Baker Hughes Announces Record Q2



Baker Hughes Inc. said that, in accordance with generally accepted accounting principles (GAAP), income from continuing operations for the second quarter 2006 was $1,395.0 million or $4.14 per diluted share compared to $218.0 million or $0.64 per diluted share for the second quarter 2005 and $318.8 million or $0.93 per diluted share for the first quarter 2006.

Net income for the second quarter 2006 was $1,395.0 million or $4.14 per diluted share compared to $218.8 million or $0.64 per diluted share for the second quarter 2005 and $339.2 million or $0.99 per diluted share for the first 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 $359.8 million or $1.07 per diluted share for the second quarter of 2006 compared to $218.0 million or $0.64 per diluted share for the second quarter 2005 and $318.8 million or $0.93 per diluted share for the first 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 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 quarter of 2006 or any quarter of 2005. Income from continuing operations is reconciled to operating profit in the section titled Reconciliation of GAAP Results and Operating Results in this news release.

In addition to the sale of its interest in WesternGeco referenced above, second quarter results include a $0.05 per diluted share favorable tax benefit. Of this amount, $0.04 per diluted share is attributable to certain favorable items related to foreign operations which are discrete to the quarter and which the company do not expect to recur, and $0.01 per diluted share is attributable to the reduction of the company's estimated effective tax rate for the 12 months ending December 31, 2006.

Revenue for the second quarter 2006 was $2,203.3 million, up 25% compared to $1,768.4 million for the second quarter 2005 and up 7% compared to $2,062.0 million for the first quarter 2006.

“Q2 was another strong quarter for Baker Hughes,” said Chad C. Deaton, Baker Hughes’ chairman and CEO. “Price realization accelerated in the quarter; driving strong year-over-year incremental margins. In this environment our customers are demonstrating that they value Baker Hughes’ execution and reliability. Results from North America were strong and we were pleased with the ongoing growth outside of North America--particularly in the Middle East.

“We are investing in the technology and people we will need to provide growth in future years. As demonstrated by our recent internal technology reviews, we are well poised to continue to roll-out Best-in-Class technologies throughout our four regions. Our global hiring and training programs are on pace to deliver the highly skilled, diverse workforce we will need in the future.

“We remain confident in the outlook for sustained market growth for the next several years -- particularly in the Eastern Hemisphere. The entire industry will continue to be challenged to provide energy to meet global demand assuming a continuation of robust global economic growth.

“In North America the long-term natural gas market fundamentals, which have driven sustained high levels of drilling activity, remain in place. However, we would not be surprised to see a short-term decline in drilling activity if supplies exceed storage capacity. We believe that any correction in North America gas-directed drilling activity will be relatively short in duration, resulting in a rapid rebalancing of the North American gas market and a return to higher levels of activity.”

During the second quarter of 2006, debt decreased $7.1 million to $1,076.2 million, and cash and short-term investments increased $1,331.4 million to $1,973.5 million. In the second quarter of 2006, the company's capital expenditures were $208.1 million, depreciation and amortization was $104.6 million and dividend payments were $44.1 million.

During the second quarter of 2006, the company repurchased 12.1 million shares of common stock at an average price of $82.01 for a total of $992.6 million. As of June 30, 2006, the company had authorization remaining to repurchase approximately $1.1 billion in common stock.

Oilfield Operations revenue was up 25% in the second quarter of 2006 compared to the second quarter of 2005, and up 7% sequentially compared to the first quarter of 2006. Operating profit before tax was up 53% compared to the second quarter of 2005 and up 10% sequentially compared to the first 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 43%. The pre-tax operating margin (a non-GAAP measure of operating profit before tax divided by revenue) in the second quarter of 2006 was 24% compared to 20% in the second quarter of 2005 and 24% in the first quarter of 2006. Every division posted double-digit pre-tax operating margins for the second quarter of 2006.

Drilling and Evaluation

Drilling and Evaluation revenue was up 25% in the second quarter of 2006 compared to the second quarter of 2005, and up 3% sequentially compared to the first quarter of 2006. Baker Hughes Drilling Fluids and INTEQ reported record revenue in the second quarter of 2006. Hughes Christensen’s revenue was down sequentially due to the impact of the spring break-up in Canada. Operating profit before tax was up 64% compared to the second quarter of 2005 and up 4% sequentially compared to the first quarter of 2006. Baker Hughes Drilling Fluids and INTEQ achieved record operating profit before tax in the second quarter of 2006. The quarterly year-over-year incremental pre-tax margin was 50%. The pre-tax operating margin in the second quarter of 2006 was 26% compared to 20% in the second quarter of 2005 and 26% in the first quarter of 2006. Baker Hughes Drilling Fluids and INTEQ posted record pre-tax operating margins in the second quarter of 2006.

