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Baker Hughes Co. (BKR 1.51%)
Q3Â 2020 Earnings Call
Oct 21, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Thirds Quarter 2020 Earnings Call. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.
Judson E. Bailey -- Vice President, Investor Relations
Thank you. Good morning, everyone, and welcome to the Baker Hughes Third Quarter 2020 Earnings Conference Call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell. The earnings release we issued earlier today can be found on our website at bakerhughes.com.
As a reminder, during the course of this conference call, we will provide forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and website for a discussion of some of the factors that could cause actual results to differ materially. As you know, reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release.
With that I will turn the call over to Lorenzo.
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Thank you, Jud. Good morning, everyone, and thanks for joining us. We are pleased with our third quarter results as we successfully managed the Company through the immediate impacts of both the pandemic and the industry downturn, while also accelerating our long-term strategy. From an operational perspective, I am pleased with the continued solid execution on cost-out from our OFS in OFE teams, as well as the commercial success and performance demonstrated by TPS and DS. We also saw continued free cash flow generation during the quarter and expect to be free cash flow positive for the year. As we move forward, we continue to be intensely focused on improving the margin and return profile of Baker Hughes despite the near-term macro volatility, while at the same time, executing on the long-term strategy to evolve our portfolio along the energy landscape.
After significant turmoil during the first half of the year, oil markets have somewhat stabilized. However, there is still quite a bit of uncertainty expected over the next several quarters as demand recovery is beginning to level off and significant excess capacity remains. The outlook for natural gas is slightly more optimistic as forward prices have improved with strong demand in Asia and lower expected future gas production in the US.
On the economic front, the global economy has rebounded from the severe contraction experienced in the second quarter. However, the recovery so far has proven to be quite uneven, and the risk of a second wave impacting economic demand remains relatively high. While some industrial sectors have experienced a rebound in activity, others have remained somewhat suppressed. The current environment has also resulted in the acceleration of different parts of the economy including technology adoption and the acceptance of new ways of working and living.
Importantly, one of these areas where we have been witnessing a step change in activity and mindset is the broader energy industry. The COVID-19 pandemic has revealed the speed at which the environment can respond to lower carbon levels. This has accelerated the debate on how to fuel economic growth while transitioning to a lower carbon future. We're not only seeing this acceleration in government response to the pandemic, but we're also seeing it in society at large and increasingly from our customers.
As we have recently highlighted, Baker Hughes remains committed to being a leader in the energy transition and becoming a key enabler to decarbonizing oil and gas and other industries from within. We also believe that the changes rapidly unfolding across the oil and gas landscape warrant an acceleration of this strategy. We have developed a three-pronged approach to accelerate our transition to an energy technology company. The first of these strategic pillars is to transform the core. This targets multiple work streams that are focused on improving our margin and return profile through a combination of structural cost reductions, portfolio rationalization and the use of digital technology.
On the cost side, we continue to execute the rigorous cost reduction program we outlined in April, targeting $700 million in annualized savings by year-end. Through the third quarter, we have achieved approximately 75% of our target and believe that we will likely achieve a higher run rate by the end of the year.
On the portfolio front, we have already divested of several businesses this year and we'll continue to evaluate further actions, specifically around businesses that likely don't have the potential to meet our return requirements. This process could lead to further divestments, alternative business structures like joint ventures or partnerships, or the exit of some product lines in select regions. In any scenario, we are taking a holistic view across Baker Hughes and will take decisive action to improve margins, while also maintaining business continuity and delivering for our customers.
The other major component of our transform the core initiative will be the expanding use of digital technology and remote operations. We view the expansion of remote operations in OFS and TPS as key enablers to drive better cost and margin productivity.
The second of our strategic pillars is to invest for growth. Given the subdued upstream outlook, the primary growth opportunities we see within our existing product and service footprint are the broader industrial sector, specialty chemicals and non-metallic materials. On the industrial side, we see the opportunity to develop a solid industrial platform by leveraging the strongest core competencies within our TPS and Digital Solutions segments. Our efforts will be focused on delivering energy efficiency and process solutions, targeting adjacent non-energy industrial sectors.
In addition to industrials, we remain focused on driving growth in the non-metallic and chemical sectors. Due to the lower carbon footprint associated with non-metallics, we believe this segment provides significant opportunity for expansion, as well as synergies with our upstream and chemicals businesses. In chemicals, we see the opportunities to grow internationally in the downstream segment and potentially into other adjacent specialty chemical markets to complement our current capability.
The third pillar of our strategy is focused on positioning for new frontiers. As the energy landscape continues to evolve, we have spent considerable time evaluating key growth areas associated with the energy transition and analyzed where Baker Hughes can capitalize on these opportunities. Overall, we see a range of options for our technology with the greatest near-term potential in carbon capture, hydrogen and energy storage. Although it is still very early in the evolution of these three markets, we believe that Baker Hughes can play a key role in the future development of these areas with the technology we have in-house. In fact, we are in active conversations today with multiple stakeholders and all three of these areas, primarily focused on how our compression and turbine technology can play a role in future projects.
As we execute on these three strategic pillars and our broader evolution as an energy technology company, we are committed to operating in a disciplined manner that prioritizes free cash flow, returns above our cost of capital, paying our dividend and maintaining our investment-grade rating.
Now, I'll give you an update on each of our segments. The persistent weakness in oil prices continues to create a challenging environment for Oilfield Services. In the international markets, the decline in the third quarter activity was in line with our expectations as COVID-impacted regions remain depressed and activity in the Middle East and other areas continued to decline. For the full year, we expect international drilling and completion activity to decline closer to the high end of the 15-20% range that we outlined on our last earnings call.
As we look into 2021, we expect activity to stabilize early next year and see the opportunity for recovery in some markets over the second half of the year. However, we believe that any potential second half recovery in 2021 will require higher oil prices and that most of the activity increases are likely to come from low-cost basins.
In North America, completion activity rebounded strongly during the third quarter, while drilling activity stabilized in August and September. A key driver helping to support our North American OFS results during the quarter was a recovery in our production-driven businesses, particularly in our Artificial Lift product line.
