UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9397

Baker Hughes Incorporated

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		76-0207995 (I.R.S. Employer Identification No.)
2929 Allen Parkway, Suite 2100, Houston, Texas (Address of principal executive offices)		77019-2118 (Zip Code)

Registrant’s telephone number, including area code: (713) 439-8600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

As of July 26, 2011, the registrant has outstanding 436,198,379 shares of Common Stock, $1 par value per share.

 

 

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Statements of Operations (Unaudited) — Three months and six months ended June 30, 2011 and 2010		2
Consolidated Condensed Balance Sheets (Unaudited) — June 30, 2011 and December 31, 2010		3
Consolidated Condensed Statements of Cash Flows (Unaudited) — Six months ended June 30, 2011 and 2010		4
Notes to Unaudited Consolidated Condensed Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		24
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		24
Item 1A. Risk Factors		24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3. Defaults Upon Senior Securities		25
Item 4. [Removed and Reserved]		25
Item 5. Other Information		25
Item 6. Exhibits		26
Signatures		27
EX-3.1
EX-31.1
EX-31.2
EX-32
EX-99.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Baker Hughes Incorporated
Consolidated Condensed Statements of Operations
(In millions, except per share amounts)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Revenue:
Sales		$	1,557			$	1,357			$	2,990			$	2,610
Services and rentals			3,184				2,017				6,276				3,303
Total revenue			4,741				3,374				9,266				5,913
Costs and expenses:
Cost of sales			1,266				1,013				2,432				1,956
Cost of services and rentals			2,452				1,649				4,783				2,618
Research and engineering			114				112				220				206
Marketing, general and administrative			292				312				574				617
Acquisition-related costs			—				56				—				66
Total costs and expenses			4,124				3,142				8,009				5,463
Operating income			617				232				1,257				450
Interest expense, net			(54	)			(30	)			(106	)			(54	)
Income before income taxes			563				202				1,151				396
Income taxes			228				109				432				174
Net income			335				93				719				222
Net income (loss) attributable to noncontrolling interests			(3	)			—				—				—
Net income attributable to Baker Hughes		$	338			$	93			$	719			$	222
Basic income per share attributable to Baker Hughes		$	0.78			$	0.23			$	1.65			$	0.63
Diluted income per share attributable to Baker Hughes		$	0.77			$	0.23			$	1.64			$	0.62
Cash dividends per share		$	0.15			$	0.15			$	0.30			$	0.30

See accompanying notes to unaudited consolidated condensed financial statements.

Baker Hughes Incorporated

Consolidated Condensed Balance Sheets
(In millions)
(Unaudited)

		June 30,				December 31,
		2011				2010
ASSETS
Current Assets:
Cash and cash equivalents		$	937			$	1,456
Short-term investments			—				250
Accounts receivable — less allowance for doubtful accounts (2011 - $225; 2010 — $162)			4,434				3,942
Inventories, net			2,939				2,594
Deferred income taxes			254				234
Other current assets			248				231
Total current assets			8,812				8,707
Property, plant and equipment, net			6,700				6,310
Goodwill			5,953				5,869
Intangible assets, net			1,524				1,569
Other assets			565				531
Total assets		$	23,554			$	22,986
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	1,588			$	1,496
Short-term borrowings and current portion of long-term debt			59				331
Accrued employee compensation			586				589
Income taxes payable			75				219
Other accrued liabilities			519				504
Total current liabilities			2,827				3,139
Long-term debt			3,549				3,554
Deferred income taxes and other tax liabilities			1,316				1,360
Liabilities for pensions and other postretirement benefits			507				483
Other liabilities			165				164
Commitments and contingencies
Stockholders’ Equity:
Common stock			436				432
Capital in excess of par value			7,167				7,005
Retained earnings			7,672				7,083
Accumulated other comprehensive loss			(337	)			(420	)
Baker Hughes stockholders’ equity			14,938				14,100
Noncontrolling interest			252				186
Total stockholders’ equity			15,190				14,286
Total liabilities and stockholders’ equity		$	23,554			$	22,986

See accompanying notes to unaudited consolidated condensed financial statements.

Baker Hughes Incorporated

Consolidated Condensed Statements of Cash Flows
(In millions)
(Unaudited)

		Six Months Ended
		June 30,
		2011				2010
Cash flows from operating activities:
Net income		$	719			$	222
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization			646				450
Stock-based compensation costs			53				41
Provision (benefit) for deferred income taxes			(52	)			(63	)
Gain on disposal of assets			(90	)			(49	)
Provision for doubtful accounts			76				11
Changes in operating assets and liabilities:
Accounts receivable			(512	)			(258	)
Inventories			(314	)			(124	)
Accounts payable			57				123
Accrued employee compensation and other accrued liabilities			(25	)			(37	)
Income taxes payable			(160	)			(15	)
Other			(1	)			(143	)
Net cash flows from operating activities			397				158
Cash flows from investing activities:
Expenditures for capital assets			(1,023	)			(539	)
Proceeds from maturities of short-term investments			250				—
Proceeds from disposal of assets			142				89
Acquisition of businesses, net of cash acquired			(5	)			(834	)
Net cash flows from investing activities			(636	)			(1,284	)
Cash flows from financing activities:
Net (payments) borrowings of commercial paper and other short-term debt			(21	)			555
Repayment of long-term debt			(250	)			—
Proceeds from issuance of common stock			115				28
Dividends			(130	)			(111	)
Other financing items, net			(9	)			1
Net cash flows from financing activities			(295	)			473
Effect of foreign exchange rate changes on cash			15				(23	)
Increase (decrease) in cash and cash equivalents			(519	)			(676	)
Cash and cash equivalents, beginning of period			1,456				1,595
Cash and cash equivalents, end of period		$	937			$	919
Supplemental cash flows disclosures:
Income taxes paid, net of refunds		$	647			$	342
Interest paid		$	121			$	75
Supplemental disclosure of noncash investing activities:
Capital expenditures included in accounts payable		$	33			$	26

See accompanying notes to unaudited consolidated condensed financial statements.

