Baker Hughes’ hurdles foretell industry woes
Field service firms racing for net-zero may have ‘lost focus’
The oil industry around the globe is awash in money. With the price of crude at a 14-year high during the second quarter, producers, refiners and services companies made record amounts of money.
But there was at least one notable exception: Houston oil field services company Baker Hughes. The company, which provides workers and equipment to drillers, lost $839 million from April to June, while chief competitors Halliburton ($109 million profit) and Schlumberger ($959 million) enjoyed the fruits of high oil prices.
Baker Hughes’ difficulties are perhaps an early warning to an oil field services industry trying to find new focus as producers begin to embrace lower-carbon energy and seek equipment and services that will help them get there.
The world’s largest oil field services companies are making different bets on how fast the transition will come and how far it will go as they navigate the uncertainty of the evolving
oil industry. Baker Hughes’ rivals, Schlumberger and Halliburton, have continued to focus on drilling and production.
Baker Hughes, meanwhile, has moved more quickly toward the energy transitions, positioning itself as a technology company offering digital services, low- and noemissions equipment, and technology for emerging energy sources such as hydrogen.
“A lot of oil field services companies have lost focus,” said Vikas Mittal, marketing professor at Rice University’s Jones Graduate School of Business. “They want to be a technology company, they want to be a digital company, they want to be a socially responsible company, they want to be a net-zero company. The one thing they don’t want to be is a service company.”
Mittal said clients for oil field services want reliability — the security of knowing the company they hire can service the complex equipment involved in oil drilling.
“Their value proposition,” Mittal said, “is providing the right level of service.”
Instead of focusing on service, Mittal said companies are focusing too much on investors that want steady profits — and want companies to show they can keep up with the changing energy industry.
Running ahead
While Schlumberger and Halliburton have taken small steps into carbon capture and other new energy technologies, Baker Hughes has raced ahead.
Jud Bailey, vice president of investor relations at Baker Hughes, said it’s a strength of the company that they have businesses in traditional oil field services as well as technology used in slashing carbon and other digital services.
“We have a very unique portfolio,” Bailey said, “ranging from traditional oil field services and oil field equipment, to our turbomachinery and process solutions business — where we’re a market leader in compression and power generation, and we see a big market opportunity for us given our big market share in LNG — and the digital solutions, which is a kind of an industrial business.”
The turbomachinery business manufactures things like turbines, compressors and pumps used in oil and gas operations and other industries. It’s one of the businesses Baker Hughes absorbed in its 2017 merger with General Electric’s oil and gas business, and Baker Hughes retained the assets when GE started selling off its stake in the company the following year.
Then, in 2019, Baker Hughes launched its transformation aimed at becoming an energy technology company, changing its branding to reflect the company’s net-zero carbon goal. Though the entire industry took a hit in 2020 when drilling came to a near standstill during the pandemic, Baker Hughes said it invested in new energy technology when possible.
While the turbomachinery business sets Baker Hughes apart, as Bailey said, and provides entrance to the booming liquefied natural gas market, its operations in Russia exposed the company to paper losses. The second quarter loss, Simonelli said, was mostly due to charges and other effects related to those operations that were halted after the Kremlin ignited its war in Ukraine in February.
Revenue from the turbomachinery and process solutions business in the second quarter fell by about $160 million as Russian contracts were suspended. Meanwhile, computer chip shortages and difficulty getting electronic components impaired the company’s digital solutions business.
While the supply chain issues could continue to hamper Baker Hughes’ productivity, the company has announced it sold its oil field services business in Russia. The news came less than two weeks after the second quarter earnings release where Baker Hughes reported a $365 million charge related to suspending work in Russia.
Halliburton also halted activity in Russia, and Schlumberger paused new investment there, but Baker Hughes had the most exposure in the country, analysts said, which is why it took the biggest hit. Now that Baker Hughes has mostly shed its Russian operations, Schlumberger and Halliburton — along with investors — will likely be watching to see if the company’s aggressive move to low-emissions technology will lift profits and revenues in the coming quarters.
While the company’s transition continues, it will be bolstered by the flurry of liquefied natural gas, or LNG, projects coming online, experts say.
“They’re the market leader in server machinery equipment that’s used in LNG liquefaction facilities,” said James West, an analyst with Evercore ISI. “Of the 460 million metric tons per annum that’s installed today (of LNG facility capacity), they are on 420 million of that. So they’re the clear market leader – they will continue to be the market leader with this ramp up in LNG liquefaction.”
And, analysts say, Baker Hughes will likely remain one of the major oil field services players for the foreseeable future. While it might not overtake Schlumberger as the No. 1 provider, it will likely continue to compete with Halliburton for the second spot.
Mittal at Rice said the company that puts customer service above all else will rise to the top — even if a unique portfolio with increased technology and digital offerings woos investors.
“Companies cannot thrive by pleasing the investors,” Mittal said. “Companies thrive when they satisfy customers, and from satisfied customers you make more money because they are loyal to you, they give you more sales, they stay with you — and that cash flow is what pleases investors, but the cycle is that cash flow comes from customers.”