Baker Hughes Second Quarter 2022 - Earnings Conference Call Prepared Remarks

Second Quarter 2022 - Earnings Conference Call Prepared Remarks

Jud Bailey Baker Hughes - VP of Investor Relations

Thank you.

Good morning everyone, and welcome to the Baker Hughes Second Quarter 2022 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 website for a discussion of the factors that could cause actual results to differ materially.

As you know, reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release.

With that I will turn the call over to Lorenzo.

Lorenzo Simonelli Baker Hughes - Chairman & CEO

Thank you, Jud. Good morning everyone and thanks for joining us.

Our second quarter results were mixed as each product company navigated a different set of challenges ranging from component shortages and supply chain inflation to the suspension of our Russian operations. While OFS and TPS are managing through the current situation fairly well, OFE and DS have both experienced more difficulty.

As we look to the second half of 2022 and into 2023, the oil markets face an unusual set of circumstances and challenges. On one hand, the demand outlook for the next 12 to 18 months is deteriorating, as inflation erodes consumer purchasing power and central banks aggressively raise interest rates to combat inflation. On the other hand, due to years of underinvestment globally and the potential need to replace Russian barrels, broader supply constraints can realistically keep commodity prices at elevated levels, even in a scenario of moderate demand destruction.

1

Baker Hughes Second Quarter 2022 - Earnings Conference Call Prepared Remarks

As a result, we believe the outlook for oil prices remains volatile, but still supportive of relatively strong activity levels as higher spending is required to re-order the global energy map and likely offsets moderate demand destruction in most recessionary scenarios.

In the natural gas market, the re-drawing of the energy map is having an even greater impact, with sustained high prices, a frenzy of offtake contracting activity, and a growing pipeline of major LNG projects that seem likely to reach FID. There has been a significant increase in long-term LNG offtake agreements in the US, totaling over 35 MTPA during the first half of 2022. For comparison, year-to-date LNG contracting activity is three times greater than the average annual US contracting volume going back to 2015.

This sharp increase reflects the growing importance of natural gas and LNG as governments re- balance their priorities between sustainability, security, and affordability. We believe that solving this energy trilemma will be another long-term positive for natural gas. This theme will continue to grow in importance as countries around the world face acute energy shortages and are working to avoid industrial interruptions in certain sectors of their economies.

Overall, we remain very positive on the outlook for natural gas. We also believe that a significant increase in natural gas and LNG infrastructure investment is required over the next five to ten years in order to make natural gas a more affordable and reliable baseload fuel source that can be paired with intermittent renewable power sources.

Against this uncertain macro backdrop, Baker Hughes is preparing for all scenarios and will continue to execute on our long-term strategy. If commodity prices remain resilient as we expect, our portfolio is well positioned to benefit from a strong LNG cycle and a multi-year upstream spending cycle. We will also continue to invest in our energy transition and industrial initiatives, while also returning 60 to 80% of free cash flow to shareholders.

However, if the global economy experiences further turbulence and commodity price volatility, we believe our balanced portfolio of short and long cycle businesses will enable us to generate peer- leading free cash flow and allow us to maintain our policy of returning cash to shareholders. In addition to a strong backlog that affords cash flow visibility, we have a best-in-class balance sheet that allows us to invest opportunistically, either through share buybacks or tuck-in investment opportunities. In either scenario, Baker Hughes is well positioned to create value for shareholders.

From an operational and strategic perspective, we were active over the first half of the year, executing on a number of exciting tuck-in acquisitions and new energy investments such as Mosaic, Net Power, and HIF Global, which position us in key technologies for the future. We have also been focused on setting up internal commercial structures like CTS and IAM, which will help us to capitalize on opportunities in the energy transition and industrial areas.

In addition to these initiatives, our time is increasingly focused on optimizing and formalizing our operations around the two core business areas of OFSE and IET. As the energy markets continue to evolve, it is becoming clearer that aligning across these two core areas makes strategic sense. We are focusing on ways to simplify our process and systems, with a distinct focus on productivity and efficiency across our operations, as we look to drive additional synergies between both TPS and DS, and OFS and OFE. We believe that this will be a significant area of opportunity for Baker Hughes, as we look to further streamline our organization and position it for the future.

