Baker Hughes Company (BKR) Earnings Call Transcript & Summary

All right. Good afternoon. Arun Jayaram, Head of Oilfield Services Research at JPMorgan. Next up, we have Baker Hughes, which is one of the big 3 diversified service companies. They do -- but they touch a lot of different things between industrials, they're one of the leading providers of LNG equipment, which I think Lorenzo are going to talk a lot about today. And also probably one of the best-positioned companies in terms of leading the energy transition. So lots of interesting things. Delighted to have Lorenzo Simonelli, who's the CEO of Baker Hughes. Before we're going to do fireside chat, have some fun this afternoon, I thought I'd turn it over to Lorenzo to make some opening comments. Lorenzo, we have a lot of generalists at this conference. So I was wondering if you maybe could whet the appetite of our audience to talk a little bit about Baker Hughes and your investment thesis around the story.

Yes, definitely. And first of all, Arun, thank you very much. And it's great to be back to in-person meetings and be able to spend time with you today and also for the next few days. As Arun mentioned, Baker Hughes, I'd make one correction, and we're an energy technology company. And what that means is that we really play across the spectrum of the energy mix. And we break down the company into 2 business areas, one being your traditional oilfield services and equipment side, so when you think about a Halliburton or Schlum, definitely very much in the same space that they're in, many of the same product lines. And I'm sure we'll get into that. But a lot of growth potential in the short term and medium term from the activity increase we're seeing in North America and also internationally. And the second business area is really industrial and energy technology. And as Arun mentioned, we play across the midstream, the downstream but also industrial sectors. So not just oil and gas, but when we think of aerospace, automotive, metals, providing pumps, valves. And we are the largest player from a liquefaction perspective. And I think as you all know, natural gas is here. And natural gas is our savior as we look at the energy crisis that is upon us. And I think in the years that I've been involved in energy, I can say coming into today, this is probably the most interesting time that I've seen around the energy ecosystem, with the discussions around energy security, energy affordability but also with regards to sustainability and the continued drive towards cleaner energy. So looking forward to the fireside chat today, and great to be with you.

Great. Well, Lorenzo, let's start with your oil and gas position. And I wanted to get your thoughts on what you're seeing in terms of upstream spending patterns this year -- obviously, a bounce-back year -- in terms of spending from some of the impacts from the pandemic. But how do you think about spending growth in North America versus international markets? And what kind of signals are you getting from customer around 2023?

Yes. So let's maybe break it down into North America to begin with and then move into international. And North America, we're seeing robust growth, and I think you've heard that potentially from others. But as you look at D&C spend in 2022, we look at 40-plus percent growth in spend. And if you look at some of the indicators right now, maybe even up to 50%. And we see that continuing through the year. And as you get into 2023, it being good mid-double digit as well relative to the continued spend and slightly subdued just because of the higher point coming out of 2022 but still good double-digit growth. As you look at international, again, international, we've always said that you're going to see more growth in the second half of the year and actually robust growth going into, again, 2023. So as you look at the international growth driven by the Middle East and also driven by Latin America, you've got, again, mid-double-digit growth and then, going into next year, that being continued. This is excluding the impact of Russia, which obviously we're seeing play out in the marketplace. But if you look at international, we see that being a stronger 2023 than 2022 as you've looked at the CapEx spends announced by Aramco and others in the Middle East and also Latin America. So a good trajectory, and I'd go back to what I said before. When you look at our business area of oilfield services and equipment, you've got short- to medium-term tailwind. And we're going to be able to benefit from that as you see a shortage of supply, at least for the next few years as we go back in the balance. And again, that doesn't take into consideration if we have a huge recession that people are looming about. But we don't think that's going to destruct demand to the rate that it's going to change the outlook.

Okay. Let's talk a little bit about Russia, obviously, a big impact as we think about the global energy food chain. What do you see, Lorenzo, some of the near-term and longer-term implications of Russia's sanctions as well as the potential diversification of Europe's energy supply away from Moscow?

