General Electric: Hydrogen Turbines, Small Nuclear Reactors Can Spruce Up This Withering Stock

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Zoltan Ban
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Summary

  • After a decade of struggles, GE, the American industrial giant, may have a window of opportunity to turn things around, in the form of a global energy transformation.
  • Dwindling global conventional oil & gas discoveries are ushering in the need to adopt new energy strategies. Small nuclear reactors, as well as hydrogen-powered turbines, seem to be leading contenders.
  • GE already has a presence in both fields. It remains to be seen how much of a market share it can capture, given stiff competition from financially sturdier companies.
  • If GE can successfully establish itself in these two fields, it can potentially use new-found revenues and profits to turn the business around. So far, there are some promising signs in this regard.
  • GE stock is currently expensive given fundamentals, but buying opportunities may arise. Alternatively, GE power could be an appealing buy after GE splits up.

Working On An Engine

Fox Photos/Hulton Archive via Getty Images

Investment thesis: There is no denying the deep troubles that General Electric Company (NYSE:GE) has been facing. The once-great, iconic industrial giant saw its stock price peak in the year 2000 and it is now trading at only 1/5 of those levels. A combination of consumer market shifts, stiff competition, and a non-focused business strategy, where at times GE tried to do everything, can all be blamed for the company's hardships.

Many seem to believe that there is no turning GE around anymore. But this is a decade of great upheaval and change, and when there is change there are always new potential opportunities. One of the emerging opportunities happens to be in the electricity-generation sector, where there is an emerging demand for small nuclear reactors, as well as for hydrogen-powered turbines and electrolysis equipment meant to be paired up with solar or wind power generation facilities. GE already has the means to compete in these emerging sectors. It remains to be seen whether it will succeed in establishing itself as a significant player in these emerging market opportunities. If it will manage to do so, it has the potential to lift GE out of its deep hole and give it a new lease on life. Later on, its separate GE power sector could thrive on these emerging global energy trends, after the company splits.

GE's latest financial results are not encouraging

For the first quarter of this year, GE announced a loss from continuing operations of $809 million. There was no revenue growth and it experienced negative cash flow. One of the drags seems to be the renewable energy sector, where revenues declined by 12% while the net loss increased by 85%.

GE renewables Q1, 2022 results

GE renewables Q1, 2022 results (GE)

Orders volumes also declined significantly. That may not be a significant issue, given the deteriorating profit margins. This is something worth keeping in mind, given that GE plans to split itself up into three companies by 2024. The renewables sector will fall in the same category as all other energy, which will be all focused on an energy company. That successor company is set to become the basis for the new opportunities I highlighted as potential emerging activities of interest that GE can potentially compete within, but as we can see, there are also some serious challenges.

Where GE stands in regards to hydrogen turbines and small nuclear reactors development and marketing

GE is currently working on converting natural gas-burning powerplants into hydrogen-powered plants. It is unclear what kind of business potential this field has going forward. It comes as more and more companies are looking at ramping up the production of green hydrogen derived from renewable fuels. GE could potentially position its turbines as a leading choice for new powerplants, as well as for old ones that might be retrofitted to run on fuels that will have more hydrogen in the mix.

There are simply too many unknowns at the moment in regards to what potential the emerging hydrogen power generation industry may or may not have going forward. It is certainly an industry that has many challenges ahead. First and foremost, whether through subsidies or technological improvements, green hydrogen has to outcompete hydrogen derived from hydrocarbons, as well as other potential sources of energy in terms of economics. There is no point in running turbines on hydrogen derived from natural gas. It is not entirely climate-friendly, so it does not meet those goals, and neither does it resolve our increasingly acute commodities scarcity issues. Green hydrogen thus must become a viable industry, before the hydrogen-powered turbine industry can really take shape. GE is ready to compete in this emerging industry, with turbines, as well as electrolysis systems, therefore it can emerge as a major winner if everything will go right in this regard.

There seems to be less uncertainty about the growing global demand for small nuclear reactors, which is something I intend to discuss further in this article. The GE-Hitachi small nuclear reactor, the BWRX-300, is GE's market offer in this regard. One of the interesting aspects of the design involves relying on natural water flows to cool the reactor instead of relying on water pumps to feed the water to the reactor. In theory, this should lessen the overall danger of a meltdown, as pump failure will no longer be an issue.

