Baker Hughes Company (BKR) Q1 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Baker Hughes Company First Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone and welcome to the Baker Hughes first quarter 2022 earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell. The earnings release we issued earlier today can be found on our website at bakerhughes.com. As a reminder, during the course of this conference call, we will provide forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and website for a discussion of the factors that could cause actual results to differ materially. As you know, reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release. With that, I will turn the call over to Lorenzo.

Thank you, Jud. Good morning, everyone and thanks for joining us. Our first quarter results reflect operating in a very volatile market environment during the first few months of 2022. On the positive side, TPS orders were up over 100% year-over-year, with TPS book-to-bill of 2.2 as the LNG order cycle continues to unfold. We also experienced some challenges in parts of our business due to continued pressures from broader global supply chain constraints as well as some impact from the recent geopolitical events. As we look ahead to the rest of 2022, we see a favorable oil and gas price backdrop as well as a dynamic operating environment with perhaps the most challenging supply chain and inflationary environment we have seen in several decades. The recent and unfortunate geopolitical events are amplifying several trends, including broad-based inflation and supply pressure for key materials, commodities and labor. These events are also driving changes on the economic front, where the world is transitioning from an era of strong economic growth to an environment that is more tenuous and likely to feature diverging economic conditions regionally. Despite broader political uncertainty around the world, Baker Hughes is committed to helping deliver energy globally in a safe, clean and reliable manner, while also maintaining our commitment to net zero carbon emissions and leadership in the energy transition. To meet the world’s energy needs in a responsible manner, we believe multiple years of spending growth will be required as well as significant increase in LNG infrastructure investment. While there is some near-term risk on the demand side, we expect global oil and gas supply to remain constrained in the coming years, which should support higher commodity prices and multiple years of spending growth from our customers. Recent geopolitical events have severely constrained what was already a tight global natural gas market and have refocused the world on the importance of energy security, diversity and reliability. As the world reacts to the rapid changes in the global commodity market, governments are prioritizing natural gas and LNG as a key transition and destination fuel. We continue to see a focus on prioritizing LNG from stable, lower cost markets and locations that can provide cleaner LNG. Given the current LNG price environment and the quickly changing dynamics, we believe that global LNG capacity will likely exceed 800 MTPA by the end of this decade to meet growing demand forecast. This compares to the current global installed base of 460 MTPA and projects under construction totaling almost 150 MTPA. In order to be operational by 2030, this additional capacity will need to reach FID by around 2025. Despite the volatile yet improving medium-term macro environment, Baker Hughes remains focused on executing our strategy and we continue to drive further optimization across the two core business areas of OFSE and IET. Earlier this year, we created Climate Technology Solutions, or CTS, and Industrial Asset Management, or IAM. The creation of these two groups is critical to accelerating the speed of commercial development across our key growth areas of new energy frontiers and industrials. We continue to make steady progress in developing our Climate Technology Solutions capabilities with recent investments and partnerships in NET Power, HIF Global and the acquisition of Mosaic Materials, which features a promising direct air capture technology. Mosaic’s materials science and technical expertise including their unique metal organic framework technology provides Baker Hughes with the potential to efficiently capture low concentrations of CO2 across a number of applications. NET Power is an emission-free gas-to-power technology, where Baker Hughes will develop supercritical CO2 turboexpanders and other critical pumping and compression technology. We will also bring system integration and process knowledge experience to the partnership to help accelerate the market positioning and deployment of NET Power’s emission-free and low-cost electric power. HIF Global develops projects in multiple geographies to produce e-fuels by blending green hydrogen and CO2. Baker Hughes is investing alongside EIG, Porsche, AME and Gemstone and will provide compressors, turbines, pumps, valves and other technology on future projects. We are also discussing how our recently acquired Mosaic Materials’ DAC technology could be incorporated into these future projects. Overall, we are excited about adding another carbon capture technology to our portfolio and the potential of these two partnerships to open new market opportunities in clean power and low carbon fuels for Baker Hughes. In Industrial Asset Management, we signed an important agreement with Accenture, C3.ai and Microsoft to collaborate on the build-out of the IAM solutions offering. The partnership will focus on creating and deploying Baker Hughes IAM solutions that use digital technologies to help improve the safety, efficiency and emissions profile of industrial machines, field equipment and other physical assets. In addition to advancing our commercial efforts in CTS and IAM, we also remain focused on optimizing our broader organizational structure under the core business areas of OFSE and IET. At the beginning of April, we took some steps to strengthen and better position Oilfield Services to more closely align our products, services and solutions to the lifecycle of the well and ultimately to what our customers require. OFS will move from a product line oriented structure to a solutions-focused business, centered around well construction, completions, intervention and measurements, and production solutions. In addition to the organizational changes in OFS, we were pleased to announce an agreement to acquire Altus Intervention, a leading international provider of well intervention services and downhole technology. The acquisition complements OFS’ existing portfolio by enhancing our life of wealth capabilities as operators look to improve efficiencies from mature fields. Maria Claudia and the OFS team are enhancing their operating model to become more competitive, improve the speed of decision-making and capitalize on growth opportunities in the market. These organizational changes are important steps in the OFS’ journey as customers are increasingly asking for integrated offerings and more solutions-oriented outcomes as well as a continuation of the strong productivity improvements in OFS over the past few