GE (NYSE: GE) Makes $3 Billion Bet on Oil

Brian Hicks

Written By Brian Hicks

Posted April 9, 2013

GE (NYSE: GE) CEO Jeff Immelt is jumping on the oil-boom bandwagon.

GE has agreed to purchase Lufkin Industries (NASDAQ: LUFK)—a company specializing in artificial lift technology. Artificial lift is the process of bringing hydrocarbons to the surface of reservoirs with low pressure and improving flowing consistency in wells.

The artificial lift technology industry alone grew by 37 percent in 2012, reaching $1.3 billion, and it is expected to reach $13 billion this year, as reported by CNBC.

The acquisition is worth $3.3 billion and is expected to be finalized later this year.

Lufkin’s fourth quarter earnings exceeded analyst expectations on equipment demand in the Bakken and Eagle Ford—two of the most prosperous shale areas in the country. The company will concede a dip in profits due to a downturn in onshore drilling.

Lufkin has 4,500 employees in more than 40 countries, and the company manufactures pumping units, power transmission equipment, well automation systems, and hydraulic submersible pumps. Up to 94 percent of companies will use the artificial lift in some form, according to Bloomberg.

oil rig picGE’s oil and gas department has also soared, growing 57 percent since 2009. GE has been taking an active role in the energy sector since selling and restructuring its 49 percent stake in NBC Universal to Comcast Corporation (NASDAQ: CMCSA).

This asset divestment has given GE more room to acquire companies in the oil and gas sector. The company has spent over $11 billion in acquisitions since 2007, and oil and gas is the fastest growing department within GE, making up 10 percent of its overall revenue.

The NBC/Comcast deal gave Immelt $16.7 billion to spend on expanding the industrial field within the energy sector. GE has a tailored interest in machinery and equipment, areas are laden with innovation and growth. Oil companies will need the latest advancements out there to keep the oil boom alive and well.

GE’s Contribution

Though GE is not wholly an oil and gas company, the global financial crisis played a role in GE’s retraction in financial services and the media world. Now, the company is looking to invest in something more concrete and long-lasting.

The manufacturing portion of the energy sector is one way to have a stable presence in a growing field. The company can pour its vast resource capital into just about any form of technology that will help oil companies be more successful in crude exploration.

GE also plans to ratchet up marketing for nodding donkeys—those famous mechanical devices that are a signature sight on barren oil fields in Texas. There is also a planned hiring of 125 scientists and engineers along with expanded research into drilling technology, according to Bloomberg.

$110 million dollars will go to a research center in Oklahoma City for the purpose of improving extraction rates in stubborn oil and gas reserves. It will also include more research into horizontal drilling and fracking.

GE recognizes the importance of these drilling methods in the shale oil boom—proof that the company has its corporate finger tapping the pulse of energy technology.

GE Oil and Gas

The expansion of the fossil fuel department within GE will give the company a stronger stake in a fast-growing industry. The United States is set to become the largest producer of crude in the world. With GE’s already sizable presence in the renewable market, delving deeply into petroleum resources will give the company the added advantage of investment in two diverse and opposing markets.

GE gets to have a stake in the oil-boom while investing in energy technology of the future. It will be interesting to see how GE will manage its renewable and fossil fuel markets in the future, but as of now the company is in a solid position within the energy market.

If GE plays its cards right, it can see vast profits through its oil and gas sector because of the shale craze that has spread throughout North America and the rest of the world.

The oil and gas sector can open many other doors for GE, especially through its railway sector. As more oil companies are reaching peak production, there will be a higher need for crude transportation.

Since pipelines are not always readily available, oil transportation by rail will be an expanding industry within the energy sector. GE could become wildly successful if it decides to use its GE Transportation division to get more heavily involved in crude transportation.

Investor Interest

GE Shareholders were initially skeptical of the Lufkin acquisition, but given GE’s success in the other parts of the energy market, there should be little hesitation on the part of investors.

Warren Buffet is no oil man, but he is a savvy investor with billions to show for it. And he had enough foresight to purchase Burlington Sane Fe Railway (BNSF), a train company that ships crude from the booming Bakken oil region.

Immelt and Buffet are a few of the many investors who see that the oil boom is causing more demand for railway infrastructure and energy technology.

GE made a shrewd move by venturing further into the oil business, but it appears to be staying within the confines of what it excels in: technology and engineering.

GE can enhance drilling technology through its years of engineering prowess. GE and Lufkin are companies to watch out for, and both companies will complement each other. Through Lufkin, GE will gain a higher stake in artificial lift technology, and Lufkin will benefit through GE management and its massive spending capital.

GE also managed to shine greater light on artificial lift technology. The acquisition could spawn growing interest in this area of technology, and this could attract more investment to other companies that are engaged in this innovative form crude extraction.


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