Alondra de Oteyza - Baker Hughes, Inc. Martin S. Craighead - Baker Hughes, Inc. Kimberly A. Ross - Baker Hughes, Inc..

Judson E. Bailey - Wells Fargo Securities LLC James West - Evercore ISI Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc. Sean C. Meakim - JPMorgan Securities LLC Kurt Hallead - RBC Capital Markets LLC William Sanchez - Scotia Howard Weil Scott A. Gruber - Citigroup Global Markets, Inc. (Broker) Daniel J.

Boyd - BMO Capital Markets (United States) James Wicklund - Credit Suisse Securities (USA) LLC (Broker).

Good day ladies and gentlemen and welcome to the Baker Hughes Third Quarter 2016 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Alondra de Oteyza, Director of Investor Relations. Ma'am, you may begin..

Thank you, Abigail. Good morning everyone and welcome to the Baker Hughes third quarter 2016 earnings conference call. Here with me today is our Chairman and CEO, Martin Craighead, and Kimberly Ross, Senior Vice President and Chief Financial Officer.

Today's presentation and the earnings release that was issued earlier today can be found at our website at bakerhughes.com. As a reminder, during the course of this conference call, we will provide predictions, forecasts and other forward-looking statements.

Although they reflect our current expectations, these statements are not guarantees of future performance and involve a number of risks and assumptions. We advise you to review our SEC filings for a discussion of some of the factors that could cause actual results to differ materially.

Also, 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 section. And with that, I'll turn the call over to Martin Craighead.

Martin?.

one, reducing $500 million of cost by year end through simplifying our organizational structure and operational footprint; two, focusing on our core strengths in product innovation by fortifying our full service model and building broader sales channels for our products and technology; and three, optimizing our capital structure by paying down debt and buying back shares while ensuring we maintain financial flexibility.

We've made significant progress against all of those objectives and we are doing so with an overarching focus on profitable growth and return on invested capital.

Starting with costs, last month we said that we expected to achieve the $500 million in savings by the end of the third quarter, three months ahead of our original timeline, and that we had identified additional savings opportunities beyond that.

To that end, I'm pleased to say that we not only have achieved that goal, but we now expect the total annualized savings run rate to increase by 30% to $650 million by year end. Kimberly will provide more details later in the call.

Turning to our efforts to fortify our core full service business and build new sales channels for our products and technology, we continue to make significant progress.

Previously, we said that we had identified opportunities to prune our product line portfolio and geo-market presence in certain markets by either exiting a market or converting it to an alternative sales channel. As previously highlighted, these exits and conversions represented less than 5% of total second quarter revenue.

We expect to have two thirds of these exits and conversions completed by the end of 2016. As an example, we have recently converted select geographical areas within our drilling and completion fluids business in North America to a distribution model.

We've completed one such conversion in the South Texas and Permian market, which will not only allow us to retain product revenue, but will also take our products into new markets and increase our market share.

For this particular product line, we will replicate this model elsewhere in the United States while retaining our current model and markets where the financial returns are more appealing. This business conversion illustrates how these alternative sales channels provide us an opportunity to grow with a minimal asset base.

This is just one example of how we are fine tuning our business with a surgical approach to improve efficiency, profitability and return on invested capital. That's the same philosophical view we are taking as we consider a range of ownership models for our North America land pressure pumping business.

While we will continue to participate in this market, we are looking at models that will allow us to do so while mitigating the resource requirements and capital intensity that are inherent in this particular business segment.

To be clear, some of the changes to our full service offerings provide an opportunity for conversion to an alternative business model, by selling products and services to local service providers in the markets that we're rationalizing.

However, I want to emphasize that the opportunities extend to markets where we have a limited or zero presence today.

I'm very pleased by the customer responses so far and we currently have a line of sight to a steady pipeline of revenue growth opportunities in this space, including some that could materialize in Latin America and the Middle East/Asia Pacific as early as the first quarter of 2017.

We believe these local service providers represent a market segment that is under supported. We've seen numerous examples of government programs with the goal of keeping more of the oil field service and supply chain spending in-country by establishing home grown companies. This is an ideal opportunity for Baker Hughes.

Because of our leading technology, innovator mind set and catalog of world class brands, we are uniquely positioned to enable this emerging customer segment in all facets of their business, spanning products, services, training, technical support and consulting services, and position them to compete for and win local contracts, not just in a one-time transactional way, but as part of a recurring longer-term relationship that grows over time.

While this opportunity needs some runway to develop, the growth potential is real and is attainable. Next, let me give you some thoughts on the market, how it's evolving and where we think it's heading.

As we said in July, and reiterated again in September, we continue to believe that oil prices in the mid to upper 50s are required for a sustainable recovery in North America. Our customers also need to be more confident on the durability of those oil prices before making any significant change to their spending patterns.

As we previously projected, the North American market has been continuing to grind slowly upward and we expect that to continue. In order for a broader recovery to take place, a series of milestones need to be reached before the market can respond in a more predictable way.

First, supply/demand surplus has to rebalance, allowing commodity prices to improve. Second, those commodity prices need to stabilize for confidence in the customer community to improve and their investment to accelerate.

And third, activity needs to increase meaningfully before service capacity can be substantially absorbed and pricing recovery take place. Until then, we will continue to see this dislocation we have today in the relationship between commodity prices and services pricing.

In North America, we have seen a recent shift in land activity from what was predominantly small private operators adding rigs opportunistically to include larger, more established E&P companies. While we've seen customers growing more optimistic about the industry outlook, volatility and uncertainty remain.

We expect the ramp up to remain slow and pricing to remain challenging. And as a result, we expect only modest growth in the fourth quarter in North America.

Internationally, we see activity declines and pricing pressure continuing in the near term, and with customers controlling spending, we don't expect year-end seasonal product sales to offset those declines.

In Africa, where we have a significant deepwater drilling position, we expect our revenue to further decline as a result of ongoing reductions in deepwater activity. Additionally in Norway, we expect to see a sequential revenue reduction as a result of the recently resolved local strikes which impacted the first two weeks of the fourth quarter.

Conversely, in the Middle East/Asia Pacific region, we expect to see growth opportunities in Kuwait, the United Arab Emirates, India and Oman. And in Saudi Arabia, we continue to fortify our position with a focus on flawless execution across our full suite of product lines.

And finally in Latin America, we expect the overall market to remain relatively flat, although a one-time product sale in Colombia during the third quarter will create a sequential headwind.

Now as we look ahead, it's also worth reiterating the obvious, that the oil and gas ecosystem remains fragile and susceptible to shocks from headlines, difficult (11:18) policy changes, currency fluctuation and geopolitical dynamics.

And as I've said previously, the difference in this cycle is the more prominent role of the North American shale producer, who can achieve production growth and get it into the pipe far faster than conventional producers. As such, the elasticity of the unconventional segment could act as an effective ceiling on the commodity price.

So while we remain optimistic about recovery's prospects, we are positioning the company to prosper in a lower for longer market environment. In simple terms, that means delivering solutions to our customers that result in more efficient wells, optimized production and improved recovery.

Let me give you an example of how we are delivering more efficient wells for our customers. The DJ Basin in the Rockies has historically been a drilling motor market, but operators there are challenged to reach further with more and longer laterals.

Conventional drilling systems lack the ability to stay in the target zone on longer laterals, and that limits the reach.

Last quarter, Baker Hughes combined two industry-leading products, our AutoTrak Curve rotary steerable system, the only continuous proportional steering system in the market, with our Talon Force bit technology to increase lateral lengths from 5,000 feet to 10,000 feet, while drilling 30% faster and delivering gun barrel quality holes.

Speed and reach are important, but speed and reach without borehole quality is a recipe for increased completions costs and premature wear on lift systems. So when you hit the sweet spot of fast and good, you have a clear competitive advantage, and that is what Baker Hughes does really well.

We bring technology, products, systems and people that differentiate in the markets in which we choose to play. That's why one customer in the DJ Basin awarded us 100% of their work through 2017, and it's not just one customer. We now hold nearly 50% of the drilling share in that critical basin.

Touching on optimizing production, while it's always high on our customers' agenda, given today's market conditions it's nothing short of an imperative. In some basins, particularly the Canadian oil sands with high cost and long cycle time for new projects, frankly it's a lifeline.

Our chemicals portfolio is uniquely positioned to improve and sustain productivity for our customers in that market today, and we are seeing an increase in the demands for a technology solution in that area.

For example, last month we launched our new TRETOLITE SNAP water clarifier product, designed for wells that require oil and water separation like the steam assisted gravity drainage, or SAGD, production facilities in Canada.

During the oil and water separation process, dry oil and clean water usually come with undesired costs and operational instability resulting from heat exchanger fouling, oil and water recycling and slop oil generation. These issues drive costs up and production down.

Prior to its commercial launch, we worked with an operator in Canada to trial run our TRETOLITE SNAP water clarifier and the results were overwhelmingly differentiating. Over the treatment period, we lowered oil and water rates, basic sediment and water levels in the oil.

This significantly reduced recycling, costly equipment clean-outs and slop production, all while increasing throughput capacity.

And finally, to increase ultimate recovery in a meaningful way will require not only the aforementioned well construction and production improvement, but also the development of a new range of sensing and intelligent products integrated into a broader digital framework.

For several years now, we've been investing in next generation electronics to deploy in the extreme environments that we face in drilling and completions. Our recent launch of SureSENS ELITE is a great example for this in our completions business, designed to provide 20 years of downhole data in high pressure, high temperature wells.

