Baker Hughes (BKR) Q1 2024: Non-LNG Gas Tech Orders Triple, Recasting Growth Mix

April 24, 2024 | By EarningsIQ Research

Non-LNG gas tech equipment orders surged threefold, highlighting Baker Hughes’ portfolio breadth and shifting demand drivers. Robust execution in both core segments pushed margins higher despite supply chain headwinds. Management’s confidence in durable earnings and free cash flow conversion signals a less cyclical, structurally improved business model for the medium term.

Summary

• Non-LNG Equipment Momentum: Orders outside LNG tripled, broadening IET’s growth base and future backlog quality.
• Margin Expansion Signals: Both segments delivered margin gains, reflecting structural cost actions and higher value backlog conversion.
• Order Visibility Locks In: Elevated RPO and new energy traction underpin multi-year revenue and cash flow visibility.

Business Overview

Baker Hughes is a global energy technology company operating through two primary segments: Oilfield Services & Equipment (OFSE), which provides products and services for oil and gas drilling, production, and asset optimization; and Industrial & Energy Technology (IET), which delivers equipment, services, and digital solutions for gas, LNG, and industrial markets. The company earns revenue from equipment sales, aftermarket services, and technology solutions, with a growing focus on energy transition markets such as carbon capture and hydrogen.

Performance Analysis

Baker Hughes delivered strong Q1 execution, with both OFSE and IET segments exceeding margin expectations despite lingering supply chain and offshore activity headwinds. IET was the standout, posting a 30% year-over-year EBITDA increase and 80 basis points of margin improvement, driven by the conversion of higher-margin equipment backlog and industrial tech expansion. Notably, non-LNG gas tech equipment orders more than tripled, marking the second-highest non-LNG quarterly bookings since the 2017 merger and signifying a shift in the growth mix away from traditional LNG dependency.

OFSE maintained its margin trajectory, with EBITDA margins increasing 80 basis points year-over-year, supported by cost efficiencies and productivity enhancements. While offshore rig delays in Mexico and the North Sea muted international revenue sequentially, management emphasized these were timing-related and not indicative of demand weakness. Free cash flow remained robust, and the company returned $368 million to shareholders through dividends and buybacks, reiterating its commitment to distributing 60–80% of free cash flow.

• Order Book Breadth: Total company orders held firm, with IET orders at $2.9 billion and record RPO, providing multi-year revenue visibility.
• Backlog Conversion Drives Margins: Higher-margin backlog in both segments converted at an accelerated pace, supporting structural profitability gains.
• New Energy Orders Gain Traction: $239 million in new energy orders booked, with management reaffirming a full-year target of $800 million to $1 billion.

The performance demonstrates Baker Hughes’ ability to translate a diversified backlog into earnings growth, even as legacy markets remain volatile.

Executive Commentary

Strategic Positioning

1. Diversified Order Book and Backlog Quality

Baker Hughes’ strategic pivot toward non-LNG gas tech equipment and industrial tech is materially broadening its growth base. The tripling of non-LNG orders in IET, alongside robust LNG and industrial orders, is de-risking the backlog and providing more stable, recurring service revenue opportunities. Management expects non-LNG gas tech equipment orders to rise more than 50% this year, further shifting the mix toward less cyclical, higher-margin businesses.

2. Cost Structure Reset and Margin Targets

Streamlined operations and process-driven culture have removed over $150 million in costs since segment consolidation. Both OFSE and IET are on track for 20% EBITDA margin targets (2025 for OFSE, 2026 for IET), with margin improvement coming from higher value backlog, ongoing cost-out programs, and increased operational discipline. Importantly, management asserts that achieving these targets does not require outsized market tailwinds—execution is within their control.

3. Energy Transition and New Energy Solutions

New energy orders, notably in carbon capture, hydrogen, and emissions abatement, are accelerating. The company’s technology solutions span the entire CCUS value chain, and recent awards in hydrogen-ready turbines and zero-emissions compressors validate Baker Hughes’ ability to commercialize next-generation offerings. The $6–$7 billion new energy order target by 2030 remains intact, positioning the company as a key enabler of global decarbonization initiatives.

