In my quest for a buy-it-and-forget-it stock, I looked at Ingersoll-Rand (IR: chart, web, Y!) a while back as a diversified industrial conglomerate addition to my portfolio.

In that previous post, MJ over at Dyslexic Research went back and forth on the benefits of the Trane/Ingersoll transaction.  If you remember, MJ thought Trane would bring significant value to IR, and if the housing and commercial property sector would have been as robust after the deal as before, I think he would probably have been rht.

As it turns out though, IR is now taking a $3.7 billion write down of the acquisition of Trane.

IR reported better than expected numbers from continuing operations, and revealed an outlook for 2009 that isn’t too far out of sync with the Street’s expectations.  That outlook alone lifted share prices more than 12% despite the write-down.

For the fourth quarter of 2008, IR posted a net loss of $3.3 billion compared to a profit of $2.5 billion for the same quarter of 2007.  It is evident now that Ingersoll overpaid for the Trane acquisition, as evidenced by the huge write-down, and since the economy has been flipped on its head since the acquisition, it doesn’t look good for heating and air sales for 2009.

It appears that the decision to buy Trane has taken its toll at the top for IR, as Chairman and Chief Executive Herbert Henkel unexpectedly announced his retirement with a target time frame of “next year”.

Corner Office Comments

In the long run I think Ingersoll Rand will survive, as their diversification in the industrial sector is probably going to insulate them sufficiently from a collapse.  However, the Trane deal was a bad one (hindsight being what it is), and I don’t look for that part of the company to make money any time soon.  How well the rest of the company can subsidize the HVAC sector will be seen in the coming quarters.

In reality, our discussion on the IR/TT merger wasn’t forward looking enough, if there can be such a thing, and neither of us really considered where the economy was going (at that time, June of last year, I don’t think anyone really knew).

Anyway, neither of us pulled the trigger on IR; they’ve dropped nearly 37% since then.

Investing acquisitions, Herbert Henkel, Ingersoll-Rand, IR, Trane

I’m starting to shift my resources back to expanding my oil and gas business. Not that it has been on autopilot completely, it just hasn’t required much attention lately, which can be attributed to having good people run the day-to-day production.

It’s time for more though, and I’m looking to increase production through additional acquisition or drilling.

This weekend I’ll attend a land auction with five different tracts for sale. Tract four is the one I’m interested in, as it has existing production on a full section, which equals about 640 acres. According to state records, there are five producing wells on the section, and between the five wells, the lease produces 150 barrels of oil per month, and has done so for the last several years. They are shallow wells drilled to about 1,700 feet, so consequently there is little to no reservoir pressure to push oil into the well bore.

The land, including the mineral rights are up for auction, and the existing lease would have to be upheld. However, that’s not to say that a new land owner could come in and force the existing producer to drill a certain number of wells per year to hold the rest of the acreage.

The timing of this is not all that great. Crude oil ($wtic: chart) just closed above $100 per barrel, so picking up any acreage for cheap will be nearly impossible, and there are a lot of big players in the game right now that are willing to risk more capital than I am.

The nice part about buying land with existing production is that the drilling risk is fairly low, especially in widely developed fields with long production history (production in this area dates back 80 years or so).

I suspect I’ll be a little out of my league on this, but it will be interesting to see what 640 acres brings in terms of $/acre. If it goes for anything less than $1,000 per acre it will be a steal. I’ve been doing quite a bit of digging on the state geological surveys website, and I’ve determined that there is a lot of potential in the area, all it takes is money.

I’ll let you know how it goes.

Business, Oil & Gas acquisitions, business development, land auction, leases, oil and gas, petroleum