baker hughes Annual Report 2007

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baker hughes Annual Report 2007

  1. 1. 2007 Annual Report To Stockholders Global Growth. Local Performance.
  2. 2. Investing for Growth Infrastructure To be a worldwide leader, we need a global presence, with the infrastructure and resources to serve both mature and emerging markets. Our goal is to deliver the right equipment and in-depth support to help our customers find hydrocarbons and maximize recovery from their reservoirs. We have demonstrated our commitment to supporting our customers’ operations around the world by opening new facilities in every region. And we will continue to invest to leverage opportunities and make our business grow. Technology New technology differentiates Baker Hughes as a leader in providing reliable products and services for oil and gas wells. Our technology begins with engineering, and it is driven by the passion of specialists creating superior tools and inte- grated systems to solve the toughest oilfield challenges. Our experts apply this technology to deliver unmatched results during the drilling, evaluation, completion and production processes. During the year, we increased our investments in research and engineering while significantly expanding our fleet of field equipment to serve customers worldwide. People People make the difference at Baker Hughes. Our team is made up of motivated professionals who are experts in their fields, are accountable for their actions, and who bring the highest level of integrity to everything they do. Working in a high performance culture, they produce results for our customers and create value for stockholders. We continue to invest in recruiting, training and development of the diverse workforce that will sustain our growth and build our global future. Additional information about the company is available on our website at http://investor.bakerhughes.com/annuals.cfm
  3. 3. Markets International Growth Russia Baker Hughes revenues in Russia nearly dou- bled in 2007 as a new country-management structure took effect. Highlights included side- tracking services in Western Siberia, new orders for ESP systems and chemical services, a growing wireline business and extended reach drilling records on Sakhalin Island. Libya As international companies re-enter the Libyan oilfields, Baker Hughes is positioned to serve the near-term exploration market with drilling and logging services while help- ing Libyan customers maximize production from mature fields with re-completion and artificial lift systems. Algeria In Algeria, Baker Hughes built on its strong position in standard products lines like drill bits, directional drilling, coring, wireline and completions to introduce higher-end technol- ogy. A large drilling optimization project opened new opportunities in the country’s gas-rich southwestern region. Brazil A major drilling and evaluation project with Petrobras resulted in substantial growth, sup- ported by investment in people, technology and a new operations facility. Innovative ESP subsea booster systems were successfully deployed in three deepwater fields. Drilling and Evaluation Segment Baker Atlas Hughes Christensen INTEQ Baker Hughes Drilling Fluids Baker Atlas provides Hughes Christensen is INTEQ provides real- wireline-conveyed well the leader in Tricone™ time services to help Baker Hughes Drilling logging, data analysis and PDC drill bits, ream- oil companies drill more Fluids provides fluids and perforating services while-drilling and casing efficiently, evaluate systems and services for formation evaluation, production drilling technology. Hughes Christensen geologic formations, and place wells that help optimize the drilling and and reservoir management. Baker Atlas application and design engineers work in productive zones within the reser- completion processes, maximize hydro- is a technology leader in wellbore imag- with customers to provide the best drill voir. Important technologies include carbon production and manage drilling ing, wireline formation testing and fluid bit for the application to continuously automated rotary steerable directional waste. Leading technologies include sampling, and magnetic resonance improve drilling performance. drilling systems, high performance environmentally compliant water-based logging services. drilling motors, and integrated and synthetic-based mud systems and logging-while-drilling assemblies. remediation fluids that can restore productivity from damaged wells.
  4. 4. Keys to Success Our Core Values Integrity – We believe integrity is the foundation of our individual and corporate actions. We are accountable for our actions, successes and failures. Teamwork – We believe teamwork leverages our individual strengths. We willingly share our resources as we work toward common goals. Performance – We believe performance excellence will differentiate us from our competitors. We work hard, celebrate our successes and learn from our failures. Learning – We believe a learning environment is the way to achieve the full potential of each individual and the company. India In India, Baker Hughes focused on deepwater offshore markets off both west and east coasts to substantially increase its business in directional drilling, logging-while-drilling, and wireline logging, as well as liner hanger and completion systems. Saudi Arabia Baker Hughes‘ drilling, evaluation and com- pletion technology has enabled Saudi Aramco to pursue an aggressive strategy of using hor- izontal and multilateral wells to achieve maxi- mum contact with the reservoir and increase recovery from new and existing fields. Qatar Baker Hughes‘ strengths in drilling and com- pleting large diameter wells helped operators in Qatar develop the country’s substantial nat- ural gas reserves. Intelligent Well Systems™ technology was applied to produce two zones from a deep oil well. Malaysia Baker Hughes investments to provide high- end services for deepwater fields resulted in new business, including a large direc- tional drilling project for an international operator. An advanced drilling fluids labora- tory began operations, and fiber optic perma- nent well monitoring systems were installed in two wells. Angola Advanced drill bit, rotary steerable and formation evaluation technologies supported deepwater drilling operations, as the oilfield chemical business expanded in Cabinda and on the Kizomba project. Initial application of new well remediation fluid dramatically improved production on two wells. Completion and Production Segment Baker Oil Tools Baker Petrolite Centrilift ProductionQuest Baker Oil Tools provides Baker Petrolite provides Centrilift is a leading ProductionQuest helps industry-leading well chemical technology provider of electrical customers maximize completion and inter- and services for hydro- submersible pump (ESP) recovery from both new vention solutions that carbon production, systems for artificial lift, and mature fields. The improve efficiency, reduce risk and transportation and processing. For as well as web-based well monitoring unit provides permanent monitoring, optimize production. A comprehensive upstream customers, engineered chem- services. New technologies include chemical automation, and Intelligent Well Systems™ to optimize production. product line includes liner hanger and ical programs address oil/water sepa- pump systems for harsh downhole It also delivers project management ser- packer systems, sand control technol- ration, corrosion, gas-well dewatering environments, and systems that vices that integrate technologies from ogy, horizontal completion solutions, and other production problems. For address subsea production, oil sands Intelligent Well Systems™ and tools and , all Baker Hughes divisions to meet downstream customers, chemicals and and coalbed methane applications. services for fishing, re-entry, remedia- client needs. technical services enhance plant pro- tion and stimulation operations. cesses, manage water treatment, and help ensure pipeline integrity.
