Q1 2021 Baker Hughes Co Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the Baker Hughes Company first quarter 2021 earnings call. At this time, all participants are in a listen only mode.
Later, we will conduct the question and answer session and instructions will follow 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 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 of 2021 earnings Conference call here with me of our chairman and CEO, Lorenzo Simonelli, and our CFO, Brian Worrell. The earnings release, we issued earlier today can be found on our website the 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 Lorenzo.
Thank you Jack good morning, everyone and thanks for joining US we are pleased with our first quarter results as we generated strong free cash flow continued to drive forward our cost out efforts and took the fiber meaningful steps in the execution of our strategy to lead the energy transition.
During the quarter TPS delivered the solid orders and operating income while <unk> continued to execute our cost out program to help drive another strong quarter of margin performance.
As we look ahead for the rest of 2021, we remain cautiously optimistic that the global economy and oil demand will recover from the impact of the global pandemic.
As vaccine rollout wrap up around the world, we expect rising oil and gas the model combined with continued discipline from OPEC, plus and publicly traded operators to rebalance inventories.
This should be supportive of higher oil prices and solid free cash flow across the industry.
Following a resilient in 2020, the natural gas and LNG market longer term demand outlook appears increasingly positive.
We anticipate future demand improving as governments around the world accelerate the transition towards cleaner sources of energy.
Accordingly, we see potential upside to our 20, <unk> LNG demand view, which previously caused for 550 to 600 <unk> of demand by the end of the decade.
Based on recent third party analysis and direction of the supported by discussions with some of our customers. We now see the potential for 600 to 650 MTA of global LNG demand by 2030.
Outside of oil and gas the focus on cleaner energy sources and technology to Decarbonize resource intense industries continues to accelerate.
The U S is more closely aligning with Europe and other developed nations in steering government policy to incentivize clean energy sources as well as carbon capture technologies.
We believe that these policy shifts will be crucial to supporting new industry wide investment in areas like renewable green hydrogen and Cc U S.
With the overall macro view in mind, we continue to believe that we are taking the right steps with our strategic priorities to position Baker Hughes as the leader in the energy transition.
We've had a busy start for 2021, making solid progress on all three pillars of our strategy.
On the past pillars, the transform the core of the business, we continue to identify and remove structural costs from our operations as evidenced by the improvement in our Oss margins despite lower revenue.
Coal is the continued to optimize our processes and infrastructure in order to deliver further cost reduction and footprint consolidation in 2021.
In addition to cost out actions, we continue to focus on portfolio optimization to narrow our focus streamline operations and improve overall operating efficiency.
As an example during the first quarter, we announced the agreement with Aker store to create the joint venture company in which we will contribute our subsea drilling systems product line with ACA stores MH web business.
This transaction helps align our portfolio with our long term strategic objectives. Additionally.
Additionally, we completed the sale of pressure pumping assets in Argentina, which includes the hydraulic fracturing fleet co keeping unit and related equipment.
On the second pillar of investing for growth, we continue to identify opportunities to expand in the industrial sector and increased our condition monitoring and asset management offerings.
To that end in the first quarter, we announced the acquisition of arms reliability and asset reliability services and software company with a strong presence across the broad range of industrial sectors, including metals and mining power manufacturing and utilities.
The acquisition enables our bently, Nevada business to expand forever into asset performance management and to use the scale of arms reliability technology utilizing our global footprint.
This transaction February enforces our commitment to accelerate the digital transformation of industrial assets across an ever increasing range of end markets.
On the third pillar of positioning for new Frontiers, we took steps to build out our energy transition offerings.
We announced an exclusive license for Fri internationals mixed salt process for carbon capture.
The next cell technology enabled significant cost reductions from a more energy efficient and environmentally friendly carbon capture process.
This provides a total cost of ownership savings for energy and industrial operators to Decarbonize their operations.
A mix of protest adds to our portfolio of capture technology development, which also includes the commercially available show the ammonia process and in amines based process for our compact carbon capture acquisition last year.
Additionally, we recently announced our intention to invest in the five T hydrogen from alongside other cornerstone investors plug power and shot industry.
This fund, which is targeting an ultimate size of approximately 1 billion euros is designed to accelerate the infrastructure and technology investment necessary to develop the hydrogen value chain.
We have also made progress commercially on our energy transition efforts building our diverse portfolio of offerings supported by scale and technology development.
In the first quarter, we signed an Mou with the horizon energy for the Polaris carbon storage project of northern coast of Norway.
Under the agreement, we will explore the development and integration of technologies to minimize the carbon footprint cost and delivery time of the project.
This is a great example of what the unique Baker Hughes portfolio can bring to customers.
The first will bring technology and services to drill and complete the injection wells OSV will supply subsea trees control systems and injection rises.
<unk> will supply of compression equipment for <unk> injection and <unk> will provide monitoring solutions.
As we continue to execute on the three strategic pillars, and our evolution as an energy technology company, we will maintain our discipline and prioritize the free cash flow and returns above our cost of capital.
Now I'll give you an update on each of our segments.
And oilfield services activity has increased suddenly and select areas. So far this year.
