Over the past four years, crude oil (Brent) prices increased by 275%, from $40 per barrel at the beginning of 2009 to $110 per barrel at the end of 2012.  This phenomenal growth was driven by rising global demand for energy supported by a recovering global economy from the financial crisis of 2008-09. This rise in oil prices drove greater investments in oil and gas drilling from energy companies which pursued higher margins resulting from higher oil prices. Greater investment and spending from energy companies in turn increased demand for oil and gas drilling equipment manufactured by General Electric (NYSE:GE).
During this period, sales at GE Oil & Gas increased 57%, from $9.7 billion in 2009 to $15.2 billion in 2012. Profits at the segment also increased 26%, from $1.5 billion in 2009 to nearly $2 billion in 2012.   GE was able to take advantage of the rising global investment in oil and gas drilling by leveraging its wide product portfolio and global service network. The Oil & Gas segment constitutes almost 10% of GE’s total value according to our estimates.
GE’s competitive advantages
1) Wide product portfolio
GE offers one of the widest range of products for the oil and gas industry. Its products have applications across the value chain from oil drilling to downstream processing by refineries. The company provides surface and subsea drilling and production systems, equipment for floating production platforms, compressors that assist in liquefied natural gas (LNG) pipeline compression, turboexpanders, turbines, high pressure reactors, industrial power generation and supporting equipment.
GE has also actively grown its product portfolio through research and development and specific acquisitions like the Wellstream acquisition in February 2011 that provided it with flexible subsea risers and flow lines, and the Well Support acquisition of April 2011 that added electrical submersible pumps (which increase extraction from mature oil and gas fields) to its portfolio.
2) Global service network
GE has also benefited from its extensive service network that comprises 40 service centers in the world’s main oil and gas extraction regions including the Middle East and Latin America. This has proved very crucial for the company’s oil and gas equipment sales because buyers prefer service centers in the vicinity of their operations as it helps them minimize equipment downtime.
Over the past six months leveraging these two advantages, GE Oil & Gas has won several major contracts, including contracts worth over $1.7 billion for turbomachinery and subsea wellhead production systems from Petrobras and a contract worth $200 million for subsea production equipment from Chevron.    
Rising global demand for energy
In the long term we anticipate oil prices to tread even higher driven by growing demand for oil from emerging economies like China and India. These countries have very low oil consumption levels compared to developed countries. Oil consumption per capita for China and India stand at 7 and 3 barrels per day (bbl/day) per 1000 people, respectively, in comparison to 35 for Japan, 44 for Australia, 61 for the U.S. and 64 for Canada. 
Supported by higher oil prices, investment in oil and gas drilling will continue and thereby provide growth in sales and profits at GE Oil & Gas. All in all, the oil and gas sector will drive long-term growth at GE.
We currently have a stock price estimate of $21.78 for GE, approximately 5% below its current market price. We are in the process of incorporating GE’s recent 49% stake sale of NBC Universal to Comcast and will update our model shortly.Notes:
- Brent crude oil prices over the past 5 years, February 21 2013, www.moneyweek.com [↩]
- 2011 10-K, February 24 2012, www.ge.com [↩]
- Form 8-K, January 18 2013, www.ge.com [↩] [↩]
- GE signs $1.1 billion contract with Petrobras for subsea production equipments, Sept 18 2012, www.ge.com [↩]
- GE signs $500 million contract with Petrobras for turbomachinery, January 15 2013, www.ge.com [↩]
- GE signs $120 million contract with Petrobras, Sept 28 2012, www.ge.com [↩]
- Oil consumption levels per capita, February 21 2013, www.indexmundi.com [↩]