Baker Hughes : Second Quarter 2023 Earnings Conference Call Prepared Remarks

Baker Hughes Second Quarter 2023 - Earnings Conference Call Prepared Remarks

Second 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 Second 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 second quarter results and remain optimistic on the outlook for 2023. As you can see on slide 4, we maintained our order momentum in IET and SSPS. We also delivered strong operating results at the higher end of our guidance in both business segments, booked almost $150 million of New Energy orders and generated approximately $620 million of free cash flow.

Turning to slide 5, growing economic uncertainty continues to drive commodity price volatility globally. However, despite lower oil prices over the first half of the year, we maintain a constructive outlook for global upstream spending in 2023. Market softness in North America is expected to be more than offset by strength in international and offshore markets.

As we have said previously, we expect this spending cycle to be more durable and less sensitive to commodity price swings relative to prior cycles. This is due to strong balance sheets across the industry, disciplined capital spending that is based on low asset break evens and a focus on returns versus growth. We are seeing this in North America where, despite the decline in WTI prices, IOCs and large independent E&P companies have yet to deviate from development plans.

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Baker Hughes Second Quarter 2023 - Earnings Conference Call Prepared Remarks

It is also evident in international and offshore markets, where we continue to see steady activity increases from NOCs and IOCs and production discipline from large producers.

Outside of the upstream markets, we remain optimistic on the LNG outlook, with solid demand growth this year led by Europe and Asia. In fact, despite a 50% decline in LNG prices over the first half of the year, contracted long-term offtake agreements of over 45 MTPA are slightly above contracting levels over the same period in 2022.

The continued strength in long-term LNG contracts has been a key driver of the momentum in industry FIDs, which have now totaled 53 MTPA so far this year. This includes the recent FIDs for Phase 1 of Next Decade's 17.6 MTPA Rio Grande project and QatarEnergy's 16 MTPA North Field South project.

Based on the continued development of the LNG project pipeline, we still expect the market to exceed 65 MTPA of FIDs this year and should see a similar level of activity in 2024. We continue to 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.

As we have stated consistently, we fully expect natural gas and LNG to play a key role in the energy transition as a baseload fuel to help balance against intermittent renewable energy sources. We believe the expanding pipeline of LNG opportunities is tied to the growing recognition of this reality and that the transition will take more time and must be financially viable.

As we highlight on slide 6, Baker Hughes' unique portfolio enables us to weather a choppy macro environment. We have a diverse mix of long and short cycle businesses with leading technologies that play across value chains within today's energy and industrial complex, and are well positioned to play a leading role into the future.

In addition to the earnings and cash flow durability of our portfolio, we continue to drive actions to optimize our corporate structure and drive higher margins and returns. While reducing costs is one lever, we are also fundamentally re-wiring the organization to simplify reporting lines, eliminate duplication, and taking measured steps to upgrade our financial reporting systems. We believe this will lead to more standardization, increase automation, and provide greater real-time information and analytical capabilities around our business performance.

We have now completed the actions required to achieve the first $150 million of our cost-out target by the end of 2023 and believe there are additional opportunities for further cost reductions in 2024 and beyond. As we continue to redesign our organization and install new processes and systems, our goal is to drive continued cost productivity, with the ultimate objective of exceeding 20% EBITDA levels for each business segment over the next few years.

As we work to optimize our organizational structure, we are also focused on capitalizing on favorable market trends across both business segments in the near-term, as well as the long- term.

In the near-term, both IET and OFSE are well positioned to capitalize on multiple growth vectors, most notably the multi-year upstream growth cycle in international and offshore, the wave of LNG sanctions expected through this decade, and the New Energy opportunities that utilize our existing core technologies.