Completion and Production

Completion and Production revenue was up 24% in the second quarter of 2006 compared to the second quarter of 2005 and up 11% sequentially compared to the first quarter of 2006. Baker Oil Tools and Baker Petrolite recorded record revenue in the second quarter of 2006. Operating profit before tax was up 42% compared to the second quarter of 2005 and up 20% sequentially compared to the first quarter of 2006. Baker Oil Tools and Baker Petrolite achieved record operating profit before tax in the second quarter of 2006. The quarterly year-over-year incremental pre-tax margin was 35%. The pre-tax operating margin in the second quarter of 2006 was 23% compared to 20% in the second quarter of 2005 and 21% in the first quarter of 2006. Baker Oil Tools posted record pre-tax operating margin in the second quarter of 2006.

Geographic Highlights

Revenue by geographic area for the three months ended June 30, 2006, March 31, 2006, and June 30, 2005, are detailed below. All results are unaudited and shown in millions.

Revenue by Geography
    (For the Three Months Ended June 30, 2006, March 31, 2006, and
                June 30, 2005)
  -------------------------------------------------------------------------
  Three Months
   Ended      North   Latin   Europe, Middle East,   Total
          America(A) America(B)  Africa, Asia Pacific(D) Oilfield
                       CIS©         Operations
  -------------------------------------------------------------------------
  June 30,  2006 $975.0  $198.7   $604.0   $425.6  $2,203.3
  March 31, 2006  941.2   185.7    556.1    379.0   2,062.0
  June 30,  2005  740.2   180.8    500.8    345.7   1,767.5
  -------------------------------------------------------------------------

  (A) United States and Canada.
  (B) Mexico, Central America and South America.
  (C) Europe, Africa, Russia and the Caspian area, excluding Egypt.
  (D) Middle East and Asia Pacific, including Egypt.

North American revenue increased 32% in the second quarter of 2006 compared to the second quarter of 2005 and increased 4% sequentially compared to the first quarter of 2006. Highlights included:

  • INTEQ provided outstanding performance with a "penta-combo" logging- while-drilling system with no non-productive time for a customer in the Gulf of Mexico. During the process, 23,800 feet were drilled without any failures and over 700 circulating hours in nine long runs in one deep water well. In addition to the AutoTrak® rotary closed loop drilling system, OnTrak(TM) measurement-while-drilling, SoundTrak(TM) acoustic logging and TesTrak(TM) formation pressure testing services were used on the well. Other highlights included a successful sidetrack from vertical in the 14 1/2" x 17 1/2" hole using the AutoTrak G3 system, and a close overlap between the planned and actual well paths. The TesTrak tool was used by the client to calibrate third-party pore pressure data and real-time drilling decisions were taken using the tool.
  • Hughes Christensen's new Genesis ZX® PDC technology delivered a significant performance improvement for a customer drilling in Osceola County, Michigan. The challenge was to develop a PDC bit that would increase rate of penetration (ROP) and total footage drilled to drive down cost-per-foot in a 12 1/4" hole section compared to roller cone tungsten carbide insert bits used in offset wells. Hughes Christensen engineers recommended a Genesis ZX bit which incorporates new cutter layouts designed for hard and abrasive formations to maximize durability without sacrificing ROP. The new style bit provided outstanding results, drilling approximately 100% farther and 65% faster than three offset wells that required two roller cone bits to reach section TD.
  • Centrilift successfully deployed its recently commercialized Thermo-Coil(TM) unit for an operator in South Texas. The Thermo-Coil system heats a wellbore to a temperature above dew point to prevent accumulation of liquids in a gas well that reduce production efficiency. The system was installed in a well previously unable to produce due to liquid loading. With the aid of the system, the well is now producing approximately 1.9MMCFPD.

Latin American revenue increased 10% in the second quarter of 2006 compared to the second quarter of 2005 and increased 7% compared to the first quarter of 2006. Highlights included:

  • Baker Hughes Drilling Fluids successfully completed the first application of its PERFORMAX(TM) high performance water-based mud system for an operator in the Peruvian jungle of Latin America. The operator used the ALPLEX mud system, to improve shale inhibition and wellbore stability, while drilling the 17 1/2" upper hole section, and then displaced to the PERFORMAX(TM) system for the 12 1/4" interval. The operator needed a drilling fluid system that would meet environmental requirements while providing outstanding drilling performance in the difficult Chambira formation, which typically presents hole cleaning and pipe sticking problems when drilled with traditional water base muds. The PERFORMAX(TM) system provided excellent wellbore stability and the operator achieved all drilling, logging, and casing objectives.
  • In Mexico, Baker Oil Tools successfully deployed its fourth expandable EXPress® Sand Screen System in a highly deviated well for a national oil company. Execution of the job was flawless.
  • In Venezuela, INTEQ's coring group set a record in the deep Tomoporo field in Western Venezuela. A total of 1,615 feet of core were cut in 6 1/8" hole size. The coring interval was from 15,900 feet to 17,500 feet and overall recovery was an outstanding 99%. This represented the deepest well where such long footage has been cored in Venezuela.

