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GE's purchase makes drilling equipment makers the next targets

By Bob Downing Published: April 9, 2013

From Bloomberg News:

Apr 09, 2013 10:17 am ET

April 9 (Bloomberg) -- General Electric Co.’s planned purchase of pump maker Lufkin Industries Inc. at the industry’s most expensive price tag is highlighting demand for oilfield equipment that may make Weatherford International Ltd. and Tesco Corp. the next targets.

GE said yesterday that it agreed to buy the Lufkin, Texas- based manufacturer for about $3.3 billion as part of efforts to expand in oil and gas services. GE estimates that 94 percent of existing oil wells use so-called artificial-lift pumps to help draw out the fuel, illustrating the need for the equipment made by Lufkin and its main competitor Weatherford. Oracle Investment Research said Weatherford, which commands 40 percent of the market for rod lifts, may also draw takeover interest.

GE’s offer values the pump maker at almost 17 times its profit in the past 12 months, the highest on record among similar-sized oilfield equipment deals, according to data compiled by Bloomberg. Among other candidates, Flotek Industries Inc., a $761 million maker of well equipment and specialty chemicals, could appeal to Halliburton Co. or National Oilwell Varco Inc., while Tesco’s rig-automation technology could draw buyers to the Houston-based company, according to Stephens Inc.

Lufkin owners are getting “a fabulous price,” James Wicklund, a Dallas-based analyst at Credit Suisse Group AG, said in a telephone interview. “I’m sure that when the SEC document comes out, we’ll see that Lufkin talked to several potential buyers, and I would expect that the larger cap oilfield service companies are all looking for strategic acquisitions.”

Steep Multiple

Anne Pearson, a spokeswoman for Lufkin who works at Dennard-Lascar Associates LLC, declined to comment on whether the company received interest from other suitors.

GE is paying $88.50 a share for Lufkin, or about $3.3 billion including net debt. The offer values the maker of rod lifts at almost 17 times its $195 million of trailing 12-month earnings before interest, taxes, depreciation and amortization. That ranks as the steepest multiple ever paid for an oilfield- equipment deal larger than $1 billion, data compiled by Bloomberg show.

The offer is almost 14 times analysts’ average estimate for Ebitda in 2013, the data show.

“It’s a pretty pleasant surprise valuation,” said Tim Beranek, a money manager at Denver-based Cambiar Investors LLC, which oversees about $7 billion and owns more than 500,000 Lufkin shares, according to the most recent filing.

Weatherford Appeal

The transaction implies that Weatherford, Lufkin’s closest competitor, is undervalued and also may be an appealing takeover candidate, said Laurence Balter, chief investment strategist at Oracle Investment Research, which owns Weatherford stock.

Even after Weatherford’s shares surged yesterday by the most in almost three months on the Lufkin news, the Geneva-based company’s $18 billion enterprise value, which includes $8.3 billion of net debt, is equal to just 7.3 times its trailing 12- month Ebitda, data compiled by Bloomberg show.

Today, Weatherford shares were unchanged at $12.49 at 10:01 a.m.

“It’s mega cheap,” Balter said in a phone interview from Fox Island, Washington. “It remains a great acquisition target. There’s a very high barrier to entry in this business.”

Accounting issues at Weatherford that had wiped out half its market value are mostly behind the company, according to Credit Suisse’s Wicklund.

Fading Issues

“Most of the issues that would stop Weatherford from being a target are probably gone with the closing of their financials for 2012,” Wicklund said.

The U.S. government also is investigating the company for possible violation of the Foreign Corrupt Practices Act. A deal is unlikely until that’s resolved, J. David Anderson, an analyst at JPMorgan Chase & Co. in New York, wrote today in an e-mail.

Karen David-Green, a spokeswoman for Weatherford, didn’t respond to a phone call or e-mail seeking comment.

Flotek, a maker of oilfield chemicals, also rose yesterday, climbing more than 3 percent for the biggest gain in almost a month. It would make sense for Halliburton, the world’s second- largest oilfield servicer and one of Flotek’s customers, to pursue its Houston-based supplier, said Michael Marino, an analyst at Stephens. National Oilwell Varco, with a market value of $29 billion, could also pursue Flotek, he said.

“Flotek could benefit from a larger distribution platform that the bigger guys might have,” Marino said in a phone interview from Houston. “Oilfield chemicals is a growing business right now and people want more exposure.”

Tesco Technology

Tesco’s rig-automation technology is attractive to a lot of different manufacturers, Marino said. Producers, servicers and equipment makers are working on technology to take humans out of the most repetitive, dangerous and time-consuming parts of oilfield work.

Today, Flotek shares fell 0.5 percent to $15.99, while Tesco rose 0.9 percent to $12.24.

Representatives at Tesco, which has a market value of $473 million, and Flotek didn’t respond to phone calls or e-mails seeking comment on whether they have been approached or would consider a sale. Susie McMichael, a spokeswoman for Houston- based Halliburton, declined in an e-mail to comment on the company’s interest in a takeover, while Clay Williams, chief financial officer at Houston-based National Oilwell Varco, didn’t respond to an e-mail seeking comment.

Expensive Valuations

While there are other attractive oilfield equipment makers, buyers may balk at their expensive valuations, said Cambiar’s Beranek. Oil and gas services companies larger than $1 billion command a median Ebitda multiple of 8.9, while Halliburton, Baker Hughes Inc. and National Oilwell Varco -- three of the industry’s biggest companies -- trade for less than 7 times Ebitda, data compiled by Bloomberg show. Schlumberger Ltd., the world’s largest oil-services company, has a ratio of 9.6.

“There aren’t a lot of other companies like GE out there that necessarily would be able to come in and buy a company at these sorts of valuations and make it make sense,” Beranek said.

Still, with capital expenditures at the four largest oil- service companies having more than quadrupled over the last six years, that underscores the demand for related equipment, said Credit Suisse’s Wicklund.

The oilfield services and equipment industry is poised to grow as customers pay more to reach harder-to-find hydrocarbons. Global exploration and production spending is expected to climb 5.5 percent this year to a record $645 billion, James Crandell, an analyst at Cowen Group Inc. in New York, wrote in January in a note to investors.

“There are a number of companies that are looking for strategic additions to their current product offerings,” Credit Suisse’s Wicklund said. “Anybody smaller than them is a potential target.”



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