Oil proves sticky in tough year for GE
General Electric’s (GE’s) woes in the oil patch persisted in the fourth quarter, denting sales and dragging down shares to their biggest decline in four months.
Weakness in the oil and gas unit, which makes drilling equipment and pipes, would probably linger into 2017 after an “extremely difficult” 2016, chief financial officer Jeff Bornstein said on a conference call.
Improvement was unlikely until the second half of 2017, he said after GE announced fourthquarter revenue that fell short of analysts’ estimates.
The results underscored GE’s challenges to find its footing after a sluggish economy curbed growth in 2016 and put pressure on CEO Jeffrey Immelt’s efforts to sharpen the focus on machinery such as gas turbines and jet engines.
Immelt, who sold off most consumer and financial businesses in the past two years, is looking to increase his bet on Jeffrey Immelt
crude by combining the oil operations with Baker Hughes.
GE was facing a “slowgrowth and volatile environment”, Immelt said.
The shares had fallen 2.2% to $30.53 by the close in New York on Friday, the biggest drop in four months. GE gained 9% in the past 12 months.
Revenue fell 2.4% to $33.1bn in the quarter, the Boston-based company said. Analysts had predicted $33.9bn, according to the average of estimates compiled by Bloomberg. Adjusted earnings fell to 46c a share, matching estimates.
Orders rose 4.3%. They declined slightly on an organic basis after excluding assets acquired from Alstom.
“I don’t see any signs of big problems, but it was a grind quarter,” said Nicholas Heymann, an analyst with William Blair.
TAX OVERHAUL
Investors are watching how US President Donald Trump will affect GE, including the possibility of corporate tax reform, which could bring down the company’s bill. In the fourth quarter, GE had an effective tax rate of negative 2%.
Immelt has said GE could also benefit from new infrastructure investment and an improving business climate under Trump.
Bornstein said GE had met legislators and policy makers to discuss what elements could be included in a tax overhaul, including a “reasonable” transition tax for companies looking to bring back overseas cash.
Bornstein was “reasonably confident there is going to be corporate tax reform”. GE had not included any potential benefits from tax policy changes in its earnings forecasts, he said.
While fourth-quarter sales tumbled 22% in the oil and gas unit, orders were flat.
The segment, along with GE’s slumping mining business, was “bottoming now from an order perspective”, Scott Davis, an analyst at Barclays, said in a note. The divisions could show improvement in the second half, Davis said.
GE hopes to capitalise on an eventual crude rebound through the deal with Baker Hughes, which would create the world’s second-largest oilfield service provider and equipment maker. GE would own 62.5% of the combined company.
The manufacturer is also selling two divisions — water and industrial solutions — to help fund restructuring and free up cash for potential acquisitions.
POWER DIVISION
Bornstein said the water unit, which makes products for desalination and waste-water treatment, had received “a lot of bids at decent valuations”.
Revenue last quarter climbed 20% in the power division, which is shipping a new gas turbine.
GE Aviation, which is boosting production of a new jet engine, posted a 6.7% increase.
Sales and profit across GE’s industrial units were light, “although investor expectations were fairly low heading into the earnings” report, Julian Mitchell, an analyst at Credit Suisse Group, said on Friday in a note.
Operating earnings in 2017 would be $1.60-$1.70 a share, GE said, reaffirming a forecast the company gave in December. Organic revenue was expected to increase 3%-5%.