Q4 2020 Baker Hughes Co Earnings Call
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Good day, ladies and gentlemen, and welcome to the Baker Hughes Company fourth quarter and full year 2020 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will fall.
So at that time, if anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone 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 fourth quarter and full year 2020 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 Baker Hughes Dot 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 some 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 Laura.
So.
Thank you Jud.
Good morning, everyone and thanks for joining US we are pleased with our fourth quarter results as we generated strong free cash flow and executed on our cost out programs, while navigating the impacts of the global pandemic and industry downturn.
During the quarter or fast M D S executed well on commercial opportunities and cost out initiatives.
TPS delivered solid orders and operating income.
Despite an incredibly challenging year to for Baker Hughes and the industry in 2020, we generated over $500 million in free cash flow, but $6 $4 billion and TPS orders and executed on our substantial cost out and restructuring program.
We also took several important steps to accelerate our strategy and invest in new energy transition technologies.
Helping to position the company for the future.
I cannot thank our employees enough for their hard work and dedication to achieve our goals and move the company forward over what has been a trying year for everyone.
As we look ahead to 'twenty 'twenty, one we are cautiously optimistic that the global economy and oil demand will begin to recover from the impact of the global pandemic.
Assuming a successful rollout of vaccines around the world are synchronized global recovery should help drive solid growth in oil demand over the next 12 to 18 months and support a meaningful reduction in excess capacity over that time period.
We believe the macro environment likely translates into a somewhat tepid investment environment for oil and gas companies during the first half of 2021.
However, we expect spending and activity levels to gain momentum over the course of the year as the macro environment improves likely.
Likely setting up the industry for stronger growth in 2022.
And the natural gas and LNG market 2020 proved to be a more resilient year for demand primarily due to growth in China, an accelerated coal to gas switching across several countries.
LNG demand growth is estimated to have held firm versus 2019 levels and said much better than other commodities that saw meaningful declines.
We believe this resiliency highlights the structural demand growth for LNG and reaffirms our positive long term view for natural gas as a transition and destination fuel for broader energy consumption.
Regardless of the state of short term macro environment Baker Hughes remains focused on executing the free pillars of our strategy.
Transform the core invest for growth and position for new frontiers.
Our efforts to transform the core are the most visible and immediate components of our strategy.
We delivered over 700 million of annualized cost savings in 2020.
We'll continue to optimize our processes and infrastructure in order to deliver further cost reductions and footprint consolidation in 2021.
On the second pillar of investing for growth, we continue to identify opportunities to expand in the industrial sector and increase our condition monitoring and asset management offerings.
We recently won awards in our D. S segment that encompass our full suite of industrial asset management and digital capabilities and we are having promising discussions for future awards in both the oil and gas and industrial sectors.
We also continued to see good traction with our non metallic offerings, where we broke ground on a facility in Saudi Arabia, with our partner, Saudi Aramco and will soon be completing our new facility in Houston.
On the first pillar of positioning for new Frontiers, we continue to evaluate multiple concepts in business models across the C. C U S hydrogen and energy storage value chains.
We see several opportunities to deploy our existing technologies or add to our offering through targeted investments and bolt on acquisitions.
And C. C U S. We acquired compact carbon capture or free C. In November.
<unk> is an early stage carbon capture technology that offers a 75% smaller footprint and lower capex requirements compared to what is available today.
And hydrogen we are seeing positive momentum with our product offerings and remain engaged with several customers across a wide range of industries to advanced that hydrogen projects.
As we execute on these three strategic pillars, and our broader evolution as an energy technology company. We are committed to operating in a disciplined manner that prioritizes free cash flow and returns above our cost of capital.
Now I'll give you an update on each of our segments.
Our oilfield services business activity has stabilized globally with modest improvements in select areas and positive signs to favor improvement across multiple regions over the course of 'twenty 'twenty one.
In the international markets the decline in fourth quarter activity was mostly in line with our expectations aside from some additional softness in the middle East that developed late in the year.
For 2021, our view remains largely intact with a modest recovery in the second half across several low cost basins.
Looking across different geographies, we expect a solid recovery to continue in Latin America of depressed levels modest improvement in the North Sea and Russia, and the potential for a modest second half recovery in the middle East.
In North America, a solid year and improvement in drilling and completion activity outweighed typical fourth quarter seasonality low.
Looking into 2021, we expect further improvements in drilling activity over the first half of the year as public e&ps begin to add back rigs.
Though the rig count is moving higher we believe that the commitment towards capital discipline and maintenance mode spending remains intact.
While we are pleased to see that the outlook for Oss is gradually improving our primary focus remains on increasing the margin and return profile of this business from improved operating efficiency and portfolio actions.
During 2020, we executed on our cost out actions in RFS and continue to work through multiple work streams to further reduce our cost structure.
This includes a plan to reduce our rooftops by over 100 facilities in 'twenty 'twenty, one and shut down completions related operations in select countries in Latin America and Africa.
Overall, we believe that OSI operating margins remain on track to reach double digits in the coming years. Following the significant structural cost reductions in 2020, and as we institutionalize both from our operations and better operating processes.
Moving to TPS I'll focus remains on executing the significant backlog of LNG projects awarded in recent years continuing to grow our after market services offering driving growth in our valves business and capitalizing on attractive opportunities in the new energy space.
During the quarter, we booked an additional award for power generation for the North field East LNG project in Qatar.
This follows the main refrigerant compression awards, we booked in the third quarter.
For the LNG market overall, our long term outlook for demand growth remains intact.
The recent increase in LNG spot prices has solidified a similar view from many of our customers and improved momentum for a number of projects.
