Baker Hughes Co - Class A (BKR) — Q3 2018 Earnings Call Transcript

Thank you, Nicole. Good morning everyone and welcome to the Baker Hughes, A GE Company third quarter 2018 earnings conference call. Here with me today are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell. Today's presentation and the earnings release that was issued earlier today can be found on our website. As a reminder, during the course of this conference call, we will provide predictions, forecasts, and other forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings for a discussion of some of the factors that could cause actual results to differ materially. As you know, reconciliations of operating income and other non-GAAP to GAAP measures can be found in our earnings release and on our website under the Investor Relations section. With that, I will turn the call over to Lorenzo.

Thank you, Phil. Good morning everyone and thanks for joining us. On the call today, I will give a brief overview of our third quarter results. I will then share some perspectives on market dynamics and highlight some of our key achievements in the quarter as we continue to build out our market-leading product companies. We are now in the second year of our journey as BHGE; we are operating the company better and driving change in the industry with our differentiated portfolio. We are focused on commercial innovation, outcome-based models, and leading technology. Today, I will provide a few exciting examples of our outcome-based solutions. The product is a new approach to integrated well construction in oilfield services that will provide significant productivity across the value chain. The second is a new philosophy for offshore development, which introduces new technology and a productivity-based approach to subsea deepwater projects. Brian will then review our financial results in more detail before we open the call for questions. In the third quarter, we delivered $5.7 billion in orders and $5.7 billion in revenue. Adjusted operating income in the quarter was $377 million. We are seeing continued improvements in our shorter cycle businesses, and the outlook for our longer cycle businesses is improving. Free cash flow in the quarter was $146 million. Earnings per share for the quarter were $0.03 and adjusted EPS was $0.19. Now I would like to take a few moments to share our view on the markets. We are encouraged by the improved outlook on the macro environment. Overall, the North American market continues to be resilient. Drilling-related activity remains stable, which bodes well for our portfolio. We see softness in frac-related completions activity as the North American pressure pumping market weakens into the fourth quarter. Outside of our minority investment in BJ Services, we are not materially impacted by the current challenges in the North American pressure pumping markets. The international markets are improving, and we expect them to remain strong in 2019 as customers increase spending and activity levels. In the Middle East, despite some geopolitical risk, we expect activity to continue to grow into 2019, driven by the United Arab Emirates, Saudi Arabia, and Iraq. The offshore market is the strongest we have seen in many years. Although it will remain well below prior cycle peaks, the improving tender and order activity is an encouraging sign as we look toward 2019 and beyond. While the offshore market remains competitive, our technology and flexible partnership approach are proving to be successful with customers. LNG continues to be the primary transition fuel for a number of large economies in the world. We conservatively estimate our total of 65 million tons per annum to be sanctioned by 2020. Global energy demand has remained robust through 2018. Chinese imports were up 30% and South Korea and India have both grown over 6% year-over-year. Given the strong global demand growth and current landed agents' spot prices over $10 for million BTU, we are seeing more confidence from our customers to move ahead with their projects. Earlier this month, we saw the first major final investment decision since 2015 with LNG Canada sanctioning two trains totaling 14 million tons per annum. As we have previously stated, we believe this is just the start of a new significant build cycle for which our portfolio is well positioned. With that let me share some highlights of the third quarter. In Oilfield Services, the dynamics and challenges of well construction are changing. Our leadership position in well construction is driven by technology. The next level of productivity will be unlocked by higher automation and advances in remote operations. It will be enabled by sophisticated data analytics as well as innovative models that focus on partnerships and collaboration. The innovative model is our partnership with ADNOC. Earlier in October, we announced a strategic partnership with ADNOC where we will acquire a 5% equity stake in ADNOC drilling for $500 million. We will significantly increase our presence in the United Arab Emirates and will be the exclusive supplier for a number of drilling and well construction capabilities across ADNOC’s conventional and unconventional hydrocarbon resources. This unprecedented strategic partnership accomplishes several things. First, the partnership will improve drilling efficiencies, service levels, and outcomes while strengthening our relationship for the long-term. Our and our customers' incentives are fully aligned and focused on better and higher returns. Second, this agreement is fully aligned with our priority to gain share in the Middle East and will drive incremental revenue over the coming years. Third, BHGE will generate attractive returns through a 7% annual dividend on our original investment. We will also receive a significant down payment from ADNOC drilling this quarter to fund capital needs as we ramp-up activity. I'm very pleased