Baker Hughes Incorporated

NOTE 1. GENERAL

Nature of Operations

     Baker Hughes Incorporated (“Company,” “we,” “our” or “us”) is engaged in the oilfield services industry. We are a leading supplier of wellbore-related products and technology services and provide products and services for drilling, pressure pumping, formation evaluation, completion and production, and reservoir development services to the worldwide oil and natural gas industry. We also provide products and services to the downstream refining and process and pipeline industries.

Basis of Presentation

     Our unaudited consolidated condensed financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, certain information and disclosures normally included in our annual financial statements have been condensed or omitted. These unaudited consolidated condensed financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2010 (“2010 Annual Report”). We believe the unaudited consolidated condensed financial statements included herein reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. In the notes to the unaudited consolidated condensed financial statements, all dollar and share amounts in tabulations are in millions of dollars and shares, respectively, unless otherwise indicated.

Accounting Standards Updates

     In May 2011, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) 820, Fair Value Measurement. The Accounting Standards Update (“ASU”) conforms certain sections of ASC 820 to International Financial Reporting Standards in order to provide a single converged guidance on the measurement of fair value. This update also expands the existing disclosure requirements for fair value measurements. This ASU is effective for interim and annual periods beginning after December 15, 2011. We will adopt this ASU prospectively in the first quarter of 2012. We have not yet determined the impact, if any, on our consolidated condensed financial statements.

     In June 2011, the FASB issued an update to ASC 220, Comprehensive Income. This ASU requires entities to present components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements that would include reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We will adopt the new presentation requirements of this ASU retrospectively in the first quarter of 2012.

NOTE 2. ACQUISITIONS

ACQUISITION OF BJ SERVICES

     On April 28, 2010, we acquired 100% of the outstanding common stock of BJ Services Company (“BJ Services”) in a cash and stock transaction valued at $6,897 million. BJ Services is a leading provider of pressure pumping and other oilfield services and was acquired to expand the product offerings of the Company. Total consideration consisted of $793 million in cash, 118 million shares valued at $6,048 million, and Baker Hughes options with a fair value of $56 million in exchange for BJ Services options. We also assumed all outstanding stock options held by BJ Services employees and directors.

Recording of Assets Acquired and Liabilities Assumed

     The transaction has been accounted for using the acquisition method of accounting and accordingly assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The excess of the consideration transferred over those fair values totaling $4,406 million was recorded as goodwill. The following table summarizes the amounts recognized for assets acquired and liabilities assumed.

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

		Fair Values
Assets:
Cash and cash equivalents		$	113
Accounts receivable			951
Inventories			419
Other current assets			125
Property, plant and equipment			2,745
Intangible assets			1,404
Goodwill			4,406
Other long-term assets			109
Liabilities:
Liabilities for change in control and transaction fees			210
Current liabilities			776
Deferred income taxes and other tax liabilities			1,428
Long-term debt			531
Pension and other postretirement liabilities			154
Other long-term liabilities			29
Noncontrolling interests			247
Net assets acquired		$	6,897

     During the quarter ended March 31, 2011, we increased our step-up adjustment related to noncontrolling interests in certain BJ Services entities by $68 million to $202 million and reduced our step-up adjustment related to deferred tax liabilities and other taxes by $21 million to $1,262 million as part of the acquisition accounting related to fair market value adjustments for acquired intangible assets and property, plant and equipment (“PP&E”) as well as for uncertain tax positions taken in prior years.

Pro Forma Impact of the Acquisition

     The following unaudited supplemental pro forma results present consolidated information as if the acquisition had been completed as of January 1, 2010. The pro forma results include: (i) the amortization associated with an estimate of the acquired intangible assets, (ii) interest expense associated with debt used to fund a portion of the acquisition and reduced interest income associated with cash used to fund a portion of the acquisition, (iii) the impact of certain fair value adjustments such as additional depreciation expense for adjustments to PP&E and reduction to interest expense for adjustments to debt, and (iv) costs directly related to acquiring BJ Services. The pro forma results do not include any potential synergies, cost savings or other expected benefits of the acquisition. Accordingly, the pro forma results should not be considered indicative of the results that would have occurred if the acquisition and related borrowings had been consummated as of January 1, 2010, nor are they indicative of future results.

		Three Months Ended				Six Months Ended
		June 30, 2010				June 30, 2010
		Pro Forma				Pro Forma
Revenue		$	3,745			$	7,402
Net income		$	98			$	231
Basic net income per share		$	0.23			$	0.54
Diluted net income per share		$	0.23			$	0.53

NOTE 3. SEGMENT INFORMATION

     Baker Hughes has ten operating segments that have been aggregated into the following five reportable segments:

	•		North America (U.S. and Canada)
	•		Latin America
	•		Europe/Africa/Russia Caspian
	•		Middle East/Asia Pacific

•

Industrial Services and Other (downstream chemicals and reservoir development services)

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

     We have aggregated our operating segments within each reportable segment because they have similar economic characteristics and because the long-term financial performance of the segments is affected by similar economic conditions. The performance of our segments is evaluated based on profit before tax, which is defined as income before income taxes, interest expense, interest income, and certain gains and losses not allocated to the segments. The financial results of BJ Services are included in each of the five reportable segments from the date of acquisition on April 28, 2010.

