Baker Hughes Company (BKR) Q1 2011 Earnings Report, Transcript and Summary

My name is Ashley, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Baker Hughes First Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Gary Flaharty, Vice President of Investor Relations. Sir, you may proceed.

All right. Thank you, Ashley, and good morning, everyone. Welcome to the Baker Hughes First Quarter 2011 Earnings Conference Call. Here with me this morning are Chad Deaton, Baker Hughes' Chief Executive Officer and Chairman; Martin Craighead, President and Chief Operating Officer; and Peter Ragauss, Baker Hughes' Senior Vice President and Chief Financial Officer. Following management's comments this morning, we'll open the line for your questions. Reconciliation of operating profits and any 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. I do want to caution you that any -- our 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 more thorough discussion of the risk factors. For a full discussion of the risk factors, please refer to our annual report 10-K, our 10-Q and of course, the forward-looking disclosure in this morning's news release. With that, I'll conclude our discussion with the administrative details and turn the call over to Peter Ragauss. Peter?

Thanks, Gary. Good morning. This morning, we reported net income on a GAAP basis attributable to Baker Hughes of $381 million or $0.87 per share. Revenue was $4.5 billion, up 78% or almost $2 billion compared to a year ago and up 2% or $102 million sequentially. EBITDA per share was $2.19, up $0.86 or 65% compared to a year ago and up $0.01 from last quarter. To help in your understanding of the moving pieces, I'll bridge Q1 of last year to Q1 this year. GAAP EPS a year ago was $0.41 per share, add $0.02 for acquisition-related expenses incurred in Q1 last year, expect $0.13 for the impact of the higher share count and the higher effective tax rate, subtract $0.07 for higher corporate costs and net interest expenses, subtract $0.05 for the impact of the incremental noncash amortization costs associated with the acquisition. Last, operations added $0.69 per share. That brings us to $0.87 per share and includes the operational impact of the North Africa geopolitical events and weather in North America and Asia-Pacific this quarter. Bridging the sequential quarters, GAAP EPS for Q4 2010 was $0.77 per share. First, add $0.07 per share for acquisition-related costs, net of the gain on investment in Q4 2010. Subtract the impact of the higher relative tax rate, higher share count, interest and corporate expense of $0.02 per share. Subtract $0.04 per share for the impact of higher seasonal export sales in Q4 2010. Last, operations added $0.09 per share, again including the operational impact of the North Africa disruption and weather in other parts of the world, which gets us to $0.87 per share. In table 3 of our earnings release, we provide financial information on a pro forma combined basis with revenue and profit before tax of BJ Services included into the prior period's results to allow meaningful comparison between quarters. From this point on, in the conference call, any comments on revenue, operating profit and operating profit margin refer explicitly to table 3. Revenue in North America was $2.35 billion, up 43% compared to a year ago and up 6% sequentially. North America operating profits were $460 million, up $284 million year-over-year and down $18 million sequentially. North America margins were at 20% compared to 11% a year ago and 22% last quarter. Gulf of Mexico profit was down sequentially, as large orders for completion equipment delivered last quarter did not reoccur this quarter, costing us about 50 basis points in margin. Colder than normal weather also reduced operating profit by nearly 200 basis points. International revenue was $1.9 billion, up 8% compared to a year ago and down 2% compared to the prior quarter. Operating profits were $233 million, up $101 million year-on-year and up $58 million from the prior quarter. International margins were 12.2%, up 319 basis points sequentially, as we continue to progress towards our international operating margin target. Our industrial services and other segment revenue was $270 million, up 9% compared to last year and down 4% compared to last quarter. Operating profit was $14 million, down $4 million compared to a year ago and down $14 million sequentially. First quarter results were impacted by seasonally lower activity for our Pipeline Commissioning business. The operating margin was 5%. Turning to balance sheet. At quarter end, our total debt was $3.8 billion or flat with the prior quarter. Our total debt to capital ratio was 21%. Our capital expenditures were $429 million this quarter. At the end of the quarter, we had $1.4 billion of cash and short-term investments, and we also have $1.7 billion undrawn and available under our committed credit facilities. Now, let me provide you with our updated outlook for the balance of 2011. We now plan interest expense to be between $200 million and $205 million for 2011. Corporate costs are unchanged at $250 million to $260 million. Depreciation and amortization range is unchanged between $1.38 billion and $1.43 billion, and annual capital expenditures of $2.3 billion to $2.7 billion is unchanged. And our tax rate is still expected to be between 36% and 34%. Last, I want to remind you that the Canada breakup will have a very significant impact for us in Q2, given the size of our business there now combined with BJ Services and coming off strong results in Q1 and detrimentals are very high during the breakup. Growth in profit in the rest of the world could offset the decline in Canada. And if that happens, earnings per share should be roughly flat with Q1 2011. I'll now turn the call over to Martin, who will highlight our geographic results. Martin?

