- Emerson Electric has announced two bolt-on deals into the oil & gas sector.
- Acquisitions might be welcomed after Emerson has been shedding many assets in recent years.
- Growth is uninspiring, as I am not impressed with the portfolio transformation, which makes me cautious at current levels as a lot of margin expansion is already priced in.
Emerson Electric (EMR) is boosting its expertise into the oil & gas sector again. About a week ago, the company announced the purchase of GeoFields, a supplier of software and services for pipeline integrity data collection at undisclosed terms. This deal is now followed by the purchase of Paradigm for half a billion dollars.
These deals add some growth again, after Emerson has been shedding some non-core assets at cheap multiples last summer. While investors in Emerson are waiting for growth, management still has to impress me with its ¨buying high, selling low¨ practices.
Paradigm Marks A New Paradigm?
Emerson announced that it has laid out $510 million to acquire Paradigm, a supplier of software solutions to the oil & gas sector. Combined with Emerson's existing Roxar software business, Emerson helps producers to increase efficiency and cut costs. Paradigm is headquartered in Houston of course, and adds over 500 people to Emerson's payroll.
Few financial details have been announced other than that a 13 times EBITDA multiple has been paid, suggesting an anticipated EBITDA contribution of $39 million per year. In that light, the contribution to all of Emerson is very modest, equivalent to roughly one percent of total EBITDA.
This technology is much in demand as it allows maximised production of existing fields and reservoirs, as reducing break-even points in this marginal production ¨era¨ is very important. In fact, many producers with a smaller production base, but lower break-even costs, trade at huge premiums compared to larger producers with higher break-even rates. This ¨discrepancy¨ is driven by the market's view that upside in oil prices is somewhat limited for some time to come.
