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2012 YEAR IN REVIEW
This Annual Report to Stockholders, including the letter to stockholders from Chad C. Deaton, Executive Chairman, and Martin S. Craighead, President and Chief Executive Officer, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “potential,” “would,” “may,” “probable,” “likely,” and similar expressions, and the negative thereof, are intended to identify forward-looking statements. Baker Hughes’ expectations regarding these matters are only its forecasts. These forecasts may be substantially different from actual results, which are affected by many factors, including those listed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Items 1A and 7 of the Annual Report on Form 10-K of Baker Hughes Incorporated for its year ended December 31, 2012. The use of “Baker Hughes,” “our,” “we” and other similar terms are not intended to describe or imply particular corporate organizations or relationships.
2012 YEAR IN REVIEW
  • The AutoTrak™ Curve rotary steerable drilling system reached an impressive milestone by drilling more than 3 million feet (914,400 meters) since its launch less than two years earlier. Described as the industry’s most accurate and efficient horizontal drilling system, AutoTrak Curve is improving drilling efficiencies and reshaping the “economies of Shale.”
  • Rebounding Gulf of Mexico activity drove 32% growth in revenue. Along with our strength in Completions and Production, Baker Hughes has built a position as the leading supplier of Drilling Services. Advanced wireline technologies introduced in 2012 are expected to grow our position in Evaluation in 2013 and beyond.
  • We dramatically expanded our Integrated Operations activities, particularly in the Middle East. Our tremendous growth in Iraq is considered to be the largest and fastest startup in Company history and establishes a strong foothold in one of the world’s key oil-producing regions.
  • We continue to solidify our position as the leader in Well Construction and Production services. Customer demand for our FracPoint™ completion systems continues to climb. Today, Baker Hughes is the number one provider of sliding sleeves in the United States.
  • A new integrated drilling services contract in Norway, combined with our strong position in the United Kingdom and Continental Europe, makes Baker Hughes a premier Drilling Services provider in the Europe region.
  • The rapid shift from natural gas to oil-directed drilling in North America challenged results in our Pressure Pumping product line. At the same time, it created unprecedented demand for production enhancement products and services and contributed to record revenues and profits globally for Artificial Lift and Upstream Chemicals.
  • Baker Hughes was identified as a world sustainability leader on the Dow Jones Sustainability World Index of the world’s largest companies from 58 industry segments. This was the first year we participated in the evaluation.
  • Recognizing growing water challenges facing our customers, we launched the H2prO™ water management service, which uses the industry’s most comprehensive suite of solutions to help reduce total cost of operations and environmental impact by treating produced and flowback water for reuse.
This Annual Report to Stockholders, including the letter to stockholders from Chad C. Deaton, Executive Chairman, and Martin S. Craighead, President and Chief Executive Officer, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “potential,” “would,” “may,” “probable,” “likely,” and similar expressions, and the negative thereof, are intended to identify forward-looking statements. Baker Hughes’ expectations regarding these matters are only its forecasts. These forecasts may be substantially different from actual results, which are affected by many factors, including those listed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Items 1A and 7 of the Annual Report on Form 10-K of Baker Hughes Incorporated for its year ended December 31, 2012. The use of “Baker Hughes,” “our,” “we” and other similar terms are not intended to describe or imply particular corporate organizations or relationships.
LETTER TO SHAREHOLDERS
2012 was a year in which Baker Hughes demonstrated that by investing in the right technologies in the right geographies, we are anticipating our customers’ needs and delivering integrated solutions to materially improve ultimate recovery.

 

While 2013 is certain to bring its own unique challenges, we are bullish that the thirst for energy will continue rising as the world’s population keeps growing and global living standards improve. We see tremendous opportunity for Baker Hughes to help meet that demand for energy, and the brightest opportunities will come from deep water, especially in the Gulf of Mexico, and from unconventional resource developments.

In fact, one of our newest products, the AutoTrak™ Curve rotary steerable drilling system–specifically designed for horizontal drilling in shales–delivered phenomenal success for Baker Hughes in 2012 by drilling 3 million feet (914,400 meters) in the onshore U.S. in less then two years since being launched. Several other new products for unconventionals also had stellar performance: Baker Hughes Talon™ and Kymera™ drill bits and our FracPoint™ multizone hydraulic fracturing completion system.

The well-documented oversupply of hydraulic fracturing horsepower in the U.S. and Canada clearly impacted our Pressure Pumping product line results this year. While we expect many of the capacity and logistical challenges to remain for the short term, we believe we have made significant improvements in this product line and will emerge stronger when balance returns to the market. Baker Hughes made the decision to retool this business by taking a differential approach to technology development and addressing supply chain and logistics issues to generate better margins. As a result, we’re seeing improvements in this product line, and we expect the trend to continue.

