“2023 will be the year to solidify our transformation and prove our strategic roadmap is well laid out for long-term growth”
Chairman, President, and Chief Executive Officer
Dear fellow shareholders,
2022 was a year of progress for the strategic transformation of Baker Hughes as we continue to focus on building a differentiated energy technology company. With our integrated portfolio of energy solutions plus new technology and digital offerings that serve a wider industrial and New Energy base, we are uniquely positioned to capitalize on oil and gas commodity tailwinds, as well as the accelerating momentum and structural growth of the energy transition.
During the year, we navigated a complex energy market and macro environment, improved performance in the second half of the year, and took meaningful steps toward simplifying our organization to ultimately deliver more long-term value to our shareholders and achieve our purpose of taking energy forward.
The macro environment
Baker Hughes worked to navigate the lingering pandemic-based supply chain volatility throughout the year, as well as new inflationary pressures and other impacts triggered by the geopolitics surrounding Russia’s invasion of Ukraine. We made the strategic decision to exit our Russia operations in 2022, which included the sale of our Russian oilfield services business to local management — a resolution we believe was the responsible financial and operational move for the Company, as well as for the safety and integrity of our impacted employees.
In the near term, we remain constructive on the outlook for oil and gas, and we believe underlying fundamentals remain supportive of a multi-year upturn in global upstream spending. With years of under-nvestment now amplified by recent geopolitical factors, global spare capacity for oil and gas has deteriorated and will likely require years of investment growth to meet forecasted demand. We also believe that the U.S. Inflation Reduction Act, upcoming legislation in Europe, and investments in the Middle East will support significant growth in New Energy in 2023 and beyond.
Recent world events have re-focused the world’s policymakers on better balancing the energy trilemma — a three-way push-pull of energy security, sustainability, and affordability. The heightened focus on energy security and affordability is driving near-term capital spending in oil and gas production. At the same time, the continued focus on solving climate change and Environmental, Social, and Governance (ESG) leadership creates an attractive environment for investment in energy-sustainability solutions.
To balance the energy trilemma over the longer term, we believe natural gas and LNG will continue to play pivotal roles in the energy mix, requiring significant investment in these areas. We also believe the new policy directions seen in 2022 will continue to solidify over the next five to ten years, helping to spur significant increases in New Energy development.
Baker Hughes is in a prime position to benefit from this evolving landscape without compromising on our net-zero emissions ambitions or our purpose to deliver cleaner, safer, and more efficient energy. Our unique portfolio of assets, energy transition technologies, and long-term strategy has allowed us to maintain a strong balance sheet and invest in differentiated technologies while we transform our operations to better deliver for our customers and enhance shareholder value.
increase in adjusted EBITDA*
in free cash flow*
Technology and innovation
in research and development
in new energy transition orders
ESG rating by MSCI
reduction in Scope 1 & 2 GHG emissions**
HSE perfect days
About Baker Hughes
countries where we conduct business
*Adjusted EBITDA and free cash flow are non-GAAP measures. Please refer to the Baker Hughes Reconciliation of GAAP to non-GAAP Financial Measures section at the end of this Annual Report.
** 2021 actual compared to 2019 base year.
Our 2022 performance
I remain proud of our team’s resilience and adaptability to ensure that Baker Hughes achieved strong results during another year of volatility while restructuring our operations to benefit our customers and shareholders. In 2022, Baker Hughes grew orders, revenues and margins compared to 2021. We booked $26.8 billion in orders, increased adjusted EBITDA by 11%, and continued generating strong free cash flow of $1.1 billion.
Beginning in the fourth quarter of 2022, we re-segmented the Company into two business segments, Oilfield Services & Equipment (OFSE) and Industrial & Energy Technology (IET), as detailed later in this letter. Full-year results are stated using the new segment structure.