years. As we continue to evolve Baker Hughes across the two business areas of OFSE and IET, we expect more meaningful synergy opportunities between TPS and DS. We are also focused on driving better returns in our OFE business as well as further synergies between OFS and OFE. Now, I will give you an update on each of our segments. In Oilfield Services, activity levels at the start of the year have continued to trend positively in both the international and North American markets. We also see improving visibility for stronger growth in several key areas over the rest of 2022. In the international markets, underlying activity is improving broadly with particular strength in Southeast Asia, Latin America and the Middle East. The uncertainty in Russia is an offset. We expect growth in most international markets to continue with the strongest increases likely to come from the Middle East over the second half of the year and into 2023. Producers in the region are in the early stages of investing in capacity expansion and should help drive a multiyear increase in activity across the region. In North America, drilling and completion activity continues to move solidly higher with further increases expected over the course of the year. Although current oil and gas prices would normally suggest a stronger increase in activity, the combination of E&P capital discipline and industry shortages in labor and equipment is likely to keep short-term incremental increases more moderate in nature. While we are pleased with the growth in activity and the growing pipeline of work in many regions, underlying operations continue to be impacted by supply chain and inflationary pressures and most recently, disruption to our operations in Russia. Our OFS team is working extremely hard to offset these headwinds and with price increases, sourcing actions and a global team working to solve logistics constraints. The product line that continues to feel the most supply chain-related pressure is our production chemicals business, where we have taken actions to enhance our sourcing and manufacturing functions. In addition to recently enacting a supply surcharge and changing out some of the leadership in our chemicals business, we are also taking steps to source and produce chemicals closer to key demand hubs with the opening of our production chemicals facility in Singapore later this year and the recently announced JV with Dussur in Saudi Arabia. As we look over the balance of the year, we remain committed to achieving a 20% EBITDA margin by the fourth quarter. Moving to TPS, the first quarter represented a continuation of the successes we achieved in 2021. TPS orders totaled $3 billion for the second consecutive quarter, driven again by strong orders in LNG. We believe that we are at the beginning of another constructive LNG cycle, which is being expedited by the current geopolitical situation, particularly for U.S. LNG projects. Our positive long-term view is also supported by the recent improvements in policy sentiment in certain parts of the world towards natural gas role within the energy transition. The recent EU taxonomy changes to now include natural gas as a transition fuel is an example of this and the added need to diversify and provide energy security will likely intensify policy efforts. As these market dynamics play out, a number of projects should accelerate and we now believe that 100 to 150 MTBA of LNG FIDs will be authorized over the next 2 years, with additional FIDs becoming more likely in 2024 and 2025. Given the strong TPS orders performance in the first quarter as well as the acceleration in timing for several LNG projects, we now expect TPS orders to increase in 2022 versus 2021. During the first quarter, we were pleased to be awarded a major order to provide an LNG system for the first phase of Venture Global’s Plaquemines LNG project. We will be providing 24 modularized compression trains for the first phase of the project and this award is part of a 70 MTPA master equipment supply agreement. The highly efficient liquefaction train system is modularized, helping to lower construction and operational costs with a plug-and-play approach that enables faster installation and first cargo. This important order builds on an award in the fourth quarter of 2021 for power generation and the electrical distribution equipment for the comprehensive power island system for the Plaquemines project. The Plaquemines order follows a similar contract for VG’s Calcasieu Pass LNG terminal in 2019. In 2021, Baker Hughes successfully completed delivery of the ninth and final block for Calcasieu Pass. All shipments were finalized ahead of schedule and excellent achievement by our team. Calcasieu Pass holds the global record for the fastest construction of a large scale Greenfield LNG project moving from FID to first LNG in 29 months. Outside of LNG, we booked an award for NovaLT16 turbines, which will run on 100% hydrogen for Air Products new net zero blue hydrogen energy complex in Edmonton, Alberta. Our collaboration with Air Products will be critical for a net zero future and this order follows the award we received for advanced compression technology for the NEOM carbon-free green hydrogen project. We were also pleased to be awarded a contract by TERNA to supply gas turbines and compressors that can run on a blend of natural gas and hydrogen for a new compression station for the Greek natural gas transmission system. Baker Hughes will provide free compression trains deploying our NovaLT12 hydrogen-ready gas turbines and PCL compressors with the capability to transport up to 10% hydrogen for this project. The project directly supports the EU’s hydrogen strategy goals to accelerate the development of clean hydrogen and show its role as a cornerstone of a climate-neutral energy system by 2050. These latest hydrogen orders build on Baker Hughes’s extensive experience in developing and supplying turbomachinery equipment to compress, transport and utilize hydrogen. Next, on Oilfield Equipment, we are encouraged to see improving demand trends across the different business areas. Although recent world events impacted first quarter results, we remain disappointed with the overall level of profitability. At a macro level, trends in the subsea and offshore markets continue to improve. In the subsea tree and flexible pipe market, we expect a solid increase in industry awards this year as a firm commodity price outlook supports a growing pipeline of deepwater opportunities in core markets. In our international wellhead business, we also see a positive order outlook across multiple regions and particularly in the Middle East. In the first quarter, we were awarded a contract in Asia to provide subsea wellheads and subsea production systems plus related services, including 12 subsea trees for a deepwater gas field. We also achieved our first award in Ivory Coast, where we will supply subsea trees, flexible flow lines and rises to develop the Baleine deepwater oil field. In Latin America, we were pleased to build on our flexible pipe business success, securing awards for flexible pipe systems in services that will be deployed across a number of key post-salt revitalization programs, enabling increased