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Executives

Gary Flaharty – Vice President of Investor Relations

Chad Deaton – President, Chief Executive Officer, Chairman

Peter Ragauss – Senior Vice President, Chief Financial Officer

Martin Craighead – Senior Vice President, Chief Operating Officer

Analysts

William Herbert - Simmons & Company International

James Crandell - Barclays Capital

Ole Slorer - Morgan Stanley

Scott Gruber - Sanford C. Bernstein

Daniel Boyd - Goldman Sachs

Marshall Adkins - Raymond James

Stephen Gengaro - Jefferies & Co.

Michael Urban - Deutsche Bank Securities

[Jeff Keevers] – Weeden & Co.

Baker Hughes Incorporated (BHI) Q4 2009 Earnings Call January 26, 2010 10:00 AM ET

Operator

Good morning, ladies and gentlemen. My name is Tina and I will be your conference facilitator today. At this time I would like to welcome everyone to the Baker Hughes fourth quarter 2009 earnings conference call. (Operator Instructions)

I will now turn the conference over to Mr. Gary Flaharty, Vice President of Investor Relations. Sir, you may proceed.

Gary Flaharty

All right. Thank you, Tina. Good morning everyone. Welcome to the Baker Hughes fourth quarter 2009 earnings conference call.

Here with me this morning are Chad Deaton, Baker Hughes’ President and Chief Executive Officer and Chairman; Peter Ragauss, Baker Hughes’ Senior Vice President and Chief Financial Officer; and Martin Craighead, Senior Vice President and Chief Operating Officer.

Following management’s comments this morning we’ll open the line for your question. Reconciliation of operating profits and any non-GAAP measures to GAAP measures and results for the historic period can be found in the news release itself as well as on our website at www.bakerhughes.com in the Investor Relations section under Financial Information.

Last I caution you this morning that any company outlooks discussed are subject to various risk factors. We’ll try to highlight these risk factors as we make forward-looking statement; however, the format of the call does prevent a thorough discussion of these factors. For a full discussion of risk factors, please refer to our annual report 10-K, 10-Q and in particular the forward-looking disclosure in this morning’s news release.

With that I’ll conclude our discussion of the administrative details and turn the call over to Peter Ragauss. Peter?

Peter Ragauss

Thanks, Gary. Good morning. This morning we reported net income on a U.S. GAAP basis of $84 million or $0.27 per share. This compares to $1.41 per share a year ago and $0.18 per share for the third quarter of 2009.

Q4 revenue was $2.4 billion, down 24% or $758 million year-over-year and up 9% or $196 million sequentially. For the full year, net income on a U.S. GAAP basis was $1.36 per share compared to $5.30 per share in 2008. 2009 full year revenue was $9.7 billion, down 19% from $11.9 billion in 2008. North American revenue was down 31% compared to 2008 and non-North American revenue was down 9%.

Looking at quarterly comparisons, North American revenue was $890 million in the fourth quarter, down 37% year-over-year but up 9% sequentially. Revenue outside of North America was $1.5 million in the fourth quarter. That was down 13% year on year but up 9% sequentially also.

Reorganization, severance, acquisition related charges and the increase in allowance for doubtful accounts totaled $74 million before tax or $0.16 per share in Q4. This was comprised of $20 million for reorganization costs, $16 million for severance, $16 million for acquisition related costs and $22 million for the increase in allowance for doubtful accounts. For the balance of our comments this morning, references to operating profit and operating profit margins will be on an adjusted basis, excluding these charges. On this adjusted basis, our oilfield operating margin for the fourth quarter was 12%, down from 23% in the year ago quarter but up 10% from the third quarter.

Turning to the performance of our two segments, Drilling and Evaluation revenue was $1.1 billion in Q4. This was down 28% year-over-year but up 8% sequentially. The Drilling and Evaluation segment’s operating margin was 8% in Q4. That’s down from 22% in the year ago quarter but up sequentially from 5% in Q3. Revenue for our Completion and Production segment was $1.3 billion, down 20% from the year ago quarter and up 10% sequentially. C and P’s operating margin in Q4 was 16% and this compares to 23% in the fourth quarter 2008 and is up from 14% in the prior quarter.

To help you evaluate our earnings per share in the fourth quarter, I’ll review the significant items that bridged the sequential and year ago quarters to fourth quarter EPS of $0.27. In Q3, 2009, our U.S. GAAP net income per share was $0.18. From this $0.18, subtract $0.04 for higher acquisition related charges; add $0.01 for a gain on auction rate securities; add $0.09 for increased profits in North America and add $0.03 for increased profits outside of North America. This gets us to the $0.27 we are reporting for the fourth quarter.

Now, bridging from the year ago quarter, from the U.S. GAAP net income per share of $1.41 we reported in the fourth quarter 2008, subtract $0.03 for higher acquisition related costs; subtract $0.07 as a result of higher corporate expense; add $0.06 for the net impairment of auction rate securities; subtract $0.06 for a higher tax rate and share count compared to the year ago quarter; subtract $0.56 for decreased profits in North America; and subtract $0.48 for decreased profits outside of North America. This gets us to the $0.27 we are reporting for the fourth quarter.

In Q4 our corporate costs were $66 million, in line with our guidance for underlying corporate costs and in line with Q3. Turning to the balance sheet, at quarter end our total debt was $1.8 billion and our long term debt to cap ratio was 20%. Our net debt was $205 million. Our net debt to cap ratio was 2%. We have no maturities of long term debt until November, 2013. We currently have $1 billion of un-drawn, committed credit facilities. We have a $500 million facility which is accessible through 2012. We also have a $500 million, 364 day facility, which is accessible through the end of March, 2010. We are currently reviewing our options to extend or expand this second facility in light of the BJ Services acquisition.