Looking ahead, E&P customers in North America are increasingly signaling their commitment to capital discipline and a maintenance mode for spending that will allow for minimal or modest production growth. While this shift to maintenance mode likely implies an increase in activity from current levels, we believe that it suggests an uncertain outlook over a longer time period. While the outlook for OFS remains challenging into 2021, we are closely engaged with our customers to help find solutions and remain committed to structurally reducing our cost base and finding ways to improve the margin profile for this business.
Although our company strategy involves pivoting the portfolio and leading the energy transition, the OFS business remains core to our company as we believe that oil and gas will still play a leading role in the energy landscape for the foreseeable future.
Moving on to TPS, this segment, as you know, is a multifaceted business with a leading position in LNG, a robust aftermarket services franchise and an improving valves business. It also has attractive growth potential in industrial and new energy applications. TPS has remained resilient in a challenging market environment.
The most significant development for TPS in the quarter was the award for the main refrigerant compressors for four mega trains of Qatar Petroleum's North Field East LNG project, executed by Qatargas. The order reinforces over two decades of trust and successful Turbomachinery collaboration between Baker Hughes, Qatar Petroleum and Qatargas. With six LNG mega trains driven by Baker Hughes' technology already in operation, the NFE award underscores the strength of our offerings for the world's most complex LNG projects.
Taking a broader view of the LNG market, our long-term outlook for LNG demand growth remains intact. We continue to view natural gas as a transition and destination fuel for lower carbon future, supported by a few key drivers.
First, the phasing out of coal should support natural gas demand in the power generation space. With coal still accounting for nearly 30% of global energy supply, natural gas has ample opportunity to displace coal in both developed and developing markets over the coming decades. China's recent pledge to be carbon-neutral by 2060 implies continued growth in gas consumption. And India is also expected to see almost a doubling in natural gas demand over the next 15 years.
Second, we also believe that LNG, and gas more broadly, is well placed to support renewables growth. It can provide cleaner, flexible, reliable and competitively priced power for peak load management and grid stabilization. Third, we see the capacity to further reduce the carbon footprint of existing and future LNG operations through the use of new technologies.
We have been a pioneer from the early days of LNG and a clear leader in LNG development for almost 30 years, introducing new technologies to enable more efficient production and operations. For example, TPS continues to partner with customers to reduce their carbon footprint across our installed base of over 5,000 gas turbines and 8,000 compresses. So far in 2020, we have booked upgrade orders that will result in a reduction in excess of 160,000 tons of CO2 per year.
We are also having productive discussions with customers regarding use of carbon capture technology and hydrogen for various projects. Carbon capture technology can be added to liquefaction trains through upgrading existing equipment or new installations, which can meaningfully reduce carbon emissions.
For hydrogen, we are seeing increased applications for hydrogen blend turbine for mechanical drive in LNG. At Baker Hughes, we have turbines running on 100% hydrogen as well as blended hydrogen in several power generation applications across our fleet. We believe that hydrogen blend applications will grow as LNG operators seek to reduce the carbon footprint of their projects and as the hydrogen infrastructure becomes more efficient around the world. Importantly, as customers weigh the economics of future projects with the demands for a lower carbon footprint, we have the technology portfolio in place that can help execute their plans and satisfy all stakeholders.
Next, in Digital Solutions, while broader industrial activity trends are improving, we see continued weakness in the oil and gas and aerospace markets. Despite these challenges, our team is executing well, taking decisive cost actions. Our strategy for DS is focused on driving continued expansion across the oil and gas and industrial end-markets and building on our condition monitoring and other leading technologies to deliver outcome-based solutions for a range of industries.
An example of where we'd like to see our DS business in this environment is reflected in an important contract we won this quarter with Petrobras to deliver innovative solutions and safer operations in plants across Brazil. The three-year frame agreement combines Digital Solutions' hardware and edge devices with our leading software offerings to provide holistic, outcome-based solutions to the customer. DS will deliver to Petrobras a wide set of hardware technologies from our Bently Nevada, Nexus Controls and Panametrics product lines to enhance multiple aspects of the customer's operations through risk mitigation and performance standardization and improvements. On the software side, we will also be deploying our new Bently Nevada Orbit 60 series, a machinery protection and condition monitoring system, for the first time in Latin America. When combined with our System 1 condition monitoring and diagnostics software, Orbit 60 provides customers with the ability to create proactive maintenance and fleet management programs for maximum productivity and cost reduction.
Finally, on Oilfield Equipment, we continue to navigate a difficult environment and remain focused on cost-out efforts and improving the margin profile of this business. In the third quarter, we made solid progress on these initiatives, executing on our cost goals related to the restructuring plan for the business.
Also, during the third quarter, we reached an agreement to sell our Surface Pressure Control Flow business, which operates primarily in North America. We are retaining the SPC Projects business, which operates in the Middle East, Africa, North Sea and Asia. This disposition is in line with our strategy to focus the portfolio on core activities.
For our offshore-leveraged businesses, the market outlook remains challenged. Lower oil prices and continued macro uncertainty has led offshore operators to focus on conserving cash flow and reprioritizing their portfolio of potential projects and investments. As a result, although tree awards are now trending closer to 150 trees for the year, we are not expecting any material growth in new awards in 2021.
Within our shorter cycle services business, we continue to experience weakness in intervention work due to both budget and mobility constraints. While we believe this type of activity will improve with higher oil prices, we do not anticipate a material change in this business for the next few quarters.
A bright spot within our OFE portfolio remains the non-metallic and flexible pipe business, which is seeing positive momentum with customers around the world. Our offshore flexible pipe business continues to book solid awards in Brazil, while our non-metallics business continues to provide significant opportunity for expansion in the broader energy markets.
Overall, we are executing on the framework we laid out on our first quarter earnings call. We are on track to hit our goals of right-sizing our business and generating free cash flow for 2020 and to achieve the $700 million in annualized cost savings by year-end. Baker Hughes is uniquely placed to navigate the challenging market environment the industry is currently facing and positioning to lead the energy transition. We remain focused on executing for customers, being disciplined on cost and delivering for our shareholders.
