Good day, ladies and gentlemen, and welcome to the Baker Hughes GE Company 4th Quarter and Full Year 2017 Earnings At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Phil Mueller, Vice President of Investor Relations.
Sir, you may begin.
Thank you, Saundra. Good morning, everyone, and welcome to the Baker Hughes, a GE Company 4th quarter and total year 2017 earnings conference call. Here with me today are our Chairman and CEO, Lorenzo Simonelli and our CFO, Brian Worrell. Today's presentation and the earnings release that was issued earlier can be found on our website atbhge.com. As a reminder, during the course of this conference call, we will provide predictions, forecasts and other forward looking statements.
Although they reflect our current expectations, these statements are not guarantees of future performance and involve a number
of risks and
assumptions. Please review our SEC filings 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 non GAAP to GAAP measures can be found in our earnings release and on our website atbhge.com under the Investor Relations section. Similar to last quarter, all results discussed today are on a combined business basis as if the transaction closed on January 1, 2016. With that, I will turn the call over to Lorenzo.
Thank you, Phil. Good morning, everyone, and thanks for joining us today. On the call today, I will give a brief overview of our results in the Q4 and total year. Then I will share our perspectives on the market dynamics in our operating segments and highlight some of our key achievements in the quarter. Finally, I will give you some perspective on how we see the market developing into 2018 and explain how our strategy is aligned to those developments.
Brian will then review our financial results in more detail before we open the call for questions. Beginning with the Q4, we delivered $5,800,000,000 in orders and $5,800,000,000 in revenues. We saw growth in our shorter cycle businesses and declines in our longer cycle businesses as expected versus the prior year. Adjusted operating income in the quarter was $303,000,000 We continue to see improved margin performance in our oilfield service business, partially offset by challenges in our long cycle businesses. Operating cash performance in the quarter was strong.
We made progress on the improvements we discussed with you on the Q3 earnings call, while we ended the factoring program. Earnings per share for the quarter were negative $0.07 and adjusted EPS was 0 point 15 dollars In the Q4, our teams continued to execute on our integration plan. We delivered $81,000,000 of synergies in the quarter. In the second half of twenty seventeen, we realized a total of $119,000,000 of synergies. Our synergy target of $700,000,000 in 2018 remains on track.
We are focused on the priorities we laid out: growing market share, improving margins and delivering better cash generation. 1 of the immediate focus areas was to review our balance sheet and optimize our capital structure. Significant progress was made in the 4th quarter as we increased our quarterly dividend to $0.18 per share, announced a $3,000,000,000 share buyback authorization and issued $3,950,000,000 in senior notes. I want to thank all of our employees for their hard work and the progress we made during the 1st 7 months as BHGE. Moving to our 2017 total year results, orders were $22,000,000,000 Orders in turbomachinery were slightly up versus 2016, despite the 16 despite the continued lack of new LNG projects, while the Digital Solutions and Oilfield Equipment businesses grew orders substantially.
In 2017, we delivered revenues of $21,900,000,000 and adjusted operating income grew significantly to $1,000,000,000 Despite continued market headwinds in 2017, we maintained our commitment to invest in research and development as technology and innovation remain core to our strategy. We invested approximately $600,000,000 in R and D in 2017. BHGE's efforts in 2017 resulted in over 80 U. S. Patent grants and over 240 new product launches.
On HSE, we continue to drive a strong culture of safety for our employees, our customers and everyone involved in our operations. Since the implementation of the Perfect HSE Day program on July 3, we achieved over 70 perfect HSE days and we had over 130 perfect HSE days in total year 2017, a fantastic achievement for the BHGE team. As you know, GE is evaluating exit options for its stake in our company. While GE reviews its position, we remain fully committed to what matters the most, delivering for our customers and for our shareholders. We are well positioned for any changes ahead as we already operate independently with a strong governance structure in place.
We are focused on our execution and on delivering synergies from the merger of our 2 companies. As I stated earlier, our synergy targets remain intact with only a minor portion of the savings tied to the DIRECTV involvement. Now let me give you some more specific highlights of our reporting segments in the Q4. In our Oilfield Service segment, we saw solid growth driven by our well construction and production business lines in North America, the Middle East and Latin America. All product lines grew in North America despite the rig count being down 2.5% versus 3rd quarter.
International activity in the oilfield services remains muted with some pockets of healthy activity. Asia Pacific rig count saw an increase in the 4th quarter after having been flat much of the year, while Latin America increased steadily through the quarter. The Middle East was mostly flat for the year as rig count growth in Iraq and UAE offset declines in other markets. As you know, our focus is to increase market share in the critical regions of North America and the Middle East, leveraging our strength in drilling services, bits, completions and artificial lift. With that in mind, the Permian remains a key basin for us as rig count there continues to grow.
In the Q4, we secured several notable wins in the Permian as our drilling services product line was active on 55% more rigs than in prior quarter, delivering best in class wells across the basin. Our advanced drilling portfolio enables faster, longer and more reliable drilling in the Permian's complex geology and harsh drilling environment, leading to improved drilling economics for our customers. Our AutoTracCurve rotary steerable system continues to achieve record drilling performance for major customers across the basin. In the Middle East, our team had another strong quarter. Our drilling services product line outpaced rig count and completions grew 19%.
