Baker Hughes Company

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company third quarter 2024 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. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Chase Mulville, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to Baker Hughes' third quarter earnings conference call. Here with me are 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 a presentation with our prepared remarks during this webcast, which can be found on our website. As a reminder, during 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 website for factors that could cause actual results to differ materially. Reconciliations 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. Starting on slide four, we delivered strong third quarter results. highlighted by another record quarterly EBITDA and the third consecutive quarter of at least 20% year-on-year EBITDA growth. EBITDA margins continue to improve at an accelerated pace, increasing year-over-year by 2.7 percentage points to 17.5%, which marks the highest margin quarter since 2017. This strong performance is driven by significant margin expansion across both segments, with clear progress being made toward our 20% EBITDA margin targets. Total company orders remained at solid levels during the quarter, including 2.9 billion for IET. This marks the eighth consecutive quarter for IET orders at or above that level and highlights the end market diversity and versatility of our technologies. Our free cash flow performance was equally impressive during the quarter, coming in at $754 million. Our business continues to perform well, and we remain confident in achieving the midpoint of our full-year EBITDA guidance. Baker Hughes is becoming less cyclical and is demonstrating the capability to generate more durable earnings and free cash flow across cycles, given our balanced portfolio, significant reoccurring IAT service revenue, and improved cost structure. in addition to the company's untapped market opportunities. Turning to slide five, we want to highlight recent key awards in technology developments. In gas technology equipment, we secured two additional FPSO orders, increasing the year-to-date total to four. Sypharm awarded us a contract to supply BCL and ICL centrifugal compressors for Total Energy's all-electric Cambino FSO project in Angola. Separately, IET was selected to provide electric motor-driven compressors for an FPSO project in a strategic Latin American basin. In gas technology services, we secured a multi-decade agreement for an LNG facility in the Middle East to provide extensive aftermarket services and digital solutions, leveraging IET's iCenter. Including this award, Gas Technology Services has booked into RPO over $600 million of contractual service agreements year-to-date, highlighting the value of Gas Technology's lifecycle offering. In New Energy, we continue to see solid order momentum. We booked $287 million during the quarter, increasing year-to-date orders to $971 million. We are on pace to exceed the high end of our $800 million to billion-dollar order guidance, anticipating to book over a billion for the first time. In climate technology solutions, we received the largest award to date for our zero-emissions ICL technology. As part of the UAE's decarbonization strategy, we will supply 10 compressor units to the Vibe Petroleum Enterprise for the Markham gas storage facility. highlighting continued strong global demands for gas infrastructure. In OFSE, we continue to experience strong order momentum in Brazil, further strengthening our relationship with Petrobras. During the quarter, we received multiple contracts to supply flexible pipe systems in Brazil's Santos Basin. The contracts also include multi-year service agreements to support maintenance activities through the lifecycle of the project. We are also seeing increased brownfield activity as more customer spending is allocated to optimizing recovery from existing fields, an underlying trend that we expect to last many decades. This creates a strong backdrop for mature asset solutions. Our integrated offering that leverages OFSC's full range of innovative technologies to enhance total field recovery. Aligned with this trend, we were awarded a sizable multi-year well intervention and completion contract in the Middle East. We continue to make progress on the digital front. OFSC benefited from increased customer adoption of Lucepa, our intelligent automated field production digital solution. A major global operator expanded the use of Lucepa across multiple wells in the Permian Basin, enabling optimized recovery rates through real-time field orchestration to produce lower-carbon short-cycle barrels. Additionally, we announced earlier this month a new strategic collaboration with Repsol to develop and deploy next-generation AI capabilities for Lucepa across its global upstream portfolio. In addition, at the GasTech conference last month, we launched Carbon Edge, powered by IET's Cordent. This end-to-end risk-based digital solution delivers precise real-time data and alerts on CO2 flows across CCUS infrastructure from subsurface to surface. This connectivity enables OFSE and IET customers to mitigate risk, improve decision-making, enhance operational efficiency, and simplify regulatory reporting. Turning to the next slide, it is important to reiterate our long-held macro view of structurally growing energy demand, which underpins our strategy and remains the nucleus of our long-term growth potential. Between now and 2040, we expect global primary energy demand to grow by 10%, driven by population growth and increasing energy intensity across major