DBRS Rates Baker Hughes Incorporated at Ap

Dominion Bond Rating Service (“DBRS”) is assigning the above noted ratings to Baker Hughes Incorporated (“Baker Hughes” or the “Company”) based on the following conclusions:

(1) The Company’s good performance and resulting financial flexibility has been driven by strong operating conditions worldwide due to high commodity prices. Market conditions for the industry are often gauged by the drilling rig count, which is currently at its highest level in almost 20 years. Baker Hughes has been streamlining its balance sheet since its 1998 acquisition of Western Atlas Inc., having sold all its non-oilfield service businesses and having partially divested its seismic business in late 2000 into the 30%-owned WesternGeco (Schlumberger Ltd. holds the remaining 70%). Modest debt results in debt-to-capital of 20% and a strong debt-to-cash flow ratio of 1.05 times for the 12 months ended June 30, 2005 (0.59 times using net debt). The Company’s balance sheet strength and flexibility are keys to operating in the volatile oilfield services industry, allowing Baker Hughes to manage market downturns, while expanding efficiently during strong periods.

(2) Baker Hughes operates in over 90 countries, offering products that cover the life cycle of an oil or gas well through exploration, development, and production. This breadth and depth allows Baker Hughes to meet the needs of major oil companies operating around the globe and national oil companies looking for comprehensive product lines and fewer suppliers. The only product the Company lacks relative to its largest competitors is pressure pumping, which has driven superior margins for the Company’s largest competitors in response to U.S. natural gas demand. While North America remains the most important market for Baker Hughes (42% of 2004 revenues), long-term growth will be more significant internationally, acknowledged recently by the Company’s geographic reorganization with a number of senior management positions moving to international regions.

(3) As with most of its large competitors, Baker Hughes derives some competitive advantage from its more technologically advanced products. In addition to having the size to develop new technology (in an industry that is very slow to accept it), Baker Hughes is also adept at improving on existing products to increase efficiency. There have been a number of patent disputes among current oilfield service providers, a trend that could become more international with increased competition from China and Russia.

(4) In the oilfield service segments in which it operates, Baker Hughes is either the market leader or one of the top three providers. With its long history, the Company has a good reputation, which is often a key determinant in choosing a service provider. The outlook for Baker Hughes and the industry is positive in the near term and over the long term with periods of volatility expected. Due to current supply constraints on older mature reserves worldwide, new production will come from reserves that are harder to reach and produce, and will require a greater level of oilfield services as a result. In the past, industry volatility has partially stemmed from companies overbuilding equipment in good markets only to suffer in the subsequent downturn. Baker Hughes, with its strong financial condition, is well-positioned to manage any downturn and even take advantage of the conditions that could result.

Note:
p - This rating is based on public information.