Baker Hughes Company (BKR) Earnings Call Transcript & Summary

Hey everyone. Marc Bianchi here from the TD Cowen Energy and Sustainability Research team. Delighted to be joined by Chris Barkey from Baker Hughes. Chris is the Chief Technology Officer of the Industrial Energy Technology division of Baker. So we're excited to have Chris here and kind of talk through some of the energy transition opportunities that Baker has. So maybe to kick it off, Chris, could you give us a couple of minute background on who you are and kind of what your mandate is in this role?

Yes, no problem. So I haven't been with Baker Hughes north long term. I'm kind of approaching about 3 years now with the company. And as you said, I'm the Chief Technology Officer of the Industrial Energy Technology Group. And fundamentally, I'm accountable functionally for all of engineering in the group, I'm accountable across the full life cycle of engineering and technology. So all the way from kind of early research, stickiness in the test tube through kind of technology maturation product introduction and then obviously, the technical support for all of our products in service. So I cover technology strategy, I cover functional strategy, i.e., how we do engineering, product and service safety, so product safety first and foremost in our minds, the people strategy, how do we do strategic workforce planning, which is fascinating in the context of the transition because, actually, there are some new skills that we need there. And obviously, I support all of the business segments helping them with their product strategy and making sure we've got everything in place to deliver that. Prior to Baker, I had a 30-year career with Rolls-Royce. And my final role there was Group Director of Engineering and Technology. So again, accountable for all the engineering across Rolls-Royce across all of it, product areas that was civil aerospace, defense aerospace, marine, nuclear and power systems, which is the reciprocating piece. And then in between, I was Chief Executive of the U.K. National Institute for Advanced Materials Science that was great fun. I'm a non-exec Chairman of a specialist high-tech manufacturing company, and was non-exec Director of a company that designs and builds test facilities around the world. So a 35-year career in engineering, a lot around gas turbines and turbine machinery but obviously broadening into the energy transition space. So that's me.

Yes. And it's -- as we're going to talk a pretty good background for what IT does and hopes to do. So maybe you're joining us from India right now. Can you just talk about what you're doing over there and how that leverages sort of the role that you have at Baker Hughes?

Yes. So I mean, there's a bit of day job about what I'm doing. So I'm in Bangalore today. I'm flying to Pune in the morning and then -- the next day, I'm driving, I think it's about a 4-hour drive over to Mumbai. And actually, Baker Hughes is a global company and engineering is a global function. So I have teams all over the world. I've got a global center in Mexico. Obviously, there's a center of gravity around the U.S. in Florence in Italy and other sites in Italy through Europe, through some of the teams on carbon capture, for example, inspections in the U.K. and here in India. So we've got at least 4 significant engineering sites and then a number of smaller manufacturing and engineering sites. So I'm here to visit those. I'm here to find out how we're doing in terms of some of the executional pieces, some of the technology pieces but also spending time talking to some of our strategic outsourced partners, talking to some government agency at a meeting with NASSCOM, which is kind of trade association affiliated with the government to work out how we can maybe position the work in India to get funding. I talk to academia. We're part of a -- I haven't talked to them this trip, but I'm part of -- Baker Hughes is a part of the consortium with IIT Madras on sustainability. So again, pushing that energy forward agenda. And I think tomorrow, I'm going to visit the National Chemical Laboratory in Pune. So lots and lots of stuff. And again, my role is trying to glue some of these things together so that our company strategy aligns with both customers and governments and funding agencies around the world.

Yes. Well, that's great. Maybe -- before we get into some of the transition stuff, you could give a high-level introduction to IET kind of the core competencies of the business, what are the most important end markets today and over time? And just for folks that may not be as familiar with Baker Hughes, the company kind of defines the business overall into 2 broad categories: oilfield services and equipment, which is about 60% and then 40% is industrial energy technology, which is sort of the future and the growth opportunity, whereas the oilfield services and equipment is more traditional upstream oil and gas extraction and midstream services, but just to set it up there, Chris.

