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Article by DailyStocks_admin    (10-24-08 08:12 AM)

The Daily Magic Formula Stock for 10/23/2008 is Baker Hughes Inc. According to the Magic Formula Investing Web Site, the ebit yield is 24% and the EBIT ROIC is 25-50 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

BUSINESS
Baker Hughes Incorporated (“Baker Hughes,” “Company,” “we,” “our” or “us”) is a Delaware corporation engaged in the oilfield services industry. Baker Hughes is a major supplier of products and technology services and systems to the worldwide oil and natural gas industry, including products and services for drilling, formation evaluation, completion and production of oil and natural gas wells. We may conduct our operations through subsidiaries, affiliates, ventures and alliances.
Baker Hughes was formed in April 1987 in connection with the combination of Baker International Corporation and Hughes Tool Company. We acquired Western Atlas Inc. in a merger completed on August 10, 1998.
As used herein, “Baker Hughes,” “Company,” “we,” “our” and “us” may refer to Baker Hughes Incorporated and/or its subsidiaries. The use of these terms is not intended to connote any particular corporate status or relationships.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our Internet website at www.bakerhughes.com as soon as reasonably practicable after these reports have been electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).
We have adopted a Business Code of Conduct to provide guidance to our directors, officers and employees on matters of business conduct and ethics, including compliance standards and procedures. We have also required our principal executive officer, principal financial officer and principal accounting officer to sign a Code of Ethical Conduct Certification. Our Business Code of Conduct and Code of Ethical Conduct Certifications are available on the Investor Relations section of our website at www.bakerhughes.com . We will disclose on a Current Report on Form 8-K or on our website information about any amendment or waiver of these codes for our executive officers and directors. Waiver information disclosed on our website will remain on the website for at least 12 months after the initial disclosure of a waiver. Our Corporate Governance Guidelines and the charters of our Audit/Ethics Committee, Compensation Committee, Executive Committee, Finance Committee and Governance Committee are also available on the Investor Relations section of our website at www.bakerhughes.com .

Information contained on or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing we make with the SEC.
We are a provider of drilling, formation evaluation, completion and production products and services to the worldwide oil and natural gas industry. We report our results under two segments - the Drilling and Evaluation segment and the Completion and Production segment. We have aggregated the divisions within each segment because they have similar economic characteristics and because the long-term financial performance of these divisions is affected by similar economic conditions. They also operate in the same markets, which include all of the major oil and natural gas producing regions of the world. We previously reported a third segment, WesternGeco, which consisted of our 30% interest in WesternGeco, a seismic venture jointly owned with Schlumberger Limited (“Schlumberger”); however, on April 28, 2006, we sold our 30% interest in WesternGeco to Schlumberger.
The results of our Drilling and Evaluation segment and our Completion and Production segment are evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance.
• The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids (drilling fluids), Hughes Christensen (oilfield drill bits), INTEQ (drilling, measurement-while-drillin g and logging-while-drilling) and Baker Atlas (wireline formation evaluation and wireline completion services) divisions. The Drilling and Evaluation segment provides products and services used to drill and evaluate oil and natural gas wells.

• The Completion and Production segment consists of the Baker Oil Tools (workover, fishing and completion equipment),

Baker Petrolite (oilfield specialty chemicals) and Centrilift (electrical submersible pumps and progressing cavity pumps) divisions and the ProductionQuest (production optimization and permanent monitoring) business unit. The Completion and Production segment provides equipment and services used from the completion phase through the productive life of oil and natural gas wells.
For additional industry segment information for the three years ended December 31, 2007, see Note 13 of the Notes to Consolidated Financial Statements in Item 8 herein.
DRILLING AND EVALUATION SEGMENT
Baker Hughes Drilling Fluids
Baker Hughes Drilling Fluids is a major provider of drilling fluids (also called “mud”), completion fluids (also called “brines”) and fluids environmental services (also called “waste management”). Drilling fluids are an important component of the drilling process and are pumped from the surface through the drill string, exiting nozzles in the drill bit and traveling back up the wellbore where the fluids are recycled. This process cleans the bottom of the well by transporting the cuttings to the surface while also cooling and lubricating the bit and drill string. Drilling fluids are typically manufactured by mixing oil, synthetic fluids or water with barite to give them weight, which enables the fluids to hold the wellbore open and stabilize it. Additionally, the fluids control downhole pressure and seal porous sections of the wellbore. To ensure maximum efficiency and wellbore stability, chemical additives are blended by the wellsite engineer with drilling fluids to achieve particular physical or chemical characteristics. For drilling through the reservoir itself, Baker Hughes Drilling Fluids’ drill-in or completion fluids possess properties that minimize formation damage. Fluids environmental services of Baker Hughes Drilling Fluids also provides equipment and services to separate the drill cuttings from the drilling fluids and re-inject the processed cuttings into specially prepared wells, or to transport and dispose of the cuttings by other means.
Technology is very important in the selection of drilling fluids for many drilling programs, especially in deepwater, deep drilling and environmentally sensitive areas whereas cost efficiency tends to drive customer purchasing decisions in other areas. Specific opportunities for competitive differentiation include:
• improving drilling efficiency,

• minimizing formation damage, and

• handling and disposing of drilling fluids and cuttings in an environmentally safe manner.
Baker Hughes Drilling Fluids’ primary competitors include M-I SWACO, Halliburton Company (“Halliburton”) and Newpark Resources, Inc.
Key business drivers for Baker Hughes Drilling Fluids include the number of drilling rigs operating (especially the number of drilling programs targeting deep formations), total footage drilled, environmental regulations, as well as the current and expected future price of both oil and natural gas.
Hughes Christensen
Hughes Christensen is a leading manufacturer and supplier of drill bits, primarily Tricone ® roller cone bits and fixed-cutter polycrystalline diamond compact (“PDC”) bits, to the worldwide oil and natural gas industry. The primary objective of a drill bit is to drill a high quality wellbore as efficiently as possible.
Tricone ® Bits . Tricone ® drill bits employ either hardened steel teeth or tungsten carbide insert cutting structures mounted on three rotating cones. These bits work by crushing and shearing the formation rock as they are turned. Tricone ® drill bits have a wide application range.
PDC Bits . PDC (also known as “Diamond”) bits use fixed position cutters that shear the formation rock with a milling action as they are turned. In many softer and less variable applications, PDC bits offer higher penetration rates and a longer life than Tricone ® bits. Advances in PDC technology have expanded the application of PDC bits into harder, more abrasive formations. A rental market has developed for PDC bits as improvements in bit life and bit repairs allow a bit to be used to drill multiple wells.

The main driver of customer purchasing decisions in drill bits is the value added, usually measured in terms of savings in total operating costs per foot drilled. Specific opportunities for competitive differentiation include:
• improving the rate of penetration,

• extending bit life and bit reliability, and

• selecting the optimal bit for each section to be drilled.
Hughes Christensen’s primary competitors in the oil and natural gas drill bit market include Smith International, Inc. (“Smith”), Grant Prideco, Inc. and Halliburton.
Key business drivers for Hughes Christensen include the number of drilling rigs operating, total footage drilled, type of well drilled (vertical, deviated, horizontal or extended reach), drilling rig rental costs, as well as the current and expected future price of both oil and natural gas.
INTEQ
INTEQ is a leading supplier of drilling and evaluation services, which include directional drilling, measurement-while-drillin g (“MWD”) and logging-while-drilling (“LWD”) services.
Directional Drilling . Directional drilling services are used to guide a drill string along a predetermined path to drill a wellbore to optimally recover hydrocarbons from the reservoir. These services are used to accurately drill vertical wells, deviated or directional wells (which deviate from vertical by a planned angle and direction), horizontal wells (which are sections of wells drilled perpendicular or nearly perpendicular to vertical) and extended reach wells.
INTEQ is a leading supplier of both conventional and rotary based directional drilling systems. Conventional directional drilling systems employ a downhole motor that turns the drill bit independently of drill string rotation from the surface. Placed just above the bit, a steerable motor assembly has a bend in its housing that is oriented to steer the well’s course. During the “rotary” mode, the entire drill string is rotated from the surface, negating the effect of this bend and causing the bit to drill on a straight course. During the “sliding” mode, drill string rotation is stopped and a “mud” motor (which converts hydraulic energy from the drilling fluids being pumped through the drill string into rotational energy at the bit) allows the bit to drill in the planned direction by orienting its angled housing, gradually guiding the wellbore through an arc.
INTEQ was a pioneer and is a leader in the development and use of automated rotary steerable technology. In rotary steerable environments, the entire drill string is turned from the surface to supply energy to the bit. Unlike conventional systems, INTEQ’s AutoTrak ® rotary steerable system changes the trajectory of the well using three pads that push against the wellbore from a non-rotating sleeve and is controlled by a downhole guidance system.
INTEQ’s AutoTrak ® Xtreme ® system combines conventional mud motor technology with rotary steerable technology to provide directional control and improved rate of penetration.
Measurement-While-Drillin g . Directional drilling systems need real-time measurements of the location and orientation of the bottom-hole assembly to operate effectively. INTEQ’s MWD systems are downhole tools that provide this directional information, which is necessary to adjust the drilling process and guide the wellbore to a specific target. The AutoTrak ® rotary steerable system has these MWD systems built in, allowing the tool to automatically alter its course based on a planned trajectory.
Logging-While-Drilling . LWD is a variation of MWD in which the LWD tool gathers information on the petrophysical properties of the formation through which the wellbore is being drilled. Many LWD measurements are the same as those taken via wireline; however, taking them in real-time often allows for greater accuracy, as measurements occur before any damage has been sustained by the reservoir as a result of the drilling process. Real-time measurements also enable “geo-steering” where geological markers identified by LWD tools are used to guide the bit and assure placement of the wellbore in the optimal location.
In both MWD and LWD systems, surface communication with the tool is achieved through mud-pulse telemetry, which uses pulse signals (pressure changes in the drilling fluids traveling through the drill string) to communicate the operating conditions and location of the bottom-hole assembly to the surface. The information transmitted is used to maximize the efficiency of the drilling process, update and refine the reservoir model and steer the well into the optimal location in the reservoir.