With that, I will turn the call over to Brian.
Brian Worrell -- Chief Financial Officer
Thanks Lorenzo. I will begin with the total Company results and then move into the segment details. Orders for the quarter were $5.1 billion, up 4% sequentially, driven by TPS and DS, partially offset by declines in OFS and OFE. Year-over-year, orders were down 34% with declines in all four segments. Remaining Performance Obligation was $23 billion, up 1% sequentially. Equipment RPO ended at $8.3 billion, up 4% sequentially, and services RPO ended at $14.7 billion, down 1% sequentially. Our total book-to-bill ratio in the quarter was 1 and our equipment book-to-bill in the quarter was 1.1.
Revenue for the quarter was $5 billion, up 7% sequentially, driven by TPS, OFE and Digital Solutions, partially offset by declines in OFS. Year-over-year, revenue was down 14%, driven by declines in OFS and Digital Solutions, partially offset by an increase in TPS.
Operating loss for the quarter was $49 million. Adjusted operating income was $234 million, which excludes $283 million of restructuring, separation and other charges. Adjusted operating income was up 124% sequentially and down 45% year-over-year. Our adjusted operating income rate for the quarter was 4.6%, up 240 basis points sequentially.
We are particularly pleased with the margin improvement in the third quarter, which was largely driven by our restructuring execution. We have achieved roughly 75% of our $700 million in cost-out initiatives and are on track to complete the rest during the fourth quarter. Based on our execution to date, as well as additional opportunities that we have identified through this process, we feel confident that we can exceed our initial cost-out estimates by the end of this year.
Corporate costs were $115 million in the quarter. We expect corporate costs to decline slightly in the fourth quarter versus third quarter levels. Looking ahead to 2021, we expect our cost-out efforts and lower separation costs to reduce corporate expenses. Depreciation and amortization was $315 million in the quarter. We expect D&A to be flat sequentially in the fourth quarter. Net interest expense was $66 million. Income tax expense in the quarter was $6 million. Included in income tax is a $42 million benefit related to the CARES Act, which will lower our net cash tax payments in future periods.
GAAP loss per share was $0.25. Adjusted earnings per share were $0.04.
Free cash flow in the quarter was $52 million, which includes $178 million of cash payments related to restructuring and separation activities. For the fourth quarter, we expect free cash flow to be roughly flat to sequentially higher, supported by stronger operating results, continued capex discipline and modest improvement in working capital. For 2021, we expect free cash flow to improve significantly versus 2020 levels, largely driven by higher operating income, as well as lower restructuring and separation charges.
Lastly, as Lorenzo mentioned, in the third quarter, we reached an agreement to sell our Surface Pressure Control Flow business, which operates primarily in North America within OFE. We expect the transaction to close in the fourth quarter. Additionally, during the quarter, we completed the sale of our Specialty Polymers business in OFS. These dispositions are part of our strategy to exit businesses that do not meet our return requirements and are aligned with our broader portfolio evolution objectives.
Now, I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward.
In Oilfield Services, the team delivered a strong quarter despite the ongoing market challenges. OFS revenue in the quarter was $2.3 billion, down 4% sequentially. International revenue was down 3% sequentially while North America revenue was down 7%. Operating income in the quarter was $93 million, which was a solid increase sequentially and a 200 [Phonetic] basis point improvement versus the prior quarter. The improvement in margins was driven by strong execution on the cost-out initiatives we announced in April.
As we look ahead to the fourth quarter, visibility in both the North American and international markets remain limited. Internationally, activity remains soft in multiple regions, which is likely to be further impacted by typical seasonality. We expect year-end product sales to be muted in the fourth quarter due to customer budget constraints. Based on these factors, we expect our fourth quarter international revenue to decline modestly on a sequential basis.
In North America, we expect relatively firm drilling and completion activity versus the third quarter and a modest sequential improvement in our production-related businesses, partially offset by typical seasonality. Given these dynamics, we expect our North American OFS revenue to be roughly flat with third quarter levels. While we expect to experience modest volume pressure in the fourth quarter, we remain committed to executing on our cost-out actions and believe that OFS margin rates could be roughly flat to slightly higher in the fourth quarter.
Although we still do not have great visibility for 2021, I will give you some initial thoughts on how we see the market next year. In the international market, we expect activity levels to stabilize late this year or early next year and remain relatively unchanged for the first half of 2021. Based on conversations with customers, we believe that a second half recovery in activity in select international basins is a reasonable expectation if oil prices begin to improve. However, despite a potential second half recovery, we believe that international activity will still be down on a year-over-year basis for 2021.
In North America, we have limited visibility next year due to the short-cycle nature of the market, uncertainty in oil prices and the rapidly evolving business models of some of the largest US producers. As more E&Ps commit to maintenance mode capex levels, minimal production growth and returning more cash to their shareholders, we believe that overall North American drilling and completion activity will struggle to be flat on a year-over-year basis in 2021 and that US oil production should decline on a year-over-year basis. Although this activity outlook suggests that OFS revenue will be down modestly in 2021 on a year- over-year basis, we believe that our cost-out actions should still translate to a modest improvement in OFS margins and operating income for 2021.
Moving to Oilfield Equipment, orders in the quarter were $432 million, down 58% year-over-year, with no major subsea tree awards in the quarter and the challenging offshore environment impacting results. Our offshore flexible pipe business saw a solid orders quarter, specifically in Brazil, continuing to build on the strong momentum we have seen from that segment over the past 18 months.
Revenue was $726 million, flat year-over-year. Revenue growth in Subsea Productions Systems and Flexibles was offset by declines in Subsea Services.
Operating income was $19 million, a 37% improvement year-over-year, driven by higher volume in our Subsea Production Systems and Flexibles businesses, along with solid cost-out execution, partially offset by softness in services activity.
For the fourth quarter, we expect revenue to be roughly flat sequentially, driven by continued backlog execution in SPS and Flexibles. With roughly flat revenue and further cost-out actions, we expect an increase in operating income versus the third quarter.
