Baker Hughes Company (Nasdaq: BKR) (“Baker Hughes” or the “Company”) announced results today for the third quarter of 2022.
We were generally pleased with our third quarter results, with strong performance in OFS while TPS successfully managed multiple challenges. We also saw strong orders performance, with continued momentum in OFE as well as TPS. 2022 has presented some unique challenges for Baker Hughes, and as we head towards 2023 we believe many of the key challenges should be behind us. I would like to thank our team for their continued commitment to deliver for our customers and execute our strategy,” said Lorenzo Simonelli, Baker Hughes chairman and chief executive officer.
Source: Baker Hughes
“The macro outlook has grown increasingly uncertain as the global economy is dealing with strong inflationary pressures, a rising interest rate environment, and sizeable fluctuations in global currencies. Despite these economic challenges, we remain positive on the outlook for oil and gas. We believe the fundamentals remain supportive of a multi-year upturn in global upstream spending, and that elevated natural gas and LNG pricing remains constructive for future FIDs. On the new energy front, recent policy movements in Europe and the U.S. are likely to help support a significant increase in clean energy development.”
“Given the dynamic macro backdrop, Baker Hughes is focusing on preparing for a range of scenarios and executing on what is within our control. Last month, we announced a restructuring and re-segmentation of the company into two reporting segments, OFSE and IET. These changes are designed to sharpen our focus, improve operational execution and better position Baker Hughes to capitalize on the quickly changing energy markets. Importantly, we expect these changes to increase shareholder value as we continue to invest in our portfolio for new energy and long-term growth opportunities,” concluded Simonelli.
Quarter Highlights
Supporting our Customers
The OFS segment was awarded a Wireline Services contract by Petrobras to support offshore operations. The contract allows Baker Hughes to introduce several new well construction technologies to the region, including RCX™ Magna large area multi-probe sampling, SureVIEW™ DAS, which provides comprehensive exploratory formation evaluation data, and Downhole Electric Cutting Tool (DECT) pipe cutting service.
OFS’ Wireline Services product line was also awarded a three-year contract by Sonatrach in Algeria, leveraging our deep understanding of the customer’s needs and positioning OFS as the leading wireline provider in the country.
OFS continued to drive interest in its digital portfolio of solutions. A major North American operator awarded Baker Hughes a contract to perform an offline analysis on 60 wells in the Permian and Delaware basins using ProductionLink – Predictive Failure Analytics (PFA). ProductionLink PFA software transforms the way customers manage production operations by adding significant value for electrical submersible pumps’ run life extension, operations and inventory planning, and maximizing overall lift performance.
The TPS segment saw continued growth in LNG. TPS secured another contract for two additional New Fortress Energy’s (NFE) “Fast LNG” projects, supplying two main refrigerant turbocompressor strings. Each turbocompressor will feature one LM6000PF+ gas turbine, and the technology will be deployed in various offshore projects across the globe, helping to increase overall LNG supply.
TPS announced a new outcome-based services contract for the maintenance and monitoring of turbomachinery equipment operations at Coral Sul FLNG, the first deep-water floating LNG facility operating off the coast of Mozambique for the ENI-led Coral South project. This new service agreement builds on an existing contract awarded to Baker Hughes in 2017 for the project’s power and gas refrigeration process. As part of the scope, Baker Hughes will fully leverage its growing digital capabilities by providing remote monitoring and diagnostics services, as well as a suite of other services based on Bently Nevada’s System 1 technology.
TPS also secured a contract in Saudi Arabia to supply 12 electric motor driven compressors to support gas processing for Aramco’s Jafurah unconventional gas field project, the largest non-associated gas field in the country. This contract follows a previous contract awarded to TPS in the second quarter, bringing a total of 26 compressor trains supplied by Baker Hughes to the Jafurah project.
OFE’s Flexible Pipes Systems (FPS) product line saw a third-straight quarter of record orders. OFE secured several long-term contracts with operators in multiple regions, including Brazil and Asia, to provide flexible pipes for offshore projects, reflecting FPS’ strong technology capabilities.
The DS segment continued to see interest in its industrial asset management solutions. Bently Nevada secured multiple contracts supporting customers’ digital transformation across their operations. In Europe, the business secured a milestone, multi-year Software as a Service contract, expanding Bently Nevada’s existing scope to deliver plantwide software across the customer’s entire installed base. In the Middle East, Bently Nevada secured a contract with a major national oil company to extend asset condition monitoring hardware and software across three offshore platforms while centralizing and connecting data back to the customer’s onshore operations center. The contract includes 3500 and TDI hardware modules, System 1 servers, and cyber security protection.
