Baker Hughes : First Quarter 2023 Earnings Conference Call Prepared Remarks

Baker Hughes First Quarter 2023 - Earnings Conference Call Prepared Remarks

First Quarter 2023 - 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 2023 Earnings Conference Call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Nancy Buese. The earnings release we issued earlier today can be found on our website at bakerhughes.com. We will also be using a presentation with our prepared remarks during this webcast, which can also be found on our investor website.

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 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.

We were pleased with our first quarter results and remain optimistic on the outlook for 2023. As you can see on slide 4, we maintained our strong order momentum in IET and SSPS. We also delivered solid operating results at the high end of our guidance in both business segments, booked almost $300 million of New Energy orders and generated approximately $200 million of free cash flow.

Turning to slide 5, while 2023 has already started off with some macro volatility, we remain optimistic on the outlook for energy services and Baker Hughes. Our diverse portfolio features long cycle and short cycle businesses that position us well to navigate any periods of variability that may occur across the energy sector.

Despite the elevated recession risk for major developed economies, we expect the supply- demand balance in the global oil markets to gradually tighten over the course of the year. Factors driving this include China's economy recovering, non-OECD demand continuing to grow, and OPEC+ remaining proactive in maintaining adequate and stable oil price levels. We expect this macro backdrop to still support a double-digit increase in global upstream spending in 2023, with multiple international projects being executed and the offshore development pipeline growing.

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Baker Hughes First Quarter 2023 - Earnings Conference Call Prepared Remarks

We continue to believe that the current environment remains unique, with a spending cycle that is more durable and less sensitive to commodity price swings, relative to prior cycles. Factors driving this extended cycle include financially strong operator balance sheets, disciplined capital spending focused on returns versus growth, and IOCs and NOCs that are balancing modest production growth with longer-term investments in New Energy.

Another notable characteristic of this cycle is the continued shift towards the development of natural gas and LNG. As the world increasingly recognizes the crucial role natural gas will play in the energy transition, serving as both a transition and destination fuel, the case for a multi-decade growth opportunity in gas is steadily improving. This is driving operators of all sizes to dedicate more spending towards natural gas development, as well as LNG projects and associated infrastructure.

We are seeing the early stages of this shift through a step-up in the exploration and development of gas reserves in regions like Africa, the Middle East, and the Eastern Mediterranean. We are also seeing the introduction of new technologies and entrants into the LNG sector more broadly, as well as an evolution in contracting structures for LNG offtake volumes.

For these reasons, LNG project sanctioning activity has gotten off to a strong start in 2023 with 20 MTPA already reaching FID and other projects likely to soon follow. Contrary to conventional wisdom, we believe that recent declines in global LNG prices from the unsustainably high levels reached last year is a net positive for the sector, by supporting demand growth in key developing markets and bringing closer alignment on LNG pricing expectations between buyers and sellers.

Based on conversations with existing and new customers, we see the potential for this LNG cycle to extend for several years with a pipeline of new international opportunities expanding project visibility out to 2026 and beyond. We remain confident that we will see 65 to 115 MTPA of LNG projects reach FID in 2023 and continue to see solid project activity in 2024 and 2025.

In addition to capitalizing on the commercial opportunities presented by this favorable macro backdrop, a primary focus for Baker Hughes in 2023 is transforming the company operationally and positioning it for the future of the energy markets. This includes executing on our previously stated cost-out initiatives, which Nancy will talk about in more detail, and reshaping the company into two strategically managed business segments with a leaner corporate function.

We have done a lot of work evaluating our entire organization these last few months, and the changes we are driving will enable faster decision-making and allow us to operate as a leaner, more simplified organization. It will take time to reach our ultimate goals, but I strongly believe that the work we are undertaking this year will lay the foundation for consistently better operating results and higher returns in the future.

Turning to slide 6, I will provide an update on each of our business segments.

In Oilfield Services and Equipment, despite recent volatility in oil and gas prices, we remain positive on the outlook for a multi-year cycle, with growth trends clearly shifting in favor of international and offshore markets. With approximately 70% of our OFSE business internationally focused, we are well positioned to capitalize on these unfolding market dynamics.

