Baker Hughes : Fourth Quarter and Full-Year 2020 Earnings Conference Call Prepared Remarks

Fourth Quarter & Full Year 2020 - Earnings Conference Call Prepared Remarks

Jud Bailey Baker Hughes - VP of Investor Relations

Thank you.

Good morning everyone, and welcome to the Baker Hughes Fourth Quarter and Full Year 2020 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.

We are pleased with our fourth quarter results as we generated strong free cash flow and executed on our cost-out programs while navigating the impacts of the global pandemic and industry downturn. During the quarter, OFS and DS executed well on commercial opportunities and cost-out initiatives while TPS delivered solid orders and operating income.

Despite an incredibly challenging year for Baker Hughes and the industry in 2020, we generated over $500 million in free cash flow, booked $6.4 billion in TPS orders, and executed on our substantial cost-out and restructuring program. We also took several important steps to accelerate our strategy and invest in new energy transition technologies, helping to position the company for the future. I cannot thank our employees enough for their hard work and dedication to achieve our goals and move the company forward over what has been a trying year for everyone.

As we look ahead to 2021, we are cautiously optimistic that the global economy and oil demand will begin to recover from the impact of the global pandemic. Assuming a successful roll out of vaccines around the world, a synchronized global recovery should help drive solid growth in oil demand over the next 12 to 18 months and support a meaningful reduction in excess capacity over that time period.

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Baker Hughes Fourth Quarter & Full Year 2020 - Earnings Conference Call Prepared Remarks

We believe this macro environment likely translates into a somewhat tepid investment environment for oil and gas companies during the first half of 2021. However, we expect spending and activity levels to gain momentum over the course of the year as the macro environment improves, likely setting up the industry for stronger growth in 2022.

In the natural gas and LNG markets, 2020 proved to be a more resilient year for demand primarily due to growth in China and accelerated coal-to-gas switching across several countries. LNG demand growth is estimated to have held firm versus 2019 levels and fared much better than other commodities that saw meaningful declines. We believe this resiliency highlights the structural demand growth for LNG and reaffirms our positive long-term view for natural gas as a transition and destination fuel for broader energy consumption.

Regardless of the state of the short-term macro environment, Baker Hughes remains focused on executing the three pillars of our strategy to transform the core, invest for growth, and position for new frontiers.

Our efforts to transform the core are the most visible and immediate components of our strategy. We delivered over $700 million of annualized cost savings in 2020, and will continue to optimize our processes and infrastructure in order to deliver further cost reductions and footprint consolidation in 2021.

On the second pillar of investing for growth, we continue to identify opportunities to expand in the industrial sector and increase our condition monitoring and asset management offerings. We recently won awards in our DS segment that encompass our full suite of industrial asset management and digital capabilities and we are having promising discussions for future awards in both the oil and gas and industrial sectors. We also continue to see good traction with our non- metallic offerings, where we broke ground on our facility in Saudi Arabia with our partner Saudi Aramco and will soon be completing our new facility in Houston.

On the third pillar of positioning for new frontiers, we continue to evaluate multiple concepts and business models across the CCUS, hydrogen, and energy storage value chains. We see several opportunities to deploy our existing technologies or add to our offering through targeted investments and bolt-on acquisitions.

In CCUS, we acquired Compact Carbon Capture, or 3C, in November. 3C is an early stage carbon capture technology that offers a 75% smaller footprint and lower capex requirements compared to what is available today. In hydrogen, we are seeing positive momentum with our product offerings and remain engaged with several customers across a wide range of industries to advance their hydrogen projects.

As we execute on these three strategic pillars and our broader evolution as an energy technology company, we are committed to operating in a disciplined manner that prioritizes free cash flow and returns above our cost of capital.

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Baker Hughes Fourth Quarter & Full Year 2020 - Earnings Conference Call Prepared Remarks

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

In our Oilfield Services business, activity has stabilized globally with modest improvement in select areas and positive signs for further improvement across multiple regions over the course of 2021.

In the international markets, the decline in fourth quarter activity was mostly in line with our expectations, aside from some additional softness in the Middle East that developed late in the year. For 2021, our view remains largely intact with a modest recovery in the second half across several low-cost basins. Looking across different geographies, we expect a solid recovery to continue in Latin America off depressed levels, modest improvement in the North Sea and Russia, and the potential for a modest second half recovery in the Middle East.

