Baker Hughes Company (BKR) Earnings Call Transcript & Summary

[Audio Gap] Baker has really transformed itself with arguably the most diverse business mix in OFSE being a provider of integrated oil products, services and digital solutions. The company is also enabler of the energy transition in multiple business lines with its turbomachinery solutions for carbon capture, LNG in the emerging hydrogen market. Lorenzo, thank you so much for coming in today.

Thank you very much. Good to be here.

So the transformation of Baker Hughes has really been remarkable over the years. The way I look at it is each year you've come here has sort of been like another step I watched. I think right after you did the merger, you were here. So we keep seeing this each year. Earlier this year, you kind of simplified the company into kind of 2 different segments and sort of simplified the structure. Where are we or where are you in the vision of where you want Baker to be? Is this where you wanted to get all along? Is this kind of the model that you're aspiring to?

I'd say we've been on a continuous journey and really pleased of how we've successfully transformed Baker Hughes into a leading energy technology company. And I would say that we're well into it, still some refining that we're going to be doing as we go forward. And some of you may see the investor presentation we posted this morning, which helps to give some more of that refinement. But over the course of the last few years, we've executed a lot. If you look at the margin improvement, 250 bps over the last 4 years increase with only 4% revenue increase. And it's been a steady strategy of really 3 pillars. The first being transformed the core, which is all about driving efficiencies, simplicity, focusing on operational excellence with the customers' service delivery and last year, we announced a $150 million cost out, which was going to be annualized by the end of 2023. We changed from 4 product companies into 2 major segments. And we're executing well on that strategy. So really, that first pillar has been core to the EBITDA growth. Secondly, has been invest for growth and that's really the opportunity of developing further our digital platform. We announced Cordant and Leucipa. Also the new areas of business associated with the oilfield services, the opportunity to bring in some new capabilities with Altus Intervention and continuing to relook the portfolio. And we've done over $1.5 billion of dispositions and we've been able to read out some of the lower performing areas, noncore assets. And the third leg has been really the new frontiers. And as you mentioned, we're into hydrogen, we're into CCUS. We're into geothermal. We're looking at clean integrated power. And you look at this year so far, New Energy orders already above $400 million in the first half of the year. That was the target we set out at the beginning of the year for the total year of 2023. Now we've got an estimate of $600 million to $700 million. So I feel good that we've got the right foundation in place, made a lot of changes on the leadership team as well, which you know. And each year, we've come to this conference, and we've sort of teed up what's next. So we're going to continue doing that and progressing as we go forward as Baker Hughes.

So 1 of the things I find fascinating compared -- I'm always comparing to the last cycle, but this cycle, there's almost no 2 of your peers. Nobody is really alike. Everybody has a very clear differentiation in terms of their plans. I'd love to hear kind of how you're thinking about, say, in the next kind of 5 to 8 years kind of through the end of the decade energy transition is sort of playing through. How is Baker Hughes differentiated from your bigger competitors -- or your other competitors, excuse me, as we see this evolve in terms of your business mix? How does Baker set itself apart from the others?

Well, I think if you look at history, a lot of people would put our peers as in the traditional oilfield services players. And when you look at Baker Hughes, it's very different with the capability that we provide. If you look at a breakdown of our Industrial Energy Technology, which I think is a distinctive difference between us and the traditional oilfield services, you look at Gas Technology Equipment and Services. I mean we play in LNG. And as you've seen, LNG is going through a multiyear upcycle, we see another 65 MTPA this year. We see another 65 MTPA next year and even after that, another 30 to 60 for '25 and '26. So our ability to play in liquefaction with the gas turbines and the compressors is very differentiated. But then you go on and you look at the Onshore and Offshore Production. The ability we have on FPSOs, the ability to have power generation and compression on onshore, very different than the other traditional players. And also, that reduces the potential cyclicality and volatility we see within our business. And we also have the industrial products, industrial solutions and what we did today in the investor presentation is really give a bit more clarity and transparency to the growth vectors that we see in Industrial Energy Technology. So we took what was really a plethora of different elements of reporting and made it into 5 categories. And you've got the Gas Technology Equipment, Gas Technology Services. We've broken out Climate Technology Solutions now, so you'll be able to see the orders and the revenues really associated with a large part of what you have as New Energy. And then the Industrial Products and the Industrial Solutions. So that's going to give both internally more efficiencies, give more accountability much easier to manage. And it's part and parcel of the strategy that Ganesh has had now he's in here 6 months and really coming to the forefront of his strategy.