  5. 5. 2007 Annual Report 1 Selected Financial Highlights Year Ended December 31, 2007 (In millions, except per share amounts) 2006 2005 2004 2003 As Reported: $ 10,428.2 Revenues $ 9,027.4 $ 7,185.5 $ 6,079.6 $ 5,233.3 2,277.8 Operating income 1,934.3 1,233.4 816.4 557.0 1,513.9 Income from continuing operations 2,398.6 874.4 525.3 175.8 Income before cumulative effect 1,513.9 of accounting change 2,419.0 879.3 528.6 134.5 1,513.9 Net income 2,419.0 878.4 528.6 128.9 Per share of common stock: Income from continuing operations: $ 4.76 Basic $ 7.26 $ 2.58 $ 1.57 $ 0.52 4.73 Diluted 7.21 2.56 1.57 0.52 Net income: $ 4.76 Basic $ 7.32 $ 2.59 $ 1.58 $ 0.38 4.73 Diluted 7.27 2.57 1.58 0.38 0.52 Dividends 0.52 0.48 0.46 0.46 Number of shares: 315.4 Outstanding at year end 319.9 341.5 336.6 332.0 318.0 Average during year 330.6 339.4 333.8 334.9 Reconciliation from As Reported to operating profit: $ 1,513.9 Income from continuing operations $ 2,398.6 $ 874.4 $ 525.3 $ 175.8 – Non-operational items, net of tax (1) (1,035.2) – – 150.1 $ 1,513.9 Operating profit after tax (2) $ 1,363.4 $ 874.4 $ 525.3 $ 325.9 Per share of common stock: Operating profit after tax: $ 4.76 Basic $ 4.12 $ 2.58 $ 1.57 $ 0.97 4.73 Diluted 4.10 2.56 1.57 0.97 Cash, cash equivalents and $ 1,054.4 short-term investments $ 1,103.7 $ 774.0 $ 319.0 $ 98.4 3,837.7 Working capital 3,345.9 2,479.4 1,738.3 1,210.5 9,856.6 Total assets 8,705.7 7,807.4 6,821.3 6,416.5 1,084.8 Total debt 1,075.1 1,087.9 1,162.3 1,484.4 6,305.6 Stockholders’ equity 5,242.9 4,697.8 3,895.4 3,350.4 17% Total debt/equity ratio 21% 23% 30% 44% 35.8 Number of Employees (thousands) 34.6 29.1 26.9 26.5 Note: The above excludes the results of Baker SPD, Baker Hughes Mining Tools, BIRD Machine, EIMCO Process Equipment, and our oil producing operations in West Africa, all discontinued businesses. Includes gain on sale of our interest in affiliate, restructuring charges and reversals and impairment of investment in affiliate. Additional information of each item can (1) be found on our website at www.bakerhughes.com/investor. Operating profit after tax is a non-GAAP measure comprised of income from continuing operations excluding the impact of certain non-operational items. We believe (2) that operating profit after tax is useful to investors because it is a consistent measure of the underlying results of our business. Furthermore, management uses operat- ing profit internally as a measure of the performance of our operations. Total Operating Profit 2007 Revenues by Region Total Revenues Total Debt After Tax Per Share (Diluted) 2005–2007, by Quarter 2005–2007, by Quarter (In millions) 2005–2007, by Quarter (In millions) $3,000 $1.40 $1,200 Canada, 5% $1.20 $2,500 $1,000 Asia Pacific, 9% $1.00 Middle East, 10% $2,000 $800 Russia, Caspian, 6% $0.80 $1,500 $600 USA, 36% $0.60 $400 $1,000 Africa, 9% $0.40 Europe, 15% $200 $500 $0.20 Latin America, 10% $0 $0 $0 2005 2006 2007 2005 2006 2007 2005 2006 2007
  6. 6. 2 Baker Hughes Incorporated To Our Stockholders In the fourth year of the current growth Baker Hughes also repurchased 6.4 mil- cycle, Baker Hughes achieved record reve- lion shares of common stock in 2007, at nues, exceeding $10 billion for the first time, an average price of $81.25, for a total of while also earning its highest annual operat- $521.5 million. At the end of 2007, the ing profit. We are pleased with the progress company had authorization remaining to we have made in growing our business in key repurchase approximately $824.0 million geographic markets, particularly in the East- in common stock. On December 31, 2007, ern Hemisphere, which contributed $879 mil- Baker Hughes had 315.4 million shares out- lion in incremental revenue during the year. standing and $1.054 billion in cash and At the same time, market growth in North short-term investments. America slowed as natural gas inventories reached record high levels and changes in Segment Results the Canadian royalty structure discouraged Drilling and Evaluation revenues were drilling activity. $5,293 million in 2007, up 14% from In 2008, we will continue to grow glob- $4,661 million in 2006. Operating profits ally. To drive growth in 2007, we invested in before tax of $1,396 million in 2007 were infrastructure at our technology centers and 12% higher than the $1,242 million for in operations facilities in emerging markets; this segment in 2006. Highest growth was in technology, through increased Research & achieved by the directional drilling, logging- Chad C. Deaton Engineering spending and capital expendi- while-drilling and wireline logging product tures for rental equipment; and in people, both lines at INTEQ and formation evaluation prod- through recruiting and development programs. uct line at Baker Atlas. Drilling and Evaluation We also understand the need to optimize segment pre-tax operating margin was 26% our organization for improved profitability in for 2007 and 27% in 2006. an increasingly competitive market. Completion and Production revenues grew by 18% to $5,135 million in 2007 from $4,367 million in 2006. The segment’s oper- Record Financial Results Baker Hughes had revenues of $10.4 billion ating profits in 2007 were $1,112 million, up in 2007, up from $9.03 billion in 2006. Our 18% from $942 million in 2006. The pre-tax operating profit was $1.514 billion or $4.73 per operating margin for both 2007 and 2006 diluted share, compared to $1.363 billion or was 22%. Growth in the Completion and $4.10 per diluted share in 2006. Production segment is consistent with the For the full year in 2007, the company’s industry’s increased emphasis on maximizing net income was $1.514 billion or $4.73 per recovery from oil and natural gas reservoirs. diluted share, compared to $2.419 billion Our completions and electrical submersible or $7.27 per diluted share in 2006, which pump (ESP) product lines at Baker Oil Tools included a $1.035 billion after tax gain from and Centrilift, respectively, had the highest the sale of our 30% interest in the Western growth rates, while the specialty chemical Geco seismic business to Schlumberger Ltd. business at Baker Petrolite also achieved Capital investment of $1.127 billion in steady gains. The ProductionQuest production 2007 was up 22% from $922 million in 2006. optimization business unit, which was formed Of the total investment, 49% was devoted in 2006, achieved solid revenue growth in 2007. to rental tools and equipment in global oper- ations, 12% was used to build new facilities Regional Performance as part of our worldwide expansion, and 39% In 2007, Baker Hughes continued to was spent on expanding engineering and implement our strategy of increasing our manufacturing capacity. presence and growing our business in key countries where the long-term growth poten- tial is the highest. In 2005, we organized our operations into four geographic regions to
