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BHGE announces fourth quarter and total year 2017 results

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Oilfield Technology,

“In the first 180 days as BHGE, we have made strong progress on our integration efforts and aligning our team to the priorities of growing market share, improving margins and generating more cash. We secured important customer wins in a market environment that continues to be uncertain. Our team continues to execute on critical integration steps as planned, delivering approximately US$80 million of synergies in the quarter,” said Lorenzo Simonelli, BHGE chairman and chief executive officer.

“For the fourth quarter, we delivered US$5.8 billion in orders and US$5.8 billion in revenues. We saw growth in our shorter-cycle businesses and declines in our longer-cycle businesses. Total year 2017 orders were US$22 billion on a combined business basis. Orders in Turbomachinery & Process Solutions were up slightly versus 2016 despite the continued low demand for new LNG projects, while the Digital Solutions and Oilfield Equipment businesses grew orders substantially. For the total year 2017, we delivered revenues of US$21.9 billion on a combined business basis.

“In our Oilfield Services segment, we achieved solid growth driven by our well construction product lines in North America, the Middle East and Latin America. All product lines grew in North America, despite the rig count being down versus the third quarter. International activity remains muted with some pockets of healthy activity. Asia Pacific rig count saw an increase in the fourth quarter after having been flat much of the year, while Latin America increased steadily through the quarter. The Middle East held stable for the year as rig count growth in Iraq and the UAE offset declines in other markets.

"In our Oilfield Equipment segment, the subsea market remains challenging with low activity levels and pricing challenges. We expect tree awards to continue to grow in 2018, though at a slower rate than in 2017 and with totals still more than 50% below prior cycle peaks. We continue to expect offshore activity to be muted in the short term.

"In our Turbomachinery & Process Solutions segment, on- and offshore production driven demand is improving, however new LNG activity is muted as the market remains oversupplied. Downstream application driven demand continues to grow as refinery utilisation increases and petrochemical demand rises. "In our Digital Solutions segment, we see continued growth both for our measurement and controls business lines as well as our Digital offerings. Customers are eager to explore the opportunity to unlock value through better connectivity and we’re making great progress in using existing active projects to showcase our value proposition.

“Overall, we continue to see improvement in activity as early indications of customer capital spending in 2018 are encouraging, particularly for our shorter cycle businesses. International activity is stabilising, and we are seeing signs of activity increase both in the volume and size of tenders for new work as customers feel more confident about their operating costs and commodity price stability. The subsea market continues to be challenging and activity remains low, with prices continuing to be pressured. We expect activity in the LNG space to increase as customers position to make new capacity available in 2022 and beyond. “Our strategy is well suited to market conditions and customer needs. Reducing product and service cost, integrating equipment and service modules, and a focus on outcomes are all aligned with the goal of creating value for customers and for BHGE.”

Quarter Highlights

Customer Contract Wins Across BHGE

BHGE was named as the exclusive supplier to support the appraisal and early production phases of the development of the Cambo field, northwest of the Shetland Islands in the UK. The agreement leverages BHGE’s integrated portfolio of solutions for the oilfield services segment, including a full suite of well services solutions. The Company’s integrated scope of fullstream offshore oil and gas capabilities played a major role in the award.

BHGE’s Oilfield Services segment secured a three-year, multimillion dollar well construction contract in the Middle East. BHGE will provide underbalanced and coiled tubing drilling bottom hole assemblies, drilling fluids, pumping equipment, intervention services, and heavy equipment support for operations and moving requirements - for workover gas wells in the region. This award underpins BHGE’s leadership position in the market.

BHGE’s Turbomachinery & Process Solutions segment continued its success in the Middle East. BHGE secured the largest-ever turbomachinery and process solutions agreement with PetroChina for the provision of its proven turbine generators for the Halfaya oilfield in Iraq. The agreement strengthens BHGE’s presence in Iraq and demonstrates the Company’s dedication to the region. Saudi Aramco also awarded a multimillion dollar contract to BHGE to drive enhanced production at the Haradh and Hawiyah gas fields. BHGE also secured a contract with Maersk Oil to provide an integrated scope of turbomachinery equipment for the Tyra field redevelopment project in the Danish sector of the North Sea. BHGE was selected for the project based on its ability to provide advanced, oil-free turbomachinery technology which will help the sustainable redevelopment of the field.

In the Oilfield Equipment segment, BHGE and SONATRACH formed a new company to satisfy the demand for manufacturing capabilities that meet the highest international standards. The project draws on the extensive experience of BHGE in oilfield equipment manufacturing and leverages the Company’s global and local scale to provide production solutions.

In BHGE’s Digital Solutions segment, the measurement and sensing business secured multiple long-term contracts including a critical deal in the Middle East for ultrasonic flow meters. With close customer collaboration, this deal ensures highest levels of availability for BHGE ultrasonic flow meters across a significant installed base to improve operators’ upstream production. In addition, BHGE secured a significant condition monitoring and software contract, including System 1, the Bently Nevada 3500 system and Enterprise Impact, for the largest gas gathering center for an NOC in the Middle East. This contract connects, monitors and analyses more than 120 non-BHGE rotating equipment assets, including pumps, compressors and steam turbines.

