Baker Hughes 2007 Annual Report Download - page 109

26 Baker Hughes Incorporated
in 2008 compared to 2007. Canadian imports are expected
to decrease as a result of lower activity levels in Canada 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. Capacity to accept LNG
imports is not expected to constrain LNG imports. In its January
2008 STEO, the DOE forecasted that U.S. natural gas prices
are expected to average approximately $8/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 sig-
nificant 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 pub-
lished 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 weaken-
ing 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 moderately in 2008 compared to 2007. Drilling
activity is expected to increase 2% to 3% in the U.S. on
land; decrease 8% to 10% offshore U.S.; and decrease 8%
to 10% in Canada with customer spending trends in each
market reflecting these drilling activity trends. Production-
oriented spending is expected to increase 4% to 6% reflect-
ing increases in oil and gas production. Our expectations
for spending and revenue growth in North America assume
normal winter and summer weather, stable economic growth
in the U.S. and a modest increase in LNG imports.
Company Outlook
This section should be read in conjunction with the factors
described in the “Risk Factors Related to Our Business,” “Risk
Factors Related to the Worldwide Oil and Natural Gas Industry”
and “Forward-Looking Statements” sections contained herein.
These factors could impact, either positively or negatively, our
expectation for oil and natural gas demand, oil and natural
gas prices and drilling activity.
•฀ Outside North America – In 2008, we expect revenues
outside North America to increase in a percentage range
from the low to mid-teens compared with 2007, continu-
ing the multi-year trend of growth in customer spending.
Spending on large projects by NOCs are expected to reflect
established seasonality trends, resulting in softer revenues in
the first half of the year and stronger revenues in the second
half and in particular, a sequential decline in the first quarter
of 2008 compared to the fourth quarter of 2007 of approxi-
mately $100 million in revenue primarily from our Comple-
tion and Production segment. In addition, customer spending
could be affected by weather-related reductions in the North
Sea in the first and second quarters of 2008. In 2007, 2006
and 2005, revenues outside North America were 58.2%,
55.7% and 57.6% of total revenues, respectively.
•฀ North America – Revenue growth in 2008 from North
America is expected to be no more than moderate. Revenue
increases from our U.S. land operations in our Drilling and
Evaluation segment and moderate but steady growth from
our Completion and Production segment throughout North
America are expected to be partially offset by decreases in
revenue from our Drilling and Evaluation segment in Canada
and the U.S. offshore. In 2007, 2006 and 2005, North
American revenues were 41.8%, 44.3%, and 42.4% of
total revenues, respectively.
Other factors that could have a significant positive impact
on profitability include: increasing prices for our products and
services; lower than expected raw material and labor costs;
and/or higher than planned activity. Conversely, less than
expected price increases or price deterioration, higher than
expected raw material and labor costs and/or lower than
expected activity would have a negative impact on profitabil-
ity. Our ability to improve pricing is dependent on demand for
our products and services and our competitors’ strategies of
managing capacity. While the commercial introduction of new
technology is an important factor in realizing pricing improve-
ment, without capital discipline throughout the industry as a
whole, meaningful improvements in our prices are not likely
to be realized.
Our 2008 capital budget supports the continuation of the
infrastructure expansion we began in late 2006 and early 2007.
In 2007, we opened new or expanded facilities in many regions
and/or countries including Latin America, the Middle East, and
Russia. In addition, we opened the first phase of our Center
for Technology and Innovation in Houston, a research and engi-
neering facility to design advanced completion systems for high
pressure, high temperature hostile environments. In early 2008,
we opened our new campus in Dubai which includes our
Middle East and Asia Pacific region headquarters, a regional
operations center, and a training center which expands our
Eastern Hemisphere training capabilities. Capital expenditures
are expected to be approximately $1.3 billion for 2008, includ-
ing approximately $250 million to $300 million that we expect
to spend on infrastructure, primarily outside of North America.
The execution of our 2008 business plan and the ability
to meet our 2008 financial objectives are dependent on a
number of factors. Key factors include: the strength of the
oilfield services market outside North America and our ability
to realize price increases commensurate with the value we