So what's behind Halliburton's entry into the ESP business? And what's up here in 2011 with the timing of these significant acquisition investments by the big box oil service enterprises - GE and HAL ?.
Some quick thoughts and a brief on this addition to the ESP vendor market segment. Please email your thoughts also, and we can compile and provide some good perspectives for next year's ArtificialLift.pro 2012 Global Artificial Lift report.
News on the street these past two years was that HAL was looking for an ESP entry point - preferably of course by acquisition - ie after a long due diligence process with Al Khorayef, it didn't materialize to an acquisition. We kept hearing it was on, then off, then on, and off again. Price kept shifting, and then when the GE deal completed with Wood Group at $2.5 billion +++, no doubt that AKP could see reason to up their price expectations. Khobar management stayed mum of any activities during the due diligence process with a non-disclosure agreement between the two parties. I believe our financial valuation of the AKP plant in Eastern Province 2nd Industrial City and also Libyan assests are on target.
But I think that Halliburton has taken the prudent method to enter this market place. They didn't drop a lot of cash or equity in the purchase. And they aren't wasting money buying a separate global distribution and service network. In addition, they can pick and choose markets that make sense. In addition, they can tap into Global's senior management talent for their experience and wisdom in acquiring other artifical lift segments. And that same GAL management team are in startup assertive mode - and NOT in the traditional entrenched defensive mode you often find in the big box. To be a big enterprise in the three spot is a pickle, just like you learn at biz school.
I agree - certainly Halliburton would want to leverage business plays like their Iraqi infrastrucure distribution into the virgin Iraqi esp market, and perhaps soon some other strategic locations worldwide.
Here's a key for our clients. Our next report should show the drill down opportunities as we see them unfolding in artificial lift. Halliburton should be most receptive for serious consideration of breakthrough AL technologies brought to market by startups. They are best positioned and obviously capitalized for either a partial ownership position in a venture, or other means. The market perception of Halliburton as a technology leader would be compelling during trials with operators. Many advantages for Halliburton, whereas the big three would remain in a traditional lock down mode for outside enterprise technology portfolio integration. Thoughts?
Old school rule of thumb about some of the bix box oil service companies - Schlumberger is the 'wireline company', Halliburton is the 'pumper', and Baker Hughes the 'downhole oil tools and bits' provider. So enter Halliburton company to electric submersible pumps. The timing was right to add the artificial lift segment to their industry pumping portfolio. In addition, Wall Street analysts have been promoting the business case to Halliburton as an obvious growth venue for some years. It's just that the entry point never quite materialized for them, until now.
A star asset that GAL has are its people. It's got some of the best and most experienced operations people in the industry. But why a startup like Global Artificial Lift, with only a couple of domestic regional operations and working on an early entry attempt into selling electric submersible pumps and their other lift equipment into Colombia? Was it mostly a matter of availability?
Some background ideas: GE's entry was a dagger for some eager to buy into the business (like Cameron), and somewhat a windfall for others looking to capitalize the gaps by way of startups . The acquisition premium GE paid was astounding. Just consider that Centrilift's Joe Brady in the late 90's purchased ODI for $31.5 million and at a revenue to price ratio of parity. Joe was able to transition the consolidation quite easily into his franchise. Whereas, GE paid a multiple of 5 times sales to enter in market position 3 ! And Centrilift acquired ODI technology like motor auto-wind, AR technologies, numerous valuable patents, a Tulsa based factory with specialized purpose built tooling equipment - lathes, presses, et al, and regional service centers, etc together with quite a number of talented engineers and field service personnel. What did GE get just in terms of similar industry advanced proprietary technology??? And how much has the past 5 years R&D budget been in OKC??? So goes the number 3.
The Halliburton M&A team were long on study, and still empty handed. Consider also Global's equity and cash flow situation, and there's no better time for private investors to sell than during a strong secular upturn like we are in. A downturn would have been devastating to the investors, and the amount of cash they'd have put up in such a scenario is a motivator to sell when the market is high. I agree that many really don't understand the type of capital requirements it takes to run an ESP shop - inventory etc. And when the down cycle hits, especially with all these new players around with same-same low cost Chinese content and lack of enterprise stocking capabilities, it's going to be ugly for the less capitaized esp companies. So I believe Global's timing to sell was on target.
