貝克休斯 (BKR) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE company, Third Quarter 2018 Earnings Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Phil Mueller, Vice President of Investor Relations.

Sir, you may begin.

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 at bhge.com.

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 at bhge.com 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 our 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 are building 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 we are 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 2 exciting examples of our outcome-based solutions.

The first 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 developments, 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 to 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'd 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 market.

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 risks, 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 it's been 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 out to 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 a total of 65 million tons per annum to be sanctioned by 2020.

Global LNG demand has remained robust through 2018.

Chinese imports are up 30%, and South Korean and India have both grown over 6% year-over-year.

Given the strong global demand growth and current landed Asian spot prices over $10 per 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 2 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 latest example of these innovative models 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 (sic) [$550 million].

We will significantly increase our presence in the United Arab Emirates, and we 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 productivity 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% dividend on our original investment.

We will also receive a significant downpayment from ADNOC drilling this quarter to fund capital needs as we ramp up activity.

I am 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 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 and 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.

As an example, in the third quarter, we drove a world record of over 9,000 feet in a 24 hour period.

We utilized our remote monitoring capabilities to ensure the well path stayed in the target zone 100% of the time.

We reduced the customers' drilling cost by 35%.

Over the last 3 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 steerables due to increasing well complexity and a 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.

We drilled the first wells 50% faster than planned with very high accuracy.

The strength of our offering is not simply built on 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 Celle, 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.

In oilfield equipment, our outlook is steadily improving.

We won our first new-build BOP order since 2014 for a semi-sub 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 34 trees for ONGC 98/2 project.

This award represents the single largest subsea contract ever awarded by ONGC.

After our success with Gorgon, Shwe and a number of other projects in the first half of the year, this is yet another big win for our OFE business and an important step to 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.

The competition from Shell and other sources of energy require 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 wells is 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 to do.

We need to continue to operate smarter, reduce cost and drive a better sustainable economic model in our offshore.

Our customers need it and expect it.

We have been working on a new model to 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 who can connect entire subsea systems and support our customers in optimizing not just the initial CapEx spend but the entire life-of-well cost.

We are connecting the core building blocks of our subsea offering with solutions across the BHGE portfolio: reservoir insights, field development and well construction from OFS, production handling and power systems from TPS, software and sensors from our Digital Solutions business, and EPCI capabilities from our partners.

Our subsea connect strategy focused on 4 key areas, which build on the breadth of our portfolio and leveraging our partners.

The first area is around independent planning and risk management, which integrates the subsurface, seabed, surface and EPCI capabilities.

The second focuses on new modular deepwater technology.

The third is working across a network of preferred partners to better integrate well construction.

That includes subsurface development, SPS, surf, flexible risers, topside compression and power generation.

The fourth area incorporates digital tools and advanced analytics to optimize project designs and processes.

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 intervention simpler and more efficient, dramatically lowering the total cost of ownership.

We have developed this family of solutions using 3 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 and developed powerful new technology that is unique in the marketplace today.

Our new lightweight compact tree is 50% lighter than its predecessor.

It uses unique tree caps, which can be configured to suit changing requirements.

These tree caps eliminate the need for multiple connections and significantly reduce manufacturing and installation cost 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, reducing cycle time, cost and footprint.

But the most common configuration the manifold will be made-to-order with 0 product engineering and delivered in 10 months from contract award.

Our new modular compact pump is the world's first subsea multi-phase pump without a barrier fluid system, which allows the pump to be configured to different field requirements quickly and easily.

This ensures better reliability as high-risk items such as mechanical steels are not needed and eliminates the need to re-bundle hydraulics during the life of the field.

For our composite risers, we have significantly reduced hang-off weights and platform burdens.

We have simplified riser configurations and minimized the subsea infrastructure, which reduces complexity and cost materially.

Finally, our subsea connection system enables fast and reliable connections between all the elements of the subsea distributions business.

It uses a patented locking mechanism that leaves only one moving part of the design on 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 to move forward with offshore projects.

In Turbomachinery and 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, Qatar 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 cycle to be a key driver of revenue and profits for us in 2019 and beyond.

In the third quarter, our upstream production business secured its fourth FPSO win of the year, up from just one FPSO sold in 2017.