Europe, Africa, and CIS revenue was up 21% in the second quarter of 2006, compared to the second quarter of 2005, and was up 9% sequentially compared to the first quarter of 2006. Highlights included:

  • In Libya, Baker Hughes Drilling Fluids had continued success with the PERFORMAX® high performance water-based mud system in the Sirte basin of Libya. Use of the system has enabled the client to drill the complicated well design previously achieved only when drilling with oil-based mud.
  • In Nigeria, INTEQ took 52 TesTrak(TM) stations with 136 measurements of formation pressure while drilling for a super major. The logging interval of 2,800 feet was covered in less than 20 hours. The average duration per station was only 23 minutes, which included tool positioning, downlinking, and uplink decoding.
  • Hughes Christensen delivered Best-in-Class performance in Tengiz field, Kazakhstan, by drilling the 12 1/4" section below a salt layer in One Fast Run for the first time in field history. The operator wanted to drill efficiently four different formation types at the fastest penetration rate possible. Hughes Christensen engineers recommended a 12 1/4" steel body Genesis® bit. The PDC bit set new field penetration rate benchmarks by drilling three of the four formations at record pace.
  • INTEQ reported the first deployment of the 4 3/4" AutoTrak® X-treme® system (in combination with CoPilot® drilling dynamics measurement tool and LithoTrak(TM) neutron porosity and formation density systems) offshore Denmark. The assembly was used to drill and geo-steer 12,100 feet of 6" horizontal hole to total depth. Three runs were performed using Hughes Christensen roller cone bits. The only trips required were for bits and upon reaching target depth. The drain hole was drilled at a rate of penetration more than 70% faster than the average drilling performance in the area.
  • INTEQ successfully performed its first TesTrak® formation pressure testing system run on Sakhalin in a horizontal extended reach well, the deepest well globally for the TesTrak system to date. The objectives--to measure formation pressure and validate reservoir pressure data from previous wireline runs--were fully achieved. In total, 21 test stations were successfully conducted. With a measured depth of 32,700 feet, the TesTrak tool performed its deepest measurement on record.

Middle East and Asia Pacific revenue was up 23% in the second quarter of 2006, compared to the second quarter of 2005 and up 12% sequentially compared to the first quarter of 2006. Highlights included:

  • In China, INTEQ completed another successful deployment of the VertiTrak® automated vertical drilling system. A 16" section was completed in 45 days in the remote Northwest Tarim basin, where this section usually required 4-6 months to drill. Hole deviation problems due to high formation dip angles, a big concern for the operator, were overcome using the VertiTrak system.
  • In Malaysia, Baker Atlas logged a deepwater well for a super major. The two-hole sections were logged with the MREXSM magnetic resonance, 3DEXSM 3-D Resistivity measurement, HDILSM high definition induction log, RCI®, Reservoir Characterization Instrument and seismic services at 100% operating efficiency. Due to unfavorable downhole conditions (high salinity and borehole inclinations from 20 degrees to 30 degrees) in the intermediate section, rush processing of the 3DEX data was required. Quick processing delivered accurate results to the client. Data accuracy was further validated by the 3DEX results obtained in the TD section of the well where the mud system had changed to synthetic-based mud and in-gauge hole conditions.
  • INTEQ flawlessly executed the Middle East's first "penta-combo" service (OnTrak(TM), measurement-while-drilling; LithoTrak(TM), neutron porosity and formation density; SoundTrak(TM), acoustic logging; and TesTrak formation pressure sampling services) ahead of plan on an extended reach well for a large gas operator. The TesTrak service successfully performed 53 formation pressure points in a challenging environment. In real-time, INTEQ's aXcelrate(SM) high speed telemetry service delivered high resolution data from the OnTrak, LithoTrak, and SoundTrak sensors. In memory, the OnTrak system acquired a gamma ray image, the LithoTrak service acquired a 16-sector density image, and the SoundTrak service provided high quality compressional (from monopole) and shear measurements (from quadrupole).
  • Hughes Christensen and INTEQ set back-to-back rate of penetration (ROP) records for a national oil company in Saudi Arabia. The performance challenge was designing a bottom hole assembly (BHA) that would allow the operator to efficiently drill extended horizontal sections out past 2,000 feet. Baker Hughes engineers recommended INTEQ's new 4 3/4" AutoTrak® X-treme system with its integrated modular motor design to deliver high total rotary speed and torque at the bit. The system was coupled with a Hughes Christensen Genesis® bit specially designed to meet the rotary closed loop system's requirements. The BHA was utilized to drill a lateral section and set a new field ROP record of 131.5 feet/hour, outperforming the old mark of 114 feet/hour held by a competitor's product for nearly two years. On the next run, the all-BHI bottomhole assembly set another field performance record of 136.1 feet/hour.

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, or other transaction that could occur in the future.

Baker Hughes has increased its guidance for revenue and income from continuing operations and modified our guidance for net interest expense and tax rate to reflect its revised outlook.

  • Revenue for the year 2006 is expected to be up 23-25% 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, are expected to be between $205 and $220 million for the year 2006.
  • Income from continuing operations per diluted share is expected to be between $7.07 and $7.37 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 $3.07 per diluted share, based on our weighted average shares outstanding for the three months ended June 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 $4.00 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 $445 and $460 million for the year 2006.
  • The tax rate on operating results for the third and fourth quarter is expected to be between 32.5% and 33.5%. The tax rate on operating results for the year 2006 is expected to be between 31.5% and 2.5%.

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