Baker Hughes Company (BKR) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Baker Hughes A GE company Third Quarter 2018 Earnings Call. 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. [Operator Instructions] 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, Nicole. Good morning everyone and welcome to the Baker Hughes, A GE Company third quarter 2018 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 today can be found on our website at bhge.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 at bhge.com under the Investor Relations section. With that, I will turn the call over to Lorenzo.

Thank you, Phil. Good morning everyone and thanks for joining us. On the call today, I will give a brief overview of our third quarter results. I will then share some perspectives on market dynamics and highlights some of our key achievements in the quarter as we are building out our market leading product companies. We are now in the second year of our journey as BHG, we are operating the company better and we are driving change in the industry with our differentiated portfolio. We are focused on commercial innovation, outcome based models and leading technology. Today, I will provide few exciting examples of our outcome based solutions. The product is a new approach to integrated well construction in oilfield services that will provide significant productivity across the value chain. The second is a new philosophy for offshore development, which introduces new technology and a productivity based approach to subsea deepwater projects. Brian will then review our financial results in more detail before we open the call for questions. In the third quarter, we delivered $5.7 billion in orders and $5.7 billion in revenue. Adjusted operating income in the quarter was $377 million. We are seeing continued improvements in our shorter cycle businesses and the outlook for our longer cycle businesses is improving. Free cash flow in the quarter was $146 million. Earnings per share for the quarter were $0.03 and adjusted EPS was $0.19. Now I would like to take a few moments to share our view on the markets. We are encouraged by the improved outlook on the macro environment. Overall, the North American market continues to be resilient. Drilling related activity remains stable, which bodes well for our portfolio. We see softness in frac-related completions activity as the North American pressure pumping market weakens into the fourth quarter. Outside of our minority investment and BJ services, we are not materially impacted by the current challenges in the North American pressure pumping markets. The international markets are improving and we expect them to remain strong in 2019 as customers increase spending and activity levels. In the Middle East, despite some geopolitical risk, we expect activity to continue to grow into 2019, driven by the United Arab Emirates, Saudi Arabia and Iraq. The offshore market is the strongest spin in many is years. Although it will remain well below prior cycle peaks, the improving tender and order activity is an encouraging sign as we look out to 2019 and beyond. While the offshore market remains competitive, our technology and flexible partnership approach are proving to be successful with customers. LNG continues to be the primary transition fuel for a number of large economies in the world. We conservatively estimated our total of 65 million tons per annum to be sanctioned by 2020. Global energy demand has remained robust through 2018. Chinese imports were up 30% and South Korea and India have both grown over 6% year-over-year. Given the strong global demand growth and current landed agents spot prices over $10 for million BTU. We are seeing more confidence from our customers to move ahead with their projects. Earlier this month, we showed a first major final investment decision since 2015 with LNG Canada sanctioning two trains totaling 14 million tons per annum. As we have previously stated, we believe this is just the start of a new significant build cycle for which our portfolio is well positioned. With that let me share some highlights of the third quarter. In Oilfield Services, the dynamics and challenges of well construction are changing. Our leadership position in well construction is driven by technology. The next level of productivity will be unlocked by higher automation and advances in remote operations. It will be enabled by sophisticated data analytics as well as innovative models that focus on partnerships and collaboration. The negative competencies innovative model is our partnership with ADNOC. Earlier in October, we announced the strategic partnership with ADNOC where we will acquire a 5% equity stake in ADNOC drilling for $500 million. We will significantly increase our presence in the United Arab Emirates and we will be the exclusive supplier for a number of drilling and well construction capabilities across ADNOC’s conventional and unconventional hydrocarbon resources. This unprecedented strategic partnership accomplishes several things. First, the partnership will improve drilling efficiencies, service levels and outcomes while strengthening our relationship for the long-term. Our and our customers incentives are fully aligned and focused on better and higher returns. Second, this agreement is fully aligned with our priority to gain share in the Middle-East and will drive incremental revenue over the coming years. Third, BHGE will generate attractive returns through a $0.07 on our original investment. We will also receive a significant down payment from ADNOC drilling this quarter to fund capital need as we ramp-up activity. I'm very pleased with our team’s ability to execute this deal and its strategic and financial framework. Separate from this transaction, we continue to differentiate with our outstanding technology and are leveraging our unique