Baker Hughes Forges Ahead: Powering the Energy Transition and AI Boom (NASDAQ:BKR) - BKR Stock Research Report

## Executive Summary / Key Takeaways * Strategic Transformation Driving Growth: Baker Hughes is successfully executing a multi-year transformation, shifting towards a more diversified energy and industrial technology company with a strong focus on high-growth, less cyclical markets like natural gas, LNG, and AI-driven power solutions. * Robust Financial Performance and Margin Expansion: The company has consistently delivered strong financial results, with adjusted EBITDA margins expanding significantly, reaching 17.7% in Q3 2025. Management targets a 20% total company adjusted EBITDA margin by 2028, driven by operational efficiencies and portfolio optimization. * Technological Leadership in Key Sectors: Differentiated technologies, including advanced gas turbines (NovaLT, LM9000), digital solutions (Cordant, Leucipa), and specialized compression, provide a competitive edge in efficiency, reliability, and lower-carbon solutions, particularly for LNG, data centers, and geothermal projects. * Portfolio Optimization and Strategic Acquisitions: Key M&A activities, notably the pending $13.60 billion acquisition of Chart Industries (TICKER:GTLS), are set to further enhance the Industrial & Energy Technology (IET) segment's capabilities and accelerate growth in critical markets, complemented by strategic divestitures. * Resilient Outlook Amidst Headwinds: Despite global oil market volatility, geopolitical tensions, and tariff uncertainties, Baker Hughes maintains a positive long-term outlook, particularly for natural gas and new energy, supported by a record IET backlog and a commitment to shareholder returns. ## A New Horizon for Energy Technology Baker Hughes Company, established through a merger in 2017 and rebranded in 2019, has embarked on a profound strategic transformation, moving beyond its traditional oilfield services roots to become a diversified energy and industrial technology powerhouse. This journey, termed "Horizon One," has focused on operational improvement and portfolio optimization, setting the stage for "Horizon Two," which emphasizes continued margin expansion and strategic growth in high-demand sectors. The company's core business spans two segments: Oilfield Services Equipment (OFSE) and Industrial Energy Technology (IET), serving a global footprint across over 120 countries with approximately 57,000 employees. The industry landscape is rapidly evolving, marked by a growing global energy demand, the imperative for decarbonization, and the exponential rise of AI-driven power consumption. Baker Hughes is strategically positioned at the nexus of these trends, particularly benefiting from what it terms the "age of gas." Natural gas is increasingly recognized for its abundance, affordability, and lower emissions compared to other fossil fuels, making it a critical component in the global energy mix and a bridge to a lower-carbon future. This macro shift, coupled with significant investments in data center infrastructure, creates substantial opportunities for Baker Hughes' versatile technology portfolio. ## Technological Edge: Powering Efficiency and Sustainability Baker Hughes' competitive moat is significantly strengthened by its differentiated technology offerings, which deliver tangible benefits across its diverse end markets. In the IET segment, the company's liquefaction solutions are considered best-in-class, pairing advanced compression technology with the industry's broadest selection of drivers, including heavy-duty and aeroderivative gas turbines and electric motors. The LM9000 aeroderivative gas turbine, for instance, exemplifies this leadership by delivering a 44% simple cycle efficiency, setting new benchmarks in performance and reliability for large-scale energy infrastructure projects. This efficiency directly translates to superior LNG project economics for customers. The NovaLT gas turbines are another cornerstone of BKR's technological differentiation, particularly in the burgeoning distributed power and data center markets. These 12 and 16-megawatt turbines are hydrogen-ready, supporting both reliability and lower-carbon operations. The company has made targeted organic investments to enhance NovaLT capabilities, including increasing power range and reducing start-up times, while also significantly increasing manufacturing capacity to meet surging demand. These innovations enable flexible, lower-carbon power solutions for digital infrastructure, a critical need given the IEA's projection that global energy consumption from data centers will more than double to 945 terawatt hours by 2030. Beyond turbines, BKR's digital solutions like Cordant Asset Health and Leucipa offer advanced capabilities. Cordant is deployed on major LNG projects like NextDecade (TICKER:NEXT)'s Rio Grande, integrating