GE Misses Sales Estimates as Oil Weighs on Immelt’s Overhaul

(Bloomberg) -- General Electric Co.’s woes in the oil patch persisted in the fourth quarter, denting sales and dragging down shares to their biggest decline in four months.

Weakness in the oil and gas unit, which makes drilling equipment and pipes, will probably linger into this year after an “extremely difficult” 2016, Chief Financial Officer Jeff Bornstein said on a conference call. Improvement is unlikely until the second half of 2017, he said after GE announced fourth-quarter revenue that fell short of analysts’ estimates.

The results underscored GE’s challenges to find its footing after a sluggish economy curbed growth in 2016 and pressured Chief Executive Officer Jeffrey Immelt’s efforts to sharpen the focus on machinery such as gas turbines and jet engines. Immelt, who sold off most consumer and financial businesses in the last two years, is looking to deepen his bet on crude by combining the oil operations with Baker Hughes Inc.

GE is facing a “slow-growth and volatile environment,” Immelt said on the conference call.

The shares fell 2.2 percent to $30.53 at the close in New York, the biggest drop in four months. GE gained 9 percent in the last 12 months, compared with a 22 percent advance for the Standard & Poor’s 500 Index.

Revenue fell 2.4 percent to $33.1 billion in the quarter, the Boston-based company said in a statement. Analysts had predicted $33.9 billion, according to the average of estimates compiled by Bloomberg. Adjusted earnings fell to 46 cents a share, matching estimates.

Orders rose 4.3 percent in the quarter. They declined slightly on an organic basis after excluding assets acquired from Alstom SA.

“I don’t see any signs of big problems, but it was a grind quarter,” said Nicholas Heymann, an analyst with William Blair & Co.

Tax Overhaul

Investors are watching how President Donald Trump will affect GE, including the possibility of corporate tax reform that could bring down the company’s bill. In the fourth quarter, GE had an effective tax rate of negative 2 percent. Immelt has said GE could also benefit from new infrastructure investment and an improving business climate under Trump.

GE has met with lawmakers and policy makers to discuss what elements could be included in a tax overhaul, including a “reasonable” transition tax for companies looking to bring back overseas cash, Bornstein said in a telephone interview. While a final package hasn’t been passed, Bornstein said he is “reasonably confident there is going to be corporate tax reform.”

GE hasn’t included any potential benefits from tax policy changes in its earnings forecasts, Bornstein said.

While fourth-quarter sales tumbled 22 percent in the oil and gas unit, orders were flat for the period. The segment, along with GE’s slumping mining business, is “bottoming now from an order perspective,” Scott Davis, an analyst at Barclays Plc, said in a note. The divisions could show improvement in the second half, he said.

Oil Deal

GE hopes to capitalize on an eventual crude rebound through the deal with Baker Hughes, which would create the world’s second-largest oilfield service provider and equipment maker. GE would own 62.5 percent of the combined company.

The manufacturer also is selling two divisions, water and industrial solutions, to help fund restructuring and free up cash for potential acquisitions. Bornstein said the water unit, which makes products for desalination and wastewater treatment, has received “a lot of bids at decent valuations.”

Revenue last quarter climbed 20 percent in the power division, which is shipping a new gas turbine. GE Aviation, which is boosting production of a new jet engine, posted a 6.7 percent increase.

Sales and profit across GE’s industrial units were light, “although investor expectations were fairly low heading into the earnings” report, Julian Mitchell, an analyst at Credit Suisse Group AG, said Friday in a note.

Operating earnings in 2017 will be $1.60 to $1.70 a share, GE said, reaffirming a forecast the company gave last month. Organic revenue is expected to increase 3 percent to 5 percent.

To contact the reporter on this story: Richard Clough in New York at rclough9@bloomberg.net. To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson