Baker Hughes Company

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only 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, then zero, or 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. Judd Bailey, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to the Baker Hughes Second 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 guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and our 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 gap to non-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 second quarter of 2020 was challenging in several areas as our company navigated through the impacts of the COVID-19 pandemic and the sharp decline in activity levels due to lower oil and gas prices. Despite these headwinds, I was pleased with how our team executed with strong margin performance in TPS, NDS, solid cost-out execution in OFS, solid order bookings in OFC and TPS, and another quarter of free cash flow generation. Although the majority of lockdowns have been easing globally and economic activity likely trough during the second quarter, visibility on the economic outlook remains extremely limited. More specifically, the risk of a second wave of virus cases globally, the reinstitution of some lockdowns, and the potential for lingering high unemployment create an uncertain economic environment that likely persists through the rest of 2020. We expect this economic uncertainty to weigh on the oil and gas markets, which are currently in an excess supply position. Given these factors, we are preparing for potential future volatility while also focusing on both structurally reducing our cost base and implementing a number of strategic initiatives across all of our product companies. In our oilfield services segment, despite the challenging environment, we remain strongly engaged with our customers to proactively offer solutions that lower costs, improve efficiency, and deliver returns that they could use. In North America, drilling and completion activity declined largely in line with the expectations we referenced on our first quarter call, with activity down over 50%. While the U.S. market appears to have troughed, and we started to see some improvements in our production-related businesses in June and July, visibility over the second half of 2020 remains limited, with any incremental activity closely tied to oil prices. Overall, we maintain our view that U.S. drilling and completion spend will be down more than 50% for the full year. Internationally, the decline in activity was higher during the second quarter than our initial estimates. primarily due to quarantines and COVID-related impacts in Latin America and sub-Saharan Africa. As we look into the second half of 2020, we see competing forces with potential for some COVID-impacted rigs to come back online, but likely offset by signs of further activity declines in the Middle East. Based on these dynamics, we now see full-year international drilling and completion spending down 15% to 20%, versus our initial estimates of a 10% to 15% decline compared to 2019. Given this challenging backdrop and the high likelihood that 2021 will also be somewhat subdued, we are focused on what we control in OFS from both a cost and product perspective. Looking at costs, we are accelerating our efforts in remote operations to drive further cost reductions for both Baker Hughes and our customers. improving productivity, and ensuring safety by reducing person-to-person interactions. We have seen a solid increase in remote operations so far in 2020, with over 70% of our drilling operations in the second quarter utilizing remote capabilities, up from 60% in the first quarter and roughly 50% in 2019. The best example of our success in remote operations is with Equinor in Norway. where we have recently implemented their IO3 automated remote operations model on another six rigs, reducing our field service personnel on the rigs by 50%. While the majority of our drilling operations are now utilizing remote capabilities, we still see further opportunities for margin improvement as we are in the relatively early stages of recognizing the full scope of cost and productivity benefits of this technology. Additionally, we see increased opportunities over time as we apply remote operation capabilities outside of drilling and towards broader well construction and completion-related activities. Looking at products within our OFS portfolio, we remain committed to providing the best technology in drilling services and completions, and we see opportunities to capitalize on our strong presence in the production value chain. More specifically, We see opportunities to leverage our strength in artificial lift and production chemicals with our growing competencies in remote operations and AI to provide a comprehensive production solutions platform to help customers optimize production. Overall, I'm quite pleased with the execution and strategic direction of our OFS business in navigating this downturn and positioning for the future. Moving to our TPS segment. the team continues to execute very well despite a challenging environment. With lockdowns in Italy and other parts of the world easing, I'm pleased to report that our facilities in Italy are almost back to 100% utilization, and our schedule for equipment backlog execution remains largely intact. As we indicated on our first quarter earnings call, the biggest impact to our TPS operations in 2020 from the pandemic is in TPS services. which experienced dislocations during the second quarter due to mobility restrictions and the delay of some customer outages. Despite the short-term headwinds impacting services, the team is managing the environment extremely well and has been able to drive productivity improvements, supporting higher year-over-year margins for the business. On the TPS equipment side, our onshore-offshore production segment has held up relatively well, despite the pressure on offshore-related equipment. For the first half of 2020, order activity for onshore-offshore production is up versus the first half of 2019, following several FPSO bookings this year. We also continue to gain traction in our growing industrial gas turbine segment, highlighted by the second quarter award of nine Nova LT gas turbines for a utility power generation project in the Middle East. The Nova LT family provides a more efficient, cleaner power generation solution for a broad range of industrial and emerging energy applications. With our growing range of competitive products, as well as new applications, such as operating on 100% hydrogen, we are confident in the potential growth of this product line. For our LNG equipment business, the near-term outlook remains challenging. but we continue to stay optimistic on the longer-term fundamentals for natural gas and especially LNG. In the near term, LNG FIDs remain uncertain given the macroeconomic environment, with the economic impact of COVID-19 putting pressure on LNG demand and driving further weakness in LNG prices. Despite this uncertainty, we expect there could be one or two FIDs by year-end, with smaller or brownfield projects likely more competitively advantaged. Longer term, we remain firm believers that natural gas and LNG demand growth will outpace oil demand, as natural gas will be both a transition and destination fuel that the world looks for cleaner sources of energy in the coming decades. In fact, we have seen several actions during the pandemic that could help accelerate the shift away from coal and oil to natural gas. For example, we see signs that the lower cost of natural gas is helping to drive incremental demand as LNG prices