Baker Hughes Reports 3Q06 Results

Baker Hughes Incorporated (NYSE: BHI) announced that income from continuing operations for the third quarter 2006 was $358.6 million or $1.09 per diluted share compared to $220.6 million or $0.64 per diluted share for the third quarter 2005 and $1,395.0 million or $4.14 per diluted share for the second quarter 2006.

Net income for the third quarter 2006 was $358.6 million or $1.09 per diluted share compared to $221.9 million or $0.65 per diluted share for the third quarter 2005 and $1,395.0 million or $4.14 per diluted share for the second quarter 2006.

Operating profit, which is a non-GAAP measure comprised of income from continuing operations excluding the impact of certain identified non- operational items, was $358.6 million or $1.09 per diluted share for the third quarter of 2006 compared to $220.6 million or $0.64 per diluted share for the third quarter 2005 and $359.8 million or $1.07 per diluted share for the second quarter 2006. The non-operational item in the second quarter of 2006 related to the pre-tax gain of $1,743.5 million ($1,035.2 million after tax), recorded as a gain on the sale of our interest in an affiliate, resulting from the sale of our 30% interest in WesternGeco, our seismic joint venture with Schlumberger Limited, to Schlumberger on April 28, 2006 for $2.4 billion in cash. There were no non-operational items in the first or third quarters of 2006 or any quarter of 2005. Income from continuing operations is reconciled to operating profit in the section titled "Reconciliation of GAAP and Operating Profit" in this news release.

Third quarter results include a $0.02 per diluted share tax benefit attributable to the reduction of the company's estimated effective tax rate for the twelve months ending December 31, 2006 due to strong results from the Middle East and Africa.

Revenue for the third quarter 2006 was $2,309.4 million, up 29% compared to $1,784.8 million for the third quarter 2005 and up 5% compared to $2,203.3 million for the second quarter 2006.

Chad C. Deaton, Baker Hughes chairman and chief executive officer, said, "Quarter three was a good quarter for Baker Hughes. Our Drilling and Evaluation segment reported record revenue, record operating profit and record operating profit margins with 44% year-over-year incremental operating profit margins. INTEQ and Hughes Christensen had particularly strong quarters. Baker Atlas' results for the last several quarters reflect our ongoing investment in people and equipment and we expect to see the benefits of accelerating growth in the first half of 2007.

"Our Completion and Production segment had record revenue with year-over- year incremental operating profit margins of 29%. Baker Petrolite, in particular, had an outstanding quarter. We are experiencing some growing pains from several successful quarters of rapid expansion at Baker Oil Tools. Baker Oil Tools' backlog is limiting their ability to respond to short lead time orders which are generally associated with premium pricing. With the capacity additions coming on line in Q4 2006 and Q1 2007, we expect Baker Oil Tools' backlog to return to a more manageable level during the first half of 2007."

Mr. Deaton concluded, "We remain confident in our outlook for continued growth for 2007 and through the end of the decade. We expect the industry to take appropriate actions in the first half of 2007 to rebalance the North America natural gas market and we expect continued growth outside of North America. A series of significant recent contract awards around the world including Brazil, Mexico, Russia and Saudi Arabia support our outlook for continued international expansion. Accordingly, we will continue to invest in manufacturing capacity, make additions to our rental fleets, and hire and train field engineers to support our customers' needs through the end of the decade."

During the third quarter of 2006, debt increased $4.9 million to $1,081.1 million, and cash and short-term investments decreased $631.9 million to $1,341.6 million. In the third quarter of 2006, the company's capital expenditures were $234.4 million, depreciation and amortization was $111.1 million and dividend payments were $42.6 million.

During the third quarter of 2006, the company repurchased 7.5 million shares of common stock at an average price of $72.16 for a total of $537.9 million. During the first nine months of 2006, the company repurchased 20.9 million shares of common stock at an average price of $77.56 for a total of $1.62 billion. As of September 30, 2006, the company had authorization remaining to repurchase approximately $580.3 million in common stock.

Segment Highlights

We report our results under three segments: Drilling and Evaluation, which consists of the Baker Atlas, Baker Hughes Drilling Fluids, Hughes Christensen, and INTEQ divisions; Completion and Production, which consists of the Baker Oil Tools, Baker Petrolite, and Centrilift divisions and our ProductionQuest (formerly Production Optimization) business unit; and WesternGeco, our 30% interest in the WesternGeco seismic joint venture with Schlumberger Limited that was sold to Schlumberger on April 28, 2006. In this news release "Oilfield Operations" refers to the combination of the Drilling and Evaluation and the Completion and Production segments. The results of Oilfield Operations and WesternGeco are reported as "Total Oilfield."

