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GE Deal With Baker Hughes Creates $32 Billion Oil-Services Giant

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General Electric
  • GE Deal With Baker Hughes Creates $32 Billion Oil-Services Giant

General Electric Co. agreed to combine its oil and gas business with Baker Hughes Inc., creating an industry giant with a broader suite of offerings amid the ongoing slump in crude prices.

GE will own a 62.5 percent stake in the combined provider of oilfield services, which will be publicly traded and have $32 billion in sales, the companies said Monday in a statement. GE will contribute $7.4 billion to fund a special dividend of $17.50 a share to Baker Hughes stockholders.

“This transaction creates an industry leader, one that is ideally positioned to grow in any market,” GE Chief Executive Officer Jeffrey Immelt said in the statement. The “new Baker Hughes” will draw on the companies’ combined experience in manufacturing and service, while broadening the use of digital technology such as GE’s Predix operating system, according to the statement.

Oilfield contractors are increasingly forming partnerships to help cut costs and expand their offerings and distribution channels amid the downturn. The moves have come into favor as customers seek ways to improve efficiency and get greater value out of the services and gear needed to suck crude out of the ground.

The deal comes after GE held talks earlier this year about buying pieces of Baker Hughes set to be divested under a sale of the Houston-based company to Halliburton Co., a transaction that collapsed. By joining forces, Baker Hughes and GE are betting they can compete more effectively with the world’s top oilfield-services provider, Schlumberger Ltd., which recently bought equipment-maker Cameron International.

Shares Rise

GE rose less than 1 percent to $29.43 at 7:10 a.m. in New York before regular trading, while Baker Hughes was up 7.9 percent to $63.80. Through Oct. 28, GE had fallen 6.2 percent this year, compared with a 4 percent gain in the Standard & Poor’s 500 Index. Baker Hughes rose 28 percent over the same period.

The transaction is subject to approval by regulators and Baker Hughes shareholders, as well as other customary closing conditions.

Lorenzo Simonelli, CEO of GE Oil & Gas, will serve in the same role at the new company, while Immelt will be chairman and Baker Hughes CEO Martin Craighead will be vice chairman, according to the statement. The company will have dual headquarters in Houston and London.

The transaction, expected to close in the middle of next year, will add 4 cents a share to GE’s earnings in 2018 and 8 cents by 2020, GE said. The company anticipates “runrate synergies,” or savings through cost cuts, of $1.6 billion by 2020.

The companies plan to discuss the merger in an investor conference call at 8:30 a.m. New York time.

Oil Expansion

GE has expanded its oil and gas business in recent years through more than $10 billion in acquisitions, making it the company’s fourth-largest division. Yet, within the world of oilfield services and equipment manufacturing, Boston-based GE ranked 11th, according to April data from Spears & Associates.

Sales in GE’s oil and gas unit fell 25 percent in the third quarter, the biggest decline among the company’s industrial units. Immelt emphasized in a conference call this month that “we still think this is a core GE business.” Executives have said the company, which may add as much as $20 billion of new debt to support growth efforts, is open to deals and would like to be opportunistic during the oil market slump.

Baker Hughes terminated plans to be acquired by Halliburton earlier this year after failing to win antitrust approval from regulators.

Hardest Hit

The oil-services and equipment sectors have been among the hardest hit in the industry’s two-year downturn, contributing the largest chunk of the more than 350,000 jobs slashed globally.

At least 100 North American oilfield-service companies have gone bankrupt in 2015 and 2016 as energy prices slid, according to a tally by law firm Haynes & Boone. Exploration customers were forced to cut an unprecedented amount of spending over the past two years to cope with the oil industry’s worst financial crisis in a generation.

Centerview Partners and Morgan Stanley served as financial advisers to GE on the deal, while Shearman & Sterling provided legal advice. Goldman Sachs Group Inc. advised Baker Hughes on financial matters and Davis Polk was the company’s legal adviser.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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New COVID Variant: Brent Crude Sheds Over $10 to $72 Per Barrel

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Crude oil - Investors King

Brent crude oil extended decline by over $10 on Friday on concerns that a new COVID variant called B.1.1.529 could force economies to impose restrictions and slow down global demand.