     Summarized financial information is shown in the following table:

		Three Months Ended								Three Months Ended
		June 30, 2011								June 30, 2010
Segments		Revenue				Profit (loss)				Revenue				Profit (loss)
North America		$	2,368			$	440			$	1,486			$	204
Latin America			542				71				384				13
Europe/Africa/Russia Caspian			806				47				736				69
Middle East/Asia Pacific			701				88				545				40
Industrial Services and Other			324				34				223				18
Total Operations			4,741				680				3,374				344
Corporate and Other			—				(63	)			—				(56	)
Interest expense, net			—				(54	)			—				(30	)
Acquisition-related costs			—				—				—				(56	)
Total		$	4,741			$	563			$	3,374			$	202

		Six Months Ended								Six Months Ended
		June 30, 2011								June 30, 2010
Segments		Revenue				Profit (loss)				Revenue				Profit (loss)
North America		$	4,720			$	900			$	2,405			$	345
Latin America			1,015				134				656				22
Europe/Africa/Russia Caspian			1,577				138				1,456				149
Middle East/Asia Pacific			1,360				167				984				70
Industrial Services and Other			594				48				412				35
Total Operations			9,266				1,387				5,913				621
Corporate and Other			—				(130	)			—				(105	)
Interest expense, net			—				(106	)			—				(54	)
Acquisition-related costs			—				—				—				(66	)
Total		$	9,266			$	1,151			$	5,913			$	396

NOTE 4. EARNINGS PER SHARE

     A reconciliation of the number of shares used for the basic and diluted earnings per share (“EPS”) computations is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Weighted average common shares outstanding for basic EPS			436				398				435				355
Effect of dilutive securities — stock plans			2				1				3				1
Adjusted weighted average common shares outstanding for diluted EPS			438				399				438				356
Future potentially dilutive shares excluded from diluted EPS:
Options with an exercise price greater than the average market price for the period			2				6				3				6

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

NOTE 5. INVENTORIES

     Inventories, net of reserves, are comprised of the following:

		June 30,				December 31,
		2011				2010
Finished goods		$	2,590			$	2,283
Work in process			208				181
Raw materials			141				130
Total		$	2,939			$	2,594

NOTE 6. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment are comprised of the following:

		June 30,				December 31,
		2011				2010
Land		$	193			$	191
Buildings and improvements			1,762				1,605
Machinery and equipment			6,908				6,409
Rental tools and equipment			2,669				2,472
Subtotal			11,532				10,677
Less: Accumulated depreciation			4,832				4,367
Total		$	6,700			$	6,310

NOTE 7. GOODWILL AND INTANGIBLE ASSETS

     The changes in the carrying amount of goodwill are detailed below by reportable segment:

										Europe/				Middle				Industrial
										Africa/				East/				Services
		North				Latin				Russia				Asia				and
		America				America				Caspian				Pacific				Other				Total
Balance as of December 31, 2010		$	2,731			$	879			$	936			$	895			$	428			$	5,869
Purchase price adjustments for previous Acquisitions			314				(293	)			86				(42	)			12				77
Acquisitions			5				—				—				—				—				5
Other adjustments			1				—				1				1				(1	)			2
Balance as of June 30, 2011		$	3,051			$	586			$	1,023			$	854			$	439			$	5,953

     Intangible assets are comprised of the following:

		June 30, 2011												December 31, 2010
		Gross				Less:								Gross				Less:
		Carrying				Accumulated								Carrying				Accumulated
		Amount				Amortization				Net				Amount				Amortization				Net
Definite lived intangibles:
Technology		$	767			$	208			$	559			$	760			$	181			$	579
Contract-based			17				8				9				20				11				9
Trade names			81				16				65				84				18				66
Customer relationships			497				57				440				495				39				456
Subtotal			1,362				289				1,073				1,359				249				1,110
Indefinite lived intangibles:
Trade name			360				—				360				360				—				360
In-process research and development			91				—				91				99				—				99
Total		$	1,813			$	289			$	1,524			$	1,818			$	249			$	1,569

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

     Intangible assets are amortized either on a straight-line basis with estimated useful lives ranging from 2 to 20 years, or on a basis that reflects the pattern in which the economic benefits of the intangible assets are expected to be realized, which range from 15 to 30 years.

     Amortization expense for intangible assets included in net income for the three months and six months ended June 30, 2011 was $24 million and $46 million, respectively, and is estimated to be $90 million for the full fiscal year 2011. Estimated amortization expense for each of the subsequent five fiscal years is expected to be as follows: 2012 — $95 million; 2013 — $94 million; 2014 — $93 million; 2015 — $88 million; and 2016 — $87 million.

NOTE 8. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

     Our financial instruments include cash and cash equivalents and short-term investments, accounts receivable, accounts payable, debt, foreign currency forward contracts and interest rate swaps. Except as described below, the estimated fair value of such financial instruments at June 30, 2011 and December 31, 2010 approximates their carrying value as reflected in our consolidated condensed balance sheets. The fair value of our debt, foreign currency forward contracts and interest rate swaps has been estimated based on quoted period end market prices.

Short-term Investments

     During the year ended December 31, 2010, we purchased short-term investments consisting of $250 million in U.S. Treasury Bills, which matured in May 2011 and were used to repay the $250 million principal amount of our 5.75% notes that matured in June 2011.

Debt

     The estimated fair value of total debt at June 30, 2011 and December 31, 2010, was $4,045 million and $4,298 million, respectively, which differs from the carrying amount of $3,608 million and $3,885 million, respectively, included in our consolidated condensed balance sheets.

