The Transcripts

Baker Hughes (BKR) Q1 2023 Earnings Call Transcript

Operator Good day, ladies and gentlemen, and welcome to the Baker Hughes Company First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.I’d now like to introduce your host for today’s conference Mr. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.Jud Bailey Thank you. Good morning, everyone, and welcome to the Baker Hughes first quarter 2023 earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Nancy Buese. The earnings release we issued earlier today can be found on our Web site at will also be using a presentation with our prepared remarks during this webcast, which can also be found on our Investor website. As a reminder, during the course of this conference call, we will provide forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions.Please review our SEC filings and website for a discussion of the factors that could cause actual results to differ materially. As you know, reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release.With that, I will turn the call over to Lorenzo.Lorenzo Simonelli Thank you, Jud. Good morning, everyone, and thanks for joining us. We were pleased with our first quarter results and remain optimistic on the outlook for 2023.As you can see on Slide 4, we maintained our strong order momentum in IET and SSPS. We also delivered solid operating results at the high-end of our guidance in both business segments, booked almost $300 million of new energy orders and generated approximately $200 million of free cash flow.Turning to Slide 5. While 2023 has already started off with some macro volatility, we remain optimistic on the outlook for Energy Services and Baker Hughes. Our diverse portfolio features long-cycle and short-cycle businesses that position us well to navigate any periods of variability that may occur across the energy sector.Despite the elevated recession risk for major developed economies, we expect the supply-demand balance in the global oil markets to gradually tighten over the course of the year. Factors driving this include China’s economy recovering, non-OECD demand continuing to grow and OPEC+ remaining proactive in maintaining adequate and stable oil price levels.We expect this macro backdrop to still support a double-digit increase in global upstream spending in 2023 with multiple international projects being executed and the offshore development pipeline growing. We continue to believe current environment remains unique with a spending cycle that is more durable and less sensitive to commodity price swings relative to prior cycles.Factors driving this extended cycle include financially stronger operator balance sheet, disciplined capital spending focused on returns versus growth and IOCs and NOCs that are balancing modest production growth with longer-term investments in new energy.Another notable characteristic of this cycle is the continued shift towards the development of natural gas and LNG. As the world increasingly recognizes the crucial role natural gas will play in the energy transition, serving us both a transition and destination fuel, the case for a multi-decade growth opportunity in gas is steadily improving. This is driving operators of all sizes to dedicate more spending towards natural gas development as well as LNG projects and associated infrastructure.We are seeing the early stages of this shift through a step-up in the exploration and development of gas reserves in regions like Africa, the Middle East and the Eastern Mediterranean. We are also seeing the introduction of new technologies and entrance into the LNG sector more broadly as well as an evolution in contracting structures for LNG offtake volumes.For these reasons, LNG project sanctioning activity has gotten off to a strong start in 2023 with 20 MTPA already reaching FID and other projects likely to soon follow. Contrary to conventional wisdom, we believe that recent declines in global LNG prices from the unsustainably high levels reached last year is a net positive for the sector by supporting demand growth in key developing markets and bringing closer alignment on LNG pricing expectations between buyers and sellers.Based on conversations with existing and new customers, we see the potential for this LNG cycle to extend for several years with a pipeline of new international opportunities expanding project visibility out to 2026 and beyond. We remain confident that we will see 65 to 115 MTPA of LNG projects reach FID in 2023 and continue to see solid project activity in 2024 and 2025.In addition to capitalizing on the commercial opportunities presented by this favorable macro backdrop, our primary focus for Baker Hughes in 2023 is transforming the company operationally and positioning it for the future of the energy markets. This includes executing on our previously stated cost-out initiatives, which Nancy will talk about in more detail and reshaping the company into two strategically managed business segments with a leaner corporate function.We have done a lot of work evaluating our entire organization these last few months, and the changes we are driving will enable faster decision making and allow us to operate as a leaner, more simplified organization. It will take time to reach our ultimate goals, but I strongly believe that the work we are undertaking this year will lay the foundation for consistently better operating results and higher returns in the future.Turning to Slide 6. I will provide an update on each of our business segments. In Oilfield Services and Equipment, despite recent volatility in oil and gas prices, we remain positive on the outlook for a multi-year cycle, with growth trends clearly shifting in favor of international and off-shore markets. With approximately 70% of our OFSE business internationally focused, we are well-positioned to capitalize on these unfolding market dynamics.Geographically, multiple regions are poised for strong growth this year, led by the Middle East and Latin America, where the pipeline for both shallow water and deepwater growth opportunities becoming more visible. In other markets like, West Africa and the Eastern Mediterranean, offshore activity is also improving with multi-year drilling programs starting to come into focus.In North America, activity has been seasonally weaker to start the year as expected with a high likelihood of further softness as activity and gas basins responds to recent natural gas price weakness. However, with roughly 55% of our North American business comprised of artificial lift and production chemicals and a customer mix weighted