2

Baker Hughes Second Quarter 2022 - Earnings Conference Call Prepared Remarks

Now, I will give you an update on each of our segments.

In Oilfield Services, activity levels continue to trend positively in both the international and North American markets and net pricing is being achieved across multiple product lines. We also see improving visibility for growth in some key areas into 2023 and beyond.

In international markets, broad diversified growth continues, with recent strength in Latin America, West Africa and the Middle East. We expect growth in most international markets to continue, with the strongest increases likely to come from the Middle East over the second half of the year and into 2023. Producers in the region are committed to an orderly increase in production and are beginning to execute drilling plans to improve both oil and natural gas production capacity in the region.

In North America, activity and pricing remains strong, with the rig count continuing to track above our expectations. We expect continued modest growth in rig count in the coming months, but the outlook for 2023 will be dependent on broader macro factors and oil prices.

Operationally, I am pleased overall with the progress made by the OFS team during the second quarter in navigating the challenges related to Russia, as well as supply chain constraints and inflation. During the second quarter, the suspension of our OFS operations in Russia accelerated quicker than anticipated as we moved closer to reaching an agreement to sell our OFS operations in the country.

Outside of the impacts from Russia, our OFS business executed well in the second quarter, with improvements in our production chemicals business. After being weighed down for several consecutive quarters by supply chain and inflationary impacts, chemicals saw a sequential increase in margins and has a line of sight to further increases in the coming quarters.

Going forward, we expect to continue to drive margin improvement despite the cost headwinds from the suspension of our operations in Russia.

Moving to TPS, the second quarter represented another solid performance in orders, where we remain on track to generate $8 to $9 billion in orders in 2022 with an optimistic view of 2023. Operationally, TPS performed well despite some revenue impacts from the suspension of operations in Russia, as well as some project shipment delays across both equipment and services.

We continue to believe that we are at the beginning of another constructive LNG cycle, particularly for US projects. Including the FID of VG's Plaquemines Phase 1 at the end of May and Cheniere's FID of Corpus Christi Stage 3 in June, we continue to expect 100 to 150 MTPA of LNG FIDs over the next two years with additional FIDs in 2024 and 2025.

During the second quarter, we were pleased to be awarded an order to provide seven mid-scale LNG trains to support the Stage 3 expansion project of Cheniere's Corpus Christi Liquefaction facility. Each train is comprised of two electric motor-driven compressors producing approximately

1.5 MTPA of LNG, totaling 10.5 MTPA of production capacity. This award builds on the strong relationship between Baker Hughes and Cheniere since 2012, as we currently provide all liquefaction equipment for Cheniere's Corpus Christi and Sabine Pass projects.

3

Baker Hughes Second Quarter 2022 - Earnings Conference Call Prepared Remarks

Outside of LNG, the TPS team booked an important gas processing award in Saudi Arabia to supply 14 electric motor-driven compressors for the Jafurah unconventional gas field project, the largest non-associated gas field in the country. Baker Hughes is leveraging its local compressor packaging facility in Modon to deliver the equipment and support the Kingdom's in-country total value add program.

Also, during the quarter, TPS booked an award from Tellurian to provide electric-powered Integrated Compressor Line technology and turbomachinery equipment for a natural gas transmission project in southwest Louisiana. The project is expected to supply upwards of 5.5 billion cubic feet of natural gas daily, with virtually no emissions.

ICL zero-emissions is landmark technology that lowers the carbon footprint of a key segment of the natural gas supply chain and is already reducing the climate footprint of pipeline projects in many regions that deliver vital gas supplies. This order marks the first time Baker Hughes will install its ICL decarbonization technology for pipeline compression in North America.

During the quarter, TPS' CTS organization continued to support the growth of the hydrogen economy. TPS secured a contract with Air Products to supply advanced syngas and ammonia compression technology for the production of green ammonia for the NEOM carbon-free hydrogen and ammonia facility in Saudi Arabia. This order builds on our hydrogen collaboration framework with Air Products and leverages Baker Hughes' broad experience and references in supplying syngas and ammonia compressors.

Next, on Oilfield Equipment, we are encouraged to see improving demand trends across the different business areas. However, we remain disappointed with the overall level of profitability of the business and are executing on further actions to drive additional cost out and improve operations across the portfolio.

