Baker Hughes Company (BKR) Q4 2012 Earnings Report, Transcript and Summary

Hello. My name is Dawn, and I will be your conference facilitator. At this time, I would like to welcome everyone to Baker Hughes Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Mr. Trey Clark, Vice President of Investor Relations. Sir, you may proceed.

Thank you, Dawn. Good morning, everyone. Welcome to the Baker Hughes Fourth Quarter 2012 Earnings Conference Call. Here with me today is our President and CEO, Martin Craighead; and Peter Ragauss, Senior Vice President and Chief Financial Officer. Today's presentation and the news release that was issued earlier today can be found on our website at bakerhughes.com. Additional reconciliation of operating profit and non-GAAP measures to GAAP results for historic periods can also be found on our website in the Investor Relations section under Supplemental Financial Information. During today's presentation, I must caution you that any company outlooks discussed this morning are subject to various risk factors. We'll try to highlight these risk factors as we make these forward-looking statements. However, the format of the call prevents a more thorough discussion of these risk factors. For a full review of these risk factors, please refer to the Baker Hughes' SEC filings and in particular, the forward-looking disclosure in this morning's news release. With that, I'll turn the call over to Martin Craighead. Martin?

Thanks, Trey, and good morning. This morning, Baker Hughes reported record annual revenue of $20.9 billion, including an 11% increase in our international segments and a 5% increase in our North America segment. Much of this growth can be attributed to the new products and services we've brought to the market, especially in the deepwater and unconventional plays, as well as solid operational performance in the Gulf of Mexico and our international businesses in Europe, Africa Russia and the Middle East. In North America, we experienced challenging market conditions for most of the year, including the oversupply of pressure pumping capacity and activity levels in Canada that were below expectations. Later in the call, I'll provide more detail on these markets. In the near term, we are focused on improving the quality of earnings by positioning Baker Hughes as the partner of choice in a business environment where customers are pressured to reduce their finding and development costs, but also improve their ultimate recoveries even as they expand into harsher and more challenging frontiers. In these market conditions, customers turn to those companies that can deliver differentiating products and technology, products like our FracPoint sliding sleeve system and our steerable drilling liner technology and of course, our AutoTrak Curve rotary steerable system, which just hit another impressive milestone bypassing 3 million feet drilled in the U.S. alone since being launched less than 2 years ago. These products differentiate, and they are becoming increasingly important to our customer and our own income statement. That's why we continue to increase our investment in technology and new product development and accelerate the commercialization of new products. I'll speak to these items more in a few minutes, but first, I'll turn the call over to Peter to give more detail on the quarter and full year's results. Peter?

