How Large Will General Electric’s Oil & Gas Operations Become? (GE)

General Electric (NYSE:GE) is more than formidable and more than an enviable company.  It has one of the few remaining pure "AAA" bond ratings, and it still thinks of itself and acts like a growth company.  It shed its more volatile finance operation where insurance made earnings predictability more than challenging based upon weather, and it just recently closed the $11+ Billion sale of GE Plastics.  Despite the cash that can be used for its huge buyback plan, it is using cash for growth as well. 

If you look past airplane engines, commercial finance, consumer finance, appliances, power plants, media/content, lighting and much more, you will see the growth initiatives it has embarked upon. Less than two months ago at a private luncheon with a few new media counterparts and GE’s CFO Keith Sherin, it was actually surprising to hear over and over: "We are a growth company."  When you consider that it targets a 20% return on capital and a desire to reinvest into its operations this gets much easier to fathom, even if you keep that huge size in the back of your mind.  If you look at what is going on in the GE Oil & Gas unit, you will see that its energy initiatives are going far beyond just the Ecomagination for wind, water, and more.

GE’s oil & gas unit isn’t a start-up at all, but it looks like this is going to be getting more and more attention inside the conglomerate.  Just yesterday, GE announced a cash offer of 289 million British Pounds (more than $500 million in the U.S.) to acquire Sondex plc.  This oilfield technology operator will further expand GE’s capability and expertise in oil & gas production technologies.  Back in January it announced the acquisition of Vetco Gray for some $1.9 Billion, and that unit has more than 5,000 employees in more than 30 nations and in the vicinity of $1.6 Billion in revenues in 2006.  Vetco Gray is one of the world’s leading suppliers of drilling, completion and production equipment for on- and offshore oil and gas fields, including subsea applications. 

If you use perhaps the easiest tool for smart investing by "following the money," it is becoming more and more evident that GE is going to become a larger player in all forms of energy.  That may be of some concern to some oil and gas service and outfitters, but this is a huge industry with room for even larger players.  It should also go to show that the underlying margin strength in that sector probably aren’t going away any time soon. 

The company has many engines behind it, no pun intended.  Of course it is vulnerable to the economy like most companies, but it seems to be headed steadily in the right direction.  Its stock performance over the last 18 to 24 months has been a point of contention for both shareholders and for management, but the company has value and any recent calls for it to break itself up seem to have been quieted.  It takes quite a lot of cash inflows from investors to move a near-$400 Billion company, but the underlying developments and fundamentals out of the largest market cap conglomerate seem to be firing on all cylinders.

Jon C. Ogg
September 4, 2007

Jon Ogg can be reached at [email protected]; he produces the Special Situation Investing Newsletter and he does not own securities in the companies he covers.