20 Beneficiaries of the Shale Gas Boom
Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Repercussions from the surge in unconventional energy sources are being felt across the capital goods space, particularly in those verticals that are closely tied to gas power generation. Therefore, I believe this is a theme that will become particularly investable in 2013.
Electrical equipment Industry
Pressure pump manufacturers: The pressure pump manufacturers are the most direct beneficiaries in capital goods of the shale gas revolution, particularly if this extends from the US into other markets such as China. In this space, the two global leaders at present are Weir Group (NASDAQOTH: WEIGY) and Gardner Denver (NYSE: GDI). Competition is intensifying in this field, with National Oilwell Varco (NYSE: NOV) also entering the market. However, GDI and Weir still have the highest exposure in terms of proportion of sales accruing from this market.
Gas-fired power plant plays
Indirectly, we highlight that if the move toward gas-fired power generation is indeed a permanent feature of the power landscape globally, this will help the gas turbine manufacturers such as General Electric (NYSE: GE), Siemens AG (NYSE: SI), Mitsubishi Heavy Industries (MHI) and Alstom (NASDAQOTH:ALSMY). If we see the coal-to-gas switch persist in the US, which is the world's largest market in terms of the installed base of gas turbines, this should benefit GE in particular, given its dominant position in its home market. However, competition is intensifying, and MHI recently shipped its first domestically-manufactured gas turbine, from its new Savannah plant. In China, which is currently the largest gas turbine market in terms of new orders, the equipment is supplied by three main local-foreign partnerships; Dongfang Electric (NASDAQOTH: DNGFF) with MHI, Siemens with Shanghai Electric (NASDAQOTH:SIELF), and GE with Harbin Electric (NASDAQOTH: HBPWF). Aside from the turbine equipment, companies supplying the process automation control technology for gas-fired power plants would also see orders increase, such as Emerson Electric (NYSE: EMR), ABB (NYSE: ABB) and Invensys (NASDAQOTH: IVNYY)
An increased usage of existing gas-fired power plants by electric utilities should also spur rising demand for aftermarket parts for the installed gas turbine fleet; this could have a meaningful near-term earnings impact on the suppliers of these aftermarket services, as this business tends to be much higher-margin than supplying the Original Equipment. Hence, while GE’s recent Energy Services order intake has been sluggish, we think this could accelerate in markets such as the United States in 2013.
Process instrumentation/flow equipment manufacturers
Compressors: GE and Rolls Royce (NASDAQOTH:RYCEY) are two of the major players in compressors for the gas pipelines. Also, Swiss-based Burckhardt Compression (it demerged a few years ago from Sulzer) is a global leading manufacturer of turbo compressors highly exposed to LNG. The other players in the LNG compressor industry include Dresser Rand (NYSE: DRC) and Nuovo Pignione (GE’s Oil & Gas segment). The key drivers for revenue growth for these players are the expected investments in building the LNG receiving terminals, LNG storage and desulphurization or polyethylene production plants.
Extraction/cleansing of natural gas: Honeywell (NYSE: HON) should continue to prosper in its UOP business (which is a part of the Performance, Material, and Tech (PMT) operating segment) from its role in helping to extract and cleanse natural gas. The company's recent acquisition of a majority stake in Thomas Russell has increased its expertise in gas recovery.
Process instrumentation/pumps: Emerson and Endress & Hauser (private) are the two global leaders in the process instrumentation. In terms of pure-plays focused on process instrumentation equipment, Sulzer AG (NASDAQOTH:SULZF) is ranked as the second largest global manufacturer of pumping solutions (centrifugal pumps). It competes with companies such as Flowserve (NYSE: FLS) and Pentair (NYSE: PNR). Sulzer has currently only 2-4% sales exposure to the shale gas but is planning to strengthen its footprint in this space.
Machinery: Rotork (NASDAQOTH:RTOXY) is expected to benefit from the build out of gas infrastructure ‒ its valve actuators are used in pipelines and processing plants and are a material proportion of company sales. Smiths Group’s (NASDAQOTH:SMGZY) John Crane business should benefit from the build out in gas infrastructure as a supplier of mechanical seals and service provider for pressure pumps (examples of customers are Sulzer, Flowserve, Weir). John Crane accounts for 35% of Smiths Group operating profit while the Oil & Gas segment comprises two-thirds of John Crane business.
Where, the shale gas boom has destroyed the railroad business and the coal players, it is expected to benefit many sectors/industries across the country. Electric equipment manufacturers are expected to be one of the main beneficiaries of this revolution.
AnalystX has no position in any stocks mentioned. The Motley Fool recommends Emerson Electric Co. and National Oilwell Varco. The Motley Fool owns shares of General Electric Company and Pentair. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!