Thank you, Martin, and good morning. Before I start the review of our financial results, I'd first like to remind everyone of last quarter's announcement pertaining to our Process and Pipeline Services business. This business was reclassified to discontinued operations in our financial statements, and all prior periods were restated. For purposes of today's call, I'll only be discussing financial results from continuing operations. This morning, we reported income from continuing operations for the fourth quarter of $211 million or $0.48 per share. This includes a $63 million or $0.14 per share reserve for bad debt in Latin America. Excluding this reserve, income from continuing operations would have been $274 million or $0.62 per share. Revenue for the fourth quarter was $5.2 billion, which is flat compared to the previous quarter, as deteriorating market conditions in North America were offset by record revenues in all of our international segments. EBITDA for the fourth quarter was $841 million, down 2% sequentially, including the additional bad debt reserve in Latin America. As Martin highlighted, we posted record revenue of $20.9 billion for the year, which is up approximately 8% or $1.5 billion from the prior year. This was the result of strong growth in every region of the world, with the exception of Canada, which experienced a 13% reduction in market activity. Adjusted EBITDA for the year was $3.7 billion, and adjusted income from continuing operations was $1.32 billion or $3 per share. On a GAAP basis, income from continuing operations for the year was $1.28 billion or $2.90 per share. To help in your understanding of the quarter's results, I'll bridge last year's earnings per share to this quarter. In the third quarter, we posted earnings from continuing operations of $0.60 per share. First, add back $0.10 for previously identified items in the third quarter. That brings us to a third quarter adjusted earnings per share from continuing operations of $0.70. Next, add back $0.06 for bad debt reserves recognized in Latin America and Europe in the third quarter. Subtract $0.14 for North America operations due to a sharp decline in activity towards the end of the fourth quarter and further erosion of pressure pumping pricing. Add $0.08 for international Operations, primarily due to share gains, increased activity and year-end product sales in our international regions. Subtract $0.02 for higher corporate costs and interest expense, and subtract $0.06 for a higher effective tax rate, primarily due to a change in our geographical mix of earnings. At this point, our operational earnings per share would have been $0.62. However, due to additional reserves in Latin America, we subtract another $0.14. That brings us to $0.48 per share. In Table 5 of our earnings release, we provide adjusted financial information, including the impact of identified adjusting items on each region's results in the fourth quarter of 2011 and the third quarter of 2012. In this point on in the conference call, any comments on revenue, operating profit and operating profit margin refer explicitly to Table 5 unless otherwise stated. Revenue in North America was $2.6 billion, down $183 million or 7% sequentially. North America operating profit was $222 million, around $99 million sequentially. As a result, North America operating profit margin was 8.7%, in line with recent guidance. Our North America operational performance can be summarized into 4 main points: First, in the U.S. and Canada, the pressure pumping product line continued to face margin pressure with further pricing degradation. These unfavorable price conditions were partially offset by a sequential reduction in our guar costs and continued improvements in our efficiency. Second, some of our other U.S. product lines experienced a reduction in activity as rig counts declined sharply towards the end of the quarter due to customers shutting down early for the holiday period. However, activity levels for our production product lines remained strong with Upstream Chemicals and artificial lift posting near record revenues and profits during the quarter. Third, in Canada, our operations were also significantly impacted by one major customer who shut down all of their Canadian drilling and completion operations during the quarter. And fourth, the Gulf of Mexico continued to perform well, as deepwater activity levels continued to increase. Moving to international results, each of our international segments experienced increased activity and posted record revenue in the fourth quarter. In aggregate, revenue was $2.5 billion, up $178 million or 8% versus the prior quarter and up $195 million or 9% compared to a year ago. International operating profit was $261 million, up $13 million sequentially, including the reserve in Latin America of $63 million previously highlighted. Excluding these reserves in the third and fourth quarters, international operating profit was up $47 million sequentially. Reported international operating profit margin was 10.6%, down 20 basis points sequentially. Excluding the impact of bad debt in Latin America, international operating profit margins would have been 13.1%. This is an increase of 110 basis points sequentially and modestly higher than recent guidance. Focusing on each of our international segments, our Europe/Africa/Russia Caspian segment delivered the highest revenue, operating profit and operating profit margin in the last 3 years. Sequentially, revenue increased $84 million or 10% with operating profits improving $52 million, excluding the $6 million reserve for bad debt in Europe in Q3. Operating profit margins were 18.2% in the fourth quarter. The revenue and profit increase is primarily associated with strong activity in year-end product sales in Africa and Russia. Activity gains in Continental Europe were partially offset by rig delays in Norway early in the quarter. Turning to the Middle East, Asia-Pacific segment, we also saw sequential revenue growth increasing $38 million, primarily due to increased activity in Iraq, the Arabian Gulf and Australia. Operating profit, however, was flat sequentially as result of continued start-up and logistics costs in Iraq, along with frac fleet mobilization costs in Saudi Arabia to support upcoming unconventional work. And in our Latin America segment, we achieved sequential revenue improvement of $56 million or 10%. This increase is primarily due to year-end product sales and activity improvements in the Andean region and Mexico offset by reductions in Brazil as the active rig count there declined 10%. Excluding the impact of bad debt in Q3 and Q4, operating profits decreased $3 million to an overall operating profit margin of 11.1%. For our Industrial Services segment, which now excludes the Process and Pipeline Services business, revenue was $191 million, down $2 million sequentially, and operating profit was $21 million, up $6 million sequentially. Operating profit margins were 11% in the fourth quarter. Increased profits were primarily due to a mix of sales, with good performance from our downstream chemicals group. Turning to the balance sheet, for the quarter, we were free cash flow positive. During the quarter, we reduced receivables in each of our oilfield operating segments, resulting in a net accounts receivable decrease of $283 million. This translates into a 5-day reduction in our days sales outstanding. At the same time, we also reduced our inventories by $108 million from the prior quarter. Capital expenditures for the quarter were $714 million, resulting in a total of $2.9 billion for 2012. Our positive cash flow was used to pay down short-term debt. Total debt was $4.9 billion, down $229 million from the prior quarter. As a result, the total debt-to-capital ratio declined 1 percentage point to 22%. We ended the quarter with a balance of $1 billion in cash. Now let me provide you with our guidance for 2013, starting with rig counts. For North America, we project the average annual rig count will decline by 5% or 125 rigs compared to 2012. In the U.S., relative to the fourth quarter 2012 exit rate of 1,763 rigs, we anticipate that the rig count will be flat during the first quarter of 2013 and then modestly rebound throughout the remainder of the year to a final 2013 exit rate of 1,880 rigs, comprised of approximately 1,420 oil rigs and 460 gas rigs. On average, compared to 2012, expect the annual U.S. rig count to decline by 5% this year. U.S. rig count includes offshore rigs, which are expected to increase 8% to 52 rigs in 2013. This includes an increase of 4 deepwater rigs compared to 2012. In Canada, the first quarter rig count is projected to sequentially improve 38% to 511 average rigs. This would be 13% below the average from the first quarter of 2012. Canadian rig counts in the second half of the year are currently forecast to be similar to the second half of 2012, resulting in an average annual rig count decline of 8% in 2013. Looking internationally, the average rig count is anticipated to grow to 1,383 rigs in 2013 led by Latin America, the Middle East and Asia Pacific. Excluding Iraq, this would represent a 7% increase in the international rig count. Our international revenue and margins are expected to improve in 2013. However, these typically drop in the first quarter due to seasonally lower product sales and weather disruptions. For the year, solid revenue and margin growth is anticipated in our Eastern Hemisphere operations. The Middle East, Asia-Pacific segment should see the most significant growth, as we continue to build our integrated operations in Iraq and Saudi Arabia. And recent share gains in the North Sea and East Coast of Africa will drive growth in our Europe/Africa/Russia Caspian segment. In Latin America, our activity is expected to increase in Mexico, Argentina and the Andean region, partially offsetting reductions in Brazil, which are expected to occur in the middle of the year. For the year, Industrial Services activity should remain stable with margins ranging between 10% and 12%. Since Industrial Services no longer includes the Process and Pipeline Services group, we expect much less seasonality. Looking at interest expense, we expect it to be between $210 million and $220 million for the full year. Corporate costs are expected to be between $280 million and $290 million, which is a reduction of $10 million to $20 million compared to last year. Depreciation and amortization expense is expected to be between $1.5 billion and $1.6 billion. Capital expenditures for the year are now expected to be about $2 billion, which is a reduction of approximately 30% year-over-year or $900 million. We are reducing our spend in pressure pumping horsepower and infrastructure significantly. Our rental tool spend is expected to be flat year-on-year. Total CapEx will be allocated approximately 35% to North America operations and 45% to international operations. The balance will support our Global Products and Services group, IT and other corporate functions. And finally, our annual tax rate is expected to be between 32% and 33%. At this point, I will now turn the call back over to Martin. Martin?

