Baker Hughes : Fourth Quarter and Full-Year 2021 Earnings Conference Call Prepared Remarks

Baker Hughes Fourth Quarter & Full Year 2021 - Earnings Conference Call Prepared Remarks

Fourth Quarter & Full Year 2021 - Earnings Conference Call Prepared Remarks

Jud Bailey Baker Hughes - VP of Investor Relations

Thank you.

Good morning everyone, and welcome to the Baker Hughes Fourth Quarter and Full Year 2021 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 some 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.

We are pleased with our fourth quarter results as we generated another quarter of strong free cash flow, solid margin rate improvement, and strong orders performance from TPS. During the quarter, TPS continued to operate at a high level, OFE successfully executed on its cost improvement initiatives, and OFS performed extremely well despite continued pressure on supply chain and commodity inflation.

For the full year, we were pleased with our financial performance. We took several steps in 2021 to accelerate our strategy and help position the company for the future. Last year proved to be successful on many fronts for Baker Hughes, with key commercial successes and developments in the LNG and new energy markets, as well as record free cash flow generation and peer-leading capital allocation.

After a quiet start to the year, LNG activity played an important role in helping TPS book almost $7.7 billion in orders in 2021, which was just below the record levels achieved in 2019. Perhaps more importantly, we believe that the step-up in LNG order activity provides a solid indication that a new LNG cycle is beginning to take shape. We also believe that the uptick in orders, along with other recent policy movements, particularly in Europe, confirms that natural gas is gradually gaining greater acceptance as a transition and destination fuel for a net zero world.

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Baker Hughes Fourth Quarter & Full Year 2021 - Earnings Conference Call Prepared Remarks

In new energy frontiers, we started to see more pronounced commercial successes from our energy transition efforts, generating approximately $250 million in new orders across our TPS, OFS, and DS product companies, primarily in the areas of hydrogen and CCUS. We remain confident in our ability to grow this business over the next decade to ultimately total $6 to $7 billion of orders by 2030.

I am also very pleased to report that Baker Hughes delivered its strongest ever free cash flow year generating over $1.8 billion in 2021, which represents almost 70% conversion from adjusted EBITDA. We are pleased to see this performance, as our cash restructuring and separation payments wound down and we continued to make progress on improving our working capital and broader cash processes.

Our strong free cash flow profile provides the company with ample flexibility and optionality when it comes to our broader capital allocation strategy. As evidence of this, we returned almost $1.2 billion back to shareholders through dividends and buybacks in 2021, while also making multiple acquisitions and investments across the industrial and new energy spaces.

On the industrial front, we completed the acquisition of ARMS Reliability and a major investment in Augury, which will help Baker Hughes continue to build out its industrial asset management platform and deliver an expanded set of asset performance capabilities.

On the new energy front, we were active this year in pursuing early-stage technologies in CCUS and in hydrogen. In CCUS, we acquired a position in Electrochaea, a bio-methanation company, and also entered into an exclusive license with SRI for the mixed salt process. In hydrogen, we made an investment in Ekona, a growth stage company developing novel turquoise hydrogen production technology, as well as Nemesys, a technology company focused on a range of early- stage hydrogen technologies.

While 2021 saw many positive achievements, the year was also not without its challenges. We saw continued disruptions from the COVID-19 pandemic, which continued to impact our operations. Supply chain and inflationary pressures also drove higher costs and delivery issues primarily across our OFS and DS product companies. Our teams have continued to work to offset some of these pressures, but we expect to continue to see some level of tension and disruption in these areas potentially through the first half of the year.

As we look ahead to 2022, we expect the pace of global economic growth to remain strong. However, growth rates are likely to moderate from 2021 levels as central banks are expected to begin tightening monetary policy in order to reduce COVID-related stimulus plans and quell growing inflationary pressures.

Despite the expected slowdown in the pace of growth, we believe the continuing broader macro recovery will translate into rising energy demand in 2022, with oil demand likely recovering to pre- pandemic levels by the end of the year. Pairing this demand scenario with continued OPEC Plus, IOC and E&P spending discipline, we expect the oil markets to remain tight for some time. We believe that this will provide an attractive investment environment for our customers and a strong tailwind for many of our product companies.