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Baker Hughes First Quarter 2023 - Earnings Conference Call Prepared Remarks

Geographically, multiple regions are poised for strong growth this year led by the Middle East and Latin America, where the pipeline for both shallow water and deepwater growth opportunities is becoming more visible. In other markets like West Africa and the Eastern Mediterranean, offshore activity is also improving, with multi-year drilling programs starting to come into focus.

In North America, activity has been seasonally weaker to start the year as expected, with a high likelihood of further softness as activity in gas basins responds to recent natural gas price weakness. However, with roughly 55% of our North American business comprised of artificial lift and production chemicals, and a customer mix weighted towards the majors and large independents, we expect our portfolio to perform relatively well in the current environment.

Within our OFSE product lines, we continue to see the strongest growth and performance in our Well Construction product line, which is supported by the leading technologies in our drilling portfolio. Our Completions, Intervention, and Measurement product line also continues to perform well, and will be further improved by the recently closed acquisition of Altus Intervention. Altus will complement our existing intervention solutions business and add new technology that can be scaled into new geographic markets.

In Production Solutions, we continue to see incremental improvements in our chemicals business as supply chain constraints ease and profitability continues to normalize. Our Singapore facility will soon be fully operational, and we remain on track for margins in the chemicals business to return to historical levels by the end of this year.

Another positive development for our Production Solutions business is the recent announcement of Leucipa, which is a platform agnostic digital solution. This software enables the automation of field production, connecting artificial lift, fluids and chemicals, and removing unnecessary costs and manual processes, which will ultimately drive enhanced production. We also recently announced a collaboration with CORVA, a third-party digital solution that improves well construction efficiency, further enhancing OFSE's digital capabilities.

In our Subsea & Surface Pressure Systems product line, the demand outlook continues to strengthen. During the first quarter, we booked a major award to provide equipment and services for the Agogo field offshore Angola. We will be providing 23 subsea trees and 11 Aptara manifolds, representing our largest subsea tree order in almost five years. As we reposition the Subsea Projects & Services business to focus predominately on a few key markets, we see a robust pipeline of opportunities building and anticipate further order momentum for this year and beyond.

For our Flexibles business within SSPS, we expect orders to remain strong in 2023 after a record year in 2022. Given robust demand, conversion cycles are lengthening in this business with limited excess capacity until 2025.

On the operational front, the integration of SSPS into our OFSE segment and restructuring of the business continues to progress well. In line with the capacity rationalization for SPS that we disclosed last quarter, we are in the process of decommissioning and right sizing multiple manufacturing sites.

Our focus is now shifting to the Surface Pressure Control business, where we see similar opportunities to right-size capacity, integrate supply chain and engineering, and localize in key growth markets, particularly the Middle East. As a reminder, these steps are in addition to the cost savings gained from removing management layers and will largely come into effect in 2024.

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Baker Hughes First Quarter 2023 - Earnings Conference Call Prepared Remarks

For 2023, we continue to expect OFSE to deliver double-digit revenue growth and for EBITDA margins to expand by 150 to 200 basis points as activity increases in multiple regions and self- help initiatives in key areas are executed.

Moving to Industrial & Energy Technology, we saw another excellent quarter commercially, continuing on the strong momentum from the end of 2022. Gas Tech Equipment booked a number of LNG awards in the quarter, totaling almost $1.4 billion, with continued progress across our world-class franchise.

The recent decline in LNG prices have had virtually no impact on our discussions in terms of timing or the pipeline of opportunities. With project cycle times that can last 8 to 10 years from the initial planning phase to final commissioning, operators take a long-term view for LNG project development and look through near-term commodity price fluctuations.

During the first quarter, we were pleased to be awarded a major order to supply two main refrigerant compressors for the North Field South project, which will be executed by Qatargas. The MRCs are part of two LNG "mega trains" representing 16 MTPA of additional capacity that is estimated to further boost Qatar's LNG production capacity to 126 MTPA by 2027.

