General Electric views the future of energy globally as upbeat, citing several "positive trends in energy" in reporting a 58% hike in its operating earnings to $3.5 billion in the first quarter this year, compared to the same period in 2010. Both CEO Jeffrey Immelt and CFO Keith Sherin talked bullishly about GE's various energy plays, particularly global turbine orders, during a conference call with financial analysts Thursday.
"Some of the positive trends in energy include strengthened equipment and services, pricing appears to be stabilizing and most important, large gas turbine quote activity is increasing, so we did see solid order growth in the first quarter," said Immelt, although he acknowledged that margins were decreased, particularly in energy transactions.
Overall, energy orders for the company were up 17% quarter over quarter for the first three months this year, Sherin said. There were 27 natural gas turbine orders in the first quarter, compared to 10 such orders in the same quarter last year. In wind, however, overall orders were down 23% (327 units in the first period this year vs. 494 units last year) quarter over quarter, he said.
"We're in really good shape for accelerating industrial sales growth; it's positive in 2011 and should accelerate in 2012," Immelt said. "All the precursors are in place: good equipment orders, backlog growth and good services orders. Strategic acquisitions in energy position that [business segment] well for the long term."
Noting that GE has set a target of $15 billion in revenues from its oil/gas services businesses, a senior consultant with the consulting firm Frost & Sullivan said recent acquisitions could mean that the GE operations in that space will evolve into a comprehensive oilfield services company. "GE has been aggressive in its growth ambitions in the global energy market with acquisitions of more than $11 billion in the last year alone," said the consultant, adding the caveat that its 2010 oil/gas services revenues of $7.5 billion, however, make it, at best, a "medium-size" player in the space, compared to companies such as Schlumberger ($27 billion in revenues).
In response to questions on gas turbines, Sherin said the outlook "does feel a little better. At the end of last year we had about 112 gas turbines in shipment, and we said we'd be down about 10, but today we're looking at opportunities to be at least flat and to put some more into production to meet the growth we see coming.
"The Middle East has been very strong and other areas globally," he said, noting that there was only one new order in the United States in the first quarter. "[The U.S. market] is an area that has to pick up as we go forward, and we are really trying to help our customers in Japan [in the wake of the nuclear plant problems]. There is an awful lot of generating capacity that is out of service [in Japan], and they are trying to put as much power in place as they can to prepare for the summer and deal with the fact that they have to replace a lot of power."
Sherin said GE's turbine executives are "cautiously optimistic" and the overall outlook is good. For 2011 it should be at least flat and 2012 should be better, he said.
Immelt ties GE's gas and wind turbine businesses to five major factors that are beginning to trend positively:
"All of these things make us a little more bullish on the gas turbine market," Immelt said. "Energy tends to be a later-cycle recovery item, and that has historically been the pattern of [energy] price activity."
Global energy supplies remain strong, and this is continuing to keep energy prices down, he said. Overall, GE is betting now that natural gas will be the "power generation fuel of choice," Immelt said.
"We think we are well positioned there. With retirements and replacements [of existing generation plants], along with new economic growth, we think the outlook is going to be pretty good." Immelt thinks there could be "a nice increase in gas turbine demand," with the U.S. market being less than half of the overall growth.
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