GE to Buy Oil & Gas Giant Lufkin for $3.38 Billion

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General Electric agreed to buy oilfield services provider Lufkin Industries to expand its profitable oil and gas business.

GE, the world's biggest maker of jet engines and electric turbines, has expanded in the energy industry with a series of acquisitions of companies that make equipment used in oil and gas production, while divesting assets in finance and media industries.

The company has spent about $11 billion in acquisitions since 2007 to boost its presence in the oil and gas business, which is the conglomerate's fastest-growing and which contributes about 10 percent of its total revenue.

Lufkin will broaden GE's artificial lift capabilities beyond electric submersible pumps.

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Artificial lift refers to the use of external means to help lift hydrocarbons to the surface in reservoirs with low pressure, as well as to improve the efficiency of naturally flowing wells.

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"The artificial lift segment is at the heart of critical changes that are helping producers maximize well potential, which translates into increased output at lower operational cost," Daniel C. Heintzelman, CEO of GE Oil & Gas, said in a statement.

The global artificial lift sector is expected to approach $13 billion in 2013, according to Spears & Associates, GE said.

Lufkin's fourth-quarter profit beat analysts' estimates on demand for its pumping equipment from companies operating in energy-rich shale fields such as Bakken and Eagle Ford, despite a slowdown in overall drilling activity.

However, the company estimated that a slow recovery in the stalled U.S. onshore drilling will dent profits this quarter.

GE's offer values Lufkin at $88.50 per share, a premium of 38 percent to the stock's Friday close. Shares of Lufkin surged in pre-market trading, while shares of GE also traded higher.

The offer is higher than Lufkin's intrinsic value of $70.98 per share as measured by Thomson Reuters StarMine.

The StarMine model is a measure of a stock's current value when considering analysts' growth estimates for five years, and then modeling the typical growth trajectory over a longer period of time.

The acquisition, valued at about $3.3 billion including debt, is expected to close in the second half of 2013.

Simmons & Co. advised Lufkin, while Goldman Sachs and Deutsche Bank advised GE.