Caterpillar Pares Outlook for 2015 Amid Weak Oil, Mining Commodity Prices, Keeps Capex Projection at $1.6 Billion

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Researched by Industrial Info Resources (Sugar Land, Texas)--Heavy machinery manufacturer Caterpillar Incorporated (NYSE:CAT) (Peoria, Illinois) took a big hit from tumbling commodity prices late in 2014, and has accordingly trimmed its outlook for this year. The company is a major equipment supplier in the Oil & Gas Industry; lower prices means that it's less profitable for drillers to drill, which means they have less need for equipment, which means less business for Caterpillar. Similar problems were seen in the Metals & Mining Industry. Net income for 2014 was reported to be $3.7 billion, a 2.48% decrease from 2013.

Industrial Info is tracking $59 million in active projects involving Caterpillar, including the $5.5 million addition of a unit at the Santa Maria landfill gas power plant in Talagante, Chile. The project involves the installation of two Caterpillar G3516 internal combustion engines, each with a capacity of 2 megawatts, along with auxiliary equipment and an SCR system to boost the supply of renewable energy to the regional grid to 220 kilovolts. The project is expected to kick off in March and to be completed in the third quarter.

Total sales and revenues stood at $55.18 billion, a decline of less than 1% from 2013. The Energy & Transportation segment reported record sales and profits, but weak prices for mined commodities reduced sales in the Resource Industries segment. The Construction Industries segment saw an uptick in sales, but this was largely in North America.

Two of the most negative factors in the fourth quarter were currency impacts from the weakening euro and Japanese yen, and lower demand for construction equipment in the Asia/Pacific and Latin America regions. North America was the only region to escape a sales decline in the Construction Industries segment; higher demand for oil & gas and transportation services gave the region, particularly the U.S., a significant boost in the Energy & Transportation segment.

Caterpillar's capital expenditures, excluding equipment leased to others, totaled $1.54 billion for 2014, compared with $2.52 billion in 2013, and $3.35 billion in 2012.

"The most significant [negative factor for the year] being the impact of negative inventory absorption," said Mike DeWalt, the vice president of Caterpillar, in a conference call. "We were expecting a small inventory reduction in the fourth quarter, and we actually ended up taking inventory down $1.1 billion. That resulted in a substantial cost absorption headwind versus our outlook. While it was a hit to profits, we want lower inventory, we've been working to reduce it, and we're happy to have it lower."

While the outlook for the U.S. remains upbeat, slow global growth and an ongoing weakness in commodity prices are expected to take Caterpillar's 2015 sales and revenues down to $50 billion. In particular, low oil prices are detrimental to the Energy & Transportation segment and the company's construction business in oil-producing areas, while low prices for copper, coal and iron ore are cutting the outlook for mining equipment sales. Slowing growth in China also caused Caterpillar executives to reduce their outlook for construction equipment sales there.

Executives do not expect capital expenditures to differ greatly from those in 2014, and estimate about $1.6 billion.

"Without a doubt, the impact of substantially lower oil and gas prices is the most significant reason we're expecting lower sales in 2015," DeWalt said in the conference call. "From mid-October to today, oil prices have dropped from the mid-$80s to the high $40s, and that's off prices that were around $100 for most of the first half of last year. With oil this low, we expect substantial reductions in producers' [capital expenditures], and that it'll be negative for our sales."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.