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Baker Hughes Second Quarter 2023 - Earnings Conference Call Prepared Remarks

Longer term, we believe that our unique portfolio positions us well to capitalize on the Energy Transition, which is driving fundamental changes to the energy landscape, our customer base, and how they operate. Given our position as a strategic supplier for both subsurface and surface solutions, our portfolio is increasingly aligned to our customers' capital allocation decisions, and provides a unique vantage point as we work with them on planning and developing the next generation of energy projects.

Turning to slide 7, Baker Hughes' portfolio and our customer relationships have never been stronger. Since 2017, we have significantly enhanced our size and scale in key regions like the Middle East, as well as our relationships with key customers. By selling a range of solutions that includes LNG, power generation and compression solutions for onshore and offshore production applications, and integrated solutions for well construction and production, we are able to offer capabilities that uniquely position us for today and the future.

Today, our wide range of core competencies are being utilized in select areas like deepwater projects, where we provide power generation and compression for FPSOs, in addition to subsea equipment and flexible risers. We are also seeing growth opportunities through further investment in natural gas value chains, increasing investment in New Energy, and higher demand for integrated solutions. Some of these unique and emerging solutions play to our strengths as they combine subsurface capabilities with highly engineered surface technologies that also layer in digital offerings across the scope of work.

As we look to the future, it is clear that almost all energy companies are transitioning, and while the pace of change may differ, the direction of travel is clear. We believe that as the need to decarbonize becomes more widespread, the demand for integrated solutions across these areas will grow. In fact, we are in the early stages of collaborating with key customers on a range of future opportunities that leverage our unique set of technologies for New Energy applications.

For example, in CCUS we can evaluate and drill reservoirs for CO2 storage and provide CO2 compression expertise. Other solutions include geothermal power, where we drill geothermal wells and provide steam turbines, and blue ammonia projects, where we provide ammonia and CO2 compression solutions, as well as the drilling and monitoring of CO2 storage wells.

Overall, I am extremely excited about the multitude of new opportunities developing for solutions that leverage our unique portfolio. We believe, combining these growth opportunities with our business transformation objectives provides attractive upside for our margins and returns going forward.

Turning to slide 8, I will provide an update on each of our business segments.

In Oilfield Services & Equipment, we continue to be encouraged by the multi-year cycle unfolding in international markets, particularly in offshore basins. With approximately 70% of our OFSE business internationally focused, and around 40% exposed to offshore, we remain well positioned to benefit from these market dynamics.

On a regional basis, we are experiencing strong growth in most areas, with particular strength in Latin America and the Middle East. We see no change to the pace of activity across international markets and continue to see promising signs in markets such as West Africa and the Eastern Mediterranean. One area that continues to lag is the North Sea, where UK fiscal uncertainty is hampering developments.

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Baker Hughes Second Quarter 2023 - Earnings Conference Call Prepared Remarks

In North America, the market continues to trend softer on lower oil and gas prices. However, the impact of price volatility in the first half of the year has largely been limited to the activity of private operators and in gas basins.

Our OFSE business in North America is production-levered and the majority of our customer base is made up of major oil companies and public E&Ps, which have yet to deviate from plans laid out at the start of the year. This portfolio and customer mix results in a business that is generally less volatile than fluctuations in North America activity and rig count. This resiliency was evident during the second quarter, where our OFSE North America revenue was modestly higher despite a 15% sequential decline in the North America rig count.

Within our OFSE product lines, we continue to experience strong growth across the portfolio, which was led in the second quarter by Completions, Intervention & Measurements. We also continue to develop new technologies for the CIM portfolio with innovations like SONUS, the industry's only acoustic set liner hanger system, which can cut the time taken to set a liner hanger from hours to minutes.

In Production Solutions, we continue to see solid growth in artificial lift globally. During the quarter, we had early commercial success with our recently acquired AccessESP technology, winning two awards with key customers in the Middle East. The AccessESP system offers an efficient alternative to conventional ESP installations without the need for a heavy workover rig, which reduces time, costs and emissions while boosting well performance.

