Yeah, good morning, and welcome to day two of our ninth annual energy conference. My name is Arun Jayaram. I'm the OFS and E&P analyst at J.P. Morgan. Super thrilled to introduce Baker Hughes' Chairman and CEO, Lorenzo Simonelli. He and I are gonna participate in a fireside chat today, together this morning. Lorenzo, how are you?
Arun, doing very well. Thank you for hosting us again.
Yeah, this is one of the presentations I'm really looking forward to host today. Lorenzo, I've prepared a few key topics that I think is relevant to the investment case on Baker Hughes. I wanna start maybe with the journey we've been on since you merged with GE Oil & Gas and the legacy Baker Hughes company in 2017. Can you talk a little bit about the journey?
Sure, and I think, I'll be brief because hopefully a lot of people know the journey. But I think, given that there's a new interest in energy and also a number of people are new from an investor standpoint into looking at energy again, it may be important to recap because Baker Hughes is a historic name, but the company that is Baker Hughes today is very different. In fact, in 2017, we took what was the Oilfield Services & Equipment business of Baker Hughes and merged it with General Electric. And that provided a complete different portfolio and an additional capability to service our customers across much more of the equipment, industrial applications, and created a unique portfolio. Then obviously, between 2017 and 2022, we went through a bit of a rollercoaster.
Many of you know the external events and some of our own internal events. We obviously separated from General Electric and are fully deconsolidated and fully separate from GE now. We also went through the pandemic, like many others, and had to restructure, and the exit of Russia, which was a meaningful part of our business. So, you know, as I look at my tenure, I'd say I started in 2017, but I was reborn at the end of 2022, when a lot of these external events were put behind us, and really, we charted a path forward for Baker Hughes since 2022 on the strategy that we laid out across our two segments of Oilfield Services & Equipment and Industrial & Energy Technology.
Lorenzo, where do you see the biggest opportunities to continue to grow the company over the medium and longer term?
So, as I look at the two segments, the good thing is we've got tailwinds across both. I think it starts with the macro aspect of the demand for energy, which is robust as you look forward, and in particular, natural gas. And as you look at the energy transition, it is going to happen, but it will be slower in the uptake, and it will be more pragmatic in its approach, which means oil and gas is here for a lot longer. So the fundamentals for Oilfield Services & Equipment continue to be solid with, you know, strong international growth. I'm particularly interested, though, in the opportunity we have around gas infrastructure and also the associated growth in our Industrial & Energy Technology. And that's a part of the business that I think is not as well known because of the name Baker Hughes.
People associate it always with the oilfield services. We have gas turbines, we have compressors, we have pumps, we have valves, we have inspection technology, condition monitoring, software. All of this enables our ability to help customers, both in the industrial space as well as the energy space, to transition and also to build the infrastructure they need for what is increasing energy demand. That's an area that I'm very excited by. You've seen the growth in LNG that we've had in the past few years. LNG is gonna continue to grow, but also as we move further in the natural gas and the infrastructure required for data centers, for the surging demand that's taking place, and then the energy transition. At the end, you need rotating equipment. You need compressors. When you think about hydrogen, you think about clean, integrated power solutions, you think about geothermal.
All of the equipment that we provide is needed within these applications. Very excited about the growth trajectory on the Industrial & Energy Technology side and the solid foundation for the oilfield services.
Lorenzo, you know, I wanna spend a little bit more time today talking about IET. I think your OFSE business is somewhat understood by the market. Doesn't mean it's not unique, but we really wanna spend more time on IET. You've often said that IET is very industrial-like and maybe feel that investors don't broadly appreciate the kinds of solutions that you provide at Baker Hughes. So maybe you could spend some time and talk about what you think differentiates your IET business from... and what maybe what the street is not understanding around IET.
Definitely, and, I think, Arun, you characterized it well. The Industrial & Energy Technology, IET, segment of Baker Hughes is much more industrial-like. And so for people that are used to oilfield services, it's not a short-cycle business... It's a longer cycle business. It is a aspect of being an OEM for equipment that goes into very important applications, and then has a service stream and a relationship that extends 20 to 30 years. So it is a very distinctive, and it's more a razor, razor blade type of approach. And in fact, if you look at that business, it's got a great aftermarket, and it's got a great installed base of assets between the compressors, the pumps, the turbines, that has a huge historical opportunity for us to mine new service opportunities, and also provide upgrades as we go forward within the energy landscape.
That's very different than the services of having a tool and going out and executing a service, and I think that's still being understood by many, and partially because, the name, obviously, Baker Hughes, is historical in the oilfield services.
