Baker Hughes Company

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. Later, we conduct a question-and-answer session, and instructions will follow at that time. As a reminder, the conference call is being recorded. I would like to introduce your host for today's conference, Mr. Chase Mulville, Vice President of Investor Relations. Sir, you may begin.

Thank you, Justin. Good morning, everyone, and welcome to Baker Hughes' third quarter 2023 earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli, and our CFO, Nancy Beze. The earnings release we issued yesterday evening can be found on our website at BakerHughes.com. We will also be using presentation with our prepared remarks during this webcast, which can also be found on our website. 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 risk and assumptions. Please review our SEC filings and website for a discussion of the factors that could cause actual results to differ materially. Reconciliation of operating income and other gap to non-gap measures can be found in our earnings release. With that, I'll turn the call over to Lorenzo.

Thank you, Chase. Good morning, everyone, and thanks for joining us. We were pleased with our third quarter results. and remain optimistic on the outlook. As you can see on slide four, we maintain strong orders performance in both IET and SSPS, with large awards coming from Venture Global in LNG and VAR Energy in Subsea. We also delivered strong operating results at the upper end of our EBITDA guidance range, booked almost $100 million of new energy orders, and generated $592 million of free cash flow. We continue to see positive momentum across our portfolio despite persisting global uncertainty. Turning to the macro on slide five, oil prices have rebounded as the combination of resilient oil demand and production cuts have tightened the market. As a result, the oil market is likely to see inventory draws through the rest of 2023. Continued discipline from the world's largest producers the pace of oil demand growth in the face of economic uncertainty and geopolitical risk will be important factors to monitor as we look into 2024. While oil prices have strengthened during the second half of this year, upstream development plans are mostly set through year-end. Therefore, we remain confident in our 2023 outlook. We still expect international drilling and completion spending to be up year-over-year in the mid-teens and North America up by mid to high single digits. As we have said previously, we expect this upstream spending cycle to be more durable and less sensitive to commodity price swings relative to prior cycles. Higher hydrocarbon prices do provide positive momentum into operators' development plans for next year. While it is still early, and with the caveat there is growing geopolitical risk, we do see another year of solid upstream spending growth in 2024, led by international and offshore markets. In the offshore market specifically, we were awarded 21 subsea trees during the quarter, which includes a significant equipment order from a sub-Saharan African operator. This award expands Baker Hughes' presence in offshore Angola and consists of 11 deepwater horizontal trees, Aptara manifolds, and subsea controls. OFSC also saw continued growth in the North Sea, booking two major multi-year contracts from VAR Energy, one being a long-term contract for well intervention and exploration logging services, and the other being an order to deliver seven vertical tree systems for the Boulder field. Turning to LNG, despite a soft economy, the global LNG market remains fundamentally tight. This tightness is evidenced by the recent LNG price spikes that resulted from the current geopolitical situation and strikes in Australia by LNG workers, which temporarily interrupted operations at several LNG facilities. In the third quarter, global LNG demand was up approximately 1.5% year-over-year. Year-to-date, global LNG demand has reached record levels at just over 300 MTPA. This is despite softer than anticipated gas demand and economic weakness persisting in key LNG consuming markets like Europe and China. Globally, we expect 2023 LNG demand to approach 410 MTPA or up about 2% compared to last year. With estimated global nameplate capacity of 490 MTPA this year, Effective utilization is expected to be over 90%, which has historically represented a tight market. Looking into 2024, we forecast LNG demand to increase by 3%, which should result in utilization rates remaining at elevated levels, as we forecast just 15 MTPA of nameplate capacity coming online next year. Looking out to 2025 and 2026, We see similar trend of supply growth being balanced by demand growth, which should keep global LNG markets at relatively strong utilization levels. LNG prices remain healthy, which has helped to sustain the strength in offtake contracting, a key driver of LNG FIDs. During the quarter, we received an order to provide additional liquefaction equipment and a power island to Venture Global as part of our upsized master equipment supply agreement of over 100 MTPA. As a reminder, we have provided LNG modules for both of Venture Global's 10 MTPA Calcasieu Pass and 20 MTPA Plaquemines projects. Additionally, we were pleased to be recently awarded by Agnot Gas on behalf of Agnot two electric liquefaction systems for the 9.6 MTPA RUES LNG project in the United Arab Emirates. The award is expected to be booked in the fourth quarter of 2023 and was announced at this year's ADAPEC conference. The LNG trains will be driven by Baker Hughes's 75 megawatt brush electric motor technology and will feature our state-of-the-art compressor technology, making RUES LNG one of the first all-electric LNG projects in the Middle East. We are pleased to see continued traction from brush power generation, which we acquired in 2022 to enhance our industrial electric machinery portfolio and to support our strategic commitment to provide lower carbon solutions. Since then, we have secured several additional orders for our electric machinery portfolio, including a contract from WISN in the first quarter for four ELNG compressor trains in Sub-Saharan Africa. These recent successes of BRUSH further validate our strategy of investing in bolt-on M&A opportunities that can complement the current IET and OFSC portfolios, as well as our efforts in new energy. Turning to slide six, through the third quarter, 53 MTPA of capacity has taken FID this year. For 2023, we expect to book LNG orders totaling approximately 80 MTPA, given we sometimes receive larger LNG orders before projects have