  7. 7. 2007 Annual Report 3 Baker Hughes achieved record revenues, exceeding $10 billion for the first time, while also earning its highest annual operating profit. We are pleased with the progress we have made in growing our business in key geographic markets, which contributed $879 million in incre- mental revenue during the year. have a consistent approach in each market In late 2006, Baker Hughes placed all its across our product lines and to place decision- operations in Russia under the leadership of making authority closer to our customers. This a senior Baker Hughes executive in the role organization, in combination with our signifi- of President, Baker Hughes Russia. Though it cant investments in infrastructure, equipment was a departure from the Baker Hughes divi- and people, resulted in significant growth in sional business model, the country manage- our targeted markets. ment structure was considered the most effective way for us to operate in the Russian market. To support the new organization, Latin America Revenues in the Latin America region, Baker Hughes increased its investment in facil- which includes Mexico, Central and South ities, equipment and people in Russia. Subse- America, increased 20% in 2007 to $990 mil- quently, Baker Hughes has provided services lion from $827 million in 2006. for all the major Russian production asso- Increased business in Brazil, where reve- ciations and national companies, including nues were up 65% for the year, was the most Gazprom and Rosneft, as well as interna- important factor in the region’s growth during tional companies operating in the country. the year. A significant project to provide high- During the year, Baker Hughes gained end directional drilling and logging-while- integrated project management business, drilling services to Petrobras in its Marlim serving a national oil company on nine rigs Sul and Roncador deepwater fields started with sidetracking services using drill bits, up during the year. To support this activity, directional drilling and measurement-while- Baker Hughes built a new, larger facility at drilling technology, as well as casing exit the Macaé service base, invested in field and completion equipment and services. equipment and hired and trained 134 local Our Russian operations also received orders engineers and technicians. for INTEQ directional drilling services, sand Also in Brazil, Centrilift has applied its control completions, and Centrilift ESP sys- advanced ESP subsea booster system tech- tems for horizontal wells in the newly devel- nology to help Petrobras produce efficiently oped Vankor field in Eastern Siberia. Our from its Jubarte, Espadarte and Golfinho production optimization experts from Baker deepwater fields. Oil Tools and ProductionQuest installed two Baker Hughes also gained business in Intelligent Well Systems in the Valdelp field in Colombia through increased industry activity Western Siberia. Hughes Christensen began and Mexico through increased market share. servicing a drill bit management program for This Annual Report to Stockholders, including the letter Revenue in Venezuela was up slightly during TNK-BP’s Orenburg, Nyagan and Samotlor to stockholders from Chairman Chad C. Deaton, contains the year even though international oil com- business units. The Russian wireline logging forward-looking statements within the meaning of Section 27A panies were re-evaluating their positions and perforating business grew rapidly in of the Securities Act of 1933, as amended, and Section 21E in the country in light of contract revisions Western Siberia and from Sakhalin Island, of the Securities Exchange Act of 1934, as amended. The imposed by the government and the national with services conducted both by Baker Atlas words “will, “expect, “should, “scheduled, “plan, “aim, ” ” ” ” ” ” oil company. and our ONGF subsidiary. In addition, Baker “ensure, “believe, “promise, “anticipate, “could” and ” ” ” ” Petrolite gained production chemical business similar expressions are intended to identify forward-looking in Siberia and in the Arctic region. Europe, Africa, Russia, Caspian statements. Baker Hughes’ expectations regarding these matters are only its forecasts. These forecasts may be sub- Revenue in the Europe, Africa, Russia, In Astrakhan in southern Siberia, Baker stantially different from actual results, which are affected Caspian (EARC) region was $3,066 million Hughes Russia helped Gazprom and its by many factors, including those listed in ”Risk Factors“ and for 2007, up 24% from $2,473 million drilling subsidiary Burgas drill a well below “Management’s Discussion and Analysis of Financial Condi- in 2006. While the North Sea and other Euro- 13,000 feet, through difficult formations tion and Results of Operations” contained in Items 1A and 7 pean markets still accounted for about 50% where vertical drilling is extremely challeng- of the Annual Report on Form 10-K of Baker Hughes Incor- of the region’s revenues during the year, a ing. Baker Hughes provided integrated opera- porated for its year ended December 31, 2007. The use major contributor in the region’s growth dur- tions on the project, which included INTEQ’s of “Baker Hughes, “our,” “we” and similar terms are ” ing the year was an 80% increase in revenue VertiTrak™ vertical drilling system, Baker not intended to describe or imply particular corporate in Russia. Hughes Drilling Fluids PERFORMAX™ and organizations or relationships.