developing countries. To put this in perspective, There are roughly 8 billion people in the world today. One billion live in OECD countries, with the other 7 billion living in emerging economies. According to the Energy Institute, a person in the developed world consumes, on average, three times the energy of a person who lives in emerging countries. Therefore, even a small increase in energy consumption per capita in the emerging world can have a sizable impact on overall energy demand. While we forecast significant growth in renewables, we believe this increase in primary energy demand will need to be met by multiple sources. Ultimately, we expect renewables to fall short of meeting both growing demand and replacing hydrocarbons to decarbonize the existing energy system. It will take an all of the above strategy, focusing on the emissions and not the fuel source, to meet the increase in energy demand. In our view, Natural gas is a clear winner. It is abundant, low cost, and has lower emissions. This is the age of gas. By 2040, we expect natural gas demand to grow by almost 20% and global LNG demand to increase at an even faster rate of 75%. This backdrop provides a very constructive environment in which Baker Hughes can flourish. We are experiencing a significant increase in gas infrastructure equipment orders and anticipate this trend will continue as many developing economies look to increase the use of natural gas within power generation and industrial applications. In LNG, we continue to see a requirement for 800 MTPA of liquefaction capacity by 2030 to meet increasing global LNG demand. This view is supported by more than 200 MCPA of LNG capacity under construction today and a positive outlook for additional FIDs. Turning to oil, we anticipate moderating levels of demand growth through the end of the decade. In this environment, we expect OPEC spend to accelerate as the focus shifts from greenfields to brownfield developments. We have positioned our OFSE portfolio for differentiated growth in mature fields. playing a leading role in helping customers optimize oil and gas production through our mature asset solutions. With this energy mix backdrop, the focus must be on lowering emissions. We see energy efficiency and decarbonization technologies playing a critical role in achieving net zero goals. We are focusing our efforts to enhance and develop new technologies in these areas and see this as a fundamental growth theme for our company. On decarbonization, we continue to experience good traction across our new energy portfolio, which focuses on CCUS, hydrogen, geothermal, clean power, and emissions abatement. We expect deployment of decarbonization technologies will continue to gain momentum as policy support and technology advances drive improving project economics. With this anticipated strengthening demand backdrop, we remain confident in our ability to achieve our 2030 orders target of $6 to $7 billion. Across our industrial and energy installed base, we are also developing solutions to enhance efficiency and reduce emissions from our equipment. This can be in the form of upgrading turbines and compressors, installing electric motors, or adding zero leak valves. Beyond equipment, we are seeing increased levels of digital adoption for cordent, which improves asset performance, optimizes processes, and reduces energy consumption. Turning to slide seven, I wanted to spend some time discussing near-term market dynamics, where we see customer spend shifting toward global gas and mature fuels as oil demand fundamentals soften. Oil markets have recently been impacted by both supply and demand factors, including slowing global economic growth, resilient North American production, weakening OPEC plus compliance, and geopolitical uncertainty in the Middle East. Even with the uncertain oil macro backdrop, our global upstream spending outlook for this year remains unchanged. In North America, we continue to anticipate spending to decrease year over year in the mid single digits range. And we expect to outperform given our production weighted portfolio mix. Across international markets, we maintain our outlook for high single digit growth this year. Looking beyond 2024, there are many factors that we are monitoring that could drive further volatility in oil prices. On the supply side, we continue to see production increasing in North America, adding to the growth in deep water production that is planned for next year. Combining these variables with planned OPEC Plus production increases, projections point to relatively soft oil fundamentals in 2025. However, geopolitical uncertainty across the Middle East could create added volatility for oil prices. We continue to evaluate our 2025 plans for the company, and we will communicate guidance in January. Based on the current macro and geopolitical environment, we expect next year's global upstream spending to be similar to 2024 levels. As the upstream cycle matures, we expect our customers to increasingly focus on optimizing production from existing assets. providing significant growth opportunities for our mature asset solutions. This leverages our decades of experience, deep domain knowledge, and industry-leading technologies by capitalizing on our expansive capabilities across the OFSE portfolio. By 2030, we estimate that 80% of the world's oil and gas supply will be produced by mature fields. Turning to natural gas, we continue to see strong growth, which will drive demand for our gas-led products and solutions in both OFSE and IET. For LNG, year-to-date offtake contracting has totaled 78 MTPA, which is on pace to exceed the record 84 MTPA achieved in 2022. This