As a result, we continue to expect that free to full projects are likely to move forward in 2021, followed by a robust pipeline of LNG projects that we expect to reach.
Beyond 2021.
And our pipeline and gas processing segment, we secured an award with South gas company in Iraq for the design manufacture and construction of an integrated natural gas processing and production facility.
An important part of this project is a supply of compression equipment and digital monitoring systems that will enable the reuse of previously flared natural gas, which is estimated to reduce iraq's carbon emissions by roughly 6 million tons annually.
This award highlights our broad capabilities as we seek to deliver a diverse range of decarbonization solutions for our customers.
For TPS, we are optimistic about the outlook for recovery in 2021, and 'twenty through 'twenty two after a difficult year in 2020 as customers resume spending to maintain and in some instances upgrade their equipment.
While our contractual services business has remained resilient through the recent market turbulence, we expect growth to be led by a recovery in transactional services and upgrades areas that were particularly impacted during the pandemic.
On a long time basis, we are excited by recent traction for upgrade opportunities as customers look to decarbonize and improve the efficiency of their equipment.
Next on oilfield equipment, we executed on our cost out efforts and have taken several portfolio actions over the course of 2020.
We continue to focus on right sizing the business and optimizing the portfolio in the face of a challenging offshore market environment.
In the fourth quarter, we won an order from Eni for the Gogo field in Angola. The project include several solutions from our subsea connect suite of technologies, including multiple subsea trees Wellheads and manifolds.
With Brent prices, returning to the fifties and more optimistic view for oil demand over the next few years, we see the outlook for industry Subsea tree awards, improving modestly in 2021.
So still well below 2019 levels.
As we look out longer time, we believe that deepwater activity will be increasingly dominated by low cost basins and then it will be difficult to sustain 2019 industry order levels for the foreseeable future.
Finally in digital solutions, the oil and gas and aerospace end markets remain challenging.
However, we have seen some recovery in industrial end markets outside of aerospace in line with the rebound into the global economy.
In the fourth quarter, we were awarded several projects that demonstrate our capabilities in industrial asset management.
We secured an extension to a previously awarded projects with Petrobras.
We will provide a suite of digital solutions and services to optimize productivity reduce operational and safety risks and lower carbon emissions across Petrobras sites.
Our bently, Nevada business secured a contract with a major hydroelectric operator in the U S to provide orbit 60 system, one software and a five year services agreement for industrial asset management across multiple dams.
Bently, Nevada also secured a fleet wide contract with the American energy power to deploy system, one software remote monitoring and analytical services to diagnosed machinery issues in real time.
These wins are an example of our deep domain expertise and industrial asset management.
Going forward, we see significant opportunities to apply these capabilities and the oil and gas sector and we believe that these core competencies are also applicable to a number of industrial sectors.
Overall, we executed well in 2020 against the challenge of the global pandemic and the industry downturn, delivering strong free cash flow and executing on our cost out programs.
Baker Hughes is well placed to navigate the current market environment and positioned to lead the energy transition we remain focused on executing for customers being disciplined on cost and delivering for our shareholders with that I'll turn the call over to Brian.
Thanks, Lorenzo I'll begin with the total company results and then move into the segment details.
Orders for the quarter were $5 $2 billion up 2% sequentially, driven by OFC and digital solutions, partially offset by declines in Oss in TPS.
Year over year orders were down 25 per cent with declines in all four segments.
Remaining performance obligation was $23 4 billion up 2% sequentially equipment RP O ended at $8 billion down 3% sequentially and services <unk> ended at $15 $4 billion up 5% sequentially.
Our total company book to Bill ratio in the quarter was 0.9, and our equipment book to Bill in the quarter was 0.9.
Revenue for the quarter was $5 $5 billion up 9% sequentially, driven by TPS and digital solutions, partially offset by low single digit declines in Oss and O N E.
Year over year revenue was down 13% driven by declines in Oss OFC and digital solutions, partially offset by an increase in TPS.
Operating income for the quarter was $182 million.
Adjusted operating income was $462 million, which excludes $281 million of restructuring separation and other charges.
Adjusted operating income was up 98% sequentially and down 15% year over year, our adjusted operating income rate for the quarter was eight 4% up 380 basis points sequentially. We were particularly pleased with the margin improvement in the fourth quarter, which was largely driven by strong execution on our restructuring.
<unk> and improvements in operating productivity.
Corporate costs were $111 million in the quarter for the first quarter, we expect corporate cost to be roughly flat with fourth quarter levels.
Appreciate and amortization expense was $307 million in the quarter for the first quarter, we expect D&A to decline slightly from fourth quarter levels and gradually declined through the year.
Income tax expense in the quarter was $568 million driven by our geographic mix of earnings evaluation allowance tax expense of $225 million and the $91 million tax expense related to business dispositions.
Although we expect our book tax rate to remain elevated in 2021, we expect our cash taxes to decline.
Diluted GAAP earnings per share were 91 cents.
Included in diluted GAAP earnings per share is a $1 4 billion dollar gain on our investment and see three dot AI recorded in other non operating income.
We invested $69 million and see three that AI when we formed our partnership in June 2019, and.
In December <unk> completed its IPO, which requires us to mark our investments fair value since I see three investment is recorded as a marketable security on our balance sheet. The change in fair value will be reflected in the other non operating income line on a quarterly basis going forward.
While we are very pleased with our investment we are equally as pleased with our strong partnership with <unk> three as we develop and market new AI solutions for the oil and gas industry. We also view our unique C. III partnership as a good example of our capital allocation philosophy, as we invest in new technology frontiers and energy transition.
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Adjusted loss per share was seven cents.
Included in adjusted loss per share are the valuation allowance tax expense as mentioned earlier.
