Executive Summary / Key Takeaways

• Baker Hughes is transforming into a more profitable energy and industrial technology company, leveraging its diversified portfolio across oil, gas, LNG, and new energy markets.
• Structural margin improvement, driven by internal transformation initiatives, cost optimization, and lean strategies, is significantly enhancing profitability, with segment EBITDA margins targeting 20% by 2025 (OFSE) and 2026 (IET).
• The Industrial Energy Technology (IET) segment, particularly Gas Technology and New Energy solutions, is a key growth engine, benefiting from robust backlogs, increasing aftermarket service opportunities, and expanding into high-growth areas like data centers and CCUS.
• While the Oilfield Services & Equipment (OFSE) segment faces near-term headwinds from slowing upstream spending and market volatility, its focus on mature fields, production-weighted portfolio, and ongoing cost efficiencies are expected to drive continued margin improvement.
• Macroeconomic uncertainty, trade policy, and tariffs present risks, with an estimated net EBITDA impact of $100 million to $200 million in 2025, but the company is implementing mitigation strategies and maintains a path towards approaching previous full-year guidance lows under specific market conditions.

Powering the Energy Transition: Baker Hughes' Strategic Evolution

Baker Hughes Company stands as a pivotal energy technology enterprise, strategically positioned across the evolving energy and industrial value chain. Formed in 2017, the company has undergone a significant transformation, consolidating its operations into two core segments: Oilfield Services & Equipment (OFSE) and Industrial Energy Technology (IET). This restructuring, initiated in late 2022, alongside focused cost optimization and efficiency programs, has fundamentally reshaped its operational model, aiming to drive structural margin improvement and enhance earnings durability.

The global energy landscape is in a dynamic state, characterized by growing demand driven by population growth and industrialization, coupled with an urgent need to reduce carbon emissions. This dual challenge underscores the increasing importance of natural gas as a lower-emission bridge fuel and the accelerating development of new energy solutions. Baker Hughes' portfolio is deliberately aligned with these trends. The company sees the "age of gas" as a significant opportunity, with projections indicating substantial growth in natural gas and LNG demand, requiring significant investment in infrastructure and technology. Simultaneously, the burgeoning demand for decarbonization technologies, including Carbon Capture, Utilization, and Storage (CCUS), hydrogen, and geothermal energy, presents new growth vectors.

In this environment, Baker Hughes competes with a diverse set of players. In traditional oilfield services and equipment, key rivals include global giants like Schlumberger (SLB), Halliburton (HAL), and equipment providers like NOV Inc. (NOV). Baker Hughes holds a significant market share, estimated at over 50% in its primary markets. While competitors like SLB may exhibit faster revenue growth or specialized strengths in areas like AI-driven reservoir analytics, Baker Hughes differentiates itself through its integrated portfolio, offering solutions that span both upstream and downstream applications, and its growing industrial technology footprint. HAL, with its focus on unconventional resources and cost leadership, presents a strong challenge in price-sensitive markets. NOV competes primarily in equipment, where manufacturing speed can be a differentiator. Baker Hughes' strategic response involves leveraging its technological depth, global scale, and integrated offerings to provide differentiated value, focusing on efficiency, reliability, and emissions reduction across the energy lifecycle. The company's ability to compete against a diverse group of industrial companies in IET markets further highlights its unique positioning.

Technological Edge: Fueling Efficiency and New Growth

At the core of Baker Hughes' strategy is its differentiated technology portfolio, which provides a critical competitive moat. In Gas Technology, the company offers a range of turbines and compressors essential for LNG liquefaction, gas processing, and pipeline transport. Its NovaLT™ gas turbines, for instance, are increasingly being deployed for distributed power solutions, including powering data centers, with 22 units booked in Q1 2025 for this application, totaling over 350 megawatts. These turbines offer flexibility, capable of running on natural gas or hydrogen, aligning with lower-carbon objectives. The company's modularized LNG solutions, like those employing the LM9000™ gas turbine, are designed for nimble deployment, supporting projects like Argent LNG's proposed 24 MTPA facility.

Beyond core equipment, Baker Hughes is heavily invested in digital solutions and new energy technologies. Digital offerings like Leucipa, an intelligent automated field production solution, are being expanded by major operators to optimize recovery rates through real-time orchestration. The Cordant™ platform, leveraging over 20 years of monitoring data and generative AI, enhances asset performance, optimizes processes, and supports emissions abatement through solutions like CarbonEdge™ for CCUS infrastructure monitoring. These digital tools provide tangible benefits, improving operational efficiency and reducing costs for customers.

In the realm of New Energy, Baker Hughes is developing and deploying technologies for CCUS, hydrogen, geothermal, and clean power. Its zero-emission Integrated Compressors (ICLs) are critical for handling large volumes of gas in applications like the Margham Gas storage facility. The company is also exploring utility-scale geothermal power development with the U.S. Air Force and Department of Defense and is partnering with Hanwha to develop small-scale ammonia turbines for marine and industrial applications. New upgrade technologies for the installed base are expected to generate hundreds of millions of dollars in accretive orders by 2030, improving the availability, reliability, emissions, and productivity of aging equipment. The strategic intent behind these technological investments is clear: to provide solutions that meet the dual challenge of increasing energy demand while lowering emissions, creating new revenue streams, enhancing the value proposition to customers, and strengthening Baker Hughes' competitive position against both traditional energy service providers and emerging industrial technology firms.