Looking ahead to 2021, we expect the offshore markets to remain challenged as operators reassess their portfolios and project selection, as well as how they will allocate capital internally moving forward. We expect OFE revenue to be down on a year-over-basis due to lower order intake in 2020 and a likely continuation of a soft environment next year. Although revenue is likely to be down in 2021, our goal is to maintain positive operating income as the decline in volume is offset by our cost-out efforts.
Next, I will cover Turbomachinery. The team delivered another strong quarter with solid execution. Orders in the quarter were $1.9 billion, down 32% year-over-year. Equipment orders were down 39% year-over-year and equipment book-to-bill was 1.7. We were pleased to receive the order from Qatar Petroleum for the North Field expansion that Lorenzo mentioned earlier. Service orders in the quarter were down 17% year-over-year, mainly driven by fewer upgrades and lower transactional services orders.
Revenue for the quarter was $1.5 billion, up 26% versus the prior year. Equipment revenue was up 78% as we executed on our LNG and onshore/offshore production backlog. Services revenue was up 1% versus the prior year.
Operating income for TPS was $191 million, up 18% year-over-year, driven by higher volume and strong execution on cost productivity. Operating margin was 12.6%, down 90 basis points year-over-year, largely driven by a higher mix of equipment revenue.
For the fourth quarter, we expect strong sequential revenue growth due to the continued execution on our LNG and onshore/offshore production backlog, as well as typical fourth quarter seasonality. Based on these dynamics, we expect TPS revenue and operating income to increase on a sequential basis. For the full year 2020, we now expect operating income to increase modestly on a year-over-year basis.
Looking into 2021, we are planning to generate solid year-over-year revenue growth, driven by the conversion of our current equipment backlog and a modest increase in TPS service revenues. Although a higher mix of equipment revenue may be a slight headwind for growth in margin rates next year, we still expect solid growth in operating income based on higher volume.
Finally, in Digital Solutions, orders for the quarter were $493 million, down 20% year-over-year. We saw declines in orders across all end markets, most notably aviation, oil and gas, and power. Sequentially, orders were up modestly as the global economy began to recover. Revenue for the quarter was $503 million, down 17% year-over-year due to lower volumes across most product lines. This was driven by a reduction in maintenance activity in Pipeline & Process Solutions, as well as the weaker automotive and aviation sectors, which impacted the Waygate, Druck and Panametrics product lines. Sequentially, revenue was up 7% as most industrial end-markets began to recover.
Operating income for the quarter was $46 million, down 44% year-over-year, driven by lower volume. Sequentially, operating income was up 12%, driven by higher volume across all product lines.
For the fourth quarter, we expect to see sequential growth in revenue and operating income, driven primarily by typical seasonality and backlog execution.
Looking into 2021, we expect a modest recovery in revenue on a year-over-year basis, driven primarily by a rebound in industrial end-markets. With higher volumes and the benefit of our cost out program, we believe DS margin rates can get back to low-double digits for the full year.
Overall, I am pleased with the execution in the third quarter amid a challenging economic backdrop. As I discussed on our last earnings call, our goal through this downturn is to remain disciplined in our capital allocation to preserve our financial strength and liquidity. We remain focused on free cash flow, improving financial returns and protecting our dividend, while maintaining our investment-grade rating.
With that, I will turn the call back over to Jud.
Judson E. Bailey -- Vice President, Investor Relations
Thanks Brian. Operator, let's open it up for questions. Operator, let's open it up for questions, please.
Questions and Answers:
Operator
[Operator Instructions] Our first question will come from James West with Evercore ISI. Please go ahead.
James West -- Evercore ISI -- Analyst
Hey, good morning, Lorenzo and Brian.
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Hi, James.
Brian Worrell -- Chief Financial Officer
Hi, James.
James West -- Evercore ISI -- Analyst
Lorenzo, I'd love to dig in a little bit further on LNG so that I can level set expectations here. Clearly, the cycle seems to be restarting with major award in the third quarter in Qatar. Is this the -- I mean, am I right about that? Is this the restart of the liquefaction build-out cycle? Or was that one-off? There's a large number, as you know, of named projects that were going to be FID-ed this year, but things changed. Are we at the beginning of that FID process again?
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Yeah, James, as we've mentioned before, I think you've got to look at LNG on a longer-term basis. And we've always said it's cyclical, and obviously, very pleased with the North Field expansion project in Qatar. And I think again, it's in line with our expectations with where we see LNG on the long term. And if you look out to 2030 [Phonetic], again, we expect there to be demand in place and a capacity requirement for about 650 million to 700 million tons. So, if you think about going forward to the next three to four years, you've still got between 50 million tons to 100 million tons of projects that need to be FID-ed. We are very well positioned for those, and we stay very close to those.
And as you think about LNG, natural gas, we see it as a key aspect of the energy transition, both from a transition and destination fuel and enabling the reduction of coal usage. So, again, we're very much in line with the continued expansion of LNG and natural gas usage.
James West -- Evercore ISI -- Analyst
Sure, no doubt [Phonetic]. Thanks for the update there. And then, Lorenzo, hydrogen becoming a very big topic, part of a lot of the rebuilding stimulus around the world, something you and I talked about back in April when we talked about -- more about LNG. But it seems like the topic has just grown in size. And could you -- you mentioned on the call that you're in discussions, but could you talk about what you're seeing in the background here, maybe not seeing on hydrogen? How much activity is really out there and kind of what's the opportunity set for Baker?
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Yeah, James, and as you said correctly, there is a lot of interest in hydrogen, and congratulations also on the report you published. I think the excitement is really around where hydrogen can be used in the energy transition toward the zero emissions fuel source. And we are seeing increasing activity. I think it's important to note that hydrogen has been around before. And in fact, from a Baker Hughes standpoint, we've been active in hydrogen since 1962 with our compressors. And in fact, we have over 2,000 compressors that are utilized in hydrogen applications today. Where we play is clearly on the compression and generation side. As we see hydrogen continue to evolve, we see an opportunity to play across more of the value chain. And as you think about it, we've got our turbines today that already can run 100% on hydrogen as well as a mix of both natural gas and hydrogen. We see that increasing as we go forward, also our compressors that are actively used.
