Hello. My name is Lorraine and I will be your conference facilitator. At this time, I would like to welcome everyone to the Baker Hughes Fourth Quarter 2013 Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to Mr. Trey Clark, Vice President of Investor Relations. Sir, you may proceed.

Thank you, Lorraine. Good morning, everyone, and welcome to the Baker Hughes fourth quarter 2013 earnings conference call. Here with me today is our Chairman and CEO, Martin Craighead; and Peter Ragauss, Senior Vice President and Chief Financial Officer. Today's presentation and earnings release that was issued earlier today can be found on our website at bakerhughes.com. As a reminder, during the course of this conference call, we will provide predictions, forecasts and other forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks and assumptions. We urge you to review our SEC filings for a discussion of some of the factors that could cause the actual results to differ materially. Also, a reconciliation of operating profit and other non-GAAP measures to GAAP results can be found on our earnings release and on our website at bakerhughes.com under the Investor Relations section. And with that, I'll turn the call over to Martin Craighead. Martin?

Thanks, Trey, and good morning. I'll begin my remarks with a brief review of our 2013 results. We ended 2013 with revenue of $22.4 billion, which is a record for Baker Hughes. Our revenue growth in 2013 was almost entirely driven by the Eastern Hemisphere, though we continue to build critical mass in a variety of key markets, particularly Africa, the Middle East and Russia Caspian. The Western Hemisphere was marked by activity declines in several markets, particularly United States, Brazil and Mexico, where rig counts and well counts are below 2012 levels. In Latin America, we adjusted and realigned our business to account for lower activity levels. And as such, we were able to exceed our margin objectives for the fourth quarter. Furthermore, the actions we've taken and the steps we continue to take will position this segment for better profitability going forward. In North America, the ongoing overhaul of our U.S. Pressure Pumping business continues to gain momentum. As such, we saw margins increase in all four quarters last year and we expect this to continue. Outside of Pressure Pumping, our other product lines posted solid results, particularly our Completion Systems, Artificial Lifts and Upstream Chemicals. An unexpected operational challenge occurred last year in the fourth quarter when our Iraq business experienced a significant disruption, resulting in a complete shutdown of our operations. We took immediate action to ensure the safety of our people, and I'm thankful to local authorities and our customers who provided assistance. With additional security measures in place, we were able to resume activities by the end of September. The short-term losses in Iraq are disappointing, but the wellbeing of our people will always precedence. Our Middle East Asia-Pacific operation progressed very well in 2013, Iraq disruptions notwithstanding. Revenue in this region grew 24%…

Thanks, Martin, and good morning. Today, we reported adjusted net income for the fourth quarter of $277 million or $0.62 per share. Adjusted net income excludes $29 million in after-tax several cost or $0.06 per share. However, adjusted net income increased before an after-tax losses of $79 million or $0.18 per share in Iraq. The loss in Iraq is primarily related to the significant disruption of operations previously highlighted during the quarter, expenses associated with personnel movements and security measures and other non-operating items. As Martin mentioned, we resumed operations in Iraq by the end of the year. On a GAAP basis, net income attributable to Baker Hughes for the fourth quarter was $248 million or $0.56 per share. Revenue for the fourth quarter was $5.86 billion, a third consecutive record quarter for Baker Hughes. Compared with the same quarter last year, revenue is up $535 million or 10% despite the loss of revenue in Iraq. Adjusted EBITDA for the fourth quarter was $955 million. For the full year, as Martin highlighted, we posted a record revenue of $22.36 billion, which is up 5% or $1 billion from the prior year. This work is primarily driven by our international operations in the Eastern Hemisphere. Adjusted EBITDA for the year was $3.7 billion and adjusted net income was $1.17 billion or $2.62 per share. On a GAAP basis, net income for the year was $1.1 billion or $2.47 per share. For helping your understanding of the quarter's results of this last quarter's earnings per share for this quarter, in the third quarter we posted GAAP net income of $0.77 per share, plus added back $0.04 for severance costs which were highlighted in the third quarter. That brings us to the third quarter adjusted EPS of $0.81. Next add back $0.09 for…