At quarter end we had cash and short term investments of $1.6 billion. This totals $2.6 billion in available liquidity. Sequentially we released another $180 million in working capital, primarily through our ongoing focus on supply chain and inventory reduction.

Last, for 2009 as a whole, our free cash flow before dividends and carryover tax payments was nearly $600 million and this is after taking $250 million of non-recurring charges.

Last, a few thoughts on guidance for 2010 and the first quarter. Capital spending for 2010 is expected to be in the range of $1.1 to $1.2 billion. Our tax rate is expected to increase to between 33 and 34%. Corporate spending, excluding reorganization and acquisition related costs, is expected to be $65 to $70 million per quarter. And finally, first quarter EPS excluding acquisition related costs and non-recurring charges is expected to be roughly in line with the current consensus which will be a challenge but is doable.

I’ll now turn the call over to Martin who will highlight our geographic results. Martin?

Martin Craighead

Thanks, Peter. I’ll review our international operations first, which improved significantly in the fourth quarter with revenue increases in all three international regions.

In Latin America, year on year revenue was down 11% due to lower activity and revenues in the Venezuela, Southern Cone and Andean geomarkets. These declines were partially offset by increased revenues in the Mexico, Central America and Brazil geomarkets. Revenue increased 15% sequentially with increased revenue in the Andean, Brazil, Venezuela and Southern Cone geomarkets, more than offsetting lower revenues attributable to project delays on the Alma marine project in the Mexico, Central America geomarket.

As is usual for the fourth quarter we had strong artificial lift in Completions equipment sales throughout the region. The operating profit margin in Latin America for the fourth quarter was 9%, down from 21% in the fourth quarter of ’08 and up from 5% in the prior quarter. Profitability in the fourth quarter was impacted by lower activity and utilization in Mexico, Central America geomarket in both our Alma marine project and the ATG activity.

Brazil remains one of the most important service plays in the world as we enter 2010. The pre-sale base in offshore Brazil continues to grow as a target of intensive planning and engineering design activities required to develop this basin into a premiere producing region. Baker Hughes is well positioned, having committed the technical and operational resources necessary to continue helping our customer optimize their development plans.

In the fourth quarter our collaboration with our customer achieved a record for drilling the carbonate section of the pre-salt Santos Basin. A two feet well was drilled using Baker Hughes’ Quantec bits combined with our TruTrak drilling technology and delivered a 37% reduction in the cost per meters in the best previous well in the pre-salt section.

The new Baker Hughes geographic organization is also allowing us to re-enter key markets around the world with product lines previously absent. One example is Colombia, where we re-entered the market after a long wire line absence and logged an exploration wildcat for the NOC in partnership with an IOC. The well used a full suite of Baker Hughes wire line technologies including our Beacon Center for data management and real time visualization. Geo-scientists discovered pay zones that were previously undetectable with the basic standard issue wire line tools.

In Mexico we remain optimistic of the opportunities as PEMEX explores different approaches to improving their reserve base and their recovery factors. We continue our work on the Alma Marine project with good technical and operational successes. Unfortunately, customer spending constraints have limited near term activity to three rigs, short of the target seven rigs. Under utilization of assets deployed for this project continue to be a near term drag on profitability.

Turning to the Middle East-Asia Pacific region, revenues decreased 16% from year ago levels across all geomarkets with the exception of two. Strong Completion system sales in Southeast Asia and artificial lift sales in North Asia reported improved results in these geomarkets compared to a year ago. Year-over-year revenue declines were greatest in the Saudi, Egypt and Indonesian geomarkets.

Sequentially revenues increased 2% as increased revenues in North Asia from artificial lift, from Completion systems in Southeast Asia and Egypt, and drilling fluid sales in Indonesia offset lower revenues from the Saudi and India geomarkets. Operating profit in the Middle East and Asia Pacific region was 12% in the fourth quarter compared to 23% in the year ago quarter and 12% in the third quarter.

A Baker Hughes centralist ESP recently set a record in Egypt’s western desert, completing ten years of service. Over its life the pump lifted over 360,000 barrels of oil. Saudi Aramco has awarded Baker Hughes a two year contract for two fit for purpose, under balanced oil tubing drilling packages, designed to re-enter existing wells in the gas fields of southern Saudi Arabia. We will provide project management oversight and down hole drilling and Completion services including the industry leading coil track steer able drilling system deployed on coil tubing. Operations are set to begin in the second quarter of this year.

Turning to Europe, Africa, Russia and the Caspian, revenue declined 12% year-over-year in the region as higher revenues from directional drilling, drilling fluids and Completions in Norway; directional drilling, wire line and Completions in Nigeria; and strong directional drilling sales in the sub-Sahara and geomarket were offset by lower activity and revenues from other geomarkets in the region. The largest year on year revenue declines occurred in the Russia, UK and Angola geomarkets.

Sequentially revenue was up 11% supported by increases in directional drilling and Completion sales in Norway; improved wire line revenue and shipments of Completions equipment in Nigeria; sales of bits and Completions equipment in Libya and directional drilling and Completions systems in sub-Sahara and Africa. Our operating profit for the Europe, Africa, Russia and Caspian region was 16% in the fourth quarter, down from 22% in the year ago quarter and up from 14% in the prior quarter.

Stout Oil has awarded Baker Hughes extensions on two contracts in Norway. The contracts are for the provision of drill bits, directional drilling, formation, evaluation and related services on ten to 12 rigs operating in multiple fields’ offshore Norway. Valued at approximately $270 million, the award extends the contracts through October, 2012.

In Russia we were awarded contracts for ESP deliveries in 2010 that exceed our total for 2009, including all of Sergei Nester gas’s western ESP award for 2010 and for the third year running all of Vancore’s ESP needs. Building on this success, we are looking forward to the launch of [Ultra R], a new low cost yet highly reliable motor designed specifically for the Russian market.

