Houston-based Baker Hughes Co. kicked off third quarter earnings season for the oil and natural gas sector on Wednesday, acknowledging challenges but optimistic about the emerging upcycle, with a continuing bullish view for LNG.
The oilfield services (OFS) giant operates around the world in four segments: OFS, Oilfield Equipment (OFE), Turbomachinery & Process Solutions (TPS), and Digital Solutions (DS).
CEO Lorenzo Simonelli led the one-hour conference call with analysts, reiterating comments he had made during the second quarter conference call.
“The macro outlook has grown increasingly uncertain,” he told analysts. “The global economy is dealing with the strongest inflationary pressures since the 1970s, a rising interest rate environment and sizable fluctuations in global currencies.
“Despite these economic challenges, we remain constructive on the outlook for oil and gas, and believe that underlying fundamentals remain supportive of a multi-year upturn in global upstream spending.”
Global operators continue to demonstrate “a great deal of financial discipline, which we expect to translate into a more durable upstream spending cycle, even in the face of an unpredictable commodity price environment.”
Stressed Global Gas Market
Prices for global natural gas and liquefied natural gas remained elevated in the third quarter, he noted, “as a multitude of factors increased tensions on an already stressed global gas market.” Surging LNG demand in Europe “directed cargoes from other regions and created an exceptionally tight global market that could get even tighter in 2023.
“This situation has resulted in record high LNG prices, but it’s also slowed down switching from coal to gas in some developing countries…We believe that significant investment is still required over the next five to 10 years to ensure natural gas is positioned as a key part of the energy transition.”
While current natural gas prices may appear “attractive for new projects,” Simonelli said, “this is also a pivotal time for the industry, with price-related demand destruction occurring in some markets and LNG developers facing inflationary pressures and a higher cost of capital for new projects.
“As a result, we believe the landscape may be shifting in favor of established LNG players with the scale, diversity and financial strength to navigate the risks and uncertainties. Those are brownfield projects. And projects that utilize faster-to-market modular designs may be particularly advantageous in the coming years.”
Baker Hughes also is anticipating “continued price volatility” in the oil markets, Simonelli said, “as demand growth likely softens under the weight of higher interest rates and inflationary pressures. However, we expect supply constraints and production discipline to largely offset any demand weakness. They should support price levels that are conducive to driving double-digit upstream spending growth in 2023.”
Support For ‘New Energy’
Baker Hughes continues to grow its “new energy” portfolio as well, he said. Recent policies enacted in Europe and the United States “are likely to help support a significant increase in clean energy development.”
For example, the Biden administration’s recently enacted Inflation Reduction Act of 2022 (IRA) “should be particularly impactful” to accelerate green hydrogen, carbon capture utilization and storage, and direct air capture projects.
“While we have not changed our expectations for the ultimate addressable market sizes in these areas, the attractive tax incentives could accelerate development ahead of previously expected forecasts,” Simonelli said. The IRA also “will create favorable economic conditions for a portfolio of new energy investments.”
By business unit, OFS orders were up 17% year/year during the quarter, while OFE orders climbed 21%. TPS and DS orders each rose 5% from a year ago. Overall, orders topped $6.1 billion in 3Q2022, up 3% sequentially and 13% higher year/year.
In the TPS segment, which includes LNG services, Baker Hughes remains “on track to generate $8-9 billion in orders in 2022 and in 2023,” Simonelli said. “Primary growth continues to be LNG, where multiple projects are expected to move forward” for final investment decisions (FID) in 2022 and 2023.
“Although inflationary pressures and rising interest costs have slowed progress on some projects, we remain comfortable with our expectation of 100-150 million metric tons/year (mmty) reaching FID by the end of 2023, including the 31 mmty that has reached FID to date,” he added.
During 3Q2022, the company was awarded another order by New Fortress Energy Inc. to support its Fast LNG facilities project offshore Louisiana, the third booked order since 2Q2021.
Meanwhile, OFS unit growth overall is “clearly shifting more in favor of the international markets,” Simonelli said.
North American “drilling and completion activity is beginning to level off after significant growth over the last few years. Although the U.S. market will be more dynamic and dependent on oil prices, we generally expect solid activity levels through the end of this year.
“We have an opportunity for modest growth in 2023 driven by public operators,” he said. “Over the course of the year, we have generated solid margin improvement across multiple product lines, including drilling services, completions, artificial lift and wireline.”
Latin American Growth
OFS growth, however, “continues to be led by Latin America, West Africa and the Middle East,” the CEO told analysts. “In all of these markets, offshore activity is noticeably strengthening. While our drilling services and completions business are well-positioned to win in Latin America, Brazil offers the best combination of visibility and growth in the region, while Mexico and Guyana are also improving.”
This year “has presented some unique challenges for Baker Hughes and has driven several important decisions to better position the company for an evolving energy landscape as we head toward 2023. While we are preparing for a volatile environment, we are confident that we can navigate these challenges with the support from our recent corporate actions and our world-class team.
“We are intently focused on improving our operational execution, capitalizing on the multi-year upstream spending cycle and the unfolding wave of LNG FIDs,” Simonelli said.
In other news, Nancy Buese has been tapped as CFO, effective in November. She is taking the reins from Worrell, who is to become an adviser until mid-2023. Buese formerly was the financial chief for Newmont Corp. from 2016 until earlier this year. She also spent more than a decade as CFO of MarkWest Energy Partners LLP.
Baker Hughes recorded a net loss in 3Q2022 of $17 million (minus 2 cents/share), versus year-ago profits of $8 million (1 cent). Cash flow rose 44% year/year to $596 million. Operating income fell to $269 million, off by $110 million in 3Q2021.
