General Electric (GE): Hydrogen turbines and small nuclear reactors can embellish this stock
Investment thesis: There is no denying the deep problems that General Electric Company (NYSE:GE) was confronted. The once big and iconic industrial giant saw its stock price peak in the year 2000 and it is now trades at only 1/5 of those levels. A combination of consumer market changes, fierce competition and an unfocused business strategy, where at times GE has tried to go all out, can be blamed for the company’s troubles.
Many seem to believe that there is no longer any way to overthrow GE. But this is a decade of great upheaval and change, and when there is change there are always new potential opportunities. One of the emerging opportunities is in the electricity generation sector, where there is an emerging demand for small nuclear reactors, as well as for hydrogen turbines and electrolysis equipment intended to be coupled to installations. solar or wind power generation. GE already has the means to be competitive in these emerging sectors. It remains to be seen whether it will succeed in establishing itself as a significant player in these emerging markets. If he succeeds, he has the potential to pull GE out of his deep hole and breathe new life into it. Later, its separate GE energy business could thrive on these emerging global energy trends, after the company was spun off.
GE’s latest financial results are not encouraging
For the first quarter of this year, GE reported a loss from continuing operations of $809 million. There was no revenue growth and it experienced negative cash flow. One of the drags seems to be the renewable energy sector, where revenues have fallen by 12% while the net loss has increased by 85%.
Order volumes also decreased significantly. This may not be a significant issue, given deteriorating profit margins. This is something to keep in mind, given that GE plans to split into three companies by 2024. The renewable energy sector will fall into the same category as all other energy, which will be all focused on an energy business. This successor company is poised to become the foundation for the new opportunities that I have highlighted as potential emerging businesses of interest in which GE can potentially compete, but as we can see there are also serious challenges.
Where is GE in the development and commercialization of hydrogen turbines and small nuclear reactors
GE is currently working on converting natural gas power plants to hydrogen plants. It is unclear what kind of business potential this area has in the future. This comes as more companies look to increase production of green hydrogen derived from renewable fuels. GE could potentially position its turbines as a top choice for new power plants, as well as older ones that could be retrofitted to run on fuels that will have more hydrogen in the mix.
There are simply too many unknowns at present regarding the potential that the emerging hydrogen-based electricity generation industry may or may not have in the future. It is certainly an industry that has many challenges to overcome. First and foremost, whether through subsidies or technological improvements, green hydrogen must supplant hydrogen from hydrocarbons, as well as other potential energy sources in economic terms. There is no point in running turbines on hydrogen derived from natural gas. It is not entirely climate-friendly, so it does not achieve these goals, nor does it solve our increasingly acute problems of raw material shortages. Green hydrogen must therefore become a viable industry, before the hydrogen turbine industry can really take shape. GE is ready to compete in this emerging industry, with turbines, as well as electrolysis systems, so it can emerge as a big winner if all goes well in this regard.
There seems to be less uncertainty about the growing global demand for small nuclear reactors, which I intend to discuss later in this article. GE-Hitachi’s small nuclear reactor, the BWRX-300, is GE’s market offering in this regard. One of the interesting aspects of the design is to rely on natural water flows to cool the reactor instead of relying on water pumps to supply the reactor with water. In theory, this should reduce the overall danger of a meltdown, as pump failure will no longer be an issue.
Agreements or memorandums of understanding have been concluded for these reactors to be deployed in Canada, Poland and Sweden. The first operational reactor could enter service in Canada by 2028. Personally, I believe that such projects could be accelerated in order to fill the growing gap between energy supply and demand in the world. If so, we could start to see some of these small nuclear reactors come online sooner and in much higher volumes.
The global energy supply picture looks increasingly untenable, begging for viable solutions to bridge the growing gap between supply and demand
Many distractions stray from the fundamentals of energy supply in this decade. We started with the COVID crisis, then the Ukraine crisis. Perhaps now the emerging crisis of the spread of Monkeypox, which could become our next reason to disrupt the rhythm of our lives. Certain other issues, such as the breakdown of supply chains for a wide variety of goods, ranging from power to semiconductors, all combine to create perceptions that cause us to lose sight of a factor that arguably plays a most important role in shaping our lives, namely the scarcity of energy.
As I’ve been saying for a few months now, perhaps the most important data point of this decade is global trends in the discovery of conventional oil and gas. Last year, we consumed about eight times more oil and gas than the world discovered. We have consumed far more oil and gas than has been discovered, every year, throughout this century so far. There is currently no prospect of improving the situation in this respect. Based on OPEC’s preliminary monthly production estimates, global petroleum liquids production in April was 98.7 mb/d.
Demand in the fourth quarter of this year is expected to reach 102.6 mb/d, according to the latest OPEC estimates. Even if all sanctions against Iran, Russia and Venezuela were to be lifted instantly, the gap between current production and global demand levels cannot be closed. Based on EIA data, global monthly liquids production peaked in the month of November 2018 at 102.2 mb/d. A price-induced demand destruction event is therefore extremely likely within the next 12-18 months, unless another unforeseen and seemingly unrelated demand destruction event occurs before then. Of course, the EIA disagrees with this result as a likely scenario. He sees production meeting demand this year and next, without any difficulty. In other words, we are in a scenario of perfect market equilibrium.
I believe that for the first time in modern times, we are facing a grim situation, where, due to geological and geopolitical factors, we are about to enter a prolonged period of global energy shortage. In other words, global energy availability, or better said availability limits, will play the most important role in determining economic growth, inflation, living standards and most other aspects of our individual and collective well-being.
More and more public policy measures will aim to ensure that the impact on living standards, economic health and other aspects of national or regional life will be as small as possible. Securing reliable and abundant sources of energy that can be conveniently deployed to meet our needs is quickly becoming the most significant economic issue facing a growing number of economies around the world.
The alternative is to introduce increasingly restrictive measures aimed at curbing demand, such as Spain’s recent decision to limit the use of air conditioning in summer and heating in winter in public buildings. Future energy conservation measures could become more drastic and coercive across the globe if the gap between global energy supply and demand continues to widen.
The market seems to be very unaware of the growing need to fill a growing global energy supply gap that seems to be opening up further, due to geological and geopolitical trends. The challenge for governments and industry will be to try to close this gap as much as possible. When there is a need, companies that have the right product profile to meet that need are ready to take advantage of it.
GE is such a company, with the right products to meet the new energy demands of this decade and beyond. As these new needs become more evident and the growing market for products such as hydrogen turbines, electrolysis equipment and smaller, more deployable nuclear reactors takes shape, the positive impact on the outlook GE’s business is also expected to materialize.
There is, of course, the other aspect of GE’s overall business profile, namely the poor performance for some decades now. Even though its stock price is less than a fifth of its peak over 20 years ago, it still trades at a forward P/E of around 27. Based on this measure, it is less than attractive as the current market. investment opportunity. There’s also the potentially messy business of splitting the company into three different entities. As things stand, I would personally favor an investment in GE’s energy segment, where I see the benefits of the current global energy situation benefiting GE’s current business. Logic would dictate that it’s worth waiting for the full split to happen in 2024.
If the overall stock market continues to decline, taking GE shares with it, to a more reasonable valuation level, it might be worth considering starting a position in GE before that. Until such a drop in GE’s stock price occurs, this is a stock worth watching and monitoring, in case it becomes a buying opportunity. Otherwise, there is always the possibility of waiting for the final split of the company in 2024.