As part of INTEQ’s mud logging services, engineers monitor the interaction between the drilling fluid and the formation and perform laboratory analysis of drilling fluids and examinations of the drill cuttings to detect the presence of hydrocarbons and identify the different geological layers penetrated by the drill bit.
The main drivers of customer purchasing decisions in these areas are the value added by technology and the reliability and durability of the tools used in these operations. Specific opportunities for competitive differentiation include:
• the sophistication and accuracy of measurements,

• the efficiency of the drilling process (measured in cost per foot drilled), rate of penetration, and reduction of non-productive time,

• the reliability of equipment,

• the optimal placement of the wellbore in the reservoir, and

• the quality of the wellbore.
INTEQ’s primary competitors in drilling and evaluation services include Halliburton, Schlumberger and Weatherford International Ltd. (“Weatherford”).
Key business drivers for INTEQ include the number of drilling rigs operating, the total footage drilled, the mix of conventional and rotary steerable systems used, technological sophistication of and type of wells being drilled (vertical, deviated, horizontal or extended reach), as well as the current and expected future price of both oil and natural gas.
Baker Atlas
Baker Atlas is a leading provider of formation evaluation and wireline completion and production services for oil and natural gas wells.
Formation Evaluation . Formation evaluation involves measuring and analyzing specific physical properties of the rock (petrophysical properties) in the immediate vicinity of a wellbore to determine an oil or natural gas reservoir’s boundaries, volume of hydrocarbons and ability to produce fluids to the surface. Electronic sensor instrumentation is run through the wellbore to measure porosity and density (how much open space there is in the rock), permeability (how well connected the spaces in the rock are) and resistivity (whether there is oil, natural gas or water in the spaces). Imaging tools are run through the wellbore to record a picture of the formation along the well’s length. Acoustic logs measure rock properties and help correlate wireline data with previous seismic surveys. Magnetic resonance measurements characterize the volume and type of fluids in the formation as well as providing a direct measure of permeability. At the surface, measurements are recorded digitally and can be displayed on a continuous graph, or “well log,” which shows how each parameter varies along the length of the wellbore. Formation evaluation tools can also be used to record formation pressures and take samples of formation fluids to be further evaluated on the surface.
Formation evaluation instrumentation can be run in the well in several ways and at different times over the life of the well. The two most common methods of data collection are wireline logging (performed by Baker Atlas) and LWD (performed by INTEQ). Wireline logging is conducted by pulling or pushing instruments through the wellbore after it is drilled, while LWD instruments are attached to the drill string and take measurements while the well is being drilled. Wireline logging measurements can be made before the well’s protective steel casing is set (open hole logging) or after casing has been set (cased hole logging). Baker Atlas also offers geophysical data interpretation services which help the operator interpret the petrophysical properties measured by the logging instruments and make inferences about the formation, presence and quantity of hydrocarbons. This information is used to determine the next steps in drilling and completing the well.
Wireline Completion and Production Services . Wireline completion and production services include using wireline instruments to evaluate well integrity, perform mechanical intervention and perform cement evaluations. Wireline instruments can also be run in producing wells to perform production logging. Baker Atlas (and Baker Oil Tools) also provide perforating services, which involve puncturing a well’s steel casing and cement sheath with explosive charges. This creates a fracture in the formation and provides a path for hydrocarbons in the formation to enter the wellbore and be produced.

Baker Atlas’ services allow oil and natural gas companies to define, manage and reduce their exploration and production risk. As such, the main driver of customer purchasing decisions is the value added by formation evaluation and wireline completion and production services. Specific opportunities for competitive differentiation include:
• the efficiency of data acquisition,

• the sophistication and accuracy of measurements,

• the ability to interpret the information gathered to quantify the hydrocarbons producible from the formation,

• the efficiency of providing wireline completion and production services at the wellsite, and

• the ability to differentiate services that can run exclusively or more efficiently on wireline from services that can run on either wireline or drill pipe.
Baker Atlas’ primary formation evaluation and wireline completion and perforating competitors include Schlumberger, Halliburton and Weatherford.
Key business drivers for Baker Atlas include the number of drilling and workover rigs operating, as well as the current and expected future price of both oil and natural gas.
COMPLETION AND PRODUCTION SEGMENT
Baker Oil Tools
Baker Oil Tools is a world leader in wellbore construction, cased-hole completions, sand control and wellbore intervention solutions. The economic success of a well largely depends on how the well is completed. A successful completion ensures and optimizes the efficient and safe production of oil and natural gas to the surface. Baker Oil Tools’ completion systems are matched to the formation and reservoir for optimum production and can employ a variety of products and services.
Wellbore Construction. Wellbore completion products and services include liner hangers, multilateral completion systems and expandable metal technology.
Liner hangers suspend a section of steel casing (also called a liner) inside the bottom of the previous section of casing. The liner hanger’s expandable slips grip the inside of the casing and support the weight of the liner below.
Multilateral completion systems enable two or more zones to be produced from a single well, using multiple horizontal branches.
Expandable metal technology involves the permanent downhole expansion of a variety of tubular products used in drilling, completion and well remediation applications.
Cased-Hole Completions. Cased-hole completions products and services include packers, flow control equipment, subsurface safety valves, and intelligent completions.
Packers seal the annular space between the steel production tubing and the casing. These tools control the flow of fluids in the well and protect the casing above and below from reservoir pressures and corrosive formation fluids.
Flow control equipment controls and adjusts the flow of downhole fluids. A common flow control device is a sliding sleeve, which can be opened or closed to allow or limit production from a particular portion of a reservoir. Flow control can be accomplished from the surface via wireline or downhole via hydraulic or electric motor-based automated systems.
Subsurface safety valves shut off all flow of fluids to the surface in the event of an emergency, thus saving the well and preventing pollution of the environment. These valves are required in substantially all offshore wells.
Intelligent Completions ® use real-time, remotely operated downhole systems to control the flow of hydrocarbons from one or more zones.

Sand Control. Sand control equipment includes gravel pack tools, sand screens and fracturing fluids. Sand control systems and pumping services are used in loosely consolidated formations to prevent the production of formation sand with the hydrocarbons.
Wellbore Intervention. Wellbore intervention products and services are designed to protect producing assets. Intervention operations troubleshoot drilling problems and improve, maintain or restore economical production from already-producing wells. In this area, Baker Oil Tools’ offerings range from service tools and inflatable products to conventional and through-tubing fishing systems, casing exits, wellbore cleaning and temporary abandonment.
Service tools function as surface-activated, downhole sealing and anchoring devices to isolate a portion of the wellbore during repair or stimulation operations. Service tool applications range from treating and cleaning to testing components from the wellhead to the perforations. Service tools also refer to tools and systems that are used for temporary or permanent well abandonment.
Inflatable packers expand to set in pipe that is much larger than the outside diameter of the packer itself, so it can run through a restriction in the well and then set in the larger diameter below. Inflatable packers also can be set in “open hole” whereas conventional tools only can be set inside casing. Through-tubing inflatables enable remedial operations in producing wells. Significant cost savings result from lower rig requirements and the ability to intervene in the well without having to remove the completion.
Fishing tools and services are used to locate, dislodge and retrieve damaged or stuck pipe, tools or other objects from inside the wellbore, often thousands of feet below the surface.
Wellbore cleaning systems remove post-drilling debris to help ensure trouble-free well testing, completion and optimum production for the life of the well.
Casing exit systems are used to “sidetrack” new wells from existing ones, to provide a cost-effective method of tapping previously unreachable reserves.
The main drivers of customer purchasing decisions in wellbore construction, cased-hole completions, sand control and wellbore intervention are superior wellsite service execution and value-adding technologies that improve production rates, protect the reservoir from damage and reduce cost. Specific opportunities for competitive differentiation include:
• engineering and manufacturing superior-quality products and providing solutions with a proven ability to reduce well construction costs,

• enhancing production and ultimate recovery,

• minimizing risks, and

• providing reliable performance over the life of the well, particularly in harsh environments and for critical wells.
Baker Oil Tools’ primary competitors in wellbore construction, cased-hole completions and sand control include Halliburton, Schlumberger and Weatherford. Its primary competitors in wellbore intervention include Weatherford and Smith.
Key business drivers for Baker Oil Tools include the number of drilling and workover rigs operating, the relative complexity of the wells drilled and completed, as well as the current and expected future price of both oil and natural gas.
Baker Petrolite
Baker Petrolite is a leading provider of specialty chemicals to the oil and gas industry. The division also supplies specialty chemicals to a number of industries including refining, pipeline transportation, petrochemical, agricultural and iron and steel manufacturing and provides polymer-based products to a broad range of industrial and consumer markets. Through its Pipeline Management Group, Baker Petrolite also offers a variety of products and services for the pipeline transportation industry.
Oilfield Chemicals . Baker Petrolite provides oilfield chemical programs for drilling, well stimulation, production, pipeline transportation and maintenance programs. Its products provide measurable increases in productivity, decreases in operating and maintenance cost and solutions to environmental problems. Examples of specialty oilfield chemical programs include emulsion breakers and chemicals which inhibit the formation of paraffin, scale, hydrates and other well performance issues or problems.

