The alliance, which is subject to antitrust and other regulatory approvals, seeks to leverage Baker Hughes’ well completions and artificial lift offerings, along with Aker’s subsea production and processing systems. Subsea production is especially challenging work as it entails managing hostile conditions on the ocean floor. Deepwater subsea fields have so far exhibited low recovery rates and rising costs of development, which the Baker/Aker team will seek to improve. Offshore work typically commands high levels of services intensity and attractive pricing, which makes the market appealing to oilfield services firms.
In our view, the integrated product/services offering should increase customer switching costs, and the access to Aker’s subsea strengths will allow Baker Hughes to more effectively compete with peers like Schlumberger and Cameron, who formed a comparable alliance in 2012, called OneSubsea. We continue to believe Baker Hughes is on the path to achieving a narrow moat through initiatives such as this, but for now we are maintaining our no moat rating and will until we see the firm consistently achieve economic returns. Our $63 fair value estimate [of Baker Hughes] remains unchanged as well.
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