by Aaron Levitt | April 9, 2013 11:01 am
A big player in the oil and gas service industry just made a huge move to get even bigger.
No, I’m not talking about Halliburton (NYSE:HAL) or even Baker Hughes (NYSE:BHI). I’m talking about American bed-rock company and Dow Jones Industrial Average component General Electric (NYSE:GE).
Yes, that GE.
The manufacturing giant was already on its way to becoming an energy powerhouse, as GE Oil & Gas posted a 16% year-over-year jump in revenue for 2012.
Now, this latest buy-out — of lesser-known Lufkin Industries (NASDAQ:LUFK) — won’t just make energy GE’s third largest manufacturing unit, but is poised to make the company one of the largest players in the industry … and thus a great way for investors to play growing energy consumption.
While you may not have heard of Lufkin, you are likely familiar with one of its major products. The firm manufacturers “beam-style” artificial pump lifts — also known as pump jacks — that have become synonymous with energy production (and the TV show Dallas). These pump jacks are used to lift hydrocarbons to the surface in reservoirs with low pressure and help improve the efficiency of naturally flowing well.
In fact, they are used in roughly 94% of the more than 1 million oil-producing wells around the world, according to Lufkin’s data. In fact, analysts say the global artificial lift sector should hit $13 billion in 2013, mostly fueled by the development of unconventional shale plays.
Seems pretty obvious, then, why GE wanted the firm. The deal — in which General Electric will pay $3.3 billion for Lufkin — will help compliment GE’s own energy business.
GE already makes underground pumps that pull oil and gas to the surface, as well as wellheads, compressors and filters. But Lufkin manufactures a series of other rig completion equipment as well as various pumps that can be used in shale rock, offshore and other well applications to help move oil to the surface.
The addition of Lufkin’s nine manufacturing facilities will round out GE’s portfolio by adding a slew of new lift types — including hydraulics and progressive cavity pumps — to GE’s own artificial pump capabilities. The deal also includes Lufkin’s sophisticated family of well automation control products as well as production optimization software products — something GE currently doesn’t offer.
To top it off, Lufkin operates a foundry, along with an industrial gears and power transmission business. While the foundry will mostly be sold, the power transmission segment — which features customers in industries ranging from hydro-power to steel mills to even sugar plantations — could be a nice addition to GE’s other industrial manufacturing businesses.
With that in mind — and despite the fact that some analysts have complained about GE overpaying for LUFK, as the M&A price was at a 38% premium — it sounds like a smart deal to me.
So far, GE has spent about $11 billion on acquisitions since 2007 to boost its presence in the oil and gas business. Last fall, GE CEO Jeffrey Immelt said that the company would seek other acquisitions in the $1 billion to $3 billion range. The Lufkin buy-out certainly fits GE’s plans to continue growing its oil and gas division via acquisition and is transformative for the over 120-year-old company.
The company’s recent sale of its NBCUniversal media unit to Comcast (NASDAQ:CMCSA), coupled with this industrial acquisition, could mean the company is moving away from its riskier financial side — i.e. GE Capital — and back to building things that matter.
Plus, the buy strengthens GE’s position across the energy spectrum from subsea to onshore unconventional plays. The company has basically set itself up to provide E&P firms a wide range of solutions across their wells. This is especially important as we’ve seen many energy companies move towards production from a whole host of different venues, regions and well types.
To top it off, the energy unit for GE posted 2012 revenue of nearly $1.92 billion, while Lufkin reported 2012 revenue of about $1.3 billion.Thus, the addition of LUFK alone into GE’s oil unit will almost double total revenues … and for only about 13.5 times Lufkin’s estimated EBITDA (earnings before interest, taxes, depreciation, and amortization). That’s not so bad considering other potential oil field equipment firms — such as Dril-Quip (NYSE:DRQ) — are currently going for much larger forward premiums.
In short, the Lufkin deal should be seen as a great use of GE’s $126 billion cash pile — especially at a time when interest rates are currently next to nothing.
And of course, that makes it a big positive for shareholders as well. As GE continues to build up its oil and gas arsenal and become a force to reckon with in the sector, long-term shareholders will ultimately be rewarded. Get ready for the firm to kick back some of those juicy revenues and cash flows to shareholders by the way of dividends.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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