in most economies are not only cheaper than oil, but also cheaper than the coal equivalent in some instances. Furthermore, a number of government pandemic stimulus packages have included requirements for green energy or a focus on energy transition, including LNG. For example, clean energy features heavily in the European Commission's stimulus package, and in Germany, LNG trucks have been granted toll road exceptions into 2023. The positive long-term outlook for LNG reaffirms our strategy to position Baker Hughes in our TPS segment to capture the high-value, higher technology opportunities along the gas value chain. We see quite a few opportunities across our TPS portfolio, including the introduction of more efficient power generation and compression technology to help minimize carbon emissions for new projects and for our current installed base of LNG equipment. For example, one of the key differentiators of our LM9000 aeroderivative turbine is its lower carbon footprint and efficiency, which was recently validated by the completion of the first engine to test with Novatec for the Arctic LNG2 project, an important milestone for the ongoing development of this leading turbine technology. With our installed base of over 400 MCPA of liquefaction equipment globally, our TPS service franchise is uniquely positioned to offer upgrades and technology services that can extend equipment life, enhance equipment availability and performance, and contribute to further emissions reductions and controls. Some recent examples include upgrading our gas turbine to increase fuel flexibility, specifically around hydrogen blends, and injecting new technology into equipment with a focus on reducing potential methane leakages. Overall, we are very excited with the direction of our TPS franchise and how it is positioned to benefit from the growth in natural gas and LNG demand as well as the growing demand for lower carbon solutions. Next, our digital solutions business is executing well in the face of weakness across all of its major end markets. The slowdown in the oil and gas markets, specifically in the midstream and downstream areas, is negatively impacting volumes for our Bentley Nevada and process and pipeline services businesses. Going forward, a key focus for DS will be to leverage the strong condition monitoring technology at Bentley Nevada to drive new opportunities in the oil and gas, renewables, and industrial sectors. Broader industrial activity trends are also negatively impacting our inspection, measurement, and sensing businesses. Outside of oil and gas and power, the aerospace segment is a significant end market for DS and has also been the weakest as global flight activity remains far below historical levels. Conversely, the electronics markets and some other industrial end markets are showing improvement, but visibility is limited. On a more positive note, customer activity in the Asia-Pacific region has rebounded well from the lows of the first quarter. Despite these challenges, our team is executing incredibly well, taking decisive concessions and delivering strong sequential margin improvement in a difficult environment. Finally, on oilfield equipment, the business faces challenges on several fronts. With lower oil prices and significant macro uncertainty, major operators are reprioritizing their portfolio of potential projects and investments, which is delaying the sanctioning of many offshore projects. As a result, our outlook for the subsea tree market remains muted, with an expectation for approximately 100 trees being awarded to the industry in 2020. We see this uncertainty extending into 2021, as majors and NOCs reassess their portfolios and capital allocation priorities. We continue to see strength in an offshore FlexWalls offering with strong orders performance in the second quarter in Brazil and Saudi Arabia. Orders for the first half of the year are roughly flat versus 2019, and FPS remains well positioned not only in Brazil, where we have seen success, but also in the rest of the world, where our FlexWalls offering continues to gain traction. The continued weakness in floater activity is also likely to linger through the second half of 2020. which would negatively impact service activity in our subsea drilling systems business. Budget and mobility constraints are also negatively impacting intervention work and other subsea services across our installed base. As these challenges persist, we remain focused on identifying ways to right-size the business and improve profitability across OFE. Overall, we are executing on the framework we laid out on our first quarter earnings call. We are on track to hit our goals of right-sizing our business and generating positive free cash flow for 2020 and to achieve the $700 million in annualized cost savings by year-end. We continue to explore and identify further ways to make all of these savings structural in nature. We believe that the expanded use of remote operations and multi-skilling will drive greater productivity and a step change in service delivery capabilities. ensuring the health and safety of our employees during the pandemic, and greatly reducing our resource needs in a longer-term recovery. We also continue to improve our supply chain organization and procurement processes by identifying and eliminating redundant infrastructure and excess inventory. Although we are managing through this downturn and focused on ways to structurally improve our cost base and productivity levels, I would reiterate that our portfolio evolution and energy transition very much remain a strategic focus for Baker Hughes. Over the past two years, we have evaluated the key growth areas associated with energy transition and analyzed where we can leverage our core competencies and technology to capitalize on these opportunities. As we go through this process, we are committed to taking a disciplined approach and focusing on areas that can provide growth but also good financial returns. We are evaluating a range of opportunities, and see potential in a few key areas that include carbon capture, mechanical energy storage, and various parts of the hydrogen value chain. In all three of these, we believe that our turbine compression, valves, subsurface, monitoring and detection technologies can play a key role in providing solutions. In fact, Baker Hughes has been involved in CCUS projects for more than a decade in our OSS segment. and our turbo machinery technology is currently deployed in the world's largest CCUS project in Australia. Although it's still early days, I'm excited about the level of engagement we are having with customers on these topics, as well as multiple trials around the world in which we are currently participating. Before I turn the call over to Brian, I want to take a moment to thank our employees for their resilience and commitment to delivering for our customers, shareholders, and each other. all while balancing the potential threats and implications from the coronavirus pandemic and the broader challenges in the economic environment. I'm extremely proud of the Baker Hughes team during these difficult past few months, and we have once again proven our collective strength as we have adapted in the face of unprecedented market conditions and COVID-19. Baker Hughes' portfolio operates across the energy value chain, which makes us uniquely positioned to navigate the challenging market environment the industry is currently facing. We remain focused on execution, disciplined on cost actions, committed to supporting our customers, and delivering for our shareholders. With that, I'll turn the call over to Brian. Thanks, Lorenzo.