General Electric concerned about oil equipment sales
General Electric (GE) has legitimate concerns about its Oil & Gas segment. This is due to lower oil equipment sales. In 1Q16, the company lowered guidance for the segment for 2016.
Low crude oil prices have affected capital expenditure and investment decisions in the oil and gas space, thus affecting GE’s order book. However, management is confident it will secure large orders in 2H16. The large orders expected in 2H16 will negate the sluggishness persisting in the US markets and will help build the order backlog until 2017.
General Electric’s Oil & Gas segment provides cutting-edge technology and services solutions throughout the value chain (i.e., upstream [subsea, offshore, onshore], midstream [liquefied natural gas, pipeline, storage], and downstream [refinery and petrochemical]). It has approximately 40,000 employees and reported revenue of ~$3.2 billion in 2Q16. This segment contributed ~11.2% to GE’s total industrial (XLI) revenues and ~7.7% to its operating profit, with an operating margin of 11.8% in 2Q16.
General Electric’s Oil & Gas segment guidance for 2016
Per General Electric’s management, the Oil & Gas industry environment is difficult, with respect to the order inflow through 1H16. For 2Q16, management said that the Oil & Gas segment’s operating profit was down 40% organically, as against the previous guidance of 30% for the year. There has been no change in the consolidated earnings per share guidance of $1.45–$1.55 for 2016, following the company’s 2Q16 results.
Investors interested in trading in the oil and gas sector can consider the SPDR S&P Oil and Gas Exploration & Production ETF (XOP). XOP’s major holdings include Marathon Oil (MRO) at 2.2%, Continental Resources (CLR) at 2.1%, and Newfield Explorations (NFX) at 2.1%.
In the next part of this series, we’ll discuss the reason for the strong performance of GE’s Power segment in terms of orders in 2Q16.