Dover to Spin-Off Wellsite Business, Focus on Core Platforms

Dover Corporation DOV has decided to spin-off its Wellsite business into a stand-alone, publicly-traded company, in order to separate the company’s upstream energy businesses in the Energy segment. This spin-off will help Dover focus on its less volatile core platforms.

Reasons for the Spin-Off

Dover’s upstream energy business, which comprises Dover Artificial Lift, Dover Energy Automation, and US Synthetic, is jointly known as the Wellsite business. The business operates in the oil & gas drilling and production industry. Dover anticipates the Wellsite business to generate approximately $1 billion revenues and $250 million earnings, before interest, taxes, depreciation and amortization in 2017.

Dover announced separation of its upstream energy businesses in September 2017 anticipating that its oil & gas exposed businesses will remain turbulent due to volatile oil prices. The company was looking for sound alternatives to separate the business either by a tax-free spin-off, sale or other strategic combination in order to ensure the best shareholder value.

Dover Corporation Price


Dover Corporation Price | Dover Corporation Quote

Spin-Off Details

Dover estimates that the spin-off will be in the form of a distribution of 100% of the stock of Wellsite, which will be tax-free for the company and U.S. shareholders, for income tax purposes. The company expects the transaction to close by the second quarter of 2018, subject to certain customary conditions. The name of the new entity will be announced later.

As part of the transaction, Wellsite is projected to raise new debt in the range of $700-$800 million — the proceeds of which will be paid to Dover in the form of a dividend. Dover expects to return the proceeds to shareholders as the primary source of funding for its $1 billion of share repurchases. The share buyback is expected to be completed in 2018.

Emerging Company from Spin-Off

The spin-off will create a robust company poised to outshine in the upstream oil and gas markets, with particular strength in U.S. shale basins. Upon completion of the spin-off, Wellsite will be a leading provider of a full range of oil and gas production technologies and solutions, wellsite productivity software, and IIoT solutions.

Wellsite will also be the industry leader in the development and production of polycrystalline diamond cutters used for oil and gas exploration. Further, Wellsite’s strong balance sheet and free cash flow will provide ample financial flexibility to the company.

Wellsite Leadership

Dover announced that Sivasankaran ("Soma") Somasundaram, president and chief executive officer (CEO) of its Energy segment, will become the president and CEO of Wellsite upon completion of the transaction. Somasundaram has a deep understanding of Wellsite`s operations, and the oil and gas industry, which will help drive the company’s growth going forward.

Other Initiatives

Dover has also announced to expand the scope of its previously-announced rightsizing initiatives. These include headcount reductions and facility closures, as well as consolidations due to the company’s focus on reducing its cost structure to prepare for Wellsite’s spin-off.

The anticipated 2018 benefits, before associated costs, of these actions are now estimated to be $50 million, up $10 million from the previous forecast. Dover expects charges related to its rightsizing initiatives and other costs to be in the range of $60-$65 million, with the majority of the costs to be realized in the fourth quarter of 2017.

Share Price Performance

Since the announcement of Wellsite’s spin-off, Dover’s shares have outperformed the industry it belongs to. The company’s shares have gained around 10% over the past three months compared with 9.7% growth recorded by the industry.

Summing Up

Dover continues to focus on margin expansion through productivity initiatives, including supply-chain activities, diligent restructuring activities, strategic pricing and portfolio shaping. In sync with this, the company divested a significant portion of its technology business with the spin-off of Knowles Corporation in 2014. Dover will remain keen on restructuring actions in the future also to better align its cost base.

Zacks Rank & Stocks to Consider

Currently, Dover carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the sector are Applied Industrial Technologies, Inc. AIT, Chart Industries, Inc. GTLS and IDEX Corporation IEX. All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Applied Industrial has a long-term earnings growth rate of 12%. Its shares have rallied 6.9%, year to date.

Chart Industries has a long-term earnings growth rate of 20%. So far this year, shares of the company have gained 27.7%.

IDEX Corporation has a long-term earnings growth rate of 13%. The stock has rallied 46.9% in the year so far.

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