Baker Hughes Company (BKR) Earnings Call Transcript & Summary

Okay. Hey, everyone. Marc Bianchi here at Cowen's Energy Transition and Oil Service analyst. I'm excited to be joined by Baker Hughes. And from Baker, we've got Rod Christie, who's heads up their Turbomachinery and Process Solutions business. So Rod, thanks so much for being here. So I like to think of Baker and talk about Baker as sort of the perfect transition stock, right? There's a good business existing and current energy, getting fossil fuel out of the ground, the transition is going to involve a lot of LNG, and that's a big part of your business. And then on the destination side there's all these great technologies that you have for hydrogen, CCS and several other things that we get to talk to -- talk about. So I think it's -- for a sustainability & energy transition conference to have you guys here is great. So we're excited about that.

Maybe to kick it off, you could give a short overview of Baker's TPS business? What's the competitive positioning today? What are you focusing on for future growth? And maybe why TPS is uniquely positioned to participate in these applications?

It's a great opportunity. I love the way you frame it because it's exactly how I think of it. It is fairly uniquely positioned. Both from a Baker perspective and really from the Turbomachinery and Process Solutions perspective. So you're right, I mean, obviously, a very good position in LNG for the business as a core onshore/offshore production and some of the refining applications. You tend to think of us mainly as sort of either hydrocarbons -- sort of either processing or moving hydrocarbons or reforming hydrocarbon and some helping sort of change state. So we're involved in some power generation application, compression applications, liquefaction applications, big in LNG, big in offshore production, involved in some of the refining applications and the chemical applications around sort of ethylene and ammonia. Mostly retaining equipment, whether it's recipe in compressors or central fuel compressors, gas turbines, steam turbines, et cetera, you tend to think of it in that area but also process controls capability. So valves, control valves, pumps and also, clearly, gearboxes from the point of view of taking one speed and getting it to other speed for a specific application. So then that's sort of component by component level. And then we still really think of the business as sort of equipment and systems provision, some -- so that can be -- customer wants a steam turbine, gas turbine compressor, we can do with that. But more often not, it's either a system or a subsystem. So skid or in respect to some of the applications of tool system, a motorized tool system, either motorized power facility and motorized liquefaction facility. And then life cycle services, so the full life cycle support that is quite a wide range from pure transaction to performance-based contracts. So you bought the technology to perform in your asset in a certain way. We'll underwrite that capability from a technology and performance perspective and bring new technology to enhance the performance going forward. And then both sides -- both us and the customer benefit from that performance enhancement. And then really with respect to sort of the -- what do you think of sort of energy transition and climate technology side. We've been really looking at both the importance of gas in the transition, whether different people look at it as a destination fuel, I think people look at the transitionary fuel, in either way, it plays quite a big role in decarbonizing sort of the industry. And then with respect to kind of the core capabilities from an engineering, basic science point of view, project deployment point of view, hydrogen, carbon capture, clean power all really play into a great space for us. It plays the strengths of the organization to deploy a large complex projects anywhere in the planet reliably for customers. And then from a sort of physics, thermodynamics perspective, it plays really well with the engineering and technology capabilities we have, which is why you've seen us really look at carbon capture, hydrogen, clean power, predominantly at this point in time.

Okay. And we're going to get into a lot of that. But before we do, so this is an equipment business with lot of services and a solutions business, but any equipment business is buying a lot of stuff and it's sort of problematic with supply chains right now. So just curious, how are you seeing the supply chain? If I kind of look at it as an outsider, it seems like TPS has, within Baker, avoided a lot of the supply chain challenges but just curious about why that might be and how you're seeing the outlook there?

A couple of things. I mean, we managed, obviously, through the period of COVID because we kind of let forward into the supply chain and work with them to make sure that they could continue to operate during the whole period of COVID. We tend to have very deep relationships with our supply chain. A lot of projects and project activity, you can kind of see coming for a few times, and we're really sort of linked very well kind of giving the supply chain idea of what capacity we're looking at, what they have available, do we need to secure any specifically. So it's quite an integrated operation up and down through. The areas where I think you probably see the potential is obviously in the sort of electronic space. So we see the same challenges around chips, especially around sort of control systems saying, we're okay. We're okay just now. But certainly, you can see that the stress in the system, and it's a constant battle to manage that side of it and make sure it doesn't impact anything. And again, that's really sort of looking at how -- across Baker, whether it's the digital solutions business or our controls business or any of the other controls activity and so semiconductor activity that we represent the business as Baker Hughes and make sure we leverage the position of the company. And then I'd say the other thing you clearly see at this point in time, obviously, it's inflation and the potential for further inflation in the supply chain. So we've done a lot of work really kind of looking upstream, what's coming, what are the critical things that we think are in there. So forging, for example, looking downstream, how has that impacted capacity, either from a base materials point of view or from a forging capacity point of view and make sure that we've secured capacity there that means that we're not really going to be impacted even in a fairly decent upside case. We see that we can actually fulfill what we have line of sight to today from customers that have yet to sign the order, but we expect [ same ] order over the next 12, 18 months.