This is another sign that offshore spending is returning to more normalized levels.

We expect orders in 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 a contract to provide turbine compressive packages using our PGT25+ aeroderivative gas turbine technology with dry low emission combustors at 2 compression stations in Canada.

We continue to see growth opportunities in our pipeline in gas processes and segments into 2019.

Our transactional services business, which is driven by our large installed base of on and offshore production units has seen improvements over the course of 2018 as customers are beginning to replenish depleted safety stocks.

Transactional service orders in the third quarter were up 46% year-over-year.

This is a positive sign, which 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 Measurements and Controls businesses.

In September, we were pleased to announce the successful deployment of Plant Operations Adviser, a cloud-based advanced analytics solution with BP across all 4 of their operated 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 Atlantis 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 insights 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 have chosen to deploy POA to over 30 upstream assets across the globe.

We are also driving growth in our core hardware offerings across multiple industries.

The oil and gas end markets continue to gain momentum, specifically in our pipeline inspection business.

In the quarter, we saw solid growth and continued to strengthen our technology offering, including launching our partnership with a large pipeline operator to drive greater reliability in pipeline inspections.

We were awarded a large contract in our Condition and Monitoring business at the Bruce Power Plant in Canada, and we're 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 increased sales in industrial CT systems and portable video borescopes for parts 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 4 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 to 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 4 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 detail.

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 3. Sequentially, the decline was driven by Oilfield Equipment down 47% primarily due to orders tightening in 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 rebuild backlog, especially in our longer-cycle equipment businesses.

Year-over-year, Oilfield Services was up 10%, and Turbomachinery was up 16%, offset by Oilfield Equipment down 27% and Digital Solutions down 31% as a result of a large digital order we secured in the third quarter of last year 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 1.0, and equipment book-to-bill ratio was also 1.0.

Revenue for the quarter was $5.7 billion, 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 2%.

Operating income for the quarter was $282 million, up $204 million 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 operating income rate for the quarter was 6.7%, which is up 340 basis points year-over-year and 140 basis points sequentially.

We grew margin rates over 100 basis points in every segment sequentially.

As we have outlined, we are very focused on our goal of expanding margin rates, and this quarter demonstrated continued progress.

In the third quarter, we delivered $35 million of incremental synergies.

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.

Depreciation and amortization was $39 million lower than the second quarter.

This was primarily driven by assets that were set up at the closing of the merger in July last year, which were fully depreciated by the beginning of the third quarter 2018 and, therefore, did not continue to depreciate in the third quarter.

In the quarter, we incurred an $85 million charge related to our BJ Services investment.

This noncash charge brought the equity investment in the company to 0 on our balance sheet.

As a result, we will not be incurring additional charges going forward.

We continue to work with the BJ Services team to grow their business, capture market opportunity and return to profitability.

Tax expense for the quarter was $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, did not tax affect losses on our U.S. operations.

We expect our fourth quarter effective tax rate to be approximately 35%.

As a reminder, once we start to generate earnings in the U.S., we will be able to benefit from the U.S. valuation allowances we have built up.

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.

Gross 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.

These are both broadly 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 convergence over time.

Next, I wanted to give you an update on our recent capital allocation actions.

There are essentially 3 significant cash flows, which we expect to occur in the fourth quarter as a result of our portfolio action.

As Lorenzo mentioned, we recently announced a strategic partnership agreement with ADNOC where BHGE will purchase a 5% equity stake in ADNOC drilling.

We expect the deal to close this year.

We will pay $500 million (sic) [$550 million] to ADNOC for the equity stake, and then collect a down payment from ADNOC drilling relates to working capital requirements 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 the net impact of these 3 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 as it pertains to our share repurchase 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 step before we resume our buyback activity.

Also at the beginning of October, we were pleased to see S&P's ratings affirmation at A- 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 remain stable.

While 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, 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 the Marjan integrated well services contract.

We expect these costs to continue through 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 the increased volume in subsea production system, continued cost-out and the nonrepeat 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 improvement 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 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 up 130 basis points compared to the second quarter.

TPS has had a challenging year so far as the business executed through lower-margin downstream backlog with limited volumes from segments like LNG and upstream production.

