Trey Clark - Vice President, IR Martin Craighead - Chairman and CEO Peter Ragauss - SVP and CFO.

Jim Wicklund - Credit Suisse Byron Pope - Tudor, Pickering, Holt & Company Bill Sanchez - Howard Weil Bill Herbert - Simmons & Company Waqar Syed - Goldman Sachs Ole Slorer - Morgan Stanley Angie Sedita - UBS Chuck Minervino - Susquehanna Dough Becker - Bank of America Rob MacKenzie - Iberia Capital.

Hello. My name is Don, and I will be your conference facilitator. At this time I would like to welcome everyone to the Baker Hughes Second Quarter 2014 Earnings Conference Call. (Operator Instructions). I will turn the conference over to Mr. Trey Clark, Vice President of Investor Relations. Sir, you may proceed..

Good morning, everyone, and welcome to the Baker Hughes’ second quarter 2014 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 the 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, forecast 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 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 will turn the call over to Martin Craighead.

Martin?.

Thanks Trey and good morning. During the second quarter Baker Hughes adjusted profit from operations increased $103 million over the previous quarter, a rise of 15%.

The growth in operating profit is the result of improving execution across the enterprise, as we continue to drive operating efficiencies and accelerate the delivery of innovative new products and services around the world.

Let me share a few highlights, starting with our international operations, where I am pleased with the improving quality of our earnings. In our Europe, Africa, Russia Caspian segment, we saw a solid rebound in activity, following weather delays in Russia and the North Sea during the first quarter.

Additionally, sales for wireline services and drilling services increased in the United Kingdom, Angola and Mozambique based on our outstanding reliability and newly introduced technologies for offshore exploration markets.

The strong performance of these product lines, along with rising activity levels across the region, contributed to record revenue and record operating profit for this geographical segment. We also posted record revenue and record operating profit in the Middle East/Asia-Pacific segment, driven by strong activity growth in many of our key markets.

Again, drilling services was a strong contributor and we also benefited from the delivery of high pressure, high temperature completions technologies in Southeast Asia, and a new integrated artificial lifting completion system in China. In Latin America, flexibility and customer centricity are critical to growing our profits and reducing our risk.

During the second quarter, we posted 3% topline growth, despite a flat rig count. Operationally I am very pleased with the strong service quality we are delivering across the region, particularly in the offshore markets.

Our share in Mexico’s marine region is increasing with recent contract wins for drilling services, intelligent production systems and cementing. And in Brazil, we increased our share of drilling services in this challenging performance driven deepwater market.

Across our internal operations, we are seeing strong activity growth, ever more challenging projects and greater reliance on newly introduced technologies. This is a perfect environment for us, and the results are reflected in the growth and strong incremental margins in our international business this quarter.

Turning to North America, we are seeing activity growth in the US onshore market in the form of more rigs, more wells and more horizontal drilling. Demand for AutoTrak Curve, Kymera drill bits and Talon drill bits are at record levels, and not surprisingly, we set record revenues in our drilling services and drill bit product lines.

But it’s the production side of our business that’s beginning to deliver truly differential growth in North America. Our customers’ appetite for new technologies, which can boost oil production from shale, is growing, and the recent launch of our production waste solution could not have been timed better.

Installation of ProductionWave are rapidly accelerating and we are seeing an upsurge in our production chemicals product lines, contributing to record sales in artificial lift and upstream chemicals.

As a result of the strong contribution from new technologies like ProductionWave and improving market conditions in the United States, we were able to overcome Canadian breakup and organically deliver increased revenue and increased margins in North America from the first quarter to the second quarter, and this is the first time Baker Hughes has ever achieved this, since we began reporting our results geographically.

Across the US onshore market, the growth engine remains the Permian. During the quarter, well counts in the Permian rose more than 10%, including an increased proportion of horizontal wells. Growth in the Permian is creating tighter market conditions across all other basins.

These market forces have been favorable for all of our product lines, particularly pressure pumping. In addition to the rise in activity, there are also a growing number of customers experimenting with longer laterals and higher volumes of profit.

As a result, our horizontal stages grew, our stage counts per well increased and our pumping volumes per well also rose. Due to this improving mix and increasing utilization, we achieved higher revenue per stage across virtually every major basin in the United States.

To be clear, our plan to transform our Pressure Pumping business is on track, and we continue to have opportunities to improve our margins from higher asset utilization and operating efficiencies.

Later in today’s call, I will share a few examples of new technologies we have recently commercialized that we expect to have a meaningful impact on our industry and on our earnings. But first let me turn it over to Peter for additional details on the quarter and our guidance on the near-term.

Peter?.

