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Baker Hughes - solid growth in revenues and profit

Baker Hughes reported fourth-quarter revenue growth of 16% to $6.8bn.

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Baker Hughes reported fourth-quarter revenue growth of 16% to $6.8bn. This was driven by increased volumes in both the Oilfield Services & Equipment (OFSE) and Industrial & Energy Technology (IET) divisions.

Underlying operating income grew at a slightly faster pace, up from $692mn to $816mn.

Order intake of $6.9bn was just ahead of revenue, although 14% down year-on-year due to a 29% decline in new IET business.

Free cash flow fell 4% to $633mn as an increase in capital expenditure more than offset improved operating cash flow. Year-end net debt improved from $4.2bn to $3.4bn.

Payouts to shareholders totalled $0.5bn bringing the full year total to $1.3bn.

The shares were up 1.1% in after-hours trading.

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Our view

Baker Hughes is one of the largest providers of services and equipment to the oil and gas industry. But it also has one eye on the rapidly changing mix of our energy supplies. It's seeing strong growth in orders for its new energy business, which supports technologies such as green hydrogen and carbon capture.

For now, its more traditional business is also doing well. Orders for Oilfield Services & Equipment (OFSE) were up 16% in 2023, and we believe this will remain a valuable source of business for some time.

Even if demand for fossil fuels starts to ebb, it should be somewhat offset by decommissioning work on oil well closures, which in itself is a multi-billion dollar opportunity. However, a prolonged period of weakness or volatility in oil prices would still likely be a net drag on orders for the OFSE division.

But it's the Industrial & Energy Technology (IET) division that's been enjoying the strongest revenue momentum of late. This houses the company's gas technology and new energy activities. A strong growth driver here is the ongoing build-out of liquefied natural gas infrastructure (LNG), where capacity is set to increase by about 60% by the end of the decade, due to its place as a key transition fuel and role in improving energy security.

Whilst recent order intake has been somewhat disappointing, this has been attributed to timing issues for equipment orders, and we think the long term outlook is positive. Further, the group's order book still stands at over $33bn, meaning it's well placed to ride out peaks and troughs in demand.

We still think IET is likely to become a bigger part of the business in the next few years, as growth in oilfield services moderates, new energy operations start to scale, and service revenues from the installed base of LNG assets begin to flow. If Baker Hughes gets that right, it should improve margins and revenue visibility.

The group boasts a robust balance sheet and impressive cash flows. That's currently supporting share buybacks and a prospective dividend yield of 2.6%. But as with any shareholder returns, there are no guarantees.

Whilst we're excited about the growth story emerging at Baker Hughes, the valuation currently sits towards the top of the peer group meaning the shares are likely to be sensitive to any potential missteps. The current high levels of macroeconomic uncertainty also raise the risk that customers hold back on committing to new investments in both renewables and fossil fuel-based energy projects.

Environmental, social and governance (ESG) risk

The ESG risk to oil and gas service providers runs parallel to those impacting producers. Environmental concerns are the primary driver of ESG risk for this group, with carbon emissions and waste disposal being the main issues. Health and safety, community relations and ethical governance are also contributors to ESG risk.

According to Sustainalytics, Baker Hughes's management of material ESG issues is strong, as are its ESG reporting practices. Based on available evidence, a part of executive remuneration is explicitly linked to sustainability performance targets. Similarly, the environmental policy is very strong. The company also has a strong whistleblower programme in place. It does not appear to be implicated in any significant controversies. It has a stated goal of reducing scope 1 and 2 emissions by 50% by 2030, and an overall reduction in scope 3 by 2033, although we would like to see this target more clearly defined.

Baker Hughes key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 24th January 2024