Baker Hughes Company

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company First Quarter 2020 Earnings Call. At this time, all participants are in a listening mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star as in zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jeb Bailey, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to the Baker Hughes first quarter 2020 earnings conference call. Here with me are our chairman and CEO, Lorenzo Simonelli, and our CFO, Brian Worrell. The earnings release we issued earlier today can be found on our website at bakerhughes.com. As a reminder, during the course of this conference call, we will provide forward-looking statements. These statements are not guaranteed to future performance and involve a number of risks and assumptions. please review our SEC filings and website for a discussion of some of the factors that could cause actual results to differ materially. 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, Judd. Good morning, everyone, and thanks for joining us. The first quarter of 2020 was challenging for Baker Hughes and the rest of the industry due to the turmoil and economic fallout created from the COVID-19 pandemic. as well as the significant decline we saw in oil and gas prices. Even with these ongoing disruptions, we produced solid results in our TPS and OFS businesses during the quarter and generated over $150 million in free cash flow despite typical seasonal headwinds. Overall, I'm extremely proud of our team for the level of focus and perseverance through an extraordinary set of circumstances. The strength of our company and diversity of our product portfolio is most apparent in times like these. From the execution of our HSE operations and supply chain teams in the face of a crisis to the continued emphasis on maintaining our balance sheet strength and the strong backlog of our work in our TPS segment, Baker Hughes is uniquely positioned to navigate the challenges we face as an industry. Since we last spoke on our fourth quarter earnings call in late January, it's an understatement to say that the macro environment has changed rapidly. The sudden demand shock to global GDP from COVID-19 combined with the rising global oil supply drove a 67% decline in oil prices during the first quarter. Looking forward, the outlook for oil supply and demand appears equally uncertain. On the demand side, U.S. GDP is forecasted to decline by 40% or more in the second quarter. while global GDP is expected to contract meaningfully for both the second quarter and the full year. This economic shock is estimated to negatively impact global oil demand by 20 to 30 million barrels per day in the second quarter, and by 9 to 10 million barrels per day for 2020 as a whole. On the supply side, recent events have proven even more dynamic, with initial indications in March of a likely increase in production from some of the world's largest producers during the second and third quarters. There are now signs that the dramatic collapse in oil demand and the quickly growing threat to global storage capacity could prompt a quicker supply response with production shut-ins in the United States potentially complementing production cuts that were agreed to by the OPEC plus countries last week. For the natural gas and LNG market, the excess supply the industry encountered earlier this year is likely to be compounded by the decline in economic activity. However, we also agree with the view that the gas markets may correct slightly faster than oil markets, as a decline in associated U.S. gas production could lift North American prices sooner than previously thought. Longer term, we remain positive on the medium to long-term outlook for natural gas and LNG prices, as well as LNG's role as a transition fuel and as a destination fuel. Considering these factors, 2020 will likely continue to be a very difficult year for the energy sector due to the magnitude of near-term oil demand degradation, regardless of the outcome on the supply side in the coming months. Looking into 2021, the outlook remains unclear, and it will largely be driven by the pace of economic recovery from the COVID-19 pandemic and the supply response that ultimately materializes. As a result of this uncertain market, we at Baker Hughes are taking multiple steps to prepare for what is likely to be a sharp reduction in activity levels and delays to project FIDs. For our OFS segment, we now believe that North America drilling and completion spend is likely to contract in 2020 by at least 50% versus 2019. This view is based on our conversations with customers, the wave of recently revised EMP budget announcements, and our own expectations that private operators are likely to act in a similar or more severe fashion than public EMPs. The higher percentage of production-related businesses in our North American portfolio typically acts as a buffer to the more volatile drilling and completion-related product lines. However, we would caution that in the current environment, we may not see as much resilience as operators look to conserve cash. We believe this could impact sales of ESPs and production chemicals as customers shut in wells and lower 48 production likely declines over the next 12 to 18 months. Internationally, we expect that the combination of lower oil prices and impacts from COVID-19 pandemic to contribute to a double-digit decline in spending in 2020 versus 2019. Regionally, we expect Latin America and sub-Saharan Africa to see the sharpest near-term declines, followed by the North Sea In the Middle East, we expect the combination of ongoing projects and the emerging natural gas focus could make spending modestly more resilient. On a longer-term basis, we believe that a key consideration at the other end of this crisis will be the role of North American Shell versus other low-cost producers in meeting global demand. While it's still too early to