Turning to the cash flow statement free cash flow in the quarter was $250 million. This was driven by an improvement in sequential operating results and modestly lower net capex.
Free cash flow from the fourth quarter includes $189 million of cash payments related to restructuring and separation activities.
For the first quarter, we expect free cash flow to decline sequentially, primarily due to seasonality.
When I look at the total year 2020, I am pleased with our financial results considering the disruptions in the global economy, the impact of the COVID-19 pandemic the significant restructuring that we executed over the year and the number of corporate transactions that we completed.
Orders of $20 $7 billion for the full year were down 23% in 2020, driven by declines in all segments total.
Total company book to Bill was one in the year.
Total year revenue of $20 $7 million was down 13% O F. S was down 21 per cent and D. S declined 19%, partially offset by an increase of 3% in TPS.
Adjusted operating income of $1 billion was down 35 per cent in the year with total company adjusted operating income margins declining 170 basis points, mostly driven by volume declines in Oss and D. S.
Corporate costs for the year were $464 million for 2021, we expect corporate expenses to decline versus 2020.
Our cost out efforts and lower separation costs should lead to a gradual reduction in quarterly corporate expenses over the course of the year.
During 2020, we exceeded our goal of $700 million in annualized cost savings with the majority coming out in the second half of the year and the average cash payback of our restructuring actions has been less than one year.
In addition to restructuring we completed the sale of three businesses in 2020, including S. P. C flow in the fourth quarter. These dispositions are in line with our strategy to exit businesses that do not meet our return requirements and are aligned with our broader portfolio evolution objectives.
Overall, we believe that the actions taken in 2020 and greatly improved our global operations and helped to lay the groundwork for further improvement in our margin and return profile in the coming years.
So the full year, we generated $518 million of free cash flow. We are pleased with our performance as our capital discipline cost out initiatives and working capital release helped to offset lower operating results and $670 million in cash restructuring and separation costs incurred during the year.
In order to achieve some of our cost out initiatives in 'twenty and 'twenty, one we put restructuring and impairment charges of $256 million in the fourth quarter with an expected cash payback of less than one year.
Following our cost rationalization actions in 2020. This next phase is primarily associated with optimizing our structural costs, most notably reducing our facilities footprint to align with our broader business transformation objectives.
For 2021, we expect free cash flow to improve significantly versus 2020 and to approach historical levels, largely driven by higher operating income modestly lower capex and significantly lower restructuring and separation cash expenditures.
Now I will walk you through the segment results in more detail and give you our thoughts from the outlook going forward.
Oil field services the team delivered a strong quarter to close out a challenging year in the market.
<unk> revenue in the quarter was $2 $3 billion down 1% sequentially.
International revenue was down 5% sequentially led by declines in Asia Pacific The North Sea and the Middle East North America revenue increased 11% sequentially due to solid growth in both the North American land and offshore markets.
Operating income in the quarter was $142 million or 53% increase sequentially and a 220 basis point improvement in margin rate.
The improvement in margin was driven by our restructuring and cost out initiatives as well as favorable product mix.
As we look ahead to the first quarter, we expect to see typical seasonal softness during the quarter, even though the international drilling activity is largely stabilized as a result, we expect our first quarter international revenue to decline modestly on a sequential basis.
In North America, we expect the recent momentum in drilling and completion activity in the U S. Land segment to continue into the first half of 'twenty 'twenty, one as operators refresh spending budgets as a result, we expect a modest sequential increase in North American O F. S revenues.
Although we should benefit from our cost out initiatives margin rates may decline modestly in the first quarter due to international seasonality and fewer product sales for the full year 2021, our expectations are largely in line with the view we shared in October on our third quarter earnings call.
Internationally, we expect activity levels to stabilize and remained relatively unchanged for the first half of 'twenty 'twenty one.
We currently anticipate a second half recovery in activity across multiple regions. However, we still expect that our international revenue will be down in the mid single digit range on a year over year basis.
The recent increase in commodity prices and the redeployment of budgets have improved our near term outlook in North America at the moment, though activity in the back half of the year remains less clear.
As a result, we believe that drilling and completion activity in North America is also likely to be down in the mid single digits on a year over year basis.
Although <unk> revenue will likely be down modestly for the full year, we believe that our cost out actions should still translate to a strong improvement in Oss margin in 2021.
Moving to oilfield equipment orders in the quarter were $561 million down 49% year over year and up 30% sequentially. The sequential improvement in orders was driven by the Eni of Gogo Award and a strong performance by our S. P. C project segment, specifically in the Middle East, which helped offset a sequential decline.
In flexible orders.
Revenue was $712 million down 7% year over year.
Declines in subsea services and subsea drilling systems were offset by growth in F T S and flexible.
Operating income was $23 million or 47% improvement year over year. This was driven by higher volume in Sps and flexible along with help from our cost out program, which was partially offset by softness in services activity.
For the first quarter, we expect revenue to decrease sequentially, driven by lower Sps and flexible as backlog conversion.
Operating income to also declined sequentially, but remain in positive territory, primarily based on our cost out initiatives.
For the full year 2021, we expect the offshore markets to remain challenged as operators reassess their portfolios and project selection we.
We expect OSP revenue to be down double digits on a year over year basis due to the lower order intake in 2020, and a likely continuation of a difficult offshore environment in 'twenty and 'twenty one.
Although revenue is likely to be down in 2021. Our goal is to maintain positive operating income as our cost out efforts should offset the decline in volume.
Next I will cover turbo machinery, the team delivered another strong quarter with solid execution.
Orders in the quarter were $1 $8 billion down 4% year over year equipment orders were down 10% year over year, we were pleased with another solid quarter of bookings for TPS, despite the challenging environment.
