General Electric faced further fallout this week from problems with its most advanced gas turbine, the 7HA, which late last month came under scrutiny for blade oxidation issues.
The turbine problems are more serious than previously thought, according to JPMorgan analyst Steve Tusa, Bloomberg reported.
- But while the oxygenation issues pose "a significant fundamental headwind" they do not end the power business for GE, analyst Nick Heymann with William Blair, told Utility Dive.
Just about one year ago, GE's then-new CEO, John Flannery, told investors that GE would sell $20 billion worth of assets and focus on three core businesses: aviation, healthcare and power.
In October, GE's board pushed Flannery out, replacing him with Lawrence Culp, formerly CEO of Danaher.
In addition to the issues he inherited, Culp also faced a new problem at GE Power. In late September, GE reported oxidation problems with its 7HA gas turbine had caused Exelon to shut down its Colorado Bend plant in Texas.
The problem affects 14 of the 51 installed 7HA turbines and as many as 70 of the company's 9FB turbines, but a fix has been identified, Heymann said, and he expects GE will quantify the magnitude and scope of the costs to correct the problem when it announces third quarter earnings.
But JPMorgan's Tusa says the solution could take years, not months, to fix, which could cause GE to lose ground in the race to bring new products to market. GE has a $71 billion order backlog for the 7HA, but that could be more of a liability than an asset, Tusa said.
For Heymann, however, the problems in GE's power sector are part of a longer term down cycle that could rebound in the coming years.
"More than anything else, the sudden very large drop in global power additions was the primary problem" for GE Power, Heymann said.
That problem was compounded by the "poor timing" of GE's 2015 acquisition of Alstom, a major manufacturer of equipment for coal plants, Heymann said. Demand for coal plants has eroded as cheap natural gas has made gas-fired generation the most prevalent form of new fossil-fired generating plants.
Although demand for gas turbines has fallen off a cliff in developed countries, which represents about 40% of the market, the market is shifting. "The real future" for gas turbine sales is to non-developed countries, Heymann said.
When that rebound might occur is not clear, but Heymann says it could come as soon as 2021 when seabed processing for offshore oil reserves begins to take hold. The technology allows water to be separated from oil before being pumped to the sea surface, providing multiple cost savings and potentially driving higher margins for emerging economies with rich offshore oil reserves.
The higher cash flows will allow those nations to electrify their economies, leading to an upsurge in demand for gas turbines, Heymann said.
Overall, though, Heymann sees the performance of GE's industrial group shifting to three units: aviation, oil services unit Baker Hughes and the company's renewables unit. Those units will compose more than 80% of the company's industrial sector 2019 estimated earnings, he forecasts.