predict, we believe it is prudent to contemplate a shift in this balance over the next few years. relative to what we have witnessed over the last decade. For digital solutions, which is the other short cycle business in our portfolio, we expect revenue and margins to remain under significant pressure in the near term, before normalizing in the second half of 2020, assuming improving economic activity. As a reminder, we have typically framed ES as a diversified GDP plus business, with exposure across a broad number of end markets, from oil and gas to power and other industrial markets. Given its presence in North America, Europe, and Asia Pacific, and its exposure to end markets like aerospace and automotive, we expect that orders and revenue for DS will likely be meaningfully impacted by global GDP declines, as well as oil and gas trends. For the long cycle businesses in our portfolio, which are primarily driven by LNG and offshore development, we expect that the combination of constrained customer cash flow and economic uncertainty will likely delay a number of projects. In our OSE segment, we expect to see industry subsidy tree orders around 100 trees or fewer versus the last two years of approximately 300 trees ordered annually. For TPS, we expect the uncertain environment to result in fewer LNG FIDs in 2020. as operators delay sanctioning decisions in order to better assess the economic and commodity price outlook. We expect to see a similar dynamic for the onshore, offshore production segment within TPS, with only a few large-scale offshore projects likely to move forward this year. In order to navigate this uncertain environment that will undoubtedly lead to lower activity levels, we have taken decisive actions in our effort to cut costs, accelerate structural changes, and deploy technology and optimize processes that can lower costs for our customers. We have cut our expectations for capital expenditures by over 20% compared to our prior estimate and have also begun to execute on a restructuring plan that we expect to drive around $700 million in annualized savings across our organization. These cost savings will be derived from reducing our headcount, manufacturing footprint, and overhead costs for lower activity levels across multiple geographies. These cost-out initiatives are designed to respond to near-term activity declines, as well as anticipated longer-term structural changes for the industry. Some of these actions are an acceleration of the broader structural changes we have outlined over the past two quarters in order to drive improvement in margins and a greater level of operating efficiency. In addition to the acceleration of many of these initiatives, the early stages of this downturn have also encouraged the deployment of cost-saving technologies with a growing number of customers around the world. One example of this is our capability in remote drilling and completion operations. After establishing a successful remote drilling track record in the Marcellus Basin, the North Sea, and China, we are having promising discussions with several customers about utilizing this technology going forward in an effort to lower operating costs. Another example of pushing forward with new technology is our ability to run a virtual string test, a process that proves the engineering, functionality, and performance of our turbo machinery equipment. We recently performed the virtual string test on the first compression train for Venture Global's Calcasieu Pass project, which used cutting-edge virtual technology to connect 21 people in five cities around the world to facilitate, run, and observe the test. Despite the downturn facing the industry and the cost-out initiatives we are executing, our corporate strategy remains clearly focused on being the leading energy technology company to help the industry facilitate the energy transition. Now more than ever, our customers will demand technology and solutions for increased productivity and efficiency, both to achieve their carbon reduction goals and to navigate the current macro environments. This gives us an opportunity to engage with them on new commercial models focused on outcomes and new technical and operational solutions focused on improving efficiency and maximizing value. Alongside our commitment to energy transition, we will continue to execute on our portfolio evolution strategy to reshape the company over the coming years. The current market environment reinforces our view on this strategic objective. Given the already challenged outlook for some product lines to generate financial returns which will be compounded by the declining commodity prices and forecasted reduction in activity levels, we are accelerating the exit of non-core product lines in multiple countries around the world. For example, in North America, we are shutting down our full-service drilling and completion fluids business and also ceasing operations in a number of smaller, commoditized, completions-driven businesses. Although the near-term focus on our portfolio are divestitures, and some product line exits, we will continue to evaluate opportunities to invest or partner in areas that generate more stable earnings and higher returns. These actions align with our objectives of transitioning the portfolio to a higher mix of industrial and chemical end markets and capitalizing on energy transition-related growth opportunities. Before I turn the call over to Brian, I want to emphasize that the Baker Hughes portfolio remains uniquely positioned. Our strong backlog of longer cycle projects and aftermarket services provide stability while our shorter cycle businesses encounter pressure from the dramatic decline in activity. This balanced portfolio operates across the energy value chain and makes us uniquely positioned to navigate the challenging market environment the industry is currently facing. With that, I'll turn the call over to Brian.