capabilities to gain share. We have some key wins in the third quarter like the Qatar Petroleum Integrated Drilling Award and the Marjan Field in Saudi Arabia. The Middle-East remains a key focus area for us. As I mentioned earlier, our well construction leadership in oil field services is driven by technology. Specifically in our drilling services product line. We are the global leader in the unconventional space and continues to set records in critical markets. As an example, in the third quarter, we drove the world record of over 9,000 feet in a 24 hour period. We utilized our remote monitoring capabilities to ensure the world-class data and the target term are 100% at the time. We reduced the customer’s drilling cost by 35%. Over the last three years BHGE has drilled over a mile a day in more than 200 wells in the Marcellus and Utica demonstrating our ability to deliver world-class results on a consistent and sustainable basis. In the Permian, we have seen a growing use of our rotary steerable due to increasing well complexity and a more challenging drilling operations. Our RSS activity has grown over 100% in the Permian over the last year. In the third quarter, we partnered with ConocoPhillips to improve drilling performance on one of their assets. We feel the fast wells 50% sponsored planned with very high accuracy. The strength of our offering is not simply built from having the leading RSS in the market. Our competitive advantage is our integrated system, which includes extended life drill bits, high performance drilling motors and our advanced rotary steerable system. We have more than 1,500 engineers and scientists working together at our drilling services facility in Southern Germany. We have and continue to invest heavily in state of the R&D for mechanical, hydraulic and integrated electronics and have built a leading position in this technology. In also the equipment our outlook is steadily improving. We won our first new-build BOP order since 2014 for a semi-sub with a customer in Asia. This is a small, but encouraging sign that the offshore market is recovering. Earlier this month, we announced the award of 34th [indiscernible] ONGC 98th project. This award represents the single largest subsea contract ever awarded by ONGC. After our success with [indiscernible] and a number of other projects in the first half of the year this is yet another big win for our OFC business and an important step to rebuilding our backlog. The demand outlook is clearly encouraging. Despite this improved outlook, we know our customers are still looking for a better and more sustainable economic model for offshore. The competition from Shell and other sources of energy require higher certainty and lower overall costs to make large capital intensive offshore projects competitive in the long run. The average breakeven costs for unsanctioned depot as well is between $45 to $52 per barrel. While development breakeven costs have come down significantly over the past couple of years, the industry still has more to do. We need to continue to operate sponsor, reduce costs and drive a better sustainable economic model in our offshore. Our customers need it and expect it. We have been working on a new model for subsea, which we call Subsea Connect. It is rooted in our philosophy of bringing differentiated productivity based solutions to the market. We are the only company in the world, who can connect entire subsea systems and support our customers and optimizing not just the initial CapEx spend, but the entire life of wealth cost. We are connecting the core building blocks of our subsea offering with solutions across the DHC portfolio. Reservoir insights, field development and well construction from [OFS] (ph) production handling and power systems from TPS software and sensors from our digital solutions business and EPCI capabilities from our partners. Our subsea connect strategy focused our four key areas, which builds on the breadth of our portfolio and leveraging our partners. The fact there is around independent planning and risk management, which integrates the sub surface, seabed surface and EPCI capabilities. The second focus in on new modular deepwater technology. The third is working across the network of preferred partners to better integrate well construction. That includes sub surface development, STX, FERC, flexible writers, top side compression and power generation. The fourth area incorporates digital tools and advanced analytics to optimize project designs and purchases. The cornerstone of our Subsea Connect strategy is a brand new family of modular products that work together as an integrated subsea system. We have redesigned and reengineered subsea systems to make installation, production and interventions simpler and more efficient dramatically lowering the total cost of ownership. We have developed this family of solutions using three principles. Firstly, products are structured into standard components in subassemblies that can be configured depending on a individual requirements. Secondly, these products are modular and serve as building blocks for the overall system. Thirdly, our offerings are lighter and have a dramatically smaller footprint. We have applied these principles across the broad spectrum of offering and developed powerful new technology that is unique in the marketplace today. Our new light weight compact tree is 60% lighter than its previous version, it uses unique tree caps which can be configured to suite changing requirements. These tree caps eliminate the needs for multiple connections and significantly reduce manufacturing and installation cost for us and for our customers. Our new compact block manifold addresses the industries need for modular pre-engineered manifolds that use off the shelf components. Reducing cycle time, cost and footprint. For the most common configuration