Past E&P underinvestment will likely require years of catch-up spending: Baker Hughes CEO

Years of underinvestment in the oil and natural gas patch has been "amplified" by recent geopolitical events, notably the Russia-Ukraine war, and that, coupled with diminished spare capacity, will likely require years of investment growth to meet forecasts of future demand, the top executive of big oilfield services and energy technology provider Baker Hughes said Jan. 23.

For that reason, the company, as well as much of the oil and gas industry, continues to believe that the early stages of a multiyear upturn in global activity has begun, and is likely to yield a second consecutive year of double-digit increases in worldwide exploration-and-production spending, Baker Hughes CEO Lorenzo Simonelli said during his company's fourth-quarter earnings conference call.

"In addition to strong growth in traditional oil and gas spending, we also believe that the Inflation Reduction Act in the US and potential new legislation in Europe will support significant growth opportunities in new energy in 2023 and beyond," Simonelli said.

Simonelli echoed remarks made Jan. 20 by Olivier Le Peuch, CEO of peer oilfield services purveyor SLB, formerly known as Schlumberger, who like many other industry executives and analysts have made similar statements in recent quarters about an upstream sector that has been unwilling to raise spending by sums adequate to create supply over the long term.

As the coronavirus pandemic struck the globe in 2020 and caused oil demand to plummet, upstream players abruptly slashed activity to bare-bones levels. Recovery from that event has been steady but slow as thrifty habits stuck. Upstream operators have been cautious and refused to raise capex even when oil prices in mid-2022 rose to levels well above $100/b, although prices have since dropped to the $80s/b.

No desire for strategy shift

"Capital discipline has become ingrained in the sector and the benefits of a scaled back or lower growth business model are so prevalent that it is hard to see why the independents would shift strategy," Evercore ISI analyst James West said in a Jan. 10 investor presentation.

Restraint in spending on upstream activity has allowed companies to return more cash to their shareholders, slowed down drilling of new wells, as well as raised margins since cash outlays are reined in. It also allows companies to take the time needed to optimize their operations so they assure they get the most value for every dollar spent.

In addition, Simonelli said Baker Hughes remains "positive" on near- and long-term prospects for what he called the "natural gas and LNG investment cycle."

"Near term, we believe that the likely reopening of China, combined with Europe's need to refill gas storage supplies, will play a critical role in keeping global gas and LNG markets tight," he said. "Longer term, we remain optimistic on the structural growth outlook for natural gas and LNG as the world looks to lower emissions and displaces the consumption of coal."

Geographically, the "most promising" outlook is for the Middle East, with activity scheduled to increase in multiple countries this year and likely next year, he added, also echoing SLB's comments.

In addition, Latin American and West African offshore activity is driving growth in several countries in those regions and creating opportunities, he said. But in North America, visibility remains limited given capital discipline and also supply-chain shortages that have created rig and frac crew tightness.

Offshore generally is picking up in 2023, with orders for subsea production systems remaining "strong," Simonelli said.

"We saw good order traction in both subsea trees and flexibles [i.e., flexible pipelines] in the fourth quarter," he added. "After a record year in 2022 in flexibles orders, we expect another strong year in 2023, as well as a significant increase in subsea trees awards."

North America seen rangebound

"Expect rangebound activity from current levels over the course of 2023" in North America, Simonelli said.

Despite cost inflation and higher interest rates that have slowed the pace of new LNG final investment decisions in 2022, progress has occurred for those projects, he said.

"We continue to expect significant growth in new project sanctions in 2023 with elevated activity levels likely continuing into 2024," Simonelli said. "Following 36 mt/year of LNG FIDs in 2022 ... we continue to expect to see an additional 65 to 115 [mt/year] of LNG projects reach FID in 2023."

Visibility is growing for new project opportunities that are developing toward the middle of the decade, Simonelli said.

Moreover, "we are seeing progress on a number of brownfield initiatives and advancements in our new modular concept that is likely to extend the current wave of activity several more years," he added.

Baker Hughes posted operating income of $663 million or 18 cents/share in Q4, up 15% year on year.

Revenue of $5.9 billion for the quarter increased 10% sequentially and was up 8% year on year.

The company also reported record orders of $8 billion for in Q4, up 32% sequentially and up 20% year on year.