Technology and Innovation

BHGE’s completions business is focused on rolling out technologies that will help customers achieve longer laterals, frac more stages at once, and produce larger fractures without compromising the well’s integrity. The new BLITZ™ Coiled Tubing Frac Sleeve System performs fast, effective fractures with unmatched precision and speed in multistage fracturing operations, with more than 1000 runs to date. BHGE’s new Stim-HOOK™ multilateral multistage fracturing system was developed to enhance production in unconventional plays while lowering breakeven costs. As part of a multimillion dollar, multiyear exclusive collaboration agreement for a field development programme with one of the largest operators in the Permian Basin, BHGE constructed six wells for future installations. BHGE believes this approach will serve as a platform for accelerating implementation of multilateral technology for unconventional resource development on a global scale.

BHGE continues to focus on the development of its NovaLT family of equipment. In the fourth quarter, the Company achieved another milestone and sold the first-ever offshore NovaLT16 gas turbine driven compressor solution for a project in Vietnam. BHGE’s NovaLT16 gas turbine driven centrifugal compressor train provides a highly efficient solution with a strong emphasis on high availability and reliability, while reducing operating costs. The NovaLT16 package will be combined with the offshore platform’s existing gas engine driven reciprocating compressors to expand gas compression capacity at Block 09-1.

Executing for Customers.

BHGE’s AutoTrak™ Curve rotary steerable system achieved record drilling performance for major customers across the Permian Basin, including drilling a curve and lateral in only four days - half the time as a standard system - and setting numerous 24-hour footage records. The drill bits product line increased activity significantly in the basin, fuelled by its new Dynamus™ extended-life drill bit, which enables longer drilling life in harsh formations, resulting in extended run times, higher rates of penetration and increased drilling efficiency.

BHGE’s TransCoil™ rigless-deployed electrical submersible pump (ESP) system extended the economic life of a mature deepwater field in Malaysia. BHGE installed a TransCoil system in a mature well offshore Malaysia, leading to stabilised production at 2300 bfpd vs. 1663 bfpd previously. The installation was less than half the cost of the quote for a traditional rig deployment in the field. A second system also was installed in one of the most challenging formations in the Middle East, bringing 6000 bfpd back online in a well that had been shut in since August.

BHGE successfully completed the first field installation of IntelliStream™ with a North-America based customer. Deployment for an additional three IntelliStream contracts is currently under way. IntelliStream, BHGE’s upstream Production Optimisation enterprise software solution, provides analytic-driven insights and continuous learning to optimise production and reduce non-productive time in a single system.

Orders for the quarter were US$5757 million, up 1% sequentially and down 2% year-over-year. This sequential increase was driven by service orders, which were up 2%, and partially offset by equipment orders, which were down 1%. The 2% year-over-year decline was mainly driven by a 5% decrease in service orders partially offset by a 3% increase in equipment orders.

The Company's total book-to-bill ratio in the fourth quarter was 1.0; equipment book-to-bill ratio in the fourth quarter was 0.9.

Backlog grew in the fourth quarter, which ended at US$21.0 billion, an increase of US$0.1 billion or 1% from the third quarter of 2017. Equipment backlog was US$5.4 billion, down US$0.3 billion, or 6%, sequentially. Services backlog was US$15.7 billion, up US$0.5 billion, or 3%, sequentially.

Revenue for the quarter was US$5763 million, an increase of US$388 million, or 7%, sequentially. Compared to the same quarter last year, revenue was down 3%. All segments grew revenue sequentially despite a declining rig count within the quarter. Year-over-year, the shorter cycle businesses grew, as Oilfield Services was up 10% and Digital Solutions was up 4%. The growth in the shorter cycle businesses was offset by a decrease in the longer cycle businesses as Oilfield Equipment declined 21% and Turbomachinery & Process Solutions declined 14% year-over-year.

On a GAAP basis, operating loss for the fourth quarter of 2017 was US$92 million, which includes additional property, plant and equipment depreciation as a result of purchase accounting for pre-merger Baker Hughes. Operating loss decreased 25% sequentially and increased unfavourably year-over-year. Total segment operating income was US$395 million for the fourth quarter of 2017, up US$66 million, or 20%, sequentially, and down US$147 million, or 27%, year-over-year.

Adjusted operating income (a non-GAAP measure) for the fourth quarter of 2017 was US$303 million and excludes adjustments totalling US$395 million before tax, mainly related to restructuring charges, merger and related costs, as well as inventory write downs due to product and supply chain rationalisation. A complete list of the adjusting items and associated reconciliation has been provided in Table 1a in the section entitled “Charges and Credits” for a reconciliation from GAAP. Adjusted operating income for the fourth quarter was up US$63 million, or 26%, sequentially mainly driven by growth in Oilfield Services and improvement within Oilfield Equipment. Adjusted operating income was down US$58 million, or 16%, year-over-year driven by Oilfield Equipment and Turbomachinery & Process Solutions, partially offset by growth in Oilfield Services.

