We formally launched Baker Hughes, a GE company (BHGE), on July 3, 2017. BHGE combines the strengths of the legacy Baker Hughes and GE Oil & Gas businesses, integrating products, services and digital solutions for upstream, midstream and downstream applications. Together, we provide a new way of serving the industry through our fullstream offering that stretches across the oil and gas value chain.
During our first six months as BHGE, we focused on building core operations, delivering results for customers and shareholders, and executing on the integration. We also made important progress on our three financial priorities of growing market share, increasing margin rates and generating better cash conversion, with a focus on maximizing total shareholder return. I am extremely proud of what our team has achieved as a combined company and would like to share some of our 2017 accomplishments and our view on BHGE’s promising future.
2017 IN REVIEW
Throughout the year, oil and gas markets remained challenging. Oil supply continued to exceed demand, maintaining the industry’s lower-for-longer dynamic. Crude oil prices hit lows in June 2017, and while the outlook improved toward the end of the year, there was no material change in our customers’ spending behavior.
The average global rig count in 2017 was 2,030, an increase of 27% as compared to 2016. The increase was driven by North American activity, where the rig count rose 69%. Internationally, the rig count decreased 1% in 2017.
While the natural gas and liquefied natural gas (LNG) markets remained over supplied, global demand for gas was strong. Incremental supply for LNG will be required to come online by 2025.
We made progress toward our three financial priorities despite the difficult macro environment. We booked $22 billion in orders, an increase of 4% year-over-year. Revenues decreased 5% year-over-year to $22 billion. Margins improved and total year 2017 adjusted operating income was $1 billion, up 69% year-over-year.
We also made progress toward our goal of improving free cash flow generation by implementing more robust working capital processes for inventory and receivables. While there is more work to do, we have laid the foundation to transform BHGE into a strong cash-generating company.
In our first 180 days as a combined company, we focused on optimizing our capital structure. We announced a $3 billion share buyback authorization, and we increased our quarterly dividend by 6% to $0.18 per share. We also announced a $3.95 billion debt offering at attractive pricing that allowed us to refinance a portion of our higher interest debt. These actions reflect our confidence in our ability to generate strong free cash flow and shareholder returns.
*Discussion throughout this letter is on a combined business basis, which is a non-GAAP measure.
Please refer to the GAAP to non-GAAP measures table at the end of the downloadable Form 10-K for a reconciliation.
Prior to the close of the transaction, we had detailed integration plans in place that were focused on customers, process harmonization and a smooth transition for our employees. We have made tremendous progress since July 3. Our employees are energized and our customers are excited about what they have seen so far, and by the valuable opportunities ahead.
Our integration efforts, as well as our synergy targets of $1.6 billion by 2020, remain firmly on track.
We are also focused on building a new, shared culture that embraces the strengths of both legacy organizations. Together, we created culture pillars to guide decision-making and the way we work.
In 2017, we secured several major commercial wins and delivered record performance for our customers. Highlights included winning our first fullstream deal with Twinza Oil Limited for an offshore project in Papua New Guinea. We also signed an agreement with Siccar Point Energy for an integrated project in the North Sea, where we will provide a suite of well services for the appraisal well in addition to providing the construction and installation of subsea equipment. Additionally, we were awarded two major contracts by Eni East Africa to provide subsea production systems, ancillary equipment and services, and rotating equipment, including aeroderivative gas turbines for power and gas refrigeration process at the Coral South FLNG project offshore Mozambique. We also won our largest turbomachinery order to date with PetroChina for turbine generators in the Halfaya oil field in Iraq.
Our Oilfield Services business grew in several critical markets, including North America and the Middle East, driven by our well construction and artificial lift businesses. Our AutoTrak™ Curve rotary steerable system coupled with our industry-leading drill bits continued to help operators improve their drilling economics. We also strengthened our position in the artificial lift segment, securing several new contracts and delivering solid performance for customers. For example, our TransCoil™ rigless artificial lift system extended the economic life of a mature deepwater field in Malaysia.
In 2017, we had strong demand for our digital products and services as our customers are eager to explore the opportunity to unlock value and drive productivity through better connectivity. We signed our largest-ever digital order with a significant international customer. We further expanded our digital partnerships with some of our major customers, including Shell, who co-develops our JewelSuiteTM modeling platform. The platform delivers speed, accuracy and complex technical modeling capabilities to reduce risk and improve well productivity. Shell is currently deploying the software across its enterprise.
Technology continues to differentiate us as a company. In 2017, we remained focused on this core strength, investing more than $600 million combined in research and development. Results included launching more than 240 new products and receiving more than 2,800 patents.