Thanks, Peter. I'd like to provide an overall update and outlook on the business, starting with North America. At current commodity prices, we expect activity to remain stable this year and as our customers keep a cautious outlook. We predict that the average North American rig count will be down compared to last year. However, this decline will be partially offset by continued gains in rig efficiencies that can be attributed to increased pad drilling, a more modernized rig fleet and a continued absorption of new drilling completions and production technologies that we are bringing to the market. On the last earnings call, we reported that rig efficiencies in the U.S. have improved about 15% during 2012. This year, we project roughly another 10% increase in wells per rig compared to 2012. In addition to rig efficiencies, our customers will focus increasingly on production enhancement. For example, in the past, the drilling and completion design of a well was defined by the reservoir, while artificial lift consideration was usually dealt with years later. Today, Baker Hughes is working with U.S. customers to engineer artificial lift solutions during the well planning stages, and by planning for production enhancement techniques upfront, we're helping our customers improve ultimate recovery. Now I'd like to comment on some of the various operations in North America. First, to Canada, which is a meaningful part of our North American business. Many of our customers continue to deal with constrained cash flows from low natural gas prices and an abundance of projects that are marginally profitable. Our U.S. shale oil production, coupled with decreasing consumption and limited refining and pipeline capacity, is increasing differentials for heavy oil close to $40 a barrel. Considering that break-even prices for new heavy oil projects can be as high as $65 a barrel, we believe that some of these projects in Canada are at near-term risk. Given this, Canadian customers are focused squarely on conserving cash and increasing returns on capital. And until industry fundamentals change -- and the biggest driver to that is improvement and takeaway capacity -- Canadian activity will remain challenged. As you would expect, we're adjusting our 2013 plans to mirror the projected activity levels. Now these cycles are nothing new in Canada, and once again, value-adding technologies, which can lower an AFE or increase production rates are critical to our customers. Some of our technologies that are instrumental to this include the Talon and Kymera drill bits, rotary steerable systems, resistivity imaging services, steam additives for SAGD applications and next-generation OptiPort and FracPoint completion tools. As for the pressure pumping market, based on our estimates, the U.S. market has about 20% to 25% too much horsepower, which translates into at least 125 fleets across the sector that are currently idle or underutilized in some capacity. All else being equal, the U.S. would need at least 300 additional drilling rigs to come back online in order to get those idle fleets fully up and utilized. Of course, any increase in drilling activity will improve fleet utilization. As we discussed in previous calls, Baker Hughes began overhauling this very important product line a year ago. At the beginning of 2012, about 20% of our fleets were working 24-hour shifts. Today, I'm pleased to say that we've nearly doubled that. We've lowered costs by improving our supply chain and moving our infrastructure closer to the centers of activity. In fact, we opened 6 new facilities last year. We invented and then rapidly commercialized alternatives to guar in order to offset the cost and volatility of that particular commodity. Our newest products, MaxPerm and CLEARSTAR, are replacing as much as 20% of our total guar consumption today. And we've introduced new biofuel engines that leverage technology to drive efficiency and bring environmental gains. Most importantly, we're winning the right kind of work with the right customers, and I expect further improvements in all these areas through 2013. In addition to these important actions, technology and product integration are key value enhancers for our customers and for Baker Hughes. As an example, our reservoir solutions team in the U.S. are working directly with customers to optimize frac designs, using advanced formation evaluation data from Baker Hughes' wireline services. These teams are able to identify the most productive zones in the well. In one particular case, we proposed a non-geometric completion design resulting in fewer stages than the geometric design deployed on several other wells. This particular result was outstanding, and the customer realized increased production and a significant cost reduction. This is a great example of how we are winning work by providing more than just stages through integrated solutions to our customers. Another example of our initiative to improve the economies of shale is our recently announced collaboration with CGGVeritas. We are working together to integrate their geophysical capabilities with our petrophysical and geomechanical expertise to significantly improve operator economics in shale and type plays. And we're confident this collaboration has the potential to expand our capabilities around full field development. Our Gulf of Mexico operations continue to perform exceptionally well. Activity is increasing, our share is improving, and we are being rewarded for game-changing technologies such as advanced wireline formation sampling, Kymera drill bits and next-generation completion systems. The growing mix of development work will continue to benefit Baker Hughes' sizable Completions business. Let me share a recent example of this. After 2 years of research, an integrated engineering team from our pressure pumping and completion systems product lines successfully designed and deployed a next-generation, multizone, single-trip frac system for a customer operating in the lower tertiary. This new system allows for multiple fracs during a single trip in these HPHT environments and was installed 50% faster when compared to traditional techniques. In addition to the engineering achievement, the operational execution was flawless, and we set an industry record for installation depth for this type of a system. And as a result, this customer has ordered additional systems for the Gulf of Mexico, and the system is also on order for West Africa and Asia Pacific. Now turning to our international business, in Norway, we rapidly mobilized resources during the quarter to begin executing on our new contract. Clearly, this is a huge market, and we're pleased to enter the new year as the leading provider of drilling services in this technically challenging offshore environment. Also last quarter, we successfully deployed a steerable drilling liner system in the North Sea that integrates our Rotary steerables technology with our proven liner hanger systems by pulling the liner behind the bottomhole assembly while drilling. This saves our customer a couple of days of completions time, but it also enables them to tap reserves in underpressured mature fields without the risk of lost circulation. The product will differentiate in environments where wellbore stability issues previously impeded our customer's ability to reach deeper reservoirs. In addition, we've begun work on a new development project in the Barents Sea. A delineation well was drilled in the fourth quarter, and we are now embarking on drilling the second well of a 22-well program providing drilling services and completion systems. Logistics, maintenance and basic support for our growing business in the Norwegian Arctic will be provided out of our new facility in Hammerfest. In Africa, we've opened a new facility in Mozambique in order to support recent contract awards there these, and these share gains in East Africa will position Baker Hughes as a leading supplier of drilling services for this growing region. In Latin America, we were awarded a major contract in Brazil to provide integrated services for a deepwater exploration campaign in the Santos Basin. Baker Hughes will provide drilling, evaluation, completion, pressure pumping and artificial lift technologies and services. In Asia Pacific, we were awarded a series of well construction contracts during the quarter, including awards for drilling services in Indonesia and the Cooper basin of Australia. We also secured a direct award for multiple deepwater exploration wells in the South China Sea, and this represents a major expansion of our position in the Chinese offshore market. We're also continuing to grow and refine our integrated operations business in the Middle East. During the fourth quarter, we mobilized multiple rigs in Saudi Arabia to support our new operations in Shaybah. We also added rigs in Iraq and exited the year with 7 operational rigs and intend to mobilize 2 additional rigs this quarter. We expect to see profitability improve in Iraq as we progress in 2013. This will be the result of reduced logistics costs and improved operating efficiency. We do not expect Iraq to be accretive to our Middle East margins this year due to the high percentage of past due revenue associated with this type of work, but we do expect Iraq to contribute to earnings in the second half of this year. As we've said before, our establishment of our strong foothold in one of the world's key hydrocarbon producing regions is of strategic importance, and I remain confident in our ability to execute and improve our financial performance there. Now let me provide some final thoughts on the year ahead. While we see a reduction in North America onshore spend led by continued weakness in pressure pumping pricing, it will be more than offset by growth in the Gulf of Mexico and in international markets. And what I like about that is that half of that increased spend will be in drilling and completions product lines. The task of finding and efficiently producing oil and gas is not getting any easier for our customers. We all know that -- about the challenges of maximizing recovery from deepwater reservoirs. And while much has been said and written on the abundance and real potential of unconventional reservoirs, the fact remains that these reservoirs present their own unique set of challenges for our customers, ranging from environmental to economic to operational. Harvesting both unconventional and deepwater opportunities in the future will require customers to leverage a portfolio of leading-edge products and services and basin-specific expertise from their service providers. And given Baker Hughes' reputation for innovation, product design, service excellence and service integration, we are very well positioned to help customers most effectively monetize their reservoir assets. And to that end, first, we remain committed to leading in technology and innovation, which is why we will increase our investment in R&D in 2013. Second, we will grow our expertise in reservoir development in integrated operations around the world. And third, we will expand our core service offering to include critical capabilities and emerging technologies. And finally, we continue to remain firmly committed to improving both our return on capital and the quality of earnings. Before we open it up for questions, on behalf of Baker Hughes, let me offer my condolences to the families around the world who have lost loved ones in the tragedy in Algeria. Many of these individuals were customers and colleagues. Baker Hughes does not have any employees at that facility, and our thoughts are with those who have been impacted by this tragic event. And with that, Trey, let's go ahead and open it up for some questions.