Thanks. As Peter just highlighted, based on a solid growth in rig counts and well counts and a growing demand for technology-driven well construction and production solutions, the outlook for Baker Hughes this year is very good. Let me share a few examples of where we are starting to see differential market traction with key customers around the world, starting with our Europe, Africa, Russia Caspian business. The offshore markets in Europe, West Africa and the Caspian play very well to our strength in delivering highly reliable and highly innovative well construction solutions. A year ago in Norway, we mobilized for one of the largest drilling services contracts in the history of our industry. And today, I'm pleased to announce another win in the North Sea of similar magnitude. In the fourth quarter, Statoil awarded Baker Hughes a major multiyear contract for the provision on completion services in Norway. This award covers the majority of Statoil's fields and represents a significant increase for our completion of the business in Norway, solidifying our position as the market leader for completions systems in the North Sea. Our Middle East/Asia-Pacific business is our fastest growing segment in the world. In 2013, it grew 24% over the prior year to become our largest international segment. Based on our forecast of strong rig count growth across the region and recent strategic wins, we expect this trend will continue in 2014. Late last year, we announced that Baker Hughes and PETRONAS Carigali entered into a long-term oilfield service agreement to increase production in the Greater D18 field. We began mobilization during the fourth quarter. And today, we are drilling the first of several appraisal wells. In Australia, we are expanding our share in the growing deepwater market. During the fourth quarter, we were awarded a three-year…

Thanks, Martin. At this point, I'll ask the operator to open the lines for your questions. To give everyone a fair chance to ask questions, we ask that you limit yourself to a single question and one related follow-up. Lorraine, can we have the first question please?

And our first question comes from James West from Barclays.

So Martin, Peter, free cash flow generation, really impressive, and this will get focus going forward both in capital discipline and keeping working capital down. Was there anything in '13 that was a one-off or some type of catch-up, which makes it harder to achieve this level of cash flow generation going forward or is it a level relative to how do you look at it that we should think about in '14?

Thanks for recognizing that, James. We put a lot of hard work into working capital, particularly this year. I wouldn't say anything as a one-off. In fact, we'd probably set a new baseline in some of our days outstanding whether it's DSOs or days payable. And we put a big focus on it this year. We put in some new processes, particularly around billing and invoicing that helped our receivable reduction in particular. So I think there's probably more to do on the receivable side going into 2014. So I wouldn't expect we'd take a decreasing working capital in 2014, but some decreasing in sort of the days sales outstanding. But I got to commend the teams, because we put some stretched targets out there and they exceeded every one of them. So they did a very good job in 2013.

Perhaps a little bit of unrelated follow-up here. Martin, you made the comment about your North American Pressure Pumping business, four quarters in a row of improved profitability. At this point, are we firmly profitable in that area, or is there still a lot more room to go, is there still a lot more upside in North American margins as a result of that?

James, I don't want to comment on a particular product line. Profitability performance, I'll tell you that I don't think we're on the fairway yet and we have a lot of opportunity to center this business relative to the market. As we've laid out in the past a really, really solid plan, great metrics, milestones. Plans are working. I mean no one wants to go faster than I do. We're getting there. You know what to do. And I'm very confident, but I'd like to avoid the profitability answer.

Thank you. And our next question comes from Jim Wicklund from Credit Suisse. Please go ahead.

Impressive across the board. Martin, you talk about mobilizing for a project in Africa. Can you talk to us a little bit about West Africa overall, what project this might be, but overall, how West Africa should play out this year and next year?

Yeah, absolutely. So, Jim, you've been, like a lot of the other listeners, have been with us for quite a while. And seven, eight years, five years ago, we had some challenges in a couple of countries in West Africa. I think one of our customers, you guys stuck with us, and it's starting to pay off dividends. We've been winning some nice contracts. Our brand is much stronger than it's ever been, both with the national oil companies, well, it's always been strong with the IOCs, but we've made a lot of nice gains. And our customers are having good geological success. I'm very optimistic the pre-salt stretch across that region. Our completions business is exceptionally strong. The drilling business is strong. It's a nice mix of both NOCs as well as IOCs and even some European independents. So I'm very optimistic on that part. And I would say of all Africa, while East Africa was certainly a story in '12 and '13 and will into '14, I think West Africa will be more of a story in '14 and '15.

