Why GE is Perfectly Positioned for a Renewable Future

According to a recent report from research firm Wood Mackenzie, Big Oil could shift up to a fifth of its drilling investments into renewable energy in the next 20 years.

In this week's episode of Industry Focus: Energy, analysts Sean O'Reilly and Taylor Muckerman look at what Big Oil players such as Chevron and Royal Dutch Shell are doing in renewable energy today, and what they're planning to do in the next few decades. Also, the hosts look at this week's news from OPEC and the market's reaction to it, what it means for General Electric (GE 1.30%) that CEO Jeff Immelt is stepping down and handing the reins over to the former head of GE Healthcare, and more.

A full transcript follows the video.

This video was recorded on June 15, 2017.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, June 15, so we're talking about energy, materials, and industrials. I'm your host, Sean O'Reilly, and joining me in studio is the only man who can talk fluently about professional soccer and energy and materials stocks, Mr. Taylor Muckerman.

Taylor Muckerman: Not all professional soccer.

O'Reilly: Just Portugal.

Muckerman: Just Portuguese soccer, and the occasional World Cup games.

O'Reilly: And your lovely wife, of course, is of Portuguese descent.

Muckerman: Yes.

O'Reilly: That's awesome. Oh, wait, your wedding was there.

Muckerman: It was. Yeah, almost a year ago, July 2.

O'Reilly: I remember when you came back, you had a tan and a big smile on your face, and you said you married the woman of your dreams.

Muckerman: Yes. Still.

O'Reilly: And you still believe that. She's listening. [laughs] 

Muckerman: No, she doesn't listen.

O'Reilly: She doesn't listen? I'm crushed.

Muckerman: Whenever I do Market Minute or whatever it is on [Amazon.com] on the Echo, she'll listen to that. Because, I'll come home and say, "Alexa, tell me my stock market news," and then my voice will show up.

O'Reilly: God. Is that creepy? Do you do that over dinner?

Muckerman: No. [laughs] It's just the first thing I do when I come home, if I know I'm on it.

O'Reilly: So on today's show, we're talking about the retirement of General Electric's Jeff Immelt. Surprise departure there, a little bit earlier than scheduled.

Muckerman: A little bit earlier than people thought.

O'Reilly: Interesting trends coming out of the renewable-energy investing space. But first, what's going on with Qatar and Saudi Arabia and the oil markets and everything? I didn't quite understand it at first. Oil fell 5% in a day, and I was like, what the heck, guys, you had an agreement.

Muckerman: I don't know if it was necessarily all Qatar, but they're in the news because a consortium of Middle Eastern countries were pulling diplomats out of the country or speaking out in the news about Qatar's sponsorship of terrorism, financially, and I guess they house some terrorists in Qatar. But I'm not a foreign diplomat, but I do have some inclination to say that some of these other countries are sponsors of terrorism as well.

O'Reilly: Going out on a limb there.

Muckerman: So they're casting stones.

O'Reilly: You had another fun statistic. We have a bunch of people in Qatar. 

Muckerman: We do. It's our forward Air Force base there, and a big portion of our Middle Eastern intelligence community there.

O'Reilly: So they're all there?

Muckerman: I think over 10,000 U.S. troops and civil servants are based there. I can't remember the name of the air base off the top of my head, but it's the largest in the region by far. So we have some interest there. That's why I don't necessarily think it was influencing oil markets that badly, Qatar in particular, because it's more of a natural gas, LNG producer than it is an oil producer.

O'Reilly: I just think the market got jittery because --

Muckerman: Middle Eastern tensions.

O'Reilly: That's the word. And they've all had this agreement ...

Muckerman: OPEC, yeah.

O'Reilly: OPEC, to cut supply, and anytime they're not the best of friends, everyone gets nervous, and here we are.

Muckerman: I mean, you're talking about a country where almost 60% of its GDP comes from oil and natural gas. But then again, I don't have the exact number for natural gas, but I do know it's the majority of the fossil fuels that Qatar is producing.

