Baker Hughes Co - Class A (BKR) — Q1 2026 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to the Baker Hughes First Quarter Earnings Conference Call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Ahmed Moghal. The earnings release we issued yesterday evening can be found on our website at bakerhughes.com. We will also be using a presentation with our prepared remarks during this webcast, which can be found on our investor website. As a reminder, we will provide forward-looking statements during this conference call. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and website for the factors that could cause actual results to differ materially. Reconciliation of adjusted EBITDA and certain GAAP to non-GAAP measures can be found in our earnings release and presentation available on our investor website. With that, I'll turn the call over to Lorenzo.

Thank you, Chase. Good morning, everyone, and thanks for joining us. First, I'd like to provide a quick outline for today's call. I will begin with a summary of our first quarter results and recent portfolio actions, then highlight key awards and address the evolving macro environment, including the ongoing situation in the Middle East. I will then turn it over to Ahmed, who will present an overview of our financial results as well as provide guidance for the second quarter and review our outlook for the full year. He will also share an update on the progress with Chart integration planning and discuss recent actions to further optimize our portfolio. To conclude, I will highlight the progress we continue to make in positioning Baker Hughes as a leading provider of industrialized energy solutions, and then we'll open up the line for questions. Let us turn to Slide 4. Against the backdrop of ongoing conflict in the Middle East, our top priority remains the safety and well-being of our employees and their families. We remain in close contact with our team and continue to monitor the situation closely. I am proud of our team's resilience. Despite a complex operating environment, we delivered another strong quarter of financial results, reflecting the strength of our portfolio and disciplined execution, which more than offset the significant impact of regional disruptions. For the first quarter, adjusted EBITDA totaled $1.16 billion, exceeding our guidance range as we continue to deepen our exposure into adjacent end markets and drive structural operational efficiency. Adjusted earnings per share were $0.58, 13% above the same quarter last year, even as results were impacted from the Middle East conflict, the PSI divestiture and the formation of the SPC joint venture. Adjusted EBITDA margin rose 140 basis points year-over-year to 17.6%, driven by strong IET performance, partially offset by lower OFSE margin. Turning to orders. IET delivered another outstanding quarter with bookings reaching a record of $4.9 billion, marking the third consecutive quarter above $4 billion. This performance reflects ongoing strength across energy infrastructure, highlighted by $1.4 billion in Power Systems orders and further progress in LNG, gas infrastructure and CCS. IET also reported a book-to-bill of 1.5x for the quarter, resulting in a record RPO of $33.1 billion. This marks the fifth consecutive quarter that IET has achieved this milestone. Excluding transactions, RPO rose by 3% on a sequential basis and increased 10% compared to the prior year. These results underscore the diversity and versatility of the IET portfolio, supporting sustained growth across energy infrastructure markets as the importance of energy security continues to rise. During the first quarter, we generated free cash flow of $210 million. Our first quarter performance demonstrates the durability and robustness of our portfolio, the positive trajectory aided by our business system and the strong momentum in IET. We are confident that our versatile portfolio and track record of operational excellence positions us for sustained growth during Horizon 2 as we continue to navigate a volatile environment. Earlier this month, we announced the divestiture of Waygate Technologies as part of our ongoing portfolio management strategy and comprehensive evaluation to identify further opportunities for enhancing shareholder value. Combined with the sale of PSI to Crane and the joint venture with Cactus, which both closed earlier in January, we expect to generate gross proceeds of approximately $3 billion in 2026, further strengthening our balance sheet. Now turning to key awards on Slide 5. In Power Systems, we achieved another outstanding quarter, securing orders across our power generation, grid stability and energy management capabilities. For power generation, we converted a prior slot reservation agreement into an integrated solution award for a critical infrastructure project in North America. This contract includes NovaLT16 gas turbines, BRUSH Power Generation electric generators, gears and long-term aftermarket services, delivering up to 1 gigawatt of reliable power to support growing energy demand from data centers. Additionally, we announced a contract to provide 25 BRUSH Power Generation generators to Boom Supersonic. When paired with Boom's gas turbines, this is expected to deliver a total of 1.21 gigawatts of generator capacity for data centers. In grid stability, we secured a contract with Hitachi Energy to design, manufacture, install and commission 4 synchronous condensers. These will enhance system reliability and stability at 2 energy substations in Australia. By providing crucial voltage support and dynamic response, synchronous condensers help mitigate the challenges associated with intermittent power from renewable sources, ensuring a more reliable and stable grid. In energy management, Baker Hughes received a second contract for the engineering and design of Hydrostor’s advanced compressed air energy storage system in the U.S. This collaboration includes up to 1.4 gigawatts of potential equipment orders for compressors, expanders, motors and generators. Further