the manifold will be made to order with zero product engineering and delivered in 10 months from contract award. Our new modular compact pump is the world's fast subsea multi-base pump without a barrier fluid system, which allows the pump to be configured to different fuel requirements quickly and easily. This ensures better reliability at high risk items such as mechanical steel are not needed and eliminates the need to re-bundle hydraulics during the life of a field. For our composite rises we have significantly reduce 10 [indiscernible] and platform drivers. We have simplified driver configurations and minimize the Subsea infrastructure it reduces complexity and cost materially. Finally our subsea connection system enabled fast and reliable connections between all the elements of the subsea distribution system. It uses the passenger blocking mechanism that needs only one moving part to design on the sea bed. We are looking forward to introducing our Subsea Connect model to our customers and numerous industry experts on November 28 in Houston. Subsea Connect will further strengthen our competitiveness and help our customers to move forward with offshore projects. In Turbomachinery & Process Solutions, we continue to see strength in the LNG market. Our customers are beginning to move forward with new projects to provide new LNG supply from 2022 and beyond. As I previously mentioned earlier this month LNG Canada announce the FID for its LNG plant in Kitimat. In September [TAR] (Ph) Petroleum announced their intent to grow total production capacity to a 110 million ton per annum. Both of these are very positive developments for the LNG market and support our view that new LNG projects would begin to move forward in the second half of 2018. We expect this backdrop to be a key driver of revenue and profits for us in 2019 and beyond. In the first quarter our Austrian production business secured its four FPSO wins of the year. Up from just one FPSO in 2017. This is another sign that offshore spending is residing to more normalized levels. We expect orders and upstream production to ramp up in 2019 as more large projects are sectioned. These orders will start generating revenues in 2020. In North America, pipeline demand continues to grow driven by the Permian production growth and associated capacity constraints as well as Western Canada production growth. We are pleased the winning contract to provide over compressor packages, using our PGT25 Plus aeroderivative gas turbine with dry low emission combustors, at two compression stations in Canada. We continue to see growth opportunities in our pipeline and gas process segment into 2019. Our transactional services business which is driven by our large installed base of on and offshore production units have seen improvement over the course of 2018 as customers begin to replenish the future safety spots. Transactional service orders in the third quarter were up 46% year-over-year, this is a positive sign which we expect to contribute to revenue and margin improvements over the coming quarters. In digital solutions, we continue to gain traction with customers on digital offerings and grow our core - measurement and controls business. In September we were pleased to announce the successful deployment of plant operations advisor. A cloud based advanced analytics solution with DC across all four of their operator production platforms in the gulf of Mexico. This important milestone came after an initial deployment of POA proved that BHD’s technology can help prevent unplanned downtime on BP’s Atlanta platform. Our POA solution now work across more than 1200 mission critical pieces of equipment analyzing more than 155 million data points per day and delivering insight to the BP of asset performance and maintenance. Our collaborative approach with BP has resulted in a unique set of capabilities and we are excited that they have chosen to deploy POA for a very upstream assets across the globe. We are also driving growth in our core hardware offerings across multiple industries. - GAAP end market continues to gain momentum, specifically in our pipeline inspection business. In the quarter, we saw solid growth and continued to strength our technology offering including launching our partnership with a large pipeline operators to drive greater reliability in pipeline sessions. We were awarded a large contract in our condition and monitoring business at the Bruce Power Plant in Canada. We are also expanding our solutions into the mining segment securing a major contract in Latin America. Our inspection technology offering remain strong with solid growth in the aviation and consumer electronics sectors. In North America, we continue to grow our automotive business with entry sales industrial CT system and portable video borescope passed inspections. Our core mission as a Company is unchanged. We will continue to leverage our differentiated technology and our focus on customers to build market leading product companies and deliver productivity solutions to the oil and gas industry. As I have previously stated, we will focus on core areas over the next 12 months. First, we will utilize our differentiated offerings to catch the benefits of the improving market dynamics in each of our businesses. Our improved commercial processes and renewed focus on our customers will help us to regain market share. Second, we will continue to optimize our internal purchases, operating mechanisms and organizational structures. Third, we will continue to execute on our synergy programs. Four, while much of this has already taken place, we will ensure BHGE is 100% prepared for the eventual separation from GE. These full focus areas are fully aligned with our priorities of growing market share, improving margin and delivering strong free cash flow. With that, let me turn the call over to Brian.

