General Electric's (GE) future views on energy and energy infrastructure spending globally support further acquisitions in the space. With more attractive (valuation) on various franchises, including National-Oilwell Varco (NOV) , it appears prime time for GE to consider moving on the M&A front.
Recent moves in oil prices confirm a volatile pricing environment for crude as supply and demand movements appear all over the map. GE though, looking longer-term, suggests consumption to grow ratably around the world. It's a constructive view, supporting further acquisitions to build upon the company's expected $13 billion in revenue for 2016, a down forecast of about 15%-20% year over year.
This is the year that companies fix cost structure, focus on services annuities and bolster margins to reduce breakeven points. Both GE and NOV are on this track, from a cost optimization perspective, and together they could create even more value. The focus, when these spending cycles are down, is to build services backlog, improve cost positions and project execution practices and concentrate on technology and productivity.
National Oilwell-Varco can no doubt benefit the supply chain at the GE Store, and scale like this is quite rare for GE to find, especially at what could be a very attractive franchise valuation at present. Even at a sizeable premium, GE can acquire NOV at a significant discount to prior-period highs.
As of the first quarter of 2016, GE's services backlog increased by 16%. National Oilwell-Varco's rig aftermarket, wellbore and completion and production could broaden product and service capabilities to further grow market share. This service mix, and the supply chain and cost optimization initiatives, make perfect strategic sense. Finally, NOV's product portfolio for land rigs, for both oil and gas extraction, is additive to GE's.
The fit is crystal clear here.
NOV's book value is $42.60; wiping out goodwill and intangibles yields a positive tangible book value of $16 per share. The most cyclical elements are virtually zero, and there is plenty of liquidity as well. So even if the more or less obvious mosaic for a GE+NOV tie up is not realized, there is a reasonable margin of safety to consider owning the shares here anyway.
Management at NOV are steadfast at right-sizing costs in the interim and will continue preserving margin and cash flow from services and land-based product revenue before offshore activity returns -- even a little bit.
It wasn't that long ago that the market valued equity National Oilwell-Varco at $34 billion. The company may not return to the strong profit levels yielded at those valuations two years ago, certainly not this year or next. However, what a fantastic and well-capitalized franchise National Oilwell Varco is at these low points in the capex cycle.
If you imagine what GE would like to look like in the future, National Oilwell-Varco fills in a lot of that, efficiently and productively; particularly as it pertains to their oil and gas aspirations
After a terrific summer of getting to know you all, I am moving on. I very much enjoyed my time as a contributor to Real Money.
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