FOR ALL THE leaders’ enthusiasm about the digital realm, GE continued the endless job of refreshing and reshaping its heavy industrial business units. While Immelt dreamed of creating a heavy-industrial Google in San Ramon, he also gazed longingly on the vast oil industry conglomerates like Schlumberger and Halliburton, whose fortunes from both equipment and oil-field services had soared during the long bull market that began after the financial crisis and ran into the early 2010s. Even before the crisis, Immelt and his lieutenants had begun to acquire. The company bought Vetco Gray, which made drilling equipment, for $1.9 billion in 2007, adding it to Nuovo Pignone, the Italian oil equipment maker that Welch had purchased in the 1990s. After the financial crisis, Immelt had altered GE’s portfolio through subtraction more than anything else, shedding businesses that had lost their appeal after the Welch years. But now GE became, in a series of high-dollar acquisitions, a player in the oil and gas equipment market virtually overnight. They bought an oil-field service equipment business based in Britain, manufacturers of pumps, wellheads, regulators, and piping in Texas, and a Norwegian firm whose sensors measured the pressure and flow of oil.
GE in acquisition mode twirled like a tornado, gathering up smaller companies to blend into the overall mass—sometimes at prices that Immelt’s critics, like sell-side Wall Street analysts and business journalists, would occasionally, quietly, criticize. Churning on, the company hopped across the landscape of suppliers to the fracking and offshore drilling crowd—drill-bit makers, compressor vendors, pipeline inspectors—scooping up more companies to add to the mix. GE was going big on the oil business.
And then one day GE touched down in Lufkin, Texas.
The announcement came on April 8, 2013, with a GE press release that invoked the “world-class people, equipment and services” of Lufkin Industries, which GE was swooping in to buy for $3.3 billion. The Lufkin company, which made “artificial lift” equipment to help pump oil and gas up from underground reservoirs, had been in business, along with its forge, for 111 years, dominating the little city’s economy. Lufkin Industries had been Lufkin’s biggest employer for decades, its fortunes moving in sync with the community as the oil-producing economy of Texas and Oklahoma crested and fell over time.
Recent years had been kind. The growth of the North American shale market had driven a surge in equipment orders and driven up Lufkin’s profits. (That was one of the major reasons why the small firm, when GE came calling, had been able to extract what critics felt was a steep price.)
The Lufkin deal was a late-arriving piece of the $14 billion spree that built up GE Oil & Gas, from a one-off Welch deal into one of the most important industrial business lines in the company. Although GE had owned an Italy-based oil equipment business since the 1990s, Immelt was now making oil the industrial sector into which he extended GE in such a large way. The strategy sounded a dissonant note when set next to some of Immelt’s rhetoric about the environment, especially the marketing tag of “ecomagination,” which GE affixed to any of its products that could boast of increased efficiency. Still, Immelt and the youthful CEO of the oil unit, Lorenzo Simonelli, were confident that they were positioning the company to take advantage of the one great need of almost every economy in the world as economic growth sped up and populations grew. GE had found a way to siphon profits from oil.
By 2014, the company had already assembled a conglomerate within a conglomerate through a spate of energy industry deals. The unit now known as GE Oil & Gas was its third-largest by sales. Oil and gas accounted directly or indirectly for one-fourth of GE’s $100 billion in industrial revenue that year. While Immelt heard, and was annoyed by, the chirping of some analysts who felt that he’d paid a premium to leap into the oil and gas industry several years after his competitors, the company’s leadership was sure that the ensuing years would show the bet paying off.
Crowded into a conference room at the St. Regis Hotel in Manhattan in September of that year, GE Oil & Gas executives briefed investors and analysts on their plans for the future. A reviving global economy would push up oil demand, they predicted, compelling GE’s customers to order more and more of their drilling supplies. One after the other, as the analysts sipped coffee and munched on pastries, the executives clicked through their slide decks and outlined a steady progression to increasingly ambitious technologies, all of which would win the company high profit margins and steady sales growth.
GE executives foresaw demand for oil and gas becoming so strong that it would stimulate new drilling in the most technically foreboding environments, like deepwater pockets of oil located far offshore. GE would wring out profit all along the production line, they assured the gathering, and could introduce new machines that weren’t yet in use. One slide showed a massive separator, sitting on the seafloor, where it would remove natural gas from oil as it flowed out of subsea deposits, feeding both commodities to ships on the surface. There would be great opportunity for GE, executives said, as high prices drove more exploration off the coasts of Norway and Scotland.
The seafloor separator was the kind of high-tech device, intended for use in a high-risk environment, that only stood a chance of being used at all if the oil company was going to make a lot of money selling the oil it produced. In spite of the fact that oil companies, to maximize their profit, stuck to simple and cheap production techniques when the price was low, GE had a reassurance to offer. It was an executive named Andrew Way, a specialist in offshore equipment, whose job it was to present that slide. Not to worry, Way said. GE’s “base case” assumption for all of the rosy pictures it was painting about its oil unit was $100 for a barrel of oil.