Thanks Lorenzo. I will begin with the total Company results and then move into the segment details. Orders for the quarter were $5.7 billion, down 5% sequential and flat year-over-year. These results do not include the ONGC 98/2 order, we announced on October 3rd. Sequentially, the decline was driven by oilfield equipment down 47%, primarily due to orders timing and digital solutions which was down 1%. These declines were partially offset by oilfield services of 5% and Turbomachinery, which is up 4%. Overall, as we head into the fourth quarter, we feel good about our ability to redo backlog especially in our longer cycle equipment businesses. Year-over-year, oilfield services up 10% and Turbomachinery was up 16% offset by oilfield equipment down 27% and digital solutions down 31% as a result of the large digital order we secured in the third quarter of last year did not repeat. Repeating performance obligation ended the quarter at $20.8 billion, which was down 1% sequentially. Equipment RPO ended at $5.4 billion flat versus the second quarter and services RPO ended at $15.3 billion, down 1%. Our book-to-bill ratio in the quarter was one and equipment book-to-bill ratio was also one. Revenue for the quarter was $5.7 million, up 2% sequentially. Revenue growth was driven by oilfield services, which is a 4% and oilfield equipment up 2% partially offset by Turbomachinery, which was flat and digital solution down 1%. Year-over-year revenue was up 7%, driven by oilfield services up12%, digital solutions up 6% and oilfield equipment up 3% partially offset by Turbomachinery, which was down 3%. Operating income for the quarter was $282 million, up $204 sequentially and up $475 million year-over-year. Adjusted operating income was $377 million, which excludes $95 million of restructuring impairment and other charges. Adjusted operating income was up 30% sequentially and up over 120% year-over-year. Our adjusted EBITDA operating income rate for the quarter was 6.7% which was up 340 basis points year-over-year and the 140 basis points sequentially. We do margin rates that were 100 basis points in every segments sequentially. As we had outlined, we are very focused on our goal of expanding margin rate and this quarter demonstrate its continued progress. In the third quarter, we delivered $35 million of incremental synergy. As Lorenzo stated, we are well on track to deliver on our synergy commitments. Corporate cost were $98 million in the quarter flat sequentially and up 11% year-over-year. Depreciation and amortization for the quarter was $353 million, depreciation and amortization was $39 million lower than the second quarter, this was primarily driven by the assets that were set up as the closing of the merger in July last year, which have fully depreciated by the beginning of the third quarter 2018 and therefore did not continue to depreciate in the third quarter. In the quarter, we incurred an $85 million charge related to our [BPA] (Ph) services investments, this non-cash charge about the equity investment in the company to zero on our balance sheet. As a result, we will not be incurring additional charges going forward. We continue to work with the BPA services - to grow their business, capture market opportunity and return to profitability. Cash expense for the quarter was $110 million up $48 million sequentially. Our effective tax rate was 47%, the relatively high tax rate is driven by the fact that we had been in a net loss position in the U.S. for a period of time and therefore - tax affect losses on our U.S. operations. We expect our fourth quarter effective tax rate to be approximately 35%. As a reminder, once we start to generate earnings in the U.S., we will be able to benefit from the U.S. valuation allowances we built up. Longer term continues to expect our structural tax rate to be in the mid to low 20. Earnings per share for the quarter was $0.03 up $0.08 sequentially and $0.34 year-over-year. On an adjusted basis earnings per share were $0.19 up $0.09 sequentially and $0.21 year-over-year. Free cash flow in quarter was a $146 million, which includes a $151 million of restructuring legal settlement and deal related cash outflows as well as $94 million of net capital expenditures. Growth CapEx for the quarter was $242 million. Year-to-date, we have generated $350 million of free cash flow, this includes approximately $360 million of restructuring, legal settlement and deal related cash outflows. These were both brought in-line with the expectations we had at the beginning of the year. While there is more work to do, we feel good about our progress on generating stronger free cash flow and we are on track to achieve our goal of 90% free cash flow conversion overtime. Next, I wanted to give you an update on our recent capital allocation action. There are essentially three significant cash flows which we expect to occur in the fourth quarter as a result of our portfolio actions. As Lorenzo mentioned, we recently announced the strategic partnership agreement with ADNOC where BHGE will purchase a 5% equity stake and ADNOC -. We expect the deal to close this year. We will pay $500 million to ADNOC for the equity stake and then collect the down payments from ADNOC drilling related to working capital departments under the partnership agreement. We also expect to collect $375 million of proceeds from the sale of our natural gas solutions business. Overall, we expect a net impact of these three asset to be cash positive in the fourth quarter. After the announcement in June by GE to pursue an orderly exit of their 62.5% investment in our Company, we evaluated our next steps from a capital allocation standpoint specifically at it pertains to our share purchase program. We decided not to continue with our buyback in the third quarter and to wait until we have more clarity