Oil unit drags down earnings from core industrial business; Immelt hails 'diversity'

By Ted Mann 

The global oil-market rout continued to weigh on General Electric Co., which posted a quarterly decline in operating income and orders for its core industrial businesses.

GE reported a 6.1% gain in revenue for the first three months of 2016, but profit declines in units making locomotives, power turbines and oil-industry equipment hurt its bottom line.

Chief Executive Jeff Immelt said the conglomerate's diversity enabled it to withstand a "very challenging environment," especially in the oil and gas business. The company maintained its annual guidance for investors but lowered its outlook for the oil unit, saying its operating profit could fall 30% over the course of 2016 on as much as a 20% drop in revenue.

"Diversity is a key strength during this period of volatility," Mr. Immelt said on a conference call. "Most of the portfolio is strong, and we're delivering. There's plenty of business out there to achieve our goals."

The collapse in crude oil prices has hit GE in the midst of a generational shift at the company. Mr. Immelt is selling off the bulk of GE Capital, the financial services arm that once provided half of GE's profit but became a drag after nearly collapsing during the financial crisis.

The exit from the finance business is ahead of schedule, Mr. Immelt said Friday. GE has signed deals for $166 billion of the roughly $200 billion in assets it plans to sell from the unit. GE filed a request to regulators on March 31 that would allow it to shed its designation as a systemically important financial institution and exit supervision by the Federal Reserve.

Meanwhile, GE said it is making progress integrating the power-equipment business it bought last year from France's Alstom SA. Profit in the power business, excluding Alstom, fell 28% in the first quarter, but the company expects revenue and earnings to rise in the second half of the year.

The company's jet-engine business was strong, with profit up 16% despite a decline in equipment orders. This week, federal regulators issued a safety directive requiring airlines to fix or replace certain GE engine models to prevent ice buildup that could lead the engines to shut down.

The gloomy performance of the oil business dominated. GE reported declines across all the unit's product lines, which include compressors, flexible risers and valves. The business has been hardest hit by drop-offs in subsea oil exploration and onshore oil and gas production in the U.S., said Chief Financial Officer Jeffrey Bornstein.

"The first quarter was way softer than we expected it to be," Mr. Bornstein said in an interview. The number of active onshore oil rigs in the U.S. slid by 27% in the first quarter, he noted, when GE had expected a drop of half that size for the industry. Profit in the company's oil business fell 37% compared with a year earlier, while equipment orders dropped 70%.

For the quarter ended March 31, GE reported an operating profit of $3.3 billion for its core industrial business, down 7% from a year earlier.

Overall, GE posted a net loss of $98 million tied largely to discontinued operations, including some within its finance unit. A net loss of $13.57 billion in the year-earlier first quarter reflected an $8.94 billion loss from discontinued operations and a $6.3 billion income-tax provision. Revenue in the latest period rose to $27.85 billion.

Oil wasn't as significant a burden on GE rival Honeywell International Inc., which reported a 9% jump in earnings despite a 38% drop in sales in its business unit that makes catalysts and adsorbents for the oil refining and petrochemical industry.

Honeywell Chief Financial Officer Thomas Szlosek said demand for gasoline and petrochemicals remains high, which means customers haven't interrupted production cycles to reinvest in plants and refineries.

"The customers are running those facilities very hard, not stopping to reload their catalysts," he said in an interview. "The good news is that has to stop some time. The better news is we have a nice backlog of orders, particularly in the catalyst business."

Honeywell booked a first-quarter profit of $1.19 billion. Revenue increased 3.4% to $9.5 billion.

Earlier this year, Honeywell held merger talks with United Technologies Corp. but abandoned its pursuit after it was rebuffed by United Technologies. On Friday, Honeywell CEO David Cote told investors that he had moved on: "It's done. It's past. It had its time, and that time has gone."

--Anne Steele and Andy Pasztor contributed to this article.

Write to Ted Mann at ted.mann@wsj.com

 

(END) Dow Jones Newswires

April 23, 2016 02:48 ET (06:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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