4. Localized Manufacturing and Regional Differentiation

Localization in strategic markets like Saudi Arabia is deepening competitive moats. New chemical facilities, in-country manufacturing of wellheads and compressors, and regional supply chain investments are not only meeting customer requirements but also positioning Baker Hughes as the go-to partner for both traditional and new energy infrastructure in high-growth regions.

5. Digital and AI-Enabled Solutions

AI-driven production optimization (e.g., Lucifer platform) and digital orchestration are becoming central to customer value propositions. With 44,000 installed ESPs and growing digital capabilities, Baker Hughes is leveraging its installed base to capture recurring revenue and deliver measurable efficiency gains for customers, particularly in mature asset management.

Key Considerations

This quarter underscores a business model pivoting toward less cyclical, higher-value segments, with visible growth levers and operational discipline as central themes.

Key Considerations:

• Order Mix Shift: The surge in non-LNG equipment orders reduces reliance on the historically lumpy LNG cycle and supports more consistent service growth.
• Margin Expansion Path: Structural cost actions and higher-margin backlog conversion are driving durable profitability, not just cyclical recovery.
• Energy Transition Optionality: New energy order momentum and CCUS pipeline growth provide strategic upside and hedge against fossil fuel volatility.
• Regional Tailwinds: Localization and capital shifts in the Middle East, especially Saudi Arabia’s pivot to gas, play directly to Baker Hughes’ strengths and installed base.
• Execution Risk: Margin targets rely on sustained backlog quality, supply chain normalization, and continued discipline in both cost and capital allocation.

Risks

Execution on backlog conversion and cost-out programs remains critical, as supply chain tightness—especially in gas tech services—could pressure margins if not managed. Order visibility is high, but cyclicality in upstream activity, especially in North America, and geopolitical or macroeconomic shocks could disrupt demand. The pace of energy transition investments and policy support for CCUS and hydrogen are external variables that could accelerate or delay new energy growth.

Forward Outlook

For Q2 2024, Baker Hughes guided to:

• Revenue of $6.6 to $7.05 billion
• EBITDA of $1 to $1.1 billion, with margin rate up approximately 70 basis points quarter-over-quarter at the midpoint

For full-year 2024, management maintained guidance:

• Revenue of $26.5 to $28.5 billion
• EBITDA of $4.1 to $4.5 billion
• New energy orders of $800 million to $1 billion

Management highlighted:

• Continued strength in IET backlog conversion and margin expansion
• Seasonal recovery in OFSE as rig activity normalizes and deferred projects catch up

Takeaways

Baker Hughes’ Q1 results reinforce a narrative of structural improvement and portfolio diversification, with order momentum and margin expansion underpinning multi-year earnings visibility.

• Order Quality Drives Confidence: The shift toward non-LNG, higher-value orders and robust RPO provide a durable foundation for earnings and cash flow growth.
• Margin Targets Within Reach: Cost discipline and backlog mix are pushing both segments toward 20% EBITDA margins, with management emphasizing controllable execution levers over market reliance.
• Energy Transition Optionality: New energy and digital solutions are emerging as credible future growth engines, with CCUS and AI-enabled optimization gaining commercial traction.

Conclusion

Baker Hughes is executing on a multi-year transformation, with Q1 results validating the strategic pivot toward less cyclical, higher-margin businesses. The company’s ability to convert a diversified backlog into earnings growth, while investing in new energy and digital solutions, supports a constructive outlook for long-term value creation.

Industry Read-Through

Baker Hughes’ results signal a broader industry shift as energy technology providers diversify beyond traditional hydrocarbons to capture growth in gas infrastructure, digital optimization, and decarbonization. The tripling of non-LNG equipment orders and acceleration of CCUS and hydrogen projects reflect rising demand for flexible, lower-emission solutions. Competitors with narrow LNG or oilfield exposure may face increasing pressure as customers prioritize portfolio breadth, local content, and digital capabilities. For the sector, the pivot toward energy transition technologies and recurring service revenue is accelerating, with margin improvement increasingly tied to operational discipline and backlog quality rather than pure volume recovery.

BKR Energy Oilfield Services Energy Transition Gas Technology CCUS Digital Optimization Backlog