Foreign Currency Forward Contracts

     We conduct our business in over 80 countries around the world, and we are exposed to market risks resulting from fluctuations in foreign currency exchange rates. A number of our significant foreign subsidiaries have designated the local currency as their functional currency. We transact in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to reduce the risks associated with the effects of certain foreign currency exposures. Under this program, our strategy is to have gains or losses on the foreign currency forward contracts mitigate the foreign currency transaction gains or losses to the extent practical. These foreign currency exposures typically arise from changes in the value of assets and liabilities which are denominated in currencies other than the functional currency. Our foreign currency forward contracts generally settle in less than 180 days. We do not use these forward contracts for trading or speculative purposes. We designate these forward contracts as fair value hedging instruments and, accordingly, we record the fair value of these contracts as of the end of our reporting period to our consolidated condensed balance sheet with changes in fair value recorded in our consolidated condensed statement of operations along with the change in fair value of the hedged item.

     We had outstanding foreign currency forward contracts with notional amounts aggregating $150 million and $156 million to hedge exposure to currency fluctuations in various foreign currencies at June 30, 2011 and December 31, 2010, respectively. These contracts are designated and qualify as fair value hedging instruments. The fair value was determined using a model with Level 2 inputs including quoted market prices for contracts with similar terms and maturity dates.

Interest Rate Swaps

     We are subject to interest rate risk on our debt and investment of cash and cash equivalents arising in the normal course of our business, as we do not engage in speculative trading strategies. We maintain an interest rate management strategy, which primarily uses a mix of fixed and variable rate debt that is intended to mitigate the exposure to changes in interest rates in the aggregate for our investment portfolio. In addition, we are currently using interest rate swaps to manage the economic effect of fixed rate obligations associated with certain debt so that the interest payable on this debt effectively becomes linked to variable rates. Our interest rate

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

     The components of net periodic cost are as follows for the six months ended June 30:

																		Other Postretirement
		U.S. Pension Benefits								Non-U.S. Pension Benefits								Benefits
		2011				2010				2011				2010				2011				2010
Service cost		$	18			$	16			$	4			$	3			$	4			$	4
Interest cost			10				11				16				12				4				6
Expected return on plan assets			(16	)			(14	)			(16	)			(10	)			—				—
Amortization of prior service cost (benefit)			—				—				—				—				(2	)			1
Amortization of net loss			4				6				2				2				—				—
Net periodic cost (benefit)		$	16			$	19			$	6			$	7			$	6			$	11

     We invest the plan assets of our U.S. and Non-U.S. pension plans in investments according to the policies developed by our investment committees. The changes in the fair value of our U.S. and Non-U.S. pension plans’ assets using Level 3 unobservable inputs for the three months and six months ended June 30, 2011 were as follows:

		Three Months Ended June 30, 2011
		U.S.								Non-U.S.				Non-U.S.
		Property				Hedge				Property				Insurance
		Fund				Funds				Fund				Contracts				Total
Ending balance at March 31, 2011		$	14			$	98			$	20			$	16			$	148
Unrealized gains			1				2				—				—				3
Transfers from Level 2 to Level 3			—				2				—				—				2
Ending balance at June 30, 2011		$	15			$	102			$	20			$	16			$	153

		Six Months Ended June 30, 2011
		U.S.								Non-U.S.				Non-U.S.
		Property				Hedge				Property				Insurance
		Fund				Funds				Fund				Contracts				Total
Ending balance at December 31, 2010		$	14			$	—			$	19			$	16			$	49
Unrealized gains			1				4				1				—				6
Transfers from Level 2 to Level 3			—				98				—				—				98
Ending balance at June 30, 2011		$	15			$	102			$	20			$	16			$	153

     Beginning in 2011, the U.S. pension plan began purchasing shares in three hedge funds, which the Company deems to be Level 3 investments. These hedge funds take long and short positions in equities, fixed income securities, currencies and derivative contracts.

NOTE 11. COMMITMENTS AND CONTINGENCIES

LITIGATION

     We are involved in litigation or proceedings that have arisen in our ordinary business activities. We insure against these risks to the extent deemed prudent by our management and to the extent insurance is available, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain deductibles or self-insured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of self-insurance, it is our policy to self-insure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation. The accruals for losses are calculated by estimating losses for claims using historical claim data, specific loss development factors and other information as necessary.

     We were among several unrelated companies who received a subpoena from the Office of the New York Attorney General, dated June 17, 2011. The subpoena received by the Company seeks information and documents relating to, among other things, natural gas development and hydraulic fracturing. We are reviewing the subpoena and discussing its contents with the New York Attorney General’s office in anticipation of our responding as appropriate.

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

     In July 2011, the Company settled the previously reported customer claim against BJ Services relating to the move of a stimulation vessel out of the North Sea market. The settlement did not have a material effect on our consolidated condensed financial statements.

OTHER

     In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds for performance, letters of credit and other bank issued guarantees, which totaled approximately $1.2 billion at June 30, 2011. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on our consolidated condensed financial statements.

NOTE 12. STOCKHOLDERS’ EQUITY

     The following tables summarize our stockholders’ equity activity.

