Baker Hughes Company (BKR) Q2 2010 Earnings Report, Transcript and Summary

Good morning. My name is Carrie, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Baker Hughes Second Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now turn the conference over to Mr. Gary Flaharty, Vice President of Investor Relations. Sir, you may proceed.

Thank you, Carrie, and good morning, everyone. Welcome to the Baker Hughes Second Quarter 2010 Earnings Conference Call. Here with me this morning are Chad Deaton, Baker Hughes' Chief Executive Officer and Chairman; Peter Ragauss, Senior Vice President and Chief Financial Officer; and Martin Craighead, President and Chief Operating Officer. Following management's comments, we'll open the lines for your questions. Reconciliation of operating profits and non-GAAP measures to GAAP results for historic periods can be found on our website at www.bakerhughes.com in the Investor Relations section under Financial Information. Finally, I want to caution you that any company outlooks discussed this morning are subject to various risk factors. We'll try to highlight these risk factors as we make these forward-looking statements. However, the format of the call does prevent a thorough discussion of these risk factors. For a full discussion, please refer to our annual report, 10-K, 10-Q, and in particular, the Forward-looking Disclosure in this morning's news release. With that, I'll conclude our discussion of the administrative details and turn the call over to Chad. Chad?

Thank you very much, Gary, and good morning, ladies and gentlemen. Following up on two pretty decent quarters, our great results this past quarter is mixed. On a positive side, operationally, we performed better than expected in North America, Russia and Asia Pacific, where we made some significant improvements sequentially. In North America, we are now well positioned to benefit from the continued increase in our unconventional gas development. And as for our acquisition of BJ Services turned out to be pretty well timed. As a leader in completions, directional drilling, bits and now, pressure pumping, we have the full tool kit we need to compete in the unconventional shale plays. Sequentially, our U.S. Land business showed strong growth. However, the sequential improvement for North America as a whole was muted in Q2 by the moratorium in the Gulf of Mexico, and of course, spring breakup in Canada. Now that we own BJ services, our revenue in the Canadian market has increased by about 80%, as both companies enjoy a very strong presence in the country. Revenues in Russia made significant improvement both year-over-year, as well as sequentially. Our acquisition of Oilpump Services has given us the uncontested number two position in the Russian ESP [electrical submersible pumping] market, which is the largest ESP market in the world. And in Asia, our new geomarket organization is beginning to deliver contract land wins and improved share. Aside from the temporary slowdown in the Norwegian drilling activity, our European region performed well during the quarter. And in the Middle East, we're winning some contracts and expanding our presence in Iraq. On the other hand, in Africa and Latin America, where we have invested heavily, revenue has lagged and our profit is below our expectations. Africa is particularly difficult challenge for us right now. In North Africa, Libya has announced 30% budget cuts, spending in Algeria is recovering slowly following the change in the management of Sonotrack and Nigeria revenue is down following significant Q4 '09 and Q1 '10 deliveries for the Total Usan completion project. As a result, profits declined in the region and resulted in the temporary increase in our tax rates in some countries, which calculate tax as a percentage of revenue. As for Latin America, we're disappointed with the progress we've made in Mexico. In the second quarter, we're on just two rigs on the ALMA Marine project and if you recall, this is to be a seven rig, 15 well contract. So despite strong operational performance and a significant investment to support larger scale operations, we have been unable to procure more activity. This contract is up for renewal during this quarter, and at this time we intend to let it lapse. Africa and Latin American regions do have some bright spots. Sub-Sahara Africa revenue was up strong year-over-year, and we're seeing strong year-over-year and sequential performance in our Andean and Brazilian geomarkets. Also in Brazil, we obtain a good contract for the second most active Brazilian operator that further diversify their customer base in the country. In the quarter, we completed our first year under our new geographical organization, and I'm pleased with our accomplishments in several different areas. We sought to improve our understanding of the market, moving from eight different product line views to a coherent view of each local market and the global market as a whole, and we've done that. We wanted to do a better job of setting R&D