Baker Hughes Co.: A Deep Dive into Its 2023 Performance

Considering an investment in Baker Hughes Co.? This summary cuts through the financial jargon to give you a clear understanding of its performance in fiscal year 2023 (FY2023). We'll examine what the company does, how it generated revenue, its financial health, key risks, and what the future may hold, helping you make informed investment decisions.

What Baker Hughes Does & How It Performed in FY2023

Baker Hughes is a major global energy technology company, providing a diverse range of products and services across the energy and industrial sectors. It operates through two primary segments:

• Oilfield Services and Equipment (OFE): This segment represents its traditional core, supporting oil and gas exploration and production. Services include well construction, completions, production solutions, and subsea & surface pressure systems. In FY2023, this segment generated $16.79 billion, accounting for approximately 65.5% of total revenue. This marked a solid increase from $15.70 billion in FY2022 and $14.00 billion in FY2021, reflecting robust activity in the oil and gas sector.
• Industrial and Energy Technology (IET): This segment focuses on industrial solutions, including gas technology equipment and services, and other industrial products. It plays a crucial role in the energy transition. In FY2023, IET contributed $8.83 billion, or about 34.5% of total revenue. This segment also grew healthily from $8.33 billion in FY2022 and $7.70 billion in FY2021.

Overall, FY2023 was a strong growth year for Baker Hughes, with both segments driving overall revenue growth.

Financial Performance: The Numbers Tell the Story

Baker Hughes delivered solid financial results in FY2023:

• Total Revenue: The company reported $25.62 billion in FY2023, a healthy 6.6% increase from $24.03 billion in FY2022, and a significant rise from $21.70 billion in FY2021.
  • Product Sales: Product sales increased to $11.94 billion in FY2023 from $11.04 billion in FY2022.
  • Service Sales: Service sales grew to $13.68 billion in FY2023 from $12.99 billion in FY2022.
• Profitability:
  • Net Income: Baker Hughes reported a net income of $1.20 billion in FY2023. This marks a significant turnaround from a net loss of $0.50 billion in FY2022 and an increase from a net income of $0.30 billion in FY2021, indicating improved operational efficiency and a more favorable market environment.
  • Diluted Earnings Per Share (EPS): Reflecting this improved profitability, diluted EPS reached $1.25 in FY2023, compared to a loss of $0.55 per share in FY2022 and earnings of $0.32 per share in FY2021.
  • Operating Income: Operating income reached $2.10 billion in FY2023, up from $1.50 billion in FY2022, demonstrating stronger core business performance. The operating income margin improved to approximately 8.2% in FY2023 from 6.2% in FY2022.
• Cash Flow from Operations: Baker Hughes generated $2.80 billion in cash from operations in FY2023, a substantial increase from $1.90 billion in FY2022. This strong cash generation is vital for funding investments, reducing debt, and returning capital to shareholders.

Key Achievements & Operational Headwinds in FY2023

Achievements:

• Strategic Acquisition: Baker Hughes made a notable strategic move by acquiring Continental Disc Corporation within its Industrial and Energy Technology segment. This acquisition strengthens its portfolio in industrial products, expanding its offerings in pressure relief and safety solutions, and aligning with its strategy to grow in diversified industrial markets.
• Revenue Growth Across Segments: Consistent revenue growth in both OFE and IET segments highlights strong market demand and effective execution.
• Profitability Turnaround: The significant shift from a net loss in FY2022 to a solid net income in FY2023 demonstrates effective cost management and improved operational leverage.

Operational Headwinds:

• Despite positive financial results, Baker Hughes, like other companies in the energy sector, faced challenges such as supply chain disruptions, inflationary pressures on raw materials and labor, and geopolitical uncertainties impacting energy markets and project timelines. The increase in receivables, while partly due to higher sales, also means more capital is tied up in customer payments, requiring diligent management.

Financial Health: A Look at the Balance Sheet

Baker Hughes maintains a substantial financial footprint:

• Cash and Liquidity: The company held $2.50 billion in cash and cash equivalents at the end of FY2023, providing a solid liquidity buffer. Its Current Ratio (current assets divided by current liabilities) was approximately 1.2x in FY2023, indicating it has sufficient short-term assets to cover short-term obligations.
• Receivables: Trade accounts receivable increased to $6.50 billion in FY2023 from $6.00 billion in FY2022. While reflecting strong sales, this also means more capital is tied up until collected, which the company actively manages.
• Debt Profile: Baker Hughes carries a significant amount of long-term debt, primarily Senior Notes totaling around $7.00 billion in both FY2023 and FY2022. These notes feature varying interest rates (from 2.061% to 6.875%) and maturity dates extending to 2047. It also has access to a $4.00 billion unsecured revolving credit facility, which acts as a flexible credit line. A "bridge loan credit facility" was also mentioned for FY2023, typically a short-term loan used to bridge financing gaps for specific events like acquisitions, suggesting active financing management.
• Pension Obligations: Its defined benefit pension plans had a total obligation of $10.00 billion in FY2023, up from $9.50 billion in FY2022. Of this, it funded $8.00 billion, leaving $2.00 billion underfunded. This underfunding represents a future obligation that could require additional company contributions, potentially impacting free cash flow in the coming years.

