Baker Hughes on Monday said it expects overall annual spending by oil and gas producers to decline modestly this year, a pattern the company attributed to a risk-averse stance among customers amid heightened geopolitical tensions in the Middle East.
Management said growth in specific regions - notably Latin America, offshore Africa and North America land - should partially counterbalance lower capital outlays in Europe and the Middle East. The company highlighted Brazil and Mexico as primary drivers of Latin American growth, and said North America is likely to see a further seasonal recovery in the third quarter.
Company executives linked the softer global spending outlook to the recent escalation in the Middle East. The conflict has, they said, driven repeated flare-ups in tensions between the U.S. and Iran and encouraged producers to focus on maximizing output from existing assets while keeping flexibility to respond to changing market conditions. "Customers remain focused on maximizing production from existing assets while preserving flexibility to respond to evolving market conditions," Chief Executive Officer Lorenzo Simonelli said on a conference call with analysts after the company reported quarterly results.
Baker Hughes reported quarterly profit that beat estimates and said industrial and energy technology orders rose to a record $7.1 billion, more than doubling year-over-year. Shares of the oilfield services provider rose by more than 6% following the results.
Despite the upbeat orders and profit beat, the company cautioned that disruptions stemming from the Middle East conflict are likely to shave 1% to 2% off revenue in its Industrial and Energy Technology (IET) segment. Baker Hughes forecast third-quarter revenue for the IET unit in a range between $3.17 billion and $3.47 billion - a guidance the company noted sits below analysts' expectations of $3.79 billion, based on data compiled by LSEG.
"While the overall impact from Middle East disruptions should remain modest, we expect some increase in logistics and inflationary pressures at our regional facilities during the third quarter," Chief Financial Officer Ahmed Moghal said, adding that strength outside the Middle East should help offset the disruption.
To reduce exposure to oil-price volatility and broaden its revenue base, Baker Hughes said it is relying on resilient growth areas such as LNG infrastructure and power grid upgrades. The company plans to expand its gas turbines and generator capacity, with that new capacity expected to be operational by 2029. Management estimated the expansion could support nearly $5 billion in annual power systems revenue opportunity.
Implications for markets and sectors
- Oilfield services and equipment providers may face mixed regional demand as producers prioritize production from existing assets over new drilling.
- Power systems, LNG infrastructure and related industrial technology markets are positioned as potential sources of more stable revenue for contractors facing oil-price volatility.
- Regional logistics and inflationary pressures in the Middle East could compress margins for companies operating facilities in affected areas.
Company outlook and guidance
Baker Hughes has provided a narrower revenue outlook for its IET segment for the third quarter, reflecting the companys view of near-term disruption. The firm expects IET revenue between $3.17 billion and $3.47 billion in the third quarter, acknowledging that this is below consensus analyst expectations. Management believes the modest revenue hit from the Middle East will be at least partly offset by activity gains in other regions.