Getting Positioned for the Nat Gas Revolution

 | Apr 09, 2013 | 11:30 AM EDT  | Comments
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Stock quotes in this article:

ge

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lufk

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cbi

The trading week began with news that industrial General Electric (GE) had inked a $3.3 billion deal to buy Lufkin Industries (LUFK), which makes various products -- like rod lifts -- for the energy industry. That price, $88.50 per share, constitutes a hefty 38% premium over Lufkin's Friday closing level.

I think this transaction is important for several reasons. First, it continues GE's recent strategy of expanding more deeply into oil services, as well as large medical and industrial business lines, as it moves out of its media and finance businesses. Second, it shows that CEO Jeff Immelt understands how important and long-lasting the shale revolution will ultimately be in the U.S. I agree with "El Capitan" Cramer, who said on CNBC Monday that Immelt probably understands this better than any other non-energy CEO out there.

Finally, this transaction shows that large enterprises are willing to invest billions of dollars to take advantage of this historical shift in domestic energy production -- a development that is on its way to render the U.S. energy-independent within a decade. Chemical firms have already signed up to build multibillion dollar plants over the next few years near the low-cost natural gas sources of the Gulf Coast.

In addition, energy master limited partnerships (MLPs) are still easily raising billions in order to continue expanding the nation's energy infrastructure -- pipelines, storage facilities, pump stations and so on -- in order to handle the huge increases in natural gas and oil production in North America. We have also just begun to explore the requirements of investing tens of billions of dollars into the construction of the giant liquefied natural gas (LNG) plants that will be necessary for export to regions of the world where nat gas prices are much higher.

Given the build-out necessitated by this increasing energy bounty, we'll see high demand for energy-construction services for years, if not decades to come. Firms that provide these services should do very well meeting that demand, and one company I particularly like here is Chicago Bridge & Iron (CBI). I wrote about this construction giant in January, discussing it as one of a couple of plays that would win in the domestic energy expansion. At that time, the stock was selling at $49, and I picked up some shares at $50. Now it's priced at almost $59 a share, and it's still showing a lot of positive momentum.

Last week the company upped its 2013 revenue guidance by $500 million to $11.2 billion, with earnings now expected at between $4 and $4.35 per share -- largely surpassing the then-consensus target of $4. Management said last year's purchase of Shaw Group has significantly benefited its top and bottom lines. Meanwhile, over the past two months, 2014 analyst targets have risen by more than $1 to over $5. The company furthermore said its order backlog currently totals $27 billion.

The firm also got a nice shout-out Monday from a Goldman Sachs analyst, who said the company had the "best in class LNG franchise" and sees upside of perhaps 10% to 15% to the current 2013 earnings consensus. Chicago Bridge has doubled its bottom line over the past three years, so future here looks very bright indeed.

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