Notable product launches included the LM9000 aeroderivative gas turbine, which provides a 20% reduction in the total cost of ownership for LNG operators and can also be used for simple cycle, cogeneration and combined cycle power generation. We introduced the TerrAdapt™ bit, the industry’s first adaptive drill bit that adjusts to downhole conditions autonomously to enable smoother, faster drilling and extended tool life. Finally, we introduced IntelliStream™, our upstream production optimization software solution that provides analytical insights and continuous learning to improve production and reduce non-productive time.
We are also leveraging emerging digital technologies such as robotics and virtual reality to enhance reliability and accuracy for our own operations and our customers’. For example, we are working with companies such as Avitas Systems to transform how industrial asset inspections are carried out by using predictive analytics, artificial intelligence, autonomous drone technology and digital enablement.
We founded BHGE with a commitment to ensuring that everything we do is safe and compliant, and does not harm people or the environment. We believe that doing the right thing must always come first. As such, we implemented industry-leading policies to ensure we always meet the highest Health, Safety and Environment (HSE), Quality and Integrity, and Compliance standards. Since becoming BHGE, we harmonized the legacy Baker Hughes “Perfect HSE Day” concept, which highlights a 24-hour period without a serious injury, motor vehicle accident or environmental impact, across the company.
Since the combined “Perfect HSE Day” concept was implemented in July 2017, we achieved 72 Perfect HSE Days by year-end. While this is a good start, nothing short of 365 Perfect HSE Days will satisfy us.
We also adhere to the highest ethical standards through sound governance, effective policies and guidelines, and open channels of reporting, fostering a culture of complete compliance.
LOOKING AHEAD TO 2018
Toward the end of 2017, oil and gas markets recovered, underpinned by strong demand growth and OPEC’s commitment to extend production cuts through 2018. The markets are expected to be in equilibrium through 2018 and long-term market fundamentals indicate a sustained period of range-bound crude oil prices at or around current levels. Our customers are adjusting to the “new normal” as the energy industry is going through a transformation with a fundamental change in demand patterns and the acceleration of renewable energy sources. With this outlook, our customers are aiming to sustainably reduce both capital and operating expenditures (capex and opex). They expect solutions that will improve productivity and efficiency and leverage economies of scale to deliver a higher industrial yield, with lower carbon impact.
Our Strategy is Based on Three Pillars
Market-Leading Product Companies50%
Reduction in the cost of doing business
Reducing total system costs by improving efficiencies, reducing cycle time, and improving asset utilization and reliability of equipment delivered.
Integrated Service Modules50%
Improvement in productivity
Through integrated and differentiated solutions that reduce CAPEX and OPEX, drive improvements in productivity and reduce non-productive time.
Increase in industrial yield
By leveraging the scale of our portfolio and driving radical improvements by offering new developed concepts at a project level.
This is how we will create unmatched value for our customers.
Our multi-year strategy to deliver on these customer needs and expectations is based on the following three growth pillars:
Market-Leading Product Companies – We are focused on increasing our profit margins and competitiveness. Part of this is inventing new ways to deliver our products and services to the market. We can reduce costs and improve efficiencies through innovative new technologies, new materials and processes such as additive manufacturing and new supply chain solutions to reduce cycle time.
Integrated Service Modules – We are applying an outcomes-based approach to unlock value by creating commercial models that shift from selling products to delivering integrated service modules. At the enterprise level, we are identifying unique solutions that we can build to solve customer challenges, reduce total cost and improve productivity.
Fullstream – We are creating an entirely new commercial model where we align with our customers to deliver step changes in project economics by lowering the cost per barrel of oil equivalent, the cost per megawatt hour or any other unit representing industrial yield. This will make our customers’ projects more competitive in the new energy landscape.
We strive toward bold targets over the next few years for these three growth pillars: 50% improvement in core competitiveness, or the cost of doing business; 50% improvement in productivity, measured at the integrated service level; and 50% improvement in industrial yield. This is our “50-50-50” plan.
STRONG FOUNDATION TO BUILD BHGE'S FUTURE
In summary, 2017 represented just the beginning for BHGE. We made steady progress on our integration, and began to deliver on the commitments we made to shareholders. We have more work to do, but we are proud of our early successes.
I want to thank the BHGE team and our customers for a successful 2017. I also want to express my deep gratitude to our shareholders, who have invested in us and in our future. Lastly, I would like to acknowledge and thank our Board of Directors, whose guidance and partnership have been invaluable as we have worked to build this great company.
The world needs more energy, but delivered with greater efficiency, at lower cost and with a reduced carbon footprint. We have laid the foundation to deliver on our purpose of inventing smarter ways to bring energy to the world. With our talented people and unique set of products and services, BHGE can, and will, deliver. We look forward to working with our employees and customers in the months and years ahead, as we continue on this journey together.
Chairman, President and Chief Executive Officer