contracting strength supports our outlook for 100 MTPA of FIDs between 2024 and 2026. We also continue to see strong demand for gas infrastructure projects, with significant awards this year for MGS III in Saudi Arabia, Hazar Amal in Algeria, and the Markhams gas storage facility in Dubai. We expect non-LNG gas technology equipment orders this year to more than double levels booked in 2023. On the back of another strong year for new energy, we see several projects progressing toward FID in the U.S. and internationally in 2025, giving us confidence that our new energy orders will continue to grow. To conclude on the market outlook, our production-levered OFSC portfolio will benefit from increasing levels of OPEC spending. In addition, our diversified IET portfolio and significant leverage to recurring revenue position us well to drive more earnings and free cash flow stability, which will be supplemented by the structural growth drivers outlined in our long-term energy outlook. Turning to slide eight, I wanted to spend a few minutes discussing the full lifecycle aspect of gas technology, where there is a strong linkage between equipment and services. This connectivity and associated recurring service revenue stream are valuable characteristics of our IET business. that are more aligned with our high-quality industrial peers. Starting from the design phase of the project, we work closely with our customers to select the right equipment to meet the desired operating conditions, while also providing solutions that are safe, reliable, and efficient. This early engagement provides significant visibility into our future equipment orders. After receiving the equipment award, We work with the customer to design the appropriate maintenance plan to optimize their total cost of ownership. This typically includes preventive maintenance, the provision of spare parts, repairs, and field technical support. Compared to the original equipment sale, these aftermarket service agreements provide recurring revenue streams that can generate one to two times the revenue over the life of the equipment. Commercial value of these long-term agreements is linked to performance, reliability, and availability guarantees. This, along with the engineering support over the life of the contract, drives customer loyalty and, in turn, higher margins. In many cases, this recurring service revenue is supplemented by upgrade opportunities on our installed equipment. As the original equipment manufacturer with decades of service experience we have the best knowledge to assess the feasibility of various options. We have successfully executed over 2,000 upgrade projects around the world, optimizing upstream oil and gas production, LNG production, pipeline transport volumes, refinery and petrochemical output, and much more. To meet rising upgrade demand, we are investing in new technology that keeps equipment running beyond its original design life and improve the availability reliability, emissions, productivity, and lifecycle costs of our customers' installed equipment. Our service capabilities will also continue to evolve and provide additional growth opportunities for our advanced service solutions, leveraging the latest AI capabilities and over 20 years of monitoring and diagnostic data from our machines. Through our iCenter facilities, which specialize in the edge-to-cloud applications and remote operations, we are able to improve operating performance, increase asset efficiency, and reduce emissions throughout the life of the equipment. At every stage of this lifecycle journey, we are closely aligned with our customers to ensure they extract the best value from our equipment. In return, we are rewarded with a recurring higher margin revenue stream that is reflective of the differentiated industrial-like aftermarket services provided by gas technology. Looking at slide nine, our gas technology serviceable equipment base, which spans across LNG, onshore, offshore production, industrial, downstream, and gas infrastructure markets, has doubled from 4,400 units in 2000 to about 9,000 units in 2023. Due to the significant growth and the introduction of service business models like contractual service agreements in the early 2000s, our gas technology services revenues demonstrated a notable increase from about $400 million in 2000 to $2.6 billion in 2023. Looking out to 2030, we expect our serviceable installed base to increase by 20% given our robust level of equipment backlog and positive outlook for orders. This significant installed base growth and the multi-decade lifespan of our equipment gives us confidence that we can structurally grow our gas technology services revenue over the next decade. Anchored by gas technology's lifecycle business model, our IET segment is truly differentiated in what sets us apart from our peer group. Before turning the call over to Nancy, I would also like to take a moment to welcome Amerino Gatti to the company as our new executive vice president of OFSE. Amerino has an extensive background in both energy and industrial sectors. He will be pivotal in leading OFSE into the next horizons, building upon the strong foundations laid by Maria Claudia Boras and her team to achieve our 2025 EBITDA margin targets. We are accelerating towards the next phase of our journey. Across our three horizons, we remain focused on executing our strategic pillars, which include transforming the core, driving profitable growth, and delivering for new energy. We are committed to driving margins and returns higher and realizing the full potential of our diversified energy and industrial company. With that, I'll turn the call over to Nancy.