Orders this quarter were supported by awards for the Iraq flare gas project and power generation units for Qatar Petroleum's NFU project.
Service orders in the quarter were up 2% year over year driven by growth in contractual services revenue.
Revenue for the quarter was $1 $9 billion up 19% versus the prior year equipment revenue was up 67 per cent as we continue to execute on our LNG and onshore offshore production backlog services revenue was down 11% versus the prior year.
Operating income per TPS was $332 million up 9% year over year, driven by higher volume and strong execution on cost productivity.
Operating margin was 17, 1% down 160 basis points year over year, largely driven by a higher mix of equipment revenue.
For the first quarter, we expect revenue to decline sequentially roughly in line with the last couple of years.
Based on this revenue outlook, we expect TPS operating income to grow year over year, but expect margin rates to be roughly flat versus the first quarter of 2020 due to a higher mix of equipment revenue.
For the full year 2021, we expect to generate solid year over year revenue growth driven by the conversion of our current equipment backlog and a modest increase in TPS service revenues.
So a higher mix of equipment revenue may be a slight headwind for growth and margin rates next year, we still expect solid growth in operating income based on higher volume.
Finally in digital solutions orders for the quarter were $528 million down 18% year over year, we saw declines in orders across most end markets, most notably transportation oil and gas and industrial.
<unk> orders were up 7% driven by seasonality and power and some improvements in transportation.
Revenue for the quarter was $556 million down 16% year over year due to lower volumes across all of these product lines with the largest declines in weight gain and Reuter Stokes sequentially revenue was up 10% with some industrial end markets begin to recover.
Operating income for the quarter was $76 million down 30% year over year, driven by lower volume.
<unk> operating income was up 66% driven by higher volume across all product lines and cost productivity.
For the first quarter, we expect to see sequential revenue declines in line with typical seasonality and operating margin rates back into the single digits.
Looking into 2021, we expect a modest increase in revenue on a year over year basis, primarily driven by a recovery in industrial end markets with higher volumes and the benefit of our cost out program. We believe D. S margin rates can get back to low double digits for the full year.
Overall, I am pleased with the execution in the fourth quarter and the total year amid a difficult macroeconomic backdrop, while 2021 may have some challenges we are confident in our strategy and our ability to execute we remain focused on free cash flow and improving margins and financial returns with that I will turn the call back over to John.
Thanks, Brian operator, let's open it up for questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
These limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
Again, that's one question and one follow up our first question comes from Sean Meacham with Jpmorgan. You May proceed with your question.
Thank you Hey, good morning.
So to start off I'd like to dig into free cash flow a bit more if we could you.
No really the result in the fourth quarter, especially without any working capital help.
It looks like good momentum into 'twenty one.
Lots of moving pieces between 'twenty, one versus 'twenty Bryan touched on it in his comments so core operational cash flow should improve we're going to lap the severance and restructuring charges, but working capital progress payment tailwind don't likely recur capex should be pretty restrained.
Cash taxes, probably help a little bit so all in dividend cover shouldn't be an issue.
Is there any reason why we shouldn't translate that into free cash flow north of $1 billion in 'twenty one.
Yeah, Shaun look you've got the right pieces, there and just to elaborate a little bit further on that.
I'd say earlier I would expect free cash flow to get back to historical levels sort of the 18 19 level and.
You you hit on a couple of based on how we're seeing things play out right now should see should see higher earnings as you mentioned Capex, specifically I would expect a modest decline versus what we saw in 2020, assuming similar activity levels and what we're seeing right now working capital specifically.
Based on what I'm seeing now Shawn I would say should be neutral or a modest source of cash in 'twenty, one and I think it really depends on O F F activity levels, and how progress payments play out from new orders and Turbo and Endo F E M.
As I also mentioned, while we expect earnings to be higher do you expect cash taxes to decline as we expect some refunds to come in in 2021, so that should be a tailwind as you mentioned and look the largest changes is really the cash restructuring and separation charges, which will reduce material and in 2021. So so overall.
That you know that increase in earnings.
The upside from cash restructuring should support.
Material improvement feel good about the process improvements we've made.
The teams are all over this it's a it's a key metric in and all of our performance metrics and you know.
Are pleased with the performance there and have got a pretty good construct for for 'twenty one.
Understood I appreciate that feedback and I'd also like to touch on the TPS order trajectory. So good inbound across the board, but EPS was the most resilient you have some nice awards that you called out.
We were off about 25% year on year in 'twenty not a surprise given the pandemic in 2019 was quite strong.
This is a very common debate today among investors that trajectory of awards for this business, particularly.
LNG sentiment is.
Howard of late and hydrogen expectations have gone hyperbolic so.
Can we just talk about your expectations for keeping your book to bill at or above one time in 'twenty, one and beyond and I'm thinking about just kind of buildup of awards in the next few years, you've got kind of a base of service awards, you've got line of sight of equipment Awards, maybe in downstream and then smaller versus larger.
LNG opportunities.
Yes, Shawn overall, we think that the order outlook for 'twenty, one and 'twenty two is roughly similar to what we booked in 2020, the Mexican slightly changed year over year as you mentioned on the LNG side.
We saw some good bookings in 2020, and we're seeing continued momentum in 'twenty, one with that again expecting three to four projects that will move towards the end of 'twenty. One, but also followed by a robust pipeline of LNG projects that continue to reach beyond the.
2021, so again conversations with customers given the current pricing have continued to be positive.
And as you look at it from a demand perspective, we continue to believe LNG demand increases as we go forward outside of LNG equipment, you know the opportunity set for 2021 same roughly the same as what we saw in 2020, there could be some mix movement between onshore offshore and valves.