And so, when you look at the value chain, there's really an opportunity across the generation and also the movement, the storage, liquefaction and also end destination of hydrogen. I look at hydrogen paralleling the story of LNG. And if you look back 30 years ago, the natural gas expansion and also what we've seen in LNG is I think what we'll see also with hydrogen, and they'll play together as we go forward. And we're uniquely positioned with the technology investments we've made to participate in the evolution of hydrogen like we have done with natural gas and LNG. So, feel very good about the future prospects there. Early days. But again, it's something we're staying close to, and we've got a history of proven technology in it.
Operator
Thank you. Our next question will come from Chase Mulvehill with Bank of America. Please go ahead.
Chase Mulvehill -- Bank of America -- Analyst
Hey, good morning, everyone.
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Hi, Chase.
Brian Worrell -- Chief Financial Officer
Hi, Chase.
Chase Mulvehill -- Bank of America -- Analyst
I guess, first question, just kind of talking about OFS and the restructuring initiatives that have been ongoing there, some obviously pre-COVID. But really, I think there's kind of two components as we kind of dissect kind of OFS and restructuring. So, you've got the associated cost-out from the total of the $700 million that you mentioned across the entire organization. So, you've got a portion of that is allocated to OFS. And then also, kind of pre-COVID, you had initiatives in OFS to drive better connectivity, optimize supply chain, enhance the service delivery platform and really drive down product costs. So, maybe if you can just take a minute, update us where you are today on these initiatives and maybe talk to the path toward double-digit margins in OFS.
Brian Worrell -- Chief Financial Officer
Yeah, Chase, look, you hit the highlights there. Very pleased with how Maria Claudia and the team exercised their operating muscle this quarter. The whole Company did a great job on the restructuring. We're about 75% of the way through that. OFS is ahead of that. And you're absolutely right. Their margin improvement is not just coming from what we launched in April, but it's the result of a lot of the work that we talked about in 2019 around supply chain, around product cost, around process optimization, so really a lot of efforts from the team and the results of multiple work streams. Well, what I will say is that we do anticipate having some better results from a cost-out standpoint. And that's really a result, Chase, of all this work and finding opportunities as we execute on the restructuring and then some of these other initiatives that we've talked about.
In terms of opportunities and the path to get OFS back to double-digits, feel good at these volume levels and what we talked about the outlook for what we're seeing in the market in 2021 that the team can certainly get there. We've got more to go on the restructuring. As I said, there is more to come in the fourth quarter, and we are confident that we're going to exceed the targets that we talked to you about. And we're still in relatively early days in some of the other process improvements around supply chain, around facilities optimization, process optimization that we've embarked upon. So there are certainly opportunities there and feel good about the pathway to get to double-digit margins. We're not going to stop at where we are today, and the pipeline keeps growing.
Chase Mulvehill -- Bank of America -- Analyst
Okay, perfect. A quick follow-up, Brian, really is on free cash flow. And obviously, you've given us some guide points to 2021 across the segments. And obviously, it looks like it's leading to -- implies EBITDA will be up on a year-over-year basis. And when we think about 2021 free cash flow, could you talk to the moving pieces? Obviously, I think you talked about $800 million of -- or there had been $800 million of kind of the cash restructuring and severance and things. But maybe talk to how much of that goes away next year, and working capital, capex and just kind of the different moving pieces for free cash flow, and would be happy if you want to give us a number, but definitely the moving pieces would be helpful.
Brian Worrell -- Chief Financial Officer
Yeah. A nice try there, Chase. Anyway, look, it's a bit early to be very specific, obviously. But based on everything we're seeing in the market today and how the business is performing, I'll give you kind of the framework and the way I think about it. I think around capex, it should really be similar to what we're seeing this year, assuming similar activity levels that we talked about and how we're seeing the market. Working capital should actually be neutral. And I think, how that plays out is really going to depend on the OFS activity levels and then progress payments from any new orders that come in on TPS and OFE next year. But based on what I see today, I'd say neutral is a pretty good assumption around working capital.
And then, you highlighted one. The biggest change coming into next year is really around restructuring and separation charges. We expect that to be materially lower in 2021. So, with the increase in earnings coming through and then the tailwind from restructuring and separation charges, it should support a material improvement in free cash flow in 2021. And look, Chase, I think you've seen the power of the portfolio and what we can do from a free cash flow standpoint in the last couple of years before we headed into this heavy restructuring. And in those years, we had restructuring and merger-related charges come through there. So, that gives you a good gauge about the power, the free cash flow conversion of the portfolio.
Chase Mulvehill -- Bank of America -- Analyst
Okay, perfect.
Operator
Thank you. Our next question will come from Sean Meakim with J.P. Morgan. Please go ahead.
Sean Meakim -- J.P. Morgan -- Analyst
Thanks. Hey, good morning.
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Hey, Sean.
Brian Worrell -- Chief Financial Officer
Good morning, Sean.
Sean Meakim -- J.P. Morgan -- Analyst
So, let me spend a little more time on TPS. Good results in the quarter. You're able to hold in the margin. You pulled through a lot more throughput on a backlog that was good to see. Orders were solid. Qatar not in there yet. So that's also helpful. One of the key concerns for investors is the trajectory for TPS beyond '21. So next year, you have pretty good visibility on top line growth. Some margin benefits should get pulled in there. Post-Qatar, large awards look limited, at least in the near term. And so, I think there are concerns around 2022 and beyond. So maybe you could just give us an updated view on the trajectory in terms of the moving parts where you have visibility beyond next year.