Yes, exactly. So as you said, IET, as an entity has only really been in place since October '22, so it's relatively young in its history, but obviously, lots of very mature business units are fundamentally part of it. So it's really split into, I'll say, 3 main areas. There's what you would traditionally know as the gas technology, the turbomachinery equipment side. So that's aero-derivatives, heavy-duty gas turbines, lots of electromechanical equipment with brush, our compressor portfolio, both centrifugal and reciprocating compressors and our modular solutions, in particular, in the LNG space. And then on the kind of the aftermarket side, there's the Gas Technology Services business, that does both full CSA contracts as well as transactional spares, we look at repairs and upgrades, how do we insert technology into our existing fleet and also help with customer training and the obvious field service engineers place. On the Industrial Technology side, it's a collection of 4 critical businesses. There's the valves, pumps and gears business, which again does everything from control valves to pressure relief valves on the safety side. We've got centrifugal pumps, and we got range of gears and bearings. We have a big condition monitoring business that would -- that one of the core brands there is Bently Nevada that does condition monitoring, protection devices, advanced machinery diagnostic and software solutions. We've got an inspections business that does ultrasonic, film, radiography x-ray as well as pipeline inspection and a number of software and services, to go with that. And then we have what's called a PSI, which is the precision kind of sensing and instrumentation, and that does everything from nuclear gamma ray sensors with Reuter-Stokes, pressure transducers with Druck, and then flow gas, moisture measurement with Panametrics. And then the 2 key, what we call, growth areas is Climate Technology Solutions that we'll talk a lot about in the session today in IET digital. And that's where we have coalesce all of our digital offerings under the banner of Cordant, and that's everything from kind of asset health, asset management, asset inspection and asset strategy. So how do you take all of that information and make sure that you kind of maintain process output or maintain machinery uptime. And then we have some optimization pieces around process optimization and energy and emissions management. And our competencies range from the turbo machine as we've talked about, the delivery of modular solutions, the aftermarket and services and all of the things I've just described in the industrial and that allows us to be quite unique, I think, as IET to deliver everything from kind of single instruments all the way through to full up LNG trains with all of the digital and physical services that go with all of those offerings. So there aren't many companies that can do that full kind of wing-to-wing offering. And obviously, our end markets are, as you say, oil and gas, upstream and LNG but also ref and pet other industrials geothermal, clean power and then some of the new energy transition areas like hydrogen CCUS.

So within IET, one of the core offerings, right, is the turbine compressor package offering, I guess, you call in. One of the things that you guys posted that event in Italy earlier this year that several of us attended. And one of the things that kind of stuck out to me was that the evolution of that turbine compressor package in the LNG market and how that kind of continue to push the envelope of efficiency over time and adapt to what customers were asking and the comparison was made to -- that's how the hydrogen and CO2 markets are going to evolve, and there was this sort of idea that as you're on the leading edge of development with that turbine compressor combination, you've demonstrated you can do that. Now we're going to go do that with hydrogen and CCUS. So maybe you could talk about that a little bit and how you see that being leveraged into the transition side of things.

Yes. So I think that there's a couple of lenses on it. I mean as you know, Marc, Baker Hughes is the kind of a leading provider of liquefaction equipment, both the driver and driven, so the driver on the compressors. And we're installed on about 430 MTPA around the world. And I think we are one of the -- or the founding technology partner, and we remain at the forefront of innovation in that space. And as you mentioned, that means staying competitive on gas turbines and compressors being flexible to any application and really drive efficiency, flow and pressure and reliability. And we have a track record of innovation, for example, the introduction of the new LM9000 and some of the new compressor technology that's making its way to market with reduced number of cases. And that's always been a competitive space and will continue to be. But I think some of the things that we've learned there from the specifics of gas turbines and compressors, then start to bleed straight over into hydrogen, whether you're burning hydrogen in the gas turbines, or whether you're compressing hydrogen for either storage or transportation. I think the other thing that, that position has helped us with is expanding our capability to make some of our existing equipment more efficient, more reliable and more decarbonized. So we've got offerings for ELNG. We've got low carbon LNG, we've got flare reduction, but also starts to give us an integration capability of all of those things, which are really important when you start to look at hydrogen, when you start to look at CCUS and when you start to look at integrated clean power, where you're actually bringing together a number of different elements and integrating that into a solution. Then I think just that the industrial know-how and capability and our expertise in engineering, but also the science and the technology foundational piece, just positions us perfectly to take our existing strong position and make it stronger in an energy transition context.

