Baker Hughes 2009 Annual Report Download - page 92

18 Baker Hughes Incorporated
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
We are a major supplier of wellbore-related products and
technology services and systems and provide products and ser-
vices for drilling, formation evaluation, completion and pro-
duction, and reservoir technology and consulting 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, which are aligned
by product line based upon the types of products and services
provided to our customers and upon the business characteris-
tics of the product lines during business cycles. Collectively,
we refer to the results of these two segments as Oilfield Oper-
ations. The primary driver of our business is our customers’
capital and operating expenditures dedicated to oil and natural
gas exploration, field development and production. Our busi-
ness is cyclical and is dependent upon our customers’ expecta-
tions for future oil and natural gas prices, economic growth,
hydrocarbon demand and estimates of current and future oil
and natural gas production.
Prior to May 4, 2009, our business operations were orga-
nized primarily through seven product line divisions and sec-
ondarily through four super regions – North America; Latin
America; Europe, Africa, Russia, Caspian (“EARC”); and Mid-
dle East, Asia Pacific (“MEAP”). On May 4, 2009, we reorga-
nized the Company by geography and product lines. Global
operations are now organized into a number of geomarket
organizations, which report into nine region presidents, who
in turn report into two hemisphere presidents. Separately,
product-line marketing and technology organizations report
to a president of products and technology. The presidents of
the Eastern Hemisphere, Western Hemisphere, Products and
Technology and the Vice President of Supply Chain report to
our Chief Operating Officer. The reorganization of the Com-
pany by geography and product lines is intended to strengthen
our client-focused operations by moving management into the
countries where we conduct our business. The product-line
organizations will continue to be responsible for product devel-
opment and manufacturing, technology, marketing and deliv-
ery of solutions for our customers to advance their reservoir
performance. The supply chain organization is responsible for
development of cost-effective procurement and manufacturing
of our products and services. The new organization structure
will also improve cross-product-line technology development,
sales processes and integrated operations capabilities. As of
December 31, 2009, we had approximately 34,400 employees,
with approximately 61% of these employees working outside
the United States.
During 2009, as the global economy continued to weaken
many of our customers reduced their 2009 exploration and
development spending, and we saw significant decreases from
peak drilling activity, particularly in the U.S. land market and
Canada. In addition, we experienced declines in prices for our
products and services.
For 2009 we generated revenues of $9.66 billion, which is
down $2.20 billion or 19% compared to 2008 and compared
to a 31% decrease in the worldwide average rig count for
the same time period. Our North American revenues for 2009
were $3.58 billion, a decrease of 31% compared to a 42%
decrease in the average rig counts in both the U.S. and Can-
ada, which reflects the severe contraction in customer spend-
ing and activity. Revenues outside of North America were
$6.08 billion, a decrease of 9% compared to 2008. As a result
of the decline in activity and contractions in customer spend-
ing, during 2009 we took actions to adjust our operating cost
base, which consisted primarily of reductions in workforce.
In connection with the reductions in workforce, we recorded
expenses of $92 million in 2009 related to employee severance
costs. Net income for 2009 was $421 million compared to
$1.64 billion in 2008.
In late 2009 and early 2010, there was a modest improve-
ment in the outlook for the global economy. In response to
higher prices for oil and natural gas, many of our North Amer-
ican customers are anticipating an increase in drilling activity
from year-end 2009 levels. While crude prices in the $70–$80/Bbl
range are adequate to support many international projects,
the outlook for international activity will be influenced by the
degree to which the global economy improves, driving demand
for oil and natural gas.
PENDING MERGER WITH BJ SERVICES
On August 30, 2009, the Company and BJ Services
entered into a merger agreement pursuant to which the
Company will acquire 100% of the outstanding common
stock of BJ Services. We have estimated the total consideration
expected to be issued and paid in the merger to be approxi-
mately $6.4 billion, consisting of approximately $0.8 billion
to be paid in cash and approximately $5.6 billion to be paid
through the issuance of approximately 118 million shares of
Baker Hughes common stock valued at the February 11, 2010
closing Baker Hughes share price of $46.68 per share. Subject
to satisfaction of conditions to closing, it is anticipated that
closing of the transaction will occur in March 2010; however,
we cannot guarantee when or if the merger will be completed
or that, if completed, it will be exactly on the terms as set
forth in the merger agreement.
BJ Services is a Delaware corporation formed in 1990.
BJ Services is a leading provider of pressure pumping and oil-
field services for the petroleum industry. BJ Services’ pressure
pumping services consist of cementing and stimulation services
used in the completion of new oil and natural gas wells and in
remedial work on existing wells, both onshore and offshore.
BJ Services’ oilfield services include casing and tubular services,
precommissioning, maintenance and turnaround services in the
pipeline and process business, including pipeline inspection,
chemical services, completion tools and completion fluids.