Thanks, Peter. Good morning. Let me start with international operations. We had a good quarter despite some extraordinarily hostile market forces, including geopolitical uncertainty in North Africa and the Middle East and abysmal weather in Asia-Pacific. That said, the actions we are taking to improve international margins are evident again in this quarter's results. Turning first to Latin America. Revenue increased 19% year-over-year, but fell 2% sequentially, as increases in the Mexico, Venezuela and Southern Cone geomarkets were not sufficient to offset the lower seasonal sales in the first quarter in the Andean and Brazil geomarkets. Margins improved sequentially as volume growth, incremental cost management and efficiency gains offset seasonally high fourth quarter sales. Operating profit margin is now 13%. Activity in Brazil remains strong. Our teams there continue to push the limits of technology in the pre-salt reservoirs of the Lula field, formerly known as Tupi. For example, we were the first company to kick off in the salt section and successfully drilled the first directional well in the field. This is very important because Brazil's pre-salt reservoirs are unique and that the target reservoir itself lies immediately below the salt section. Therefore, by kicking off and building angle within the salt section, allows for more reservoir to be exposed to the well bore. This was achieved using an advanced directional drilling package. For Brazil's largest independent, we drilled our first 2 wells as part of an integrated operations project with the estimated revenue this year at $60 million. Turning to the Europe, Africa, Russia Caspian segment, revenue fell 3% sequentially, as revenue increases in Africa and Europe were more than offset by geopolitical disruptions and lower revenue in Libya and seasonally weaker export sales. In the Continental Europe geomarket, increases in the land rig count was supported by rising unconventional gas and geothermal activity in Poland, Turkey and Germany. As highlighted on our March Analyst Conference, we achieved an exciting technology milestone in the first quarter, installing the GeoFORM, our openhole Conformable Sand Management System offshore Italy with positive feedback from the customer. Drilling activity in the U.K. geomarket slowed this quarter. We saw operational delays caused by higher levels of maintenance and refurbishment of rigs and the associated blowout prevention equipment to meet certification requirements. And given our strong market share position, these impacts were not insignificant to our profitability. For Q2, we expect the weather and rig issues to be behind us, allowing us to execute on recent contract awards. Turning to Norway, we were impacted by the inclement weather and increased pricing pressure from competitive bidding. In Q1, we won a two-year completions contract by a super major valued at more than $200 million as a result of our solid historical performance in countries. The Russia-Caspian geomarket was flat sequentially through Q1, even against the usual seasonal weather impacts. Our outlook is strong for the remainder of '11, and we expect to realize some pricing improvement, particularly on the D&E product lines going forward. In the first quarter, we won a multimillion dollar integrated operations contract for complete rig management and deployment of our full suite of projects -- or products for an NOC in the Yamal Peninsula. In Western Siberia, we secured a multiwell project plan for 2011, utilizing an advanced directional drilling package for a leading Russian major. And in offshore Sakhalin, where we have been historically strong in our completions in Pressure Pumping business, we won a 10-well 3-year contract for high-pressure frac-ing and gravel placement services. Turning to Africa, activity is increasing at Sub-Sahara and Eastern Africa, and we see some incremental growth given that oil prices hold. Nigeria looks more secure, as the governor's elections are complete and presidential elections are on the horizon. And from a business perspective, pressure pumping was particularly strong for us in Nigeria this quarter. In North Africa the situation is mixed. Algeria is improving and Tunisia is recovering. However, IOCs remain cautious throughout the area, and Libya is, of course, completely shut down operationally, but fixed costs continue. On a positive note, in Angola we won a 3-year deepwater drilling and evaluation services contract for Block 18 from an IOC, and another IOC has awarded us with a 2-well drilling and evaluation program for Block 16 and Block 23. Turning to the Middle East, Asia-Pac segment. Sequential improvement in the Middle East offset weaker activity in Asia-Pacific, which was exposed to a litany of weather disruptions. The sequential improvement in the Middle East segment was due to production enhancement activities in Iraq, where sales double sequentially, strong wireline in chemical sales in the Gulf geomarket and margin improvement throughout the region. With regards to new rigs coming online in Saudi Arabia and the U.A.E., we fully expect to gain a fair share of the incremental work based on our proven performance in country and solid relationships with the NOCs. A couple of highlights in the quarter. In order to help Saudi Arabia meet domestic gas demand, we deployed an advanced underbalanced Coil Tubing drilling solution to enhance production from existing gas wells. After resolving startup issues, the project has hit its stride and is delivering record results in terms of footage drilled and nonproductive time. Our nonproductive time is now 5% compared to the nearly 18% average of the 5 wells drilled prior to the beginning of our contract. In Iraq, despite slower-than-anticipated drilling activity, we're seeing our completion of Production business flourish. We are deploying all of our C&P product lines on workover rigs and rigless operations with heightened demand for cementing, Coil Tubing, cleanout, openhole case to a wireline services. And recent awards for wireline and a coring tender will further strengthen our position in Iraq. In Asia-Pacific, severe weather disruptions adversely impacted revenue this quarter. And similar to the North Sea deepwater rig issues mentioned earlier, some Asia-Pac rig activity was delayed as operators audited their rigs for safety compliance and kept some in the shipyards for extended repairs. Additionally, we saw the usual seasonal decline in product sales following a strong fourth quarter. So far, in 2011, Asia-Pacific remains a competitive market with limited ability to move prices. On the upside, we are witnessing increased shale drilling activity in China with opportunity for us to leverage our strong North American expertise in unconventional drilling technologies and our completion products portfolio. In the first quarter, in the Southeast Asia geomarket, our Reservoir Development Services group commenced a 15-month development study for an NOC to increase production of oil and gas in a mature field offshore Malaysia. And on the same project, Baker Hughes was awarded with a multimillion dollar production enhancement contract with strong upside potential moving forward. This is a significant award in that the NOC has chosen our reservoir management team to manage the field and make the operational decisions. And while the financial upside is significant, we're really excited about the change this business model represents. In India, we were rewarded a 5-year deepwater integrated operations contract from an NOC. Valued at almost $300 million, we will provide drilling systems, fluids, liner hangers, cementing and mudlogging services. This integrated operations project will position us well for incremental business in shale gas and redevelopment of depleted fields throughout India. Moving to our Industrial Services group. It performed as expected in Q1. This group is comprised of downstream services, Specialty Chemicals and pipeline inspection and commissioning services, all of which were seasonally impacted. Finally, I'll turn to our North America operations. This market remains exceptionally strong for us, void by a rising oil price more than offsetting anemic natural gas prices. Overall spending levels on land have increased, as incremental spending on oil and liquids-rich natural gas plays has offset weakness in dry gas plays. Last Thursday, Baker Hughes announced that the oil rig count has now surpassed the gas rig count in the United States for the first time in 16 years. The foundation of our North American land activity has been the unconventional shales and the corresponding demand for our horizontal drilling, advanced completions and pressure pumping. Weather was a positive for us in Canada, where the drilling season was extended, but a net negative for North America, considering the impact of cold weather on Southern U.S. pressure pumping. In U.S. land our Drilling, Completions, Wireline and Pressure Pumping businesses delivered very strong results this quarter, as we continue to realize market opportunities from our expanded product portfolio. I'd like to highlight a few customer successes in the quarter. Baker Hughes Pressure Pumping continues its pull-through success this time with Cabot Oil & Gas for a multi-well package in the Marcellus Shale with estimated annual revenues of more than $150 million. We secured an incremental contract for drilling services, drilling fluids, completions, wireline and chemicals for this independent operator. Adding to our portfolio of work in the Marcellus, another independent operator has awarded us a 39-well, $140 million contract to perform all of their Marcellus shale work as a complete and full package this year and into next. In the Eagle Ford, we won a contract from an independent operator for total drilling and completion package representing 12 wells and more than $100 million of revenue for 2011. As highlighted at our Analyst Conference, we are aggressively pursuing nanotechnology to help our customers overcome technical challenges in the well bore. In the first quarter, we announced our FracPoint premium system incorporating IN-Tallic balls which decompose in a controlled way during the fracturing process. We've deployed these balls in the Bakken, the Marcellus and the Anadarko Basin. In Canada, we had a very strong quarter driven by oil activity. While total rigs increased 25% year-over-year and 45% from last quarter, the oil rig count in Canada was up 57% year-over-year and up 70% sequentially. In the quarter, we had almost 10 extra revenue days because of the late start to the spring breakup. Shale plays are ramping up in Canada, and our Pressure Pumping business has clearly benefited. In Q1, we installed a complex fracture treatment with OptiPort Coil Tubing deployed frac sleeve technology, which significantly reduced average fracturing time by 45% and reduced fluid usage by 30%. And finally, turning to the Gulf of Mexico, where we have a very strong market position, profitability was sharply down sequentially. The decline was primarily due to the sequential dropoff of completion product sales. And with that, I will turn the call over to Chad.