So Ganesh comes at a very critical time. This is 1 of the key leadership changes that you've made over the last 6 months. He comes in at a critical stage with record backlog, and I know execution is important. So what are his goals? What is he trying to accomplish? Like I guess, how are you marking him? And how would you define success in that role for him over the next several years?

So we've been very clear with the aim of EBITDA margin rate improvement. And as you look at the IET business, there is no reason why the IET business can't be an upper quartile industrial business performance. And if you look at the main mission he has is by '25, '26, get to the 20% plus EBITDA. When you look at the strong backlog we have as well as the improvements he's making operationally, I feel good he's going to be able to do that. And also ROIC above 20% by '25, '26. So those are the main key attributes. But beyond that, it's also the way in which we drive rigor of operational excellence within the business and be able to go through these 5 categories and show the growth and transparency of how we're executing our strategy into the results that you're able to see.

Is there anything structurally that needs to change within IET? Are you satisfied with the footprint, the manufacturing, the processes or anything or is Ganesh kind of going through that now to try to see if anything needs to be changed or updated?

I think as we go forward, we like the structure we have. We like the portfolio we have. Is there some refining that can always be looked at, and that's the next phase he's going into is really better understanding all the product lines and also seeing which ones may be a noncore, but I'd say we're there from a structure perspective. Now it's refining it and also continuing to invest in some of the newer technologies, which, again, are really going to be the growth areas as we go forward into the second half of this decade, because of the New Energy opportunities with CCUS, with hydrogen and clean integrated power.

Is that a different thing altogether from IET? I mean, I know this is New Energy and new technologies, but is that sort of a different skill set?

It's really not. And for us, it's very much linked to the engineering expertise that we have. Compressors, turbines, this is technology that goes into the New Energy. Today, we're already the only company that has a 100% ready hydrogen gas turbine. We have CO2 compressors. So all of this is great stuff that goes into the New Energy areas.

The LNG market, you just mentioned before, another 65 million tonnes per annum the rest this year and next year. I'd love to understand a little bit how you're thinking kind of bigger picture here, a lot of volumes coming on, particularly out of the U.S. over the next several years. How does that -- do those volumes have to come into the market and be absorbed in order to kind of see that second wave coming through? I know you just signed a deal yesterday with Tellurian so you can talk about that as well. But I'd just love to understand how you're sort of thinking about maybe where does the U.S. fit kind of globally? And does this -- like I said, does this have to be absorbed first before you can see another wave?

As you look at the situation and also what's happened over the course of the last few years and also impacted by Russia and Ukraine conflict, there is a realization that natural gas and LNG is required not just as a transition, but a destination fuel. To be able to have affordability, sustainability and security of energy, it's vital that natural gas and LNG continue to play a role. I just came in this morning from Singapore. Gastech, which is a large conference associated with gas, which is taking place. We announced a couple of things. First of all, Venture Global framework agreement going to 100 MTPA plus. And then Tellurian, as you mentioned, relative to their continued execution of the Driftwood LNG. I can tell you that the pipeline of opportunities that we see in LNG don't stop in '23, '24. They continue as you go into '25 and '26, and it's an international game. And you're going to have enough demand to be able to absorb the production that's coming on. If you just look at China, China still has a considerable increase that they're planning on LNG being a provider of energy. And there's still a lot of coal that can be displaced. And that's the benefit that you've seen in the U.S. and Europe, being able to reduce the greenhouse gases and the impact has been thanks to natural gas and also the shift towards LNG. So we see it continuing to be positive and really going into the latter part of this decade as well.