We also expect continued momentum in the global gas markets in 2022, building on a strong 2021. A combination of demand and supply factors converged in 2021, pushing natural gas and LNG prices to record breaking levels in both Europe and in Asia. The gas price spikes also highlighted the fragility of the global energy system as the world transitions to net zero.

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Baker Hughes Fourth Quarter & Full Year 2021 - Earnings Conference Call Prepared Remarks

Looking ahead, we expect a number of additional LNG FIDs in 2022 and beyond, supported by the growing appetite for longer-term LNG purchase agreements. As we have previously mentioned, we see significant structural demand growth for LNG in the coming decades. Our positive long-term view is also supported by the recent improvements in policy sentiment in certain parts of the world towards natural gas' role within the energy transition.

Against this constructive macro backdrop, Baker Hughes remains focused on executing our strategy across the three pillars of transform the core, invest for growth, and position for new energy frontiers. Importantly, we also continue to work towards aligning Baker Hughes across the two business areas that we outlined in the third quarter of last year - Oilfield Services & Equipment and Industrial Energy Technology, or OFSE and IET.

Since we unveiled our vision of ultimately executing across these two broad business areas, we have been evaluating all aspects of the company in order to determine the most efficient organizational and corporate structure. Our goal is to find the right structure that properly aligns our internal resources and helps accelerate growth in key strategic areas, while also enhancing our profitability and returns, and increasing shareholder value.

We have reached some early conclusions and have started to implement changes internally. Most notably, we recently created the Climate Technology Solutions group and the Industrial Asset Management group, which will both report to Rod Christie, Executive Vice President of TPS.

Climate Technology Solutions, or CTS, will encompass CCUS, hydrogen, emissions management, and clean and integrated power solutions. Industrial Asset Management, or IAM, will bring together key digital capabilities, software, and hardware from across the company to help customers increase efficiencies, improve performance, and reduce emissions for their energy and industrial assets.

We believe that the creation of these two groups will help accelerate the speed of commercial development for solutions-based business models across our new energy and industrial asset management offerings. Importantly, it will not change any of our reporting structure today.

Overall, we are very excited with the strategic direction of Baker Hughes and believe the company is well placed to capitalize on near-term cyclical recovery and well positioned for the long-term structural change in the energy markets.

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

In Oilfield Services, activity levels ended the year on a positive note in both the international and North American markets and all signs point to a strong year of growth in 2022. Additionally, the OFS team had to navigate an increasingly difficult supply chain environment over the second half of 2021 and ended the year on a high note with a strong fourth quarter margin performance.

Looking into 2022, we expect a strong, broad based recovery across the international markets, led by Latin America and the Middle East. While Latin America should see the second consecutive year of double-digit growth, the Middle East is in the very early stages of what we expect to be a multi-year growth cycle. Capital is being deployed in the region to restore near-term production levels and lay the foundation for longer term capacity expansion.

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Baker Hughes Fourth Quarter & Full Year 2021 - Earnings Conference Call Prepared Remarks

In North America, we expect another year of impressive growth in the US land market, as well as a recovery offshore. Based on conversations with our customers, we expect the underlying trends in North America to remain the same as 2021, with public E&Ps and IOCs remaining disciplined in deploying capital, while private E&Ps will remain more active.

While we were pleased to achieve 10% operating margin rates in OFS in the fourth quarter, margins are still below our broader objectives, namely due to the recent negative impacts of commodity price inflation and supply chain disruptions. That being said, our OFS team is working extremely hard to offset these headwinds, with successful pricing increases across multiple product lines and continued progress in mitigating some of the logistics constraints.

Based on the actions being taken by our OFS team and assuming the gradual normalization of the current state of supply chain disorder, we remain focused on achieving 20% EBITDA levels in OFS by the end of 2022.

Moving to TPS, the outlook remains constructive driven by opportunities in LNG, onshore/offshore production, and new energy initiatives.