priorities for the organization, thus reflecting market priorities. And now, we have a process in place to do that. We wanted to make sure that we didn't compromised our standards for field execution and safety. And today, we have maintained our high level of service quality, as well as our HSE standards. We decided to launch a multiyear effort to upgrade our supply chain and we're beginning to see the benefits of this transformation. We wanted to address the market share growth challenges of the past, and under the new organization we've made progress. Over the last several quarters, we have kept pace with our peers and we are achieving higher success rates on tenders. We also said that the new business model would help us achieve long-term profitability and that is where additional work is required. International margins remain disappointing. I believe we are now about three to four months behind where we expected to be at this time. Now that the regional organizations have a year under their belt, we're increasing our focus on improving efficiency and returning our international margins to acceptable level. On April 28, we closed on our acquisition of BJ Services and began integrating its international operations into those of Baker Hughes. We've established reporting relationships for both BJ and Baker Hughes international managers, and we've aligned operating territories in order to improve coordination between the product lines. Financially, BJ Service has already had a positive impact in our results, excluding the acquisition related costs, and it was slightly accretive to earnings per share in its first two months. Unfortunately, while the international integration is proceeding, we have not yet been able to engage the full power of BJ because of the whole separate order imposed on us by the Department of Justice, which has kept us from combining operations in the United States. As you may know, full integration of our business in the U.S. is predicated on our selling two simulations vessels on the Gulf of Mexico and related assets in order to create a fourth competitor and the same control of stimulation services in the Gulf. On July 6, we announced that we have reached agreement with a buyer on the sale of the vessels and the associated assets. We now look forward to the DOJ's approval of the grid sale, so we can integrate U.S. operations and take advantage of the opportunities of the combined company in what is our largest shared market. I do want to take just a minute and comment on the Deepwater Horizon accident. This is clearly a tragedy and we cannot forget the fact that 11 lives were lost. A loss of life, the oil spill and the drilling moratorium will test all of us here in the Gulf coast. With so many rigs idled, Baker Hughes has redeployed over 300 people and also a substantial amount of equipment as we move to U.S. land and international offshore markets where deepwater drilling continues. We do remain committed to the deepwater drilling industry. While the loss of life and environmental damages are significant, we believe the industry will rebound. I was working in the U.K. in 1988 when the Piper Alpha disaster occurred. That accident left 165 people dead and resulted in significant improvements in operations in the North Sea and throughout the industry. Operating procedures and safety standards were strengthened and enforced and accident rates have been substantially reduced. The Deepwater Horizon accident likely will result in a similar process and technology improvements that will reduce the risks of deepwater development. Already, customers from around the world were asking service companies to certify that their employees have the right competencies to work offshore. Many are asking us to help train their people, and they're demanding quality programs to verify that equipment does the job that it's told to do. Financially, the Gulf of Mexico moratorium has negatively impacting our business on the shelf and in the deepwater, with a potential impact of $0.08 to $0.11 per share per quarter in the second half of the year. As was the case with Piper Alpha in the North Sea some 20 years ago, government and the industry must worked together to find the answers and to begin moving forward. As to our outlook, we expect our North America Land business to continue its solid performance as unconventional gas and oil directed drilling in U.S. continues to grow and as the Canada market rebound seasonally. We look forward to completing our integration with BJ Services and attacking this market with our full suite of products and services, and we believe international markets will continue to improve. Deepwater activity outside the United States will continue to be strong. And finally, we expect our emphasis on operational efficiency to help us improve our international margins significantly by year end. So at this point, I'm going to turn it over to Peter to go through the financials, and then he's going to hand it off to Martin for a review of some operations. Peter?