oil recovery and extending the life of multiple subsea developments. Finally, in Digital Solutions, order activity remains solid with growth across our industrial end markets as well as improvement in the oil and gas markets. DS continues to be affected by supply chain challenges and electronic shortages as well as continued inflationary pressures. The team is working tirelessly to manage the situation and navigate the evolving supply chain issues that have been exasperated by recent events. In the first quarter, we made a number of changes in the DS business as we look to improve the overall performance. We unified our unique sensor business units, Panametrics, Reuter Stokes and Druck under one product line, Precision Sensors and Instrumentation, or PSI. As a combined business, PSI will better support potential investment opportunities crucial for the future development and help optimize the unique technology and commercial requirements of each brand. Unifying the businesses will also help drive better cost and operational performance. While we recognize that there is still more work to do, we also continue to make key personnel and operational changes across DS to drive performance, profitability and return improvements and to ensure that we have the right team in place to take this business forward. During the quarter, Bentley Nevada secured an important contract with a refiner in Brazil. Our ARMS reliability OnePM solution will support the customers’ operations by providing visibility on over 10,000 assets. We will be providing optimal digital strategies to support asset integrity and availability, which will lead to maintenance cost optimization and effectively enable risk management while delivering enhanced performance. Despite some of the challenges this quarter, we are optimistic on the outlook across both of our core business areas and excited about the new energy investments we are making for Baker Hughes. We believe that we are well-positioned to benefit from an extended cyclical recovery in OFSC and longer term structural growth trends in LNG, new energy and industrial asset management. Importantly, we expect to generate strong free cash flow as the cycle plays out and remain committed to returning the majority of it back to shareholders. With that, I will 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 $6.8 billion, up 3% sequentially driven by OFE and TPS partially offset by a decrease in Digital Solutions and OFS. Year-over-year, orders were up 51%, driven by increases across all four segments. We are particularly pleased with the orders performance in the quarter, especially in TPS, following a strong orders performance in the fourth quarter. Remaining performance obligation was $25.8 billion, up 10% sequentially. Equipment RPO ended at $9.9 billion, up 20% sequentially and Services RPO ended at $15.9 billion, up 4% sequentially. Our total company book-to-bill ratio in the quarter was 1.4 and our equipment book-to-bill ratio in the quarter was 1.9. Revenue for the quarter was $4.8 billion, down 12% sequentially with declines in all four segments. Year-over-year, revenue was up 1%, driven by increases in OFS and Digital Solutions partially offset by decreases in OFE and TPS. Operating income for the quarter was $279 million. Adjusted operating income was $348 million, which excludes $70 million of restructuring, separation and other charges. Adjusted operating income was down 39% sequentially and up 29% year-over-year. Our adjusted operating income rate for the quarter was 7.2%, down 320 basis points sequentially. Year-over-year, our adjusted operating income rate was up 160 basis points. Adjusted EBITDA in the quarter was $625 million, down 26% sequentially and up 11% year-over-year. Adjusted EBITDA rate was 12.9%, up 120 basis points year-over-year. As I will expand in a moment, our adjusted operating income and adjusted EBITDA margin rates were impacted by geopolitical events as well as broader global supply chain challenges. Corporate costs were $105 million in the quarter. For the second quarter, we expect corporate costs to be roughly flat compared to the first quarter. Depreciation and amortization expense was $277 million in the quarter. For the second quarter, we expect D&A to be slightly up compared to first quarter levels. Net interest expense was $64 million. Income tax expense in the quarter was $107 million. GAAP diluted earnings per share was $0.08. Included in GAAP diluted earnings per share is an $85 million gain from the net change in fair value of our investment in ADNOC drilling and a $74 million loss from the net change in fair value of our investment in C3.ai. Both are recorded in other non-operating loss. Adjusted earnings per share were $0.15. Turning to the cash flow statement, free cash flow in the quarter was negative $105 million. Free cash flow in the quarter was impacted by lower collections from a select number of international customers, which are largely timing related as well as a build in inventory as we get ready to execute on our large order backlog. For the second quarter, we expect free cash flow to improve sequentially, primarily driven by higher earnings and stronger collections. We continue to expect free cash flow conversion from adjusted EBITDA to be around 50% for the year, but anticipate the majority of our free cash flow to be generated over the second half of 2022. The quarterly progression should be more in line with what we experienced during 2018 and 2019. In the first quarter, we continued to execute on our share repurchase program, repurchasing 8.1 million Baker Hughes Class A shares for $236 million at an average price of just under $29 per share. As of March 31, GE’s ownership of Baker Hughes Class B shares represented 4% of the total company, down from just over 11% at the end of 2021. GE’s overall ownership of Class A and Class B shares was 11.4% at the end of the first quarter, down from 16.2% at the end of 2021. Before I go into the segment results, I will comment on the current situation in Russia and how it currently factors into our broader outlook. Russia represented roughly 4% of total company revenue in the first quarter and we recently announced that we have halted all new investment in the country. Additionally, sanctions from the U.S., UK. and the EU continue to evolve and are making ongoing operations increasingly complex and significantly more difficult. As a result, we expect erosion of our Russia-related revenues over the course of 2022, particularly in OFS. However, the pace and magnitude of this is difficult to predict given the dynamic nature of the situation. Therefore, there is a range of possible outcomes we are preparing for across our product companies. On broader supply chain, while we did see some areas stabilize in the first quarter, there continues to be pressure on electronics, challenges in logistics and an evolving understanding of implications due to global and geopolitical uncertainty. We remain focused on being adaptable to deliver for our customers and on our commitments. Now I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward. In Oilfield Services, the team delivered a solid quarter despite some of the global challenges. OFS revenue