GE‘s oil & gas business has grown at strong rates over the last many years through strategic acquisitions and organic growth. The industrial conglomerate currently is one of the largest suppliers of oil and gas drilling equipment with leading position in many segments such as subsea and turbomachinery solutions. During 2009-2013, revenues from GE’s oil & gas segment increased at a compounded annual growth rate of nearly 15%, from $9.7 billion in 2009 to $17 billion in 2013. Profits from this segment also rose steadily during this period, from $1.5 billion in 2009 to $2.2 billion in 2013. But with global crude oil prices expected to remain stable over the next few years with rising oil production from the U.S., can GE continue to grow its oil & gas business at such strong rates?
We figure with global demand for oil & gas continuing to grow, especially from the developing countries, oil & gas production will likely also rise in coming years. Accordingly, GE anticipates oil & gas industry’s total spending to rise by 6% annually through 2017. In our view, this rising industry spending will grow GE’s oil & gas results, as the company holds a leading position as an equipment supplier. GE’s simplification initiative, which is lowering costs, will ensure that this revenue growth translates into strong profit growth. So overall, we figure GE will likely be able to grow its oil & gas business in coming years.
GE’s oil & gas segment will constitute about 12% of its overall revenues in 2014. We currently have a stock price estimate of $28.33 for GE, around 10% ahead of its current market price.
GE Has Built A Formidable Position As An Oil & Gas Equipment Supplier
Over the last two decades, GE acquired many oil & gas equipment suppliers. The company started with the acquisition of NuovoPignone, which enabled the industrial conglomerate to establish a foothold in the turbomachinery space. Since then, GE has undertaken strategic acquisitions to build leading positions in specific areas. Today, GE is a leading player in the subsea segment, in which capital expenditure from the oil & gas industry is expected to grow by 9% annually through 2017. The acquisitions of Wellstream in 2011 and of vectogray before that enabled GE to build its product portfolio in the subsea space. Similarly, the acquisitions of Well Support, Sondex, Hydril and Lufkin helped GE build its formidable position as a drilling and surface equipment supplier. Several other acquisitions have allowed GE to establish itself in the downstream segment as well. Overall, today GE is one of the largest suppliers of oil & gas products, which have applications across the entire value chain from drilling to downstream processing by refineries.
In addition, GE has an extensive support network comprising of 40 service centers in the world’s main oil and gas extraction regions, including the Middle East and Latin America. We figure this is crucial for growth as buyers prefer service centers in the vicinity of their operations as this helps minimize their equipment downtime.
Strong Long Term Growth Fundamentals
In the first half of 2014, GE’s oil & gas revenues have risen by 23% annually, and the segment’s margins have expanded by 60 basis points. For the full year 2014, the company anticipates its oil & gas revenues and profits to be higher than those in 2013. In our opinion, the long term growth potential for GE’s oil & gas business is solid. With a rising global population, demand for energy is bound to grow. We figure that a significant portion of this growing energy demand will have to be fueled by oil & gas. This will compel oil & gas extraction, transportation and and refining companies to invest more capital, thereby growing the market for GE’s oil & gas equipment products.
Currently, large developing countries like China and India consume significantly less oil per person, compared to developed countries. China and India currently consume 7 and 3 barrels per day (bbl/day) per 1000 people, respectively. The corresponding figures for Japan is 35, for Australia is 44, for the U.S. is 61 and for Canada is 64. So, as consumption of oil in developing countries rise, GE’s oil & gas business will likely grow.