Brent crude, against which Nigerian crude oil is measured, dropped from $82.55 per barrel it attained on Thursday to as low as $72.09 on Friday at 7:20 pm Nigerian time before it rebounded slightly to $72.98 per barrel as shown below.

Global financial markets plunged across the board following reports that two cases of the new heavily mutated COVID variant from South Africa have been reported in Hong Kong and that the United Kingdom, one of the most affected nations during COVID-19 with over 140,000 deaths has halted flights from six South African nations to prevent a potential breakout of the new COVID variant.

Experts are concerned that the new variant outbreak would slow down global growth and increase global risks going into the new year.

According to Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA, “Even without severe restrictions, people will adopt more caution which will weigh on demand, as OPEC+ has repeatedly stated and factored into their models.”

However, heavy crude oil-consuming nations like the United States, China and others that have been calling for more supply will now enjoy substantial price reduction if this continues, therefore, Joe Biden may not need to release millions of barrels into the global market.

“Crude is back at levels last seen at the start of October and if this risk aversion continues in the weeks ahead, there’s plenty of room to fall. While OPEC+ would likely have avoided altering production plans next week or in the months following in response to the SPR releases, it may soon feel its hand is being forced. Next week may come too soon but another major outbreak could see them slam on the brakes,” Craig Erlam added.

 

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Flight to Safety as Variant Fears Soar

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

Risk assets are getting pummelled at the end of the week as a new Covid variant sparks fears of new restrictions and lockdowns.

The most worrying thing about the new strain at the moment is how little we know about it, with early indications being that it could be more problematic than delta. The biggest fear is that it will be resistant to vaccines and be a massive setback for countries that have reaped the benefits from their rollouts.

We’ll no doubt learn more in the days and weeks ahead but for now, fear of the unknown will weigh heavily going into the weekend and could carry over into next week. We’re seeing a typical flight to safety in the markets with equities, commodity currencies and oil getting whacked and traditional safe havens like bonds, gold, the yen and swissy getting plenty of love.

In times like this, we get a true sense of what investors consider to be real, reliable safe-havens. And bitcoin is off 8% today which has delivered a fatal blow to its safe-haven credentials, putting an end to another crypto myth that has surfaced over the years despite there being zero evidence to back it up. Maybe one day investors will have a different opinion but right now, when their cash is at stake, they’re sticking with safe-haven assets with a track record, as they should.

Pfizer has sought to calm nerves, stating that should a vaccine-escape variant emerge, it could produce a tailor-made vaccine in about 100 days. Three months can feel like a long time but when compared to where we were 18 months ago, that is very reassuring as a worst-case. It may not be quick enough to prevent more restrictions this winter though.

Erdogan standing firm on interest rates

Turkish President Erdogan is successfully talking down the lira once again, claiming there’s no turning back from the new economy program and that interest rates will decline. It’s incredible to see a President have such disregard for something that will have such a huge impact on so many people. It’s like he’s playing with the markets to see what he can get away with. In a sign of Erdoganomics fatigue, the currency has quickly recouped the more than 2% losses it incurred immediately following the comments. A sign that these antics are now expected and priced in, it seems.

Oil slides on variant concerns

Oil is among the assets taking a heavy beating on the variant news today, falling more than 5% as traders fret about the impact on restrictions and behaviour this winter. Even without severe restrictions, people will adopt more caution which will weigh on demand, as OPEC+ has repeatedly stated and factored into their models.

It seems the US and other consuming countries have played their hand too soon. Sure, Biden will score some political points ahead of the midterms as voters see prices at the pump fall, which was ultimately the goal. But should prices spike again early next year, what then?

