Baker Hughes Announces Second Quarter Results

Revenues for the second quarter of 2005 were $1,775.5 million, up 18% compared to $1,499.0 million for the second quarter of 2004 and up 8% compared to $1,650.6 million for the first quarter of 2005.

Second quarter results include the favorable impact from lowering the company's estimated effective tax rate for the 12 months ending December 31, 2005, and the favorable impact from recording a deferred tax asset of $10.6 million related to the company's supplemental retirement plan. These items contributed approximately $0.04 per diluted share in the second quarter of 2005.

Chad C. Deaton, Baker Hughes chairman and chief executive officer, said, "A number of factors contributed to a stronger than expected second quarter. Strong activity levels in North America, Latin America, the UK and the Middle East are rapidly consuming excess capacity and challenging the industry's ability to supply products and services. These markets are supporting a premium for reliable technology that delivers measurable improvements in productivity and efficiency. During the second quarter we achieved improvements in price and productivity, and did a good job of managing increasing raw materials costs. In addition, our tax rate was lower than planned."

Commenting on current market conditions, Mr. Deaton continued, "Our customers recognize the ongoing need to accelerate the development and production of oil and gas reserves to meet the world's growing energy requirements. While we remain concerned about the negative impact of high energy prices on global economic growth, we believe the market for our drilling and evaluation products and services will remain strong and the market for our completion and production group will continue to strengthen as new wells are completed through the balance of the year."

Mr. Deaton continued, "We have again increased our capital spending budget for 2005 to support the increased market activity we expect. We will also continue to invest in human resources and new technology that deliver measurable economic benefit to our customers. And we will continue to strive for fair pricing for the value we provide. This quarter's results could not have been achieved without the dedication, commitment and productivity of Baker Hughes employees. They deserve recognition for the contributions they have made to the company's success."

During the second quarter of 2005, debt decreased $9.6 million to $1,092.7 million, and cash increased $195.9 million to $482.0 million. In the second quarter of 2005, the company's capital expenditures were $113.8 million, depreciation and amortization was $93.6 million and dividend payments were $38.9 million.

In September 2002, the company's Board of Directors authorized the company to repurchase up to $275.0 million of its common stock. During the second quarter of 2005, the company did not repurchase any shares. In total, the company has repurchased approximately 8.1 million shares at a cost of $230.5 million and has authorization remaining to repurchase up to $44.5 million in stock.

Operational Highlights

We report our results under three segments: Drilling and Evaluation, which consists of the Baker Atlas, Baker Hughes Drilling Fluids, Hughes Christensen, and INTEQ divisions; Completion and Production, which consists of the Baker Oil Tools, Baker Petrolite, and Centrilift divisions; and WesternGeco, the seismic joint venture with Schlumberger Limited in which we have a 30% interest. In this news release "Oilfield Operations" refers to the combination of the Drilling and Evaluation and the Completion and Production segments. The results of Oilfield Operations and WesternGeco are reported as "Total Oilfield." Historical information on these segments from the first quarter of 2001 through the second quarter of 2005 can be found on the website.

Operational highlights for the three months ended June 30, 2005, June 30, 2004 and March 31, 2005 are detailed below. All results are unaudited and shown in millions.

Revenues by geographic area for the three months ended June 30, 2005, March 31, 2005 and June 30, 2004 are detailed below. All results are unaudited and shown in millions. Additional information for prior periods beginning with the three months ended March 31, 2001 can be found on the website.

North American revenues increased 25% in the second quarter of 2005 compared to the second quarter of 2004. All divisions had increased sales from a stronger North American market.

• Hughes Christensen's Genesis® diamond bit rentals benefited from increases in gas-directed land-based drilling in the US and Canada, where the North American rig count was up 16% compared to the second quarter of 2004.
• Baker Oil Tools' results were particularly strong in the Gulf of Mexico and Eastern Canada, where it installed Eastern Canada's first Intelligent Well System^™ in a well off Sable Island.
• Baker Atlas logged an ultra-deep well in the Gulf of Mexico with 24,500 psi pressure using its industry leading XMAC(SM) acoustic logging system and 3D-Explorer(SM) induction logging services.

Latin American revenues increased 21% in the second quarter of 2005 compared to the second quarter of 2004. The growth in revenues was broad- based, and in total, grew faster than the rig count, which was up 12% compared to the same period a year ago. Every division benefited from the increase in market activity.

