Baker Hughes Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Baker Hughes is an energy technology company operating through Oilfield Services & Equipment (OFSE) and Industrial & Energy Technology (IET).
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $5.716 billion | $4.835 billion | +18% |
| Operating income | $438 million | $279 million | +$160 million |
| Operating margin | 7.7% | 5.8% | +1.9 percentage points |
| Net income attributable to Baker Hughes | $576 million | $72 million | +$504 million |
| Diluted earnings per share | $0.57 | $0.08 | +$0.49 |
| Operating cash flow | $461 million | $72 million | +$389 million |
| Capital expenditures | $310 million | $268 million | +$42 million |
| Cash and cash equivalents, March 31 | $2.415 billion | $2.488 billion at Dec. 31, 2022 | -$73 million |
| Total debt, March 31 | $6.659 billion | $6.658 billion at Dec. 31, 2022 | +$1 million |
Q1 2023 operating cash flow less capital expenditures was $151 million, versus negative $196 million in Q1 2022; this is a simple derived measure, not a company-reported metric. The current ratio was approximately 1.32 at March 31, 2023. Cash less total debt was approximately negative $4.244 billion. The company had no borrowings under its $3 billion revolving credit facility or $3 billion commercial paper program and reported compliance with debt covenants. Its next debt maturity was $649 million in December 2023.
Revenue increased in both segments: OFSE rose 19% to $3.577 billion, while IET rose 18% to $2.138 billion. Segment operating income increased to $371 million from $213 million for OFSE and was flat at $241 million for IET. The declared cash dividend was $0.19 per share, versus $0.18 a year earlier.
Material changes and notable items
- Net income included $392 million of gains from changes in the fair value of equity investments, compared with $11 million in Q1 2022. The gains included $181 million related to C3.ai and $211 million related to ADNOC Drilling. This non-operating item materially boosted reported pretax and net income.
- Operating income improved primarily on stronger OFSE performance, driven by higher volume and pricing, partly offset by cost inflation and unfavorable productivity. IET’s higher volume and pricing were offset by inflation, mix, foreign exchange, and increased new-energy research and development costs.
- Worldwide average rig count increased 15% year over year to 1,897. Oil and gas benchmark prices were lower than a year earlier; Brent averaged $81.14 per barrel and Henry Hub gas averaged $2.62 per mmBtu.
- Russia operations had been discontinued in 2022; management said Russia represented about 4% of total revenue in Q1 2022. Lower Russia activity contributed to a decline in OFSE revenue in Europe/CIS/Sub-Saharan Africa.
- Restructuring, impairment and other charges were $56 million, with a separate $18 million inventory impairment. The company expected approximately $145 million of additional restructuring charges in 2023 and anticipated substantial completion by year-end, with most charges in the first half.
Outlook, risks and contingencies
- Management expected double-digit growth in global upstream spending in 2023 and stronger international OFSE activity, with North American spending also expected to improve, assuming commodity prices remained around then-current levels. It cited elevated recession risk and volatile macro conditions; outlook statements were expressly subject to change.
- Management remained positive on long-term LNG economics and expected growth in lower-carbon businesses including hydrogen, geothermal, carbon capture, utilization and storage, and energy storage. It also described natural gas as an important transition and destination fuel.
- 2023 capital expenditures were expected to be up to 5% of annual revenue. Expected 2023 income tax payments were $500 million to $550 million.
- Cash and cash equivalents included $549 million held in jurisdictions where funds cannot readily be transferred or converted internationally. The company reported that 73% of its cash was held outside the U.S.; customer nonpayment or cash-control restrictions could affect liquidity.
- Off-balance-sheet arrangements, including performance bonds, letters of credit and guarantees, totaled approximately $4.7 billion. The company said they were not expected to materially affect its financial position, results or cash flows; consortium project partners’ inability to perform could nevertheless create additional costs or disputes.
- Management did not expect pending legal proceedings to have a material adverse effect, but outcomes remain uncertain. A shareholder derivative case was terminated by the court in April 2023; a remaining claim in a separate shareholder action, an IEC-related arbitration, and a securities class action involving C3.ai remained unresolved or unpredictable.
- After quarter-end, the company completed the sale of Nexus Controls to GE on April 3, 2023, with an immaterial gain, and closed its acquisition of Altus Intervention in April.
Important facts for investors to verify
- How much future earnings and EPS depend on fair-value movements in the C3.ai and ADNOC Drilling investments, rather than operating performance.
- Whether OFSE growth and margin improvement continue, and whether IET can offset inflation, unfavorable mix and new-energy investment costs.
- Progress against the 2023 restructuring plan, including actual additional charges versus the approximately $145 million estimate.
- Cash generation, working-capital needs, geographically restricted cash, and the December 2023 debt maturity and refinancing plans.
- Whether market assumptions behind management’s spending outlook hold, given lower year-over-year oil and gas prices and elevated recession risk.
- Developments in the unresolved legal matters and any material exposure from guarantees, off-balance-sheet arrangements or project consortium obligations.