My follow-up is with Mexico, you mentioned the Soledad project in Mexico. With the recent change in the Mexican constitution, there's some thought that while mega tenders as opposed to an open and awarded, the actual implementation may be delayed, because it may not (inaudible) running that field in a couple of quarters. Has the outlook on Mexican activity for the industry and for Baker Hughes changed with the change in the constitution?

I don't think the activity plans have changed, Jim. I think it's a very good question, because I think what changes the uncertainty has gotten greater. And you're right, there's definitely an appetite, I think, on the side of our customer down there to decide what exactly they want to fund and what they don't. I'm hoping if you're not going to getting the cash flows. So there's this high degree of uncertainty. We're trying to figure it out. We like the projects that were recently tendered. We did what we felt was an appropriate number. We weren't successful. I'm disappointed we were unsuccessful, but I'm not disappointed in how we tendered it. These are still long-term turnkey contracts and albeit Iraq or Mexico and some of these places, there's a lot of risk associated on the service company size. But I think we've tried to be a bit more prudent and with a measured outlook of how to go after these, again, as you kind of highlight, within the context of the uncertainty right there.

And our next question comes from David Anderson from JPMorgan. Please go ahead.

I was curious about your guidance for the first quarter. It sounded like you'd like to run 10% margins. As you're thinking about 2014 in your base case, how are you thinking about margin expansion through year-end? I'm particularly interested in kind of how much margin you're thinking about in terms of increased 24-hour work as far as if you could talk about that a little bit?

Let me say this. Our 24-hour work in the fourth quarter did contribute to the margin, albeit small expansion in the Pressure Pumping product line and it will continue to. Today, we set up around 55% and I expect to get somewhere into 70% by the end of next year, which I think it will probably stay at. If you couple the incremental gains in Pressure Pumping that we expect, a strengthening Gulf of Mexico outlook, particularly around the stimulation and completions in the second half of the year and a general increase in well counts, and this isn't the date out there, but we put it at around 5% or so, and a growing appetite for technology, because our customers, I think, are going to squeeze about the last drops out of the efficiency curve that they're going to get. And it's going to be about making better wells. I fully expect that we can get to the mid-teens by the second half of the year.

So again that 5% forecast of the well count, I was curious how much of that, you think, has contributed to PAD drilling. I guess I'm just curious from your standpoint, you just look at the Eagle Ford and Bakken, how much of that work right now do you think is on PAD drilling today and where do you think that kind of trends throughout the year?

Okay. So in 2012 and '13, about half of the wells drilled were horizontal. In 2012, 40% of those were from a PAD based on our calculations and estimates. In 2013, it went up 50% to 60% of the horizontal wells were on PADs. Now you can't keep going up 50% every year. So I think on a multiple fronts, I don't care if it's the drilling, the completions, the PAD drilling, this efficiency curve is flat-lining for our customers. And you're not going to get every horizontal well off of a PAD. So if we sit at 60% today, let's say next year we may get to 80%, and I don't know how much more you can get past that.

Yeah, those are industry numbers, those aren't your numbers, right?

Yeah. That's what we estimate to be the industry, that's right.

Peter, one last quick one. You were talking about the first quarter number for earnings. Can you just help us where the share count should be? I have it like around 440 million. Is that the right average or might be a little lower?

Well, we bought back 6.3 million shares in Q4. So you're looking at 443 million, something like that as an average for Q1.

And our next question comes from Scott Gruber from Bernstein. Please go ahead.

How are you thinking about revenue growth potential in North America this year? There're several moving parts you mentioned, well count in U.S., which should be up 5%, actually driven by horizontals, 5% rig count growth in the Gulf and then Canada, where there's still a pricing headwind onshore? Putting all those together, where should we think about North American revenues coming up in the year, what type of growth should we expect?