• Baker Oil Tools successfully installed its fourth In-Force^™ Intelligent Well System^™ in Ecuador in the second quarter. The completion also included QuantX gauges and a Centrilift electric submersible pump.
• INTEQ introduced the VertiTrak® automated vertical drilling service on a remote location in Brazil in over 3,000 feet of water successfully drilling more than 5,000 feet with a greater than 70% increase in rate of penetration compared to a competitor.

Europe, Africa, and CIS revenues were up 9% in the second quarter of 2005 compared to the second quarter of 2004. Europe and Africa combined revenues were up 17% in the second quarter of 2005 compared to a rig count which was down 2% for the same period. Russian revenues in the second quarter of 2005 were down compared to the second quarter of 2004, primarily related to lower ESP sales by Centrilift.

• During the second quarter of 2005, Baker Atlas opened a research center in Novosibirsk, Western Siberia.
• In Norway, INTEQ successfully drilled a demanding "Starfish" well with five laterals contacting over 43,000 feet of reservoir using the AutoTrak® rotary steerable system, APLS^™ Advanced Porosity Logging System, CoPilot® drilling dynamics service, and Hughes Christensen's Genesis bits.

Middle East and Asia Pacific revenues were up 20% in the second quarter of 2005 compared to the second quarter of 2004, exceeding the increase in the rig count for the comparable period. The growth in Middle East revenues was led by strong sales of Baker Oil Tools' Equalizer^™ sand screen and INTEQ's X- Treme® drilling motor services. Results for Asia Pacific also included unplanned export sales to China by Baker Atlas.

• Centrilift's ESPCP Electric Submersible Progressing Cavity Pump set a new standard for reliability setting a world record of 1,600 days of continuous service in Oman.
• Baker Oil Tools installed its first expandable EXPRess® screen completion in Egypt's Gulf of Suez following a successful EXPRess solid pipe installation.

Oilfield Operations

Revenues for the second quarter of 2005 increased 18% compared to the second quarter of 2004 and increased 8% compared to the first quarter of 2005. With the exception of Centrilift, every division increased revenues compared to the second quarter of 2004 and compared to the first quarter of 2005. Baker Hughes Drilling Fluids, Baker Oil Tools, Baker Petrolite, Hughes Christensen and INTEQ all reported record revenues in the second quarter of 2005. The decrease in revenues at Centrilift was primarily due to a decrease in Russian revenues in the second quarter of 2005.

Every division except Centrilift reported improved profits in the second quarter of 2005 compared to the second quarter of 2004. Baker Oil Tools, Baker Petrolite and Hughes Christensen reported record operating profits in the second quarter of 2005.

The non-GAAP measure of pre-tax operating margin, which is operating profit before tax divided by revenues, was 19.9% for the second quarter of 2005 compared to 16.6% for the second quarter of 2004 and 18.9% for the first quarter of 2005. Baker Oil Tools, Baker Petrolite and Hughes Christensen reported record pre-tax operating margins in the second quarter of 2005, and every division except Baker Hughes Drilling Fluids, reported at least double digit pre-tax operating margins.

Corporate, Net Interest and Other

Corporate, net interest and other expenses were $64.7 million in the second quarter of 2005, down $9.1 million from the second quarter of 2004 and up $5.6 million from the first quarter of 2005. The decrease in corporate, net interest and other expenses compared to the second quarter a year ago was primarily due to lower net interest costs. Compared to the first quarter of 2005, the increase was primarily due to higher corporate cost center spending and increased costs associated with assets and liabilities retained from the discontinued Process segment, partially offset by lower net interest expense and favorable changes in foreign currency.

Outlook

• Revenues for the year 2005 are expected to be up 17% to 19% compared to the year 2004. Revenues in the third quarter of 2005 are expected to be up 17% to 19% compared to the third quarter of 2004 and up 1% to 3% compared to the second quarter of 2005.
• WesternGeco is expected to contribute $75 to $85 million in equity in income of affiliates for the year 2005 and $20 to $25 million for the third quarter of 2005.
• Corporate and other expenses, excluding interest expense, are expected to be between $185 and $195 million for the year 2005 and approximately $49 to $52 million in the third quarter of 2005.
• Net interest expense is expected to be between $53 and $57 million for the year 2005 and approximately $13 to $15 million in the third quarter of 2005.
• Net income per diluted share is expected to be between $2.52 and $2.60 for the year 2005. Net income per diluted share is expected to be between $0.64 and $0.67 in the third quarter of 2005.
• Capital spending is expected to be between $490 and $510 million for the year 2005.
• Depreciation and amortization expense is expected to be between $390 and $410 million for the year 2005.
• The effective tax rate for the third and fourth quarters of 2005 is expected to be approximately 33%. The effective tax rate for the year 2005 is expected to be approximately 32%.