BKR Financial Analysis

Analysis Date: 2/3/2025

Business Model

Baker Hughes operates in two segments: Oilfield Services & Equipment (OFSE) and Industrial & Energy Technology (IET). OFSE provides products and services for drilling, evaluation, completion, production, and intervention of oil and gas wells. IET provides turbomachinery and process solutions for the energy and industrial sectors, including gas technology equipment, gas technology services, industrial products, industrial solutions and climate technology solutions.

Revenue Sources

• Oilfield Services & Equipment (OFSE): Well Construction, Completions, Intervention, and Measurements, Production Solutions, Subsea & Surface Pressure Systems
• Industrial & Energy Technology (IET): Gas Technology Equipment, Gas Technology Services, Industrial Products, Industrial Solutions, Climate Technology Solutions

Income Statement Analysis

• Revenue increased by 6.6% sequentially, indicating positive business momentum. (Pro)
• Cost of revenue increased by 8.7% sequentially, outpacing revenue growth, which could pressure gross margins. (Con)
• Operating income decreased by 28.5% sequentially, despite revenue growth, suggesting increased operating expenses or lower efficiency. (Con)
• Net income attributable to Baker Hughes Company increased significantly by 53.9% sequentially, primarily driven by a large income tax benefit. (Pro, but driven by non-operating items)

Balance Sheet Analysis

• Cash and cash equivalents increased significantly by 27.1%, indicating improved liquidity. (Pro)
• Inventories decreased slightly by 2.7%, potentially indicating better inventory management. (Pro)
• Short-term debt decreased significantly by 64.2%, improving the short-term financial health. (Pro)
• Total Equity increased by 9.9%, reflecting overall growth and profitability. (Pro)
• Goodwill decreased slightly by 0.96%, which is not a major concern. (Neutral)
• Total liabilities remained relatively stable with a minor increase of 0.4%. (Neutral)

Capital Allocation

Baker Hughes is committed to returning 60% to 80% of free cash flow to shareholders, primarily through dividends and opportunistic share repurchases. The company announced a 10% increase in quarterly dividends. Baker Hughes also focuses on disciplined portfolio management, technology investment, and maintaining a strong balance sheet. Capital is reinvested in R&D, particularly in IET and new energy technologies, and for strategic growth opportunities. In 2024, $484 million was spent on share repurchases and dividends were increased, reflecting a shareholder-friendly capital allocation strategy. M&A activity was quiet in 2024, with a focus on tuck-in acquisitions and technology bets in new energy to complement existing technology leadership.

Management Commentary

Record quarterly & annual revenue and adjusted measures of EPS, EBITDA and EBITDA margins

Strong IET orders; new energy orders of $1.3B

Significant margin expansion driven by strategy execution

Record free cash flow in 2024

Global upstream capex spend: expect slightly lower year-over-year global upstream capex in 2025. NAM down mid-single-digits & international flat-to-down slightly year-over-year

Oil cycle maturing

Overall Sentiment: Positive to cautiously optimistic. Management is very positive about record results and margin expansion, especially in IET. They acknowledge a maturing oil cycle and anticipate slight decrease in upstream spending in 2025, particularly in North America, but emphasize strength in gas and LNG sectors and new energy orders. Overall tone suggests confidence in continued growth and profitability, especially in IET, despite some headwinds in OFSE due to market conditions.

Recommendation

Rating: Buy

Reason for Rating: Based on strong financial performance in 2024, record free cash flow, significant margin improvements, and positive outlook for IET segment, a 'Buy' recommendation is warranted.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/3/2025, 5:42:14 AM