Thanks, Chad. This morning, we reported net income on a U.S. GAAP basis of $93 million or $0.23 per share. Adding back the impact of a $0.13 charge for acquisition-related cost, our earnings were $0.36 per share. This compares to $0.28 per share a year ago and $0.41 per share for the first quarter of 2010. Q2 was a very complicated quarter, with a number of factors that impacted results and our disclosure. Last quarter, we gave guidance that our earnings would have been in the low 40s, excluding the impact of the acquisition-related cost, purchase price adjustments for BJ Services and a tax rate between 33% and 34%. So excluding the merger-related cost of $0.13, step up in depreciation and amortization of $0.05 and about a $0.03 impact from the Gulf of Mexico drilling moratorium, underlying operating earnings would have been about $0.44. This also excludes the impact of the change in tax rate of about $0.07. You will notice this morning that we changed our reporting segments from Drilling and Evaluation and Completion and Production to five new segments: North America, Latin America, Europe Africa Russia Caspian, Middle East Asia-Pacific, which are all the same names we used before but they've been replotted slightly, and a new segment called, Industrial and Other. The new Industrial and Other segment consists of our Global Downstream Chemicals, Pipeline Inspection and Reservoir Technology and Consulting businesses. BJ Services historical segments have also been remapped into this five new segments. This was a natural outcome of the organization began last May and recognizes that the transition period, product line management to geographic management has ended, and that our primary process for evaluating performance and allocating resources is now on geographic lines. Many significant changes were related to our acquisition of BJ Services in April 28. Acquisition-related costs, expense in the current quarter were $56 million before tax, $51 million after-tax or $0.13 per share. We acquired BJ mid-quarter, so Q2 only includes results for May and June. U.S. GAAP results from BJ for prior periods are not included in our prior periods. We issued 118 million shares, representing 27.6% of the company, which brought our total share count to a little over 430 million shares. The average share count for the second quarter was 399 million shares. During Q2, our purchase price allocation process for BJ services progress to the point, where we can now provide a reasonable estimate of the fair value adjustments relating to inventory, PP&E and intangibles. As it currently stands, we're ending up with about $1.8 billion in intangibles and a PP&E step up of about $475 million. In addition, as part of the ongoing purchase price allocation analysis, we identified certain transaction cost of approximately $196 million, that we have included as part of the purchase price consideration and then included the amount as part of goodwill. The preliminary incremental non-cash charge for D&A, depreciation and amortization, is about $172 million annually or about $43 million per quarter. These D&A amounts are offset somewhat by reduced interest expense of $4 million a quarter resulting from a debt reevaluation. This of course is subject to change as we complete our valuation work. Since Q2 includes only two months of BJ, the net impact in this quarter was about $26 million before tax, $18 million after-tax or about $0.05 per share. This charge impacts our reported operating margins, it is allocated to the segments based on where BJ's assets are, mostly North America, Latin America and Asia. As Chad said, for the short two months, BJ Services has contributed to our earnings, it is already accretive on an earnings per share basis and accounted for about 1/3 of the company's EBITDA. This morning, we also provided supplemental information for Q1 2008 through Q2 2010 by quarter. This schedule, which is available on our website as an Excel spreadsheet, shows revenue and operating income for our new segments for Baker Hughes and BJ Services on a pro forma combined basis, including the D&A charges and excluding synergies. Our tax rate in the quarter was 44%. Significantly higher than our previous guidance, reflecting a 39% rate for the first half of 2010. So Q2 reflects this rate along with a true up for the first quarter. The increase in the effective tax rate is primarily due to profits below expectations in certain African countries. This results in unbenefited tax losses in some foreign jurisdictions, where tax losses in countries that impose taxes on revenues were deemed profit. In addition, profits are well over plan in North America at marginal rates between 35% and 37%, and the BJ Services tax rate is planned at 36.5%. After operations. Q2 revenue was $3.4 billion, up 44% or $1.04 billion year-over-year and up 33% or $835 million sequentially, primarily due to the addition of BJ Services for two months. Looking at quarterly comparisons by segment. North American revenue was $1.5 billion in the second quarter, up 115% year-over-year and up 62% sequentially. Revenue outside of North America is $1.7 billion in the first quarter, up 13% year-on-year and up 16% sequentially. Industrial and Other revenue was $223 million in the first quarter, up 34% year-on-year and up 18% sequentially. As outlined on Table 3 of the earnings release, on a combined pro forma basis, combining BJ Services' and Baker Hughes' results for all prior periods and adding in just the month of April 2010 results for BJ Services, Q2 revenue would have been $3.75 billion, an increase of $629 million or 20% compared to the same period a year ago, and an increase of $88 million or 2% sequentially. Q2 North America revenue would have been $1.73 billion, up $658 million or 61% year-over-year and up $87 million or 5% sequentially. Outside North America, revenue would have been $1.77 billion, down 2% year-over-year and flat sequentially. And Industrial and Other revenue would have been $247 million, up 3% year-over-year and flat sequentially. Referencing again Table 3 on a pro forma combined basis, our oilfield operating margin for the second quarter was 10%, up 100 basis points from 9% in the first quarter. International margins were flat sequentially at 7%, including the BJ Services businesses. And North America margins increased 300 basis points despite the spring breakup in Canada and the impact of the drilling moratorium. In Q2, our combined corporate costs were $56 million compared to $49 million in Q1 for Baker Hughes stand alone. Turning to balance sheet. At quarter end, our total debt was $2.9 billion. In the second quarter, we used $480 million in cash and issued $320 million of Commercial Paper in total to fund the $800 million cash portion of the BJ transaction. We also assumed $500 million in debt from BJ Services. Our total debt-to-cap ratio was 18%. We had cash of $900 million and our net debt was $2 billion and our net debt cap ratio was 12%. We also completed two other acquisitions in the quarter for $154 million. Following the BJ Services transaction, we met with the rating agencies to review our financial condition and our long-term plan. The rating agencies reaffirmed our debt ratings, A by S&P and A2 by Moody's. Today, we have $1.7 billion of committed credit facilities consisting of a three-year $1.2 billion facility accessible through March 2013, and our existing $500 million facility accessible through July 2012. Last, a few thoughts on guidance for the third quarter and the balance of the year. We expect to have a tax rate of 37% to 38%. As mentioned previously, the Gulf of Mexico drilling moratorium will have an impact of $0.08 to $0.11 per share per quarter, we expect corporate cost of $60 million in Q3. And we are on track to meet our first year synergy targets. Finally, CapEx for the combination on a pro forma basis is unchanged at $1.7 billion to $1.8 billion. I'll now turn the call over to Martin, who will highlight our geographic results. Martin?

