(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.
“In this industry there are very few one-stop shops,” said Tim Ghriskey of Solaris Asset Management, which owns GE shares. “GE has almost a front-end to back-end offering line.”
GE’s investment and research in new technologies could help drive innovation at a time when the North American shale boom is shifting from the “land rush” stage, where companies compete to lock up leases, to a “manufacturing” stage, with a focus on improving efficiency and lowering costs.
“It’s further acknowledgement by one of the oldest manufacturers in the country and in the world that this is and will be the growth sector in our economy, and frankly around the world, for a long time to come,” said Christopher Guith, vice president of policy at the US Chamber of Commerce’s Institute for 21st Century Energy.
GE dove into the oil and gas business in 1994 when it acquired Nuovo Pignone, a maker of turbines and compressors based in Florence, Italy. It began expanding into other sectors in 2007, when it bought Vetco Gray, a drilling company.
But the acquisition drive went into full gear from 2010 to 2013, when GE bought several companies, including Wellstream, which makes flexible pipeline products for deepwater production, and the well support division of the John Wood Group, which makes pumps.
GE executives say the division grew at a compound annual rate of over 20 percent over the last several years. Orders grew from $1 billion in 1994 to $16 billion in 2011. It accounts for 10 percent of the company’s revenue and employs 43,000 people in 100 countries.
Throughout the expansion, the headquarters of the oil and gas division remained in Florence. That should make Simonelli feel right at home, since he was born in the Tuscany capital known more for Renaissance art and high fashion than as an industrial center.
But Simonelli won’t have much time to put down fresh roots. In July, GE said it would establish a new global oil and gas headquarters in London at the beginning of 2014 for all the businesses except turbomachinery.
One area where GE sees opportunity is in pumps and other equipment that help push oil or gas to the surface. That is especially important in shale fields, where production starts out quite high and then drops off fairly quickly as pressure decreases.
That’s where the John Wood and Lufkin acquisitions come into play. GE now owns electric submersible pumps and flow control systems formerly made by John Wood. Lufkin also is in the so-called “artificial lift” business, making the donkey ear pumps that pull oil or gas out of traditional wells.
“When we make these types of acquisitions we look for things that play to GE’s strengths or play to scale,” said Eric Gebhardt, chief technology officer at GE Oil & Gas. “Rotating equipment, like electrical submersible pumps, is something GE is a specialist in, from aviation engines to the motor division to power generation.”
Working with experts from those divisions, GE’s research center took existing technology and applied it to the pumps it acquired from the Wood Group. The result was a tenfold improvement in the lab, Gebhardt said, with the technology now in field trials with a customer.
It also used analytics and modeling to redesign gas pumping stations to expand the capacity in shale fields like North Dakota’s Bakken, Gebhardt said.
“When you’re talking about wells costing $7 (billion) to $12 billion dollars a pop compared to $500,000 for a conventional onshore well, every day counts,” said Guith of the U.S. Chamber. “Any seemingly small efficiency improvement could mean the difference of tens if not hundreds of thousands of dollars.”
Now it’s up to Simonelli to manage the patchwork of companies that Heintzelman and his predecessors pulled together.
“If he is successful, it puts him in the front of the line to succeed Jeff Immelt,” said Ghriskey. “But it will be a test, not a layup.”
The company has set no timetable for Immelt to step down from a job he has held since 2001, when he took over from Jack Welch.
Reporting By Patricia Kranz; Editing by Frank McGurty and Jim Marshall