Baker Hughes : First Quarter 2022 Earnings Conference Call Prepared Remarks

First Quarter 2022 - Earnings Conference Call Prepared Remarks

Jud Bailey Baker Hughes - VP of Investor Relations

Thank you.

Good morning everyone, and welcome to the Baker Hughes First Quarter 2022 Earnings Conference Call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell. The earnings release we issued earlier today can be found on our website at bakerhughes.com.

As a reminder, during the course of this conference call, we will provide forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and website for a discussion of some of the factors that could cause actual results to differ materially.

As you know, reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release.

With that I will turn the call over to Lorenzo.

Lorenzo Simonelli Baker Hughes - Chairman & CEO

Thank you, Jud. Good morning everyone and thanks for joining us.

Our first quarter results reflect operating in a very volatile market environment during the first few months of 2022. On the positive side, TPS orders were up over 100% year-over-year, with TPS book-to-bill of 2.2 as the LNG order cycle continues to unfold. We also experienced some challenges in parts of our business due to continued pressures from broader global supply chain constraints, as well as some impact from the recent geopolitical events.

As we look ahead to the rest of 2022, we see a favorable oil and gas price backdrop, as well as a dynamic operating environment, with perhaps the most challenging supply chain and inflationary environment we have seen in several decades. The recent and unfortunate geopolitical events are amplifying several trends, including broad-based inflation and supply pressure for key materials, commodities, and labor. These events are also driving changes on the economic front, where the world is transitioning from an era of strong economic growth to an environment that is more tenuous and likely to feature diverging economic conditions regionally.

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Despite broader political uncertainty around the world, Baker Hughes is committed to helping deliver energy globally in a safe, clean, and reliable manner, while also maintaining our commitment to net-zero carbon emissions and leadership in the energy transition. To meet the world's energy needs in a responsible manner, we believe multiple years of spending growth will be required, as well as a significant increase in LNG infrastructure investment. While there is some near-term risk on the demand side, we expect global oil and gas supply to remain constrained in the coming years, which should support higher commodity prices and multiple years of spending growth from our customers.

Recent geopolitical events have severely constrained what was already a tight global natural gas market and have re-focused the world on the importance of energy security, diversity, and reliability. As the world reacts to the rapid changes in the global commodity market, governments are prioritizing natural gas and LNG as a key transition and destination fuel. We continue to see a focus on prioritizing LNG from stable, lower-cost markets and locations that can provide "cleaner" LNG.

Given the current LNG price environment and the quickly changing dynamics, we believe that global LNG capacity will likely exceed 800 MTPA by the end of this decade to meet growing demand forecasts. This compares to the current global installed base of 460 MTPA and projects under construction totaling almost 150 MTPA. In order to be operational by 2030, this additional capacity will need to reach FID by around 2025.

Despite the volatile, yet improving, medium-term macro environment, Baker Hughes remains focused on executing our strategy and we continue to drive further optimization across the two core business areas of OFSE and IET.

Earlier this year we created Climate Technology Solutions, or CTS; and Industrial Asset Management, or IAM. The creation of these two groups is critical to accelerating the speed of commercial development across our key growth areas of new energy frontiers and industrials.

We continue to make steady progress in developing our Climate Technology Solutions capabilities, with recent investments and partnerships in NET Power, HIF Global and the acquisition of Mosaic Materials, which features a promising direct air capture technology. Mosaic's material science and technical expertise, including their unique metal-organic framework technology, provides Baker Hughes with the potential to efficiently capture low concentrations of CO2 across a number of applications.

NET Power is an emission free gas-to-power technology, where Baker Hughes will develop supercritical CO2 turboexpanders and other critical pumping and compression technology. We will also bring system integration and process knowledge experience to the partnership to help accelerate the market positioning and deployment of NET Power's emission-free and low-cost

electric power.