  8. 8. 4 Baker Hughes Incorporated Latin America » Centrilift demonstrated INTEQ expanded operations significantly in Brazil as it that its ESP technology began operations on a major deepwater directional can create value in sub- drilling and LWD contract. INTEQ is drilling and evalu- sea applications with ating complex horizontal wells using AutoTrak™ the successful startup rotary steerable systems and advanced measure- ments like the TesTrak™ formation pressure tester. of booster systems in three of Brazil’s deep- water fields. Deepwater activity in Brazil contributed to Baker Hughes growth in Latin America.
  9. 9. 2007 Annual Report 5 Drilling and Evaluation revenues were up 14% in 2007 compared to 2006, and operating profits were 12% higher as pre-tax operating margins averaged 26% for the year. Highest growth was achieved by the directional drilling, logging-while-drilling and wireline logging product lines. PENETREX™ mud systems, and Hughes Saudi Arabia has been leading growth for Christensen’s Genesis™ ZX technology PDC Baker Hughes in the Middle East, with activity drill bits. increasing rapidly and revenue nearly tripling Finally, INTEQ helped Exxon Neftegas Lim- since 2005. Baker Hughes technology has ited drill the world’s longest Extended Reach enabled Saudi Aramco to pursue an aggres- Drilling (ERD) well from Sakhalin Island, using sive strategy of applying horizontal wells to the AutoTrak system and a full range of log- achieve “maximum reservoir contact” and ging-while-drilling services to reach a total maximize production from new and existing depth of 37,014 feet. In early 2008, INTEQ fields. Our drill bit technology, rotary steerable helped ExxonMobil break this record with an systems, logging-while-drilling, remote oper- extended reach well of 38,322 feet, and ations centers and high performance fluid Baker Oil Tools installed a record-length liner systems have been applied on up to 30 rigs to complete the well. simultaneously in the Kingdom. Baker Hughes also made gains in Africa Baker Oil Tools has applied a wide range during 2007, with significant growth in Alge- of completion equipment in Saudi Arabia, ria, Libya, Equatorial Guinea and Angola. In including Intelligent Well Systems in multilat- Algeria, INTEQ gained a six-rig integrated ser- eral wells and high-pressure, high-temperature vice contract to provide well engineering, as completion strings for deep gas wells. Our well as tools and services in a new gas field in EQUALIZER™ inflow control device for horizon- the southwestern region of Algeria. In Libya, tal wells has been installed in nearly 200 miles Baker Hughes gained market share by provid- of horizontal hole in the country, helping max- ing products and services to serve the emerg- imize oil recovery and limit water production. ing exploration market while helping Libyan In Qatar, revenues increased 58% from oil companies maximize production from 2006, as Baker Hughes applied drilling, for- Latin America Revenues 2005–2007, by Quarter mature fields. In Equatorial Guinea, Baker Oil mation evaluation and completion technolo- (In millions) Tools performed more than 50 frac pack well gies to help develop the country’s significant $300 completions using its Modular Stimulation natural gas reserves. Vessel technology. In China, Baker Hughes provided technol- $250 In Angola, Baker Hughes Drilling Fluids ogy and service for extended reach drilling $200 scored a significant success by providing and sand control completions for both inter- $150 MICRO-WASH™ remediation fluid to signfi- national and national oil companies offshore $100 cantly restore productivity from two deep- in Bohai Bay and the South China Sea. Suc- $50 water wells where oil based drilling fluids had cess on these ongoing projects helped Baker impeded flow from the reservoir. This technol- Hughes gain work onshore for a national $0 2005 2006 2007 ogy has strong prospects for 2008 as its use oil company. Excellent performance in geo- in additional wells is planned in West Africa steering a horizontal well in the Jidong field and the Middle East. helped establish an agreement to provide ongoing services in the area. INTEQ also introduced its VertiTrak™ vertical drilling sys- Middle East, Asia Pacific Baker Hughes‘ revenues in the Middle tem to drill difficult formations onshore China. East, Asia Pacific (MEAP) region increased Baker Hughes‘ business in India increased 17% during the year, reaching $2,015 mil- 29% in 2007 compared to 2006, as our oper- lion, up from $1,729 million in 2006. This ations serviced ONGC, Reliance and other growth was paced by activity in Saudi Arabia, operators in deepwater markets. Qatar, China, India and Malaysia. In Malaysia, revenues climbed 86% from We are excited about opportunities to 2006 as we provided drilling fluids to deep- expand our business in the Middle East, and water rigs, INTEQ began a 50-well directional our focus on this market showed positive drilling project for Talisman Malaysia, Baker results in 2007. Atlas delivered high-end logging services, and