Thanks Martin and good morning. Today we reported adjusted net income for the second quarter of $404 million or $0.92 per share. Adjusted net income excludes $39 million and after tax charges or $0.09 per share related to litigation settlements for labor claims which were previously disclosed in our most recent 10-K and 10-Q.

Adjusted net income also excludes $12 million after tax or another $0.03 per share for currency devaluation in Venezuela. Compared to the prior year, adjusted earnings per share increased $0.38 or about 70%. On a GAAP basis, net income attributable to Baker Hughes for the second quarter was $353 million or $0.80 per share.

Revenue for the second quarter was $5.94 billion, a record for Baker Hughes, and an increase of $448 million or 8% compared to the same quarter last year. Adjusted EBITDA for the second quarter was $1.16 billion, up $299 million or 35% year-over-year.

To help in your understanding of the quarter’s results, I will bridge last quarter’s earnings per share to this quarter. In the first quarter of 2014 we posted GAAP net income of $0.74 per share. First add back $0.10 for severance cost and a royalty agreement which were highlighted in the first quarter.

That brings us to our first quarter adjusted EPS of $0.84. Moving to the second quarter, add $0.06 for North America operations due to increased US activity and actions to improve US profitability, which as Martin mentioned more than offset the seasonal decline in Canadian activity related to spring breakup.

Add $0.09 for international operations due to increased revenue and profitability. Add $0.01 for industrial, due to the seasonal increase in activity, and subtract $0.01 for increased corporate expenses. At this point our adjusted earnings per share would have been $0.99.

Next subtract $0.07 for the tax effect, related to an unfavorable geographic mix of earnings. That brings us to adjusted earnings per share of $0.92 for this quarter. To get to GAAP earnings per share of $0.80, subtract $0.09 for the litigation settlements and subtract $0.03 for the Venezuela currency devaluation.

From this point on in the conference call, any comments on revenue, operating profit and operating profit margin, refer explicitly to Table 5 in our earnings release, which excludes these two adjusting items. Taking a closer look at our results from operations, revenue in North America was $2.84 billion, up $67 million or 2% sequentially.

North America operating profit was $340 million, up $40 million sequentially. As a result our North America operating profit margin was 12%, which is a sequential improvement of a 120 basis points. A sequential rise in revenue and operating profit is attributed to strong sales of new technologies and increased activity in several other US geomarkets.

In our US onshore business, our revenue outpaced the 5% rise in well counts over the prior quarter, but particularly strong growth in our central and western geomarkets. Our Gulf of Mexico revenues also grew sequentially and more than originally expected, as a result of rising share of drilling services and strong sales of completion products.

North American Profitability was also favorably impacted by ongoing actions to improve our US Pressure Pumping business, which resulted in higher asset utilization, better supply chain efficiencies, increased revenues per stage and reduced consumption of some raw materials.

In summary, the improvement to our US pressure pumping profitability and the increase in US onshore activity played out largely as expected.

However, the early rebound in Canadian rig count increased activity in the Gulf of Mexico and rising sales of new technologies were all better than expected for the second quarter, and resulted in North America revenue and margins rising above our most recent guidance.

Moving to international results, we posted revenue of $2.76 billion, up a $125 million or 5% versus the prior quarter. Sequential incremental margins for international operations were just over 45% for the quarter. As a result, operating profit increased $57 million or 16% versus the prior quarter to a total of $404 million.

Operating profit margin for the quarter improved 150 basis points sequentially to 14.6% Our Europe, Africa, Russia Caspian segment delivered 7% revenue growth over the prior quarter, resulting in record revenue. Additionally, operating profit margins increased 180 basis points over the prior quarter.

The increase in performance for this segment was a result of the seasonal rebound of activity in Russia and the North Sea, following poor weather in the first quarter. Additionally, in the UK, we saw increased sales in wireline services, drilling services and drilling fluids.

Lastly, we benefited from operational leverage in Africa, as we continued to gain share in the deepwater markets on the west and east coast of this region.

Our Middle East/Asia Pacific segment, also delivered record revenue in the second quarter along with 66% incremental margins, resulting in a 190 basis point increase in operating profit margins for the quarter.

The sequential improvement in profitability is a result of strong drilling services activity in Saudi Arabia and favorable product mix in both drilling and completion services across China, Australia and Southeast Asia. These gains were partially offset by reduced revenue in Iraq where we began the process of demobilizing on a large turnkey contract.

In Latin America, operating profit was flat as revenue increased modestly. Rising activity in Argentina, Mexico and Brazil was offset by reduced activity in other countries.

For our industrial services segment, we posted revenue of $333 million, up $12 million or 4% sequentially, primarily as a result of a seasonal increase in our process and pipeline services business. Operating profit margins were 10.2%, up a 150 basis points over the prior quarter.