You touched on it before, but outside of LNG, FPSOs, the offshore market are really picking up. Now you had several orders earlier this year on the FPSO market. Can you just talk about your outlook over the next several years? We're seeing, obviously, a major pickup in offshore work, although there's also FPSOs that probably are half full that kind of could be reused and I'm just curious as kind of what you're seeing there in terms of incremental FPSO demand?

No, definitely. And I think it's an area of our business that's underappreciated the presence and strong presence we have on onshore and offshore production. You cited FPSOs. And again, in 2022, very successful on the FPSOs. As we look forward, we see 6 to 7 FPSOs going through every year until the end of the decade. And when you look at the opportunities, Guyana is out there. You saw that ExxonMobil just announced a new FPSO. You've got Suriname, you've got Namibia, you've got Brazil with the pre-salt. So there's a strong tailwind on the FPSO side, but then also on the onshore. When you think about the onshore power generation and also compression that's required, especially in the Middle East and what's happening in the Kingdom, we're continuing to see strong demand and growth as we go forward. So we're not just a single-trick pony. We've got a number of levers of growth within the IET side of the house and then also in OFSE.

So you're guiding orders issued at the high end of the $11.5 billion to $12.5 billion. I think you're saying -- if I'm not mistaken, you said you're expecting a similar level next year. Does this mix change much going forward? Is it still going to be kind of -- I guess does that have any -- does that really influence financially your EBIT, your margins? Or does all of the -- whether it's FPSO or LNG or anything else, is it all relatively the same margin?

The FPSOs and the LNG relatively the same margin, as you know, service calories come through higher. We've always said that it's about 2x. So as we go forward, though, in particular for '24 and '25, you'll consistently see the same type of mix. It's going to vary with the lumpiness of some of the LNG orders. The 11.5% to 12.5% excludes a potential big order this year that could come in on LNG. There's lots of opportunities out there, as you know, with Calcasieu Pass, Cheniere and others. So we're not factoring a large order in there. But then as you go forward into '24 and '25, what's going to start to come in is also the New Energy. And with 600, 700 this year, again, with the Inflation Reduction Act type of policies, we continue to see that momentum. And the margin rate, again, our EBITDA margin rate target is very clear for '25, '26, 20% plus.

So on the New Energy side, 1 of my kind of big takeaways from back in January when we met with you in Italy. You were sort of outlaying all the New Energy in multiple different agreements and JVs and partnerships across. I mean, across -- it seems like everybody -- I mean, in my view, it looked to me like you basically have kind of lines in a whole bunch of different ponds, trying to see what's going to catch, then you probably -- if something kind of picks up, you'd put more capital into 1 area. Am I reading that right? Are you -- it seems like it's a strategy to kind of spread -- putting your chips on a lot of different places, trying to see what works and where the demand is coming from. Did I misread that?