In other areas, but the opportunity is roughly the same and as you said we are seeing increased traction on C. C. You asked as well as hydrogen and with the continuing theme of the energy transition a lot of customer discussions on services. We are optimistic about the outlook for 'twenty, one and 'twenty two as cut.
His resume their maintenance activity and also with the opportunity to continue to focus on upgrades of their equipment. So we think TPS services has has been underappreciated in the decarbonization theme and there's potential therefore increase from 'twenty one 'twenty two so again overall 'twenty one 'twenty two.
Roughly similar to 2020.
Thank you. Our next question comes from James West with Evercore ISI. You May proceed with your question.
Hey, good morning, guys.
James.
Lorenzo I noticed you had in the release and in your commentary a number of pretty significant wins in the digital solutions business, particularly on the industrial side of the business could you, perhaps elaborate a bit more on and those are the key pillar of the strategy to move into other verticals industrial being a key one.
Are those could you elaborate on kind of what youre seeing and what the trends or are there and how much further we.
It has to go.
Yeah James.
I think you've seen debt on the industrial landscape a number of companies are looking to commit to net zero and you've seen that propensity increase and when you look at our portfolio. We've got an opportunity in that second pillar of invest for growth really to aid them and not decreasing that carbon footprint, helping them to.
Decarbonize. So you look at areas of pulp and paper you look at areas of cement do you look at the food and beverage also mining that's where we're seeing an increased opportunity and it's very much in line with the strategy that we're executing to provide from the existing portfolio of industrial gas pipe and valves pumps as well as then.
Condition monitoring and asset management and that relationship also we have with C. Free on the side of digital helps us. So we are seeing increased intensity from the customer discussions and this is very much in line with the way in which we are transforming the company.
Okay, well, then maybe a follow up to that.
The U S is becoming.
A hot topic, something we've discussed and Rod discussed recently.
Could you maybe give your thoughts on kind of the.
The near term outlook for carbon capture and maybe the longer term themes from my perspective, it seems like the the main mitigates and pathway as we go carbon neutral.
But it hasn't been adopted.
Rapidly as maybe one of them one would've thought.
Yes, James in that we've been involved in carbon capture for some time and you've seen some of the recent announcements where are some of the LNG projects are looking to again.
Mitigates some of the share to emissions and we feel confident about the outlook for the market of Cc U S and we're in dialogue with a number of customers were actually involved in over 20 trials at the moment and that's also one of the key reasons why we acquired in November free C compact carbon capture because we see the opportunity.
Do you have a smaller footprint.
Quit meant being very useful there as you look at it you know the IEA already says that theres going to be an increased requirement of carbon capture and from 40 million tons per day up to 750 million tons by 'twenty fatty and then also to $2 4 billion tons by 2050 so.
Hard to give you a precise number but clearly it's an important part of the portfolio as it continues to grow and we expect to see orders coming through in the next one to three years.
I would agree with you. It is the area that probably fast moves and then followed by hydrogen and others, but it's clearly something that customers are looking at already.
Thank you. Our next question comes from Angie Sedita with Goldman Sachs. You May proceed with your question.
Thanks, Good morning, guys.
Oh, hi, so on the international markets Lorenzo I don't know if you have additional color around your outlook right you spoke to the tepid recovery to start the year and gaining momentum into year end and stronger growth from to 22, but maybe you can talk about the pace of activity for 'twenty, one E&P spending outlook.
Customer dialogue and then what is the degree of your visibility into the level of activity for 'twenty two.
Yeah, Angie and as we mentioned, we expect activity levels to stabilize and remain relatively unchanged for the fast half of 'twenty. One we do expect a increase.
Increase in the second half from from a recovery in the activity across multiple regions that framework, obviously is based on.
Our current thinking debt time.
No material impact from the virus ongoing and locked.
Lockdowns are maintained to a minimum.
Which obviously would impact that framework, if it changes, but looking at the geographies. We expect a solid recovery to continue in Latin America. The depressed levels also some modest improvement in the North Sea and Russia and also in the Middle East a potential second half recovery as things start to improve there.
On the offshore markets.
Similarly, mixed some improvement in areas like Brazil and Norway.
But also as we looked at some stack them to areas in West Africa. So as we look at international I think we still expect that our international revenue will be down in the mid to single digit range on a year over year basis with an uplift in the second half.
2020 are likely to be a stronger year, just given the macro assumptions that way.
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2022 is sorry net.
[laughter] I figured that out.
Helpful. I appreciate that learns and so on to that margin I'm. Good to hear there is more to be done on the cost out program and I assume potentially further realignment of the portfolio. So maybe Brian is there additional color around the path of margins for 'twenty one.
Maybe even thoughts around the exit rate given the cost out efforts and then even color around and the realization of double digit margins is that a possibility by late 'twenty two.
Yeah, and just to give you a little more color.
As I think about the year I mean at first you know the team has done a great job in terms of responding to the environment and really realizing the benefits of multiple years of work to transform the business and the way it operates and specifically around the first quarter as I mentioned margin rate could be down slightly based on seasonality.
And lower per.
Product sales, but.
But the decline in volume and mix should be partially offset by the cost out benefits.
That we've already seen come through that will carryover as well as additional cost benefits that will come through in the first quarter and then you know beyond the first quarter I'm I'm I'm feeling good about the margin accretion that we should see as volume recover seasonally in the second quarter and then within.
Back half recovery in activity. So you've got all of the restructuring efforts that have started to show benefits and you'll see that in the margin rate here in the fourth quarter and you've got the incremental benefits that will be coming through as we continue to execute on the programs that we are that we just announced and if I think about the.