The strong commodity price performance has resulted in positive signs for further improvement across multiple regions over the course of 2021.
In the international market, we have greater confidence in our outlook for the second half as customer conversations and project opportunities are standing up in key markets, such as the Middle East Latin America and Russia.
Based on the discussion for our customers, we still expect the recovery in international activity to be second half weighted which should provide strong momentum for growth in 2022.
In North America stronger than expected activity in the first quarter helped us to mitigate some of the impacts from the Texas Winter storms and also provide some upside potential for the full year versus our prior expectations.
Although the rig count is moving higher we believe that the commitment towards capital discipline and maintenance mode spending remains intact among the public e&ps.
While we are pleased to see the outlook for RFS is improving somewhat faster than we anticipated.
Our primary focus remains on increasing the margin and return profile of this business for improved efficiency and portfolio actions.
We continue to execute on our plan to reduce our rooftops by approximately 100 facilities in 2021 and size of our product lines of appropriately for the current environment.
Overall, we believe the Oss remains on track to achieve double digit operating income margins given the significant structural cost reductions we have made improved operating process and the increasing use of remote operations.
Moving to EPS, we continue to balance our focus between new energy initiatives and current core operations like LNG high technology compression applications pumps and valves and after market services.
As I mentioned earlier, our long term outlook for demand growth in the LNG market is improving the.
The resilience of demand during the pandemic combined with the acceleration of climate commitments has resulted in improving optimism over the demand outlook.
This has also been reflected in our conversations with customers as more nations such as China make net zero of commitments. It is becoming increasingly clear that of phaseout of coal in favor of natural gas is necessary to reach their goals as well as broader global carbon targets.
Based on this outlook, we feel increasingly confident in our expectation of free to for projects, reaching FID in 2021, followed by a strong pipeline of opportunities in 2022 and beyond.
For the non LNG segments of our Ccs portfolio order activity remains solid with a positive outlook during.
During the first quarter, we booked awards for power generation and compression equipment for multiple SPX growth in Latin America and for our fixed platform in the Asia.
For the TPS services, we are optimistic about the outlook for recovery in 2021, and 'twenty 'twenty two as customers resume spending to maintain and in some cases upgrade their equipment.
We expect growth to be led by a recovery in transactional services and upgrades areas that were particularly impacted in 2020.
And our contractual services business. We are pleased to receive a 10 year contract extension to the existing global service contract with Petronas, The Malaysia LNG project, one of the largest LNG facilities in the world. This.
Of this contract is an extension of the 40 year partnership between the TPS team and the Petro escalation of LNG.
The relationship has included key technology injections that have helped the customer increased production capacity by reducing machine downtime and saving cost with extended meantime between maintenance.
On a longer term basis, we are optimistic on the outlook for upgrade opportunities as customers seek to reduce carbon emissions and improve the efficiency of their equipment. As an example in the first quarter, we announced the cooperation agreement with novel Tech to upgrade existing liquefaction trains at Yamal LNG to run on hydrogen blends.
Supporting their emissions reduction efforts.
Together with other tech we are introducing the first solution for Decarbonising, the core of LNG production and area and we expect to grow meaningfully in the future.
Net on oilfield equipment, we continue to focus on right sizing the business and optimizing the portfolio in the face of the challenging offshore market environment.
With Brent prices moving in for the <unk> and a more optimistic view for oil demand over the next few years, we continue to see the outlook for the industry Subsea tree awards, improving modestly in 2021 gross.
Still well below 2019 levels.
The longer time, we believe the deepwater activity will be increasingly dominated by low cost basins and that it will be difficult to sustain 2019 industry order levels for the foreseeable future.
As I mentioned in the first quarter, we announced an agreement with <unk> to create a 50 50 joint venture company to deliver global offshore drilling solutions for the combination of our SCS business with ACA stores MH West business.
This transaction will result in a leading equipment and services provider with integrated delivery capabilities financial strength of focus and experienced management team and the flexibility to the address of full range of customer priority.
Finally, and digital solutions, although operating results were below our initial expectations, we experienced the strong recovery in orders in the first quarter.
This was primarily led by industrial end markets as the global economies began to recover.
In the first quarter, we were awarded several projects that demonstrate our capabilities and emissions reduction solutions as well as our growing industrial presence the.
Panna metrics product line secured several orders for the flare IQ of advanced flare gas monitoring and optimization system with contracts for oil and gas operators in North America, China and the UAE.
We signed the new agreement with the customer in the UAE to pilot, our flare IQ technology marketing the fast deployment of flare IQ in the Gulf region.
Our technology will enable the customer to reduce methane emissions from flare operations and reduce its operational cost of pilot sites by delivering high efficiency flat combustion.
We were also pleased to secure an important award with a major aircraft engine OEM to utilize our <unk> technology to improve fuel efficiency performance displacing a competitor.
<unk> dual channel pressure sensor technology will enable the customer to deliver improved fuel efficiency and reliability performance.
And our <unk> technology business, we were awarded several orders from LG energy solution to support of electric vehicle battery cell inspection across facilities in Asia and Europe.