with our team's ability to execute this deal and its strategic and financial framework. Separate from this transaction, we continue to differentiate with our outstanding technology and are leveraging our unique capabilities to gain share. We have some key wins in the third quarter, like the Qatar Petroleum Integrated Drilling Award and the Marjan Field in Saudi Arabia. The Middle East remains a key focus area for us. As I mentioned earlier, our well construction leadership in oilfield services is driven by technology, specifically in our drilling services product line. We are the global leader in the unconventional space and continue to set records in critical markets. For example, in the third quarter, we drove the world record of over 9,000 feet in a 24-hour period. We utilized our remote monitoring capabilities to ensure world-class data was available at the targeted time. We reduced the customer’s drilling cost by 35%. Over the last three years, BHGE has drilled over a mile a day in more than 200 wells in the Marcellus and Utica, demonstrating our ability to deliver world-class results on a consistent and sustainable basis. In the Permian, we have seen a growing use of our rotary steerable systems due to increasing well complexity and more challenging drilling operations. Our RSS activity has grown over 100% in the Permian over the last year. In the third quarter, we partnered with ConocoPhillips to improve drilling performance on one of their assets, achieving a reduction in well completion time of 50% versus planned, with very high accuracy. The strength of our offering is not simply built from having the leading RSS in the market. Our competitive advantage is our integrated system, which includes extended life drill bits, high-performance drilling motors, and our advanced rotary steerable system. We have more than 1,500 engineers and scientists working together at our drilling services facility in Southern Germany. We have and continue to invest heavily in state-of-the-art R&D for mechanical, hydraulic, and integrated electronics and have built a leading position in this technology. Additionally, our equipment outlook is steadily improving. We won our first new-build BOP order since 2014 for a semi-submersible with a customer in Asia. This is a small but encouraging sign that the offshore market is recovering. Earlier this month, we announced the award of a significant subsea contract with ONGC. This award represents the single largest subsea contract ever awarded by ONGC. Following our success with ONGC and several other projects in the first half of the year, this is yet another big win for our OFC business and an important step in rebuilding our backlog. The demand outlook is clearly encouraging. Despite this improved outlook, we know our customers are still looking for a better and more sustainable economic model for offshore. Competition from Shell and other energy sources requires higher certainty and lower overall costs to make large capital-intensive offshore projects competitive in the long run. The average breakeven costs for unsanctioned deepwater projects are between $45 to $52 per barrel. While development breakeven costs have come down significantly over the past couple of years, the industry still has more work to do. We need to continue to operate responsibly, reduce costs, and drive better sustainable economic models in our offshore operations. Our customers need it and expect it. We have been working on a new model for subsea, which we call Subsea Connect. It is rooted in our philosophy of bringing differentiated, productivity-based solutions to the market. We are the only company in the world that can connect entire subsea systems and support our customers in optimizing not just the initial CapEx spend, but the entire life of the well cost. We are connecting the core building blocks of our subsea offering with solutions across the DHC portfolio: reservoir insights, field development, and well construction from Oilfield Services; production handling and power systems from Turbomachinery & Process Solutions; software and sensors from our digital solutions business; and EPCI capabilities from our partners. Our Subsea Connect strategy focuses on four key areas, building on the breadth of our portfolio and leveraging our partners. The first is around independent planning and risk management, which integrates the subsurface, seabed surface, and EPCI capabilities. The second focus is on new modular deepwater technology. The third is working across the network of preferred partners to better integrate well construction, including subsurface development, STX, flexible risers, topside compression, and power generation. The fourth area incorporates digital tools and advanced analytics to optimize project designs and purchases. The cornerstone of our Subsea Connect strategy is a brand new family of modular products that work together as an integrated subsea system. We have redesigned and reengineered subsea systems to make installation, production, and interventions simpler and more efficient, dramatically lowering the total cost of ownership. We have developed this family of solutions using three principles. Firstly, products are structured into standard components and subassemblies that can be configured depending on individual requirements. Secondly, these products are modular and serve as building blocks for the overall system. Thirdly, our offerings are lighter and have a dramatically smaller footprint. We have applied these principles across a broad spectrum of offerings, developing powerful new technology that is unique in the marketplace today. Our new lightweight compact tree is 60% lighter than its previous version, it uses unique tree caps that can be configured to suit changing requirements. These tree caps eliminate the need for multiple connections and significantly reduce manufacturing and installation costs for us and for our customers. Our new compact block manifold addresses the industry's need for modular, pre-engineered manifolds that use off-the-shelf components. For the most common configuration, the manifold will be made to order with zero product engineering and delivered in 10 months from contract award. Our new modular compact pump is the world's fastest subsea multi-phase pump without a barrier fluid system, which allows the pump to be configured to different fuel requirements quickly and easily. This ensures better reliability while high-risk items such as mechanical seals are not needed and eliminates the need to re-bundle hydraulics during the life of a field. For our composite risers, we have significantly reduced complexity and cost materially. Finally, our subsea connection system enables fast and reliable connections between all the elements of the subsea distribution system using a mechanism that requires only one moving part designed for the seabed. We are looking forward to introducing our Subsea Connect model to our customers and numerous industry experts on November 28 in Houston. Subsea Connect will further strengthen our competitiveness and help our customers move forward with offshore projects. In Turbomachinery & Process Solutions, we continue to see strength in the LNG market. Our customers are beginning to move forward with new projects to provide new LNG supply from 2022 and beyond. As I previously mentioned earlier this month, LNG Canada announced the FID for its LNG plant in Kitimat. In September, TAR Petroleum announced their intent to grow total production capacity to 110 million tons per annum. Both of these are very positive developments for the LNG market and support our view that new LNG projects would begin to move forward in the second half of 2018. We expect this backdrop to be a key driver of revenue and profits for us in 2019 and beyond. In the first quarter, our Austrian production business secured its fourth FPSO win of the year, up from just one FPSO in 2017. This is another sign that offshore spending is returning to more normalized levels. We expect orders and upstream production to ramp up in 2019 as more large projects are sanctioned. These orders will start generating revenues in 2020. In North America, pipeline demand continues to grow, driven by the Permian production growth and associated capacity constraints, as well as Western Canada production growth. We are pleased to win contracts to provide compressor packages, using our PGT25 Plus aeroderivative gas turbine with dry-low emission combustors, at two compression stations in Canada. We continue to see growth opportunities in our pipeline and gas processes segment into 2019. Our transactional services business, which is driven by our large installed base of on and offshore production units, has seen improvement throughout 2018 as customers begin to replenish their future safety stock. Transactional service orders in the third quarter were up 46% year-over-year, which is a positive sign we expect to contribute to revenue and margin improvements over the coming quarters. In digital solutions, we continue to gain traction with customers on digital offerings and grow our core measurement and controls business. In September, we announced the successful deployment of plant operations advisor, a cloud-based advanced analytics solution with BP across all four of their operator production platforms in the Gulf of Mexico. This important milestone came after an initial deployment of POA proved that BHGE’s technology can help prevent unplanned downtime on BP’s Atlanta platform. Our POA solution now works across more than 1,200 mission-critical pieces of equipment, analyzing more than 155 million data points per day and delivering insight to BP on asset performance and maintenance. Our collaborative approach with BP has resulted in a unique set of capabilities, and we are excited that they chose to deploy POA across their upstream assets globally. We are also driving growth in our core hardware offerings across multiple industries. The GAAP end market continues to gain momentum, specifically in our pipeline inspection business. In the quarter, we saw solid growth and continued strengthening of our technology offerings, including launching our partnership with a large pipeline operator to drive greater reliability in pipeline operations. We were awarded a significant contract in our condition and monitoring business at the Bruce Power Plant in Canada. We are also expanding our solutions into the mining segment, securing a major contract in Latin America. Our inspection technology offering remains strong, with solid growth in the aviation and consumer electronics sectors. In North America, we continue to grow our automotive business with entry sales of industrial CT systems and portable video borescopes passing inspections. Our core mission as a company is unchanged. We will continue to leverage our differentiated technology and our focus on customers to build market-leading product companies and deliver productivity solutions to the oil and gas industry. As I have previously stated, we will focus on core areas over the next 12 months. First, we will utilize our differentiated offerings to capture the benefits of the improving market dynamics in each of our businesses. Our improved commercial processes and renewed focus on our customers will help us regain market share. Second, we will continue to optimize our internal processes, operating mechanisms, and organizational structures. Third, we will continue to execute on our synergy programs. Fourth, while much of this has already taken place, we will ensure BHGE is 100% prepared for the eventual separation from GE. These focus areas are fully aligned with our priorities of growing market share, improving margins, and delivering strong free cash flow. With that, let me turn the call over to Brian.

Thanks Lorenzo. I will begin with the total company results and then move into the segment details. Orders for the quarter were $5.7 billion, down 5% sequentially and flat year-over-year. These results do not include the ONGC 98/2 order we announced on October 3rd. Sequentially, the decline was driven by oilfield equipment down 47%, primarily due to timing and digital solutions, which was down 1%. These declines were partially offset by oilfield services up 5% and turbomachinery, which was up 4%. Overall, as we head into the fourth quarter, we feel good about our ability to reduce backlog, especially in our longer cycle equipment businesses. Year-over-year, oilfield services were up 10% and turbomachinery was up 16%, offset by oilfield equipment down 27% and digital solutions down 31% as a result of the large digital order we secured in the third quarter of last year that did not repeat. Repeating performance obligations ended the quarter at $20.8 billion, which was down 1% sequentially. Equipment RPO ended at $5.4 billion, flat versus the second quarter, and services RPO ended at $15.3 billion, down 1%. Our book-to-bill ratio in the quarter was one, and the equipment book-to-bill ratio was also one. Revenue for the quarter was $5.7 million, up 2% sequentially. Revenue growth was driven by oilfield services, which was up 4%, and oilfield equipment up 2%, partially offset by turbomachinery, which was flat and digital solutions down 1%. Year-over-year revenue was up 7%, driven by oilfield services up 12%, digital solutions up 6%, and oilfield equipment up 3%, partially offset by turbomachinery, which was down 3%. Operating income for the quarter was $282 million, up $204 sequentially and up $475 million year-over-year. Adjusted operating income was $377 million, which excludes $95 million of restructuring, impairment, and other charges. Adjusted operating income was up 30% sequentially and up over 120% year-over-year. Our adjusted EBITDA operating income rate for the quarter was 6.7%, which was up 340 basis points year-over-year and 140 basis points sequentially. We do margin rates that were 100 basis points in every segment sequentially. As we had outlined, we are very focused on our goal of expanding margin rates, and this quarter demonstrates continued progress. In the third quarter, we delivered $35 million of incremental synergy. As Lorenzo stated, we are well on track to deliver on our synergy commitments. Corporate costs were $98 million in the quarter, flat sequentially and up 11% year-over-year. Depreciation and amortization for the quarter was $353 million, $39 million lower than the second quarter, primarily driven by assets set up as part of the merger closing last July, which have fully depreciated by the beginning of the third quarter, and therefore did not continue to depreciate in Q3 2018. In the quarter, we incurred an $85 million charge related to our BPA services investment; this non-cash charge impacted the equity investment in the company, reducing it to zero on our balance sheet. As a result, we will not be incurring additional charges going forward. We continue to work with BPA services to grow their business, capture market opportunity, and return to profitability. Cash expenses for the quarter were $110 million, up $48 million sequentially. Our effective tax rate was 47%. The relatively high tax rate is driven by the fact that we have been in a net loss position in the U.S. for a period of time and therefore carry forward losses affect taxes on our U.S. operations. We expect our fourth quarter effective tax rate to be approximately 35%. Once we start generating earnings in the U.S., we will be able to benefit from the valuation allowances built up in the U.S. Longer term, we continue to expect our structural tax rate to be in the mid to low 20s. Earnings per share for the quarter were $0.03, up $0.08 sequentially, and $0.34 