Deal Gives GE a Crown Jewel of The Oil Industry
General Electric’s $2.8bn (£1.74bn) acquisition of Aberdeen-based John Wood Group’s well support division has secured one of the British company’s crown jewels: its electric submersible pumps, which are in ever greater demand for squeezing more oil out of ageing fields.
The deal has also strengthened GE’s oil and gas business to the point that the group presents it as a global force with “a really terrific portfolio”.
The question is whether the price GE has paid is too high.
It is not that GE cannot afford it. The company has a market capitalisation of about $227bn and spare cash (excluding that required to back GE Capital) at the end of last year of $19bn.
But it has to demonstrate that its oil drilling and production support business, put together in a series of deals worth about $10bn since 2007, will justify the commitment of capital.
The jubilant reaction of Wood Group’s share price – which rose 13.9 per cent on Monday – certainly suggests that GE has been generous. Competition for the deal is likely to have been stiff; the well support division was reported to have attracted interest from leading US oil services groups Halliburton, Weatherford International and Cameron International.
GE’s winning bid is worth about 17 times last year’s earnings before interest, tax, depreciation and amortisation of $166m, and 14 times the ebitda of $200m it predicts for 2011.
John Krenicki, chief executive of GE Energy, said the price was “in line with other transactions in the oil services industry”, including his company’s $1.12bn acquisition of the Hydril pressure control business from Tenaris in 2008.
GE’s £800m acquisition of Wellstream, agreed last December, was priced at about 13 times ebitda.
Schlumberger’s $11bn acquisition of Smith International of the US last year was slightly lower at 11 times expected 2011 ebitda.
There are reasons why the Wood Group business would deserve a premium. Its pumps, which generate about half the division’s revenues, have a strong position in a market that is becoming increasingly important: squeezing extra production out of ageing oilfields.
Mr Krenicki said: “About two-thirds of the world’s oil comes from 300 highly depleted giant fields, and the world has only tapped about a third of what they hold. So if you can squeeze another 1 or 2 per cent out of them, it is really worth doing. This is the first place oil companies will want to invest their money, because it is a lot more productive than trying to find new fields.”
Most of the division’s remaining revenues come from pressure control valves for oil and gas wells, which are used in the fast-growing “unconventional” gas business, producing from rocks that have previously been uneconomic such as shales.
In the US, the unconventional gas industry has been booming, and is expected to invest a further $40bn-$60bn over the next five or six years. It also has the potential to expand to China and some parts of Europe.
Those industry trends mean that the global oil services market, which is expected to be worth $500bn this year, is growing fast, with a 15 per cent rise expected for 2012.
GE also hopes to use its research and development to enhance the performance of Wood Group’s products.
As an example of the success of the move into oil and gas production, Mr Krenicki cites the contracts GE has won for the giant A$45bn Gorgon gas project off the north-west coast of Australia, which is being led by Chevron of the US.
“Companies are betting billions of dollars on these massive projects, and they want suppliers they can count on to be there for the long run,” he said.
However, GE still has to prove that its rapid move into oil services, diversifying away from its traditional base in power generation, will pay off.
“It really comes down to execution,” Mr Krenicki says. “If we execute well, we’ll be fine.”