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Lorenzo Simonelli - Baker Hughes
Chairman's Letter

Dear fellow shareholders,

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"At Baker Hughes, we are committed to playing a leading role in the future of energy. We believe that a cleaner environment is better for business and better for the world."

- Lorenzo Simonelli
  Chairman and
  Chief Executive Officer



2019 was a pivotal year for Baker Hughes as we accelerated our separation from GE, launched a new company brand, and repositioned the company for the future. While the broader energy markets were challenged, we delivered on our priorities with strong financial results for the year.

Throughout the year, the focus on the energy transition increased significantly, and it is clear that the threat of climate change and the resulting pressure on capital markets will continue to influence the trajectory of our industry.

Looking forward, it is not just the energy industry that is changing. The convergence of technology and data analytics is transforming the way the world works—from how we communicate and interact, to how we power societies and develop and deliver products and services. These changes are happening faster than ever.

The rate of change requires a fundamentally new approach to the industry. The demand for energy globally is growing, and oil and gas will remain critical to the global energy mix for the long term. However the onus is on us in the industry to make it cleaner, more productive, and more profitable, in a world of competing energy sources and changing societal demands. We believe those who can adapt and use change to their advantage will increasingly separate themselves from those who will be left behind.

At Baker Hughes, we are committed to playing a leading role in the future of energy. We believe that a cleaner environment is better for business and better for the world. In 2019, we made it a core component of who we are, how we work, and how we approach the future.

We are an energy technology company, and our purpose is to take energy forward–making it safer, cleaner, and more efficient for people and the planet. Our purpose aligns to our core strategy and values, and it underpins our financial objectives. We have laid the foundation to deliver higher-productivity solutions from our integrated portfolio for our customers, to develop rewarding careers for our employees, and to achieve strong free cash flow and industry-leading returns for our shareholders.



2019: year in review

Our performance

2019 was a year of solid performance for Baker Hughes despite a challenging energy market. During the year, we delivered consistently on our priorities of growth, margin improvement, and free cash flow conversion.

We delivered strong orders and revenue growth, led by double-digit, year-over-year orders growth in Turbomachinery & Process Solutions (TPS) and Oilfield Equipment (OFE). TPS continued its leadership in liquefied natural gas (LNG), securing contracts for every major LNG project that was sanctioned between the fourth quarter of 2018 through 2019. OFE maintained its market position, and secured a number of important subsea production awards globally. Oilfield Services (OFS) continued to navigate a challenging market in North America, while driving strong growth internationally and outperforming peers. In Digital Solutions (DS), we continued to gain traction with customers across oil and gas and other end-markets, such as aviation, automotive, and consumer electronics.

We grew total company adjusted operating income margins, with higher margins in TPS, OFS, and OFE, driven by strong execution on our internal productivity initiatives.

We delivered strong cash flow in 2019, driven by improvements in working capital processes and disciplined capital allocation. In addition, we returned $1 billion to shareholders through dividends and buybacks.

Overall, our 2019 results were in line with the framework we outlined at the beginning of the year. We remain focused on improving operational execution, expanding margins, generating strong cash flow, and driving returns in 2020.

2019 financial highlights

$2.1B

in 2019 cash flows from
operating activities

$1.2B

in 2019 free cash flow*

$27B

in 2019 orders

161

Perfect HSE Days

Introduced Our Way, the new Baker Hughes code of conduct

* Free cash flow is a non-GAAP measure. Please refer to the GAAP to non-GAAP measures table at the end of this document for a reconciliation.



The new Baker Hughes

In 2019, we accelerated our separation efforts from GE, launched our new company brand, and positioned ourselves to compete more effectively in a changing and dynamic marketplace.

In September 2019, GE sold down its stake in Baker Hughes to below 50%, which resulted in its board representation declining from five seats to one. We successfully negotiated agreements with GE to maintain continuity of our operations through this period of separation.

Some of the most visible changes from the separation included a new company name and stock ticker (NYSE: BKR). In addition, we introduced a new brand positioning as an energy technology company, which better reflects our portfolio–from oilfield, to turbomachinery, to digital solutions—while giving us room to grow in the future, and to lead the energy transition.

Positioning our portfolio

In just two years since the formation of our company, we have made solid progress on creating a new culture and identity, achieving our integration milestones, and delivering on our financial objectives, while continuing to improve our operations and execution.

In 2019, we began to evolve our portfolio. Our approach is focused on developing integrated offerings from across our portfolio to lead the energy transition and growing in areas that are highly differentiated and less fragmented, which will be a critical enabler to generating higher returns and strong free cash flow.

During the year, we continued to divest non-core assets that did not meet our threshold for returns. We formed new digital collaborations with C3.ai and Microsoft who are leaders in artificial intelligence and cloud computing. We worked with customers and partners to build local capacity in important markets and in specialized technical areas, including our non-metallics partnership with Saudi Aramco.

We see opportunities for growth along the gas value chain with our TPS segment, in the downstream space with our DS segment, and we will strengthen our industrial and chemicals presence across our business. Importantly, we believe this can largely be accomplished with our current technology and services, which has demonstrated the ability to achieve strategic initiatives organically.

I want to thank all our talented, hard-working and dedicated employees. Without them, none of the progress we achieved in 2019 would have been possible.



Chairman and CEO Lorenzo Simonelli said:

 

“At Baker Hughes, we are uniquely positioned to compete and win in this environment. We have a unique portfolio that spans the energy and industrial value chain, unmatched technical capabilities, and a leading low-carbon offering.”

