Despite recent low natural gas prices, the demand for hydrocarbon is rising, analysts say.

The buildout of new AI data centers, electric transmission lines and battery storage limitations are all contributing to the rise of what Evercore analysts are calling the “age of natural gas.”

Baker Hughes projects a 20% increase in natural gas demand by 2040, as part of an “all-of-the-above strategy” that emphasizes emissions reduction rather than focusing solely on fuel sources, the company said in its third-quarter 2024 earnings.

And the company expects “renewables to fall short of meeting both growing demand and replacing hydrocarbons to decarbonize the existing energy system,” said Lorenzo Simonelli, CEO of Baker Hughes, during the company’s Oct. 23 earnings call.

There is an industry-wide recognition among data center operators of the need for reliable power. Natural gas’ reliability and speed to market are seen as key advantages.

“We remain bullish on the long-term demand for oil and, in particular, natural gas over the next decade, given AI-driven electricity demand is forecast to rise sharply in the United States and stronger global economic growth will inevitably drive demand for more oil and gas,” NOV President and CEO Clay Williams said Oct. 25 during the company’s earnings call.

Both Baker Hughes and NOV are positioning themselves to capitalize on evolving market needs.

As the popularity of AI grows, Baker Hughes’ focus remains on integrated solutions and technology developments such as Leucipa, its artificially intelligent automated field production solution.

In the third quarter, “a major global operator expanded the use of Leucipa across multiple wells in the Permian Basin, enabling optimized recovery rates through real-time field orchestration to produce lower carbon short cycle barrels.”

Baker Hughes also announced a new strategic collaboration with Repsol in early October to develop and deploy next-generation AI capabilities for Leucipa across its global upstream portfolio.

In addition to technology improvements spurred on by growing natural gas demand, much of the advances made by both companies in the global drilling market have been driven by advances made in U.S. shale production. What was once believed to be costly and impractical has actually led to impressive efficiency gains in U.S. production, Williams said.

This gain has led to the crowding out of investments in other markets, namely offshore, but he sees that tide slowly turning back to allow more developments in that area.

Recent announcements by NOV include the greenfield development of the Kaskida’s high-pressure reservoir in the Gulf of Mexico, “a feat made possible by NOV’s development of leading 20,000-PSI equipment,” Williams said. He also mentioned development projects offshore Suriname and additional gas facilities in the Middle East.

Baker Hughes made strides offshore as well, securing several key contracts during the quarter, including two new FPSO orders to increase its yearly total to four. Additionally, Saipem awarded Baker Hughes a contract to supply BCL and ICL centrifugal compressors for the Kaminho FSO project in Angola and it also received a contract to supply 10 compressor units to Dubai Petroleum for the Margham Gas storage facility.

Even with some growth offshore, Williams cautioned that the industry faces cost discipline challenges and potential declines in drilling activity in the near term, leading to a greater amount of uncontracted time or “white space” in the calendars of NOV’s drilling contractor customers.

“We now believe the white space effect is starting to slow some of the spending plans of our drilling contractor customers into 2025,” Williams said. “While we expect some to continue to invest in their offshore rigs to these periods of white space… we know others are probably thinking about slowing their near-term expenditures.”

Geopolitical uncertainties may also have an impact on oil prices, Baker Hughes said, but the company is maintaining a positive outlook for upstream spending in 2024. Its strategic focus on natural gas and technology solutions appears to provide a buffer against short-term market fluctuations.

“As the upstream cycle matures, we expect our customers to increasingly focus on optimizing production from existing assets, providing significant growth opportunities for our mature asset solutions… We continue to see strong growth which will drive demand for our gas-led products and solutions.” Simonelli said.

NOV felt pressure on commodity prices in the third quarter due to slower Chinese oil demand and excess OPEC capacity, leading NOV toward a more a cautious outlook among operators and service companies.

Conversely, NOV is grappling with the pressures of a cautious spending environment among oil and gas operators. NOV foresees a potential slowdown in demand for offshore drilling equipment in early 2025, stemming from ongoing shale sector consolidation and the impact of low oil prices on production growth.

However, as supply chain issues resolve, Williams anticipates a resurgence.

“I think most foresee higher drilling activity in 2026 and beyond as demand accelerates on the backside of the FPSO supply chain catch-up,” he said. “Our early expectation is for demand for offshore drilling equipment as well as aftermarket spares and support for offshore drilling rigs to decline modestly into early 2025 and then see demand grow again in the second half of 2025.”

Financial results

Financially, both companies saw solid results, despite the various market changes.

Baker Hughes reported an EBITDA of $754 million for the third quarter, marking a year-on-year growth of 20%. The company achieved its highest EBITDA margin since 2017, at 17.5%, attributing this growth to margin expansion across its segments and an improved cost structure. Recent key contracts, including FPSO orders and agreements for LNG facilities, are part of its larger decarbonization strategy as they look to leverage technology and enhance energy efficiency.

In contrast, NOV reported an EBITDA of $286 million, up 2% from the second quarter and 7% from last year. The company’s EBITDA margin stood at 13.1%, boosted by improved operational efficiency and a higher margin backlog. Growing long-cycle capital equipment revenues helped offset declines in certain shorter-cycle products for the company.

Both companies are optimistic about long-term energy demand, even in the face of an ever evolving energy landscape.

Comments