Yep. Lorenzo, LNG has been a big part of the Baker story over the last couple of years, but we've also seen a noticeable pickup in your non-LNG orders in Gas Tech. Can you talk a little bit about the underlying strength of this non-LNG growth?
And I've been with this business for several decades, so I've seen the various cycles, and I, like all of you, enjoy when LNG is good. I also enjoy when the rest of the portfolio comes to light. And the good thing is, that gas infrastructure, onshore, offshore production, you look at other energy installations, all of this requires the equipment that we provide. And that is significant growth as we go forward. You think about gas. It's not just about an LNG, it's also about the compression that's required in a gas field. It's about the infrastructure to be able to process the gas and move the gas, the pipelines that are required. If you look at our order intake, just alone in the third quarter, we were up 3x from a non-LNG perspective.
If you look at this year, we'll be up 50% from a non-LNG equipment standpoint. If you look at what we announced in the first quarter with the Master Gas System in the Kingdom of Saudi Arabia, or what we've recently had in the press relative to Algeria and the Hassi R'Mel infrastructure, this is the gas infrastructure that's coming online as the world understands that gas is going to increase as a supply source to meet the demand. And all of the equipment that we provide actually goes into that. That's from a gas infrastructure perspective. Then you also have the onshore, offshore production. When you think about FPSOs, when you think about different platforms, all of these elements need power generation, they need compression. Our equipment goes into those.
We have a great penetration within the FPSOs, and as we go forward, you'll have heard also from others, and SBM the other day, there is a very strong market backdrop with regards to FPSOs. And as you go forward, also pipelines. There's gonna be needed incremental infrastructure build-out, especially in the developing world, and also in the supply of the energy that's required across nations. And when you think about gas going to Europe, there's gonna be incremental pipelines that are necessary, infrastructure that's required. And you think about the energy transition. All of this doesn't just go on gas, also goes on hydrogen, also gets used with regards to CO2, also gets used with regards to geothermal.
And so there's a tremendous opportunity outside the sector of LNG, where our equipment gets utilized and actually has growth opportunities, and that allows us to be much more stable and go through the cyclicality that you have sometimes with LNG by itself.
Great. Lorenzo, you and the team have built a, you know, one of the best Gas Technology Equipment franchises in the marketplace. Could you talk about the interlinkages between Gas Technology Equipment and Gas Technology Services?
Definitely, and again, this is an area where I mentioned before, razor, razor blade. And I think it's important to better appreciate the way in which the life cycle of what we deal with in the projects that we're in, and getting an appreciation for how that can be also monetized over time, because these are long-term relationships. And if you look at our equipment, when it gets installed, it could be a couple of years, anywhere between 2-3 years between the order and the installation. Then, it could be another few years between the installation, commissioning, the upstart of the equipment, and then the initial services.
What's important to note, though, is once we've got the incumbency, once we've got the equipment, we are the OEM, and if you look at LNG in particular, we provide contractual service agreements that extend out over 20-30 years as these large liquefaction infrastructure plants continue their life cycle, and that provides us an opportunity of 2x the revenue. It provides us an opportunity of 2x plus the margin rate on the original equipment, and this is significant growth opportunity, as well as a solid line of sight to the growth trajectory. If you look at our installed equipment, just on LNG, we're gonna be going up 70% in our installed equipment, just because of the cycle we've been through.
So the line of sight that we have to that equipment then being serviced as we go forward, it doesn't happen day one, though, and that's the important aspect of understanding our life cycle. So you've got to look out to 5 years, 10 years, 15 years, but we've got service contracts that extend out into 2050, and that provides a huge stability for our company as well, and durability in being able to have earnings and also predictability.
Great. Lorenzo, two of the key mega trends we're seeing in the market are data centers and just secular power demand growth, which has obviously been important for investors. Can you talk about, you know, how Baker could benefit from increasing demand for power solutions related to data centers?
It's great to see the growth in data centers and also the, I think, excitement around now, suddenly, even in the United States, there being a view that there's gonna be energy demand increase that needs to be both off-grid as well as on-grid, and also clean power being provided, as well as then internationally. You look at the data centers that many of the companies are announcing, it's a huge opportunity for Baker Hughes. And in fact, we're playing in the space with developers, directly also with the companies that are going to be providing the data centers and also with Microsoft, AWS, Google, and alike. How we play? There's a couple of areas. First of all, as you look at the aspect of just having base load power off the grid, if you think about grid instability, you think about intermittency.