Brian Worrell -- Chief Financial Officer
Yeah. Hey, Sean. I'll talk through some of that. And I will say, the first phase of Qatar is in the orders number this quarter. So, that's a good first step here. So look, thinking beyond 2021, the orders that we've got in backlog right now that we'll book here in the fourth quarter will definitely have a positive impact on '21 and '22, given the conversion cycle. So, there is some visibility into that. And based on what we're seeing today, Sean, the orders environment next year should be OK. It looks pretty solid. So, I'm feeling relatively positive about that. And then, I think the other thing that somebody has got to take into account and we certainly look at as you think about 2022 and beyond is that the service revenue should continue to expand, given the growth in our installed base, a lot of the installs that you've seen come in over the past couple of years, and the service agreement profile that we have. So look, this combo of services likely growing faster than equipment when you get beyond 2021 is certainly a tailwind for margin rate.
And then, the other thing that I would add, Sean, is, we talked a lot about growth initiatives for the Company and where we're pivoting to from a capital allocation standpoint. A lot of that is in Turbomachinery. And I'd particularly highlight some of the industrial growth areas where it's not really a lot about technology. It's about commercial models. It's about commercial resources, some small investments there. So you will start to see some of that kick in a little more materially when you get to 2022, 2023.
So look, I think overall, the TPS backdrop for 2022 and beyond is constructive. And obviously, we'll continue to update you as things evolve. But I think there's a lot of positive momentum in the business. And with the cost-out and the way Rod and the team have restructured things to run the business, I feel positive about where we're headed.
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Just to complement that, Sean, if you think about, again, a question previously around LNG, again, we still see about three to four projects for next year. And to the point of the energy transition and also the application of our products in the industrial space, you've got the industrial gas turbines, the NovaLT family, which has been released. You've also got the valves business. And so, we are increasingly having conversations on how can people drive efficiency and lower carbon footprint across pulp and paper, across metallurgy and other industries. So, there is an adjacency aspect there. And again, it will take some time, but we feel good about the prospects of TPS.
Sean Meakim -- J.P. Morgan -- Analyst
Got it. Thank you for that. I think that's helpful. And then, maybe to clarify the prior question on free cash into '21 or just to dig in a bit deeper, we're going to -- by the time -- by the middle of next year, we'll be wrapping your fourth year post the initial deal between Baker and GE. If anything, the challenges, the pandemic accelerated the restructuring plan. And so, I'm just curious why there should be any charges of materiality next year. Could you maybe just clarify where and why we should still see more charges next year that could have a drag on cash?
Brian Worrell -- Chief Financial Officer
Yeah, Sean, anything that would come through would not be material and anywhere near the level that we're talking about here. You're right, we have accelerated a lot of the actions that we were looking at into this year. The thing I would say is, as we go through this process and as we work on driving OFS margins and returns higher, we have seen some areas where there could be some potential opportunities for additional cost-out and additional improvements. Anything that we would do, Sean, in this space would have incredibly quick paybacks. And again, nowhere near the levels that we're talking about right now, so minimal in terms of additional charges, if at all.
Operator
Thank you. Our next question will come from Angie Sedita with Goldman Sachs. Please go ahead.
Angie Sedita -- Goldman Sachs -- Analyst
Thanks. Good morning.
Brian Worrell -- Chief Financial Officer
Hi, Angie.
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Good morning.
Angie Sedita -- Goldman Sachs -- Analyst
Hi. So, thanks for all the details, Brian. Really very helpful. And nice to see the margins across the board, given the cost-out program. So, if you could, maybe you could talk about '21 margins and maybe the path of margins across your segments. You touched on it briefly, but additional color there. And then, if you could also give us an update around where you think normalized margins will be for each of these businesses, given the cost-out?
Brian Worrell -- Chief Financial Officer
Yeah. Angie, thanks. Look, as I said, I'm really pleased with how all the teams have performed here in executing on the restructuring in this incredibly tough environment. So look, just a little bit on '21, and then we can move over to what we think on a longer term basis. Given the profile of Oilfield Services with a potential second half recovery if oil prices improve but international still down year-over-year and North America relatively flat, we believe all the cost-out actions that we've taken in OFS to translate to modest margin improvement in 2021. So you have the carryover of all this cost-out that we've worked on.
Similar story for Oilfield Equipment. While revenue will be down year-over-year given the order intake in 2020, and I think the environment will be a little soft next year as well, we think we'll maintain positive operating income, given the cost-out that we've done that should offset the volume declines.
On TPS, look, again, the revenue growth next year will be driven by backlog conversion. And we think services should rebound some, given that maintenance can't continue to be pushed out. So I'd expect solid growth in operating income, driven by higher volume. But that equipment mix could actually impact the margin rate, Angie. But still great performance by both pieces of the business.
And then, DS margin rates should be getting back into the low-double digits for the full year as volume recovers in the broader industrial space. I think, aerospace and oil and gas might still lag a little bit. But given how we've positioned the business, I think we're in good shape there.
And if you take a step back and look more broadly, look, as I said earlier, I feel really confident about OFS getting into the double-digit margins over the medium term. There's more cost that will come out in the fourth quarter. We've taken some portfolio actions that will certainly be accretive to margins. And look, there is no stone being left unturned in terms of looking at the OFS business and which pieces need some more work to get to the right level of returns. So, I feel good about how we're looking at that business and how we are operating.
Oilfield Equipment, honestly, it's a challenging market. There are some bright spots with flexibles and non-metallics, but it's tough for that to offset kind of the core SPS space. And I think in this market environment, probably, you're looking at high-single digit levels. I think our long-term goal is lower-double digits. But I think we're going to need to see some more volume there.
And then in Turbomachinery, haven't changed our outlook really in terms of mid-double digits to high-double digits in terms of what that business can do. And a lot of that's going to depend on the mix of services and equipment in any given year.
And then, overall, I think DS should continue to be a mid-teens margin business through the cycle, especially given the cost-out that we've done during this downturn. And feel good that as volume picks back up, you'll see those high gross margins fall through to the operating income level. So pretty constructive view on margins across the portfolio, Angie.