Overall, we executed well in the first quarter, delivering strong free cash flow and making significant progress on our strategic priorities.
We are of a broad portfolio and our strategic focus on the rapidly changing energy market Baker Hughes is well positioned to take advantage of a recovery in the global economy, and the oil and gas markets near term.
The longer term, we are well positioned for growth as we develop decarbonization of solutions across multiple industries.
We remain focused on driving better outcomes for customers executing on our strategy and delivering for our shareholders with that I will 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 $4 $5 billion down 12% sequentially, driven by OSB and TPS, partially offset by an increase in digital solutions.
Year over year orders were down 18% driven by declines in Oss and OSV, partially offset by increases in digital solutions and TPS.
Remaining performance obligation was $23 $2 billion day.
1% sequentially.
The equipment <unk> ended at $7 $5 billion down 6% sequentially and services <unk> ended at $15 7 billion up 2% sequentially.
Our total company book to Bill ratio in the quarter was the <unk> nine and our equipment book to Bill in the quarter was 0.8 <unk>.
Revenue for the quarter was $4 8 billion down 13% sequentially with declines in all four segments.
Year over year revenue was down 12% driven by declines in Oss OSB and digital solutions, partially offset by an increase in TPS.
Operating income for the quarter was $164 million.
The adjusted operating income was $270 million, which excludes $106 million of restructuring separation and other charges the restructuring charges in the first quarter relate to projects previously announced in 2020.
Adjusted operating income was down 42% sequentially and up 13% year over year, our adjusted operating income rate for the quarter was five 6% down 280 basis points sequentially.
Year over year, our adjusted operating income rate was up 120 basis points.
We are pleased with the operating margin improvement on a year over year basis, which was largely driven by strong execution on our restructuring actions and continued improvements in operating productivity of.
Adjusted EBITDA in the quarter was $562 million, which excludes $106 million of restructuring separation and other charges of.
Adjusted EBITDA was down 27% sequentially and down 5% year over year.
This quarter, we began disclosing total company adjusted EBITDA in our earnings release as well as the EBITDA by reporting segment in conjunction with this new disclosure. We filed an 8-K. This morning that provides three years of history by quarter for both total company and reporting segment EBITDA.
Corporate costs were $109 million in the quarter for the second quarter, we expect corporate cost to be flat to slightly down compared to first quarter levels from continued cost out efforts.
Depreciation and amortization expense was $292 million in the quarter for the second quarter, we expect DNA to be roughly flat sequentially and to gradually decline in the second half of the year net.
Net interest expense was $74 million <unk>.
Income tax expense in the quarter was $69 million GAAP.
GAAP loss per share was <unk> 61.
Included in GAAP loss per share is the $788 million loss from the change in fair value of our investment in <unk> Dot AI, partially offset by the reversal of current accruals of $121 million due to the settlement of certain legal matters.
Adjusted earnings per share were <unk> 12.
Turning to the cash flow statement free cash flow in the quarter was $498 million free cash flow for the first quarter includes $108 million of cash payments related to restructuring and separation activities.
We are particularly pleased with our free cash flow performance in the quarter. The sequential improvement was largely driven by working capital and the lower level of cash restructuring and separation payments.
For the second quarter, we expect free cash flow to decline sequentially, primarily due to less favorable working capital trends for the total year, we still expect free cash flow to improve significantly versus 2020 and to be in line with or better than historical levels. The drivers for free cash flow versus 2020 will be higher operating income.
Modestly lower capex and significantly lower restructuring and separation cash payments.
Lastly, as Lorenzo mentioned in the first quarter, we reached an agreement with anchor store to create a joint venture company that will bring together, our subsea drilling systems product line with ACA stores wholly owned subsidiary MH worth we expect the transaction to close in the second half of the year subject to customary closing conditions. This transaction.
Flex our continued focus on optimizing our portfolio.
Now I will walk you through the segment results in more detail and give you of our thoughts on the outlook going forward.
In the oilfield services the team delivered a strong quarter in a mixed market environment.
<unk> revenue in the quarter was $2 2 billion down 4% sequentially.
International revenue was down 5% sequentially led by declines in Russia, and the Middle East.
North America revenue increased 1% sequentially with solid growth in our North America land, well construction businesses offset by declines in Gulf of Mexico, and chemicals for the first quarter, our production related businesses accounted for over 60% of our total North America revenue.
Despite the 4% decline in revenue operating income of $143 million grew 1% sequentially, while margin rate expanded 30 basis points of six 5% the improvement in margin rate was driven by our restructuring and cost out initiatives the.
Of the Oss team executed very well on a robust cost out programs over the last year under difficult market conditions. Despite of 30% decline in Oss revenue versus the first quarter of 2020 EBITDA margin rate for <unk> was up 110 basis points year over year to 15, 6%.
As we look ahead to the second quarter, we expect to see a seasonal increase in international activity, which should be followed by a stronger cyclical recovery over the second half of the year.
As a result, we expect our second quarter international revenue to increase in the mid single digit range 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.
As a result, we expect growth in North American <unk> revenues to be in the mid to high single digit range.