In Subsea & Surface Pressure Systems, we continue to experience positive order momentum. We booked a major award during the second quarter with Eni for the Baleine field offshore Ivory Coast, providing eight subsea trees and three Aptara manifolds. Operationally, we are encouraged by the early success of repositioning the Subsea Projects & Services business to focus on selected key markets with a leaner cost base.

While top line trends for OFSE remain strong and should maintain strong momentum into 2024, we remain equally committed to translating higher revenue growth into higher margins and returns. For 2023, this will translate into double-digit revenue growth and an expansion of EBITDA margins by 150 to 200 basis points.

In Industrial & Energy Technology, we saw another excellent quarter commercially, with $3.3 billion in orders, maintaining the strong momentum from the first quarter. Gas Tech Equipment achieved $1.6 billion in orders, driven by multiple areas, including almost $900 million of LNG awards in the quarter.

In LNG, Baker Hughes booked an order for three Main Refrigerant Compressors for NextDecade's Rio Grande LNG project in Texas. Baker Hughes will supply Frame 7 turbines paired with centrifugal compressors across Rio Grande's first three LNG trains in a parallel configuration arrangement, providing more operational flexibility.

In Onshore/Offshore Production, we were pleased to be awarded a major order from MODEC to supply gas technology equipment for Equinor's BM-C-33 project in the Brazilian pre-salt Campos area. Baker Hughes will be providing turbomachinery equipment for the FPSO, including LM2500 gas turbine and steam turbine generators, for a combined cycle power generation solution to reduce the project's carbon footprint.

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Baker Hughes Second Quarter 2023 - Earnings Conference Call Prepared Remarks

Combined cycle solutions are an important trend in the offshore oil and gas industry, as they enable the reduction of overall FPSO carbon emissions. Baker Hughes expects to reduce carbon emissions by more than 20% for this project versus similar open cycle FPSOs with the same power demand.

On the New Energy front, we booked over $100 million of orders in the quarter in IET, including multiple orders for Air Products to support its Louisiana Clean Energy Complex. These awards included vertical centrifugal pumps for ammonia loading, compression trains for CO2 storage, and a subsurface study undertaken by OFSE to assess the capacity of the reservoir. In addition to the Louisiana project, we also received an award for hydrogen compression equipment for Air Products' New York Green Hydrogen facility.

IET also saw increased traction in the growing blue ammonia space. During the quarter, IET secured multiple orders in the Middle East, including awards to supply syngas and ammonia compressor trains and centrifugal pump trains.

Orders in our Industrial Technology businesses maintained strong momentum in the second quarter with 8% growth year over year led by Pumps, Valves & Gears and Inspection.

In our Condition Monitoring business, we secured an agreement to deliver asset protection and monitoring hardware, software, and services for a floating LNG project offshore Malaysia. The scope includes Bently Nevada's Orbit 60 condition monitoring system, Ranger Pro wireless monitoring systems, System 1 software, and cyber security enhancements, as well as end-to-end project management support and services.

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 there is still work to do, profitability in Industrial Tech is experiencing a solid recovery that we expect to continue over the course of 2023.

IET is also making solid progress on its strategic initiatives around digital and growing outside its traditional customer base into new markets. We received our first major award for Cordant from a large ammonia producer in the Middle East in the first quarter, delivering an integrated suite of solutions for asset performance management, process optimization and digitally enabled services through IET's iCenter.

Building on this award, during the second quarter, we signed a long-termMulti-Maintenance Program contract where we will be providing maintenance planning, project management, and resident engineering on site for the customer's current fleet of steam turbines and centrifugal compressors. This contract demonstrates the full range of capabilities and complementary services of our IET Digital and Gas Tech Services portfolio, providing a blueprint for expanding our digital platform with new and existing customers.

Overall, we are pleased with the continued momentum in IET this year. With a record RPO that now exceeds $27 billion, we expect to generate strong revenue growth over the next few years that will be accompanied by strong margin improvement and higher returns.

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