Scott, I'm not going to quantify at this stage, prefer not to. But you touched on the drivers. And I think some of the drivers actually are missed and that's this technology side. There will be, I think, an increase in efficiency associated with the PAD. So we're going to get more revenue on a daily basis. And it will again, disconnect from the rig count a bit. There will be of course a strengthening off of Mexico. I think Canada is going to be pretty much flat year-on-year. But you're going to see whether it's the one I talked about today, the Shadow Plug, it sells at a premium and that premium is being tested upwards, not downwards, because of the value that it's providing. So the biases on revenue, to me, are all going in the right direction to the right. We did see some price slippage from three to four and you pretty much know what product line that was, but it was small. And frankly, I think there will may be even a little bit more price slippage into Q1 on that one particular product line. But other than that, I think most of the arrows are going in the right direction.

Could you at least say at this point if the outlook for revenue growth in the U.S. eclipsing that well count growth numbers, is there a high likelihood of that happening?

I would fully expect that to be the case, yes.

Okay. If I could just turn to international real quick, can you provide some color on which countries will be driving that 10% rig count growth number? And again, how you think your revenues will trend relative to that rig count growth?

As we posted pretty consistently, I expect that revenues in every region will outgrow the rig count. On a country basis, there may be some decisions made that go against that. But on a regional basis, I would fully expect that we'd do better than rig count. And from an international perspective, you look at this way, in Latin America, it's pretty much driven around the Andean belt. It's possible that the Southern count could be a surprise in 2014, a favorable surprise as in way it materialized so far. Certainly the Middle East led by Saudi, I think, will see a pretty good increase in rig count in Iraq. I'm not so sure frankly that that's got much more appetite for some of those contracts we're on right now. So I'm not so sure our revenue will average the pace of the rig count. And the Gulf region along with Saudi will be strong. I think Australia has got a pretty strong outlook. And given these will be flat, given the elections, I think places like Malaysia, Vietnam and even Myanmar are going to have a pretty sharp rig count growth from a percentage standpoint. And then as I mentioned to Jim earlier, I think West Africa is going to see a pretty strong increase on the rigs, whereas East will be relatively flat. So revenue is strong in those respective areas. And certainly I would expect, Iraq notwithstanding, us outpacing rig count in terms of revenue.

And our next question comes from Bill Sanchez from Howard Weil. Please go ahead.

I just wanted to circle back on the North American market commentary. I guess first quarter, we're looking up roughly 150 basis points. Beginning your second half outlook, I think you said mid-teens. Help us think about how we progressed, because 2Q I would expect with a Canadian breakup for markets to be down, which would then mean you get a pretty big leap to get to that kind of range for second half of the year. I was just hoping maybe you could reconcile that a little bit. You said you could be getting a mix here from the Gulf of Mexico. Perhaps you could talk a little bit about that as well, because I think in the prepared comments, you said we saw some mix issues in 4Q and also some push-backs and the like on the additional activity you had expected. So maybe just a little more color on that will be helpful.

Let's take the Pressure Pumping business. We haven't had any help from the market in improving those margins, right? Those are all self-help, albeit they were starting from maybe a more challenged positioned and fully expected that we would swim upstream. But we're going to continue to, because as I said earlier, we saw a lot more opportunity beginning and the middle of fairway. So that's a big part of it. And we don't need the market to help us. The Gulf of Mexico has got a pretty sharp up and down and it's trending in the right direction in terms of the rig mix and type of work that our customers will be calling out whether it's stimulation or completions. And when I say pretty sharp up and down, I mean it can have really strong incrementals and detrimentals, and I expect it to have incrementals given the way the market is unfolding. And back to the efficiencies outside of Pressure Pumping, on U.S. land with higher well count and an increase in overall activity, and then overall, Bill, I guess we're just going to have to be a little more efficient in the way our resources in North America to hit some stronger incrementals than we have in the past. So yeah, you're right, Q2 go down because of Canada. But with what we have to do and what we know we're going to do, I'm confident that we'll get to the mid-teens.

