Why did GE and CAT buy Natural Gas Engine Makers?
Caterpillar announced an acquisition of Natural Gas engine maker today following GE’s similar acquisition couple of weeks ago. GE’s acquisition of Dresser was a bigger deal ($3B) compared to Caterpillar’s $800MM deal to acquire MWM.
Both these deals are obvious product diversification in the energy space (Dresser is mostly upstream and MWM is further downstream). For both GE and Caterpillar this could be one of the several repositoning efforts to build capability in the transition of US transport economy for dependence on crude oil to shale Natural gas.
US is the Saudi Arabia of Natural Gas reserves. Mr. Boone Pickens has been pounding the table on this for few years now. With the US dollar depreciating, the barrel of crude could soon surpass even the most optimistic predictions (remember the $200 targets when it hit $145 in 2008).
GE appears to be slowly entering into the automotive sector via the infrastructure/service provider strategy. Charging stations for the electric cars and now the Natural Gas IC engines. GE energy makes Natutral Gas Turbines used mostly in the combined cycle plants and peaker natural gas only units (for power generation). That might change soon as the demand keeps exceeding supply in the power generation sector and the long gestation period for Nuclear Plants combined with reluctance to build new coal plants and cheap shale natural gas makes it economical to build base load plants using Natural Gas Turbines.
The passenger car market could certainly benefit from small natural gas engines. Most US homes already have natural gas supply. It should not be that hard to get set up to fill ones automobile with Natural Gas at home. Will have to compress it first to liquify it. Home Depot and GE could collaborate (since Mr. Nardelli is not at HD anymore) and sell that capability to consumers.
Will we have a natural gas turbine or natural gas internal combustion engine powered on highway Heavy Duty trucks, rail and other machinery one day? Looks like it will make sense at $500+ barrel cude oil….
LIFO Liquidation at Caterpillar
My response to WSJ article on Caterpillar dated 7/22/09 (also posted on WSJ online comments section). Caterpillar got burned due to huge capacity expansion in 2007/2008 because they thought they knew what was coming. So I believe, they are holding the cards close to their vest and focusing on the bottom line now (at least you know what you are getting when you focus on the supply side).
Also I think they are benefiting from the huge LIFO reserve created during the pre 2008 inflationary world. This reserve is being depleted since the existing inventory is being used instead of new inventory.
What do you do with all that inventory of tires that were stockpiled when Oil was at $100+ and capacity constraint at the tire manufacturer’s caused the tire prices to go through the roof ? It seemed prudent to stockpile those tires then, not so now.
Perhaps it is time to switch to FIFO accounting for the inventory in case of deflation?
Update (October 26, 2009)
For Q3, 2009, Caterpillar reported $7.29 billion in revenues (down 44% from 2008 Q3) and $404 Million of earnings (down 54% from 2008 Q3) of which $120 million was attributed to LIFO reserve liquidation (29.7%) and $129 million to tax benefits (31.9%).
Shaker Cherukuri
Managing Principal
Process Improvement Solutions, Inc.