equipment and digital intelligence to reduce downtime and boost availability and production. Leucipa, a digitally automated fuel production solution, is being expanded by customers like SOCAR for all wells in the Absheron and Gunseli fields, including those with non-Baker Hughes electric submersible pumps, and by ENI (TICKER:E) for ESP optimization and AI-driven predictive analytics. These digital offerings enhance operational efficiency, reduce emissions, and optimize total cost of equipment ownership for customers, creating a strong competitive advantage. In new energy, BKR's geothermal solutions provide reliable and scalable baseload power, leveraging IET's Organic Rankine Cycle and steam turbine technologies alongside OFSE's subsurface expertise. The company is also collaborating on Net Power solutions for utility and industrial scale near-zero emissions power generation and developing a new small-scale turbine for ammonia applications with Hanwha, suitable for shipping, FPSO, and gas infrastructure markets. These R&D initiatives aim to deliver significant improvements in energy efficiency and decarbonization, positioning Baker Hughes at the forefront of sustainable energy development. For investors, these technological differentiators translate into a robust competitive moat, enabling Baker Hughes to command premium pricing, secure long-term service agreements, and capture market share in high-growth areas. The company's ability to offer integrated, high-impact solutions that improve performance and reduce emissions strengthens customer loyalty and underpins its long-term growth strategy. ## Financial Performance: A Story of Resilient Growth and Margin Expansion Baker Hughes has demonstrated a compelling trajectory of financial improvement, particularly through its "Horizon One" strategy. For the nine months ended September 30, 2025, the company reported total revenue of $20,347 million, a slight decrease from $20,465 million in the same period of 2024. Despite this, net income attributable to Baker Hughes Company was $1,712 million, down from $1,800 million year-over-year. However, the underlying operational performance, especially in IET, paints a picture of increasing efficiency and profitability.

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In the third quarter of 2025, total revenue increased 1% year-over-year to $7,010 million. Adjusted EBITDA rose to $1,240 million, exceeding the midpoint of management's guidance. This performance contributed to a 20 basis points year-over-year increase in consolidated adjusted EBITDA margins to 17.7%, highlighting the resilience of the portfolio. For the full year 2024, Baker Hughes achieved record annual free cash flow of $2.3 billion, representing a 49% conversion rate, and adjusted EBITDA of $4.6 billion, up over 20% year-over-year, with margins expanding to 16.5%.

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The IET segment has been a primary driver of this growth. In Q3 2025, IET revenue surged by 15% year-over-year to $3,374 million, leading to a 20% increase in segment EBITDA to $635 million. This strong performance was fueled by volume, pricing, and favorable foreign exchange, alongside record Gas Technology Equipment (GTE) margins and the highest Cordant Solutions margins in four years. For the first nine months of 2025, IET revenue grew 10% to $9,595 million, with EBITDA up 22% to $1,721 million. The segment's record Remaining Performance Obligations (RPO) of $32.1 billion as of September 30, 2025, provides significant revenue visibility. Conversely, the OFSE segment faced headwinds. In Q3 2025, OFSE revenue decreased 8% year-over-year to $3,636 million, primarily due to lower international activity. Segment EBITDA declined 12% to $671 million, impacted by lower volume, inflation, and business mix, though partially offset by cost-out initiatives and productivity improvements. For the first nine months of 2025, OFSE revenue was down 9% to $10,752 million, with EBITDA down 7% to $1,971 million. Despite these challenges, OFSE's EBITDA margin of 18.5% in Q3 2025 demonstrates the team's focus on cost efficiencies and structural operational changes. Liquidity remains robust, with $2.7 billion in cash and cash equivalents and $5.7 billion in total liquidity as of September 30, 2025. The company's net debt to adjusted EBITDA ratio stands at a healthy 0.7x. Capital allocation prioritizes maintaining a strong balance sheet, funding strategic growth initiatives, and returning capital to shareholders. Dividends paid in the first nine months of 2025 totaled $683 million, and the company repurchased $384 million of Class A common stock. Baker Hughes aims for a net debt to adjusted EBITDA ratio of 1 to 1.5x within 24 months following the Chart (TICKER:GTLS) acquisition, supported by existing cash, free cash flow, and $1 billion from further portfolio management.