taken FID. The LNG project pipeline remains strong, both in the U.S. and internationally. Therefore, we expect to see similar year-over-year levels of FID activity in 2024 and could see between 30 to 60 MTPA of LNG FIDs in both 2025 and 2026. Based on existing capacity, projects under construction, and future FIDs in the pipeline, we have line of sight for global LNG installed capacity to reach 800 MTPA by the end of 2030. This represents an almost 70% increase in nameplate capacity from 2022, which provides significant near-term growth for gas tech equipment and further long-term structural growth for gas tech services. Importantly, since 2017, there have been 204 MTPA of LNGFIDs, and Baker Hughes has been selected for 201 MTPA of this new capacity. These projects are scheduled to come online over the coming years, representing an almost 50% increase in our global liquefaction installed base between now and 2028. Turning to slide seven, we have long held the view that natural gas is an abundant, low-carbon, and versatile energy source. It will play a critical role as both a transition and destination fuel. Accordingly, natural gas will be fundamental in satisfying the world's energy needs for many decades to come, while also improving air quality and reducing global emissions, displacing coal in the broader energy mix. We forecast that primary energy demand will continue to grow beyond 2040 due to rising population and increasing consumption per capita in the developing world. However, it is essential to meet this growing demand with affordable and reliable energy to ensure a strong global economy. Today's mix of primary energy demand is still heavily reliant upon coal, which accounted for 24% of global energy demand in 2022. In many Asian countries like China and India, coal is a much higher share of the energy mix. This is the opportunity for cleaner burning natural gas to be paired with renewables and or CCUS as a baseload energy source to displace coal in the energy mix over the coming decades. That being said, all energy sources will be needed to meet increasing energy demand, although with an increasing importance on minimizing global emissions. Importantly, many of our customers' long-term spending plans are beginning to reflect this evolving energy mix. This presents significant customer synergies across our IET and OFSC portfolios, providing a unique opportunity to be an integrated solutions provider as the energy transition takes shape. Turning to slide eight, as we take energy forward, making it safer, cleaner, and more efficient for people and the planet, We are focused on our strategic framework of transforming our core to strengthen our margin and returns profile, while also investing for growth and positioning for new frontiers in the energy transition. Through these key pillars, our company is building and executing a plan to deliver sustainable value for our shareholders and stakeholders. As our strategy and the energy markets have evolved, we have been increasingly focused on the execution of our strategy across three time horizons. Across the first time horizon, which spans through 2025, we are focused on driving enhanced margin accretion through organizational simplification and expanded efficiencies, operational discipline, and optimization of asset and people productivity. Importantly, these actions are well within our control. During this period, Baker Hughes remains poised to benefit from the macro tailwinds that we see across our two business segments. Specifically, we remain well positioned to benefit from the continued strength in the natural gas and LNG growth cycle, as well as the multi-year increases in upstream spending driven by international and offshore markets. We also remain focused on navigating short-term supply constraints, specifically in aerospace sector, and broader macroeconomic and political uncertainty. Throughout Horizon One, we will be focused on transforming our business and simplifying the way we work. Additionally, we remain committed to further developing and commercializing our new energy portfolio, while also evolving our digital offerings. All of this will underpin our goals to deliver 20% EBITDA margins in OFSE by 2025 and in IET by 2026. During the second horizon, which extends out to 2027, the focus shifts towards investing for the next phase of growth, where our strategy is to solidify our presence in the new energy and industrial sectors while leveraging gas tech services growth across our expanding installed equipment base. At the same time, we see upstream and natural gas spending continuing to grow at a lower rate. We also expect an increasing customer focus on efficiency gains and emissions reductions, offering meaningful opportunities for our IET and OFSE digital businesses as we further deploy our LUCIPA, CORDANT, and FLARE reduction solutions during this horizon. To illustrate, The IEA estimates that improving efficiencies by just 10% across oil and gas operations would save almost half a gigaton of CO2 per year, which is equivalent to achieving 5% of the Paris Agreement goals. Also in Horizon 2, we expect to exceed our ROIC targets of 15% and 20% in OFSC and IET, respectively. and drive further margin expansions across both business segments above our stated 20% EBITDA margin targets. Lastly, Horizon Free looks to 2030 and beyond, where our execution over the coming years will position Baker Hughes to compete across many new industrial and energy frontiers, including CCUS, hydrogen, clean power, and geothermal. By this time, we expect decarbonization solutions to be a fundamental component, and in most cases, a prerequisite for energy projects, regardless of the end market. The need for smarter, more efficient energy solutions and emissions management will have firmly extended into the industrial sector. Considering this backdrop, we expect our new energy orders to reach $6 to $7 billion in 2030, and across a much broader customer base. Before turning over to Nancy, I'd like to speak to the positive momentum that Baker Hughes has built during 2023, and where we have experienced strengthening tailwinds in both OFSE and IET. International and offshore markets are set to drive the strongest year of OFSE growth in more than five years, while continued robust LNG activity is set to push IET orders to yet another record year in 2023. And most importantly, our improved operational execution and cost structure and continued commitment to our customers are helping us to deliver on our commitment to our shareholders. With that, I'll turn the call over to Nancy.