That's an excellent segue into the kind of next topic is -- on your LNG business. Management on the call has been talking about this 100 to 150 MTPA sort of awards over '22 and '23. What level of visibility do you have to that? I presume your sort of just deep in those conversations. So maybe you could give us a little more color on that.

I think -- I mean it's probably fair, and I thought I think it comes out of a surprise to you, Marc. I mean these projects don't -- you don't sneak up on you. You're involved in them for a long period of time. Both from a technology selection and actually a project development point of view, what's the concept, the customer wants to follow both technically and commercially. So you get an idea of how you're looking to trade the plan, what their appetite for risk is, how they want to design the plan and then the pace at which they expect to deploy. I think what I'd say is, we've seen obviously with the situation in the Ukraine, obviously, there's a drive for diversification and energy security from other places, it's given quite, I think, quite a tailwind to a lot of projects that were in the system. We see them probably come a little bit quicker to FID. So most of, in fact, not most, but pretty much all of what we see in that mix over the next 24 months we're in active conversation with the customer as it stands. And as they sign up more offtake, they're also talking to us because it gives us the ability to start thinking about when and how do we want to start supply chain. And I think some of the projects you would look at right now, you'd say there's -- those that are advantaged because they're already FERC approved. They've gone through in North America, specifically, a lot of the process. So they're basically ready to go. And then those who are yet to get FERC approval, we're not a long pole intent. We can -- depending on the solution they pick certainly if you go modular, we can satisfy their need much faster than currently -- FERC we're getting approved later then.

Yes. I mean, I guess, along those lines, there's some concern in the U.S. We've got all these FERC approved projects, but concerns about getting the gas, right? Like there's pipeline availability. There's U.S. E&Ps. They don't want to spend on new drilling. There's all these reasons to think that like maybe they won't be able to get the gas even if they have the permit. So how are you seeing that as a potential bottleneck to some of these projects moving forward?

I'd say all the ones that are in the short term that we would see some really high probability of FID over the next period of time that they either have secured their captive or they're geographically advantaged to access gas from a different location. So I think certainly North American projects right now that are in the hopper, I think that's not necessarily an issue for them now. I think the next phase, you start to think about where do they fall? And what's the challenges that face them with respect to securing gas.

Is it -- so if we've got 100 million to 150 million tons of sort of the outlook for the next couple of years, what -- how many MTPA would you say is coming from North America? And then what are the other like second, third buckets where it would be coming from?

So I think you'll you see Qatar as both building out just now and another phase of Qatar. There's renewed interest in solution, a solution for Mozambique. Clearly, we've worked and they're working with both [indiscernible] we are deployed for ENI. And really, you've got that question around what's the best solution to get more on the Mozambique gas into the market. A little bit out from Asia, expansion for Indonesia. But I'd say most of it at this point in time, you think of coming out of North America -- or potentially a project, I think there's -- there are a number of projects that look advantaged by being the West Coast in Mexico. I think you'll see probably one of those go in the near future.

Got it. Okay. I've got some other questions around the upstream side of LNG, but I think we need to move on. There's EU has sort of waffled on how they think about natural gas and with the taxonomy, it was out and then it was back in, and now it's in, but there's a vote in July that may veto that decision. How important is that to FID of these projects and sort of the medium- to longer-term outlook?

