Adjusted net income for the third quarter of 2014 excludes $14 million in before and after-tax charges ($0.03 per diluted share) relating to the impairment of a technology investment and $58 million before and after-tax costs ($0.13 per diluted share) associated with a restructuring of operations in North Africa, resulting primarily from recent disruptions in Libya.
Concurrent with the restructuring of this business, certain North African entities previously reported in the Middle East/Asia Pacific segment are now reported within the Europe/Africa/Russia Caspian business; accordingly, the historical financial results of these two segments have been revised to reflect this change.
Source: Baker Hughes
Martin Craighead, Baker Hughes Chairman and Chief Executive Officer commented, "Our third quarter results included record revenue, record free cash flow, and more than a 10% sequential increase in adjusted earnings. We achieved these results despite several geopolitical events in the Eastern Hemisphere and a sharp reduction of activity in the Gulf of Mexico which caused margins to fall short of our expectations. Our outlook for the near term remains positive based on increasingly favorable market conditions in our North American business and recent actions to increase profitability internationally.
"Latin America delivered increased revenue and margins primarily from Argentina and offshore Mexico. In the Eastern Hemisphere, protracted disruptions in Libya and Iraq, along with a sharp decline in the value of the Russian Ruble, contributed to reduced revenue and margins. In the quarter, we restructured our North African operations and completed the demobilization of a major contract in Iraq.
"In North America, revenue growth was driven by a significant increase in service intensity in our pressure pumping product line and the seasonal rebound of our Canadian business. At the same time, activity delays our customers are experiencing in the Gulf of Mexico caused North American margins to remain unchanged.
"For the fourth quarter, our North American segment is expected to deliver increased revenue and margins as activity levels return to normal in the Gulf of Mexico and profitability continues to improve in our pressure pumping business. Internationally, we project increased revenue and margins due to the seasonal uplift in year-end product sales along with recent contract wins in Latin America, and actions taken to improve efficiencies in the Eastern Hemisphere."
Free cash flow for the third quarter was $725 million and a record for Baker Hughes. Additionally, 2.9 million shares of Baker Hughes stock were repurchased on the open market, totaling $200 million. This leaves $1.05 billion remaining under the previously announced authorization to repurchase shares.
Total dividend payments were $74 million in the third quarter of 2014, reflecting the previously announced 13% increase in the quarterly cash dividend.
The effective tax rate on adjusted net income, which excludes the charges for the business restructure in North Africa and the impairment of a technology investment with no tax benefits, was 34.6%. Including these charges, the effective tax rate on net income for the third quarter of 2014 was 38.7%.
Capital expenditures were $425 million in the third quarter of 2014 and less than depreciation and amortization expense of $455 million.
Adjusted EBITDA (a non-GAAP measure) in the third quarter of 2014 was a record high of $1,188 million, an increase of $29 million, or 3%, compared to the second quarter of 2014 and an increase of $170 million compared to the third quarter of 2013.
The following section provides operational and technical highlights outlining the successes aligned to our strategy.
Efficient Well Construction
Baker Hughes Awarded Contract for Deepwater Drilling Services in Brazil. Baker Hughes has been awarded a multi-year contract to provide directional drilling and logging-while-drilling services for a national oil company in Brazil. The workscope includes several recently introduced technologies such as FASTrak logging-while-drilling fluid analysis sampling and testing service, EDAR Extra-Deep Azimuthal Resistivity service, and SeismicTrak seismic-while-drilling service. The award of this contract positions Baker Hughes as the leading supplier of drilling services in this critical deepwater market and is expected to commence in the fourth quarter of this year for a term of at least three years.
Gulf of Mexico Geomarket Achieves Deepest Kymera Run in the World. Kymera hybrid drill bit technology was used to drill to a depth of 31,625 ft (9639.3 m) for a deepwater client in the Gulf of Mexico on a highly challenging well in the Lower Tertiary. Two Kymera drill bits were used in place of several traditional drill bits, resulting in 130% faster drilling and 255% further penetration than prior runs.
New Drilling Record Set in North America. Baker Hughes set a company record in North America for the longest lateral footage drilled in a 24 hour period, at 7,313 ft (2229 m). This milestone was achieved with a service value combination comprised of the AutoTrak Curve rotary steerable system, Kymera hybrid drill bit technology, and Reservoir Navigation Services. Baker Hughes also deployed wireline services and the RoqSCAN wellsite mineralogical analyzer to evaluate the lateral section.
United Kingdom Geomarket Awarded Decommissioning Project. Baker Hughes secured a contract with a North Sea independent operator for decommissioning services using the Rigless Intervention System beginning in the second quarter of 2015. This new system has been developed for abandonments, conductor pre-installations, and workovers, and significantly reduces cost by eliminating the need for a drilling rig.
Gulf of Mexico Deploys First Activate-On-Demand Reamer. Baker Hughes executed its first run of the GaugePro Echo on-command digital reamers in the Gulf of Mexico saving a deepwater client 36 hours of rig time. This service uses sensor technology and real-time communication to efficiently and accurately ream on command, unlike conventional mechanical technologies.
Optimizing Well Production
Baker Hughes Introduces New Gas Mitigation Service to Boost Production. Adding to the capabilities of the ProductionWave solution for unconventional wells, Baker Hughes launched the MaxRate gas mitigation service. This technology has been successful in preventing pump failures and production declines in wells that produce both oil and gas. On one project in the Rocky Mountains, a customer used MaxRate on a well that was experiencing a steep production decline curve and repeated electrical submersible pumps shutdowns caused by high gas content in the production fluid. After MaxRate was installed, the production rate improved substantially and there were no additional gas-related issues.
Mexico Geomarket Secures Contract for ProductionWave. Baker Hughes secured a contract to install ProductionWave on a large onshore project in Mexico starting in early 2015. Through this contract, Baker Hughes will provide engineering services, artificial lift technologies, and chemical injection systems for a term of three years.
Increasing Ultimate Recovery
Baker Hughes Provides Industry-Leading Solutions to Processing Challenges. The Baker Hughes Crude Oil Management solution provides a suite of tools and technologies that enables optimum feedstock preparation and desalting performance to maximize refinery utilization and profitability. In addition to this solution, earlier this year, Baker Hughes launched Jettison solids release agents. The combination of these downstream chemical technologies is leading to increased share of activity across several Gulf Coast refineries.
Baker Hughes Introduces Innovative Fracturing Fluid System. Baker Hughes successfully launched the ClearStar fracturing fluid system with superior results during field trials and commercialization. This synthetic guar replacement technology preserves formation permeability better than traditional guar-based products. During testing the ClearStar system coupled with EnZyme breaker technology, outperformed other premium guar-based systems with a 15% average increase in cumulative production.
Leading in Sustainability
Baker Hughes Provides Full Disclosure of Chemistry Used on Fracturing Operations. Baker Hughes recently announced a new policy of disclosing 100% of the chemistry contained within its hydraulic fracturing fluid systems for all wells it fractures, without the use of any trade secret designations. This new disclosure format is intended to increase public trust in the process of hydraulic fracturing, while still protecting the market-driven commercial innovation that has helped the Company become a global industry leader.