GE and Subsea 7 …

The past few decades of leadership at GE has lessons for all companies. Stay focused on areas where you have differentiated skills (engineering, for GE) and avoid trends (financialisation). Set short-term expectations you can hit, but manage for the long-term. Take hard decisions. And hope for a little bit of good luck.

FT View, 21 October, 2017

There is a really easy explanation for why the BHGE and Subsea 7 talks broke off (aside from the fact that Kristian Siem probably likes owning and actively running a company with as many cool toys as Subsea 7)… Have a look at these results from BHGE last week:

BHGE 3Q 2017 Oil

BHGE basically turned over $3.4bn in oil field services and equipment and made no money on it (a 1% operating margin). Subsea 7 on the other hand has been a profit machine through the down turn:

SS7 5 year share price

Subsea 7 might be a much smaller company but it had operating income of $235m on $1bn of revenue. The only real worry Subsea 7 has is the size of the order book and Brazil exposure.  Subsea 7 really doesn’t need to expose it’s shareholders to the risks of a complex merger integration that isn’t going as quite as planned: Some commentary indicated the market was worse than when the merger was announced, not something anyone in the market I think really believes.  On those numbers Subsea 7 management would be taking over BHGE not the other way around.

The fact is that that the top end subsea execution companies have found a profitable niche. The OpEx is so high that competitors just didn’t last as the downturn hit, projects bid at the peak of the market got procurement at the bottom, a kind of natural hedge,  whereas the markets BHGE competes in might be bigger but they are structurally less profitable because more people can compete in them and the lower OpEx commitment means they just keep on doing so.

I still think the backlog is a huge issue. Financial markets are notoriously short-sighted and fickle, and I cannot see how the vast drop in demand in seismic and rig utilisation doesn’t eventually lead into dramatically lower offshore commitments. But I also accept that offshore oil isn’t going anywhere fast and it would appear Subsea 7, FMC Technip and a couple of others are pulling away. Saipem came out with some horrible numbers today with adjusted EBITDA in the offshore division down 17% YOY showing there is still pain to come. And everyone complains of weak order intake… But the larger companies appear to be generating more than sufficient cash to see off the weak and be in a great position for even a mild recovery.

I’m naturally scpetical that you can simply pick markets and keep acquiring companies on a “buy and build” strategy and this contrasts strongly with the very clear industrial strategy Subsea 7 has followed for a long time now. Exactly as the FT recommends GE should do whereas BHGE seems to be the combination of two companies facing ex ante growth limits who looked for a transaction to try and solve structural issues. Eventually you can probably cut enough cost to force it to work in a financial sense but industrial logic takes years to develop.

One thing is for sure: If BHGE are serious about getting involved in offshore execution only McDermott is big enough to move the financial needle and small enough to digest in a practical sense.

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