The Transformation Paying Off: Margin Expansion and Financial Strength

Baker Hughes' commitment to operational excellence and transformation is visibly translating into improved financial performance. The company has consistently met or exceeded the midpoint of its quarterly EBITDA guidance, demonstrating enhanced execution rigor. In Q1 2025, adjusted EBITDA reached a new first-quarter record of $1.04 billion, up 10% year-over-year, driving a 140 basis point expansion in adjusted EBITDA margin to 16.1%. This margin improvement occurred even as a softer upstream market impacted OFSE, highlighting the structural nature of the gains.

The IET segment has been a significant driver of this performance, with EBITDA increasing by at least 30% year-over-year for five consecutive quarters. This growth is fueled by higher volumes, favorable mix (particularly in Gas Technology Equipment), price discipline, and productivity enhancements. The segment's EBITDA margin reached approximately 17.1% in Q1 2025, up significantly from 14.6% in the prior year period, progressing towards its 20% target for 2026. The OFSE segment, despite a revenue decrease in Q1 2025 due to lower activity, also demonstrated margin resilience, with EBITDA margin improving to approximately 17.8% from 17.0% in Q1 2024. This reflects the team's focus on cost optimization and efficiency initiatives, which are expected to drive further margin improvement towards the 20% target for 2025.

The financial health of the company remains solid. As of March 31, 2025, Baker Hughes held $3.3 billion in cash and cash equivalents and maintained a net debt-to-EBITDA ratio of 0.6x, with total liquidity of $6.3 billion. The company generated $709 million in operating cash flow and $409 million in free cash flow in Q1 2025. Capital allocation remains balanced, with $417 million returned to shareholders in Q1 2025 through dividends ($229 million) and share repurchases ($188 million). The quarterly dividend was increased by two cents in Q1 2025, reflecting confidence in the durability of earnings and cash flow.

The company is targeting a free cash flow conversion of 45% to 50% for the full year 2025 and remains committed to returning 60% to 80% of free cash flow to shareholders.

Outlook and Risks: Navigating Uncertainty with a Clear Strategy

The outlook for 2025 is characterized by a degree of uncertainty, particularly concerning global trade policy and tariffs, as well as potential volatility in oil prices. Baker Hughes expects global upstream spending to be lower in 2025 compared to 2024, with declines anticipated in both international (mid- to high-single digits) and North American (low-double digits) markets, assuming oil prices stabilize around current levels and tariffs remain at the 90-day pause rates. The company estimates a net EBITDA impact from tariffs in the range of $100 million to $200 million for 2025, although mitigation strategies are being implemented. Secondary effects from tariffs, such as broader economic weakness or changes in customer behavior, remain difficult to quantify but could introduce further downside risk.

Given this fluid environment, Baker Hughes has adopted a hybrid guidance approach, providing explicit guidance for Q2 2025 and a framework for the full year. For Q2 2025, total revenue is expected to be between $6.3 billion and $7 billion, with total EBITDA projected at $1.04 billion to $1.2 billion. This guidance assumes partial offset of tariff impacts and consistent tariff levels. The IET segment is expected to deliver EBITDA of $520 million to $580 million on revenues of $3.0 billion to $3.3 billion, led by Gas Tech Services growth. The OFSE segment forecasts EBITDA of $600 million to $700 million on revenues of $3.3 billion to $3.7 billion, implying further sequential margin improvement despite a less pronounced seasonal recovery.

For the full year 2025, while formal guidance ranges were not provided in Q1, management indicated that the IET EBITDA guidance range from January ($2.2 billion to $2.4 billion) remains achievable. They also expressed belief that the company's full-year results could approach the low end of its previous guidance range ($4.7 billion EBITDA) if tariff impacts are at the lower end of the estimated range and market conditions hold. Despite the expected decline in global upstream spending, OFSE margins are still anticipated to improve year-over-year, driven by internal efficiencies.

Key risks to monitor include the trajectory of oil prices, the duration and scope of trade policy impacts, the pace of activity recovery in key markets like Mexico and Saudi Arabia, and the effectiveness of mitigation strategies against inflationary pressures and supply chain tightness (particularly in aeroderivatives). Customer payment delays, especially in challenging economic environments, also pose a liquidity risk, although the company utilizes mechanisms like credit default swaps to manage exposure.

Conclusion

Baker Hughes is navigating a complex energy landscape with a clear strategy centered on technological differentiation, operational excellence, and portfolio diversification. The company's transformation efforts are yielding tangible results, most notably in structural margin expansion that is expected to continue driving profitability towards and beyond the 20% segment EBITDA targets. The IET segment, fueled by robust backlogs in Gas Technology and emerging opportunities in New Energy and industrial markets like data centers, provides a strong foundation for growth and earnings durability, supported by a valuable lifecycle service business. While the OFSE segment faces near-term cyclical pressures, its focus on mature fields and cost efficiencies positions it for resilient performance and continued margin improvement. Despite macroeconomic uncertainties and tariff-related headwinds, Baker Hughes' strong balance sheet, consistent cash flow generation, and commitment to shareholder returns underscore its financial strength. The company's ability to leverage its unique technological portfolio across traditional and new energy markets, coupled with its ongoing operational transformation, positions it to capitalize on the long-term structural growth in global energy demand and the transition towards lower emissions, presenting a compelling investment thesis for discerning investors.