The Baker Hughes Second Quarter 2023 Earnings Conference Call was hosted by Mr. Jud Bailey, Vice President of Investor Relations. Chairman and CEO Lorenzo Simonelli and CFO Nancy Buese were also present. The earnings release can be found on the company's website. There was a discussion of the factors that could cause actual results to differ materially. The company maintained order momentum and delivered strong operating results, booked $150 million of New Energy orders, and generated $620 million of free cash flow. Economic uncertainty is driving commodity price volatility globally.

Despite a decline in oil prices in the first half of 2023, the outlook for global upstream spending is positive due to strong balance sheets and a focus on returns versus growth. The LNG market is also optimistic with Europe and Asia leading the demand growth and 53 MTPA of FIDs so far this year. The potential for this LNG cycle to extend for several years is expected with project visibility out to 2026 and beyond.

Baker Hughes is expecting natural gas and LNG to play a key role in the energy transition, and their diverse portfolio of long and short cycle businesses with leading technologies allows them to weather a choppy macro environment. They are taking steps to optimize their corporate structure and drive higher margins and returns, such as reducing costs and re-wiring the organization. They have completed the actions required to achieve the first $150 million of their cost-out target and are aiming to exceed 20% EBITDA levels for each business segment in the next few years. They are also focusing on capitalizing on favorable market trends in the near-term and long-term.

Baker Hughes is well-positioned to capitalize on multiple growth vectors in the near-term, such as the international and offshore growth cycle, LNG sanctions, and New Energy opportunities. The company's portfolio and customer relationships have been strengthened since 2017, enabling them to offer a range of solutions for onshore and offshore production applications, integrated solutions for well construction and production, and power generation and compression for FPSOs. They are also seeing growth opportunities through further investment in natural gas value chains, New Energy, and integrated solutions that combine subsurface capabilities with highly engineered surface technologies and digital offerings.

Energy companies are transitioning to decarbonize and are collaborating on new energy applications, such as CCUS, geothermal power, and blue ammonia. Oilfield services and equipment have seen strong growth in Latin America, the Middle East, West Africa, and the Eastern Mediterranean, though the North Sea is lagging due to fiscal uncertainty in the U.K.

Schlumberger's OFSE business in North America is largely unaffected by the decline in oil and gas prices and the North American rig count, as its customer base is mainly made up of major oil companies and public E&Ps. Despite this, the company is still experiencing strong growth across its OFSE product lines, with products like SONUS, AccessESP, and Subsea & Surface Pressure Systems. During the second quarter, Schlumberger won two awards with key customers in the Middle East for its AccessESP technology and an award with Eni for eight subsea trees and three Aptara manifolds.

Baker Hughes has seen strong momentum in the OFSE and IET businesses, with double-digit revenue growth and an expansion of EBITDA margins by 150-200 basis points expected for 2023. In the second quarter, IET achieved $3.3 billion in orders, Gas Tech Equipment achieved $1.6 billion in orders, including almost $900 million of LNG awards, and Baker Hughes was awarded a major order from MODEC for the BM-C-33 project in Brazil. In addition, over $100 million of orders were booked in IET for Air Products' Louisiana Clean Energy Complex. Combined cycle solutions are being used to reduce carbon emissions for FPSOs, with this project expected to reduce emissions by more than 20%.

In the second quarter of 2023, IET saw increased traction in the blue ammonia space and secured multiple orders in the Middle East, including awards to supply syngas and ammonia compressor trains and centrifugal pump trains. They also secured an agreement to deliver asset protection and monitoring hardware, software, and services for a floating LNG project offshore Malaysia, and received their first major award for Cordant from a large ammonia producer in the Middle East. Profitability in Industrial Tech is experiencing a solid recovery that is expected to continue throughout the year. IET is also making progress on its strategic initiatives around digital and growing outside its traditional customer base.