on GE next step before we resume our buyback activity. Also at the beginning of October, we were pleased to see S&P rating affirmation at A minus for our long-term debt and A1 for our short-term debt. S&P highlighted our independent capital and governance structure as well as an expectation of an improving financial outlook for BHGE as key contributing factors to their decision. Next, I will walk you through the segment results. In auto services, the market for our products and services remaining stable, while our takeaway capacity constraints in the U.S. are leading to an increase in drilled but uncompleted well, drilling related activities remain stable. The North America rig count was up 10% in the third quarter, primarily driven by the seasonal Canadian recovery. The U.S. rig count was up 1%. Internationally rig count was up 4%, with increases across Africa, Asia and Latin America. OFS Revenue for the quarter was $3 billion up 4% sequentially. Revenue in North America was up 3% driven primarily by strength in the U.S. both on shore and in the Gulf of Mexico. Internationally, revenue was up 4%, driven by strong growth in Asia-Pacific and the middle east. We saw solid sequential revenue growth in our drilling services, international pressure pumping, completion and artificial lift product line. Operating income was $231 million, up 22% sequentially. Core incremental margins were in-line with our expectations and we continue to execute on our synergy programs. We did benefit from lower depreciation and amortization in the quarter. However, this was partially offset by approximately $20 million of negative foreign exchange impact primarily in Argentina. In the fourth quarter, we expect top-line growth in line with the broader market, we have started to incur modest ramp up cost as we begin to execute on our recent large international project wins, including both the Equinor and the Marjan integrated well services contract. We expect these costs to continue to the first half of 2019. We remain confident in our ability to continue to regain share in critical markets and to improve margin rate. Next on oilfield equipment. Orders in the quarter were $553 million, down 47% sequentially and 27% year-over-year due to the timing of major subsea awards. As I mentioned the ONGC 98/2 award will be recognized in the fourth quarter. Revenue was $631 million, up 3% versus the prior year driven by increased volume in subsea production equipment and continued growth in our surface pressure control business, specifically in North America. This was partially offset by lower revenue and flexible pipe systems due to the timing of certain delivery. Operating income $6 million in the quarter, up $47 million year-over-year driven by increased volume in subsea production system, continued cost out and the non-repeat of the foreign exchange impact in the third quarter of 2017. We expect continued margin improvements into the fourth quarter, driven by higher cost absorption from increased volume. As we progress through 2019, we expect additional volume and margin improvements from our 2018 wins in subsea production systems. This will be partially offset by lower volume and flexible pipe systems. Moving to Turbomachinery, orders for the quarter were $1.6 billion, up 16% year-over-year. The increase in orders was driven primarily by services, which were up 41% partially offset by lower equipment orders down 10%. The continued growth and service orders was driven mainly by transactional services up 46% in the quarter and up 20% year-to-date. A clear sign that activity is beginning to recover. Revenue for the quarter was $1.4 billion, down 2% year-over-year, driven by lower equipment revenues. Service revenue in the quarter was up 9%, primarily driven by higher volume from upgrades. TPS operating income was $132 million, down 2% year-over-year. The decline was mainly driven by lower volume partially offset by favorable mix. The operating income rate was 9.5% flat versus the prior year and 130 basis points, compared to the second quarter. TPS has had a challenging year so far as the business executed through lower margin downstream backlog with limited volumes from segments like LNG and upstream production. Throughout the first nine months of the year, we have seen encouraging signs both from improving backlog mix and increasing service orders. We remain confident in our positive fourth quarter outlook for TPS. Next on digital solutions. Orders for the quarter was $629 million, down 31% year-over-year, primarily driven by the largest digital order we signed last year, which did not repeat. We saw continued momentum in the oil and gas and industrial end market, which drove year-over-year improvement in our pipeline and process solutions measurement and sensing and Bently Nevada product line. Regionally, we saw continued growth in North America and Latin America partially offset by seasonal decline in Europe. Revenue for the quarter was $653 million, up 6% year-over-year. We saw strong growth across most of our product lines with inspection technologies, pipeline and process solutions, measurement and sensing and software all up significantly. Revenues in our controls business were down driven by continued softness in the power end market. Operating income was $106 million, up 38% year-over-year. The growth was driven by volume increases and continued synergy execution in pipeline and process solutions, which more than offset the power market headwinds. Digital solutions has had a very strong year so far with good execution and solid synergy realization. As we have explained previously, the power end market continues to be soft and we expect this to result in less pronounced seasonality than we would ordinarily expect in the fourth quarter. With that Lorenzo, I will turn it back over to you.

