A Second Look at GE Rapidly Diversifying Into ..... Oil

Updates

GE accelerates its transition to oil investment.

The acquisition of Wellstream expands GE Oil & Gas' extensive subsea manufacturing and services portfolio and accelerates its presence in the fast growing deepwater production regions of Africa, Asia and Brazil.

Original Post

I was alerted to the story that GE had just bought John Wood Group's well support division a couple of days ago. I didn't know anything about John Wood at the time and I completely missed the significance of the story.

Now that I have had the opportunity to read a much longer story and analysis of the deal in the Financial Times, I have a much better understanding and appreciation for what this means.

I am strongly convinced that fossil fuels (coal, oil and natural gas) will be the major source of energy for America and the rest of the world for many decades, notwithstanding all the hype about wind and solar energy in the press and from politicos.

I have been accused of colleagues that I can't see anything "other than oil." I admit it.

It took awhile, but any serious student of energy requirements can see that there is not enough land in the United States for enough solar panels to generate the amount of electricity that would be needed to replace coal, nuclear, and natural gas.

There may be a niche for solar energy but it's not going to amount to a hill of beans, as they say, in the big picture.

Wind energy is a much bigger source of energy than solar but it, too, will provide an inconsequential amount of energy for the world compared to oil, coal, and nuclear.

It has been interesting to watch General Electric over the past few years try to make a go of it with regard to wind energy. General Electric had a huge interest in wind energy and wind turbines.

But it looks like even General Electric has finally seen the light (no pun intended). Read the Financial Times story; read the direct quotes, and read between the lines.

Here's a sampling of items from the article:

By buying John Wood Group's well support division GE has secured one of the British company’s crown jewels: its electric submersible pumps, which are in ever greater demand for squeezing more oil out of aging fields.

GE was willing to pay a huge price for this division: GE’s winning bid is worth about 17 times last year’s earnings before interest, tax, depreciation and amortization of $166m, and 14 times the ebitda of $200m it predicts for 2011.

A GE spokesman says: "About two-thirds of the world’s oil comes from 300 highly depleted giant fields, and the world has only tapped about a third of what they hold. So if you can squeeze another 1 or 2 per cent out of them, it is really worth doing. This is the first place oil companies will want to invest their money, because it is a lot more productive than trying to find new fields.”

In the US, the unconventional gas industry has been booming, and is expected to invest a further $40bn-$60bn over the next five or six years. It also has the potential to expand to China and some parts of Europe.

Those industry trends mean that the global oil services market, which is expected to be worth $500bn this year, is growing fast, with a 15 per cent rise expected for 2012.

All of that was very interesting, but it was the final thoughts of the article that spoke volumes:

GE still has to prove that its rapid move into oil services, diversifying away from its traditional base in power generation, will pay off.

Two points in that last statement caught my attention: 1) "rapid move into oil services"; and, b) "diversifying away from its traditional base in power generation."

GE seems to have lost its footing the past few years (yes, partly due to the recession) but I think its move into wind turbines instead of oil services was a strategic mistake. GE is now trying to correct that mistake and trying to do it "rapidly."

Even others have noted that GE was not diversified in energy. With 20/20 hindsight, it looks like they were sucked into the hype of wind energy during the lost decade.

When GE, which I think of as a wind turbine company in energy production, looks to diversify and to do so "rapidly" almost takes my breath away. And their diversification is back to the old standby: oil.

GE diversifying into oil convinces me that fossil fuels (coal, oil and natural gas) will be the major source of energy for America and the rest of the world for many decades, notwithstanding all the hype about wind and solar energy in the press and from politicos.