towards the majors and large independents we expect our portfolio to perform relatively well in the current environment.Within our OFSE product lines, we continue to see the strongest growth and performance in our well construction product line, which is supported by the leading technologies in our drilling portfolio. Our completions, intervention and the measurement product line also continues to perform well and will be further improved by the recently closed acquisition of Altus Intervention. Altus will complement our existing intervention solutions business and add new technology that can be scaled into new geographic markets.In Production Solutions, we continue to see incremental improvements in our chemicals business as supply chain constraints ease and profitability continues to normalize. Our Singapore facility will soon be fully operational and we remain on-track for margins in the Chemicals business to return to historical levels by the end of this year.Another positive development for our Production Solutions business is the recent announcement of Leucipa, which is a platform-agnostic digital solution. This software enables the automation of field production, connecting artificial lift, fluids and chemicals and removing unnecessary costs and manual processes, which will ultimately drive enhanced production.We also recently announced a collaboration with Corva, a third-party digital solution that improves well construction efficiency, further enhancing OFSE’s digital capabilities.In our Subsea and Surface Pressure Systems product line, the demand outlook continues to strengthen. During the first quarter, we booked a major award to provide equipment and services for the Agogo field offshore Angola. We will be providing 23 subsea trees and 11 Aptara manifolds, representing our largest subsea tree order in almost five years.As we reposition the Subsea Projects and Services business to focus predominantly on a few key markets, we see a robust pipeline of opportunities building and anticipate further order momentum for this year and beyond.For our flexible business within SSPS, we expect orders to remain strong in 2023 after a record year in 2022 given robust demand, conversion cycles are lengthening in the business with limited excess capacity until 2025.On the operational front, the integration of SSPS into our OFSE segment and restructuring of the business continues to progress well. In line with the capacity rationalization for SSPS that we disclosed last quarter, we are in the process of decommissioning and right-sizing multiple manufacturing sites.Our focus is now shifting to the surface pressure control business, where we see similar opportunities to right-size capacity, integrate supply chain and engineering, and localizing key growth markets, particularly the Middle East. As a reminder, these steps are in addition to the cost savings gains from removing management layers and will largely come into effect in 2024.For 2023, we continue to expect OFSE to deliver double-digit revenue growth and for EBITDA margins to expand by 150 basis points to 200 basis points as activity increases in multiple regions and self-help initiatives in key areas are executed.Moving to IET. We saw another excellent quarter commercially, continuing on the strong momentum from the end of 2022. Gastech equipment booked a number of LNG awards in the quarter, totaling almost $1.4 billion with continued progress across our world-class franchise.The recent decline in energy prices have had virtually no impact on our discussions in terms of timing or the pipeline of opportunities with project cycle times that can last eight to 10 years from the initial planning phase to final commissioning, operators take a long-term view for LNG project development and look through near-term commodity price fluctuations.During the first quarter, we were pleased to be awarded a major order to supply two main refrigerant compressors for the North Field South project, which will be executed by Qatar Gas. The MRCs are part of two LNG mega trains, representing 16 MTPA of additional capacity that is estimated to further boost Qatar’s LNG’s production capacity to 126 MTPA by 2027.Also during the quarter, Baker Hughes was awarded an ordered by Bechtel to supply two MRCs for Sempra Port Arthur’s LNG Phase 1 project in Jefferson County, Texas. Baker Hughes will supply gas turbine and centrifugal compressors across two LNG trains, for a nameplate capacity of approximately 13 MTPA, as well as two electric motor driven compressors for the plant’s boosting services.Baker Hughes was also awarded an order by Black & Veatch to deliver two LM9000 driven compressor trains for the PETRONAS LNG facility in Sabah, Malaysia. PETRONAS specifically selected the LM9000 gas turbine technology for the two MTPA FLNG facility to reduce complexity, maximize efficiency and minimize footprint, while lowering CO2 emissions compared to other technologies in its class.On the new energy front, we booked almost $250 million of orders in the quarter in IET, including contracts to supply CO2 compression solutions for multiple FPSO projects in Brazil. The six gas turbine-driven compression streams will each reinject more than one MTPA of CO2 into oil reservoirs, enhancing production rates and reducing emissions.We were also pleased to book an order for centrifugal pumps and hydraulic powered recovery turbines for Air Products blue hydrogen project in Edmonton to enable CO2 capture during the auto thermal reforming process. This award is another example of how Baker Hughes and Air Products continue to collaborate to drive the hydrogen economy forward.During the quarter, we also announced an agreement with HIF Global, the world’s leading e-fuels company to cooperate on the development of technology for direct air capture. HIF Global intends to test Bakers Hughes Mosaic technology to capture carbon dioxide for direct air capture and combine it with the green hydrogen to produce e-fuels.Orders in the Industrial Technology businesses will maintained strong momentum to start 2023 with double-digit growth year-over-year across all product lines, led by some of the hydrogen-related awards in pumps, valves and gears. In our Condition Monitoring business, we saw notable awards in the Middle East and in Europe, which featured the full suite of our capabilities in monitoring, sensing and asset health across multiple sectors.On the operational side, Industrial Tech also continues to benefit from volume and margin improvements in condition monitoring and inspection as chip shortages and supply chain issues