Baker Hughes’ [inaudible] resistivity tool [Ase Track], combined our third generation Auto Trak system is redefining what’s possible in the North Sea. In the fourth quarter, this combination precisely geo-steered the wild bore through the reservoir, all the while staying within six to eight feet from a steeply dipping shelf formation. This technology enables Baker Hughes to achieve critical steering control at high build rates with minimum tortuosity and chalk formations while drilling side tracks and avoiding a myriad of previously drilled wells.

Now, turning to North America, revenue in the fourth quarter was down 37% in comparison to the year ago quarter but increased 9% sequentially on increased activity both on land and in the Gulf of Mexico. The North American profit margin was 10% in the fourth quarter, down from 24% in the year ago quarter and up from 7% in Q3 2009. Baker Hughes’ Drilling and Evaluation technology is being used on critical wells throughout the North American basins. For example, in California, [Asetrack] was used in conjunction with AutoTrak to place a wellbore precisely in the reservoir’s sweet spot, just a few feet from the cap rock in a mature oil field, resulting in a tripling of expected production.

And in the Gulf of Mexico, Baker Hughes’ provided a variety of technologies to enable McMoRan to drill and evaluate the recent Davy Jones ultradeep discovery. HPHT logging tools, Magmatech drilling fluids, long life intech motors, Quantec PDC bits and a Baker Oil Tools [with] stock liner system all contributed to this significant achievement.

With that, I’ll turn the call over to Chad.

Chad Deaton

All right. Thank you, Martin. Overall I’m pleased with Quarter 4. We saw significant improvement for both the North America and the international geomarkets and we continued to make progress on many different fronts.

Q4 was our second quarter of consecutive improvement in North America as we benefited from higher levels of activity. While the price environment did not change significantly from the third quarter, higher activity on the heels of aggressive cost cutting earlier in the year led to improved profitability and attractive incrementals.

Internationally we did see sequential improvement in our geomarket operations, although we still have room for improvement. In the Latin America region our revenues were down as strongly from Q3 levels and despite more than anticipated activity levels in Mexico, our profitability improved as we expected it would.

We also saw higher revenue in the eastern hemisphere geomarkets and a rebound in the profitability of our Europe, Africa, Russia and Caspian region. During the quarter we continued to fine tune our new organization’s structure. I continue to be very encouraged by the feedback that I’m receiving from both our customers as well as from our employees. The new organization continued to mature in the fourth quarter, contributing to the improved results, and we expect this new organization to deliver on its promise of increased share and long term profitable growth as we move through 2010.

We’re making significant progress towards closing the BJ acquisition and we still anticipate a first quarter closing. Integration teams at both companies have made excellent progress and will be ready upon closing so we can effectively integrate BJ’s services into Baker Hughes and implement our operational plan.

Looking forward, we are encouraged by the improving rig count in North America. Since the end of the third quarter the gas rate count has increased to 123 rigs or 17% with 80% of the activity related to the unconventional shelf [lays]. Similarly the oil rig count is up 140 rigs or 47%, with 80% of the activity in the Permian and Williston Basins.

In some areas of the U.S. we are again starting to hire as a result of strengthening demand for our products and services. And as this demand expands and leads to improved capacity utilization, we will be able to implement price increases. Obviously we’ll keep our eye on North American gas supply and what this could mean in the second half of this year with regards to land gas drilling.

In the Gulf of Mexico, the lower tertiary plate continues to look promising and the recent developments indicate strong potential in the deep gas place such as McMoRan’s Davy Jones prospect. During the fourth quarter, two new drilled deepwater rigs entered the market and we expect an additional nine rigs to enter the Gulf of Mexico by year end 2010. Our product line and service capabilities are well suited to the deep gas and deepwater markets. We have increased market share on new builds coming into the market.

We have seen improvement in the Canadian rig count and we are well positioned for both the emerging shale plays in the Montney and Horn River areas. And the current oil sands activity with the recent openings of our new Fort McMurray and Laduke facilities. We see oil directed activity continuing as long as oil prices remain around current levels, thus supporting drilling in both North America and the international markets. Outside of North America we look for overall activity to improve and for our customer spending to increase from 2009 levels. However, price realizations and profitability will continue to be impacted by contracts that were negotiated in 2009.

In closing, 2009 was a year of significant change for the industry and for Baker Hughes as well. Our industry was faced with a significant decline in North American activity and we reacted accordingly, emerging with a leaner, more focused organization. We also set a new course for the company by implementing a new geomarket structure that is improving our market visibility, our efficiency and our customer intimacy. Through our supply chain initiatives and outsourcing programs we are driving efficiency throughout the organization, which will enhance our profitability. And last, by setting in motion the acquisition of BJ Services we’ll add the portfolio breadth and capabilities that will make us a much stronger competitor in both the North American and international markets.

Finally, I do know that many of our employees do listen to these calls and I just wanted to take a minute and thank them for their efforts in Q4. I know that without a doubt they put in a lot of hours, especially over the year end holiday season, in order to get the orders booked and out the door prior to the year end close. So just a quick note of thanks to them.

And Gary, let’s go ahead and open up for questions.

Gary Flaharty

All right. Thank you, Chad. At this point I’ll ask Tina to open the lines for your questions. To give everyone a fair chance to ask a question we do ask that you limit yourself to a single question and a related follow up question. Tina, could we have the first question please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Herbert - Simmons & Company International.

William Herbert - Simmons & Company International

First of all, Chad, could you just comment in terms of what you’re seeing on a leading edge basis with respect to your different product lines and service lines on the North American pricing front?