Angie Sedita -- Goldman Sachs -- Analyst
Great, thank you. Very helpful. So maybe going back to the hydrogen and carbon capture and so forth, it's really nice to see this leadership in the energy transition. And maybe, Lorenzo, you could talk about where you see the biggest near-term opportunities versus long-term opportunities, whether it's hydrogen and the hydrogen blend or 100% hydrogen on the turbines, or is it compression, and compare that to the path and opportunity set for carbon capture.
Lorenzo Simonelli -- Chairman and Chief Executive Officer
So, Angie, first of all, I think clearly, it's going to take some time as we evolve on the energy transition. And again, if you look at the presence of oil and gas, that's going to remain in the short term. As we position ourselves, I think, CCUS is particularly important as you look at the Paris Agreement and reaching some of the climate goals. We see an increasing discussion with our customer base of -- both on brownfield and greenfield LNG projects of incorporating CCUS. In fact, we've got experience of already some LNG projects utilizing carbon capture and sequestration. So I think near term, there's the opportunity there. Hydrogen is going to be longer term as the infrastructure is built out.
As you look at energy transition, though, I think, Angie, a lot of this is going to be predicated also on some of the government policies. The technology is very much in place today. And we've proven the technology in many cases, and we've had it for some time. We need to make these, from an economic justification standpoint, stand-alone as well. And some of that's going to come through with the increasing government policies over the next few years and some of the subsidies that get put in place. We're seeing a lot of activity in Europe. You've seen the statements by China where they want to get to from a net zero perspective. So again, evolving space, and we're going to be playing our role and with the technology that's required.
Operator
Thank you. Our next question will come from Bill Herbert with Simmons. Please go ahead.
Bill Herbert -- Simmons -- Analyst
Thanks. Good morning.
Brian Worrell -- Chief Financial Officer
Hi, Bill.
Bill Herbert -- Simmons -- Analyst
Hey, Brian. So getting back to cost-out, I'm curious as to how much more relative to the original $700 million target. And so, these are a few questions embedded in one. One, how much of that is OFS? Secondly, in light of the redefined market opportunity in Lower 48, it's not just that you're [Phonetic] in maintenance mode, but the industry, from your client standpoint, is consolidating rapidly and significantly. That's not a good outcome for Lower 48, OFS, anyone. And so, I'm just curious as to how you guys think about that and how much more you need to cost out and then more over additional portfolio adjustments in light of the fact that you're not only in maintenance mode but your client base is shrinking.
Brian Worrell -- Chief Financial Officer
Yeah. So, I'd say on the cost-out, look, not really going to provide a revised estimate at this time, but we do see upside coming through here in the fourth quarter. And roughly, we said about two-thirds of the cost-out comes from Oilfield Services, and the incremental is probably about -- it's about that level, maybe a little bit higher from where the cost is going to come out. Again, I just want to again congratulate Maria Claudia and the team for exercising some pretty strong operating muscle here and working hard on the cost-out. So, that gives you a rough guide as to where you will see that come through. And we'll update you as we roll through the quarter and report on our [Phonetic] earnings just how much that was.
In terms of what's going on from a portfolio standpoint and what's happening in the marketplace, Lorenzo can jump in here as well, but I think if you look at some of the consolidation that's happening, you've got -- you're going to have larger players. I think a lot of those players are going to look at technology to help them drive better cost, better performance, better returns to their customers. And actually, that that bodes well for us. So, we've got good relationships with these customers and think that we can help them make a difference. And from a portfolio standpoint, look, we'll continue to look at the places where we actually can generate returns that meet our hurdles. And that may mean that we don't do some things. We partner in different ways with others to do things that maybe we don't think are the right thing for us to offer as part of an integrated package. But we're being quite flexible and very pragmatic about it and are committed to getting higher margins and returns, particularly in OFS.
Bill Herbert -- Simmons -- Analyst
Okay. And last one from me. With regard to Q1, is the seasonality that you're expecting at this point typical or atypical? And if it's atypical, how is it so?
Brian Worrell -- Chief Financial Officer
Look, I'd say right now, everything I'm seeing, Bill, would say it's going to be typical seasonality. I don't see anything that will change that at the moment. If we see any different indicators, we'll certainly let you guys know. But right now, I'd say, it seems pretty normal from a seasonality standpoint.
Operator
Thank you. Our next question will come from Scott Gruber with Citigroup. Please go ahead.
Scott Gruber -- Citigroup -- Analyst
Yes, good morning.
Brian Worrell -- Chief Financial Officer
Hey, Scott.
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Hey, Scott.
Scott Gruber -- Citigroup -- Analyst
Brian, I'm going to circle back on your comments that working capital would be broadly neutral next year. I think it's better than the expectation in the marketplace. So, just drilling down a little bit, I thought as we look at the contract liability in TPS, I thought that that would unwind some and present a headwind, maybe a couple of hundred million bucks. Correct me if I'm wrong there. And then, as I think about OFS since working capital is driven by changes in your current accounts from year-end to year-end, it would seem that the recovery in OFS exit to exit would present another working capital headwind, even if we just get back to the maintenance levels. So, is that fair? And if so, what are the offsets? You mentioned down payments under TPS orders? Were there others that neutralized the potential headwinds from your two larger segments?
Brian Worrell -- Chief Financial Officer
Yes. So, listen Scott, you're right on the progress collections. We have built up that progress collections liability as we've increased our orders, particularly in Turbomachinery. But as we've talked about specifically, we look to keep those projects free cash flow positive over the life of the projects. So look, I don't expect this decline in the liability to be a materially large cash drain in 2021 or 2022 at this point. And a few things to think through. Look, the increase that you have seen will draw down over the next 2, 2.5 years as we mentioned. Look, you can see -- clearly see the progress liability on the balance sheet. But what's harder for you to kind of untangle are partial offsets that you see on the asset side. Typically, when we get an upfront payment, we place orders for long lead items, we bring inventory in and build up inventory on a project. In addition, there'll be some receivables associated with that project as well. So it's not exactly one for one in terms of the cash flow impact that you see in the progress collections line. And another consideration, as you mentioned, is what the future awards are going to be like over the next couple of years. So look, based on the project cycle, where we are, how each of those projects should perform from a free cash flow standpoint, again, I don't see that being a major drag as we go into next year.