Yes. I'd say we're a little bit more thoughtful about the way in which we allocate capital and also the way in which we place our bets. New Energy, we've broken down into a couple of areas. CCUS so we believe CCUS is going to be a driving factor in the short term with regards to reducing CO2 emissions. So you've got to have the capture technology. You've got to have it both precombustion, post combustion. We've taken a view that modular is going to be very important, and that's where we're focusing is on modular compact carbon capture. And it blends in well with our Oilfield Services business as well because of the subsurface knowledge, the ability to drill a well, understand the cabins, et cetera. And it builds in with the compression because you may have to pipe the CO2. So we've been very conscious where we play from a CCUS perspective. And on the $400 million of orders that we've seen through the first half in New Energy, 50% is CCUS related. Then we've looked at, as you think about hydrogen, we've got a number of plays in hydrogen and also the gas turbine that's 100% ready, but then also new technologies around electrolyzers. We're staying away from commodities. Everybody has to remember, hydrogen has been around a long time, and we know how to work with hydrogen. It's now an aspect of efficiencies and bringing down the cost curve. So we're looking at technologies such as Nemesis that enable us to bring down the cost curve on electrolyzers. And we're active in NEOM. We're active with air products on a number of hydrogen products. Then clean integrated power solutions. Our view is NET Power is a technology where we're providing the turbo expander. It's a very neat technology. It's very much at its starting point, but has the opportunity to be a big game changer. Produce 300 megawatts of clean power generation. Direct air capture, we went into Mosaic. Again, the strategy and the thought process behind it is there is no way we're going to achieve our net 0 goals without direct air capture from the atmosphere. Mosaic is a very good absorbent pellet that enable us to bring in, and we think that's going to be successful. And across geothermal, we've been in geothermal so we continue to develop the capabilities we have. But I'd say we're very selective because where we want to be is technology differentiated. We don't want to be commodity players. So we're going where our history lies and the way in which we develop the LNG market, developing these other markets going forward.

It's really -- it's using the equipment and the technology you've developed over the years in the traditional oil and gas industry, which you're able to transfer into new market.

Exactly. So it gives us a stronger view of success factor. I'm sure some of them will be left by the wayside. But our confidence level in what we invest in is very high.

At some point, are you going to be looking at -- is there M&A in the future if -- when this kind of gets to a more mature level in terms of that business? Could -- is that possible going forward?

I'd say our strategy is more organic with technology tuck-ins and small acquisitions as necessary. I think when you look at what we did with BRUSH last year, what we did with Altus, those are great acquisitions that add to the portfolio and enhance what we have already. Do we need large-scale M&A? No. But will we be on the lookout for technology differentiation? Yes. Sure.

Okay. That makes a lot of sense. I think 1 of the biggest transformations we've seen in Baker over the last, say, 5 years has been in your OFSE business. Maria Claudia has had a lot of work, a lot of work. It feels like we're there, though. I mean can we put a mark in this? Is it -- have we hit success? The numbers would seem to indicate that's kind of back to where it should be.

Don't say that to her. Because, yes, I would say she's been very successful, and we've been very successful as a team, really executing an OFS strategy to date. And as you look at the exit rate at the end of 2022, they'd already been successful in achieving close to the 20% EBITDA. And so every good deed warrants another opportunity. So we put OFSE on her as well, and now she's executing a similar strategy of really restructuring SPS in particular. And so as you look at the areas of well construction, very well positioned. SIM, very well positioned. Production Solutions, well positioned and now she's tackling SSPS.

So on that SSPS side, is the goal to be smaller but more profitable in that business? Are you -- how are you sort of addressing that market? I know you're taking some capacity out and rationalizing some of your facilities there. what's the ultimate goal there? Do you -- I mean is this just about profits and maximizing profits in that business?

So you have to break down SSPS into its elements because we've always been strong in flexibles, and we continue to be strong and actually have a great order backlog on flexibles for the upcoming years. We've been strong on the wellheads and done a lot of the restructuring there. Predominantly where we need to focus on is the trees. And to your point, that's the rationalization that's taken place. We've reduced capacity by 40% to 50%. We're focusing on certain basins, be in Asia, Australasia, West Africa and also some of the East Med, where we've got a strong presence and also where we've got strong customer relationships. And so it is a more refined focus and then margin accretion. And from losing money in SPS, we'll be making money, and we're looking to obviously continue that trend and go up to the high single digit and then ultimately break into the double digit. But overall, it's all calculated in the guidance that we've given by 2025, OFSE at 20% plus EBITDA.

And you've targeted cost rationalization. I think that was -- a majority of that was in there. How far along are you on that so far?

We've made the execution and now you'll see the benefits. Some of them come through at the end of this year, but majority go into next year. And as you look at the $150 million that we announced last year, $60 million of that was within OFSE.