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## Strategic Initiatives and Outlook: Charting a Course for Growth Baker Hughes' strategic roadmap is defined by portfolio optimization, targeted acquisitions, and a clear vision for long-term growth. The pending acquisition of Chart Industries (TICKER:GTLS), Inc. for $13.60 billion, approved by Chart (TICKER:GTLS) shareholders in October 2025 and expected to close mid-2026, is a transformative move. This acquisition is anticipated to significantly enhance IET's capabilities in gas and liquid molecule handling, unlocking an estimated $325 million in cost synergies and expanding BKR's presence in high-growth markets like LNG, data centers, hydrogen, and Carbon Capture, Utilization, and Storage (CCUS). An integration management office is already in place, with 14 dedicated work streams focused on harmonizing systems and operations. Complementing this, Baker Hughes has strategically divested non-core assets. The agreement to form a joint venture with Cactus, Inc. (TICKER:WHD) for its Surface Pressure Control (SPC) business and the sale of Precision Sensors & Instrumentation (PSI) to Crane Company (TICKER:CR) for approximately $1.15 billion are expected to generate around $1.4 billion in gross cash proceeds, further strengthening the balance sheet and providing capital for reinvestment in higher-margin opportunities. Concurrently, the acquisition of Continental Disc Corporation (CDC) for $553 million in August 2025 bolsters IET's valves portfolio with margin-accretive, life cycle-based revenue. Looking ahead, management has provided concrete guidance and ambitious targets. For the full year 2025, Baker Hughes now expects total company adjusted EBITDA to exceed $4.7 billion, with the midpoint raised to $4.74 billion. IET is projected to see its revenue midpoint increase to $13.05 billion and EBITDA to $2.4 billion. IET orders guidance was also raised to $14 billion, reflecting robust year-to-date performance and anticipated LNG and power generation orders. Management is firmly committed to achieving 20% IET margins in 2026. Over the next three years, IET is targeting at least $40 billion in orders, led by gas infrastructure, power generation, and new energy markets. For OFSE, while revenue is expected to be around $14.35 billion, with EBITDA at $2.62 billion, the focus remains on margin resilience in a subdued upstream market. Global upstream spending is anticipated to decline in 2025 and potentially in 2026 due to softening oil fundamentals and OPEC+ supply dynamics. However, longer-term, substantial investment is expected internationally and offshore to sustain production growth. Baker Hughes is targeting a 20% total company adjusted EBITDA margin by 2028 and at least 50% free cash flow conversion by the same year, targets that do not yet factor in the accretive benefits from the Chart (TICKER:GTLS) acquisition. ## Competitive Landscape and Positioning Baker Hughes operates in a highly competitive environment, vying with industry giants like Schlumberger (SLB), Halliburton (HAL), TechnipFMC (FTI), and Weatherford International (WFRD), as well as indirect competitors in renewable energy and industrial technology. In oilfield services, Baker Hughes' OFSE segment competes directly with SLB and HAL. While SLB often leads in integrated digital platforms and HAL in drilling efficiency, Baker Hughes differentiates through its comprehensive portfolio and focus on mature asset solutions. Its production-weighted portfolio in North America, for example, allows it to outperform the broader market during downturns. The company's flexible pipe technology, evidenced by record orders from Petrobras (TICKER:PBR), and advanced drilling systems like auto-track exact rotary steerable systems, provide a competitive edge in complex offshore and challenging well environments. Despite a challenging upstream market, OFSE is actively working to close the margin gap with peers through cost efficiencies and operational discipline. In industrial and energy technology, the IET segment faces competition from a broader array of players, including industrial conglomerates and specialized equipment providers. Baker Hughes' strength lies in its best-in-class liquefaction solutions and a diverse range of drivers, which offer superior efficiency and reliability for LNG projects. The NovaLT turbines, with their hydrogen-ready capabilities and increasing manufacturing capacity, position BKR strongly against rivals in