highlighting our momentum in energy management, we announced a collaboration with Google Cloud to develop AI-enabled power optimization and sustainability solutions for data center applications. This partnership leverages Baker Hughes expertise in power systems and Google Cloud's leadership in advanced AI and data analytics, bringing together the core capabilities of both companies to drive innovation and operational efficiency across the data center market. In gas infrastructure, we secured 2 key awards this quarter. We received a significant order for an advanced electric motor-driven compression solution supporting offshore operations in the Middle East. Additionally, Baker Hughes will deliver gas compression units, including 3 NovaLT gas turbines for the San Matias Pipeline S.A. in Argentina, marking our first NovaLT deployment in South America. In LNG, we booked equipment orders totaling $1.2 billion this quarter across key regions. Notably, Qatar Energy awarded us a significant contract for 2 mega trains on the North Field West project, representing 16 MTPA of capacity. Our scope includes 6 Frame 9 gas turbines, 12 centrifugal compressors and integrated power solutions, utilizing three Frame 6 gas turbines and three BRUSH Power Generation generators. We are also seeing potential acceleration of LNG project FIDs in North America. Reflecting this momentum, we recently entered into a strategic agreement with ST LNG to provide critical gas compression and power generation solutions for their proposed 8.4 MTPA LNG export terminal offshore Texas. Additionally, we continue to drive value through our life cycle model, signing a 5-year aftermarket service agreement with Petrobras. This contract covers maintenance, repair and engineering services for up to 64 aeroderivative gas turbines across 19 FPSOs, further strengthening our role as a trusted provider for Petrobras' critical operations. Including our 1 gigawatt data center order highlighted earlier, we secured $1.4 billion in new energy orders this quarter, a strong start to the year that reinforces our confidence in achieving our $2.4 billion to $2.6 billion target for 2026. New energy bookings also included a significant award to provide advanced compression and pumping technologies for Qatar Energy, LNG's large-scale carbon capture facility. Our scope includes 6 compression trains powered by variable speed electric motors, enabling the capture and transport of 4.1 million tons of CO2 annually. In our Downstream Chemicals business, we signed a substantial multiyear agreement with Marathon Petroleum, establishing ourselves as the preferred supplier of hydrocarbon treatment products and services for 12 refineries and 2 renewable fuels facilities throughout North America. This strategic collaboration reinforces our position within the downstream market and demonstrates our commitment to delivering innovative solutions that enhance operational efficiency and support sustainable growth for our customers. Turning to Energy Upstream. We secured key awards that reflect our differentiated positioning and long-term value proposition to customers across the oilfield services market. In Brazil, we secured a major contract with Petrobras to deliver 91 kilometers of flexible pipe, risers, flowlines and comprehensive maintenance and installation services, supporting the country's pre-salt and post-salt developments. We also signed a major contract extension with Petrobras to provide integrated workover and P&A solutions for one of the world's largest offshore P&A projects. Within SSPS, we also received an award from Turkish Petroleum to provide subsea production systems for 5 wells in the Black Sea, including deepwater horizontal tree systems, manifolds, subsea distribution infrastructure and topside control units. In Argentina's Vaca Muerta shale, we signed a 3-year contract with YPF to provide well construction technology, including Lucida, rotary steerable and Perma Force drill bits to support unconventional shale development. We also continue to see strong momentum across integrated services, signing a contract with Gulf Energy to drill and complete 43 wells in Kenya's South Lokichar Basin, marking our first fully integrated project in Sub-Saharan Africa. Moving to digital. We continue to advance our position across both hardware and software solutions. In IET, we secured several contracts to deploy Cordant Asset Health, including an award for a large U.S. combined cycle power plant, which further illustrates the value of our digital solutions in enhancing efficiency and reliability. Notably, Cordant’s power-related orders doubled year-over-year, continuing strong momentum from 2025 when power orders rose by more than 80%. This robust growth highlights both the rapid adoption of our digital offerings within the power sector and our commitment to advancing the global transformation of power systems. In OFSE, we expanded our Lucida agreement with a large NOC for ESP surveillance and optimization and signed a new multiyear Leucipa contract with Xpand Energy, covering gas wells across the Marcellus, Utica and Haynesville Shale basins. Currently, this technology is actively deployed across approximately 75,000 wells globally, providing digital enablement that significantly differentiates our artificial lift portfolio through improved surveillance, optimization and production performance. Lastly, underscoring the expanding commercial synergy opportunities within our enterprise capabilities, we established a strategic collaboration with XGS Energy and were awarded a contract for initial well design and engineering support for its 150-megawatt geothermal project in New Mexico. Our early involvement positions us to deliver integrated subsurface and surface solutions that set us apart from our competitors. Turning to the macro on Slide 6. Despite an otherwise constructive global demand backdrop, the Middle East conflict has introduced a meaningful new layer of macro uncertainty. Disruptions across critical energy corridors, including the Strait of Hormuz, have tightened global oil and LNG balances, leading to sharp price increases. These developments have heightened inflationary pressures, which would present downside risk to global economic growth should the conflict persist over an extended period. The conflict has introduced significant volatility into global oil markets, impacting over 10% of global oil volumes. Concerns around the security of key transit routes have tightened near-term supply-demand balances with growing risk of undersupply in 2026. While the duration and full extent of the conflict remain uncertain, it is evident that geopolitical risk has become a structural reality for oil and gas markets. This development has significant consequences for the reliability of supply and global energy security. To address these challenges, there is a growing need for increased upstream investment to expand global production capacity and ensure we can meet rising demand. Additionally, rebuilding global inventories above historical levels is expected to play a critical role in supporting energy security, particularly given the significant drawdown of inventories following the extended closure of the Strait of Hormuz. The conflict has also significantly affected global LNG markets with 20% of worldwide LNG capacity now offline, driving significant price volatility. The recent infrastructure damage in the region and the effective closure of the Strait of Hormuz have materially constrained the LNG market's ability to respond to growing demand, likely to result in a supply shortfall this year. Consequently, we are seeing increased sensitivity to price movements in key consuming regions. In Asia, higher LNG prices have led to fuel switching from natural gas to coal, which has helped moderate additional upward pressure on LNG prices. Meanwhile, in Europe, the gas injection season has begun at a slower pace against relatively low storage levels. Currently, storage levels are only 30% of capacity, 6% below last year and 13% below the seasonal average. These dynamics underscore the ongoing challenges and highlight the importance of energy security across global markets. Turning to 2026. We now expect global upstream spending to be modestly below our prior outlook of low single-digit declines compared to 2025, driven entirely by a significant reduction in Middle East activity. This is expected to be partially mitigated by more resilient spending across other regions with North America and international markets outside of the Middle East now expected to be broadly flat compared to last year. This outlook assumes a resolution of the Middle East conflict by midyear and the full reopening of the Strait of Hormuz. That said, geopolitical conditions remain fluid and the ultimate timing and magnitude of the recovery in the region are subject to a wide range of potential outcomes. In the near term, we anticipate greater emphasis on optimizing production from existing wells. Once the conflict ends and the Strait of Hormuz is fully opened, we expect a measured increase in activity in the Middle East, led by a meaningful increase in remediation and intervention work as previously shut-in wells are brought back online. The pace of activity in the region will be dictated by producers' ability to restore export flows out of the region. In light of these significant disruptions, we see 2 key structural trends shaping energy markets in the wake of recent geopolitical developments. First, energy security will likely become a foundational priority for governments and industry alike, driving greater emphasis on diversifying oil and gas supply sources and increased investment in power and energy infrastructure, while also supporting continued development of lower carbon solutions such as geothermal, nuclear and grid modernization. Importantly, this is not just about adding supply. It is about building a more resilient energy system that supports industrial outcomes. That means greater redundancy, more diversified infrastructure and less reliance on single large-scale assets. A more distributed energy system will be critical to supporting future economic growth. This is where Baker Hughes is uniquely positioned with differentiated capabilities across the full energy value chain, spanning from molecule to electron. By leveraging these strengths, we're able to support customers with integrated life cycle solutions across the full energy spectrum and adjacent industrial markets. Against this backdrop, we are increasingly confident that our Horizon 2 IET order target will exceed $40 billion, supported by strengthening demand across global energy infrastructure markets. Second, regardless of the outcome of the current conflict, we expect an environment characterized by heightened geopolitical risk that is likely to result in persistent risk premiums for oil and LNG prices. This environment underscores the importance for higher upstream investment, particularly across the U.S., Latin America and other deepwater regions. To close, let me briefly recap. Despite the ongoing tariff-related pressures and significant Middle East disruption, we delivered strong results with IET achieving 35% year-over-year EBITDA growth and reaching record levels in both orders and backlog. This performance reflects effective execution of the Baker Hughes business system, supported by strong pricing and continued productivity improvements. Looking ahead, we remain focused on the successful closing of the Chart transaction and ensuring a seamless integration process. We are making substantial progress in integration planning and remain confident in delivering our targeted cost synergies of $325 million. More broadly, our ongoing portfolio management actions, strategic initiatives and comprehensive business evaluation are reinforcing the durability and effectiveness of our long-term strategy. These efforts enable us to navigate an evolving market landscape with confidence and position us to capture new growth opportunities. With that, I'll now turn the call over to Ahmed.