All right. Thank you, Martin. Good morning, everyone. Q1 was another good quarter for Baker Hughes. And then closing up this session this morning, I wanted to take a look at some of the major themes that we discussed at our Analyst Conference and see how we progressed during this recent quarter. First, international margins improved again by over 300 basis points sequentially more than covering the impact of the geopolitical disruptions in North Africa and the weather issues in Asia. We made steady progress towards our goal of exiting 2011 with mid-teen international operating margins. The early focus of our plan to increase international margins was cost management and improving operational efficiency. I want you to keep in mind that during the reorganization, we carried duplicate resources and beginning last fall, we started to bring these back in line. We made significant gains here, as evidenced by our marketing, general and administrative costs, which were 6.2% of revenue in Q1 compared to a 12% a year ago, which is a huge difference. Now with costs in line with our expectations, the focus of our improvement efforts is on continuing to advance operational efficiency. As we move towards the second half of 2011, activity drills becomes a much more important driver of future improvement. And based on what we're seeing on the international front, I'm confident the activity will be there. A second topic we discussed at the conference was that we expected to lead in North American margins through this cycle. Our confidence in the strength of the North American market has continued to increase. Service intensity in the unconventional shales is growing, as we grow longer horizontal wells requiring more frac stages and complex completions. The addition of FracPoint premium and AutoTrak curve has strengthened what I believe as one of the strongest technology offerings the industry has to address the challenges of the unconventional shales. With our pressure pumping sold out in North America, we expect to accelerate the deployment of new hydraulic fracturing fleets. Our conviction remains strong that supply will not match demand this year. As a measure of our confidence, we are increasing our annual average U.S. rig count forecast from 1,740 to 1,790 for 2011, and that compares to 1,548 last year. And we are increasing our Canada rig count forecast from 340 to 390, and that compares to 348 last year. The activity increases will self-support higher margins and realize pricing. We also expect the Gulf of Mexico activity to begin a nice build for the rest of the year and support higher margins as well. A third key objective from the conference is that we expect to remain a leader in the offshore markets, both on the shale as well as the deepwater. The permitting of 10 rigs this quarter in the Gulf of Mexico is encouraging. However, we also recognize the 10 deepwater wells recently permitted to be drilled will only be a fraction of the activity levels we saw before the drilling moratorium was announced. This level of activity is insufficient to offset the 380,000 barrel per day or 23% drop in Gulf of Mexico oil production as forecasted by the EIA for the 2012 compared to the 2010 time period. A significant amount of the work has already been contracted for these recent 10 permits, and work for several other permits that are pending have also already been assigned. We've been awarded more than our historical share and look forward to seeing this move past the permit stage and finally turn into some actual contracts and work. So also [ph] we expect to lead the market in competency assurance. Over the last year, we've continued to invest in our training, our safety and our competency assurance programs so that our experienced people are ready to go when the deepwater activity resumes. Our customers have also been busy, auditing our processes and procedures in anticipation of resumption in deepwater drilling activity. I believe that with the combination of our experienced people and our suite of advanced technology and services, we are in a great position as activity starts out. Last and certainly not least was supply chain. We continue to progress with our multiyear supply-chain effort. This quarter's most notable accomplishment was the opening of our new PDC drill bit manufacturing plant in Dhahran, Saudi Arabia. The opening of the plant is another step in moving our supply-chain closer to our customers and markets and diversifying our manufacturing footprint. I was on-hand for the opening of the plant with senior Saudi Aramco officials and they paid us a not-very-nice complement during the ribbon cutting ceremony saying that no company in the last 4 years has introduced more technology into the Kingdom than Baker Hughes. In the following day, they shared the news that Saudi Aramco was ramping up drilling activity from 92 to 118 rigs with an increased focus on oil-producing projects. We've made some nice progress in these last 4 or 5 years in the kingdom, and with our recent performance, which Martin highlighted earlier, we expect that we will receive our fair share of the incremental activity. And during the same trip to the Middle East, we were told by ADNOC that Abu Dhabi plan to add 16 rigs and several of our clients recently, both the IOCs as well as the NOCs alike have noted the spare production capacity has become stretched and may not prove adequate, given the geopolitical tensions across North Africa and the Middle East. And when you combined that tension with the growing economy and the energy implications of the tragic events in Japan, and we come to the conclusion that exploration, development and production spending will increase, thus, raising our confidence that the second half of 2011 will set the stage for a strong 2012. So Gary, let's open it up for some questions.