Well, I think what it's brought to the forefront is the importance of energy security but also the importance of energy diversification. And what you can see happening in Europe right now is an accelerated view of how do you lower the dependence on both Russian oil and Russian gas over the next few years. And that's going to drive a lot of potential for substitutes to come in. We are strong believers that those substitutes will be from the U.S. LNG side as well as other international LNG projects that are going forward. And then on the actual side of oil, you're already starting to see that there's trapped barrels within Russia, that basically 2 million to 3 million that are going to have to be made up from incremental production in other locations. Predominantly, again, the Middle East will be the beneficiary going there with regards to incremental spare capacity they have and also the investments that they're making. From a Baker Hughes perspective, maybe just to touch on that, again, we've mentioned that we are following all the sanctions and abiding by law with regards to our Russia activities. As we look at our presence during the course of the year, we see our Oilfield Services revenue declining down to 0 by the end of the fourth quarter. And I'd say that's in line with what we mentioned. And we're seeing the deceleration of revenue accordingly in second quarter, third quarter and 0 in fourth quarter. We are, obviously, applying the sanctions associated with our OFE business, where we have a big project. We've got to see how that project milestones occur. But again, that will be out by the end of the year. And on TPS, again, that's very LNG-specific. And we're applying the sanctions, where necessary, from an LNG perspective and, obviously, ramping down operations where necessary. So I don't see a big impact there from a total year outlook perspective. But there'll be some residual costs that, again, we have to deal with. So overall, in line with what we said.

Great. And are you seeing any positive signs in other markets that -- from spending perspective to offset the impact from Russia?

Definitely. And I think, again, as you look at the global mix, you are going to have a rebalancing that takes place. And it won't be overnight. But over the course of the next 24, 36 months, when you look at the incremental spend going into the Middle East, when you look at Latin America, in particular, the pre-salt fields, they're going to be increasing their production. And they're going to be offsetting the -- and displacing the Russian oil that's no longer going into Europe and being able to provide that. Likewise, the Russian oil, over time, will find another home. There will be a certain period of time where it is constrained just because of the logistics. But again, they'll be producing, maybe not to the same levels that they are today, but they'll still be producing considerable and being able to distribute it to other places. The one thing that I think you all appreciate in this room is the demand for energy is not abating. And actually, as we go forward, there's going to be more requirement for energy as well as diversification of energy going forward.

Great. Let's talk a little bit about the upstream spending cycle. Do you see visibility in terms of a multiyear spending cycle develop?

We do see a multiyear. And I think, again, you've heard about the underinvestment that's taken place over the course of the last few years, and that comes home to roost. And as you look at going forward, we mentioned the D&C spending that we're seeing in North America, that continuing into next year. Likewise, also within the Middle East. What we're also seeing though, maybe different than the past, is capital discipline is going to remain. So even though you'll start to see incremental spend from an allocation perspective, it's going to stay very disciplined. And I think if you're looking for a huge incremental increase in production overnight, that's unlikely to happen. It will be staged. It will be much more disciplined and also a focus on returning, especially with the IOCs returning back to shareholders. So it's different than times before. The adage of drunken sailor when prices are high, I think this is going to be different. And also, we're going to see higher prices for a considerable amount of time, which is going to drive a balanced spend increase as well.

How would you characterize trends in your industrial segments, which reflect about half of your top line? Are you seeing any signs of -- we're hearing the R-word a lot. But any changes in terms of demand in terms of your industrial segments?

When we look at Baker Hughes, and again, we look at the 2 business areas, we say oilfield services and equipment, about 50%, and then the industrial and energy technology, about 50%. And when you look at that, we're very active in the midstream from the liquefaction, LNG. We feel very positive about natural gas and LNG and that continuing to grow for the foreseeable future and, actually, the growth accelerating just given what we're seeing from an energy landscape perspective. Also, as we think of FPSOs, we think of onshore/offshore production, both the power generation and the compression requirement, feel very good. On the industrial side, again, we see that industrial will continue to grow. That's the one area, though, you've got to look at from a recessionary perspective. It will be more in line with GDP. So we're keeping our eyes on there. But again, at this moment, no real change from the upward trend that we've been seeing.