Looking at the balance sheet, we ended the quarter with a cash balance of $1.2 billion, which is unchanged from the prior quarter. Total debt for the quarter was $4.6 billion and our debt-to-capital ratio remained unchanged from the previous quarter at 20%. Capital expenditures for the quarter were $424 million.

During the quarter we repurchased approximately 2.9 million shares on the open market, totaling $200 million. This leaves $1.25 billion remaining under our previously announced authorization to repurchase shares. And finally as previously announced during the second quarter, we increased our upcoming quarterly dividend payoff by 13%.

Now let me provide you with our guidance for the remainder of 2014. Our activity outlook for North American is relatively unchanged. During the second quarter, the US rig count increased 4% sequentially as predicted, led mainly by the Permian.

We expect continued rig count growth throughout the summer and fall, before the typical seasonal decline in the first quarter. We continued to forecast the 4% increase in the average US rig count compared to last year with an average rig count of 830 rigs for 2014.

Also during the second quarter, the US onshore well count increased 5% as drilling efficiencies improved, following the slowdown due to weather in the first quarter. Our full year forecast has not changed and we continued to project a 5% increase in the US well count this year.

For the Gulf of Mexico, we are beginning to see a greater proportion of deepwater rigs performing completions work; however this trend is favorable for Baker Hughes, it has resulted in a slight drop in the active rig count.

We still project two or three incremental deepwater rigs to enter the Gulf of Mexico this year, but we now expect the average US offshore rig count to be flat compared to last year. In Canada, rig counts began climbing from seasonal lows at a faster pace than normal, mainly due to a warm dry spring in May and June.

Activities expected to continue ramping up over the course of the year Likewise, we have revised our Canadian rig count forecast upwards from a 5% to an 8% increase for the full year.

For the third quarter, in North America we expect the increase in US and Canadian activity and further improvement of our Pressure Pumping business will contribute to increased revenue and margins. As a reminder, these gains may be impacted by hurricane activity in the Gulf of Mexico this quarter.

Looking outside of North America, we project the average international rig count to increase 8% compared to last year, with healthy growth in Saudi Arabia, Australia, Argentina and Africa. In Iraq, we began to demobilize on one of our two turnkey contracts.

These resources are now being redeployed to more profitable markets in the Middle East and North Asia. Additionally, due to the recent instability in Iraq, the movement of equipment between the north and the south of the country has been problematic. Despite these logistical challenges our remaining operations are fully active at this time.

As we complete the demobilization on this contract during the third quarter, it is likely that our Middle East/Asia Pacific margins may remain flat, before resuming growth again in the fourth quarter. For our Industrial Services group, revenue and margin should both increase slightly based on higher pipeline and process services activity.

To summarize, we predict continued revenue growth in all of our operating segments, including strong growth in North America. As a result, we are forecasting profit from operations to increase in the third quarter by about 15%.

With respect to non-operational items, for the third quarter, corporate and net interest expenses are expected to be similar to the second quarter. Our 2014 effective tax rate is now expected to be about 35% for the second half of the year. In 2015, we expect our tax rate to return to a range of 32% to 33%.

And finally, capital expenditures for the year have been revised down slightly to be about $1.9 billion. At this point I will now turn the call back over to Martin.

Martin?.

Thanks Peter. I am pleased with the improving results we delivered in our operating segments this quarter, and the trajectory we are on for the year. These results are a reflection of our strategy to convert innovations in to earnings.

This means accelerating the delivery of products and services which enable differential value to our customers, differential margins for our business and differential returns for our shareholders. During the second quarter, we launched 47 new products and services. These are new technologies designed to address the industry’s biggest challenges.

Efficient well construction optimized well production and increased ultimate recovery. I would like to highlight just a few examples of recently introduced technologies that have the potential to reshape our industry.

From the challenges of drilling in the ultra deepwater frontier to pushing the limits of lateral lengths in the inconventionals, improving the conversion efficiencies of wells is critical to the economical of future exploration and development.

As an example, our recently introduced FASTrak technology is helping our customers to reduce the time and cost to evaluate their reservoir and is seeing strong demand in offshore exploration markets.

FASTrak integrates our proven wireline sensor technologies with our logging-while-drilling platform to create the industry’s first commercial service capable of retrieving reservoir fluid samples while drilling and evaluating the target formation. To date we have deployed this service on more than 50 critical deepwater projects.

During the second quarter, we performed an extensive FASTrak operation for an operator in Nigeria. On this project, we retrieved 10 high quality fluid samples and completed more than a 100 pressure tests in a single run all during the drilling process, helping our customer make critical completion decisions and saving days of rig time.

Now any service which can reliably improve our customers understanding of the reservoir and save days of pain for a deepwater rig will have exceptional demand. We are leveraging FASTrak technology to win share in several deepwater markets, including West Africa, the North Sea, and the Gulf of Mexico.