year-over-year. On an adjusted basis, earnings per share were $0.19, up $0.09 sequentially and $0.21 year-over-year. Free cash flow in the quarter was $146 million, which includes $151 million of restructuring, legal settlement, and deal-related cash outflows, as well as $94 million of net capital expenditures. Growth CapEx for the quarter was $242 million. Year-to-date, we have generated $350 million of free cash flow, this includes approximately $360 million of restructuring, legal settlement, and deal-related cash outflows, both of which are in-line with the expectations we had at the beginning of the year. While there is more work to do, we feel good about our progress on generating stronger free cash flow, and we are on track to achieve our goal of 90% free cash flow conversion over time. Next, I wanted to give you an update on our recent capital allocation actions. There are essentially three significant cash flows which we expect to occur in the fourth quarter as a result of our portfolio actions. As Lorenzo mentioned, we recently announced the strategic partnership agreement with ADNOC where BHGE will purchase a 5% equity stake. We expect the deal to close this year. We will pay $500 million to ADNOC for the equity stake and then collect the down payments from ADNOC drilling related to working capital under the partnership agreement. We also expect to collect $375 million of proceeds from the sale of our natural gas solutions business. Overall, we expect a net impact of these three actions to be cash positive in the fourth quarter. After the announcement in June by GE to pursue an orderly exit of their 62.5% investment in our Company, we evaluated our next steps from a capital allocation standpoint, specifically regarding our share purchase program. We decided not to continue with our buyback in the third quarter and to wait until we have more clarity on GE's next steps before we resume our buyback activity. Also at the beginning of October, we were pleased to see S&P rating affirmations at A minus for our long-term debt and A1 for our short-term debt. S&P highlighted our independent capital and governance structure, as well as an expectation of an improving financial outlook for BHGE as key contributing factors to their decision. Next, I will walk you through the segment results. In Oilfield Services, the market for our products and services remains stable, while our takeaway capacity constraints in the U.S. are leading to an increase in drilled but uncompleted wells. Drilling-related activities remain stable. The North American rig count was up 10% in the third quarter, primarily driven by the seasonal Canadian recovery. The U.S. rig count was up 1%. Internationally, the rig count was up 4%, with increases across Africa, Asia, and Latin America. OFS revenue for the quarter was $3 billion, up 4% sequentially. Revenue in North America was up 3%, driven primarily by strength in the U.S., both onshore and in the Gulf of Mexico. Internationally, revenue was up 4%, driven by strong growth in Asia-Pacific and the Middle East. We saw solid sequential revenue growth in our drilling services, international pressure pumping, completion, and artificial lift product lines. Operating income was $231 million, up 22% sequentially. Core incremental margins were in-line with our expectations, and we continue to execute on our synergy programs. We did benefit from lower depreciation and amortization in the quarter; however, this was partially offset by approximately $20 million of negative foreign exchange impact primarily in Argentina. In the fourth quarter, we expect top-line growth in line with the broader market. We have started to incur modest ramp-up costs as we begin to execute on our recent large international project wins, including both the Equinor and Marjan integrated well service contracts. We expect these costs to continue into the first half