Early in 2012 we opened our 11th global technology center in Dhahran, Saudi Arabia, to focus on the rapidly expanding unconventional market in the Middle East. We expect that center to complement our alignment with customers who most value reliable, efficient, and integrated solutions to the challenges of unconventionals.

LETTER TO SHAREHOLDERS

An integral part of our success in breakthrough innovations is due to our ongoing investment in research and development. Our 2012 investment of nearly $500 million was dedicated to strengthening our core competencies in Drill Bits, Drilling Services, Completions, and Artificial Lift technologies, and in developing solutions for the unconventional, deepwater, and high-pressure/high-temperature oil and gas frontiers.

Our technology investments warrant a long-term view and a commitment to stay the course throughout the business cycle. One outcome of that investment is taking place at our Center for Technology Innovation (CTI) in Houston, where our experts are collaborating across disciplines to unlock the key to monobore completions that are integrated with intelligent production systems for the ultra-deepwater, frontier wells in the Gulf of Mexico.

Among our successes this year is our record on health, safety, and environmental initiatives. Highlights include reducing injuries among short-service employees, which is particularly meaningful for our field operations. We also placed a great deal of emphasis on transportation and driver safety, and showed improvement in these areas as well. However, we cannot be satisfied until every employee arrives home safely at the end of the day.

To offer an end-to-end customer experience, Baker Hughes delivered industry-leading environmental initiatives in 2012, especially in hydraulic fracturing technology. Our emphasis on transparency, cleaner fluids, and a reduced on-site footprint enables us to bring a full suite of environmentally safe and compliant solutions to customers worldwide. For example, we recently designed, tested, and commercialized new bifuel engines for our fleets that leverage technology to drive efficiency while simultaneously generating environmental gains.

We also recognize that our ability to tackle the world’s toughest oil and gas challenges depends on our success in recruiting, retaining, and developing diverse new talent. Baker Hughes’ ability to recruit and retain top-notch employees has been extraordinarily successful.

LETTER TO SHAREHOLDERS

From our network of global research and technology centers to our partnerships with the world’s leading academics, universities, and technical schools, we’ve created thousands of new jobs, especially in North America, and we’ve attracted considerable new talent to our company, including more than 750 engineers and scientists globally.

Another extension of the desire to bring diversity of thought to the table is evidenced by our widespread focus on diversity and inclusion. During 2012, we expanded our focus on inclusion by placing heightened emphasis on performance and talent management dialogue among all employees. We introduced an independent, neutral ombuds program to offer an additional outlet for U.S.-based employees to resolve myriad issues. In addition, we successfully added a diversity and inclusion module to our global management training programs. Twenty-four percent of the recent graduates in engineering, science, and technology positions recruited to Baker Hughes were women, and 20 percent of our employees in leadership and management positions are diverse–further evidence that our nationalization efforts around the globe are maturing.

As we head into 2013, our priority is to relentlessly focus on the quality of our earnings and on improving total shareholder returns.

In addition to continuing to improve our Pressure Pumping product line in North America, our outlook for International results continues to strengthen. Our investments in infrastructure and technology over the last few years have yielded significant efficiencies. Europe, especially Norway, looks particularly promising in the coming year as we deliver on our large, integrated Drilling Services contract in the North Sea. Sub Sahara Africa operations have continued to exceed customer expectations, and Baker Hughes is well positioned for growth on the East Coast of Africa to facilitate the industry’s deepwater discoveries there.

We expanded our international presence with our entry into Iraq in 2012. And we believe our Integrated Operations approach in this resource-rich basin will be a meaningful contributor to our results in the long term.

In closing, on behalf of the board of directors, we would like to acknowledge the service of our Lead Director, John Riley, who will retire effective April 25, 2013. John has been an influential voice in guiding Baker Hughes over the past 16 years, and we are grateful for his contributions. In addition, we welcomed a new board member early in 2012, Lynn Elsenhans. Lynn is a veteran energy executive, and we look forward to her contributions.

We are very optimistic about what Baker Hughes will accomplish in 2013. We believe that now, more than ever, we are well connected to the opportunities that will enable us to deliver the smart technologies and flexible solutions our customers have come to expect from Baker Hughes.

LETTER TO SHAREHOLDERS

As I prepare to retire from Baker Hughes, I would like to acknowledge the tremendous effort of our leadership team and all our employees to hold ourselves to the highest standards and deliver meaningful results for our customers. For me personally, it has been an honor and a privilege to represent this company and to proactively communicate our efforts to stakeholders and industry around the world. Going forward, Martin and I have spent the past two years planning a smooth transition to a new CEO, and as of April 25, Chairman of the Board. I am confident that we have the right leader in Martin to take Baker Hughes to the next level of performance.

For the past eight years, Chad has led Baker Hughes and has been instrumental in transforming this company into a global competitor. By investing in people, technology, and infrastructure, Chad laid the foundation for meaningful growth, and it is a privilege to now take up that legacy and build upon it for the future. On April 25, Chad will retire from Baker Hughes. On behalf of the Board of Directors and all employees, I would like to acknowledge our gratitude and appreciation for Chad’s leadership and vision, and most importantly, his commitment to Baker Hughes’ success.

CONNECTED TO INNOVATION
ADVANCING RESERVOIR PERFORMANCE
  • Baker Hughes continually advances reservoir and near-wellbore understanding and focuses it to help our clients reduce operational uncertainty and risk, and make informed decisions that maximize well production and profitability in all hydrocarbon-bearing reservoir types.
CONNECTED TO INNOVATION
ADVANCING RESERVOIR PERFORMANCE

The Baker Hughes Reservoir Development Services (RDS) group uses a rigorous, multidisciplinary approach to systematically evaluate reservoir potential and provide industry-leading reservoir advice and innovative solutions for immediate results. Expert teams in Aberdeen, London, Kuala Lumpur, Perth, Dubai, Calgary, Moscow, Abu Dhabi, Mexico City, Rio de Janeiro, Singapore, Sydney, Buenos Aires, and Houston work diligently to find and maximize reserves; increase production rates and recovery factors; select, define, and execute field development plans; and analyze acquisition and divestiture options. Our extensive experience in global hydrocarbon basins is supported with proven methodologies and proprietary workflows and software.

Baker Hughes formation evaluation services use high-resolution logs to actively and comprehensively delineate the formation near the wellbore. Exploration and production companies use our services to improve production and reduce the risk of unexpected drilling costs. For example, our Shale Formation Evaluation suite goes far beyond conventional formation evaluation methods to acquire measurements that accurately characterize complex shale reservoirs, identify stimulation zones, and optimize wellbore placement and completion design.

 

CONNECTED TO SUSTAINABILITY
HEALTH, SAFETY, AND ENVIRONMENT
  • For Baker Hughes, commitment to health, safety, and environmental (HSE) performance is not just a stated goal. It is a condition of employment and is integral to our business decisions, plans, and operations.
CONNECTED TO SUSTAINABILITY
HEALTH, SAFETY, AND ENVIRONMENT

We continually develop processes and technologies that enhance the efficiency, productivity, and safety of oil and gas operations while reducing their environmental footprint. Fundamental training for all field employees includes environmental awareness, hazard awareness and reporting, chemical handling standards, and affirmation of each employee’s Stop Work authority, which means that any employee has the right and the responsibility to stop a job if an unsafe or a potentially hazardous situation is witnessed.

Baker Hughes is committed to being a leader in sustainable oilfield chemistry. The SmartCare™ program embodies this commitment. It includes a well services chemical ranking system that sets new standards for visibility and accountability, and encompasses an ever-growing SmartCare family of environmentally responsible chemical products.

Our H2prO™ Surface Water Management services and ResPRO™ Subsurface Water services leverage unsurpassed understanding of oilfield water chemistry to help our clients reduce and recycle produced water and conserve fresh water efficiently, economically, and in compliance with appropriate policies and regulations.

We have received numerous accolades for our efforts: inclusion in the Dow Jones Sustainability World Index and Bloomberg’s Civic 50 ranking; first-place honors in the energy sector in Security Magazine’s ranking of Fortune 500 companies; and continued high ranking in the Newsweek Green Rankings.

CONNECTED TO HERITAGE
WELL CONSTRUCTION
  • Baker Hughes oilfield technologies have set the standard for drilling and completion innovation, performance, and reliability under the most challenging conditions for more than a century. Today, we continue to push the boundaries as the world’s leading provider of well construction services.
CONNECTED TO HERITAGE
WELL CONSTRUCTION

The AutoTrak™ Curve rotary steerable closed-loop directional drilling system. The AutoTrak Curve system builds on the legacy of the original AutoTrak platform, which has set the benchmark for steering accuracy and reliability since its introduction in 1997. Specifically designed for faster, safer well construction in unconventional resource plays, the AutoTrak Curve operates on surface commands and can drill in any desired direction. By building higher angles, it exposes more of the producing reservoir and improves hydrocarbon recovery.

Evolved from industry-leading sliding sleeve technology, the FracPoint™ multistage hydraulic fracturing system provides a safe, cost-effective alternative to traditional pressure pumping options to fracture 40 stages or more in a single pumping operation. Its ability to improve initial productivity and accelerate reservoir drainage in tight shale reservoirs has converted otherwise unprofitable projects into money-making assets and has made it the number one system of its type in the United States. To date, the FracPoint system has been used in more than 4,500 horizontal wells.