Thanks, Peter. As Chad mentioned, this quarter marks the first year for our new organization. And as I look back over that year, I'm pleased with the progress we've made and the short timeframe in which we did it, and I look forward to capitalizing on the enormous potential of this combined organization. North America had a good quarter. The U.S. rig count averaged 1,506 rigs in the second quarter of 2010, an increase of 571 rigs or 61% from the second quarter of '09, and an increase of 161 rigs or 12% compared to the previous quarter. The horizontal rig count for the second quarter of 2010 increased 102% year-over-year and increased 18% sequentially, reflecting the increase in drilling activity in the unconventional reservoirs. At least 90% of the growth in the U.S. rig count was concentrated in six active plays. Horizontal Drilling and hydraulic fracturing are prominent in all of these plays and as such, we saw high differential growth in fracturing and related products including our growing Frac-Point multistage completion system. Our AddFRAC frac-fluid treatment service and our extremely successful line of composite plugs. Our ability to ramp up to meet demand for these plug systems is one recent tangible benefit of our new supply chain organization. We've reviewed and overhauled the manufacturing processes, enabling us to double production in less than 12 months and capitalize on this near-term market opportunity. Another couple of highlights for U.S. Land operations this quarter, Hess Corporation awarded Baker Hughes a five-year contract for directional drilling services, drill bits, drilling fluids, pressure pumping, cased hole wireline, logging, packers and completion systems in North Dakota's Bakken Shale play. Also in the Bakken, Baker Hughes installed the first Frac-Point multistage frac system to be instrumented with downhaul fiber optics and electronic monitoring sensors and a 20,000 foot horizontal well, so the customer can acquire realtime downhaul data during the fracturing operations. In the Gulf of Mexico, our business had built up strong sequential momentum prior to the moratorium. We're taking the actions necessary to properly manage the downturn, yet insure we retain our market-leading position once the activity recovers. As Chad mentioned, we remain committed to providing differentiated technology for deepwater applications in the Gulf. During the quarter, for example, Baker Hughes installed electrical submersible pumping systems in two vertical subsea boosting stations located on the seabeds at Shell's deepwater Perdido Field in the Gulf of Mexico. These pumping systems have the capacity to boost up to 125,000 barrels of fluid per day. Canada has had a seasonal spring breakup, yet I'm happy to report that Canada is rebounding quickly, and we sense that Q3 will be a strong quarter for us. The BJ merger has given us an especially strong franchise position in Canada, and the teams are integrating at a great pace and sharing ideas and opportunities to leverage the synergies there. For example, one of the largest SAGD producers in Canada awarded us the contract to complete all of their 50 SAGD heavy oil wells in 2010. Latin America has a very diverse mix of geomarkets. We are experiencing strong performance in the Andean and Brazil geomarkets. In Brazil, for example, we were awarded and offshore multiproduct contract for a Brazilian independent, the second most active operator in the country. The award includes directional drilling, logging while drilling, wireline and surface logging and realtime monitoring services. Not much has changed in either Venezuela, which remains difficult because of the payment issues or in the Southern Cone, which is dominated by high operating cost particularly labor cost in Argentina. Mexico is, however, the most disappointing. Budget cuts have idled industry capacity and flooded nearby markets, creating incremental pricing pressure in what was already a low-priced market. In Europe, revenues declined in the quarter, primarily due to a dramatic but temporary shift in activity from drilling and evaluation in Norway in the first quarter to completions in Q2, and the impact of a stronger dollar on our local currency service revenues in the U.K. compared to the first quarter. In June, we open our Eco-Centre Waste Management Facility in Peterhead, Scotland, to serve the North sea with environmentally compliant waste processing services from the rig site to final disposal. And as Chad mentioned, our results in Africa were disappointing and won't show meaningful improvement until Q4. Activity in Africa had been strong in the last couple of quarters, however, projects in four countries finished during the quarter for us. Operations in Angola are down to a rig dispute that halted work on a major project of ours. And in North Africa, Q2 revenues were impacted by project delays in Algeria and severe budget cuts by our customers in Libya. In Russia, activity improved in the second quarter, over a weak Q1 and as long as oil prices remain above $70, we believe our customers will continue to invest. Our Middle East performance was driven by the Saudi Arabia and Gulf geomarkets, as key product deliveries of screen, ESPs and safety valves were completed. In Saudi Arabia, the mobilization of our coiled tubing drilling rig was delayed for the entire quarter, but the project is now underway. A second hybrid rig is in the country and will be mobilized next quarter. Our Saudi Arabia geomarket, received a purchase order for 30 permanent downhaul monitoring systems to be used in conjunction with intelligent well systems, and we achieved the milestone of completing and controlling more than 1 million feet of reservoir section with EQUALIZER technology. Our operation in Iraq is up and running. We will install our first ESP this months, and I'm pleased to announce that we signed a three-year technical services agreement with the Iraqi South Oil Co. for the deployment of wireline data acquisition and logging services. We saw growth across the broad region of Asia Pacific, specifically in the completion, artificial lift and fluids product lines and growth was strongest in Australia and Indonesia. During the quarter, we were awarded upper completion contracts in Australia and drilling and evaluation service contracts in Indonesia and China. PetroChina awarded Baker Hughes a contract to supply 77 multistage open hole Frac-Point completions systems for horizontal wells in China's second largest onshore oil and gas field. We also signed a strategic two-year framework agreement with PetroChina Tarim Oilfield Co. to supply directional and vertical drilling systems, formation evaluation services, completion services, artificial lift technology and electrical submersible pump systems in the Tarim field in Northwest China. Some final words on our merger with BJ Services. From an international perspective, the BJ Services acquisition is fundamentally complete and the international teams from both organizations have been meeting to develop joint approaches to customers and to exploit the co-location opportunities. We've also begun to see some benefits in our international operations. In Indonesia, Baker Hughes is getting chemical treatment business based on BJ Services' ongoing coiled tubing operations in that country. In the UAE, Baker Hughes and BJ Services obtained a joint contract to work on seven offshore rigs together. And in Iraq, we're moving BJ Services coiled tubing and cementing units onto the Baker Hughes base that's already established in country. We're 14 months into our geographic organization, the structure has improved our ability to understand our market and better serve our customers. It has enabled us to standardize numerous functional processes and procedures and implement our supply chain strategy. All of which were impossible on the previous structure. Today we're focused on leveraging the benefits of the international geomarkets to improve productivity and efficiency and to fine tune our overhead and support cost at our geomarket, region, product line and corporate functions. We will be making adjustments focused on international margins. Finally, I want to let you know that our supply chain initiatives are proceeding full steam ahead. We are consolidating vendors and leveraging our purchasing power. We have trimmed our manufacturing footprint and adopted lean manufacturing processes to deliver more output from the same fixed cost base. We're also reviewing labor costs globally and working to geographically align our manufacturing capacity to more efficiently supply customers in our geomarkets. Again, all of this made possible by last year's reorganization. And with that, I'll turn the call back over to Chad.