gradually abate. Although, supply chain functionality and operational performance is still not back to where we would like, we are seeing steady progress that we expect to continue over the course of the year.In IET Digital, Cordant, our recently launched integrated suite of solutions is seeing some initial success. We are pleased to be collaborating with BP (ph) on further defining and developing Cordant for asset performance management and process optimization. BP will deploy 1 PM in select locations across its Gulf of Mexico production assets, where Baker Hughes currently has a large installed base of rotating equipment, controls and associated digital services. The companies will look for opportunities to expand this collaboration across other regions in the future.Overall, we are pleased to see strong momentum for IET continue into 2023, with a record backlog of $26.5 billion and a robust pipeline of new order opportunities in LNG, onshore/offshore production and new energy. Based on our strong first quarter and the growing pipeline of project opportunities, we are increasingly confident that IET orders for 2023 are likely to meet or potentially exceed the high end of our guidance range of $10.5 billion to $11.5 billion.Before I turn the call over to Nancy, I’d like to spend some time on the commitments Baker Hughes is making in the areas of sustainability and ESG. As many of you know, we are one of the first companies in the energy sector to commit to a 50% reduction in Scope 1 and Scope 2 emissions by 2030 and to be at net zero by 2050.To help achieve these goals, we are empowering Baker Hughes employees to remove carbon from our products and operations as we better integrate our carbon out program. We are also intently focused on developing our own scope-free emissions reduction road map and expect to have more news to share on this area later this year.Overall, I feel confident in the structural changes we are executing at Baker Hughes and our positioning to capitalize on the multi-year upstream spending cycle, the ongoing wave of LNG investments and the acceleration in new energy opportunities.With that, I’ll turn the call over to Nancy.Nancy Buese Thanks, Lorenzo. I will begin on Slide 8 with an overview of total company results and then move into the segment details on our forward outlook. Total company orders for the quarter were $7.6 billion. Year-over-year, orders were up 12%, driven by an increase in OFSE, partially offset by a slight decline in IET.Sequentially, orders were down 5%, driven by industrial and energy technology, partially offset by an increase in oilfield services and equipment. We are again extremely pleased with the orders performance in the quarter as we maintained strong momentum across both segments.Remaining performance obligation was $29.6 billion, up 7% sequentially. OFSC RPO ended at $3.1 billion, up 20% sequentially, while IET RPO ended at $26.5 billion, up 5% sequentially. Our total company book-to-bill ratio in the quarter was 1.3 times. IET book-to-bill was 1.7 times.Revenue for the quarter was $5.7 billion, down 3% sequentially and up 18% year-over-year, driven by increases in both segments. Operating income for the quarter was $438 million. Adjusted operating income was $512 million, which excludes $74 million of restructuring and other charges. Adjusted operating income was down 26% sequentially and up 47% year-over-year.Adjusted EBITDA in the quarter was $782 million, down 17% sequentially and up 25% year-over-year. Our adjusted EBITDA rate for the quarter was 13.7%, down 240 basis points sequentially and up 80 basis points year-over-year. Corporate costs were $100 million in the quarter. For the second quarter, we expect corporate costs to be roughly flat compared to first quarter levels.Depreciation and amortization expense was $269 million in the quarter, driven by the closing of multiple acquisitions in the fourth quarter of 2022. For the second quarter, we expect D&A to be around $280 million, with the increase driven by the acquisition to Altus Intervention.Net interest expense was $64 million. Income tax expense in the quarter was $179 million. GAAP earnings per share was $0.57. Included in GAAP earnings per share were $392 million in gains from the change in fair value for certain equity investments, all of which are recorded in other non-operating income. Adjusted earnings per share were $0.28.Turning to Slide 9. We maintained a strong balance sheet with total debt of $6.7 billion and net debt of $4.2 billion, which is 1.4 times our trailing 12 months adjusted EBITDA. We generated free cash flow in the quarter of $197 million, down sequentially, driven by lower adjusted EBITDA. Year-over-year, our free cash flow is up $302 million.For the second quarter, we expect free cash flow to improve sequentially, primarily driven by higher earnings and stronger collections. We continue to expect free cash flow conversion from adjusted EBITDA to be in the low to mid-40% range for the year and anticipate the majority of our free cash flow to be generated over the second half of the year.Turning to Slide 10 and capital allocation. We maintained a quarterly dividend of $0.19 per share and we did not repurchase any stock during the first quarter. Despite slowing down our buyback pace from last year, as we closed and began integrating multiple small acquisitions, we remain committed to returning 60% to 80% of our free cash flow back to shareholders with a priority of increasing our regular dividend over time.Turning to Slide 11. As Lorenzo mentioned, we continue to make progress with our $150 million cost-out target and expect all actions necessary to achieve these savings to be completed by the end of the second quarter. The majority of these savings will come from direct structural cost reductions as we consolidate the former four product companies into two business segments. These actions drive a smaller executive leadership function, the removal of duplicative spending and an overall leaner corporate structure.During the first quarter, we benefited from approximately $15 million of cost-out related to the consolidation into two business segments. The balance of the identified savings will come from additional headcount reductions and more efficient cost measures related to the streamlining of multiple support and corporate functions across the organization. We expect to realize the full benefit of these initiatives by the end of the year.Based on progress to-date and areas of opportunity that we have found, we have good line of sight to exceeding our initial $150 million target. Working