  10. 10. 6 Baker Hughes Incorporated Completion and Production revenues grew 18% and the segment’s operating profits also were up 18% from 2006. Rapid growth in the Completion and Production segment is consistent with the industry’s increased emphasis on maximizing recovery from oil and natural gas reservoirs. ProductionQuest installed fiber optic well rebounds. Baker Petrolite’s business in the monitoring systems in two wells for the Canadian tar sands grew as the division national oil company. provided chemicals and services for Steam Assisted Gravity Drainage (SAGD) and oil mining operations. North America North America remains our largest region. Revenues of $4,358 million in 2007 were up Investing in Infrastructure 9% compared to $4,000 million in 2006. As a leading global service company, The average North America rotary rig Baker Hughes recognizes the need to invest count was essentially flat from 2006 to 2007 for growth in three areas: infrastructure, tech- at 2,111 rigs. While the total U.S. rig count nology and people. was up 7%, the average offshore rig count We are investing in our infrastructure to dropped 19% year to year, ending the year at establish and reinforce our global presence 64 rigs. Historically high gas storage levels and to support our engineering and manufac- slowed the growth in natural gas-directed turing programs. drilling, while high oil prices prompted an In 2007, we invested $130 million in increase in drilling for oil. new and upgraded facilities. During the year, Baker Hughes participated in unconven- we added or expanded 25 operations facilities tional gas development activities by drilling in 12 countries, including a major support Europe, Africa, Russia, Caspian Revenues 2005–2007, by Quarter and completing horizontal wells in the Barnett base in Macaé, Brazil. In Dubai, we recently (In millions) and Woodford shale plays in North Texas and opened a new complex that includes our $900 Oklahoma. Business for Baker Petrolite and Middle East, Asia Pacific region headquarters, $800 Centrilift was generally strong throughout our Eastern Hemisphere Education Center, a $700 North America as demand for their production- Middle East operations office and repair facil- $600 related products and services grew despite a ity, and a well screen manufacturing plant. $500 $400 flat rig count. In the Rocky Mountains, Baker We also have completed the first phase $300 Petrolite foamer treatments and Centrilift of our Center for Technology Innovation in $200 pump technology were utilized to remove Houston, a world-class facility focused on the $100 water from gas wells to enable them to development of completion and production $0 2005 2006 2007 produce efficiently. technologies. The center has unique capabili- In the Gulf of Mexico, Baker Hughes ties for testing well completion components participated in the deepwater market with a at extremely high pressures and temperatures. wide range of services. Baker Hughes Drilling During the year, we also expanded our tech- Fluids introduced its new RHEO-LOGIC™ nology center in Celle, Germany and added synthetic based system on wells as deep as manufacturing capacity for our completions 29,500 feet. Baker Oil Tools installed several product lines in the United States. Intelligent Well Systems including five at Our investment in infrastructure will water depths greater than 8,000 feet. continue through 2008 as we build our Centrilift provided ESP systems for subsea global platform for accelerated growth in boosters and riser lift systems in waters up 2009 and beyond. to 8,960 feet deep. Development drilling activity in Canada Investing in Technology dropped significantly in 2007, as the Alberta As a key element in our growth strategy, government imposed higher royalties and the we also increased our investment in technol- average rig count fell 27% from 2006 levels. ogy during the year. Research and Engineer- In response, Baker Hughes adjusted its oper- ing (R&E) spending in 2007 was $372 million, ating structure and staffing levels, and relo- up 10% from $339 million in 2006. More cated key personnel to other markets, while than 60% of R&E activity was directed at preserving our ability to respond when activity new product development. Baker Hughes teams also conducted joint research projects
  11. 11. 2007 Annual Report 7 Europe, Africa, Russia Baker Hughes Drilling INTEQ helped Exxon Neftegaz Limited set the world Fluids applied its record for the deepest extended reach well, drilling MICRO-WASH ™ reme- a hole with a measured depth of more than seven and the Caspian » diation fluid to restore miles from the Yastreb rig on Sakhalin Island, Russia. significant oil produc- On the Sakhalin I project, Baker Hughes has drilled tion from two dam- 13 of the world’s 15 longest extended reach wells. aged wells in Angola. A Baker Atlas logging crew arrives on location in Siberia.
  12. 12. 8 Baker Hughes Incorporated Middle East and INTEQ has provided advanced directional drilling Baker Oil Tools services and Baker Oil Tools has delivered sand has installed nearly control completions on hundreds of wells in China’s 200 miles of horizontal Asia Pacific » Bohai Bay and South China Sea. Hughes Christensen completions using EQUALIZER™ systems drill bits have set drilling records offshore China and in Saudi Arabia, have helped Baker Hughes penetrate the competitive assuring consistent onshore market. production over long horizontal wells. INTEQ began a large directional drilling project offshore Malaysia in 2007.
