If the energy sector is to transform over the next quarter century, one of the biggest technological shifts will be at the huge services companies which are its day-to-day backbone.

From deep sea divers to Texas roughnecks, Baker Hughes is one of the oil and gas industry’s big three global services players. Its CEO, Lorenzo Simonelli, talks to Fidelity’s Ned Salter in our Trade Off.

Lorenzo Simonelli is Chief Executive of one of the world's biggest oilfield services and energy technology companies, Baker Hughes. It supports traditional exploration and extraction while also developing the latest energy equipment. As such, it stands in both the 'old' and 'new' spheres of the energy sector.

Mr Simonelli talks to Fidelity International's Global Head of Investment Research Ned Salter about the pros and cons of natural gas at a time of political upheaval and the trade offs he faces while balancing energy security with emissions targets.

What can investors learn from the trade offs an energy CEO is facing and the choices he's making? Fidelity's experts go over the highlights from the interview with Baker Hughes Chief Executive Lorenzo Simonelli, providing context and investment implications.

Ned Salter, Global Head of Investment Research at Fidelity International, is joined by Analyst and Portfolio Manager Paul Gooden and Portfolio Manager Rosanna Burcheri.

At the beginning of 2023, the sustainability debate in the energy industry has returned to the question of how serious some of the big oil companies are about investing in renewables, with environmental lobby groups arguing that the focus on gas as a part of the medium-term solution is tantamount to greenwashing. Lorenzo Simonelli, who has headed Baker Hughes since 2017 when it was a unit of GE, is among a group of CEOs in the sector arguing that pragmatism dictates gas will be a vital part of the energy mix over the coming years. 

“When you look at the demand outlook … we need hydrocarbons in the coming decade to continue to play a role,” he told Fidelity International’s Global Head of Research Ned Salter in this interview with the head of one of the world’s leading companies.

Fidelity energy analyst Paul Gooden agrees that, in the drive to shift to renewables, we need to face up to some home truths. 

“80 per cent of primary energy supply today comes from fossil fuels and we haven't even hit peak coal yet. It's going to take quite some time, probably until the early 2030s, for peak oil, and peak gas is probably at least a decade behind that.”

But he also says that at some point Simonelli or his successor is going to have to stop allocating capital to the traditional oilfield services businesses. 

“They'll be led by the market […] As you go into a period of accelerated decline of oil demand, that's going to have implications for the oil price. And I suspect they're also going to respond to signals from the equity markets.”

But how in reality is Baker Hughes approaching that trade off in the near term? The company, which now classifies itself as a broader ‘energy technology’ business that goes beyond its roots in traditional oil and gas operations, sits in both the old and new spheres of the sector. Given the changes demanded of the industry to get to net zero, and those already beginning to take shape, shouldn’t Baker Hughes be planning today to shut down the traditional “dirty” parts of its business to focus on the good bits?

“You shouldn't,” says Simonelli. “It's important that we [don’t] lose focus on the benefits that we've received from oil and gas. At the same time, we need to continue to reduce the carbon footprint. And there's ways you can do that by minimising flaring, by upgrading equipment so that there's no leakage. By doing a series of investments from a digital perspective to drive optimisation.”

For Simonelli, liquefied natural gas (LNG) is a large part of the solution to the “trilemma” of demands facing the sector in the aftermath of Russia’s invasion of Ukraine - that energy be affordable, secure, and sustainable. “Natural gas is an abundant resource,” he says. “It can be liquefied and transported. And it is actually the least impactful [fossil fuel] from an environmental standpoint.”

Primarily, he sees LNG as a realistic solution in an imperfect world: “You won't be able to fill the world with renewable solar panels or wind farms. You need natural gas to be there as a provider of consistent and also continuous energy. Some countries that don't have natural resources and don't have the sun, don't have the wind, they're still going to need to power.”

Rosanna Bucherri, who manages US value funds for Fidelity, agrees: “Intermittency is a problem for renewable energy. I'm sure it will get resolved along the way, but it's a pragmatic approach to keep on investing in and using natural gas today.”

Where some see LNG as a temporary solution as renewable solutions improve, Simonelli sees LNG as a destination fuel in itself - that is, an energy resource that we can continually rely upon, along with those other renewable sources. He envisages a continued “diversification of the energy mix”, one which will “be full of renewables, natural gas, hydrogen, nuclear over time, and that provides also the security of supply.”

Fidelity: What's your personal sustainability tradeoff that you make as an individual? 

Simonelli: I try and cycle a lot more than drive and also go walking. 

Fidelity: What is the most pressing issue facing governments in the next five years? 

Simonelli: How to balance the increasing debt burden that governments are going to have. 

Fidelity: And what predictions do you have for where we'll all be in ten years time? 

Simonelli: That's a tough one. I think that we will find a way to continue to develop.

Risk warning

Past performance is not a reliable indicator of future results.

Important Information

This is a marketing communication. This information must not be reproduced or circulated without prior permission. This information is intended for professional investors only and is not a suitable basis for the general public or private investors.

Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances, other than when specifically stipulated by an appropriately authorised firm, in a formal communication with the client.

Fidelity International refers to the group of companies which form the global investment management organisation that provides information on products and services in designated jurisdictions outside of North America. This communication is not directed at and must not be acted upon by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. It is your responsibility to ensure that any service, security, investment, fund or product outlined is available in your jurisdiction before any approach is made to Fidelity International. 

Unless otherwise stated all products and services are provided by Fidelity International, and all views expressed are those of Fidelity International. Fidelity, Fidelity International, the Fidelity International logo and F symbol are registered trademarks of FIL Limited. 

This material may contain materials from third parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. Fidelity International is not responsible for any errors or omissions relating to specific information provided by third parties.

Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.

For German Wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. 

For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg. 

For German Pension clients issued by FIL Finance Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. 

Investors/ potential investors can obtain information on their respective rights regarding complaints and litigation in English here: Complaints handling policy (fidelity.lu) and in German here: Beschwerdemanagement (fidelity.de).

The information above includes disclosure requirements of the fund’s management company according to Regulation (EU) 2019/1156.    

Unless stated differently, information dated as of February 2023.

MK15610