The opportunities for global natural gas, including LNG, look strong in the near term, with a “number of projects” likely to be sanctioned for the next few years, Baker Hughes Co. CEO Lorenzo Simonelli said Wednesday.
During the conference call to discuss second quarter 2023 results, Simonelli said recent customer discussions to advance more liquefied natural gas projects around the world have been “very robust. There’s a clear understanding that natural gas and LNG are going to play a key role as a baseload for the energy mix going forward.”
LNG final investment decisions (FID) are ticking higher, both near term and long term, he told investors during the 2Q2023 conference call.
“What I’ve seen happen is definitely an appreciation for natural gas, that it is going to be a clear aspect of the energy mix,” Simonelli said. “We’ve always said it’s a transition and destination fuel…The best way, obviously, to transport the natural gas is through a pipeline or through LNG. And we’ve seen a number of opportunities internationally start to solidify” for 2025 and 2026.
“I think we’re in for a good couple of years.”
Even with a “50% decline in LNG prices over the first half of the year,” the company has contracted long-term offtake agreements for more than 45 million metric tons/year (mmty), “slightly above contracting levels over the same period in 2022,” Simonelli said.
NGI’s Spot Gas National Avg. on Tuesday ended at $2.590/MMBtu. This compared with a July bidweek National Avg. of $2.560. The August New York Mercantile Exchange Henry Hub gas futures contract, meanwhile, settled Wednesday at $2.603, and September ended at $2.585.
“The continued strength in long-term LNG contracts has been a key driver of the momentum in industry FIDs, which have now totaled 53 mmty so far this year.”
For Baker Hughes, the work includes equipment for the initial phase of NextDecade Corp.’s newly sanctioned Rio Grande export project in South Texas.
87% Jump In Orders
The Industrial & Energy Technology (IET) business segment, which oversees gas technology, including for LNG projects, reported second quarter orders of $1.6 billion, up 87% from a year ago.
“Based on the continued development of the LNG project pipeline, we still expect the market to exceed 65 mmty of FIDs this year and should see a similar level of activity in 2024,” Simonelli said. “We continue to see the potential for this LNG cycle to extend for several years, with a pipeline of new international opportunities expanding project visibility out to 2026 and beyond.”
As Simonelli has said previously, “we fully expect natural gas and LNG to play a key role in the energy transition as a baseload fuel to help balance against intermittent renewable energy sources. We believe the expanding pipeline of LNG opportunities is tied to the growing recognition of this reality and that the transition will take more time and must be financially viable.”
In addition to the growing backlog of natural gas prospects, “we’ve seen strength in the offshore activity,” particularly for floating production storage and offloading facilities. And in the New Energy division, designed to advance energy transition opportunities, there has been an uptick to advance several technologies including for carbon capture utilization and storage (CCUS) projects.
To that end, Baker Hughes has boosted its research and development (R&D) spending by $1 billion to “enhance existing core technologies and develop some of the early-stage technologies we have in CCUS, hydrogen and clean power,” CFO Nancy Buese said during the call. “So far this year in IET, we have spent around $40 million of incremental R&D for New Energy investments, and we expect R&D expense to be modestly higher in the second half of the year.”
‘Market Softness’ In North America
Simonelli said “growing economic uncertainty continues to drive commodity price volatility globally. However, despite lower oil prices over the first half of the year, we maintain a constructive outlook for global upstream spending in 2023.
“Market softness in North America is expected to be more than offset by strength in international and offshore markets. As we have said previously, we expect this spending cycle to be more durable and less sensitive to commodity price swings relative to prior cycles.”
In North America, while “the market continues to trend softer on lower oil and gas prices…the impact of price volatility in the first half of the year has largely been limited to the activity of private operators and in gas basins,” Simonelli said.
He credited the “strong balance sheets across the industry and disciplined capital spending” for the durability of the cycle, even with lower commodity prices.
“We are seeing this in North America where, despite the decline in West Texas Intermediate prices,” the international oil companies and large independent exploration and production operators “have yet to deviate from development plans.”
In the near term, Simonelli said the IET and Oilfield Services and Equipment (OFSE) divisions “are well-positioned to capitalize on multiple growth vectors, most notably the multi-year upstream growth cycle in international and offshore, the wave of LNG sanctions expected through this decade, and the New Energy opportunities that utilize our existing core technologies.”
The OFSE business in North America “is production-levered and the majority of our customer base is made up of major oil companies and public E&Ps, which have yet to deviate from plans laid out at the start of the year.
“This portfolio and customer mix results in a business that is generally less volatile than fluctuations in North America activity and rig count. This resiliency was evident during the second quarter, where our OFSE North America revenue was modestly higher despite a 15% sequential decline in the North America rig count.”
About 70% of the OFSE business is internationally focused, with around 40% exposed to offshore.
“On a regional basis, we are experiencing strong growth in most areas, with particular strength in Latin America and the Middle East,” Simonelli said. “We see no change to the pace of activity across international markets and continue to see promising signs in markets such as West Africa and the Eastern Mediterranean. One area that continues to lag is the North Sea, where UK fiscal uncertainty is hampering developments.”
‘Almost All’ Companies Transitioning
Don’t neglect the impact of the energy transition, Simonelli said. The move to reduce carbon emissions worldwide “is driving fundamental changes to the energy landscape, our customer base and how they operate.”
Looking to the future, “it is clear that almost all energy companies are transitioning, and while the pace of change may differ, the direction of travel is clear. We believe that as the need to decarbonize becomes more widespread, the demand for integrated solutions across these areas will grow.”
Baker Hughes is in the “early stages of collaborating with key customers” for New Energy applications, the CEO said. In the CCUS arena, the company is evaluating ways to drill reservoirs for carbon dioxide (CO2) storage.
“Other solutions include geothermal power, where we drill geothermal wells and provide steam turbines, and blue ammonia projects, where we provide ammonia and CO2 compression solutions, as well as the drilling and monitoring of CO2 storage wells.”
Baker Hughes booked more than $100 million of orders for New Energy-focused projects during the second quarter. Included were “multiple orders” to support the Louisiana Clean Energy Complex underway by Air Products and Chemicals Inc.
“These awards included vertical centrifugal pumps for ammonia loading, compression trains for CO2 storage and a subsurface study undertaken by OFSE to assess the capacity of the reservoir,” the CEO noted.
“As we look at the rest of the year, we think we could be at $600-700 million of New Energy orders…Predominantly, it’s around the attributes of CCUS projects and also hydrogen.”
Net income rose to $410 million (40 cents/share) in 2Q2023, reversing from year-ago losses of $839 million (minus 84 cents). Operating cash flow jumped 86% to $858 million.
Revenue was $6.3 billion, up 25% year/year. North American revenue was $1 billion in 2Q2023, up 13% year/year and 5% higher sequentially. Revenue in Latin America totaled $698 million, which was 37% higher than in 2Q2022.
The total book-to-bill ratio was 1.2; the IET book-to-bill ratio in the quarter was 1.3. Overall orders jumped 28% year/year to $7.5 billion.