  13. 13. 2007 Annual Report 9 In 2007, Baker Hughes continued to implement our strategy of increas- ing our presence and growing our business in key countries where the long-term growth potential is the highest. Our regional organization and our investments in infrastructure, equipment and people resulted in significant growth in our targeted markets. with major customers, including Shell, BP, In 2007, we also implemented a consis- StatoilHydro, Chevron, Eni and Saudi Aramco. tent, web-enabled performance management Of our total capital expenditures of system across the enterprise to provide a for- $1.127 billion in 2007, $443 million was mal approach to creating and maintaining a devoted to field equipment to upgrade and high performance culture. expand our ability to serve our customers. Our succession planning process, estab- For example, we added new small-diameter lished in 2004, proved effective at filling key rotary steerable systems for slimhole horizon- positions during the year, including a group tal wells, advanced formation imaging and president and three division presidents. We logging-while-drilling systems, new wireline also named 10 operations and marketing logging systems and modular pumping units vice presidents at the divisions, including for gravel pack completions. two women. We continue to seek acquisitions to expand our technology portfolio, especially Settlement with DOJ and SEC in the areas of reservoir analysis and produc- In April 2007, Baker Hughes reached tion management. parallel settlements with the United States Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) to resolve Investing in People Baker Hughes‘ workforce grew rapidly in the investigations, disclosed in 2002 and 2006, adding 5,500 employees in an effort to 2003, into Baker Hughes’ operations in take advantage of new market opportunities. Angola, Kazakhstan and Nigeria. The total In 2007, the company continued to recruit payments to settle these investigations and hire employees, but at a slower pace, so were $44.1 million, for which the company that we added 1,200 employees to the com- recorded a reserve in the fourth quarter pany by year end. of 2006. Middle East, Asia Pacific Revenues In 2006 and 2007, we have made a con- The company entered into a Consent 2005–2007, by Quarter siderable investment in training and develop- Judgment with the SEC and a Deferred Prose- (In millions) ing these new employees. In addition to cution Agreement with the DOJ, under which $600 expanded classroom and online training for the government will not further prosecute the $500 virtually every technical discipline, we invested company for these activities if the company in programs to identify and develop young meets the condition of the agreement for two $400 leaders. Our Engineering Development Pro- years. The company has hired an independent $300 gram, a two-week program for newly hired monitor to oversee its compliance activities $200 engineers, had conducted 34 sessions by for a three-year period. $100 year end, instructing 680 graduates from Since the commencement of these investi- 42 countries about the oil and gas industry gations in 2002, Baker Hughes has cooper- $0 2005 2006 2007 and Baker Hughes. Of the total, 13% were ated fully with the SEC and DOJ. We con- female engineers; we are working to increase ducted our own rigorous investigation and the number of women in our technical work we have openly shared our findings with force. Our Cornerstone programs for supervi- these agencies. The acts which resulted in sors and managers have involved more than these enforcement actions were contrary to 1,600 employees in leadership and manage- our Core Values, our policies and our expecta- ment training during 2007. tions for ethical behavior. The company has Baker Hughes also has established a terminated employees and commercial agents technical career ladder for engineers and that it believes were directly involved. In addi- scientists who want to pursue careers as tion, we have further strengthened the com- individual contributors in their fields. This pliance culture within the company by making program is designed to develop and retain extensive improvements and enhancements to creative minds whose contributions are our compliance program. critical to the company’s future.
  14. 14. 10 Baker Hughes Incorporated Most industry forecasts project that the world’s hydrocarbon demand will grow by more than 50% in the next 20 years. To satisfy this grow- ing energy need, oil and gas companies will require the innovation and technologies from companies like Baker Hughes to meet the tech- nical challenges of finding and producing hydrocarbons from new and existing reservoirs. The significant steps we have taken over Our finance function was reorganized the past few years to strengthen our global so that division finance vice presidents now compliance program will play an important report directly to the chief financial officer role in reinforcing this company’s strong instead of the business unit presidents to reputation for integrity and ethical behavior. improve efficiency and consistency and to For example, all management employees enhance our ability to comply with account- and employees working in financial roles have ing regulations. undergone required training regarding busi- After a six-month evaluation, we restruc- ness ethics and legal compliance, with partic- tured our Human Resources organization to ular emphasis on meeting the requirements provide stronger direction from the corporate of the Foreign Corrupt Practices Act (FCPA). center and to shift resources to support In addition, we launched a global “Completely region operations. Compliant” campaign to remind all Baker Late in the year, we named a new presi- Hughes employees of their obligation to com- dent for our ProductionQuest business unit ply with all policies, laws and health, safety and expanded its production optimization and environmental requirements. role to include responsibility for integrated Now that we have settled the investiga- services. Previously, our integrated operations tions with the DOJ and SEC, we are able to and project management group was focused pursue acquisitions, and refocus on imple- primarily on well construction activities. With menting our strategy for growth and profit- our customers’ increasing emphasis on max- ability. At the same time, the Deferred imizing recovery from existing fields, there Prosecution Agreement and the costs associ- is a growing demand for production-related ated with the independent monitor and rigor- project management, as well. ous compliance program will have an ongoing In 2008, we will balance our investment impact on our business. in growth with a renewed effort at cost man- agement, keeping a tight reign on administra- tive costs and discretionary spending. We will Optimizing the Organization North America Revenues 2005–2007, by Quarter The Baker Hughes business model has manage our headcount to match activity, and (In millions) been based on strong product line divisions we will continue to develop our local work $1,200 focused on providing specific products and force internationally to control costs and to services to our customers. In 2005, we increase our local content in countries where $1,000 enhanced this approach by establishing two we do business. We expect our Eastern Hemi- $800 segments and by aligning our global opera- sphere Education Center in Dubai to have a $600 tions into four consistent regions with man- strong positive impact by improving our ability $400 agement teams closer to our customers. In to train and develop employees from emerg- 2007, we took several other steps to optimize ing markets. $200 the organization to improve bottom-line $0 2005 2006 2007 results and sustain growth. Outlook To strengthen management visibility over Looking ahead, the global fundamentals global operations, I asked our Group Presi- for the upstream oil and gas industry remain dents, David Barr and Martin Craighead, to strong. Most industry forecasts project that each take financial responsibility for two of the world’s hydrocarbon demand will grow our operating regions in addition to oversee- by more than 50% in the next 20 years. To ing their product line segments. David will satisfy this growing energy need, oil and gas provide leadership for the Middle East, Asia companies will increase their spending on Pacific region and the Europe, Africa, Russia, exploration, development and production. Caspian region and will office in Dubai for They will require the innovation and technolo- six months of each year. Martin will lead the gies from companies like Baker Hughes to North America and Latin America regions. meet the technical challenges of finding and
  15. 15. 2007 Annual Report 11 North America » Baker Oil Tools Intelli- Baker Petrolite made steady gains in North America, obtaining new contracts for its FATHOM ™ deep- gent Well Systems water flow assurance programs in the Gulf of helped a major inde- Mexico and providing innovative FOAM™ solutions pendent produce oil for dewatering gas wells in the Rocky Mountains. efficiently from five In Canada, Baker Petrolite pursued the tar sands wells in more than market with treatments used during oil mining and 8,000 feet of water in SAGD operations. the Gulf of Mexico. INTEQ introduced new coiled tubing drilling technology for re-entry drilling in Oklahoma and the Texas Panhandle.
