GE refocuses on power sector as a core business in new turnaround plan
GE equipment accounts for about one-third of power generated worldwide. But the power generation business is not what it used to be, and that is not good news for GE.
GE’s share price has taken a pounding. The price dropped as much as 7% on Monday after the company announced its turnaround plan, which included a dividend cut to 48 cents/share from 96 cents/share. For the year to date, GE’s stock is down about 35%.
The company’s power sector is not the only problem, but the unit had about $39 billion in 2016 revenues and accounts for nearly one-third of overall revenues.
One trouble spot was GE’s 2015 acquisition of Alstom, a major manufacturer of equipment for coal plants. Flannery said Alstom’s business has a “single-digit return right now, disappointing, below expectations.” But the company’s gas turbine business is also “challenged,” in Flannery’s words.
“We understand very clearly that the gas markets are challenged by renewable penetration,” Russel Stokes, head of GE’s power unit, said during the investor update call. “But we still believe that gas is going to be an important contributor to the energy mix going forward even though we believe that we’re going to see some significant declines on the need for gas and utilization of gas in the short-term.”
GE, whose roots go back to Thomas Edison and the beginning of electrification, but over the past 100+ years the company has grown to include a variety of businesses, from locomotives and healthcare equipment to a financing arm.
Under the leadership of former CEO Jeffrey Immelt, GE refocused on its industrial roots. In the wake of the 2008-2009 mortgage crisis, Immelt shed much of GE’s financial assets, which had grown enough in size to rival the largest banks. Immelt bought new industrial business such as Alstom and wind turbine manufacturer LM Wind. Immelt also continued to believe that the gas turbine business would rebound, but the trend went the other way.
Globally, there was $316 billion invested in renewable energy last year and only $117 billion in fossil fuel power generation, according to the International Energy Agency (IEA).
Stokes said that he thinks gas-fired generation will continue to be a “baseload option,” especially with the prospect of retiring coal plants, the potential retirement of nuclear plants and the need to stabilize increasing renewable power penetration. But GE has also lowered its 2017 estimate for heavy duty gas turbine sales to 30 units from 40 and for 2018 to 65 units from 75.
In addition to a slow down in gas turbine sales, the business is also experiencing tighter margins. Stokes says he is looking at “doing some things that create greater value.” He is also looking to cut $1 billion in “structural costs” out of the business.
Renewables, which are not part of the power group, have a better story to tell. In the third quarter, the group’s revenues grew to $2.9 billion from $2.77 billion in third quarter 2016. Profits were $257 million, a 27% year-on-year increase. For the first nine months of the year, GE’s renewables revenues rose to $7.41 billion, a 13% year-over-year increase.
Flannery sees a “strong growth curve” for renewables. The challenge, he said, is the margin rate. “This is an intensive price competitive industry,” he said, adding that his focus is “getting our product cost down.”
Flannery also noted that GE is doing a lot of work on energy storage. Renewables and storage are “obviously a mega trend in the industry,” he said.