Baker Hughes’ second-quarter revenues have increased by 13% to $7.1bn, beating the upper end of its guidance. Oilfield Services & Equipment (OFSE) grew by 3%, with Industrial & Energy Technology (IET) up 28%, largely driven by sales of gas technology equipment.
Underlying cash profit (EBITDA) grew by 25% to $1.1bn, reflecting the increased revenue and disciplined cost management.
After a first-quarter dip, total orders were up 15% to $7.5bn, reflecting record levels for new energy and certain gas technologies.
Free cash flow cash flow fell by $0.4bn to $0.1bn due to weaker cash generation from operations. Net debt was $3.6bn at the half-year mark.
Payouts to shareholders totalled $375mn, including $166mn of share buybacks.
Baker Hughes has raised the mid-point of guidance by 5%, which was previously $27.5bn for revenue and $4.3bn for underlying cash profit.
The shares rose 2.0% in after hours trading.
Our view
Baker Hughes is one of the largest providers of services and equipment to the oil and gas industry. Ongoing investment in natural gas infrastructure underpins strong order flow for the group’s technology in this space.
Orders for its new energy business, which supports technologies such as green hydrogen and carbon capture, are also doing well. The Oil Field Services & Equipment division (OFSE) is holding its own, with weakness in the US market being offset by strong demand overseas.
When demand for fossil fuels starts to ebb, it should be somewhat offset by decommissioning work on oil well closures, which in itself is a multi-billion dollar opportunity. However, over time this part of the business could face a decline.
But it's the Industrial & Energy Technology (IET) division that's been enjoying the strongest revenue momentum of late. This houses the company's gas technology and new energy activities. A strong growth driver here is the ongoing build-out of liquefied natural gas infrastructure (LNG), where capacity is set to increase by about 60% by the end of the decade, due to its place as a key transition fuel and role in improving energy security.
We still think IET is likely to become a bigger part of the business in the next few years, as growth in oilfield services moderates, new energy operations start to scale, and service revenues from the installed base of LNG assets begin to flow. It already accounts for the lion’s share of future orders with Gas Technology Services being the biggest component. If Baker Hughes continues this trend, it should improve margins and revenue visibility.
Further, the group's order book still stands at close to $33bn, meaning that it can deal with short-term lulls in commercial activity. We think this makes it less sensitive to energy price fluctuations than oil & gas producers, but it still would feel the impact if prices were weak for a prolonged period.
The group boasts a robust balance sheet and impressive cash flows. That's currently supporting share buybacks and a prospective dividend yield of 2.6%. But as with any shareholder returns, there are no guarantees.
Whilst we're excited about the growth story emerging at Baker Hughes, the valuation currently sits towards the top of the peer group, meaning the shares are likely to be sensitive to any sustained weakness in order intake. However, the recovery in second quarter bookings was encouraging, improving efficiency, and a robust order book should help it manage a slowdown in new business.
Environmental, social and governance (ESG) risk
The ESG risk to oil and gas service providers runs parallel to those impacting producers. Environmental concerns are the primary driver of ESG risk for this group, with carbon emissions and waste disposal being the main issues. Health and safety, community relations and ethical governance are also contributors to ESG risk.
According to Sustainalytics, Baker Hughes's management of material ESG issues is strong, as are its ESG reporting practices. Based on available evidence, a part of executive remuneration is explicitly linked to sustainability performance targets. Similarly, the environmental policy is very strong. The company also has a strong whistleblower programme in place. It does not appear to be implicated in any significant controversies. It has a stated goal of reducing scope 1 and 2 emissions by 50% by 2030, and an overall reduction in scope 3 by 2033, although we would like to see this target more clearly defined.
Baker Hughes key facts
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