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General Electric Teams Up With Big Oil to Drive Renewables Growth

By Lee Samaha - May 27, 2021 at 7:16AM

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The recent announcement of orders for a major offshore wind farm highlights the growth opportunity for the industrial giant and large energy companies.

The Dogger Bank wind farm will be the largest offshore wind farm in the world when completed in 2026, and General Electric's (GE 1.30%) wind turbines will be a significant part of it. Indeed, GE just announced a slew of contracts on the third phase of the wind farm project. The project marks an important development in the offshore wind industry, and it solidifies the investment case for GE as one of the best ways to benefit from the energy transition. Here's what you need to know.

Dogger Bank

The Dogger Bank project is symbolic in many ways. First, it represents the U.K.'s commitment to utilizing its renewable energy resources. The U.K. is rich in wind power resources and its government is committed to making the country a world leader in renewable energy.

Second, it demonstrates the ability of energy companies to transform themselves and be part of the energy transition. Third, it's a significant step along the way for GE to establish itself as a leading player in the offshore wind industry.

The project will take place in three phases and will generate around 5% of the U.K.'s current electricity demand. The first two phases, Dogger Bank A and Dogger Bank B, are owned by U.K. electricity utility SSE (with a 40% share), and big oil companies Equinor (EQNR -1.02%) (40%) and Eni (E 0.00%) (20%). Dogger C is half-owned by SSE, with Equinor owning the other half.

Offshore wind turbines.

Image source: Getty Images.

For Italy's energy giant Eni, the investment will add 480 megawatts (MW) of power to its target of 5 gigawatts (GW) of generation capacity from renewable sources by 2025, and is an entry into the Northern European offshore wind market. Meanwhile, Equinor's investment will result in 1.6 GW of power generation capacity and take the company closer to its target of 4 GW to 6 GW of generation capacity by 2026. For both oil companies, Dogger Bank demonstrates how cash flows from oil and gas investments can be used to position large energy companies for the transition to renewable energy.

General Electric

For its part, GE won 190 orders for its giant Haliade-X 13 MW turbines for the first two phases of the project and was named the preferred supplier on the third phase. As such, it was no surprise to see GE announce a further 87 orders for its Haliade-X 14 MW turbines on the third phase this week.

There's another wind farm in the Dogger Bank region about 80 miles off the northeast coast of the U.K.: the 1.4 GW Sofia offshore wind farm, which will be supplied by 100 Siemens Gamesa Renewable Energy 14 MW turbines. GE Renewable Energy is also on the project to provide the high-voltage current transmission system. Construction on Sofia begins this year.

Wind turbines in a forest.

Image source: Getty Images.

The projects represent a huge step forward for GE as management plans to be breakeven in its grid solutions business by 2022 and grow its offshore wind business revenue from just $200 million in 2020 to $3 billion by 2024.

Offshore really matters

Developing the offshore wind business is crucial for GE, not least because global onshore wind-power installations are set for a period of low growth until they pick up again in 2025. 

GE's medium-term plan for renewable energy involves improving the margin performance in onshore wind while growing offshore wind orders and revenue. Meanwhile, grid solutions and hydro are expected to generate earnings by the end of 2023. As such, investors will be hoping GE Renewable Energy can get to the kind of high-single-digit margins enjoyed by its peers Vestas Wind Systems and Siemens Gamesa.

The Dogger Bank project will help GE achieve its aims, and it's worth noting that the company could generate something close to $1 billion in free cash flow (FCF) from renewable energy in 2023. That would represent a significant swing from the $600 million outflows in 2020 and a significant step along the way to returning GE to at least $7 billion worth of FCF

GE Renewable Energy Guidance

2019

2020

2021 Est

2022 Est

 

Revenue

$15.4 billion

$15.7 billion

Mid-single-digit growth

Mid-single-digit growth

 

Segment Margin (Negative)

(5.2%)

(4.6%)

Better

Positive

 

Free Cash Flow (Outflow)

($1 billion)

($600 million)

Up and positive

Up

 

Data source: General Electric.

Looking ahead

All told, the Dogger Bank news is a significant plus for GE as it looks to establish itself as a leading player in offshore wind with its Haliade-X turbine. It's also proof positive that big oil (Equinor and Eni in this case) can be a crucial part of the energy transition.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
GE
$79.93 (1.30%) $1.03
Statoil ASA Stock Quote
Statoil ASA
EQNR
$37.96 (-1.02%) $0.39
Eni S.p.A. Stock Quote
Eni S.p.A.
E
$24.14 (0.00%) $0.00
Vestas Wind Systems Stock Quote
Vestas Wind Systems
VWDRY
$8.86 (-2.21%) $0.20
Siemens Gamesa Renewable Energy, S.A. Stock Quote
Siemens Gamesa Renewable Energy, S.A.
GCTAY
$3.65 (-0.81%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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