Thanks Brian. Our outlook on the market remains positive and we are well positioned to capture the benefits of an improving macro environment across all of our businesses. The BHGE’s portfolio is unmatched in the industry. We continue to win the most important projects in the market today by partnering with our customers to address the challenges. Our priorities are unchanged, we are focused on executing to deliver on our commitments on share, margins and cash. Phil, now over to you for questions.

Thanks. With that, Nicole, let’s open the call for questions.

[Operator Instructions] Our first question comes from the line of James West of Evercore ISI. Your line is now open.

Hey good morning gentlemen. So Lorenzo and Brian, you outlined a lot of significant wins kind of across the portfolio in your prepared remarks and what I wanted to dig into or the one area I wanted to really dig into here is the Middle-East, it's obviously a growth area for the industry, you have the recent ADNOC investment, the MOU’s in the Iraq, MOU’s in Saudi, the Marjan field win. I mean it seems like you are picking up share kind of across the region, could you maybe touch on that for a minute or two and talk about your strategy and how you guys are progressing there?

Yes James, as you said clearly this is in-line with the strategy we laid out at the beginning of the year and growing our share in the Middle-East and we feel very good about what we did achieve and also the outlook going forward, the Middle-East continues to be an areas of growth. You have highlighted some of the wins, the Marjan field for us important, because it really allows us to be an exclusive provider for drilling services, co-tubing services and also provide drilling fluids engineering services and this allows to be at the start of the development really incumbent in the customer and be able to grow as the field continues to grow. Qatar Petroleum, we have announced obviously a five year drilling services contract to support the offshore and onshore drilling activities and again this is based on the success we have had of drilling wells for the customer performing well and getting the best the outcomes. And we have taken the opportunity to strengthen our partnership in United Arab Emirates with the ADNOC Drilling and this is really favoring the partnership we have already have with ADNOC, it's attractive from a strategic perspective to gain share and the conventional and also the unconventional which are going to be increasing overtime. So we feel very good about what we are seeing in the Middle-East and it's going to be an area of continued growth and focus and I'll let Brian give you a little bit more details on the ADNOC partnership.

Yes, James if I take a step back and look at the ADNOC partnership, we are going to invest $500 million of cash for 5% of the equity and in ADNOC Drilling and on that we will get a 7% annual dividend. So good returns from that standpoint. The other things I would say is that given the book of business we see there in the first year plus the 7% return it will be EPS accretive in year one, so solid financial, solid return. It's also structured in a way James that our working capital ramp is partially funded by the partnership and so we will get a payment in the fourth quarter here to help fund that working capital ramp which again furthers the return on this deal when makes it quite attractive. And the other things I really like about this is it gives us partnership with both ADNOC and ADNOC Drilling, obviously ADNOC Drilling is well positioned in UAE and is exclusive provider of drilling services for ADNOC and we are exclusive in key areas of that supply and feel good about the position it gives us into the broader market as Lorenzo mentioned on both unconventional and conventional. The other thing I would just point out to is the deal, we do have a board seat on ADNOC Drilling which further strengthens the partnership there, so like how we are positioning ourselves in UAE and the growth trajectory that the customers outlined there in UAE. And then kind of stepping back on Middle-East more broadly and our strategy, I would say when I was there in September I would say there was overall positive sentiment broadly from customers in the region. So we like how we repositioning ourselves there and feel good about our objectives to continue to gain market share in a way that is going to be you know helping us to continue to generate better returns for shareholders.

Thank you. Our next question comes from the line of Jud Bailey of Wells Fargo. Your line is now open.