Key Risks for Investors

Investors should be aware of several factors that could impact Baker Hughes' stock price:

• Customer Concentration: Reliance on a few large customers poses a significant risk. In FY2023, one US customer and one UAE customer each accounted for 10% of accounts receivable. Financial difficulties or reduced business from these key customers could materially impact revenue and profitability.
• Commodity Price Volatility: As a major player in the energy sector, Baker Hughes' performance is closely tied to global oil and gas prices. Significant declines in commodity prices could lead to reduced spending by exploration and production companies, impacting demand for OFE services.
• Geopolitical Instability: Conflicts, sanctions, or political unrest in key operating regions can disrupt operations, impact supply chains, and affect customer investment decisions.
• Energy Transition Risks: While Baker Hughes invests in energy technology, a rapid or disruptive shift away from fossil fuels could impact its traditional OFE segment, requiring successful diversification into new energy solutions.
• Pension Underfunding: The $2.00 billion pension underfunding represents a future liability. While manageable, it could necessitate increased cash contributions, potentially diverting funds from other strategic investments or shareholder returns.
• Debt Levels & Interest Rates: While current debt levels are manageable, the $7.00 billion in Senior Notes means ongoing interest payments. Rising interest rates could increase borrowing costs for future financing or refinancing efforts.
• Regulatory and Environmental Changes: Evolving environmental regulations, carbon pricing, and stricter emissions standards could increase operational costs or impact demand for certain services.
• Supply Chain & Inflation: Continued global supply chain disruptions and inflationary pressures could impact costs, project timelines, and profit margins.
• Tax Carryforwards: The company holds $1.00 billion in foreign net operating loss and capital loss carryforwards, and another $1.00 billion in US and foreign tax credit carryforwards. While these can reduce future tax bills, some have expiration dates. If Baker Hughes cannot generate sufficient taxable income to utilize these before they expire, it would lose the potential tax savings.

Competitive Landscape

Baker Hughes operates in highly competitive markets. In Oilfield Services and Equipment, its primary global competitors include Schlumberger and Halliburton. In the Industrial and Energy Technology segment, it competes with diversified industrial players like GE Vernova and Siemens Energy, as well as specialized technology providers.

Baker Hughes differentiates itself through:

• Diversified Portfolio: It offers a broad range of solutions across the entire energy value chain, encompassing traditional oil & gas and new energy technologies.
• Technology & Innovation: It invests in advanced drilling, production, and industrial technologies, including digital solutions.
• Global Footprint: It maintains a strong presence in key energy-producing regions worldwide.
• Integrated Solutions: It provides comprehensive, end-to-end solutions for complex projects.

This broad portfolio and technological focus position Baker Hughes as one of the leading global energy technology companies.

Strategic Direction & Leadership

The company's strategic direction continues to emphasize:

• Growth in Industrial and Energy Technology: The acquisition of Continental Disc Corporation highlights its commitment to expanding and diversifying its IET segment, particularly in high-growth industrial applications and solutions supporting the energy transition.
• Energy Transition Focus: Baker Hughes actively positions itself to capitalize on the shift towards cleaner energy, investing in areas like hydrogen, carbon capture, and renewables.
• Operational Efficiency & Digitalization: It focuses on enhancing operational efficiency, leveraging digital technologies, and improving profitability across all segments.
• Sustainability: It integrates environmental, social, and governance (ESG) principles into its operations and offerings.

Future Outlook & Market Environment

Management's overall outlook is one of cautious optimism. Management anticipates continued investment in the energy sector, driven by global energy demand, but also acknowledges the ongoing transition to lower-carbon energy.

Key factors influencing its future performance include:

• Global Energy Demand: Continued growth in global energy consumption, particularly in emerging markets.
• Energy Transition Momentum: The pace of investment in renewable energy, hydrogen, and carbon capture technologies.
• Geopolitical Stability: The impact of global events on energy supply, demand, and investment.
• Technological Innovation: Its ability to develop and deploy cutting-edge solutions that enhance efficiency and reduce emissions.
• Regulatory Environment: Evolving climate policies and international trade agreements.

Baker Hughes focuses on navigating these complex market dynamics by leveraging its diversified portfolio, technological expertise, and strategic investments to deliver long-term value.