How GE Is Profiting From Oil
By: Parker Nolan
Tags: Current Events, Stocks, Oil, General Electric, Energy

How GE Is Profiting From Oil

Or: How to strike gold without mining for it

When gas prices change, there is always a winner and a loser:

When gas prices rise, the people putting gas in their cars lose, and the oil companies win.

When gas prices lower, the people putting gas in their cars win, and the oil companies lose.

But there is a third group of people, and all they do is win.

The third group

When the Gold Rush occurred in the 1800s, do you think the thousands of miners that flocked to California are the ones who became rich?

Nope. People like Levi Strauss made serious cash by supplying the miners with the right tools to pursue their goals.

We are in the midst of the longest Gold Rush in history, and General Electric wants to be this generation’s Levi Strauss.

What is General Electric selling?

General Electric has developed a new software called Predix. Predix itself isn’t a standalone application, but GE as well as over 2,000 independent developers are creating apps based off the Predix platform.

What these apps allow companies to do is connect sensors to all of their physical assets (trucks, oil rigs, tractors, etc.) which send data back to the Predix cloud.

The data gathered from these sensors is massive, and can range from very simplistic (fuel efficiency of a delivery truck) to incredibly complex. Predix’s power is not in the ability to simply gather data, but in the platform’s ability to crunch the numbers and present that information in a meaningful way.

This means that once a company implements the system, they quickly get visual feedback which shows connections between different facets of the company which may not have been visible before. By seeing these interactions, it becomes easier for companies to recognize inefficiencies and then develop solutions to fix them.

Why oil is the perfect market

General Electric is already using this Predix software in their own factories and is selling it to other companies that are not in the oil industry. However, the oil industry desperately needs what General Electric has to offer.

In markets like the automobile industry, cutting costs is more of a luxury than a necessity. If Ford finds a way to make the robots that put together their cars faster, that’s the equivalent of finding a dollar bill on the ground after you cash your paycheck.

For the oil industry, eliminating inefficiencies is the difference between life or death. For oil producers, finding a way to transport fuel for less money is like finding a stale roll after not eating for days: just enough to keep you going, but not enough to make you full.

OPEC has announced that they will be cutting output, which will decrease oil supply and increase prices, if only slightly.

But this still hasn’t happened. And may say that it will not ever happen, because no OPEC member nation wants to be the one to cut production (and revenues) while its competitors continue producing oil at normal levels.

Until oil prices rise, you can bet that struggling oil companies will be finding ways to squeeze every cent of profit possible form their operations, and that will start with using software like GE’s Predix to find the things that need fixing.

Why is GE merging?

General Electric announced that they will be merging with Baker Hughes, a company that provides services for oil fields. This includes selling drills and other equipment to companies big and small, allowing them to find oil.

With this new partnership between the companies, General Electric will not only have a wide distribution channel for its software (Baker Hughes’ existing clients), but will also be partnering with a company that sells the very equipment from which Predix gathers data.

General Electric’s stock hasn’t jumped amid news of the deal, with the price actually slumping a bit as the week closed. This makes sense, because even though General Electric has a good thing on their hands with Predix, by partnering with Baker Hughes they will gain a lot of exposure to the volatile oil industry.

It’s one thing to sell software to oil companies as well as other industries, it’s another to rely solely on oil companies to purchase your products.

The Good

Yet there is some opportunity for growth in both the GE and BH side of this deal. Even though oil has been hammered and companies are doing poorly, according to Baker Hughes, nine new oil rigs were built and deployed this year in America. The owners of those nine rigs are now potential customers that Baker Hughes can service and sell equipment to.

Also, oil is one of those industries where everyone thinks they can fix what others have ruined. As smaller operations may go out of business, more will inevitably spring up as the price of oil increases, hoping to cash in on the abandoned oilfields.

Also, even when oil prices increase (who knows how long it will be until then), oil companies will be so used to using GE’s software platform that they will continue using it as they expand their operations. Increased profits are always good, right?

Tl;dr

General Electric is merging with Baker Hughes, and investors have not responded well to the deal. However, there is both short and long term opportunity for both companies, as floundering oil co’s will use GE’s software to become more efficient, and hopeful oil speculators will utilize Baker Hughes’ services to drill for oil as prices improve.