Further, in the Middle East, we were awarded a 3 year well construction contract. We will provide underbalanced and coiled tube drilling, bottom hole assemblies, fluids, pumping equipment, intervention services and operation support for our workover gas wells. This award underpins our leadership position in the market. We strengthened our position in the artificial lift segment, securing a number of contracts in Iraq. One such contract is to supply ESPs, completion equipment and wellheads in a large field in the country by displacing a competitor.
And another is a sole supplier contract for a different significant field in Iraq. Both opportunities position us to deliver high growth in that country. In addition to our core well construction businesses, we continue to leverage our broad portfolio to gain traction in key markets. In the quarter, we secured 150 well contracts in Thailand to provide turnkey offshore plug and abandonment services with our leading Mastiff Rigless Intervention System. The award is an important reference, which can expand into other geographies like the North Sea.
In our Oilfield Equipment segment, the subsea market continues to be challenging with low activity levels and challenging pricing. We expect tree awards to continue to grow in 2018, though at a slower rate than in 2017 and with the total still more than 50 percent below prior cycle peaks. As the short term outlook for the segment remains challenging, we are positioning the business for the future. For the last 3 years, while taking structural cost out of the business, we have been focused on introducing new technology that significantly lowers the total development cost of sub Sea fields. All of these actions better position our OFE business and we will have a lower cost and more integrated solutions that will help us grow market share and expand margins.
For example, in 2018, we will launch our next generation horizontal subsea tree, which will lower weight by approximately 40% and total cost by approximately 50% compared to a conventional tree with similar functionality. We are also commercializing new composite technology in our flexible riser portfolio that reduces cost, weight, installation time and will improve CO2 performance beyond conventional designs. Another area of innovation is our modular compact subsea pump technology that is significantly smaller and easier to deploy in brownfield developments on existing infrastructure. This has the potential to improve well performance at a minimal cost. These product and solution cost out efforts in combination with our ability to develop local content plus financing capabilities are critical, improving effective with customers.
In November, we announced an agreement for an integrated project in the Campo field in the North Sea with Siccar Point Energy. BHG is the exclusive provider for the appraisal well project and can extend it to the full field development. We were selected because of our integrated and differentiated portfolio, a great example of the strength of the combined offering we bring to the market. In our Turbomachinery segment, end markets remain mixed. The on and offshore production spaces are improving in some regions.
New LNG activity is muted as the market remains oversupplied and downstream continues to grow as refinery utilization increases and petrochemical demand rises. 2017 was a challenging year for Turbomachinery. The equipment margin was impacted by a shift from higher margin backlog to lower margin downstream backlog. Transactional services remained low. We expect these dynamics to continue in the medium term.
We are taking determined actions to address this situation. We are reviewing the business cost footprint and we are aggressively pursuing opportunities to expand in underpenetrated markets such as the industrial space while the LNG market recovers. We feel good about the strategic positioning of the business for the longer term and our technology offering in the segment remains unmatched. We had another strong quarter in the Middle East where we continue to expand our position. As previously announced, we signed an agreement for the Halifa oilfield in Iraq.
This deal represents our largest turbomachinery award with PetroChina. We also received a large contract for the DRIVE ENHANCE production at the Harad and Hawiya gas fields. We will supply 27 high efficiency gas compression trains consisting of compressors, gearboxes, electric motors and lube oil systems delivering increased operational efficiency to customer. As I mentioned last quarter, we have continued our technology focus on the development of the sub-twenty Megawatt NovaLT family of equipment. In this quarter, we have achieved another milestone.
We sold the first ever offshore NovaLT16 gas turbine driven compressor for a project in Vietnam. Our technology provides a highly efficient solution with the best in class availability and reliability while reducing operating costs. Projects in the petrochemical market are moving forward driven by healthy demand and cost advantaged supply. We were awarded a contract to provide an LM6000 PS Plus Aeroderivative Generator for an ethylene complex in Korea, a global first for the petrochemical industry. The LM6000 plus offers the best in cost per kilowatt in its power class, while delivering high reliability through its compact design.
This award is a result of close collaboration with our customer and our unique technology offering. In our Digital Solutions segment, we see continued growth for our measurement and controls product line as well as our advanced data driven digital offerings. Customers are eager to explore the opportunity to unlock value and drive productivity through better connectivity. Sophisticated sensor hardware technologies paired with enterprise class software products and industrial analytics is proving to be a winning formula for customers. We see increased demand in most end markets offset by a decline in power generation.
In the 4th quarter, we saw particular success in the industrial, automotive and aerospace sectors. Our measurement and sensing business had a great quarter, growing orders more than 20%. The product line secured a first of a kind performance based long term service agreement for ultrasonic flow meters with an important customer in the Middle East. With close customer collaboration, this deal ensures high levels of availability across a significant installed base to improve the customers' upstream production. In the quarter, we successfully completed the 1st field installation of IntelliStream with a North America based customer.
