3 Potential Buy-Out Targets for GE Energy

by Aaron Levitt | July 2, 2013 12:10 pm

3 Potential Buy-Out Targets for GE Energy

It’s pretty cool to see one of the “bedrocks of American manufacturing” get back to in the business of building things. Venerable General Electric (GE[1])  as a way to continue distancing itself from GE Capital and the volatile finance industry[2].

While it has added plenty of bolt-on acquisitions across its entire industrial platform, the bulk of these buy-outs have come in the energy space. The latest was a $3.3 billion deal to purchase artificial lift systems specialist Lufkin Industries — a deal that will do wonders for GE as it aims to increase its stature in the energy industry.

However, I’m not sure the Dow Jones Industrial component is done.

Including the Lufkin purchase[3], GE has spent about $14 billion on acquisitions since 2007 to boost its presence in the oil and gas business. More importantly, GE CEO Jeffrey Immelt said that the company would seek other acquisitions in the $1 billion to $3 billion range. GE clearly plans to continue growing its oil and gas division via acquisitions and ultimately transform the 120-year-old company back into an industrial powerhouse.

That raises an obvious question for investors: Who is next on GE’s shopping list? Let’s take a look at three possibilities.

Dril-Quip

When it comes to drilling equipment, giant king-pin National Oilwell Varco (NOV[4]) gets the nod from many investors. After all, the joke in the energy industry is that NOV stands for “No Other Vendor.”

But I’ve got news for NOV shareholders: There are other vendors and plucky smaller rival Dril-Quip (DRQ[5]) could be a better bet … as well as buy-out candidate from GE.

Like its larger twin, DRQ manufactures the drill bits, valves, risers and other equipment needed for every oil well. And regardless of company size, that area of the oil services sector seems to be a very fruitful one, indeed. Dril-Quip has consistently increased its order back-log over the last few years and saw a 16% sequential increase and 46% year-over-year jump in its back-log during the first quarter.

Plus, that order book should grow as drilling activity in the Gulf of Mexico and Brazil – its two key markets — continues to surge. All in all, that should help deliver more profits and capital back to shareholders. Dril-Quip has already delivered positive earnings surprises in three of the last four quarters.

With no debt on its balance sheet, a global presence and a relatively small market cap — currently under $4 billion — Dril-Quip could be the perfect target for GE if the company wants to expand its footprint into the rig component market.

Forum Energy

GE is a growing player in the subsea equipment market and sold more than 125 “Christmas trees”[6] last year. However, it’s still a relatively small player when compared to leaders Cameron (CAM[7]) and FMC Technologies (FTI[8]).

That’s a problem considering research consultant Quest Offshore Resources estimates that spending on subsea valves, pipelines and cables required to build underwater oilfields will grow to a record $13.9 billion this year. Then again, it could also put Forum Energy Technologies (FET[9]) on GE’s shopping list.

Forum was formed via a five-way merger back in 2010 and now offers a diverse product mix of products for both on- and offshore[10] well applications, including values, pumps, remotely operated vehicles and other subsea equipment. Forum continues to grow on its own via acquisitions and recently purchased German energy tool company Blohm + Voss Oil Tools.

Plus, consumable parts — parts that are worn out during well construction, completion process or mid-stream processes — make up large chunk of Forum’s sales, which provides plenty of reoccurring revenue for the company. And since forming in 2010 and coming public in 2012, earnings and revenue growth has been strong thanks to economies of scale.

All in all, with a market cap of just $2.7 billion, Forum buy-out could provide GE with plenty of bolt-on fire power across its entire energy unit — especially in the offshore and subsea markets.

Chart Industries

GE’s prowess in the energy sector tends to do with getting oil and gas out of the ground. The natural extension of that? Moving it around to end users. This includes liquefied natural gas (LNG), floating, production, storage and offloading vessels (FPSOs) and other energy infrastructure markets[11] — and it’s where a buy of Chart Industries (GTLS) could come in handy.

Chart Industries is the dominate supplier of the specialized equipment — such as heat exchangers and tanks — that are used in making and storing LNG and compressing natural gas. Due to the complexities of cooling gas to 260 degrees below zero and then storing, barriers to entry remain extremely high in LNG equipment space.

As such, Chart is the number one or two supplier in all of its main product lines and has little direct competition — something former GE CEO Jack Welch would be proud of[12].

That prowess in one of the biggest energy trends on the planet — exporting LNG in emerging markets in Asia — could make GTLS a perfect addition to GE’s growing energy arsenal. More importantly, this dominate player is still relatively small when it comes to share price. Chart Industries has a very swallowable market cap of just $2.93 billion.

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.

Endnotes:
  1. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  2. volatile finance industry: http://investorplace.com/2013/05/after-a-few-missteps-ge-is-back-on-track/
  3. Lufkin purchase: http://investorplace.com/2013/04/ge-bulks-up-energy-services-with-buy-out/
  4. NOV: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOV
  5. DRQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=DRQ
  6. “Christmas trees”: http://investorplace.com/2013/03/3-picks-to-play-the-year-of-subsea/
  7. CAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAM
  8. FTI: http://studio-5.financialcontent.com/investplace/quote?Symbol=FTI
  9. FET: http://studio-5.financialcontent.com/investplace/quote?Symbol=FET
  10. offshore: http://investorplace.com/2013/05/transoceans-dive-into-deepwater-paying-off/
  11. energy infrastructure markets: http://investorplace.com/2013/05/3-ways-to-cash-in-on-the-chemical-industrys-building-binge/
  12. would be proud of: http://investorplace.com/2012/11/jack-welch-may-be-crazy-but-not-when-it-comes-to-natural-gas/

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