						Capital								Accumulated
						in Excess								Other
		Common				of				Retained				Comprehensive				Noncontrolling
		Stock				Par Value				Earnings				Loss				Interest				Total
Balance at December 31, 2010		$	432			$	7,005			$	7,083			$	(420	)		$	186			$	14,286
Comprehensive income:
Net income											719
Foreign currency translation adjustments															83
Total comprehensive income																							802
Issuance of common stock pursuant to employee stock plans			4				103																107
Tax provision on stock plans							7																7
Stock-based compensation costs							53																53
Cash dividends ($0.30 per share)											(130	)											(130	)
Purchase of subsidiary shares of noncontrolling interests							(1	)															(1	)
Dividends paid to noncontrolling interests																			(4	)			(4	)
Capital contribution from noncontrolling interest																			4				4
Change in noncontrolling interest associated with purchase price adjustment																			66				66
Balance at June 30, 2011		$	436			$	7,167			$	7,672			$	(337	)		$	252			$	15,190

						Capital								Accumulated
						in Excess								Other
		Common				of				Retained				Comprehensive				Noncontrolling
		Stock				Par Value				Earnings				Loss				Interest				Total
Balance at December 31, 2009		$	312			$	874			$	6,512			$	(414	)		$	—			$	7,284
Comprehensive income:
Net income											222
Foreign currency translation adjustments															(120	)
Defined benefit pension plans, net of tax of $(4)															21
Total comprehensive income																							123
Issuance of common stock pursuant to employee stock plans			1				20																21
Issuance of common stock to acquire BJ Services			118				5,986																6,104
Tax provision on stock plans							2																2
Stock-based compensation costs							41																41
Cash dividends ($0.30 per share)											(111	)											(111	)
Balance at June 30, 2010		$	431			$	6,923			$	6,623			$	(513	)		$	—			$	13,464

Baker Hughes Incorporated
Notes to Unaudited Consolidated Condensed Financial Statements (continued)

     Total accumulated other comprehensive loss, net of tax, consisted of the following:

		June 30, 2011				December 31, 2010
Foreign currency translation adjustments		$	(178	)		$	(261	)
Pension and other postretirement benefits			(159	)			(159	)
Total accumulated other comprehensive loss		$	(337	)		$	(420	)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

     Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our consolidated condensed financial statements and the related notes thereto, as well as our Annual Report on Form 10-K/A for the year ended December 31, 2010 (“2010 Annual Report”). Phrases such as “Company”, “we”, “us”, and “our” intend to refer to Baker Hughes Incorporated when used.

EXECUTIVE SUMMARY

     We are a leading supplier of oilfield services, products, technology and systems to the worldwide oil and natural gas industry. We provide products and services for:

	•		drilling and evaluation of oil and gas wells;
	•		completion and production of oil and gas wells; and
	•		other industries, including downstream refining and process and pipeline industries; and reservoir development services.

     We operate our business primarily through geographic regions that have been aggregated into five reportable segments: North America, Latin America, Europe/Africa/Russia Caspian (“EARC”), Middle East/Asia Pacific (“MEAP”) and Industrial Services and Other. The four geographical segments represent our oilfield operations.

     Within our oilfield operations, the primary driver of our businesses is our customers’ capital and operating expenditures dedicated to oil and natural gas exploration, field development and production. Our business is cyclical and is dependent upon our customers’ expectations for future oil and natural gas prices, economic growth, hydrocarbon demand and estimates of current and future oil and natural gas production.

     For the second quarter of 2011, we generated revenue of $4.74 billion, an increase of $1.37 billion or 41% compared to the same quarter a year ago. For the first six months of 2011, revenue was $9.27 billion, an increase of $3.35 billion or 57% compared to the first six months of 2010. The increase in revenue was due to the significant improvement in activity primarily in North America, driven by oil-directed drilling mainly in unconventional reservoirs and the acquisition of BJ Services Company (“BJ Services”) during the second quarter of 2010.

     Net income attributable to Baker Hughes was $338 million for the second quarter of 2011, compared to $93 million for the same quarter a year ago; and was $719 million for the first six months of 2011, compared to $222 million for the same period a year ago. The increase in net income was primarily due to the improved profitability in North America and to a lesser extent internationally as well as the acquisition of BJ Services. The increase was partially offset by a charge of $70 million recognized in the second quarter of 2011 associated with increasing the allowance for doubtful accounts and reserves for inventory and certain other assets in Libya, where our operations have currently ceased, pending resolution of the conflict.

     At June 30, 2011, we had approximately 54,000 employees compared to approximately 53,100 employees at December 31, 2010.

BUSINESS ENVIRONMENT

     Global economic growth and the resultant demand for oil and natural gas are the primary drivers of our customers’ expenditures to develop and produce oil and gas. The expansion of the global economy, following the recession of 2008/2009, continued through 2010 and into 2011. Increasing economic activity, particularly in the emerging economies in Asia and the Middle East, and expectations for continued economic growth supported expectations for increasing demand for oil and natural gas. Spending by oil and natural gas exploration and production companies, which is dependent upon their forecasts regarding the expected future supply and future demand for oil and natural gas products and their estimates of costs to find, develop, and produce reserves, increased in the first half of 2011 compared to the first half of 2010. Changes in oil and natural gas exploration and production spending result in increased demand for our products and services, which is reflected in the rig count and other measures.

     In North America, customer spending on oil projects increased in 2011, resulting in a 75% increase in the North America oil-directed rig count in the second quarter of 2011 compared to the same period a year ago. The increase in oil-directed drilling reflected the global price of oil, which is trading at a premium, on a Btu-equivalent basis, relative to natural gas in North America. Gas-directed drilling activity declined 8% as decreased activity in unconventional shale gas plays with relatively little associated natural gas liquids (dry gas) was partially offset by increased activity in the unconventional liquid-rich shale gas plays with relatively high volumes of associated natural gas liquids (wet gas). Despite relatively weak natural gas prices, spending on gas-directed projects in

the second quarter of 2011 was supported by: (1) associated production of natural gas liquids and crude oil in certain basins; (2) hedges on production made in prior periods when future prices were higher; (3) the need of companies to drill and produce natural gas to hold leases acquired in earlier periods; and (4) the influx of equity from companies interested in developing a position in the unconventional shale resource plays.

