Baker Hughes Notes 'Mixed' Financial, Operational Results in 2Q10

Baker Hughes announced net income for the second quarter 2010 of $93 million or $0.23 per diluted share compared to net income of $87 million or $0.28 per diluted share for the second quarter 2009 and net income of $129 million or $0.41 per diluted share for the first quarter 2010.

Baker Hughes completed its acquisition of BJ Services on April 28, 2010. Financial results for the second quarter 2010 include results for BJ Services for the months of May and June 2010. Second quarter 2010 results also include a charge for acquisition-related costs of $56 million before-tax ($51 million after-tax) or $0.13 per diluted share. In addition, as part of the purchase price allocation process, $196 million of transaction and change in control expenses incurred by BJ Services have been included as part of goodwill.

Second quarter 2010 results also include a $26 million before-tax ($18 million after-tax) or $0.05 per diluted share charge for increased depreciation and amortization of tangible and intangible assets associated with the BJ Services acquisition for May and June 2010 (Estimated to be $39 million before-tax for a full 3 months).

The effective tax rate, excluding the impact of acquisition-related costs, in the second quarter was 44% and the expected effective tax rate for the rest of the year is now between 37% and 38%. The impact on earnings per share of the 44% effective tax rate in the second quarter 2010, compared with the midpoint of the 33% to 34% guidance given in our first quarter 2010 conference call, was approximately $0.07. The increase in the tax rate is primarily due to profits that are below expectations in certain African countries, which resulted in tax losses in some foreign jurisdictions for which we obtain no tax benefit or tax losses in countries that impose taxes on revenue.

Revenue for the second quarter 2010, which includes revenue for BJ Services for May and June 2010, was $3.37 billion, up 44% compared to $2.34 billion for the second quarter 2009 and up 33% compared to $2.54 billion for the first quarter 2010.

Chad C. Deaton, Baker Hughes chairman and chief executive officer, said, "Results in the second quarter were mixed. Operationally, our performance improved in North America, Russia and Asia Pacific, each making significant improvement sequentially. However, in Africa and Latin America, where we have invested heavily, revenue has lagged and our profit was below our expectations. With our organization now well established, our focus is on improving efficiency and operating margins.

"In the quarter, we completed our first year in our new geographic organization, and on April 28th we closed on our acquisition of BJ Services and began integrating its international operations into those of Baker Hughes. BJ Services has had a positive impact on our results, and excluding acquisition-related costs, was already accretive to earnings per share in its first two months. The international integration is proceeding smoothly, and we look forward to integrating US operations once the agreed sale of our Gulf of Mexico stimulation vessels and related assets has Department of Justice approval.

"In response to the Gulf of Mexico drilling moratorium, we have deployed people and equipment to US land operations and to international offshore markets where deepwater drilling continues. The drilling moratorium negatively impacted our business on the shelf and in deepwater by $0.03 per share during the quarter and has a potential negative impact per share of $0.08 to $0.11 per quarter in the second half of the year.

"Looking forward, we expect our North America land business to remain strong compared to last year as unconventional gas and oil-directed drilling in the US continues to grow and as the Canada market, where we are a significant participant, rebounds seasonally. We believe international markets will continue to improve and expect our emphasis on operational efficiency to help us improve our international margins significantly by year end."

During the second quarter 2010, we issued 118 million shares of common stock to stockholders of BJ Services representing 27.6% of the combined company. Debt increased $892 million to $2.91 billion and cash decreased $695 million to $919 million as compared to the first quarter 2010. The change in debt reflected the assumption of $500 million in debt from BJ Services and the issuance of $320 million of short-term debt to fund the $793 million cash purchase portion of the BJ Services acquisition. The change in cash reflected the use of $480 million cash for the acquisition of BJ Services. Capital expenditures were $338 million, depreciation and amortization expense was $261 million and dividend payments were $64 million in the second quarter 2010.

Earnings before interest, taxes, depreciation and amortization or "EBITDA" per diluted share for second quarter 2010 was $1.38, up $0.29 or 27% compared to $1.09 for the second quarter 2009 and up $0.04 or 3% compared to $1.34 for the first quarter 2010. EBITDA is a non-GAAP measure and is calculated in Table 1 (Calculation of EBIT and EBITDA (non-GAAP measures).