This design incorporates application-specific integrated circuits, or ASICs technology, that does not break down in high temperatures and delivers the next generation of reliability and accuracy for downhole gauges.

The SureSENS ELITE gauge delivers ongoing pressure, temperature, flow and fluid density readings required to calculate estimated returns and optimize intelligent production systems. Initial market uptake has been strong and we're currently ramping up the production.

I'm completely confident that as we focus on what we do best, differentiate ourselves in the marketplace with leading products and technology, make prudent decisions about where and how we go to market and continue to invest in our people, Baker Hughes will prosper no matter the environment.

So with that, let me hand it off to Kimberly and I'll come back at the end of the call with a few final thoughts.

Kimberly?.

Thanks, Martin, and good morning, everyone. Let me start by saying that like Martin, I am very pleased with the progress our teams have made. We have had a lot of moving parts recently.

During the last six months, we restructured the organization and people have now settled into their new role, while at the same time focusing on the customer and executing our cost reduction initiative.

Additionally, we took steps to optimize our capital structure and continued to enhance processes around cross management, capital discipline and working capital. Delivering on all these objectives simultaneously ahead of schedule is a true testament of team performance. While we have more work to do, I have no doubt that we are on the right path.

Moving to our third quarter results, today we reported revenue for the third quarter of $2.4 billion, down 2% sequentially, primarily as a result of activity reductions in our Gulf of Mexico, West Africa and Norwegian deepwater operations. On a GAAP basis, the net loss for the quarter was $429 million or $1.00 per share.

The adjusted net loss for the third quarter was $64 million or $0.15 per share. Adjusted net loss excluded $365 million in after-tax adjusting items, or $0.85 per share primarily related to additional impairments and restructuring charges.

As a result of the restructuring actions taken this quarter, we have now achieved $600 million of annualized savings. Approximately two thirds of the savings are related to lower compensation expense from workforce reductions and another one third of savings are associated with reduced depreciation and amortization expense from impairments.

From a segment perspective, approximately 30% of the cost savings reside in North America, 65% in international and 5% in industrial services. The majority of the benefit is reflected in our third quarter results with an estimated incremental benefit in the fourth quarter of approximately $20 million.

Based on this progress, and as Martin alluded to earlier, we now expect to achieve a new annualized savings target of $650 million by year end. Heading into 2017, we fully expect those efforts to continue.

For example, we are evaluating opportunities to further optimize our global manufacturing footprint, thus reducing under-absorption and achieving other sourcing efficiencies throughout the supply chain.

Also, we continued to carry costs associated with North America land pressure pumping business as we work through our process to maximize shareholder value for that business. Turning back to the third quarter, adjusted operating profit before tax and interest for the quarter was $7 million, a sequential improvement of $462 million.

Most of the improvement is driven by a reduction in operating costs as a result of the actions we have taken to align our cost structure to the realities in the market and by the reduction in provisions for doubtful accounts and excess inventory, resulting mainly from the controls and processes we are establishing around receivables and inventory.

Also, the third quarter results included the benefit of several non-reoccurring items totaling $45 million. The effective tax rate for the third quarter was a negative 19%.

Our income tax rate has remained, and will continue to remain, volatile between the quarters as a result of the geographic mix of earnings, valuation allowances and certain discrete items. Taking a closer look at our results from operations, in North America, revenue of $674 million increased 1% sequentially. The increase in U.S.

onshore activity and the seasonal uptick in Canada were almost entirely offset by a steep decline of activity in the Gulf of Mexico. In the Gulf of Mexico, we experienced project delays and reduced drilling activity as reflected by the 22% drop in the U.S. offshore rig count. In the U.S.

onshore, where most of the activity increases were driven by small private E&P companies, we managed to outpace the sequential rig count growth in our drilling services and drill bits product lines.

However, with almost half of our operations in the region associated with production, our business experiences less of an immediate correlation between revenue and the rig count. We see a similar dynamic in Canada where we are less impacted by the seasonality as a result of this mix.

Adjusted operating losses for the quarter were $74 million with operating margins improving 1,192 basis points sequentially. This improvement was driven primarily by cost reductions, including lower depreciation and amortization expense from impairments and reduced provisions for excess inventory.

The third quarter includes the benefit of approximately 410 basis points associated with non-reoccurring items. Moving to international results, we reported revenue of $1.4 billion, which is a 4% decrease versus the prior quarter. Despite the overall decline, our Latin America revenue grew 3% sequentially.

This increase was driven primarily by one-time product sales in Colombia, partially offset by reduced activity in the region, mainly in Venezuela with an IOC and in Mexico. In our Europe, Africa, Russia, Caspian segment, revenue was down 11% sequentially as a result of steep activity reductions, primarily in Norway and West Africa.

