GE Sinks as Oil Outlook Sputters, Marring End of Immelt’s Tenure

(Bloomberg) -
GE earnings
General Electric CEO Jeff Immelt (AP Photo/Michael Dwyer)

Even in his final days as General Electric’s CEO, Jeffrey Immelt can’t escape the stench of oil.

GE’s profit is likely to barely meet the projected range as sluggish crude prices keep a lid on demand for oilfield equipment, the company said Friday as it reported earnings. The shares plunged the most in almost two years.

“The resource markets remain challenging,” Immelt said on a conference call with analysts. The Boston-based provider of gas turbines and artificial lift systems is seeing “pressure in power and oil and gas.”

The outlook marks a disappointing end to Immelt’s tumultuous 16-year tenure as chief executive officer, during which GE trailed the broader stock market. Oil has become a symbol of the company’s hurdles after Immelt spent billions on crude-related acquisitions in the years before prices collapsed. He closed a deal this month to merge those assets with Baker Hughes, with GE retaining a majority stake in the combined entity.

The shares tumbled 3.1 percent to $25.87 at 10:59 a.m. in New York after dropping as much as 5.4 percent for the biggest intraday decline since August 2015. The drop extends GE’s slide this year to 18 percent, making the company the biggest loser in 2017 on the Dow Jones Industrial Average, which has advanced 9 percent.

This year’s earnings are likely to be near the bottom of the company’s forecast of $1.60 to $1.70 a share, Chief Financial Officer Jeff Bornstein said on the call. Analysts anticipate $1.62 a share, based on the average of estimates compiled by Bloomberg.

Industrial operating cash flow will also be toward the low end of the $12 billion-$14 billion outlook, “driven by pressure principally in power and oil and gas,” Bornstein said.

The challenges of navigating those markets will fall to John Flannery, a GE veteran whose most recent job was to run the health-care unit, after he takes over from Immelt on Aug. 1. He will also have to contend with pressure from activist investor Trian Fund Management. GE agreed earlier this year to deepen cost cuts after discussions with the firm, which was co-founded by Nelson Peltz.

In preparation for the CEO transition, Flannery has been meeting with investors, customers, employees and government officials. He plans to provide an update in mid-November to detail his plans for capital allocation and cost cutting. Flannery will focus on “reframing our look at 2018 and beyond,” he said on the call.

Second-quarter adjusted earnings fell to 28 cents a share, GE said. That exceeded the 25-cent average of analysts’ estimates compiled by Bloomberg. Sales declined 12 percent to $29.6 billion, compared with $29.2 billion expected by analysts.

Revenue slid 3 percent in the oil and gas unit. That business and GE’s power division showed an “unusual degree of margin weakness,” Morgan Stanley analyst Nigel Coe said in a note to clients.

GE broadened its oilfield offerings with the Baker Hughes transaction, which is intended to help the companies capitalize on an eventual rebound. GE owns 62.5 percent of the new entity.

For the company as a whole, industrial operating cash flow rose to $1.5 billion, a sharp turnaround from the previous quarter. Immelt had promised that the metric would rebound after a surprise $1.6-billion plunge during the first three months of the year rattled shareholders. But the company still needs a “huge” second half to achieve full-year targets, said Gautam Khanna, an analyst at Cowen & Co.

The disappointing performance extends Immelt’s uneasy relationship with investors.

While he became one of the world’s best-known CEOs and won praise for shifting the portfolio away from finance and toward equipment manufacturing, Immelt failed to win the accolades that Wall Street bestowed on his predecessor, Jack Welch. Immelt faced criticism for cutting the dividend in 2009 and paying too much for some acquisitions. He also built up the oil and gas division just before crude prices plummeted.

The shares have fallen almost one-third since Immelt took the helm, and they have declined on each of the past seven days when GE reported earnings, including Friday.

Immelt will stay chairman until the end of the year.