Baker Hughes 2014 Annual Report Download - page 49

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Halliburton Merger Agreement
On November 16, 2014, Baker Hughes and Halliburton Company (“Halliburton”) entered into a definitive
agreement and plan of merger under which Halliburton will acquire all of the outstanding shares of Baker Hughes in
a stock and cash transaction. Under the terms of the agreement, stockholders of Baker Hughes will receive, for
each share of common stock of Baker Hughes, a fixed exchange ratio of 1.12 Halliburton shares plus $19.00 in
cash. The transaction is subject to approvals from each company’s stockholders, regulatory approvals and
customary closing conditions. The transaction is expected to close in the second half of 2015; however, Baker
Hughes cannot predict with certainty when, or if, the pending merger will be completed because completion of the
transaction is subject to conditions beyond the control of Baker Hughes. For further information about the merger,
see Note 2. "Halliburton Merger Agreement" of the Notes to Consolidated Financial Statements in Item 8 herein.
Outlook
Our industry is cyclical, and past cycles have been driven primarily by alternating periods of ample supply or
shortages of oil and natural gas relative to demand. As an oilfield services company, our revenue is dependent on
spending by our customers for oil and natural gas exploration, field development and production. This spending is
dependent on a number of factors, including our customers’ forecasts of future energy demand, their expectations
for future energy prices, their access to resources to develop and produce oil and natural gas, their ability to fund
their capital programs and the impact of new government regulations.
In the second half of 2014, the oil market experienced an excess of supply as a result of sustained high output
from tight oil plays in North America, a slowdown in demand from key consumer regions such as Europe and East
Asia and the Organization of the Petroleum Exporting Countries ("OPEC") position in late November to not cut
production. This market imbalance resulted in a rapid decline in oil prices, with both Brent and West Texas
Intermediate prices dropping to near six-year lows and 60% below 2014 peak highs. Oil prices continued to drop in
early 2015.
These changes in market conditions are a clear indicator that we are in the early stages of a down cycle in our
industry. As with past cycles, the early days are always marked with a high degree of uncertainty, with capital
spending from our customers remaining highly uncertain as a result of the rapid decline in commodity prices.
In North America, activity levels began to decline in late December, and we expect, based on prior cycles, for
activity to continue to decline throughout 2015. In each of the last three downturns dating back to the 1990s, North
America rig counts have fallen between 40% and 60% in a period of only twelve months. At the end of January
2015, the U.S. onshore oil-directed rig count had fallen approximately 25% from October highs, declining faster
than we had predicted in early January. The Canadian rig count, which we previously expected to remain flat in the
first quarter of the year, is already trending 10% below the prior quarter average, with an increased likelihood of
further declines, as signs of an early spring break up are already impacting oilfield activity. At this accelerated pace,
the North America rig count is currently trending to exit the first quarter of 2015 down approximately 1,000 rigs, or
50%, compared to the fourth quarter average.
Outside of North America, in prior cycles the international rig count has not fallen as sharply, but begins to drop
steadily a couple months after the first signs of weakness appear in North America. Unlike prior cycles, we are
already seeing the international rig count decline, with customers beginning to defer new projects and executing
spending reductions for 2015. The decline is expected to begin in onshore and shallow water markets, with
deepwater activity and spending from national oil companies remaining more resilient.
Based on the expected reduction in activity and customer spending, pricing declines for our products and
services will potentially occur as a result of excess supply of equipment and the increase in our customers’ needs
for cost reductions in order to maintain the economic viability of current projects. The combination of reduced
activity and increased pricing pressure from our customers will result in a contraction of our revenue and margins in
2015.
Our objective through this down cycle is to remain nimble and maintain a strong focus on asset utilization,
working capital and returns. We believe we are well positioned financially and strategically, and will proactively
adapt to changing market conditions by right-sizing our cost structure to reflect expected near-term activity levels,