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    Baker Hughes Co (BKR)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (After Market Close)
    Pre-Earnings Price$30.04Last close (Jan 24, 2024)
    Post-Earnings Price$30.46Open (Jan 25, 2024)
    Price Change
    $0.42(+1.40%)

    What went well

    • Baker Hughes is on track to achieve 20% EBITDA margins in both OFSE and IET segments by 2025 and 2026 respectively, driven by cost optimization, structural changes, and improved pricing, which is expected to enhance profitability and create more value for shareholders.
    • The company's diversified and versatile IET portfolio, beyond LNG, offers significant growth opportunities, including leadership in FPSOs with expectations of securing 7 to 9 FPSO projects over the next few years, and expanding into underserved markets like pipelines, gas processing, petrochemicals, and industrial sectors. This contributes to exceptional growth since 2020, with a more than 50% increase in other areas.
    • Record financial performance in 2023, with EBITDA levels approximately 25% above prior cycle peaks and consolidated EBITDA margins averaging 200 basis points above 2018 and 2019 levels, demonstrates strong execution. The company expects continued EBITDA growth in 2024, marking the fourth consecutive year of double-digit growth, along with further margin expansion.

    What went wrong

    • Persistent supply chain constraints in aeroderivative turbines are expected to remain tight through the end of 2024, potentially impacting execution in Gas Tech Equipment. ,
    • Declines in North American land activity are anticipated in 2024, which may negatively affect OFSE revenue and margins. ,
    • Baker Hughes has a higher effective tax rate compared to peers and lacks specifics on how they will reduce it to the low 20% range over time, introducing uncertainty. ,

    Q&A Summary

    1. 20% EBITDA Margin Targets
      Q: How will you achieve the 20% EBITDA margin targets for OFSE and IET?
      A: Baker Hughes remains committed to the 20% EBITDA targets for both OFSE and IET. They have a clear plan involving structural changes, cost optimization, and efficiency improvements. In OFSE, recent cost initiatives, including over $150 million in cost removals, will help reach 20% margins by 2025. In IET, they expect to achieve 20% margins by 2026, driven by higher-margin backlog conversion, improved pricing, and cost productivity.

    2. Impact of U.S. LNG Permitting Delays
      Q: Are permitting delays in U.S. LNG projects a risk to your 2024 outlook?
      A: There is no impact expected on 2024 from U.S. LNG permitting delays. While delays are occurring, Baker Hughes anticipates 65 MTPA of LNG FIDs this year, supporting their outlook. They believe the situation will resolve over time and emphasize that international LNG projects can offset any U.S. slowdown.

    3. IET Order Guidance Details
      Q: Can you provide details on IET order guidance between LNG and other components?
      A: Baker Hughes expects another strong year of IET orders, with guidance between $11.5 billion and $13.5 billion. While LNG remains significant, they also foresee strong growth in onshore/offshore production, FPSO awards, and other non-LNG opportunities. The midpoint of $12.5 billion would rival their second-largest order year.

    4. Organizational Transformation and Cost Reductions
      Q: What are your plans for further cost reductions and transformation?
      A: Baker Hughes is focused on operational excellence, having already removed over $150 million in costs. They are streamlining processes, synchronizing systems, and eliminating duplication to drive efficiency and margin improvements. They will continue this transformation but are not setting new cost targets, instead focusing on margin improvement.

    5. Aero-Derivative Supply Chain Challenges
      Q: Can you update on aero-derivative supply chain issues and 2024 outlook?
      A: The aero-derivative supply chain remains tight but stable. Baker Hughes managed the challenges in 2023 and expects to continue doing so in 2024, with this reflected in their guidance. They are working closely with suppliers to ensure execution without impacting results.

    6. International LNG Projects Offsetting U.S. Delays
      Q: If U.S. LNG approvals slow, can international projects fill the gap?
      A: Yes, international LNG projects can offset any U.S. slowdown. Baker Hughes sees opportunities globally, with projects in the Middle East, Africa, and Southeast Asia progressing. They offer solutions across all LNG project types and are confident in their global reach.

    7. Non-LNG Services and Installed Base Growth
      Q: What's the growth outlook for non-LNG equipment and associated services?
      A: There is significant opportunity in non-LNG equipment, including onshore/offshore FPSOs, gas pipelines, and industrial segments like refineries and petrochemicals. Baker Hughes is expanding service solutions and digital offerings, expecting substantial growth in their installed base and services.

    8. Tax Rate Expectations
      Q: Where do you expect to get the tax rate to, and over what time frame?
      A: Baker Hughes aims to reduce their tax rate to the low 20% range over time. They are working on structuring and efficiencies to bring the rate down in the next few years, acknowledging its importance for earnings improvement.

    9. LNG Award Expectations in IET Guidance
      Q: What's the LNG award expectation in IET guidance for 2024? Is it contributing to the wide guidance range?
      A: Baker Hughes anticipates 65 MTPA of LNG FIDs in 2024. The guidance includes expected LNG orders, but they do not include orders from projects not yet FID-ed. The wide guidance range accounts for the timing and certainty of these orders.

    10. New Energy Business Growth Potential
      Q: In New Energy, which areas have the most potential near-term growth?
      A: Significant growth is expected in carbon capture technologies, hydrogen, geothermal, emissions management, and deflaring. Baker Hughes anticipates $800 million to $1 billion in New Energy orders in 2024, with a total addressable market of $60 billion to $70 billion by 2030.

    11. IET End Market Growth Opportunities
      Q: Which IET end markets have the biggest growth opportunities?
      A: The IET portfolio offers significant growth in onshore/offshore production, including FPSOs and gas processing. There are also opportunities in petrochemicals, refining, and various industrial markets. The versatility of the IET portfolio provides multiple avenues for growth.

    12. Qualitative Aspects of '24 OFSE Margin Increase
      Q: Can you discuss the qualitative aspects of the '24 OFSE margin increase?
      A: Baker Hughes expects a material step-up in margins for OFSE in 2024. Cost initiatives launched in early 2024, including structural changes and cost optimizations, will drive margin improvements, especially in the second half of the year. They anticipate OFSE to average 20% EBITDA margins in 2024.

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