2023-04-19 10:07:28 ET
Summary
- Baker Hughes' Industrial & Energy Technology ("IET") segment services the natural gas sector.
- And even though natural gas prices are down more than 65% since last year, Baker Hughes' IET came out a lot stronger than many could have hoped for.
- Meanwhile, I maintain that Baker Hughes' balance sheet is getting in the way of shareholders' capital return.
Investment Thesis
Baker Hughes Company ( BKR ) is a large oilfield services company. As we headed into Q1 quarter, I stated ,
Baker Hughes [has] more than $640 million of debt due in December 2023. This will get in the way of Barker Hughes increasing its commitment to returning capital to shareholders.
Indeed, true to form, that's exactly what's happening here. That's the bad news. The good news is that we can now see that natural gas, as the chosen transition fuel, remains resilient.
The best indication of this is that while natural gas presently is priced at close to a 30-year low, after adjusting for inflation, Baker Hughes' Industrial & Energy Technology ("IET") segment, which services natural gas and all its related facets, reported flat operating income year-over-year.
With all this in mind, let's dig into the quarter's results .
The Good and the Bad from Q1 2023
Author's calculations, BKR Q1 2023
What you see above is Baker Hughes' operating income segment breakdown.
After a tremendous amount of momentum in the past 12 months, right now, Baker Hughes' Oilfield Services & Equipment makes up more than 60% of Baker Hughes' operating income line.
Furthermore, recall that Baker Hughes' Industrial & Energy Technology ("IET") segment is substantially focused on natural gas and all related services, including pipelines, power generation, and gas compression modules.
Meanwhile, the OFSE segment designs and manufactures products and provides related services for oilfield operations from exploration and development to decommissioning.
And it's difficult to imagine that even after natural gas has plummeted to the trough pricing it has and is down more than 65% since the same period a year ago, Baker Hughes' IET segment remains this strong.
Again, this fully supports the narrative that the natural gas sector and its related services remain in very high demand.
Capital Returns Program?
In my prior article, I highlighted CFO Nancy Buese's assertion ,
[Baker Hughes] will continue to target 50% free cash flow conversion from adjusted EBITDA on a through cycle basis but expect[s] 2023 to be in the low to mid 40% range.
The quote above highlights ambition. But with Baker Hughes' free cash flow line reporting approximately $200 million, there's very little excess free cash flow to be returned back to shareholders, aside from its dividend payout.
Moreover, as the table that follows shows, Baker Hughes will have to repay nearly $700 million worth of debt this year.
To put this figure into perspective, this is very roughly equal to the total sum that Baker used to repurchase its shares last year.
Consequently, this means that for now, Baker Hughes' shareholders will have to content themselves with its 2.6% dividend yield.
The Bottom Line
At the core of the bull case is the belief that even if Baker Hughes' free cash flows in this particular quarter were unimpressive, the driving theme behind the bull thesis is that we are in the midst of a much-needed capital spend and technological upgrade cycle that places natural gas as the central transition fuel.
Indeed, the way I describe this theme to my Investment Group members is as this: We are in the middle of a decarbonizing cycle. This means that somewhere close to 80% of total energy which presently comes from fossil fuels will get drastically reduced to around 20% of our total energy supply.
Presently, the remaining 20% of total energy comes from nuclear, biomass, and renewables. But over the next 5 or so years, we'll rapidly witness renewable energy taking center stage. And the bridge that will get us between where we are today and where we'll be in 5 years and beyond, is natural gas, the green of the bridge fuels.
For further details see:
Baker Hughes: Energy Transition Picks Up Momentum