Throughout the first 9 months of the year, we have seen encouraging signs both from 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 large 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 improvement in our Pipeline and Process Solutions, measurement and sensing and Bentley Nevada product lines.

Regionally, we saw continued growth in North America and Latin America, partially offset by seasonal decline 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 technology, 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'll 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 markets today by partnering with our customers to address their challenges.

Our priorities are unchanged.

We are focused on executing to deliver on our commitments on share, margins and cash.

Phil, now over to you for questions.

Thanks.

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

(Operator Instructions) Our first question comes from the line of James West of Evercore ISI.

Lorenzo and Brian, you outlined a lot of significant wins kind of across the portfolio in your prepared remarks, and one I wanted to dig into or the one area I wanted to really dig into here is the Middle East.

It's obviously a growth area for the industry.

You have the recent ADNOC investment, the MOUs in Iraq, MOUs in Saudi, the Marjan Field win.

It seems like you're picking up share kind of across the region.

Could you maybe touch on that for a minute or 2 and talk about your strategy and how you guys are progressing there?

James, as you said, clearly, this is in line with the strategy we laid out at the beginning of the year and growing our share in the Middle East, and we feel very good about what we've achieved and also the outlook going forward.

The Middle East continues to be an area of growth.

You've highlighted some of the wins.

The Marjan Field for us is important because it really allows us to be an exclusive provider for Drilling Services, coiled tubing services and also provide drilling fluids engineering services, and this allows us to be at the start of the development really incumbent with the customer and be able to grow as the field continues to grow.

Qatar Petroleum, we've announced, obviously, a 5-year Drilling Services contract to support the offshore and onshore drilling activities.

And again, this is based on the success we've had of drilling well for the customer, performing well and getting the best outcomes.

And we've taken the opportunity to strengthen our partnership in United Arab Emirates with the ADNOC drilling, and this is really favoring the partnership we've already had with ADNOC.

It's attractive from a strategic perspective to gain share in the conventional and also the unconventional, which are going to be increasing over time.

So we feel very good about what we're seeing in the Middle East, and it's going to be an area of continued growth and focus.

And I'll let Brian give you a little bit more details on the ADNOC partnership.

Yes, James, if I take a step back and look at the ADNOC partnership, we're going to invest $500 million (sic) [$550 million] of cash for 5% of the equity in ADNOC Drilling.

And on that, we'll get a 7% annual dividend.

So good returns from that standpoint.

The other thing I'd say is that given the book of business we see there in the first year plus the 7% return, it will be EPS accretive in year 1. So solid financials, solid return.

It's also structured in a way, James, that our working capital ramp is partially funded by the partnership, and so we will get a payment in the fourth quarter here to help fund that working capital ramp, which again furthers the return on this deal and makes it quite attractive.

And the other thing I really like about this is it gives us a partnership with both ADNOC and ADNOC Drilling.

Obviously, ADNOC Drilling is well positioned in UAE and is the exclusive provider of Drilling Services for ADNOC.

And we are exclusive in key areas of that supply and feel good about the position it gives us into the broader market, as Lorenzo mentioned, on both unconventional and conventional.

The other thing I'd just point out, too, is the deals we do have a board seat on ADNOC Drilling, which further strengthens the partnership there so like how we're positioning ourselves in UAE and the growth trajectory that the customers outlined there in UAE.

And then kind of stepping back on Middle East more broadly in our strategy there I'd say when I was there in September, I'd say there was overall positive sentiment broadly from customers in the region.

So we like how we're repositioning ourselves there and feel good about our objective to continue to gain market share in a way that's going to be helping us continue to generate better returns for shareholders.

Our next question comes from the line of Jud Bailey of Wells Fargo.

A couple of questions on TPS, I guess, maybe, Lorenzo, first for you if I could, you made some good commentary on LNG awards and kind of your outlook in a 65 million MTPA.

You're going to be booking probably LNG Canada in the fourth quarter.

Can you maybe give us your -- maybe a little more detailed thoughts on how you see kind of order cadence progressing and kind of projects around the world and kind of how that looks over a couple of years?

Any more thoughts would be appreciated.

We feel, again, very positive on the outlook of the LNG market.

We've said consistently that in the second half of the year, we'd start to see final investment decisions.

LNG Canada is clearly a first good step in that direction and also what we show with Cheniere Corpus Christi.

As you know, back in 2014, we did actually get selected for the LNG Canada with our high-efficiency LMS 100 aeroderivatives so that's a good start, and we're progressing well in the LNG market.

If you look overall, we expect demand to double to about 500 MTPA by 2030.

And as we mentioned, there's going to be sanctioning of up to 65 million tons per annum by now and 2020.

So we feel well positioned, and LNG is a good, robust positioning for us.

And I'll let Brian jump in a little bit more on TPS, which, again, continues the theme of improvement as we stated all along, and we feel good about that.

Yes, LNG is obviously an important part of the TPS story.

But I take a step back and look at some of the key leading indicators that we saw in 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 as I mentioned, were up 41%.

Equipment orders were down 10%, and that's mainly on large deals.

But as you saw and as you mentioned, there's a lot of activity in the LNG space, and we're well positioned to capitalize on that.

And then within service orders, transactional services, which convert more quickly, we're up 46% in the quarter, and that's 20% year-to-date.

And third quarter service revenue in TPS was up 9%, so starting to see some of that come through.

We're also executing on the cost-out program that we talked to you about, will start to yield results in Q4 and definitely into next year.

And when I look at all these indicators, it makes me pretty confident about our positioning for the quarter to be able to deliver margin growth and as we roll into 2019.

And overall for TPS, really, outlook hasn't changed for 2019 on what we talked about with the cost-out, better project mix that we have in the backlog and we see coming to the backlog and then the higher outages that will roll through the services portfolio kind of underpinned with that transactional service demand growth that we've seen here this quarter and year-to-date.

So feeling good about where we are positioned with TPS.

Our next question comes from the line of Dave Anderson of Barclays.

I was hoping you could talk a little bit about the opportunities you see in offshore developments over the next 12 to 18 months.

You've had a couple of good wins the last few months, including the large ONGC award.

I was wondering if you could perhaps expand on that award in particular.

It's one of the larger integrated awards we've seen.

I'm assuming it was very competitive, but what put you in a position to win this, what did you guys bring to the table and maybe you could also expand a little bit relationship with McDermott.

It seems like it's not a coincident that you've teamed up with them now several times here.

Firstly, let's start off with the offshore outlook and also how we see it developing.

Clearly, there's an improving sentiment out there.

We've got better visibility to commodity price that's range bound, and with that, also the competitiveness of our offering has increased, which is allowing customers to go forward with final investment decisions.

It's not at the height of what we saw back in 2014, but we do see the pipeline of opportunities improving as we go forward.

And you've seen some announcements of the Gorgon Phase 2, Shwe positive Phase 2 and most recently, the ONGC 98/2.

So just to put that into perspective, it is the single largest award that ONGC has made.

We do have a partnership structure with both McDermott and LNT.

We're going to be providing 34 deepwater trees, manifolds, controls, connection systems, SPS installation tools.

And really, it's a great result.

And it does build on the relationship we've had in the past with McDermott, but I'd say it also builds on the strong relationship we have with ONGC.

We have worked with them in the past, and we've always said it's important to be flexible in the type of arrangements we have and alliances we have to meet the customer requirements.

And in this case, we're very happy to be with our partners and providing what they need going forward at the productive rates as well.

The industry as a whole on offshore continues to be very competitive.

And clearly, there's that element that continues just because there's still some overcapacity out there.

So we're focused on really continuing to drive productivity in our portfolio, and that's why we launched subsea connect, really the work that we've done over the last year on developing better products, lighter weight, more cost competitive, and that's the offering that we're providing also and we're continuing to work with.

Yes.

And Dave, one thing I'd say about where we are in subsea in particular because of the market dynamics that we talked about and you're all familiar with, Neil and the team have done a great job this year repositioning our offering and taking quite a bit of cost out of the -- out of the products as well as installation costs with our partners and take the overall cost of these projects down for us to respond to that competitive environment.

So we like where we're positioned there.

You highlighted McDermott.

I like the way the team is positioning to take advantage of what's going on in the market and win there.

So look we feel good about the backlog going into 4Q and into 2019 in subsea, in particular.