the rapidly expanding data center power market. The integration of Chart Industries (TICKER:GTLS) is expected to further enhance BKR's value proposition across the LNG value chain, enabling more efficient project design and better life cycle economics. Baker Hughes' digital solutions, such as Cordant and Leucipa, provide a competitive advantage by optimizing asset performance and driving operational efficiencies, a critical factor as customers increasingly seek to reduce downtime and boost production. While competitors like SLB also invest heavily in digital, BKR's approach emphasizes enterprise-wide integration across its diverse portfolio, creating unique commercial synergies between its OFSE and IET segments in areas like gas infrastructure, CCUS, geothermal, and data centers. This integrated approach allows Baker Hughes to offer end-to-end solutions that many specialized competitors cannot match. Financially, Baker Hughes' gross profit margin of 22.81% and EBITDA margin of 16.27% (TTM) are competitive within its peer group. While some rivals may exhibit higher P/E or P/B ratios, BKR's consistent margin expansion and strong free cash flow generation underscore its improving financial health and operational effectiveness. The company's commitment to increasing its dividend and opportunistic share repurchases further signals confidence in its earnings durability.

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## Risks and Challenges Despite a compelling investment thesis, Baker Hughes faces several pertinent risks. Market conditions in global oil markets remain volatile due to geopolitical tensions, international trade policy uncertainty, and the accelerated return of OPEC+ supply, which could lead to continued fluctuations in oil prices through 2026. This potential oversupply weighs on sentiment and keeps operators cautious, impacting upstream spending. Trade policy and tariffs present a quantifiable risk, with an estimated net EBITDA impact in the range of $100 million to $200 million for 2025, assuming current tariff rates persist. While mitigation strategies are in place, further escalation or retaliatory tariffs could introduce additional financial headwinds. The company is also monitoring potential secondary effects of trade policy shifts, such as more cautious customer behavior and broader economic weakness, which are difficult to quantify but could affect economically sensitive areas of the business. The Chart Industries (TICKER:GTLS) acquisition, while strategically significant, introduces integration risks and the need to manage increased leverage. The company aims to achieve a net debt to adjusted EBITDA ratio of 1 to 1.5x within 24 months post-closing, but the incurrence of new indebtedness could impact future financial condition. Furthermore, legal proceedings, such as the ongoing securities class action related to C3.ai, Inc. (TICKER:AI), introduce uncertainty regarding potential financial liabilities. Finally, a substantial portion (77%) of Baker Hughes' cash is held outside the U.S., which may not be quickly and efficiently usable due to exchange or cash controls in certain jurisdictions. ## Conclusion Baker Hughes is in the midst of a profound transformation, evolving into a more resilient and diversified energy and industrial technology company. Its strategic pivot towards the "age of gas" and the burgeoning AI-driven power demand, underpinned by a robust portfolio of differentiated technologies, positions it for sustained growth. The company's consistent track record of operational excellence, evidenced by expanding margins and strong free cash flow, demonstrates its ability to execute effectively even amidst challenging market conditions. The transformative acquisition of Chart Industries (TICKER:GTLS), coupled with ongoing portfolio optimization and a clear technological roadmap, is set to unlock significant value and accelerate Baker Hughes' growth trajectory in critical, high-margin markets. While geopolitical uncertainties, oil market volatility, and tariff impacts present near-term challenges, management's proactive strategies and commitment to achieving ambitious financial targets, including 20% total company adjusted EBITDA margins by 2028, reinforce the long-term investment thesis. Baker Hughes' ability to leverage its integrated solutions and technological leadership to meet the world's dual challenge of more energy with fewer emissions makes it a compelling consideration for discerning investors.