All right. Thank you, Chad. At this point, I'll ask Ashley to open the line for your questions. To give everyone a fair chance to ask a question, we ask that you limit yourself to a single question and related follow-up question. Ashley, could we have the first question, please?

Our first question comes from the line of Kurt Hallead with RBC Capital Markets.

Well done on the margin front, congratulations. Now the real work begins. Chad, as you start to embark on hitting that midteens exit rate for next year, you mentioned that you feel very confident in the potential for E&P spending trends to pick up in the second half of the year. And I guess, let me just start by a bigger picture question, is given the fact that we had 90-plus dollar oil for almost a two-year period now and the outlook $400 oil being sustained for quite some time, how come in my mind why hasn't the customer base moved more aggressively to increase spend up to this point?

Well, I think everybody was sitting back trying to just watch this and see if it was real. You the general economy around the world, Kurt, that was in questions, so I think people were trying to watch which way that would go. I think it required a stimulus or something to kick it off. And I think, clearly, in this case, with Aramco announcing their increase followed very quickly by ADNOC in Abu Dhabi. And also, you've seen Brazil had been quite bullish for the last year. So I think that's what's been the stimulus behind us and kicked everything off.

Okay. Then in terms of from a spare key, you mentioned spare capacity on the oil production front. And what about the spare capacity on the oil field services front? Some of the -- your primary competitors here last week discussed the international market is still being extremely competitive from a pricing standpoint. I think Martin highlighted a couple of different areas where that was still the case. At what point do you think oil field service capacity will be sufficiently absorbed and you're being in a position now to have a little bit more pricing power?

I think by the end of this year, you'll see that. Last quarter, we talked about from an international standpoint, first there, we saw -- starting to get a little bit of tightness on some improvement on pricing was Russia. This quarter, we're starting to see it in the Middle East. We're starting to see a little bit of it in parts of Europe. So I think by the end of the year, services equipment, especially, is going to be tight and know people that will start getting some meaningful price improvement.

And then lastly, if I may, your exit rate for 11 once again is midteens on your international margin. Beyond that, where do you think -- where is your expectation and where you think you're taking on national margins in 2012?

Well, as we said in the conference, we're going to be competitive in 2012. So I think we'll have room to improve on that midteens in 2012.

Okay. Chad, thank you.

You bet.

And next question comes from the line of Bill Herbert with Simmons & Company.

I wanted to delve a little bit into North America for a sec here, Peter, recognizing that indeed we've got breakup in Canada on the one hand. On the other hand, however, you've got more benign weather conditions in lower 48. You've also got a Gulf of Mexico rig count which is up, probably going to be up pretty sharply quarter-on-quarter from the Q1 averages. And also, the March exit rate rig count U.S. land up pretty sharply relative to the Q1 average. So shouldn't U.S. at least offset the profit demise in Canada in Q2, when you roll all those elements up together?

Well, I think it's going to be close, Bill. I mean ,the Canada impact is absolutely huge. We're the biggest service company in Canada now. And it's a big drop, and it happens every Q2 and it only happens -- it's now, the impact is almost twice as big as what it used to be for Baker Hughes. But we do expect U.S. land to spring back to almost offset it, and we do expect the Gulf to come back. So it's going to be a close call. But we still expect revenues to be down sequentially in North America a bit. And whether or not the margins offset that, we'll know more in 3 month's time.

Time will tell, right. Remind us what percentage of North American revenues Canada represented in Q1, was it close to 25%?

A little less than 25%

Okay, 20% to 25%, thereabouts?

Yes.

Okay. Next topic here is with regard to your delivery of new frac capacity, Martin. Are we still at 40,000 horsepower every 6 weeks or has the supply chain improved? And walk us through the sort of leading-edge pricing dynamics on the frac front?