Also during the quarter, Baker Hughes was awarded an order by Bechtel to supply two MRCs for Sempra's Port Arthur LNG Phase 1 project in Jefferson County, Texas. Baker Hughes will supply gas turbines and centrifugal compressors across two LNG trains, for a nameplate capacity of approximately 13 MTPA, as well as two electric motor driven compressors for the plant's boosting services.

Baker Hughes was also awarded an order by Black & Veatch to deliver two LM9000-driven compressor trains for the PETRONAS ZLNG facility in Sabah, Malaysia. PETRONAS specifically selected the LM9000 gas turbine technology for the 2 MTPA FLNG facility to reduce complexity, maximize efficiency and minimize footprint, while lowering CO2 emissions compared to other technologies in its class.

On the New Energy front, we booked almost $250 million of orders in the quarter in IET, including contracts to supply CO2 compression solutions for multiple FPSO projects in Brazil. The six gas turbine-driven compression trains will each reinject more than 1 MTPA of CO2 into oil reservoirs, enhancing production rates and reducing emissions.

We were also pleased to book an order for centrifugal pumps and hydraulic-powered recovery turbines for Air Products' blue hydrogen project in Edmonton to enable CO2 capture during the Auto-Thermal Reforming process. This award is another example of how Baker Hughes and Air Products continue to collaborate to drive the hydrogen economy forward.

During the quarter we also announced an agreement with HIF Global, the world's leading eFuels company, to cooperate on the development of technology for Direct Air Capture. HIF Global intends to test Baker Hughes' Mosaic technology to capture carbon dioxide through Direct Air Capture and combine it with green hydrogen to produce eFuels.

Orders in our Industrial Technology businesses maintained strong momentum to start 2023 with double digit growth year over year across all product lines, led by some of the hydrogen-related awards in Pumps, Valves, and Gears. In our Condition Monitoring business, we saw notable awards in the Middle East and in Europe, which featured the full suite of our capabilities in monitoring, sensing, and asset health across multiple sectors.

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Baker Hughes First Quarter 2023 - Earnings Conference Call Prepared Remarks

On the operational side, Industrial Tech also continues to benefit from volume and margin improvements in Condition Monitoring and Inspection, as chip shortages and supply chain issues gradually abate. Although supply chain functionality and operational performance is still not back to where we would like, we are seeing steady progress that we expect to continue over the course of the year.

In IET Digital, Cordant, our recently launched integrated suite of solutions, is seeing some initial success. We are pleased to be collaborating with bp on further defining and developing Cordant for asset performance management and process optimization.

bp will deploy OnePM in select locations across its Gulf of Mexico production assets, where Baker Hughes currently has a large installed base of rotating equipment, controls, and associated digital services. The companies will look for opportunities to expand this collaboration across other regions in the future.

Overall, we are pleased to see strong momentum for IET continue into 2023, with a record backlog of $26.5 billion and a robust pipeline of new order opportunities in LNG, Onshore/Offshore Production, and New Energy.

Based on our strong first quarter and the growing pipeline of project opportunities, we are increasingly confident that IET orders for 2023 are likely to meet or potentially exceed the high end of our guidance range of $10.5 to $11.5 billion.

Before I turn the call over to Nancy, I would like to spend some time on the commitments Baker Hughes is making in the areas of sustainability and ESG. As many of you know we were one of the first companies in the energy sector to commit to a 50% reduction in Scope 1 and Scope 2 emissions by 2030 and to be at net zero by 2050. To help achieve these goals, we are empowering Baker Hughes employees to remove carbon from our products and operations as we better integrate our Carbon Out program. We are also intently focused on developing our own Scope 3 emissions reduction roadmap and expect to have more news to share on this area later this year.

Overall, I feel confident in the structural changes we are executing at Baker Hughes and our positioning to capitalize on the multi-year upstream spending cycle, the ongoing wave of LNG investments, and the acceleration in New Energy opportunities.

With that, I will turn the call over to Nancy.

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