Executing on Priorities and Leading with Innovation
During the quarter, Baker Hughes announced that it is restructuring and simplifying its organization and accelerating its strategic transformation. Baker Hughes is restructuring its four product companies to focus on two reporting business segments and streamlining its corporate structure, which is expected to deliver at least $150 million in cost savings and form the baseline for further margin improvement. Effective October 1, the Company has been formally restructured into two reporting business segments; Oilfield Services & Equipment (OFSE) integrates the current OFS and OFE product companies; Industrial & Energy Technology (IET) integrates the current TPS and DS product companies. These changes are designed to simplify operations, enhance profitability, and drive growth, meeting customer needs and producing solutions in the rapidly evolving energy and industrial markets.
TPS also continued to support the growth of the hydrogen economy, securing two contracts with Air Products to supply advanced compression and steam turbine generator technologies for the net-zero hydrogen energy complex in Edmonton, Alberta, Canada, as well as the NEOM carbon-free hydrogen project in Saudi Arabia. In Edmonton, Baker Hughes will supply its high-pressure ratio compressor technology for hydrogen compression, enabling a significant reduction of compressor footprint due to its unique design and power density. These orders are part of the companies’ previously announced hydrogen collaboration framework in 2021.
An investment into graphene production technology company Levidian will provide Baker Hughes with an entry point into the promising market of graphene production, a game-changing additive for many materials. Levidian’s technology stands out with the ability to produce a high-quality type of graphene in large volumes. A wide range of methane and fugitive gas streams can be decarbonized by conversion into graphene and hydrogen which can then be used to decarbonize hard-to-abate industries.
In August, TPS announced the acquisition of the Power Generation division of BRUSH group to enhance its electric machinery portfolio. The acquisition was completed in early October. BRUSH’s technology is already in use across a wide range of industries and complements Baker Hughes’ existing e-LNG offering, supporting the Company’s strategic commitment to provide lower carbon solutions.
Source: Baker Hughes
Orders for the quarter were $6,063 million, up 3% sequentially and up 13% year-over-year. The sequential increase was a result of higher order intake in Oilfield Equipment and Oilfield Services, partially offset by a decrease in Digital Solutions and Turbomachinery & Process Solutions. Sequentially, equipment orders were up 19% and service orders were down 7%.
Year-over-year, the increase in orders was a result of higher order intake in all segments. Year-over-year equipment orders were up 20% and service orders were up 7%.
The Company’s total book-to-bill ratio in the quarter was 1.1; the equipment book-to-bill ratio in the quarter was 1.3.
Remaining Performance Obligations (RPO) in the third quarter ended at $24.7 billion, an increase of $0.4 billion from the second quarter of 2022. Equipment RPO was $9.1 billion, up 3%. Services RPO was $15.6 billion, flat sequentially.
Source: Baker Hughes
Revenue for the quarter was $5,369 million, an increase of 6%, sequentially. The increase in revenue was driven by higher volume in all segments.
Compared to the same quarter last year, revenue was up 5%, driven by higher volume in Oilfield Services and Digital Solutions, partially offset by lower volume in Turbomachinery & Process Solutions and Oilfield Equipment.
Source: Baker Hughes
On a GAAP basis, operating income for the third quarter of 2022 was $269 million. Operating income increased $294 million sequentially and decreased $110 million year-over-year. Total segment operating income was $606 million for the third quarter of 2022, up 25% sequentially and up 19% year-over-year.
Adjusted operating income (a non-GAAP measure) for the third quarter of 2022 was $503 million, which excludes adjustments totaling $235 million before tax. A complete list of the adjusting items and associated reconciliation from GAAP has been provided in Table 1a in the section entitled “Reconciliation of GAAP to non-GAAP Financial Measures.” Adjusted operating income for the third quarter of 2022 was up 34% sequentially, driven by higher volume and pricing with all segments expanding their margins. Adjusted operating income was up 25% year-over-year driven by volume and margin expansion in Oilfield Services, partially offset by lower volume in Oilfield Equipment and Turbomachinery & Process Solutions, and margin contraction in Digital Solutions.
Depreciation and amortization for the third quarter of 2022 was $254 million.
Adjusted EBITDA (a non-GAAP measure) for the third quarter of 2022 was $758 million, which excludes adjustments totaling $235 million before tax. See Table 1b in the section entitled “Reconciliation of GAAP to non-GAAP Financial Measures.” Adjusted EBITDA for the third quarter was up 16% sequentially and up 14% year-over-year.
Corporate costs were $103 million in the third quarter of 2022, down 5% sequentially and down 2% year-over-year.
Other Financial Items
Income tax expense in the third quarter of 2022 was $153 million.
Other non-operating loss in the third quarter of 2022 was $60 million. Included in other non-operating loss is a $50 million loss from the net change in fair value of our investment in C3 AI.
GAAP loss per share was $(0.02). Adjusted diluted earnings per share was $0.26. Excluded from adjusted diluted earnings per share were all items listed in Table 1a as well as the “other adjustments (non-operating)” found in Table 1c in the section entitled “Reconciliation of GAAP to non-GAAP Financial Measures.”