We expect solid and steady margin rate improvement through the year as volumes improve in our cost out reduction efforts yield further results.
For the full year 2021, our industry outlook has modestly improved from what we shared on our fourth quarter earnings call.
Internationally, we still expect the second half recovery in activity with positive signs developing for multiple customers. However, without clear visibility on some of these incremental opportunities. We expect our international revenue to be down in the mid single digit range on a year over year basis.
In North America, the recent increase in commodity prices and strong recovery from private e&ps have improve the near term outlook as activity recovers, we believe that drilling and completion activity is likely to be modestly higher on a year over year basis.
We expect our north American revenue to lag overall industry spending and rig count trends, given our portfolio mix and the exit of several commoditized businesses last year.
Although commodity prices have increased and signals around customer spending and rig count are moving in a positive direction I want to reiterate that we will not be chasing revenue. We remain focused on pursuing projects that are accretive to margins and returns given these dynamics Oss revenue may be down modestly for the full year, but we expect our core.
Cost out actions to translate to a strong improvement in Oss margins in 2021.
Moving to oilfield equipment orders in the quarter were $345 million down 30% year over year and down 39% sequentially.
Revenue was $628 million down 12% year over year, primarily driven by declines in subsea services subsea drilling systems and the disposition of SPC flow, partially offset by growth in Sps and flexible.
Operating income was $4 million, which is up $12 million year over year. This was driven by higher volume in fts and flexible along with help from our cost out program, partially offset by softness in services activity and subsea drilling systems.
For the second quarter, we expect revenue to decrease sequentially driven by lower Sps and flexible backlog conversion, we expect operating income to remain closed the first quarter levels for.
For the full year 2021, we expect the offshore markets to remain challenged as operators reassess their portfolios and project selection.
We expect OSP revenue to be down double digits on a year over year basis due to the lower order intake in 2020 and unlikely continuation of the difficult offshore environment in 2021.
Although revenue will be down in 2021, our goal remains to generate positive operating income as our cost out efforts should offset the decline in volumes.
Next I will cover turbo machinery, the team delivered another strong quarter with solid execution orders in the quarter were $1 4 billion up 4% year over year equipment orders were up 28% year over year.
Orders this quarter were supported by awards for power generation and compression equipment for multiple <unk> in Latin America and for fixed platform in Asia <unk>.
Orders in the quarter were down 9% year over year, primarily driven by declines in transactional services and contractual services.
Revenue for the quarter was $1 5 billion up 37% versus the prior year equipment revenue was up over 100% as we continue to execute on our LNG and onshore offshore production backlog services revenue was up 6% versus the prior year.
Operating income for TPS was $207 million up 55% year over year, driven by higher volume and strong execution on cost productivity, partially offset by a higher equipment mix.
Operating margin was 13, 9% of 160 basis points year over year.
We were very pleased with the margin rate improvement year over year, particularly given the change in equipment revenue mix from 32% to 47%.
For the second quarter, we expect revenue to be roughly flat sequentially based on expected equipment backlog conversion with this revenue outlook, we expect TPS margin rates to be roughly flat versus the second quarter of 2020 due to a higher mix of equipment revenue and an increase in technology spending for.
For the full year 2021, we expect TPS to generate double digit year over year revenue growth driven by equipment backlog conversion and modest growth in TPS services, we expect the higher mix of equipment revenue to result in roughly flat margin rates year over year. However, we still anticipate solid growth in operating income based.
On higher volumes and improved cost productivity.
Finally in digital solutions orders for the quarter were $549 million up 10% year over year, we saw growth in orders across the oil and gas and most industrial end markets. While aviation remains a challenge sequentially orders were up 4% driven by the improving global economic environment.
The man.
Revenue for the quarter was $470 million down 4% year over year, primarily driven by lower volumes in Nexus controls process and pipeline services and way gate technologies sequentially revenue was down 15% due to a lower opening backlog driven by reduced order intake in 2020 as well.
As typical seasonality.
Operating income for the quarter was $24 million down 17% year over year, driven by lower volume, partially offset by cost productivity sequentially operating income was down 68% driven by lower volume.
For the second quarter, we expect to see strong sequential revenue growth and operating margin rates back into the high single digits for the full year 2021, we expect modest growth in revenue on a year over year basis, primarily driven by a recovery in industrial end markets with higher volumes and the continued focus on cost.
We believe the margin rates can get back to low double digits for the full year.
Overall, we delivered a strong quarter in TPS and Oss along with exceptionally strong free cash flow, while we faced volume challenges in our OSB and <unk> businesses. We are confident in our ability to 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 up for questions.
Thank you.
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Our first question comes from the line of Sean Meakin with Jpmorgan. Your line is now open.
Thank you good morning, Hey, Sean special.
So I wanted to start on free cash flow, Brian I. Appreciate your comments you walk through the moving parts quite nicely in the prepared comments and typically <unk> is seasonally challenging for collections.
I'd like your customers are feeling more comfortable with their cash flow profiles. The maybe they did in the back half of last year.
But sounds like free cash flow positive even without the collection of benefit.
So.
How should we think about that full year free cash flow expectation given the strong start you'd said.
