Why General Electric Company (GE)’s Betting on Oil & Gas

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What Could Be the Risks for General Electric?

The risks General Electric faces with this acquisition are related to Lufkin’s risks. The main one being a possible decline in US and world oil and gas drilling. The company’s oil segment accounted for 84% 2012’s revenue. Another factor of risk is given by the possible fluctuation of oil and gas prices that could reduce capital spending of Lufkin’s clients.

The price of raw materials is another risk factor. Lufkin uses large amounts of steel and iron to manufacture its products. An increase in the price of these raw materials could heavily impact the company. If Lufkin is unable to pass these prices to customers, its margins and cash flow could be adversely affected.

Lufkin Industries, Inc. (NASDAQ:LUFK)’s main US manufacturing facilities are unionized, and the collective bargaining agreement of those facilities will expire in October 2014. This could lead to labor disputes post agreement expiration.

Final Comment

This deal is a good opportunity for General Electric. Although it is expensive compared to other industrial transactions, General Electric Company (NYSE:GE)’s management is focusing on this segment because they believe new technologies in the oil & gas industry could lead to cheaper energy in North America, with a profound impact in the American economy.

This is in line with the growth in General Electric Company (NYSE:GE)’s Oil & Gas segment, which has increased revenue by 12% from 2011. Synergies could be found in the acquirer’s global scale and insightful service offerings, reaching customers across geographies quickly and efficiently. Also, Lufkin’s product collection could blend with General Electric’s current product offering: gears and bearings can go together with the conglomerate’s existing product line (they are currently in use on General Electric Company (NYSE:GE)’s compressors and gas turbines).

Damian Illia has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company.

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