Before April 2010 we reported results for two segments - Drilling and Evaluation and Completion and Production. In May 2009, we announced a new organization for Baker Hughes and began a transition period in which both product line and geographic information were used to allocate resources and assess performance. That transition was completed at the beginning of the second quarter 2010 and we are now disclosing results for five new segments: North America (Canada, US and Trinidad), Latin America (including Mexico), Europe/Africa/Russia/Caspian (excluding Egypt), Middle East/Asia Pacific (including Egypt), and Industrial and Other (downstream chemicals, process and pipeline equipment, and reservoir technology and consulting).

Operational Highlights

North America

Hess Corporation has awarded Baker Hughes a five-year contract for directional drilling services, drill bits, drilling fluids, pressure pumping, cased hole wireline and packers and completion systems in North Dakota's Bakken formation.

Also in the Bakken, Baker Hughes installed the first FracPoint multi-stage frac system to be instrumented with downhole fiber optic and electronic monitoring sensors in a 20,000 foot horizontal well. The system will enable the customer to acquire real-time downhole data during fracturing operations.

Baker Hughes has installed electrical submersible pumping (ESP) systems in two vertical subsea boosting stations located on the seabed at Shell's Perdido Field in the Gulf of Mexico in 8,000 feet of water. The pumping systems at Perdido are designed to boost up to 125,000 barrels of fluid per day.

Baker Hughes won a contract with one of the largest SAGD producers in Canada to complete all of its approximately 50 SAGD wells in 2010.

Latin America

OGX, the second most active operator in Brazil, awarded Baker Hughes a multi-product line contract including directional drilling, logging while drilling, wireline and surface logging and real-time monitoring services. The contract follows a recent award for electrical submersible pumps from the same customer.

EZ-Case(TM) liner drilling technology and a TORX liner hanger were used to successfully drill a casing string through a difficult shale/dolomite section in Mexico's Marine Region. An EZ-Case system also was used to perform the first casing-drilling job in Chevron's Boscan field in Venezuela.

Europe / Africa / Russia Caspian

In Norway Baker Hughes performed a reservoir study that helped win a 1 1/2 year drilling and formation evaluation contract with a new customer for the Trym and Oslevar fields. Baker Hughes will provide drill bits, rotary steerable system and advanced logging while drilling systems.

On June 23, Baker Hughes opened its Eco-Centre(TM) waste management facility in Peterhead, Scotland, providing the North Sea oil and gas industry with environmentally compliant waste processing services from the rig site to final disposal.

Baker Hughes acquired Oilpump Services, the second-largest ESP system company in Western Siberia, doubling our ESP market share in Russia.

The Russia Geomarket was awarded 21 horizontal completions for the second half of 2010 to be installed in an Eastern Siberia green field project, following the successful pilot project well using Equalizer(TM) inflow control devices.

Middle East / Asia Pacific

In Iraq, Baker Hughes has signed a three-year technical services agreement with the South Oil Company (SOC) to develop SOC's wireline capabilities and deploy state of the art wireline data acquisition and logging services in Iraq.

In Saudi Arabia, Baker Hughes received a purchase order for 30 permanent downhole monitoring systems, including advanced pressure and temperature sensors, to be used in conjunction with intelligent well systems. Also in Saudi Arabia we achieved the milestone of completing and controlling more than 1,000,000 feet of reservoir section with Equalizer(TM) Technology.

Bahrain Petroleum Company's (BAPCO) 260,000 barrel per day petroleum refinery recently awarded several water treatment applications to Baker Petrolite Saudi Arabia, in a three-year contract which was transitioned starting in June from the incumbent supplier.

PetroChina recently awarded Baker Hughes a contract to supply 77 multistage open hole FracPoint completion systems for horizontal wells in the tight gas sands of the Changquing Field, China's second largest onshore oil and gas field.

Baker Hughes recently signed a strategic framework agreement with PetroChina Tarim Oilfield Co. to supply directional and vertical drilling systems, formation evaluation services, completion services, artificial lift technology and electrical submersible pump (ESP) systems in the Tarim field in northwest China. The two-year agreement covers ultra-deep, high-pressure high-temperature formations as well as shallow zones. The agreement also includes provisions for joint development of solutions specifically designed to address the challenges in the Tarim oilfield.


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