You'd like you expect to get back to historical levels of it sounds like maybe in the low $1 billion type of number.
Shouldn't expectations start to move higher based on how you started the year.
Yes, Sean look we were pleased with how free cash flow is pacing. So far this year and I would say that the framework that we laid out when we were on the call in January is still largely intact, but with a couple of positive exceptions and you pointed out one really driven by <unk>.
Receivables and then some work we've been doing around inventory I think working capital will likely be better and EBITDA is pacing slightly better. So far this year. So indications are pretty good for the full year free cash flow performance and as we've talked with you about before we've worked a lot on improving our supply chain and working cap.
Processes, we've gotten a lot of systems in place and we're becoming more efficient in managing cash collections and inventory overall, and then I think youll recall, we pointed out in any of this is very important our incentive structure companywide is really more focused on free cash flow and cash conversion and so when I put all of that together.
Thank the are certainly tailwind for free cash flow for the year Sean.
Over the course of the year working capital can fluctuate just really depending on the dynamics of each segment OSF activity TPS progress collections, but.
It should be a source of cash.
This year and Thats, a little better than we talked about in January and just as a reminder of the other drivers of the the backdrop of free cash flow for the year operating income should be higher capex should be.
Slightly lower.
With the activity levels that are similar to what we what we've been talking about here.
The earnings are higher cash taxes should be lower because some of the refunds that we have and the mix of income and then as you know the biggest thing is just the reduction in the.
The restructuring and separation related charges, we had an $8 million in the first quarter I would expect the second quarter to be around the same level, Sean and then taper off in the second half of the year. So.
As you said like the start to the year.
The progress that we've made and feel pretty good about the overall performance.
That's very encouraging thank you Brian.
So then Lorenzo.
For me about Oss in OSB.
Moving to segments, where you've been really focused on transforming the operation than the portfolios to boost margins and returns for.
Progress NFS is continuing.
OSB is still seem to be a heavier lift later cycle its more offshore levered. So that's understandable, but where would you say you are in the transformation for each in terms of.
Operating efficiency and portfolio adjustments.
Yeah, Hey, Sean.
Jump in here first of all look I feel really good about the momentum.
And margin accretion that we've created through the cost out actions really over the last year with Maria Claudia and the team and the Oss and I'd say based on the actions that we've taken today and actions we're still executing on in the outlook you know.
Of that we that we talked about.
I continue to believe that we should have operating margin rates in the high single digits by the fourth quarter with a real good shot at double digits. The team is executing incredibly well not done with everything that we've got to do but I think you've seen the momentum here.
And the team is still working hard at this and certainly.
Have a lot that they've been working on and are continuing to execute on and I feel good about the execution capabilities. So look you should see a steady margin improvement obviously, depending on activity levels throughout the course of the year in <unk>. So I'd say, we're well on our way.
<unk> are beginning to be stabilized and I think we're going to have a great margin business here.
As we continue to execute this year you pointed out <unk> <unk> is a bit of of heavier lift please.
Pleased with the joint venture announcement that we have we expect that to close in the in the second half and I think thats a good step in our overall portfolio optimization.
For the remainder of OSB were continuing to focus on cost out across the business as we see overall pressure in the in the offshore market, we have been reducing head count and footprint to align with.
The lower volumes and I think just given the activity levels and backdrop that we see.
We want to we want to offset the volume pressure this year with those cost out actions, so our margin profile of that.
<unk>, but still not where the business needs to be over the long term and we will continue to evaluate how we run it differently and better given this this market environment, Sean I would just add if you look at our strategy and the free pillars. This really fits in the transform the core and the team's been doing a good job of executing on that first pillar and its.
Crucial that we continue to execute but pleased with the performance as we're going through the year.
Very good thanks for you both.
Thank you.
Next question comes from the line of James West with Evercore ISI. Your line is now open.
Thanks, Good morning, guys and congrats on the solid free cash flow next quarter.
So the window.
Your upgraded view of LNG was interesting.
From cross current of course in the market right now with the.
Some of them, suggesting Elena.
LNG.
It's been the asset risk, we don't agree with that at all but the some of that and then of course our view.
I want to use our transition fuel and.
And it could be of landed fuel even further in the future and so I'm curious.
As your customer base, how theyre thinking about LNG, why you see or how you see the upgraded the.
The numbers that Youre talking about.
Day in and the outlook overall for for LNG.
Yes, James and as we mentioned in the prepared remarks, we see the long term outlook for LNG remaining in fact can actually seeing positive upside and so we've taken up the outlook from <unk>.
$600 of 650 M. Tpa from what we said previously for demand for 20, <unk> and if you look at the backdrop 2020 was very resilient and also coming into 2021 youre continuing to see a good demand robust from countries, such as India, China and there is a couple of factors at play here.
The move from coal to natural gas given some of the commitments relative to energy transition, which are going to play out also as you look at getting to 600 to 650 million tons by the end of the decade from a demand perspective that means we've got to have approximately 700 to 800 million tons of nameplate capacity.
So that suggests that we're going to have enough of a 100 to of 150 million tonnes.
Over the course of the next three to four years.
