How Rising Global Energy Demand Bodes Well For GE’s Long-Term Growth

by Trefis Team
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GE’s (NYSE:GE) energy sector related businesses have steadily constituted an increasing portion of its value over the past few years. Revenues from GE’s energy infrastructure division as a percentage of its total revenues increased from around 20% in 2007 to 30% in 2011, and the strong performance has continued in 2012. [1] This growth has been driven by GE’s increasing focus on the energy sector which is expanding driven by growth in global energy demand. Additionally, increasing revenues in the energy infrastructure division have also helped GE to partially offset the impact of the financial crisis on its largest division, GE Capital.

GE manufacturers oil and gas drilling equipment and systems, gas turbines, power generation systems, wind turbines, provides solar technologies and several other related services as part of its energy businesses. It provides products and services across the entire energy spectrum – from energy production to distribution and management. At present, the energy infrastructure division constitutes nearly one-fourth of the company’s total value, just behind GE Capital, according to Trefis estimates.

We currently have a stock price estimate of $21.78 for GE, marginally above its current market price.

See our complete analysis of GE here

Increasing global demand for energy driving growth in GE’s energy businesses

The demand for energy in the form of electricity and fuel is larger than its current supply in several parts of the world, particularly in developing countries. Additionally, the increasing global economic output will require a greater amount of energy. GE through focused research and development and strategic acquisitions has positioned itself strongly to benefit from the increasing global energy demand. In 2011, GE acquired Converteam that significantly expanded its product and service capabilities in electrification and automation systems. Other major acquisitions over the past couple of years include Dresser, Lineage Power Holdings, Wellstream and the Well Support division of John Wood Group. Leveraging its strengthened position, the company has been able to bag several major contracts like the $1.1 billion contract for subsea wellhead production from Brazilian energy company Petrobras in September 2012.

Energy businesses are increasing in importance for GE

GE’s increasing focus on the energy equipment sector has also enabled it to partially offset declining revenues at GE Capital, its largest division. Revenues at GE Capital declined from $65.6 billion in 2007 to $45.7 billion in 2011 largely due to the impact of the financial crisis. Over the same period, revenues at the energy infrastructure division increased from $34.9 billion to $43.7 billion. [1] And, in the nine months ended September 30, energy infrastructure revenues for the first time overtook those of GE Capital. [2] Going forward, it is highly likely that GE’s energy businesses will constitute the largest portion of its value.

However, for the strong growth in GE’s energy businesses to continue, stability in global economic growth is crucial. For instance, a major decline in global economic growth will lower crude oil prices which will impact investments in exploration and extraction of oil. This will directly impact GE’s sales of oil drilling equipment and machinery.

At present, long-term growth fundamentals for the global energy sector are strong as per capita energy consumption levels in developing and under-developed economies are significantly lower than those in developed economies. Electricity consumption per person per year in the United States is approximately 12 MWh. The corresponding figures for China and India are 3.5 MWh and 1.0 MWh, respectively. [3] Thus, this gap in energy consumption between developed and developing economies will continue to drive growth in the global energy sector and GE by virtue of its strong presence in this sector will continue to benefit from this growth.

All in all, GE’s increasing focus on the energy sector is beneficial for the company, particularly from a long-term growth perspective.

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Notes:
  1. GE 2011 10-K, www.ge.com [] []
  2. GE Q3 2012 10-Q, www.ge.com []
  3. List of countries by electricity consumption, www.wikipedia.com []
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