In Norway, activity was impacted not only by the timing of drilling and completion schedules, but also by delays that resulted from the recent union strikes. In West Africa, where we have a significant market share position in drilling, several large projects were temporarily suspended.

The Middle East, Asia Pacific segment revenue was relatively flat sequentially as activity declines and price erosion across most of the region were offset by pockets of activity growth primarily in Saudi and Kuwait.

International adjusted operating profit was $92 million with operating margins up 2,540 basis points sequentially, despite the decline in revenue.

Sequentially, margins include a 1,300 basis point benefit from provision of doubtful accounts, mostly related to Ecuador, and valuation allowances on indirect taxes in Africa not repeating in the third quarter. Margins also benefited from cost reductions and reduced provisions for excess inventory.

Note that our current quarter margins include the benefit of approximately 180 basis points related to non-reoccurring items. For our industrial services segment, revenue for the third quarter was $268 million, down 2% sequentially.

The decrease in revenue was mainly related to project delays in the pipeline inspection and maintenance business causing an earlier than usual seasonal decline. Industrial services adjusted operating profit was $26 million with operating margins increasing 824 basis points sequentially on declining revenue.

The increase in margins was driven by cost savings and provision for doubtful accounts from the second quarter not reoccurring. Also, the current quarter margins include the benefit of approximately 110 basis points related to non-reoccurring items.

Looking at cash flow, during the quarter we generated $109 million in free cash flow, which includes $103 million of restructuring payments during the quarter. This quarter, we repurchased approximately 5.3 million shares on the open market totaling $263 million.

In less than six months, we've purchased more than half of the $1.5 billion of shares under our previously announced program. As such, we ended the third quarter with $3.7 billion of cash on the balance sheet, which positions us well to address the challenges and opportunities ahead.

Capital expenditures for the quarter were $70 million, unchanged sequentially. We have recently implemented enhanced controls on capital spending to ensure that we maintain the needed discipline and focus on returns when activity begins to ramp up.

For all of 2016, we still expect our capital expenditures to range between $300 million and $400 million. Depreciation and amortization for the third quarter was $262 million, down $43 million or 14% sequentially.

The acts and impairments recorded in the third quarter are expected to result in approximately $35 million of annualized depreciation and amortization savings going forward. To summarize, we've made good progress on our cost reduction initiative.

Not only have we exceeded our original target for the year, but we've identified opportunities for further cost efficiencies. We have also continued to generate positive cash flow through managing our cost structure, reducing our working capital, and maximizing return on invested capital. And with that, let's go to Q&A.

Alondra?.

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

With that being said, Abigail, can we have the first question please?.

Thank you. Our first question comes from Jud Bailey with Wells Fargo. Your line is open..

Thank you. Good morning..

Good morning, Jud..

First of all, congratulations on impressive results. My first question I think is for Kimberly. I think you may have, you've touched on this, but looking at your results, revenue is down slightly sequentially but you had over a $200 million increase in EBITDA sequentially.

Did I hear you right that you recognized about $600 million of savings already, annualized savings in the third quarter and that accounts for probably the majority of the increase in EBITDA? What other items should we look at that were driving the sequential increase in EBITDA? Was it mix, or some other things that helped drive that? And then thinking about the fourth quarter, it sounds like we have some more cost savings to kind of roll through.

I just wanted to just kind of have you touch on that, please..

Yeah. Thanks, Jud. So clearly we did have some cost savings in the quarter, that both from the initiatives that we did in Q2 as well as in Q3. And as we said, now on an annualized basis, we do expect to get $650 million, of which $$600 million is now done. With that said, there were some Q2 to Q3 items.

Recall that in Q2 we had about $166 million of bad debt that didn't reoccur this quarter. Also, we had valuation allowances on indirect taxes last quarter of about $45 million.

And in this quarter, we also recognized some non-reoccurring benefits, which were a bunch of small items largely related to some of the initiatives that we had with regards to cost reductions. And then also we had provisions for excess inventories that don't repeat this quarter.

Then if we think of the Q4, I think there are a couple of things to recognize. First of all, again, we said that we have about $20 million more of savings that we expect in quarter four. Obviously, the $45 million of one-offs this quarter will not repeat next quarter.

And then a lot depends on activity, and keeping in mind that in Q4 last year we saw some pullback during the holiday season, and so that could repeat this quarter again. And also, we don't expect to have a significant peak in direct sales in Q4, which historically has been a quarter when there are quite a bit of direct sales coming through..

Okay. That's helpful. Thank you. But just to sum it up and just to kind of follow up on that, it looks like if I hear you correctly, we back out some of the one-time items you cited that were favorable.

This is very much a real new baseline in margins that we should think about, so activity increases we should apply, what are we thinking incremental margins should be as we think about 2017? So it feels like this is a new baseline. I just want to confirm that.

