Baker Hughes : Third Quarter 2020 Earnings Conference Call Prepared Remarks

Third Quarter 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 Third Quarter 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 third quarter results as we successfully managed the company through the immediate impacts of both the pandemic and the industry downturn, while also accelerating our long-term strategy. From an operational perspective, I am pleased with the continued solid execution on cost-out from our OFS and OFE teams, as well as the commercial success and performance demonstrated by TPS and DS. We also saw continued free cash flow generation during the quarter and expect to be free cash flow positive for the year.

As we move forward, we continue to be intensely focused on improving the margin and return profile of Baker Hughes despite the near-term macro volatility, while at the same time executing on the long-term strategy to evolve our portfolio along with the energy landscape.

After significant turmoil during the first half of the year, oil markets have somewhat stabilized. However, there is still quite a bit of uncertainty expected over the next several quarters as the demand recovery is beginning to level off and significant excess capacity remains. The outlook for natural gas is slightly more optimistic as forward prices have improved with strong demand in Asia and lower expected future gas production in the US.

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Baker Hughes Third Quarter 2020 Earnings Conference Call Prepared Remarks

On the economic front, the global economy has rebounded from the severe contraction experienced in the second quarter. However, the recovery so far has proven to be quite uneven and the risk of a second wave impacting economic demand remains relatively high. While some industrial sectors have experienced a rebound in activity, others have remained somewhat suppressed. The current environment has also resulted in the acceleration of different parts of the economy, including technology adoption and the acceptance of new ways of working and living.

Importantly, one of these areas where we have been witnessing a step change in activity and mindset is the broader energy industry. The COVID-19 pandemic has revealed the speed at which the environment can respond to lower carbon levels. This has accelerated the debate on how to fuel economic growth while transitioning to a lower carbon future. We have not only seen this acceleration in government response to the pandemic, but we are also seeing it in society at large, and increasingly from our customers.

As we have recently highlighted, Baker Hughes remains committed to being a leader in the energy transition and becoming a key enabler to decarbonizing oil and gas and other industries from within. We also believe that the changes rapidly unfolding across the oil and gas landscape warrant an acceleration of this strategy.

We have developed a three-pronged approach to accelerate our transition to an energy technology company.

The first of these strategic pillars is to transform the core. This targets multiple workstreams that are focused on improving our margin and return profile through a combination of structural cost reductions, portfolio rationalization, and the use of digital technology.

On the cost side, we continue to execute the rigorous cost reduction program we outlined in April, targeting $700 million in annualized savings by year end. Through the third quarter, we have achieved approximately 75% of our target and believe that we will likely achieve a higher run rate by the end of the year.

On the portfolio front, we have already divested of several businesses this year and will continue to evaluate further actions, specifically around businesses that likely don't have the potential to meet our return requirements. This process could lead to further divestments, alternative business structures like joint ventures or partnerships, or the exit of some product lines in select regions. In any scenario, we are taking a holistic view across Baker Hughes and will take decisive action to improve margins while also maintaining businesses continuity and delivering for our customers.

The other major component of our transform the core initiative will be the expanding use of digital technology and remote operations. We view the expansion of remote operations in OFS and TPS as key enablers to drive better cost and margin productivity.

The second of our strategic pillars is to invest for growth. Given the subdued upstream outlook, the primary growth opportunities we see within our existing product and service footprint are the broader industrial sector, specialty chemicals, and non-metallic materials.

On the industrial side, we see the opportunity to develop a solid industrial platform by leveraging the strongest core competencies within our TPS and Digital Solutions segments. Our efforts will be focused on delivering energy efficiency and process solutions, targeting adjacent non-energy industrial sectors.

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Baker Hughes Third Quarter 2020 Earnings Conference Call Prepared Remarks

In addition to industrials, we remain focused on driving growth in the non-metallic and chemicals sectors. Due to the lower carbon footprint associated with non-metallics, we believe this segment provides significant opportunity for expansion, as well as synergies with our upstream and chemicals businesses.

In chemicals, we see opportunities to grow internationally, in the downstream segment, and potentially into other adjacent specialty chemicals markets to complement our current capability.

The third pillar of our strategy is focused on positioning for new frontiers. As the energy landscape continues to evolve, we have spent considerable time evaluating the key growth areas associated with energy transition and analyzed where Baker Hughes can capitalize on these opportunities.