One more, Peter, just for you. As we think about 1Q, I guess a couple of things. I know you talked about the year-end product sales falling off. We think revenues and margins are down. I was wondering just Latin America, Middle East specifically, relatively speaking, should be less impactful perhaps on the margin side just given the kind of the self-help initiatives you've put in place in Latin America, maybe offsetting some of those product sales and just trying to think about what the rack snapping back. I'm assuming the revenue loss was probably pretty similar to the overall after-tax loss, given very high detrimentals on that work should that revenue line frankly hold in a little bit better as we see that Iraq revenue offsetting some of these product losses?

Yeah, let me just talk about Iraq for a second. We're on all the rigs that we run prior to the disruption. So that's the good news. Not all those rigs are operating at full efficiency yet, because you can imagine when you drop rigs quickly, you've got some repair work to do. So we're going to do some of that in Q1. So we're not on full revenue yet in Iraq, but we're almost there. But I think the better way to think about the Q1 drop-off is international revenues went up about $165 million Q3 to Q4. I think you can expect us to give most of that back in the Q1, because our year-end product sales were actually probably higher than normal than this year. So that's the overall international outlook. And that includes Iraq coming back. So quite a big drop off in product sales from Q4 to Q1. That's across the board in the regions.

Anything Latin America-specific that's helpful to you here, 4Q to 1Q comparison?

I think you'll see a pretty significant decline in revenues in Latin America in Q1.

Peter is right in terms of the revenue, but we would expect in Latin America the margin to hold in there against some of the cost control measures we've put in place. And the mix of those revenues, while smaller, will be better. So Latin America is, as I said, forecasted and predicated on a whole lot of revenue that doesn't contribute margins. We're not going to do that.

And our next question comes from Ole Slorer from Morgan Stanley. Please go ahead.

You're giving a fair amount of color on the first quarter, but it's still a tricky question to model correctly, given all the moving parts. You highlighted that excluding Iraq the seasonal improvement in Canada should compensate for some of the lack of product sales. That suggests kind of something in the low, would that be a fair way of thinking about it?

I think that's pretty much what I said on the guidance that it'd be a little bit up on Q4.

And you'd call that Q4 of $0.80 if you make the adjustments you suggested, right?

Yeah, pretty much.

Secondly, you're sort of seeing some signs in your drilling market that letters of intent, particularly in West Africa are taking longer time than the normal to convert from LOIs to firm contracts and maybe particularly in Nigeria. And I wonder whether you could offer your views on whether there's anything particular in West Africa this time around which makes approval processes to start contracts assuming that this affects also completion and drilling and all the rest of it compared to what you've seen in other years?

I just got back from there. And I'm very optimistic in terms of the way the Nigerian market is unfolding in particular, since you highlight that. I did not hear from a lot of customers and our folks of course. I mean there's always frustrations of course on multiple fronts like there is in any country. But I'll tell you the takeaway for Nigeria for me was the emergence of a whole new operator class independents. Nigerian owned and operated, very straight forward to deal with, independents of the government restrictions around having a PSE or out of tendering rules, it reminds me frankly of a North American independent mentality, very capital disciplined, but ambitious, high risk curve in terms of growing. And it's very refreshing for the country. And some of the best talent is working for these independent Nigerian companies. And like a lot of independents' appetite for technology talk with us and I'm sure our competitors, but getting after it. So I'm not aware of any delays that are unique or emerging, but it very well could be, but I didn't hear of any.

Yeah, the conversion delays seem to be more to do with the IOCs and some of the projects there, particularly in deepwater, but it could be matter-driven, but relatively imminent stock belt, all the service work would have been also tendered at this point and particularly won your fair share, given your historic strength in Nigeria. Well, thanks for that and to clarify. There was nothing unusual going on there. Sure, thank you.

And our next question comes from Bob Mackenzie from Iberia Capital. Please go ahead.

I wanted to hit back on North American margins. And I guess I want to understand a little bit better whether you still think there's no structural difference between yourself and some of the other peers that are currently on mid to high-teens margins? I understand the guidance you gave for the back half of the year, being what it is. But let me hear some more detail on how you think you get there? Is it really the customer initiatives? What are the moving pieces there to get you there?