I mean, I wouldn't say it doesn't have an impact, but I think there's also a recognition that -- I think you've got two groups in pretty much every political camp. You have pragmatists and idealists, and it's a bit of a battle between the two. If you look at what has happened recently, obviously, I think two weeks ago, EU announced that it would create $330 billion -- or [ EUR 330 billion ] fund to basically fund energy security. And that included gas. So it includes bringing more gas in from different sources as well as driving greater penetration of renewables and looking at other solutions. But it's on the agenda. I think if you look at a lot of the different technologies and also what you have to go physically to either some of the transition technologies are still early in a technology readiness level. So there may be 4, 5, 6 not yet 7, 8, 9, 10 -- sorry, 7, 8, 9. So there's still work to do there, which also means that supply chains aren't yet mature to drive that. If you think about wind and solar, there's only so much capacity at this point in time, and there's also a deployment there. So I think to me, you look at gas as there's certainly a very feasible dispatchable transportable solution for a period of time, doesn't necessarily lock you into carbon emission either. I know we were thinking that, hopefully, later, we can talk a little bit about things like hydrogen, Ekona. There's a path that we see there. We can obviously comfortably modify and adapt existing technology to burn hydrogen in a low NOx capability -- low nitrous oxide way. But also, I think Ekona potentially gives us a solution that allows you to deploy hydrogen while using all the advantages of natural gas transportation that exists today. So I think there's ways around that that will happen. You will look at it both from a prismatic point of view and also from what happens from a carbon point of view. So a lot of the projects we're looking at today won't necessarily be held up with finding a carbon solution, but they're all thinking about what is a carbon solution for both the production of LNG. And then post-shipment what are the solutions to address carbon on methane as an energy source. So I do think there's solutions there that will come through.

Okay. Well, maybe let's jump into some of that kind of in the new energy side. I think the awards were $250 million in 2021, and the company has talked about this aspiration to get it up to $6 billion to $7 billion, essentially creating another TPS business out of these new opportunities. I mean how do you see that evolving in 2023 -- or 2022, excuse me, in 2023, we're starting with $250 million in '21? What's that look like? And how does it ramp up to 2030?

I mean, clearly, I think if you look at it in anyone's scenario, hockey stick towards the back end, obviously. Right now, it's really around the sort of deployment and proving of some of the earlier technologies, it's moving things like our compact carbon solution from TRL5 through 6, 7, getting it into commercial application, how we scale it. It's a similar kind of play with Ekona, similar with NET Power, for example. So it's in this next phase is really sort of looking at feasibility, working with customers on early deployment so we can take the technology very quickly into an industrial application, commercial application in a controlled environment and then go from there. So I see, certainly in the short term, I think carbon capture and storage, there's quite a lot of activity there. There's quite a lot of activities starting to look at NET Power and what's the solution -- how quickly can we deploy NET Power into different applications. Of the acquisitions that we've made and the investments we've made, I'd say NET Power and Ekona have certainly kind of had the coring with people saying how quickly could we buy from you. So I think there's a lot of interest in those capability. And really, for us, it's getting the technology proven and to a point where we can sell basically in the open market without any of the engineering controls that we want to have. So I think you feel good about that trajectory and the potential there. I think the other area that links into the sort of climate tech side that probably is underpenetrated at this point in time because not that many people tend to talk about it because it's just not sexy as demand and supply side efficiency. If you think of putting carbon capture on anything, it's another process, it's another cost. It makes what you've got more expensive. If you think about efficiency, it makes it more efficient. It makes it better performing. The energy cost goes down, the carbon cost goes down or carbon emission goes down. There's a lot less activity on that side. That's probably the one thing that surprises me the most. A lot of people are very interested in when can I get carbon capture? How expensive is it? What does it look like? What the regulatory regime? When does hydrogen hit -- carbon-free hydrogen hit? When can I get a clean power solution? Not so many at this point in time, team has focused on actually just optimizing technologies that they've got either on demand side or supply side.

I guess it had to change.

I think it's starting to change. I wouldn't say it's not a change, but to me, it's probably been the one piece that we look to most. And I think it's probably a lot of it is -- telling you, I'm just running my hydrocarbon plant better and that's resulting in lower emissions is probably less acceptable and something we will talk about then hey, I'm working on technology that debates carbon emission in its entirety. So every analysis you look at of what we have to do total across the energy industry in broad, not just oil and gas, but broadly is a big portion of the whole thing is both demand and supply efficiency.

Yes. And I think my understanding is this might show up in your services business for TPS, but maybe there's a new equipment aspect to it as well. But if -- maybe if I look at the order profile for this year that's expected $8 billion to $9 billion. Like my understanding is there's like a 5-year service time line for major LNG installs after 5 years, they need a big overhaul. But maybe walk through that dynamic, what the sort of visibility is to growth in your service business? And what could this -- if we do start getting new equipment for efficiency, what's the market opportunity there for you?