If I look at the Flexible Pipe business in Neil's world why we've continued to make a lot of improvements there as well, just given where we are in the procurement cycle of the largest customers there, I do expect that piece of the business to be a bit of a headwind next year that will offset some of the positive momentum we're seeing in the subsea production system space.

Our next question comes from the line of Scott Gruber of Citi.

Brian, your guidance on 4Q for oil services is the trend with the market if I heard you correctly.

Now we have a lot of moving pieces 4Q, as you know, seasonality and this extended frac holiday year-end product sales, et cetera.

Would you be able to put a range on the 4Q revenue trajectory in Oilfield Services for us?

Yes, Scott.

We feel pretty constructive about the fourth quarter outlook for OFS.

We do expect top line growth in line with the broader market, and I'd say core incrementals around our historical rate there, so nothing out of line there.

We do expect some increased headwinds though, as I mentioned, from some ramp-up costs as we start to execute on some of the recent international wins.

And it's really Equinor and Marjan that Lorenzo talked about earlier.

And those types of costs are really driven by mobilization cost of the fleet, some increased reactivation cost as we start to put tools in place to be able to start up that activity in the early part of next year.

And then, of course, there's some new tool build that we'll do here in the quarter as we get ready for executing on those.

So look, I would expect those costs to continue a little bit into 2019, and it's just a short-term dynamic there, but feel pretty good about how we're positioned from a share standpoint in OFS.

We've seen positive momentum now for the last few quarters.

Maria Claudia and the team are focused on important deals and I think have positioned the team pretty well to capture the market growth.

So overall in line with the market, like I said, with core incremental holdings and like the outlook we see there.

And Scott, just to remind everybody and I think it's important when we talk about the North America market, our exposure to the frac side of things is limited here.

We've got just a minority investment in the BJ Services so we're not materially impacted by some of the challenges you're seeing in the Permian softness outside of some of the impacts on completions there.

Our next question comes from the line of Bill Herbert of Simmons.

Brian, with regard to core incrementals, remind me what those are.

I think they have been in the vicinity of 25% and again, to be clear, in light of all the very impressive international contract wins that you guys have garnered in the very competitive pricing environment, you expect to maintain those for the foreseeable future well into 2019?

Yes, Bill.

If you take a look at incrementals, the printed incrementals in OFS for the quarter, 38%.

When you take into account the bit of favorability coming in from lower depreciation and amortization but then the unfavorability coming from FX primarily Argentina, adjust for those and where synergies came in OFS, incrementals are right in line with where we would expect at about 24%.

As I was saying earlier, I don't see the book of business changing our view on what that incremental margin is going to be over the course of the year.

Next year, as I mentioned, there are some short-term headwinds with some of the ramp-up costs that we see here on a couple of the large wins, but I generally feel good about those incrementals, given where we are from synergy execution, knowing that there's some headwinds coming through on commodities and the other cost-out we're working, I feel good with that historical rate.

Our next question comes from the line of Kurt Hallead of RBC.

You definitely piqued my curiosity on the subsea fronts with the subsea connect.

You went through a number of different dynamics that drive the value proposition.

I appreciate that.

So I'm just kind of wondering as well whether or not you could put that into a context relative to what one of your major peers are offering to the market and maybe how subsea connect -- does it take that and make it even better?

Does it lower the cost even more?

So can you give a relative value prop maybe compared to what one of your major competitors are doing on the subsea front?

Yes, Kurt.

Overall, the industry has been working towards this as we've come through a difficult cycle within the industry, there's been a focus by our customers to drive productivity within the offshore and deepwater projects, and our offering here is differentiated relative to what we're doing specifically with our trees, our manifolds and the integration that we can have across our portfolio.

I think what is differentiated is the extent of our portfolio and the reach we have.

And so what we're offering to our customers is really on the capability that we can help them drive the lowest cost per barrel, lowest listing cost and that's what we're focused on.

Other are doing it in the industry, we have our approach, and we feel very good about the positioning of it.

Thank you.

And then that's all the time we have for questions.

I'd like to hand the call back to Lorenzo for any closing remarks.

Thanks, and thanks for joining us today.

We're excited about the future and remain constructive on our outlook for the industry.

We're remaining focused on our priorities of share, margins and cash.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference.

That this concludes today's program and you may now disconnect.

Everyone have a great day.