GE Faces ‘Incredibly Volatile’ Oil Market Amid Industrial Shift

Updated on
General Electric Tops 1Q Estimates on $29.4B Revenue

General Electric Co.’s sales of oilfield equipment fell in the first quarter as the slump in global crude markets weighed on the company’s accelerating return to its industrial roots.

GE Oil & Gas had the largest revenue decline among the manufacturing units, and companywide sales missed analysts’ estimates. Chief Financial Officer Jeff Bornstein acknowledged the unpredictability of crude prices while maintaining his forecast for a possible drop in sales at the business.

“It’s an incredibly volatile environment right now,” Bornstein said Friday in a telephone interview.

GE’s quarterly earnings report came a week after it announced a sweeping strategy shift to exit most of its finance business. Chief Executive Officer Jeffrey Immelt is speeding his tilt away from the division that destabilized the parent during the financial crisis and bolstering the manufacturing operations whose products span diesel locomotives to jet engines to medical-imaging gear.

Excluding the effects of Immelt’s plan for GE Capital, revenue decreased 3 percent to $33.1 billion, trailing the average $34.2 billion estimate. On that basis, adjusted profit from continuing operations was $3.1 billion, or 31 cents a share, GE said. That topped the 30-cent average of eight analyst estimates compiled by Bloomberg.

“GE had a good quarter in a slow growth and volatile environment,” Chief Executive Officer Jeffrey Immelt told analysts and investors on a conference call. “We’re seeing the world we planned for.”

Shares Fall

GE fell 0.1 percent to $27.25 at the close in New York as broader indexes retreated. The shares gained 7.9 percent this year, compared with a 1.1 percent increase in the Standard & Poor’s 500 Index.

Immelt said April 10 that GE will sell the bulk of GE Capital and already had agreements to unload about $27 billion in real estate assets. GE said the GE Capital restructuring, including pledges to repatriate offshore cash, would result in a first-quarter aftertax charge of $16 billion.

With the GE Capital effect, sales were down 12 percent to $29.4 billion.

The company maintained its 2015 forecast for industrial earnings of $1.10 to $1.20 a share, suggesting operations are “solidly on track,” said Nicholas Heymann, a William Blair & Co. analyst.

‘More Credible’

“You have an increasingly more credible understanding of how to get” to GE’s full-year targets, Heymann said in a telephone interview. “We still don’t have a gauge on how much less oil and gas is going to be down, but it’s not going to be down 20 or 30 percent, it sounds like.”

GE Power & Water, which is introducing a new heavy-duty H-class gas turbine this year, boosted revenue 4 percent. The unit is set to grow this year with the 12.4 billion-euro ($13.4 billion) acquisition of Alstom SA’s energy business, a deal that is under review by European regulators. Sales in the aviation unit fell 2 percent, while equipment orders surged 64 percent as it prepares to roll out the new Leap engine.

Revenue from the oil and gas unit declined 8 percent, the most among GE’s industrial businesses, and profit dropped 3 percent. GE notified regulators during the quarter of plans to cut as many as 575 jobs from its Lufkin division, which makes oilfield pumps.

‘Challenging Year’

“This will be a challenging year in oil and gas,” Bornstein said. GE had projected that sales for GE Oil & Gas may fall as much as 5 percent this year, and Bornstein kept that forecast in place on Friday. West Texas Intermediate crude has tumbled almost 50 percent in the past 12 months.

Even with pullbacks in capital spending among energy producers, GE could make acquisitions in the oil and gas industry, according to Julian Mitchell, an analyst with Credit Suisse Group AG.

“If oil prices stabilize, consolidation in oil and gas is likely to accelerate, and GE could well participate,” Mitchell said in an April 12 note. Mitchell recommends GE as outperform, while William Blair’s Heymann rates the stock as market perform.

Industrial margins, a metric used by investors to gauge the strength of GE’s operations, rose 1.2 percentage points to 14.6 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE