Investing.com -- S&P Global Ratings has upgraded the issuer credit rating of Houston-based oilfield services provider, Baker Hughes (NASDAQ: BKR ) Co., to ’A’ from ’A-’ due to its expanding industrial energy technology (IET) business and improved margins. The rating agency also upgraded the company’s unsecured debt to ’A’ from ’A-’.
Baker Hughes’ IET business now accounts for nearly half of its revenues, with margins in both IET and its traditional oilfield services (OFS) businesses showing continual improvement. The company’s revenues increased by 9% year over year in 2024, including a nearly 20% increase in its IET segment, primarily driven by gas technology equipment sales.
For the full year 2024, about 45% of the company’s revenues were from IET, up from 40% in 2023. This proportion is expected to continue to increase in 2025 and beyond, driven by sales of gas technology equipment to both LNG-related and non-LNG end markets, and gas technology services as customers return to Baker Hughes for inspections, maintenance, and repairs on its installed base.
The IET segment’s contracted backlog at the end of 2024 was $30.1 billion, providing revenue visibility for the next two years. The company’s EBITDA margins improved to 15% in 2024 from 13% in 2023 due to the conversion of higher-margin backlog during the year, as well as the impact of structural system improvements such as supply chain optimization, efficiency, and commercial discipline. Baker Hughes expects to bring EBITDA margins to 20% in OFS this year, and to 20% in IET by the end of 2026.
The company also ended 2024 with a funds from operations (FFO) to debt ratio of 85% and a debt to EBITDA ratio of 0.85x. These ratios are expected to improve in 2025 and 2026 due to higher EBITDA and positive discretionary cash flow (DCF). Baker Hughes is also expected to repay the $599 million of long-term debt maturing in December 2026.
The stable outlook reflects S&P Global Ratings’ expectation that Baker Hughes will continue to strengthen its credit measures in 2025 and 2026. This is driven by strong demand for gas technology equipment and services in IET, as well as improving EBITDA margins in both its IET and traditional OFS segments.
The company has publicly stated that it intends to return 60%-80% of free cash flow--cash flow from operations less capital expenditure (capex) --to shareholders through a combination of dividends and share repurchases. After paying out about 65% of free cash flow in 2024, the company is expected to pay out closer to the upper end of its range in 2025 and 2026.
S&P Global Ratings could lower the rating if it expects the FFO to debt ratio to fall well below 60% for a sustained period. This could occur if there is a sustained contraction in natural gas prices that makes future LNG projects uneconomic, or if the company pursues a more aggressive-than-expected financial policy and significantly increases its capital spending or shareholder distributions.
Conversely, the ratings could be raised if Baker Hughes is able to improve its EBITDA margins to levels more in line with higher-rated peers, while keeping FFO to debt above 60% and DCF above 15%, on a sustained basis. This could occur if demand for OFS stabilizes and demand for IET remains strong, Baker Hughes executes on its cost-cutting initiatives, and the company keeps shareholder distributions within cash flow.
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