Thanks. Good morning. A couple of question on TPS. I guess maybe Lorenzo first for you if I could, you made some good commentary on LNG awards and your outlook $65 million in TPA, you already, you really book and LNG came in the fourth quarter. Can you maybe give us a little more detailed thoughts on how you see kind of order cadence progressing and kind of projects around the world. And kind of how that looks over the next couple of years, anymore thoughts that would be appreciated.

Yes Jud, we feel again very positive on the outlook of the LNG market, we have said consistently that in the second half of the year we would start to see final investment decisions. LNG Canada plays a first good step in that direction and also what we show with Corpus Christi. As you know, back in 2014, we did actually get selected for the LNG Canada with our high-efficiency element 100 aeroderivative. So that is a good start and look we are progressing well in the LNG market. If you look overall we expect demand to double to about 500 MTPA by 2030 and as we mentioned there is going to be sectioning of up to 65 million pounds per annum by now 2020. So feel well positioned and LNG is a good robust positioning for us, and I'll let Brian jump in a little bit more on TPS which again continues the theme of improvement as we have stated along and we feel good about that.

Yes, LNG is obviously an important part of the TPS story, but when I take a step back and look at some of the key leading indicators that we saw this quarter. I feel really good about where TPS is and where its headed. Overall orders were up 16% versus last year, mainly driven by services which, as I mentioned were up 41%. Equipment orders were down 10% that is mainly on large deals. But you know as you saw, as you mentioned there is a lot of activity in the LNG space and we are well-positioned to capitalize on that. And then within service orders, transactional services, which convert more quickly were up 46% in the quarter and that is 20% year to date and the third quarter service revenue and TPS was up 9% since starting to see some of that come through. We are also executing on the cost up program that we talked about, this will start to yield results in the Q4 and definitely into next year and when I look at all these indicators, it makes me pretty confident about our positioning for the quarter to be able deliver margin growth and as we roll into 2019. And overall for TPS really outlook hasn’t changed for 2019 on what we talked about with the cost out, better project mix that we have in the backlog and we see coming to the backlog and the higher outages that will roll to the services portfolio kind of underpinned with that transactional service demand growth that we have seen here this quarter and year-to-date. So feeling good about where we are positioned with TPS.

Thank you. Our next question comes from the line of Dave Anderson of Barclays. Your line is now open.

I was hoping if you can talk a little bit about the opportunities you are seeing offshore development over the next 12 to 18 months. You have had a couple of good wins last few months including the large NGC award, I was wondering if you can perhaps - that award in particular, it’s one of the larger integrated awards, I’m assuming its very competitive. But what put you the position to win this, what did you guys bring to the table and maybe you could also expand about relationship with McDermott, it seems like it’s not a coincident, you have teamed up with them now several times here?

Sure. Dave. And firstly, let’s start off with the offshore outlook and also how we see it developing. Clearly, there is an improving sentiment out there, we have got better visibility to commodity price, range bounds and with that also the competitiveness of our offering has increased, which is allowing customers to go forward with final investment decisions. It’s not at the height of what we saw back in 2014, but we do see the pipeline of opportunities improving as we go forward. And you have seen some announcements of the Gulf on Phase two, [indiscernible] Phase two and most recently beyond ONGC 98/2. So just to put that into perspective, it is the single largest award that ONGC has made, we do have a partnership structure with both McDermott and L&T. We are going to be providing study full deepwater tree, manifolds, controls connection systems, SPS installation tools, and really it’s a great result and it does build on the relationship we have had in the past with McDermott. But I would say it also built on the strong relationship we have with ONGC. We have worked with them in the past and we have always said, it’s important to be flexible in the type of arrangements, we have and alliances we have to meet the customer requirements. And in this case, we are very happy to be with our partners and providing what they need going forward as the productive rates as well. The industry as a whole and offshore continues to be very competitive and clearly there is that element that continues just because there is still some overcapacity out there. So we are focused on really continuing to drive productivity in our portfolio and that is why we launched Subsea Connect really the work that we have done over the last year on developing better products, lighter weight, more cost competitive and that is the offering that we are providing also, and we are continuing to work with.

And Dave, one thing I would say about where we are in subsea in particular, because of the market dynamics that we have talked about and you are all familiar with. Neil and the team has done a great job this year, repositioning our offering and taking quite a bit of costs out of the products, as well as installation costs and as we work with our partners to take the overall cost of these projects down for us to respond to that competitive environment. So we like where we are positioned there, you highlighted McDermott, I like the way the team is positioning to take advantage of what is going on in the market and win there. So look we feel good about the backlog going into 4Q and into 2019 and subsea in particular. If I look at the flexible pipe business in Neil’s world, while we have continued to make a lot of improvements there as well. Just given where we are in the procurement cycle of the largest customers there. I do expect that piece of the business to be a bit of a headwind next year that will offset some of the positive momentum we are seeing in the subsea production systems face.

