General Electric Company's (GE 0.34%) CEO Jeff Immelt is stepping down and handing the reins to the CEO of GE Healthcare John Flannery, and investors seem to have pretty split feelings about it.

In this week's episode of Industry Focus: Energy, Sarah Priestley, Sean O'Reilly, and Taylor Muckerman discuss how the market is reacting to the seat change in GE's management, who the new CEO is, how GE is changing its strategy going forward, and more. Also, the cast talks about how hurricane Harvey is impacting the oil industry, and what long-term changes to the space we might see as a result of the disaster.

A full transcript follows the video.

This video was recorded on Aug. 31, 2017.

Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking energy and industrials. It's Thursday, 31st of August, and we're going to be discussing hurricane Harvey and GE's changing leadership. Joining me in the studio is Motley Fool Premium analyst, Taylor Muckerman, and on Skype all the way from Switzerland is Sean O'Reilly. Sean, you're kindly handing the show hosting torch over to me after years of running the Energy Industry Focus show, and you're becoming a full-time writer and Fool contributor. How does it feel to now be in the gig economy?

Sean O'Reilly: I could not be happier. You have been arguably one of the best hires I've ever seen Fool editorial ever made, so, kudos!

Priestley: [laughs] I'll pay you later!

O'Reilly: As Taylor has, I'm sure, elucidated, we've been talking about oil for, I don't know, two and a half years now, and there's so much more to be done out there. So, your background with Rolls Royce, making jet engines and everything, you were a middle manager there, could not be happier with what you'll bring to the Industry Focus podcast, with all that the energy and industrial space has to offer.

Priestley: Awesome. Thank you, Sean! I wasn't expecting such a warm welcome, I'll have to pay you the bribe. [laughs]

Taylor Muckerman: I know. Vacation is treating him well, apparently. Happy-go-lucky Sean. 

O'Reilly: Taylor, British accent, am I right?

Muckerman: Yeah, her accent is better than your attempt at it.

Priestley: That's not difficult. [laughs] 

O'Reilly: My Ohio accent? [laughs] 

Muckerman: Yeah, that one.

Priestley: Today, we're going to talk a little bit about GE saying goodbye to longtime CEO Jeff Immelt. We're going to do that later in the show. Before we do, I feel like we have to touch on hurricane Harvey. The governor of Texas has called the storm one of the largest natural disasters America has ever faced. Harvey reached the U.S. on Friday as a category four storm and has so far claimed the lives of 30 people. So, there's just some truly awful images coming out of Texas right now, and we really feel for everybody who's been affected by it. The storm yesterday made its second landfall on Louisiana, and it looks like there's more devastation to come. Taylor, natural disasters such as this have far-reaching effects, but I keep seeing headlines around the impact Harvey may have on America's oil and gas industry.

Muckerman: Yeah, obviously terrible in any city, but when you see a storm like this hit a city as large and important as Houston is, being the fourth largest city in America and home to over six million people, it's definitely not just going to impact the city of Houston or even just Texas. Home to pretty much every oil and gas job you can think of -- every type, not every single one. Headquarters of 20 Fortune 500 companies, and a lot of those are in the oil and gas space. So, huge ports, huge airports. You talk about the oil and gas industry, refineries on the Gulf Coast have been shut down, I think upwards of 20% of our refining capacity has been shut down. I believe it's the Port of Corpus Christi, it's one of the key oil export ports, you're seeing that being negatively impacted by the storm. And it reflected in the price of gasoline skyrocketing and the price of oil collapsing, because you have now these refineries being shut down, the demand for oil isn't there from these refineries, so stockpiles are potentially building. Even though we've probably lost 500,000 barrels per day in oil production because of this, temporarily lost, you're still seeing that demand shrink from the refineries, and traders billing up the price of gasoline because there's nothing coming out of these refineries as an end a product. I think you saw the largest spike in gas prices in several years because of this.

Priestley: And that's gas at the pump.

Muckerman: Yeah, it's the price that we'll eventually pay once the price increases filter their way down from the prices the traders are paying to the prices that we'll end up paying. You're definitely going to see an uptick over the next few days if you fill up your car.

Priestley: Sean, what do you think the long-term impact of this will be? Do you think there will be a long-term impact?

O'Reilly: No, I was actually just thinking as Taylor was giving a rundown of the situation, you've got the largest oil refinery in the country, the Motiva Enterprises refinery, it's like 600,000 barrels a day, prepared for shut down yesterday, and the price of gasoline skyrocketing but the price of oil dropping, and I thought, "This will obviously reverse and normalize once the situation abates." Long-term, this will be a blip on the map. But short-term, obviously, the devastation in Houston is horrific.

Muckerman: One thing that we might learn long-term is what happens to these shale wells if they get shut down prematurely and they try to restart them. There is some worry that some of the wells they've had to shut down on the Eagle Ford and even offshore. Offshore is more conventional drilling, but the onshore shale wells, they're nervous that they won't be able to return the pressure that they had inside these wells before they shut them down. So, it'll be interesting to see how much production is coming out of these wells once they flip that switch back on. I can't remember a time where the mass shutdown of shales wells has been necessitated, so it'll be interesting to see.

