Shares in oil and gas equipment and services company Baker Hughes(NASDAQ: BKR) rose by 10.1% in July, according to data provided by S&P Global Market Intelligence. The move comes after an impressive set of earnings that displayed a combination of good progress on operational improvements and margin expansion, alongside broad-based order strength in industrial and energy technology (IET) orders. Here's the lowdown.
Baker Hughes' margin expansion
The company operates in two segments. IET offers compression and power generation equipment for liquid natural gas (LNG), natural gas, and industrial applications. It also has a fast-growing new energy business (including carbon capture, hydrogen, and clean power solutions). The second segment, oilfield services and equipment (OFSE), offers drilling, well construction, and well maintenance and enhancement equipment and services.
Management aims to increase OFSE earnings before interest, taxes, depreciation, and amortization (EBITDA) from 16.9% to 20% by 2025. Similarly, management seeks to increase IET EBITDA margin from 15% to 20% by 2026.
Naturally, investors will monitor progress toward these targets, and Baker Hughes reported good margin performance in both segments with year-over-year margin and sequential margin expansion.
EBITDA Margin | Q2 2023 | Q1 2024 | Q2 2024 | Aim |
|---|---|---|---|---|
Oilfield services and equipment (OFSE) | 16.4% | 17% | 17.8% | 20% by 2025 |
Industrial and energy technology (IET) | 14.9% | 14.7% | 15.9% | 20% by 2026 |
Data source: Baker Hughes presentations.
CEO Lorenzo Simonelli attributed the ongoing margin expansion to the restructuring initiated in 2022, ongoing continuous improvement initiatives, improved supply chains, and improved service levels.
Image source: Getty Images.
Balanced order growth
There was also some good news on orders: $7.5 billion in orders in the quarter (compared to revenue of $7.1 billion), and $3.5 billion in IET orders. Within IET, Baker Hughes has been doing very well with LNG orders in recent years, but this quarter, it was the turn of its non-LNG orders to outperform, with record orders of $1.4 billion.
The company's new energy orders also reached a record $445 million in the quarter and now stand at $684 million for the first half (compared to $750 million for the whole of 2023), with management guiding for $800 million to $1 billion in 2024. As such, management believes new energy orders are trending toward the high end of the 2024 guidance range.
Image source: Getty Images.
What's next for Baker Hughes
With ongoing margin expansion in both segments and good order growth in non-LNG and new energy solutions, Baker Hughes will have a strong 2024. LNG investment is likely to be ongoing, and the future looks bright for Baker Hughes. Throw in some potential upside from a new U.S. administration taking a more free-market approach to energy policy. Baker Hughes has upside potential, provided energy prices stay where they are.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