Chad Deaton

Well, I’ll put it this way, we’re not seeing the price deterioration any more. I think if you kind of look at the different ones that are tending to get a little bit tight right now, Bill, are the ones where I think we’ll start leading a little bit on pricing. Bits, we had some market share gain in bits in the fourth quarter and it started to get tight a quarter, so I think bits’ you know the typical Hughes reaction will be one of the ones to lead just like it does when it goes down. Our C&P side of the business continues to hold up fairly well. You know they’re not hit as hard as D&E so that will slowly come back in pricing as it tightens. You know some on the D&E side, some of the directional drilling, AMWD type work is becoming much more critical, you know, with these horizontal wells so I think that we’re going to start seeing, that does kind of leave the big players with a better chance to start improving pricing as time goes on. I would say that’s kind of the breakdown.

William Herbert - Simmons & Company International

So when we’re talking about let’s focus on where we’re sort of really tight here, bits and D&E, given the service intensity of the shale plays, the longer laterals, etc., is pricing beginning to move there on that front or do we expect to start seeing an inflection some time this quarter?

Chad Deaton

It’s not moving yet and it just depends on if this activity, the rig count still continues to climb, you know, 20 or 30 rigs a week, then I would think by the end of this quarter or early second quarter we could possibly see some chances to raise some prices.

William Herbert - Simmons & Company International

Secondly, with regard to the first quarter guidance and reaffirming consensus which is I think in the neighborhood of $0.37 to $0.38, we printed $0.42 to $0.43 clean, if you break down with the likely evolutionists for the first quarter, North America likely sees a decent sequential improvement off of a strong effort in the fourth quarter, which means that international if you’re going to be having a sequential downtick in earnings per share is likely lower. What’s that driven by, if that’s the right conclusion? Is it driven by year end product sales not being as forthcoming in the first quarter as they were in the fourth and further margin pressure? Or what’s going on on that front?

Peter Ragauss

Let me start off the answer here and maybe my colleagues can chip in, but I think there are a lot of moving parts to look at, a lot of factors that play into Q1. Typically we usually have a stronger fourth quarter and we describe that with a put forward revenue in the press release. But there are a number of other things. You know we had a $0.01 of auction rate securities gain which won’t repeat. The Venezuela devaluation preliminarily our estimates that could cost us $0.01, not a big move but the good thing is we managed that pretty well. And then when you think about what’s happening out in the international regions, we had a particularly strong Norway in Q4 and we wouldn’t expect that to necessarily repeat in Q1 so we see some pullback in Norway, so in the Europe region that’s a driver. In the Middle East you’ve got start up costs. Martin mentioned the [coil] tubing contract in Saudi and we’re just getting that geared up, so we’re certainly going to incur costs and the revenues will follow [audio impairment] so tip in there with a new project.

Also we’ve got start up costs in Iraq. We’re making good progress there and getting people on the ground and getting facilities built and getting permits, and that’s taking some money and again the revenues will follow later in the year.

Heading south, Mexico’s, you know everybody’s talked about the uncertainty in Mexico and we have our own particular uncertainty in addition to ATG which is just how many rigs we can get on in Alma and that can swing things quite a bit in Latin America. And then finally you have the unpredictable weather that could hit you in Q1, particularly in Russia and the North Sea which we haven’t factored into any of this.

William Herbert - Simmons & Company International

Okay. Good. That all makes sense. Thanks very much, guys.

Peter Ragauss

There’s one more in there as well, Bill, is the year on year change in pricing international. A lot of those contracts negotiated in 2009 and we’re going to see the results of some of that in 2010 which I think is what our peers are saying as well.

Operator

Your next question comes from James Crandell - Barclays Capital.

James Crandell - Barclays Capital

Chad or Martin, you just mentioned ramping up in Iraq. Do you think that you are far enough advanced now in your presence that you are going to be a serious contender for the first round of ITM bids in fields like Majnoon, West Qurna, Zubayr in Iraq?

Chad Deaton

We’re in discussions with all the players that are out there right now you know for one or are working on things from BP to ENI to Exxon to all the others, as well as the national oil companies. We are seeing some business. It has been product sales and things picking up. We expect that perhaps we’ll even do some of our first on the ground work by the end of Q1 in a couple of areas. Of course one of the areas that the clients are looking to Baker Hughes for help is in the area of improving existing production. Of course that’s through down hole pumps and chemicals and other things. So we think that’s going to be one of our early areas that we’ll be building that.

Martin, do you want to make any comments? I think you just talked to our guys down there.

Martin Craighead

Hi, Jim. I guess the only thing I’d add is I’m absolutely confident that our position is every bit as strong as anyone else’s. We said that a few months ago on [Cella]. Our relationship with the NOC there is extremely good. We have a great brand, a great reputation as Chad says we’ve been selling reputable products in there a long time. Our management team is evolving. We’ve had a pretty good presence in terms of executive visits, both here from Houston as well as from the region into Iraq. Our hiring program is well ahead of schedule. In terms of the engineering talent, the Iraqi engineers. And in terms of the bids, we already have bids on the table submitted, I don’t want to say for which one in case maybe our competitors missed it, but I’m very satisfied.

In terms of when it’s all going to happen, that’s the big question, but steady as she goes.

James Crandell - Barclays Capital

And follow up is on the new deepwater rigs that are coming to the market, not market share in deepwater overall but the new rigs that are coming onto the market, both on the Drilling side and the Completion side, how do you feel you’re doing in winning projects, placing your products on those rigs in both segments?

Martin Craighead

If you look at the four that just recently entered the Gulf of Mexico, we were successful in the areas of sand control completion tools, upper completion, MDW, LWD, drilling fluids, fishing tools, mud logging, wire line logging and the nine that are entering in 2010 of what’s been tendered so far, we’ve won 31% of what is tendered so far for our part of services. So we’re happy with that number, Jim. That’s above what our market share is right now in deepwater, so we like what we’ve been awarded for what’s just come in recently and we like where we stand in terms of what the nine coming in in the Gulf of Mexico.