There are deals in place or memorandums of understanding for these reactors to be deployed in Canada, Poland, and Sweden. The first operational reactor might come into service in Canada by 2028. I personally think that such projects might be accelerated in the interest of meeting the world's growing energy supply/demand gap. In that case, we might start seeing some of these small nuclear reactors come online sooner and in much higher volumes.

The global energy supply picture is looking increasingly untenable, begging for viable solutions to closing the widening supply/demand gap

There are many distractions away from energy supply fundamentals this decade. We started with the COVID crisis, then the Ukraine crisis. Now possibly the emerging crisis of the Monkeypox spread, which may become our next reason to disrupt our life's rhythm. Some other issues, such as the breakdown of supply chains for a wide variety of goods, ranging from food to semiconductors, are all combining to create perceptions that cause us to lose sight of a factor that arguably plays a larger role in shaping our lives, namely energy scarcity.

As I have been saying for some months now, perhaps the most important data point of this decade is that of global conventional oil & gas discovery trends. Last year, we consumed about eight times more oil & gas than the world discovered. We have consumed significantly more oil & gas than was discovered, every year, throughout this century so far. There are no prospects currently of the situation getting any better in this respect. Based on OPEC's preliminary monthly production estimates, global oil liquids production in April stood at 98.7 mb/d.

Global oil supply

Global oil supply (OPEC)

Demand in the fourth quarter of this year is expected to reach 102.6 mb/d, according to the most recent OPEC estimates. Even if all sanctions on Iran, Russia, and Venezuela were to be lifted instantly, the gap between current production and global demand levels cannot be closed. Based on EIA data, global monthly liquids production peaked in the month of November, 2018 at 102.2 mb/d. A price-induced demand destruction event is therefore extremely likely within the next 12 to 18 months unless another unforeseen and seemingly unrelated demand destruction event will occur before then. Of course, the EIA disagrees with this outcome being a likely scenario. It sees production meeting demand this year and next, without any difficulties. In other words, we are in for a perfect market balance scenario.

I believe that for the first time in modern times, we are faced with a grim situation, where, due to geological as well as geopolitical factors, we are set to enter a prolonged period of global energy scarcity. In other words, global energy availability, or better said limits on availability, will play the most important role in determining economic growth, inflation, living standards, and most other aspects of our individual and collective well-being.

More and more public policy measures will focus on making sure that the impact on living standards, economic health, and other aspects of national or regional life will be impacted as little as possible. Securing dependable and plentiful sources of energy that can be practically deployed to meet our needs is fast becoming the most important economic issue facing a growing number of economies across the world.

The alternative is to introduce increasingly restrictive measures meant to dampen demand, such as Spain's recent decision to limit air conditioning use in the summer and heating in the winter in public buildings. Future energy conservation measures may become more draconian and coercive across the world if the global energy supply-demand gap continues to widen.

Investment implications

There seems to be very little market awareness of the growing need to close a widening global energy supply gap that seems to be opening up wider, due to geological as well as geopolitical trends. The challenge for governments and industry alike will be to try to narrow that gap as much as possible. When there is a need, companies that have the right product profile to fill that need are set to benefit.

GE is such a company, which has the right products on offer to meet the new energy demands of this decade and beyond. As these new needs will become more obvious, and the growing market for products such as hydrogen turbines, electrolysis equipment, and small nuclear reactors that are easier to deploy will take shape, the positive impact on GE's business prospects should take shape as well.

There is, of course, the other side of GE's overall business profile, namely the poor performance for some decades now. Even though its stock price is less than a fifth of where it was at its peak more than 20 years ago, it is still trading at a forward P/E of about 27. Based on this measure, it is less than attractive as a current investment opportunity. There is also the potentially messy business of splitting the company into three different entities. As things stand right now, I would personally favor being invested in the GE power segment, which is where I see the benefits from the current global energy predicament benefiting GE's current business. Logic would dictate that it might be worthwhile to wait until the full split happens in 2024.

If the overall stock market will continue to decline, taking GE stock with it, to a more reasonable level of valuation, it might be worthwhile considering starting a position in GE before then. Until such a decline in GE's stock price happens, it is a stock worth watching, and keeping an eye on, in case it becomes a buying opportunity. If not, then there is always the option of waiting for the final split of the company in 2024.

This article was written by

Zoltan Ban profile picture
6.54K Followers
My name is Zoltan Ban,  I have a BA in economics. I am a personal investor with over a decade and a half of active trading experience.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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