And then number two, how are you thinking about additional cost cut opportunities for 2017? Where do you see the opportunities? Is there any way to get a sense of how you think the size and scale of that next round of cost reductions could be?.

Yes. I'm not going to give color at this point in time on 2017. But again, when you talk about baseline, keep in mind that we did have that $45 million this quarter that we don't expect to reoccur. With regards to additional cost savings, so we're continuing to identify areas.

I've talked in the past about opportunities around manufacturing cost savings. There are things like continuing to negotiate with our suppliers. We're also evaluating what and where we manufacture things, whether it's internally, externally, we're looking at that.

We're looking at processes to reduce costs in our products and also to bring our products to market faster. We're looking at logistics and distribution, and we started already some of those initiatives and they will continue into 2017. But at this point in time, we're not giving a specific number.

As I've said, we've increased the cost savings target for this year on a run rate basis to $650 million and we'll continue to look for more opportunities..

Great. Thanks. Thanks again..

Thank you. Our next question comes from James West with Evercore ISI. Your line is open..

Hey. Good morning, Martin. Morning, Kimberly..

Good morning, James..

Good morning..

Martin, I'm curious on the sales channel strategy that you're putting in place on the international side.

I could totally get the concept of selling to some of the local providers, but how do you manage the, I guess the process of strengthening them when they could compete against you in other product lines that you're keeping in those countries?.

Well, a lot of that goes, James, to the selection of the individual player. I think one of the advantages that we have is being the first mover in this space in a strong, purposeful way. So, selecting the right player, having the agreements pretty tight and papered up well..

Okay..

But you know, there's another element here. These are long-term, enduring relationships. They could be measured in decades. And some of these markets that I said in my prepared comments are markets that we don't even exist in..

Right..

So in that case, it's (33:28) for us..

That's easy. Sure..

Okay. And the risk of, let's say, annoying us with some kind of violation of an agreement, when we have the technology pipeline that we have, we have the spare parts, platform, I mean, it's always – it's a risk, but it's a very I think manageable risk, James..

Okay. Okay. Fair enough, Martin. And then on the pressure pumping side of the business, obviously, we're here at the bottom of the cycle. We appear to be going into an up-cycle that could show some strength here next year. That is a nice swing earnings provider.

So how do you think about the timing of the, either the partnering or the exiting? I know you said you definitely want to have access, so some type of strategy around maybe taking that off of your plate to put it on somebody else's plate for at least for the time being.

How do you think about the timing there and how you maximize the value of some type of transaction?.

Well, the fact that we're going to keep a meaningful participation kind of takes the timing risk out of the transaction..

Okay..

And as you've said and as we've said multiple times, having someone else manage it, run it, invest in it, we'll keep a relationship. But since that business has moved to the form that it is, which is really water and sand, it's become a horsepower and logistics game.

So our strategy has not wavered one bit, and as I said in the remarks, we're moving through the process. We like where we are, and hopefully we'll bring this to conclusion within the next few months..

Okay. Great. All right. Thanks, Martin..

You're welcome..

Thank you. Our next question comes from Byron Pope with Tudor, Pickering, Holt. Your line is open..

Good morning. Martin, I just have one question on North America. It remains your largest revenue segment, and so you provided a couple of data points for it. I think you mentioned drilling services and drill bits outpacing the U.S. land rig count in Q3.

So as we think about North America onshore activity recovering faster than international and global offshore activity, can you frame for us how you think about which of Baker's product and service lines both in D&E and C&P you expect to lead the growth charge for you guys next year?.

Sure, Byron. Good morning. I'll tell you, by far the competitive advantage as well as the secular change in the market with regards to longer laterals lines itself up very well to a proportional steering rotary steerable, which is the AutoTrak Curve. We're the only one with that.

And being able to drill a gauge hole the entire through the curve, through the lateral, avoid all the micro doglegs that the competitor tools create, as these completions get longer and you got to get your pipe to bottom, I mean the market is rapidly steering itself right into our drilling bailiwick, if you will.

You couple that bottom hole assembly with the drill bit in terms of maximizing steerability and durability, I mean it's a beautiful thing to watch. You move to the production side and a big part of our business in North America is the production portfolio, and as we migrate less and less from the pressure pumping, it's only going to become more.

And the artificial lift, I think is kind of a hidden gold mine. We continue to innovate in that space. I don't think our customers are paying attention to their electric bill as much as they should be. I think that's going to be another opportunity where technology is going to make a difference for our customers' lifting cost.

So if I had to frame it up, it's first and foremost drilling technology followed by the artificial lift, and then as you've heard me say over and over, Byron, we've discussed the great thing about North American production is that as wells get older, it's like people getting older, they need drugs.

These wells need chemicals, and just as I highlighted in the oil sands, our chemical expertise and our folks in that area are constantly innovating for some new flow assurance and items. So I'd stack it up in that category..