Thank you, Martin. At this point, I'll ask Dawn to open the lines for your questions. [Operator Instructions]

[Operator Instructions] Our first question comes from James West from Barclays.

Martin, in your comments, your prepared comments, a lot of commentary around North America, also in Peter's comments as well. Some of it, I guess, negative. Some of it Baker Hughes specific, positive. As we think about an environment where you are introducing new technologies, you are getting an improving customer mix, you do see the Gulf of Mexico being a good driver of growth. Yet, U.S. land rig count down, maybe completions are up in that scenario, still pricing challenges and pricing weakness spreading out. How should we think about margin progression kind of off of this fourth quarter level? Is that the low? Or are we stuck in this kind of single-digit range? Or should we kind of bounce back off this as we go through the year as some of the positives in your mix and in your business come through?

Well, this is Peter. I'll answer first and maybe Martin can supplement that. But we think the Gaum is going to progress nicely. We've got good share positions there. We've had a 30% increase in revenues last year, and that -- and revenue should continue to move forward in the Gaum. Canada, of course, bounces around with seasonality, should be up in Q1, should be down sharply in Q2, and the second half looks like second half of last year. So that leaves you with 2 other variables, which are the pressure pumping business in U.S. land and our other product lines in U.S. land. And other product lines seem to be holding up in U.S. land, haven't had much pricing pressure there yet, so that's been pretty good. And we expect the rig count to continue to improve throughout the year, so those product lines right now look like they're pretty stable and pretty good. And I think the big variable is what happens in pressure pumping, whether or not pricing continues to decline and outpaces our cost savings. We are expecting guar cost to improve further into Q1, and they did improve in Q4, so that's good. But pricing's been pretty much eating up those savings in recent quarters, so that's the big volatility, and we're not going to try to make a call on that right now.

Okay. So Peter, do you think that given that the rig count -- you just said the rig count to improve that you're greater than, I guess, your peers' exposure to the spot market for pressure pumping? Is it -- would it be a net positive? Or is that a net negative for you?

Well, James, this is Martin. Now we do...

I know it's a tough question.

Well, we do expect the -- as Peter said, the rig count to improve from here on out slightly, more towards the back half of the year than the early part. And -- but on a year-on-year average, it's down. And in terms of the pricing, we have been and continue to be probably still a little bit more exposed to the spot market and that price environment is continuing to weaken. It's not -- I don't think it's found bottom yet. I think it's a tough thing to call. The flip-side of that is we're -- I don't think we have as much price decline opportunity versus, let's say, in operator or service company that's got still a -- more of a contract mix. So with the year-on-year decline in the rigs, a little bit more pricing softness in that particular product line, it's -- as Peter said, it's a little difficult to say exactly where it's going to end up.