I live in Houston, and the number of times we have outages during the course of a storm is significant. A data center needs to make sure that it has a reliable source of power all the time, so you need to have off-grid applications, and that's where our NovaLT turbines, 16-megawatt, comes in. Also, a full range of industrial gas turbines that can be packaged and provided as power source from a gas perspective, as well as then being hydrogen-ready. We're the only company with a 100% hydrogen-ready gas turbine that's already been sold into the marketplace with Snam in Italy, which can be used on natural gas to begin with, and then go towards hydrogen. Also, as we go forward, there is the aspect of utility scale.
If you think about data centers in one location, the permitting for a combined cycle power generation plant is gonna take time. We have a partnership with NET Power. NET Power is a 300-megawatt clean power solution, utility scale, off of natural gas, oxy combined cycle, and it is very suitable as we go forward. So we're gonna be playing across the board with regards to power supply immediately, which is off the grid with the packages we can provide, but then also being able, through our partnership with NET Power, to go towards utility scale, clean power. And we're seeing this marketplace really starting to grow significantly and a lot of interest from our customer base.
A quick follow-up. GE Vernova is an independent public company now. In fact, they're presenting right at the same time next door.
They are.
Ironically. Can you detail how the relationship works between you and Vernova?
It's a very good relationship, and in fact, I had the chance to say hello to Scott beforehand because, obviously, we have similar backgrounds, and we come from, you know, a similar upbringing relative to the capability and technology that we have. And in fact, we abide by commercial agreements in place that were put in place at the time of the separation and are very established. They have their specific areas of the market and their specific high-power output gas turbines. So when you think about the large frame, heavy-duty gas turbines, they go into the electricity space of the large utility players. We play, obviously, in the oil and gas, we play in the smaller range, and we buy and sell from each other. And so, you know, I'll actually buy from them, the large frames, they'll buy the smaller frames from ourselves.
It's a relationship that works very much in harmony, also towards technology and opportunities to look at advances in technologies and efficiencies for our customers. It's all predicated on documents and contracts that have been in place and are very established.
... Great. Let's talk a little bit about global gas. Lorenzo, you've been very clear on your view that global gas and LNG, and how natural gas is not a transition fuel, but a destination fuel. What are you seeing today that gives you confidence in this view?
I think there's a realization that, energy demand is growing and gas is the solution for us. This is the age of gas. I've said it before. Let's just take LNG. And since, 2019, we've been saying there needs to be an installed capacity by 2030 of 800 million tons per annum. We are well on track to do that, and in fact, I think people were suspicious at the outset when we said it in 2019. Now, you look at the demand curves, you also look at the uptick that's happening now. As we get into the 2030s, there'll be more LNG that comes online as well, but we need an installed capacity of 800 MTPA by 2030. LNG allows natural gas to be flowing, and it allows the energy to provide a good source.
Also, as you look at the energy transition plans, yes, the developing world is still utilizing coal, but their energy demand is increasing at such a rate that they've already got their plans to utilize more natural gas. When you look at China, you look at India, their consumption of natural gas is increasing. Renewables will play a part, hydrogen will play a part, but if you look at the urgency with regards to power coming on, energy being available, today, natural gas is both the transition and destination fuel. And the good thing is that it's abundant, and it's lower emissive than coal. And so we're strong proponents of natural gas and really see it as a growth opportunity going forward, as well as then continuing to evolve in the energy mix with the energy transition. Now, though, is the time for gas.
Great. Let's talk about new energy. New energy markets seem to be evolving a bit slower than many had thought. Would you agree with this viewpoint? And, perhaps talk about which new energy markets are you most optimistic about looking out to 2030.
So we've always been of the belief that the energy transition would take time, and actually, when we laid out our plan and we looked at the addressable market, our addressable market that we see by 2030 of $60 billion-$70 billion of new energy hasn't really changed. And that's made up of CCUS, it's made up of hydrogen, it's made up of geothermal, it's made up of emissions abatement, emissions management, and clean, integrated power solutions, and all of our equipment and capabilities going into those end markets. And as you look at our success in 2023, we already booked over $750 million of new energy orders. As you look at our guidance for this year, 2024, we're on track for $800 million-$1 billion.
As you look at our first quarter, we're already above 220. So that line of sight is there, and we actually think that it's going at the pace we assumed it would. We think CCUS is gonna be a fast mover, and it's gonna be necessary with regards to the targets that many of the companies have placed as pledges out there with regards to reducing their CO2. At the same time, we're seeing hydrogen continue to increase in the belief. You'll have seen the offtake that was announced from also Air Products, Total. You'll have seen that there's many FEED studies that are taking place on hydrogen, so it takes time. I've been through the creation of LNG. I see hydrogen being very similar. Something like this, you know, it took LNG 40 years. Hydrogen will be quicker, but it doesn't happen overnight.