O'Reilly: Moving on. Mr. Jeff Immelt leaving GE after 16 years. He, of course took over for Jack Welch. That was a big deal, a very big deal.

Muckerman: Not only was it a big deal, but it was at a big time in the world. It was right the same week as Sept. 11.

O'Reilly: Oh, my gosh, are you serious?

Muckerman: I'm dead serious, yes. So he not only had to take over one of the largest companies in the United States --

O'Reilly: The symbol of American Business.

Muckerman: And ingenuity, yes. And at one of the toughest times and U.S. history. Then he also had to lead this company through the great financial crisis, where at the time, it was a massively important company in the financial world.

O'Reilly: It was deemed a systemically important financial institution, which sounds insane.

Muckerman: Yes. So when you look at this company's performance in the stock market since he took over, it's vastly underperformed the Dow and the broad S&P 500, but it was a little bit more exposed to the financial crisis than most other companies outside the banking sector.

O'Reilly: I flipped through the annual report last week. In order to get out of the financial GE Capital business, they sold the operations, asset, all the things they own, everything. They've done just under $200 billion worth of asset sales. Of course, that was tied to a lot of liability, so I'm not saying "They have a $200 billion cash hoard." The bottom line is, they moved around $200 billion worth of stuff. That's walking-around money.

Muckerman: Jeff Immelt did that. So, granted, the stock price might not have done that well over 16 years, but the company is dramatically different than it was. It's still making billions of dollars, and it's completely reinvented itself. So now, only about 10% of its earnings are going to come from a financial portion of its business, not necessarily even GE Capital.

O'Reilly: It's interesting to me. One, I'm wondering if he planned this the whole time, because this is a year after they moved to their new campus for their headquarters, and they finally got out of the GE Capital business. Is this what the plan was all along?

Muckerman: I don't know if it was his plan all along. It certainly was their plan after 2008 and 2009. So now you have this industrial behemoth, what it used to be, essentially. You have some healthcare exposure. But some of its biggest businesses are power and renewable energy. Power is 21% of its revenue, roughly, and renewable energy is about 7%, and then just recently, just yesterday, the Baker Hughes merger was officially passed by the regulators here in the United States.

O'Reilly: Unsurprising after the European --

Muckerman: Yeah. It's free and clear. They can move ahead with that. This is only a couple years after they acquired Alstom from France, and that dramatically increased their business in the power segment with offshore wind turbines, transmission equipment. They're a big player.

O'Reilly: Not only did they have a very decent foothold in renewables. If you need an aircraft engine or a wind turbine --

Muckerman: Or a gas turbine. They had the gas-turbine business, they bought Alstom, they added the wind, so now they have gas and wind, which you can imagine, both are going to be huge components of future energy production, or power production. Probably the two biggest in the next couple of decades.

O'Reilly: I'm wondering what the calculus was there. I don't know if it was just more impressive or what, but this leads me to my next question that I wanted to get your thoughts on, which is the guy taking over, John Flannery.

Muckerman: Yeah, I don't know if he's a lifer, but he's been there for ...

O'Reilly: Thirty years. He's been there for 30 years. He's a lifer, but he's the former head of GE Healthcare.

Muckerman: For the last few years, yeah.

O'Reilly: It's not the turbine business. But I also tend to think of one of the more innovative things that GE has done in recent years has been the healthcare stuff. You see the commercials for a GE MRI machine at a hospital. He actually went on record with this interview the other day, like, "Yeah, I'm going to take the strategies that I used to turn around the healthcare business and apply them to the rest of -- "

Muckerman: Yeah, it was a pretty stagnant business before he took over.

O'Reilly: Right. That's kind of cool. I'm very curious what the strategies exactly are.

Muckerman: Yeah, he has broad exposure. Like you said, healthcare was his latest experiment as an employee of GE. He's been part of their equity business, their capital business. He's very well respected within and outside of the firm. You've seen quite a few executives rush to his support saying this is big shoes to fill, but it's the right guy to do it.