Cash flow from operating activities was $597 million for the third quarter of 2022. Free cash flow (a non-GAAP measure) for the quarter was $417 million. A reconciliation from GAAP has been provided in Table 1d in the section entitled “Reconciliation of GAAP to non-GAAP Financial Measures.”
Capital expenditures, net of proceeds from disposal of assets, were $180 million for the third quarter of 2022.
Results by Reporting Segment
The following segment discussions and variance explanations are intended to reflect management’s view of the relevant comparisons of financial results on a sequential or year-over-year basis, depending on the business dynamics of the reporting segments.
Source: Baker Hughes
Oilfield Services (OFS) revenue of $2,842 million for the third quarter increased by $153 million, or 6%, sequentially.
North America revenue was $942 million, up 10% sequentially. International revenue was $1,899 million, an increase of 4% sequentially, driven by higher revenues in the Middle East, Asia Pacific, and Latin America, partially offset by lower revenues in Russia Caspian and Europe.
Segment operating income before tax for the quarter was $330 million. Operating income for the third quarter was up $69 million, or 27% sequentially, primarily driven by higher volume and price, partially offset by cost inflation.
Source: Baker Hughes
Oilfield Equipment (OFE) orders of $874 million were up $150 million, or 21% year-over-year, driven by higher order intake in Flexibles, Surface Pressure Control, and Services partially offset by lower orders in Subsea Production Systems and the removal of Subsea Drilling Services from consolidated OFE operations. Equipment orders were up $167 million, or 33%, and services orders were down $16 million, or 8% year-over-year.
OFE revenue of $561 million for the quarter decreased $42 million, or 7%, year-over-year. The decrease was driven by lower volume in Subsea Production Systems, and from the removal of Subsea Drilling Services from consolidated OFE operations. These decreases were partially offset by higher volume in Flexibles, Services, and Surface Pressure Control.
Segment operating loss before tax for the quarter was $6 million, a decline of $20 million year-over-year, driven by lower volume and lower cost productivity.
Source: Baker Hughes
Turbomachinery & Process Solutions (TPS) orders of $1,810 million were up $91 million, or 5% year-over-year. Equipment orders were up $102 million, or 13% and service orders were down $11 million, or 1%.
TPS revenue of $1,438 million for the quarter decreased $124 million, or 8%, year-over-year. The decrease was primarily driven by lower equipment and projects volume. Equipment revenue in the quarter represented 41% of TPS revenue, and service revenue represented 59% of TPS revenue.
Segment operating income before tax for the quarter was $262 million, down $16 million, or 6%, year-over-year. The decrease was primarily driven by lower volume, foreign exchange movements, and inflation, partially offset by favorable business mix.
Source: Baker Hughes
Digital Solutions (DS) orders of $547 million were up $24 million, or 5%, year-over-year, primarily driven by higher order intake in the Bently Nevada business.
Digital Solutions revenue of $528 million for the quarter increased $19 million, or 4%, year-over-year, driven by higher volume across all product lines.
Segment operating income before tax for the quarter was $20 million, down $6 million, or 22%, year-over-year. The decrease year-over-year was primarily driven by lower cost productivity and cost inflation, partially offset by higher volume.
Reconciliation of GAAP to non-GAAP Financial Measures
Management provides non-GAAP financial measures because it believes such measures are widely accepted financial indicators used by investors and analysts to analyze and compare companies on the basis of operating performance and liquidity, and that these measures may be used by investors to make informed investment decisions.
Source: Baker Hughes
Table 1a reconciles operating income (loss), which is the directly comparable financial result determined in accordance with Generally Accepted Accounting Principles (GAAP), to adjusted operating income (a non-GAAP financial measure). Adjusted operating income excludes the impact of certain identified items.
Source: Baker Hughes
Table 1b reconciles net income (loss) attributable to Baker Hughes, which is the directly comparable financial result determined in accordance with GAAP, to EBITDA (a non-GAAP financial measure). Adjusted EBITDA (a non-GAAP financial measure) excludes the impact of certain identified items.
Source: Baker Hughes
Table 1c reconciles net income (loss) attributable to Baker Hughes, which is the directly comparable financial result determined in accordance with GAAP, to adjusted net income attributable to Baker Hughes (a non-GAAP financial measure). Adjusted net income attributable to Baker Hughes excludes the impact of certain identified items.
Source: Baker Hughes
Table 1d reconciles net cash flows from operating activities, which is the directly comparable financial result determined in accordance with GAAP, to free cash flow (a non-GAAP financial measure). Free cash flow is defined as net cash flows from operating activities less expenditures for capital assets plus proceeds from disposal of assets.
Source: Baker Hughes
Source: Baker Hughes
Source: Baker Hughes
Source: Baker Hughes