The world’s energy companies are becoming more pragmatic in their approach to reaching net-zero emissions and Baker Hughes Co.’s customers plan to boost their natural gas exposure in the coming years, CEO Lorenzo Simonelli said.
It is “becoming clearer just how complex the undertaking is for the transition of the world's energy ecosystem,” Simonelli said during the first quarter conference call. The “slower-than-expected expansion of renewable energy capacity” has led to “record levels of coal demand. Consequently, we are seeing more pragmatism toward a pathway to decarbonization…
“There is mounting consensus that there is no possible route to decarbonize the energy system without driving greater efficiency and significantly increasing gas weighting within the overall energy mix.”
The challenge for exploration and production (E&P) companies, Simonelli told analysts, is to provide secure and sustainable energy as demand mounts. For Baker Hughes customers, the answer is natural gas.
“Gas is abundant,” with lower emissions and costs, the CEO said. “This is the age of gas.”
From the supermajors and national oil companies to the independent E&Ps, all of the company’s customers “are messaging that they plan to increase their exposure to gas in the coming years.”
Even Saudi Arabia is reallocating capital “primarily toward gas” as it works toward net-zero emissions, he noted.
“The country's shifting focus toward natural gas, where production is now expected to increase by more than 60% through 2030, will require significant investment in gas infrastructure,” Simonelli said.
In fact, Baker Hughes this week clinched its second order of the year to supply pipeline centrifugal gas compressors for the Kingdom’s expansion. Since January, the company has secured orders for 35 compressors.
“In addition, we are seeing a number of gas infrastructure projects emerge around the world,” the CEO said. “These midstream opportunities, along with solid first quarter bookings, give us confidence that non-LNG gas tech equipment orders will be up more than 50% this year.”
More LNG Capacity, Please
Long-term demand for natural gas, including liquefied natural gas, “remains very encouraging,” Simonelli said. “Through 2040, we expect natural gas demand to grow by almost 20%,” representing a compound annual growth rate of 1%.
The company’s Industrial & Energy Technology division, which handles natural gas equipment including for LNG infrastructure, delivered $2.9 billion in orders for the quarter. One award from Black & Veatch would supply the proposed Cedar LNG project in British Columbia with electric-driven liquefaction technology.
LNG demand to 2030 is set to climb by “mid-single digits annually,” the CEO said. That would support installed nameplate capacity of 800 million metric tons/year (mmty). By 2040, LNG consumption should require “further capacity additions” above 800 mmty, Simonelli said.
“While there could be periods of price volatility driven by temporary dislocations in supply and demand over this time period, we see these as opportunities for accelerated demand creation…
“LNG consumers who tend to be very price sensitive typically respond to lower prices with stronger demand. We have seen evidence of this recently.
“Global LNG demand is up 4% year-to-date against the backdrop of an approximate 50% decline in LNG prices over the same period.”
Over the next three years, Baker Hughes is forecasting that about 100 mmty of global LNG capacity could be sanctioned.
“This view, supported by customer dialogue and our internal LNG demand expectations, would result in our installed capacity increasing by 70%,” the CEO said.
Non-LNG Portfolio? ‘Very Important’
When asked about the outlook for natural gas equipment overall, Simonelli said, “Obviously, we've spoken a lot about LNG, and we will, I'm sure, in the future. And I think at times, we don't get a lot of time to talk about the non-LNG sector, and it's a very important part of our portfolio…
“It's very extensive as well in the equipment and solutions that play across a number of end markets, including the upstream, midstream refining, petrochemical…pipelines and various industrial and other end markets.”
The versatility of Baker Hughes equipment “not only goes into LNG but goes into these other end markets. And the first quarter was evident of that,” as sales tripled year/year.
“Onshore/offshore production has remained consistently strong as part of the mix” for gas compression and power generation equipment.
The energy sector is embracing “an all-of-the-above approach to the energy transition,” where “the focus is shifting toward the emissions rather than the fuel source,” Simonelli said. “I have spoken about this important shift for several years now, and we are pleased to see it taking hold in our customers' operations and policy initiatives.”
Carbon capture, utilization and storage (CCUS) solutions are becoming a big draw for E&Ps.
“This is very encouraging to see and provides tailwinds for our technology solutions that play across the entire CCUS value chain.”
On the capture side for carbon dioxide (CO2), Baker Hughes is developing a suite of solutions. “For CO2 compression, we have experienced a strong increase in demand, both for offshore and onshore applications, while we are also involved in several CO2 storage projects.”
Data Centers? Bring It
Beyond growth in the CCUS business, Baker Hughes also is seeing more customer inquiries for hydrogen, geothermal, clean power and emissions abatement.
By 2030, the New Energy unit’s orders are forecast to reach “between $800 million and $1 billion…which would amount to a tripling of…orders since 2021,” Simonelli said.
There is “realization that we need an all-of-the-above approach to the energy transition. It means there's a shifting focus toward emissions rather than the fuel source. And that puts CCUS at the forefront…As we go forward, we think CCUS is going to be a first mover.”
What about demand growth that is likely to result from the buildout of artificial intelligence (AI) data centers?
The AI-driven data centers could lead to “substantial electrical load growth,” Simonelli said. For Baker Hughes, it would be a positive any way it’s sliced. Internally, AI “drives optimization” for customers. Externally, AI provides “growth for our equipment and the services that we provide,” including natural gas turbines that can be switched to hydrogen.
Data center developers also are “coming to a realization that there is going to be a growing need for off-grid solutions, as well as distributed power generation, with a view to continuing the aspect of reducing emissions. So there are also opportunities for geothermal and other areas where we play.”
Meanwhile, the outlook for North American activity this year is not as positive. Baker Hughes expects to see a “year/year decline in the low- to mid-single-digit range,” Simonelli said. “We continue to anticipate declining activity in U.S. gas basins, partially offsetting modest improvement in oil activity during the second half of the year.
“Across international markets, we maintain our expectations for high single-digit growth. This contemplates extended OPEC-plus cuts through the end of the year, as well as any potential timing differences between the transitioning of rigs from oil to gas in Saudi Arabia.”
Net income fell from a year ago to $455 million (46 cents/share) from $576 million (57 cents).
Revenue rose 12% year/year but was down 6% from 4Q2023 at $6.4 billion. North America revenue was $990 million, down 3% sequentially. International sales of $2.8 billion was off by 5% sequentially because of volume declines in Asia, Latin America and the Middle East.
The total book-to-bill ratio in 1Q2024 was 1.0, with an IET book-to-bill of 1.1.
