For stock traders, mergers and acquisitions can be both extremely lucrative and extremely unpredictable. However, General Electric Company (NYSE:GE) is all but certain to go on a buying spree in the near future, and Baker Hughes Incorporated (NYSE:BHI), National-Oilwell Varco, Inc. (NYSE:NOV) and Weatherford International Plc (NYSE:WFT) are all top targets.
Earlier this year, General Electric CEO Jeffrey Immelt told the IHS CERAWeek energy conference that GE has a strong balance sheet and intends to use its massive $129.7 billion cash hoard to “fill in” its oil and gas portfolio.
With cash balance that large, it’s likely that GE can have its pick of the oil and gas companies out there.
GE’s cash stash, the relatively low-growth earnings environment, the hugely discounted oil market and the comments from Immelt all point to an imminent General Electric shopping spree. It’s not a matter of “if” a GE buyout will happen. It’s a matter of who and when.
Here are the top three candidates.
Baker Hughes Incorporated (BHI)
When BHI was expected to merge with Halliburton Company (NYSE:HAL), GE was rumored to be one of the top potential bidders for more than $7 billion in divested assets that the two companies were prepared to unload in hopes of gaining regulatory approval. If General Electric were interested in buying the BHI assets that HAL was willing to discard, why wouldn’t it be interested in owning the whole enchilada?
GE has already acquired more than $10 billion in oil and gas assets in the last decade, and asset prices have never been lower. General Electric’s oil and gas division has grown to be the company’s fourth-largest division, but a buyout of BHI would put GE in rare company in the oilfield services space.
“If they buy Baker Hughes, they’re immediately in the top 3,” Barclays analyst David Anderson said in April. “This is sort of the big missing piece.”
National-Oilwell Varco, Inc. (NOV)
Back in April, CNBC analyst Jim Cramer discussed the benefits of a potential marriage between GE and NOV. Cramer believes that General Electric’s Industrial Internet, which improves machine efficiency via its system of sensors and Predix cloud software, could dramatically improve the performance of NOV’s equipment.
“Oil well drilling sure could use that, and the king of drilling, National Oilwell Varco, could use Predix on its machines so you would know ahead of time when they were ready for service,” Cramer explained.
The two companies are already working together to provide floating production storage units, so GE clearly recognizes the benefits of combining the two companies’ engineering strengths.
Weatherford International Plc (WFT)
On one hand, WFT would be the easiest bite to swallow because its $5 billion market cap is by far the smallest of the three stocks mentioned. Unfortunately for WFT shareholders, there is a good reason why the company isn’t as large as its rivals.
WFT is a distant fourth in most of the categories that BHI and HAL operate. In addition, one of WFT’s biggest strengths is its artificial lifts business. Artificial lifts are one of the specialties of 2013 GE buyout Lufkin Industries.
Furthermore, WFT’s debt-to-equity ratio of 1.54 is a huge red flag compared to the 0.26 ratio of BHI. NOV also has a high debt-to-equity ratio (2.92).
“It seems to make a lot less sense when you can buy much better franchises without any debt or operational weaknesses,” one analyst said of a WFT buyout earlier this year. However, you can never rule out the possibility that GE will opt to go bargain shopping, and you certainly can’t argue with WFT’s potential price tag.
As of this writing, Wayne Duggan was long BHI and HAL.
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