Okay. Thank you, Martin. We went on a little longer today with our comments than what we normally do. So I think, Gary, let's just open it up for questions. We have a lot to talk about.

Thank you, Chad. At this point, I'll ask Carrie to open the line for your questions. To give everyone a fair chance to ask a question, we do ask that you limit yourself to a single question and a related follow-up question. So, Carrie, at this point, can we have the first question, please.

Your first question comes from Joe Hill of Tudor, Pickering, Holt. Joe Hill - Tudor, Pickering & Co. Securities, Inc.: Chad, I noticed in your release you expressed confidence that your operating margins in international would improve significantly by the end of the year. And kind of given what we saw in the second quarter with ECA, Africa in particular and Latin America, could you tell us what gives you confidence that you can meet those targets?

Joe, Q2, and Martin said in his comments, Q3, Africa will not return until Q4 in terms of improvement. Africa and Q4, Q1 of last year and this last quarter is very strong, but fell off for various regions in North Africa and parts of West Africa in Q2, and that will carry through into Q3. And we see Africa, kind of, back in Q4. Also, we see in Europe, Norway, which has been very strong for us and a shift mainly from drilling to completions. But that already is moving back into the drilling sides, so we see Norway return in Q3 and Q4. U.K. is picking up. I mean, the rig count is forecast to be up around 20% for the second half of the year versus first half, so we see that improving there with the strength in Europe. Both Middle East and Asia by Q4, again, I think Q3 is going to be, kind of, a quarter similar probably to Q2. But I think by Q4, we're starting to see different activity from Iraq to these contracts in the Emirates, there's some work in Oman, Egypt's picking up. So the forecast is showing that the Middle East, Asia, Q4, we should see some improvement there. And of course, we got some things to do in Latin America in Q3, which we should see the benefits of in Q4. So you don't want to plan this thing out, looks like Q4 will start showing the improvement. Joe Hill - Tudor, Pickering & Co. Securities, Inc.: And if you exclude pressure pumping, what product line performed the best in the quarter, relative to your expectations, and what was the worst?

I think drilling services, drilling systems continue to perform well. I don't any of them were really the worst. I think, probably, wireline North America has got some of the most challenges. I think bids are coming back due to the rig count increase in North America. ESPs, obviously, always swing back-and-forth based on orders, big orders quarter-over-quarter, but ESP business had a fairly decent quarter. Obviously, as you said, Joe, pressure pumping was clearly the strongest of all the product line. Joe Hill - Tudor, Pickering & Co. Securities, Inc.: Finally, for Peter, the incremental tax rate obviously, took a big step up here. Given the forecast improvements and profitability, should we expect the tax rate to come down for 2011?

We do think we'll probably come down in 2011. If we do get a nice uptick, steady uptick in international margins, which we're expecting beginning in Q4, it's going to help. And if we can stay at those levels and improve from there, it's going to help a lot. The other thing we've got going on is we're reviewing our cost structures and margins from a tax perspective, and we're looking for efficiencies as integrate Baker and BJ together. There's a lot we can do there with the expected tax planning. So a couple of levers we've got there going into 2011.

Your next question comes from the line of Stephen Gengaro of Jefferies. Stephen Gengaro - Jefferies & Company, Inc.: I guess two things. I'll start with North American margins. If you look at, I guess, Table 3 that you provided. The incrementals were, I think, north of 60% despite Canada. How should we think about that going forward? And finally, can you give us some sense for what the biggest drivers were there?

Stephen, this is Chad. The biggest driver is North America. If you go back to the pressure pumping, very strong incrementals and pressure pumping. Land, traditional legacy, Baker Hughes, decent incrementals, not as strong as first quarter, but decent in the second quarter. I think, going forward, what you'll see is right now on the pressure pumping side, we're maxed out. We are adding equipment. Some is actually coming in this week from some capital equipment that we authorized back in January to be built. So that's rolling out. That will give us some continuous revenues and help with some incrementals on there. There's still some room for pricing on pressure pumping, that's coming up. I think where we've got our other side is, although we were tight on some of the other traditional product lines, directional drilling, bits, et cetera, we're not as tight there as we are in the pressure pumping equipment side. So that gives us some room to continue to grow in second half of the year. I think that will be the breakdown of, I would see incrementals through the rest of the year. Stephen Gengaro - Jefferies & Company, Inc.: Just as a follow-up, you've mentioned, I think, pro forma, CapEx unchanged, is there any reallocation of that, sort of, to North America pressure pumping versus other areas?

Yes, we set it, 1 7 to 1 8, or roughly about 600 million through the first half of the year spending. That's typical usually the second half spends more than the first half just to -- people get their orders in at the end of the first quarter, et cetera. Obviously, the BJ side of that is a fair amount of the CapEx, and probably about 60% of BJ's capital plan for this year is for North America. And that's kind of split between Canada and the U.S. land. And then the other 40% of BJ is international, as far as legacy, Baker Hughes, most of our capital continues to be for international operations.

Your next question comes from the line of Kurt Hallead of RBC Capital Markets.

You guys referenced the waiting on the DOJ to approve the sales of steam assets. I think when you guys announced it at the beginning of July, the expectation was hopefully to have a close by the end of July? Could you give us some general update as to when you think you might be able to close this transaction?

Kurt, I wished I could. We're surprised it's not closed as well. We continue to get back in front of the DOJ almost everyday. I send an email asking where we stand, our team. We're just waiting on some final things that they need to go through at the buyer, but we're hoping that this happens pretty soon. It is a tremendous inconvenience for us right now.

You're kind of at a point where you're hesitant or really -- given the DOJ situation, you really can't handicap the timing at this stage?

No.

I had a follow-up here, Peter. I was wondering if you could just -- you've mentioned that your synergies are on track. Just for the benefit of us with early-stage Alzheimer, can you go through the list of the synergies for us once again?

Yes, what we said was we expected the first 12-month synergies of $75 million and an additional $75 million in the following 12 months. In the first 12 months, most of those will be, sort of, in the corporate functions, and associated with the change of control payments and everything else. And I'm happy to report that in the first two months that we've owned BJ, we've achieved $10 million of synergies. So I want to say, we're well on track, I mean, we're 6/7 of the way there for the first year. And then, going forward, we've got a lot of opportunities in publicating facilities, back-office synergies as we put our systems together. We're working together already internationally on combined supply-chain activities, chemicals, purchases and things like that. All of that's starting to unfold now, but that was more or less, in the plan for the second year.

Given the delay in the DOJ approval here of this transaction and the full integration of the BJ U.S. operations, you guys are going to have to run even faster in the back half of the year? Or could you give us some general color on how you think you might be able to make up for the lost time?