For our customers developing North American shale resources, it’s all about maximizing reservoir contact. The recently introduced SHADOW series frac plugs are allowing our customers to redefine the limits of well geometry by eliminating the need to mill-out plugs with coil tubing.

On one project last quarter, a customer used several dozen SHADOW plugs to design and complete a well that would have been unimaginable before SHADOW plug. The deepest plug was set at more than 25,000 feet measured depths on a horizontal well stepping out nearly 15,000 feet, a trajectory well beyond the range of coil tubing.

SHADOW plug technology is enabling our customers to construct well bores and access reserves that would not have been possible with conventional completions technology. Sales for SHADOW plug are increasing across every US geomarket.

We have also expanded the commercialization of this product internationally with our first deliveries scheduled for Russia and China. The introduction of innovative new products like SHADOW plug and FASTrak are the latest in a continuum of well construction technologies Baker Hughes has been bringing to our industry for more than 100 years.

But we recognize meeting the world’s energy needs in the future can’t be solved simply by drilling more holes more efficiently. We must optimize production from existing resources.

And one of the biggest opportunities for our industry today is to boost production rates from shale, and this is one of our goals to radically transform the production potential of every shale oil well in every shale oil basin.

If I characterize some of the largest production challenges we are working to solve, they broadly fall under three categories. First, understanding the reservoir; how can we identify the source of production and predict the quantity and the chemistry of the produced fluids.

Second, automation; how can we integrate surface hardware with sensor technologies and real time monitoring to create an intelligent, adaptive production system.

And third, down hole architecture; the development of new artificial lift products that have been designed to accommodate the extreme well geometries, the wide flow ranges and the multiple fluid phases which are common when producing from shale. It’s these challenges, that ProductionWave was designed to solve.

The ProductionWave solution is a family of technologies which can be custom tailored on a well-by-well basis or what we call a service value multiplier. Since introducing this system last year, sales have surpassed expectations, with more than 1,000 installations year-to-date across every North American oil basin from Alaska to the Eagle Ford.

ProductionWave has been one of the most rapidly adopted production technologies in the history of our company and is becoming a meaningful driver of our North American growth story. And today I am pleased to share with you the next great breakthrough that will further strengthen the ProductionWave platform.

Until now there has never been an artificial lift product that was designed to deployed and operate in a horizontal shale well, and why would there be. Electrical submersible pumps were developed for vertical and deviated well bores where production rates are high or the oil is very heavy.

And regardless we are meant to squeeze out a few more barrels a day from shallow vertical wells in mature conventional fields.

Until the unconventionals took off and we began drilling 15,000 shale oil wells per year in the United States alone, there was never a need to design a system that can navigate around a tight bend radius and operate horizontally and no one ever has until now.

This month we are launching FLEXPump Curve the world’s first artificial lift system engineered to be deployed below the ever tightening bend angles which are common in unconventionals and then set in the horizontal section at the maximum depth and extension possible.

Why is this important? Because the deeper you can set the pump, the higher the drawdown rate resulting in higher production rates. FLEXPump Curve is one of several new innovations we will be introducing to transform the way oil is produced from shale leading to greater energy production for the world.

For our customers with mature assets, our research and engineering investment is focused on efficient technologies to increase ultimate recovery. In Saudi Arabia, Baker Hughes delivered a game changing all-electric intelligent well system, enabling controlled production of eight different zones simultaneously.

Delivering a system of this size and complexity would not have been possible with traditional hydraulically controlled intelligent completion systems. The completion design includes three cased-hole laterals isolated by premier feed-through packers and an open-hole main-bore, segregated in to five zones by swelling-elastomer feed-through packers.

Numerous down-hole sensors are deployed throughout the tubing and the annulus to allow real-time monitory of production performance.

Active flow-controlled devices installed in each zone are actuated remotely to restrict production in high water cut zones increasing productions from hydrocarbon rich zones and enabling greater recovery over the life of the well.

And the entire network of flow-controlled devices is deployed and operated using one single electric control line as opposed to traditional systems requiring multiple hydraulic control lines. This significantly signifies the installation process, improves system reliability and enables highly accurate remote control, never possible before.

This technology removes the guess work out of well intervention, reduces the total cost of ownership for this well for our customer, and represents the future of intelligent production systems. More importantly, it has the potential to enable more consistent production and higher recovery rates across other mature fields around the world.

The common thread to each of the operational successes I just highlighted is innovation. Innovation is enabling us to redefine the technical limits of what’s possible such as new well geometries enabled by SHADOW plug.

At the same time, through integration we are creating differentiating new services combinations from within our product portfolio like ProductionWave, and through inter dependence with our customers we share a commitment to tackle the industry’s greatest challenges such as intelligent well systems used to boost ultimate recovery.