Oilfield Operations

Oilfield Operations revenue was up 29% in the third quarter of 2006 compared to the third quarter of 2005, and up 5% sequentially compared to the second quarter of 2006. Operating profit before tax was up 54% compared to the third quarter of 2005 and up 4% sequentially compared to the second quarter of 2006. The quarterly year-over-year incremental pre-tax margin (a non-GAAP measure of the change in operating profit before tax divided by the change in revenue) was 38%. The pre-tax operating margin (a non-GAAP measure of operating profit before tax divided by revenue) in the third quarter of 2006 was 24% compared to 20% in the third quarter of 2005 and 24% in the second quarter of 2006. Every division posted double-digit pre-tax operating margins for the third quarter of 2006.

Drilling and Evaluation

Drilling and Evaluation revenue was up 32% in the third quarter of 2006 compared to the third quarter of 2005, and up 8% sequentially compared to the second quarter of 2006. Baker Hughes Drilling Fluids, Hughes Christensen and INTEQ reported record revenue in the third quarter of 2006. Operating profit before tax was up 66% compared to the third quarter of 2005 and up 11% sequentially compared to the second quarter of 2006. Baker Hughes Drilling Fluids, Hughes Christensen and INTEQ achieved record operating profit before tax in the third quarter of 2006. The quarterly year-over-year incremental pre-tax margin was 44%. The pre-tax operating margin in the third quarter of 2006 was 27% compared to 21% in the third quarter of 2005 and 26% in the second quarter of 2006. Baker Hughes Drilling Fluids and INTEQ posted record pre-tax operating margins in the third quarter of 2006.

Completion and Production

Completion and Production revenue was up 27% in the third quarter of 2006 compared to the third quarter of 2005 and up 2% sequentially compared to the second quarter of 2006. Centrilift and Baker Petrolite recorded record revenue in the third quarter of 2006. Operating profit before tax was up 40% compared to the third quarter of 2005 and down 3% sequentially compared to the second quarter of 2006. Centrilift and Baker Petrolite achieved record operating profit before tax in the third quarter of 2006. The quarterly year- over-year incremental pre-tax margin was 29%. The pre-tax operating margin in the third quarter of 2006 was 22% compared to 20% in the third quarter of 2005 and 23% in the second quarter of 2006. Baker Petrolite posted record pre-tax operating margin in the third quarter of 2006.

Geographic Highlights

Revenue by geographic area for the three months ended September 30, 2006, June 30, 2006 and September 30, 2005, are detailed below. All results are unaudited and shown in millions.

North America revenue increased 38% in the third quarter of 2006 compared to the third quarter of 2005 and increased 6% sequentially compared to the second quarter of 2006. Highlights included:

  • Working for a major independent in the Gulf of Mexico, Baker Atlas recently logged the deepest well in its history (greater than 32,400 feet). The initial logging run consisted of the 3D Explorer(SM) resistivity and Hexagonal Diplog(SM) formation dip services (to further delineate the dip and direction of formation features). This instrument string was logged from target depth where bottom hole pressures approached 28,000 psi.
  • Baker Hughes Drilling Fluids recently experienced record success in its deepwater efforts with the announcement of a major discovery in the Jack Field, Gulf of Mexico. Baker Hughes Drilling Fluids products played a significant role in the success of the two exploratory wells drilled. Baker Hughes Drilling Fluids' Dynamic Kill Drilling (DKDTM) riserless deepwater drilling system and SYN-TEQTM synthetic-based drilling fluid system were used to drill the wells. Fluids Environmental Services (FES) engineers provided technology for wellsite process and the assurance of full environmental compliance according to EPA standards.

Latin America revenue increased 15% in the third quarter of 2006 compared to the third quarter of 2005 and increased 5% sequentially compared to the second quarter of 2006. Highlights included:

  • Baker Hughes Drilling Fluids successfully completed the second exploratory well for a client in the Amazonian jungle of Peru using a fresh-water version of the PERFORMAX(TM) high performance water-based mud system. The location of the wells within the Amazon Basin presented several environmental and logistical drilling challenges. Due to the remote location, the wells had to be drilled exactly as planned with little margin for error. The operator selected the PERFORMAX system to provide environmental compliance and superior performance in the harsh jungle conditions.
  • In Brazil, INTEQ successfully deployed the TesTrak® logging-while- drilling formation pressure tester tool for the first time in two wells offshore Rio de Janeiro. TesTrak is one of the key technologies in the recent success of the large tender award by the operator. Client objectives were to obtain information about the depletion level in a produced reservoir. Critical to the success of the deployment was the fast operating cycle for performing each pressure test (SmarTest(TM)) and the high sealing efficiency of greater than 94% (SmartPad(TM)), unmatched by the competition.
  • Baker Oil Tools has achieved three years of flawless operations with the world's first and only all electric intelligent completion installation. The InCharge® intelligent well system from Baker Oil Tools was installed in the Marlim, Sul field in Brazil with the objective of 1) achieving water injection management in the reservoir with selective mechanisms in two pay zones, 2) monitoring the volumes injected and 3) real-time attendance of well and reservoir parameters.
  • In July, an INTEQ AutoTrak® rotary drilling system and service broke a recently established drilling record in East Venezuela. Applying knowledge gained on previous wells, two 8" AutoTrak systems drilled an interval of 8,700 feet in two runs of 160 and 114 hours, respectively, in 14.4 days (effective drilling time). This was against a challenging performance target time that was set at 18 days. The performance significantly improved upon the field historical average time of 32 days for the same section.

Europe, Africa, and CIS revenue was up 26% in the third quarter of 2006, compared to the third quarter of 2005, and was up 5% sequentially compared to the second quarter of 2006. Highlights included:

  • On the Scott field in the Central North Sea, a Hughes Christensen Genesis® PDC 12 1/4" bit drilled an entire section in one run, six days ahead of the drilling curve. The bit drilled 5,500 feet in 115 hours at an average rate of penetration greater than 45 feet per hour.
  • Using cased-hole drill-stem test tools, Baker Oil Tools recently completed a successful job for an operator in Southern Russia. The job was to individually perforate and test five separate zones offshore in the Caspian Sea. Baker Oil Tools successfully tested all five zones using the same string of tools, greatly reducing rig downtime and spare parts costs.

Middle East and Asia Pacific revenue was up 23% in the third quarter of 2006, compared to the third quarter of 2005 and up 1% sequentially compared to the second quarter of 2006. Middle East revenue was impacted by the decision to exit Iran. Highlights included:

  • Baker Oil Tools has successfully installed a Tri-Lateral Intelligent Well System(TM) for a national oil company in Saudi Arabia. The system consisted of three HCM-A(TM) and Premier® Packers that provide flow control from each lateral, and enable interventionless water shut off throughout the life of the well. Baker Oil Tools also successfully integrated a fiber optic flow meter from a third party company. The completion marks the first of its kind within the Kingdom of Saudi Arabia.
  • Hughes Christensen and INTEQ recently cut field development costs for a Gulf of Egypt client by significantly increasing penetration rates. Performance improvement was achieved utilizing Hughes Christensen's industry-leading Genesis® Steerable PDC bit technology and INTEQ's innovative AutoTrak® RCLS rotary steerable system. The Genesis EZSteer(TM) bit and AutoTrak system drilled the 12 1/4" hole section with outstanding results. Rate of penetration was increased by 63% to 22 feet per hour compared to the three-well average offset rate of just 13.5 feet per hour. The increased rate of penetration improved field economics, reducing cost per foot by 27%, and allowed the operator to finish the section seven days ahead of schedule.
  • Baker Atlas Indonesia recently completed a series of logging runs for a major international oil company in a 16,400 foot deep deviated exploration well at a bottom hole temperature of 305° Fahrenheit. The job encompassed the deployment of several first time services in Indonesia, including the EARTH Imager® and RCI® with Straddle Packer services.
  • INTEQ completed the first deployment of its 6 3/4" StarTrak(TM) resistivity imaging tool for a national oil company. Run in combination with the AutoTrak system and LithoTrak(TM), the 3,655 foot section length was successfully completed in one run. High quality resistivity images and density images were transmitted via the INTEQ Al Khobar BEACON(SM) service center to geo-steer the well and ensure optimum wellbore placement.
  • Centrilift has been awarded a contract from a national oil company to supply down-hole electric submersible pump systems and variable speed drive packages for approximately 236 wells. The systems, which will include Centrilift's Centurion(TM) design pump stages and GCS Electrospeed® II variable speed drives, will be installed over a two year period.

Outlook

The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially. Factors affecting these forward-looking statements are detailed below under the section titled "Forward-Looking Statements" in this news release. These statements include the impact from the adoption of FAS 123®, Share-Based Payment; the sale of our interest in WesternGeco to Schlumberger at the end of April 2006; and the impact of expected stock repurchases. These statements do not include the potential impact of any other acquisition, disposition, merger, joint venture, the outcome of the previously disclosed governmental investigations, or other transaction that could occur in the future.

We have increased our guidance for revenue and modified our guidance for income from continuing operations, income taxes, depreciation and amortization, and corporate and other expense to reflect our revised outlook.

  • Revenue for the year 2006 is expected to be up 25-26% compared to the year 2005.
  • WesternGeco contributed $58.7 million in equity in income of affiliates through the sale at the end of April 2006.
  • Corporate and other expenses, excluding interest expense and interest and dividend income, are expected to be between $201 and $208 million for the year 2006.
  • Income from continuing operations per diluted share is expected to be between $7.33 and $7.38 for the year 2006. This includes the impact from the sale of our interest in WesternGeco, which resulted in a gain of $1.04 billion, net of tax, or approximately $3.08 per diluted share, based on our weighted average shares outstanding for the nine months ended September 30, 2006. Income from continuing operations per diluted share, excluding the gain on the sale of our interest in WesternGeco, is expected to be between $4.25 and $4.30.
  • Capital spending is expected to be between $850 and $880 million for the year 2006.
  • Depreciation and amortization expense is expected to be between $433 and $440 million for the year 2006.
  • The tax rate on operating results for the fourth quarter is expected to be between 31.5% and 32.5%. The tax rate on operating results for the year 2006 is expected to be between 31% and 32%.
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