Then you've got the other areas of geothermal. What's good is we're selling the equipment we have today, while we're also developing the new technology. So we're very confident in the outlook that we've laid out relative to the order uptake, and we said that by 2030, you know, we see new energy being around $6 billion-$7 billion for Baker Hughes of a growth taking place. And with the capabilities that we have and also with the growth that we've seen, we feel very positive about that.
Great. Let's shift gears, talk a little bit about your margin targets. You had a good Q1. Margins in both OFSE and IET were up 80 basis points year-over-year. You had some really nice progress in IET. As you know, you and Nancy are on a margin expansion journey. Can you talk about what we need to see from IET to get on the path to 20% margins by 2026?
Arun, very pleased with the first quarter across Baker Hughes and the two segments. And when you look at it holistically, both of the segments showing margin accretion, and as you look at you know, the 80 basis points across OFSE and then also IET. And really, as you look at IET, you know, we're very confident in that 2026 20% EBITDA as we are with OFSE on the 20% that we set for 2025, and I think the line of sight for that OFSE is very clear. As you look at IET, it's really made up of a few levers that you're starting to see materialize in the numbers, and you'll continue to see materialize. The first is we've got an amazing backlog.
We've got that backlog from what we've taken in, and now we're executing that backlog that's at a higher margin rate and actually putting it into the field. So you've got the volume, the price, and the backlog that's being executed from what we've built as orders. Secondly, we've got efficiencies. As you look at the amount of volume that's going through from a supply chain perspective and an engineering perspective, those efficiencies yield a better absorption of costs. So the liquidations are no longer there. We're able to drive productivity and efficiency. As you go forward, our Industrial Tech business, getting back to the historical rates, you know that we had some supply chain constraints. Those supply chain constraints are being alleviated. Chips are available. We've now been able to validate the chips.
That takes 12-18 months, and so those Industrial Tech margins are going back to the historical rate, and the gross margins were always there. We have also new service offerings and new digital solutions that are being introduced that actually provide us the margin rate improvement versus what we were selling historically. And last is, as we go forward, you know, from an investment standpoint, and, as you look at base cost productivity and from an R&D standpoint, it starts to level out, and we're continuing to drive the base cost productivity. So as you look at those levers, there's a very clear roadmap towards that 20% of the EBITDA on the IET side.
Okay, let's take a minute to talk about OFSE. Maybe you could highlight your macro views given the OPEC+ announcement, plus, some of the noise we're hearing out of Saudi Arabia.
Yeah, lots of noise.
Yeah.
I think, the important aspect is, let's stay focused on the macro and what's taking place, and, you know, we continue to see that, there is, strong international growth. We see, you know, high single digit. We said that from the beginning of the year. May not have been as, robust as some others thought, but we stayed true to what we said at the beginning of the year. We still see that high single digit. We think that, again, as we look at going forward, North America will pick up, you know, as we go into 2025. As you look at the rig count, and you look at activity, clearly 2024 is slightly depressed.
We said that at the beginning of the year, and we continue to be really on pace for what we said at the beginning of the year of the market outlook as we go forward. And I think, the fundamentals from a demand perspective, especially with international activity, continue to be robust as we look at also 2025.
Lorenzo, I wanna conclude today talking a little bit about M&A. Let's start in OFSE. Your largest competitor has been recently more active around M&A. One of the questions we get is, what kind of impacts to Baker Hughes from the combination of SLB and ChampionX? How does that impact your Production Solutions business?
We feel very good about our proposition and also the way we're set up from a portfolio perspective. We came out last year very much showing our Mature Asset Solutions. We're very established in chemicals. I think people know that. With Petrolite, we just opened a new facility in Singapore. We've got a facility in the Kingdom of Saudi Arabia that is finalizing commissioning. We've got both upstream and downstream chemicals. We're very present in the ESPs with Centrilift. We've got a great market position and also great customer acceptance. And we are seeing great opportunities to also integrate our digital offerings of Leucipa with production optimization and helping the Mature Asset Solutions. And, you know, when you look at the mature assets, this is really the area that's gonna grow going forward.
As you look at production, you know, 70% of the world's production comes from mature assets, and we think that as we go forward, there's gonna be a lot more focus on those basins as we look to increase even by 1%-2%, that provides significant volume of supply, and we've got the right setting. So M&A activity is happening. You've seen all the activity on the E&P side. We think we'll benefit from that over time. They tend to, you know, favor the larger players and also the technology. And on the activity in our field services has been relatively limited, and we don't see any change to our portfolio or also our strategy.
Great. Lorenzo, we're out of time. On behalf of the J.P. Morgan team, thanks for participating in the conference this year.
Thank you very much.