     Outside of North America, customer spending is most heavily influenced by oil prices, which were more than 50% higher in the second quarter of 2011 compared to the second quarter of 2010, as the economic recovery continued. In response to higher oil prices and expectations that the expanding economy would support prices well in excess of $80/Bbl, our customers’ spending increased. This was reflected in a 5% increase in the rig count outside of North America.

Oil and Natural Gas Prices

     Oil (Bloomberg West Texas Intermediate (“WTI”) Cushing Crude Oil Spot Price and Bloomberg Dated Brent (“Brent”)) and natural gas (Bloomberg Henry Hub Natural Gas Spot Price) prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
WTI oil prices ($/Bbl)		$	102.34			$	77.88			$	98.50			$	78.35
Brent oil prices ($/Bbl)			116.81				78.63				110.96				77.71
Natural gas prices ($/mmBtu)			4.38				4.33				4.29				4.71

     WTI oil prices averaged $102.34/Bbl in the second quarter of 2011. Prices ranged from a high of $113.93/Bbl in April 2011 to a low of $90.61/Bbl in June 2011. Oil prices weakened throughout the second quarter of 2011 driven by expectations of a slowdown of the worldwide economic recovery and energy demand growth, particularly in Europe. The International Energy Agency (“IEA”) estimated in its July 2011 Oil Market Report that worldwide demand would increase 1.2 million barrels per day or 1.4% to 89.5 million barrels per day in 2011, up from 88.3 million barrels per day in 2010.

     Natural gas prices averaged $4.38/mmBtu in the second quarter of 2011. Natural gas prices traded in a range between $4.847/mmBtu and $4.041/mmBtu in the second quarter of 2011. At the end of the quarter, working natural gas in storage was 2,432 Bcf, which was 9% or 252 Bcf below the corresponding week in 2010.

Rig Counts

     Baker Hughes has been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors and/or other outside sources. This data is then compiled and distributed to various wire services and trade associations and is published on our website. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international and U.S. workover rigs. Published international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian and onshore China, because this information is not readily available.

     Rigs in the U.S. are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth to be a potential consumer of our drill bits. Rigs in Canada are counted as active if data obtained by the Canadian Association of Oilwell Drillers and Contractors indicates that drilling operations have occurred during the week and we are able to verify this information. In most international areas, rigs are counted as active if drilling operations have taken place for at least 15 days during the month; however, in certain international areas where better data is available, we compute a weekly or daily average of active rigs. In international areas where there is poor availability of data, the rig counts are estimated from third-party data. The rig count does not include rigs that are in transit from one location to another, rigging up, being used in non-drilling activities, including production testing, completion and workover, and are not expected to be significant consumers of drill bits.

     Our rig counts are summarized in the table below as averages for each of the periods indicated.

		Three Months Ended June 30,								%				Six Months Ended June 30,								%
		2011				2010				Change				2011				2010				Change
		| | |												| |
U.S. — land and inland waters			1,795				1,464				23	%			1,745				1,385				26	%
U.S. — offshore			31				42				(26	)%			28				44				(36	)%
Canada			187				163				15	%			379				310				22	%
North America			2,013				1,669				21	%			2,152				1,739				24	%
		mm
Latin America			417				384				9	%			413				381				8	%
North Sea			38				45				(16	)%			41				44				(7	)%
Continental Europe			74				51				45	%			74				48				54	%
Africa			76				85				(11	)%			79				82				(4	)%
Middle East			291				256				14	%			287				258				11	%
Asia Pacific			251				267				(6	)%			262				262				—
Outside North America			1,147				1,088				5	%			1,156				1,075				8	%
Worldwide			3,160				2,757				15	%			3,308				2,814				18	%

Second Quarter of 2011 Compared to the Second Quarter of 2010

     The rig count in North America increased 21% reflecting a 75% increase in the oil-directed rig count partially offset by an 8% decrease in the U.S. gas-directed rig count, and a 26% increase in the oil-directed rig count and a 1% increase in gas-directed rig count in Canada. Outside North America the rig count increased 5%. The rig count in Latin America increased primarily due to higher activity in Brazil, Colombia and Venezuela, while partially offset by lower activity in Argentina and Mexico. The increase in the Continental Europe geomarket was led by Turkey, Poland and Germany. The rig count in Africa decreased primarily due to the shutdown of activity in Libya partially offset with stronger activity in Algeria and Gabon. The rig count increased in the Middle East primarily due to higher activity in Kuwait, Egypt and Abu Dhabi, partially offset by declines in activity in Yemen and Pakistan. In the Asia Pacific region, activity decreased primarily in Indonesia, Malaysia and Vietnam while activity increased in India and Thailand.

RESULTS OF OPERATIONS

     The discussions below relating to significant line items from our consolidated condensed statements of operations are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where possible and practical, have quantified the impact of such items. We acquired BJ Services on April 28, 2010; therefore, our results of operations for the three and six months ended June 30, 2010 include the results of its operations from that date. In addition, the discussion below for revenue and cost of revenue is on a total basis as the business drivers for the individual components of product sales and services are similar. All dollar amounts in tabulations in this section are in millions of dollars, unless otherwise stated.

Revenue and Profit Before Tax

     The performance of our segments is evaluated based on segment profit before tax, which is defined as income before income taxes, interest expense, interest income, and certain gains and losses not allocated to the segments.