Baker Hughes made a long-term maintenance program contract during the second quarter and has a record RPO of $27 billion. They also published their 2022 Corporate Sustainability Report, which showed they are on-track to meet their Scope 1 and 2 net-zero emissions goal by 2050. They have enhanced their reporting with over 20 new metrics and have reduced their Scope 1 and 2 emissions by 28%, compared to their 2019 baseline year. They are also now reporting on 10 categories of Scope 3 emissions.

Baker Hughes had a strong second quarter, with total company orders of $7.5 billion, up 28% year-over-year, and total company revenue of $6.3 billion, up 25% year-over-year. The company had an impressive book-to-bill ratio of 1.2, and IET book-to-bill of 1.3, for eight consecutive quarters. Remaining Performance Obligation was $31 billion, and OFSE RPO ended at $3.5 billion, while IET RPO ended at $27.5 billion. The company is focused on improving their margins and return profile as they grow.

Operating income for the quarter was up 23% sequentially and 68% year-over-year, with an adjusted operating income rate of 10%. Adjusted EBITDA was $907 million, up 16% sequentially and 39% year-over-year. Corporate costs were down $3 million sequentially and $11 million year-over-year. Depreciation and amortization expenses were $276 million. Net interest expense was $58 million and income tax expense was $200 million. GAAP earnings per share was $0.40 and adjusted earnings per share was $0.39. Free cash flow for the quarter was $623 million, up $426 million sequentially and $476 million year-over-year.

This paragraph discusses the company's performance in terms of free cash flow conversion from adjusted EBITDA, their balance sheet, capital allocation, and cost reduction plans. They have maintained their quarterly dividend and repurchased 3.6 million Class A shares, and are targeting free cash conversion from adjusted EBITDA of over 50%. They have also executed all actions necessary to achieve their $150 million cost-out target by the end of 2023, and are looking into potential further cost reduction opportunities in 2024 and beyond.

Oilfield Services and Equipment performed better than expected in the quarter due to higher revenue and margins in SSPS and growth in International OFS markets. OFSE orders and revenue were both up year-over-year, with international revenue increasing 10% sequentially and North American revenue increasing 5% sequentially. SSPS orders were up 48% year-over-year and are up 54% for the first half of 2023. However, profitability in the chemicals business was lower than expected and there is still work to do in order to get margins in line with historical levels by the end of the year. The ultimate objective is to drive EBITDA margins for each business segment above 20%.

OFSE had a strong quarter with operating income up 12% sequentially and 68% year-over-year, as well as EBITDA up 10% sequentially and 35% year-over-year. IET also performed above expectations with orders of $3.3 billion down 7% sequentially and up 33% year-over-year, driven by higher margin rates from Industrial Technology revenues and Gas Technology Services. Major awards during the quarter included equipment for the Rio Grande LNG project and FPSO equipment for the BM-C-33 project in Brazil. RPO for IET ended at $27.5 billion, up 4% sequentially.

Revenue for the quarter was up 34% year-over-year, with Gas Tech Equipment and Services revenue increasing 80% and 21%, respectively. Industrial Tech revenue was up 9%. Operating income for IET was $311 million, up 32%, and EBITDA was $363 million, up 28%. R&D spend is increasing to develop early-stage technologies such as CCUS, hydrogen, and clean power, and the outlook for both OFSE and IET is optimistic with solid growth tailwinds and operational enhancements.

Baker Hughes expects third quarter revenue to be between $6.4 billion and $6.6 billion and EBITDA between $930 million and $990 million for the full year, with revenue between $24.8 billion and $26 billion and EBITDA between $3.65 billion and $3.8 billion. OFSE expects third quarter revenue between $3.8 billion and $4 billion and EBITDA between $635 million and $695 million, with revenue between $15.1 billion and $15.7 billion and EBITDA between $2.5 billion and $2.7 billion for the full year. IET expects third quarter revenue between $2.45 billion and $2.75 billion and EBITDA between $355 million and $415 million.