The Hughes Christensen Kymera™ hybrid drill bit combines the cutting superiority of legacy Hughes Christensen diamond bits and the rock-crushing strength of roller cone bits to drill through the most complex rock formations faster, smoother, and more precisely than either diamond or roller cone bits. In well construction projects throughout the world, the Kymera bit has drilled two to two-and-a-half times faster than other bits, extended run lengths by more than 200 percent, and dramatically reduced nonproductive time.

These are only three of the hundreds of well construction technologies that are driving efficiency gains in unconventional and conventional reservoirs.

CONNECTED TO RECOVERY
WELL PRODUCTION
  • From tight shale plays to heavy oil deposits to giant ultra-deepwater fields, success or failure of hydrocarbon-producing assets is directly related to the volumes of oil or gas that can be produced cost effectively.
CONNECTED TO RECOVERY
WELL PRODUCTION

Today, three factors–the need to increase ultimate recovery, new production enhancement needs generated by shale development, and the rapid shift from gas to oil production in North America–are driving renewed growth in the demand for production technologies that Baker Hughes is uniquely qualified to provide. In tight shales, for example, production often declines dramatically within two years after the well is put on stream. In these wells, our industry-leading electrical submersible pumps (ESPs) help recover oil that will not flow naturally.

We take a total systems approach to identifying issues that could affect shale production and delivering customized, environmentally responsible chemical solutions to prevent, inhibit, or remediate those issues. We leverage our worldwide knowledge base, extensive laboratory facilities in strategic locations, and companywide commitment to research and development to formulate unique products for specific applications. We also offer on-site training, consultation, and solutions for production process stabilization and increased equipment reliability.

The sour gas and solids that inhibit production and ultimate recovery from shale wells can also collect, along with gas hydrates, to block flow in subsea flowlines, pipelines, and risers. Baker Hughes provides industry-leading flow assurance chemical products that prevent or mitigate solids buildup to ensure flow in offshore and deepwater operations. We also provide subsea booster systems that operate on the seabed to increase the flow of hydrocarbons from the well to floating production, storage, and offloading vessels, or to production platforms.

CONNECTED TO OPPORTUNITIES
INDUSTRIAL SERVICES
CONNECTED TO OPPORTUNITIES
INDUSTRIAL SERVICES

In North America, where refining capacity is relatively flat, U.S. shale oil production and increasing consumption of Canadian crude oil by U.S. refineries provide significant growth opportunities for our chemical and industrial services. Shale oils vary widely in composition. These variations, plus many common characteristics of shale oil, can lead to disruptions across the refining supply chain.

Baker Hughes offers unique chemistries and innovative service programs to eliminate or mitigate shale oil transportation and processing challenges. Among these are hydrogen sulfide (H2S) scavengers, oil/water separation products, antifoulants and blending stability chemicals, contaminant removers, pipeline drag reducers, and finished fuel additives. Our experienced service teams provide rapid 24/7/365 response to meet fuel and crude oil specifications while ensuring health, safety, and environmental (HSE) compliance.

While shale oil is significantly impacting refining in the Western Hemisphere, worldwide refining capacity continues to shift to the east, with demand increasing sharply in China and India. Baker Hughes is active and enjoying success in both countries, with local manufacturing in China and growing technical support and field operations in both countries.

Global growth of midstream and gas handling infrastructures affords additional opportunities for our chemical products and services. Our Process and Pipeline Services group finished 2012 with strong performance, and we expect to see continued demand for these products and services.

CONNECTED TO FUTURE
INTEGRATED OPERATIONS
  • Going forward, the oil and gas industry will be characterized by new business models and continually evolving services. Baker Hughes is well positioned to meet the demands of the future.
CONNECTED TO FUTURE
INTEGRATED OPERATIONS

Our Integrated Operations offerings provide expert project management, comprehensive engineering, and a full suite of services, making it easier for our clients to manage risk and focus on project goals.

From a single re-entry string to full-scope field development, we implement application-specific mixes of technologies, project management, logistics, and supply chain expertise to accelerate production and lower total operating cost. This expertise is complemented by worldwide support with local proficiency in reservoir modeling and simulation; enhanced oil recovery techniques; exploration; drilling; completions; stimulation; production; and rejuvenation. Integration options range from managing turnkey projects to simply bundling services.

The Baker Hughes Integrated Operations Management System—with project-specific key performance indicators—supports a continuous analysis and improvement approach that helps mitigate operational and financial risk, reduce nonproductive time, and enhance safety. Operational- and knowledge-based tools help us continuously improve all processes and capture data with the greatest level of integrity. Integrated Operations team members identify potential problems and develop customized solutions based on international standards and best practices.

The reach of Baker Hughes Integrated Operations extends to key markets around the world, including Mexico, the Middle East, Russia, Asia Pacific, Algeria, and Brazil.