IntelliStream provides analytic driven insights and continuous learning to optimize production and reduce non productive time in a single system. Let's now turn to 2018. Our outlook remains positive. Early indications of customer capital spending are encouraging, particularly for our short cycle businesses. The recent strength in commodity prices underscored this view.
However, we do expect markets for our long cycle businesses to continue to lag. We expect strength in our oilfield services business driven by our well construction product line and increased completions activity as operators work down the drilled but uncompleted well inventory in North America. International activity remains stable and we are seeing signs of activity increase both in volume and size of tenders for new work as customers feel more confident about their operating costs and commodity price stability. The subsea market continues to be challenging and activity remains low, with prices continuing to be pressured. We expect activity in the LNG space to gain traction through 2018 as customers position to make decisions on new capacity coming online from 2022 onwards.
Looking at 2018 and beyond, it's clear that coming out of the most recent downturn, the market and our customers' expectations have structurally changed. Oil and gas service providers have and will continue to look at ways of improving efficiency and costs for customers, regardless of where the price of oil and gas may move. We are leveraging our unique portfolio of products and services to comprehensively reduce product and service costs, while improving equipment efficiency and reliability to significantly lower project breakeven costs. We are creating value through integrated and differentiated equipment and service modules that will improve our customers' total cost of projects and operations, which we are already seeing with the projects such as Siccar Point. We are developing full stream solutions in areas such as gas and subsea that are outcome based and redefine how these solutions are delivered today.
This strategy improves industrial yield for our customers, meaning lower costs, improved efficiency, less nonproductive time and more throughput. Delivering on this strategy will help our customers meet their goals and in turn help BHGE grow market share, expand our margins and generate strong cash flows. With that, let me turn the call over to Brian.
Thanks, Lorenzo. I'll begin with the total company results and then move into the segment details. Orders were $5,800,000,000 for the quarter, up 1% sequentially and down 2% year over year. Quarter over quarter, Turbomachinery orders increased 23 percent and Oilfield Services increased 5%. The growth was partially offset by Oilfield Equipment and Digital Solutions.
Year over year, our shorter cycle businesses of Oilfield Services and Digital Solutions grew orders, but were offset by declines in our longer cycle businesses of Turbomachinery and Oilfield Equipment as we anticipated. Total year 2017 orders were $22,000,000,000 up 4% versus 2016. We grew orders in every segment. Backlog for the quarter ended at $21,000,000,000 up $116,000,000 versus last quarter. The growth in backlog was driven by services, which ended at $15,700,000,000 up $460,000,000 or 3% with long term service agreements in Turbomachinery driving the increase.
Equipment backlog ended at $5,400,000,000 down 345,000,000 dollars Our equipment book to bill dropped below 1 within the quarter on lower equipment orders in both oilfield equipment and Turbomachinery. Revenue for the quarter was $5,800,000,000 up 7% sequentially and all segments grew. Year over year, revenue was down 3% as our shorter cycle businesses grew more than offset by declines in Oilfield Equipment and Turbomachinery. Revenue for the year was $21,900,000,000 down 5% versus 20 16. Our Oilfield Equipment and Turbomachinery segments experienced lower revenue as a result of lower 2015 2016 equipment order intake, which impacted their opening backlog.
Revenue in Oilfield Services was up 1%. Adjusting for BJ Services in our 2016 results, revenue in OFS was up 4%. Operating loss for the quarter was $92,000,000 On an adjusted basis, operating income was $303,000,000 which excludes restructuring, impairment and other charges of $395,000,000 incurred primarily on continued execution of restructuring projects to capture synergies as well as merger and integration related costs. In addition, we had 2 items related to customers in Latin America that resulted in a net $29,000,000 expense. This was also excluded from adjusted operating earnings.
Given the current situation in Venezuela, we reserve for our receivables and specific inventory in the country. This charge was partially offset by the release of receivables reserves related to accounts in Ecuador on which we collected a significant amount in the quarter. Adjusted operating income was up 26% sequentially. All segments were up excluding Turbomachinery. In the quarter, depreciation and amortization expense was $425,000,000 The increase versus the 3rd quarter was primarily driven by purchase accounting.
Year over year, adjusted operating income was down 16% driven by Turbomachinery and Oilfield Equipment, partially offset by Oilfield Services. Total year adjusted operating income was $1,000,000,000 up 69%. This was driven by Oilfield Services, which was up significantly due to increased volume and cost out, partially offset by declines in our Oilfield Equipment and Turbomachinery segments as lower volume and mix negatively impacted their cost leverage. Next on taxes, I will first cover the 4th quarter dynamics and then give you an update on how U. S.
Tax reform will impact us. In the Q4, we had a tax credit of $51,000,000 which includes a $132,000,000 one time positive impact driven by the new tax legislation in the U. S. This impact has been excluded from our adjusted EPS this quarter. Excluding this item, tax expense on our operations was $81,000,000 U.
S. Tax reform drove quite a bit of activity With the corporate tax rate reduced from 35% to 21%, we have revalued our deferred tax assets, valuation allowances and liabilities at this new rate. This resulted in the $132,000,000 impact I mentioned earlier. Another new element is the transition tax on our non U. S.
