Does GE-Baker Hughes Merger Come at the Wrong Time?

 | Jul 07, 2017 | 2:20 PM EDT
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It has been a while since I focused my Real Money column on the weekly Baker Hughes rig count. Today's report showed a headline figure of 763 rigs employed in the U.S. for oil drilling, an increase of seven rigs from the prior week's figure. 

On its own, that's not a bullish data point for West Texas Intermediate crude futures pricing, but the quick decline in oil prices yesterday afternoon and this morning seemed to foretell a higher rig count. In fact, West Texas Intermediate prices have risen since the Baker Hughes figures were released, and are, as of this writing, holding the $44 per barrel level. 

Perhaps the real headline figure in the Baker Hughes numbers is not the rig count itself, but the header at the top of the data release: Baker Hughes, a GE Company. Yes, Baker Hughes (BHI) and General Electric (GE) finally completed their merger this week. Former shareholders of Baker Hughes received shares in a new company, symbol (BHGE) , along with a $17.50 one-time dividend per share (paid yesterday), funded by GE. General Electric owns 62.5% of the new partnership and BHGE shareholders own the remaining 37.5%. (General Electric is part of TheStreet's Action Alerts PLUS portfolio.) 

BHGE shares posted their first trade Wednesday morning at $40.80 and have proceeded to plummet in the next 2½ trading days to their current level of $36.43. Welcome to the world of oil and gas equities; believe me, I have the scars to prove that trading energy stocks can be an unforgiving proposition. 

That's the real question facing GE's purchase of Baker Hughes. It's not the industrial logic, as GE's legacy energy assets combine with Baker Hughes' to produce a powerful force in oil services, and also one with overlaps in corporate structure that suggest that achieving synergistic cost savings should not be terribly difficult. 

No, the question is one of timing. Did GE purchase Baker Hughes at the wrong time in the energy cycle? The equity markets are saying yes, and the performance of GE's shares in the midst of the Trump Jump has been brutal. A 17.5% year-to-date decline in GE shares is difficult to swallow, but that decline contrasted with a 14.5% year-to-date increase in the Nasdaq makes it very difficult for institutional fund managers to continue to hold the stock. 

So that's the issue confronting GE's John Flannery, who assumes the CEO chair on Aug. 1 and will become chairman of GE's board of directors on Jan. 1, 2018. The vigorous rebound in U.S. oil production is exactly the factor that is leading the market to lower its valuation on U.S.-based energy and energy services companies, including Baker Hughes/BHGE. It's hard to believe Flannery or his predecessor, Jeff Immelt, did not see the increase in rig counts, but as of this week they control the company that produces that data, so there's really no excuse for GE senior management not to be intimately acquainted with the machinations of the markets for oil and gas. 

Flannery's most recent experience at GE has been in its healthcare segment, and he built his reputation in the company as a "fixer" in GE Capital and as a business development leader for GE Corporate. From reading his official bio, it would seem he has no experience in the energy segment whatsoever. 

So, my unsolicited advice for Flannery would be to fly to Houston and meet with the 25-year-old (assuming there is one) who puts together the weekly Baker Hughes rig count. From the outside, there's no way of knowing whether Flannery agreed with Immelt's aggressive move into the energy sector. It's his business now, though, and the very data his company produces explain why oil prices are so frustratingly volatile and depressed. GE shares aren't going to rebound until oil does -- or at least the market perceives that such a rebound is imminent -- so Flannery needs to become a wildcatter in spirit, if not in practice.

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