Baker Hughes Co., unleashed from General Electric, reported solid growth in the third quarter, lifted by growth in liquefied natural gas (LNG) services, with more to come in 2020, CEO Lorenzo Simonelli said.
During a conference call to discuss results on Wednesday, Simonelli held court with his management team to discuss the company’s rebirth as a standalone company with a new name, stock symbol and rebranding.
“We are also entering a new chapter as we move into the next stage of our corporate development and prepare for the energy transition we see unfolding over the next decade,” Simonelli told analysts.
“In the coming decades, we forecast natural gas will be the key transition fuel for a lower carbon future,” he said. Oil demand growth is slowing, while demand for alternative resources is accelerating, but “renewable sources will not be able to fulfill global energy demand, given currently available technology and its small footprint today.”
There’s an opportunity for natural gas “to take a more prominent role over the coming years. Our view is that natural gas demand will grow more than twice the pace of oil, and LNG demand growth will be higher, at an annual rate of 4-5%,” Simonelli said.
Overall, growth in gas demand offers “tremendous opportunity for our businesses, and we will position the company to capture the high value, higher technology opportunities along the gas value chain.”
Equipment growth within the company’s Turbomachinery & Process Solutions (TPS) segment, which includes LNG, is forecast to soar in the coming years for the LNG export trade. About 80 million metric tons/year (mmty) of LNG capacity has been sanctioned worldwide since the end of last year, and the industry remains on track to hit a forecast of 100 mmty by year’s end, Simonelli said.
“As you look at LNG overall, over the course of the next few years that's going to be increasing project activity,” he said. One forecast puts LNG demand at 550 mmty by 2030. “To put that in perspective, you're going to need to have about 650 mmt of nameplate capacity in place to actually provide that.”
There is a timing aspect for when LNG projects are sanctioned as sponsors secure contracts and financing, which could mean “some reduction in 2020, but no more than 10% or a little bit more than that.”
Improving margins in the other business segments, particularly Oilfield Services (OFS) and Oilfield Equipment (OFE), also is a goal. The OFS segment’s growth is expected to be driven by supply chain efficiencies, better asset utilization and lower product costs and procurement. For OFE, the margins are forecast to improve on converting the backlog to capitalize on cost out initiatives.
Meanwhile, global crude demand “appears to be slowing due to a number of factors,” said Simonelli, “most notably trade tensions,” which he said are beginning to manifest in the bellwether economies of the United States, China and the Eurozone.
“U.S. production growth is likely to decelerate” into 2020 too, as exploration and production (E&P) companies continue to reduce capital expenditures, Simonelli said. A “range-bound oil price environment in 2020 and potentially beyond” also is expected.
The OFS segment is “preparing for a North American market that is likely to see another reduction in E&P spending in 2020 as operators exercise capital restraint and seek to improve free cash flow...
“It's still early, but we agree with some estimates suggesting that Lower 48 drilling and completion spending could decline in the high-single digit or even low double-digit range in 2020 on a year/year basis due to a combination of weaker pricing and lower activity levels.”
During the third quarter, Baker booked $7.8 billion in orders, up 35% year/year and 19% sequentially. Equipment orders in the quarter climbed 89% from 3Q2018, with service orders up 1%. The total book-to-bill ratio in 3Q2019 was 1.3; the equipment book-to-bill ratio was 1.8.
“Overall, we executed well in the third quarter, and we believe that Baker Hughes is well positioned to navigate a potentially choppy macro backdrop with a good combination of long-cycle businesses in TPS and OFE, more stable end markets within Digital Solutions, and a differentiated OFS portfolio,” Simonelli said.
The backog, i.e. remaining performance obligations (RPO), ended September at $22.2 billion, an increase of $1.7 billion from 2Q2019. Equipment RPO was $7.4 billion, up 32% sequentially, while the Services RPO was $14.9 billion, off 1%.
Net profits in 3Q2019 totaled $57 million (11 cents/share), versus year-ago earnings of $13 million (3 cents). Cash flow climbed 51% year/year to $360 million from $239 million, but it was down 39% from 2Q2019 cash flow of $593 million.
Revenue totaled $5.88 billion in 3Q2019, up 4% year/year but down 2% from the second quarter. North America revenue was nearly $1.18 billion, down 3% sequentially. International revenue rose 6% from the second quarter to $2.17 billion on growth across the Asia Pacific, Middle East and Europe.