Okay. Let's shift gears and talk a little bit about TPS and Baker's unique leverage to the LNG cycle. The company had previously outlined expectations of 100 to 150 MMTPA of orders over the next couple of years. What's your conviction in this forecast as we sit here today?

So I think some of you are meeting with my customers as well. And we're in the privileged position to be key partners of nearly all of the LNG producers around the world. And we feel very good about the role that natural gas and LNG is going to play. As you look at the energy ecosystem, and you look at it in practicality, the solution in the interim as well as the longer term is natural gas, and it's abundant. And we see that liquefaction capacity by 2030 needs to be above 800 million tonnes. If you look at where we are today, there's about 460 million tonnes in capacity. So there's a significant amount that needs to be continued to be introduced. You've got about 160, 150 that's under construction right now, which still means you've got several hundred million tonnes that's got to be constructed in the future. What we said was we see the next 3 years, 100 million to 150 million tonnes, we have brought that forward. And we actually think that the 150 million tonnes will be within 2 to 3 years. And I can tell you, the activity levels right now are supporting that from a customer interest perspective. Those that you'll meet with, we work with them very closely. And you've seen some of the announcements that have already been done, both internationally as well as North America. So outlook for LNG is positive. And the other indicator that we gave, if you look at our 2022 orders outlook for TPS, we initially came into the year saying it will be sort of flattish to 2021. We actually took that up and said it's about $8 billion to $9 billion for 2022. And we see a robust pipeline for 2023 as well.

Great. And how do you see the impact of Russia-Ukraine impacting the pace of FIDs in gas?

So I think it's actually going to accelerate the international and also accelerate the U.S. When you look at the position that U.S. LNG is in, we've got FERC approval already for 150 million tonnes that hasn't been produced yet. So there's an acceleration of those opportunities. Also, you've got this big demand coming from Europe. And Europe is willing to do what is necessary to continue to rebalance its energy mix. So I think you're going to see that natural gas and LNG is robust. And if anything, I get more convinced that it's a longer cycle than a shorter cycle just given some of the impact of Russia-Ukraine. And it's accelerated what we already knew. There was going to be an energy shortage of supply. This has accelerated that and actually further impacted it because some things in Russia will be coming offline for a short-term period before they're able to be redistributed elsewhere.

Yes. Lorenzo, on day 2 of the conference, I'm going to be moderating a panel on LNG, and Venture Global is going to be participating and one of the co-CEOs. So excited to hear, and Baker...

Is that going to be Bob or Mike?

Bob.

Okay.

Okay. So just given their participation in the conference, I think they're going to talk about some of the unique technology that Baker has provided to them. I know you don't like talking about specific customers. But in this case, I was wondering if you could maybe talk about the modular design that you brought to Venture Global to help them in terms of the speed to market.

Definitely. And I think it goes down to the presence we've had in LNG over the course of the last 3 decades. And people sometimes, I think, misassume that LNG is just starting now. It's been around some time, and we were actually the pioneers at the beginning. And we've consistently invested in technology to be able to improve the offerings we have to our customer base. So it be large, it be mid, or it be small scale, it be stick build or it be modular, we are your provider from a liquefaction capability. And what we did with Venture Global was really a concept of faster LNG by being able to apply a modular solution. And on their Calcasieu Pass project, that's exactly what we did. And so from FID to first cargo, they were able to reduce the time to 27 months approximately. And normally, an LNG project would take anywhere from 3 to 4 years. The concept is, at its simplest, you package everything in one place. So that means you put the coal box. You put the compression. You put the liquefaction. You put it into a module. You ship the module. You attach the module to the other apparatus necessary for the LNG plant. And you turn it on. That's what they've been able to do, and that accelerates the time to market and brings down a lot of the construction that would normally be required at site. So it's a theme that we came up with. They've introduced it, obviously. We are seeing it as being a market segment that is increasing in interest and can be applied to floating LNG as well as onshore. And we see it as part of the portfolio of offerings we have. So we also offer the large scale. And many of you know we're in Qatar with all of their trains. So that would be the big trains, but we offer to all.

Yes. You stole my thunder. I was wondering if you could talk about other projects that could reach FID this year. In 1Q, you booked $3 billion of inbound TPS orders, obviously, with the Venture Global's Plaquemines project. I know they have additional phases. But give us a sense of what are some potential orders for Baker as we look over the balance of the year.

