General Electric Company (GE), Lufkin Industries, Inc. (LUFK): How To Find Value In This Market

General Electric CompanyThe oil and gas services sector has underperformed the broader market averages over the past 12 months, as energy companies have reset their capital investment plans lower. While oil prices averaged roughly $94 per barrel in 2012, natural gas prices fell sharply due to lackluster economic growth and utility demand. Even still, energy companies increasingly need products that will help improve their efficiency in horizontal drilling activities, a method that is used in the shale areas of the Permian and Williston basins. So, which companies have some growth potential?

Founded in 1902, Lufkin Industries, Inc. (NASDAQ:LUFK) is a leader in the manufacturing of artificial lift products, as well as producing power transmission products for the energy infrastructure providers. The company’s specialty is rod pumping products, the fastest growing segment of the $11 billion domestic lift market. Lufkin’s lift products supplement an oil reservoir’s natural upward pressure, improving the flow of liquids and enhancing an oil well’s efficiency.

In FY2012, Lufkin Industries, Inc. (NASDAQ:LUFK) reported strong financial results, with increases in revenues and operating income of 37.5% and 30.8%, respectively, versus the prior year. The company’s top-line growth benefited from a 25% gain in rod pumping units, as well as strong sales of related automation equipment and services. In addition, Lufkin Industries, Inc. (NASDAQ:LUFK)’s profitability was enhanced by operating efficiencies from recent acquisitions, including major purchases of competitors offering complementary products in 2011 and 2012.

However, Lufkin Industries, Inc. (NASDAQ:LUFK)’s backlog has slipped recently, indicating some softness in capital spending plans by the oil production companies. Consequently, the company decided to sell out to a larger, more diversified competitor, agreeing to General Electric Company (NYSE:GE)’s cash offer of roughly $3 billion. The acquisition pairs Lufkin’s leading position in artificial lift products with GE’s leadership position across the oil and gas industry spectrum, including production, processing, and transmission arenas.

While General Electric Company (NYSE:GE) is well known for its massive financial, medical, and aerospace businesses, it actually generates nearly a third of its total revenues from the diversified energy sector. In addition, the sector continues to gain prominence as GE downsizes other business units, including the sale of its remaining 49% interest in NBCUniversal in February 2013. In FY2012, General Electric Company (NYSE:GE) eported solid performance for its energy-related businesses, with increases in segment revenues and adjusted operating income of 11.5% and 10.6%, respectively, compared to the prior year. The company also generated strong adjusted operating cash flow, $11.4 billion for the year, allowing it to further consolidate its market share in the energy sector.

Founded in 1985, Flotek Industries Inc (NYSE:FTK) is a supplier of drilling and production enhancement products, including stimulation chemicals, drilling tools, and artificial lift products. Its sales were cut in half during the financial crisis, but the company’s fortunes have bounced back strongly with record sales in 2012 and 2013. While Flotek’s artificial lift segment has had trouble generating growth, its chemical segment has enjoyed strong results due to its production enhancing Nanofluid technology that interacts with oil and gas fluids at the molecular level.