		Three Months Ended																Six Months Ended
		June 30,																June 30,
										Increase																Increase
		2011				2010				(decrease)				% Change				2011				2010				(decrease)				% Change
Revenue:
North America		$	2,368			$	1,486			$	882				59	%		$	4,720			$	2,405			$	2,315				96	%
Latin America			542				384				158				41	%			1,015				656				359				55	%
Europe/Africa/Russia Caspian			806				736				70				10	%			1,577				1,456				121				8	%
Middle East/Asia Pacific			701				545				156				29	%			1,360				984				376				38	%
Industrial Services and Other			324				223				101				45	%			594				412				182				44	%
Total		$	4,741			$	3,374			$	1,367				41	%		$	9,266			$	5,913			$	3,353				57	%

		Three Months Ended																Six Months Ended
		June 30,																June 30,
										Increase																Increase
		2011				2010				(decrease)				% Change				2011				2010				(decrease)				% Change
Profit Before Tax:
North America		$	440			$	204				236			$	116	%		$	900			$	345			$	555				161	%
Latin America			71				13				58				446	%			134				22				112				509	%
Europe/Africa/Russia Caspian			47				69				(22	)			(32	)%			138				149				(11	)			(7	)%
Middle East/Asia Pacific			88				40				48				120	%			167				70				97				139	%
Industrial Services and Other			34				18				16				89	%			48				35				13				37	%
Total		$	680			$	344			$	336				98	%		$	1,387			$	621			$	766				123	%

Second Quarter of 2011 Compared to Second Quarter of 2010

     Revenue for the second quarter of 2011 increased $1.37 billion or 41% compared to the second quarter of 2010. Excluding BJ Services, revenue was up 23%. The primary drivers of the change included increased activity and improved pricing in the U.S. Land and Canada markets and to a lesser extent, increased activity in our international segments.

     Profit before tax for the second quarter of 2011 increased $336 million or 98% compared to the second quarter of 2010. Excluding BJ Services, profit before tax was up 73%. These increases were primarily due to worldwide cost management initiatives as well as strong activity in the North America segment where increased service intensity in the unconventional markets has led to increased efficiency and utilization, and pricing improvement.

North America

     North America revenue increased 59% in the second quarter of 2011 compared with the second quarter of 2010. Excluding BJ Services, revenue increased 33%. Revenue and pricing increases were supported by a 23% increase in the U.S. land and inland waters rig count and a 15% increase in the Canada rig count. The unconventional reservoirs are demanding our best technology to deliver longer horizontals, complex completions, increasing hydraulic fracturing (“frac”) horsepower and more frac stages resulting in improved pricing and higher revenue. Revenue in the Gulf of Mexico was essentially unchanged compared to the second quarter of 2010. Revenue in Canada is up compared to second quarter of 2010 but is down sequentially from the first quarter of 2011 due to the seasonal spring thaw.

     North America profit before tax increased 116% in the second quarter of 2011 compared with the second quarter of 2010. Excluding BJ Services, profit before tax increased 98%. In addition to increased revenue, the primary drivers of the increased profitability included improved tool utilization, improved absorption of manufacturing and other overhead, and higher pricing. This improvement was partially offset by a decline in our profitability in the Gulf of Mexico directly attributable to the slow pace of re-permitting following the lifting of the drilling moratorium.

Latin America

     Latin America revenue increased 41% in the second quarter of 2011 compared with the second quarter of 2010 outpacing the 9% increase in the Latin America rig count. The primary drivers included increased activity and commensurate revenue increases for drilling services and completions in the Brazil geomarket and artificial lift and drilling fluids in the Andean geomarket.

     Latin America profit before tax increased $58 million in the second quarter of 2011 compared to the second quarter of 2010 primarily due to the increased revenue from the Brazil and Andean geomarkets.

Europe/Africa/Russia Caspian

     EARC revenue increased 10% in the second quarter of 2011 compared to the second quarter of 2010. The primary drivers of the increase were sales of completions systems and fluids in the Norway geomarket and directional drilling and wireline sales in the Continental Europe geomarket, partially offset by the impact of decreased sales in Libya where our operations have currently ceased, pending resolution of the conflict.

     EARC profit before tax decreased 32% or $22 million in the second quarter of 2011 compared to the second quarter of 2010. Improved profit before tax in the Europe and Africa regions resulting from higher activity was more than offset by expenses of $70 million, before and after-tax, due to the civil unrest in Libya. These expenses were associated with increasing the allowance for doubtful accounts and reserves for inventory and certain other assets in Libya.

Middle East/Asia Pacific

     Middle East/Asia Pacific revenue increased 29% in the second quarter of 2011 compared to the second quarter of 2010. The increase in this segment was attributable to higher activity in various product lines and share gains from the Iraq, Saudi Arabia, Southeast Asia and Gulf geomarkets.

     Middle East/Asia Pacific profit before tax increased 120% or $48 million in the second quarter of 2011 compared to the second quarter of 2010 primarily due to increased revenue in the Gulf, Southeast Asia, Saudi Arabia and Iraq geomarkets.

Industrial Services and Other

     Industrial Services and Other revenue increased 45% in the second quarter of 2011 compared to the second quarter of 2010. Excluding BJ Services, revenue increased 29%. Industrial Services and Other profit before tax increased 89% or $16 million in the second quarter of 2011 compared to the second quarter of 2010. Excluding BJ Services, profit before tax increased 29%.

Six months ended June 30, 2011 compared to six months ended June 30, 2010

     Revenue for the six months ended June 30, 2011 increased $3.35 billion or 57% compared to the six months ended June 30, 2010. Excluding BJ Services, revenue was up 19%. The primary drivers of the change included increased activity and improved pricing in the U.S. Land and Canada markets and to a lesser extent, increased activity in our international segments.