Priestley: So, there could be some short-term costs.

Muckerman: Yeah, some of these wells, you could see some share prices be hit if these wells don't produce as much as folks were expecting when they were originally drilled. Certainly, ones that were drilled at an earlier date are probably toward the tail end of their lives anyways. But, if you just drilled a well a week ago and it doesn't return to that initial surge, you could be losing several hundred thousand dollars, if not millions.

Priestley: Yeah. I think it's kind of telling on the share prices, I'm thinking of Exxon and Chevron, they're only down a quarter of a percent today. Obviously, given the recent malaise in the industry, this is not what was needed.

Muckerman: No. And those companies are a little more buffeted, because they do have the refining capacity, so they're going to benefit from the higher gas prices. But, if you look at a pure-play producer in the shale regions of Texas, the share price might be a little bit more negatively impacted than them.

Priestley: Thank you very much for clearing all of that up. There's a lot of flashy headlines, but hopefully it won't be as bad as people --

Muckerman: Yeah, hopefully it's not as bad. But, certainly, the importance of Houston in our nation's economy and global economy with all the rails passing through there and the ships dropping off goods and picking up goods, it's vitally important not just for the millions of lives that are impacted there, but the hundreds of millions of lives and small business owners that could be impacted by this.

Priestley: Yeah, absolutely. Thank you very much. After talking about something so huge, it seems a little trivial, but we are going to briefly touch on GE. GE has been in the news a lot lately after it announced that longtime CEO Jeff Immelt will be stepping down to be replaced by GE Healthcare president and CEO John Flannery. Investors seem to have had mixed feelings about his departure. Some hope that the change in leadership could signal an end to the 16 years of stock price stagnation that I feel has really epitomized Immelt's tenure. GE is actually the worst performing component of the Dow since he became CEO, the stock is down 20% year to date. So, Sean, I know that Immelt was a divisive CEO, but what did you make of him?

O'Reilly: I firmly believe that Immelt gets a bad rap. There's the old saying that you don't want to follow a great leader, and he came in after the retirement of the one and only Jack Welch. How are you supposed to follow that act? You take that into account, and you take the fact that he was given the reins of a corporation that had this giant financial arm attached to it that, arguably, everything is 20/20 in hindsight, but it shouldn't have been there. So, he had to contend with and spin off one of the largest financial institutions in the country that nobody even knew about. The spin-offs of assets of GE Capital, I think the final tell is over $200 billion in assets that the company has wound down. They didn't get $200 billion in value, because there's obviously more or less (unclear 8:42) liabilities tied to those things, but it would (unclear 8:49) a race without a leg. It wasn't the best situation to inherit in, and yet he executed it flawlessly, he got rid of GE Capital, and now it's set up for at least an attempt at returning to the company's roots in the industrial sector.

Priestley: Yeah, absolutely. They spun off NBC, which I think they owned, they spun off their consumer electronics division, their iconic electric light bulb business. So, they've made some massive changes. But I think one of the biggest things has been Immelt's doubling down on the oil and gas industry. Taylor, what do you make of this, and how have they really demonstrated their focus?

Muckerman: That's another area where maybe there's some poor timing, or he came in a little too early with this. He had GE Capital collapsing, and the great financial crisis of 2008 and 2009, and then invested very heavily in the oil and gas sector. Most notably with the purchase of Baker Hughes, which closed earlier this year, making GE-Baker Hughes the second largest oil and gas services company in the world. You're looking at a company that's going to have, I think they're looking at an estimated 2018 revenue of $34 billion. So, no small potatoes there. They really need the oil and gas sector to turn around for this to be worth it. Long-term, you have to imagine that over the next five to 10 years, we will see a rebound in oil and gas, regardless of the much longer-term future of the sector, it's still vitally important when you think about everything outside of fuel that oil and natural gas provide feedstocks for. Sean and I have talked about this many times, but literally, I would say over 50% of the things in your house have some form of oil or natural gas in them as a feedstock. So, the company is dumping hundreds of millions of dollars, billions of dollars into expansions and new plant build-outs in the Gulf Coast on the petrochemical side. Global industry and the United States is at the Forefront of that. So, I really think that it's tough when you have a company this large, to bet on it in the short term. The Baker Hughes deal is still very much in the short term. So, I'm not going to write this one off for at least a couple more years. I think the broad portfolio that this company offers as a major producer of wind and natural gas turbines, the healthcare business, which I think did about $4 billion in revenue in the first quarter of 2017 out of a total of $28 billion, call it, for the whole company. So, they've got a leader stepping up from a pretty meaningful division, and he's known as a very sound operator and has driven growth in that division, as well as GE Capital where he first joined the company. So, certainly not too much hesitation on my end about where this company can potentially go.