HIF Global develops projects in multiple geographies to produce eFuels by blending green hydrogen and CO2. Baker Hughes is investing alongside EIG, Porsche, AME and Gemstone and will provide compressors, turbines, pumps, valves, and other technology on future projects. We are also discussing how our recently acquired Mosaic Materials' DAC technology could be incorporated into these future projects.

Overall, we are excited about adding another carbon capture technology to our portfolio and the potential of these two partnerships to open new market opportunities in clean power and low carbon fuels for Baker Hughes.

In Industrial Asset Management, we signed an important agreement with Accenture, C3 AI and Microsoft to collaborate on the build-out of the IAM solutions offering. The partnership will focus on creating and deploying Baker Hughes IAM solutions that use digital technologies to help improve the safety, efficiency, and emissions profile of industrial machines, field equipment, and other physical assets.

In addition to advancing our commercial efforts in CTS and IAM, we also remain focused on optimizing our broader organization structure under the core business areas of OFSE and IET. At the beginning of April, we took some steps to strengthen and better position Oilfield Services to more closely align our products, services, and solutions to the life cycle of the well, and ultimately to what our customers require.

OFS will move from a product-line oriented structure to a solutions-focused business, centered around Well Construction; Completions, Intervention, and Measurements; and Production

Solutions.

In addition to the organizational changes in OFS, we were pleased to announce an agreement to acquire Altus Intervention, a leading international provider of well intervention services and down- hole technology. The acquisition complements OFS' existing portfolio by enhancing our life-of-

well capabilities as operators look to improve efficiencies from mature fields.

Maria Claudia and the OFS team are enhancing their operating model to become more competitive, improve the speed of decision-making, and capitalize on growth opportunities in the market. These organizational changes are important steps in OFS' journey as customers are increasingly asking for integrated offerings and more solutions-oriented outcomes, as well as a continuation of the strong productivity improvements in OFS over the past few years.

As we continue to evolve Baker Hughes across the two business areas of OFSE and IET, we expect more meaningful synergy opportunities between TPS and DS. We are also focused on driving better returns in our OFE business, as well as further synergies between OFS and OFE.

Now, I will give you an update on each of our segments.

In Oilfield Services, activity levels at the start of the year have continued to trend positively in both the international and North American markets. We also see improving visibility for stronger growth in several key areas over the rest of 2022.

In the international markets, underlying activity is improving broadly, with particular strength in Southeast Asia, Latin America, and the Middle East. The uncertainty in Russia is an offset. We expect growth in most international markets to continue, with the strongest increases likely to come from the Middle East over the second half of the year and into 2023. Producers in the region are in the early stages of investing in capacity expansion that should help drive a multi-year increase in activity across the region.

In North America, drilling and completion activity continues to move solidly higher with further increases expected over the course of the year. Although current oil and gas prices would normally suggest a stronger increase in activity, the combination of E&P capital discipline and industry shortages in labor and equipment is likely to keep short-term incremental increases more moderate in nature.

While we are pleased with the growth in activity and the growing pipeline of work in many regions, underlying operations continue to be impacted by supply chain and inflationary pressures and, most recently, disruption to our operations in Russia. Our OFS team is working extremely hard to offset these headwinds, with price increases, sourcing actions, and a global team working to solve logistics constraints.

The product line that continues to feel the most supply-chain related pressure is our production chemicals business, where we have taken actions to enhance our sourcing and manufacturing functions. In addition to recently enacting a supply surcharge and changing out some of the leadership in our chemicals business, we are also taking steps to source and produce chemicals closer to key demand hubs, with the opening of our production chemicals facility in Singapore later this year and the recently announced JV with Dussur in Saudi Arabia.

As we look over the balance of the year, we remain committed to achieving a 20% EBITDA margin by the fourth quarter.

Moving to TPS, the first quarter represented a continuation of the successes we achieved in 2021.

TPS orders totaled $3 billion for the second consecutive quarter, driven again by strong orders in LNG. We believe that we are at the beginning of another constructive LNG cycle, which is being expedited by the current geopolitical situation, particularly for US LNG projects.