I won't go into specific names because the projects are well-known. But I think we've always said that we see 4 to 5 FIDs, and we continue to see those on a global basis. We do think there's a good pipeline of North America FIDs as well as Mexico FIDs. As you look at some of those, brownfields as well. You've seen Cheniere, and you may have heard from them earlier that they've gone ahead with some of their projects. You've got Cameron LNG that has the potential for another 2 trains. So the visibility is very good. As well as then also new concepts, when you think about what people are discussing on the East Coast of North America, and the #UnleashUSLNG, which is a concept that is gaining traction. And look, the U.S. has a unique opportunity with regards to LNG. There are a lot of factors that go into wherever they are able to do it all, but we feel confident. And internationally, you've still got Mozambique. You've got Tanzania. You've got Qatar, which is moving forward. So our -- let's put it this way. My phone is ringing on a daily basis. And there's a lot of requests with regards to, if we place an order, how quickly can we get the equipment.

Great. Great. And thank you. We do have EQT in our panel tomorrow in terms of unleashing U.S. LNG. So thanks for that commercial. $8 billion to $9 billion of order potential inbound is what you said on the last call.

Yes.

I don't think that's in the transcript or in the prepared remarks, but you'd mentioned that in Q&A. What kind of visibility do you see these types of orders as you think of stretching into the following year, 2023?

Again, as you look at the pipeline of activity -- and not just LNG but also as you look at the increasing traction in the rest of the industrial and energy technology portfolio because I don't want you to walk away thinking we just do LNG. I love LNG. But I also like the other product lines that we have and also the other sectors. And we brought in over $250 million of energy transition orders in 2021. We continue to see that increasing as we continue to develop our CCUS capability, our hydrogen capability, our clean integrated power solutions. Likewise, on the offshore/onshore production and the introduction of our NovaLT, which is an industrial gas turbine that can also run 100% on hydrogen. So the vectors are there to be able to see a continued strength of orders going into 2023 as well. So at this stage, I'd say, outside of a major recession happening, that orders can be at the $8 billion to $9 billion level going 2022 and also 2023.

Great. Let's talk -- let's go back to OFS a little bit. Could you talk about your top line expectations in OFS this year and your thoughts on reaching your 20% EBITDA margin bogey by year-end? And I know that you've been working with some things in the supply chain, chemicals. But how are you feeling about some of those headwinds that everyone has been experiencing kind of clearing up as you go through the rest of the year?

Yes. So as you look at Oilfield Services and, again, you look at what I indicated from an external dynamics perspective, good volume growth, good traction, so we see high single-, low double-digit revenue growth within the Oilfield Services. And our visibility to the 20% EBITDA is very solid from a fourth quarter perspective. And the way we look at it is, what's been the impact of chemicals inflation as well as supply chain constraints? And that's already about 200 basis points. If you look at the impact of China with their zero-COVID policy, and some of that is easing. So as we go through the year, we're already starting to see the indications of the improvement in those situations from a supply chain constraint as well as inflationary pressure. And so feel good about the 20% plus EBITDA going from a 4Q exit rate of 2022. And the OFS team, to their credit, has been on this journey of business transformation. So if you haven't had the unusuals of chemicals, you actually do the math, and they'd be very close to 20% already.

Okay. Let's talk about some of the real interesting longer-term TAMs that you have in hydrogen and CCUS. And a question that we get from investors is, does tightness in traditional oil and gas markets and high energy costs -- is that leading to faster adoption in energy transition? Or is it leading to a more focus from your clients on just traditional energy?