Exit rate and how to think about.
You know the business performance here, assuming there's no unexpected change in product or geographic mix Angie we should be in the high single digits by fourth quarter with a shot at reaching double digits, depending on volume and and I think you know that the team has shown that they've been executing an end.
Having some upside in these restructuring programs. So I think that's a tailwind for how to think about <unk> and feel good about the margin trajectory.
Thank you. Our next question comes from Chase Mulvehill with Bank of America. You May proceed with your question.
Hey, good morning, everyone.
Okay.
I just wanted to kind of come back to the LNG topic, a meal prices are pretty strong today.
Today, and so just kind of want to understand.
What impact this is having a day.
LNG business and maybe you can first talk to the impact it's having on the order flow as you're having conversations with some of your customers and then secondly talk to it and you spoke to it a little bit on the service side I would assume that you know stronger LNG prices are having a rather positive impact on some of the transactional and upgrade services.
You mentioned that previously, but if we look at the model I think 'twenty 'twenty service revenues are about 400 million below kind of 2019 levels so given stronger.
LNG prices when do you think we can get back debt 400 million debt, we lost last year on the service side.
Okay. So I'll kick it off here and just give you a view of the LNG outlook and you.
We mentioned that again, we were pleased with the resilience that we saw in 2020 and again, we continue to see that the demand for LNG increases in particular in Asia and also do you see coal to gas continuing to shift and as we look at this year again, we see free to four projects moving towards.
And the current discussions with customers are ongoing and as we look at beyond 2021 again, we see a number of projects solidifying going out if you look at it from a longer term perspective by 'twenty Friday, we still need to have a capacity of approximate.
$650 to 700 million tons of LNG in place and so youre looking at 50 to 100 million tons.
Being over the course of the next three to four years. So we feel that that trajectory is very much in place and feel good about our opportunities in this space continuing.
And chase specifically around services as it relates to LNG I would remind you that the overwhelming majority of LNG services or on the these contractual services agreements and that that revenue has pretty much played out as we expected it to play out this year. So the LNG service isn't really.
<unk> impacted as much by some of the shorter term and in year dynamics.
That you are that you see in other parts of the portfolio I will say, though longer term for LNG service and CSA is as we're booking these new orders and things start to come on line you will see more contractual service agreement come into the RPE, Oh, and you did see our P O grow in the quarter and that's really on the back of <unk>.
CSA is in LNG as I said the overwhelming majority.
Sign up for these long term service agreements, taking a step back, though and looking at our overall TPS services and and and how I think about getting back to the 2019 baseline I'd give it a you know a wide timeframe maybe over the next two to three years as I said CSA revenue has been pretty resilient.
Got good visibility there given the nature of those contracts in and how we operate those transactional services should see some recovery as our customers really stopped delaying maintenance.
Activity and it you know deciding when it normalizes back to 2019 levels is difficult, but we do expect some some tailwind this year.
Based on what we're hearing from customers and I I'd say chase that probably the most difficult bucket of revenue to predict is upgrades.
Which is truly discretionary in nature and is usually one of the first items that operators cut so I'd say it budget constraints remain in place it could take upgrades a little while to get back to 2019 levels again, we are seeing you know a key.
Customers talk about upgrades for various reasons performance better cost positioning and then also some of the carbon capture areas that Lorenzo mentioned, so that that's why I I'd say the visibility is a bit less clear in that area and what I'd say about two to three years on getting back to 19 levels.
Okay helpful. There, if we could shift gears, a little bit and talk about <unk>.
A little update here, we saw some nice awards in the press release, and obviously <unk> had a really nice IPO.
And so could you talk about the success that you're having on the external opportunity side and maybe also briefly on kind of where you are kind of fully exploiting kind of across your enterprise.
We're very pleased with where we are on D. C. Three relationship and to think it's a.
Really just over a year that we've entered into this partnership put aside the IPO. Because this is really a strategic relationship and partnership that we have for an increasing theme of providing artificial intelligence to our customer base across the energy landscape we.
We are seeing a number of applications that we put onto the marketplace. You've seen the awards that have happened in Asia as well as Latin America, and the drive for productivity the drive for reducing nonproductive time really aid the element of introducing artificial intelligence and the platform that see free has in place so.
We're continuing to see good traction with our customer base and we think that will continue with the drive towards reducing unplanned downtime internally, we're taking the artificial intelligence and utilizing it with an op process improvements of inventory some of our internal processes as well as then.
Also on our manufacturing base looking at our own equipment and are increasingly also looking at some of the services that we provide to our customers as we look at our with drilling et cetera, and seeing how we take the different information and anticipate again ex cash instead of taking place in some of the services. We provide so you know this was an op.
Maturity that continues to grow I'm very committed to the partnership I'm happy with how it's proceeding yeah, and Hey, Chase I'd just add one thing there is some exciting developments are starting out that we're seeing.
Seeing some opportunities to pull through our own offerings with the sale of C. Three AI software and I'd say, the most promising opportunities near term or around condition based monitoring solutions.
And with our <unk> services for E. S. P. So look we see an opportunity to expand the value that we can provide our customer base by expanding our advisory service offerings alongside that C. Three portfolio. So as we continue to work with the teams were again starting to see some of the opportunities play out that we were.
Exploring when we when we made this investment so we're in early stages here and I think long term. This is going to continue to be a great partnership.
Thank you. Our next question comes from David Anderson with Barclays. You May proceed with your question.
Hi, Good morning, Lorenzo a couple of questions around your investing for growth pillar there.
So as I think about global oil demand recovering over the next few years I would think your artificial lift and chemicals businesses would benefit most.