Thank you. Our next question comes from the line of Scott Gruber with Citi. Your line is now open.

Yes, good morning. Brian you are going on 4Q for oil services, is the trend with the market if I heard you correctly and we have a lot of moving pieces 4Q as you know seasonality and just extended frac holiday year and product sales et cetera. Would you be able to put a range on the 4Q revenue trajectory in oil services for us?

Yes. Look we feel pretty constructive about the fourth quarter outlook for OFS, we do expect top-line growth in-line with the broader market and I would say core incremental around our historical rate there, so nothing out of line there. We do expect some increase headwinds though as I mentioned from some ramp-up cost as we start to execute on some of the recent international wins and it's really Equinor and Marjan that Lorenzo talked about earlier and those types of costs are really driven by mobilization cost of the fleet, some increased reactivation cost as we start to put tools in place to be able to start up that activity in the early part of next year and then off course there is some new tool build that we will do here in the quarter as we get ready for executing on those. So look, I would expect those cost to continue a little bit into 2019 and it's just a short-term dynamics there, but feel pretty good about how were positioned from a share standpoint in OFS we have seen positive momentum now for the last few quarters, Maria Claudia and the team are focused on important deals and I think it position the team pretty well to capture the market growth. So overall in-line with the market like I said with core incremental holding and like the outlook we see there.

And Scott just to remind everybody and I think it's important when you talk about the North America market, our exposure to the frac side of things is limited here. We have got go just the minority investment in the BJ service, so we are not materially impacted by some of the challenges you are seeing in the Permian softness outside of some of the impact from completions there.

Thank you. Our next question comes from the line of Bill Herbert of Simmons. Your line is now open.

Hi. Brian, you have already quoted incremental on mining what those are, I think they had been in the vicinity of 25% and again to be clear in light of all - very impressive international contract wins that you guys have Gardner in a very competitive price environment, do you expect to maintain those for the forcible future and well into 2019.

Yes Bill. If you take a look at incremental, the present incremental in OFS for the quarter is 38% when you take into account that a favorability coming in from lower depreciation and amortization, but then the un-favorability coming from FX primarily Argentina and adjust to those and where synergies came in OFS incremental are right in-line with where we would expect it about 24%. As I was saying earlier, I don’t see the book of business changing our view on what that incremental margin is going to be over the course of the year, next year as I mentioned there are some short-term headwinds with some of the ramp-up cost that we see here on a couple of the large wins, but I generally feel good about those incremental given where we are from synergy execution, knowing that there are some headwinds coming through on commodities and the other cost that we were working. I feel good with that historical rates.

Our next question comes from the line of Kurt Hallead of RBC. Your line is now open.

Hi, good morning. You definitely peaked my curiosity on the subsea front with the Subsea Connect. I went through the number of different dynamics that drive the value preposition, I appreciate that. So I'm just kind of wondering as well whether or not you could put that into a context relative to one of your major peers are offering to the market and maybe how Subsea Connect - does it take that and make it even better, does it lower the cost even more. So can you give a relative value prop maybe compared to what one of your major competitors are doing on subsea front.

Yes Kurt. Look I think overall industry has been working towards this as we come through a difficult cycle within the industry there has been a focus by our customers to drive productivity within the offshore and deepwater projects and our offering here is differentiated relative to what we are doing specifically with our trees, our manifold and the integration that we can have across our portfolio. I think what is differentiated is the extent of our portfolio and the reach we have and so what we are offering to our customers is really the capability that we can help them drive the lowest cost per barrel, lowest listing cost and that is what we are focused. Others are doing it in the industry. We have our approach and we feel very good about the positioning of it.

Thank you and then it’s all the time you have for question. I would like to hand the call back Lorenzo for any closing remarks.

Thanks and thanks for joining us today. We are excited about the future and remain constructive on our outlook for the industry. We are remaining focused on our priorities of share, margins and cash. Thanks.

Ladies and gentlemen. Thank you for participating in today's conference. That does conclude today’s program. You may all disconnect. Everyone have a great day.