Lorenzo Simonelli
Chairman & Chief Executive Officer at Baker Hughes
Thank you, Jud. Good morning, everyone, and thanks for joining us. We are pleased with the way the team has continued to execute on our strategy over the course of the third quarter. At the total company level; we had a strong orders quarter, grew adjusted EBITDA and adjusted operating income margin rate sequentially and year-over-year, and had another solid quarter of free cash flow. While we did experience some mixed results across our product companies; on the positive side, TPS generated strong orders, operating income, and margin rates and OFE had a solid orders quarter. On the more challenging side, our OFS business was negatively impacted by Hurricane Ida, cost inflation in our chemicals business, and delivery issues stemming from supply chain constraints while DS also faced supply chain delays that impacted product deliveries. As we look at the macro environment, the global economy continues to recover.
However, the pace of growth is being hampered by lingering effects from the COVID-19 Delta variant, global chip shortages, supply chain issues, and energy supply constraints in multiple parts of the world. Despite these headwinds, global growth appears to be on a relatively solid footing underpinning a favorable outlook for the oil market aided by continued spending discipline by the world's largest producers. In the natural gas and LNG markets, fundamentals remain strong with a combination of solid demand growth and extremely tight supply in many parts of the world. In fact we believe the positive case for structural demand growth in natural gas as part of the broader energy transition is becoming increasingly evident. The current environment illustrates the need for policy makers to focus on the utilization of natural gas as a baseload fuel that can be combined with renewable energy sources to provide a cleaner, safer, more affordable, and more reliable source of energy to populations around the world.
A number of developed economies have had great success over the last 10 to 15 years lowering their carbon emissions by switching from coal to natural gas. However, some policy scenarios have seen a more rapid conversion straight to renewables, which limits the role of natural gas as a transition fuel and can lead to broader grid instability. We believe that there is a strong and logical combination of a secure stable baseload of natural gas that is needed to complement renewable energy sources and in turn offset intermittencies. As you can see from recent events, the cost of moving too aggressively are beginning to surface as multiple parts of the world are experiencing energy shortages, unprecedented increase in energy prices, and shutdowns and brownouts across multiple industries.
The increase in natural gas prices has been most acute due to a number of factors, including under investment and gas reserves, a declining contribution from hydroelectric and renewable power, and continued increases in energy demand. Ironically, the fallout from higher prices has also led to an increase in coal consumption leading to coal shortages and a spike in coal prices. Natural gas has been a key contributor to lowering emissions in the United States over the last 15 years as power generation consumption switched from coal to natural gas. US power consumption of natural gas has increased from around 16% of total generation to roughly 40% over the past 20 years while coal consumption has declined from over 50% of the energy supply mix to approximately 25% over the same period. By comparison, today roughly 60% of Asia Pacific's power generation comes from coal and about 10% from natural gas.
As more countries step up their carbon reduction commitments, we believe that natural gas will play a critical role in displacing higher emission sources like coal and by supporting the growth in renewable energy technologies with relatively cheaper and affordable baseload power. Natural gas and LNG are core to Baker Hughes' strategy and we will continue to play a key role in providing natural gas as a safe, reliable resource to the world. In addition to our focus on natural gas and LNG, Baker Hughes has spent considerable time over the last few years to move and accelerate our broader strategy forward. During the third quarter, we outlined how we are working to best position Baker Hughes for today and in the coming years. We have given a lot of thought around how to service the oil and gas and energy markets today while also investing for the future across the industrial space and various new energy initiatives.
While we continue to execute our strategy through the three pillars of transform the core, invest for growth, and position for new frontiers; the way that we're thinking about the company and our broader long-term strategy is clearly evolving. As we recently highlighted at an investor conference at the beginning of September, we are starting to view our company in two broad business areas; oilfield services and equipment and industrial energy technology. On the OFSE side of the company, we have a technology leading global enterprise with core strengths in drilling services, high-end completion tools, flexible pipe, artificial lift, and production in downstream chemicals. We strongly believe that these businesses can generate top tier returns and free cash flow conversion. OFSE is poised to benefit from cyclical growth in the coming years as we believe that we are in the early stages of a broad-based multi-year recovery that will be characterized by longer-term investment into the core OPEC+ countries.
The way we think about industrial energy technology or IET is essentially our TPS and DS businesses. Both product companies have compelling portfolios that are beginning to see significant secular growth opportunities, particularly in the areas like hydrogen and CCUS. With core competencies across a number of offerings like power generation, compression, and condition monitoring as well as a growing presence in flow control, industrial asset management, and digital; we have a strong foundation on which to build an even more comprehensive presence in the broad industrial energy technology markets. We believe that focusing on two major business areas with close alignment will enhance our flexibility, improve execution, increase shareholder returns, and provide long-term optionality as the energy markets evolve.
Now I'll give you an update on each of our segments. In Oilfield Services, activity levels continued to increase during the third quarter with North America outpacing the international markets broadly. As I just mentioned, we believe the OFS market is in the early stages of a broad-based multi-year recovery. Internationally, we saw the strongest rig count growth during the third quarter in Southeast Asia followed by more modest growth in the North Sea and Latin America. The return to growth in Russia and the Middle East has been slower as OPEC+ is taking a measured approach to increasing production. However, based on discussions with our customers, the pipeline of opportunities in these regions continues to grow and will likely be a major driver of international growth in 2022. In North America, offshore activity was disrupted by hurricanes during the month of August while US land continues to steadily move higher.