Our next question comes from Bill Herbert from Simmons & Company. William A. Herbert - Simmons & Company International, Research Division: Martin, with regard to your international commentary here, it sounds like EAC and MEAP up or expected to be up reasonably nicely in 2013 and Latin America, probably down year-over-year. If I heard you correctly, you said Andean, Mexico, everything but Brazil, only partially offsets the declines in Brazil. So when you -- when that -- how does that distill into an overall international top line growth rate for 2013? Is it high single digits with kind of EAC and the Middle East, Asia Pacific, up maybe high single low double and Latin America, down low single. Is that about right?

Yes, I'd say that's pretty reasonable, Bill. William A. Herbert - Simmons & Company International, Research Division: Okay. And then we didn't talk much about margins. You were flat year-over-year in 2012. Historically, we've talked about kind of the current environment, which is mostly sort of volumetric driven, very selective pricing and hopefully, some mix opportunities as well, distilling into, call it, 20% to 25% incremental margin environment internationally. Is that what we should assume for 2013?

Yes, it might be a bit better than that, but I think that's a reasonable number from here on out. William A. Herbert - Simmons & Company International, Research Division: Okay. And last one for me, Peter, year-end product sales, I think Q4 2011, we witnessed kind of a $50 million contribution quarter-on-quarter. Was that roughly in the ballpark for this fourth quarter? Or was it a bit better than that?

In terms of contribution margin? William A. Herbert - Simmons & Company International, Research Division: No, no, no. In terms of top line fourth quarter versus third quarter.

Oh no, it was better than that. I would say much of the sequential improvement in revenues internationally was year-end product sales, and it's pretty much spread across the 3 regions, pretty strong, I think we said in our remarks in Africa and Russia, strong in Asia Pacific and strong in Latin America. So therefore, we would expect that to reverse out into Q1. William A. Herbert - Simmons & Company International, Research Division: Sure. So the of the $178 million revenue improvement quarter-on-quarter, call it, at least 50% of that was year-end product sales on pretty high incrementals?

Yes, more than 50%.

Our next question comes from Kurt Hallead with RBC Capital Markets.

I wanted to -- I want to focus my question on the international front and just get a little color for, first, what kind of drag on margins has Iraq been. If you could put that into context in terms of basis points, that'd be great and then give us some indication -- that'll give us some indication on what we can expect for a tailwind as we go into the second half of the year, specifically in the Middle East as it relates to Middle East/Asia margin.

Kurt, this is Martin. I'm not going to get specific on the basis point impact. I can tell you that, obviously, it's still a drag on the margin. As we said, it's going to continue to be. We're still experiencing some issues with regards to the mobilization and the startup there. A lot of those issues, frankly, are just us on the learning curve, but a lot of them continue to be associated with the difficulty in the lack of transparency with regards to institutional responsibilities and bureaucracy and so forth. Now I'll tell you this, that a lot of issues that we have control over are improving pretty rapidly, and that's being driven by, again, moving up the learning curve. And on the other hand, some of the issues, I think, you're not just hearing it from us with regards to operating there. It's still challenged. But I'll tell you that, we -- as I said, we finished with 7 rigs there. We should probably be mobilizing 2 to 3 more rigs in this quarter, and we expect it will be providing additional EPS for the Middle East region. I mean, So that's the outlook right now.

And Kurt, let me add, we expect our Middle East, Asia-Pacific region to sort of grow the most in terms of revenues and grow the most in terms of margin and much of that is driven by Iraq for the revenue improvement and very high incrementals from here. And so -- and that plays into it, and of course, Saudi also plays into that Middle East equation, too. So let's not forget about Saudi, but Iraq and Saudi will -- we expect to drive very handsome returns by the end of the year.

Okay. Appreciate that additional color, Peter. Maybe as a follow-up question, similar process, kind of different product line, you mentioned that you had some benefit of the guar rolling off, the high-cost situation through your P&L, and then you have pricing kind of eating away at that. Can we just kind of focus on the guar? Can you remind us what you expected to recapture in a gross number from the guar inventory roll off from the high?

I can't, because we never specified the number, but it's a couple of hundred basis points certainly of margin.

So that'd be from your high point to once all the inventory rolled off. Is that way to look?

Yes, that's probably quarter-to-quarter, so that's -- it's even greater than that if you think about high point to low point.

Okay. And Peter, just would that be like 400, 500 basis points in aggregate?

I'm talking about that particular product line. I'm not talking about North American margins general.

Yes, yes, I'm focusing on guar, too. So would that kind of be the order of magnitude?

Yes, that's a little high, but yes, it would be that order of magnitude from high to low.

Our next question comes from Michael Urban from Deutsche Bank.

Wanted to stick with pressure pumping for a second. Given some of the things that you've done over the course of the last year specific to Baker Hughes improving supply chain logistics 24-hour operations, you've given us a pretty good path or outlook here for North America and the U.S., but on an apples-to-apples basis, as that market progresses and hopefully improves at any given level of market demand and pricing, would you expect Baker Hughes margin to be higher?

Yes.

And I mean, if you talked about -- I know you talked about kind of how much it was hurting you at one point, at various points over the last year. I mean, do you have an estimate of roughly what that difference would be, whether that's in basis points and margin or absolute cost or whatever the case may be?

Well, Mike, I can't -- I don't want to quantify by product line in a specific region. I can tell you, as Peter said in his remarks, the non-pressure pumping business for Baker Hughes are -- some of them setting records and just excelling. They're doing fantastic. And this particular product line and the pressure pumping has made tremendous headway, but these headwinds on pricing, it's not over yet. And I just -- it's going to be a drag on the overall North America margin for all of '13 easily. But I think, as you asked in the first part of your question there, at any given point, wherever it maybe in terms of market pricing, we will be better than we were before just given the way we're running the business today around the supply chain, as well as around the efficiency and the type of customers we have where we can have a number of 24-hour fleets that we have now. So walking forward, our -- that particular business, I believe, will perform differentially favorably for us than it will for the market.