So I think -- I mean probably the biggest challenge, and I'll put it on -- it's on both sides. One is, is there a demand [ and there ask ] from a customer. The other piece is, if you think of it like a new LNG facility or a new FPSO, it's a very clear ask. The customer has a very clear ask become -- I've got a design, I've got a solution right, I have a concept. With efficiency and efficiency improvement, it requires us to -- we've got to have a team that can go out and basically consult that can work and deploy and find the right solutions for each application. So I would say that business can certainly grow as we put more people in the field as there's more sort of traction around not just the efficiency side, but how does that also translate into a lower carbon intensity. That could be a double-digit growth opportunity for us. And largely, if you think about it organic, so it doesn't require us necessarily to acquire another technology. It just requires us to continue to invest in the technology we've got and then deploy into existing solutions.

Okay. Well, we've got a little over 5 minutes left, so we make sure we talk to the NET Power and Ekona. So Ekona uses paralysis or heating in the absence of oxygen to convert methane into hydrogen and solid carbon, if I have that right. And then that power is oxyfuel combustion for natural gas, again, it makes easier to kind of get the CO2 out of that process. So one, correct anything that I might have gotten wrong with that, but then just give us an introduction to the two technologies, if you could. And I've got a couple of questions.

Marc, first, I had to complement your point, you're the first person that I've spoken to who's nailed it from a concept point of view, straightaway.

Google is an incredible tool.

So look, with Ekona, if you think of the challenge in hydrogen, think of methane today and methane fugitive emissions from the methane system, we have a challenge, obviously, making sure we're not betting meeting, it's got a much higher heating intensity than carbon dioxide in the short term. If you have a problem keeping methane in the pipe, sure is how going to have a problem keeping hydrogen in the pipe. It's a smaller -- it's a small atom. It will escape by crazy. And also, it's going to be run at a higher pressure. So you also have to think about what that infrastructure looks like. Is it fit for purpose? You have the whole things around hydrogen embrittlement in pipeline. You got to think about -- so one of the things that we really like, there's a number of things we like about Ekona. One is you can modularize it. You can deploy it at the end of the methane pipe that exists today. So you're straight into the existing system of transportation except -- whether it comes as a liquid [ tertiary ] gas fiber that comes in that pipe into your country and then goes into the national grid system. You just put this at the point of use, and then you're only worrying about hygiene in a much, much shorter period of time or pipe work. Carbon comes out as solid-state, carbon black. That currently is about $1,000 a ton. You obviously go industrial scale, producing carbon black. If you're investing -- price of carbon black comes down, there's already a lot of work looking at how do you deploy carbon black into other things. Today, it tends to be in car tires, printed circuit boards, road surfaces, but it has other applications that are being worked on, you can reform that. So there's two sources of revenue. One is the carbon black market, one it's hygiene obviously, there's a fuel source into your existing facility and it's an easier way of dealing with it. And we look at the technology as really potentially getting below the cost of blue meter -- blue hydrogen. So steam methane reformed hydrogen with carbon capture.

Does that need -- does it need a revenue stream to get to that level? So if you're selling Ekona...

Actually, on the carbon black it's been modeled with a very, very low. Today, it's [ $1,000 ], if you mull it down to about [ 10% ], it still actually works out incredibly competitive against blue hydrogen. So it changes that dynamic. And it also means that if you think of large steam methane reformation, today, you probably look at trying to cite that need someone that's going to use the hydrogen today versus send it into a grid system for distribution. And I think this gives you a way on to hydrogen as a fuel versus methane as a fuel. So that's one thing that we think is actually very competitive. The NET Power solution, if you put a carbon price in and you think about existing power gen technologies where you're going to have to capture carbon or deal with carbon, this hunts very well. And the higher the price, obviously, the better it hunts. It's a high-efficiency solution, you can actually cap the carbon very easily because it's a very pure stream of carbon. You can also utilize that in synthetic fuels. For example, if you've got hydrogen, you can blend, so you can actually have a circular economy around synthetic fuels. It plays quite nicely in that space. So it's certainly very promising from a power gen, dispatchable, again, which is going to be something that's going to be required to ensure you can also balance out the renewable ones.

Yes, absolutely. How do the cost for NET Power compared to a combined cycle with carbon capture? I would think you need to build an ASU and some other plant for NET Power that you wouldn't need for the other application to...

We would say, at this point in time, we have a line of sight that brings it below the cost of high-efficiency gas turbine with carbon capture.

Okay. Well, great, Rod. I think don't have time to squeeze in another question. So this has been great. Really appreciate it, and look forward to catching up again soon.

Thank you very much.

All right.