Baker Hughes profits soar on increased unconventional drilling in North America

Source: Baker Hughes

Baker Hughes Incorporated (NYSE: BHI) announced net income attributable to Baker Hughes for the fourth quarter 2010 of $335 million or $0.77 per diluted share compared to $84 million or $0.27 per diluted share for the fourth quarter 2009 and $255 million or $0.59 per diluted share for the third quarter 2010. Net income attributable to Baker Hughes for the year 2010 was $812 million or $2.06 per diluted share, compared to $421 million or $1.36 per diluted share for the year 2009. 

Income attributable to Baker Hughes for the fourth quarter 2010, excluding acquisition-related costs and a gain on investment, was $366 million or $0.84 per diluted share. 

Revenue for the fourth quarter 2010 was $4.42 billion, up 82% compared to $2.43 billion for the fourth quarter 2009 and up 8% compared to $4.08 billion for the third quarter 2010. Revenue for the year 2010 was $14.41 billion, up 49% compared to $9.66 billion for the year 2009. 

Results for the year 2010 include results of BJ Services starting from May 2010 unless otherwise stated.
Chad C. Deaton, Baker Hughes chairman and chief executive officer, said, "In North America, margins increased almost 500 basis points sequentially reflecting the ongoing strength of customer spending in unconventional oil and gas plays and price realization. Given high oil prices and relatively low gas prices, customers are increasing drilling in crude oil and liquids rich natural gas plays where service intensity continues to increase. The trend toward longer horizontal wells with more frac stages is benefitting our directional drilling systems, completions and pressure pumping sales. 

"We continue to make good progress with the integration of BJ Services and Baker Hughes. We are increasing the pull through of Baker Hughes products into pressure pumping projects and have also been able to leverage our leadership in drilling and completions technology to pull through pressure pumping. 

"Given the ongoing delays in permitting new work offshore in the Gulf of Mexico, particularly in the deepwater, many operators have increased workover activity in order to offset production declines from existing fields. In the fourth quarter 2010, we benefitted from increased share of the incremental workover and completion activity as well as increased interest in drilling deep high pressure high temperature wells on the shelf. However, we remain concerned about the pace of permit approval, for both deepwater and shelf drilling, which continues to weigh on the outlook for the Gulf of Mexico. 

"International operating profit margins improved 375 basis points sequentially in the quarter as a result of reduced support costs, improving productivity and seasonally strong product sales. Margins improved sequentially in all regions except Africa where margins were unchanged. International pricing appears to have bottomed in some markets and in some product lines. We are continuing to execute our plans to increase international profit margins. 

"Looking ahead, we expect the economic recovery to continue resulting in increased oil demand and support for higher oil prices and a sustained multi-year expansion of international spending. However, at the current pace, we do not expect meaningful price leverage in our international markets until late 2011." 

Debt increased by $39 million to $3.88 billion and cash and short-term investments decreased by $150 million to $1.71 billion compared to the third quarter 2010. Capital expenditures were $486 million, depreciation and amortization expense was $326 million and dividend payments were $66 million in the fourth quarter 2010. Capital expenditures were $1.49 billion, depreciation and amortization expense was $1.07 billion and dividend payments were $241 million in the year 2010. 

Earnings before interest, taxes, depreciation and amortization or "EBITDA" per diluted share for fourth quarter 2010 was $2.18, up $1.07 or 96% compared to $1.11 for the fourth quarter 2009 and up $0.54 or 33% compared to $1.64 for the third quarter 2010. EBITDA for the year 2010 was $6.63 per diluted share up $1.93 or 41% from $4.70 for the year 2009. EBITDA is a non-GAAP measure and is calculated in Table 1 (Calculation of EBIT and EBITDA (non-GAAP measures)). 

Operational Highlights 

North America

The service intensity of land-based drilling in North America continues to escalate as we advance our capability to leverage pressure pumping and Baker Hughes' legacy product lines. For example we were recently awarded a multi-well 90-stage program in the Williston Basin that includes drilling, completions, wireline perforating, bits, cementing and pressure pumping. 

In the Alberta oil sands, our Xtreme Temperature ESP system set a record run life in a Steam Assisted Gravity Drainage (SAGD) application of more than 800 days of continuous operation in one of the harshest ESP environments. In addition, 17 CENtigrate UltraTemperature ESP systems were installed and now have more than 2,570 days of operation. 

Also in Canada, we have received an exclusive award from EnCana to utilize our 4-3/4'' TruTrak systems on coil-tubing rigs in the Entice coal bed methane project where the customer plans to drill 1,200 shallow vertical and directional wells over the next 18 months. 

