Manufacturers including 3M and Ecolab are betting on specialty equipment for the booming energy sector.
In this Land of 10,000 Lakes, manufacturers that have spent a decade buying water treatment firms are now aggressively adding oil to the mix.
Companies ranging from Pentair and Ecolab to Graco and 3M are making big bets on the energy sector by acquiring specialty equipment makers or introducing new products that protect pipelines or thin, separate, store or decontaminate oil, gas and frac sand.
Ecolab just bought Champion Technologies, an oil and gas chemicals firm, while Graco rolled out a new line of industrial sprayers that insulate oil rigs with fire-resistant foam. Pentair recently doubled its size by merging with Swiss-based Tyco Flow Controls, which plays a significant role in oil and gas refineries.
“We like the long-term growth outlook for the energy industry,” said Chuck Rescorla, vice president of manufacturing, distribution and information systems for Minneapolis-based Graco. “We like the fact that it’s a global industry and not tied to just one regional area. … We are looking to do more in it in the future.”
In two years, Minnesota’s stake in the estimated $50 billion energy-equipment sector has grown from less than $1 billion to more than $6 billion in annual equipment sales. Driving orders for this high-tech gear are a growing demand for oil worldwide, a shift toward cleaner, cheaper natural gas, and innovative new drilling methods that make exploration easier. Improved hydraulic fracturing techniques have emerged in North Dakota, Oklahoma, Pennsylvania, Ohio, Canada and Europe. Such processes demand billions of gallons of water, powerful pumps, filters and valves plus durable “frac sand,” which fractures shale rock to release gas and oil from the earth.
Analysts say Minnesota’s industrial firms are strong candidates to tackle this booming sector because they have capital and the global reach to invest for the long-term. “The bottom line is that a lot of companies have taken notice and invested capital in a growth arena,” said Edward Jones analyst Matt Arnold. “That includes some Minnesota companies that are well capitalized enough to pursue it. … A lot of [the interest] comes from the recently discovered domestic opportunity in shale and oil sands.”
Manufacturers’ rapid growth in the oil market is much like their expansion into water 10 years ago. Companies such as 3M and Pentair snapped up water treatment firms and expanded their businesses tremendously. Now manufacturers are looking to oil equipment as the next frontier.
Hube Visee, director of industrial air filtration for Bloomington-based Donaldson Co. said, “The [U.S. energy equipment] industry has probably grown at a 30 percent rate. When you look at how much natural gas and even oil is being extracted in North Dakota and other places, you can easily get to those kinds of growth rates.”
In December 2011, St. Paul-based Ecolab got into the oil service sector in a big way. It paid $8.3 billion for Nalco, an Illinois firm that specializes in filtering the water used in oil exploration, refining and paper making. The deal gave Ecolab $5 billion in annual sales, a line of corrosion detectors for drilling and refining, and a line of specialty chemicals that minimize harmful pollutants.
“With Nalco we acquired wonderful technology,” CEO Doug Baker recently told analysts. “It allows the continuous monitoring of [oil] products as they work in water flows. It’s like having a continuous CAT scan of your arterial water system.”
Determined to expand its energy presence, Ecolab paid $2.3 billion in April for 97 percent of Champion Technologies, a Houston-based oil-additives company that gives well-drillers on land the chemicals needed to thin, unclog and de-scale crude oil or gas.
Nalco and Champion now comprise 19 percent of Ecolab’s sales.“Energy offers a double-digit top-line and bottom-line performance,” Baker said. He expects Nalco and Champion’s revenues to grow 12 to 13 percent this year and 16 to 18 percent in future years. “We really believe in showing up where the growth is and energy is one of the markets we have great confidence in.”
Golden Valley-based Pentair Inc. — largely an industrial pump, water filtration and pool equipment maker — did a mega deal of its own in September of 2012. It doubled in size by marrying Swiss-based Tyco Flow Controls. The Tyco unit gave Pentair a manufacturer of valves and controls that keep oil flowing in refineries and pipelines, along with a line of thermal products.
Tyco Flow also broadened Pentair’s international reach from 40 percent of revenues to 60 percent. Tyco Flow “has more sales outside the country,” said CEO Randy Hogan said. “They are much bigger particularly in China, in Australia, New Zealand and in the Middle East.”
The deal “gives us more control of our destiny,” Hogan added.
Today, Ecolab and Pentair are two Wall Street darlings generating roughly $5 billion in energy-related equipment sales. Analysts such as John Quealy with Canaccord Genuity say investors are impressed with the growth potential the energy sector brings to these companies. But Quealy also noted that this burgeoning equipment industry is also fraught with “resource volatility and rapid industrialization.”