  16. 16. 12 Baker Hughes Incorporated value we create for our customers. Managing costs will be another priority in 2008, with the objective of maintaining acceptable mar- gins as we continue to invest in growth. James R. Clark Retires Baker Hughes President and Chief Operat- ing Officer James R. “Rod” Clark retired from the company on January 31, 2008. I want to personally thank Rod for his significant contri- bution to Baker Hughes. The Baker Hughes executive management team includes (left to right): David H. Barr, Vice President and Group President, Completion and Production; Peter A. Ragauss, Senior Vice President and Chief Financial Officer; Opportunities for Growth Chad C. Deaton, Chairman, President and Chief Executive Officer; Alan R. Crain, Senior Vice President and In conclusion, I believe that 2008 will General Counsel; Didier Charreton, Vice President, Human Resources; and Martin S. Craighead, Vice President be a year of transition for the oilfield service and Group President, Drilling and Evaluation. industry. After a year of moderate growth, we expect activity to accelerate. Global hydrocar- bon demand will continue to increase as producing hydrocarbons from new and known oil and gas reserves decline, so oil and existing reservoirs. gas companies will need to find new fields While the long-term projections for E&P and maximize production from existing assets. spending are strong, we expect the growth Many new offshore rigs, under construction rate to moderate this year. In North America, today, will be delivered over the next few for example, we expect a modest increase in years, enabling growth in deepwater markets. activity in 2008 as strong drilling activity has All of this points to strong prospects for this brought natural gas production growth industry for many years to come. With this roughly into balance with demand growth. opportunity in mind, Baker Hughes will con- In this environment, we expect our Comple- tinue to invest in infrastructure, technology tion and Production segment to benefit, as and people to service the growing demand customers seek to optimize production. We in 2009 and well past the end of the decade. expect North America activity to pick up in 2009. Sincerely, Outside of North America, we expect our revenues to increase in the low to mid-teens in 2008, as international operators develop reserves in the Middle East, Russia, Africa Chad C. Deaton and Asia. Chairman, President and We expect deepwater drilling activity Chief Executive Officer to remain flat at least until 2009, when the first new deepwater rigs will begin entering the market. Facing a somewhat slower anticipated overall growth rate in 2008, we will continue to work to attain pricing in keeping with the
  17. 17. Baker Hughes Incorporated Notice of Annual Meeting of Stockholders April 24, 2008 To the Stockholders of Baker Hughes Incorporated: The Annual Meeting of the Stockholders of Baker Hughes Incorporated (“Company” “Baker Hughes” “we” “us” or “our”) will , , , be held at the Plaza Banquet Room located at 2777 Allen Parkway, Houston, Texas on Thursday, April 24, 2008, at 9:00 a.m., Cen- tral Daylight Time, for the purpose of considering and voting on: 1. Election of Twelve Directors; 2. Ratification of Deloitte & Touche LLP as the Company’s Independent Registered Public Accounting Firm for Fiscal Year 2008; 3. Approval of the Performance Criteria for Awards under the 2002 Director & Officer Long-Term Incentive Plan; and 4. Such other business as may properly come before the meeting and any reconvened meeting after an adjournment thereof. The Board of Directors has fixed February 25, 2008 as the record date for determining the stockholders of the Company entitled to notice of, and to vote at, the meeting and any reconvened meeting after an adjournment thereof, and only holders of Common Stock of the Company of record at the close of business on that date will be entitled to notice of, and to vote at, that meeting or a reconvened meeting after an adjournment. You are invited to attend the meeting in person. Whether or not you plan to attend in person, we urge you to promptly vote your shares by telephone, by the Internet or, if this Proxy Statement was mailed to you, by completing, signing, dating and returning it as soon as possible in the enclosed postage prepaid envelope in order that your vote may be cast at the Annual Meeting. You may revoke your proxy any time prior to its exercise, and you may attend the meeting and vote in person, even if you have previously returned your proxy. By order of the Board of Directors, Sandra E. Alford Corporate Secretary Houston, Texas March 12, 2008 TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE (i) vOTE YOUR SHARES BY TELEPHONE OR THE INTERNET, OR (ii) If YOU REcEIvEd A PAPER cOPY, THEN SIGN, dATE ANd RETURN YOUR PROXY AS PROMPTLY AS POSSIBLE. AN ENvELOPE, WHIcH REQUIRES NO POSTAGE If MAILEd IN THE UNITEd STATES, IS ENcLOSEd fOR THIS PURPOSE.
