have relied heavily on service providers to offer support. Everything from seismic testing of untapped shale plays to storing and refining raw materials, the oil and gas services industry has quietly ensured that those who take on the challenge to produce America’s primary energy sources can do so effectively and as inexpensively as possible.

Even as the oil and gas producers had to tighten their belts for the past several years, leading to massive layoffs and significant slow-downs in productivity, oil and gas services took even larger hits to their operations while still trying to effectively provide support for the industry.

Of the 450,000 workers laid off across the oil industry in the past decade, the services industry took the brunt of the damage. According to Rystad Energy, 300,000 oil and gas services workers were laid off between 2014-2016.

These are, of course, among the many risks involved with working in a massive and multiplex commodity-based industry. The smaller and more niche a services company is, the harder it is for that company to survive in a down market. Across the industry, most services companies do indeed specialize to the extent that disruptions can be costly. A select few have managed to branch out their operations across multiple sectors and weather the various storms in the market that have heavily impacted other companies.

Halliburton and Schlumberger, for example, notably offer extensive services for upstream and downstream operations, but companies of their size and caliber are tremendously difficult to create and manage. Unlike smaller services companies, larger, integrated services companies are likely to have the resources on hand to survive when a down market does occur.

When the market goes up, so does the number of companies offering services. According to an analysis by Deloitte, the midstream, in particular, is set to explode as demand for transportation infrastructure skyrockets. Additionally, data from the U.S. Energy Information Administration reveals that natural gas flaring, or burning off excess gas which cannot be sold to market due to a lack of infrastructure to handle it, dropped down to 10 percent in 2016 after reaching above 35 percent in 2014, highlighting the fact that there was a noticeable delay in how long the services industry can take to catch up to the production side of the industry, especially immediately following a down market when resources are tight.

This is just one example of the difficulties both E&P and the services industry currently face. It takes some time for the services industry to recover from a down market after severe layoffs and the rolling back on services and infrastructure projects. By the time companies have recovered, including new companies rising to take the place of those that shut down in the interim, the market may again shift back down again.

How a Fullstream Company May Reap Benefits in the Market

For decades, different companies have developed specialized processes for each level of production. Among the three, we usually hear the most about the production activity in the upstream. Upstream operations are certainly no more or less important than the other two sectors. However, upstream has always been the biggest hotbed for technological innovations and changes in the industry, mostly by necessity. The sector also garners the most fascination from those outside of the oil and gas industry, from the iconic 1960s TV show, The Beverly Hillbillies, to the cult classic 2007 film, There Will be Blood.

Baker Hughes has a long and successful history as an upstream company. In the early 1900s, the company was founded as a tools manufacturer, with one of its key founders, Howard R. Hughes, Sr., holding the patent to the first rolling cutter drill bit to find success in the market. Over the years, Baker Hughes has grown in size and specialization, as it moved from an upstream company to an integrated oil and gas company offering services in both the upstream and midstream sectors.

Part of what made BHGE possible, however, is the fact that upstream operations inevitably blend directly into the midstream and downstream sectors. What’s more, these sectors must merge together as seamlessly as possible to avoid major interruptions in service and quality, forcing sometimes disparate corporations from across the globe to work together to provide services effectively.

For that reason, E&P companies are more likely to seek out integrated oil and gas services that operate in multiple sectors, as integrated services allow for a far more seamless transition between getting product out of the ground to getting it into the market for consumers.

Baker Hughes in the Midstream

While often overlooked in importance, midstream operations are the backbone of the industry as a whole and in many ways is undeniably important to the U.S. and international economies. Oil transportation may be regularly ignored or misunderstood, but it is also usually more likely to be maligned once something goes wrong (such as a pipeline or tanker oil spills). Still, the midstream is a sector experiencing a shocking level of growth right alongside the upstream thanks in no small part to the development of shale drilling and exploration operations in the Bakken, Eagle Ford, Haynesville and Marcellus shale plays.

Midstream is also an area where Baker Hughes acquired specialization. Over the years, the company has offered midstream applications through pipelines, transportation, gas plants, terminals and technologies necessary for effective midstream operations.

As a sector, the midstream has seen rapid growth in the past two decades. The U.S. oil pipeline infrastructure is larger than ever, and new, durable pipeline materials have resulted in safer transportation of oil over land.