Thanks, Lorenzo. First, I would like to reiterate Lorenzo's comments that our foremost priority is ensuring the safety and well-being of our employees and their families in the Middle East. I'll begin on Slide 8 by presenting an overview of our consolidated results. Next, I'll give a quick update on the pending Chart transaction and discuss progress in our portfolio management strategy. After that, I'll review our segment results and provide a brief summary of the second quarter and the full year guidance. As Lorenzo mentioned, we once again delivered strong orders in the first quarter with total company orders of $8.2 billion, including $4.9 billion from IET. Adjusted EBITDA of $1.16 billion increased 12% year-over-year, driven by robust IET growth, partially offset by the impact of the Middle East disruptions on our OFSE business. Adjusted EBITDA margins increased by 140 basis points year-over-year to 17.6%. GAAP diluted earnings per share were $0.93. Excluding $0.35 of adjusting items in the quarter, diluted earnings per share were $0.58, up 13% year-over-year. During the quarter, we generated free cash flow of $210 million. The first quarter is generally the weakest period for free cash flow due to seasonal factors, but this period was further affected by some delays in customer payments. Moving on to capital allocation on Slide 9. The company's balance sheet remains strong with our net debt to adjusted EBITDA ratio declining to 0.32x. Following the successful debt offering in March, our cash position increased to $14.8 billion, while liquidity increased to $17.8 billion. The long-term debt issuance in March raised $6.5 billion in U.S. bonds and EUR 3 billion in European bonds, marking our inaugural bond offering in Europe. The proceeds from this offering will be allocated towards closing the Chart acquisition. Our target remains to reduce our net debt to adjusted EBITDA ratio to between 1 and 1.5x within 24 months after the Chart transaction closes. We plan to achieve this through free cash flow generation and proceeds from our ongoing portfolio management actions. At the start of the quarter, we completed the previously announced SPC and PSI transactions. In addition, we anticipate generating gross proceeds of $1.6 billion from the IPO of HMH in the recently announced sale of Waygate Technologies to Hexagon. As a result, we expect to achieve our $1 billion incremental divestment target ahead of schedule, underscoring our commitment to disciplined capital management and maintaining our strong balance sheet. With respect to Chart, we remain focused on closing the transaction and executing a seamless integration. With regulatory reviews still underway in certain jurisdictions, we currently expect closing in the second quarter, understanding that the timing may evolve as those processes progress. We believe this combination will significantly enhance the value we deliver to customers, broaden our industrial portfolio and enable us to expand into adjacent markets. On integration, our integration management office led by Jim Apostolidis continues to make significant progress. The team is organized into 17 operational work streams, each focused on ensuring a smooth transition. To date, we have identified more than 250 synergy opportunities and remain confident in achieving the full $325 million of targeted cost synergies. As we have progressed through integration planning, our work has further reinforced both the strategic and industrial rationale of this acquisition while highlighting strong cultural alignment between the two organizations. Let's now turn to segment results, starting with IET on Slide 10. During the quarter, we booked record IET orders of $4.9 billion, driven by continued strength in Power Systems, LNG and gas infrastructure. Over the last 4 quarters, IET orders totaled $16.6 billion, which is up 25% versus the prior 4 quarters. Our first quarter results reflect outstanding performance in IET with revenue of $3.35 billion at the high end of our guidance range and increasing 14% year-over-year. Compared to last year, revenue was impacted by the PSI and CDC transactions, which together represented a headwind of 3% to aggregate revenue. Growth was led by strong performance in Gas Technology Services as we continue to work down the overdue aeroderivative backlog. We expect these benefits to carry into the second quarter with a more normalized environment anticipated in the latter half of the year. During the quarter, IET revenue was slightly impacted by shipping delays associated with Middle East disruptions across key trading routes. IET EBITDA for the quarter increased 35% year-over-year to $678 million. Margins expanded by 310 basis points to 20.2%. This strong margin performance was driven by favorable backlog pricing, elevated project closeout and productivity and ongoing execution of the Baker Hughes business system, further reinforcing our operating discipline. Turning to OFSE on Slide 11. OFSE delivered another solid quarter, demonstrating resilience despite persistent macroeconomic headwinds and the ongoing challenges in the Middle East. Revenue for the quarter was $3.24 billion, reflecting a 9% sequential decline, while remaining slightly above the midpoint of our guidance range. SPC was excluded from the consolidated results after the formation of a joint venture with Cactus in early January, contributing 4% to OFSE's sequential revenue decline. Relative to our expectations, strong performance in Mexico, Sub-Saharan Africa and the Gulf of Mexico more than offset the disruptions experienced in the Middle East during March, which impacted OFSE revenue by approximately 2% when compared to the fourth quarter of 2025. OFSE reported EBITDA of $565 million, exceeding the midpoint of our guidance range. EBITDA margin declined 70 basis points sequentially to 17.4%. This decline was attributed to the SPC transaction, seasonality and the impact of Middle East disruptions, partially offset by an improvement in North America OFSE margins. The quarter was positively impacted by foreign exchange and a more favorable mix of direct sales across offshore markets, which generally yield higher margins. In addition, SSPS posted continued strength in orders totaling $650 million, up 22% year-over-year. This is a robust 82% increase when excluding the impact of SPC. Turning to Slide 12. I will provide our outlook for the second quarter and then comment on our full year 2026 guidance. For clarity, I will speak to the midpoint of the guidance ranges. For the purposes of this guidance, it is assumed that the situation in the Middle East will continue through the end of June without further escalation. The full reopening of the Strait of Hormuz is anticipated thereafter, followed by a measured increase in Middle East activity levels during the second half of the year. This guidance does not account for any potentially significant secondary impacts, such as elevated inflationary pressures or broader supply chain disruptions that could arise from the ongoing situation. Starting with second quarter guidance, we anticipate company revenue of $6.5 billion and adjusted EBITDA of $1.13 billion. For IET, we expect results to demonstrate another quarter of robust year-over-year EBITDA growth led by Gas Technology and CTS. The impact on IET for Middle East-related disruptions is expected to be modest in the second quarter. Overall, we forecast IET EBITDA to reach $670 million. The major factors driving our guidance ranges for IET will be the pace of backlog conversion in GTE, the progress with aeroderivative repairs in GTS, the level of disruptions related to the ongoing conflict in the Middle East, foreign exchange rates and trade policy. For OFSE, we anticipate second quarter results will be impacted by events in the Middle East and a return to a more typical mix of direct sales. While a normal seasonal recovery is anticipated for regions outside the Middle East, we expect this to be offset by significant declines in the Middle East. Consequently, EBITDA is projected to be $540 million for the quarter with revenues estimated at $3.2 billion. Outside of the Middle East conflict, factors driving our guidance ranges for OFSE include execution of our SSPS backlog, near-term activity levels, trade policy, foreign exchange rates and pricing across more transactional markets. Moving to our full year guidance. We are maintaining our company's revenue and adjusted EBITDA guidance range. Currently, we anticipate full year results to be slightly below the midpoint of these guidance ranges, reflecting both our resilience and adaptability in navigating ongoing uncertainties. Although near-term challenges persist due to the conflict in the Middle East, we remain confident that our portfolio positions us to manage short-term disruptions effectively. As we look ahead to full year IET orders, we have started 2026 with strong momentum, driven by a record first quarter led by Power Systems' strong performance. Given this momentum, we believe we are well positioned to achieve at least the $14.5 billion midpoint of our order guidance. The growing emphasis on energy security is expected to further support demand for energy infrastructure, unlocking potential upside to IET's Horizon 2 order target. We now anticipate achieving at least the midpoint of our full year IET EBITDA guidance of $2.7 billion. Developments in the Middle East may result in minor delays to planned LNG maintenance in GTS. However, we expect these impacts to be more than offset by the first quarter outperformance and revenue conversion from higher backlog levels. In OFSE, ongoing tensions in the Middle East have introduced considerable uncertainty, which may impact our ability to achieve the midpoint of our original full year guidance range. However, should the conflict conclude by the end of June without significant escalation and provided the Strait of Hormuz is fully operational during the second half of the year, we anticipate being able to achieve the low end of our EBITDA guidance range of $2.325 billion. We will continue to monitor the situation closely, and we'll provide any significant updates if and when appropriate. In summary, we delivered another quarter of outstanding operational performance even with ongoing challenges in the Middle East. IET once again delivered very strong results, while OFSE demonstrated continued resilience against a difficult backdrop, highlighting the durability of the portfolio. This success is a testament to the strength of the Baker Hughes business system, which continues to drive enhanced execution, productivity and profitability across the organization. We also continue to advance our portfolio management strategy with the announcement of the Waygate Technologies divestiture marking another important milestone. Collectively, these efforts reinforce our focus on delivering sustained long-term value for our shareholders. With that, I'll turn the call back to Lorenzo.