Because of our kind of late start, Bill, I have to remind you that really, this management team got involved in a lot of the capital planning in the third quarter of last year, right? And so we came out of the block as fast as we could. Our suppliers are working very closely with us. Your estimate that they were around 40 every 6 weeks is about what we did in the first quarter. We are heavily low backloaded in the second half of this year, and we have full expectation that we'll deliver what we budgeted. But we are backloaded in the second half because of late start. And in terms of pricing, we still see price improvement for incremental placement of equipment. And certainly, we would prefer to have a lot more coming out than we do. But it is what it is on the supply chain, and we just don't see any degrading of the price at this stage.

Neither do we. But is it fair to assume that with regard to your backend-loaded capacity delivery that we should be expecting improving net pricing with that equipment as it gets absorbed?

Yes, I think that's a good assumption.

All right, thanks very much, guys.

Our next question comes from the line of Angie Sedita with UBS.

Good quarter guys.

Thanks, Angie.

Chad, under your international margins, obviously, very impressive here in Q1 at 12.2%. And as you've stated, you want to get midteens by the end of the year. Could we be at 15% margins before Q4, potentially Q2 or even Q3 for international?

December 28, yes. I think a lot of that, Angie, is going to come on the first question from Kurt was on pricing, one where we start seeing some pricing movement. And we keep in mind, when we said the 15%, we want it -- that was our goal we're going to get to without a lot of price influence on that. So whatever we can get on price in Q3, Q4, will help us get there faster.

And so give us your thoughts on Q2 for international margins?

I think Q2 will be probably a little bit better than Q1, and we'll see our real benefit coming in Q3, Q4. And again, that comes based off in the volume side more than the price. So that's how we've got it plugged in.

Right, okay. And then regards to volume versus cost management and improving efficiency, how far along are you on your cost cutting efforts? Is it now 75%, or is it actually still close to the 50%? Where are we on that?

No, no. We, in fact, we're kind of surprised we did as well as we did in the first quarter on the cost side. We did better that we thought, so I think we're pushing more up onto the 90-plus percent on the cost and that's really pushing the efficiency supply-chain and volume.

Okay, okay, that's helpful. And then finally, on the Gulf of Mexico, clearly we picked at 33 rigs working before Macondo, and I believe we're at 13 today. Given the time to ramp up activity, what quarter should we begin to see a more meaningful impact on your numbers Q3, Q4? Is it 2012? And also, in Q3 of 2010, we saw a decremental margins of 50% to 60%. Could we see incremental margins ultimately at 50% to 60%?

Well, first, keep in mind that these 13 rigs are permitted, not necessarily working. So a couple of them have gone back, but we still not seeing all of those permitted rigs to go back. And the second wave of permits that sit out there, an additional 11 permits. Now we're kind of plugging in to hopefully come in sometime Q3, Q4. So total, you've got 20 plus, 21 rigs plus or minus out there. I don't think all of them will be back to drilling by the end of this year just simply because I think there's still going to be some challenges out there and some other things coming. But I think Q2, we're going to see a better Q2 than we saw in Q1. And hopefully, Q3 and Q4 will be building quite rapidly. And with the tightness of equipment, not just us, everybody out there, then yes, I think you'll start seeing some very nice incrementals flowing through, especially on early 2012.

All right. That match my expectations. Thanks so much, Chad.

Our next question comes from the line of Joe Hill with Tudor, Pickering. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Great quarter. I was pleased to see both international margin performance and the lack of any unusual items. It was a really clean quarter to go through.

Thank you. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Just kind of getting along some more esoteric lines, it's been about a year since you guys closed the BJ deal. And can you give us an update on how you feel your relative competitiveness is in the integrated ops area a year into BJ at this point and just compare it to where you were a year ago.

Well, a year ago, we closed it on the international side. And as Martin talked about, only 2 quarters ago, that we're able to close it on the U.S. side. And so I think you have to kind of -- although one may not be considered integrated ops, it definitely requires a lot of the combined services. So internationally, I think we're still doing -- we're doing better in some countries than others when it comes to integrated ops. Martin made a comment about a award in the Yamal Peninsula for a major Russian client that to me is probably one of the biggest single exploration wells I/O type package that I've ever seen being awarded, very complicated. And that was awarded to the entire group for us. You see what's happening in the Coil Tubing drilling project in Saudi Arabia, where we've got the BJ site in there, cementing and Coil Tubing, as well as all the Baker Hughes legacy equipment. We're seeing some good things down in Latin America and the Andean area, where we won several projects there. Martin talked about the project in Malaysia, where we won not only the reservoir evaluation study, but also all the services that are combined with that going forward. So I think we're gaining traction internationally on I/O and then domestically, where it's not really called I/O, again, I think the capital award up in the Marcellus, the other independent that was awarded, the independent down in Eagle Ford, I mean, these are total packages in covering everything from wireline to cementing to pumping, to Coil Tubing. And that was a little bit of combination of legacy Baker Hughes clients awarding the pressure pumping, and in a sense of pressure pumping BJ Legacy clients giving us the rest of the services. So I think we're just really starting to get into our stride. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Okay. And then, I noticed you guys have had some placements of the IN-Tallic product and you talked a little bit about OptiPort. Just from a conceptual standpoint, would you have expect the penetration of those products to have an impact on Coil Tubing demand in the lower 48?

Well, a lot of the OptiPort is more Canadian than it is lower 48. There's very little of that done in the lower 48. So I think it would be more a question of what could happen in Canada site. And as the IN-Tallic balls come on, clearly, once you get to the point where dissolving or decomposing the ball and eventually the inserts or the seats and taking those chokes out of there is a pretty efficient system. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Okay. So there would be less requirement for standby coil at that point?