In North America, a solid year-end improvement in drilling and completion activity outweighed typical fourth quarter seasonality. Looking into 2021, we expect further improvements in drilling activity over the first half of the year as public E&Ps begin to add back rigs. Although the rig count is moving higher, we believe that the commitment towards capital discipline and maintenance- mode spending remains intact.

While we are pleased to see that the outlook for OFS is gradually improving, our primary focus remains on increasing the margin and return profile of this business through improved operating efficiency and portfolio actions. During 2020, we executed on our cost-out actions in OFS and continue to work through multiple work streams to further reduce our cost structure. This includes a plan to reduce our rooftops by over 100 facilities in 2021 and shut down completions-related operations in select countries in Latin America and Africa.

Overall, we believe that OFS operating margins remain on track to reach double digits in the coming years following the significant structural cost reductions in 2020, and as we institutionalize both remote operations and better operating processes.

Moving to TPS, our focus remains on executing the significant backlog of LNG projects awarded in recent years, continuing to grow our aftermarket services offering, driving growth in our valves business, and capitalizing on attractive opportunities in the new energy space.

During the quarter, we booked an additional award for power generation for the North Field East LNG project in Qatar. This follows the main refrigerant compression award we booked in the third quarter. For the LNG market overall, our long-term outlook for demand growth remains intact. The recent increase in LNG spot prices has solidified a similar view for many of our customers and improved momentum for a number of projects. As a result, we continue to expect that 3 to 4 projects are likely to move forward in 2021, followed by a robust pipeline of LNG projects that we expect to reach FID beyond 2021.

In our pipeline and gas processing segment, we secured an award with South Gas Company in Iraq for the design, manufacture and construction of an integrated natural gas processing and production facility. An important part of this project is the supply of compression equipment and digital monitoring systems that will enable the re-use of previously flared natural gas, which is estimated to reduce Iraq's carbon emissions by roughly 6 million tons annually. This award highlights our broad capabilities as we seek to deliver a diverse range of decarbonization solutions to our customers.

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Baker Hughes Fourth Quarter & Full Year 2020 - Earnings Conference Call Prepared Remarks

For TPS Services, we are optimistic about the outlook for recovery in 2021 and 2022 after a difficult year in 2020 as customers resume spending to maintain and, in some instances, upgrade their equipment. While our contractual services business has remained resilient through the recent market turbulence, we expect growth to be led by a recovery in transactional services and upgrades, areas that were particularly impacted during the pandemic. On a longer-term basis, we are excited by recent traction for upgrade opportunities as customers look to decarbonize and improve the efficiency of their equipment.

Next, on Oilfield Equipment, we executed on our cost-out efforts and have taken several portfolio actions over the course of 2020. We continue to focus on right-sizing the business and optimizing the portfolio in the face of a challenging offshore market environment.

In the fourth quarter, we won an order from Eni for the Agogo field in Angola. The project includes several solutions from our Subsea Connect suite of technologies, including multiple subsea trees, wellheads, and manifolds.

With Brent prices returning to the $50s and a more optimistic view for oil demand over the next few years, we see the outlook for industry subsea tree awards improving modestly in 2021, though still well below 2019 levels. As we look out longer term, we believe that deepwater activity will be increasingly dominated by low cost basins and that it will be difficult to sustain 2019 industry order levels for the foreseeable future.

Finally, in Digital Solutions, the oil and gas and aerospace end-markets remain challenging. However, we have seen some recovery in industrial end-markets outside of aerospace, in line with the rebound in the global economy.

In the fourth quarter, we were awarded several projects that demonstrate our capabilities in industrial asset management. We secured an extension to a previously awarded project with Petrobras. We will provide a suite of digital solutions and services to optimize productivity, reduce operational and safety risks, and lower carbon emissions across Petrobras sites. Our Bently Nevada business secured a contract with a major hydroelectric operator in the U.S. to provide Orbit 60, System 1 software and a five-year services agreement for industrial asset management across multiple dams. Bently Nevada also secured a fleetwide contract with American Energy Power to deploy System 1 software, remote monitoring and analytical services to diagnose machinery issues in real-time. These wins are an example of our deep domain expertise in industrial asset management. Going forward, we see significant opportunities to apply these capabilities in the oil and gas sector, and we believe that these core competencies are also applicable to a number of industrial sectors.

Overall, we executed well in 2020 against the challenges of the global pandemic and the industry downturn, delivering strong free cash flow and executing on our cost-out programs.

Baker Hughes is well placed to navigate the current market environment and positioned to lead the energy transition. We remain focused on executing for customers, being disciplined on cost, and delivering for our shareholders.

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

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