Baker Hughes Company

Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE Company second quarter 2019 earnings call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance during the conference, please press star and the zero key on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference. Mr. Phil Mueller, Vice President of Investor Relations. Sir, you may begin.

Thank you, Catherine. Good morning, everyone, and welcome to the Baker Hughes GE Company's second quarter 2019 earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli, and our CFO, Brian Worrell. Today's presentation and our earnings release can be found on our website at bhge.com. As a reminder, during the course of this conference call, we will provide forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. As you know, reconciliations of operating income and other non-gap-to-gap measures can be found in our earnings release. With that, I will turn the call over to Lorenzo.

Thank you, Phil. Good morning, everyone, and thanks for joining us. On the call today, I'll give a brief overview of our second quarter results, update you on our view of the market, and take you through the quarter highlights. Brian will then review our second quarter financial results in more detail before we open the call for questions. In the second quarter, we booked $6.6 billion in orders. We delivered $6 billion in revenue. Adjusted operating income in the quarter was $361 million. Free cash flow in the quarter was $355 million. Earnings per share for the quarter were negative 2 cents, and adjusted EPS was 20 cents. We executed well in the second quarter, and importantly, our financial outlook for 2019 is unchanged from what we communicated previously. Now let me take a few moments to share our view on the macro environment. Beginning with the longer cycle markets, the outlook for LNG remains strong. We have seen approximately 50 MTPA of new capacity reach FID since the fourth quarter of 2018, and the industry is on track to reach the 100 MTPA we outlined by the end of 2019. I'm pleased to report that our technology has been selected for each one of the projects that have reached a successful FID thus far. We remain well positioned for a number of other projects that we expect to move towards positive FID this year. When I look out beyond this immediate investment cycle, I see continued growth and a multi-year opportunity set for BHGE. By 2030, LNG demand is expected to be approximately 550 MTPA. Let me put that into context for you. To produce 550 MTPA, the industry will need to operate approximately 650 MTPA of nameplate capacity. This represents significant growth from today's installed capacity of approximately 380 million tons. Therefore, even with 100 million tons FID by the end of 2019, we expect multi-year order activity through 2025. In the subsea market, we continue to see around 300 trees in 2019. Our base expectation for subsea trees going into the year was roughly flat versus 2018. and with activity levels still well below industry capacity, the space remains competitive. As discussed previously, we are expecting order activity for our flexible pipe business to improve in 2019. I'm very pleased that orders in the first half of 2019 were up significantly versus the lows of 2018, a good sign for 2020 revenues in oilfield equipment. For the shorter cycle oilfield services markets, our outlook has not changed significantly. Internationally, most markets have a positive outlook, as we expected. This is largely driven by the Middle East, where we have seen continued momentum, and the North Sea, which remains a key area of activity for BHG. We also see positive signs across other markets, such as sub-Saharan Africa, Asia Pacific, and Latin America. As all field services' excess capacity is absorbed by increasing activity, we are seeing positive momentum on international pricing. Given contracting dynamics, it will take some time before we see the benefits of pricing increases flow through, but I am encouraged by what I see in the market today. In North America, we expect U.S. production to grow over the coming years, even as CapEx slows. North America and the U.S. land market specifically are very transactional and remain hard to predict even six to nine months out. We share the view that CapEx across North American operators will be down in 2019. The majority of that will be on the completion side, specifically around pressure pumping. We expect the increase in U.S. production in the current year to drive growth in product lines such as chemicals and artificial lift. With that macro framework in mind, our focus is on where we can differentiate ourselves to drive the right returns across our portfolio. Since we formed BHG just over two years ago, our priorities were clear and remained unchanged. From the outset, one of our priorities was to regain share and grow revenues faster than the market in OFS, especially internationally. Our initial focus was in reinvigorating our sales force and prioritizing commercial success. In parallel, we have been winning the right kind of contracts to drive better returns in the business. Now, with our commercial processes in place, the organization is even more focused on high-quality execution for our customers. A couple of examples of how we are creating step changes in efficiency for our customers are ADNOC drilling and Equinol. We highlighted these important wins last year, and we have been transitioning into the execution phase. Our strategic partnership with ADNOC drilling gives us the opportunity to double our presence at ADNOC's conventional development programs. We also have a unique position for the unconventional development, which is expected to ramp significantly in the coming years. We began operating under the new partnership in January, and I am pleased to report that our operational performance today has been very strong. We have now helped to mobilize four rigs and drilled over 100,000 feet with 97 percent drilling efficiency. On the first eight