Baker Hughes to take $15 billion goodwill impairment charge in 1Q

Oilfield services provider Baker Hughes will be taking a $15 billion non-cash goodwill impairment charge in its first quarter 2020 in response to the significant decline in oil and gas prices and the COVID-19 pandemic.

In addition to taking critical steps to reduce the spread and infection of the virus as well as mitigate the impact of this pandemic to its business operations, Baker Hughes said on Monday it is taking a number of actions in response to the current market environment.

Under these actions, the company has approved a plan that will result in restructuring, impairment, and other charges of approximately $1.8 billion, of which approximately $1.5 billion will be recorded in the first quarter of 2020.

Future cash expenditures associated with these charges are estimated to be approximately $0.5 billion with an expected payback within one year. These restructuring charges are designed to right-size the company’s operations for anticipated activity levels and market conditions.

The company also approved a plan to reduce 2020 net capital expenditures by over 20% versus 2019 net capital expenditures.

Baker Hughes expects that it will record a non-cash charge related to the impairment of goodwill of approximately $15 billion in the first quarter of 2020.

According to its statement, the company’s market capitalization declined significantly during the first quarter driven by current macroeconomic and geopolitical conditions including the collapse of oil prices driven by both surplus production and supply as well as the decrease in demand caused by the COVID-19 pandemic.

In addition, the uncertainty related to oil demand continues to have a significant impact on the investment and operating plans of Baker Hughes’ primary customers.

Based on these events, Baker Hughes concluded that a triggering event occurred which required the company to perform an interim quantitative impairment test as of 31 March 2020.

Based upon the results of the impairment test, the company concluded that the carrying value of the Oilfield Services and Oilfield Equipment reporting units exceeded their estimated fair value, resulting in a goodwill impairment charge. This impairment charge will not impact the company’s cash flow and the charge is subject to finalization.

Baker Hughes’ cash and cash equivalents totalled $3 billion for the year ended 31 December 2019, excluding assets held on behalf of GE. The company’s liquidity is further supported by a revolving credit facility of $3 billion and access to commercial paper and other uncommitted lines of credit. At both 31 December 2019 and 31 March 2020, Baker Hughes had no borrowings outstanding under the revolver, the commercial paper program, or uncommitted lines.