That's helpful. And as I think about all those that you mentioned, I don't think of any of those as being particularly capital intensive.

And so, realize it's too early to opine on 2017 CapEx, but is that a fair characterization of those product service lines that you mentioned that aren't terribly capital intensive as you think about the growth base?.

That's exactly right. No, an overarching theme that we kind of coined back when we came out of in May, was that we're going to be a capital-light organization. I mean return on capital is going to drive our mindset in our investment decisions, who we work for and where we work. So yes, that's what we like about our core businesses..

And it goes to our core strengths also..

Great. Thank you. Appreciate it..

Thanks, Byron..

Thank you. Our next question comes from Sean Meakim with JPMorgan. Your line is open..

Hey. Good morning..

Good morning, Sean..

So Martin, maybe you could follow on to that discussion talking about the lower capital intensity of the business.

Would it be fair to say, given how that mix can shift, that your CapEx spend just on a theoretical basis, or just conceptually, could stay below DD&A for an extended period of time? And to that extent, how do you think about what that translates in the form of free cash flow?.

So, Sean, this is Kimberly. Obviously, the idea here is to have a better return on our capital at the end of the day, right. So it's less about how much we spend and more about what kind of returns we get on capital. And obviously, there are different components to the capital.

Clearly, well as we start seeing increase in activity, then there will be money that will be spent on tools and those type of things. And additionally, we'll be looking at will there be some capital that we'll need to put into play with regards to redesigning our footprint around supply chain.

And so there might be some other initiatives like that, that we'll have where we'll spend some CapEx. So again, we haven't given the color for 2017 at this point. Very clearly right now, I want to make sure everyone realizes, not that we're starving the business from CapEx by any means. It's very much about what kind of returns are we getting.

And obviously, there's been a decline in the overall activity, therefore less requirement for CapEx. But with that said, not having the investments in rolling stocks and large facilities and other things for North America pressure pumping will obviously take some of the capital intensity away..

Okay. That's helpful. Thank you. And then just thinking about some of the challenges you're having offshore, you cited lower activity, but also some transitory issues, the North Sea and West Africa in particular.

I was curious how much, are you seeing any outsized impact on your share just from the particular rigs where projects were being delayed, where perhaps you had more equipment this particular quarter? Just trying to get a sense for some of the transitory effects and what the implication is for the next couple of quarters going forward..

That's a good question, Sean, and I think we were disproportionately hurt in the Gulf of Mexico, disproportionately helped on a share basis in West Africa, just given the customers that we work for. Our drilling share in West Africa now is probably 50%. It is that way. It has been consistently in the Gulf.

We're not down, I'm not down on deepwater or offshore. It's just going through a transition. Our customers are battling their balance sheets trying to get the cost in line. We still have a very positive view on a dollar per barrel recovery cost.

It makes all the sense in the world, but at these commodity prices, I think my customers in West Africa need about $65. I think it's probably about $55 in the North Sea, and I think it's about the same in the Gulf. And until we see that, as we've said before, you just have to have some period of stability for them to come back.

The nice thing about that market, as you know, is the focus on technology, reliability, quality. That's right up our alley, so we're participating in managing our costs until that starts to recover..

That's helpful feedback. Thanks, Martin..

Thank you..

Thank you. Our next question comes from Kurt Hallead with RBC. Your line is open..

Hey. Good morning..

Hi, Kurt..

So you guys provided a lot of great information here this morning, and I just wanted to clarify a couple things just to make sure I'm on the right page here. So on a operating loss basis, when you adjust out for those one-time items, the operating income number I come up with is minus $1 million.

Kimberly, am I approaching that the right way?.

Yeah, without corporate..

Yeah, it's without, before corporate. Yeah, before corporate. That's correct. Yeah..

Yeah..

Okay. And then the context you guys provided around that was in the fourth quarter alone, you'll get another $20 million of incremental cost savings..

That's the expectation, yes..

Okay. And then can you give us some color around – I'm sorry, Kimberly, go ahead..

I was just going to say, but also keep in mind the $45 million of non-reoccurring benefits that we had this quarter..

Exactly. Thank you.

And then the Andean sale, can you give us some general sense of what that contribution was in the third quarter?.

I can't quantify it for you, but it was material to Latin America's results..

Okay.

And to the point where you think then Latin American operating income will not be repeatable effectively in the fourth quarter, that'll be down sequentially because of that sale?.

Yes..

Or you think it still could be flat..

No, I think your first supposition is correct..

Okay. Great. All right. That's all I had. Appreciate the info. Thank you..

You're welcome, Kurt..

Thank you..

Thank you. Our next question comes from Bill Sanchez with Howard Weil. Your line is open..

