Multi Year LNG And Power Backlog Will Support Stronger Long Term Earnings Resilience

Catalysts

About Baker Hughes

Baker Hughes provides equipment, services and digital solutions across the full energy value chain, from production to power and industrial applications.

What are the underlying business or industry changes driving this perspective?

• Record IET orders of US$4.9b in the quarter, a 25% rise in IET orders over the last 4 quarters to US$16.6b and an RPO of US$33.1b support multi year revenue visibility and give a foundation for earnings resilience as this backlog converts.
• Power Systems strength, including US$1.4b of orders and large data center related contracts for up to roughly 2.2 gigawatts of capacity, points to growing exposure to long term electricity demand and can support higher IET revenue and aftermarket driven margin stability.
• Broad participation in LNG, gas infrastructure and carbon management, including US$1.2b of LNG equipment orders, North Field West mega trains and large scale CO2 compression for QatarEnergy, ties Baker Hughes to energy security and lower carbon investment themes that can underpin revenue and service earnings.
• Digital solutions momentum, with Cordant power related orders doubling year over year and Leucipa deployed on about 75,000 wells, increases high margin software and monitoring revenue and supports net margin quality over time.
• Portfolio reshaping and the pending Chart acquisition, alongside about US$3b of expected 2026 divestiture proceeds and identified cost synergies of US$325m, aim to concentrate the business in higher return industrialized energy solutions, which can support EBITDA margins and free cash flow.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Baker Hughes compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Baker Hughes's revenue will grow by 7.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 11.2% today to 10.5% in 3 years time.
• The bullish analysts expect earnings to reach $3.6 billion (and earnings per share of $3.68) by about April 2029, up from $3.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.1 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 27.4x on those 2029 earnings, up from 21.9x today. This future PE is lower than the current PE for the US Energy Services industry at 31.0x.
• The bullish analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent or worsening conflict in the Middle East and prolonged closure or partial reopening of key transit routes such as the Strait of Hormuz could suppress regional activity for longer than assumed, which may reduce OFSE revenue and weigh on group earnings if the anticipated second half recovery does not materialize.
• The business is increasingly tied to large LNG, gas infrastructure and power projects, so any long lasting reduction in global upstream and LNG spending, or delays to LNG maintenance and project FIDs, could slow backlog conversion in IET and limit growth in revenue and EBITDA margins.
• Baker Hughes is heavily exposed to long duration equipment and service contracts. If inflation, tariffs or supply chain constraints are higher or more persistent than baked into current assumptions, pricing and cost pass through may not fully offset pressure on project profitability, which could compress net margins and free cash flow.
• The planned acquisition of Chart and ongoing divestitures require execution over several years. If integration issues, slower than expected cost savings or weaker than expected earnings from acquired businesses emerge, the targeted US$325m of cost synergies and the intended improvement in EBITDA margins and balance sheet strength may not be achieved.
• Rapid expansion into power systems and data center related demand depends on adding manufacturing capacity for NovaLT turbines, BRUSH generators and synchronous condensers. If capacity remains tight, supply chain investments disappoint or customer demand shifts toward alternative technologies, IET revenue growth and high margin aftermarket earnings from this installed base could be lower than currently assumed.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Baker Hughes is $80.0, which represents up to two standard deviations above the consensus price target of $65.0. This valuation is based on what can be assumed as the expectations of Baker Hughes's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $44.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $34.3 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of $68.94, the analyst price target of $80.0 is 13.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.