Possibly, yes. But we're sold out of coil tubing units, so we can put them to work elsewhere. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Okay. That's good to hear. And finally, it looks like you've broken a little bit of the log jam in Angola with some contracts wins. Could we expect to see more activity there for you guys going forward?

Let's be patient here. These were -- there's a couple of nice wins, they were small, but it's a step in the right direction. As Martin said. It's going the right way. So I wouldn't count on Angola being a big 2011 play for us right now. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Okay, fair enough. That does it for me. Thanks.

Thanks, Joe.

Our next question comes from the line of Michael LaMotte with Guggenheim Partners.

Martin, if I could just follow up with you quickly on the U.S. and some cleanups on pressure pumping, where do we stand, vis-a-vis 24/7 operations?

Well, that's a good question, and I expected that. We're not where we want to be. And again, it's a capacity-constrained. It's a opportunity-rich. Several of our bases are running 24 hours, but not very many. And it's really a question of staffing at this stage. We're ramping up as quickly as we can, the market opportunities there, the customers are willing, but we're probably -- I don't know, maybe 10% to 20% of our fleet is able to accomplish that at this stage.

Okay, and in terms of the headcount, if I think about moving towards 24/7 and adding as much horsepower as you are over the next 3 quarters, are you seeing any challenges or difficulties on the hiring front and any wage pressure that we should be mindful of?

Well, I think, yes. I think that's a reality is that there is wage inflation. But we're -- as we said later we're able to get that back in the pricing. It's really the attraction of the talent. And we're all out there hiring as vigorously as we can, Michael. But yes, it's staffing these and staffing them right, that's the challenge. And we're all faced with it.

And what's the sort of nonproductive time on a new recruit? How long does it take to get them generating revenue?

Well, it depends on the individual, of course. On the engineering front, it could be pushing close to 9 months to a year. And then on the, let's say, the more conventional labor, it's probably 60 days.

Okay. Great. Thanks, Martin.

And our next question comes from the line of Stephen Gengaro with Jefferies & Company. Stephen Gengaro - Jefferies & Company, Inc.: Back to the international margin question, when you -- sort of laid out the plan looking at your goals your, what, 700 basis points through your 1,000 basis points of margin improvement already. And my sense from conversations at your conference was the supply-chain was really going to kick in the second half of the year. I guess 2 parts of the question. 1, are you surprised internally how good the quarter that you just reported was? And B, if you were, how should we think about maybe the upside to those targets?

Well, I wouldn't say that we were shocked at how good the quarter was. I made the comment, I think we were pleased that our cost control was a little better than what we anticipated, which was a nice benefit. But I think we had said in the last call that we felt that first quarter was going to be an improvement in the step and I think we even said in the last call that Q2 was probably not going to be the next inflection point. A little bit of improvement. We would really see that next inflection point from Q3 to Q4. So yes, we're happy with the quarter, especially in the cost front. I think our supply chain has not changed. I'll let Martin commented on this it's worth seeing. I think the supply chain is doing what we anticipate, I think every service company out there right now is probably pretty stretched and working hard. But we expect the benefits to really start showing up in Q3 Q4 on the supply-chain side. Martin, do you want to make a comment?

Yes, Steven. On the supply chain, it gets back to the whole reorganization that we triggered 2 years ago next month. We wouldn't have the capability to do any of what we're doing on the supply-chain had we not made that reorganization. And yet, this is probably not the market environment you want to be rewiring your entire supply chain in terms of the buoyancy we see in the market. But we are in a state of flux. And I'm real happy with the job that our people are doing out there on the manufacturing front, the logistics front, the sourcing front to keep us where we are. And your comment about this thing being more backloaded in the second half and into '12 is right. But we're on schedule on the supply-chain side. And in terms of your comment about were we surprised, I'll follow-up on Chad. No. I mean, this is why we pulled the trigger 2 years ago was to get closer to our customer, to have an integrated approach in solving their problems. And we told you -- told everybody at the Analyst Conference that the reorganization is done, and we're executing on what we've committed to. So this is what we expected to make happen. And We still see a lot more coming. Stephen Gengaro - Jefferies & Company, Inc.: Yes, directionally, we weren't surprised. The magnitude is what we were surprised by. When you look at the 3 sort of geographic regions internationally, is there any commentary you can give us as far as how they -- any materially better or worse than the others as we move through the rest of the year, as far progress?

Well, I think you will see continued improvement in the Middle East. The Middle East came back strongly in the Q1. Asia had its challenges, which we've heard from everybody as reported before, regarding weather and everything. And wages probably a tougher pricing front right now than about anywhere internationally we have. I think Middle East is going to do well. I think we've turned the corner, knock on wood, in Africa, where we've taken it back from where it was hurting us on the negative side to contributing. I think Latin America in the second half will continue to improve. And then Europe will do better in the second half. So I think with the exception of Asia right now, everyone is going in the right direction. And Asia, by the end of the year, I think you'll see with the tightness of equipment and people and etc cetera you'll start seeing that improvement in Asia. Stephen Gengaro - Jefferies & Company, Inc.: Great. Thank you.

And our next question comes from the line of Ole Slorer with Morgan Stanley.

Back to the rather impressive international margin expansion, so is it a bit fair to say that --because this is also volume driven given that your sequential revenue was down very modestly, was this then all to do with costs and your system is it now fully in place, there's no more incrementally to be collected there in the second quarter, is that the way to understand it?