I would like to thank Rod and the TPS team for an exceptional year in 2021, which exemplified the strength of the TPS business. TPS booked almost $7.7 billion of orders, which included 22 MTPA of LNG orders across 4 projects and 9 FPSOs and offshore topside project awards. On the execution side, TPS generated over $1 billion of operating income, representing over 16% in operating margin rate, despite revenue growth in equipment significantly outpacing services. We are excited about what the future holds for TPS across multiple fronts.

In LNG, we were pleased to book two awards in the fourth quarter.

We announced a major LNG award for the 5 MTPA Pluto Train 2 Project in Western Australia, which is operated by Woodside, and also received a large-scale LNG equipment award in the Eastern Hemisphere.

Additionally, we were awarded an order to deliver power generation equipment for a major LNG project in North America.

We continue to be optimistic on the outlook for LNG and remain confident on the potential for 100 to 150 MTPA of awards over the next two to three years. Based on the continued pace of discussions with multiple customers and the positive fundamentals in the global gas markets, we have a general bias towards the upper end of this range.

For the non-LNG segments of our TPS portfolio, we see multiple opportunities for continued growth, and we were pleased to book a number of awards in new energy during the quarter.

In hydrogen, we booked an award for advanced compression technology for the NEOM carbon- free hydrogen project in the Kingdom of Saudi Arabia, building on the announcement we made with Air Products in the second quarter of 2021. We will be providing our HPRC solutions to the NEOM project, which will enable a lower cost of production and accelerate the adoption of hydrogen as a zero-carbon fuel. Our collaboration with Air Products will be critical for a net-zero future, and the award is a good example of how Baker Hughes' proven technology is helping to accelerate the hydrogen economy.

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Baker Hughes Fourth Quarter & Full Year 2021 - Earnings Conference Call Prepared Remarks

In CCUS, we received an order from Santos to supply turbomachinery equipment for the Moomba Carbon Capture and Storage project in South Australia. Baker Hughes will provide gas turbine, compressor and heat recovery steam generator technologies to compress the carbon dioxide. The project will serve a gas processing plant and permanently store 1.7 million tons of carbon dioxide annually in depleted natural gas reservoirs in the onshore Cooper Basin.

Even though 2021 order activity came in well ahead of our expectations, we still expect to see a similar level of orders for TPS in 2022, driven primarily by LNG.

Next, on Oilfield Equipment, we are pleased with the overall trends in this business as order activity is becoming more favorable and we continue to show progress in taking costs out.

At a macro level, trends in the subsea and offshore markets are anticipated to continue to improve in 2022 after gaining modest traction over the course of 2021. In the subsea tree market, we expect industry awards to take another step higher in 2022 but likely remain below pre-pandemic levels for the foreseeable future. Outside of the tree market, we continue to see a strong pipeline of flexibles order opportunities. We are also seeing improving market conditions in our international wellhead and subsea services businesses.

In the fourth quarter, we were pleased to announce a major 10-year contract for surface wellheads and tree systems in the UAE. As part of ADNOC's largest ever wellhead award, this important win will further enhance our partnership with this key customer, as well as strengthen our footprint in the region.

Our subsea services business saw some good traction in the fourth quarter with a strong orders performance, driven by increased activity in the North Sea and Sub-Saharan Africa.

Although OFE is showing signs of a path to recovery, we still believe the offshore markets will remain structurally challenged as the energy markets and our customers' budgets evolve. As a result, we remain focused on right-sizing the business, improving profitability, and optimizing the portfolio. The merger of Subsea Drilling Systems with MHWirth to create HMH is an excellent example of how we are continuing to transform the OFE portfolio.

Finally, in Digital Solutions, overall market conditions are improving. We experienced solid growth across our industrial end markets through 2021 and are starting to see a pick-up in markets that lagged - particularly the oil and gas, transportation, and aviation end markets. Additionally, the DS business continues to be impacted by the supply chain challenges and chip shortages that began earlier in the year.

During the quarter, DS continued to secure important contracts with key customers for condition monitoring and industrial asset management solutions.

Bently Nevada secured a contract with Yara to enable digital transformation and improve asset reliability and efficiency. The enterprise-wide contract will enable data availability between Yara's plant operations and the cloud across 23 sites, using Bently Nevada's latest System 1 Evo asset management software.

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