through this process, we have identified additional areas to remove excess layers, decentralized key functions and standardize key operating processes that will result in significant additional cost savings.Although, we have not yet quantified the additional cost-out savings, we plan to have all the work completed on any additional restructuring by the end of the second quarter and to realize the full cost-out benefit by the end of the year.Now I will walk you through the business segment results in more detail and give you our thoughts on the outlook going forward. Starting with Oilfield Services and Equipment on Slide 12. Orders in the quarter were $4.1 billion, up 10% sequentially and up 25% year-over-year. SSPS orders were $1.2 billion, up 60% year-over-year, driven by an increase in subsea tree awards across multiple regions.Most notably, we received a large subsea equipment order from ENI for Agogo Phase 3 and an SPC order in the Middle East. OFSC revenue in the quarter was $3.6 billion, flat sequentially and up 19% year-over-year. On a sequential basis, the seasonal decline in the traditional Oilfield Services businesses was offset by an increase in SSPS revenue, driven by the timing of backlog conversion.International revenue was up 1% sequentially, driven by Latin America up 10%, and Europe, CIS, SSA, up 1%, offset by Middle East, Asia down 2%. North America revenue decreased 4%. Excluding SSPS, international revenue was down 3% sequentially and North America revenue was down 1%.OFSC operating income in the quarter was $371 million, down 11% sequentially and up 75% year-over-year. Operating income rate was 10.4%, down 120 basis points sequentially and up 330 basis points on a year-over-year basis. OFSC EBITDA in the quarter was $579 million, down 6% sequentially and up 33% year-over-year.EBITDA margin rate was 16.2%, with margins decreasing 100 basis points sequentially, primarily due to seasonality in the services business, lower cost productivity and a higher mix of SSPS revenue converting during the quarter. Year-over-year EBITDA margins were up 180 basis points.If we move to Slide 13, IET orders were $3.5 billion, down 18% sequentially and down 1% on a year-over-year basis. Gas Technology equipment orders in the quarter were down 9% year-over-year. Major awards during the quarter included equipment for Qatar’s North Field South LNG expansion and Sempra’s Port Arthur LNG Phase 1 project, as well as compression equipment for CO2 reinjection for multiple FPSOs in Brazil.Gas Technology Services orders in the quarter were up 5% year-over-year, driven by strong upgrades and transactional services. Industrial Technology orders were up 16% year-over-year with all sub-segments delivering double-digit orders growth. RPO for IET ended at $26.5 billion, up 5% sequentially. Within IET RPO, Gas Tech Equipment RPO was $10.5 billion, and Gas Tech Services RPO was $13.6 billion.Turning to Slide 14. Revenue for the quarter was $2.1 billion, up 18% versus the prior year. Gas Tech Equipment revenue was up 52% year-over-year, driven by the execution of project backlog. Gas Tech Services revenue was up 2% year-over-year, driven by transactional services, offset by the discontinuation of our Russia operations.Industrial Technology revenue was up 4% year-over-year. Inspection and condition monitoring revenue was up year-over-year, while PBG, PSI and Nexus Controls were down year-over-year. Operating income for IET was $241 million flat year-over-year. Operating margin rate was 11.3%, down 200 basis points year-over-year.IET EBITDA was $297 million, up 2% year-over-year. EBITDA margin was 13.9%, down 210 basis points year-over-year. Higher volume was offset by higher equipment mix and higher R&D spending related to new energy investments.Turning to Slide 15. I’d like to update you on our outlook for the two business segments. Overall, we remain optimistic on the outlook for both OFSC and IET with solid growth tailwinds across each business as well as continued operational enhancements to help drive backlog execution and margin improvement.For Baker Hughes, we expect second quarter revenue to be between $6.1 billion and $6.5 billion and adjusted EBITDA between $845 million and $905 million. For the full year, our guidance remains unchanged. However, with the strong performance in the first quarter and positive outlook for the second quarter, we now believe that adjusted EBITDA is trending between the midpoint and the upper end of the guidance range of $3.6 billion to $3.8 billion.For OFSC, we expect second quarter results to reflect growth in International markets and softness in North America, but still see sequential improvements on both revenue and EBITDA. We expect second quarter revenue for OFSC between $3.65 billion and $3.85 billion and EBITDA between $590 million and $650 million.For the full year 2023, we remain positive on the outlook for OFSC. International activity is tracking in line with our expectations, but we now expect North America D&C spending to increase in the low-double digits in 2023, which is lower than the mid to high-double digit growth expectation that we communicated in January.Despite the weaker outlook in North America, our full year outlook for OFSC remains unchanged, with revenue between $14.5 million and $15.5 billion and EBITDA between $2.4 billion and $2.8 billion in 2023. For IET, we expect second quarter results to benefit from strong revenue growth year-over-year as we execute on our backlog for Gas Tech Equipment, while Industrial Technology is expected to grow modestly.We expect second quarter IET revenue between $2.35 billion and $2.75 billion and EBITDA between $320 million and $380 million. For the full year, our outlook for IET is a little more constructive as we see positive order momentum continuing and supply chain disruption in both Gas Tech and Industrial Tech gradually improving in line with expectations.For orders, we are maintaining our guidance range that feel increasingly confident in meeting high end of the range and see the opportunity to exceed the high end and potentially match 2022 order levels. As we get more visibility on the timing for select projects, we’ll provide updates during the year. For revenue and EBITDA, our guidance remains unchanged, but with a bias that each could trend above the midpoint of the range.With that, I’ll turn the call back over to Lorenzo.Lorenzo Simonelli Thank you, Nancy. Turning to Slide 16. Baker Hughes is committed to delivering for our customers and our shareholders. We remain focused on capitalizing on the growth opportunities across