Retained earnings and cash. In the 4th quarter, the transition tax charge was 271,000,000 The impact of this charge was offset by foreign tax credits, which we generated in the quarter. As you recall, we had laid out some significant tax synergies from the merger. By repatriating certain foreign earnings in October, we were able to deliver on these synergies well ahead of our original plan. The last major area of tax reform is the territorial system, which theoretically exempts non U.
S. Earnings from U. S. Income tax. This piece of the new law is a net positive for us as we should be able to more freely move cash throughout the world to manage our liquidity profile.
The U. S. Legislation is quite new, so we have recorded our best estimate to date that this could change. We think our the quarter was $0.07 On an adjusted basis, earnings per share was $0.15 Free cash flow in the quarter was negative 367,000,000 dollars Included in this amount is $152,000,000 of net capital expenditures, dollars 103,000,000 of restructuring related payments as well as $1,200,000,000 of negative impact from ending our receivables monetization program. Considering the monetization impact and restructuring, we delivered a strong operational cash flow quarter.
Receivables, excluding the onetime impact from factoring as well as inventory and payables, all generated cash. We have made significant progress on implementing better processes as we discussed on the Q3 earnings call. There's more work to do, but we believe this is a good starting point for 2018 free cash flow. Ending the factoring program was the right decision and will allow us to save on interest costs and improve operating cash flow performance in 2018. We expect to collect over 75% of the receivables we didn't factor in the Q1 and for this not to impact 2018.
As Lorenzo mentioned, we raised $3,950,000,000 of debt within the quarter as part of our capital allocation actions and began executing on our $3,000,000,000 share buyback authorization. The debt issuance should effectively be cash flow neutral with the savings we expect from ending monetization, refinancing $800,000,000 of existing debt and lowering our dividend outflows through our share buybacks. Overall, we think this was a great move for the company. Next, I'll walk you through the segment results. In Oilfield Services, market conditions were relatively flat as the rig count in North America was down 2.5% with some volatility throughout the quarter.
Both spudded wells and completed wells in North America declined in the quarter, but with strong commodity price performance in the 4th quarter and through the early days of 2018, we expect a more favorable market going forward. Revenues of $2,800,000,000 were up 5% sequentially, driven by double digit growth in completions and strong performances in our artificial lift and drilling services product lines. Regionally, we increased revenue in the Middle East, Latin America, Asia Pacific and North America. Revenues for North America were 1,100,000,000 dollars up 4% sequentially as all product lines grew. We saw particular strength in our Drilling Services product line.
Internationally, revenue was $1,700,000,000 up 6% sequentially, driven by strong performance in the completions product line, particularly in Saudi Arabia and Algeria, as well as solid growth from drilling services in the broader Middle East region and Asia Pacific. Operating income was $113,000,000 up 49% sequentially driven by our progress on synergies and cost out programs as well as higher volume, partially offset by a $14,000,000 increase in D and A due to purchase accounting adjustments. Completions, drilling services and artificial lift generated strong incremental margins in the quarter. We expect the business to grow in 2018 with typical seasonality as we execute on our plans to increase share in the North America and Middle East markets and further strengthen our drilling services, bits, completions and artificial lift product lines. Market dynamics remain favorable for us as well complexity continues to increase and operators shift more to completions mode in North America.
As we execute through our synergy programs, we expect to see solid incremental margin performance. Next, on Oilfield Equipment. The business executed well this quarter but continues to operate in a difficult environment. As Lorenzo mentioned, we continue to view the offshore market as challenging in the near term. OFE orders in the quarter $561,000,000 down 27% versus last year, broadly in line with our expectations.
Equipment orders were down 42%, primarily due to the timing of some orders in flexible pipe systems. This decline was partially offset by our subsea production business gaining incremental volume on existing agreements in Australia and Sub Saharan Africa. Service orders were up 21% year over year, driven by increased demand for surface wellhead spares. Revenue was $672,000,000 down 21% versus the prior year. This was driven by lower subsea production systems equipment deliveries and installations as well as continued market softness in our rig drilling systems business.
As mentioned previously, we expect revenue growth in 2018 as the large equipment orders we won in 2017 begin to convert into revenue. Operating income was $29,000,000 down 78 percent year over year. This was driven by continued volume and pricing pressure and negative cost leverage. Sequentially, OFE operating income grew $72,000,000 driven by year end volume growth, better cost productivity as we closed some long term projects and the non repeat of the $30,000,000 negative FX impact we incurred in the 3rd quarter. Overall, the OFE business will continue challenged into the Q1 as we expect lower volume.
We expect to see positive momentum as we progress through 2018. We remain focused on positioning this business for the future. Moving to Turbomachinery. Overall, the results were below our expectations. We continue to work through lower margin equipment backlog and volume.
We had anticipated higher service volume to partially offset these dynamics, but activity remained muted. Orders in the quarter were $1,700,000,000 down 8% year over year. While orders performance was broadly in line with our expectations, we saw some push outs on larger equipment deals. Total year orders were $6,200,000,000 up 2% versus 2016. Turbomachinery Services backlog ended the year at $13,500,000,000 dollars up $500,000,000 versus the Q3 and the margin rates on this remained strong.