Thanks. Good morning. Martin, two part question for you. Just given the North America revenue performance we saw relative to U.S. rig count; I know you talked about the impact of Gulf of Mexico.

Could you help us perhaps just size for us Gulf of Mexico as a percentage of total MAM (45:02) revenue in the quarter? And also help us, Martin, as we think about 2017 top line in North America, what your expectations may be as it relates to the Gulf of Mexico type of recovery.

What's going to be a good proxy to determining how your top line grows? Is it just overall spending with regard to the universe of independent E&P companies? Or how do we think about that mix between the U.S.

land, Canada and Gulf of Mexico next year?.

I think it's, look, as we've said all along, Bill, and I appreciate your question, but breaking out the Gulf isn't something that I want to do.

In terms of searching for a proxy as it relates to Baker Hughes North America, it's a challenge for you guys because you've got North America that's, sorry, pressure pumping, which will be separated in some capacity. We have an increasingly strong mix in the production portfolio, which doesn't tie to the rig count as directly.

And then you have a fireball with regards to this drilling technology and the growing lateral lengths, which is really polarizing a market in separating guys who can only offer motors and to the guys who can offer rotary steerable tools.

So, I think I can't give you the proxy as to some kind of indication out there of how you would model our North American revenue. It's been our intention, Bill, I can tell you, to continue to make this company focus on what it does best, which in many regards is going to make us increasingly more unique than our peers.

And another threat of all this will be, as I said, the new channels that are even will participate in North America, like we did on our drilling fluids and what that means to revenues versus accretive margins. So I'll leave it to you experts to figure out what that proxy is. But that's the best color I can give you right now..

Is it your view, Martin, it looks like Gulf of Mexico I guess activity has stabilized after a pretty sharp 3Q.

Is that your view in the mix of rigs and projects that you're working on would suggest 4Q Gulf of Mexico is up for you relative to 3Q?.

No I don't. I think that our customers, particularly our IOCs, are still struggling with cash flow issues. We have a significant operator there that told us recently the word from headquarters is you're going to deploy your capital to some better opportunities, one international and one on land.

And if you look at the 17 rigs or whatever drilling rigs that are out there today, I think 10 at most have a contract to go beyond Q2, the MODUs. Beyond Q2, I've got six or seven rigs that I don't have visibility to. So I don't see the Gulf of Mexico getting better until probably mid-2017..

Thanks for the time, Martin. Good quarter..

Thank you..

Thank you. Our next question comes from Scott Gruber with Citigroup. Your line is open..

Good morning..

Hi, Scott..

Martin, a longer-term question for you.

What do you believe is the margin potential for your portfolio after you get through all the restructuring, after the sales model conversions, along with the smaller exposure to frac? And let's say the market delivers a modest middle of the road recovery in upstream spending over the next few years, what do you think is the normalized margin level that is reasonably achievable for your mix of businesses?.

That's a great question. I think just one, you're going to have to wait until we see the market settle out a bit more, we see our business settle out a bit more. Don't forget, six months ago we were in a very different state. We've moved extremely fast, fixed a lot of things. We have more to do. Kimberly highlighted some of the manufacturing strategy.

I'm not prepared yet to put a number out there as to a normalized rate, but we feel we got a lot of smiles on our faces on this side of the fence. We feel really good about where our business is going. I'm just going to leave it at that right now, Scott..

Well, if I could ask a follow-up, do you think it's unreasonable to assume that you can do better than the low teens margins you achieved last cycle?.

Tell me what oil prices are and gas prices. And look, I'm not trying to avoid your question. I think as we get further through this process in our business and we get our portfolio where we want it to be – we still have some moving pieces. We still have putting some meat on the bones with regards to our new channels.

When we have that all sorted out, I think we'll be prepared to put some numbers out there for you..

Okay. Well, I'll look forward to it. Thanks..

Thank you. Our next question comes from Dan Boyd with BMO Capital Markets. Your line is open..

Thanks. Good morning..

Hi, Dan..

Hey. Sorry to keep following up on the baseline EBITDA run rate, but I want to give it one more shot. When I fully adjust the numbers, I get to about $224 million in EBITDA, adjusted for 3Q. 4Q, presumably we're going to see another $10 million benefit since half the $20 million benefit is D&A. So we have a $234 million run rate going into 4Q.

So want to confirm that that's correct. And then as I think about seasonality in 1Q 2017, presumably since you're not seeing the uptick in 4Q, there shouldn't be much of a seasonality impact in 1Q.

Is that a fair way to think about it?.

So, and if it's helpful later on, you can get offline with Alondra if you really want to get into the details. But if you're looking at it right now, it's $269 million was your starting point. You've got $45 million of non-reoccurring items, takes you to $224 million.

Then if you take $20 million of the cost savings, so then you end up at $244 million, right, if you're doing math..

Well, I was – okay..