Baker Hughes is expecting increased orders, revenue, and EBITDA for IET in 2023, with a range of $11.5 billion to $12.5 billion, $9.65 billion to $10.35 billion, and $1.4 billion to $1.6 billion respectively. The major factors driving these ranges are the pace of backlog conversion, supply chain delays, foreign currency movements, and the level of R&D spend related to their New Energy investments. Additionally, they are lowering the expected tax rate range by 250 basis points. Jud Bailey is moving on from the Investor Relations role to become their new VP of Business Development and Chase Mulvehill is joining from Bank of America to replace him.

Lorenzo Simonelli explains that the Industrial Equipment and Technology (IET) business has seen an increase in orders this year, leading to an increase in guidance of $1 billion. He attributes this to a large pipeline of opportunities and improved visibility for the year and the next few years, as well as the solidification of project timing.

Baker Hughes is seeing strong order momentum in new energy orders, with $150 million booked in the second quarter and on track to reach $600-$700 million by the end of the year. This order momentum is driven by CCUS and hydrogen projects, as well as new combined cycle technology and blue ammonia. LNG is also playing a key role, with robust customer discussions and offshore production opportunities.

Lorenzo Simonelli of Baker Technology expects orders to remain near the 2023 guidance of $11.5-$12.5 billion for the next couple of years due to strong LNG FID outlook, offshore opportunities, and New Energy. He believes that natural gas is a transition and destination fuel and that the best way to transport it is through pipeline or LNG, which has solidified opportunities for 2025 and 2026.

Nancy Buese provided an explanation of the factors that have affected the company's Q3 guide, including higher R&D spend for IET and the performance of Gastech Services and Industrial Tech. She also mentioned that the company is keeping an eye on North America and whether it weakens. The company is expecting to provide updates on cost reductions at a later date.

Nancy Buese has outlined the success of the program in the first half of the year, which has created $150 million of run rate savings. Going forward, the focus will be on optimizing organizational design and structure, improving processes and internalizing better efficiency, and upgrading financial and operating systems. These efforts will result in net savings and be visible in the company's margin profile.

Lorenzo Simonelli and Marc Bianchi discuss the multi-year journey of Baker Hughes and the expectations of margin expansion for the SSPS business. Lorenzo states that pricing gains within traditional OFS are expected to be seen later this year and into 2024 as contracts roll. He also mentions that cost inflation has been an issue in keeping a lid on OFS incrementals.

Nancy Buese and Scott Gruber are discussing the pricing outlook for the business in the coming year. Buese expects that there will be good incrementals for the international part of the business due to cost savings and efficiency improvements, and that they are hoping to see some net pricing benefit in the coming year. However, it is too early to tell what the macro backdrop will be.

Lorenzo Simonelli is confident in the outlook of the offshore development industry for the next two to three years, citing over 200 tree awards and the market being on track to exceed 300 for the second consecutive year. He is pleased with how Baker has restructured and recentered their business around key regions and customers, and is monitoring potential awards to further increase their backlog. Nancy has been working to improve the financial plumbing of the organization, which has been reflected in the free cash flow conversion to start the year.

Lorenzo Simonelli explains that the $1 billion increase in the guide for the year is due to a combination of factors, including project timing on the LNG side, strength in the offshore marketplace, an increase in new energy, and momentum in the industrial tech sector. He also mentions that Middle OFIC business saw 9% sequential growth due to the team's focus on customer activity and service performance.

Lorenzo Simonelli provided more detail on the outlook for LNG FIDs in 2025 and beyond. He believes that the need for LNG will continue to increase, and that 800 MTPA will be needed by 2030. He also noted that FIDs will be coming sooner due to the current environment and situation in the marketplace. He mentioned a number of projects including Cameron, Port Arthur, Commonwealth, Tellurian, and others that are imminently looking at FIDs.

This summary was generated with AI and may contain some inaccuracies.