Hydrate inhibitors – Natural gas hydrates are solid ice-like crystals that form in production flowlines and tubing and cause shutdowns and the need for system maintenance. Subsea wells and flowlines, particularly in deepwater environments, are especially susceptible to hydrates.
Paraffin inhibitors – The liquid hydrocarbons produced from many oil and natural gas reservoirs become unstable soon after leaving the formation. Changing conditions, including decreases in temperature and pressure, can cause certain hydrocarbons in the produced fluids to crystallize and deposit on the walls of the well’s tubing, flow lines and surface equipment. These deposits are commonly referred to as paraffin. Baker Petrolite offers solvents that remove the deposits, as well as inhibitors that prevent new deposits from forming.
Scale inhibitors – Unlike paraffin deposits that originate from organic material in the produced hydrocarbons, scale deposits come from mineral-based contaminants in water that are produced from the formation as the water undergoes changes in temperature or pressure. Similar to paraffin, scale deposits can clog the production system. Treatments prevent and remove deposits in production systems.
Corrosion inhibitors – Another problem caused by water mixed with downhole hydrocarbons is corrosion of the well’s tubulars and other production equipment. Corrosion can also be caused by dissolved hydrogen sulfide (“H 2 S”) gas, which reacts with the iron in tubulars, valves and other equipment, potentially causing failures and leaks. Additionally, the reaction creates iron sulfide, which can impair treating systems and cause blockages. Baker Petrolite offers a variety of corrosion inhibitors and H 2 S scavengers.
Emulsion breakers – Water and oil typically do not mix, but water present in the reservoir and co-produced with oil can often become emulsified, or mixed, causing problems for oil and natural gas producers. Baker Petrolite offers emulsion breakers that allow the water to be separated from the oil.
Refining, Industrial and Other Specialty Chemicals . For the refining industry, Baker Petrolite offers various process and water treatment programs, as well as finished fuel additives. Examples include programs to remove salt from crude oil and to control corrosion in processing equipment and environmentally friendly cleaners that decontaminate refinery equipment and petrochemical vessels at a lower cost than other methods. Baker Petrolite also provides chemical technology solutions to other industrial markets throughout the world, including petrochemicals, fuel additives, plastics, imaging, adhesives, steel and crop protection.
Pipeline Management . Baker Petrolite’s Pipeline Management Group (“PMG”) offers a variety of products and services for the pipeline transportation industry. To improve efficiency, Baker Petrolite offers custom turnkey cleaning programs that combine chemical treatments with brush and scraper tools that are pumped through the pipeline. Efficiency can also be improved by adding polymer-based drag reduction agents to reduce the slowing effects of friction between the pipeline walls and the fluids within, thus increasing throughput and pipeline capacity. Additional services allow pipelines to operate more safely. These include inspection and internal corrosion assessment technologies, which physically confirm the structural integrity of the pipeline. In addition, PMG’s flow-modeling capabilities can identify high-risk segments of a pipeline to ensure proper mitigation programs are in place.
The main driver of customer purchasing decisions in specialty chemicals is superior application of technology and service delivery. Specific opportunities for competitive differentiation include:
• higher levels of production or throughput,

• lower maintenance costs and frequency,

• lower treatment costs and treatment intervals, and

• successful resolution of environmental issues.
Baker Petrolite’s primary competitors include Champion Technologies, Inc., Nalco Holding Company and Smith.
Key business drivers for Baker Petrolite include oil and natural gas production levels, the number of producing wells, total liquids production, and the current and expected future price of both oil and natural gas.

CEO BACKGROUND

Chad C. Deaton
55
Chairman of the Board, President and Chief Executive Officer of the Company since February 2008. Chairman of the Board and Chief Executive Officer from 2004 to 2008. President and Chief Executive Officer of Hanover Compressor Company from 2002 to 2004. Senior Advisor to Schlumberger Oilfield Services from 1999 to 2001. Executive Vice President of Schlumberger from 1998 to 1999. Employed by the Company in 2004.


Alan R. Crain
56
Senior Vice President and General Counsel of the Company since 2007. Vice President and General Counsel from 2000 to 2007. Executive Vice President, General Counsel and Secretary of Crown, Cork & Seal Company, Inc. from 1999 to 2000. Vice President and General Counsel from 1996 to 1999, and Assistant General Counsel from 1988 to 1996, of Union Texas Petroleum Holdings, Inc. Employed by the Company in 2000.


Peter A. Ragauss
50
Senior Vice President and Chief Financial Officer of the Company since 2006. Segment Controller of Refining and Marketing for BP plc from 2003 to 2006. Mr. Ragauss joined BP plc in 1998 as Assistant to the Group Chief Executive until 2000 when he became Chief Executive Officer of Air BP. Vice President of Finance and Portfolio Management for Amoco Energy International immediately prior to its merger with BP in 1998. Vice President of Finance for El Paso Energy International from 1996 to 1998 and Vice President of Corporate Development for Tenneco Energy in 1996. Employed by the Company in 2006.


David H. Barr
58
Group President of Completion and Production since 2007 and Vice President of the Company since 2000. Group President of Drilling and Evaluation from 2005 to 2007. President of Baker Atlas from 2000 to 2005. Vice President, Supply Chain Management, of Cooper Cameron from 1999 to 2000. Mr. Barr also held the following positions with the Company: Vice President, Business Process Development, from 1997 to 1998 and the following positions with Hughes Tool Company/Hughes Christensen: Vice President, Production and Technology, from 1994 to 1997; Vice President, Diamond Products, from 1993 to 1994; Vice President, Eastern Hemisphere Operations, from 1990 to 1993 and Vice President, North American Operations, from 1988 to 1990. Employed by the Company in 1972.


Martin S. Craighead
48
Group President of Drilling and Evaluation since 2007 and Vice President of the Company since 2005. President of INTEQ from 2005 to 2007. President of Baker Atlas from February 2005 to August 2005. Vice President of Worldwide Operations for Baker Atlas from 2003 to 2005 and Vice President, Marketing and Business Development for Baker Atlas from 2001 to 2003; Region Manager for Baker Atlas in Latin America and Asia and Region Manager for E&P Solutions from 1995 to 2001. Employed by the Company in 1986.


Didier Charreton
44
Vice President, Human Resources of the Company since 2007. Group Human Resources Director of Coats Plc, a global company engaged in the sewing thread and needlecrafts industry, from 2002 to 2007. Business Development of ID Applications for Gemplus S. A., a global company in the Smart Card industry, from 2000 to 2001. Various human resources positions at Schlumberger from 1989 to 2000. Employed by the Company in 2007.


Christopher P. Beaver
50
Vice President of the Company and President of Baker Oil Tools since 2005. Vice President of Finance for Baker Petrolite from 2002 to 2005; Director of Finance and Controller at INTEQ from 1999 to 2002; Controller at Hughes Christensen from 1994 to 1999. Various accounting and finance positions at Hughes Christensen in the Eastern Hemisphere from 1985 to 1994. Employed by the Company in 1985.

Paul S. Butero
51
Vice President of the Company since 2005 and President of INTEQ since 2007. President of Baker Atlas from 2006 to 2007. President of Hughes Christensen from 2005 to 2006. Vice President, Marketing, of Hughes Christensen from 2001 to 2005 and as Region Manager for various Hughes Christensen areas (both in the United States and the Eastern Hemisphere) from 1989 to 2001. Employed by the Company in 1981.


Stephen K. Ellison
49
Vice President of the Company and President of Baker Atlas since 2007. Vice President, Middle East, Asia Pacific Region for Baker Atlas from 2005 to 2007; Asia Pacific Region Manager, Baker Atlas from 2001 to 2005 and Asia Pacific Region Operations Manager, Baker Atlas from 2000 to 2001. Employed by the Company in 1979.


Alan J. Keifer
53
Vice President and Controller of the Company since 1999. Western Hemisphere Controller of Baker Oil Tools from 1997 to 1999 and Director of Corporate Audit for the Company from 1990 to 1996. Employed by the Company in 1990.


Jay G. Martin
56
Vice President, Chief Compliance Officer and Senior Deputy General Counsel of the Company since 2004. Shareholder at Winstead Sechrest & Minick P.C. from 2001 to 2004. Partner, Phelps Dunbar from 2000 to 2001 and Partner, Andrews & Kurth from 1996 to 2000. Employed by the Company in 2004.


Nelson Ney
44
Vice President of the Company and President of Centrilift since 2007. Operations Vice President, Europe, Africa, Russia and the Caspian Region for Hughes Christensen from 2006 to 2007; Operations Vice President, Centrilift Latin America Region from 2005 to 2006; General Manager, Centrilift Latin America operations from 2004 to 2005 and Regional Manager, Hughes Christensen Latin America operations from 2001 to 2004. Employed by the Company in 1990.