in the quarter was $2.5 billion, down 3% sequentially. International revenue was down 7% sequentially, led by declines in the North Sea, Russia Caspian, the Middle East and Latin America. North America revenue increased 6% sequentially with solid growth in both North America land and offshore. Operating income in the quarter was $221 million, down 14% sequentially. Operating margin rate was 8.9% with margins declining 110 basis points sequentially driven by lower volume, less favorable mix and continued inflationary pressure in the Chemicals business. Year-over-year, margins were up 230 basis points. As we look ahead to the second quarter, underlying macro fundamentals continue to improve, and we expect to see strong growth in both international and North American activity, as well as improvement in pricing. This is likely to be partially offset by weakness in Russia. We estimate that our second quarter revenue should increase sequentially in the mid to high single-digit range. With this revenue framework, we would expect our margins to increase by approximately 100 to 200 basis points sequentially. For the full year 2022, we see an improving outlook across most major markets, which is partially tempered by global supply chain and geopolitical factors. In the international market, we expect the continuation of a broad-based recovery with industry-wide activity growth in the low to mid-double digits. In North America, we expect continued activity increases with the broader market set to experience strong growth in excess of 40%. Given this macro backdrop and some of the headwind considerations I noted earlier, we would expect OFS revenue to increase in the low to mid-double digits. The largest variable to this range is the number of potential outcomes in Russia. Despite this uncertainty, we still expect margin rates to increase throughout the year and continue to target 20% EBITDA margins by the fourth quarter. Moving to Oilfield Equipment. Orders for the quarter were $739 million, an increase of over 100% or $394 million year-over-year. The strong orders performance was driven by SPS, supported by a large subsea tree contract in Asia, along with growth in flexibles, surface pressure control and services. As a reminder, we removed subsea drilling systems from consolidated OFE operations when we completed the merger with MHWirth in the fourth quarter of 2021. Revenue was $528 million, down 16% year-over-year, primarily driven by SPS, SPC and the removal of SDS, partially offset by growth in services and flexibles. Operating loss was $8 million, down $12 million year-over-year, primarily driven by lower volume in the quarter. OFE’s lower revenue and operating margin in the quarter were driven by lower equipment backlog conversion in SPS. For the second quarter, we anticipate revenue to be approximately flat to up mid-single digits sequentially, depending on the timing of backlog conversion. We expect operating income to be around breakeven or slightly positive. For the full year 2022, we expect a recovery in offshore activity and project awards, which should help drive a solid increase in orders when adjusting for the removal of SDS. We expect OFE revenue to decline double digits, primarily driven by the deconsolidation of SDS and OFE margin rate to be in the low single-digit range. Next, I will cover Turbomachinery. The team delivered another strong quarter with solid execution. Orders in the quarter were $3 billion, up $1.6 billion year-over-year, a new quarterly record for TPS. Equipment orders were up $1.5 billion year-over-year, driven by a significant award to provide an LNG system for the first phase of VG’s Plaquemines LNG project in North America. Service orders in the quarter were up 8% year-over-year, primarily driven by growth in contractual and transactional services, partially offset by lower order volumes and upgrades. Revenue for the quarter was $1.3 billion, down 9% versus the prior year. Equipment revenue was down 26%, driven by timing of project execution. Services revenue was up 6% year-over-year, driven by higher volume in upgrades, pumps and valves. Operating income for TPS was $226 million, up 9% year-over-year. Operating margin was 16.8%, up 280 basis points year-over-year. Margin rates in the first quarter were favorably impacted by higher services mix and strong cost productivity, especially on projects at or near completion. For the second quarter, we expect revenue to be flat to up mid-single digits on a year-over-year basis driven by higher equipment volume from planned backlog conversion. With this revenue outlook, we expect TPS margin rates to be roughly flat slightly higher versus the second quarter of 2021, depending on the ultimate mix between equipment and services. For the full year, we expect strong growth in TPS orders versus 2021, driven by increasing LNG awards. We also continue to see a solid pipeline in our onshore/offshore production segment along with opportunities in pumps, valves and new energy areas. While we expect very strong growth in orders, revenue growth should likely range between high single digits to low double digits. On the margin side, we continue to expect operating income margin rates to be roughly flat year-over-year in 2022, depending on the mix between services and equipment. As we mentioned last quarter, included in this framework is an expected increase in investments and R&D expenses that relate to our new energy and industrial growth areas. Finally, in Digital Solutions, orders for the quarter were $567 million, up 3% year-over-year. DS continues to see a strengthening market outlook and delivered growth in orders across most end markets. Sequentially, orders were down 6%, driven by typical seasonality. Revenue for the quarter was $474 million, up 1% year-over-year primarily driven by higher volumes in precision sensors and instrumentation and weight gate, partially offset by lower volume in PPS, Nexus Controls and Bently Nevada. Sequentially, revenue was down 15% driven by typical seasonality and challenges in the global environment, particularly supply chain. Operating income for the quarter was $15 million, down 38% year-over-year largely driven by headwinds from electronics shortages, some cost inflation and COVID-19-related lockdowns in China. Sequentially, operating income was down 71% driven by lower volume. For the second quarter, we expect to see strong sequential revenue growth and operating margin rates back into the mid-single digits. For the full year, following five quarters in a row of positive book-to-bill, we expect solid DS revenue growth as supply chain constraints begin to ease over the second half of the year and backlog conversion improves. With higher volumes, we expect to see strong improvements in DS margins, which should approach high single digits for the total year. Overall, we have navigated a volatile environment during the quarter, delivering strong orders across the company and positioning to execute on our record backlog. Despite very troubling and challenging geopolitical events and broadly stressed global supply chains, we are confident in our ability to adapt and execute as the rest of the year unfolds. With that, I will turn the call back over to Jud.

