Oil gloom hurts General Electric’s earnings

The global oil-market rout continued to weigh on General Electric Co., which posted a quarterly fall in operating income and orders for its core industrial businesses.

GE reported a 6.1 percent gain in revenue for the first three months of 2016, but profit declines in units making locomotives, power turbines and oil-industry equipment weighed on overall results.

Chief Executive Jeff Immelt said the conglomerate’s diversity enabled it to withstand a “very challenging environment,” especially in the oil and gas business.

The company maintained its annual guidance for investors but lowered its outlook for the oil unit, saying operating profit in that business could fall as much as 30% over the course of 2016 and revenue might decline by 20 percent.

“Diversity is a key strength during this period of volatility,” Immelt said on a conference call. “Most of the portfolio is strong, and we’re delivering. There’s plenty of business out there to achieve our goals.”

The collapse in crude oil prices has hit GE in the midst of a generational shift at the company. Immelt is selling off the bulk of GE Capital, the financial services arm that once provided half of GE’s profit but became a drag after nearly collapsing during the financial crisis.

The exit from the finance business is ahead of schedule, Immelt said on Friday. GE has signed deals for $166 billion of the roughly $200 billion in assets it plans to sell from the unit. GE filed a request to regulators on March 31 that would allow it to shed its designation as a systemically important financial institution and exit supervision by the Federal Reserve.

Meanwhile, GE said it is making progress integrating the power-equipment business it bought last year from France’s Alstom SA. Profit in the power business, excluding Alstom, fell 28 percent in the quarter, but the company expects revenue and earnings to rise in the second half of the year.

GE’s jet-engine business was strong, with profit up 16 percent despite a decline in equipment orders. This week, federal regulators issued a safety directive requiring airlines to fix or replace certain GE engine models to prevent ice buildup that could lead the engines to shut down.

The gloomy performance of the oil business dominated, however. GE reported declines across all the unit’s product lines, which include compressors, flexible risers and valves. The business has been hardest hit by drop-offs in subsea oil exploration and onshore oil and gas production in the U.S., said Chief Financial Officer Jeffrey Bornstein.

“The first quarter was way softer than we expected it to be,” Bornstein said in an interview. The number of the industry’s active onshore oil rigs in North American slid by 27 percent in the first quarter, he noted, when GE had expected a drop of half that size. Profit in the oil business fell 37 percent, and equipment orders fell 70 percent compared with a year earlier.

For the quarter ended March 31, GE reported an operating profit of $3.3 billion for its core industrial business, down 7.0 percent from a year earlier.

Overall, GE posted a net loss of $98 million, compared with a net loss of $13.57 billion a year earlier. The year-earlier loss, however, was largely driven by a $6.3 billion income-tax provision and an $8.94 billion loss from discontinued operations. Revenue rose to $27.85 billion.

Oil wasn’t as significant a burden on GE’s rival Honeywell International Inc., which reported a 9% jump in earnings despite a 38 percent drop in sales in its business unit that makes catalysts and adsorbents for the oil refining and petrochemical industry.

Demand for gasoline and petrochemicals remains high, Honeywell Chief Financial Officer Thomas Szlosek said. And sales in that unit slowed because customers haven’t interrupted production cycles to reinvest in plants and refineries.

“The customers are running those facilities very hard, not stopping to reload their catalysts,” he said in an interview. “The good news is that has to stop some time. The better news is we have a nice backlog of orders, particularly in the catalyst business.”

Honeywell booked a profit of $1.19 billion in the March quarter. Revenue increased 3.4 percent to $9.5 billion, but rose 1 percent excluding acquisitions and currency effects.

Earlier this year, Honeywell held merger talks with United Technologies Corp. but abandoned its pursuit after it was rebuffed by United Technologies. On Friday, Honeywell CEO David Cote told investors that he had moved on: “It’s done. It’s past. It had its time, and that time has gone.”

Source: MarketWatch