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indicators฀of฀hydrocarbon฀demand,฀such฀as฀electricity฀gen-
eration฀or฀industrial฀production.
•฀ Access฀to฀prospects฀–฀the฀ability฀of฀oil฀and฀natural฀gas฀com-
panies฀to฀develop฀economically฀attractive฀projects฀based฀on฀
their฀expectations฀of฀future฀energy฀prices,฀required฀invest-
ments฀and฀resulting฀returns.฀Access฀to฀prospects฀may฀be฀
limited฀because฀host฀governments฀do฀not฀allow฀access฀to฀
the฀reserves฀or฀because฀another฀oil฀and฀natural฀gas฀com-
pany฀owns฀the฀rights฀to฀develop฀the฀prospect.
•฀ Weather฀–฀the฀impact฀of฀variations฀in฀temperatures฀as฀
compared฀with฀normal฀weather฀patterns฀and฀the฀related฀
effect฀on฀demand฀for฀oil฀and฀natural฀gas.฀A฀key฀measure฀
of฀the฀impact฀of฀weather฀on฀energy฀demand฀is฀population-
weighted฀heating฀and฀cooling฀degree฀days฀as฀reported฀by฀
the฀U.S.฀Department฀of฀Energy฀and฀forecasts฀of฀warmer฀
than฀normal฀or฀cooler฀than฀normal฀temperatures.฀Weather฀
can฀also฀impact฀production,฀for฀example,฀in฀the฀North฀Sea,฀
the฀Gulf฀of฀Mexico฀and฀Canada.
•฀ Access฀to฀capital฀–฀the฀ability฀of฀oil฀and฀natural฀gas฀compa-
nies฀to฀access฀the฀funds฀necessary฀to฀carry฀out฀their฀E&P฀
plans.฀Access฀to฀capital฀is฀particularly฀important฀for฀smaller฀
independent฀oil฀and฀natural฀gas฀companies.฀Key฀measures฀
of฀access฀to฀capital฀include฀cash฀flow,฀interest฀rates,฀analy-
sis฀of฀oil฀and฀natural฀gas฀company฀leverage฀and฀equity฀
offering฀activity.
•฀ Technological฀progress฀–฀the฀design฀and฀application฀of฀
new฀products฀that฀allow฀oil฀and฀natural฀gas฀companies฀to฀
drill฀fewer฀wells฀and฀to฀drill,฀complete฀and฀produce฀wells฀
faster,฀recover฀more฀hydrocarbons฀and/or฀lower฀costs.฀Key฀
measures฀also฀include฀the฀overall฀level฀of฀research฀and฀
engineering฀spending฀by฀oilfield฀services฀companies฀and฀
the฀pace฀at฀which฀new฀technology฀is฀both฀introduced฀
commercially฀and฀accepted฀by฀customers.
•฀ Pace฀of฀new฀investment฀–฀the฀investment฀by฀oil฀and฀natu-
ral฀gas฀companies฀in฀emerging฀markets฀and฀any฀impact฀it฀
has฀on฀their฀spending฀in฀areas฀where฀they฀already฀have฀an฀
established฀presence.
•฀ Maturity฀of฀the฀resource฀base฀–฀the฀growing฀necessity฀for฀
increased฀levels฀of฀investment฀and฀activity฀to฀support฀pro-
duction฀from฀an฀area฀the฀longer฀it฀is฀developed.฀Key฀mea-
sures฀include฀changes฀in฀undeveloped฀hydrocarbon฀reserves฀
in฀mature฀areas฀like฀the฀North฀Sea,฀the฀U.S.,฀Canada฀and฀
Latin฀America.
•฀ Government฀regulations฀–฀the฀costs฀incurred฀by฀oil฀and฀
natural฀gas฀companies฀to฀conform฀to฀and฀comply฀with฀
government฀regulations,฀including฀environmental฀regula-
tions,฀may฀limit฀the฀quantity฀of฀oil฀and฀natural฀gas฀that฀
may฀be฀economically฀produced.
For฀additional฀risk฀factors฀and฀cautions฀regarding฀forward-
looking฀statements,฀see฀the฀“Risk฀Factors฀Related฀to฀Our฀฀
Business”฀and฀the฀“Forward-Looking฀Statements”฀sections฀
contained฀herein.฀This฀list฀of฀risk฀factors฀is฀not฀intended฀to฀
be฀all฀inclusive.