     Profit before tax for the six months ended June 30, 2011 increased $766 million or 123% compared to the six months ended June 30, 2010. Excluding BJ Services, profit before tax was up 70% primarily due to strong activity in the North America segment where increased activity has led to increased utilization, improved absorption of manufacturing and other overhead costs, and realized pricing improvement, and to a lesser extent, higher profits in the Latin America and Middle East/Asia Pacific segments as a result of cost management, improvements in operational efficiency and improved absorption of fixed costs.

Costs and Expenses

     The table below details certain consolidated condensed statement of operations data and their percentage of revenue for the periods indicated.

		Three Months Ended June 30,																Six Months Ended June 30,
		2011								2010								2011												2010
Revenue		$	4,741				100	%		$	3,374				100	%		$	9,266				100	%		$	5,913				100	%
Cost of revenue			3,718				78	%			2,662				79	%			7,215				78	%			4,574				77	%
Research and engineering			114				2	%			112				3	%			220				2	%			206				3	%
Marketing, general and administrative			292				6	%			312				9	%			574				6	%			617				10	%

Cost of Revenue

     Cost of revenue as a percentage of revenue was 78% and 79% for the three months ended June 30, 2011 and 2010, respectively; and was 78% and 77% for the six months ended June 30, 2011 and 2010, respectively. The decrease for the three months was due primarily to improved pricing, efficiency and cost management initiatives partially offset by the $70 million charge in Libya where our operations have ceased, pending resolution of the conflict. The increase for the six months was primarily due to the impacts of civil unrest in North Africa, including the charge related to Libya.

Research and Engineering

     Research and engineering expenses increased 2% and 7% for the three and six months ended June 30, 2011, respectively, compared to the same periods a year ago. The increases were primarily due to the acquisition of BJ Services in the second quarter of 2010. We continue to be committed to developing and commercializing new technologies as well as investing in our core product offerings.

Marketing, General and Administrative

     Marketing, general and administrative (“MG&A”) expenses decreased 6% and 7% for the three and six months ended June 30, 2011, respectively, compared to the same periods a year ago. Excluding BJ Services, MG&A for the three and six months ended June 30, 2011 decreased 11% and 17%, respectively. These decreases resulted primarily from a reduction in costs associated with finance redesign efforts, which were completed during 2010. In addition, during the first six months of 2011, we benefited from reductions in expenses as a result of cost cutting measures implemented in the latter half of 2010 and synergies we are realizing as we continue to integrate BJ Services into our operations.

Interest Expense, net

     Interest expense, net of interest income increased $24 million and $52 million for the three months and six months ended June 30, 2011, respectively, compared to the same periods a year ago. These increases were primarily due to the issuance of $1.5 billion of debt in August 2010 and the assumption of $500 million of debt associated with the acquisition of BJ Services in April 2010.

Income Taxes

     Total income tax expense was $228 million and $432 million for the three months and six months ended June 30, 2011, respectively. Our effective tax rate on operating profits for the three months and six months ended June 30, 2011 was 40.5% and 37.5%, respectively, which is higher than the U.S. statutory income tax rate of 35% due to the $70 million charge in Libya for which there was no tax benefit, higher effective tax rates on certain international operations and state income taxes.

     Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessment of additional taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. We have received tax assessments from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. We believe we have substantial defenses to the questions being raised and will pursue all legal remedies should an unfavorable outcome result. Resolution of any tax matter involves uncertainties and there are no assurances that the outcomes will be favorable.

OUTLOOK

     This section should be read in conjunction with the factors described in “Part II, Item 1A. Risk Factors” and in the “Forward-Looking Statements” section in this Part I, Item 2, both contained herein. These factors could impact, either positively or negatively, our expectation for: oil and natural gas demand; oil and natural gas prices; exploration and development spending and drilling activity; and production spending.

     Our industry is cyclical, and past cycles have been driven primarily by alternating periods of ample supply or shortage of oil and natural gas relative to demand. As an oilfield services company, our revenue is dependent on spending by our customers for oil and natural gas exploration, field development and production. This spending is dependent on a number of factors, including our customers’ forecasts of future energy demand, their expectations for future energy prices, their access to resources to develop and produce oil and gas, the impact of new government regulations and their ability to fund their capital programs.

     Our outlook for exploration and development spending is based upon our expectations for customer spending in the markets in which we operate, and is driven primarily by our perception of industry expectations for oil and natural gas prices and their likely impact on customer capital and operating budgets as well as other factors that could impact the economic return oil and gas companies expect for developing oil and gas reserves. Our forecasts are based on our analysis of information provided by our customers as well as market research and analyst reports including the Short Term Energy Outlook (“STEO”) published by the Energy Information Administration (“EIA”) of the U.S. Department of Energy (“DOE”), the Oil Market Report published by the IEA and the Monthly Oil Market Report published by Organization of the Petroleum Exporting Countries (“OPEC”). Our outlook for economic growth is based on our analysis of information published by a number of sources including the International Monetary Fund (“IMF”), the Organization for Economic Cooperation and Development (“OECD”) and the World Bank.

     The primary drivers impacting the 2011 business environment include the following:

•

Worldwide Economic Growth — The global economy is continuing its expansion following the recession of 2008/2009. Economic growth has been strongest in China and the other emerging and developing countries outside the OECD. While important in terms of total consumption, the developed economies of OECD countries are expected to experience relatively modest economic growth and will not contribute meaningfully to incremental oil or natural gas demand. In