of 2019. We remain confident in our ability to continue to regain share in critical markets and to improve margin rates. Next, on oilfield equipment, orders in the quarter were $553 million, down 47% sequentially and 27% year-over-year due to the timing of major subsea awards. As I mentioned, the ONGC 98/2 award will be recognized in the fourth quarter. Revenue was $631 million, up 3% versus the prior year, driven by increased volume in subsea production equipment and continued growth in our surface pressure control business, specifically in North America. This was partially offset by lower revenue in flexible pipe systems due to the timing of certain deliveries. Operating income was $6 million in the quarter, up $47 million year-over-year, driven by increased volume in subsea production systems, continued cost reduction, and the non-repeat of the foreign exchange impact in the third quarter of 2017. We expect continued margin improvements into the fourth quarter, driven by higher cost absorption from increased volume. As we progress through 2019, we expect additional volume and margin improvements from our 2018 wins in subsea production systems. This will be partially offset by lower volume in flexible pipe systems. Moving to turbomachinery, orders for the quarter were $1.6 billion, up 16% year-over-year. The increase in orders was driven primarily by services, which were up 41%, partially offset by lower equipment orders down 10%. The continued growth in service orders was driven mainly by transactional services, which were up 46% in the quarter and up 20% year-to-date. A clear sign that activity is beginning to recover. Revenue for the quarter was $1.4 billion, down 2% year-over-year, driven by lower equipment revenues. Service revenue in the quarter was up 9%, primarily driven by higher volume from upgrades. TPS operating income was $132 million, down 2% year-over-year. The decline was mainly driven by lower volume, partially offset by favorable mix. The operating income rate was 9.5%, flat versus the prior year and down 130 basis points compared to the second quarter. TPS has had a challenging year thus far as the business executed through a lower margin downstream backlog, with limited volumes from segments like LNG and upstream production. Throughout the first nine months of the year, we have seen encouraging signs from both improving backlog mix and increasing service orders. We remain confident in our positive fourth quarter outlook for TPS. Next, on digital solutions, orders for the quarter were $629 million, down 31% year-over-year, primarily driven by the largest digital order we signed last year, which did not repeat. We saw continued momentum in the oil and gas and industrial end markets, which drove year-over-year improvements in our pipeline and process solutions, measurement and sensing, and Bently Nevada product lines. Regionally, we saw continued growth in North America and Latin America, partially offset by seasonal declines in Europe. Revenue for the quarter was $653 million, up 6% year-over-year. We saw strong growth across most of our product lines, with inspection technologies, pipeline and process solutions, measurement and sensing, and software all up significantly. Revenues in our controls business were down, driven by continued softness in the power end market. Operating income was $106 million, up 38% year-over-year. The growth was driven by volume increases and continued synergy execution in pipeline and process solutions, which more than offset the power market headwinds. Digital solutions has had a very strong year so far with good execution and solid synergy realization. As we have explained previously, the power end market continues to be soft, and we expect this to result in less pronounced seasonality than we would ordinarily expect in the fourth quarter. With that, Lorenzo, I will turn it back over to you.