Thank you, Ahmed. For those following along, please turn to Slide 14. Following yet another strong quarter, it is clear that we are gaining real momentum in executing our strategy to transform Baker Hughes. Across our 3 time horizons, our strategy is designed to evolve Baker Hughes into a leading industrialized energy solutions company, one that is uniquely positioned at the intersection of energy and industrial markets. Fundamental to this transformation is our ability to operate across the full energy value chain, spanning from molecule to electron. In energy upstream, we continue to provide our customers with critical technologies and services that enable efficient and reliable hydrocarbon production. As those molecules move through the system, our energy infrastructure capabilities enable their transportation, processing and subsequent conversion into usable energy. Through the versatility of our IET portfolio, enhanced by the planned acquisition of Chart, we are expanding our reach into industrial markets that directly rely on the energy produced across the value chain, broadening our capabilities at the intersection of energy systems, industrial demand and global innovation. What differentiates Baker Hughes is not just our participation across these markets, but our ability to connect them. Our portfolio enables us to integrate solutions across the energy value chain, linking subsurface, surface and end-use capabilities in a way that is uniquely differentiated. This is especially important as the lines between energy and industrial markets increasingly converge, unlocking new opportunities for integrated solutions, higher-value offerings and more durable recurring revenue streams. Reliability, scalability and predictability are critical to industrialized energy solutions, and this is precisely where Baker Hughes is positioned to lead. Across our broad and versatile portfolio, we deliver mission-critical technologies, comprehensive life cycle solutions and advanced digital capabilities for industrialized energy applications. Importantly, our ongoing portfolio actions continue to positively reinforce our path ahead. We continue to execute deliberate and strategic steps to advance our transformation as we build a company capable of industrializing energy solutions. Our strategy, unmatched portfolio and distinct capabilities position Baker Hughes to deliver sustainable growth, continued margin expansion and create long-term value for our shareholders and customers as we continue our journey in Horizon 2. In closing, I would like to thank all Baker Hughes employees for delivering another strong quarter. I especially want to recognize the resilience and focus of our colleagues in the Middle East who continue to support one another and our customers in a challenging environment. We continue to prioritize the safety of our people and their families. With that, I'll turn the call back over to Chase.

