Baker Hughes' first quarter earnings soar on increased activity, rising oil prices

Source: Baker Hughes

Baker Hughes Incorporated (NYSE: BHI) announced net income attributable to Baker Hughes for the first quarter 2011 of $381 million or $0.87 per diluted share compared to $129 million or $0.41 per diluted share for the first quarter 2010 and $335 million or $0.77 per diluted share for the fourth quarter 2010. 

Revenue for the first quarter 2011 was $4.53 billion, up 78% compared to $2.54 billion for the first quarter 2010 and up 2% compared to $4.42 billion for the fourth quarter 2010. 

Results for the first quarter 2010 do not include the results of BJ Services, acquired at the end of April 2010. 

Chad C. Deaton, Baker Hughes chairman and chief executive officer, said, "International margins continued to improve in the first quarter, despite weather and geopolitical disruptions, as we made steady progress towards our goal of exiting 2011 with international operating margins in the mid-teens. The foundation of our improvement plan has been managing costs and improving efficiency, which have driven the increase in profitability we have seen to date. As we move towards the second half of 2011, activity growth becomes a more important driver of future improvement. 

"Geopolitical supply disruptions have focused attention on the limits of spare oil production capacity and have driven oil prices higher. High oil prices have spurred both international oil companies and national oil companies to accelerate their spending plans. Assuming oil prices do not increase to levels high enough to destroy demand, we expect oil-driven spending growth to be sustained for multiple years. Recent announcements by the Kingdom of Saudi Arabia and Abu Dhabi regarding increased rig activity in the Middle East, and steady increases in spending by Petrobras and other companies to develop fields offshore Brazil give us confidence that the volume growth supporting our margin plans will occur. 

"The impact of higher oil prices has not been isolated to the international markets. In North America, on land, overall spending levels have increased as incremental spending on oil and liquids-rich natural gas plays has more than offset weakness in dry gas plays. The rig count in Canada is already dominated by oil-directed drilling and as of last week, for the first time since 1995, the US has more rigs drilling for oil than natural gas. Service intensity in the unconventional shales continues to increase as we drill longer horizontal wells requiring more frac stages and complex completions. 

"Our pressure pumping is sold out in North America. We expect to accelerate the deployment of new hydraulic fracturing fleets in the second half of 2011; however, we do not expect that supply will match higher demand for fracturing this year. Although weather improved in March, utilization of equipment was high and we were unable to catch up on work we missed due to colder weather earlier in the quarter. 

"Offshore markets will benefit from the resumption of deepwater activity in the Gulf of Mexico. We are encouraged by the recent permitting activity. However, we also recognize that the ten deepwater wells recently permitted to be drilled will only be a fraction of the activity levels we saw before the drilling moratorium was announced. This level of activity is insufficient to offset the 380,000 barrel per day or 23% drop in Gulf of Mexico oil production forecast by the EIA for 2012 compared to 2010. We have continued to invest in our training, safety, and competency assurance programs during the last year, and we are well positioned in the Gulf of Mexico, with our suite of advanced technology and services and experienced personnel, for a resumption of deepwater drilling activity. 

"We expect demand for hydrocarbons to continue to increase as the global economy grows. Following the tragic earthquake and tsunami in Japan, we expect oil and LNG to experience higher incremental demand, supporting high oil prices. With shrinking spare capacity, we believe that exploration, development and production spending will increase, raising our confidence that the second half of 2011 will set the stage for a strong 2012." 

Debt decreased by $44 million to $3.84 billion and cash and short-term investments decreased by $311 million to $1.40 billion compared to the fourth quarter 2010. Capital expenditures were $429 million, depreciation and amortization expense was $315 million, and dividend payments were $65 million in the first quarter 2011. 

Earnings before interest, taxes, depreciation and amortization or "EBITDA" per diluted share for the first quarter 2011 was $2.19, up $0.86 or 65% compared to $1.33 for the first quarter 2010 and up $0.01 compared to $2.18 for the fourth quarter 2010. EBITDA is a non-GAAP measure and is calculated in Table 1 (Calculation of EBIT and EBITDA (non-GAAP measures)). 

In addition to reported results, we are also providing "Supplemental Financial Information" in Table 3 for revenue and operating profit before tax (a non-GAAP measure) for the first quarter 2010. This information presents pro forma combined revenue and operating profit before tax, including estimates for depreciation and amortization expense associated with the acquisition of BJ Services in April 2010. 

Operational Highlights 

North America 

We continue to realize market opportunities from our expanded product portfolio. For example, in US Land geomarket, through an existing contract with Cabot Oil & Gas for pressure pumping services, we were awarded incremental contracts for drilling services, drilling fluids, completions, wireline and chemicals, with estimated annual revenue of more than $150 million. In March, we achieved a 50% increase in efficiency in stage completions for Cabot, a new record for the client. 

In US Land, an independent operator awarded us a 39-well, $140 million contract to perform all their Marcellus Shale work (excluding microseismic) in 2011-2012. 

In the Eagle Ford shale, we secured a contract from an independent operator that includes 12 wells with all product lines, representing over $100 million in revenue for 2011. 