Our positive long-term view is also supported by the recent improvements in policy sentiment in certain parts of the world towards natural gas' role within the energy transition. The recent EU taxonomy changes to now include natural gas as a transition fuel is an example of this, and the added need to diversify and provide energy security will likely intensify policy efforts.

As these market dynamics play out, a number of projects should accelerate, and we now believe that 100 to 150 MTPA of LNG FIDs will be authorized over the next two years with additional FIDs becoming more likely in 2024 and 2025.

Given the strong TPS orders performance in the first quarter as well as the acceleration in timing for several LNG projects, we now expect TPS orders to increase in 2022 versus 2021.

During the first quarter, we were pleased to be awarded a major order to provide an LNG system for the first phase of Venture Global's Plaquemines LNG project. We will be providing 24 modularized compression trains for the first phase of the project, and this award is part of a 70 MTPA master equipment supply agreement. The highly efficient liquefaction train system is modularized, helping to lower construction and operational costs with a "plug and play" approach

that enables faster installation and first cargo.

This important order builds on an award in the fourth quarter of 2021 for power generation and electrical distribution equipment for the comprehensive power island system for the Plaquemines project.

The Plaquemines order follows a similar contract for VG's Calcasieu Pass LNG terminal in 2019.

In 2021, Baker Hughes successfully completed delivery of the ninth and final block for Calcasieu Pass; all shipments were finalized ahead of schedule, an excellent achievement by our team. Calcasieu Pass holds the global record for the fastest construction of a large-scale greenfield LNG project, moving from FID to first LNG in 29 months.

Outside of LNG, we booked an award for NovaLT16 turbines, which will run on 100% hydrogen, for Air Products' new net-zero blue hydrogen energy complex in Edmonton, Alberta. Our collaboration with Air Products will be critical for a net-zero future, and this order follows the award we received for advanced compression technology for the NEOM carbon-free green hydrogen project.

We were also pleased to be awarded a contract by TERNA to supply gas turbines and compressors that can run on a blend of natural gas and hydrogen for a new compression station for the Greek natural gas transmission system. Baker Hughes will provide three compression trains, deploying our NovaLT12 hydrogen-ready gas turbines and PCL compressors, with the capability to transport up to 10% hydrogen for this project.

The project directly supports the EU's Hydrogen Strategy goals to accelerate the development of clean hydrogen and ensure its role as a cornerstone of a climate-neutral energy system by 2050.

These latest hydrogen orders build on Baker Hughes' extensive experience in developing and supplying turbomachinery equipment to compress, transport and utilize hydrogen.

Next, on Oilfield Equipment, we are encouraged to see improving demand trends across the different business areas. Although recent world events impacted first quarter results, we remain disappointed with the overall level of profitability.

At a macro level, trends in the subsea and offshore markets continue to improve. In the subsea tree and flexible pipe market, we expect a solid increase in industry awards this year as a firm commodity price outlook supports a growing pipeline of deepwater opportunities in core markets. In our international wellhead business, we also see a positive order outlook across multiple regions, and particularly in the Middle East.

In the first quarter, we were awarded a contract in Asia to provide subsea wellheads and subsea production systems plus related services, including 12 subsea trees, for a deepwater gas field. We also achieved our first award in Ivory Coast, where we will supply subsea trees, flexible flowlines and risers to develop the Baleine deepwater oil field.

In Latin America, we were pleased to build on our flexible pipe business' success, securing awards for flexible pipe systems and services that will be deployed across a number of key post-salt revitalization programs, enabling increased oil recovery, and extending the life of multiple subsea developments.

Finally, in Digital Solutions, order activity remains solid with growth across our industrial end markets as well as improvement in the oil and gas market. DS continues to be affected by supply chain challenges and electronic shortages, as well as continued inflationary pressures. The team is working tirelessly to manage the situation and navigate the evolving supply chain issues that have been exacerbated by recent events.