That's an incremental 50 to 100 million tons than we indicated before so feel good about that outlook. This year, we still see free to for these taking place and in the discussion with customers. There's a lot of uptake discussions with the robust demand outlook as you look at the.
Back drop you have had some expansions in Qatar you have had some expansions announced in other locations you have got some of the North America projects that are out there commercially looking at offtake agreements and again, it's really encouraging to see just the announcements being made by several of the large users on the way in which they're going to transition from <unk>.
Coal to natural gas, which clearly applies to LNG as well so feel good about the outlook as we go forward.
Right, Okay that makes for since rod must be a pretty busy guy. These days. So how should we think about the.
The order outlook for TPS, then is because of the next several quarters.
Yeah as we look at TPS orders overall were still thank you all of our outlook for 'twenty, one and 'twenty two looks roughly similar to what we booked in 2020 that could be some mix change from a year over year perspective on the LNG side as I mentioned three to four projects likely to move forward in 2021, followed by.
Our robust pipeline of LNG projects to reach beyond 2021, so that continues to be a positive momentum as we've indicated before.
For non LNG equipment. We believe there is an opportunity for 2021 to be in line with 2020, the mix could move around a little bit between onshore and offshore and valves and other areas, but the opportunity is.
The the same we're also starting to see even though minimal in.
Number.
Triste traction on our offerings for <unk> and hydrogen there is a pick up there relative to discussions with customers.
More forward looking but some of the technologies that we're bringing on to the scene getting traction and debt will bridge. Some possibility over the next couple of years and then services, we're optimistic with the outlook that we've mentioned for 'twenty, one and 'twenty two as customers resume their maintenance activity and in some cases also look for upgrade equipment. So again no real.
Changed from what we said and it's becoming more robust.
Thank you. Our next question comes from the line of Chase Mulvehill with Bank of America.
It is now open.
Hey, good morning, everyone.
J J curve.
I guess I'll start with <unk>.
Lots of lots of Investor interest these days relative to you.
The us.
And on the capture side, you've got one of the broadest technology offerings that include show the ammonia.
That means and also mixed salt process technologies, but could you maybe just take a minute and speak to your comprehensive offering today across the entire <unk> value chain.
Where are you investing more and finally, what parts of the value chain, you're seeing Baker will be able to differentiate the most.
Yes, sure Jason as you said, we've been spending quite a bit of time on <unk> and it is much broader than just the process aspect as you look at Baker Hughes from our portfolio of perspective, I think we're uniquely positioned because we can play across multiple areas of the value chain. If you look at it from a post combustion capture we've also.
Consulting and reservoir evaluation and design.
As well as the subset of storage services like well construction reservoir modeling and also as you look at the longer term integrity and monitoring as you think about technology from a Ccs perspective again, you've mentioned some of the carbon capture.
Acknowledging that we have turbo machinery solvent based state of the capture of processes are going to be key the chilled ammonia process, which is commercially available already today and it's going to be ideal for large scale projects. The comeback carbon capture which is rotating bed technology, which we acquired at the end of last year.
Sure. This is going to be for smaller and mid scale projects and key for offshore industries as well as cement factories and different types of industries and then the recently announced the mixed salt process, which we mentioned during the SRA International.
License that we got which is again a novel process that will be utilizing our key equipment and allow for low energy usage also reduced water in the greater efficiency. So we're building a portfolio here across the <unk> from a technology standpoint, as well across the value chain.
Yes, I appreciate the color there and maybe as a quick follow up to this could you maybe talk to the adjustable market.
Across the <unk> value chain, but then maybe also speak to what you see as the addressable market for hydrogen.
Sure.
Announced in 2019 being an energy technology company focusing on the energy transition. So we spent a lot of time of the course of the last 12 to 18 months evaluating the market opportunities for ourselves as it relates to these different areas and we've really looked at free things, where our technology can play today also hot technology may evolve and the <unk>.
<unk> for quiet to remain competitive and also other areas in the value chain. So talking specifically to <unk>, we look at the addressable market for ourselves to be between $35 billion to $40 billion by 2030 now.
Addressable market covers the full range of technologies. The Baker Hughes can currently offer like the carbon capture technologies, we mentioned the compression story and monitoring and also assumes really a relatively mid case of 450 million tons of <unk> by 2030, so feel good about being able to play in this market.
And again, it's going to be an important market for us going forward on hydrogen.
<unk> been looking at this for some time you know we've been present in hydrogen with some of the key technologies already as we look out to 2030, we see an addressable market for us for ourselves of $25 billion to $30 billion.
I think you've got to keep in mind that this is evolving but again its going to encompass a wide range of products and technologies across the value chain and we're going to be focused on where.
Higher technology solutions can be better than the conventional technology and also address the market that way.
Perfect. Thanks.
Thanks for thanks Jay.
Thank you. Our next question comes from the line of Marc Bianchi with Cowen. Your line is now open.
True.
I'd like to go back to the GPS and I think if I heard right the guidance for second quarter was for the.
The margin rate to be flat with second quarter of 2020.
Which would imply like a 100 basis points.
