General Electric is concerned about oil equipment sales
General Electric (GE) has legitimate concerns about its oil and gas segment due to lower oil equipment sales. So the company has lowered its guidance for the segment in fiscal 2016. But, at the same time, GE has maintained its full-year EPS (earnings per share) guidance of $1.45–$1.55 in 2016.
Low crude oil prices have affected capital expenditure as well as investment decisions in the oil and gas space, affecting its order book.
General Electric’s oil and gas segment provides cutting-edge technology and service solutions throughout the value chain, including the upstream (subsea, offshore, onshore), midstream (LNG, pipeline, storage), and downstream (refinery, petrochemical) spaces. The segment employs approximately 40,000 employees, and it reported revenue of ~$16.5 billion in fiscal 2015. This segment contributed ~15.1% to GE’s total industrial (XLI) revenues and ~13.5% to its operating profit with an operating margin of 14.7% in fiscal 2015.
General Electric’s Oil and Gas segment: 2Q16 guidance
As per General Electric’s management, the oil and gas industry environment is difficult with respect to the order inflow that started in the beginning of fiscal 2016. The company has downwardly revised its fiscal 2016 oil and gas operating profit by approximately 30%. There’s been no change in the EPS guidance of $1.45 to $1.55 per share.
Investors interested in trading oil and gas could look into the SPDR S&P Oil and Gas Exploration & Production ETF (XOP). Major holdings in XOP include SM Energy (SM) at 3.2%, Southwestern Energy (SWN) at 2.9%, and Continental Resources (CLR) at 2.6%.
Let’s examine the reason for GE’s power segments’ outperformance. In the next part of this series, we cover GE’s power segment’s forecasts for fiscal 2016.