Minnesota firms go wild for oil equipment

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.

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.

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."

Growth has to be balanced with the fact that the trade offers volatile energy pricing and sometimes unpredictable income, analysts said.

Peter Johnson, who covers Ecolab, Pentair, Donaldson, Graco and sometimes 3M for investment firm Mairs and Power, noted crises like the 2010 Deepwater Horizon oil spill and rig explosion that killed 11 workers in the Gulf of Mexico. As a result, BP and the rig maker "were blacklisted" and saw their stock tumble, he said. Still, he said Minnesota's newcomers "are all really cautious companies … so it seems they are trying to go after this industry in a smart way" and avoid risks.

Some companies are determined to grow in the sector, but are doing so more slowly or in unique ways.

Thulin "is making incremental changes and trying to help drive top-line growth. We saw last year that they announced these end-market initiatives [around aerospace, oil and gas]. And now he is announcing new geographies," Ajay Kejriwal said.

3M Co. has sold products like drill-bit grinders and pipe tape to oil firms for years. But it upped its sector presence in 2005 when it paid $1.3 billion for Cuno, a water treatment giant that filters briny water from oil wells among other things. In 2007, 3M bought a small, strategic pipeline coatings firm. And in 2012, it bought Ceradyne, a ceramics company with $500 million in sales. The purchase gave 3M Ceradyne's line of drill motor bearings, pump bearings, ball valves, and drilling telemetry tools for oil and gas companies.

Donaldson Co. is also broadening its reach. For 35 years Donaldson has manufactured air-filtration systems for small gas turbines powering offshore drilling platforms. But then came fracking, which allowed large expanses of U.S. oil and gas sources to be tapped for the first time. So Donaldson began making large air-filtration systems for frac sand processing plants. It also started manufacturing the oil, coolant and fuel filters for the mining and oil service trucks. Today, Donaldson's energy-related sales have grown to roughly $250 million or 10 percent of company sales.

Nine months ago, Donaldson piloted a fridge-sized dust-collection system that mounts directly onto frac sand trucks. The trucks haul sand from mines in western Wisconsin and southern Minnesota to sand processing plants that sift the good sand from the bad. The good sand then gets trucked to North Dakota's Bakken oil fields and other places. Donaldson has already received calls about orders from sand processors in southern Minnesota, where rich but controversial frac sand fields have been found and await mining.

Meanwhile, Graco officials described the company's oil technology products as an intriguing but "niche" business. Graco's first oil product came 12 years ago when it converted a commercial paint sprayer into one that could spray insulation onto oil pipelines so the oil stayed warm and didn't clog. Seven years ago, it bought an automated-equipment firm to lube hot-running compressors along thousands of miles of oil pipeline. It then added lube systems for frac sand trucks and oil rig service trucks. Sales from the sector remain small. That's why Rescorla, Graco's vice president of manufacturing, said he was pleasantly surprised when he attended a trade show in China last month and found Graco's truck equipment at an oil industry show. "That was exciting. That was neat for me to see."