General Electric Company (NYSE:GE) has seen substantial growth in its Oil and Gas segment, achieving an 11.43% CAGR in the revenue over 5 years. As the other segments of the company decline or become stagnant, Oil and Gas is quickly becoming the most important segment of the company, currently sourcing more than 10% of the company's total revenue and more than 14% of the company's total profits.
Source: GE Annual Report 2012
GE Oil and Gas segment has a proven record for acquisitions, integrating and growing companies, demonstrated by $11 billion in acquisitions since 2007. In an effort to further its growth in this sector, the company has recently announced that it would acquire Lufkin Industries for around USD 3.1 Billion. Lufkin Industries Inc. (LUFK) is a global supplier of artificial lift products, technology, services and solutions, including automated control equipment and analytical products for artificial lift equipment, to the oil and gas industry. In addition, the company designs, manufactures and services power transmission products for use in energy infrastructure and industrial applications.
Lufkin industries are the suppliers of turbo gearing and specialty bearing products to GE, and this acquisition will allow GE to strengthen its supply chain and utilize LUFK's expertise in order to enhance its services in the Turbomachinery sector.
However, in my opinion, the greatest benefit for GE from this acquisition is that it will accelerate GE's growth in the oilfield products sector through artificial lift with solutions to a wide variety of well types and technologies for production automation and optimization. Lufkin manufactures and services a wide range of artificial lift equipment through a global network of more than a 100 service centers and 9 manufacturing facilities.
The global artificial lift sector is expected to approach USD 13 billion in 2013, according to Spears & Associates. Growth in the sector is driven by the development of unconventional shale plays, liquids-rich resource plays and producers' focus on optimizing the ultimate recoveries from mature oil fields. The artificial lift market grew 23% YoY and within this market, rod lift systems represented 31 percent of the total market size of USD 10.9 billion in 2012. Lufkin Industries is an industry leader in rod lift solutions; approximately 76% of North American oil and gas operators have used the company's equipment. The demand for the company's core product, the rod lift, grew rapidly in 2012 with revenues from rod lift reaching USD 506 million, a growth of 25% YoY.
Apart from this, Lufkin's oilfield products segment also designs, manufactures, installs and services automated control equipment and analytical products for artificial lift equipment. The automation solutions provided by LUFK helps its clients in lowering production costs and optimizing well efficiency. The company develops leading automation solutions across all artificial lift technologies and has recently made several acquisitions in order to expand the company's portfolio of artificial lift products and services and to expand its geographic presence.
GE, over recent years, has made a concerted effort to increase its presence in oil and gas, and with the acquisition of Lufkin Industries, GE would be able to consolidate its position in one of the fastest growing segments in the oil and gas market. GE, with its financial strength and global presence, would be better able to extract value from LUFK's assets and technologies. I would expect post acquisition LUFK to quickly expand its presence in the international markets, especially in Latin America, Russia and the Middle East.
The demand for artificial lifts is dependent upon the level of onshore drilling and the work over activity, which, in turn, is dependent upon the producers' perceptions of the stability of oil price and the demand for oil. According to the U.S. Energy Information Administration forecasts, worldwide demand for oil would grow 25%, reaching 112 million barrels per day by 2035 from the current level of approximately 90 million barrels per day. In order to benefit from this growth in demand and depleting readily accessible reserves, oil and gas producers are looking to extend the ultimate recovery of the existing wells and also turning to unconventional reservoirs such as shale formations. These developments in the oil and gas sector would cause an increase in demand for artificial lifts in the future.
The oil and gas sector looks to be a promising playing field for GE and the acquisition of LUFK would make it the largest provider of artificial lift solutions in North America. With the financial strength of GE, I would not only expect the company to take Lufkin Industries' to the international arena, but also expect the company to continue to boost its growth in this sector through further acquisitions. Based on high expected demand and promising future outlook, I would recommend a buy rating for General Electric Company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.