Potential Acquisition Candidates For GE, Exxon And Others

by: Marc Courtenay

"History must repeat itself because we pay such little attention to it the first time." (Blackie Sherrod, sportswriter born 1919 and still "kicking")

On April 8th, we learned that General Electric (NYSE:GE) would be acquiring Lufkin Industries (NASDAQ:LUFK). The deal is one of the three largest in the oilfield machinery and equipment industry during the past decade, and sets the stage for further acquisitions in this sector. Investors should start considering which companies might be next.

Bloomberg had been saying since September 2012 that LUFK was a takeover target when its stock had fallen to the lowest price in 3 years. "Lufkin will more than double GE's share of the artificial lift segment and give it about 15 percent market share," Julian Mitchell, an analyst at Credit Suisse in New York wrote in a note to clients.

Companies like GE have access to billions of dollars at low-to-zero interest rate cost-of-borrowing. The LUFK deal is only one of the energy-related purchases that it has been making, and it won't be the last. That's why I've written this article, so we investors can begin looking for the next likely takeover targets of companies like GE and Exxon Mobil (NYSE:XOM).

The oil and gas sector has become GE's fastest-growing division, with sales since 2009 up 57 percent to $15.2 billion. Its strategy is based on the premise that a shale-oil bonanza is poised to make the U.S. the world's largest crude producer and that natural gas prices have recovered.

Which companies will GE (and perhaps other big players such as Exxon Mobil) go after next? Which shareholders will be as fortunate as Lufkin's, who'll receive $88.50 per share in cash, which is 38 percent more than Lufkin's $63.93 close on April 5th, the Friday before the announcement?

Chart Industries (NASDAQ:GTLS), which reports earnings on April 22nd, has been bandied about for months as a takeover target. It manufactures and supplies engineered equipment used in the production, storage, and end-use of hydrocarbon and industrial gases in the United States, the Czech Republic, China, Germany, and internationally.

With its relatively small market cap of only $2.37 billion, it could easily be gobbled up. Remember, GE is offering to pay around $3.3 billion for LUFK.

The downside to the GTLS idea is that its shares are selling at near its 52-week high of $83.69. Yet when we consider that it has a Price-to-Earnings-to Growth (PEG) rate of less than 1 and a forward PE ratio of around 18, GTLS may still be considered a good value.

Concerning this topic, I'd encourage you to watch this video, but please wait till you finish reading what I have to say. Just because a famous "talking head" considers a company an acquisition target doesn't make it so.

Chart Industries is one of the global leaders in the production of the equipment that liquefies natural gas, yet there are some privately-held companies that compete with it. The premium for those privately held businesses may be more tempting.

That's said, I'd also consider Atwood Oceanics (NYSE:ATW) an even more irresistible acquisition bulls-eye. This Houston, Texas firm is an offshore drilling contractor that engages in the drilling and completion of exploratory and developmental oil and gas wells.

ATW, with a PEG ratio of only 0.50, owns a fleet of approximately 11 mobile offshore drilling units primarily located in the United States, Gulf of Mexico, the Mediterranean Sea, offshore West Africa, offshore southeast Asia, and offshore Australia. It also has three ultra-deep-water drill ships, and two high-specification jack ups under construction.

At $49.34-a-share, ATW is selling at a Price-to-Book value of 1.6 and a forward (1-year) PE ratio of only 8.23. It's priced like LUFK was back in September 2012, and its trailing twelve month operating margin (39%) and profit margin (33%) are too good to pass up.

ATW, which next reports earnings on May 1st, has a market cap of only $3.32 billion, which is bite-size for a XOM or a GE. Another one-swallow menu item for these behemoth acquirers is a company like Clean Harbors, Inc. (NYSE:CLH), which steps into the earnings confessional on April 29th.

It would sure look responsible for a big integrated energy company like XOM or Chevron (NYSE:CVX) to acquire the leading provider of environmental, energy and industrial services in North America. The company serves a diverse customer base, including a majority of the Fortune 500 companies, thousands of smaller private entities and numerous federal, state, provincial and local governmental agencies.

Through its Safety-Kleen subsidiary, Clean Harbors also is a premier provider of used oil recycling and re-refining, parts washers and environmental services for the small quantity generator market. No wonder last quarter it reported a stunning 62% year-over-year growth in earnings-per-share (EPS).

When the company reports on Monday April 29th, the analyst community is anticipating an average EPS number that is 43% below the previous quarter (which included the earnings generated by the massive clean-up after Superstorm Sandy). Yet the same group of analysts is anticipating a 55% increase in sales growth and revenue.

CLH is currently priced with a PEG ratio (5-year expected) of around 1.6 and a forward PE ratio of 17.5 with a market cap of $3.54 billion. From many perspectives, it's priced-to-buy and acquire, yet it's trading well below its 52-week high of $69.25.

Some other names to consider as takeover targets would include FMC Technologies, Inc. (NYSE:FTI), which provides technology solutions for the energy industry worldwide and hit a 52-week high on April 11th. Another less conspicuous target is the diversified chemical company FMC Corp. (NYSE:FMC), which has a market cap of only $8 billion plus a forward PE of less than 13.

Another lesser-known possibility is Atmos Energy (NYSE:ATO), the $3.93 billion (market cap) company that engages in the distribution, transmission, and storage of natural gas in the United States. As of the last quarter of 2012, its year-over-year EPS growth was 17.5%.

Unlike many of the other names, ATO pays a 3.23% dividend. It would be a good fit for a large company that produces natural gas such as Chesapeake Energy (NYSE:CHK) or XOM that may want to expand its ability to handle, transmit and store natural gas.

Besides its regulated distribution operations, Atmos Energy owns a regulated transmission and storage business within Texas. Atmos Pipeline -- Texas is one of the largest intrastate systems in the state. Its Gas Supply and Services Group provides gas supply and transportation support for our six regulated distribution divisions.

ATO's nonregulated operations constitute a significant and growing part of its business growth. Organized under Atmos Energy Holdings, they include Atmos Energy Marketing, Atmos Pipeline and Storage, Atmos Gathering Company and Atmos Power Systems.

These are the kinds of companies that are likely to be scooped up in easy-to-finance arrangements that will make shareholders delighted when the announcements are made and the stocks' prices soars. It's just a matter of time, so do your due diligence and start accumulating.

Disclosure: I am long GE, CVX. 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.