Kurt, I don't think it's going to affect that much. As Peter said, a lot of that was the corporate that is being worked on or is being done. It has nothing to do with just the U.S. land-type operation. And as far as some of the other synergies, that's more -- a lot of that involves a combination of basis that are facilities or offices, which I think, last time I looked in the far east, they've identified some 13 offices that could be co-located. And whereas in North America, it's going to be a little harder to combine facilities just because of the size of BJ's facilities and the amount of horsepower and equipment they have. We don't have anything big enough for them to move in with us and vice versa. So we never did consider that type of synergy in the U.S. We looked mainly internationally, where we felt there was a lot of combination. We're working on that already.

Your next question comes from the line of Dan Boyd of Goldman Sachs.

Chad, you mentioned that you increased your, you can increase CapEx for BJ, but it looks like they're still spending a decent amount this year. Some of the data out there suggests that BJ lost some market share during the last cycle. How do you think about the competitive position of the combined company going forward? Do you want to take back some of that lost market share? Or is the goal really just to maintain the current position?

I think everybody lost -- all the majors lost market share in the last cycle, obviously, it's gone from three or four big players to 15 or 16 players. So everybody gave up a little bit. I think BJ did lose a little bit, maybe a point. It's not our goal to go out there and build a whole bunch of excess equipment and take all of that market share back. We will defend the market share. We're not going to let it go down anymore, and that's one reason why we are building some additional equipment. BJ is turning down work today, and we just don't want that number to get too big. I think there is the danger that this history has shown it's overbuilt, and that's always a possibility out there, but we're trying to balance the amount of equipment. They didn't build a lot last year, just simply because they're really tightened up, so we've done a little bit more. Like I said, we authorized some in January and we just authorized some more large 3,000-horsepower freight to be built for the second half of the year delivered in October, November. And then we'll watch it and see what market conditions are doing at the time.

Your guys are impacted a little bit more by the Canadian seasonality than some of your peers. Can you just of the statistics on what you saw in U.S land revenues sequentially, maybe on a pro forma basis? And then also talk about the margin progression you sold just in U.S. land specifically as the quarter progressed?

Well we don't break out U.S. land versus Canada in terms of margin or anything, but in general, we saw U.S. land margins improve dramatically in BJ and nicely in Baker Hughes. Canada wasn't as bad as we thought it was going to be. It held up better, if you'd look at it during what our plan, we thought, the break-up wasn't as bad. And that holds true for both BJ, as well as Baker Hughes. Baker's always been in pretty good shape up in Canada due to our split of services on completion and in the ESPs and the chemical sides, so that helps condition us or I guess, positions us a little better in Canada during the breakup. There's no doubt BJ gets hit hard. As Martin made a comment though, we see Q3 coming back pretty strong, for both BJ as well as Baker Hughes. And I think Q3, Q4 should be good quarters for us. We see land, U.S., we talked about continuing to go forward. I don't think Canada will offset the problems we have in the Gulf on the moratorium, which we talked about.

The one thing I'm just trying to make sure, is there any reason, I think, peers are reporting margins, I think, as we look our for the third quarter, probably in the mid-teens range at least. And I think that Halliburton just reported over 20% in North America, though they don't have as much Canadian exposure. Are you on track to hit those type of numbers in the back half of the year?

We'll throw out the Gulf, and I would say yes, I'm not afraid of those mid-teens to high-teens margins.

Your next question comes from the line of Marshall Adkins of Raymond James. J. Adkins - Raymond James & Associates: I want to focus, just stay on the North American topic just for a minute here. Peter said some pretty impressive sequential margins. Help me to understand where your margin improvements' going to come from? I mean, you mentioned Canada, obviously, BJ. And you were huge in Canada, so it's a down quarter. We're going to get some improvement there. But were you exceptionally large in the Gulf of Mexico and/or, could you share with us how BJ margins are comparing to Baker margins as we go forward?

Marshall, this is Martin. Let me take a crack at that. In terms of, how do we see the margins progressing and why, I will make a follow-up on some of the comments Chad made. Across all product lines and across all of the key basins in U.S., we've begun to see price movement. And obviously, in some of the product lines, directional drilling, as well as some of the key completion technologies, like our Frac-Point and our composite plugs, there's differential pricing movement there. I think we're also seeing in some of those key basins, our customers' prepared, besides just a supply tightening, there was a strong focus on the customers to improve their efficiency, improve the recoverable numbers. Some of the drilling is getting tougher, not easier, even though we're drilling further in more concentrated profiles. So we're seeing a willingness like never before to pay for technology in certain debates. And certainly, it's not across all customers yet, but that's gaining some traction. And then, we are very anxious, more so than anybody out there listening to get this whole separate off of us. And the numbers we're presenting today are really just an accounting exercise of adding BJ for two months in us. And that's not why we bought BJ. And you know that, Marshall, there's a whole lot of synergy that a couple of our competitors are able to enjoy. And it's not just on the cost side, more importantly in this market, it's in the solutions that we're able to bring forward to the customer. And we were probably less able to do that now since the announcement of the acquisition than before. So, we're running it separately as we're supposed to. So working together, being very selective on the prize, but more aggressive than in the past, and by no means as U.S. land dried up when it comes to technology, so I'd say that's the three main areas, if that answers your question. J. Adkins - Raymond James & Associates: And follow-up to that, it sounds like getting the approval of the disposition of the Sand Control business is going to be a big deal for you guys in terms of integrating those two, which is helpful. Can you give us some sense of -- the business you're getting, you're selling to superior. What was the run rate of that business before it was sold, or is there such a thing?

Annual revenues, roughly, $70 million or so. And profitability varies depending on what jobs you're on, right?

It's really hard to try to pull it together and come up with a number.

Your next question comes from the line of Scott Gruber of Bernstein.