And then, around OFS, you're right. As activity levels increase, typically you do see a working capital drag. A couple of things I would highlight. as part of the work we've been doing in OFS over the last couple of years to really drive better free cash flow performance, we've made a step function change in both the collections and order to remittance process, as well as the inventory input process, and feel good about the new processes that we have in place and that we'll be able to manage incremental volume, while continuing to improve our inventory turns as well as our days sales outstanding. We've made great improvement since coming together in 2017. And there is more that can come there. So that's -- we're all incentivized on free cash flow. It's the largest piece of our short-term incentive plan. And we've got pretty good processes in place to capitalize on that as volume returns.
The other thing I would mention here is OFE in particular. We are in a cycle in OFE that that's probably been more of a draw on working capital, just given where the projects are in their execution phase. And that should turn around as we go into next year as well.
Scott Gruber -- Citigroup -- Analyst
Got it. That's really good color. And then, just as a quick follow-up on TPS aftermarket, obviously, you had material COVID disruptions this year, but there is also an upcoming tailwind from the last LNG build-out cycle. How much will TPS aftermarket recover in '21? And then, what's the follow-on growth potential in '22? Any color there on growth rate potential would be great.
Brian Worrell -- Chief Financial Officer
Yeah. Look, it's -- we do see a modest increase in services revenue next year after it's been declining in the low-double digit so far this year. I'd say contractual and transactional services have behaved this year roughly as we expected. The areas that have been a little bit weaker have been in upgrades as well as services on pumps and valves in the midstream and downstream space as customer is pretty aggressive on preserving cash and minimizing opex. So when I put all that into 2021, I do expect some level of recovery on the things that have been deferred from this year for the transactional services and for pumps and valves. So, we'd expect that there could be some movement from next year into 2022 in that space but do expect the contractual services to improve next year and into 2022 and beyond, based on the LNG build-out, as you pointed out.
And then, the other thing that I would say that could snap back relatively quickly depending on what's going on the environment are upgrades. There's a lot of activity right now in that space, particularly around decarbonization and an opportunity to make a dent there. So I'd say the commercial team and the engineering team are pretty busy. Customers aren't ready to pull the trigger on those yet, given the environment. But that could be materially better as we go into '21 and '22. So again, a positive backdrop for services, underpinned by the contractual services. And then, on the transactional side, we know what parts have to be replaced. We know what maintenance needs to be done. It's just a question of when.
Operator
Thank you. And our final question on today's question-and-answer session will come from Blake Gendron with Wolfe Research. Please go ahead.
Blake Gendron -- Wolfe Research -- Analyst
Yeah, thanks. Good morning. Thanks for getting me on here.
Brian Worrell -- Chief Financial Officer
Hi, Blake.
Blake Gendron -- Wolfe Research -- Analyst
So one question, two parts. Two areas of the digital industrial realm that would be great to dig into. The first is on asset performance management through the BHC3 partnership. It appears the refiners and chem facilities are attacking the structurally lower demand environment by accelerating APM adoption. It seems like you're going up against some industrial software providers, perhaps some equipment OEMs. So, what gives you confidence in being able to win in such a nascent competitive landscape? And then, the second area I want to dig into is additive manufacturing. We've seen a ton of start-up activity in this realm. It's not new technology per se, but perhaps nearing an inflection point for multi-industry adoption. Is this mostly a cost efficiency lever for Baker in support of core segments, kind of along the lines of Chase's question on supply chain? Or is this something you can monetize in core and diversification end-markets? Thanks.
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Yeah, Blake, just first of all, on the digital transformation, and you're right, we are seeing increased levels of activity around really implementing digital transformation at both our customer sites and then also internally ourselves within our internal processes. We are very happy with the BHC3 relationship. You'll have seen that we've developed applications that we're providing to our customers. And again, it's a drive toward reducing non-productive time. And we are able to do that through advanced analytics. And what's unique about C3.ai is the artificial intelligence that it has and the ecosystem that it's created, which isn't just used within the oil and gas space, but it's used in multiple other industries, defense, banking. And C3 has been regarded externally as a pioneer in artificial intelligence. So, we're having good success in the conversations with our customers and also with applying it internally ourselves. So, we see that continuing. I'd say COVID has actually accelerated the application of digital transformation, as you've also seen with our remote operations that are taking place, and we see that continuing as people drive for productivity.
On the aspect of 3D printing and additive, again, this is not new. And we see it both being an operational improvement for our customers because obviously, it reduces the cycle time in which we can get them parts. We can actually drive incremental productivity within our own manufacturing. You're moving away from costing and metals to being able to have, again, 3D printing at sites. And so, it makes it much quicker. And we think it's an opportunity, again, to become more efficient and productive as we continue to drive efficiencies, both internally for ourselves but then also for our customers. So, two areas that we've discussed before and we continue to invest in as we go forward.
Okay. I think we'll go to the wrap. And I just wanted to take a moment to thank everyone for joining us today. And I'd like to leave you with some closing thoughts. We are pleased with our third quarter results and believe they illustrate and reinforce the potential of Baker Hughes, as we execute on our margin and returns objectives and evolve our portfolio with the energy landscape.
I want to take a moment to thank our employees for their continued commitment and dedication in delivering for our customers, shareholders and each other. I'm extremely proud of the Baker Hughes team.
Thank you, and I look forward to spending time with you again soon. Operator, you may close the call now.
Operator
[Operator Closing Remarks]
Duration: 65 minutes
Call participants:
Judson E. Bailey -- Vice President, Investor Relations
Lorenzo Simonelli -- Chairman and Chief Executive Officer
Brian Worrell -- Chief Financial Officer
James West -- Evercore ISI -- Analyst
Chase Mulvehill -- Bank of America -- Analyst
Sean Meakim -- J.P. Morgan -- Analyst
Angie Sedita -- Goldman Sachs -- Analyst
Bill Herbert -- Simmons -- Analyst
Scott Gruber -- Citigroup -- Analyst
Blake Gendron -- Wolfe Research -- Analyst
