Baker Hughes Company (BKR) Class A USD0.0001

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Baker Hughes’ third-quarter revenue grew by 4% to $6.9bn, just below the bottom end of its guidance range. That comprised a flat outcome in Oilfield Services & Equipment (OFSE) and 9% growth in Industrial & Energy Technology (IET).

Orders fell 22% to $6.7bn largely due to a 34% decline in IET.

Underlying cash profit (EBITDA) continued to outpace revenue growth, rising 23% to reach $1.2bn, the middle of the guidance range. That was driven by higher pricing as well as efficiency gains.

Free cash flow growth was similarly strong at 27% to $754bn. $361mn was returned to shareholders, including share repurchases of $152mn. Net debt came in at $3.4bn.

Baker Hughes remains confident that underlying cash profit for the year will meet the mid-point of guidance, which works out at $4.5bn.

The shares were flat in after-hours trading.

Our view

Baker Hughes’ unchanged profit guidance at the end of the third quarter was enough to stop investors panicking about a small miss on sales and a drop in order intake. As it’s not unusual for quarterly orders to bounce around we’re not too concerned yet. But it’s something to monitor.

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 a strong order book for the group’s technology in this space.

The Oil Field Services & Equipment division (OFSE) is holding its own.

Demand for oil hasn’t peaked yet but should development in the sector dry up the group is also showing its well placed to pick up business to maximise the efficiency of existing fields. Over time, however, 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. We’re also supportive of the push to develop and sell more digital solutions across the client base. If Baker Hughes can continue these trends, it should hopefully improve margins and revenue visibility.

The group's order book still stands at close to $33bn, meaning that it can deal with short-term lulls in commercial activity. This makes it less sensitive to energy price fluctuations than oil & gas producers, but it would still feel the impact if prices were weak for a prolonged period.

The group boasts a robust balance sheet and impressive cash flows. That helps support share buybacks and a prospective dividend yield of 2.4%. But future shareholder returns can’t be guaranteed.

We're excited about the growth story emerging at Baker Hughes, but that’s also reflected by a valuation towards the top of the peer group. It’s well deserved in our opinion, but means the shares are likely to be sensitive to any sustained weakness in order intake.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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