Overall, we see a range of options for our technology with the greatest near-term potential in carbon capture, hydrogen, and energy storage. Although it is still very early in the evolution of these three markets, we believe that Baker Hughes can play a key role in the future development of these areas with the technology we have in-house. In fact, we are in active conversations today with multiple stakeholders in all three of these areas, primarily focused on how our compression and turbine technology can play a role in future 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, returns above our cost of capital, paying our dividend, and maintaining our investment grade rating.

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

The persistent weakness in oil prices continues to create a challenging environment for Oilfield Services. In the international markets, the decline in third quarter activity was in line with our expectations as COVID-impacted regions remain depressed and activity in the Middle East and other areas continued to decline. For the full year, we expect international drilling and completion activity to decline closer to the high end of the 15% to 20% range that we outlined on our last earnings call. As we look into 2021, we expect activity to stabilize early next year and see the opportunity for recovery in some markets over the second half of the year. However, we believe that any potential second half recovery in 2021 will require higher oil prices and that most of the activity increases are likely to come from low-cost basins.

In North America, completion activity rebounded strongly during the third quarter while drilling activity stabilized in August and September. A key driver helping to support our North American OFS results during the quarter was a recovery in our production driven businesses, particularly in our Artificial Lift product line. Looking ahead, E&P customers in North America are increasingly signaling their commitment to capital discipline and a maintenance mode for spending that will allow for minimal or modest production growth. While this shift to maintenance mode likely implies an increase in activity from current levels, we believe that it suggests an uncertain outlook over a longer time period.

While the outlook for OFS remains challenging into 2021, we are closely engaged with our customers to help find solutions and remain committed to structurally reducing our cost base and finding ways to improve the margin profile for this business. Although our company strategy involves pivoting the portfolio and leading the energy transition, the OFS business remains core to our company as we believe that oil and gas will still play a leading role in the energy landscape for the foreseeable future.

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Baker Hughes Third Quarter 2020 Earnings Conference Call Prepared Remarks

Moving on to TPS. This segment, as you know, is a multi-faceted business with a leading position in LNG, a robust aftermarket services franchise, and an improving valves business. It also has attractive growth potential in industrial and new energy applications. TPS has remained resilient in a challenging market environment.

The most significant development for TPS in the quarter was the award for the main refrigerant compressors for four mega trains at Qatar Petroleum's North Field East LNG project, executed by Qatargas. The order reinforces over two decades of trust and successful turbomachinery collaboration between Baker Hughes, Qatar Petroleum and Qatargas. With six LNG mega trains driven by Baker Hughes technology already in operation, the NFE award underscores the strength of our offerings for the world's most complex LNG projects.

Taking a broader view of the LNG market, our long-term outlook for LNG demand growth remains intact. We continue to view natural gas as a transition and destination fuel for a lower-carbon future, supported by a few key drivers.

First, the phasing out of coal should support natural gas demand in the power generation space. With coal still accounting for nearly 30% of global energy supply, natural gas has ample opportunity to displace coal in both developed and developing markets over the coming decades. China's recent pledge to be carbon neutral by 2060 implies continued growth in gas consumption and India is also expected to see almost a doubling in natural gas demand over the next 15 years.

Second, we also believe that LNG, and gas more broadly, is well placed to support renewables growth. It can provide cleaner, flexible, reliable, and competitively priced power for peak load management and grid stabilization.

Third, we see the capacity to further reduce the carbon footprint of existing and future LNG operations through the use of new technologies. We have been a pioneer from the early days of LNG and a clear leader in LNG development for almost 30 years, introducing new technologies to enable more efficient production and operations. For example, TPS continues to partner with customers to reduce their carbon footprint across our installed base of over 5,000 gas turbines and 8,000 compressors. So far in 2020, we have booked upgrade orders that will result in a reduction in excess of 160,000 tons of CO2 per year.

We are also having productive discussions with customers regarding the use of carbon capture technology and hydrogen for various projects. Carbon capture technology can be added to liquefaction trains through upgrading existing equipment or new installations, which can meaningfully reduce carbon emissions.

For hydrogen, we are seeing increased applications for hydrogen blend turbines for mechanical drive in LNG. At Baker Hughes we have turbines running on 100% hydrogen, as well as blended hydrogen in several power generation applications across our fleet. We believe that hydrogen blend applications will grow as LNG operators seek to reduce the carbon footprint of their projects, and as the hydrogen infrastructure becomes more efficient around the world. Importantly, as customers weigh the economics of future projects with the demands for a lower carbon footprint, we have the technology portfolio in place that can help execute their plans and satisfy all stakeholders.

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