I think you're pretty close to that. There won't be a lot of incremental on the cost side to collect in the second quarter, correct.

And was there, I mean, you had Latin America sequentials up 440 basis points, Europe up from just under 400, Middle East, Asia, 106. Some very impressive numbers there. Was there anything that was a one-off or kind of light on startup costs that will come back in the second quarter? Was there any kind -- anything unusual that will swing the other way? Did you borrow anything from the second quarter anywhere?

No, I think the big one, and Peter already hit it, the big one is Canada and...

Talking international first.

I considered Canada kind of international.

North America, okay. Not in North America.

No. We didn't have anything that was big on ramp up. I mean, I think what also probably helped us quite a bit we did have a lot of costs when we moved in the Coil Tubing drilling units into Saudi. These were 2 big investments to get in there, and that's done. They're up and running and doing extremely well right now and contributing. Iraq, we had some startup costs last year but a lot of what we're doing on Iraq is more on the workover, and we may have some things depending on awards coming forward, that will lower [ph] the debt, probably more of a Q3 event. So no, I don't think there was anything that was one-off. Martin, do you have...

Ole, I'd say to your comment on Latin America, Mexico was a real problem for us in the latter part of last year and stabilizing that patient helped a lot this quarter.

And looking forward into the next quarter, Martin. Is there anything that you see that will be a lumpy startup or some other unusual item that sequentially could depress margins in any region?

None come to mind. But this business, given the scale and the scope of where all the places we are, it's possible. But I honestly, nothing comes to mind at this stage.

The only area could be Russia on a couple I/O type projects we've been awarded. But I don't think they will be huge following.

Okay. So turning back to North America, you highlighted that just under 25% of your sales in Canada in terms of benefits from a seasonally very strong market. Yet, at 19.6% margin, you came in 400, 500 basis points maybe below the benchmark amongst the large-cap peers that you have and the pure play pressure pumping rental tool companies they are looking at margin in the high 20s. So does that then suggest that your U.S. business is significantly underperforming. And to what -- is that just a matter of having old equipment and that will improve as you get new equipment? Or is there something else that underlying should improve rapidly, more rapidly?

I think there's a couple things there, Ole. One is weather clearly hurt us. We were just sold-out specially in the pressure pumping area. When it came back, we weren't able to make up that difference for the couple of weeks that we lost. So that was -- it was a big one. The other one is keep in mind, one of the things we said is we wanted to have leading margins through the cycle. And part of that will mean -- because of our -- we got a significant part of our North American revenue that does come from the production side, the ESPs and the chemicals. And those will never -- you'll never see the margin improvement because the rig count goes up quickly on those 2 areas. So -- but I think also you'll see U.S. land bounce back very nicely in Q2 with much stronger margins, which will put us more back in that hunt. If you break it out on D&E versus -- and pressure pumping versus production-type chemicals, ESPs, et cetera, our directional, our drilling, our logging, our pressure pumping margins, I think are as strong as anybody's so.

So the momentum going into the second half of the year is going to be on the D&E and on production side on the ESPs, is that sort of the next leg to the story of margin in North America?

Well I think when you see the next point of leading through the cycle is when you see that -- eventually, if the rig count goes down or pressure pumping becomes very competitive and the chemical and ESP side of the business will stay very strong, and it will help us hold our margins better than perhaps some of the pure play pressure pumping companies and others.

Okay, well, thank you very much. It looks like you guys are in excellent shape.

All right, thanks, Ole.

Thanks, Ole.

And our next question comes from the line of Matt Conlan with Wells Fargo Securities.

Ole touched on what I was looking for as well on North America. So you're saying that the margin underperformance versus your competitors is mostly a mix issue on your total product lines?

Yes. I think it is a mix issue. I don't think it's a 1 quarter mix issue, I think it's a mix issue in the North American business.

Okay. And within that mix are the Canadian operation, which are stronger than we could have expected going in, are they inherently lower margin than the U.S. business at this point in the cycle?

No, not necessarily. I think Canadian also has a huge chemical ESP side of its business, with all the heavy oil and tar sands and other things up in the mining area.

So that's kind of disproportionate on the mix issue.

Yes, that's fair to say.

Okay, and quickly just on Mexico, you said it's stabilized there. But within that stabilization, was it a little bit worse or a little bit better than last quarter?

Better.

Okay, terrific. Thank you very much.

You're welcome.

Our next question comes from the line of Doug Becker with Bank of America.

Thanks. Chad and Martin, you've highlight the unconventional opportunity in the international markets, I guess specifically Europe and China. It seems like that type of activity is picking up a little bit faster than we would've expected. Could you just talk about the current size of that market for Baker and just maybe the potential, say, 2 or 3 years from now? When does that become an important driver of results?

Well, all in all, it's very small part of our business now, but I think you hit it on the head. In time, it's going to be a significant player. But I think you got to look at it by region. For instance, I think Eastern Europe is going to -- it will have some logistic issues and challenges in order to get its shale-type plays put together. It's going to take some time, quite a bit of time, I think, to develop that. Right now, it's mainly in clients trying to understand exactly what they have, do some drilling, some vertical drillings, some basic fracs and things to try to see what's there. China is probably going to be the area that takes off, with the Chinese demand and thirst for energy, and you know that they will not have a problem running pipelines across the country wherever else in order to transport this gas. We've been quite successful in China on our unconventionals. We recently by a major Chinese oil company there, we're awarded 2 big fields for their high-end technology support services, anything that has to do with things like premium FracPoint and so on in the horizontal drilling and the completions. If it becomes complicated, then we get called in. So we like our position in China. I think the other interesting area is Argentina, where there seems to be a lot of push right now. The other area still sits in the Middle East, where Saudi Aramco's got -- going to be looking at 6 different areas or 6 rigs to look at shale gas in the Kingdom. And I just got back from Oman meeting with the minister of petroleum there and they talked about their oil shale potential that they have, that they're looking at developing. So it's starting to take off internationally just like it did about 4 years ago for the gas side in the U.S. and now we're starting to see some of the oil interest international.