And of course in Brazil, which is the next hot spot, we’re very well represented down there so it’s even higher market share. So we’re winning our share.

James Crandell - Barclays Capital

And Chad or Martin, last question and just a quick one is can you review how you’re integrating BJ Services into the company? Will they have a product line focus still at BJ for at least a period of time or will it just be integrated regionally right into the company as it exists today?

Chad Deaton

Well, internationally it will be integrated pretty quickly, Jim, because already we hopefully will get this closed by the end of this quarter. But the integration team as I made in my comments has been working on both sides in order to be able to pull the trigger on this soon. And internationally we see this happening very quickly. Domestically, you know it’s probably going to take a few months to get everybody on the ground and get to know everybody, get their people into key positions, but we think that over a couple, three quarters that will integrate it well. Now there will be obviously a product line, pressure pumping, just like there’s a product line in bits for us, but from the operational side in the field we’ll integrate quickly and co-locate where we can and work together on these packages.

Operator

Your next question comes from Ole Slorer - Morgan Stanley.

Ole Slorer - Morgan Stanley

When it comes to the integration of the new geomarket management structure, which can be disruptive and in some cases took a lot of time for other companies, where do you feel you stand now in terms of having this structure optimized?

Chad Deaton

I think the field geomarkets are almost completely there. I think we’ve got another quarter of just final settling in but all the people are in place. They’ve now moved, they’ve got their teams together, the sales teams are working exceptionally well together. You just travel around and listen to them talk about the packages that they’re winning and what they’re doing. I think the product line technology side has made a lot of progress in the last couple of months, probably still three or four months for them to kind of get finally organized and in place. But I think you know one of the worries all of us had, Ole, was if we didn’t have the organization in place especially geographically out in the field and then we got the BJ acquisition closed, that’d be a lot on our plate. But I’m feeling a lot more comfortable that the organization is running quite smoothly now and we’ll be able to handle the integration of BJ here in the next couple of months much better than I think what it could be. So I’m happy.

Martin, a lot of these guys work for you. Do you have a comment on it?

Martin Craighead

I guess the only thing I’d add, Ole, is I’d echo what Chad said. We’re very happy but we’re not satisfied yet. I mean it’s uncovering a lot of possibilities, opportunities, but it’s settling in nicely. But we still have a long way to go.

Ole Slorer - Morgan Stanley

So Martin do you still have costs associated with building out the organization into the fourth quarter and when do you expect those to ebb off?

Martin Craighead

You know, that’s a good question. As we said we carried a lot just to make sure that the process went as smoothly as possible and it looks like that was successful. It was the right decision. Most of that is out. We have a little bit more in the first quarter.

Peter Ragauss

Yes, we’ve still got some systems work to catch up, three wire all of our internal management information and so on, so you’re still going to see some charges coming through for systems work and switch over of that. And we’ve still got some outsourcing work to do in the first couple of quarters of 2010. But the bulk of the costs are behind us.

Ole Slorer - Morgan Stanley

When it comes to the acquisition of BJ Services, Chad, I think you set a time in [inaudible] that you felt it would be accretive to 2011. Sounds as if that was a little conservative.

Chad Deaton

Well, we’ll look back when it comes and we’ll answer that question.

Ole Slorer - Morgan Stanley

So your guidance for the first quarter, is that on a Baker Hughes standalone or is it on a pro forma?

Chad Deaton

It’s standalone.

Ole Slorer - Morgan Stanley

And what is the earliest that this acquisition could close?

Chad Deaton

The end of the first quarter.

Ole Slorer - Morgan Stanley

So the very end of the first quarter is the earliest. So there won’t be any partial benefits in the first quarter from this acquisition?

Chad Deaton

There might be a little bit, but.

Martin Craighead

It could close in March so there may be some sub-period for a few days.

Ole Slorer - Morgan Stanley

You’ve been very successful in being awarded a large extension from Petrobras on all the directional drilling work. I seem to remember there was quite some differences in drilling performance in pre-salt. Could you go a little bit through the circumstances that led to that direct award?

Chad Deaton

Obviously they are probably a client that looks at performance about as well as any customer we work with. They really do break in down in terms of their KPIs, look at it regularly. We performed exceptionally well on the directional drilling of the BDM, WDE side. They as you know Ole, they extended the contract through 2012 for up to 50% of the business. They do have some new rigs coming on which they pulled us in and asked us if we’re ready to take those on and would we go ahead and start gearing up for those additional rigs to make sure we can handle them, which we’re in the process of doing. I think one comes in this quarter and we will take that one over when it comes.

So they’re just a performance driven organization, looking at greater penetration, non productive time they watch very closely. This recent well that Martin referred to in his discussion was I think a 37% improvement in drilling time versus the previous well. So they just really build on. And there’s a lot of feedback that comes back and forth between our company and theirs, regarding just the continuous improvement. And Martin mentioned the [Beacon] Center so those are live, that’s live data being sent back into their office and our engineers working to try to just improve. And of course I think one of the successes we’re having now is with the increase of our drilling fluids on these rigs along with the bit, Hughes has made some significant gains on the bit side down there. So it’s really a system approach now. We’ve got the whole bottom, whole assembly bits, fluids and it’s just ending up with a better result.

Ole Slorer - Morgan Stanley

And in terms of the organization down there, we all remember what happened in 2008 when they took the cost of building this thing out before the revenue came along. Are you now at a more balanced organization relative to the incremental work scope?

Peter Ragauss

We clearly are on the DDMWD side. You know that’s now in place. We’re still building out on the fluids side. We went from a few percentage points of market share to up to 50 so there’s still a lot of build out there, Ole. But the bit side, the directional drilling side, the Intek side, that’s just now adding additional costs, additional people as we gear up these next few rigs. But we’ve got our costs in line there.

