Baker Hughes' Profitability Surges in Fourth Quarter

Baker Hughes BKR posted superb fourth-quarter results, with revenue increasing 8% sequentially and adjusted operating margins jumping to 10.3% from 7.9% in the prior quarter. All of the company's segments contributed to the improvement. In terms of operating income, this was Baker Hughes' best quarter since its 2017 merger with GE Oil and Gas. Our fair value estimate and no moat rating are unchanged following the results.

In year-over-year terms, revenue was about flat with the fourth quarter of 2020, with revenue decline in turbomachinery offset by revenue gains elsewhere. However, operating margins were still up 180 basis points from the prior year, due to aggressive cost-cutting along with the benefit of operating leverage in the company's oilfield services segment (where margins have climbed 400 basis points year over year).

Management guidance is consistent with our expectation for revenue growth in 2022 of about 10% along with continued margin improvement. In particular, a continued recovery in oil markets should drive strong growth in the oilfield services segment. Oilfield services' margins have now surpassed precoronavirus levels but should continue to post strong gains in 2022 on higher activity, improved pricing, and easing of supply chain issues.

For full-year 2021, the turbomachinery segment posted over $1 billion in operating profit, matching its previous peak achieved in 2016 (while the segment was still part of GE). In particular, liquid natural gas projects have continued to buoy profits. The turbomachinery segment also posted strong order flow in the fourth quarter, lifting full-year book to bill up to 1.2 times. For 2022, management is expecting margins about flat compared with 2021, owing partly to a drag from investments to expand in industrial and new energy end markets.

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