Revenue for the quarter of $1,600,000,000 was down 14% versus the prior year driven by both lower equipment backlog and services activity. Operating income of $146,000,000 was down 53%. This was driven primarily by lower volume, which drove lower cost absorption and productivity versus the Q4 of 2016. Looking forward to 2018, while the business continues to be very well positioned for an improving market environment, we expect the first half to be challenging with lower services volume driven by the maintenance schedules of our customers. We expect TPS margin rates to be at or around 4Q 2017 levels in the medium term.
Rod and the team have an aggressive cost out plan to offset some of these short term dynamics. We expect sequential improvements to our margin rates as we progress to the second half of twenty eighteen when business mix improves and our cost actions yield results. Next on Digital Solutions. We see some early signs of recovery in the oil and gas end market and other markets like aviation and automation remain strong. Major project investments, however, remain muted, especially in our 2nd largest market, power generation.
In the quarter, Digital Solutions orders were 694,000,000 up 1% year over year driven by strong performance in our measurement and sensing product lines, partially offset by softer demand for our controls products and power gen. We continue to see a slowdown in large EPC projects in the Middle East and Europe, partially offset by strength in China. Sequentially, orders were down 24%. Excluding the large digital order we booked in the 3rd quarter, orders were up 12%. Revenue for the segment was $695,000,000 up 4% year over year.
We saw growth in our inspection technology and condition monitoring businesses as we executed through a strong opening backlog, which was slightly offset by headwinds in our measurement and sensing and controls product lines. Operating income was $107,000,000 up 1% year over year driven by strong cost execution offset by product mix as we continue to penetrate industrial and other non oil and gas markets. Sequentially, operating income grew $20,000,000 driven by seasonal year end volume growth, improved cost productivity and some positive mix. Overall, we expect the Digital Solutions business to file its typical seasonal profile in the Q1, driven by customer spending behavior and product mix, which will lead to a volume decline sequentially. We expect continued top line growth and margin expansion into 2018 as we execute further cost reductions and benefit from synergies in combining our pipeline inspection businesses.
Lorenzo, with that, I'll turn it back over to you.
Thanks, Brian. Overall, we've made a lot of progress in the quarter. I'm encouraged by the results in our Oilfield Services business and our operational cash flow generation. We've made tremendous progress on our capital allocation priorities in the 4th quarter. We continue to position the company for further growth and profitability, and we are focused on executing to deliver on our commitments on growth, margins and cash.
Phil, now over to you for questions.
Thanks. With that, Saundra, let's open up the call for questions.
Our first question comes from the line of James West with Evercore. Your line is now open.
Thanks and good morning guys.
Hi, James. Good morning.
Lorenzo, I want to go ahead and kind of hit the elephant in the room head on, if you will. The GE ownership interest in Baker Hughes, could you remind us what their options are in terms of exiting the ownership of BHGE? And then more importantly, could you talk more about what changes as if and when GE exits their ownership position, especially given the contracted agreements that you have in place that already envisioned some sell down at some point?
James, thanks for the question and good to hear from you. As you stated, GE announced a strategic review of its position of BHGE, which remains ongoing. So from that standpoint, we'll keep you updated as we hear more. There is a contractually a 2 year lock up that you know and that's in place. What I can assure you is that I run a strong independent company with a focus on executing our strategy to the benefit of our customers and all of our shareholders.
The synergies remain on track at $700,000,000 for 2018 And the majority of the value creation is within our control, and we feel very good about that. So the dependence from a GE perspective to achieve those is minimal. We've got a strong governance and operating model in place, and we're well positioned to execute and deliver our commitments to shareholders in any structure going forward. So I think at this stage, really, it's, we'll keep you informed as we hear more.
And then Lorenzo, I believe and correct me if I'm wrong here, but I believe even as they if and when they exit, there are certain contracts that still allow you some of the access to, say, the GE store or things like that for a certain number of years. Is that correct? And so there would be well, I recognize the synergies are all within your control, but some of the other maybe somewhat benefits would still be in place?
Yes, James, that is very much correct. And in fact, when we created BHGE, we ensured that we had the capability to access technology from General Electric and that would be ongoing irrespective of the relationship and the ownership structure. So we've got commercial arrangements in place.
Okay, perfect. Thanks, Lorenzo.
Thanks.
Thank you. And our next question comes from the line of Angie Sedita with UBS. Your line is now open.
Thanks. Good morning, guys. Hi,
Angie. Hi, Angie.
Hi. So really impressive quarter on Q4 as far as cash flow generation. Maybe you could talk a little bit about cash generation in 2018 and update us again on the uses of cash going into the year?
Yes, Angie, maybe just to kick it off and then I'll pass it over to Brian to give some of the details because I'm really pleased by the way in which the team performed in Q4. We continue to see improvements in the focus from an operational standpoint. We indicated in the last call that we would start undertaking process improvements, and we've seen those start to come through. And we retain very much our stated capital allocation of returning 40% to 50% of net income to shareholders. With that, I'll pass it over to Brian to
give some more details. Yes, Angie, after the strong 4th quarter, taking a look at 2018, the first thing is we expect higher net income, just given what we're seeing in the marketplace and more importantly, the synergies, which are very positive for overall free cash flow performance. We talked about a lot of the operating changes that we were going to be putting in place here in the Q4. And while I'm pleased with the performance there, we still got more work to do. So we are anticipating continued improvement in working capital, specifically in accounts receivable, as well as inventory.
