In light of nearly record high prices at the pump, as well as new technological advances such as horizontal drilling, energy companies are racing to capitalize on new opportunities that are developing in the drilling sector. They seem to be capturing more reserves than ever before, growing their asset bases at an extreme rate. In fact, the United States Energy Information Administration (EIA) announced "proved reserves of U.S. oil and natural gas in 2010 rose by the highest amounts ever recorded". Increasing proven reserves no doubt provides profit potential for these companies, but it also can allow raising of additional capital needed to increase production budgets.
In recognition of such big developments in the upstream oil and gas sector in the US, many companies are looking to get a piece of the profits and enormous growth potential in this exciting market. Perhaps a surprise to some, one such company is General Electric Co. (GE).
GE's website reads:
"GE Oil & Gas is a world leader in advanced technology equipment and services for all segments of the oil and gas industry, from drilling and production, LNG, pipelines and storage to industrial power generation, refining and petrochemicals. GE Oil & Gas also provides pipeline integrity solutions, including inspection and data management, and designs and manufactures wire-line and drilling measurement solutions for the oilfield services segment."
This portion of GE has been performing well but has gone unnoticed to some investors because of GE's conglomerate profile. As per the 2nd quarter July 20th earnings report, GE highlighted their growing oil and gas segment with astonishing results:
- $4.1 Billion in orders
- $9.1 Billion Equipment Backlog ( an increase of 6% )
- +11% Segment Profit Growth
But can this segment impact GE as a whole? Let's compare the 2Q results of this lesser known segment with GE's more popular industrial divisions:
|($ in millions)||Orders||Order Growth||Equipment Backlog||Backlog Growth||Revenue||Rev Growth||Profit||Profit Growth|
|Oil and Gas||4,100||1%||9,100||6%||3,658||5%||535||11%|
|Energy (non oil/gas)||7,800||-6%||13,300||8%||8,559||19%||1,282||15%|
|Home & Business Solutions||unkn||unkn||unkn||unkn||2,204||2%||91||-14%|
GE's industrial segment as a whole has done rather well. Out of these 6 businesses, GE Oil and Gas ( call it GE O&G ) alone accounted for nearly 14.5% of total revenue, and around 14% of total profit. In addition, this portion experienced growth in all 3 measures: order growth, backlog growth, and profit growth. Perhaps the most notable comparison in my opinion is GE O&G versus the popular GE Healthcare. Although around 20% smaller by profit, GE O&G seems to be growing at a faster pace by both revenue and profit statistics.
To highlight GE O&G even further, let's compare its last quarter's performance to that of several well known companies in the same sector:
|($ in millions)||Revenue||Profit|
|Weatherford International Ltd. (WFT)||3,599||276|
|Halliburton Co. (HAL)||7,234||737|
|Baker Hughes Inc. (BHI)||5,326||439|
|Transocean Ltd. (RIG)||2,575||-304|
GE's other industrial businesses seem to dwarf GE O&G in size. However, when put into perspective with other popular companies in the same industry, we can get a better feel as to how large GE O&G really is. There is no doubt GE O&G will flourish alongside these competitors, and is also large enough to impact GE as a whole.
Key analyst recognizes growth potential:
JP Morgan analyst, C. Stephen Tusa, Jr. recently said "The GE growth story, missing for over a decade, starts here...we see 15-20% plus profit growth at GE Oil & Gas over the intermediate term..."
GE has aligned itself with some of the richest assets in the world, by successfully teaming with big players in the oil and gas industry.
GE recently inked a deal to supply $1.14 Billion with 380 subsea wellhead systems to Bazil's Petrobras (PBR). Petrobras plans to install the systems in various oil and gas fields off the coast of Brazil.
In addition, GE teamed with Chevron Corp. (CVX) July 20th. GE will supply "mission critical services" at CVX's massive Gorgon LNG project in Australia for the next 22 years. "The underlying mega-trends of the oil and gas industry play to our strengths," said Dan Heintzelman, President and CEO of GE Oil & Gas.
CVX and PBR are very big global players, providing not only revenues but industry recognition for this growing segment of GE.
The oil and gas boom has hit the US, and the rest of the world is no doubt rivaling its huge discoveries and technologies. With GE's notable reputation already respected globally, it will be easy for GE to grow one of its most underrated industrial businesses-oil & gas equipment and services. Strong earnings and growth results, positive analyst opinions, and alliances with important asset holders makes GE a formidable player in this quickly growing sector. Even though GE is a rather large conglomerate, growth from this segment will still strengthen earnings and revenues. In time, the market will appreciate this gem, which for now is still hidden deep within GE's formidable arsenal of industrial businesses.
Disclosure: I am long GE.