Newsletters

GE and Baker-Hughes Announce Merger

In what is a bit of a surprise, GE and Baker Hughes announced an unprecedented merger. The deal structure alone is creative and unique. Unlike a traditional merger or acquisition, GE will contribute its oil-and-gas business and $7.4 billion in a special cash dividend to a new entity, which will be publicly traded with 62.5% owned by GE and 37.% owned by the existing Baker Hughes. Baker Hughes shareholders will get a onetime payment of $17.50 per share. Lorenzo Simonelli, chief executive and president of GE Oil & Gas, will be CEO of the new company. Immelt will be chairman and Baker Hughes CEO Martin Craighead will be vice chairman.

But what makes the merger truly interesting is the type of company that will be created. In effect, GE will now control Baker Hughes, which will be the world’s second-largest oilfield services company, with revenue projected at $34 billion in 2020. Baker Hughes is traditionally a service company, whereas GE is an equipment manufacturer. While GE is selling the deal to investors by saying that the combined entities will be able to enact substantial cost savings through reduction of redundancies, some analysts doubt that given the different nature of the two businesses.

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More Q3 Earnings

This week we continue our discussion of Q3 earnings and what the execs had to say. I once again took some relief in the reports we are getting. All of these transcripts are available in full at www.seekingalpha.com. I try to provide you the highlights: the bold italics are the parts I found most interesting.  

FMC

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Some Signs Offshore May Come Back To Life

One topic that I have received numerous questions about is when we anticipate offshore will come back to life, if at all. Some have argued that given the ability of shale wells to respond quickly to market conditions, and the fact that oil markets are now likely to have shorter boom and bust cycles, big oil is unlikely to invest in expensive, long term projects.

But as unlikely as it seems today, several authorities are warning that because of the tremendous investment cuts, prices in oil could actually dramatically increase, leaving the world with an oil shortage in a few years.

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OPEC Revises Crude Demand

          OPEC revised its market expectations this week and forecast that demand for its crude oil will rise in the next three years. OPEC now forecasts that demand for its crude will reach 33.70 million barrels per day in 2019, up 1 million barrels from 2016. This indicates that OPEC believes that market conditions have become more favorable. In the 2015 edition of its World Oil Outlook, OPEC had actually expected crude demand to fall to 30.70 million barrels by 2020. It therefore appears that OPEC’s strategy of allowing the value of oil to fall, which in turn increased demand, may have been a better long-term strategy than previously thought.

          What is interesting to note is that OPEC demand is only expected in 2019 to be about 300,000 barrels per day more than the cartel is pumping now. OPEC expects non-OPEC supply to continue falling in 2017 before rising again in 2021. Unfortunately, OPEC still does not predict a return to higher prices. As of now, the Report assumes oil will be $65 per barrel in 2021, down from $80 a barrel in 2020 OPEC predicted in last year’s report.

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Ty’s Take For the Week Ending 11-11-2016

Several people have asked me this week about what my opinions of the U.S. election results are. And at first, I hesitated to address those, but on further reflection, the election results will certainly have an impact on our business and we should address what that impact might be. Let me state at the onset of this week’s Ty’s Take, this is not intended to be a political article. I am not advocating for or against Mr. Trump, but rather I’m trying to isolate the implications of what we know about his policies and how they will affect energy.

Let’s start with the fundamental issue: we really don’t know that much about Mr. Trump’s energy policies. But we do have some inclination of where he stands.

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The Week In Numbers For The Week Ending 10-28-2016

            In each edition of the Standard, we strive to provide you a bare bones summary of what happened to the price of WTI, Natural Gas, and Brent Crude. In addition, we summarize the major reports from API and EIA on Inventory Data. And we also throw in the rig count for good measure.

 

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Tys Take 10-28-206

            So as I mentioned, it is my favorite time to be writing the Newsletter – and that is earnings season. I love listening to what people who are not only much smarter than me, but have teams of people behind them who are much smarter than me have to say.

            Now let me preface my take on earnings reports with this warning: Remember that a CEO’s job partially entails convincing you, potential purchaser of their stock, that you should buy their stock. A CEO is rarely going to come out and say “yeah fourth quarter is going to be crap, so you all should be selling our stock like crazy!” Not going to happen. They may give cautionary news, but they will always try to put a positive spin on things. So as happy as I get when I hear these experts tell us where the market is going, I also caution you that there is, justifiably, some amount of puffing going on.

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OPEC Freeze Update

While you may be sick of reading about the potential OPEC Freeze, I can think of no topic that is bigger or more important for our industry so I thought I would give you the latest news.

As predicted in our last Newsletter, Iraq is already trying to back out of the Algiers Accord. As we reported, the agreement to potentially agree was vague and ambiguous. It seemed to give certain countries an unfettered right to increase production while implying other countries would limit production. And Iraq, now the second biggest producer in OPEC, is already trying to back out.

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Ethanol and Its Relationship To Gasoline

            One topic that has always interested me is Ethanol. As a bit of disclosure here, when I actively practiced law, I used to represent a major Ethanol manufacturer. I learned quite a bit about the business (and at least my client, contrary to popular sentiment, was actually profitable without government subsidies but they had a proprietary process that did use less energy to make the Ethanol than what was generated). And it is fascinating. I am not going to discuss the merits, or lack thereof, depending on your viewpoint, of Ethanol as a fuel (only tangentially) or on the climate, but rather, focus on Ethanol as a fuel additive.

            In the Oil & Gas Industry, we often think of Ethanol as the unwanted neighbor knocking on our door. And there are many arguments against Ethanol as a fuel – from its effect on world food prices (takes too much sugar and corn), to its harm for the climate via land use.

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Earnings Season

It’s my favorite time of year again – Earnings Season!!!! Sometimes its more like Christmas, sometimes its more like Halloween – but like both holidays it is always full of surprises!

Like the last time Big Service and Big Oil released earnings, I combed the transcripts from their executives for the key nuggets. While I will provide more info for you detail junkies, I highlight the most salient points!

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