One more comment - I would not be surprised for GE to consider exiting the ESP market at some time this decade with overtures by a big box like HAL to buy in. A good case can be made that Halliburton's recent acquisition and entry into the market has significantly lowered the value of GE's new bought franchise. Analysts are seeing yet another multi-national public company in the esp market arena, and with big capital guns and better synergy in this segment than GE. I don't believe with the limited time they had, to have really gotten their arms around the whole package & understand what they were to get themselves into with the Oklahoma City acquisition. Maybe I'm wrong. Again, time will tell. It's not too far fetched once their ROI erodes over time, to build a case for them to exit. But at what price? Is it also fair to suggest a technology gap ?- (lags $$$ to R&D of SLB and BHI). How simple would it be for GE to announce a large investment in R&D for their new esp product line ! ? Baker Hughes just did it announcing a $36 million dollar R&D outlay for their Centrilift esp product line center, (click here for the published report). Time to ante up in R&D GE is a clear message. Also - more support on this theme, I'm not seeing any meaningful tech annoucements from GE about esp system advances they're making.
So, I'd suggest a feature in the 2012 annual report about valuations and our perspective on each companies strategies across all segments - PCP, ESP, Gas Lift, Hyd lift, et al. I believe this would be valuable for clients and new investors who want a good independent backgrounder of the industry together with their investment advice and outlooks. It's important to better understand the whole arena (ie including the other majors like Borets, Alnus and Novomet). We can capsulize the global report into a summary for each custom report depending on client needs. Also, model the successful startups like Green Country/ GAL versus narrow value chain entrants like Zeitecs. This will also be relatively easy to update each year.
Another key feature of our report is to be suggestions for entry technology points. It's pretty obvious that it's the startups that are to be the breakthrough innovators in this esp industry. Why would the bix boxes want to disrupt their product life cycles? A case in point to that type of pure play resistance is Zeitecs.... So, back to GE, we'll be on the lookout for GE ESP public announcements in 2012 about technology roadmaps and actual product rollouts to market with integrated GE technologies. Otherwise, perhaps a great time for investors to enter the market with startup breakthroughs around the perimeter of value add service packages of the types we are now seeing potential. This would be similar to what Ray Johnson and SOS did with the VSD in the late 80's/early 90's. Forced Reda and Centrilift's hand to change and bid up to acquire the SOS startup, with Centrilift winning the auction and acquiring one of the top breakthrough technologies in the history of the esp industry. Result? Taking market share away from Reda for years in the process. And it didn't come from a big player, but a maverick startup. Ditto with regards to ODI and AR technology. And on and on. It will be the startups that push the technology envelope, as we are now seeing unfold. Let the big companies talk about enterprise innovation, while bidding up the startups with the real star market breakthroughs that can differentiate them from the other bix boxes and demonstrate more value.
More background on GE. General Electric's CEO Immelt had the green light from his board to invest by way of acquisition to grow the Oil&Gas business. He gave his senior management team the mandate to do it. They saw in esps an OEM "repair" market segment that could leverage off their global service center distribution, similar to some of their other OEM acquisitions like Hydril BOPs. Plus some good ppt story lines about synergies and growth prospects which are always good to talk about in presentations to Wall Street and within their own enterprise. If you have the $5+ billion acquisition budget that Immelt gave them, why not? And so they spent - but how to justify ROI on just under $3 billion for a $500M++ enterprise in market 3 position ??? I'd be interested to see TCO savings so far. Time will tell. These days the sales and returns look pretty good, along with all the other boats rising with the same major secular upturn tide.
About the future: be looking for HAL to study the market further and learn more about esp's and artificial lift while they dabble with this new acquisition. This provides some good short-term growth-story fodder for Wall Street. Meanwhile, they keep analyzing which M&A departments are always good at.
Keep an eye on the Middle East GCC. This I would believe should be a key General Electric bellweather for their success in esps, as they hold massive investments in that region on their core power turbine side of the business plus of course the expected growth in artificial lift requirements in the GCC. I wonder if they can actually jump start the esp optimization software and hardware tech capabilities from their turbine control system retrofit business. Also, we wonder how long that should really take??? How they plan these synergies and if they execute will be interesting. The potential synergies are obvious. Tap into the database for the excel on esp pricing estimates on the BP and XOM awards, and look who was spotted with the lowest price on W Qurna. Add to that the dynamics of Oman PDO, as we know Oman A.L. will be a changing landscape, with some of the new global and local supply on the horizon. What a challenge for the GE ESP Middle East area manager these next 3-5 years. Also consider that AKP may remember the HAL Alamo, strategically pricing accordingly in places in the GCC - especially Iraq - that HAL is trying to leverage with GAL equipment. None of this should help GE ESP either.
Other markets: Working draft for Northern Latin America - click on pdf above. On the North American esp landscape, - let's update the outline and go from there. More on CBM, SLB road map as it unfolds, and BHI $$$ plans re: R&D indicator. This is all getting more interesting. --- and you guys thought you had it tough back in the good ole days. All these new entries, AND CAPITALIZED! All said, focus remains: operator drivers are the lead for each report section.
Email comments please.