In the first quarter 2011, we announced the next generation of our FracPoint™ multi-stage fracturing system with innovative In-Tallic™ disintegrating frac balls. Our nanotechnology research efforts enabled us to develop metal balls that would electrochemically "decompose" saving the operator time, ensuring a clean wellbore and immediate production. 

Finally, we continue to gain market share in the Woodford Basin through a contract award by an independent operator for wireline, completions, pressure pumping, cementing and coil tubing, creating a "Blue Wellbore" for the customer. 

In the deepwater Gulf of Mexico, Baker Hughes has been awarded a multi-million dollar contract for Electrical Submersible Pump (ESP) systems and upper completions by a super major. This is the first Miocene development in the Gulf of Mexico to deploy ESPs inside the wellbore to extend life.
 
In Canada, we delivered a 15-stage fracture treatment in record time using our OptiPort™ coiled tubing deployed frac sleeve technology for a client in the Viking Resource Play in Saskatchewan. We reduced average fracturing time by 45% and reduced fluid usage by 30%. 

Latin America 

In Brazil, we achieved two key milestones for Petrobras in the Lula field. First, we kicked off the first-ever directional section in a pre-salt area in Brazil using our AutoTrak™ G3 rotary-steerable system, OnTrak™ measurement and logging-while-drilling system, and CoPilot™ real-time drilling optimization system. Second, we installed the first intelligent completion in the pre-salt deepwater frontier challenging well with high CO2 and H2S levels. 

Also in Brazil, we completed the drilling phase of our integrated operations project for Brazil's largest independent in the Campos Basin. The project continues, and we expect revenue of approximately $60 million in 2011. 

In Ecuador, Andes Petroleum awarded us a multi-million dollar three-year ESP contract, building on our successful track record of ten years of artificial lift operations in the Andes Fields. The award includes advanced pumps technology with extreme duty Centurion systems. 

Europe/Africa/Russia Caspian 

In the Continental Europe geomarket, offshore Italy, Baker Hughes installed the world's first openhole GeoFORM™ conformable sand management system. The GeoFORM system is a shape memory polymer that provides a simple, cost-effective total conformance sand control solution, while significantly reducing installation time. 

Maintaining our strong market position in the Norway geomarket, Baker Hughes was awarded a two-year completions contract by a super major for over $200 million as a result of our strong record of execution and solid relationship. 

In Russia, we have been awarded a multi-million dollar integrated operations project by a national oil company for a remote, deep, high pressure gas test well on the Yamal Peninsula. 

Also in Russia, in Western Siberia, we were awarded a multi-well project planned for 2011, introducing our 4 3/4-inch LithoTrak and OnTrak technologies through a drilling contractor for a leading Russian major.
Baker Hughes has strengthened its position in offshore Sakhalin where we secured a ten-well, three-year contract for high pressure fracing and gravel placement services. 

In the Sub-Sahara Africa geomarket, in Angola, we won a three-year deepwater drilling and evaluation services contract for Block 18 by an international oil company. Also in Angola another IOC has awarded us a two-well drilling and evaluation program for Blocks 16 and 23. 

Middle East/Asia Pacific 

In Saudi Arabia, we significantly enhanced production from existing gas wells using under-balanced coil tubing drilling on two hybrid rigs for a national oil company. Laterals of several thousand feet were drilled using our CoilTrak™ bottom-hole-assembly and custom PDC bits. Year-over-year, the monthly footage drilled has more than doubled, and we have reduced non-productive time (NPT) to 5% compared to the 17.5% average of the 5 wells drilled prior to the beginning of our contract. 

We strengthened our supply chain in the Middle East by opening our newest drill bit manufacturing plant in Dhahran, Saudi Arabia, in the first quarter 2011. The facility is fully operational and delivering industry-leading polycrystalline diamond compact (PDC) bits to the Saudi Arabian and Middle East markets. 

In Iraq, our focus on completions and production enhancement is paying dividends. All product lines are engaged with workover rigs and rigless operations on multiple projects that include cementing, coiled tubing clean-out, and open-hole and closed-hole wireline services. Recently awarded projects include work with Lukoil, BP and ENI further strengthening our position in Iraq. 

In the Southeast Asia geomarket, a NOC has awarded us a contract to revitalize and increase production and recovery of oil and gas in a mature field offshore Malaysia. The contract is comprised of a 15-month field development study with accompanying production enhancement work with considerable upside potential as work progresses. 

Also in Malaysia, a super major has awarded Baker Hughes the "2010 Team of the Year" global prize for the successful installation of six Intelligent Well completions on the St. Joseph's development in 2010. Through this award, we displaced a competitor that previously had the work for nine years. The six wells were completed in eight weeks, greatly enhancing oil field recovery and incremental revenue to the customer.
In India, we are penetrating the deepwater market through a five-year integrated operations contract from a NOC, which includes a fully integrated Baker Hughes solution estimated at almost $300 million. We will provide drilling systems, fluids, liner hangers, cementing and mudlogging on this semi-submersible rig capable of drilling high pressure / high temperature wells at 10,000 ft. 

Industrial and Other 

Our Industrial Services Portfolio (ISP) group, comprised of downstream services, specialty chemicals and pipeline commissioning and inspection, secured a significant contract from Agip KCO for providing leak testing and related services on the Kasahagan field offshore Kazakhstan.



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