I wanted to ask a bit more about compression and -- this somewhat comes from -- I'm not an expert on compression, but have a couple of companies that have exposure in my coverage. And it seems like there's sort of a wide range of from very specialized and technically advanced to fairly commoditized. And I'm kind of curious, what is Baker's exposure across that spectrum? How do you think about the opportunities or the end markets for that spectrum? And is it important to be -- to have commoditized compression or to maybe be able to pull through other services and do integration, as you mentioned? Or is it okay to just procure those from others and sort of focus on the specialized stuff? Just kind of curious how you think about all that.

I think we, as Baker Hughes are really focused on providing the most technologically advanced compression and turbines into the market. And we're focused on solving some of the biggest technical challenge for compression is part of that solution. And in general, we kind of avoid playing in the truly commoditized markets where I'll use the term, it tends to be a bit of a race to the bottom in terms of profitability. But we certainly want to be in an area that has aftermarket value as well as true first cost value rather than being in a replacement market. And again, that kind of lower end commoditized that market tends to be a replacement one. So given the decades of experience in our unique set of capabilities, that's really where we want to play is in the kind of technology-intensive applications, like liquefaction of hydrogen, that requires highly specialized equipment that actually there aren't that many people around who can do it. And we have lots of experience in that regime. And we're applying both our experience but also the new technology that we're bringing forward.

Okay. You mentioned hydrogen combustion earlier, and you're involved in supplying turbines to Air Products for their Alberta low-carbon hydrogen project and you're going to be combusting 100% hydrogen feed there. My understanding is there's a little bit of a technological hurdle to overcome just in combusting pure hydrogen. Maybe that's -- that aspect as it gets into larger size turbines. So maybe you could just sort of unpack that a little bit for us? Like what is the technological barrier, if anything, for combusting hydrogen? I know that NOx is an emission that comes from that. So how do we handle that? Just maybe talk about some of the concerns around hydrogen combustion.

Yes. I mean hydrogen is an interesting piece. It's got an incredibly low volumetric energy density, it's a very small molecule and that actually provides some challenges in the compression space. But in the combustion space, it also has some challenges. And as you said, the autoignition temperatures of hydrogen and natural gas are actually quite similar. So that's the piece, the similarity. But actually, that's where some of the similarities end. So the flammability range of hydrogen is very wide, it's between kind of 4% and 75% in air. So actually, from a combustion perspective, making it combust is easy, keeping it in a controlled manner is the hard. The flame speed in hydrogen combustion is about 4x the speed -- of the flame speed in natural gas, actually hydrogen burns with the pale blue flame that's nearly invisible in daylight. So almost impossible to detect by human senses. So we need to work out how to manage since in certain environments. And just it has 1/3 of the volumetric energy density versus methane. So that requires higher pressure to contain fuel storage and injection system dimensions, for example. And all the things that you have to deal with in any kind of combustion system, in particular, with dry low emissions, flashback, combustion instability, flame holding, those become even more challenging with hydrogen. And it's not just the combustion itself. It's around all of the auxiliary systems because most of the design standards have been developed around conventional natural gas. And with the physical properties of hydrogen, then the safety of those auxillary systems is obviously really paramount in particular by that low energy ignition of hydrogen and hydrogen blended fuels. So the benefits of hydrogen, obviously, hugely powerful from a CO2 emissions perspective, it basically remove CO2 emissions, is an issue. But the challenge is, as you say, Marc, is the higher NOx emissions. So in an unabated kind of turbine, let's say, an LT16 turbine running on hydrogen, you're kind of probably looking at somewhere between 160 and 260 VPPM of NOx at 15% oxygen. Typically, you would use water injection to abate the emissions, and you drop those numbers by about 100 VPPM, then obviously, some of the work that we're really focused on now is on kind of dry low NOx burning hydrogen, and there our targets are kind of high single digits to 15 VPPM at 15% oxygen. So really important, but again, all of our experience around dry low emissions combustion on natural gas come to play. Combustion expertise, our modeling expertise, our multiphysics modeling of combustion. Our testing facilities, both at a component level subsystem level and full engine level are coming to bear. And actually, we're just finishing off building our new hydrogen storage facility in Florence, so that we can run the engines for the Alberta Blue project that we talked about a bit earlier.