And the final piece is execution, and that comes from people working with a sense of ownership towards a common purpose. And as I said in my opening remarks, its execution that led to our improved results in the second quarter. As I consider the outlook for Baker Hughes, the fundamentals for our business are strong.

Internationally we are seeing increased customer spend across our well construction product lines in all regions, a patter we don’t expect to see reverse any time soon.

In North America, the trend of customers spending incremental OPEX towards production related technologies is unfolding as we expected, and we predict strong growth in this area for the foreseeable future. Against this backdrop, I am confident that the execution of our strategy will continue to deliver strong earnings growth.

And with that I will turn it back over to Trey. .

Thank you, Martin. At this point I will ask the operator to open the lines for your questions. To give everyone a fair chance to ask questions, we ask that you limit your self to a single question and one related follow-up question.

Could we have the first question please?.

(Operator Instructions). Our first question comes from Jim Wicklund from Credit Suisse. Please go ahead..

Nice quarter again and you covered so much that good questions are hard to come by. You guys have been known as a manufacturing company for a while. At your investor conference you showed a bunch of new technologies and then the list you have at the back that Martin you just went through a several of them is incredibly impressive.

What percentage of your revenues these days are generated by technologies developed in the last year or two?.

Probably between 35% and 50%..

Jeez. Okay and we would expect that to continue I guess, considering though - seven new products I think you said – products and services launched in the quarter. .

I would hope that it continues to grow as a percentage Jim. .

Okay. Better that’s - like I say I am impressed. My unrelated follow-up if I could. Peter on the tax rate you gave us guidance in the second half of the year.

Should we assume that the step up is because of the increased profitability in the US market?.

That’s one factor Jim. There really are really two factors that come in to play. We’ve had higher than planned losses in certain countries such as Iraq that have no tax benefit associated with them. .

Right..

And we expect that Iraq operationally will improve over the coming quarters. So that’s one thing that’s part of the geographic mix comment. But it’s also true secondly that we also had better than planned results in the US, both onshore and in the Gulf of Mexico this quarter, which are taxed at the higher US tax rate.

So those two are playing in and we think – but thinking about 2015 we are planning some structural moves that will help on the tax rate overall and the mix will change going into 2015..

Our next question comes from Byron Pope from Tudor Pickering and Holt. Please go ahead. .

Wanted to get your thoughts just on the North America landscape, you agree your US revenues are well in excess of [inaudible] US rig count and well count growth.

As we think about the full year and specifically the back half of the year with the US onshore in Canada and the Gulf of Mexico potentially all moving in the same direction, is it reasonable to think for the full year that Baker can’t continue to grow that topline faster than your expectation of the 5% well count growth for the full year, based on what you are seeing in terms of the demand for your products and services..

Byron, we would fully expect to outpace the rig count not only in North America but as we’ve done eastern hemisphere as well.

And there’s two fundamental underlying reasons for that, one is, as you very well know in North America the service intensity per well is likely to increase, and that’s starting to also materialize as we talked about the Saudi Arabia completion installation.

And this ties to the second driver if you will is that the technical challenges our customers are facing whether it be in the unconventionals, whether it be in the deepwater markets or whether it be in the, let’s say, prolific eastern hemisphere land markets, that this appetite for improving the ultimate recovery or optimizing production or making well conversions more efficient is just absolutely going to continue to grow, and that means that the money spent likely per well is just going to continue to grow and therefore our business should well outpace than we would fully expect that we would outpace rig count and well count.

.

And then just second question from me on the Europe, Africa, Russia Caspian region. There seemed to be some concerns about activity in the North Sea in the back half of the year on the Norwegian side.

But again hearing your prepared remarks it doesn’t sound as though there was any change to the messaging from your analyst day just in terms of the way you see that region progressing, and especially as I think about the deepwater West Africa market, is that a fair assumption..

That is a fair assumption. There’s really three, like a lot of our super regions, they are very contrasts within the segment.

Africa is certainly a growth story, but even there you could segment the north from the west, and Russia Caspian has really just, it’s on fire, it’s just posting great results and the leadership team there is just fantastic, and we are seeing some underlying fundamentals there as well Byron and greater appetite for technology, and service quality and that’s a bit of a departure from the years past.

And then you have the North Sea, which it’s far more mature and there are some dynamics there that I think you could say that the North Sea is still trying to find its way in terms of our customers. But we had a strong quarter in the UK and certainly a rebound from the weather issues in Q1 as I said.

And I think the Norwegian market with some of the recent successes our customers had there geologically, but yet again still struggling a little bit to try to understand the capital allocation and the return on their own investments might slow down that region down a bit for the next 12 to 18 months.

But overall we are pretty optimistic and quite ambitious as is the leadership team to continue to outpace the market. .

