General Electric (NYSE:GE) announced on Monday that it is expanding its oil and gas business with the acquisition of Lufkin Industries for $3.3 billion. Lufkin is a leading provider of artificial lift technology, which helps improve production from oil wells whose natural pressure is insufficient to bring oil/gas to the surface. This technology is used in approximately 94% of the 1 million oil wells in production worldwide, and the market for it is expected to expand further due to an increasing number of maturing oil fields.
This acquisition significantly advances GE's artificial lift product portfolio and its market presence in this crucial oil and gas equipment segment. Lufkin Industries is also a major manufacturer of industrial gears and bearings, and its acquisition will also strengthen GE's turbomachinery supply chain.
GE's oil and gas segment constituted $15.2 billion of the company's $147 billion revenues in 2012. Revenues from this segment have grown at a compounded annual growth rate of 16% over the past three years, driven by strong organic growth supported by acquisitions. We believe that the oil and gas segment will continue to be one of GE's fastest growing segments driven by rising global demand for oil and gas, especially from emerging economies.
We currently have a stock price estimate of $23.40 for GE, marginally above its current market price.
Lufkin Advances GE's Product Portfolio and Market Presence in the Artificial Lift Segment
GE currently provides electronic submersible pumps (ESP) in the artificial lift segment of the global oil and gas equipment market. Lufkin will add a variety of other technologies including rod lift, gas lift, plunger lift, hydraulic lift and progressive cavity pumps, to this. Some of these product technologies like rod lift are seeing increasing demand due to the changing dynamics of the oil and gas production market.
Rising demand for unconventional shale and liquids-rich resource plays in North America has pushed up the share of rod lift systems in the artificial lift segment to 31% in 2012, from 19% in 2010, according to Spears & Associates data cited by GE. Overall, the expanded artificial lift product portfolio will allow GE to continue to grow in the current changing oil and gas production market.
Lufkin also provides a wide array of automation systems for oil and gas wells to optimize their artificial lift technologies with an ultimate objective to reduce production costs. Lufkin's automation systems are currently used in over 150,000 oil wells worldwide. Lufkin has nine production facilities for artificial lift equipment and services its products through a global network of 110 service centers.
The Acquisition Also Strengthens GE's Turbomachinery Supply Chain
Lufkin's second major business consists of industrial gears and bearings, which improve speed and power performance of turbines used largely in energy industry applications. In this segment, it is already a supplier to GE’s compressor and gas turbines. Thus, the acquisition will strengthen GE's turbomachinery supply chain. Lufkin has three turbomachinery production facilities and seven service centers.
Overall, Lufkin generated revenues of $1.3 billion in 2012, up 37% from 2011, and its bookings grew 38% year over year in 2012, driven by 47% year-over-year growth in artificial lift orders. The purchase price of $3.3 billion is roughly 13.5 times Lufkin's 2013 estimated earnings before interest, taxes, depreciation and amortization.
Lufkin Acquisition is In Line With GE's Strategy to Focus More on Industrial Businesses
This acquisition is in accordance with GE's strategy to increase focus on industrial businesses and reduce dependency on financial and other businesses. Under this strategy, GE divested its remaining stake in NBC Universal to Comcast (NASDAQ:CMCSA) for $18.1 billion in February, and is continuing to downsize its banking operations. The excess cash generated from these activities is being used by the company to acquire relatively small companies with high growth potential that fit well into its existing industrial businesses.