Okay. Super well. We're about 2/3 of the way through the time, and I've only got halfway through my questions, so I'm going to try to speed it up here. So one of the things that you guys have outlined is a target for new energy orders. So this is largely the stuff that you're working on, but also some stuff in the other OFSE division. But I think those orders were targeted $400 million this year for 2023 going to $6 billion to $7 billion by 2030. I think you did like $300 million in the first quarter. So it seems like the $400 million target is pretty easy to achieve, but any update on the expectation there for '23? And then how do we think about bridging where you're going to be in '23 to the $6 billion to $7 billion level in 2030. When we see -- how much progress will we see on that in the '24, '25 time frame.

Yes. So I'm kind of delighted with the first quarter orders where, as you said, we're close to $300 million of orders booked and the large portion of that was in IET, not all of it. I guess the 1 thing I question, I'm not sure beating our $400 million is going to be easy. Certainly, some of those orders were driven by some very large orders with some CCUS offerings in Latin America, CO2 compression for multiple FPSOs and a couple of hydrogen wards in North America. And the trouble is these are types of orders are quite lumpy. So a, getting the exact timing right is quite hard from a forecasting, but also it's not a linear, so you can't go from the $300 million and just kind of draw a straight line for the rest of the year in 4 quarters. But certainly, there's no real update other than what we did disclose during the first quarter call that we believe that we are going to achieve in excess of $400 million, but no specific guidance over that. So I think the -- over the next 3 to 4 years, you'll see the new energy content kind of around 10% of our IET orders. But actually, when we talk about some of the technology that comes in a little bit closer to the middle and the earlier -- the earlier part of the -- the latter part of the decade, we still see that $6 billion to $7 billion range, but that's going to be closer to the end of the decade and you start to see that kind of hockey stick. So the direction of travel is clear. We're starting to build momentum as some of this technology starts to mature, and we remain confident in our outlook year-to-year.

Okay, super. It's helpful that there is an intermediate sort of expectation there because there are some other companies that have put out 2030, 2040 targets and there's nothing between now and then to sort of measure accountability. So I think that's an important thing that Baker has done. On the Climate Technology Solutions portfolio, so this is something that you're very heavily involved in and I want to make sure we give it some time. Can you talk about what that portfolio is, how many investments there are, how much capital is deployed and sort of what you're doing to cultivate these investments? Like what's the process that you bring to the table?

Yes. So I mean, again, the CTS is a mixture of both kind of organic and inorganic. So -- and we've talked a little bit about the organic with some of the compression work and the turbine work. So let's focus on the inorganic. So yes, we have a pretty broad range. I think we've made 12 investments that range from kind of complete acquisition, direct ownership to minority equity investments and in carbon capture, we've got kind of 3C - compact, carbon, capture. We've got ICS which is a kind of an enhancement technology to existing processes. We've got Mosaic, which is our metallic organic framework, direct air capture for now and MSP, which is the mixed-salt process also another kind of potassium and amine-based carbon capture. We've got some utilizations. We're creating e-fuels with HIF and electrochaea, which is a biomethanation process. And then in the hydrogen space, we've got investments in the Kona Nemesis and Levidian. Nemesis is a kind of anion exchange membrane electrolyzer and Levidian is a plasmolysis technology that creates hydrogen and high-quality graphene. So really -- and then clean energy the main 1 there is NET Power, but also investing in some long duration energy storage technology as well. So overall, with those 12 investments, we've -- although we don't disclose each one individually, we've invested somewhere in the region of $0.2 billion to $0.3 billion as a company. And then obviously, there's kind of R&D development money that goes into all of the years out going as we mature that technology. And if you think about how we cultivate the process, really, we follow a pretty standard kind of technology maturation process at a technology level, and that's at both a system level and a foundational level. And that's again where we can bring in, our more traditional Baker Hughes expertise and high-end manufacturing techniques and system engineering and some of our process engineering and kind of marry that with the kind of start-up entrepreneurial attitude in some of these investments. But we also then follow the product development process, including both technical gates and business gates to make sure that we mature at the right time and that we flip from kind of research to product development. We use the technology readiness level scale at [ NASA ] and we aim at kind of TRL6 until we really kind of launch into true product development. And then we can scale resources. We can scale our collaborative conversations with customers around pilots and other collaborations. So it's a pretty robust process, and we're starting to see real traction in some of those technologies.