wells, ADNOT Drilling has saved more than 88 days of drilling time. Our performance in the early stages of the partnership is very encouraging. Together with AdNoc Drilling, we are driving the highest level of collaboration and integration. The partnership works extremely well, both at the strategic level with the equity stake and our seat on the board, as well as at the field level. We have transferred BHG employees and assets to AdNoc Drilling, and this has put the partnership on a path to driving higher productivity and efficiency. We look forward to continuing to work closely with Agnot Drilling to support Agnot's 2030 Smart Growth Strategy. On the Norwegian continental shelf, we are working closely with Equinor and have delivered outstanding results in the first six months of the new integrated wealth services contract. As you recall, integrated drilling is at the core of this project and a key driver behind the economic value for both our customer and BHG. In the first half of 2019, we fully integrated eight drilling units in addition to the two that were already existing and have drilled more than 330,000 feet with the best-in-class performance. Our success on this project centers on helping Equinor meet their overall non-productive time objectives and reducing drilling days towards a perfect well time. And thus far, we are progressing on both fronts. BHG is also the first oil field service provider to execute on Equinor's IO-free process to de-man and move to a more automated remote operations model. This process is core to Equinor's strategy as it improves well performance and enables future automation through the aggregation of work. Fundamentally, this requires us to transform the way we work. We are developing new roles offshore, competencies onshore, and software to enable the safe and effective removal of work from the rig site. In the second quarter, we successfully executed the transition to IO3 on the first rig, and we'll continue to roll this out across the integrated rig fleet in the remainder of 2019. We are proud to be the first to deliver for Equinor on this important initiative. As a result of our strong performance today, we have been awarded additional scope on the Goderun and Martin Langer fields. While it's still early, I'm very pleased on how our BHGE team is executing. We have said from the beginning that running our oilfield services business better would be a journey. The first steps on this commercial side have been successful, and now our organization is more focused on executing for our customers. Now let me share some specific highlights of the second quarter with you. In oilfield services, we continue to win internationally in key markets. In Norway, we were awarded two long-term contracts by Equinor for down-home monitoring and sand control screens expanding on our integrated contract awards. These wins are the result of our long track record of strong performance across our completions portfolio in Norway. In the UAE, BHG has been awarded a long-term contract to supply upper completions and well monitoring for 94 wells in Agnop's offshore islands and extended reach drilling project, displacing a competitor. This is the first time we have been awarded this scope since Aetnot's offshore program began in 2014. In Malaysia, we secured an integrated well services contract for 22 wells, displacing the incumbent after 15 years. The same customer awarded DHGE a lower completions contract to deploy our geofoam sand control technology in the country for the first time. In Mexico, E&I awarded DHG a multi-year soft provider contract for artificial lift offshore. We were also awarded a contract by Petronas for drilling services offshore Mexico. Both of these wins demonstrate the strength of our offering in this market and the deep relationships we have with customers globally. Moving to North America, our production levered portfolio is driving growth amid uncertain market conditions. In the Bakken, Marathon awarded DHG a multi-year contract for artificial lift solutions, solidifying our leading position in the basin. Our performance track record was critical in securing this contract award. In Canada, we extended a large contract for production chemicals. Over the last 10 years, we have helped our customer reduce their chemicals cost by 70% per barrel of oil produced, while their production has grown 500%. This is a tremendous result, and it was a critical factor in extending our long-term relationship. In parallel, our OFS team continues to drive innovation and develop technology where we have clear line of sight to differentiation and competitive advantage. Two examples are ShoreConnect and NaviDrill Duramax. In the quarter, we deployed ShoreConnect for the first time with BP in the North Sea. With this fiber optic technology, operators can now achieve real-time distributed monitoring of the entire well. Also in the quarter, we launched our new NaviDrill DuraMax drilling motor. This technology is our latest generation of high-performing positive displacement motors and helps customers improve well construction productivity, specifically in the Permian and the Rockies. In all field equipment, we continue to expand our offerings through Subsea Connect, and remain focused on technology, lowering project costs and delivering for our customers. As I mentioned earlier, our flexible pipe business is an important part of our OFE offering and a critical component of Subsea Connect. In the second quarter, flexible pipe system orders rebounded and were up over three times year over year. This is a very positive sign for us and a core component of the 2020 revenue outlook for all field equipment. In the second quarter, we secured flexible orders for various pre-salt and post-salt fields in Latin America, as well as for important projects offshore Saudi Arabia and China. We also recently signed an MOU with Saudi Aramco to create a new joint venture facility in the Kingdom to manufacture non-metallic materials. We are very pleased to be