O'Reilly: Yeah, I couldn't help but notice, it's probably good for Flannery. Mixed bag, possibly bad for Immelt. But the stock was up a few percentage points.

Muckerman: Yeah, I think it was up about 4%. They have Trian Partners --

O'Reilly: Did they endorse it?

Muckerman: Well, they support the moves that Immelt's been making and the company's been making, but they've been itching for change in management, so maybe folks are more relieved --

O'Reilly: Mixing things up.

Muckerman: -- that there's clarity. The markets appreciate clarity.

O'Reilly: So, Mr. Muckerman.

Muckerman: What's up?

O'Reilly: Very interesting report out of consulting firm Mackenzie just came out --

Muckerman: Wood Mackenzie. Big Energy.

O'Reilly: Wood Mackenzie. Everybody calls them Mackenzie. Come on.

Muckerman: Yeah, I know. It's a big energy consulting firm, a research firm.

O'Reilly: It's like Booz Allen Hamilton, everybody just calls it Booz Allen.

Muckerman: Booz.

O'Reilly: Booz. [laughs] We're not going there. They came out with a report that says Big Oil, the guys that make the carbon come out of the ground, they could shift more than a fifth of their drilling investments to renewable sources. 

Muckerman: Yeah, just a few years after many of them canceled all plans to invest in renewable energy.

O'Reilly: I actually want to get to that in a second with [ExxonMobil].

Muckerman: Exxon, Chevron, BP, Shell.

O'Reilly: But, of course, basically, we're talking about, they're going to start investing in wind, solar, all kinds of good stuff, and they're saying this could happen in the next two decades. That actually seemed rather long to me, given the recent advances in solar tech. Anyway, I really wish -- Tyler Crowe, if you're listening, please call in right now, because he would of course, bring up Total S.A. right now. They're the French oil giant and they own 60% of SunPower.

Muckerman: Majority owner of SunPower, yeah.

O'Reilly: What did you think when you saw this?

Muckerman: It's the movement going forward. What we've seen is, these companies have had to write down their proved reserves over the last couple of years by double-digit percentages because of oil prices being so low.

O'Reilly: Once, again, for our listeners, we've done this in previous episodes, probably a year ago. Bottom line, proven reserves get calculated based upon how hard it is to get out of the grounds, but also the economics and the price per barrel. The SEC every year says, "You guy have to value this based upon the average price of oil last year," and it has not been high for three years.

Muckerman: No. So, since the summer of 2014, you've seen 15%, according to the Department of Energy, of proven reserves written off the books of U.S. oil.

O'Reilly: And because they're not economical.

Muckerman: Right. At the prices they were forced to assess these at. That being said, they still have access to this oil, they just can't claim it on their balance sheet as an asset. So they had to do something.

O'Reilly: Take a step back. Tell me about what these oil companies did a couple years ago. Just throwing in the towel on all this renewable stuff. What happened?

Muckerman: You saw Chevron abandon renewables in 2014. BP, in the wake of the Macondo spill, they sold off, between 2011 and 2013 --

O'Reilly: They dropped their brief moniker, "Beyond Petroleum?"

Muckerman: They did.

O'Reilly: How long did they have that? Three years? [laughs] 

Muckerman: I don't know the exact time frame, but it wasn't long. And so, they sold off some of their solar, if not all, business. They pulled back on the spending almost entirely. They did keep a very big portfolio of wind farms in the United States.

O'Reilly: I was about to say, don't they have a bunch of wind farms?

Muckerman: It might be the biggest. Don't quote me. But it might be the biggest or one of the biggest in the United States, spread across multiple states. So they didn't sell that, but these companies were investing new money into renewables. Then Shell did something similar. But now a good swath of them are coming back. 

O'Reilly: Thinking distinctly a couple years ago when we first started doing this show and everything, Exxon's decision to literally stop investing in all of that, and not only that but to keep that dividend going even through the downturn that we've seen for two or three years now -- I don't think I'm reaching here with this analogy; it felt a little bit like Altria Group or something. Like, we have this business, it's profitable right now, it's probably not going to be here in 100 years, we don't know.