Hey, Doug, this is Martin. Let me just follow-up on Chad's comment about infrastructure. Recently we were in discussion with the pretty big operator in Argentina. And to spec out of a job, so it ever occurs say of which typically in Eagle Ford, it would've taken all of our horsepower and our 2 big competitors on the location together. And that's the limitation that's out there on some of this frac capacity. So the opportunities there, but I think we're talking years of evolution for it to get meaningful.

I mean, that said, say in 3 years, could it be something you start seeing show up in numbers?

That's still too short time period.

Well, I think every number is important, right? Every dollar we make. Is it going to show up? You bet. But is it going to become something that's, again, like North America? No, not for a couple of years. I don't think.

Okay. And then just a quick one on the U.K. North Sea. The North Sea has generally been a strong market for Baker Hughes. The tax increases got a lot of attention. You said something expect to have an impact on your business?

Our guide say they don't think that'll have of an impact until 2012. So we're not worried about it in 2011.

But it will have an impact in 2012.

Fair enough. Thank you.

Our next question comes from the line of Brad Handler with Credit Suisse. Brad Handler - Crédit Suisse AG: Thanks. Maybe I can draw you out, please, on the Eastern Hemisphere revenue side. The revenue number was stronger than we were looking at. You mentioned Iraq progress. But nevertheless, if I think about that kind of in the context of your 2, or just sort of your 2 big competitors, it really was a lot stronger. So were there's some areas that you can help us out with and also show some nice sequential revenue progression in the Eastern Hemisphere?

Yes. I think a couple come to mind. Abu Dhabi, Saudi, Russia did a little better than I think we were expecting for the quarter, revenue. What else? Martin do you think of any off the top of your head? The Eastern hemisphere, obviously, if you throw in Latin America, Brazil...

Central Europe and Brazil did well. Central Europe was normal.

Yes. Central Europe was up. And I think. I just don't think we were hit as hard in Asia perhaps as some of the competitors in Australia, so that probably helped us. Brad Handler - Crédit Suisse AG: Right, that makes sense. Was the sequential -- the year-end sort of the completion in wireline sales that you've historically enjoy in the fourth quarter, was that down, dip a little smaller than it has been in some years?

Well, we haven't sold a lot of wireline equipment so for several years now. We stop that quite a while ago...

There is no wireline sales...

That's not something that has affected us for several years.

A fairly completion to artificial load. Brad Handler - Crédit Suisse AG: Got you. Okay. All right. That's helpful. An unrelated follow-up, please? Can you speak to some of the pricing progression in the North American market away from pressure pumping? Some of your peers have been talking about a bit of a broadening, if you will, getting some pricing and some other product lines. I just appreciate your comments on that.

Yes, we've seen some price improvement in completions, especially in the premium-type FracPoint extended the reach on longer well completions. Billing services, directional and MWD and LWD have seen improvement. We've seen some in Drilling Fluids, a little bit in chemicals and ESPs and bits in the wireline side has basically been flat this last quarter. So we're seeing a trend in almost all the product lines seen a little improvement. Brad Handler - Crédit Suisse AG: Bits are getting some improvement, wireline is flat. Did I get that?

Yes. Bits, it's basically flat in Q1. We didn't see much price improvement in bits. And keep in mind, the shale drilling is not as good for the Bit business as perhaps some vertical or classic sands or other type areas. So you don't do as well on shales and bits as you do in other areas. Brad Handler - Crédit Suisse AG: Sure. That make sense. But just for perspective, and how -- so you saw some pricing in Q1, were you also seeing some pricing in Q4 or does this market have a bit of an inflection in some of those other products, like the drilling service products you just mentioned in fluids?

We saw some pricing in Q4 in drilling services. I think we're seeing a little bit -- in Q1, we were seeing some changes in Drilling Fluids and ESPs chemical side. Brad Handler - Crédit Suisse AG: Okay. Got it. Thank you. And then as you think about kind of where things are headed, do you see the tightness continuing in those across these service lines, pricing potential still pretty good, you think?

Well, I do, and I think in a couple of areas, we're going to have to have it. For instance, in chemicals, a lot of our feedstock and a lot of our raw materials on chemical side are hydrocarbon related. So some of our customers are also our suppliers. And they are not shy in terms of cranking up their price to us right now in the chemical side. So we're going to have to -- we've got some inflation happening out. We're going to have to pass on. But yes, I think we'll see some price improvement there. Brad Handler - Crédit Suisse AG: Okay, got it. Thanks for the answers, gentlemen.

All right, thanks, Brad. And since we've reached the bottom of the hour. We need to be respectful of other people that have conference call schedule. We'll go ahead and call the Q&A at this point. So thank you Brad and also thank you Chad, Martin and Peter. I want to thank everyone, all of our participants this morning for your time and your very thoughtful questions. Following the conclusion of today's call, Alexey and I will be available to answer any additional questions you have. So once again, thank you for your participation. Ashley?