OFSE — composed of our former Oilfield Services (OFS) and Oilfield Equipment (OFE) segments — continued to benefit from the upturn in global upstream spending in 2022, and the segment’s strong geographic diversity supported growth across multiple regions. Since the merger in 2017, OFSE has substantially narrowed the EBITDA margin rate gap with our closest peers, and in 2022, the business continued to do so by improving its commercial intensity, internal processes, and operating efficiency.
In OFSE, we are pleased with the margin performance improvement in 2022. Over the course of the year, the segment has benefitted from a shift in favor of international and offshore markets while supply chain constraints continue to ease for product lines such as Chemicals. OFSE’s EBITDA margin rate reached 17.1% in the fourth quarter, reflecting a strong track record of execution and growth for the Well Construction and Production Solutions product lines, including our drilling portfolio.
While we were pleased with the operational and financial progress of OFSE in 2022, there is more work to do in raising EBITDA margin rates by improving the cost structure for the Subsea & Surface Pressure Systems (SSPS) product line (previously known as Oilfield Equipment), as well as improving efficiencies and right-sizing operations in underperforming regions.
IET, composed of our former Turbomachinery & Process Solutions (TPS) and Digital Solutions (DS) segments, saw attractive growth in 2022, primarily driven by the continuously favorable LNG cycle and emerging New Energy markets, including hydrogen and carbon capture, utilization and storage (CCUS). IET achieved record orders in 2022, and the business segment’s broad industrial portfolio continued to benefit from our Climate Technology Solutions and Industrial Asset Management organizations, which span IET’s product lines and utilize core technologies from the portfolio to offer end-to-end solutions for New Energy and digital opportunities.
As we enter 2023, IET has a record backlog of $25 billion and a robust pipeline of new order opportunities in LNG, Onshore/Offshore, and New Energy. We are well positioned to execute on this backlog to help drive significant revenue growth in 2023 and 2024.
Both OFSE and IET supported outstanding New Energy orders growth in 2022, with over $400 million in orders versus 2021, representing a 50+% year-over-year increase. Encouragingly, we began to see framework agreements and memorandums of understanding (MOUs) from the past several years convert into orders as customers increase investment in their energy transition journeys. The most notable example was the Company’s collaboration with Air Products, which was first signed in 2021 and has resulted in over $150 million in New Energy orders in 2022.
Baker Hughes remained committed to delivering increased shareholder value and maintaining a flexible capital allocation strategy in 2022. We returned $1.6 billion to shareholders through dividends and share buybacks, and we increased our dividend to $0.19 in the fourth quarter. Our strong balance sheet and free cash flow continue to allow us to deliver strong shareholder returns while we target tuck-in acquisitions, as well as strategic technology investments in the future.
* Adjusted EBITDA, free cash flow, and EBITDA margin rate are non-GAAP measures. Please refer to the Baker Hughes Reconciliation of GAAP to non-GAAP Financial Measures section at the end of this Annual Report.
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Delivering Differentiated Value
Baker Hughes is committed to being a differentiated energy technology company, playing a leading role in solving the energy trilemma and enabling the energy transition. We believe our differentiation will continue to be in our leadership through technology, digital, sustainability, and commercial capabilities, allowing us to offer an unmatched portfolio of solutions to energy and industrial customers.
2023 is the year to solidify our transformation for long-term growth. We will be hyper-focused on improving operational performance, and we will directly manage remaining headwinds. At the same time, we will continue to capitalize on the current multi-year upstream spending cycle, the next wave of LNG investment, and the growing demand for sustainability and low-carbon solutions to support the energy transition.
We are heavily committed to creating shareholder value. We will continue to evaluate our portfolio and invest in New Energy and industrial technologies in a disciplined fashion to position Baker Hughes for a future that both rewards our shareholders through best-in-class free cash flow and capital returns. It is clear to me our strategy is helping to deliver a sustainable future for people and the planet, and we are doing so in a fiscally and socially responsible manner.
I look ahead with confidence to another year of taking energy forward.
Chairman, President, and Chief Executive Officer