Ole Slorer - Morgan Stanley

On West Africa, a lot of talk about drilling pre-salt wells. Can you take any of the experiences that you’ve had now in Brazil and are you able to use those effectively if that comes to taking share on somebody’s new project in West Africa?

Chad Deaton

Well I think clearly when the times comes and that starts we will. I mean especially one of the big benefits we’re going to have now is Portuguese and Angola and our size in Brazil is going to help us tremendously with the number of people we have there if we start building up over in Angola. So that will help us along with the expertise.

Operator

Your next question comes from Scott Gruber - Sanford C. Bernstein.

Scott Gruber - Sanford C. Bernstein

In previous quarters you’d quoted a dollar volume of large projects in the bidding process. Do you have an updated figure for us and maybe you can comment on how that’s grown over the past three months to a year if you do?

Peter Ragauss

Scott, we don’t have a total of that. I mean some of the big projects we’ve recently been awarded is the BPS, [BraJon] work. We’ve got additional work in Brazil. We’ve got the $270 million contract at Stout Oil. We’ve got the coil tubing drilling contract in Saudi Arabia. You know there’s close to $1 billion I’m just adding up on the top of my head on those four. Put it this way, in the last four or five months we’re pleased with the projects that we’ve been winning and I think it comes down to this point that under the new organization our client visibility, our reaction time is much better than what it was a year ago. So we’re winning a decent share here.

Scott Gruber - Sanford C. Bernstein

And in terms of the revenue income impact from the projects, can you just walk through how you see those starting up over the course of the year?

Chad Deaton

As BraJon starting up in Q1 towards the end of Q1, we’ve got the coil, tubing, drilling contract in Saudi which will start up in Q2, early Q2 hopefully. The Stout Oil stuff in Norway’s kind of just an ongoing project, you know, that kind of rolls over. The Petrobras Brazil stuff, there are several new rigs coming in so that will start up. Like one’s coming in in Q1 and then they’ll add as the year goes on. What have I missed, Martin?

Martin Craighead

Nine rigs in Brazil this year, four of which we plan to absorb. That’s all I can think of.

Chad Deaton

So I think it just kind of builds as the year goes on.

Scott Gruber - Sanford C. Bernstein

I guess more generally when you focus on regaining some of the lost market share, are the major projects going to be an area of focus or do you believe that there’s certain geomarkets you have a little bit more of an edge? Or is it going to be more product specific where you think the share gains are going to be the easiest? How do you think about that more broadly?

Martin Craighead

Scott, let me try to answer. I guess we don’t, but I’m not sure I understand the question, please ask it again. Obviously as Chad kind of said earlier, our reputation in drilling, performance drilling, is a heck of a push in places like Brazil, as the previous fellow talked about West Africa. There’s going to be a big issue with reliability and again performance drilling. So I’d say that our share gains will continue to be in the D&E area. That’s not to say though that on the C&P side we have anything to give up on. Geographically you know we’re happy with our situation in Mexico. I think our small presence in the ATG work is turning out to not be a bad thing. And certainly where we are working there we’re with the local companies. I don’t foresee any rig reduction for the local companies in the ATG. And that is our client, if you will. And while the utilization offshore is not great, it’s giving us a good scale presence which we didn’t have before.

And in North America, you know that’s our bread and butter. We have a very strong brand and whether it’s in the oil recovery or in the gas wells, again you know it’s going to work well for us. I think it all gets back, though, to this geomarket organization where we’re just seeing so many more opportunities than we’ve ever been able to see before. So I’m pretty bullish across the various product lines as well as the geographies.

Chad Deaton

Yes, I’ll give an example why I think that Martin’s comment about the geographical organization. I took a trip right after the first of the year and hit a few geomarkets around and in one of them I was talking to the sales team and they threw a number out and said since the new organization went in place this last three or four months, we’ve made $100 million in this particular area on revenue. And when I asked the question well how much of that would you have, and they talked about bundled services, and I said how much of that would you have had anyway, at Hughes, Christiansen or in Intek or whatever would have won just because of the relationship with the client? And they knew the number. They said $71 million. But $29 additional million was awarded because we asked well since we’ve got the bit, why don’t we get the fluids, too, because they work well together.

So again it’s that opening comment when I said the sales teams, it’s one of the exciting parts about this new organization. They are really out there working together, bits people selling drilling fluids jobs and drilling fluids people selling Intek jobs. And of course they can’t answer all the technical questions but they get in the door and say well we can also do this for you. So that part I think is in areas where the bundling is much more important. I think this is going to help us in 2010.

Scott Gruber - Sanford C. Bernstein

I’m also curious whether you saw it giving your technology [audio impairment] or there was just some low hanging fruit out there. [Audio impairment] perspective, you know outside of the bundling approach if you thought you could pick up some market share and if so, you know, where?

Chad Deaton

Well, hopefully we’ve already gone after any of them.

Scott Gruber - Sanford C. Bernstein

What proportion of your gross CapEx is dedicated to the deepwater?

Peter Ragauss

I don’t have that number broken down.

Martin Craighead

Let me take a stab at that. That’s a tough one for us. You know we don’t have any permanent installations so to speak yet. We’re not in the cementing business. To say that CapEx is dedicated towards a certain rig, I mean all of our assets are fungible. They either go on the rig or they come off. Hopefully they go on more than the opposite. That’s a really tough thing to nail down but certainly with that growth, as we said the nine rigs coming into Brazil and planning to get our share, you could probably look at around 20% of that rental to CapEx at least is oriented toward that rig growth.

Chad Deaton

You know this year part of that will be we are building a new 300 foot simulation vessel as Baker Hughes so some of that CapEx obviously goes to the deepwater, deepwater CapEx. It’s for sand control.

Operator

Your next question comes from Daniel Boyd - Goldman Sachs.