Brent crude had closed out the previous month at more than $105 a barrel, only a little off its summer peak. But even as GE managers were speaking, a long slide had begun. By the end of October, oil had fallen below $100 a barrel. By the end of the year, it was under $80. A year later, a barrel of Brent crude cost less than $50—less than half the price at which GE had just assured its investors that all its plans for the oil business made financial sense.
Immelt, Bornstein, and other GE executives soon took to insisting that they paid little attention to the price of a barrel of oil; this wasn’t the market they’d been trying to elbow their way into, they said, as they built up the oil and gas unit. The explanation didn’t make sense given the industry’s direct link to oil prices. In reality, the company had chased a fad, and the fad had suddenly gotten very expensive. That could lead to only one thing: the beginning of the “right-sizing” of GE Oil & Gas.
As with all of GE’s industrial business lines, there was supposed to be security in the vast backlog of orders taken over the years by the oil and gas unit. But all those orders for pumps and compressors and drill bits weren’t going to do GE much good if the customers, pinched by the oil price collapse, couldn’t actually pay for the machinery they’d bought. GE executives privately acknowledged the sensitive negotiations that were unfolding as customers sought to renegotiate the pricing on their orders, delay deliveries, or, in some cases, cancel their orders outright. GE managers in each case had to weigh the pain of taking a financial haircut on some of the $4 billion of orders in the backlog against the stability that the orders offered once the oil price recovered—whenever that was going to be.
Pressed on the need to renegotiate parts of the order book, Bornstein tended to pivot: GE was also engaged, he said, in “standardization.” Customization had come at a cost to GE, and in the current environment it wasn’t worthwhile just to land a given sale. There would be no more bespoke offerings for different oil producers, with equipment arrays customized to their preferences like lapels on a tailored suit. To “standardize” the operation, GE got to work cutting, starting with the area that could save GE the most money in the long run: people.
That meant it was only a matter of time before the ax fell on Lufkin.
Down in Texas, there had been worrisome signs already. Local officials had been hopeful that GE would follow through on something referred to in the press as Project Phoenix. GE was considering knocking down a chunk of the more than fifty-thousand-square-foot foundry complex, extending it with new structure, and renovating the remaining building. The plan had suggested a commitment to the business that was still central to the town. But Lufkin leaders knew the ways of the oil patch. They knew what happened to big plans when the price of crude fell.
GE had been warning of job cuts across its oil and gas units for months, and it had laid off 575 workers at another former Lufkin facility nearby. Town officials held out hope now that GE would find a buyer for the foundry. But on August 24, 2015, GE announced a different decision. The foundry at the center of Lufkin, Texas, would be shut down.
“They haven’t brought good news to our office in a long, long time,” Lufkin mayor Bob Brown told a reporter that day. “When they say they’re going to dismantle the foundry, that pretty well seals the deal,” he added. “I just passed the back gate and saw guys walking out of there with their heads down, and that just breaks my heart.”
There was little he could do, Brown acknowledged to another reporter, about the price of oil, which was the key factor that drove the decision to shutter the foundry and lay off another 262 workers across the Lufkin facilities in Angelina County. Still, the smaller company had been by some measures a victim of its own success. Afloat on fracking profits during an oil boom, Lufkin had caught GE’s eye and been swallowed up at an expensive price, only to become a casualty when the conglomerate couldn’t abide the hit to earnings that a prolonged dip in the price of oil represented.
Back at GE headquarters, the company was tiring of its oil adventure—or at any rate, of having to manage the long downturn without help. GE was running out of places to cut costs in the oil and gas unit to preserve what it could of its profit margins. The cuts were getting close to the bone, and soon enough, the only remaining option would be to report losses on the business. There was only so much fat to be cut.
The other major oil industry suppliers were similarly weary, trying to shore up earnings by slashing jobs, trimming project costs, and squeezing their own customers and suppliers wherever they could. (The wildcatters had it worse: many of the mom-and-pop operators of the American oil patch started to file for bankruptcy.) One year later, GE would merge its oil and gas unit into the oil-field giant Baker Hughes, keeping for itself a more than 50 percent stake in the company and spinning out a new public company to be run by Simonelli, under GE’s control. The transaction eased GE’s exposure to the ongoing oil rout and gave the new company, dubbed “Baker Hughes, a GE company,” vast new areas of redundant employees and operations to eliminate.
With Baker Hughes, GE changed its tone a bit. The deal was transformational, but in which intended direction wasn’t made clear. GE execs like Bornstein would proclaim that the deal gave them “optionality,” but the reality was that investors were left in the dark on the strategy: Was GE doubling down on oil? Or was it preparing to exit the industry? The idea of holding such a long-term option was nice, but the game pieces in the positioning were people, and those who didn’t leave their job had no idea where the future of the company might be.
The new arrangement didn’t spare Lufkin. The historic foundry was closed. The city’s annual financial report now just shows a blank line when listing the company’s employment tally, evidence of the more than four thousand jobs that evaporated after GE came to town. Between two Mondays—the day GE announced it was coming to Lufkin and the day the company said it would move on, leaving a shuttered foundry at the center of town—just 868 days had passed.