Thanks, Brian. Operator, let’s open the call for questions.

Thank you. [Operator Instructions] Our first question coming from the line of James West with Evercore ISI. Your line is open.

Hey, good morning, Lorenzo, Brian.

Hi, James.

So, Lorenzo, you had some great detail on the LNG outlook. But I was wondering if we could get a little more color from your conversations specifically with customers as things have clearly changed pretty dramatically in the last 8 or 9 weeks as LNGs come into focus here. And if you could maybe provide us what they are saying, what their urgency level is, kind of just a little more detail on how those conversations are going and how accelerated this buildout cycle could be.

Yes. Sure, James. And I think it’s clear the unfolding situation in Europe has definitely accelerated the pace of discussions on the next wave of LNG projects aiming to take FID. We’ve already started to see market momentum pick up in 2021, as country set net-zero targets and also started to realize the role of natural gas and what it would play in the energy transition. Now I’d say we are arguably in the early stages in what could be a multi-year reorganizing of the global energy system. And with that, it will take time for the LNG landscape to evolve. And based on the discussions with customers, we see a significant step-up in a number of customers looking to take earlier FIDs with also increased long-term supply agreements. We now expect 100 to 150 MTPA to take FID over the next 2 years, with the potential of more FIDs in ‘24 and ‘25. As you know, a lot of these projects are in the U.S. So this – U.S. should be a big better and fishery as these redrawing of the global energy map. But also as we look at other places such as East, Middle East, Mexico and also Asia, we’re seeing increasing interest from customers. I think we’re very well positioned with some interesting concepts around flexibility and also speed to market. And with our highly efficient modularized reflection train system, which again was emphasized in VG, we are helping to lower construction and operational costs with the plug-and-play approach that enables faster installation, so feeling good about the LNG outlook for the number of years.

Sure. Thanks for that, Lorenzo. And then maybe just a quick follow-up for me, you made this investment in April, a few weeks ago or a week ago with HIF Global to expand, I think, e-fuels. Could you maybe comment on what exactly is going on there, what that market looks like? How you see that playing out?

Yes, sure, James. HIF is a great opportunity, and we’re pleased to be involved with this customer, and it’s another example of how collaboration can really help to drive the energy transition. HIF Global develops projects to produce e-fuels by blending green hydrogen and CO2. And we’ve invested alongside AME, EIG, Porsche and Gemstone, great partners to really help HIF continue to develop carbon neutral e-fuel projects in the United States, Chile and Australia. With a small minority investment in this equity round we will be providing compressors, turbines, pumps, valves and other technology on future projects. And I think what’s interesting here is, again, as you look at electricity-based fuels or e-fuels, their clean carbon-neutral fuels produced from renewable green hydrogen and carbon dioxide taken from the atmosphere. And they can be used by existing cars and trucks without any modification to the engines, and e-fuels require no new infrastructure transportation or filling station. So a good opportunity and an expanding market for us.

Okay. Thanks, Lorenzo.

Our next question coming from the line of Chase Mulvehill with Bank of America. Your line is open.

Yes. Good morning, everyone.

Hi, Chase.

Hi, Chase.

Hi, Brian. Hi, Lorenzo. I guess kind of a follow-up question on James, a question around LNG. And obviously, you’ve taken up your guidance for LNG – or sorry, for TPS orders this year based on strong LNG. So you’ve been guiding flat. Now you expect kind of strong order growth momentum. So I don’t know if you want to kind of quantify what strong means. And then we kind of all understand what’s happening in LNG and accelerated growth opportunities here. But maybe just step back a little bit and talk about your upstream onshore, offshore order opportunities. Because it ultimately looks like the base orders related to kind of some of the onshore/offshore stuff has taken a step higher as well.

Yes, Chase. On TPS, again, we’re seeing a continued order momentum that we saw start at the end of ‘21, and it’s really accelerated in ‘22, primarily driven by LNG, also the new energy opportunities, even though they are smaller in nature. But when you look at the LNG projects that are moving forward as I mentioned before, and you think about the likely timing, it could translate in an order number for TPS of $8 billion to $9 billion in 2022. And importantly, based on customer discussions, we’d expect our order levels to remain elevated in 2023 as well. As you can see, a lot of this on the LNG projects is a pull forward and also strong long-term LNG fundamentals. And we also see a continued traction in the new energy space. And as you saw again in the first quarter, we booked some awards on the new energy space, and we’re still at the upper end of our 100 to 200 range as we continue to see new energy orders in 2022.

Okay, alright. That’s helpful there. Nice to hear. Strong orders are going to continue into 2023 for TPS. The follow-up is really obviously, the Russia-Ukraine conflict is causing Europe and other countries to focus on energy security. Obviously, this is positive on the LNG front. But what does that ultimately mean for the energy transition? Do you think that it actually slows the pace of adoption? Does it speed it up? Like what does it mean for energy transition?

Yes, Chase, it’s a question that many are posing then. I think the focus right now in the near-term has switched to energy security, reliability and diversity. But we don’t believe that sustainability goes away. And in fact, if you look at some of the policies even introduced in Germany, the 2035 Energy Plan still continues focus on sustainability. We think the current environment will actually accelerate clean energy initiatives, particularly for fuels like hydrogen, which EU is making a large part of its long-term energy plan. What we’re seeing from the current situation is that you cannot become too reliant on one country or one source of energy. So diversity of supply is critical. And we think that pragmatism has come back into this discussion and the role of energy. Not just renewables but also, as we’ve mentioned before, gas playing a key critical role. Given the elevated commodity prices, a number of major oil companies and NOCs are going to report good profits and free cash flow. We think they will use this to continue actually developing and accelerating their carbon or decarbonization plans as well as healthy shareholder returns. And you can see that also with an example like Aramco with its CapEx plan that includes significant hydrogen. So we think Baker Hughes is very well positioned then with gas, LNG, hydrogen, CCUS, oil and pipelines. And we’ve got the technologies that are going to continue to drive this transition.

Alright. Perfect. Thanks, Lorenzo.

Thanks.

Our next question coming from the line of Connor Lynagh with Morgan Stanley. Your line is open.

Yes, thanks. I was hoping maybe we could talk a little bit more about Russia. So just wanted to understand, first off, the data point on the 4% of revenues. Is that already fully accounting for any ruble depreciation impacts? And so is what you’re basically guiding to, to actual activity declines? And I’m curious further to that, is it – at this point, you have received notification from your customers that your activity will decline or is that just your expectation based on what you’re seeing in the market?