At a macro level, trends in the subsea and offshore markets continue to improve and should have solid order momentum over the next couple of years. Despite recent commodity price volatility, we believe that a solid pipeline of deepwater opportunities will continue to develop across a few key markets.

Importantly, we continue to see OFE gain momentum outside of Brazil with its offshore flexible pipe technology, securing several large contracts with multiple customers across the Americas and the Middle East. OFE will provide flexible pipe systems and services, including risers, flowlines and jumpers, to improve oil recovery and help to extend field life and profitability. OFE booked their highest orders ever in flexibles in the second quarter, and over $600 million in flexibles orders for the first half of the year in 2022, also a record.

While activity and project awards are improving offshore, we recognize that we have work to do in OFE to drive operating margins back to an acceptable level. We are driving continued actions across the business to improve operations, while also ensuring we have the appropriate resources in place to take this business forward. We are also in the final stages of planning more integration between OFE and OFS, driving more efficient cost management across certain parts of the OFSE business area globally.

4

Baker Hughes Second Quarter 2022 - Earnings Conference Call Prepared Remarks

Finally, in Digital Solutions, while order activity was strong in the second quarter, the business continues to be hampered by supply chain challenges, mainly electronic shortages, as well as inflationary pressures.

During the quarter, DS saw continued interest for its condition monitoring systems and services in the industrial sector. Bently Nevada secured a contract to upgrade the machinery protection systems for critical machines at a steel plant in the Middle East. The contract includes Bently Nevada's latest Orbit 60 system, which will provide the customer reliable protection and will enable advanced condition monitoring without additional hardware spend.

DS also gained traction with its emissions management portfolio of technologies. Following an MOU signed in February, DS secured a contract with Petrosafe for the first deployment of flare.IQ technology for refining operations in Egypt. The deployment will be implemented at the APC Refinery in Alexandria, supporting Egypt's low-carbon strategy, and tackling emissions in the sector as the country prepares to host COP27 in November.

We also recently reached an agreement for the sale of our Nexus Controls product line to General Electric. GE will continue to provide Baker Hughes with GE's Mark control products currently in the Nexus Controls portfolio, and Baker Hughes will be the exclusive supplier and service provider of such GE products for its oil and gas customers' control needs. The transaction is expected to close in the second quarter of 2023.

As we have mentioned in the past, we continue to make strategic and operational changes across DS, including recent leadership changes in Bently Nevada during the quarter. We are also conducting a review of the broader DS portfolio, taking actions to ensure we have the right business composition to serve our customers and drive returns. As we move forward, there is clearly more work to do. We are committed to driving better performance, profitability and returns for the DS business.

Before I turn the call over to Brian, I would like to spend a few moments highlighting some of the achievements from our Corporate Responsibility Report that was published at the end of the second quarter. This report provides an expanded view of our environmental, social, and governance performance and outlines our corporate strategy and commitments for a sustainable energy future.

We again lowered our emissions footprint and expanded our emissions reporting. We achieved an 8% reduction in our Scope 1 and 2 carbon emissions in 2021 versus 2020, and a 23% reduction in 2021 compared to our 2019 baseline. We also expanded reporting of Scope 3 emissions across our value chain to include emissions from several new categories. I am also pleased to say that in 2021, we launched "Carbon Out," an internal company-wide initiative to take carbon out of our operations and meet our pledge to achieve a 50% reduction in emissions by 2030 and net-zero emissions by 2050.

We further expanded our programs and processes to embed Diversity, Equity, and Inclusion into our operating process. We launched a Global Council in 2021 to increase accountability on this strategic priority, and we updated our process to evaluate and reconcile pay equity across the company.

Overall, Baker Hughes is successfully executing on its vision as an energy technology company and to take energy forward - making it safer, cleaner, and more efficient for people and the planet. Our Corporate Responsibility Report demonstrates our progress in many of these areas.

5

This is an excerpt of the original content. To continue reading it, access the original document here.

Attachments

  • Original Link
  • Original Document
  • Permalink

Disclaimer

Baker Hughes Company published this content on 20 July 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 20 July 2022 14:03:06 UTC.