Operator, we can now open the call for questions.

Lorenzo, I wanted to get your thoughts on the impact from the Middle East conflict on the potential for infrastructure spend, both from repairing damaged infrastructure and to add redundancy for greater supply surety. This obviously, as you mentioned, should be a favorable trend for Baker. But I was wondering if you could help us gauge maybe the intermediate and longer-term impact. I know you signaled how IET orders could exceed your Horizon 2 target, but I wanted to see if you could provide a little bit more color around this.

Yes, definitely, Arun. And clearly, a lot taking place. As we look at the current situation, the top priority remains, obviously, the safety and well-being of our employees and their families in the region. So we're taking all the right precautions and supporting them in these challenging times. As we look beyond the considerable near-term uncertainty surrounding the situation, what we do recognize is that it's going to drive fundamental structural change across the energy landscape in the future. First and foremost, energy security is going to become increasingly important, and it's going to really receive more emphasis, not just within that region, but also globally with regards to how countries treat their energy security. It's going to lead to a diversified mix of energy sources that are essential to meet the energy demand. As a result, we see a stronger focus on diversifying energy supply sources, enhancing the reliability of the global energy markets. To address this, we're going to see a few things. Firstly, increased upstream investment to expand global production capacity, ensuring we meet rising demand and supporting a more durable upstream spending cycle in the years ahead. There will also be a rebuilding of global inventories above historical levels to ensure that energy security is foremost, and this will play a role in avoiding significant drawdowns in the future given the closure of the Strait of Hormuz. Beyond increased upstream investment, we'll continue to see investment in lower carbon solutions, including geothermal, nuclear and grid modernization as part of the drive to build a more sustainable energy system. It's about diversifying the energy mix and making it more durable. You're going to see a theme of increased investment in those areas. It's not just about increasing energy supply; it's about robust and resilient energy infrastructure with greater redundancy, diversified infrastructure and reduced reliance on any single large-scale assets. Baker Hughes is uniquely positioned to address these needs given our differentiated capabilities across the entire energy value chain from molecule to electron. As we look forward, we feel good about the opportunity to exceed the $40 billion target for IET orders that we gave out for Horizon 2. It's not just about LNG FIDs. It's also about associated gas infrastructure, pipelines, compression stations, and we're seeing the need for more redundancy and investments being made in those areas.