The sequential decline are so I think you mentioned that that was related to some technology sales. So could you maybe.
Talk to us about the technology spending and what that's allocated towards and then how that would.
Progress over the remainder of the year.
Yes, yes, mark in the.
In the prepared remarks, we did talk about TPS margin throughout the year as you described and I would say look the thing you've got to keep in mind is that as we execute on our large backlog of projects margin rate will likely fluctuate a little bit quarter to quarter, depending on the equipment service mix, but also.
So due to the mix of the projects in the backlog there can be some differentiation there just given the broad range of of offerings that we have in the pretty diverse set of projects in the backlog that range from LNG, the onshore offshore production to industrial turbines and some rep and pet thing so low.
That's the core.
On quarter, you can see some fluctuation.
Based on that as far as technology goes.
Roughly in 2020, we spent at the total company level of about $600 million on R&D TPS makes up a decent portion of that given the overall end markets. It serves and and the new products, we're bringing to market and we're focused on and I'd say look from a from the second quarter standpoint, we are going to see a bit of of <unk>.
Ramp up occur.
Across some areas in traditional markets like LNG in onshore and offshore production, but also in some of the new frontiers that you've heard us talk about and Lorenzo just described around the <unk> high.
Hydrogen and then some in energy storage. So specifically, we've got some increased program.
Spend in high pressure Recip compressors for hydrogen and some more work on the hydrogen gas turbine development, we already have turbines today that run the 100% on hydrogen there's some more work that we can do to expand that to two of our broader turbine base and then look we're spending some more in advanced and additive manufacturing two position in <unk>.
From a cost and the competitiveness standpoint, both in new equipment and services going forward. So look.
It's a great business of really strong franchise, you see our positioning in some key markets and this is an area, where we think investments do make sense at this stage.
Even despite that TPS will have a strong year from a margin and.
And overall income standpoint.
Okay. Thanks, a lot of for that Brian.
The next question unrelated.
Wanted to ask about the revenue commitment that you have with <unk> AI.
I believe that that was restructured lower.
During COVID-19, but still a pretty sizable number.
As we go through the next few years.
I'm just curious if you could tell us where you stand with that what you're sort of visibility as to meeting or exceeding the revenue commitment and what are the consequences. If you don't.
Yes, my relationship we'd see free Dot AI remains very important to us and it's a strategic long.
Time really the restructuring of the contract was based on the strategic element of it being a long term relationship and also the deployment of artificial intelligence capabilities to our customers. We are seeing good traction good pickup where in a number of deployments across the industry and also associated industries. So feel.
Very good about the progression that we're making.
We've talked about releases of different products that we have done externally as well as the usage of see free dot AI internally within ourselves to the drive our process efficiencies as well so on pace and feel good about the future with C. III on AI.
Thank you.
Our next question comes from the line of Scott Gruber with Citigroup. Your line is now open.
Yes can you hear me yes.
Hey, good morning.
Yeah, I wanted to stay on the.
The theme of the less carbon intense of LNG.
The Yamal project as it is great to hear.
Have you started to hear from buyers are here of buyers, particularly Asian buyers starting to request less carbon intense is gas not only just shifting from coal to gas, but actually starting the request less carbon intensive gas.
Do you think that manifest in the near future or will this kind of trend towards hydrogen blends in the turbines the more of.
Operator, driven.
So Scott as you can imagine we've been in this industry a long time in a number of our customers have already started to measure of the carbon intensity of their LNG cargoes, we do see a theme and a trend that thats going to continue and as we look at also of the disclosures that people are starting to make.
Customers on the back end of that on the LNG side. We are hearing that there is a move towards more disclosure more transparency and we think we can actually apply that to helping our customers because we've got new equipment that can upgrade and reduce the carbon intensity. We've also got sky capabilities around Ccs.
So.
LNG is a destination transition fuel for the energy transition we feel good about the outlook and we also feel good about the way in which we support our customers to continue to drive lower the carbon intensity.
Gotcha, and I, just want to come back to <unk>.
Obviously, we have the biggest oil company in the U S. Dunkin' about now potentially a mega project along the Gulf Coast.
Is that something that you'd look to participate with the Mou in discussions with them.
And just for some clarification.
These these operators with low carbon ventures, the primary area of overlap with your portfolio would be just on the subsurface expertise and maybe some project engineering is that correct. So it seemed like the vast majority of your offering is still in play.
If you worked on all of the project like this with Exelon is that fair.
Scott It is fair I would take a step back and again. This is a space that is evolving and as an ecosystem that will emerge. If you think of a parallel to LNG.
Within LNG theres various processes that can be utilized.
And API Conocophillips.
The different across the board you've got different companies as well as different operators to have that process, we apply our equipment to that we integrate with their process and we also apply our own processes as well where appropriate. So it is an ecosystem where definitely we will participate and we will work to optimize also all of these.
Projects require.
From an engineering perspective different scale different modules stick built and so it's going to be dependent a lot on whether its small scale and mid scale of <unk> that will evolve as we go forward, but I look at it being very similar to LNG from a marketplace as it develops and we will be participating along the value chain.
<unk>.
Thank you our net.
