Lufkin Deal Seen Likely With Low Valuation: Real M&A
Lufkin Industries Inc. (LUFK), the maker of oil-well pumps that fell to its lowest valuation in almost three years, is shaping up to be a deal target as new drilling techniques fuel a boom in shale-oil production.
The Lufkin, Texas-based company, which lost almost a third of its market value since February after missing profit estimates and reducing forecasts, was valued last month at 10.8 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That was the cheapest since December 2009, the data show.
With new technology opening access to oil trapped in shale rock and spurring demand for Lufkin’s pumps, the $1.97 billion company is still projected to post record earnings this year and next. Lufkin could attract bids from oil-services firms such as Schlumberger Ltd. (SLB), Halliburton Co. and Baker Hughes Inc. (BHI), according to Citigroup Inc. and Gabelli & Co. A takeover could be valued at about $75 a share, a 28 percent premium, Global Hunter Securities LLC said.
“There is no shortage of suitors,” Eric Mintz, a St. Petersburg, Florida-based fund manager who helps oversee more than $8 billion at Eagle Asset Management Inc., said in a telephone interview. Lufkin’s appeal is “their leadership position in an attractive and growing segment of the market. There’s clearly a secular growth trend with the tailwinds of oil-shale development.”
Mintz said Eagle Asset holds about 2.3 million Lufkin shares, making it the company’s biggest stockholder, according to data compiled by Bloomberg.
Christopher Boone, Lufkin’s chief financial officer, declined in an e-mail to comment on whether the company had been approached by potential buyers or would consider a sale.
Lufkin was founded in 1902 as a maker of railroad and sawmill equipment before expanding into oilfield pumps and power-transmission equipment. Oil-related products such as its artificial-lift pumpjacks, which are used to draw the fuel out of the ground when an older well loses its natural pressure, accounted for 79 percent of revenue in 2011.
On July 30, Lufkin shares had their biggest one-day drop since the company went public in 1990, tumbling 21 percent after the pump maker reported earnings that missed forecasts for a second straight quarter. Lufkin, which cited expansion costs and expenses related to a labor dispute in Argentina, also cut its profit forecast for the full year.
“They stumbled pretty badly for the second time in a row and I think investors just threw up their hands,” said Jon Loth, a Minneapolis-based money manager for Nuveen Asset Management’s Small Cap Growth Opportunities Fund, which owns Lufkin shares.
Last month, Lufkin’s enterprise value fell to as low as 10.8 times its Ebitda in the last 12 months, the cheapest multiple in almost three years, according to data compiled by Bloomberg.
The stock closed last week at $58.59, still 31 percent below its February high of $85.39. It traded at 13.4 times Ebitda, compared with its average multiple of 18 times during the past three years, the data show.
Today, Lufkin shares fell 1.7 percent to $57.62.
Even after the company trimmed its forecast, analysts project Lufkin will more than double profit in 2013 from last year’s level on sales gains of 53 percent, according to estimates compiled by Bloomberg.
Lufkin stands to benefit as advances in the technology for hydraulic fracturing, or fracking, free gas and oil trapped in dense shale-rock formations, opening up new areas in North America for exploration and drilling, said Brian Uhlmer, head of energy research at Global Hunter Securities in Houston.
The company’s specialty in pumpjacks, also known as rod- lift units, makes it an attractive takeover candidate for oil- services companies looking to profit from the boom, he said.
Oil-related activity in the most active U.S. shale plays -- the Eagle Ford region and Permian Basin in Texas and the Bakken formation in North Dakota -- has grown more than fivefold since mid-2009 to a total of 784 rigs as of June 30, according to data compiled by Bloomberg. U.S. oil production increased 7.8 percent from 2007 to 2010 and is expected to climb another 22 percent to 6.7 million barrels per day by 2020, according to data from the U.S. Energy Information Administration.
“The rod-lift market should expand dramatically,” Uhlmer said in a phone interview. Lufkin is “the best play on that growing market. It would be very, very attractive to a potential candidate who could buy them and own the technology.”
Robin Shoemaker, a New York-based analyst at Citigroup, said Schlumberger, the world’s largest oilfield-services provider, or Baker Hughes, the third-biggest, could seek to acquire Lufkin to expand their existing artificial-lift businesses.
“The bigger players have been trying to grow, through acquisitions and organically,” Shoemaker said in a phone interview. With a market value of less than $2 billion, Lufkin “is an acquisition that would be easily handled by a large company.”
Stephen Harris, a spokesman for Schlumberger, which is based in Houston and Paris, declined to comment when asked whether the company may bid for Lufkin. Pamela Easton, a spokeswoman for Houston-based Baker Hughes said in an e-mail that the company wouldn’t comment on speculation.
While Schlumberger and Baker Hughes may be interested in Lufkin, Halliburton (HAL) “makes the most sense” because it doesn’t currently have a foothold in artificial-lift pumps, said Andrea Sharkey, an analyst for Rye, New York-based Gabelli, a unit of Gamco Investors Inc., which oversees about $36 billion and owns Lufkin shares. She said Lufkin could fetch $65 to $70 a share in a takeover, at least an 11 percent premium.
Beverly Stafford, a spokeswoman for Houston-based Halliburton, didn’t respond to a phone message and an e-mail seeking comment.
Lufkin also has been expanding its international operations, with production at its Romanian factory scheduled to be begin in the fourth quarter. Non-U.S. sales made up 37 percent of Lufkin’s total revenue in 2011 and that may lure an international buyer such as Norwegian oil-services company Aker Solutions ASA, according to Neal Dingmann, a Houston-based analyst with SunTrust Robinson Humphrey Inc.
Ivar Simensen, a spokesman for Lysaker, Norway-based Aker Solutions, said in an e-mail that the company doesn’t comment on speculation when asked about a possible bid for Lufkin.
Even after its decline this year, Lufkin’s Ebitda multiple is more than 14 percent higher than the average among oil and gas services companies with a market value of more than $1 billion, according to data compiled by Bloomberg.
While management may not be willing to sell for less than “well over” $100 a share, acquirers still may be drawn to Lufkin’s equipment, said Tim Beranek, a Denver-based money manager who specializes in energy companies at Cambiar Investors LLC, which oversees $6.6 billion, including Lufkin shares.
With crude oil prices on the New York Mercantile Exchange projected by analysts to remain above $90 a barrel into 2014, oil producers will continue to use fracking and other techniques to find and drill for more of the fuel, underpinning demand for Lufkin’s pumps, Beranek said.
For an oilfield-services company looking to tap into that demand, Lufkin is “the ideal niche addition,” SunTrust’s Dingmann said.
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