GE Continues to Diversify Into Energy -- Not a Bakken Story

I first posted comments about GE's rapid diversification into oil and gas some weeks ago. That observation has now become the lede in stories about GE investments:

General Electric Co. said Tuesday it will spend $3.2 billion for a controlling stake in French equipment developer Converteam as it continues to position itself as a major player in what's expected to be a 20-year boom in oil and natural gas demand.

Converteam, which serves a variety of industries including oil and gas companies, is the latest of $11 billion in acquisitions by GE's energy business. GE also has acquired Dresser Inc., Wellstream Holdings, Lineage Power Holdings and Well Support in the past six months.

The article goes on to describe GE's bullishness on natural gas.

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I post about GE's diversification into energy for a couple of reasons. First, it supports my view that natural gas will eventually be a big story for investors. Second, I can't think of anyone who would have more insight into future government policies regarding energy than the president's economic czar. The president's economic czar is GE's CEO. Connecting the dots could be very profitable.

CNBC Opening Bell and Opening Comments -- Nothing About the Bakken

Updates

April 28, 2011: GE sees best profit outlook in a decade. Skip the article. Read the comments.


April 21, 2011: GE's profit jumps 77 percent and pays no income taxes; increases dividend for third time in one year. For those who might have forgotten, the GE/CEO is the administration's economic czar. I can see why -- making that much money and not paying federal income taxes.

March 31, 2011: When I first posted the GE story, it was mostly a throw-away post. I thought it interesting but not much more than that. Little did I think it was going to become a big, big story. Today it's the front page story on CNN.com. 

March 31, 2011: The story about GE not paying US federal income tax keeps getting more embarrassing for the administration and GE. GE says they did not pay any US federal income tax in 2010 because the company last $32 billion in the financial banking meltdown. He said today on CNBC that when things get back to normal, GE's effective tax rate would be back to its more normal "teens to 20's." In fact, the last year that GE paid federal income tax, their rate was 9 percent. The corporate statutory rate is 35%. GE owns 49% of CNBC. Comcast owns 51% of CNBC. Comcast's tax rate this year was 41%.  GE's CEO is the president's economic adviser. (Note: This was CNBC as I heard it at 2:20 p.m., March 31, 2011. I believe what I typed was accurate.)

March 28, 2011: After posting the comment about GE not paying taxes this year (as reported by CNBC), someone wrote me saying that XOM had not paid US federal taxes in years. Of course, that was incorrect, and was discussed in the comment section below.  Interestingly enough, CNBC touched on this subject again today, and put up two slides. The first slide listed four Forturne 500 companies that paid less than the statutory corporate tax rate (35%). That slide did not include any oil companies. The second slide had three companies, and the top two were XOM and COP. XOM had an effective 42% US federal tax rate for 2010, and COP had an effective 41% US federal tax rate for 2010, double the average tax rate paid by Fortune 500 companies. The average effective tax rate paid by Fortune 500 companies is 20%. The good news: if XOM and COP have effective tax rates above 40%, they both had very good years. ATT had a negative tax rate for 2010 according to CNBC, which I assume means they carried losses forward (with or without a gain this year) to result in no taxes being paid, and carrying tax losses forward.

Later, same day as original post: I've raised the issue some time ago about President Obama appointing GE/CEO as the nation's economic czar. Others are joining the fray now that "we" learn that GE paid no federal income taxes last year. 

Original Post

CNBC opening bell:

GE paid no taxes last year; took bailout money; CEO is economic czar.

Can't make this stuff up. GE paid no taxes last year -- if true, I paid more taxes than GE last year. CNBC pundits want corporate tax rate cut. What am I missing?

GE is diversifying rapidly into oil. I guess GE wants to to get into an industry where they can pay some taxes.

Here's the printed media link. 

By the way, send me the links of US oil companies not paying any federal income tax and I will link them, also.

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.