Do you think you can grow, or at least, defend your pressure pumping market share without growing capacity on par with the market, due to the combined offering of the two companies? Or is the pumping horsepower really required at this point?

Scott, I missed the first part. You were cutting out. Could you repeat that?

Do you think you can grow or at least defend your pumping market share without growing capacity on par with the market?

Yes, I think we can. I think it goes back to what Martin just talked about. I think that once we're able to combine the full breadth of services that we can bring to the client, along with some of the things that we're doing on reservoir mapping, micro-sized [indiscernible] and various other things, I do think we'll be able to gain that market share. Now there's no doubt the horsepower side of things is critical. And you don't have the horsepower, you can't grow the market much. But I do think that we probably can do a better job as an industry in terms of picking where these fracs need to take place, perhaps, bypassing some zones and increasing size on other zones. I just think over the next year or two, the industry's got to move forward to be, rather than just brute treatment, need to be a little more selective and technology understanding of the formations. I think that's the excitement again, as Martin said, why we bought BJ, to bring this total package to the client.

Turning to Mexico, Chad, can you update us as to your plans for your people on equipment in the country? You highlighted your intention not to renew the Alma Marine contract, and obviously, you're onshore activity is down as well. Can you just provide some color on your plans there, for your people and equipment?

Yes, we're already -- some of that is project-management backs. So some of these people are operational people to manage projects. There are already several of those have been relocated to various projects around the world. Some of it goes on down to Brazil to support the growth and activity in Brazil. Some of these people even come back up to help support U.S. land, ask them things, we can go back and forth on some of our Mexican employees there. So right now, there are some areas around the world that require help. Now at equipment, again, we need to just find the right home for some of that equipment and move it around. The good news is, with the exception of pressure pumping equipment, log-in tools, et cetera, can be moved pretty easily.

The discussion of a significant expansion in CapEx by PEMEX, does that incentivize you to keep more operational support in the country during the second half of the year?

Well, we'll keep a base there, Scott. We'll, obviously, keep a few bases there. We have ongoing work with PEMEX and we'll maintain a presence, but we're not going to keep a lot of equipment, anxiously waiting for the thing to take off. There is a lot of competition down there right now. We all are overstaffed. I think everybody is in the process of reallocating assets and people. And we'll see once that budget comes out and activity starts up -- and again, we've got the facilities there. We've got the base case we can build once that happens.

This is Martin. Let me just clarify a point. As Chad mentioned, allowing that contract to lapse is the only, really, structural thing we're doing in Mexico. I mean, we're still participating on ATG labs. I think we're managing nearly 100 wells for them right now, in terms of monitoring and collecting the data, and it's progressing as planned. And we have ongoing businesses in the North and in the Central and the South, as well as offshore. It's just that project, which was a big resource hog, if you will, in this global market that has just got a lot better places for it to be redeployed and that's what we're doing.

Your next question comes from the line of Brad Handler of Crédit Suisse. Brad Handler - Crédit Suisse AG: A basic question just to see if you -- to the degree to which you can help us, can you give us some guidance for the third quarter EPS?

No, I think what you have to look at, Brad, is we talked about Africa continuing the problems through the third quarter. We've got to continue to fix Latin America, especially Mexico through some of that. We have the Gulf moratorium which we said $0.08 to $0.11. Now that's, kind of, the negative areas, where on the positive areas, you've got an ongoing continued strength in land U.S., which we don't see any weakness coming out of that in third quarter. And you get a good strong recovery in Canada, probably won't offset the Gulf of Mexico, but it will definitely help. You see Europe bouncing back with the U.K. activity, and you see Norway bouncing back from the drilling to completions back to drilling. Russia had a very good quarter, probably more hold in that area through Q3 and slow improvement in Middle East and Asia in Q3. But there's still a lot of moving parts out there, obviously, trying to get one more quarter, BJ rolled in from two. And some ongoing, just some clean-up issues -- as the organization, as Martin said, we're ready to tweak certain things internationally a little bit. So I just don't think we're ready to throw out a guidance number out for Q3. Brad Handler - Crédit Suisse AG: It's just that area of -- you're talking about getting some synergies. You're obviously, anticipating a bit more in the tax rate -- it sounds like you're anticipating some recovery on some of those markets, but I know how much of that, perhaps, is cost-driven, not activity-driven. How much can we think about in terms of, sort of, structural margin improvement as you're pushing your way through? Or maybe it makes sense to ask it across the second half of the year just on that basis? I mean, how much can we think about you getting, just in terms of raw cost improvement, supply chain organization, synergy with BJ and help us put some numbers around that, please?

I would just put Q3 in as carry through from Q2-type number, but good recovery in Q4... Brad Handler - Crédit Suisse AG: Not much benefit for any of that?

You see Q4 being much better. We actually are pretty bullish when we look at where we are in the company. We love this new organization. We're now ready to take the next step, in terms of some efficiency gains in this organization. Clearly, we got better relationships with our customers around the world than we've ever had. We're excited about getting BJ. We see what's happening on the international front, how well that's working and going and we're really excited about getting the U.S. deal close, so we can take advantages of that. And internationally, we see activity improving, especially as they sit around the Q4 and on into 2011. So I think we need another quarter, as I made in my comments, think about three to four months behind. I think we thought we'd be right now on our international margins, so that puts us -- in Q4, we should see that improvement.

Peter, in Q3, can you help us with D&A and expected, kind of, SG&A expenses?

D&A, about $310 million to $320 million for the combined company. We talked to you about corporate expense being up just a little bit. We haven't run the SG&A as we reported. I have to run those numbers ahead. We've got it in that format.

Your next question comes from the line of Waqar Syed of Macquarie Company.