So working capital should also be positive as we look at 2018. And then the other big areas really are around merger and integration costs and the cash associated with those. Those have come down this quarter and will continue to go down through the first half of twenty eighteen and throughout the year. So they should be significantly lower. We are continuing to invest in high return restructuring projects and we expect that cash flow impact to continue through 2018, although tapering off as we work through the year.
So overall, we expect much better free cash flow performance in 2018.
Great, great. That's very helpful. So, and then for Oilfield Services and Equipment, you had a nice move at the top line for both businesses in Q4. Can you talk a little bit about the traction you're seeing in recapturing market share there? And then also for 'eighteen, the pricing outlook for both of those businesses, particularly for Subsea?
Yes. And Angie, maybe start off with Oilfield Services. And as you know, one of our key aspects has been regaining market share within North America and also within the Middle East. And we've seen now 2 straight quarters where we've been able to increase revenue in our core oilfield services product lines and have outpaced rig counts. So we feel we're performing well in those key basins in North America and winning back some critical work internationally, particularly with the Middle East.
We've still got work to do. We feel that there's a good outlook going forward on the Oilfield Services side, especially as you look at North America with the price that you have in place of WTI and the activity levels continuing to be strong. So we're looking to see encouraging revenue as we go forward there. On the OFE side, just to highlight there, again, we mentioned that the outlook on the offshore and deepwater remains challenging with some of the projects that have been pushed. We've got Brent that is favorable at above $70 on days.
So we do think the tree count will be up in 2018, but the rate of the increase will still be lower than what we saw in 2017 and still off the highs of the peak. So we'll start to see some of those projects come through in the back half.
And then maybe a little bit of color on the pricing, and then I'll turn it over.
Yes. Angie, if you take a look at pricing, while there certainly were some signs of stabilization in some product basins. You haven't seen really any big price movements even though we've seen the commodity strength here in the is is pretty tight and a lot of those a lot of that business is on contracts and some of the pricing is already laid in there. But I'd say in general, this is probably one of the best markets we've seen in the last few years in the oilfield services space. So we feel positive about where this is going to go.
But I think pricing is going to lag the overall commodity price increases, but something we're paying attention to and something we're actively working.
Thank you. And our next question comes from the line of Jud Bailey with Wells Fargo. Your line is now open.
Thank you. Good morning. Good morning. Question, if I could on TPS. Lourenco, you talked a little bit about it, but could you maybe help us think about the order outlook in 2018?
You referenced maybe trying to exploit some opportunities on the industrial side and of course LNG provides you with good optionality. Is it fair to think about order growth, I don't know, in the 10% to 15% range or could it be higher than that? Could you just maybe help us think about the moving for orders for TPS this year?
Yes. Maybe just to break down, John, a little bit of TPS because as Brian mentioned as well and I did, 2017 clearly was challenging with what we saw in TPS, the equipment margin being impacted with the shift from the higher margin backlog to the lower margin downstream and transactional services remaining low. As we look at 2018, the business continues to be well positioned as the market improves. And as you mentioned, we're looking to other sectors such as the industrial with our new platform of the Nova LT gaining entry and being able to get a position there as we start to see LNG then pick up in the second half. So it will be tough in the first half, but with a recovery in the second half.
And we think we've got a great positioning overall when you look at TPS. Included in there is obviously a strong services backlog of $13,500,000,000 So overall, single high single digit from an orders perspective as you look at the total year from 2018 with some of the LNG starting to come back in the second half. And longer term, nothing's changed here. This is a great solid business. We've got a great industry leading franchise within TPS as the LNG market comes back and we continue to penetrate the other segments.
Okay. And then my follow-up would be on TPS margins. I think Brian referenced first half of the year in line with 4Q. I just want to clarify, well, 2 things. 1, does that contemplate the restatement that was referenced in the Q4 in terms of new accounting for the long term service agreements?
And then also as you kind of execute on some of these cost initiatives, is it fair to think about the back half of the year rising 200 basis points or points? I mean is that a realistic goal based on what you think you can do on the cost side?
Yes. If you look at what I had said about the margin rates, I did for ease include the impact of the change to the 606 new rev rec standard. And just taking a step back and looking at that, I just wanted to remind folks here that what that new rev rec standard does is it just basically impacts the timing of revenue recognition and productivity that we drive in these long term service agreements. It basically takes them from a retrospective view to prospective only. So it doesn't change the economics of the contract.
They're still incredibly profitable. Our billing milestones for customers don't change. So it really doesn't change the cash flow either, but did include that in the short term margin rate outlook for you there. If you take a look at the second half of the year, I think you're spot on here in terms of the cost out initiatives that we've got laid in. You'll start to see them impact more dramatically in the second half.
The other thing that you have is the lower margin equipment backlog, as I said in the Q3 call and I'll reiterate here, that winds down really through the first half and turns in the second half. So the tailwinds are definitely greater than the headwinds as you move into the second half and start to see the sequential margin improvement in TPS.
