It would appear that, based on its most recent earnings results, oil services company Baker Hughes, a GE Company (NYSE:BHGE) has finally turned a corner. After more than a year of integrating two disparate businesses into a one-stop shop for oilfield equipment and services, the company is starting to see business pick up with considerable gains in revenue and orders.
By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$6.26 billion||$5.66 billion||$5.80 billion|
|Operating income||$382 million||$282 million||($111 million)|
|Free cash flow||$876 million||$146 million||($367 million)|
This past quarter was where things really started to come together for Baker Hughes. Even though oil service activity for shale in North America was weak this past quarter, the company has a much smaller presence in this part of the business than its larger peers Halliburton and Schlumberger. Hence the gains in revenue and earnings when its peers were posting weaker earnings results.
The real shining star of the quarter was the turbomachinery and process solutions (TPS) segment. This has been a key business segment for the company, as it anticipates significant growth in the liquefied natural gas business. Not only were revenue and operating income up significantly, but management also noted that it booked $2.12 billion in orders for the quarter, up 23% year over year and representing a book-to-bill ratio of 1.19. Any number greater than one means the company is taking more orders than it's fulfilling; this means we can expect growth in the near future.
Another promising note was that the company's oilfield equipment orders more than doubled in the most recent quarter to $1.04 billion. Management noted on its conference call that orders for subsea equipment and other offshore-related equipment orders were one of the most significant factors in the order increase. The thing that makes these announcements so important is that these two segments were a real drag on the prior quarter's earnings.
The one place that Baker Hughes still lags behind, though, is margin. Operating margin for the quarter was 6.1%, or 7.9% if you exclude restructuring and merger-related costs. That's certainly an improvement, but still well below the results its peers are producing.
What management had to say
Even though General Electric had technically merged its oil and gas equipment business with Baker Hughes and only had an equity stake in the combined entity, there were still lots of connections between the two companies in terms of product manufacturing and licensing. It wasn't much of an issue when GE was the majority shareholder, but now GE plans to sell most of its stake in the business.
Back in November, Baker Hughes announced several steps it took to further separate itself from General Electric. On the conference call, Baker Hughes CEO Lorenzo Simonelli explained the separation agreements:
[I]n the fourth quarter, we announced a number of commercial agreements with GE that position our company for the future. The agreements focus on areas where we'll work most closely with GE on developing leading technology and executing for customers.
First, we defined the parameters for long-term collaboration and partnership with GE on critical rotating equipment technology. Second, for our digital software and technology business, we will maintain the status quo as the exclusive supplier of GE digital oil and gas applications. Finally, we reached agreements on a number of other areas, including our controls business, pension, taxes, and intercompany services.
At the core of these agreements is our strategy to deliver a differentiated full-stream portfolio, which we have enhanced through this process. The agreements were finalized considering the eventual full separation from GE, and they preserve the important public shareholder protections we initially agreed. We are very pleased with the resulting agreements and what they mean for BHGE.
Looking better by the day, but there's still a lot of room for improvement
More than anything, Baker Hughes' new order numbers are incredibly encouraging. That signals a lot of things. One, that companies believe in Baker Hughes' model of selling both equipment and services as a package. Two, that oilfield activity is picking back up again in places other than North American shale. And three, that the company is meeting some major objectives like capturing market share, and rebuilding a backlog of work that had been drawn down after years of underinvestment in the oil and gas industry.
Another plus for Baker Hughes was negotiating a comprehensive separation plan with General Electric, which will help to remove some of the uncertainty that comes with being majority-owned by another company.
The next big hurdle Baker Hughes needs to clear is to show that it can monetize these orders better with higher margin and greater cash flow. So far, it has realized about $800 million in operational synergies from the merger; it expects that number to grow to $1.6 billion by the end of 2020. If it can maintain this kind of revenue growth and find ways to cut costs, then it will look like a business worth investing in.