John A. O’Donnell
59
Vice President of the Company since 1998 and President of Baker Petrolite Corporation since 2005. President of Baker Hughes Drilling Fluids from 2004 to 2005. Vice President, Business Process Development of the Company from 1998 to 2002; Vice President, Manufacturing, of Baker Oil Tools from 1990 to 1998 and Plant Manager of Hughes Tool Company from 1988 to 1990. Employed by the Company in 1975.


Gary G. Rich
49
Vice President of the Company and President of Hughes Christensen since 2006. Vice President Marketing, Drilling and Evaluation for INTEQ from 2005 to 2006. Region Manager for INTEQ from 2001 to 2005; Director of Marketing for Hughes Christensen from 1998 to 2001 and served in various marketing and finance positions for the Company from 1987 to 1998. Employed by the Company in 1987.


Richard L. Williams
52
Vice President of the Company and President of Baker Hughes Drilling Fluids since 2005. Vice President, Eastern Hemisphere Operations, Baker Oil Tools from March 2005 to May 2005. Worldwide Operations Vice President, INTEQ from 2004 to 2005; Vice President Eastern Hemisphere, INTEQ from 2003 to 2004 and Vice President Western Hemisphere, INTEQ from 2001 to 2003. Employed by the Company in 1975.

MANAGEMENT DISCUSSION FROM LATEST 10K

EXECUTIVE SUMMARY
We are a leading provider of drilling, formation evaluation, completion and production products and services to the worldwide oil and natural gas industry. We report our results under two segments – Drilling and Evaluation and Completion and Production – which are aligned by product line based upon the types of products and services provided to our customers and upon the business characteristics of the divisions during business cycles. Collectively, we refer to the results of these two segments as Oilfield Operations.
• The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids (drilling fluids), Hughes Christensen (oilfield drill bits), INTEQ (drilling, measurement-while-drillin g and logging-while-drilling) and Baker Atlas (wireline formation evaluation and wireline completion services) divisions. The Drilling and Evaluation segment provides products and services used to drill and evaluate oil and natural gas wells.

• The Completion and Production segment consists of the Baker Oil Tools (workover, fishing and completion equipment), Baker Petrolite (oilfield specialty chemicals) and Centrilift (electrical submersible pumps and progressing cavity pumps) divisions. The Completion and Production segment also includes our ProductionQuest (production optimization and permanent monitoring) business unit. The Completion and Production segment provides equipment and services used from the completion phase through the productive life of oil and natural gas wells.
We previously reported a third segment, WesternGeco, which consisted of our 30% interest in WesternGeco, a seismic venture jointly owned with Schlumberger. On April 28, 2006, we sold our 30% interest in WesternGeco to Schlumberger for $2.4 billion and recorded a pre-tax gain of $1,743.5 million ($1,035.2 million after-tax).
The business operations of our divisions are organized around four primary geographic regions: North America, Latin America, Middle East and Asia Pacific, and Europe, Africa, Russia and the Caspian. Each region has a council comprised of regional vice presidents from each division as well as representatives from various functions such as human resources, legal including compliance, marketing, finance and treasury, and health, safety and environmental. The regional vice presidents report directly to each division president. Through this structure, we have placed our management closer to the customer, facilitating stronger customer relationships and allowing us to react more quickly to local market conditions and needs.
We operate in over 90 countries around the world and our corporate headquarters is in Houston, Texas. We have significant manufacturing operations in various countries, including, but not limited to, the United States (Texas, Oklahoma and Louisiana), the United Kingdom (Scotland and Northern Ireland), Germany (Celle), and South America (Venezuela and Argentina). As of December 31, 2007, we had approximately 35,800 employees, up 1,200 employees from December 31, 2006. Approximately 57% of our employees work outside the United States.
2007 Financial Results
We reported revenues of $10,428.2 million for 2007, a 15.5% increase compared with 2006, exceeding the 2.3% increase in the worldwide average rig count for 2007 compared with 2006. During 2007, the rig count continued to increase outside North America, as oil and natural gas companies around the world recognized the need to build productive capacity to meet the growing demand for hydrocarbons and to offset depletion of existing developed reserves. The North American rig count was flat in 2007 compared to 2006 primarily due to the weak market conditions in Canada and offshore U.S., which offset growth in the U.S. land market. Oil prices were at historic highs in 2007, reflecting continued strong demand and relatively low spare productive capacity as well as a weaker U.S. Dollar. In addition to the growth in our revenues from increased activity, our revenues were impacted by changes in market share in certain product lines and to a lesser extent pricing improvements. Net income for 2007 was $1,513.9 million, compared with $2,419.0 million in 2006, which included $1,035.2 million after-tax gain on the sale of our interest in WesternGeco.

• The 8.9% increase in North America revenue was driven by a strong increase in gas-directed horizontal drilling on land in the U.S. where the rig count for land and inland water drilling increased 8.7% in 2007 compared with 2006. Revenue from the U.S. offshore market was impacted by the ongoing migration of rigs out of the Gulf of Mexico to more attractive international markets and weather-related disruptions. U.S. offshore revenue was up 2.9% compared to a rig count that was down 18.9% in 2007 compared with 2006. Revenue from Canada was down reflecting lower economic returns for Canadian exploration and production projects evidenced by a rig count that declined 27.2% compared to 2006.

• Outside of North America revenue increased 20.7% in 2007 compared with 2006.
• Latin America revenue increased 19.7% in 2007 compared with 2006, while the Latin America rig count was up 9.6%. The increase was driven by market share gains in Brazil and drilling activity increases in Colombia.

• A 24.0% increase in Europe, Africa, Russia and the Caspian revenue was driven by an increase in revenue from Russia and the Caspian of 50.4%, revenue from projects in Equatorial Guinea and revenue from projects in the U.K. and the Norwegian sector of the North Sea. Revenue in Europe increased 19.6% while the rig count was flat compared with 2006. Revenue in Africa increased 17.0% exceeding rig count increases of 13.8% compared with 2006. We do not count rigs in Russia or the Caspian.

• Middle East and Asia Pacific revenues were up 16.5% in 2007 compared with 2006. Revenue from the Middle East was up 18.1%, driven by our activities in Saudi Arabia and Qatar, compared to the Middle East rig count which increased 11.3%. Asia Pacific revenue was up 15.0%, driven by our activities in Australia, Malaysia and India, compared to the Asia Pacific rig count that increased 5.7%. We do not count rigs for onshore China.
The customers for our products and services include the super-major and major integrated oil and natural gas companies, independent oil and natural gas companies and state-owned national oil companies (“NOCs”). Our ability to compete in the oilfield services market is dependent on our ability to differentiate our product and service offerings by technology, service and the price paid for the value we deliver.
The primary driver of our business is our customers’ capital and operating expenditures dedicated to exploring, and drilling for, and developing and producing oil and natural gas. Our business is cyclical and is dependent upon our customers’ forecasts of future oil and natural gas prices, future economic growth and hydrocarbon demand and estimates of future oil and natural gas production. During 2007, our customers’ spending directed to both worldwide oil and North American natural gas projects increased compared with 2006. The increase in spending was driven by the multi-year requirement to find, develop and produce more hydrocarbons to meet the growth in demand, offset production declines, increase inventory levels and increase spare productive capacity. Additionally, the increase was supported by historically high oil and natural gas prices.
BUSINESS ENVIRONMENT
Our business environment and its corresponding operating results are significantly affected by the level of energy industry spending for the exploration, development, and production of oil and natural gas reserves. Spending by oil and natural gas exploration and production companies is dependent upon their forecasts regarding the expected future supply and future demand for oil and natural gas products and their estimates of risk-adjusted costs to find, develop, and produce reserves. Changes in oil and natural gas exploration and production spending will normally result in increased or decreased demand for our products and services, which will be reflected in the rig count and other measures.
Oil and Natural Gas Prices
Generally, changes in the current price and expected future price of oil or natural gas drive customers’ expectations about their prospects from oil and natural gas sales and their expenditures to explore for or produce oil and natural gas. Accordingly, changes in these expenditures will normally result in increased or decreased demand for our products and services. Oil (Bloomberg West Texas Intermediate (WTI) Cushing Crude Oil Spot Price) and natural gas (Bloomberg Henry Hub Natural Gas Spot Price) prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.

Oil prices averaged a nominal historic high of $72.23/Bbl for the year 2007. The year 2007 began with oil prices declining to a yearly low of $50.48/Bbl in mid-January. Throughout the balance of the year oil prices continued to increase due to concerns about weak inventory levels, limited worldwide excess productive capacity and concerns that demand growth would outpace production growth. The weakening of the U.S. Dollar relative to other currencies also contributed to the higher price. Oil prices reached a yearly high of $98.88/Bbl in mid-November 2007.
Natural gas prices averaged $6.96/mmBtu for the year 2007. The year 2007 began with record levels of natural gas in storage and gas prices in the low $5/mmBtu range. However, cold weather from mid-January to early February resulted in higher than anticipated withdrawals of gas in storage and placed upward pressure on gas prices, which increased to a yearly high of $9.07/mmBtu in early February 2007. As natural gas inventory continued to build throughout the year, gas prices again came under pressure, hitting a low of $5.29/mmBtu in early September. Prices recovered in late September on expectations of cooler weather and ended the year over $7/mmBtu.
Rig Counts
We have been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors or other outside sources. This data is then compiled and distributed to various wire services and trade associations and is published on our website. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international and U.S. workover rigs. Published international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian and onshore China, because this information cannot be readily obtained.
Rigs in the U.S. are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth, which may change from time to time and may vary from region to region, to be a potential consumer of our drill bits. Rigs in Canada are counted as active if data obtained by the Canadian Association of Oilwell Drillers and Contractors indicates that drilling operations have occurred during the week and we are able to verify this information. In most international areas, rigs are counted as active if drilling operations have taken place for at least 15 days during the month. In some active international areas where better data is available, a weekly or daily average of active rigs is taken. In those international areas where there is poor availability of data, the rig counts are estimated from third party data. The rig count does not include rigs that are in transit from one location to another, are rigging up, are being used in non-drilling activities, including production testing, completion and workover, or are not significant consumers of drill bits.