Thanks Brian. Our outlook on the market remains positive and we are well positioned to capture the benefits of an improving macro environment across all of our businesses. BHGE’s portfolio is unmatched in the industry. We continue to win the most important projects in the market by partnering with our customers to address their challenges. Our priorities are unchanged; we are focused on executing to deliver on our commitments for share, margins, and cash. Phil, now over to you for questions.

Thanks. With that, Nicole, let’s open the call for questions.

Hey good morning gentlemen. So Lorenzo and Brian, you outlined a lot of significant wins across the portfolio in your prepared remarks, and what I wanted to dig into or the area I wanted to really focus on here is the Middle-East. It’s obviously a growth area for the industry, you have the recent ADNOC investment, the MOU’s in Iraq, MOU’s in Saudi, the Marjan field win. I mean it seems like you are picking up share across the region, could you maybe touch on that for a minute or two and talk about your strategy and how you guys are progressing there?

Yes James, as you said, this is in-line with the strategy we laid out at the beginning of the year to grow our share in the Middle East. We feel very good about what we achieved and also the outlook going forward. The Middle East continues to be an area of growth. You have highlighted some of the wins, the Marjan field for us is important because it allows us to be the exclusive provider for drilling services, co-tubing services, and also provide drilling fluids engineering services. This allows us to be at the start of the development, really becoming incumbent with the customer and allowing us to grow as the field continues to grow. Qatar Petroleum, we announced a five-year drilling services contract to support their offshore and onshore drilling activities, and this is based on the success we have had in drilling wells for the customer, performing well and achieving the best outcomes. We have also strengthened our partnership in the UAE with ADNOC Drilling, favoring the partnership we already have with ADNOC and strategically gaining share in both conventional and unconventional sectors, which are expected to increase over time. So we feel very good about what we are seeing in the Middle East, which will be an area of continued focus and growth, and I'll let Brian give you a little more detail on the ADNOC partnership.

Yes, James, if I take a step back and look at the ADNOC partnership, we are going to invest $500 million of cash for 5% of the equity in ADNOC Drilling, and we will get a 7% annual dividend. So that’s a good return from that standpoint. The other thing I would mention is that given the book of business we see in the first year, plus the 7% return, it will be EPS accretive in year one, providing solid financial returns. Additionally, it's structured in a way that our working capital ramp is partially funded by the partnership, helping us achieve payments in the fourth quarter to assist in funding that working capital ramp, making the deal quite attractive. Furthermore, I really like that this gives us a partnership with both ADNOC and ADNOC Drilling, the latter being well positioned in the UAE and the exclusive provider of drilling services for ADNOC. We are exclusive in key areas, and we feel good about the position this gives us in the broader market for both unconventional and conventional resources. I would note that we do have a board seat on ADNOC Drilling, which further strengthens our partnership there, so we like our positioning in the UAE and the growth trajectory that UAE customers have outlined. Overall, during my recent visit in September, there was positive sentiment from customers across the region, and we like how we are being positioned to gain market share in a way that will help us generate better returns for our shareholders.

Thanks. Good morning. A couple of questions on TPS. I guess maybe Lorenzo first for you. If you could provide a little more detail on LNG awards and your outlook on the projects around the world. How do you see the order cadence visually progressing over the next couple of years?

Yes Jud, we feel very positive on the outlook of the LNG market. We have been consistent in stating that in the second half of the year, we would start to see final investment decisions. LNG Canada serves as a good step in that direction, as does the Corpus Christi project. Back in 2014, we were actually selected for the LNG Canada project with our high-efficiency aeroderivative gas turbine. That is a significant accomplishment, and we are progressing well in the LNG market. Overall, we expect demand to double to about 500 MTPA by 2030. As such, we remain well positioned, and LNG is a robust opportunity for us. I’ll let Brian jump in a little more on TPS, which continues to show improvement, as we have stated, and we feel good about that.

Yes, LNG is indeed a vital part of the TPS story. Looking at some of the key leading indicators that we saw this quarter, I feel really good about where TPS is and where it's headed. Overall, orders were up 16% versus last year, mainly driven by services which were up 41%. Equipment orders were down 10%, primarily due to large deals timing. However, there is a lot of activity in the LNG space that we are well-positioned to capitalize on. Service orders, especially transactional services, which convert more quickly, were up 46% this quarter and are up 20% year-to-date. We're beginning to see positive results from our cost improvement programs, which should yield results in the fourth quarter and definitely into next year. Given these indicators, I feel confident about our positioning for the quarter and our ability to deliver margin growth as we roll into 2019. Our overall outlook for TPS remains unchanged for 2019, and it’s underpinned by the demand in transactional services that we are currently witnessing.

I was hoping you could talk a little bit about the opportunities you are seeing in offshore development over the next 12 to 18 months. You have had a couple of good wins lately, including the large ONGC award. I’m curious what positioned you to win this very competitive award and what strengths you brought to the table, along with your partnership with McDermott.