Transportation by oil tank trucks also continues to be a necessary function in the American economy in the midstream. A surge in fracking activity and the continued importance of oil tank trucks is also playing a large part in the high demand for trucking jobs, which as an industry, is facing a shortage of around 200,000 workers.

An Eye on the Downstream

In the apex that is the downstream sector, companies have learned how to effectively and efficiently refine their core products (petroleum, natural gas), making them ready and usable. New technologies have allowed downstream companies to become ever more adept at squeezing more functional product from the refining process, while also utilizing fewer resources and making a significantly smaller environmental impact. Across all three sectors, an increase in oil production has led to the first new refinery in the U.S. in 40 years moving rapidly through the planning and permitting phases.

It’s in the downstream where GE sought to build a unique, tech-centered business, focused around supplying much-needed equipment and services. When GE launched Downstream Technology Solutions in 2014, then President and CEO of GE Oil and Gas, Lorenzo Simonelli, stated in a press release, “By launching our new Downstream Technology Solutions business, GE can help our customers optimize their operations and accelerate their own growth in this opportunity-filled sector.”

In joining GE’s downstream with Baker Hughes’ expertise in the upstream and midstream services, BHGE effectively promises a fullstream approach that is built upon the joint experience and success of the two companies.

BHGE’s Fullstream May Help Weather Unpredictable Markets

However, BHGE stands to transform how quickly services industries can step in when markets become chaotic, or even during longer sustained periods with oil and gas selling at below $50 a barrel.

As a fullstream oil industry services provider, BHGE can extend its operative arm across the entire sector, providing a streamline for E&P from upstream to downstream. For BHGE, this may mean a more sustainable model in any market, and for E&P, it could mean important cost savings that can help ensure the best prices without the hassle or worry of an important services provider going out of business during key moments in down markets.

According to the Haynes and Boone Oilfield Services Bankruptcy Tracker, over 160 oil services companies went under between 2015-2018, holding an aggregate $55.5 billion in secured and unsecured debts. The Haynes and Boone tracker also indicates that the number of bankruptcies in the services industry are growing significantly. In 2015, there were almost no oil industry services going under. Secured and unsecured debts were at near zero at that time as well.

As such, BHGE and its newly-crafted fullstream operation are well-time in the market. The company stands poised to offer the technology and streamlined approach necessary for increasing and sustained operations in the oilfield to maximize the potential of their drilling and production and get their oil to the market.

Among the many benefits BHGE promises from their fullstream operation, the company believes they will:

  • Create new sources of value for E&P
  • Improve productivity and reduce costs through integrated equipment and services
  • Significantly reduce downtime through integrated digital and physical operations
  • Simultaneously reduce risks and increase productivity
  • Utilize technology and a store of knowledge and experience to innovate and bring new solutions to market faster

According to its 2017 press release announcing the finalization of the joint operation, Simonelli, now President and CEO of Baker Hughes, a GE company, stated, “We created BHGE because oil and gas customers need to withstand volatility, work smarter and bring energy to more people.” The CEO of GE, Jeffrey Immelt, added that the new company will be able to help customers “be more productive in any cycle.”

Current trends in the oil market may be pointing toward a period of stability not seen in the past decade. However, oil and gas producers learned a hard lesson in the past decade. There is no free lunch, and it’s impossible to effectively rely on oil sustaining high prices and high demand in the long term.

Even still, production declines do not mean an end to the necessity for services and infrastructure. Indeed, it may point even more toward the demand for innovative approaches, something that a fullstream company may be able to provide in a way unseen before in the industry.

A Baker Hughes without GE?

As of June of this year, GE is officially looking to divest itself of various business units in order to more streamline its operations. The company is not only looking to spin off its healthcare wing, but is hoping to completely shed itself of Baker Hughes. According to several reports, GE wants to sell its stake in Baker Hughes, of which the conglomerate owns a two-thirds share.

This is not the first time GE has considered selling its stake in Baker Hughes. However, it is the first time GE has confirmed its intentions to sell. Earlier this year, GE denied claims that it planned to sell its share Baker Hughes. At a Barclays conference in February, GE’s CFO, Jamie Miller, stated, “At this point in time, we have no intent to change anything or execute prior to the expiration of any of the lockup periods.”

What GE’s divestiture of its stake in Baker Hughes would mean for BHGE is still unclear. Given GE already rolled its oil and gas services arm into the new BHGE company, it appears GE may be trying to completely sell off its entire fullstream operation to potential buyers.

Permian Midstream