In the Gulf of Mexico, we have been awarded a four-year contract by Chevron for deepwater pressure pumping services. The award recognizes the unique capacity and delivery capabilities of our two world-class pressure pumping vessels. 

We successfully continue to meet operational performance requirements and develop new technologies through collaborative contracts at McMoRan's Deep Gas Projects in the Gulf of Mexico's most challenging HPHT environments, with temperatures of 450 degrees F and pressures of 27,000 psi. 

Latin America 

In the Brazil geomarket, we recently achieved a milestone, having drilled more than 2,000,000 feet mostly at water depth greater than 1,000 feet, where our customer's challenges for drilling operations are greatest. We have been awarded the installation of complete cuttings handling and drying systems for seven rigs being built for Petrobras. Once the installations are completed, the number of deepwater rigs serviced by BHI Fluids Environmental Services in Brazil will increase to 34. 

In Bolivia's San Alberto gas field, we installed one of the world's deepest HPHT Level IV Multilateral well completion Intelligent Well Systems (IWS) at 14,400 ft. 

Europe/Africa/Russia Caspian 

Baker Hughes continues to see success in the introduction of new technology into the Continental Europe geomarket. As operators extend their reach into more difficult and hostile environments, they see the cost benefits that technology can bring. As an example, in Southeastern Poland we are drilling a two well exploration program with depth at 18,000 feet for conventional oil for POGC utilizing the AutoTrak-V system. 

The Russia Caspian geomarket was recently awarded cementing services, liner hangers, completion systems, drill bits and advanced wireline for the giant South Yoletan field in Turkmenistan. This field is believed to be one of the largest and most challenging natural gas fields in the world. The customer expects to drill up to 25 wells over the next three years. 

In the Sub-Saharan Africa geomarket, we were recently awarded a contract to provide oilfield chemicals and associated services for the Jubilee deepwater project located offshore Ghana. 

Middle East/Asia Pacific 

In the Saudi Arabia/Bahrain geomarket Baker Hughes is packaging Microwash remediation fluid with coiled tubing services. Treatment with Microwash cleans screens used in the completions of a large number of wells in Saudi Arabia, in some cases doubling production from treated wells. 

Also in Saudi Arabia we have performed the inaugural deployment of the Ultra-Slim Equalizer, which has the same proven functionality as the larger size Equalizers; however, it enables clients to drill slim laterals (less than 5" hole size) and complete them ensuring higher recovery. 

Across the Middle East we have completed a series of successful field trials with the new Mechanical Pipe Cutter. The new wireline tool is proving its ability to efficiently make multiple cuts per run, reducing rig time required to retrieve stuck drillpipe or tubing during workover operations. In Saudi Arabia, where a rig had suffered from stuck drillpipe for almost four weeks and where several competitors had been unsuccessful, the MPC severed the pipe on the first attempt, allowing drilling operations to resume. 

In the Australasia geomarket, a US super major has recently awarded Baker Hughes an ultra-deepwater drilling and evaluation contract for a period of up to seven years. The first well is planned to commence in November 2011 from the drillship using a wide selection of advanced Baker Hughes drilling systems, logging-while-drilling technology and drill bits. 

An international oil company (IOC) recently awarded Baker Hughes an ultra-deepwater drilling and evaluation contract on the SAIPEM-10K drillship for a period of two years plus a one-year option. The scope of work includes Indonesia, India and Sub-Sahara Africa. 

In the Southeast Asia geomarket, Baker Hughes achieved a significant milestone in the Ultra HTHP play winning Drilling Fluids and FES work from an IOC in Malaysia. Work is expected to start in fourth quarter 2011. The work scope is very challenging with well depths of 4,500 m (14,765 ft) TVD, expected Bottom Hole Temperature (BHT) of 260 degrees C (500 degrees F) and mud weights greater than 2.25 SG (18.8 lb/gal). 

The North Asia geomarket was awarded a major portion of the multi-segment services contract for the Chuandongbei Gas Project in Southwestern China by an IOC for a three-year period with options for another two years, based on our sour gas services experience. The contracts awarded include directional drilling and LWD, bits, fishing and milling, liner hangers, drilling fluids and waste management (FES). The 28-35 wells will range in depth from 4500 m to 7000 m and will be highly deviated. The production zones can have up to 17% H2S and 9% CO2 and elemental sulfur in a carbonate tight gas reservoir. 

In China we have successfully installed a SubSep™ downhole oil-water separator in one of an IOC's wells and delivered high water separation efficiency, pumping the separated water into a disposal zone thereby freeing up surface process capacity, which allowed the operator to significantly increase oil production by ramping up other wells. Based on these findings the IOC is planning to run two more systems in 2011.

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