Sure, Dave. First, regarding the offshore outlook, we clearly see improving sentiment. We have improved visibility on commodity prices, which has increased the competitiveness of our offerings, allowing customers to move forward with final investment decisions. While it’s not at the heights we saw in 2014, we certainly see the pipeline of opportunities improving. As you mentioned, we secured the ONGC 98/2 award, which is a significant milestone, being the single largest award ONGC has made. Our partnership structure with both McDermott and L&T enables us to provide a full suite of deepwater trees, manifolds, and connection systems, showcasing our capabilities. This result also leverages our established relationship with ONGC, built from our previous successful collaborations. Flexibility in our partnerships has been crucial in addressing customer requirements, and we are proud to be able to provide them what they need moving forward.

Additionally, I would mention that because of the current market dynamics we’ve talked about, Neil and the team have done significant work this year repositioning our offerings while reducing the costs of products and installation. These efforts position us well to respond competitively within the industry. I believe this teamwork has translated into our growing backlog and strong results for subsea operations heading into 4Q and into 2019. If I look specifically at the flexible pipe business while we have continued to make a lot of improvements, I do expect that part of the business to be a bit of a headwind next year due to larger customers being in their procurement cycles. However, we're optimistic overall regarding subsea production systems.

Yes, good morning. Brian, you mentioned the 4Q outlook for oil services, I heard that effectively you’re moving toward seasonal trends. Given the nuances of your business right now, can you provide a rough revenue trajectory for oil services in 4Q?

Yes, we feel constructive about the fourth quarter outlook for Oilfield Services. We do expect top-line growth in-line with the broader market, so it should be relatively consistent with historical performance. However, we do anticipate some headwinds as we start to incur increased ramp-up costs for recent large international project wins, especially regarding mobilization and reactivation of tools. These costs are expected to persist into 2019, but we feel our position from a share standpoint in OFS is improving, and we are optimistic about capturing market growth. The overall portfolio and outlook are aligned with market trends that we see.

And Scott just to remind everyone, it’s important to note that our exposure to the frac side of operations is quite limited. We have only the minority investment in BJ Services and therefore are not significantly affected by challenges in the Permian, aside from some minor impacts from regarding completions.

Hi. Brian, you have already mentioned the incremental margin opportunities, which I think were in the vicinity of 25%. Given the impressive international contracts you've captured in a competitive pricing environment, do you expect to maintain these margins into 2019?

Yes Bill. The current incrementals in OFS for the quarter are 38%. If you consider adjustments for lower depreciation and also foreign exchange impacts primarily in Argentina, the adjusted incrementals are right in line with our expectations around the 24% mark. Overall, I don’t see substantial changes impacting our view of that incremental margin over the year. While challenges exist with the ramp-up costs associated with some large wins, I feel good about the synergy execution that we have in place, as well as our positioning related to commodity costs and margin performance, keeping us steady with historical metrics.

Hi, good morning. You piqued my curiosity regarding Subsea Connect. I reviewed the aspects of the offering and I appreciate that. Can you compare its value proposition to that of one of your major competitors and evaluate whether Subsea Connect enhances your positioning, lowers costs further, or provides a unique benefit?

Yes Kurt. The overall industry has been working toward optimizing offshore and deepwater project productivity, as our customers demand better economic value during a challenging cycle. What we offer with Subsea Connect stands out in terms of our systems’ capabilities, particularly with our advanced subsea technologies and the integrity we maintain within our offerings. Our technology allows us to help clients achieve the lowest cost per barrel and enhance overall operational efficiencies. It's true that others in the industry are working on similar approaches. Our proposition is uniquely positioned within the market, understanding customer needs and driving significant cost efficiencies leading to lower costs overall.

Thanks for joining us today. We are excited about the future and remain constructive on our outlook for the industry. We continue focusing on our priorities of share, margins, and cash. Thank you.