working closely with this important customer on non-metallic product development that will benefit a wide range of industries and support further innovation and manufacturing in Saudi Arabia. In June, we were very pleased to open our subsea center of excellence in Montreux, Scotland. This well-classed COE will deliver engineering, manufacturing, testing, and services for our customers. The repurposing of this campus is an important milestone for BHG and enables us to offer product innovation from design to delivery from one location, servicing customers globally. The Center of Excellence is the home of our Optara Design Center, dedicated to the design and the development of the Optara Totex Light Subsea System, the cornerstone of our Subsea Connect vision. Lastly, on OFE, I am pleased to announce that this week, together with McDermott, we were awarded extension contracts to provide a joint surf and SPS solution for the ICTIS Phase I LNG field. We will deliver Christmas trees, control systems, distribution equipment, as well as associated life of field services. This award is a further example of our subsea connect approach and our flexible partnership model to deliver improved project economics to INPEX. We remain very well positioned on a number of other subsea projects for the year and expect to see strong second half order intake in our subsea business. In turbo machinery and process solutions, the second quarter saw the acceleration of activity in the LNG market. As mentioned previously in December of last year, Novatec selected BHE's liquefaction technology for its Arctic II LNG project. In the second quarter, we were officially awarded the order for the first two trains, which includes the supply of the gas turbine compressors and generators. Each train will produce up to 6.6 MTPA of LNG. Additionally, in the past few months, two important projects achieved significant milestones. In June, The Anadarko-led Area 1 Mozambique LNG project moved ahead with positive FID for two trains. Through the engineering enhancements and technology investments we have made over the past few years, our compression trains are expected to achieve 6.44 MTPA per train, the highest ever output for this class of turbine. In mid-July, Venture Global announced that it had secured binding commitments for the financing of of its 10 MTPA Calcasieu Pass LNG project. We will provide a comprehensive process solution that utilizes highly efficient mid-scale modular liquefaction trains, supporting Venture Global's low-cost development approach. While we did not book the orders for Mozambique's Area 1, or Calcasieu Pass, in the second quarter, we expect to receive full notice to proceed from our customers in the second half of 2019. Outside of LNG, we had a very strong orders quarter in our on and offshore production segment. We were awarded an important contract to provide compression and oil field power generation equipment for the development of the Antilla field in Algeria. The reliability and availability of our equipment, together with our proven track record and strong local presence in Algeria, were important factors that helped us to win this strategic award. We were also awarded an order to supply a gas turbine-driven generator package for an FPSO offshore India. BHG will provide free of our LM2500 plus G4 gas turbines to produce over 50 megawatts of power for the FPSO's operations. These gas turbines have a proven track record in offshore operations with high reliability and availability and were optimized to meet the reduced footprint requirements an important factor in the FDSO applications. In digital solutions, the second quarter was an important milestone for strategically positioning our digital software business. As you know, we announced a joint venture with Seafree AI in late June. I would like to share in a bit more detail why we're very excited about this strategic relationship. While there are varying approaches to digitizing the oil and gas industry, our focus has always been on helping our customers reduce non-productive time. This leads to improved production, lower maintenance costs, and better safety. We have made great progress and have developed a number of innovative solutions for customers over the recent years. As we moved further down the path of developing our digital offerings, we realized that establishing a relationship where a great AI partner would accelerate our progress and maintain our edge in this important space. Our joint venture with C-Free accomplishes just that. C-Free was recently named as the leader in IoT platforms within the energy sector by IDC Marketscape. C-Free is quickly becoming the standard enterprise AI platform, which makes them the perfect partner for us. Our collective goal is to deliver artificial intelligence that is faster, easier, and more scalable. The C3 suite is currently in use by leading oilfield businesses and in a number of other industries. Together with C3, we will deliver their existing technology to oil and gas customers and collaborate on new AI applications specific for oil and gas outcomes. We are deploying teams of data scientists and oilfield experts into customer environments to deliver solutions that meet specific customer needs. We are extremely excited about the partnership with C-Free and looking forward to working in new ways that deliver the best possible outcomes for our customers. By integrating our strong suite of digital offerings and capabilities along with the oil and gas industry expertise with C-Free's unique AI solutions, we will accelerate the overall digital transformation of the industry. In closing, we delivered a solid second quarter. Our total year outlook is unchanged and we are encouraged by strengthening international markets and a robust LNG project pipeline. Our company is positioned to benefit from multiple growth drivers. We remain focused on our priorities of gaining share, improving margins, and generating strong cash flow. With that, let me turn the call over to Brian.