OFSE and IET, including LNG and new energy. We continue to invest in R&D to develop our technology portfolio in hydrogen, carbon capture and clean power.We also remain committed to delivering on our cost-out objective by optimizing our corporate structure to enhance our margin and return profile. We continue to target EBITDA margins of 20% in OFSE and IET and increasing ROIC in both businesses to 15% and 20%, respectively.And finally, we continue to focus on generating strong free cash flow and returning 60% to 80% of this free cash flow to shareholders, while also investing for growth across our world-class business.With that, I’ll turn the call back over to Jud.Jud Bailey Thanks, Lorenzo. Operator, let’s open the call for questions.Question-and-Answer Session Operator Thank you. [Operator Instructions] And our first question coming from the line of James West with Evercore ISI. Your line is open.James West Hey. Good morning, Lorenzo, Nancy and Jud.Lorenzo Simonelli Hey, James.James West Lorenzo, I wanted to start quickly on LNG. You talked a lot about it during your prepared remarks. I don’t want to belabor the point too much, but clearly, we’ve hit another momentum point here with a number of — a good number of awards coming through for you guys, but also a lot of LNG — FID, excuse me, either happening or about to happen.And so I was curious what you see over the next couple of months as kind of timing and cadence? I know these things are hard to call exactly, but it seems like we kind of pulled forward here. And then as we think out further in the out years, what you see on the two to five-year type of horizon?Lorenzo Simonelli [Technical Difficulty] near term and also the long-term prospects for natural gas and LNG. And I think you’ve seen some of the comments made by the G7 and others that natural gas and LNG has a role to play, not just as a transition, but as a destination fuel. So even though 2022 saw the pace of FIDs slowed down somewhat because of the high interest rates and also the inflation, the customer conversations have continued.And I’m very pleased that we were able to book the Qatar NFS expansion, also Sempra Port Arthur and also some smaller projects in Asia Pacific and West Africa during the course of the first quarter. And there’s still several more projects that we’re tracking for FID this year. You’ve seen some of the external press around Rio Grande and what they’re expecting from the Fast, et cetera. And so we remain confident that this year, we’ll see between 65 MTPA to 115 MTPA of FIDs in ’23.And in terms of pipeline of opportunities, they continue to grow as well. I think a good example is Cheniere’s 20 MTPA expansion that they’ve communicated at Sabine Pass. And so we’re seeing a number of also International projects. So based on what we see today, there’s a reasonable expectation that LNG FIDs in ’24 could be approaching the same FID levels we see in 2023. Still early call, but there are a number of projects that are moving towards that.And then it continues in ’25 and ’26, we also see a set of opportunities improving and with the potential for FID ranges between 30 to 60 MTPA each year. So again, the market is very active at the moment, and we like the position that we have and helping our customers.James West Fair enough. Okay. Got it. And then on the new energy side, impressive orders this quarter of $300 million, especially compared to $400 million for all of last year. Could you maybe talk to some of the trends you’re seeing in those businesses? It’s just a function of, okay, we’ve got the various — the IRA, the repower EU, all these kind of government programs coming through. And so it’s kind of adding some firepower to the market or is it just the natural timing you see when guys are ramping for the transition?Lorenzo Simonelli James, I think we are seeing the benefits from some of the legislation, the Inflation Reduction Act that we’ve discussed before had the potential to pull forward some of this activity. And I’d say, we’re very pleased with our progress on the new energy orders. I mean, in the first quarter, you said it, we booked $300 million of orders. A large portion of that $250 million were in IET, large orders around CCUS and Latin America, CO2 compression for multiple FPSOs, two hydrogen awards in North America.So I think it’s fair to say that we anticipate that at least in 2023, we should exceed the $400 million guidance we gave. Again, we’re looking at the pipeline of opportunities. And over the course of the next three to four years, we think that the energy — new energy content should be around 10% of our Gas Tech orders.And we’ve stated previously that we believe that by the end of this decade, new energy orders could be in the range of $6 billion to $7 billion and that would imply about 10% of our Gas Tech orders could accelerate over the course of the last half of the decade. So the overall direction is positive. I think it’s in line with what we’ve been saying. We have seen some acceleration. I feel good about our positioning, and also the product capability we have here.James West Got it. Thanks, Lorenzo.Operator Thank you. One moment for next question. And our next question coming from the line of Arun Jayaram from JPM Chase. Your line is open.Arun Jayaram Yeah. Good morning. Lorenzo, I was wondering, if you could provide a little bit more color on what you’re seeing in terms of IET orders. You expressed, I believe, confidence now at the upper end of the range and perhaps achieving the $10.5 billion to $11.5 billion order guide, but what is driving the potential upside?Lorenzo Simonelli Yeah. Sure, Arun. And let’s feel good about IET. And again, we indicated that we should be at the upper end of the guidance range. And you heard some of the comments around LNG, the activity we’re seeing there. Also some of the new energy coming through from an orders perspective. So those are elements that clearly help us. We still expect the offshore production to be down after a very strong year in 2022 with the FPSOs. But overall, again, positioning for the upper end of the guide here.Arun Jayaram Great. My next question, one of the sources of upside within OFSE was SSPS. I was wondering, Lorenzo, if you could provide maybe some details on some of the self-help initiatives? I know last quarter, you talked about rationalizing some of the capacity. But what are you seeing in terms of the revenue opportunities, synergies, as you’ve combined OFS with OFE?Lorenzo Simonelli Yeah, definitely. And look, we’ve been indicating that we wanted to rationalize some of our capacity. And as