Are you looking to kind of build these out more with that in mind. I mean, you mentioned the chemicals facility in Asia. I was wondering just kind of talk about some of those longer cycle businesses. Because you have more exposure than your peers. So I'm. Just wondering if this is an area that youre thinking about further for more investment.
Yeah look we like our positioning on the production on chemical side and as you say.
From the artificial lift side of again oil demand improves we'll feel good about our ESP, we feel good about the technology, we have in place and will continue to grow that product line on the chemical side, Yes, we've actually announced investments both in Asia, and Singapore and also in the.
King them of Saudi Arabia.
And we see the opportunity of our chemicals, continuing to increase, especially as you look at enhanced oil recovery, but also an opportunity to go further into the downstream without chemicals business as well. So both of those areas are as you look at our growth trajectory feel good about the prospects going forward.
And then sticking on investing for growth you touched on it before about your digital business the digital segment and how the mix is shifting there.
If we think about the new bond administration coming in methane release of share to be a big topic up there you have a number of products within there that could really fit in there are your customers starting to talk about that yet and can you just kind of talk about how that market could develop for you over the next few years. It seems like it's kind of low hanging fruit for biden right.
Right now.
Good day, if we are seeing increased traction from the customer base and.
Irrespective of the administration, just the whole aspect of emissions management and people focusing on the emissions you saw it happen Eylea also during the Obama administration now with.
The conversations with our customers we've got the technology in place it'd be drone based IP. We've got the sense says lumen. So again conversations are increasing with our customers and it's both a point solution as well as the service that we can provide so we see an opportunity as we look at energy transition to y.
Really help our customers decrease their emissions, yes, David I'd just add here you know to the rentals point shell has publicly stated that they're working with us with <unk> on our aluminum technology and we've got both lumen terrain, which is continuous monitoring for methane emissions and as Lorenzo mentioned, we've got the lumen Sky, which is aerial and drawn based so we can do.
Fleet wide we.
Can drill down into a particular asset.
We can quantify leakage identify where it's actually occurring and look this is a much better technology than traditional ways for for trying to determine if their methane leaks because they can be quite destructive in and less accurate and is and as you know methane is you know around 80 times worse for.
And the environment, then and carbon emissions. So this is an area that that is important in.
In the World and we think we've got a great offering and do expect to see more uptake of that in the coming years.
Yeah.
Thank you. Our next question comes from her colleague with RBC. You May proceed with your question.
Hey, good morning, everybody.
Current or.
Hey, thanks for that.
So that great summary, so I'm really.
He didn't want to continue on the concept of you're investing for growth in the energy transition.
And then talk about carbon capture both in terms of you know.
Is there any way that you can help the investor base kind of quantified what.
What you're currently generating in terms of revenue.
From that <unk> business.
Maybe that's one and then more.
More importantly, right can you give us some general sense as to what you see Lorenzo in terms of the potential total addressable market or the specific products and services that Baker Hughes is currently providing.
Yes current you know look all I'll.
I'll start out here I'd say you know if I'm if you look at our you.
You know revenue today, depending on how you define energy transition Theres a lot of net portfolio that supports that but things like carbon capture hydrogen energy storage relatively small in terms of revenue base for each of the product companies.
So look the way I think about it is.
Lorenzo talked about carbon capture is probably the first area, where you'll start to see some meaningful revenue come through over the next few years. We are in pilot projects around the world. We've just made a technology acquisition.
And three C. So lots of activities there as we've talked about on earlier calls we are in hydrogen today than they've been in hydrogen for decades.
Basically elementary uses.
For hydrogen in our compression technologies, so we're starting to see.
Discussions there with customers and same thing on the AR on the.
Energy storage front, so the way I think about it as they will be some of the faster growing areas, particularly in turbo machinery and in digital solutions as we build out condition based monitors and monitoring and sensing technology around that so I think they will be there.
There will be things that will make turbo machinery go fast grow faster.
Because of because of these new offerings. So you know look I think the pace. It is how it happens will really depend on you know more.
Market acceptance and the overall economics of these projects, but I would say in the short term carbon capture is a is the best opportunity in the next one to three years.
If you look at it and again just look at what's happening around the world you've got all of these countries that are now committing to net zero you've got companies that are committing to net zero or even negative net zero.
And again to put a precise number on it it's difficult at this stage, but when you look at the portfolio. We have when you look at our.
The hydrogen discussions, we're having as well as C. C. U S. This will be an area of growth for us and it's very much in line with our strategy. So in the invest for growth as well as the new frontiers, and that's why you're seeing us take some of the smaller technology bets that we've taken and will continue to do that but feel very good.
We're at a pivotal point in time with this energy transition and also the move towards these new technologies will continue to accelerate.
That's great I appreciate I appreciate that.
And just one follow up Brian on your part just wanted to clarify one thing you said you'd have a substantially higher free cash flow in 2021 than 2020, but I wasn't quite clear as to whether or not you thought that free cash flow would be sufficient to cover the dividend and Paul.
Yeah, Kurt as I mentioned I based on what I'm seeing today I would expect it to be back at levels in line with Ah.
18, and 19, and if you recall, we were well in excess of of covering our dividend.
And in those years, so again I think the process improvement the the way we're running the business and the framework supports strong free cash flow in 2021.
Yeah.
Okay.
Thank you. Our next question comes from Marc Bianchi with Cowen You May proceed with your question.
Thank you.
I'd like to follow up a bit on the energy transition and carbon capture stuff that you mentioned so far in this call.
My my sense is that most of your offering revolves around kind of the compression equipment that you have and in some of the some of the other stuff and turbo machinery, but as we think about.
How baker wants to participate in these markets what are the missing pieces of the portfolio if any and.
