GE Oil & Gas: Ambitious Diversity that Pays Off

Ambitious acquisitions and a diversity that should have any investor hot and bothered: This is General Electric, and what we’re really eyeing here is the company’s oil and gas segment, GE Oil & Gas.

Here’s why in a nutshell:

•    The company is VERY forward-thinking when it comes to oil and gas, and it’s getting in on every tech avenue out there, from massive LNG projects with a real future to the subsea drilling tech market which is positioned to experience significant growth over the next few years
•    Its diverse portfolio also includes turbomachinery (which is in huge demand), pressure control tech and remote monitoring and diagnostics
•    It is prioritizing research and development most recently with a $110 million global research center to be based in Oklahoma City
•    GE’s Oil & Gas segment is the fastest-growing in the company, with annual 16% revenue growth over the last three years
•    As of the time of writing, GE’s market cap was $244 billion and it was currently trading for $23.46/share, with shares up 12.7% YTD and 34.6% above their 52-week low of $17.43.
•    GE’s diversity is smart and very focused: It’s downsizing its banking operations and divesting stakes and using the cash to acquire companies that complement its industrial businesses

Since January THIS YEAR ALONE, GE Oil & Gas has nailed some amazing deals:

•    The acquisition of Lufkin Industries significantly advances GE’s oil and gas equipment market share
•    A $620 million, 22-year contract service agreement to provide a broad range of advanced technology for QGC’s Queensland Curtis LNG plant offshore Australia
•    A $333 million 16-year service contract extension for the Sakhalin-2 LNG plant in Russia
•    A $500 million contract to supply Petrobras with gas turbines and electric generators for new pre-salt offshore oil projects in Brazil
•    $600 million in propulsion systems equipment for multiple customers

Let’s take a closer look as some of these contractual gems and acquisitions:

The Lufkin Acquisition

Last week, GE announced it would acquire Lufkin Industries for $3.3 billion. This will significantly increase GE Oil & Gas’ market share.

GE already supplies the industry with electronic submersible pumps in the artificial lift sector. The Lufkin acquisition expands this portfolio nicely because Lufkin’s technologies include rod lift, gas lift, plunger lift, hydraulic lift and progressive cavity pumps. This is a high demand market and GE has recognized the changing dynamics. Lufkin also provides automation systems for oil and gas wells for optimizing lift technologies and reducing production costs.

This GE artificial lift and automation systems portfolio expansion comes as demand increases for unconventional hydrocarbons, pushing up the share of the lift segment from 19% in 2010 to over 30% in 2012—and rising.

Artificial lift technology improves production at oil wells that lack the pressure to bring the hydrocarbons to the surface. Overall, 94% of all oil wells are using artificial lift systems, and demand is on the rise.

In the lift segment, what GE Oil & Gas is getting is Lufkin’s nine production facilities and its global network of service centers, 110 around the world. Lufkin’s automation systems are used in over 150,000 wells globally.

GE Oil & Gas will also be getting its hands on Lufkin’s secondary business: industrial gears and bearings, which are performance enhancers for turbines used by the industry. GE itself already supplies turbines, so this is a boost to its existing supply chain that includes three production facilities and seven service centers.

Lufkin’s revenues were up 37% from 2011, hitting $1.3 billion in 2012, with 47% growth in artificial lift orders.

Subsea Processing Bonanza

In January, GE won a$500 million contract to supply Petrobras with gas turbines and electric generators for use in a new pre-salt offshore oil project off Brazil. It has also won around $600 million in contracts with multiple customers for further propulsion systems equipment.
Of the series of contracts GE has landed for subsea tech in Brazil, here are the four key contracts that we’re watching, courtesy of Yahoo Finance:

•    7 “Espadon 200” drillships to be built by Estaleiro Atlântico Sul (EAS) in Ipojuca, northeast Brazil will be supplied with electrical power generation, propulsion, drilling drives. DP and control systems from GE.
•    Ecovix-Engevix will use integrated electric power and propulsion, drilling drives, DP and controls packages from GE for three new GustoMSC PRD 12000 ultra-deepwater drillships it is building in Rio Grande, in the south of the country.
•    Enseada do Paraguaçu Shipyard will use a comprehensively integrated package of electric power, propulsion, drilling drives, DP and control systems from GE for six new ultra-deepwater drilling ships (also GustoMSC PRD 12000 design) it is building in Maragogipe, northeast Brazil.
•    Keppel Offshore & Marine Ltd will use GE’s thruster power, propulsion and drilling drive technology for six new, semisubmersible drilling rigs being built for Brazil’s national oil company Petrobras. Keppel is a leading designer and builder of high-performance, mobile offshore rigs.

As we noted in an earlier newsletter, the subsea sector is poised for major growth.

Right now, we’re looking at a 70%-30% spread for total global onshore and offshore oil and gas production, respectively. Of that 30% of offshore production, subsea oil and gas production represents 9%. That is about to change as E&P companies go deeper and deeper, taking advantage of new technology that can handle higher pressure and higher temperatures to ward off declining production.

Subsea production systems are wells located on the sea floor rather than the surface, and the real advantage is that they allow you to use one platform to service many well areas.  And as the cost of offshore production rises, this could represent significant savings.

Subsea production could rival traditional offshore production in less than 15-20 years, and we’re looking at expected market growth for subsea facilities of around $27 billion in 2011 to an amazing $130 billion in 2020.

Subsea capital expenditure is set to grow at 14.8% to 2017, according to Infield Systems, and driving this growth is investment in Northern Europe, West Africa, Brazil and the US Gulf of Mexico.

This year is already showing growth, and that growth is expected to continue unabated over the next five years—as demonstrated by the demand for subsea infrastructure. This is where we really see a GE Oil & Gas bonanza.

Queensland LNG

In March, GE Oil & Gas announced it had secured a $620 million, 22-year contract service agreement to provide a broad range of advanced technology services for QGC’s Queensland Curtis LNG plant off Australia’s east coast.

This QCLNG plant will be the world’s first facility to turn coal seam gas into LNG. GE will provide aeroderivative gas turbines, centrifugal compressors, gearboxes, generators and auxiliaries, as well as monitoring and diagnostic serves. Production is scheduled to begin in 2014, with the bulk of the LNG going to such export markets as China, Japan, and Singapore.

According to GE, not only will the Queensland facility be one of the most efficient in the world in terms of emissions, but it shows that the GE management is savvy in its understanding of how pollution is contributing to climate change and how that could undermine support for natural gas. And here is one of the keys for investors: savvy management, one that straddles the here and now ties this into longer-term predictive scenarios that make sense.

Sakhalin LNG

GE Oil & Gas has received a 16-year service contract extension valued at $333 million for the Sakhalin-2 LNG plant in Russia. The contract extension covers 4 GE Frame 7EA gas turbines that drive the process trains for Sakhalin’s LNG plant and five GE Frame 5 gas turbines that are used for electricity production at the site. GE has also signed an MOU with the Sakhalin provincial government to work to develop power generation projects to meet the island’s future energy needs.

Russia is the world’s second-largest producer of gas right now, behind the US, and Sakhalin-2 is its only LNG project. But it’s eyeing others, and GE will likely get in on these as well, as Russia ambitiously pursues LNG diversification to offset its potential European market loss for gas as Mediterranean alternatives loom.