Baker Hughes Sees Decrease in 1Q Profits

Baker Hughes announced that net income for the first quarter 2010 was $129 million or $0.41 per diluted share compared to $195 million or $0.63 per diluted share for the first quarter 2009 and $84 million or $0.27 per diluted share for the fourth quarter 2009.

As previously reported, net income for the first quarter 2009 and the fourth quarter 2009 included expenses of $83 million before tax ($0.18 per diluted share) and $74 million before tax ($0.16 per diluted share), respectively, associated with reorganization, severance and acquisition costs, and increases to our allowance for doubtful accounts.

Revenue for the first quarter 2010 was $2.54 billion, down 5% compared to $2.67 billion for the first quarter 2009 and up 5% compared to $2.43 billion for the fourth quarter 2009.

Chad C. Deaton, Baker Hughes chairman, president and chief executive officer, said "I am pleased with our first quarter results. North America operations performed well in an improving market delivering strong incremental margins driven by efficiency and without the benefit of significant price improvement. The shift to more horizontal drilling requiring multi-stage fracing fits well with our new capabilities.

"Our international business was impacted by pricing deterioration in the quarter as a result of last year's tender awards. We expect that international spending will continue a multi-year expansion as the industry works to develop reservoirs around the world to satisfy the energy demands of the global economy. As customer spending increases we expect profit margins to improve as the year progresses.

"Our geographic and products and technology organizations, implemented one year ago, are fully functioning. Last week we closed on the BJ Services merger and we have begun to fold their operations into the geographic organization - first in the international markets and later, following the government-required divestiture of certain assets, into our US operations."

During the first quarter 2010, debt increased $220 million to $2.02 billion and cash increased $19 million to $1.61 billion as compared to the fourth quarter 2009. Capital expenditures were $246 million, depreciation and amortization expense was $189 million and dividend payments were $47 million in the first quarter 2010.

Operational Highlights

North America

North America profit decreased in the first quarter 2010 compared to the first quarter 2009 as a result of reduced pricing, partially offset by aggressive cost reductions in 2009 and a change in the mix of activity favoring horizontal wells in the unconventional oil and gas shales on land in the US and Canada. Revenue declined over the same period reflecting the impact of significant declines in realized pricing.

Sequentially the increase in our revenue and profit reflect the increase in drilling in oil and gas basins in the US and Canada. Rigs drilling horizontal wells, which are more service-intensive, comprised nearly 50% of the Baker Hughes rig count in the first quarter 2010. Pricing did not improve materially in the quarter; however, the sequential incremental margin (sequential change in profit before tax divided by the sequential change in revenue) exceeded 45%.

In North America in the first quarter 2010:

  • Baker Hughes and CGGVeritas, through our VS Fusion joint venture, completed a micro seismic survey of a 75 frac hydraulic fracturing program, delivering real-time information to the wellsite and to the customer's office which allowed them to customize each stage of the program.
  • We were awarded a total of 32 steam assisted gravity drainage (SAGD) Electric Submersible Pumps (ESPs) by several operators in Canada's heavy oil fields.

Latin America

In Latin America the decline in revenue and profit in the first quarter 2010 compared to the first quarter 2009 reflected pricing deterioration in all geomarkets as well as activity declines in the Venezuela and Southern Cone (Argentina/Bolivia/Chile) geomarket and activity mix changes, favoring workover activity over drilling activity, in the Brazil geomarket. These declines were partially offset by increased artificial lift and drilling fluids sales in the Andean geomarket and directional drilling and wireline work in the Mexico / Central America geomarket. The devaluation of the Venezuelan Bolivar decreased Latin America profit by approximately $8 million in the first quarter 2010.

The sequential decline in revenue and profit reflected seasonal sales of artificial lift equipment in the fourth quarter 2009 that were not repeated in the first quarter 2010, the impact of the devaluation of the Venezuelan Bolivar, activity mix changes in Brazil, and lower product and service pricing.

In Latin America in the first quarter 2010:

  • We executed our contract with PEMEX for the ATG laboratory field optimization program.
  • We introduced our new large-diameter sidewall coring tool, MaxCor(TM), into Brazil providing the customer with the industry's largest sidewall coring samples.
  • In Colombia we drilled and completed the industry's first multi-lateral well using our thru-tubing rotary drilling technology.

Europe Africa Russia Caspian

Europe Africa Russia Caspian revenue declined 2% in quarter 1 2010 compared to quarter 1 2009 as increased revenue and activity in the Sub-Sahara, Norway and Nigeria geomarkets partially offset pricing declines in all geomarkets and activity declines in the balance of the regions' geomarkets in the first quarter 2010 compared to the first quarter 2009.

The sequential improvement in revenue was driven by directional drilling and fluids sales in the UK and Norway geomarkets, completions systems sales in the Nigeria geomarket and wireline work in the Sub-Sahara geomarket. In Russia, low margin product sales offset the seasonal decline in Russian activity.

In Europe Africa Russia Caspian in the first quarter 2010:

  • We provided directional drilling, logging-while-drilling and tri-cone and PDC bits which allowed our client in Denmark to drill a Danish record 31,000' extended reach well.
  • We enabled a North Sea operator to abandon a well, within new environmental guidelines, in one run, resulting in time savings of approximately 6 days. Our Sentio Intervention Dynamics Service, provided real-time monitoring of the milling operation allowing the operator to minimize formation damage.

Middle East Asia Pacific

Revenue and profit in the first quarter 2010 declined compared to both the first quarter 2009 and fourth quarter 2009 as a result of price declines throughout the region.

In Middle East Asia Pacific in the first quarter 2010:

  • We installed the first FracPoint(TM) multi-stage completion system in a sandstone gas field in Saudi Arabia.
  • We are drilling the water injection wells for the Manifa fields in Saudi Arabia. Baker Hughes is the only service company that can provide nuclear magnetic resonance logging-while-drilling services in the desired wellbore size with our 4-3/4" MagTrak tool.
  • We were awarded a contract to supply 162 ESPs in the Rumailah field in Iraq.

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