What would be a reasonable timeline for you to build out that capability either organically or through through M&A.
So Mike maybe just take a step back because carbon capture has been taking place already and we're involved as you mentioned from the compression standpoint, that's project in Australia projects in the Middle East, where we're active and as we go forward.
See ourselves playing in some of the key areas of post combustion capture.
Consulting and reservoir evaluation and design the compression, but also the subsurface storage services like well construction reservoir modeling and longtime integrity and monitoring if you look at our portfolio. Those are capabilities that we have so really it's more than just compression, but again.
This is something that over the course of next two to three years, we continue to see expanding we mentioned we're in 20 trials already.
And we're seeing increased interest from our customer base on C. C U S and Mark I'd say specifically.
The technology acquisition that we that we just talked about earlier three C. Look we believe that this is pioneering technology and it's currently the pilot stage and it was incubated with a you know some key partners, including Ecuador, and we believe that we can accelerate that technology.
And commercialize it and look we think the differentiation is important versus traditional carbon capture that Lorenzo had had talked about I mean, the our technology now uses rotating beds versus static called the columns solvents are distributed in a compact and modularized format and so that combination allows.
US to have a 75 per cent reduction in footprint, leading to lower capex and lower Opex solution. So again, our manufacturing know how our technology know how with this this new technology that was developed I think is what's going to help us become a leader or continue to be a leader in this space and combine that.
With our turbo machinery business and what we have to offer there with all the things that come in from digital solutions. We think we already have a very powerful offering in this space and can start to.
It shows some progress with our with our customers and there's obviously as you would imagine a lot of conversations in this area.
Right Yep.
Thanks for that the other one I had was on on the CSA service within TPS.
Just sort of look at historical LNG capacity installations, it would appear that there's co.
Quite a large increase of sort of facilities that had been up and running for five years as we enter 2021.
So I was surprised to hear that debt that piece of the service business within TPS isn't going to be inflicting here could you maybe talk to how you see that playing out and maybe why that might not be inflicting in 'twenty one.
Yeah, you know look as I said, we've got really good visibility into how that portfolio performs in the.
The Devil is always in the details Mark in terms of when outage is actually happening when these major event happened and it really depends on how that equipment is operating the environment that it's operating within in the type of gas into the hole.
Attractiveness of the CSA portfolio is is is pretty.
You know known cash flows for customer and kind of a known view of our cash flows as well so based on what we're seeing right now in terms of working with customers in that particular machines in the end the outages that's what we're basing.
That that view on there's always room for things to move around sort of plus or minus six months. So it could be an area, where we could we could potentially see some upside come through but right now based on what I'm seeing I I feel confident with the with what we said.
And in terms of how we view that space in 2021.
Got it thanks very much.
Yeah.
Thank you. Our next question comes from Jason Jacob Lundberg with Credit Suisse. You May proceed with your question.
Hey, good morning, guys. Thanks for squeezing me in.
Jay I want.
Hey, good morning, I wanted to spend some time just on your efforts and strategy to grow the industrial business.
Could you just sort of expand on the opportunity set that you're looking at with respect to expanding in the industrial sector through industrial asset management. Please.
Yeah again, if you go back to why what we're seeing happen around the world a lot of industries are focused on reducing emissions and also net zero goals. So as you look at cement industry, you look at our pulp and paper you look at food and beverage light industrial these are all areas.
Where energy is consumed today and the missions are actually produced and we've got capabilities within our portfolio to actually help them on their decarbonization, Johnny emissions management. When you look at our digital solutions as well as our G. P. S portfolio, you've got industrial gas turbines, which we introduced you've got valve.
You've got pumps, you've got condition monitoring so it's really an adjacency associated with investing for growth. We're commercially we can go out and help our customers in the industrial sector continue to meet their goals and ambitions around that zero. So we feel that it's an opportunity for us and that's part of our strategic.
Specter of walking across the energy value chain and a number of customers you've seen us before announce within pulp and paper. These conversations are increasing and we see an opportunity on that industrial space.
Okay and then.
Related but.
You guys have a lot of ongoing efforts to grow in markets, we've talked about carbon capture today and you've talked about non metallics hydrogen as well.
Do you expect this to be an organic effort from here or how are you thinking about augmenting your efforts with M&A, either large large scale or bolt ons.
Yeah, Jake look I think we've got a lot of the know how and what we need to do to win in house today than for instance in asset management, we've been at.
Asset management for for decades, so the jump over to other industries as is not you know is.
It is not a far reach saying that though you have seen us make some investments and some relatively small investments like C. Three and three see those those types of investments are ones that that I think are quite attractive. It's good technology integrates nicely and with the portfolio.
<unk> add some capabilities.
The debt, we think augment what we already have in house. So you know from from my perspective, those are the things that tend to be on the radar screen right now I don't see a need for any large scale acquisition at the moment and we will continue to to work those opportunities for those small tuck in technologies and keep you guys posted if anything.
[laughter] changes, but that's that's kind of where our head is today and the types of things that we're seeing debt that we like right now.
Thank you great.
Well look I think when it comes to time, so I want to thank everyone for joining our call today.
Before we end I just want to leave you with some closing thoughts and we're very pleased with our fourth quarter and total year results and believe they forever illustrate the strength of the Baker Hughes portfolio as we execute on our margin and return objectives and evolve our company within the energy landscape, we continue to execute on our strategy of becoming an energy technology company.
With the free strategic pillars have transformed the core investing for growth and positioning for new frontier is in areas like C. C. U S hydrogen and energy storage, we're committed to executing the strategy, while prioritizing free cash flow generation and returns and again I just want to thank you for taking the time and look forward to speaking with you all again soon.
Operator, you can close the call.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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