Baker Hughes' 2Q Earnings Shine on N. American Drilling

Baker Hughes announced net income for the second quarter 2011 of $408 million, or $0.93 per diluted share, which excludes expenses of $70 million, before and after-tax ($0.16 per diluted share) associated with increasing the allowance for doubtful accounts and reserves for inventory and certain other assets in Libya. Including these expenses, net income attributable to Baker Hughes, a GAAP measure, for the second quarter 2011 was $338 million, or $0.77 per diluted share, compared to $93 million, or $0.23 per diluted share, for the second quarter 2010 and $381 million, or $0.87 per diluted share, for the first quarter 2011.

Revenue for the second quarter 2011 was $4.74 billion, up 41% compared to $3.37 billion for the second quarter 2010 and up 5% compared to $4.53 billion for the first quarter 2011.

Results presented for the second quarter of 2010 included the results of BJ Services from the date of acquisition on April 28, 2010.

Chad C. Deaton, Baker Hughes chairman and chief executive officer, said, "Our performance was solid this quarter with steady improvement of our international profit margin. As expected, the sequential profit improvement in US Land and the Gulf of Mexico nearly offset the seasonal decline in Canada.

"International profit before tax margin now exceeds 13 percent, excluding the Libya charge, up more than 120 basis points sequentially and up 675 basis points year over year. The largest sequential improvement was in the Europe, Africa, Russia/Caspian segment.

"In North America, US Land revenue increased sequentially at a rate more than double that of the rig count, with strong incremental margins as the service intensity of the unconventional oil and gas plays continued to increase. Furthermore, demand for pressure pumping exceeds industry supply in North America. Gulf of Mexico revenue and profit increased modestly as new permits allowed only a limited resumption of deepwater activity.

"Looking forward, we continue to see improvement in North America driven by increased activity in unconventional oil and gas plays and increased service intensity driving opportunities for advanced directional drilling, complex multi-stage completions and pressure pumping. The Canada rig count has already rebounded from second quarter lows and we are mobilizing for the normal seasonal increase in activities going forward. Our continued investment in products and services for the unconventional resource plays supports the long-term strength of the North American market. While the increase in deepwater activity makes us optimistic, the pace of permits being issued has slowed significantly. In addition, we expect to incur incremental expenses associated with the increase in deepwater Gulf of Mexico regulation in the second half of 2011.

"Globally, spare oil production capacity is tight and we expect growing demand in China, India, developing Asia and the Middle East to support high oil prices and sustain increases in international spending. Activity is expected to increase in the second half of 2011 and into 2012 led by steady improvement in Brazil and the Middle East. If activity increases as we anticipate for 2012, conditions should support pricing improvements."

Debt decreased by $233 million to $3.61 billion and cash and short-term investments decreased by $458 million to $937 million compared to the first quarter 2011. Capital expenditures were $594 million, depreciation and amortization expense was $331 million, and dividend payments were $65 million in the second quarter 2011.

Adjusted EBITDA in the second quarter 2011 was $1.02 billion, up $63 million sequentially. Adjusted EBITDA is a non-GAAP measure that excludes certain identified items, such as the Libya charge in the second quarter 2011.

Operational Highlights

North America

Baker Hughes advanced technologies including AutoTrak™Curve, FracPoint™ multi-stage fracturing system with In-Tallic™ disintegrating frac balls and extended stage FracPoint systems continue to gain traction in customer applications. These technologies will contribute to our ability to substantially differentiate from our competition.

In the emerging Niobrara play, we were awarded a one-year contract to supply directional drilling, drilling fluids, cementing, open hole and cased hole wireline, micro-seismic and pressure pumping services for a major International Oil Company ("IOC").

We were awarded two substantial integrated service contracts for large independent operators in the Permian Basin, where we have a particularly large pressure pumping presence. The product lines awarded include Pressure Pumping, Completion Systems, Bits, Production Chemicals and Wireline Services.

In the Bakken, a new customer chose FracPoint to perform a 40-stage fracturing program, and has awarded all services, including pressure pumping, directional drilling and completion tools on the rig to Baker Hughes. To date, six of these systems have been deployed for this customer.

In the Gulf of Mexico, we expanded our presence in the ultra-deep gas Shelf market with a multi-million dollar award from an IOC to provide drilling fluids and evaluation on a High Temperature High Pressure exploratory program.

Latin America

Baker Hughes was recently awarded a three-year contract to provide drilling systems, bits and completions for three deep wells in the Huron block in Colombia. Also in Colombia, a customer awarded us a one-year integrated project in the Llanos Basin on seven wells to perform drilling, completions and pumping operations.

In Brazil, activity was strong as we completed the first six wells of a 37-well campaign in a heavy oil field in the Campos Basin. In what is currently the biggest development program by an international operator in Brazil, Baker Hughes was contracted for a number of services, including drilling and evaluation, drill bit systems, completion systems, ESP systems and gravel pumping services. The first four wells are already on production.

In Argentina, Baker Hughes performed its first hydraulic fracturing stimulation job in an unconventional hydrocarbon shale reservoir. The multistage fracturing operation for YPF in the Neuquen Basin was successful.

Baker Hughes was the preferred provider of electric submersible pump equipment and services for a 200 well field in the South and Tarapoa Blocks in Ecuador. This award solidifies our place as the preferred provider for artificial lift in these fields that we have enjoyed for the last ten years.


In Nigeria, we installed our first permanent downhole fiber optic gauge in Africa allowing real time production monitoring to facilitate production from a gas reservoir.

In Gabon, Baker Hughes was awarded an offshore completions contract by a major oil company. The package consisted of injector well completions with our innovative Dual Flow Head system which allows simultaneous injection into an upper and lower zone, and full downhole gauge systems, chemical injection mandrels, gas lift, production packers and flow control devices.

In Russia, a major National Oil Company ("NOC") awarded us with a 310 electrical submersible pump systems lease contract, replacing a competitor. We achieved this based on our strong technology offering in artificial lift and the service capability of recently acquired Oil Pump Services company.

In Continental Europe, we secured a sand control contract to provide completions fluids, pressure pumping and tools to an IOC in the Eastern Mediterranean.

Middle East/Asia Pacific

In China's Shengli oilfield we performed a multi-stage FracPoint completion on a horizontal well.

In India, we launched a BEACON Real-Time Operations Center that will provide geomechanical and drilling optimization support for three deep water rigs operated by a NOC where Baker Hughes provides integrated services.


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