The underlying trends in North America remain the same with public E&Ps and IOCs remaining disciplined in deploying capital while private E&Ps remain more active. Based on conversations with our customers, we expect firm activity during the fourth quarter and continued strong growth in 2022. While activity levels and pricing discussions are both moving in the right direction, our OFS business has also had to navigate multiple challenges during the third quarter. These include Hurricane Ida, COVID related impacts, supply chain constraints, and higher input costs in our production chemicals business. Despite these challenges, we remain focused on growing our margin rate for a combination of cost reduction and efficiency initiatives as well as pricing increases to offset higher costs. As a result, we remain committed to driving OFS EBITDA margins to 20% level over the medium term.
Moving to TPS. The outlook continues to improve driven by opportunities in LNG, onshore/offshore production, pumps and valves, and new energy initiatives. We still expect the order outlook for TPS in 2021 to be roughly consistent with 2020. Importantly, the case for a multi-year growth opportunity beginning next year continues to improve. While we expect the majority of the order growth in TPS to be driven by LNG over the next couple of years, we anticipate that we will start to book more meaningful equipment orders related to hydrogen and CCUS in 2022. In LNG while we did not book any awards during the third quarter, we still expect to book one or two additional awards by the end of 2021. Based on the pace of discussions with multiple customers and the positive fundamentals in the global gas market, we still see the opportunity for an additional 100 MTPA to 150 MTPA of awards over the next two to three years with a bias towards the upper end of that range.
For the non-LNG segments of our TPS portfolio, we see multiple opportunities for continued growth. Most notably, our onshore/offshore production segment is poised to benefit from a strong project pipeline for FPSO awards driven by a number of opportunities in Latin America. In the third quarter, we were pleased to book two large FPSO awards in Brazil for power generation and compression equipment building on our recent success earlier in 2021 and in 2020. We have now booked eight FPSO and offshore topside equipment awards so far in 2021, which follows five awards in 2020. We also continue to see success in the industrial market where TPS recently secured wins for our NovaLT industrial gas turbine technology in India and China. We are deploying our NovaLT turbines for power generation across several industrial segments including electronics, ammonia production, and pharmaceutical manufacturing.
In carbon capture, TPS was selected to supply booster and export centrifugal pumps to the Northern Lights CO2 transport and storage project in Norway. This order highlights our CO2 pump injection capabilities and is the first CCUS award for our pumps product line. For TPS services, we saw continued signs of recovery during the quarter with strong growth across transactional and contractual services as well as our upgrade business and we remain optimistic about the outlook for 2022. Next on Oilfield Equipment. We remain focused on rightsizing the business, improving profitability, and optimizing the portfolio in the face of what remains an unclear long-term offshore outlook. Trends in our OFE business remain somewhat mixed despite Brent prices around $80. We continue to see a strong pipeline of flexibles order opportunities as well as improving market conditions in our international wellhead and services business.
For industry-wide subsea trees, we continue to expect modest improvement in 2021 followed by some additional growth in 2022. During the third quarter, we were pleased to be awarded a contract by Chevron Australia to deliver subsea compression manifold technology for the Jansz-lo Compression project in offshore Western Australia. This important win builds on our previous success for subsea equipment orders for Chevron's Gorgon natural gas facility. We recently completed the merger of our Subsea Drilling Systems business with MHWirth. We own 50% of the new fully independent company now called HMH. The merger is an excellent example of how we are transforming the core to ensure that we're making the right strategic decisions for Baker Hughes. By combining the two businesses, HMH will have more capability and a more integrated offering. Customers are incredibly complementary about this enhanced model and we look forward to seeing HMH succeed in the future.
Finally, in Digital Solutions, we saw multiple challenges during the quarter. Electrical component shortages largely around semiconductors, boards, and displays led to lower revenue conversion as well as broader supply chain constraints that drove pressure in the quarter. We recognize that we have work to do in Digital Solutions to drive operating margins back to an acceptable level. We are implementing changes across the business to drive operational improvements and ensure that we have the right team in place to take this business back to where it needs to be. Core to our strategy in DS is building out our industrial asset management platform. This area of focus encompasses a range of digital services and products around asset performance, asset inspection, and emissions management.
As the world strive towards a net zero target in the coming decades, enterprise level industrial asset management capabilities will be a key driver by enabling better operating efficiency, lowering energy consumption, and reducing emissions across multiple industries. Today, we have a strong position in monitoring critical industrial assets across a range of different facilities. The next steps in our strategy will be expanding our presence to non-critical assets and developing software capabilities to allow us to cover the entire balance of plant. During the quarter, DS continued to expand its industrial asset management presence with a number of wins across multiple end markets. We were pleased to announce the strategic framework alliance agreement with SABIC for integrated asset performance management services. This five-year alliance includes the delivery of Bently Nevada's plant-wide condition monitoring and machine asset protection services across over 1,200 assets at over 16 SABIC sites in Saudi Arabia.
The partnership with SABIC will deliver localized maintenance support and access to Bently Nevada's growing suite of sensors, hardware, software. and engineering services including the expansive now cloud enabled System 1 platform. In Latin America, the Bently Nevada team secured a contract with a major company to apply System 1 and condition monitoring solutions to two hydroelectric plants and a wind farm. System 1 will deliver proactive asset management to more than 600 megawatts of power between the three power generation facilities enabling safer and more reliable renewable energy. Despite a more challenging quarter in parts of our portfolio, we believe that Baker Hughes is uniquely positioned in the coming years to deliver sector-leading free cash flow conversion while also building one of the most compelling energy transition growth stories. We are committed to evolving our company with the energy markets while maintaining our prioritization on free cash flow, returns above our cost of capital, and returning capital to our shareholders.
With that, I'll turn the call over to Brian.