The U.S. land and inland waters rig count increased 8.7% in 2007 compared with 2006, due to increased natural gas drilling activity. The U.S. offshore rig count decreased 18.9% in 2007 compared with 2006, reflecting the ongoing migration of rigs out of the Gulf of Mexico to more attractive markets and weather-related disruptions. The Canadian rig count decreased 27.2% over 2006 levels due to lower activity resulting from less-favorable economics for natural gas producers.
Outside North America, the rig count increased 8.5% in 2007 compared with 2006. The rig count in Latin America increased 9.6% in 2007 compared with 2006, driven primarily by activity increases in Colombia, Brazil and Mexico. The North Sea rig count was down slightly in 2007 compared with 2006. The rig count in Africa increased by 13.8% in 2007 compared with 2006. Activity in 2007 in the Middle East increased 11.3% compared with 2006, driven primarily by activity increases in Saudi Arabia, Egypt and Oman. The rig count in the Asia Pacific region was up 5.7% in 2007 compared with 2006, with modest increases in multiple countries across the region.
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our consolidated statements of operations are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where possible and practical, have quantified the impact of such items. The discussions are based on our consolidated financial results, as individual segments do not contribute disproportionately to our revenues, profitability or cash requirements. In addition, the discussions below for revenues and cost of revenues are on a combined basis as the business drivers for the individual components of product sales and service and rentals are similar.
During the fourth quarter of 2007, we began classifying certain expenses as cost of sales and cost of services and rentals that were previously classified as selling, general and administrative expenses. The change was the result of an internal review to improve management reporting. The reclassified expenses relate to selling and field service costs which are closely related to operating activities. In addition, we have renamed selling, general and administrative expenses on the statement of operations to marketing, general and administrative expenses to more accurately describe the costs included therein. The impact of these reclassifications is to increase cost of sales by $366.1 million, $318.6 million and $276.2 million for the years ended December 31, 2007, 2006 and 2005, respectively; increase cost of services and rentals by $123.9 million, $114.3 million and $104.7 million for the years ended December 31, 2007, 2006 and 2005, respectively; and decrease marketing, general and administrative expense by $490.0 million, $432.9 million and $380.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. These reclassifications had no impact on total costs and expenses as these changes offset one another. All prior periods have been reclassified to conform to this new presentation.

Revenues
Revenues for 2007 increased 15.5% compared with 2006, primarily due to increases in activity in certain geographic areas and, to a lesser extent, improvement in price. Revenues in North America, which accounted for 41.8% of total revenues, increased 9.0% in 2007 compared with 2006. Revenues from our U.S. land operations increased 15.4% compared to a rig count that increased 8.7%, which reflects a continued increase in gas-directed horizontal drilling. Revenue from the U.S. offshore market increased 2.9% compared to a rig count that decreased 18.9%. These increases more than offset an 8.6% decline in Canadian revenue where the rig count declined 27.2%. Revenues outside North America, which accounted for 58.2% of total revenues, increased 20.7% in 2007 compared with 2006. This increase reflects the improvement in international drilling activity, as evidenced by the 8.5% increase in the rig count outside North America, particularly in Latin America, Africa, the Middle East and Asia Pacific region, coupled with improvements in certain markets and product lines and price increases.
Revenues for 2006 increased 25.6% compared with 2005, primarily due to increases in activity, as evidenced by a 13.2% increase in the worldwide rig count, pricing improvements of between seven and nine percent and increases in market share in selected product lines and geographic areas. Revenues in North America, which accounted for 44.3% of total revenues, increased 31.2% for 2006 compared with 2005. This increase reflects a continued broad based increase in drilling activity in the U.S., as evidenced by the 15.3% increase in the North American rig count, with activity dominated by land-based gas-directed drilling. Revenues outside North America, which accounted for 55.7% of total revenues, increased 21.5% for 2006 compared with 2005. This increase reflects the improvement in international drilling activity in 2006, as evidenced by the 8.7% increase in the rig count outside North America, particularly in the Middle East, Africa and the North Sea, coupled with price increases in certain markets and product lines.
Cost of Revenues
Cost of revenues for 2007 increased 16.5% compared with 2006. Cost of revenues as a percentage of revenues was 65.6% and 65.1% for 2007 and 2006, respectively. The increase in cost of revenues as a percentage of consolidated revenues was primarily due to a change in the geographic and product mix from the sale of our products and services and increasing competitive conditions and pricing pressures, particularly in North America. In addition higher raw material costs and employee compensation costs contributed to the increase. Effective January 1, 2007, we increased the depreciable lives of certain assets of our Baker Atlas division resulting in a reduction to cost of services and rentals for 2007 of approximately $23 million.
Cost of revenues for 2006 increased 17.0% compared with 2005. Cost of revenues as a percentage of revenues was 65.1% and 69.9% for 2006 and 2005, respectively. The decrease in cost of revenues as a percentage of consolidated revenues was primarily the result of overall average price increases between seven and nine percent and continued high utilization of our rental tool fleet and personnel. A change in the geographic and product mix from the sale of our products and services also contributed to the decrease in the cost of revenues as a percentage of revenues. This increase was partially offset by higher raw material costs and employee compensation costs. In addition to these factors, during the fourth quarter of 2006, we revised the accounting procedures related to certain inventory for our Baker Atlas division resulting in a one time reduction in cost of services and rentals in 2006 of $21.2 million.
Research and Engineering
Research and engineering expenses increased 9.8% in 2007 compared with 2006 and 13.1% in 2006 compared with 2005. The increase in both years reflects our commitment in developing and commercializing new technologies as well as investing in our core product offerings. During 2007, we opened the first phase of the Center for Technology and Innovation in Houston, Texas. This facility focuses on research and development of completion and production systems in harsh environments. The second phase is scheduled for completion in 2008.

Marketing, General and Administrative
Marketing, general and administrative expenses increased 6.3% in 2007 compared with 2006. The increase corresponds with increased activity and resulted primarily from higher employee related costs including compensation, training and benefits, higher marketing expenses as a result of increased activity and an increase in legal, tax and other compliance related expenses.
Marketing, general and administrative expenses increased 39.6% in 2006 compared with 2005. The increase corresponds with increased activity and resulted primarily from higher marketing and employee compensation costs, including stock-based compensation which increased due to the adoption of Statement of Financial Accounting Standard No. 123(R) – Shared Based Payment , using the modified prospective application method. The increase also results from the financial charge of $46.1 million recorded in the fourth quarter of 2006 in connection with the settlement negotiations with the SEC and DOJ.
Equity in Income of Affiliates
Equity in income of affiliates decreased $59.2 million in 2007 compared with 2006 and $39.7 million in 2006 compared with 2005. These decreases in equity in income of affiliates are due to the sale of our 30% interest in WesternGeco on April 28, 2006.
Gain on Sale of Interest in Affiliate
On April 28, 2006, we sold our 30% interest in WesternGeco to Schlumberger for $2.4 billion in cash and recorded a pre-tax gain of $1,743.5 million ($1,035.2 million, after-tax).
Interest Expense and Interest and Dividend Income
Interest expense decreased $2.8 million in 2007 compared with 2006 and $3.4 million in 2006 compared with 2005. These decreases were primarily due to slightly lower average total debt levels. Interest and dividend income in 2007 decreased $23.7 million over 2006, primarily due to lower average cash and short-term investment balances in 2007 as a result of our share repurchase programs. Interest and dividend income in 2006 increased $49.5 million over 2005, primarily due to the interest and dividends earned on the invested cash received from the sale of our interest in WesternGeco.
Income Taxes
Our effective tax rate in 2007 is 32.9%, which is lower than the U.S. statutory income tax rate of 35% due to lower rates of tax on certain international operations offset by state income taxes. Our effective tax rate in 2006 was 35.8%, which was higher than the U.S. statutory income tax rate of 35% due to taxes related to the sale of our interest in the WesternGeco venture and state income taxes, offset by lower rates of tax on our international operations. During 2006, we provided $708.3 million for taxes related to the sale of our interest in WesternGeco, which included an estimate of taxes related to the future repatriation of the non-U.S. proceeds. In 2005 our effective tax rate was 31.6%, which reflected a $10.6 million reduction to tax expense attributable to the recognition of a deferred tax asset associated with our supplemental retirement plan.
Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessment of additional taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. We have received tax assessments from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. We believe we have substantial defenses to the questions being raised and will pursue all legal remedies should an unfavorable outcome result. However, resolution of these matters involves uncertainties and there are no assurances that the outcomes will be favorable. We provide for uncertain tax positions pursuant to FIN 48, Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109 .
Cumulative Effect of Accounting Change
On December 31, 2005, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 47, Conditional Asset Retirement Obligations (“FIN 47”). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS No. 143, Accounting for Asset Retirement Obligations , refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The adoption of FIN 47 resulted in a charge of $0.9 million, net of tax of $0.5 million, recorded as the cumulative effect of accounting change in the consolidated statement of operations. In conjunction with the adoption, we recorded conditional asset retirement obligations of $1.6 million as the fair value of the costs associated with the special handling of asbestos related materials in certain facilities.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS
The discussions below relating to significant line items from our consolidated condensed statements of operations are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where possible and practical, have quantified the impact of such items. The discussions are based on our consolidated financial results, as individual segments do not contribute disproportionately to our revenues, profitability or cash requirements. In addition, the discussions below for revenues and cost of revenues are on a combined basis as the business drivers for the individual components of product sales and services and rentals are similar.