So I think it's going to lead to both in the short term. And either this has been the biggest head fake to say that net zero is important and that the pledges that people have made are going to be kept and companies continue to work towards the net zero or they're going to have to spend money on technologies that reduce emissions. At the same time, there's a need for energy and there's a need for energy now, which is going to drive the continued spending and also the production of hydrocarbons, they'd be cleaner. As you look at it, we're very well positioned because we're in the 2 business areas. And so we think that, that gives us a unique portfolio as we look at the short, medium and longer term. And some of the exciting technologies around CCUS, we have compact carbon capture, hydrogen. You mentioned the TAMs. Just to put it into perspective. Just with CCUS and hydrogen, we see an addressable market opportunity for Baker Hughes of $60 billion to $70 billion by 2030. Now just assume we get 10%, which, again, is a modest share, that's a $6 billion to $7 billion business by 2030. And it's not just oil and gas. That's the other thing that, I think, is important to remember, is CCUS. The capture and the sequestration of CO2 is across all industries. And so the addressable market is in the industrial and energy technology side of the house considerably larger than what historically it's been viewed as.

Lorenzo, I wanted to see if you can give us an update on collaboration with Air Products on hydrogen. You're obviously working with them in Canada and also have an interesting project in Saudi Arabia.

Yes. We've got a very long-term relationship with Air Products. And we actually started with LNG, as you may know, Air Products has the API process, which is used in many LNG facilities around the world. But we've also always had a technological partnership with them. And that means when you think of high-pressure ratio compressors, which are needed from hydrogen application, they come to us. And we've been in hydrogen for the last 30 years. We've got over 2,500 compressors out there. You can decide what color you want to call hydrogen. At the end, you're still going to need the equipment, and you're going to need the technology associated with it. Also, we have gas turbines that can run 100% on hydrogen. So we're actively involved in both the aspect of production of hydrogen as well as then the generation of power from hydrogen. And we've got a number of other offerings. And so we work very closely with Air Products, not only on NEOM in Canada but also the other projects. And of the hydrogen projects that have gone forward thus far, I think you'll find we're pretty much on all of them with the equipment that we provide.

Okay. I want to shift gears a little bit. One of the things that has been maybe surprising to investors is that the company returned $7 billion to investors from 2017 to 2021. I don't know if you get enough credit for that. But tell us how you rank some of your cash priorities. You've been in the market with the buyback. And how do you think about this going forward in terms of the priorities for excess free cash flow between the dividend, delevering, M&A and buybacks?

Yes. So again, thanks for the note of the $7 billion. I don't think we necessarily get enough credit for it, but I would say that so. But our policy has been very consistent. And above all, we want to make sure that we have a good dividend and that we sustain the dividend. And I think to our credit, we're one of the few companies probably that didn't take down their dividend during the downturn and actually maintained it. We also have a view that we should be generating 60% free cash flow from EBITDA on a consistent basis. And 2/3 of that will be returned to shareholders in one way or another. And that's either through dividends, but then also we have had a buyback program. The buyback program has been in place also as GE, one of our shareholders, has been selling down. They've nearly sold through their remaining stake. And so we like our capital allocation model. Again, we'll focus on the returns to shareholders as well as the technology tuck-ins. We've made acquisitions and dispositions over the course of the last few years, $1 billion of dispositions, $1 billion of acquisitions. We like our portfolio. And so I think you'll see us as being very rigorous in retaining the capital allocation we have. We're not a high CapEx to revenue unlike others, but we invest back into our business. And we'll look to remain with the same capital allocation policy.

Okay. And my final question is if you can give us an update on the potential separation of Baker Hughes into 2 distinct segments: oilfield services and equipment and your industrial energy technology segment.

So we like the way in which we've positioned Baker Hughes on the 2 business areas. And last year, at another conference, we indicated these 2 business areas and indicated the aspect of optionality. And we said we will look at what's best from a shareholder return perspective and also returns on the 2 business areas. I'd say sitting here today, that flexibility is good to have. We said it would take 12 to 15 months to analyze. We said it's a lot of also understanding legal entities, tax structures. All of that work is ongoing. At the same time, it's going to be what's best from a shareholder perspective. And I'd say flexibility is what we need to have in this dynamic environment that continues to change. We've got a lot of synergies between the 2 business areas as you look at our customer base, as you look at the solutions that we offer. At the same time, we've also got the flexibility to be able to look at different things as we go forward. So I think we'll do what's best and keep everybody updated from a shareholder return standpoint.

Great. Lorenzo, we're out of time. Thank you very much for your participation in this year's event.

Thank you very much.