Daniel Boyd - Goldman Sachs

I just want to have a follow up on Iraq. In terms of the bids that are out there, what’s the timing on when they’re due and how quickly could you ramp up, given your current infrastructure?

Martin Craighead

One of the bids have already been submitted. That means it’s on the table already in the customer’s hands. Another request has come out and these are pretty significant. Parallel to that, and I think you’re probably referring to the IOC awards, parallel to that the national oil companies aren’t sitting idle either. They’re soliciting inquiries for service equipment, wire line trucks, drilling tools and some infrastructure in terms of mud plants to be brought into the country. As I said earlier I think to Jim’s question, we’ve got quite a contingent in and out as I’m sure our competitors do as well.

In terms of when it will actually happen, I think you’ll see service revenue in Baker Hughes in

Q1 towards the end and then building from there. But in terms of the big ITM projects, you know, our customer, the IOCs are the ones that have to answer that ultimately.

Daniel Boyd - Goldman Sachs

And do you think there will be a distinction in terms of the profitability in terms of the different types of service contracts that are being offered out there? Are you seeing a difference? And what would determine the difference and maybe the make up of the project? Are some more technically challenging than others?

Chad Deaton

Are you talking about Iraq?

Daniel Boyd - Goldman Sachs

Yes.

Chad Deaton

Yes, but I think your first path is going to be a little like west Siberia 10 years ago or 12 years ago when it opened up. I think people are going to get in there and the first thing they’re going to try to do is just improve production, basic production from basic wells. And that means it goes back to bottom hole, ESP pumps, chemicals, work over type programs, maybe some kickoffs or small laterals. And then as that production comes up and they get some cash flow and other things, then I think we’ll start seeing a step out into deeper, more challenging wells, directional wells, etc. I think the first I don’t know, year, year-and-a-half, it’s really going to be focused on just improving basic production.

Daniel Boyd - Goldman Sachs

So all the projects that you’re looking at or bidding on, they’re all very similar then in terms of scope and margin potential. Is that correct?

Peter Ragauss

Yes. I think to answer your question, too, regarding pricing, the pricing is going to be good. The problem is it’s going to be a heck of an expensive place to operate in in the early stages. Infrastructure wise as well as security wise, salaries and wages and those kind of things, but from a pricing standpoint it should be very, very good.

Operator

Your next question comes from Marshall Adkins - Raymond James.

Marshall Adkins - Raymond James

Could you give me a little bit more detailed breakdown of the writedowns by region? I didn’t hear that in the overview.

Peter Ragauss

Well, we’ve got in the press releases, we’ve got as much detail as we’re prepared to discuss so I can talk about it on the [comment] on my press release.

Marshall Adkins - Raymond James

Yes, I’ve got the acquisition cost of $16 million and I guess the gain of $4 million but there’s a lot of other stuff in there. I was just wondering if you could shed a little light.

Gary Flaharty

Those are summarized on Page 9 of the news release on Table 4 and that gives you for all those categories in total, that gives you the breakdown of those categories by region and geographic area and so forth.

Peter Ragauss

It was a total of $74 million and it’s got $26 in corporate, $48 in oil field ops and then it’s got the regional breakdown on Page 9.

Marshall Adkins - Raymond James

Russia, fill me in on what’s going on there, what’s the opportunity there? Is that going to be in the next three to four years a big area for you?

Chad Deaton

It’s already a big area for us. Yes, Russia’s showing some life coming back. We were successful with two key clients there on ESP sales already, in terms of the ESP sales for 2010 already exceeded what our ESP sales were for all of 2009. Critically one of them was for all their work in the eastern Siberia [van] core project which gets a lot of exposure. You’ve got three main key customers there that have plans to increase our type of spending CapEx about 17% in 2010. We have a good relationship with all three of those clients.

So I think, of course we’ll see a break up come up in Russia. End of Q1, Q2 may not be very good but by Q3, Q4 we see Russia improving considerably. And also of course the Caspian is fairly active right now and there’s some big projects coming out there that we’ve tendered for that we hope to be able to win.

Marshall Adkins - Raymond James

So outside of the seasonal issues, it sounds like that there’s a better than average growth opportunity there versus other years?

Chad Deaton

It’ll be a better year than 2009, yes.

Marshall Adkins - Raymond James

Venezuela and the currency thing, any impact we need to be aware of there?

Peter Ragauss

Yes, the preliminary estimate is about $0.01 in Q1. Of course we’ll refine that as the quarter goes along but we managed down our fixed assets, etc., over time so we didn’t have as much exposure perhaps as some of the others.

Operator

Your next question comes from Stephen Gengaro - Jefferies & Co.

Stephen Gengaro - Jefferies & Co.

I guess two quick ones. The first on Mexico and as they sort of reassess what’s going on with Chicontepec, does that change your approach to that area at all, if they’re potentially going to more incentified contracts? Is that beneficial to Baker Hughes relative to the peers?

Chad Deaton

Well we think that we agree with these comments that some of the peers have talked about that it’s moving a little bit away from an IPM to more PEMEX calling [sharp] and the awarding of contracts, which we think is beneficial to Baker Hughes. We have continuously pushed down there that some of the things that they need have not just low cost incentive projects but to try to develop technology more and use technology more. Not that some of our peers can’t obviously provide that as well, but we think that we’re in pretty good shape with PEMEX especially on the Alma. Some of the things that we’ve been able to introduce there on Alma and as well on the ATG with some of the horizontal drilling and frac point and other things, so as Martin said you know perhaps its best we weren’t heavily into ATG like some of the others.

But we like our position there right now. We don’t have huge exposure but they clearly know us and we’ve got some real opportunity to work with them to help solve some of these technical challenges.