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

I was hoping if you could spend a moment on Brazil. Last year you certainly saw some margin pressures there as you de-mobbed from that country post the last award that came forward you saw share loss in the drilling services side.

Now that we have seen that contract being re-tendered here my understanding is you have certainly roof line to get more active in that market. You talked about the drilling services pickup here during 2Q.

What is your appetite for more exposure in Brazil here as we think about the re-tendering, where Baker goes forward in Brazil?.

Well our appetite in Brazil remains high, Bill, and we’ve never obviously appreciated the reduction in our share count, considering the performance that we have there which is leading hands down.

We drilled far more pre-salt wells than anyone else in the country and ourself and one of our peers has probably drilled in excess of 80% of all the wells in those basins.

And it’s not just about the drilling, our appetite across the entire product line mix is high, and our relationship with our customer there is strong, and they represent I think one of the most capable deepwater operators in the world, and our partnership with them is highly valuable, as it drives value in other basins around the world.

So as to the tender I am not going to share with you our strategy, but certainly economics and is a – particularly in the global environment we find our self in now economics is first and foremost in my mind We are not revenue hounds, we are not share hounds, and we’ve got our investors looked after and that market deserves to reward its suppliers is perhaps some of the highest in the world considering what’s the technology that’s being deployed, and if we can’t make those kind of standards then we take our toys elsewhere.

I don’t know what else to say..

Okay. I guess my unrelated follow-up would be, there was discussion I think in terms of the Middle East/Asia margin, peer being flat sequentially due to this de-mob in Iraq.

But I guess if I heard you guys correctly expect for revenue up across all areas, should we still think about Middle East/Asia revenue is up in 3Q as a whole, but just margins flat is that correct, or is that de-mob causing an impact to the revenue line as well. .

No, we should expect both single digit revenue increases across the board there in international regions. .

Is the second contract, my understanding was that both of the turn-key contracts the exploration wouldn’t happen until next year or some time. I mean should we assume the second contract stays intact over that period. Just any quick thoughts there and then I will turn it back. .

Yeah, you can assume that the second contract continues well in to next year. .

Our next question comes from Bill Herbert from Simmons & Company. Please go ahead. .

Peter could you just frame your comments or amplify on your comment of 15% improvement in operating income for the third quarter. Is that the way to EBIT or profit before tax, and if that presumes kind of flat to up sequentially internationally then that presumes a rather muted rate of expansion in North America given the seasonal recovery in Canada.

So I am just curious as to what drives only a 15% improvement in operating income. But I though you would have done better given the momentum in North America and onshore to seasonal in Canada and the completions mix shift in the Gulf of Mexico in the second half of the year. .

Bill thanks for asking that question, and let me just clarify. You’ll see on the cover of our press release we talk about adjusted profit before tax from operations 778 million. Then if you flip back to Table 5A you see the 778 and that’s operations, okay, that’s before the corporate.

So then if you take your 15% increase on that, that’s a little over a $100 million, okay, and that’s the number we are referring to. We are expecting operating profit to increase with the exception of Middle East/Asia Pacific to increase across the board.

But I would say that with Canada coming back and the US LAN continuing strong at high single-digit revenues, most of that uplift of a little over $100 million will be coming out of North America.

Does that clarify for you?.

Yes it does, it’s very helpful.

So I am just looking here at my – okay so still a $100 million worth operating improvement or your balance for North America is what you just said, correct?.

I said that there is a little over $100 million in total, most of which will be coming out of North America..

Okay, that’s fine. That’s better and that’s more transparent. That still strikes me as a little bit conservative with regard to North America, especially given the incrementals that Canada is likely to carry the ongoing incrementals in US LAN given your journey as to the self recovery with regard to your frac operations.

What does that imply for North American in the third quarter? I would have thought that would have been 15%..

Bill you can do math, we are not coming out with margin guidance, we are just telling you the best guess as the overall operating profit improvement. .

No, I understand that, I am just trying to clarify what the thinking is behind it..

It’s still healthy growth though in US LAN and Canada..

I get it. I understand its healthy growth, but I also think that you have some unique circumstances as well with regards to the ongoing improvement in your frac operation in your seasonal exposure to Canada, the mix shift in the Gulf of Mexico. Be that as it may, those are my views and I certainly appreciate the guidance. That’s all I basically have.

Thank you very much..

Our next question comes from the Waqar Syed from Goldman Sachs. Please go ahead. .

Just a question on the US pressure pumping market; could you may be talk about where the margins stand there or may be even if you can disclose that like how much have they improved quarter-over-quarter in the second quarter versus the first quarter.

And then if you could talk about your equipment utilization and any plans to add capacity in to this market. .

Waqar, I think lets talk about the US because we had the decline in the Canadian business and our largest business up there is pressure pumping, so that’s an unusual event that occurs every spring, so lets take that out. In the US there was a nice margin walk in that business.