you look at SSPS, we’ve taken several steps also last — at the end of last year and beginning of this year to really take out some of our excess capacity on the subsea trees. We’ve also been rationalizing capacity in Asia, Latin America, outsourcing some of the basic machining that we’ve typically done in the U.K.And now we’re looking also at some of the facilities for SPC consolidating those in the Middle East, which is our primary market for the business. So we think that on the cost-side, we’re taking the appropriate actions, and this will be part of the broader $150 million and on top of that relative to some of these actions we’re taking OFSE (ph) as we go forward.So on the actual offshore market, again, we’ve seen some strong momentum. You saw our orders. And again, the highest order rate from a five-year period for the business, and we’re seeing good traction in flexibles. So our market momentum is positive at this stage, and we see that continuing also in 2024.Operator Thank you. One moment for next question. And our next question coming from the line of Chase Mulvehill from — with Bank of America. Your line is open.Chase Mulvehill Hey. Good morning, everyone.Lorenzo Simonelli Hi, Chase.Chase Mulvehill Hi, Lorenzo. I guess a first question to you. Back at your annual meeting, you announced a few new digital offerings which included Leucipa in the OFSE segment encoded in the IET segment. So could you speak to how these differentiated digital offerings actually can help you accelerate your digital strategy and how they complement your current digital solutions offering?Lorenzo Simonelli Definitely, Chase. And look, I was with a customer yesterday and actually reviewing the opportunity of Leucipa on the OFSE side. And as you know, Leucipa is a cloud-based automated fuel production software solution, really designed to help oil and gas operators proactively manage increased production and reduce carbon emissions. So we’re pleased to have Pan American Energy Corp, a leading company in Argentina, as a launch customer and actively talking to other customers also here in North America.We also announced a collaboration with Corva and have a minority investment to improve efficiency in rig operations through analytics, real-time data and visualization. So I’d say we’re at the early stages of really being able to provide that suite of capabilities and good customer engagement.On the IET side, you mentioned it correctly, Cordant. Cordant is an integrated suite of solutions really supporting our industrial asset performance management and process optimization. It builds on the broad and established rotating equipment, sensors, valves, pump gears and inspection service domain we have within the space.And Cordant is available today through a modular approach and pleased that we announced the collaboration with BP to further define and develop Cordant and BP is going to be deploying 1 PM in select locations across the Gulf of Mexico production assets, where we have a large installed base of rotating equipment and also associated digital services.In addition, in the first quarter, we won an important contract with a fertilizer customer. And again, the scope of work includes artificial intelligence, machine learning, predictive analytics, and it’s really going to be able to help on the OEM physics-based analytics to improve their capability and reaching their production targets. So it’s multimillion dollar order, which we’re very pleased about and seeing good traction across the digital landscape with the solutions and suites that we have.Chase Mulvehill Okay. Awesome. Appreciate the color there. A follow-up maybe for Nancy. You mentioned line of sight of exceeding the $150 million of cost-outs. And I know you plan to kind of have all the work completed by the end of 2Q. So maybe it’s a little bit early to ask, but can we — can you maybe spend a minute or 2 and kind of give us some color around where you see the most opportunity for incremental cost savings across Baker?Nancy Buese Yes. Happy too. So we really started this whole project back in September ’22, and we’ve just identified so many ways to think about cost-outs of the organization and really a more efficient operating structure overall. And I would note, in the first quarter, we recognized about $15 million of those cost-outs. So we’re starting to see that just simply from the movement of four product companies into the two business segments.So when we think about the cost-outs at the moment, there’s — I think about it in two buckets. The first is, and it’s probably two-thirds of the first 150, that’s really just simplification and the organization, streamlining the operations. And that allows us to kind of take out some layers, smaller functionality, removal of duplication and just leaner overall at corporate and then also pushing us to what we call a strategically managed business structure and putting the activities closer to the business. I think there’s more we can do there as we think about that first bucket of cost-outs.The second is really cost controls and thinking about optimizing all of our support functions and thinking about how we spend our money with technology, external expenses, third-party services and the like. So I think there’s opportunities in both ways, and we’re going to continue to methodically work through all of it and thinking about how do we centralize activities that need to be at the core, how do we put the right things at the business and then really standardizing some of our key operating processes.So we do think that’s going to generate additional savings. So we need to get through this first bit of the cost-out effort, and then we will come back to you with a better signal. So we think there’s more there, but it’s probably too soon to call. And then you heard it right is we’re working hard to get all this done by Q2, so we can start realizing the savings run rates by the end of 2023.Chase Mulvehill Okay. Perfect. Thanks for the color. I’ll turn it back over.Operator Thank you. One moment for next question. And our next question coming from the line of Scott Gruber with Citi. Your line is open.Scott Gruber Yes. Good morning. Questions on the outlook for your North American business within OFSE. Lorenzo, you lowered your year-on-year D&C spend forecast which looks appropriate in light of the onshore drilling activity trending down here and it’s likely down, exit to exit. But oil production is still growing in the U.S. It’s still growing in Canada, which should drive chemicals growth. And I believe Gulf of Mexico revenues should still be