Business Case & Summary

Asked by industry analysts : What about a GE acquisition of Weatherford?

It's more than a year since GE entry into the oil & gas production artificial lift sector (reference footnote link). GE paid a premium to purchase a third place market share laggard in the oil & gas production EOR artificial lift electric submersible pump esp market segment, with much publicized expectations for real change. To date, the industry awaits signs of significant technological gains and measurable customer service improvements over their competition given assumed GE enterprise synergies. Market perception risks turning stale. How to overcome?

Note that GE is presenting this business as 'GE Artificial Lift' -across a broader product and services portfolio than just their current holding of esps. What else related to artificial lift does GE currently offer? Answer is not.

One justification that General Electric gave for its $2.8 billion acquisition deal in 2011 was that it would provide an 'entry' into the enhanced oil recovery (EOR) services business. Read more, (#1), (#2).

The current management team at GE ESP are experienced esp veterans. But does GE expect this esp-centric group to understand and grow the artificial lift business organically into gas lift, rod pumps, and other forms of reservoir-centric EOR in the midst of quick technological & service package advances being made by their competitors across the sector?

Action and achievements at a quickened pace are what it'll take to make step-change advances. For example, any move forward in market share rankings and the types of business advantages achieved (efficiencies, innovation, distribution, geo-market enterprise leverage of vertical business porfolios) will require a paradigm shift in thinking. The good old 'same ole / same ole' isn't going to work anymore. Investors and GE culture expect more. In with the new. So how's it going to be done?

Another input is the growing competitiveness and new entries in the arena. Halliburton's acquisition into the esp market sector 4Q2011 means another horse in the race to broaden their own artificial lift scope and leverage HAL enterprise capabilities. Seems GE isn't the only one with deep pockets and big boxing gloves on- what did they expect?

Welch and Immelt

Question for GE management. How would Jack Welch have lead growth and market share repositioning? To help answer the question, let's go down recent memory lane and recap from Jack's legacy - still embedded in GE culture via Immelt and underlings:

     Bullet train : GE's approach to change. You can increase the speed of the bullet train somewhat by making modifications. But if you want it to go faster you need to make radical changes to the design of the train and the system on which it runs.

     More familiar GE mantras,:
     • "We manage markets, not factories".

     • "You're either the best at what you do, or you don't do it very long"

     • "Don't play with businesses that can't win. Businesses that are number 3, number 5 in their markets - Christ couldn't fix those businesses. They're going to lose anyway."


Thus, a likely answer in this specific AL scenario, - either exit or acquire. And so a good case can be made that the race would be on to acquire. Granted that the pros at GE corporate know the merger & acquisition M&A playbook and how to execute. No sandbagging there.

Weatherford EOR obviously would provide a quick means to add mass and broaden the product line offerings across a wide AL portfolio - besides just esps. Offerings like gas lift and rod pumps would strengthen distribution offerings together with the management breadth that comes with the package. And it would instantly propel artificial lift market share in the upward direction. Couple it together like icing on the cake with GE's method to add value through continual improvement via Six Sigma processes. That's always a good storyline to tell investors.

On the other hand, perhaps Weatherford may be a likely suitor for a GE exit from the rut of essentially just an esp offering. Take another look at Weatherford's entire EOR package (top 4 columns, click here). In terms of EOR portfolios, today's GE isn't even in the top three. Mistakes do happen when investing. And GE wouldn't be the first multi-national to enter a business segment, followed by an early exit. But at what price?

History provides that GE and Weatherford have successfully invested and partnered up inside oil & gas production and just outside of artificial lift, example - click here.

Seems like a good fit, either way. Heads up - don't expect Halliburton to sit idly by.




Disclosure: the author did not hold personal equity investments in GE, HAL or WFT at the time of writing or publication.

Footnotes
www.esplift.com/GE_ESP

2011 acquisition GE ESP


click to enlarge - WFT equity and rolling earnings per share 1997-2012

ge


Next quarter's industry business case review & commentary- SLB Artificial Lift and the Russian/ Caspian region.




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