We don’t break out the product line profitability, but sequentially in the US there it was a big contributor. But as we highlighted in the prepared remarks, we also hit record revenues and margins in a couple of the key product lines. So it’s increasingly a more balanced portfolio.

In terms of utilization, it’s getting to the point now that our 24 hours schedule is probably 65% of the fleets and capacity is tight, and the utilization numbers are just about maxing out. But it is also something that’s infinitely perfectable as I say just like our supply chain and we are never giving up to try to sweat the assets a bit more.

And I appreciate your question around capacity adds, but I am not in a position comfortable with to discuss those kind of plans publicly Waqar..

And then in terms of your supply chain improvement that you’ve been working on, where are you, are you close to being done or how much of that has already been done. .

You never done, you never done. All right never done.

But I can tell you that compared to where our Pressure Pumping business was two years ago in the space of supply chain utilization, customer mix, contract management, being in the right basins, we are completely different, we have a plan, we have the right people in place to understand the business and execute to that plan.

The risk of repeating myself, of what I said on every one of these calls, it’s not going fast enough, but it’s going in the right direction. .

And then just one final question on the leap technology, anything to report there..

No. We showed you something there quite special, but its something that we keep to ourselves and you guys will be some of the first that will see it when it’s ready to go..

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

I wonder if you could help us think about the increased profit in to the third quarter from a perspective of what comes from just improved pricing and asset utilization in pressure pumping versus what comes from increased sales on new technologies. .

Ole this is Martin. .

Talking North America of course. .

Yes I understand, and are you talking pressure pumping or all product lines. .

No I am talking pressure pumping specifically. .

In the Q3 as it relates to margin, lets leave revenue off the table.

As it relates to margin, we probably have in that product line 25% associated with product substitution or new technology, probably have another 25% associated with improved utilization as I mentioned to Waqar where we got to look still some one to rock but it is tightening up, and then the last half of that would be market [hordes] this pricing that would be my best estimate, Ole..

Okay, very helpful. We are hearing about sort of huge [round fusing], 22 million-23 million pounds of sand.

Could you talk a little bit about how you feel you are set up from a logistics standpoint at the moment and is there a risk that as we go in to the fourth quarter there is lets say some disappointment because of waiting on san or some other logistical challenge.

How would you characterize what you are dealing with?.

I characterize it as we are a lot more muscled up in capabilities around supply chain and managing that side of the business as than we have ever been in my experience with that business, ever been.

And so I think we are in kind of a good position as the cycle unfolds in North America as you say the appetite for more sand is really growing particularly in the Permian as our customers stay in that experimentation mode. As we looked at the data, I was a bit surprised that every basin actually is incrementally added lengths to their wells.

I thought we would have by now may be decided to taper off. So the trend is there was going to be more sand, and the sand issue isn’t at the sand face so to speak. I don’t think there an issue with the mines, there are some particular issues may be in some of the white and the larger grained 20-40, 10-30 whatever.

But it seems to be a little bit more around the logistics. And then if you drill in to the logistics, its not really the trains and all the investments we’ve done there, it could be around the trucking issues, which I think is more temporary and less structural.

Could be some cost inflation on that space, but fully expect our teams to pass that cost on. So the quick answer is, do I think we’ll have some supply constraints in the fourth quarter? The answer is yes. I think we will manage them pretty well.

We’ll certainly manage them a hell of a lot better than we ever have in the past, and I think it will be a little basis specific. It won’t be across North America and I think it will be more of the road transport than the big rail transport. .

Martin it’s very helpful. Congrats with the good quarter and I will back to you..

Our next question comes from the line of Angie Sedita from UBS. Please go ahead. .

First on North America pressure pumping Martin, could you talk a little bit about what you are seeing today in this field and in the stock market as far as pricing, number one, and in conjunction with that are you seeing tightening in any other product outside of pressure pumping today in North America..

I would say that staying away from the issue of pricing, let me frame it up that, the capacity is very tight in a couple of basins and still a little loose in a couple of others. Overall, across the US basins in the second quarter again excluding Canada’s unusual situation, it’s a materially tighter environment than it was last quarter.

I am glad you asked about some of the other product line although than just pressure pumping. There are pricing gains being realized particularly in the drilling services and particularly in artificial lift given the introduction of some of the newer technologies.

So those two artificial lift and drilling are realizing price gains and on the pressure pumping side I will just say that this capacity is tightening, okay..

Okay, fair enough. And as unrelated follow-up certainly we are hearing new capacity is being added in to the market as far as pressure pumping. I think some of that is to reinforce existing fleet for us, but some are being added with crews.