Muckerman: If you look at the reserves, these companies only have 12 to 15 years of reserves even there, and they're not finding it at the same rate that they used to.

O'Reilly: It's like, "So, we're just going to do right by our shareholders and buy back stock or pay back in huge dividends and see how long we can keep the party going."

Muckerman: Well, Exxon is going to have to hold itself accountable now that shareholders voted for them to do a deep dive into whether or not they've been honest about climate change and its impact on the company.

O'Reilly: That's fun. It's always tricky when you're a business, because you have to make the decision of, should I return this money that we're the fiduciaries for to the shareholders, and they will invest in the renewable-energy sources? Or do we think we can get above-average returns on capital by keeping the money ourselves?

Muckerman: That's the trust you put in the company you're investing in.

O'Reilly: I don't necessarily blame Exxon for making the decision they did. Let's pretend you're an Exxon shareholder. We're both Exxon shareholders. What internal rate of return would you need with a reasonable amount of certainty from them to let them keep the money and invest in something renewable?

Muckerman: I don't have a number off the top of my head.

O'Reilly: But they don't know what they're doing, so it would have to be higher, right?

Muckerman: Also, at the time, they have the heaviest needle in oil and gas. So it takes big projects to move that needle for them, which is why they cast it aside, because at the time, solar wasn't viable, it wasn't cost-effective. Wind was really just starting to get off the ground. So it was a long-tail project, versus some of these projects in oil and gas where they can get a decent return within a few years.

O'Reilly: Let's pretend Mackenzie is right, and in 10 years, oil and gas companies are investing 20% --

Muckerman: Well, Shell says that by the end of this decade, so by 2020, they'll be investing a billion dollars per year in renewables. That pales in comparison to the $25 billion they spend every year. But going from nothing a few years ago to $1 billion by 2020, that's a pretty good move. And as you mentioned, Total, very serious about it. Statoil, big player in offshore wind, utilizing their offshore oil technology, and know how to operate in these rough environments, to then turn that into the ability to generate wind power offshore. So these companies are doing it. But having only $1 for every $5 spent on oil moved toward renewables --

O'Reilly: It seems low, doesn't it?

Muckerman: It does seem low. If they spend $350 billion over the next 20 years, what Mackenzie says is, that will get wind and solar to 6.5% of total global energy production.

O'Reilly: That's incredibly low.

Muckerman: Yeah, and they say over that same time period, they will likely spend $1.5 trillion on oil and gas.

O'Reilly: Man. I came in here wondering if there would be a time when we stop thinking of Exxon and Shell and everybody as oil and gas companies, and think of them as just energy companies. It seems to me like, with statistics like that, it's a long way off.

Muckerman: Well, then, I think they said, wind and solar only account for about 1% of total energy this year. It's 6x improvement, from 1 to 6.5.

O'Reilly: That's over a fifth of a century, though.

Muckerman: Yeah, I know. But it's only 1%, and the world has been around for Lord knows how long, so we've been producing energy from fossil fuels for quite some time. So, they have a step ahead. But to turn it back to the previous discussion, GE might be my favorite company right now to look at their energy exposure.

O'Reilly: They just got rid of the GE Capital shackles.

Muckerman: And with the Alstom integration, they said that's ahead of pace. If they can do the same thing with Baker Hughes, they'll have more exposure to oil and gas, and they have the long-tail exposure to natural gas, wind power, and solar power. Diversified with healthcare, which is also an industry. I don't know necessarily a ton about GE's healthcare arm.

O'Reilly: We need to get Kristine Harjes in here.

Muckerman: We do. If you look at biotech and healthcare equipment, surgical equipment, those industries are very well favored by long-term investors.

O'Reilly: For sure. Thank you for your thoughts, as always, Mr. Muckerman!

Muckerman: Cheers, man. You, too!

O'Reilly: That is it for us, folks. Be sure to tune in tomorrow for the Technology show with Dylan Lewis. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening and Fool on!