Right, makes sense. And then sticking with North America more broadly, talked about the cooperation with CGV, how important is seismic becoming in North America in terms of just getting better by wellbore placement, reservoir optimization? You talked about better integration across the life cycle of a well. And then more broadly, how -- are you able to get access to their best technology and fully integrate that with what you're doing based on the structure of that venture?

Structure of the agreement. The answer to your last part is yes. It's a fully -- no barriers between the 2 organizations in terms of cooperating on behalf of the customer. I'd say that it depends on the customer, which one is more evolved in understanding the reservoir, where they're at in it and how sophisticated they are. But as we said on previous calls, Mike, there is a reinjection of technology into the North American operator culture. There's -- it's -- I'd -- I think as one of our guys termed it, the stage wars are ending. It's now about efficiency and being smart, and I think you're going to see a separation in the customer community as well to the ones that are able to capitalize on, embracing technology and applying it. And you can't be smart about the reservoir if you don't have a seismic component. There is no reservoir understanding without a seismic understanding. And we like what we have with CGG and their recent alignment with Fugro, and their own Hampson and Russell capabilities matched up with our geomechanical and petrophysical capabilities is really helping. I can tell you that we have a waterfall of opportunities since this has been announced, and frankly, we're just trying to sort out the best opportunities and digest them but if the market is ready for this type of hookup.

So that collaboration is sufficient. You don't feel like you need to own it right now?

We don't like big, heavy boats, and so I think we like what we have right now.

Our next question comes from Jim Wicklund from Credit Suisse. James Knowlton Wicklund - Crédit Suisse AG, Research Division: Martin, your comment about moving frac equipment in Saudi were so unconventional. Can you tell me about that?

That's the South part of the kingdom that's called the Jafora basin. It's primarily, as you know, Jim, they call it unconventional there, but it's really, really tight. There is some shale reservoirs. This isn't particularly that, but it will have a lot of the same characteristics of the unconventional. You remember back in February, we had a opening of the unconventional research center in the kingdom. We have now dozens of people working there, as well as embedded in Saudi Aramco, both reservoir people, as well as engineers and so forth. And that frac fleet will go to work hopefully by the end of the quarter. It's kind of being commissioned right now. And the projects, the relationship with Aramco is very good in terms of defining where the wells should be, what kind of wells they should be. We're starting off with just some stratigraphic and delineation wells. But I think you've heard about the rig count expansion that's going to occur in Saudi, and it's a lot of exploration, a lot of just to keep their oil production up or get it up to that 12 million barrels a day, and a large part of it's going to be in this gas area. James Knowlton Wicklund - Crédit Suisse AG, Research Division: We are all very hopeful. There had been talk about how one of the smaller pressure pumping companies had been invited over to the kingdom to look at that, possibly moving frac equipment to do unconventionals at the northern part of the kingdom. Is that the -- do I have that right? Has Aramco been looking for frac capacity in other parts of the country to pursue unconventionals?

It -- I would assume that they probably are, but I'm not aware of any particular company moving in there, Jim, sorry. James Knowlton Wicklund - Crédit Suisse AG, Research Division: Okay. As my follow-up, it's interesting to me the technology discussion that you're starting to have now, which is kind of a shift from where you guys have been for the last while. Is this -- Gaffney Cline's 50th anniversary and all this and your mention of the CGV collaboration, is Baker finally moving into the reservoir digital age after the -- all these years?

Well, I hope we're not in the analog age, let's put it that way. James Knowlton Wicklund - Crédit Suisse AG, Research Division: No, but you guys have lagged. You haven't had a landmark or a WesternGeco, and what you did have in seismic you got rid of. And all of a sudden, I'm now hearing you guys talk about reservoir more than ever before.

Well, I think it's a continuation of -- if you remember, when Chad got here, we recognized the gap we had in understanding the reservoir and yes, whether it was geomechanics international, whether it was RDS, whether it was Gaffney Cline, we've consolidated a pretty strong organization. We're not done. We're going to muscle up that organization more, but also, as I said in my prepared remarks, we're going to increase our spending on R&D because the global customer community, in light of what you're saying, Jim, as ever for -- their appetite's even more ferocious than it's ever been about having the right products to get the job done, and that's because their job is getting a lot tougher to get those reserves. So it plays right into our wheelhouse, and we're going to keep -- we're going to stay the course. James Knowlton Wicklund - Crédit Suisse AG, Research Division: Thought it just sounds like you're accelerating the effort. It sounds great.

Our next question comes from David Anderson from JPMorgan. John David Anderson - JP Morgan Chase & Co, Research Division: You're talking about pressure pumping utilization in the industry, 20%, 25% overcapacity, pricing continuing to go down. Can you talk about your own utilization right now? In the face of the continuing declining pricing, do you keep signing up rigs -- excuse me, do you keep signing up contracts on the fleet? Or do you start to furlough some more here?

No, we don't furlough anymore. As we said, we have a certain percentage of our fleets that's cold stacked. We've actually seen our utilization improve from Q4 into these first few weeks of Q1. We're winning a lot of good work. It's the type of work with the right customers, and what I mean by that is they're near our centers of -- our new R&M centers, and they have a portfolio of rigs and -- that they're able to keep our fleets going 24 hours. So no, I expect -- in fact, our forecast shows more and more stages going throughout the -- 2013, and those are share gains. And we're happy with the work we're winning, I can tell you.

And let me just add. We've talked about rig efficiency even though the rig counts go down year-over-year. It's going up from here, and we expect rig efficiency to improve, so you still see some improvement in well count. And so yes, we are predicting the number of stages going up this year, so that's probably good for everybody and good for us differentially.