Crude is back at levels last seen at the start of October and if this risk aversion continues in the weeks ahead, there’s plenty of room to fall. While OPEC+ would likely have avoided altering production plans next week or in the months following in response to the SPR releases, it may soon feel its hand is being forced. Next week may come too soon but another major outbreak could see them slam on the brakes.

Gold jumps on safe-haven appeal

Times like this are when gold shines and we’re seeing investors flock back to an old reliable friend today. It has pulled a little off its highs after hitting $1,815 earlier in the session but it remains above $1,800 at the time of writing. It’s an interesting one for gold and bonds, as the situation now is very different from last year.

Central banks can’t just turn on the taps again with a “whatever it takes” avalanche of cheap cash as they have before. Inflation is a real problem and lockdowns will exacerbate the problem. Sure, they may be a little more patient and hold off on raising rates next month in the case of some or accelerating tapering in the case of the Fed, but they can hardly ramp up their stimulus measures in any considerable way. Their hands are tied.

This should still be bullish for gold as, at the very least, central banks will delay tightening until they have a better idea of the risks to the economy. Allowing inflation to run hot unaddressed could increase the hedge appeal of gold again, particularly in these uncertain times.

Bitcoin remains a speculative risk asset, for now

In recent weeks we’ve seen that, in times of real uncertainty, bitcoin has not done well as an inflation hedge or a safe haven asset. There’s no doubt it’s a fascinating tradable instrument and a highly speculative one, but it’s quite clear now that it’s a risk asset and nothing more. Not at the moment anyway. Who knows what the future holds.

It’s taking a real beating today, off around 8% and looking vulnerable. Key support around $55,500 has fallen which will now draw attention back to $50,000. I’m sure soon enough the eternal crypto bulls will pile back in and smell a bargain but as we’ve seen so often in the past, bitcoin is capable of enormous gains and eye-watering corrections.

If this new variant triggers major risk aversion in the markets, it could come under serious pressure. Unless of course, the inflation narrative catches again. No sign of it yet but, as ever with crypto, it has an incredible ability to find the bullish case in anything. Maybe this will be next.

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Markets to Wobble Then Shrug-off New Covid Variant

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The new Covid-19 variant will temporarily wobble financial markets, but concerns will be quickly shrugged off by them, predicts the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.

The prediction from deVere Group’s Nigel Green comes as a new Covid-19 strain discovered in southern Africa weighed on global markets on Thursday.  Travel stocks, hospitality firms, and bank stocks were amongst the hardest hit.

The World Health Organization will meet on Friday to analyse the new variant. The meeting will determine if the B.1.1.529 strain should be designated a variant of “interest” or of “concern.” The variant, which was identified on Tuesday, is said to carry an “extremely high number” of mutations.

On Friday, Asia Pacific markets were down around 2%, European stock futures predict a more than 2% drop at opening trades. Meanwhile, U.S. stock futures are also set to open lower, trading only until 1p.m. after Thursday’s Thanksgiving holiday.

Mr Green says: “Experts are determining whether the new variant is more transmissible or more deadly than previous ones.

“The fact that a new strain has been discovered and, critically, that at this stage we know little about it has caused jitters in the financial markets, which loathe uncertainty. The headlines have caused a knee-jerk reaction.

“In addition, Wall Street was closed yesterday meaning that a large bulk of global trades were missing, making other moves more pronounced.”

He continues: “This wobble is likely to be temporary with markets remaining bullish for the time being.

“Global shares have jumped 16% this year with investors focusing on the post-pandemic economic rebound. They largely shrugged off the Delta variant that caused a mini wave of market nerves in the summer.”

He goes on to add: “It’s likely that markets will do the same with this new variant.

“This is because, as Delta showed, mutations are now expected and we have more of a blueprint about how to deal with them.

“Instead, global financial markets will be focusing on other pressing issues including high inflation caused by supply side bottle necks and the likelihood of a quicker pull away from ultra-loose monetary environment.”

The deVere CEO concludes: “Markets will temporarily wobble on the uncertainty of this new Covid variant, but will remain bullish and largely focused on other issues.”

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