Second Quarter of 2008 Compared to the Second Quarter of 2007
Revenues for the three months ended June 30, 2008 increased 18% compared with the three months ended June 30, 2007, primarily due to increases in activity in certain geographic areas, price improvement and net changes in market share in selected product lines and geographic areas.
Revenues in North America, which accounted for 42% of total revenues, increased 20% for the three months ended June 30, 2008 compared with the three months ended June 30, 2007. Revenues from our U.S. land and inland waters operations increased 24% compared to a 7% increase in the rig count due to the increase in drilling for oil and natural gas. U.S. offshore revenues increased 10% despite a 13% decrease in the U.S. offshore rig count. The U.S. offshore rig count continues to decline due to the ongoing migration of rigs out of the Gulf of Mexico to more attractive international markets. Canada revenues increased 13% compared to a 15% increase in the rig count as increases in natural gas prices provided improved economics for natural gas producers.
Revenues outside North America, which accounted for 58% of total revenues, increased 17% for the three months ended June 30, 2008 compared with the three months ended June 30, 2007. This increase reflects the improvement in international drilling activity, as evidenced by the 8% increase in the rig count outside North America. Latin America revenues increased 21% compared to an 8% increase in the rig count, with revenues increasing primarily in Brazil, Colombia and Mexico. Europe, Africa, Russia and the Caspian (“EARC”) revenues increased 18% compared with the second quarter of 2007. The areas with the strongest revenue increases include Africa, where revenues increased 27% compared to a 10% increase in the rig count, as well as the Russia and Caspian area, where revenues increased 39%. Activity in the Middle East Asia Pacific (“MEAP”) region continued to expand, reflected by a 13% increase in revenues. Middle East revenues increased 13% compared to a 6% increase in the rig count, with revenues increasing primarily in Saudi Arabia and Oman. Asia Pacific revenues were up 13% compared to a 6% increase in the rig count. The increase in revenues was driven by increases in Saudi Arabia and Oman for the Middle East area and in China and Australia for the Asia Pacific area.
First Six Months of 2008 Compared to the First Six Months of 2007
Revenues for the six months ended June 30, 2008 increased 13% compared with the six months ended June 30, 2007 driven primarily by both activity increases, and price improvement and net changes in market share. Revenues in North America increased 14% as they were positively impacted by the increased activity from land rigs drilling for oil and natural gas in the U.S., driven by continued investment in drilling for oil and natural gas prospects. Revenues outside North America increased 13% reflecting increased activity in all three regions. Latin America revenues increased 15%; EARC revenues increased 13% and MEAP revenues increased 10%.

Cost of Revenues
Cost of revenues for the three months ended June 30, 2008 increased 19% compared with the three months ended June 30, 2007. Cost of revenues as a percentage of consolidated revenues was 67% and 66% for the three months ended June 30, 2008 and 2007, respectively. Cost of revenues for the six months ended June 30, 2008 increased 15% compared with the six months ended June 30, 2007. Cost of revenues as a percentage of consolidated revenues was 66% and 65% for the six months ended June 30, 2007 and 2006, respectively. The increase in cost of revenues as a percentage of consolidated revenues resulted primarily from a change in the geographic and product mix from the sale of our products and services and higher raw material and labor costs which were not fully offset by pricing increases.
Research and Engineering
Research and engineering expenses increased 15% in the three months ended June 30, 2008 compared with the three months ended June 30, 2007 and increased 13% in the six months ended June 30, 2008 compared with the six months ended June 30, 2007. The increase reflects our continued commitment to developing and commercializing new technologies as well as investing in our core product offerings.
Marketing, General and Administrative
Marketing, general and administrative expenses increased 14% in the three months ended June 30, 2008 compared with the three months ended June 30, 2007 and increased 14% in the six months ended June 30, 2008 compared with the six months ended June 30, 2007. The increase corresponds with increased activity and resulted primarily from higher employee related costs including compensation, training and benefits, higher marketing expenses as a result of increased activity, and an increase in legal, tax and other compliance-related expenses.
Litigation Settlement
In connection with the settlement of litigation with ReedHycalog, in June 2008, the Company paid ReedHycalog $70.0 million in royalties for prior use of certain patented technologies, and ReedHycalog paid the Company $8.0 million in royalties for the license of certain Company patented technologies. The net charge of $62.0 million for the settlement of this litigation is reflected in the consolidated condensed statement of operations.
Interest and Dividend Income
Interest and dividend income decreased $6.5 million in the three months ended June 30, 2008 compared with the three months ended June 30, 2007 and decreased $10.0 million in the six months ended June 30, 2008 compared with the six months ended June 30, 2007. The decrease was primarily due to lower interest rates on our short-term investments in 2008 compared to 2007.
Income Taxes
Our effective tax rate in the second quarter of 2008 is 31.2%, which is lower than the U.S. statutory income tax rate of 35% due to lower rates of tax on certain international operations, a decrease in tax reserves as a result of favorable audit settlements and the expiration of statute of limitations in various taxing jurisdictions, offset by state income taxes. The tax rate for the year 2008 is expected to be between 31.5% and 32.0%.
Our effective tax rate in the second quarter of 2007 was 34.3%, which is lower than the U.S. statutory income tax rate of 35% due to lower rates of tax on certain international operations offset by state income taxes. During the second quarter of 2007, we provided $9.3 million of additional taxes, and related interest and penalties associated with disallowed tax deductions taken in previous years, arising from the resolution of investigations with the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) in 2007.
Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessment of additional taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. We have received tax assessments from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. We believe we have substantial defenses to the questions being raised and will pursue all legal remedies should an unfavorable outcome result. However, resolution of these matters involves uncertainties and there are no assurances that the outcomes will be favorable. We provide for uncertain tax positions pursuant to Financial Interpretation (“FIN”) 48, Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109 .
OUTLOOK
Worldwide Oil and Natural Gas Industry Outlook
This section should be read in conjunction with the factors described in “Part II, Item 1A. Risk Factors” and in the “Forward-Looking Statements” section in this Part I, Item 2, both contained herein. These factors could impact, either positively or negatively, our expectation for: oil and natural gas demand; oil and natural gas prices; exploration and development spending and drilling activity; and production spending.
Our outlook for exploration and development spending is based upon our expectations for customer spending in the markets in which we operate, and is driven primarily by our perception of industry expectations for oil and natural gas prices and their likely impact on customer capital and operating budgets as well as other factors that could impact the economic return oil and gas companies expect for developing oil and gas reserves. Our energy price forecasts below are based on information provided by our customers as well as market research and analyst reports including the Short Term Energy Outlook (“STEO”) published by the Energy Information Administration of the U.S. Department of Energy (“DOE”), the Oil Market Report published by the IEA and the Monthly Oil Market Report published by the Organization for Petroleum Exporting Countries (“OPEC”). Our outlook for production spending is based primarily on energy price forecasts and forecasts of expected oil and natural gas production levels.
Our outlook for activity outside of North America is heavily influenced by our expectations for oil prices and our outlook for activity in North America is heavily influenced by our expectations for North American natural gas prices.
Expectations for Oil Prices – Demand for oil is expected to increase 0.8 to 1.0 million barrels per day in 2008 compared to 2007. Non-OPEC supply is expected to increase 0.4 to 0.6 million barrels per day. The gap between increased demand and non-OPEC supply is expected to be met with increased OPEC supply and decreases in oil inventories. Inventories and spare productive capacity, which buffer oil markets from supply disruptions, are expected to remain relatively low reflecting the continuing tight balance between supply and demand. In its June 2008 STEO, the DOE forecasted oil prices to average $122/Bbl in 2008 and given the relatively low levels of inventory and spare productive capacity, prices are expected to remain volatile. The DOE expects oil prices to average $126/Bbl in 2009. Delays in either OPEC or non-OPEC supply additions could impact this forecast.
We believe that these forecasts are similar to the forecasts our customers are using to plan their current spending levels. Our customers are likely to reduce their capital budgets if they expect oil prices to decline significantly. The risks to oil prices falling significantly include: (1) a significant economic recession in either the U.S. and/or China, developing Asia and the Middle East; (2) increases in non-OPEC production; (3) any significant disruption to worldwide demand; (4) reduced geo-political tensions; (5) poor OPEC quota discipline; or (6) other factors that result in spare productive capacity and higher oil inventory levels or decreased demand. If oil prices rise significantly there is a risk that the high energy price environment could destroy demand and significantly slow economic growth. This risk is higher for the economies that are most closely tied to the U.S. Dollar. If worldwide economic growth were to slow significantly, our customers would likely decrease their capital spending from current levels. The primary risk of oil prices increasing significantly are a supply disruption in a major oil exporting country including Iran, Saudi Arabia, Iraq, Venezuela, Nigeria or Norway and continued weakening of the U.S. Dollar.
Expectations for North American Natural Gas Prices – In its June 2008 STEO, the DOE forecasted that U.S. natural gas demand would increase 2.2% in 2008 compared to 2007 assuming normal weather. The demand for U.S. natural gas is expected to be met by production from fields in the U.S., pipeline imports from Canada, and imports of LNG with natural gas storage buffering demand and supply. At current U.S. drilling activity levels, additions of new supply are expected to offset production declines and U.S. supply is expected to increase 6.0% in 2008 compared to 2007. Canadian imports are expected to decrease as a result of lower activity levels in Canada over the past two years and increased demand within Canada. LNG imports are dependent on global demand for LNG with the U.S. playing the role of the market of last resort, accepting gas into storage if it is not needed in other international markets. As a result of increasing worldwide demand for LNG cargoes, U.S. imports of LNG in 2008 are expected to decline by approximately 30% relative to 2007 levels. In its June 2008 STEO, the DOE forecasted that U.S. natural gas prices are expected to average approximately $11/mmBtu in 2008.
We believe that our customers’ forecasts are similar to the DOE’s. Prices are expected to remain volatile through 2008 with weather-driven demand, imports of Canadian gas, LNG imports and production from lower 48 gas fields playing significant roles in determining price volatility. Variations in the supply demand balance will be reflected in gas storage levels. Based on industry data regarding production decline rates, we believe that a significant reduction in drilling activity in the U.S. or Canada would result in decreased production within one or two quarters helping to rebalance supply and demand quickly.
Industry Activity and Customer Spending – Based upon our discussions with major customers, review of published industry reports and our outlook for oil and natural gas prices described above, our outlook for drilling activity, as measured by the Baker Hughes rig count and anticipated customer spending trends are as follows:
• Outside North America – Customer spending, primarily directed at developing oil supplies, is expected to increase approximately 15% to 20% in 2008 compared with 2007. Drilling activity outside of North America is expected to increase approximately 8% to 10% in 2008 compared with 2007. Our assumptions regarding overall growth in customer spending outside of North America assume stable economic growth in the U.S., China and the balance of the world outside of North America. Our expectations for spending could decrease if there are disruptions in key oil and natural gas production markets or significant weakening of the economies in the U.S., China or other significant consumers of oil and natural gas.