Yes, very strong results here in 1Q. But Ahmed, can you unpack the 2Q guide for us a bit more? IET usually sees a nice step-up in revenues and margins in 2Q, but the guide is a bit more flattish. Obviously, a strong comp, but just curious on some color there. And then in OFSE, you guys assume no recovery in the Middle East until 3Q, no pushback there. But if we do get better activity levels in the second half of the quarter as one of your peers is seeing, I just curious how much could that contribute to segment results? It sounds like there's a bit better outlook across the other end markets. So some additional color there would be great, too.

Yes, Scott. As we said in our remarks, there's still a great deal of uncertainty regarding the duration and depth of the conflict. So there are many different factors that could affect the second quarter and the second half. As a quick reminder, for the second quarter, we're assuming the conflict persists through the end of June, but with no further major disruptions and that the Strait of Hormuz is not fully operational until the second half of the year. It's helpful to break it down by OFSE and IET. Starting with OFSE, with those assumptions, we expect a significant impact to our Middle East operations in the second quarter with that region potentially falling more than 20% sequentially, which is double the rate of decline in the first quarter. That's driven by the expectation that Middle East revenue in April will remain near March levels and then hold throughout the second quarter, effectively three months. The mix is important. Service-related revenue in the region will be affected, but the larger impact is likely to be on product sales, given logistical challenges with equipment imports and exports. Regarding a quicker recovery, there could be upside to our Middle East revenue assumptions, and we would act accordingly, which is contemplated in the range for the second quarter. But that upside could be somewhat delayed given the heavier mix of products in the region due to logistics. Outside the Middle East, we expect a typical seasonal recovery across international markets and flattish revenue in North America. SSPS should deliver a sequential increase driven by backlog linearity. OFSE margins are projecting a sequential decline in the second quarter, which I attribute to some of the tailwinds that supported first quarter margins. Excluding those first quarter benefits, OFSE's operational margins in the second quarter could be modestly higher sequentially despite supply chain and logistic disruptions. For IET, we assume a modest impact from the conflict, largely logistical constraints for shipping products similar to OFSE, which would impact GTE slightly. In GTS, we experienced lower seasonal revenue declines during the first quarter driven by execution of overdue backlog. Rolling that forward into the second quarter will temper the usual significant sequential growth in GTS between Q1 and Q2. We do not anticipate significant impact on GTS from potential LNG maintenance delays at this time. Overall, IET has been driving better linearity. We anticipate second quarter segment revenue will be flat quarter-over-quarter and IET margins will be only modestly up in Q2 given the Q1 tailwinds of productivity and project closeout. Taking all those factors into account at the company level, we expect second quarter EBITDA for the company to be relatively flat versus the first quarter. I hope those building blocks help.

I wanted to build on what Scott just asked about and to think a little bit more about the second half. There's a bunch of moving parts. IET has been an outperformer. Maybe that implies that we want to be conservative in the second half or maybe we don't want to be. OFSE, we understand what you're saying about the Middle East, but there's a building recovery that's gaining momentum. I'm curious how we should think about 3Q and 4Q unfolding, both revenue-wise for OFSE and IET and margin-wise as we track towards your targets for the year. I'm assuming you have better visibility probably on IET than OFSE, but any help you can give there would be appreciated.

James, as we think about the second half, there are multiple variables and a clear distinction between OFSE and IET, given the visibility we have on the IET side. On OFSE, the first consideration is the state of infrastructure and available storage capacity in the region. Given the uncertainty, we believe it is prudent to assume a measured ramp in the region during the second half, assuming the Strait of Hormuz is fully operational by then. That said, we do see offsetting activity in other regions and now expect North America and international markets outside the Middle East to be modestly stronger in the second half compared to our earlier expectations. On margins, we've been focused on cost discipline and cost-out actions we've been working on for Q4 and Q1 are starting to come through. We still see potential to achieve the lower end of the OFSE EBITDA guidance range, but there are many factors in play. For IET, better linearity carries through to the first three quarters with a less pronounced Q4 increase versus prior years. While modest impacts in the second half from cost inflation, logistical challenges, project delays or maintenance delays are possible, we expect them to be modest. As a reference, in 2022, during the start of the Russia-Ukraine conflict, there were only modest LNG maintenance delays that normalized over time. With current LNG price dynamics being less pronounced than in 2022, we expect impacts to be muted. Additionally, overdue aeroderivative backlog in GTS should normalize over time, which reduces the expectation of a significant second half ramp. This gives us confidence in achieving at least the midpoint of our full year IET EBITDA guidance of $2.7 billion. The situation is fluid, and our view may change as conditions evolve, but we will remain transparent and provide updates as appropriate.