On your OFS side, internationally, what's Baker's -- like where do you differentiate? What's your kind of core strength? Where do you think that you are strongest at on your international OFS business? Is there a particular product line? Is there particular region that you think you're best positioned in?

Well, if you look at Baker Hughes, we are more internationally focused than we are in North America. As you look at 70% of our activity is international, strong presence in Middle East, in particular, in Saudi Arabia, UAE, strong presence in Latin America, Brazil. And where we differentiate is really in the capabilities around production solutions. We have the chemicals, and we're able to actually marry the elements of chemicals as well as the extraction and the ESPs, et cetera, and ALS, making it beneficial for the customer. As you look at well construction, I think everybody knows the capability we have around rotary steerables and on the completion side also, we've got some very advanced tools. So the focus for Oilfield Services has been, again, move away from commoditization, stay focused on what we know and where we can incrementally add value for the customer.

When I was in Saudi earlier this year and I visited your facilities, 1 of the things I was really struck by was a lot of the in-country manufacturing you're doing in Saudi. Can you talk a little bit about that and why that's important? I think you've been talking about something like 70% of your completion tools you're trying to build in country. Can you talk about how you got there? And is that going to be replicated in other parts of the Middle East?

So it will be replicated in countries where it makes sense. And again, you don't want to be everywhere with everything. You want to make sure that you allocate appropriately. Within the Kingdom, I think many people know localization is very important. There is the aspect of IKTVA, which is a score that they give you, and also our ability to serve the customer base there. So we've had a strategy of investing, localizing and then supporting with also the nationals of that country. We've set up facilities for completions, but also for ESPs within the Kingdom, but just like we've set up wellheads as well, and we've also set them up in UAE. So depending on the market, we think localization enables us to be better for the customers, service wise, also from a cost standpoint, being closer is better.

Could you see at some point exporting from Saudi? Is that...

We already do. So if you look at our drill bits that we've been producing for many years in the Kingdom, we actually export them here to the U.S.

Wow, I didn't know that. Interesting. How are you thinking about kind of international markets maybe in '24 and beyond. Like -- I mean, I'm particularly looking at say, last cycle and kind of early last cycle, kind of how we saw this big pickup in spend in the Middle East. Where do you think we are in that? I mean how do you sort of see the duration of that market?

We're in the early innings of what is a longer duration cycle than we've seen before. As you look at this year, again, we see mid-teens on the international side. As you look at next year, we're seeing double-digit. And when you look at what the customers have said, you go to an ADNOC and they've already been clear, they want to get to 5 million barrels. You go to an Aramco, they want to be at 13 million barrels. You go to Brazil and the activity that they've got offshore and their incremental production. Mexico, what they're targeting. So I think international remains strong and in particular, with the national companies.

My last question is kind of regarding the overall structure of the company. A couple of years ago here, you kind of sort of floated the idea of a potential separation at 1 point of kind of breaking up the 2 businesses. Where is your head on that today? How are you sort of thinking about that business in terms of an OFSE separate from IET, are you sort of thinking about that still? Or your timing? How does that...

No, there's no timing. And probably I miscommunicated when I said we were evaluating a couple of years ago. It's always good for a company to evaluate. And what we came to as a firm conclusion is that Baker Hughes is stronger together. There's the opportunity for synergies when you look at it from a customer standpoint, when you look at it from the engineering and technology standpoint, the footprint that we have. And there's a lot that we can do to improve the company from within and lot of self-help. So at this stage, our strategy is clear. The execution we've got to do for '25 and '26, the metrics we've got to hit. And we've got the team very much focused on doing that. And I'd say we've got the tailwinds which are in our favor. Up-cycle and upstream, upcycle in LNG, upcycle in Onshore/Offshore Production and an upcycle in New Energy. And the portfolio gives us the opportunity to play across all of that. And if New Energy is slightly slower, guess what? The other side will be slightly stronger.

Right. Makes a lot of sense. Lorenzo, thank you so much...

Thank you very much.