Baker Hughes 2010 Annual Report Download - page 97

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condi-
tion and Results of Operations (“MD&A”) should be read in
conjunction with the consolidated financial statements of
“Item 8. Financial Statements and Supplementary Data”
contained herein.
EXECUTIVE SUMMARY
Baker Hughes is a leading supplier of oilfield services,
products, technology and systems to the worldwide oil and
natural gas industry. We provide:
• products and services for drilling and evaluation of oil and
gas wells;
• products and services for completion and production of oil
and gas wells; and
• industrial and other services including downstream refining,
and process and pipeline industries, and reservoir technol-
ogy and consulting services.
The primary driver of our businesses is our customers’
capital and operating expenditures dedicated to oil and
natural gas exploration, field development and production.
Our business is cyclical and is dependent upon our customers’
expectations for future oil and natural gas prices, economic
growth, hydrocarbon demand and estimates of current and
future oil and natural gas production.
On April 28, 2010, we completed the acquisition of
BJ Services, a leading provider of pressure pumping and
other oilfield services, for $6.9 billion in cash and stock. This
acquisition provides us with a proven leader in the areas of
pressure pumping, stimulation and fracturing and comple-
ments our existing product portfolio, allowing us to provide
a full suite of products and services to meet the needs of our
customers. For 2010, our results are inclusive of BJ Services
results from the acquisition date through December 31, 2010.
The acquired business represented approximately 46% of our
consolidated total assets at December 31, 2010 and approxi-
mately 36% of our consolidated net income attributable to
Baker Hughes for the year ended December 31, 2010.
For 2010, we generated revenues of $14.41 billion, an
increase of $4.75 billion or 49% compared to 2009. Our
North America oilfield revenues for 2010 were $6.62 billion,
an increase of 109% compared to 2009. Oilfield revenues out-
side of North America were $6.82 billion, an increase of 18%
compared to 2009. Industrial Services and Other revenues were
$971 million, an increase of 40% compared to 2009. These
increases are primarily due to the acquisition of BJ Services on
April 28, 2010, which provided $3.69 billion of revenue in 2010,
and the strength of the North America segment driven by oil
and gas-directed drilling primarily in unconventional reservoirs.
Net income attributable to Baker Hughes was $812 million for
2010 compared to $421 million for 2009. The increase is primarily
due to the acquisition of BJ Services, which provided $290 million
of net income in 2010, and improved profitability in our North
America segment partially offset by lower profits internationally.
As of December 31, 2010, Baker Hughes had approximately
53,100 employees compared to approximately 34,400 employ-
ees as of December 31, 2009. The increase in employees is
due primarily to the acquisition of BJ Services, who employed
approximately 14,000 employees at the date of acquisition.
BUSINESS ENVIRONMENT
Global economic growth and the resultant demand for
oil and natural gas are the primary drivers of our customers’
expenditures to develop and produce oil and gas. The expansion
of the global economy following the recession of 2008/2009
continued through 2010. Increasing economic activity, particu-
larly in the emerging economies in Asia and the Middle East,
and expectations for continued economic growth supported
expectations for increasing demand for oil and natural gas.
Spending by oil and natural gas exploration and production
companies, which is dependent upon their forecasts regarding
the expected future supply and future demand for oil and nat-
ural gas products and their estimates of costs to find, develop,
and produce reserves, increased in 2010 compared to 2009.
Changes in oil and natural gas exploration and production
spending result in increased or decreased demand for our
products and services, which will be reflected in the rig count
and other measures. At early February 2011 oil prices, many
international projects have attractive economic returns.
In North America, customer spending increased for both
oil and gas projects resulting in a 44% increase in the North
America rig count in 2010 compared to 2009. The increase
in oil-directed drilling reflected the global price of oil, which is
trading at a premium, on a Btu basis, relative to natural gas in
North America. The increase in gas-directed drilling was driven
by activity in the unconventional shale gas plays, despite rela-
tively low prices for natural gas. Spending on gas-directed proj-
ects in 2010 was supported by (1) hedges on production made
in prior periods when future prices were higher, (2) the need
to drill and produce natural gas to hold leases acquired in ear-
lier periods, (3) the influx of equity from companies interested
in developing a position in the shale resource plays and (4)
associated production of natural gas liquids in certain basins.
Outside of North America customer spending is most
heavily influenced by oil prices, which increased 28% in 2010
compared to 2009 as the economic recovery continued. In
response to higher oil prices and expectations that the expand-
ing economy would support prices in excess of $70/Bbl, our
customers’ spending increased. This was reflected in a 10%
increase in the rig count outside North America.
Oil and Natural Gas Prices
Oil (Bloomberg West Texas Intermediate (“WTI”) Cushing
Crude Oil Spot Price and Bloomberg Dated Brent (“Brent”))
and natural gas (Bloomberg Henry Hub Natural Gas Spot Price)
prices are summarized in the table below as averages of the
daily closing prices during each of the periods indicated.
2010 2009 2008
WTI oil prices ($/Bbl) $ 79.51 $ 61.99 $ 99.92
Brent oil prices ($/Bbl) 79.73 62.04 97.69
Natural gas prices ($/mmBtu) 4.37 3.94 8.89
WTI oil prices averaged $79.51/Bbl in 2010. Prices ranged
from a high of $91.49/Bbl in December 2010 to a low of
$65.96/Bbl in May 2010. Oil prices strengthened from a low
in late May 2010 through the end of the year driven by expec-
tations of worldwide economic recovery and energy demand
growth, particularly in Asia and the Middle East.