So really impressive to see the IET margins above 20% already. But I thought the standout this quarter were the IET orders. It came in well above our expectations. I was hoping you could spend a little bit more time on the Power Solutions side of the orders. Could you talk to the three primary drivers being generation, grid and management, and how you see those playing out? It looks like the pace has you on track to maybe upside for your 2026 order guide. And maybe if you could also comment on the longer-term stability of the data center demand, which is clearly an issue a lot of people are talking about.

Yes, Dave. I'll start by reiterating that global power demand is in a multiyear growth cycle and we're in the early stages. Projections indicate power demand will double by 2040, driven by data center and AI compute growth, digital infrastructure expansion, electrification including EV adoption, and the electrification of industrial processes. Energy security concerns and grid constraints, particularly in the U.S., are driving investments in behind-the-meter power solutions. We're seeing a shift in customer mindset: these solutions are increasingly viewed as long-term baseload infrastructure rather than short-term bridges. We see the behind-the-meter market reaching $60 billion by 2030, led by data centers, and the annual market opportunity expanding to more than $100 billion by 2030 when you include power generation, grid stability and energy management. In Q1, Power Systems secured $1.4 billion of orders across those three capabilities, accounting for almost 30% of total IET orders. We see strong momentum in large data center projects for power generation, synchronous condensers for grid stability, and energy storage solutions for energy management. Our digital solutions, including iCenter and Cordant, expand cross-selling opportunities. Cordant power-related orders doubled year-over-year in Q1, continuing strong momentum from 2025. Our installed base for NovaLTs is set to expand dramatically over the coming years, which supports aftermarket services. We have an extensive portfolio to deliver integrated power solutions across many applications and end markets. We view demand for Power Systems as durable and robust, providing potential upside to the midpoint of our 2026 IET guidance and supporting longer-term strength for IET and our Horizon 2 targets.

You've clearly been busy on the portfolio optimization front. After the sales announced year-to-date, Waygate and the HMH IPO that Ahmed mentioned, you're already above that $1 billion bogey you set out. Can you give us an update on how you're thinking about the portfolio optimization strategy going forward? Do you think you're largely done? How should we think about next steps?

Stephen, I'll take that. We use four broad strategic criteria for portfolio management on top of financial metrics: exposure to critical technologies, life cycle models and aftermarket potential, rights to play in terms of commercial and operational synergies across the portfolio, and earnings durability with expansion into new markets. Recent divestitures, including the Waygate announcement and HMH IPO-related proceeds, are expected to generate around $1.6 billion in gross proceeds. Coupled with PSI and the SPC joint venture proceeds, we expect around $3 billion of gross cash proceeds in 2026. These actions are part of a continuum of portfolio management, and we will remain disciplined to ensure alignment with strategic objectives and balance sheet strength. In the near term, our focus is on closing and successfully integrating Chart.

Lorenzo, I want to go back to Power Systems. Demand is clearly very strong. On the capacity side, you are doubling NovaLT capacity, but you're also booked out through 2028. Are you capacity constrained relative to the level of demand you're seeing? When I ask that, it's not just NovaLT, but also products like BRUSH generators and synchronous condensers. Any color on capacity would be helpful.

Saurabh, power demand is rising, driven by data centers, manufacturing returns and infrastructure needs. The NovaLT remains a core product as do electric motors, gearboxes, generators, synchronous condensers and control systems. From a capacity standpoint, we are effectively sold out of NovaLTs through 2028 and the tightness across the broader turbine market is well understood. We have increased capacity and continue to receive strong inbound demand for NovaLTs, and we'll evaluate each opportunity on its merits. Our focus is on customers who are long-term partners with financing and offtake in place. We will monitor market conditions with dynamic planning and make disciplined decisions about expanding beyond our current doubling plan based on medium- and long-term supply-demand dynamics and return thresholds. For Frame 5 gas turbines, we have available capacity in 2027 and 2028 to support orders should demand materialize. We've added capacity to our BRUSH product lines to increase generators and synchronous condenser output, and we've inaugurated our aftermarket NovaLT facility in Italy to support services growth. We maintain flexibility across our manufacturing footprint and supply chain to support additional capacity as needed, and we will continue to invest in R&D for next-generation engines and emissions reduction technologies. Taken together, our investments in capacity and innovation position us to deliver sustainable growth, margin expansion and long-term value.

Yes. Thank you to everyone for taking the time to join our earnings call today, and I look forward to speaking with you all again soon. Operator, you may now close out the call.