• North America – Customer spending in North America, primarily towards developing natural gas supplies, is expected to increase 15% to 20% in 2008 compared to 2007. Drilling activity is expected to increase 7% or more in the U.S. on land; decrease 10% to 15% offshore U.S.; and increase 8% to 10% in Canada with customer spending trends in each market reflecting these drilling activity trends. Production-oriented spending is expected to increase 15% to 20% reflecting increases in oil and gas production. Our expectations for spending and revenue growth in North America assume normal winter and summer weather, modest growth in energy demand and a reduction in U.S. LNG imports relative to 2007.
For additional risk factors and cautions regarding forward-looking statements, see “Part II, Item 1A. Risk Factors” and the “Forward-Looking Statements” section in this Part I, Item 2, both contained herein. This list of risk factors is not intended to be all inclusive.

CONF CALL

Gary Flaharty

Alright, thank you and good morning, everyone. Welcome to the Baker Hughes third quarter 2008 earnings conference call. Here with me this morning are Chad Deaton, Baker Hughes’ Chief Executive Officer and Chairman, President, and Peter Ragauss, Baker Hughes’ Senior Vice President and Chief Financial Officer.

Following management’s comments, we will open the lines for your questions.

Reconciliation of operating profits and non-GAAP measures to GAAP results for historic periods can be found on our website at www.bakerhughes.com in the investor relations section under financial information. Finally, I caution you that any company outlooks discussed this morning are subject to various risk factors. We will try to highlight these risk factors as we make these forward-looking statements.

However, the format of the call does prevent a more thorough discussion of the risk factors. For a full discussion of these risk factors, please refer to our annual report 10K, 10Q, and in particular the forward-looking disclosure in this morning’s news release. With that, I will conclude our discussion to the administrative details and turn the call over to Peter Ragauss.

Peter?

Peter Ragauss

Good morning. This morning we reported net income on a U.S. GAAP basis of $429 million or $1.39 per share. This includes a one-time tax benefit of $0.10 per share. It also includes a negative impact from the third quarter Delta Mexico hurricane. The total hurricanes impact was approximately $78 million in revenue, $50 million in profit before tax or about $0.11 per share. The Q3 EPS of $1.39 compares to $1.22 per share a year ago and compares to $1.23 per share for the second quarter 2008.

Net income for the second quarter of 2008 included a charge of $0.13 per share for litigation settlement. Q3 revenue was $3 billion, up $332 million or 12% from the second quarter of 2007 and up $12 million from last quarter.

North American revenue was $1.3 billion, up 15% compared to the year-ago quarter and up 3% compared to the prior quarter. U.S. land revenue was up 25% year-over-year compared to a rig count up 11% versus a year ago. U.S. offshore activity was impacted by hurricanes Gustav and Ike. Offshore revenue was down 14% year-over-year and down 19% sequentially.

The impact of the hurricanes on offshore operations of the direct impact was approximately $55 million in revenues. Adjusting for the impact of the hurricanes, offshore revenue would have been up 10% year-over-year and would have been up 3% sequentially.

Total non-North American revenue was up 11% year-over-year and down 1% sequentially. Both comparisons exclude the hurricane impact of about $23 million of revenue that was delayed from the third quarter.

Latin American revenue increased 19% year-over-year followed by Europe, Africa, Russia and Caspian Region with a 9% and the Middle East/Asia Pacific region where revenue was 8% higher than the year-ago quarter.

Sequentially, the Latin American region led again with a 7% revenue increase while revenue for the Europe, Africa, Russia and Caspian Region was down 3% and revenue for the Middle East/Asia Pacific region was down 2%.

Our oil field operating margin in Q3 was 22%. This compares to 24% in the year-ago quarter and 23% in the prior quarter. Excluding the impact from the hurricanes, margins would have been flat quarter-to-quarter which is in line with what we said in the last conference call.

Turning to the performance of our two segments, drilling and evaluation revenue was $1.56 billion in the third quarter, up 15% compared to the year-ago quarter and up 2% sequentially. Year-over-year revenue growth was strongest in Latin America, followed by Europe, Africa, Russia Caspian region and the Middle East/Asia Pacific region.

As was the case in the second quarter our directional drilling, drilling fluids and drill bit product lines saw the largest increase in revenue compared to the year-ago quarter. The drilling and evaluation segments operating margin was 22% down from 26% in the third quarter 2007 and down from 24% in the second quarter.

Revenue for our completion production segment was $1.45 billion, up 10% from the year-ago quarter and down 1% sequentially. Year-over-year revenue growth was strongest in North America and Latin America. Completions in oil field chemicals had the largest revenue increases compared to the year-ago quarter. CMP's operating margin was essentially flat in comparison to the third quarter 2007 and the second quarter of 2008.

To help you evaluate our earnings per share in the third quarter I will walk you through the significant items that bridged the sequential and year-ago quarters to third quarter EPS. In the second quarter of 2008 our U.S. GAAP net income per share was $1.23 per share. From this $1.23 add $0.13 to adjust for the Q2 litigation settlement, that gets us to $1.36 on an operational basis for last quarter. Subtract $0.01 for the impact of higher corporate costs in Q3 compared to Q2. Add $0.08 to adjust for a more favorable effective tax rate, subtract $0.11 for the impact from hurricanes and add $0.07 from operations. This gets us to the $1.39 we are reporting for the third quarter.

Looking at it year-over-year from the $1.32 we reported in the third quarter 2007, subtract $0.02 for the impact of higher corporate costs in Q3 2008 compared to the year-ago quarter. Subtract $0.01 for the impact of higher interest expense. Add $0.05 for the impact of lower share count. Add $0.10 to account for the benefit of a more favorable effective tax rate. Subtract $0.11 for the impact from hurricanes and add $0.16 from operations. This gets us to $1.39 we are recording for the third quarter.

Turning to the balance sheet, total debt increase just slightly to $1.63 billion. At quarter end our total debt to cap ratio was 19%. We currently have $1 billion in undrawn credit facilities. This is comprised of $500 million under a revolver accessible through July 2012 and $500 million under a 360 day facility we plan to extend in March. At the end of the third quarter we also had cash and short-term investments of $1.1 billion. This totals $2.1 billion in liquidity. We have $505 million in A1 T-1 rated commercial paper outstanding backed up by our credit facilities. We have had no problems selling commercial paper to meet our needs on a daily basis through the credit crisis. We have $525 million in debt maturities coming due in the first quarter of 2009. We are prepared to fund this debt obligation prior to its maturity.

During the third quarter we repurchased about 139,000 shares of common stock at an average price of $71 per share for a total of $38 million. At quarter end we had authorization remaining to purchase up to $1.2 billion in common stock.