Okay, great. Appreciate the color. I'll turn it back. Thanks.
Thank you. And our next question comes from the line of David Anderson with Barclays. Your line is now open.
Great. Thanks and good morning. A question on the services side. So your North America business, your product mix is quite a bit different than your larger peers. So maybe a couple of questions around there.
Artificial lift and kind of your production size has always been kind of a key part here. You have the rod lift and the ESPs, you can provide that full that kind of life of well solution. Can you talk about how successful you've been in kind of implementing sort of that life of well solution? Is there a pushback from customers? How do you see this progressing over the next few years, please?
Yes, Dave, good to hear from you. And I'll kick it off and then pass it on to Brian. And look, we're seeing the strategy within OFS play out as we anticipated. So as you mentioned, we do have a different portfolio than our competitors. We do not have the pressure pumping focus.
And so when we look at our different product lines and service lines, we feel good about the fact that we're outpacing the rig count. Again, you saw revenue growth in all of the product lines within the Q4. And in particular, when you look at the life of fuel concept, you look at the introduction of Fullstream. And look, Fullstream isn't just trying to sell everything. It's associating the different product lines and services capabilities we have, such as a linkage of the rod lift or ESP with some of the digital capabilities that we have within Digital Solutions.
I referenced the first IntelliStream that we actually introduced to a North America customer. Those are providing better outcomes for our customers, driving better cost per barrel equation, and that's really what we're looking to do going forward. So it's an early start, but we feel good about where we're headed on the introduction.
So Lorenzo, along those same lines, another core here is on the completion side. You highlighted a number of new technology, new products in your release today. Can you talk about kind of what your customers are asking from Baker Hughes? Is it around kind of efficiencies around pad drilling? Is it around higher IP rates?
Is it something else? What are you getting pulled into these days? What are they asking Baker Hughes to provide you?
So look, if you think about ultimately the customers, what they're worried about is the total cost equation and both from the CapEx perspective of undertaking the project initially and then also the operating costs. So from BHGE, they see a company that has the opportunity to really drive nonproductive time down within the OpEx. We're also able to look at, from a capital expenditure perspective, the way in which we design the project. You had the on the OFE side, the new horizontal tree, which is able to bring down the cost of a conventional tree by 50%. So that's really where we're targeting.
And the overall equation is increase production rates, be able to bring down the cost equation on cost per barrel. And we're having good impact and good discussions as we go forward with our customers.
Thanks Lorenzo. And if you don't mind if I could just squeeze one in there for Brian here. Excluding the receivables monetization, you had a very good quarter in the free cash flow as you alluded to. In the past, you've talked about getting to a 90% free cash flow conversion rate. Could you discuss some of the levers that you need to get there?
I'm just kind of wondering how much of that timing of that is predicated on a cyclical recovery here?
Yes. David, if you think about it, it's kind of a couple of things I've talked about with Angie. We've got a lot of opportunity here for self help. One is really around as I talked about, as we drive higher net income in the synergies and increase our margin rate, that's a direct impact on free cash flow and that is a pretty high conversion net income there in terms of the cost savings that come through the synergies. The second area again I'll point back to is in working capital.
While we did make some progress here in the quarter, we do have opportunities particularly in receivables as well as in inventory to drive better performance as we drive better process enhancement, product rationalization, site rationalization and take a look take a look, the legacy oil and gas business was in excess of 10 days better in terms of payables versus the legacy Baker business and we're starting to see some improvements there. So we think that is that's really a self help story. And then finally around CapEx, we think we as a combined business are less capital intensive than what folks have typically been used to in oilfield services. In addition to that, as we look at the integration, we're focused on better fleet management, better repair turnaround time, trying to optimize our CapEx spend and we're seeing some synergies come through in that area as well. So we think we've got a lot of self help here to get to that 90% free cash flow conversion.
It's not going to happen overnight, but we see a good path to get there.
Thank you. And our next question comes from the line of Scott Gruber with Citigroup. Your line is now open.
Good morning.
Hey, Scott. Hi, Scott.
I want to come back to the TPS margin line of inquiry, number of moving pieces here near term, how should we think about normalized margins in that segment over the longer term?
Yes. If you take a step back and look at what's going on here, just to give you a little bit of insight and that helps think of walk you through normalized margins here. We've got a couple of relatively short term dynamics going on. As we've talked about a couple of quarters now, we've got a mix headwind in the equipment backlog with the lower margin downstream focused projects. And again, I expect that to unwind here in the first half.
And then we'd anticipated offsetting a portion of this with services volume, but we did see that activity coming in a bit lower as we saw some push outs, some delays in customer maintenance events and schedules. And we do anticipate that to turn as well. But with the visibility we have in both the contractual service portfolio and in the installed base, it's not on contract. We don't see a lot of major outages here in the first half. So that within the services business also has a downward pressure on the mix.
And then finally, because we had lower volume the quarter than we anticipated, we had a lot of productivity projects that didn't flow through to the bottom line just given that the volume was lower, it doesn't flow through the P and L. So that should come through later as volume continues to increase. And then, Rod and the team are working at a pretty strong cost out program as we deal with these dynamics. The backlog in the equipment does get better, so you start to see that turn. So that is a positive impact as we go into the second half of twenty eighteen.