Yes. And I want to -- we've only got a couple of minutes left here. So I want to make sure you have some time to maybe dive into some of the ones that you think are more interesting. But just real quickly, one of the things I think that Nancy, the new CFO at Baker has said is kind of made the investments and now we're in sort of development mode and probably not going to be deploying a lot of new capital to making investments for CTS. Is that a fair assessment? And how are you thinking about the time line to bringing new investments into the portfolio versus kind of cultivating what you already have?

Yes. So I certainly think we're in a -- what's the word, a digestion phase, if you like. It's not quite snake swallowing a pig, but we certainly have quite a broad portfolio. And we obviously have quite a lot of investment put in at that place. And I wouldn't say that our investment is halting because actually, our investment now rolls through those ventures, through the R&D budget that we put forward for each of those ventures to develop them. So it's certainly not the kind of we've done the investment in CTS. The investment in CTS still goes. But I think really finding the way to incubate and accelerate the ones that we've invested in is the right thing to do for now. Otherwise, you just kind of -- you bat on to broader front. But I will say that both my team and the business teams are continue to be on the lookout that's part of the CTO's role is to make sure we're doing that scouting and if something exciting comes along, if a unicorn kind of rides past me, then certainly, we'll be having the right discussions with Nancy. But I think she's right that we're in that kind of digestion phase, if you like.

Great. Well, maybe just to wrap it up here. As you look across the portfolio, and we'll put NET Power aside just because that is sort of its own destack they're voting today. But across the other technologies, if you think about a milestone or important milestones over the next 12 to 24 months. Is there anything you'd call out that you would expect to hopefully be announcing or be crossing some milestone that would be impactful. Just kind of give us a flavor of what news we should be looking out for?

Yes. And certainly, there's a whole bunch of reasonably significant milestones across all of these investments and some will be public and some won't, if you like. But I hate walking past NET Power because it is one of our exciting ones. So I'll just say for example, we -- but I'll be very brief. We've got the turbo expander with the oxy combustion, and we will be -- we -- by the end of this year, we'll start to see some initial kind of lab testing on the combustion side and the turbo expander and the rest of the equipment is going really well. So I'm pleased with where we are and really excited about that technology and the leading position that we're taking there. Mosaic, which is our metallic organic framework. It's proprietary absorbent, but we think it's incredibly competitive in terms of what else is on the market, in terms of how much airflow is required, how much energy is required, how many cycles it can do in a day and how much actually fundamental CO2 per kilogram, it can absorb when looking at some of the competition. So we've done some large scale, and we're now kind of scaling that up what we call the Bravo unit, and that will run the back end of this year and into next year. So we'll start to really get the kind of the scaling and understand some of the system engineering pieces around that rather than just the technology of the [ muff ] itself. And then Ekona, we're starting to see, again, work on the -- this is the methane pulse pyrolysis technology that produces hydrogen and carbon black. So again, we're starting to see some initial work on testing as we speak. And as that scales up again over the next kind of 12 to 24 months, we'll see some activity there. So lots going on, lots of road maps, lots of programs and we'll keep driving the TRL level and keep reducing the risk and get ourselves to commercialization to really get that 2030 number we talked about earlier.

Super. Well, I'd have to leave it there, Chris, but this has been great. Really appreciate your time. And everybody listening. Let us know if you have any questions, the IR team at Baker is really helpful as well. So feel free to reach out to Jud, Antonio or Chris, if you have any questions for them.

Thanks, Marc. Thanks for your time.