Given the uncertain nature of the current credit markets, we will remain prudent with the use of our cash in the near-term.

Last, I will review the updated guidance for the fourth quarter of 2008. Our guidance for revenue growth outside North America is in the range of 14-15% for the fourth quarter 2008 compared to fourth quarter 2007. Our guidance for capital spending in 2008 remains unchanged at $1.3 billion. Our guidance for corporate spending and other for the year excluding the Q2 litigation settlement is unchanged at $270 million. Our tax rate for the fourth quarter is now expected to be between 31-32% and our tax rate for the full year is now expected to be between 30-30.5%.

I will now turn the call over to Chad who will highlight our geographic results.

Chad Deaton

Good morning ladies and gentlemen. During Q3 we continued to strengthen our position in some of the key markets around the world. We’ll walk around the world and look at these different regions starting with North America. Revenue was up 15% compared to the year-ago quarter and it was up 3% compared to the prior quarter.

U.S. land revenue was strong. It was up 25% year-over-year and an 11% increase on rig count and was up 6% sequentially which is in line with the 6% increase in rig activity. U.S. land activity continues to be driven by unconventional gas plays. We have provided strong demand for the directional drilling of LWD services such as Auto Track Express and Completion Solutions such as our frac point completion system.

U.S. offshore revenue was down 14% year-over-year and down 19% sequentially and excluding the impact of the hurricanes offshore revenue would have been up 10% year-over-year and up 3% sequentially.


The industry lost about 21-28 working days due to Gustav and Ike. Deep water operations had more disruption due to the time associated with moving on and off location. The non-moored deep water vessels did not return to normal operations until mid-September. The shallow water fleet sustained greater damage as most of the deep water rigs were able to move out of the path of the hurricanes.

Canadian activity recovered from second quarter lows and revenue was up 12% year-over-year and up 28% sequentially. As expected, a sharp rebound in rig count provided a strong sequential revenue increase for our D&E segment but also our C&P segment saw strong sequential revenue increase which was led by completions product sales.


Our operating profit margin for North America was 24% in the third quarter compared with 27% in the year-ago quarter and 25% in the prior quarter. The outlook in North America, last quarter we commented on our expectations for the arrival of newly constructed rigs in the Gulf of Mexico. We now see 21 new rigs entering the Gulf over the next three years and we experienced a very solid success in securing contract awards for these rigs. To date we won in excess of 40% of the awards that have been made for our products and services. These rigs typically generate in excess of $40 million a year in our drilling and evaluation types of services.

Looking at Latin America, revenue for the region was up 19% year-over-year and this compares to an 8% increase in the rig count for the region. Contributing to the year-over-year revenue increase was a strong quarter for our directional drilling LWD group in Brazil and increased activity for our completions product line in Mexico. In addition, our directional drilling and drilling fluids and drill bit product lines had another strong quarter in Columbia where revenues for the D&E segment were up 82% year-over-year.

Latin American revenue was up 7% sequentially compared to a 1% increase in the rig count and sequential revenue increases were driven by the same factors that impacted our year-over-year growth.

Looking at sequential and revenue trends, activity in Brazil supported strong increases for our DDL, WD and completions division and the trend in strong demand in Columbia for our drilling and evaluation segment continues.

The operating profit margin in Latin America for the second quarter was 18%. That is down about 200 basis points from the year-ago quarter but was up 17% in the prior quarter. As we said in the last call in conjunction with recent contract wins in Brazil and Mexico we are now mobilizing and incurring start-up costs related to these start ups which in the short-term will impact profitability.

In Q3 we incurred about $5 million in start-up costs on these projects. In addition, labor costs in Argentina have increased where the industry is facing some significant labor inflation. In Mexico we continue to mobilize under the recent marine contract award. Our mobilization is on schedule and initial well is now expected to spud in January, a delay from the original plan as the result of rig availability issues.

For the revenue for the Europe, Africa, Russia and Caspian region, it increased 9% year-over-year and decreased 3% compared to the very strong result in the second quarter of 2008. For Europe revenues were up 13% year-over-year compared to a 6% decrease in the North Sea rig count and revenue is unchanged sequentially.

In Norway, every product line posted some strong results year-over-year and revenue in our D&E segment increased 23% sequentially. Our drilling fluids and artificial lift product lines also had significant improvement in the region compared to a year ago.

In Russia revenue is unchanged compared to the third quarter of 2007 and down 8% compared to the second quarter. Revenue for Russia, however, excluding [inaudible] was up 18% year-over-year. Drilling fluids and artificial lift posted strong quarters in Russia compared to the year-ago period and sales in completion systems doubled in Kazakhstan compared to the year-ago quarter.

Sequentially, completions revenue declined for Russia and Kazakhstan following some strong second quarter sales for both countries. Africa revenue was up 11% year-over-year compared to a 4% decrease in rig count and was down 6% sequentially compared to a 5% decrease in rig count. Year-over-year improvement was strong by every product line in Libya and sequential revenue comparisons were impacted by the completion of the initial phase of what was a major contract in Equatorial Guinea that ended last quarter.

Our operating profit margin for Europe, Africa, Russia and Caspian was 23% in the third quarter compared to 21% in the third quarter of 2007 and 24% in the second quarter of 2008. In the region we have been awarded more than $800 million in new contracts during the quarter and that includes a $450 million award from BP Norway which included several product lines.

Middle East/Asia Pacific revenue was up 8% compared to the year-ago quarter and was down 2% sequentially. Looking at just the Middle East, revenues were up 15% year-over-year compared to a 5% increase in rig activity and Middle East revenue is unchanged sequentially.

The year-over-year improvement was led by drilling fluids, wire line, drill bits, chemicals and artificial lift in Egypt and record revenues for our directional drilling and LWD services in Saudi Arabia. Asia Pacific revenue was up 3% year-over-year but down 3% sequentially. Historically the Asia Pacific area received the least amount of focus and investment from Baker Hughes. For this reason it also offers up one of the most promising areas for the future.

As we focus and build out key countries we have realized success. For example in India revenues increased 17% compared to the year-ago quarter and that was led by completions, directional drilling and LWD, drilling fluids as well as wire lines. In Malaysia revenue was up 13% compared to the year-ago led by the same directional drilling, LWD and this time chemicals and sequentially revenue increased 21% led by the wire line and chemicals.

In Brunei revenue increased 24% year-over-year and doubled sequentially.

Operating profit margin for the Middle East/Asia Pacific is 19% in the second quarter compared to 23% in the third quarter of 2007 and 20% in the second quarter of 2008. Outlook for the Middle East/Asia Pac during the quarter we were awarded several contracts. We were awarded the artificial lift ESP system and the completion systems from Manifah in Saudi Arabia. Also in Manifah we have been called out numerous times to drill and evaluate the reservoir supply. Key tools included our 4.75 inch NMR nuclear magnetic resonance tool which was jointly built with Saudi Aramco as well as our test track pressure testing tools and in all cases we were able to provide the client with some much needed reservoir information.

Other recent key awards in the Middle East/Asia Pacific region included significant drilling contract in Australia, awards for drilling fluids and completions for [cairn] in India and a significant wire line contract covering eight expiration rigs for ONGC in India.

In closing, the near-term outlook for activity has changed over the last quarter. There are three issues that will impact the outlook for incremental spending. The credit crisis and its impact on regional and global economic growth and also oil and gas supply and demand fundamentals.

In North America several operators have already announced their intentions to lower their capital spending levels in 2009 and some have indicated they will cut 2008 planned activity. In the U.S. the rig count peaked at the end of August at 2,031 rigs. Since then rig count has declined 55 rigs. Gas directed drilling has fallen 69 rigs or about 4.3% and oil directed drilling is increased 12 rigs or about 3%.


We do expect to exit the fourth quarter with between 1,800 and 1,840 rigs down 190-230 from the peak.

Internationally we expect spending to maintain its momentum, although we could see a slowing of spending growth in some markets. Unlike U.S. natural gas, we believe the supply demand fundamentals for oil remain relative. The price of oil has been cut in half from its summer highs but it is still high enough to provide attractive returns to many of our customers.

Our strategy at Baker Hughes really remains mostly unchanged. We are well positioned to navigate through these issues. We have a strong portfolio, lean technologies and we have a high exposure to rig independent production related spending. We have a strong balance sheet, strong credit rating and a highly skilled, motivated work force.

We will manage our ongoing investment in people and the infrastructure and technology continue to position Baker Hughes for long-term growth and in doing so we also balance the need to invest for long-term growth with the need to safeguard the near-term performance. We will monitor the markets, watch discretionary spending and redeploy people and tools as necessary.


This market will, in time, begin to produce acquisition opportunities and we will continue to monitor areas where we can fill portfolio gaps or complement existing product lines or technology needs. There is no doubt we are in a position to emerge from this market as an even stronger competitor.

On a final note, as we previously described hurricanes Gustav and Ike hit Baker Hughes pretty hard in the quarter. We had a significant operation and manufacturing base in southeast Texas and Louisiana and I want to take just a minute and thank our 7,500 people that were affected by these storms. Fortunately we had no serious injuries to our employees or their families. But there were many employees that experienced some personal damage. Like so many companies in the area our people had to cope with restoring a sense of normality in both the personal as well as professional lives and we’d like to take a moment and appreciate and recognize all your efforts.

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