Analysis: GE shuffle signals growing importance of oil & gas unit

Wed Sep 18, 2013 8:07pm EDT
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By Patricia Kranz

(Reuters) - General Electric Co's decision to name rising star Lorenzo Simonelli to head its oil and gas equipment business signals just how important energy has become to the conglomerate as it retreats from finance and returns to its industrial roots.

Simonelli's success in reinvigorating GE's transportation business appears to be the main reason for his promotion. Since he took the helm of the unit in 2008, it grew from a $3.4 billion business focused almost exclusively on building locomotives in North America to a diversified business with annual revenues of $5.6 billion.

If the 19-year GE veteran can replicate that success in oil and gas - already the company's fastest-growing business with $15 billion in annual revenues - the 40-year-old Simonelli would likely emerge as a strong contender to succeed GE Chairman and Chief Executive Jeff Immelt, analysts say.

"Simonelli has done a good job of trying to bring an underperformer, perhaps an afterthought, into a profitable and growing business for GE," said Morningstar analyst Daniel Holland.

The oil and gas unit, by contrast, is hardly an afterthought as Simonelli takes the reins. It is crucial to GE's expansion strategy at a time when it is retreating from finance, which almost took the company down during the 2007-2008 financial crisis and still weighs on the company's stock.

Since 2007, GE has spent over $14 billion acquiring companies that provide equipment or services to the oil and gas industry. The spending spree anticipated the surge in U.S. energy production in recent years due to new technology that enables oil and gas trapped in shale rock formations to be extracted at a profit.

"Oil and gas is the biggest industrial growth platform for the company right now, and probably for the next decade-plus," said analyst Nicholas Heymann of William Blair & Co, which trades GE shares.

This spring GE paid $3.3 billion for oilfield pumpmaker Lufkin, turning the company overnight into a major supplier of equipment to companies that drill shale rock. Its energy business also makes underground pumps that pull oil and gas to the surface, as well as wellheads, compressors and filters.   Continued...

General Electric Co. acknowledged on Thursday that a cut in its top-tier credit rating was possible, but its chief financial officer said there was no "time bomb" hidden in its hefty finance arm. REUTERS/Brian Snyder