Question comes from the line of David Anderson with Barclays. Your line is now open.
Mr. Anderson of your line is on mute please UN mute your line.
We ask that you. Please press star one and rejoin the queue. Our next question comes from the line of Connor Lynagh with Morgan Stanley.
Your line is now open.
Yes, thanks very much.
Sure. If you guys have spoken much about this before but I was interested with the discussion of the the well link service you've deployed for Saudi Aramco can you maybe just discuss in.
In a little greater detail what this offers relative to some of the competition out there and then I guess more broadly what is your sort of upstream software. So we think that you can offer the customers. These days.
Yes, so again on the web link we are very pleased with the deployment with Aramco and it's one debt.
We displaced an existing competitor and it's actually one of the largest deployment. What this allows is visualization and also better understanding of the wells themselves and the drilling activity and across the board. If you look at our upstream business, we've been investing in digital capabilities and transformation from a remote.
<unk> perspective from a visualization for most of an artificial intelligence perspective to reduce downtime, we've got deployments with a number of our customers and so.
The drive here is for productivity to be enabled for our customers and Thats, where we see the continued focus with our digital investments taking place.
Yes got it and then maybe just sticking with the digital theme I was wondering if you could discuss the the arms reliability deal and just basically how that fits into your portfolio and effectively where you see.
That adding to your offering in the Baltic the business over time.
Yes, sure and look we're very pleased with the answer of acquisition that we announced its arms reliability that really helps a broad range of industrial asset management solutions and <unk>.
If you think about what we offer today already within Bently, Nevada, it's around condition monitoring vibration arms for liability actually provide similar capabilities in mining metals manufacturing and other industries and so as you continue to look at our expansion into other industries applying condition monitoring.
Is it a great asset to have within the portfolio. So feel very good about being able to integrate it into our current offering as well as then laying the platform for system. One of the 16 arms together as an offering to our customers to drive that productivity.
Thank you.
Our next question comes from the line.
Of course with Wells Fargo. Your line is now open.
Thanks, Good morning.
Thanks for the EBITDA color that we got now across the segments of the 15, 6% EBITDA margin of that just curious if you can give a little bit of color on where that is expected to grow over the long term, obviously aiming for some improvement for the course of this year, but what would you think of normalized EBITDA margin should be for Bakers Oss business.
Yes, Chris look as I said, you know pleased with how Maria Claudia and the team have been transforming the business.
And from a normalized <unk>.
The EBITDA margin standpoint look there is no reason this business should not be a 20% EBITDA margin business, So Maria Claudia and the team feel confident that with the actions. They are taking they've got line of sight.
To get there and it should it should be at that level.
Okay. That's helpful. Thank you and then maybe one more coming back to LNG.
A lot of <unk>.
Good pieces come together here over the next few years, probably three to four projects. This year robust after that on the revenue side, maybe if you could talk about the prospects for EBIT going forward past 'twenty one obviously.
The growth this year on flat margins, but.
The business for us given your visibility into services revenues and equipment.
Do you expect EBIT growth in 'twenty, two and after that.
Yes look I.
Point out of couple of things I'd say.
As we said this year, we do expect solid growth in operating income based on the higher volume, even though the mix might be a bit of a headwind from an equipment standpoint.
From a from a rate standpoint.
The other thing I would point out is <unk>.
Services, we are starting to see.
Services pick up a bit I mean, the first quarter service orders in TPS were slightly ahead of <unk> 19 levels, which is I think of.
A good indicator.
Based on what Lorenzo talked about from LNG order intake in the overall order set.
And I feel good about rebuilding the backlog for equipment, we just booked a large.
Extension on the contractual services agreement in TPS, So our RPM remains robust at about $13 5 billion for for.
As our services, so look I'd say in 'twenty, two when I put all of that together I would expect service revenue to continue to grow.
Depending on how orders play out.
This year and final backlog conversion of equipment orders could be flattish or modestly down again, depending on timing of how orders come in in the the pace of backlog conversion over the next 18 months and so in this scenario.
Revenue would be flat or slightly down but margin I think would improve.
And show some growth in operating income so look I mean, I think the backdrop from a market standpoint is pretty solid for TPS from where I sit today services is showing some nice indication is.
As I mentioned here and I think the backdrop for 'twenty two margin progression looks pretty good sitting here today.
Okay. Thank you very much.
Thank you. This concludes today's question and answer session I will now turn the call back over to Lorenzo Simonelli for any further remarks.
Thanks, and I thought I'd just leave you with some closing thoughts share and lastly, we are pleased with the first quarter results. We generated strong free cash flow continued to drive forward our cost out efforts and we took meaningful steps in the execution of our strategy to lead the energy transition, we're going to continue to execute on our strategy of becoming an energy technology company.
The free strategic pillars of transforming the core investing for growth and positioning for new frontier is in areas like <unk> hydrogen and energy storage as we execute on our strategic pillars, and we continue with the evolution as an energy technology company, we will maintain our discipline and prioritize free cash flow and returns.
Thanks, a lot we look forward to speaking to you again soon operator, you can end the call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect everyone have a great day.
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