The service headwinds are really short term based on the visibility we have with outages. And while the second half of twenty eighteen looks good, 2019 looks much better and we've got visibility into how that should turn. So sequentially, we should get better throughout the year and 2019 should certainly be better from a margin standpoint and you should see progressive improvements here that are pretty significant.
I think, Scott, if you look at it, we've always known TPS is more of our longer cycle business. It takes longer to recover. And as we see the other projects starting to come back with the favorable outlook within the industry, you'll see that pick up. And we've really got also the OFS business is shorter cycle where we see the pickup straight away.
I appreciate all the color. But as you think about the out years, with the longer cycle businesses returning, would you be happy with 15% in that business? Is it 20%? Kind of just thinking longer term, what would you guys be happy with achieving in that business on a normalized basis?
Yes, I think long term, I don't think things have changed dramatically in the business. To Lorenzo's point, it does take longer to see the recovery in activity flow through the P and L. But fundamentally, we've got a strong market position. We like the technology we have. We're making our cost position better and don't see a fundamental shift in the long term profitability of this business.
You have ebbs and flows within a quarter, but feel pretty good about the long term profitability and the sequential improvements over time.
Got it. And Brian, if I can sneak another one in, I may have missed it, but can you just provide some color on equipment margins in 1Q and over the course of 2018? How much more restructuring is possible there? Can you sustainably move back above breakeven in 2018?
Yes. Okay.
Sure. As we mentioned, I think Neil and the team had a strong quarter here with a lot of productivity coming through as they closed out some of the projects seeing real cost savings there. If you think about it though, they are volume pressured, especially in the first half of this year, just given where the backlog has been and the order intake has been. And we'll start to see some revenue in the second half of the year coming through on the orders that we booked this year. So naturally with more volume, you will see their margin rates improve.
We have executed some restructuring in that business. Neil and team are continuing to look at the cost structure. We actually think we've got some synergies between OFE and OFS as we move forward that will help the business as well. But again, a similar story to TPS from a long cycle standpoint, you will see sequential improvements come through, but it does take a little bit longer for that volume improvement to have an impact on margin. So look for sequential improvement in the second half.
And again, just to maybe remind you, our synergies for 'eighteen remain very much on track. So they're all in play.
And our next question comes from the line of James Wicklund with Credit Suisse.
Good morning. So far, all of the big three oilfield service companies have noted that one of their primary strategic objectives, if not the primary objective is to grow market share. It strikes me when the 3 biggest players in the sector all go after market share aggressively at the same time, something suffers and it's usually price. In the Middle East, you're gaining work in Iraq or some companies choose not to go or at least increase activity. That's one way to gain market share.
What are the levers that you guys have to pull that will make your market push market share push successful? And can pricing really go up if you're all shooting at each other?
Yes, James. First of all, just I think when you look at our strategy and we've mentioned the growing share, first of all, we're coming from it, the aspect we've got the benefit of synergies that are coming through from a cost perspective as we brought together the companies. So we're bringing down the cost of our products, and we're looking for margin accretion to continue within the OFS business. We're also looking to continue to expand on the relationships we have with our existing customers, and that's the benefit of the bringing together of the 2 companies. The scale and presence we have in these areas of the world, we're able to definitely benefit from that, and that doesn't necessarily increase our cost.
It actually helps us from a volume perspective. So look, we've seen that we've been able in North America to, again, outpace rig count, and you've seen the margin improvement take place within the business segment. Also within the Middle East, you've seen us be able to win some key awards. And again, that volume is over the installed base that we have. So we feel good about these key pillars that we have.
I can't speak to how the competition is doing it, but we clearly are looking at margin improvement.
That's a very good answer, and I appreciate that. My follow-up if I could is still back on price. You noted that margins will go up, but it will be at least in part due to the cost synergies that you can provide. What is generally and I know you guys do a ton of stuff everywhere, but generally at least in the oilfield service side of things and to some extent the equipment side, but I guess it's really the oilfield service side of things. Do you think international pricing will move up this year?
Or will your benefit primarily be from reduced cost?
I think, and you've got to look at it internationally, it's really based on large tenders. So it's difficult to look at it from a pricing perspective on a comparable saying what's happening price by price versus tenders. So what we're really focused on is the total operating expense and what we're able to provide within each tender and making sure that those margins are accretive for us.
Thank you. And ladies and gentlemen, this does conclude today's Q and A session. I would like to turn the call to Mr. Lorenzo Simonelli for any further remarks.
Thanks, Sandra. And I just want to thanks everybody for joining today. This is really the early part of the journey. We're 7 months in, and I'm very pleased with the progress that's being made on the integration, the coming together of the 2 businesses. We've made significant progress in the Q4.
You've seen the hard work by everybody on the integration front, also the capital structure. I'm looking forward to 2018 and also continuing to drive the key pillars of our strategy around growth, margin and cash in an improving environment. As we look at the industry, it's clearly got positive momentum, and we've got an opportunity to capture that. So thanks a lot, and speak to you soon.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.