Business฀Outlook
In฀our฀outlook฀for฀2005,฀we฀took฀into฀account฀the฀factors฀
described฀herein.฀We฀expect฀that฀2005฀will฀be฀a฀stronger฀year฀
than฀2004,฀with฀revenues฀increasing฀9%฀to฀11%,฀in฀line฀with฀
the฀expected฀increase฀in฀customer฀spending.฀We฀expect฀that฀
the฀growth฀in฀our฀revenues฀will฀primarily฀be฀due฀to฀increased฀
activity฀and,฀to฀a฀lesser฀extent,฀price฀improvement.฀Our฀
assumptions฀regarding฀overall฀growth฀in฀customer฀spending฀
assume฀strong฀economic฀growth฀in฀the฀U.S.฀and฀China,฀and฀
OPEC฀discipline,฀resulting฀in฀an฀average฀oil฀price฀exceeding฀
$35/Bbl.฀Our฀assumptions฀regarding฀customer฀spending฀in฀
North฀America฀assume฀strong฀economic฀growth฀in฀the฀U.S.฀
and฀natural฀gas฀prices฀exceeding฀an฀average฀of฀$5/mmBtu.
In฀North฀America,฀we฀expect฀revenues฀to฀increase฀11%฀
to฀13%฀in฀2005฀compared฀with฀2004,฀with฀the฀majority฀of฀
the฀increase฀occurring฀in฀the฀second฀half฀of฀2005.฀We฀expect฀
spending฀on฀land-based฀projects฀to฀continue฀to฀increase฀in฀2005฀
driven฀by฀demand฀for฀natural฀gas,฀following฀the฀trend฀evident฀in฀
2004.฀We฀also฀expect฀offshore฀spending฀in฀the฀Gulf฀of฀Mexico฀
to฀increase฀modestly฀in฀2005฀compared฀with฀2004.฀The฀normal฀
weather-driven฀seasonal฀decline฀in฀U.S.฀and฀Canadian฀spend-
ing฀in฀the฀first฀half฀of฀the฀year฀should฀result฀in฀sequentially฀
softer฀revenues฀in฀the฀first฀and฀second฀quarters฀of฀2005.
In฀2004,฀2003฀and฀2002,฀revenues฀outside฀North฀America฀
were฀58.4%,฀57.7%฀and฀59.9%฀of฀total฀revenues,฀respectively.฀
In฀2005,฀we฀expect฀revenues,฀outside฀North฀America฀to฀con-
tinue฀to฀be฀between฀55%฀and฀60%฀of฀total฀revenues,฀and฀we฀
expect฀these฀revenues฀to฀increase฀7%฀to฀9%฀in฀2005฀com-
pared฀with฀2004,฀continuing฀the฀multi-year฀trend฀of฀modest฀
growth฀in฀customer฀spending.฀Spending฀on฀large฀projects฀by฀
NOCs฀will฀reflect฀established฀seasonality฀trends,฀resulting฀in฀
softer฀revenues฀in฀the฀first฀half฀of฀the฀year฀and฀stronger฀reve-
nues฀in฀the฀second฀half.฀In฀addition,฀customer฀spending฀should฀
be฀affected฀by฀weather-related฀reductions฀in฀the฀North฀Sea฀in฀
the฀first฀and฀second฀quarters฀of฀2005.฀The฀Middle฀East,฀Africa฀
and฀Latin฀America฀are฀expected฀to฀grow฀modestly฀in฀2005฀
compared฀with฀2004.฀Our฀expectations฀for฀spending฀and฀reve-
nue฀growth฀could฀decrease฀if฀average฀prices฀fall฀below฀$35/Bbl฀
for฀oil฀or฀$5/mmBtu฀for฀natural฀gas฀or฀if฀there฀are฀disruptions฀
in฀key฀oil฀and฀natural฀gas฀production฀markets,฀such฀as฀Venezu-
ela฀or฀Nigeria.
In฀2004,฀WesternGeco฀contributed฀$34.5฀million฀of฀equity฀
in฀income฀of฀affiliates฀compared฀with฀equity฀in฀loss฀of฀affiliates฀
of฀$9.9฀million฀in฀2003,฀which฀excludes฀$135.7฀million฀related฀
to฀our฀portion฀of฀certain฀restructuring฀and฀impairment฀charges฀
taken฀by฀WesternGeco฀in฀the฀third฀quarter฀of฀2003,฀which฀we฀
recorded฀in฀“Equity฀in฀income฀(loss)฀of฀affiliates”฀in฀our฀consoli-
dated฀statement฀of฀operations.฀We฀expect฀the฀trend฀of฀improv-
ing฀operating฀results฀for฀WesternGeco฀to฀continue฀throughout฀
2005;฀however,฀based฀on฀the฀historical฀trend฀of฀operating฀
losses฀and฀weakness฀in฀the฀seismic฀industry฀in฀prior฀years,฀there฀
is฀uncertainty฀regarding฀the฀future฀operating฀results฀of฀West-
ernGeco.฀Information฀regarding฀WesternGeco’s฀profitability฀in฀
2005฀is฀based฀on฀information฀that฀WesternGeco฀has฀provided฀
to฀us.฀Should฀this฀information฀not฀be฀accurate,฀our฀forecasts฀for฀
profitability฀could฀be฀impacted,฀either฀positively฀or฀negatively.
22฀฀฀฀฀Baker฀Hughes฀Incorporated