You have a comment in your press release that you're helping South Oil Company in Iraq to develop their wireline capabilities. I just want to understand, does that mean you're going to be selling wireline equipment to them? Or you're just helping them in data interpretation and those kind of services?

Yes to all of the above, Waqar. The Iraqi South Oil Company has been a big customer of Baker Hughes in the Logging business for years and years. And their fleets of equips logging trucks already in Iraq from previous purchases. But this agreement is a three-year renewable contract between South Oil Company and Baker Hughes to upgrade some of the existing equipment, to train the local logging crews that are employed by South Oil Company, then help them maintain the equipment and to train their engineers on running some of the newer technology. And on occasions where higher levels of technology are required on their fleet, then we will deploy Baker Atlas-type of technology, such as magnetic resonance or the reservoir characterization instruments on their trucks. Now that is completely separate from the two logging trucks that Baker has already have in Iraq at our base.

On the R&D side, what would be the combined R&D for cost of the BJ Services and Baker's? And do you see reduction on a pro-forma basis, are the costs going to remain the same, or do you see some synergies in that area as well?

It's roughly $500 million combined on an annual basis. We, right now, don't anticipate any reduction in that, probably be a little bit of synergies in improvement. But we'll probably hold that in that ballpark going forward.

Carrie, we're reaching the bottom of the hour. Can we take one final question please?

Your final question will come from the line of David Anderson of JPMorgan.

I've got another question on the capacity. You mentioned on the pressure pump, maybe I'll ask, probably a different way. Perhaps you disagree, but it seemed pretty apparent that BJ under invested in this business in the year, leading up to the acquisition. But now that you finally have the reins, I was just wondering if you have a sense to how much capital you would need to spend on equipment to get to par? In other words, what percentage of the fleet do you think needs to be overhauled? Is it a third, quarter, half? Do you have any sense of that right now?

Not as much as we would like based on a whole set, but we haven't been able to dig into that as much as we'd want. Their equipment's not in bad shape. I think it's mainly in the last year, year and a half that, perhaps, there was a little bit of underspending. But it's way less than a quarter of the equipment that is old, so I don't think we have a huge amount to go to catch up.

So you think you can get there over the next 12 months?

I think we can. Obviously, what we're looking at doing today in the equipment that we're building, if in time, there's a downturn, what we'd do is cut up a lot of the older equipment and replace it with equipment that we're building now. Right now, you're using every piece of equipment you've got in the yard. So you just want to continue to keep it growing down the road, downturn hits, you get rid of the old stuff and replace it with the new stuff you built over this last year.

I was wondering if you could just expand a little bit more on that contract you mentioned with Hess in the Bakken. I'm kind of interested in the mechanics of it. Is there a set amount of volume that's associated with that, that's guaranteed? How's the pricing change of the life of the contract? Is it in index in some away?

I'll answer the first part because I know the answer and I'll let Martin answer the second part because I don't know the answer. There's certain products that have a certain guarantee. Directional drilling, for example, pressure pumping, you have a certain amount of guaranteed contract, not guaranteed. You obviously got to perform. But then some of the other things in various bits and a few other product lines are based more in other things. As far as the pricing goes, it is a five-year type contract. Martin, you want to comment about the pricing?

David, I don't know if it's indexed. I know there is a component of the volume. This is split with another major service company, but there is a performance-driven share allocation as well. But in terms of the indexing, I got to tell you, I don't know the answer to that.

We end up with 80% of the drilling and completion work and 30% of the pressure pumping. And the other company, as Martin commented, it's the 20% and 70% and then there's a bunch of axillary-type products that are bought as a project goes forward?

And safe to say, you wouldn't have gotten this contract if hadn't had BJ?

I don't know if you can say that. I think it obviously helped in the sense that it makes -- the customers saw that this was eventually going to be one company. And I think they -- we went after these contracts individually. We couldn't negotiate or discuss with BJ until they did that on their own and we did the rest of it on our own, but the client obviously knew that this process was going to eventually conclude and we'd be one company.

One of the drivers behind BJ deal was to compete better internationally, particularly on the IPM contracts. Nobody's, sort of, been talking about that much this quarter. I was wondering if you could, kind of, articulate a bit what you're seeing on that front? Is bidding activity heating up anywhere? Do you expect to see any contracts announced at year end or kind of, economic concerns and oil fundamentals keeping those activities on hold for the foreseeable future?

I think there's been a little wind down in project management-type projects for a couple reasons. One is, probably, the Gulf of Mexico, probably got everybody looking at how much risk you would want to take, definitely not much in deepwater as a service company. But I think that just make you look at all projects around the world a little bit. And then Of course, what's happened in Mexico has not turned out to be the best projects for anybody who have geared up for it, so I think that slowed down a little bit. Now I do think that by the end of the year and into next year, that we'll probably resume. Algeria was a big place where there was a lot of work going on, on project management. I don't think that stopped because of a concern about project management. It stopped because of the change of management in Sonatrach. And we are seeing -- the guys sat down, as Martin said, internationally between the BJ and Baker Hughes folks and identified some $2.3 billion worth of opportunity over the next 12 months of going in together to tender on projects. Some of those should win without pressure pumping. In some cases, you're able to get pull through, so it's hard to break it up. I think without a doubt, we see the future internationally, with the sea mane[ph], the coiled tubing and the pressure pumping, a lot of pull through in opportunity.

Thank you, David. And thank you Chad, Martin and Peter. I want to take this opportunity to thank everyone, all of our participants this morning for your time and your very thoughtful question. Following the conclusion of today's call, we'll be available to answer any additional questions you may have. So once again, thank you for your participation. Carrie?