And David, I think you guys kind of struggle with the whole pricing thing, but we estimate probably 25% of the work that's being done out there is still under some kind of price agreement or take or pay we never had the luxury of having. As those peel off, then that -- then you're put into the spot market, and the customer's going to try to take it out of your hide. So -- but we didn't enjoy that in the back 12 months. So is our pricing going down? Well, not really, but we're talking to the market price going down. Does that make sense? John David Anderson - JP Morgan Chase & Co, Research Division: Yes, it does. Well, that's what kind of what I'm trying to understand. I'm trying to isolate your U.S. land business in terms of margins. If your utilization is going up and I recognize you on spot market a year ago, at this level of pricing, can you expect the overall U.S. land margins themselves to pick up throughout the year based upon just increased utilization?

Yes, absolutely and the continuing improvements in some of the other cost categories. Yes, they certainly can. Utilization plays a big role outside of pricing. Utilization can affect your margins just as powerfully as pricing can. John David Anderson - JP Morgan Chase & Co, Research Division: Okay. I'm sorry, I'm going to break the rules. I have totally unrelated follow-up. On your CapEx, you talked about 30% lower. Can you, a -- can you first -- can you break out where the CapEx was spent in 2012? And secondarily, you guys have spent -- done a pretty good expansion job over the last 4 or 5 years internationally. Are you stepping back now and kind of look and you're kind of reassessing where you are? Are you thinking about where you're good and where you're not. And are you sort of retrenching certain areas. Can you just explain to us your kind of -- as you look out internationally in terms of the expansion kind of where you are now?

Let me give that a try. Almost half of our CapEx in 2012 was North America. We since dropped that to about 1/3. Our infrastructure spend is gone down a bit, but our rental tool CapEx, as we said, is about flat. And we're operating at record levels internationally. We're operating at the very high levels on U.S. land still for the -- our traditional production lines, which is in rental tools, and so we've got to keep that rental tool spend up. And so that rental tool spend hasn't shifted much really between North America and international. It's just the -- a lot of the pressure pumping investment has declined, and a lot of infrastructure spend is behind us now.

Yes. And let me just add that this -- it doesn't mean that our pressure pumping business is being starved dramatically. There's still a great cementing business there, and the market's expanding for that and the coil market. And there are still, frankly, some stimulation equipment going in to improve our efficiencies in terms of sand kings and some new blender designs and so forth. But in terms of raw horsepower, that's the most dramatic drop, as you would expect, in the CapEx. John David Anderson - JP Morgan Chase & Co, Research Division: And what about your international footprint? Where do you stand on that? Are you kind of reassessing that now? When you institute a geomarket approach, obviously, you expand that to fill out that, but are you now kind of looking at certain areas where maybe you're are not as strong as you should be and maybe pulling back there and reallocating different areas? How are you thinking about that right now?

Yes, we are. We're taking a pretty tough line on certain businesses, either they got to be improved or they got to be exited, and we started that in '12, and we're going to continue on that. And that's just prudent capital discipline and margin discipline. And I just think that's just the way to operate a business relative to, I think, once we did the whole geomarket thing, it was about growth. And we're not giving up on growth, but we're going to take a harder line on returns.

Our next question comes from Jud Bailey from ISI.

A follow-up question on Latin America, I believe you indicated earlier we're probably looking at revenues probably down year-over-year in 2013. Can you help us think about maybe, I don't know, magnitude given some of the losses in Brazil and also how we think about your margins in that environment if revenue is sequentially down? Have you been cutting costs there to kind of maintain margins at current level? Or are we going to see those drop a bit at the start of the year?

We intend to maintain pretty decent margins there. The rig count actually in Latin America is going up, all -- everywhere just about. It's just we're talking about specifically a difference in share in Brazil. That would be going down, we think, for us, and so we think we can make it up elsewhere. So we're not talking about drastic declines in revenue, certainly because we can make it up elsewhere. And we think we can keep margins sort of flattish from here by offsetting some of that Brazil share loss with gains elsewhere so...

Okay. And my follow-up is another region, for Europe, Africa, it sounds like that's probably where you're going to see the most growth behind Middle East. Can help us think about the moving parts there? Obviously, the North Sea is going to be very strong, but you talked about some of your gains in East Africa. Can you help us think about within the geomarket your best revenue growth and maybe margin there as well?

Yes, Jud, this is Martin. Let me -- as Peter, I think, highlighted in his prepared comments, we had some record performance in -- across the world, and I can tell you that, particularly, that was led by, well, smaller Russia Caspian, did exceptionally well in the fourth quarter, and I think some nice contract awards are going to be underway there. In Africa, on all corners, putting North Africa aside right now with the chaos that's unfolding there, but East Africa and our position in Mozambique, our new facilities in Pemba and customers moving in there and some contract awards and of course, our strength in Nigeria and Angola and the Ivory Coast. So I think Africa will lead and compete with Russia Caspian in terms of the specific regional growth there. And then Europe is a massive business force and just a lot of numbers, it's going to be hard to move the needle, but we're in the process of mobilizing on those additional rigs in Norway. And it's such a technology-driven basin, and with some of the products, the steerable drilling liner that I mentioned and some other things, it's -- I wouldn't count out the ability of Norway, in particular, to add some real numbers in 2013. But it's already so big, so in terms of differential, it's not going to be like Africa or Russia Caspian.

Okay. That's a good color. And then in terms of margins, it sounds like some of the work you're talking about can -- I think the number was mentioned in terms of incrementals, maybe 20%, 25% incremental margins. Is that a safe assumption in that market? Or could it be a little higher than that?

We think it could be higher than that if we fire on all cylinders throughout the year.