Yes. Connor, to hit the first part, this does include the impact of what was going on with the ruble. And as you know, it’s been down and up again and is relatively stable at this point in time. And you hit it, it represented roughly about 4% of revenues in the first quarter. And look, I’d say in terms of how we’re thinking about it for the full year, you got to take a step back and realize that sanctions from the U.S., UK. and EU continue to evolve and are evolving and are making ongoing operations increasingly complex and a bit more difficult. And kind of to give you some perspective on the quarter, we did see some decremental impact on EBITDA, about the same level on EBITDA that as Russia represented in terms of revenue of the total company. And it was really driven from lower volumes from not being able to move people and assets into the country. I’d say there were also some logistical delays and delivery challenges, which largely impacted OFE in both equipment and services. And then we also saw some logistical delays and delivery challenges in TPS, primarily in services as well. So those were the two areas that we saw the most significant impact in the quarter from Russia. And if you a step back and look at what we talked about going forward and kind of the framework that we tried to provide you for the year, we did contemplate everything that we know today and the anticipation that things are going to continue to evolve there. So based on what we talked about in terms of the revenue outlook for OFS, up low to mid-double digits, the low end really assumes that our OFS Russia operation declines over the course of the year to basically an immaterial level, so by the end of the year, really, really low there. We do have inventory in the country. But given the sanctions, are unable to import key technologies for some of the services. So there will be a drop off over the course of the year, barring something unforeseen. And there will be some impacts in TPS associated with that. But look, as we get more clarity on the situation, we will clearly react and take the appropriate cost actions to offsetting the declines in volume, which we also included in the framework that we provided you. And then, as you think about Russia and the impact on the global environment, we’re obviously working through supply chain challenges that come with things coming out of Russia and Ukraine, or not as the case may be. And then, Connor, you got to take a look to – there is going to be some offsetting activity increase to soak up the supply to meet the demand that goes away from potential declines in Russian output. And as you know, that’s not going to be one-for-one in terms of timing. So we are seeing increased activity in North America. You’ve seen increased plans, particularly in the Middle East to invest more to bring more supply to market. So we will see some impacts from that, but there is likely to be a delay versus the impact you see in Russia.

Yes, thanks for all that color. The last portion you were talking about there was my follow-up. So basically, at this point, have you seen any of your major international customers alter plans or accelerate plans or indicate that they are planning to accelerate? Certainly, it seems like there is going to be some loss of Russian oil volumes to the market. I am curious how some of these bigger companies are going to respond to that?

Yes. Yes, we are seeing customers talk about increasing their spend plan. I would say particularly, we have seen that in the Middle East and have started to see awards increase. And I think you will start to see some of that flow through here in the second half of the year and into ‘23. Obviously, we talked about the outlook in North America. That’s clearly a reaction to what’s going on in the market and what’s happening in Russia. And look, Lorenzo talked about what we are seeing in TPS orders for the year, and the situation has current – has certainly had an impact on that. And ironically, a little bit Connor, as I look at everything we are seeing right now, ‘23 is shaping up with some pretty good visibility, maybe even a little better than ‘22, because of the volatility right now. But with the backlog that we are building on the back of potentially $8 billion to $9 billion of orders in TPS with some service tailwinds, you saw service orders up in TPS 8% this quarter with strong returns and cash flow, with a lot of operators, I think you are likely to see that continue. And then we talked about what you are seeing in the upstream space. And I talked about that timing disconnect and things coming in later, I think ‘23 is shaping up with pretty good visibility and is looking to be pretty strong based on what we are seeing today. So look, we will manage through the volatility in ‘22, but I think we are positioning things to be able to take advantage of the broader context of things going on in the marketplace across the portfolio.

Got it. Thanks very much.

And our next question is coming from the line of Scott Gruber with Citigroup. Your line is open.

Yes. Thanks. So, just building upon Connor’s last question there, it sounds like the visibility into ‘23 is improving. What’s the potential for the international OFS market to actually see an acceleration in spending in ‘23, given the fact that budgets for this year were set before the surge in oil prices? And some additional color, if you will, on longer cycle projects, building in the queue to support growth in ‘23 and beyond.

Yes, Scott, just on OFS international outlook. Based on the conversations with our customers, we expect a broad-based recovery internationally with all major geographies and overall international growth in the low to mid-teens. We believe Middle East could be one of the strongest markets in 2022 and is likely in the early stages of a growth cycle as the NOCs in the region look to add production capacity on a gradual long-term basis, so good outlook going into 2023 as well. And we also expect to see another strong year of growth in Latin America, led by Brazil and Mexico. And then as we go forward, we would expect North Sea and Asia Pacific to see solid growth in 2022. Not as strong as Middle East or Latin America, but solid growth. And lastly, West Africa is also seeing some incremental activity and strong growth as we go forward. I think on the offshore side, we would say at a macro level, the trends in the subsea and offshore markets continue to improve. And as you look at our first quarter as well from an orders perspective, you can see that. In the subsea tree and flexible pipe market, we expect to see a solid increase in industry awards this year, and see it coming back for the foreseeable future.

Got it. And with some of the international operators pulling forward some projects and responding to oil prices, can you provide some color on the pricing trends you are seeing on the international side OFS market? I imagine things are getting better. But do you foresee sufficient momentum there to propel above normal incrementals in ‘23 and continue to expand your margins beyond the 20% threshold?

Scott, generally speaking, we are starting to get good pricing leverage and getting net pricing, particularly in North America, but also in some of the international markets. Right now, it varies by market, but we are having more success and better discussions around higher pricing levels.

Yes. And look, I would say particularly from an OFS perspective, as the chemicals business recovers, I would expect to see some improvement in incrementals there. And then the only thing I would say, Scott, is we are all dealing with inflation in the market and we are working hard to get surcharges in and price increases in. But that’s something you got to take into consideration as you think about the next 12 months or so.

Thanks. I appreciate the color.

And our next question is coming from the line of Arun Jayaram with JPMorgan Chase. Your line is open.

Yes. Good morning. You booked Plaquemines, the LNG system this quarter with Venture Global. And I believe Calcasieu Pass was booked in the third quarter of 2019. So, I was wondering if you could talk a little bit about the margin potential of this project relative to Calcasieu Pass, and obviously a much more challenging supply chain and inflationary environment, and what are you doing in order to protect your margins from those inflationary pressures?