Martin Craighead

Let me just add one thing to that. I think the jury is in down there, you know, finally. It’s a complex reservoir. It’s shallow but that doesn’t mean its easy to produce out of. Getting those wells down to $1 million a well left very little margin for any of the service companies participating. We avoided it. And it didn’t reach the MPV hurdles or whatever they needed down there in terms of PEMEX. Production just didn’t get there. So you know back to Chad’s comment, the real value that’s going to be provided in that reservoir for PEMEX, and you know how critical that reservoir is, on the hills of Cantrell’s decline, it’s going to be in the hands of the service companies, they’re going to be able to work with them and show them what the issues are and how the technology we have or our competitors have in their portfolio can leverage it.

It’s not to say that the factory approach is wrong. It works in some places, but I don’t see that being the long term solution in Chicontepec.

Stephen Gengaro - Jefferies & Co.

I know in Germany Art talked a lot about the supply chain and about $300 million in cost savings, I believe. Any updates on the progress there or whether that number’s going to ultimately be larger?

Chad Deaton

First of all, Art and his team are doing a tremendous job and in all the categories whether it’s strategic sourcing or whether it’s the logistics, whether it’s the sales and operations planning with the new team in place, we’re making great headway. We’re ahead of schedule and I think that the number will be bigger. The answer is yes, I do.

Gary Flaharty

We want to be conscious of where we are on time, so Tina, could we take one final question, please?

Operator

Your last question comes from Michael Urban - Deutsche Bank Securities.

Michael Urban - Deutsche Bank Securities

Actually my question has been answered. Thank you.

Operator

Would you like to take one more question?

Gary Flaharty

Go ahead and take one more.

Operator

Your last question comes from [Jeff Keevers] – Weeden & Co.

[Jeff Keevers] – Weeden & Co.

Go back to one of the comments that Peter made earlier about future for additional charges. I just wanted to clarify there whether you were talking about charges that would be broken out as kind of non-recurring items, kind of recurring, non-recurring items or whether you were just talking about continued another couple of quarters where we’d see some margin pressure because of those costs.

Peter Ragauss

If they’re of magnitude, we’ll break them out. If they’re smaller then we’ll just sort of ignore them and keep them in the margin. We’ll make that determination at the time.

[Jeff Keevers] – Weeden & Co.

So the size of them will determine whether you kind of treat them as special, non-recurring or not?

Peter Ragauss

Yes, that’s usually what our investors prefer. If something is of magnitude, we break that out for your perusal.

[Jeff Keevers] – Weeden & Co.

So I’m guessing that the size you were forecasting sort of falls in the boundary between you know those two categories right now.

Peter Ragauss

Right.

[Jeff Keevers] – Weeden & Co.

Chad, I think you know when you first stated your confidence in making the then consensus for the fourth quarter a lot of people were surprised at that and you’ve obviously beaten that number. Were you surprised?

Chad Deaton

Yes. You know it was going to be a challenge we felt. I’ve got to really give credit and that’s why I had to give the credit to our people out there in the field. I tell you people busted their tails in order to get this done. You know Martin talks about our supply chain, these guys worked to get some of these big completions packages out the door before the end of the year, which helped a lot to make this. So yes, we were a little surprised, Jeff, otherwise we would have set it higher.

Martin Craighead

But Jeff to say we were surprised, we were above our expectations in that we had at the beginning of the quarter but we did have a strong December, pretty much across the board. So if that’s considered a surprise, yes, maybe. But you know the market reacted a bit more favorably than maybe we originally thought. And we actually had an inkling this was happening when we had some plan reviews in mid-December that the guys were saying they were so busy. So to say it’s a surprise, yes, the market reacted pretty well for us.

Chad Deaton

And we had a couple of areas where we had some nice shift of business and mix. The Gulf of Mexico came on very strongly for us. We ended up picking up some nice rigs there, the UK bounced back a little more stable, Norway had a very strong quarter. So there were a few areas that just came on as the quarter went on that helped us a bunch.

[Jeff Keevers] – Weeden & Co.

So what I was trying to get at is whether there was anything that you observed or learned during the quarter that would change the sort of performance targets that you laid out in the analyst meeting for 2010?

Chad Deaton

No, I don’t think so. You know what we laid out for 2010 is the direction we’re trying to go at this new organization and I think it jelled nicely in the quarter. It started really coming together which got us our focus back. There’s a lot of excitement out there. I think this quarter’s going to help our guys with the excitement. They’re winning and everybody likes to win. So it’s going the right direction.

[Jeff Keevers] – Weeden & Co.

On that winning comment, my last question is you talk about your share gains, you cited the example of this one geomarket where they’re estimating they got 40% more revenue from the customers than what they would have without the sort of reorganization. Sure, that’s not the norm but are you taking that share from other competitors that also are able to bundle their services? Or are you taking that share from competitors that aren’t able to offer that?

Chad Deaton

It’s both.

[Jeff Keevers] – Weeden & Co.

Is there any sort of way you could characterize who you’re winning from?

Chad Deaton

No, it’s way too early. Ask me that in a year.

Gary Flaharty

Thank you, Chad. Thank you, Peter. Thank you, Martin. I want to thank everyone and all of our participants this morning for your time and your thoughtful questions. As usual following the conclusion of today’s call, both [Gene] and I will be available to answer any additional questions you may have. Once again thank you for your participation. Tina?

Operator

Ladies and gentlemen, thank you for participating in today’s Baker Hughes Incorporated conference call. This call will be available for replay beginning at 1:00 PM Eastern Time or 12:00 PM Central Time and will be available through 11:59 PM Eastern Time on Tuesday, February 9, 2010.

The conference ID number for the replay is 48158116. Again, the conference ID number for the replay is 48158116. The number to dial for the replay is 800-642-1687 in the U.S. or 706-645-9291 international. Again those numbers are 800-642-1687 or 706-645-9291. Thank you. You may now disconnect.

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Source: Baker Hughes Incorporated Q4 2009 Earnings Call Transcript
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