Well, I'm kind of strapped out in terms of what I'm going to say on this. Bob, I'm sorry. I mean I've gone through it. I don't want to provide any more color. As to a structural difference, are we all exactly portfolio lineup, no, neither by product line or even geography. We have some businesses that I wouldn't want to call them an annuity, so just chemicals, for example, where we have a substantial business that I guess you could possibly look at it as one favorably being disconnected from well count and rig count, that's for sure, probably most disconnected, but it's also the most predictable and consistent. And that might give us a bit of the lower margin at the end of the day. So it's structural, I don't know. As to the other aspects, I think I had adequately explained how we plan to get there.

Let me ask you another way. You highlighted the Shadow Plug, which is a niche competitive offering out there, but it's something that strikes us as really interesting in addition to your new lift solutions for U.S. land. Arguably those are young, but the uplift from that technology option I would think would be a material contributor, wouldn't it?

It is. We took out of the prepared script the number of installations. And I wish I could tell you, but I am not going to. Let me just tell you, it's in the hundreds. It exceeded my expectation. It's amazing, the ProductionWave installations. And offline a little bit, we even installed one in Wytch Farm in the UK. The customer is pulling over there. It's really taking off. As to this Shadow Plug, let me really quickly tell you that the other competitor falls well short on two fronts. One, it probably can't spell nanotechnology and certainly doesn't have the material science experts and scientists that we do. And so there is no other dissolving ball on a plug and perf scenario. Second, they don't have a full bore opening capability. And that's the big issue. So we think about the proposition is significant. I can't quantify right now the size of the plug and perf market. But what's exciting is we have the full range. So if there's a customer that just has a bias towards plug and perf, no problem, we can handle that. And to be able to sit down and have that conversation or if it's a sliding sleeve or it's OptiPort, there's no other completions company in North America that has the portfolio and we're just getting started in terms of changing these technologies and revolutionizing them like we are on artificial lift and plug and perf. So I'm pretty optimistic.

You said your revenue would exceed the rig count growth in all geographic regions. I think that was internationally. Would you say that also applies to your 5% well count estimate for North America?

Yes, we did state that. We should have seen the 5% well count in North America in terms of revenue growth.

And our last question will come from Kurt Hallead from RBC Capital Markets. Please go ahead.

You guys provided a lot of good color, commentary and insights on progression for 2014. So I just wanted to kind of walk through this just one more time. If we look at the relative revenue growth rates in 2014 versus 2013, I would assume that Middle East, Far East would be the highest growing region and I would assume that we have a possibility of replicating the kind of growth rate and revenues in '14 that you had '13. So maybe we can start with that? Is that a fair assumption on my part with respect to Middle East, Far East revenue growth year-on-year.

Yeah, we would expect the Middle East specific region to have the highest growth in the double-digits in 2014 versus 2013.

And then when you look at Europe, Russia, Africa, Latin America will be behind Middle East/Asia-Pac, which one of those two would come in next?

Europe, Africa, Russia Caspian would come in behind that, not far behind it. And I would say Latin America, given the Brazil turnover and all that, we had a lot of that work in the first half of 2013 that's not going to repeat in 2014. So Latin America is actually going to challenged from rig count, which I think clarification we need to make here. We expect some growth in some of our key markets, but that Brazil shadow was going to way on 2014 versus 2013 results.

And then if I heard you correctly, Peter, Europe, Russia, Africa, do you think that's going to be double-digit revenue growth year-on-year '14 versus '13?

Yes.

In terms of margin improvement year-on-year in the international region, where would you expect to have the highest, sort of the best margin improvement and where would you think would be relatively released?

Well, in terms of overall OP dollars, I think that'd be spread pretty evenly. We're taking a lot of cost out of each region and I don't think there's any one that stands out above the others in terms of OP dollar progression between 2013 and 2014. They all should be up a decent amount.

I guess when you look at operating market percentage with Latin America at 8% in 2013, I guess I was just trying to get a sense as to whether or not Latin America would show the highest relative market percentage improvement year-on-year vis-à-vis the other two?

Yes, it would. From that perspective, yes it would.