Baker Hughes (BKR) Q2 2023: IET Orders Surge $1B, Unlocking Multi-Year LNG and Energy Transition Upside

July 19, 2023 | By EarningsIQ Research

Baker Hughes raised its Industrial & Energy Technology (IET) order forecast by $1B, reflecting a step-change in LNG and new energy project visibility. The company’s record $27.5B IET backlog and accelerating new energy orders signal durable growth levers beyond traditional oilfield cycles. Margin expansion, cost transformation, and a robust international mix position BKR to outperform as energy transition demand compounds.

Summary

• IET Order Ramp: $1B increase in IET order guidance signals multi-year LNG and new energy demand visibility.
• Margin Expansion Focus: Cost transformation and mix shift drive progress toward 20% EBITDA targets.
• International Tailwinds: Offshore and international markets offset North America softness, reinforcing top-line resilience.

Business Overview

Baker Hughes is a global energy technology and services provider, operating through two primary segments: Oilfield Services & Equipment (OFSE), which delivers drilling, completions, production, and subsea solutions; and Industrial & Energy Technology (IET), focused on LNG, gas technology, industrial asset monitoring, and new energy applications. The company generates revenue from equipment sales, project execution, and recurring services, with a growing mix of long-cycle international and energy transition projects underpinning its backlog.

Performance Analysis

Baker Hughes delivered double-digit growth across both segments, with total company orders up 28% year-over-year and revenue advancing 25%. The standout was IET, where orders reached $3.3B, and the backlog (RPO, remaining performance obligation) climbed to a record $27.5B, reflecting sustained LNG project momentum and expanding industrial technology demand. OFSE also posted robust results, with international and offshore strength more than offsetting North American softness and driving segment revenue up 20% year-over-year.

Margin expansion is now a central theme, as cost-out actions and mix improvements pushed adjusted EBITDA margin up 150 basis points year-over-year to 14.4%. Free cash flow conversion improved sharply, supported by working capital discipline and higher collections in IET. Management’s focus on capital returns was evident, with 60% to 80% of free cash flow earmarked for dividends and buybacks, and a clear path to exceeding 20% EBITDA margins for each segment over the coming years.

• IET Backlog Sets Visibility: $27.5B IET RPO anchors multi-year growth as LNG and new energy projects accelerate.
• OFSE International Mix Shields Volatility: 70% international and 40% offshore exposure insulates revenue from North American rig declines.
• Cost Transformation Gains Traction: $150M cost-out target achieved, with further runway for margin lift in 2024 and beyond.

Overall, the quarter marks a strategic inflection, with durable top-line growth, margin momentum, and a pivot toward energy transition opportunities that de-risk cyclicality and enhance long-term returns.

Executive Commentary

Strategic Positioning

1. IET Order Book and LNG Cycle

Baker Hughes raised its IET order outlook by $1B, reflecting a robust pipeline of LNG projects and increasing demand for energy transition solutions. The record IET backlog provides revenue visibility well into 2026, with management citing strong customer engagement and a multi-year LNG FID (final investment decision) cycle.

2. Energy Transition and New Energy Orders

New energy orders surpassed last year’s total in just six months, with momentum in CCUS (carbon capture, utilization, and storage), hydrogen, and blue ammonia projects. The company’s ability to leverage existing technologies—such as CO2 compression and geothermal drilling—positions it as a key enabler of decarbonization and future energy infrastructure.

3. Margin Expansion and Cost Transformation

Cost-out initiatives delivered $150M in annualized savings, with further efficiency gains targeted through organizational simplification and digitalization. The company is committed to driving both segment EBITDA margins above 20%, supported by process improvements, systems upgrades, and a leaner operating structure.

4. International and Offshore Exposure

70% of OFSE revenue is international and 40% offshore, providing resilience against North American volatility. Offshore activity is expected to remain elevated, with tree awards projected to exceed 300 for several years, and Baker Hughes is well-positioned in key growth regions including the Middle East, Latin America, and West Africa.

5. Digital and Industrial Technology Expansion

Industrial technology orders grew 8% year-over-year, and the company is expanding its digital asset monitoring suite, including the first major Cordon award and Bentley Nevada’s condition monitoring for LNG projects. These offerings deepen customer relationships and create recurring service revenue streams.

Key Considerations

This quarter marks a transition point for Baker Hughes, as the company leverages its diversified portfolio and backlog to drive sustainable growth and margin improvement amid energy transition tailwinds.

Key Considerations:

• LNG FID Cycle Extension: Management expects >65 MTPA of LNG FIDs in both 2023 and 2024, supporting sustained IET order flow.
• Energy Transition Acceleration: New energy orders could reach $600M–$700M for the year, doubling 2022 levels and validating the portfolio’s adaptability.
• Operational Discipline: Cost structure simplification and working capital improvements are driving higher free cash flow conversion and margin expansion.
• International Mix as a Buffer: Global OFSE exposure reduces sensitivity to North American rig count declines and pricing pressure.
• Execution Risk in Chemicals: Chemicals business margins remain below historical norms, requiring further focus to restore profitability.

Risks

Execution risk remains in backlog conversion, particularly within IET gas technology equipment, where timing and supply chain constraints could impact revenue recognition. North America continues to soften, with potential for further rig count declines and pricing pressure in commoditized segments. Additionally, the chemicals business lags on margin recovery, and ongoing cost transformation initiatives must deliver without operational disruption. Macroeconomic volatility and project timing remain key watchpoints for order and revenue cadence.

Forward Outlook

For Q3, Baker Hughes guided to:

• Revenue of $6.4–$6.6B
• EBITDA of $930–$990M

For full-year 2023, management raised the low end of guidance:

• Revenue of $24.8–$26B
• EBITDA of $3.65–$3.8B

Management cited several factors shaping the outlook:

• Strong international and offshore project momentum, particularly in OFSE
• IET backlog conversion pace, with incremental R&D spend on new energy technologies in H2
• Potential for further cost reductions and margin lift into 2024

Takeaways

Baker Hughes enters the second half of 2023 with durable growth levers, anchored by a record IET backlog and surging new energy demand. Margin expansion and cost discipline are translating top-line gains into improved returns, while international and offshore exposure shields against North American cyclicality.

• Backlog Anchors Growth: IET’s $27.5B RPO and LNG cycle visibility provide multi-year revenue and earnings support.
• Energy Transition Momentum: New energy orders and technology integration validate the pivot beyond hydrocarbons.
• Watch Execution and Mix: Investors should monitor backlog conversion, chemicals margin recovery, and cost transformation delivery in coming quarters.

Conclusion

Baker Hughes is executing a pivot to durable, higher-margin growth, underpinned by LNG and new energy tailwinds, cost transformation, and international scale. The company’s record backlog, margin focus, and energy transition positioning set the stage for sustained outperformance and capital returns.

Industry Read-Through

Baker Hughes’ results reinforce the durability of the LNG investment cycle, with multi-year FID momentum and project visibility supporting the broader energy equipment and services sector. International and offshore activity remains a key differentiator, as North America softens and global customers prioritize capital discipline and decarbonization. Energy transition orders—especially in CCUS, hydrogen, and ammonia—signal a step-change for service providers able to leverage existing technologies for new energy applications. For peers, the message is clear: portfolio diversification, cost discipline, and digital expansion are now table stakes for long-term relevance in the evolving energy landscape.

BKR Energy Oilfield Services LNG Energy Transition Backlog International Margin Expansion