The GE Deal Looks Like a One-Off

 | Apr 08, 2013 | 11:40 AM EDT
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General Electric (GE) took another step into the oil business Monday with its agreement to buy Lufkin Industries (LUFK) at a 37% premium at above $88 a share. While this is quite a large premium to pay in a sector that has miserably underperformed in the last year, I don't think it revalues the entire space. I still believe oil-services stocks need to be bought individually at value prices, and that time is on your side.

GE is diving more deeply into the oil patch amid a noble performance from its energy division over the last two years, ever since the company bought John Wood Group's oil-services division in 2011. But expanding GE's oil-and-gas division on the back of strong results is not the only calculus in CEO Jeff Immelt's $3.3 billion buy.

Immelt does also strongly believe the U.S.'s oil-and-gas shale revolution is here to stay, and that it's a very long-term investment that will continue to yield strong profits. Yet there is a timing aspect that adds to the intelligence of the deal: Oil-services has been a money-dead sector for most of the last two years.

That includes Lufkin, a maker of some of the most exclusive bearings and pumps that power the rigs of the latest horizontal drilling wells for both tight oil and shale gas. This has been a dead stock despite its virtual monopoly in the manufacture of these parts, which makes the huge premium that GE paid perhaps more understandable. After all, the stock hasn't moved much in the past couple of years, even as the major indices have gone up 40%.

The deal also speaks to the tremendous cash reserves that GE and other mega-cap conglomerates are sitting on. That's not to mention the oil patch specifically, where reserves could be increasingly leveraged at very cheap prices in order to increase consolidation.

This all leads to the one question any Real Money reader would want answered after hearing of this deal: Where's the next one going to be? Give me the name of the undervalued services (really industrial) company that is going to generate a 30%-plus pop when Schlumberger (SLB) or Halliburton (HAL) comes gunning for it?

One stock that popped Monday off this deal was Swiss company Weatherford (WFT), which Lufkin itself pinpointed as its chief rival in the space -- and there are some similarities between the two. Weatherford has certainly been equally dead money for the past two years, and it's somewhat more focused on industrial technologies than it is on logistics in the oil-services space.

But Weatherford's balance sheet is in no way even as good as Lufkin's -- which is bad -- and Weatherford has been waiting for any stock rally to recapitalize a secondary offering for cash.

If there is a "sector upgrade" that should come from the GE deal, I don't see it. It would need another CEO with this same level of optimism and enthusiasm for rig services, which is still down at levels not seen since the late 1990s.

You'd have to be more than enthusiastic, as Immelt is, to dive into a fundamental downer like that; you'd need to be a seer.

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