Priestley: Yeah, absolutely. I really feel as though the restructuring has brought them back to their roots as the pioneer in energy and infrastructure. And the industrial segments are now much more aligned with what I feel are the company's core competencies, and their focus on this industrial internet, I think is going to be there key to growth, it's going to be through the services revenue that they're going to get from that.

Muckerman: Yeah, they're one of the first major companies to really jump into the industrial internet of things with their GE Digital branch. I think it's called Predix, that's their platform that they launched, and they now have 700 companies working with them in just about a year's time. So, a lot of feedback they're going to get, and this is what they say could be upwards of a $100 billion opportunity, not for them but just the global industrial internet of things.

Priestley: Yeah, absolutely. For anybody who's at home wondering about the industrial internet, I'm sure most people know, but it's really the industrial arm of the internet of things. An at-home example for you would be you being able to see the temperature of your home from your desk at work using an app. Really, the way that GE is using this is to monitor, to use these machines and analytics to monitor everything that's going on at the front line of their installed base in the industry and to deliver efficiency improvements and monitoring to those companies.

Muckerman: Up to the second efficiency improvements.

Priestley: Yeah. My former employer, which was a competitor of GE in the aerospace industry, we moved from a traditional sales model to a power by the hour, is what we called it, sales model. And yeah, basically you were getting a live stream of every engine that was up in the air, how it was performing, the fuel economy, how much damage it was sustaining. And that really exactly epitomizes what this industrial internet is, and what it could offer GE. Sean, do you want to weigh in on the industrial internet for GE?

O'Reilly: Yeah. Sarah, I'm actually incredibly grateful for you bringing up Rolls Royce, and the strategy shift you guys had. Immelt did the same thing. His last big innovation was trying to characterize GE's efforts in the industrial internet to basically calling it industrial software and what he called additive manufacturing, which is monitoring what's getting broken and being quicker with it. It was actually the first departure from a lot of what Jack Welch built with Six Sigma and everything. But, it's interesting they chose Flannery. There's an interesting parallel for me in choosing Flannery, and it's not what a lot of people are talking about. This man's a veteran, he was with GE for 30 years, ultimate company man, and I say that in a positive way. They sent him to India to build GE's operations there, and he went no questions asked. The relationships he built, the company is still using. When he was hired, in the conference call, I went through that thing with a fine-tooth comb, Immelt mentioned, they kept talking up his experience in GE Healthcare. And they talked about how he upped profit margins of everything. So, it was like, obviously, profits skyrocketed. And they definitely went up, but I think he expanded gross profit margins, don't quote me exactly here, but a little more than 1%. Obviously, 1% on billions of dollars is what you want, but the simple fact of the matter was, it wasn't an explosive leap. What the beauty of it was, was through efficiencies, which is kind of what the industrial internet is about.

Priestley: Yeah, absolutely. I think that Flannery is really focused on what investors want. He wrote a letter to employees that basically said as much. He said, investors understand the importance of GE in the world, but they think we're underperforming, they're expecting better executions on cash, margins, and there's a focus on taking costs out. So, yeah, I think you're absolutely right, he's totally aligned with efficiencies, and that really plays into what he's doing with the industrial internet.

Muckerman: Then, have activist investor Trian Capital owning about 1%, a huge dollar value, but only 1% of shares. But, you can already see that making some waves with some changes to executive compensation. And this isn't an activist investor that's trying to come in here and change. They clearly believe in the future of GE. They're there waiting in the wings if GE management does need some urging in the right direction. It's not one of those situations where they're investing heavily in GE to try to come in here and shake things up dramatically because they think things are being operated in a poor fashion. I think they see the potential here, and they're going to help unearth that.

Priestley: Right now, yeah. There's kind of an underlying question that's too big for us to tackle now, but at what point is GE going to be worth more as separate entities than as one? That's something that everyone should have in the back of their mind.

Muckerman: Yeah. When you look at the Baker Hughes-GE, $34 billion in revenue estimated for 2018. That's no small fry.

Priestley: No, that's bigger than a lot of companies right now. So, the bottom line is that most investors, I think, are taking a wait-and-see approach on Flannery. Everyone will be paying close attention to his first earnings call in November. Immelt had previously warned that profit could be at the low end of guidance, so it'll be interesting to see how Flannery handles that. But, the company has a P/E of just 16X right now, it has a dividend yield of 3.5%, and with the potential rewards with the restructuring, as Taylor was talking about, still to come, I think GE is probably worth a second look for a lot of patient investors. Thank you very much to both of you for weighing in on these huge topics. Sean, thank you for calling in from Switzerland. I'm sorry to listeners for some of the interruption there, but that's what you get with intercontinental communication.

Muckerman: That's true. Six hours ahead.

O'Reilly: Intercontinental host. [laughs] 

Muckerman: That's right. [laughs] Nice job on your first episode!

Priestley: Thank you very much! That's it from us today. If you would like to get in touch, please feel free to email us at [email protected], or tweet us on Twitter (NYSE: TWTR) @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For Taylor and Sean, I'm Sarah Priestley. Thanks for listening and Fool on!