Our next question comes from Brad Handler from Jefferies & Company. Brad Handler - Jefferies & Company, Inc., Research Division: Let me -- I'll stick with the -- some of the non-North America stuff as well, I guess just seeking whatever additional clarity. Coming back to this notion of kind of high grading and the quality of earnings and Martin, you obviously had a number of references in your comments to that. I guess I'm curious, have you already made decisions about exiting certain countries or certain product lines? Have you already affected those changes?

Yes and no. It's a process. It's a -- I wouldn't want to make -- I wouldn't want you to think that this is some kind of new or I -- it's just the way we're going to run the business. You have to make money or it has to be very clear when you're going to make money or there's no reason to be doing it. We have that same outlook on places as high profile as Iraq. We have a line of sight into where it's going to contribute, and if we can't, it's -- it doesn't make the cut. And we have to take some -- we have to make some decisions. And I think, in response to the earlier question, the way that we emerged out of our reorganization, it just takes time to sort out to see where -- which ones aren't going to make the cut, and only a few years into it, so I -- but I'm not going to be any more specific on that for obvious competitive reasons. But it's part of our mission to get our quality of earnings up and remain disciplined. So I don't want you to make it sound like it's a whole new way of operating or wave here. It's just that we're just going to continue to bring discipline to the numbers. Brad Handler - Jefferies & Company, Inc., Research Division: Sure. No, I understand that. I mean it's helpful. I appreciate you qualifying that for me. Does it -- so should -- as we've talked a little bit about your 2013 growth outlook internationally, did -- would you say it had an impact on others? I think you identified high single-digit, all in, sort a high single-digit revenue target or growth rate target for the year. Do you think it had some impact already in terms of that? Could it have been higher but sacrificing some margin opportunity? I mean would it -- decisions have already been made, I guess, is what I'm asking you to get at for us.

Yes, this is Peter. It's a continuous process, and it didn't contribute much, I think, in 2012. I think there's a little bit more emphasis on it in 2013, and we're counting on some of that to happen perhaps more in 2013 than what occurred in 2012. Brad Handler - Jefferies & Company, Inc., Research Division: Okay, okay. Maybe very unrelated follow-up, but I appreciate some more color on it. Your read on what's happening in Colombia right now because I know that's been a problem area for a few quarters already?

We like our position there, and the permit situation that challenged the service sector over the last couple of quarters seems to be abating. There's been some nice geological success on part of a couple of the customers, got a real professional state oil company there. And so I think '13 will be much better than it was in '12 given some of those bureaucratic things behind us.

Our last question comes from Doug Becker from Bank of America Merrill Lynch.

Martin, just hoping you could take a step back and talk about just some of the self-help initiatives and maybe you've addressed some of these already, but I'm thinking along the lines of supply chain, reliability of tools, just an update on some of these self-help initiatives, major self-help initiatives Baker Hughes has ongoing.

Yes. Well, Doug, look, it's -- I'd say that we're probably at second base with regards to the opportunity around running that business more effectively and efficiently in light of how the markets evolve these unconventionals because as we've learned and as you guys know, logistics is a big driver and the efficiency behind that. So we've made great progress in freight, supply chain in general, which drives the utilization. The staffing numbers, we expect a lot more in terms of stages, but yet, we don't see the headcount going up anywhere near what it would have been under the way the business used to be run frankly. The leadership team that's been injected into that product line is first class. They know the customers. They know how to make money in the business. We're making the right decisions. So -- but the biggest impact and the one that takes the longest because you don't have complete control over it is the customer mix. You got for the wait for the contracts to come up. You got to wait for them to roll. You got to have a facility nearby, and I really like our win rate. I'm not going to comment on it explicitly and give you any kind of numbers, but I am really happy with the type of work, who customers are, where it's at, what the pricing is. And like I say, because we're probably on second base, we got a lot more opportunity through '13 and '14. And then any favorability in terms of pricing, should that occur, will be more impactful, I think, versus the less efficient way we were running the business before.

And this is something you do expect that we'll be able to see. I know there's a lot of moving parts in North America, but we're talking meaningful improvements here in terms of several hundred basis points. Correct?

We made meaningful improvement in '12, which just got tidal waved out because of the pricing situation. And I think we can make meaningful improvement in '13 and '14. Now we don't as many low-hanging fruits as we had in the early stages of, if you remember, Q2 and Q3 of last year, but the numbers, potentials are still there. It just may take a little bit longer to roll out through '13 and into '14.

Okay. And then, Peter, just a quick one, you highlighted the international margins typically declined in the fourth quarter. You talked about some of the product sales and the impact there, talking about a flat U.S. rig count. Is it reasonable to say that first quarter EPS should be below the fourth quarter?

Certainly, Canada, we would expect to improve. You saw -- you see the rig count week by week getting much stronger, so Canada should get its -- a traditional increase. Gulf of Mexico, not much help necessarily into Q1 for us. International, certainly down, and I think the big question mark is pressure pumping and whether or not we're going to get our utilization up in Q1, and I'm not going to call that for you.

So I guess -- I mean, so if I paraphrase, you think there's at least a chance that first quarter could be higher than the fourth quarter?

Sure.

Always a chance.

But there's a lot of volatility there, high beta [ph] there.

But chance is probably the wrong term, a reasonable, realistic chance.

You be the judge of that.

Thank you, and thank you for participating in today's Baker Hughes Incorporated Conference Call. This call will be available for replay beginning at 10:30 a.m. Eastern Time, 9:30 a.m. Central Time and will be available through 11:30 p.m. Eastern Time on Wednesday, February 4 -- or February 6, 2013. The number for replay is (888) 843-7419 in the United States or (630) 652-3042 for international calls, and the access code is 33868070. You may now disconnect. Thank you.