Depreciation and amortisation for the fourth quarter of 2017 was US$425 million. The sequential increase of US$45 million was primarily driven by increased depreciation from purchase accounting. Corporate costs were US$92 million in the fourth quarter of 2017, compared to US$89 million in the prior quarter and US$181 million in the fourth quarter of 2016.

Other Financial Items

Income tax was a US$51 million credit for the fourth quarter. Included in tax expense is a US$132 million benefit related to recent United States tax reform. The tax expense excluding the impact from US tax reform was due primarily to the geographical mix of earnings and losses, which resulted in taxes in certain jurisdictions that exceeded the tax benefit from the losses in other jurisdictions, that could not be realised within the quarter due to valuation allowances provided. Over time, the Company expects the tax rate to normalise as its earnings and losses profile shifts amongst the US and international jurisdictions.

GAAP loss per share was US$(0.07). Adjusted earnings per share were US$0.15. Excluded from adjusted earnings per share were all items listed in Table 1a in the section entitled "Charges and Credits", as well as the "other adjustments (non-operating)" found in Table 1b. The other adjustments (non-operating) were primarily driven by the US$132 million benefit from US tax reform.

Cash flows used by operating activities were US$(215) million for the fourth quarter of 2017. Free cash flow (a non-GAAP measure) for the quarter was US$(367) million. Free cash flow included a US$(1.2) billion impact from the decision to end the receivables monetisation programme. In addition, free cash flow included approximately US$100 million of merger and restructuring related cash payments. A reconciliation from GAAP has been provided in Table 1c in the section entitled "Charges and Credits."

Capital expenditures, net of proceeds from disposal of assets, were US$152 million for the fourth quarter of 2017.

During the three months ended December 31, 2017, we repurchased US$501 million of the Company’s common stock, consisting of approximately US$187 million of Class A common stock and approximately US$314 million of Class B common stock including the paired units in BHGE LLC from GE. The buyback was completed on a pro rata basis and did not result in a change of GE’s approximately 62.5% interest in BHGE LLC.

Oilfield Services (OFS) revenue of US$2,774 million for the quarter increased by US$139 million, or 5%, sequentially. The sequential increase in revenue was driven by increased volume in North America, the Middle East and Latin America partially offset by decreased activity in Europe.

North America revenue was US$1090 million, an increase of 4% sequentially, as a result of increased volume across completions, artificial lift and drilling services. International revenue was US$1685 million, an increase of 6% sequentially, primarily driven by increased activity in the Middle East, Latin America and Asia and partially offset by weaker volume in Europe and Sub-Saharan Africa. From a product line perspective, the sequential growth of 5% in OFS was driven primarily by completions, artificial lift and drilling services. This growth was partially offset by lower volume in the wireline business.

Segment operating income before tax for the quarter was US$113 million, which included increased property plant and equipment depreciation from the purchase accounting valuation. Operating income for the fourth quarter of 2017 was up US$38 million, or 49%, sequentially, primarily driven by increased volume, synergy realisation and cost productivity.

Oilfield Equipment (OFE) orders were down 27% year-over-year, with equipment orders down 42%, mainly driven by timing of orders within the flexible production systems business, and lower rig drilling systems orders. Services orders increased by 21% year-over-year driven by the pressure control business and long term service agreements in the rig drilling systems business.

OFE revenues of US$672 million for the quarter decreased US$182 million, or 21%, year-over-year. The decrease was driven by lower opening backlog in the subsea production systems business, as well as lower transactional services activity mainly in the North Sea and Sub-Saharan Africa.

Segment operating income before tax for the quarter was US$29 million, down 78% year-over-year. The decrease was primarily driven by lower volume and negative cost productivity.

Turbomachinery & Process Solutions (TPS) orders were down 8% year-over-year. Equipment orders were up 24% driven by the new units business and the downstream products business, partially offset by lower orders in the flow and process technologies business. Service orders were down 22% primarily driven by lower volume in the transactional services business and upgrades business, partially offset by increased service orders in flow and process technologies.

TPS revenues of US$1622 million for the quarter decreased US$265 million, or 14%, year-over-year. The decline was driven by lower services revenue across installations and upgrades, as well as lower new units volume.

Segment operating income before tax for the quarter was US$146 million, down US$167 million, or 53%, year-over-year. The decline was driven primarily by decreased volume and reduced cost productivity. Digital Solutions (DS) orders were up 1% year-over-year, primarily driven by higher order intake across the pipeline and process solutions business and the measurement and sensing business, partially offset by lower project orders within the Bently and controls business.

DS revenues of US$695 million for the quarter were up 4% year-over-year, mainly driven by increased volume from backlog in the Bently and controls business, and growth in the Inspection technologies and pipeline and process solutions businesses.

Segment operating income before tax for the quarter was US$107 million, up 24% sequentially and up 1% year-over-year. The sequential increase was driven primarily by volume growth, as well as strong cost productivity. Year-over-year, the increase in volume and cost productivity was offset by mix and pricing pressure.

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