up for Baker this year. I think you can still hold the $1 billion, or so revenue run rate through year-end, even if the land rig count onshore is down?Lorenzo Simonelli Yeah, Scott. Look, I think there’s certainly a lot of moving parts in the North America market at the moment. And coming into the year, we expected some privates to drop oil rigs early in the year, but that would be gradually offset over the course of the year by the public E&Ps and some majors adding some rigs. The natural gas pricing has been weaker. And so we would expect 30 to 40 rigs also additional to be dropped over the course of 2023.On the oil side, though, we don’t see much risk to the oil activity. If we stay at around $80, we should be able to stay level on the rigs and I don’t think we’ll see much impact unless we start to go below the $70. And then also for the public E&Ps, we don’t see much risk to their activity levels until we get to around $60 or below. So a lot that we’re continuing to monitor. But to your point, I think it’s fair to say that we should be able to maintain that run rate.Scott Gruber Good. And then a question on the Middle East, following the OPEC production quota (ph), are you seeing or do you expect to see any impact on your chemical or less sales in the Middle East this year?Lorenzo Simonelli Yeah, Scott. Right now, we see no major change really limited in our international outlook and expect international spending to increase in the mid-double-digit range. Again, as you think about the Middle East, the GCC countries, drilling plans for this year are pretty well set along with the procurement of materials and labor. I wouldn’t — I’d be surprised if there was a material deviation from current plans. However, looking into 2024, we’ll have to monitor the health of the global economy and also the oil demand.And if OPEC+ cuts wind up being deeper or lasting longer, it could impact the growth trajectory to some degree in 2024, but it’s too early to say. And I think you’ve got to remember that a lot of these customers are looking at production capacity over the long term increasing and have been dedicated to that on the natural gas development. So we’ll monitor the situation, but at this time, limited impact.Scott Gruber Okay. Appreciate the color. Thank you.Operator Thank you. One moment please for next question. And our next question coming from the line of Luke Lemoine with Piper Sandler. Your line is open.Luke Lemoine Hey. Good morning. Lorenzo, could you talk a little more about your agreement with HIF for Direct Air Capture with your Mosaic business? And maybe what the time line could be and what the opportunity set you see for Mosaic over the next few years?Lorenzo Simonelli Yeah, definitely, Luke. And look, as we’ve mentioned previously, partnerships are critical to delivering the energy transition. So there’s no one company or technology that’s going to solve the problem. And partnerships like this that we have with HIF, we think are crucial to be able to demonstrate and showcase the technology. So HIF is a great case where they’re developing projects to produce e-fuels by blending green hydrogen and CO2. We, again, are being with them alongside others such as Porsche and also other investments.We’re going to be providing them a number of compressors, turbines, pumps, valves and other technology and per facility that’s good content for us. We announced during the course of the quarter and intend to cooperate on the development of the direct air capture. And if you look at Mosaic, it’s a company that has specialized in metal organic frameworks [indiscernible], which have the potential to capture low concentration CO2.So what we’re going to be doing is demonstrating that with a prototype with HIF in 2024 and again, enabling them to start to deploy their e-fuel projects. So feel good about the partnership here and also the opportunity going forward. It’s a game changer. Again, if you look at e-fuels because they utilize the same infrastructure that’s existing today. And so from an investment level, it can be a nice substitution with a lower carbon footprint.Luke Lemoine All right. Great. Thanks, Lorenzo.Operator Thank you. One moment for next question. And our next question coming from the line of Marc Bianchi with Cowen. Your line is open.Marc Bianchi Hey. Thank you. First question relates to Gas Tech Services. Revenue grew year-over-year here in first quarter, which I think is pretty impressive considering the comparison includes benefit from Russia last year. Maybe you could talk to the year-over-year outlook as we progress through the year? I guess you still have a difficult comparison with Russia in the second quarter, but then that goes away as we get into the back half. Just talk about what we should expect there if you could?Nancy Buese Yeah. We’re seeing really good growth in the services side of the business, and we do anticipate solid recovery. I would say, we’re cautiously optimistic. One of the limiters still is the supply chain recovery, especially on the aviation side. So as we think about the inputs for services, that’s still in its recovery phase. But yeah, we’re very supportive of where services is going and we anticipate it continuing to move up over the year.Marc Bianchi Okay. And presumably, we should see that year-over-year growth rate improve as we get into the back half?Nancy Buese Yeah.Marc Bianchi Yeah. Okay. Nancy, sticking with you, the share repurchase was — there wasn’t any in the first quarter. You’re talking about 60%, 80% return of free cash flow in the year. I’m just curious, is it more about price sensitivity on the stock price? Are there M&A that is being contemplated? Is it just a matter of when to hold on to some more cash because of what’s going on in the banking system? Maybe you could just sort of talk to those drivers?Nancy Buese Yeah, absolutely, and you have it right. We do still plan to buy back shares at some point this year, and that’s all in line with our priority of returning 60% to 80% of our free cash flow back to shareholders. But we have paused for the moment. And you’re right, the markets are a little choppy right now. So it’s a good time to just be cautious. We’ve also engaged in quite a bit of M&A activity over the last few quarters.So we’re letting that settle even with just – most of that’s completed with the closing of Altus in April, but it is a good time for us to let the organization settle and then as you know, our free cash flow is very much back-half weighted. So we’re just kind of restoring our cash levels at the moment, letting that build throughout the