- Lorenzo Simonelli
  Chairman and Chief Executive Officer



Energy forward

Our view on the future

As we execute on our operational, financial, and strategic goals, we are also mindful of the ever-changing macro backdrop across energy markets. In the short term, the macro environment is slowly improving, but we continue to expect an adequately supplied oil market under most economic scenarios. This should result in range-bound oil prices for the foreseeable future.

Over the next few decades, we believe demand growth for energy will continue. While renewables will grow as a share of the overall energy supply, we do not believe renewable sources will be able to fully and reliably meet the global energy demand given currently available technology and its small footprint today. We believe natural gas will play an increasingly important role as the key transition fuel, or perhaps even a destination fuel, growing at more than twice the pace of oil over the next 10 years. We also believe that LNG demand growth will be even higher at an annual rate of four to five percent.

Additionally, digital transformation remains a key imperative for the industry as our customers continue to look to software and analytics to improve productivity, efficiency, and safety. We believe one of the biggest opportunities for true digital transformation is the adoption of artificial intelligence (AI). According to PWC’s 22nd Annual Global CEO Survey, more than 50% of oil and gas leaders plan to or have already adopted AI in their operations, and 80% say it will significantly change the way they do business in the next five years.*

* PWC's 22nd Annual Global CEO Survey is available here: https://www.pwc.com/gx/en/ceo-survey/2019/Theme-assets/reports/pwc-2019-ceo-survey-oil-and-gas-report.pdf

Our strategy

At Baker Hughes, we are uniquely positioned to compete and win in this environment. We have a unique portfolio, unmatched technical capabilities, and a leading low-carbon offering. We also have a solid strategy to guide us, focused on becoming more competitive today, while positioning us for the future. It requires focus and innovation in these three key areas:

Transforming our core through leading product companies

When we have the best product companies, we have strong building blocks and financial strength to invest in our future. We will continue improving day-to-day operations through supply chain efficiencies, increasing asset utilization, and lowering product costs, as well as digitizing internally. We are also improving productivity for customers through integrated offerings from across our portfolio, a more collaborative and holistic project approach, and through innovative commercial models and partnerships. Lastly, we will evolve our portfolio to position for the energy transition.

Leading with technology

We recognize that we are living in the era of the Fourth Industrial Revolution where strong technological capabilities enable the development of new products and business models, and transform operations. We are embracing advancements in connectivity and AI to strengthen our digital and technical capabilities and facilitate better, safer, cleaner, and more reliable operations for our customers. We are also leveraging advanced manufacturing techniques to transform our supply chain to lower costs and operational carbon emissions.

Enabling the energy transition

We are positioning the company to lead through the energy transition, and are deploying a number of high-efficiency, low-carbon solutions today to help our customers achieve their emissions-reduction targets. In addition, in January 2019 we made an industry-leading commitment to reduce emissions from our own operations to net-zero CO2 equivalent by 2050. We plan to grow along the gas value chain and emerging energy sectors, and we will continue to develop products and services to help the industry lower its carbon footprint, while reducing our own operational emissions.

Our responsibility

Our strategy is enabled by our purpose and culture, which are built on a strong set of values that guide our behavior. This year, we refreshed our values to provide a simple, memorable, and action-oriented way of expressing our culture. They are: grow, collaboratelead, and care.

responsibility

Our employees embrace and live these values every day, providing the foundation to deliver for our customers and shareholders for the future.

We are firmly committed to operating responsibly and with accountability to serve the best interests of our stakeholders and enhance the long-term economic value of the company. Our framework is built around people, planet, and principles. 

People. We foster a diverse and inclusive (D&I) environment that supports people and communities, and enables growth, collaboration, and innovation. In 2019, we launched our first global internal inclusion survey to help us strengthen our culture of inclusion and inform key elements of our 2020 D&I strategy. We also introduced a new learning curriculum, including 30 leadership development programs. In addition, we strengthened our succession planning process to ensure a robust executive leadership pipeline.

Planet. Reducing greenhouse gas emissions by collaborating with our customers, suppliers, and other stakeholders is embedded in our strategy. We set measurable goals and targets to improve performance and reduce our overall carbon footprint, and we have made strong progress to date. In our 2018 Corporate Responsibility report we reported a 34% reduction in operating emissions since 2012.

Principles. We are grounded on sound governance, effective policies and guidelines, and transparency. We incorporate health, safety, and environment (HSE) into everything we do, and, we strive to make every day one without injuries, accidents, illness, or harm to the environment. We call it the “Perfect HSE Day.” In 2019, we achieved 161 Perfect HSE Days, a five percent increase versus 2018. During the year, we also enhanced our culture of compliance, introducing Our Way, the new Baker Hughes code of conduct, and we continued extensive training on a variety of compliance topics.

We are positioned for the future

2019 represented another strong year of performance and an exciting new beginning for Baker Hughes. We made great progress toward our strategic and financial goals, delivering on the framework we outlined at the beginning of 2019. We achieved a major milestone in our separation from GE, and we launched a new brand that will position us for the future. We have a unique offering, a strong balance sheet, and a dedicated and talented team. We are an energy technology company, and we know what we need to do to perform in 2020 and the years ahead.

I want to thank our partners and customers for a successful 2019. I also want to express my deep gratitude to our shareholders, who have invested in us and in our future.

Here is to taking energy forward – together.

Sincerely,

lorenzo-simonelli-sig

Lorenzo Simonelli

Chairman and Chief Executive Officer



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