Yes. Arun, look, we are very pleased that we have gotten the second phase of our work with VG here with Plaquemines. And look, I think it’s fair to assume that margins will be similar to what we saw on Calcasieu. I mean there is a couple of things going on here. Obviously, we have got experience with this type of project with this customer before. So, there are some natural synergies that come through in this project that we didn’t have in the first one. You did mention inflation there. Obviously, we have priced that in and have worked on productivity to help offset that as well. And look, you can imagine as we have said before, when we quote and when we win orders, we go out and we place orders for long lead items. Certainly have a view of what we believe is happening in the market today and what will happen and take the appropriate actions to protect ourselves and the customer from that inflation as much as possible. But look, this is a great order for us. It’s similar to what we did with Calcasieu. And you heard Lorenzo talk about we delivered all these modules ahead of schedule, which was very helpful for VG getting to first cargo in record time. So, our track record here is pretty good, and we are really excited about this space and this order and our partnership with VG.

Great. And I just had a follow-up. I think you delivered Calcasieu Pass in less than 30 months or so, which is very, very impressive. One of the questions we have been getting from clients just given what’s going on in LNG is this fast LNG concept, which is offshore – either these are generally a third of the size of some of the onshore facilities. But could you talk a little bit about that? Does Baker have a toolkit that can participate in the offshore LNG market? How do you see this playing out? And is this a sandbox you do want to play in?

So Arun, I think you know well, we have capability and capacity to handle many different types of LNG equipment orders at the same time. We have got great capability in our facilities. And as you look at the 30 years we have been in LNG, we have always been looking at new technologies to reduce the cycle time and also to plug-and-play. So, this new modularized approach of fast LNG can be applied both to onshore and offshore. And the number of customer discussions are intensifying around the speed to market. So, I think again, with the technology enhancements we have made, we are well positioned to capture the market here.

Great. Thanks a lot.

And our next question is coming from the line of Stephen Gengaro with Stifel. Your line is now open.

Thanks. Good morning gentlemen.

Good morning.

Good morning.

Can you – do you mind going back to your prepared comments on your oilfield services side and some of the changes you have made there. Can you talk about sort of the path to 20% EBITDA margins by the end of the year and maybe with some color around the impact of some of these changes you have made?

Yes. Look, so I would say overall, we still feel confident, Stephen, in hitting our margin target rates and getting OFS to a 20% EBITDA margin rate on a consistent basis. And I would say from here, there is a couple of things that should drive margin improvement. The biggest driver will be better profitability in our chemicals business which, as you know, has been squeezed by higher input costs, higher logistics and shipping costs and some raw material shortages. As Lorenzo mentioned, we put in pricing increases and surcharges to help offset that. But chemicals had about 170 basis point drag on OFS margins in the first quarter. So look, normalization of broader logistics and supply chain issues that have disrupted shipment schedules here in the quarter should also help with that. These two issues, if you combine with the volume improvement that we are expecting, should be enough to get us to the 20% level. In addition, we are set to bring on new chemical plants in Singapore and Saudi in ‘22 and ‘23, which will lower the cost for chemicals, get us closer to some of our customers and give us some advantages for our Eastern Hemisphere delivery. We are also continuing to work other productivity initiatives with Maria Claudia and the team, primarily around service delivery, with our remote operations continuing to drive margin improvements there. And we have been executing on supply chain rationalization as well as sourcing from some lower-cost countries, and that’s been part of a multiyear plan. So, we have got a lot of things that we have been working and are continuing to work to get the margin rates to that 20% level. But as I said, sort of broader supply chain and logistics and normalization of the chemicals margins, which we think have troughed here in the first quarter will get us there, and then there should be some icing on top.

And Stephen, just to add, the new organization that we announced is going to improve the speed of decision-making and also be able to capitalize on the growth opportunities in the market. So, it’s very much customer focused and allows us to be more responsive and more comprehensive in our integrated solutions and capture more of the market share of operating costs related to spend. So, it’s what our customers have been asking for, and we are delivering.

Thanks. And as a quick follow-up, on the chemicals – on the supply chain side, I mean clearly, Russia kind of disrupted what looked like, I think stabilization. But what’s your visibility and sort of confidence that things will sort of start to normalize here as you get into the second half of the year?

Yes. Look, I would say we started to see some encouraging signs in the latter part of the fourth quarter as chemical prices started to stabilize and logistics started to look a bit better. But obviously, with everything going on in Russia and the increase in commodity prices that’s created some more headwinds. We have seen stabilization in the broader base chemical space. But I would say where inflation is still tough is in the specialty chemical market. And as I mentioned, we had some unique issues with the supplier who had a facility that was basically shutdown and getting that facility back up and running has taken them a bit longer. So, we have been having to get some alternative supply. That’s starting to normalize as well. So, we should see some recoveries come through. And then look, we have made some changes. We recently changed out leadership in chemicals. We are doing some specific things in supply chain to deal with the current environment. We broadened our sourcing relationships just given what we experienced with this large supplier that we had. We have actually taken a look and have eliminated some products where volumes were low and margins were relatively low to free up the capability to focus on some areas where we make more money and deal with some of the supply chain challenges and focus the team there. And then with the new factories coming on, it’s allowed us an opportunity to take a step back and look at the overall supply base, how we are contracting, and we have made some changes there that we should start to see come through here in the second half. But good visibility to what’s going on there. The team understands it, just working through a little bit of a perfect storm here that seems to be abating.

Very good. Thank you.

And our next question is coming from the line of David Anderson with Barclays. Your line is now open.