course of the year, but we do intend to resume buybacks at some point later this year.Marc Bianchi Thank you so much.Operator Thank you. One moment for next question. And our next question coming from the line of David Anderson with Barclays. Your line is open.David Anderson Good morning, Lorenzo.Lorenzo Simonelli Hey, Dave.David Anderson I was just shifting back to the Middle East. Hi. Good morning. I was wondering, if you could talk about Abu Dhabi in specifically. You have a very unique position there with ADNOC Drilling. I believe you’ve been on your integrated services, you’re on something like 40 rigs right now with ADNOC Drilling.I was wondering how that’s progressing. Maybe kind of talk about some of the work that you’re pulling in there? And where that number is going to — we just saw an announcement with at Upper Zack (ph) was just awarded all IBS work. So maybe can you just talk about that business in particular and how that’s developing and where you see that going?Lorenzo Simonelli Dave, I should be asking you the question considering you were just out there in the Middle East. But look, we feel very good about the relationship that we have with the ADNOC Drilling. And as you know, it started several years ago, also our position within UAE.And I’d say that with the announcements that also ADNOC has made relative to the commitment to increasing production, we see positive momentum with the — also ADNOC Drilling, and we have a specific technologies that are appropriate that allow the time to drill to come down and drive efficiencies and productivity. So I’d say, we are optimistic about the future growth and obviously participating with ADNOC Drilling.David Anderson Do you need to bring in more equipment in there? I mean, I guess, capacity is going to be one of the things we’re going to be talking about quite a bit going forward. But just in terms of that business itself, do you need to pull-in more? Do you need to build more? Do you have enough kind of on hand?Lorenzo Simonelli Dave, with the partnership we have, we look on an annual basis at what is required from a tool perspective. And one of the key ways in which we drive efficiency and also we drive better performance is by having these discussions early. So rest assured, without not drilling, we’re tied to the hip. So anything that they got planned, we already — we’re discussing 12 months ago to make sure that we were ready for them.David Anderson And then just looking at bigger picture at this region. Middle East Asia was essentially flat in 4Q, I’m sorry, in the first quarter. I’m assuming that weakness was because of product sales that weren’t recurring from the fourth quarter. But can you just talk about how revenue kind of — should progress throughout the rest of the year in this part of the market make sure we kind of stay at this sort of 20% year-on-year growth clip throughout the year? Should that be the expectation here?Lorenzo Simonelli Yeah. You’re correct in your assessment relative to the difference between fourth quarter and first quarter. At the fourth quarter, you do traditionally have direct tool sale to take place to take place in the first quarter. As you look forward, again, we’re continuing to see that there’s good international growth within Southeast Asia as well, and we should continue to see that progression.David Anderson Okay. Thanks, Lorenzo.Operator Thank you. One moment for next question. And our next question coming from the line of Stephen Gengaro with Stifel. Your line is open.Stephen Gengaro Thanks. Good morning, everybody. Can you talk — I guess, two things as it relates to OFSE. Can you talk about just current pricing trends internationally? And then maybe as a follow-up, when you think about the 20% EBITDA margin target, how much of that is price versus sort of activity and self-help, et cetera.?Lorenzo Simonelli Yeah. Just in terms of the pricing environment, look, as you look at North America, it’s starting to level off, but we expect our pricing for our technology in North America to remain firm. Internationally, we’re gaining good traction given the strong activity levels and some of the tightness in the market. That being said, it will take some time to flow through from an earnings standpoint. And as you look at the construction of the 20%, we’ve always said that it’s a combination of some of the pricing but a lot of self-help as well.Stephen Gengaro Thanks. And when you think about production chemicals, I think Nancy mentioned getting back to sort of historical levels by the end of the year. Can you just give us kind of an update on the traction there? And are those historical levels accretive to overall service margins? I think they are, but just checking.Lorenzo Simonelli Yeah, definitely. And I think we continue to see positive developments in our Chemicals business, improving margins. Chemical pricing has been favorable. Input prices have stabilized and we improved parts of our supply chain. As you know, we’ve got a new facility that ramped up in Singapore. We’ve got another facility that ramps up in KSA later on this year.As you look at margins in the first quarter, they increased sequentially and are now up 500 basis points year-over-year. We’re still though 200 basis points to 300 basis points below the long-term average for this business. So we’ve still got some work to do to get back to the prior levels, but we expect that to be more normalized in the second half of 2023.Stephen Gengaro Great. Thank you for the color.Operator Thank you. One moment for our next question. And our next question coming from the line of Roger Read with Wells Fargo. Your line is open.Roger Read Yeah. Thank you. Good morning. I think most of the stuff has been hit. I just have one question. It was a topic at the event back at the end of January on servicing and the maintenance for the LNG facilities that are already out there. I was just wondering if you’ve seen any change in that, any improvement in that as we think about kind of the impact on margins later I guess, really Q2 onwards for this year?Lorenzo Simonelli Yeah, Roger. And as we laid out also at the beginning of the year relative to the maintenance and the contractual service agreements we have, it’s pretty much trending the way we anticipated. And so no change from what we said in January. Again, as you know, there has been some pushout from 2022 and we’ll anticipate that, that starts to catch up in ‘23 and ‘24.Roger Read That’s it from me. Thank you.Operator Thank you. And that was our last question. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all disconnect.