GE and 7 Other Industrial Stocks That Could Get Hit by Lower Oil Prices
Oil is down about 32% from its 2018 peak in early October, a decline that hurts not only companies in the oil & gas industry but also those who do business with them-mostly makers of industrial equipment.
Oil prices have recently rebounded somewhat ahead of G-20 and OPEC meetings in hopes of softened trade tensions and production cuts that could boost the market. Still, prices remain near their lows for the year, and the damage might already have been done.
“While the oil price may well see something of a bounce after the steep sell-off, the volatility of the price comes at a tricky time for O&G companies mulling over their 2019 capex budgets and may well have tempered their spending appetites into next year,” Julian Mitchell of Barclays wrote in a note on Monday.
According to a survey by the Dallas Federal Reserve this March, oil-field- service companies, on average, believe the West Texas price needs to be higher than $51 a barrel for it to be profitable to drill a new well. A price of at least $33 is needed to cover the operating expenses of existing wells.
West Texas crude is currently trading at around $52 per barrel, just above the threshold for drilling new wells. If the price continues to drop, Mitchell believes, the upstream oil-and-gas companies-those who find oil, and drill and operate wells-might start scaling back their capital spending.
That would be bad news for those who depend on oil companies for their sales. The oil-and-gas industry represents about 35% of revenue for Gardner Denver Holdings (ticker: GDI) and nearly 25% for Emerson Electric (EMR), according to Mitchell. SPX FLOW (FLOW), Kennametal (KMT), Colfax (CFX), Honeywell International (HON), nVent Electric (NVT), and General Electric (GE) all get between 15% and 20% of their revenue from oil clients.
That exposure has real-life implications. During the oil market’s downturn in 2015 and 2016, when the West Texas crude price dropped more than 70% from peak to trough, earnings before interest and taxes, or EBIT, from energy exposed segments at SPX FLOW and Kennametal dropped almost 80%. At General Electric, the decline was more than 40%.
If a similar oil downturn were to occur over the next two years, these companies could get hit again. Mitchell estimates Gardner Denver, Emerson Electric, and SPX FLOW are at risk of a cut in their 2020 earnings of over 30%, while General Electric could be 10% lower.
General Electric shares are already down 57% this year, far more than implied by the size of its oil business, as it struggles with far larger troubles. Emerson Electric has lost 4.6%, a smaller-than-expected drop considering its oil exposure, according to Mitchell’s analysis, while Gardner Denver has tumbled 27.4%, and SPX FLOW has declined 23.9%, both near where they should be based on the drop in oil.
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