General Electric has agreed to pay $2.8bn cash for the well support division of John Wood Group, the UK oil services company, continuing its drive to expand in the energy industry by acquisition.
The deal is the fourth acquisition for GE’s energy business in recent months, taking its spending to $7.5bn, as the group, the largest US manufacturer by market capitalisation, seeks to reduce dependence on its financial arm and strengthen its position in industrial markets.
The Wood Group’s well support business makes submersible pumps and equipment for controlling and monitoring oil and gas wells, used for squeezing resources out of mature fields, and for “unconventional” gas, producing from previously uneconomic sources such as shale.
It joins the group of oil services companies that GE has been putting together through acquisition, beginning with the $1.9bn purchase of Vetco Gray in 2007.
John Krenicki, chief executive of GE’s energy division, said its oil and gas production support business had annual revenues of about $5bn a year and “a really terrific portfolio” that did not need to be expanded further through more deals.
“Five years ago, our revenues from oil and gas drilling and production equipment were zero. Now, out of nowhere, we are a force to be reckoned with,” Mr Krenicki said.
“If there are any more acquisitions in the energy business, they are more likely to be in other parts of the portfolio.”
As GE tries to strengthen its manufacturing operations, it is broadening its energy business, which in the past was heavily dependent on sales of gas turbines in the US market.
In the past four months, GE has paid $3bn for Dresser of the US, which makes engines, pumps and valves for the oil and gas industry, and $1.2bn for Wellstream, a UK-based oil services company.
Outside the oil and gas sector, it also spent $520m for Lineage Power, a Texas-based provider of energy-efficient power supply equipment for data centres.
For the Wood Group business, GE is paying about 17 times last year’s earnings before interest, tax, depreciation, and amortisation of $166m, and 14 times predicted 2011 ebitda.
Mr Krenicki said the price was “in line with other transactions in the oil services industry”, including GE’s $1.12bn acquisition of the Hydril pressure control business from Tenaris in 2008.
Schlumberger, the largest oil services company by market capitalisation, bought Smith International of the US last year for 11 times 2011 ebitda.
GE expects the oil services market to grow by 15 per cent next year, and believes it can enhance the Wood Group product range by deploying its strength in research and development.
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 one or two per cent out if them, it is really worth doing.”
The disposal is a significant deal for Wood Group, which has a market capitalisation of £3.5bn ($5.6bn).
The UK company is shifting towards being a service provider and contractor for the oil industry, with the $955m acquisition of PSN, also based in Aberdeen, that was announced in December.
Wood Group’s investors welcomed the move. The shares rose 14 per cent.
GE’s shares rose 1 per cent to their highest since October 2008.
Wood Group confirmed earlier in February that its well support business could be up for sale.
Halliburton, Cameron International, and Weatherford International, the US oil services groups, were reported to have been interested.
GE was advised by Citigroup and Wood Group by Credit Suisse.