Hey. Good morning Lorenzo. So, a question on the global push to build out LNG capacity, I had heard anecdotally it was a minimum of 4 years to bring a new train on, start to finish. But you are talking about Plaquemines closer to 29 months, you talk some modular design. Is this the new standard that we should be thinking about these projects? And I guess related to that, is there a limit to how much equipment you can provide in a given year in terms of your manufacturing capacity if these projects are accelerated?

Yes, Dave. And I think you have to go back to the tenure we have had in the LNG cycle. And we have always said that there is going to be small-scale, mid-scale, large-scale, and we are going to be participating in all of those and also looking at modular as well as stick build. And depending on the customers’ needs, we are going to be providing them. Clearly, the modular is faster to market. It is a plug-and-play model. So, we are seeing increased interest from some of the independent players, and I would say also within North America. Globally with some of the larger projects, they still continue on the stick build. We don’t have a challenge on capacity. Again, we have had big flows of LNG projects in the past, and we feel good about being able to manage it. And our facilities that are set up in Florence and Massa and Avenza in Italy, are well prepared for the LNG project wave.

So, if we think about the U.S. build-out of export capacity, what are – are there any other kind of areas where you think there are bottlenecks that need to be freed up? Would you expect most of the awards going forward to be in this modular category? Just curious how you think about that kind of supply. You are just one part of it, of course. So, I am just wondering, looking out the rest of that, are there other areas that are at bottlenecks that could either speed up or slowdown these projects?

I think the area that people are looking at and also reacting to is on the EPC side. And that’s one of the areas that I think is a focus right now. I would say also the modular approach reduces some of the dependence on the full aspect of EPCs. And so it’s a faster approach from that perspective. But labor continues to be constrained. And so that’s something that’s being looked at.

Good. Thank you.

And our next question is coming from the line of Roger Read with Wells Fargo. Your line is open.

Yes. Thank you. Good morning. How are you?

Good. Hi Roger.

Just a couple of quick questions. The first one is you made the comment about supply chain easing up as the year goes on, and understand chemical is a little different than some of the others. But as we think of some of the pieces that will go into these LNG orders, some of the issues going over in China, is there any risk of that affecting?

Hey Roger, I will go ahead. You cut off there a little bit. But on…

Sorry.

That’s alright. On supply chain, it tends to be challenging. And obviously, with everything going on in the global geopolitical space, it’s been a little more challenging. But look, I would say from how it impacts us and how we are dealing with it, we are managing the price increases in various metals like copper and steel and nickel. There is no supply issue, it’s just managing through those pricing. And you can imagine that, that’s going into our quotes. And to deal with all of this, we have taken down the timing and validity of our quotes to be able to deal with this. So, customers know what’s going on, and they can have good visibility into what the cost of these projects are going to be. Look, from a castings and forgings standpoint, we are still able to get supply. We are dealing with scarcity in Europe and higher pricing there. So, we are seeing – what we are doing with our customers, our suppliers are doing as well, with quotes are only valid for a shorter period of time given the raw material pricing and the unique energy challenges in Europe. But look, that’s the beauty of being part of a global company like Baker Hughes. I mean we have been able to shift supply into China. We focused on Northwest China to be able to deal with some of the port issues and things we are seeing in COVID. We had really good experience there. We have also moved some supply to Mexico and India. So, we are able to pivot because we have got a large supply base and can direct that demand to different places. So, we feel good about what we are doing there on supply chain. We expect to see some stabilization come through, but have a great sourcing team, working with the projects team to make sure we can fulfill on the demand that we see coming through. From a logistics standpoint, I would say the team has done an outstanding job of managing that. Our inflation we have seen in logistics is well below the headline prices that you have seen. We have changed ports that we are using in North America and China. So, we have been incredibly reactive here. I don’t see it being a big constraint today for the LNG cycle that we are seeing, but that’s something that we will have to watch as it evolves.

Okay, great. Thanks. And then the follow-up, as we think about just – we had one of your competitors yesterday talk about exceptional tightness in North America. I was just curious your view on availability and – of equipment, labor, etcetera, as we think about the international markets ramping up and at what point you would see significant tightness really helping out on the pricing side there. I understand things should get better as this year goes along, given the guidance, but where we could see things get very, very good on the OFS and OFE sides.

Yes. Look, I would say broadly, tightness you are seeing outside of the U.S., it’s similar to what you are seeing inside of North America, some labor tightness around the globe in some markets, not as much as you are seeing in North America. And look, just given the overall increase in activity, you are seeing tightness in supply of equipment. I think we have all got capability or I know we have got capability to ramp up and have been planning on that. But – but look, when you have got demand up as much as you are seeing in North America and globally, general economic tendencies come back into play and you start to see the ability to have more constructive pricing discussions, deal with some of those supply/demand issues. And I would say the international market, as you know, is more longer term contract base versus spot market like you see in North America. Where you see some real opportunity here is on some of that spot business, and I would say we are being very constructive with our customers, taking into account what we are seeing on the supply chain, what we are seeing in overall demand, and it’s a constructive backdrop for OFS at the moment.

Great. Thank you.

And I am showing no further questions at this time. I would now like to turn the call back over to Lorenzo Simonelli for any closing remarks.

Yes. Thank you very much, and thank you to everyone for joining our earnings call today. Just before we end the call, I wanted to leave you with some closing thoughts. Despite some of the challenges this quarter, we are optimistic on the outlook across both of our core business areas and excited about the new energy investments we are making for Baker Hughes. We believe that our upstream oil and gas businesses are poised to capitalize on a strong multiyear recovery, while our industrial businesses are poised to benefit from a strong LNG cycle, growth in new energy orders and the development of our industrial asset management capabilities. While we benefit from these macro tailwinds, we expect to generate strong free cash flow and return 60% to 80% of it back to shareholders. So, thanks for taking the time. We look forward to speaking to you all again soon. And operator, you may close out the call.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating in today’s conference. You may all disconnect.