  18. 18. PROXY STATEMENT TABLE Of cONTENTS Proxy Statement....................................................................................................................................................................... 1 Voting Securities ...................................................................................................................................................................... 2 Proposal No. 1, Election of Directors ........................................................................................................................................ 3 Corporate Governance ............................................................................................................................................................ 5 Security Ownership of Management ........................................................................................................................................ 8 Charitable Contributions .......................................................................................................................................................... 9 Compliance with Section 16(a) of the Securities Exchange Act of 1934 ................................................................................... 9 Compensation Discussion and Analysis .................................................................................................................................... 9 Executive Compensation .......................................................................................................................................................... 23 Summary Compensation .................................................................................................................................................... 23 Grants of Plan-Based Awards ............................................................................................................................................. 24 Outstanding Equity Awards at Fiscal Year-End .................................................................................................................... 25 Option Exercises and Stock Vested ..................................................................................................................................... 26 Pension Benefits ................................................................................................................................................................ 26 NonQualified Deferred Compensation ............................................................................................................................... 27 Potential Payments Upon Termination or Change in Control .............................................................................................. 27 Director Compensation ............................................................................................................................................................ 38 Compensation Committee Report............................................................................................................................................ 39 Compensation Committee Interlocks and Insider Participation ................................................................................................. 39 Audit/Ethics Committee Report ................................................................................................................................................ 39 Proposal No. 2, Ratification of the Company’s Independent Registered Public Accounting Firm ............................................... 40 Fees Paid to Deloitte & Touche LLP........................................................................................................................................... 40 Proposal No. 3, Approval of the Performance Criteria for Awards Under the 2002 Director & Officer Long-Term Incentive Plan ................................................................................................................................................... 41 Annual Report ......................................................................................................................................................................... 42 Incorporation by Reference ...................................................................................................................................................... 43 Stockholder Proposals .............................................................................................................................................................. 43 Other Matters .......................................................................................................................................................................... 43 Annex A – Policy for Director Independence, Audit/Ethics Committee Members and Audit Committee Financial Expert........... A -1 Annex B – Audit/Ethics Committee Charter ............................................................................................................................. B -1 Annex C – Guidelines for Membership on the Board of Directors ............................................................................................ C -1 Annex D – Stockholder Communications with the Board of Directors ...................................................................................... D -1 Annex E – 2002 Director & Officer Long-Term Incentive Plan, as amended .............................................................................. E -1
  19. 19. 2007 Proxy Statement 1 PROXY STATEMENT reflected on the voting form from a bank or brokerage firm that accompanies this Proxy Statement. If your shares are held This Proxy Statement is furnished in connection with in an account at a bank or brokerage firm that participates in the solicitation of proxies by the Board of Directors of Baker such a program, you may direct the vote of these shares by Hughes Incorporated, a Delaware corporation (“Company,” the Internet or telephone by following the instructions on the “Baker Hughes,” “we,” “us” and “our”), to be voted at voting form enclosed with the proxy from the bank or broker- the Annual Meeting of Stockholders scheduled to be held age firm. Votes directed by the Internet or telephone through on Thursday, April 24, 2008 and at any and all reconvened such a program must be received by Mellon Investor Services meetings after adjournments thereof. LLC by 11:59 p.m. Eastern time (10:59 p.m. Central time) on Information About the Notice of April 23, 2008. Directing the voting of your shares will not Internet Availability of Proxy Materials affect your right to vote in person if you decide to attend the meeting; however, you must first request a proxy either on the In accordance with rules and regulations recently adopted Internet or the voting form that accompanies this Proxy State- by the Securities and Exchange Commission (the “SEC”), we ment. Requesting a proxy prior to the deadlines described may now furnish to our stockholders proxy materials, including above will automatically cancel any voting directions you have our Annual Report to Stockholders, on the Internet. On or previously given by the Internet or by telephone with respect about March 12, 2008, we will send electronically an annual to your shares. meeting package personalized with profile and voting informa- The Internet and telephone proxy procedures are designed tion (“Electronic Delivery”) to those stockholders that have to authenticate stockholders’ identities, to allow stockholders previously signed up to receive their proxy materials via the to give their proxy instructions and to confirm that those Internet. On or about March 12, 2008, we will begin mailing a instructions have been properly recorded. Stockholders autho- Notice of Internet Availability of proxy materials (the “E-Proxy rizing proxies or directing the voting of shares by the Internet Notice”) to those stockholders that previously have not signed should understand that there may be costs associated with up to receive their proxy materials on the Internet. If you electronic access, such as usage charges from access providers received the E-Proxy Notice by mail, you will not automatically and telephone companies, and those costs must be borne by receive a printed copy of the proxy materials or the Annual the stockholder. Report to Stockholders. If you received the E-Proxy Notice by Shares for which proxies have been executed will mail and would like to receive a printed copy of our proxy be voted as specified in the proxies. If no specification materials, you should follow the instructions for requesting is made, the shares will be voted fOR the election of such materials included in the E-Proxy Notice. nominees listed herein as directors, fOR ratification Registered stockholders may also sign up to receive future of deloitte & Touche LLP as the company’s Indepen- proxy materials and other stockholder communications elec- dent Registered Public Accounting firm for fiscal year tronically instead of by mail. In order to receive the communi- 2008 and fOR approval of the performance criteria for cations electronically, you must have an e-mail account, access awards under the 2002 director & Officer Long-Term to the Internet through an Internet service provider and a web Incentive Plan. browser that supports secure connections. Visit http://www. bnymellon.com/shareowner/isd for additional information regarding electronic delivery enrollment. Stockholders with shares registered in their names with Mellon Investor Services LLC may authorize a proxy by the Internet at the following Internet address: http://www.proxyvoting.com/bhi, or tele- phonically by calling Mellon Investor Services LLC at 1-866-540-5760. Proxies submitted through Mellon Investor Services LLC by the Internet or telephone must be received by 11:59 p.m. Eastern time (10:59 p.m. Central time) on April 23, 2008. The giving of a proxy will not affect your right to vote in person if you decide to attend the meeting. The Company will bear the cost of any solicitation, whether by Internet or mail. In addition to solicitation, certain of the directors, officers and regular employees of the Com- pany may, without extra compensation, solicit proxies by tele- phone, facsimile and personal interview. The Company has retained Laurel Hill Advisory Group to assist in the solicitation of proxies from stockholders of the Company for an antici- pated fee of $8,500, plus out-of-pocket expenses. A number of banks and brokerage firms participate in a program that also permits stockholders to direct their vote by the Internet or telephone. This option is separate from that offered by Mellon Investor Services LLC and should be

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