And then of course you need to take in account what happens with activity in Q4, which that's obviously not something that we'd know the answer to yet..

Okay. Yeah, all right. And then as I think about your AutoTrak and the market share that you're gaining, one of your other competitors mentioned that they're sold out.

Is this something that you can use to pull through other products and services or bundle to gain market share beyond just AutoTrak?.

You know, that's a good question, Dan. And we're about sold out as well. As to a pull-along, there's not as much of that going on in North America. Very, very few. Very, very few , I wouldn't even call them bids, transactional activity is in any kind of combined state.

But given the performance of our systems and the leverage that we have, and particularly as it starts to tighten up, I think you'll see more and more around completions are being pulled through.

But we remain very focused on execution and I think our share position is going to just continue to grow, one, because of performance and two, which I think is a bit lost on the marketplace, is where these wells are going and you cannot drill them with a motor. Your torque and drag will just tear you up.

And we have the only rotary steerable that has the ability to gently push off versus an on/off type of switch which creates a pretty tortuous well path, which is no big deal if you've got a 10,000-foot lateral, but as we approach 20,000-foot laterals, you've got to have really a smooth environment.

So yeah, I think we will be pulling through more services as this market evolves..

Great. So hopefully that can help offset some of the mix issue. Thanks a lot..

You're welcome..

Thank you. Our last question comes from Jim Wicklund with Credit Suisse. Your line is open..

Good morning, guys. Appreciate it.

International, Martin, historically, and you and I have been doing this a while, international, usually it takes about six to 12 months to begin to recover after the U.S., but this time with deepwater, the rising tide not lifting all boats, and you're still talking about activity and pricing pressure in the international, can you give us what you all's expectation is of how long the recovery's going to be generally in international following the domestic recovery we've already seen?.

Well, I think it's a very – and you're right, Jim, we've been in this a long time. And I think it's a little different. North America's activity bump is because a significant amount of the deflation that's come off of our backs and our competitors' backs. That isn't going to be there forever.

And as we're just talking to Dan around some of the technology, we're getting tapped out in North America. And so that's a response in the market that's because of our costs coming down. So it's not that the fundamentals of I think our customer community being able to really make money at $50 oil.

It's because we're giving up too much of the economic rent. And that's going to go away eventually. Internationally, I hate to say this, Jim. If we don't see $55 oil in the North Sea, it's not coming back. And I think we need $65 in West Africa.

Russia is staying steady, I think for reasons that is really around production level mandates versus pure economics. Parts of the Caspian and so forth are flat to trending down. Now Middle East definitely continues to be a bright spot. And it gets back to low cost producer wins in this market, so substantial I think.

I don't think I'm exaggerating when I say substantial opportunity in Kuwait, Saudi, the United Arab Emirates and so forth. Oman. But besides that, if we don't get a lift in oil prices that's durable beyond just a few days or weeks, I don't see the rest of the world coming back in any meaningful way..

Okay. That's, we'll pray for higher oil prices. And my follow-up, if I could, Russia. One of the larger companies mentioned it in glowing terms a number of times. Can you talk about your exposure in Russia and how big of a market that could be for your more direct sales group? I know in Saudi they're pushing for 70% and all.

But Russia's a different animal.

Can you talk about your potential in Russia and your activity in Russia?.

Year-on-year, we picked up over 100 drilling rigs in Russia. Obviously, our state of play last year was a bit bobbled and cumbersome given the situation we were in. So they've hit the market hard, and the customers have responded. Again, technology's playing a role. In terms of overall size, I envision that we'll have a very large business in Russia.

But it will be somewhat of a hybrid. There'll be leveraging the local content initiatives that are taking place. And again, the trade secrets and the model that we'll have around these new channels will facilitate that growth.

On the other hand, in parts of Western Siberia the technology demands are still high and that goes to the fact that, as I said, we've picked up 100 drilling rigs in Russia just in the last eight months.

So I don't want to quantify it for you at this stage, but it's going to be a bigger part of our Eastern Hemisphere business, I'm pretty confident of..

You don't need to divine it. That's very good, Martin. Thank you very much. Appreciate it..

Thank you. I will now turn the call back to Martin Craighead for closing remarks..

Thanks, Abigail. So let me thank all of you for joining us and let me wrap up with three points. First, there continue to be some challenging conditions and volatility and uncertainty remain, but there is some growing optimism that the conditions needed for a sustained recovery are closer at hand than they seemed to be just a few months ago.

The strong progress that we made on all three components of our plan I want to remind you of, from costs and controls to commercial strategy and capital structure. And finally, we achieved stronger performance in the third quarter largely due to accelerated execution on cost reductions and efforts to fortify our core business and top line results.

This is aligned with our focus to achieve profitable growth and improve returns on capital for Baker Hughes. Again, I want to thank you all for joining us and have a good rest of your day..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone have a great day..