General Electric Co. (GE)’s burgeoning interest in oil and gas assets and a cash stockpile approaching the highest level in at least a decade is turning Dresser-Rand Group Inc. and Dril-Quip Inc. into potential takeover targets.
Chief Executive Officer Jeffrey Immelt built the company’s oil and gas unit, GE’s fastest-growing business since 2008, through acquisitions including the July purchase of Lufkin Industries Inc. for more than $3 billion. Sanford C. Bernstein & Co. sees GE deploying some of its $19.3 billion in cash on takeovers amid a boom in U.S. drilling.
Dresser-Rand, which makes compressors and turbines, and Dril-Quip, a subsea drilling equipment manufacturer, could be attractive targets for GE, Global Financial Private Capital LLC said. Dril-Quip (DRQ) is projected to boost sales by 63 percent in the next three years, faster than all but two similar-sized U.S. peers, and analysts see Dresser-Rand expanding 51 percent, according to data compiled by Bloomberg. While a GE bid for those companies could raise antitrust concerns, Chart Industries Inc., a maker of natural gas storage equipment, could also lure interest, Eagle Asset Management Inc. said.
“Good assets are available” in oil and gas, Steven Winoker, a New York-based analyst at Bernstein, said in a phone interview. “They want to continue to be bigger here and make it a bigger part of the company.”
Seth Martin, a spokesman for Fairfield, Connecticut-based GE, said the company doesn’t comment on speculation.
Immelt said in December that he wants industrial divisions to eventually account for 70 percent of earnings, and told a conference in May that GE is considering spinning off parts of its finance unit through an initial public offering.
He has bought companies including Lufkin, Dresser Inc. and the well-support division of John Wood Group Plc (WG/) to help expand the oil and gas division’s annual sales by 54 percent in four years to $15.2 billion in 2012. He’s positioning GE to take advantage of what he called a “natural gas revolution” and surging oil production from the U.S. shale drilling boom.
American crude output grew at a record pace in 2012, rising more than at any time since the first commercial oil well was drilled in 1859.
That’s helping drive up capital spending for exploration and production, with worldwide expenditures projected to climb to a record $678 billion in 2013, up 10 percent from 2012, James West, an analyst at Barclays Plc in New York, wrote in a June 4 report.
“No matter what you think of the oil business or where you think the price of oil is going, it would be hard not to look at this as a growth business,” said Chris Bertelsen, chief investment officer of Sarasota, Florida-based Global Financial, which oversees about $2.1 billion. “It makes sense for them to look at small, bolt-on acquisitions where it’s not economical for them to go through a lot of R&D and brand it as their own.”
Immelt’s cash hoard, bolstered by GE’s $16.7 billion exit this year from NBCUniversal, creates an opening for more deals in the oil and gas industry, with Dril-Quip and Dresser-Rand among attractive potential targets, Winoker of Bernstein wrote in an Aug. 21 note to clients.
Blaise Derrico, a Dresser-Rand spokesman, said the company doesn’t comment on speculation. Dril-Quip Chief Financial Officer Jerry Brooks didn’t respond to phone messages seeking comment. The two Houston-based companies have market values of $4.7 billion and $4.3 billion, respectively.
Analysts estimate Dresser-Rand’s revenue will climb 51 percent from last year to $4.1 billion in 2015, compared with a median growth rate of 35 percent at U.S. oil and gas services companies valued at more than $1 billion, according to data compiled by Bloomberg.
Dresser-Rand is an acquisition candidate for a more diversified capital equipment company or industrial conglomerate looking to capitalize on increasing demand for oil equipment, J. David Anderson, a New York-based analyst at JPMorgan Chase & Co., said in May.
Dril-Quip will boost sales to $1.2 billion in 2015, up from $733 million last year, beating the growth rate at 93 percent of similar-sized peers, data compiled by Bloomberg show.
“Dril-Quip is always at the top of the list of companies that are talked about as a consolidation target,” Will Gabrielski, a New York-based analyst at Lazard Capital Markets LLC, said in a phone interview. It “has very visible multiyear growth in front of it.”
A deal with GE could potentially be viewed by regulators as anti-competitive, he said.
While a takeover of Dresser-Rand, which lists GE Oil & Gas as a top competitor, could also face antitrust scrutiny, Chart (GTLS) may be an appealing target, Eagle Asset’s Eric Mintz said. The investment firm oversees about $10 billion, including Dresser-Rand, Dril-Quip and Chart shares.
Chart makes storage equipment for liquefied natural gas, a fuel that many railroads are studying as they seek to cut operating costs. Sales at the company, which has a market value of $3.6 billion, are poised to jump 66 percent through 2015 to $1.7 billion, according to the average of analysts’ estimates compiled by Bloomberg.
“GE has got a big locomotive business,” Mintz, a St. Petersburg, Florida-based fund manager, said in a phone interview. “If this is the next wave in spending by railroads, it certainly would be very attractive to them.”
Chris Rioux, manager of investor relations and financial planning at Garfield Heights, Ohio-based Chart, said the company doesn’t comment on speculation.
Today, Dresser-Rand (DRC) shares climbed less than 1 percent to $61.67 at the close in New York, while Dril-Quip fell less than 1 percent to $106.19. Chart rose 0.2 percent to $118.65.
Relatively high valuations could deter GE. Dril-Quip’s price-earnings ratio of 30 tops all but two peers, while Dresser-Rand is pricier than 72 percent of the group, according to data compiled by Bloomberg.
Chart’s enterprise value of $3.7 billion is 23 times its earnings before interest, taxes, depreciation and amortization, a higher multiple than 95 percent of fabricated metal and hardware manufacturing companies valued at more than $1 billion, data compiled by Bloomberg show.
Focusing on oil and gas targets like Chart would allow GE to expand in an industry with high growth potential, said Charlie Smith, chief investment officer of Pittsburgh-based Fort Pitt Capital Group Inc., which oversees $1.5 billion including GE shares.
“Their energy-focused efforts in M&A over the past few years have been a good idea,” Smith said in a phone interview. “It should really be a sweet spot for GE.”