Are you concerned at this point on anything that you are seeing as far as new capacity coming in to the Permian or overall in the market and just your thoughts on capacity overall..

I still think we are 20% over capacitized in North America. I think there is still some repositioning that has to go on. I don’t think it’s strictly an equipment situation, I think it’s a more acute problem with crews. So absorbing this capacity is getting it to work is going to be on getting the crews ready to go.

Am I concerned about other folks adding capacity? I don’t worry about what I can’t control. So we have a pretty disciplined approach. I can tell you as to how we’ll introduce capital to the market and if it can’t give us the returns that AutoTrak Curve can’t or a FLEXPump curve or an investment in the Middle East then we are not adding capacity..

Our next question comes from Chuck Minervino from Susquehanna. Please go ahead..

I just wanted to get a little bit more detail on the international rig count forecast you guys provided. If you can just give us a little bit more color, the 8% year-over-year number.

I am not trying to pick through this too much, but it looks like the international rig count kind of first half of the year is only up about 4%, so you’d have a pretty meaningful ramp in the second half of the year and even if we don’t get to 8% it would be a very notable ramp.

So I was hoping if you could just kind of touch on that a little bit and may be also where you see the rig count growing here in the second half of the year. .

Chuck let me take a stab at it. We are still seeing pretty growth, and I guess that the greatest growth is still in the Middle East, that’s driven by Saudi, the South Arabian Gulf, Kuwait, Qatar etcetera. That’s the biggest single inflexion.

Africa we are still seeing it up significantly, second to the Middle East and that’s in Central Africa and other places. Europe’s still decent, third in the pecking order if you will. Asia-Pac a little lower. I guess if there’s one disappointment it’s been Latin America, it’s actually been flat year-on-year.

We are talking about a 9% before and Latin America is not delivered if you will. So that’s caused us to take it down a little bit. So we still feel pretty good about the second half of the year at this point. .

And then if I can just may be ask one more here. Norway and not picking through the rig count too much here, but Norway the rig count kind of looks like it slid down the last couple of months from 21 rigs down to 16 and I know that’s kind of an area of focus for you guys.

Is that just more a seasonal issue or/and may be that bounces back or is there anything we should be more aware of there. .

Norway we are showing pretty much flat year-on-year, may be down a little bit, but that’s made up in other places like Continental Europe. So we were not expecting great rig increases in Norway and we are not seeing it. .

Our next question comes from Dough Becker from Bank of America. Please go ahead..

There was a very nice jump in Europe, Africa, Russia Caspian margins in the second quarter.

Should we expect margins to improve in the third quarter? I think the Norwegian completion contract is still scheduled to kick off, and then if that’s the case, your product sales coming in the fourth quarter, could we be seeing fourth quarter margins, I don’t know 19%-20% in Europe, Africa, Russia Caspian..

We are expecting a little bit of an increase in Q3 in the [Europe] region, just like we are, mostly with the exception of Middle East, Asia Pacific, and product sales should improve in to the fourth quarter. I am not going to give you specific guidance now on to the fourth quarter, but certainly a little bit, certainly ought to be higher than Q2. .

So good trajectory there. And then Martin just last quarter you highlighted geowave walkaway technology that we combine it with surface seismic. You all got a very comprehensive geophysical model.

How do you view the importance of having seismic acquisition capability to us to [Baker] to them?.

Let me just follow-up on the previous question. The completions contract is really a late Q4 early ’15 implementation, I just wanted to clarify that. As to seismic acquisition we are not in it, we are not in the business.

We feel pretty confident in our relationship and ongoing strengthening ties with CGG, and we are more focused on all the internal processing and interpretation capabilities.

And whether its in the micro seismic world or in the Middle East where we are trying to do some walkaways, and help our customers understand the geo model better or the earth model. The arrangement we are in right now seems to be appropriate for us. .

And just a real quick clarification, last quarter you mentioned about 10% spare capacity in frac for the US, today you mentioned North America about 20% over capacitized. Is Canada just a [delta] there or is there some other reconciliation..

No, I don’t I would challenge me ever saying it was only 10% over capacitized. So I think it’s – okay. .

Okay. Understood..

Thank you Dough. Don lets go and take one more question please. Thank you..

Our last question comes from Rob MacKenzie from Iberia Capital. Please go ahead. .

My question has been asked and answered, thank you..

Okay, well that was quick. That will conclude today’s presentation. Don lets go ahead and close down the call. Thank you. .

Thank you. Thank you for participating in today’s Baker Hughes Incorporated Conference Call. This call will be available for replay beginning at 12 pm Eastern Time, 11 am Central Time, and will be available through 11:30 pm Eastern Time on July 31, 2014.

The number for the replay is 888-843-7419 in the United States or 630-652-3042 for international calls, and the access code is 37166275. You may now disconnect. Thank you..