To: Dennis Roth who wrote ( 14) 1/31/2008 9:16:56 AM From: Dennis Roth Read Replies (1) | Respond to of 18 Baker Hughes Inc. (BHI): Growth, execution challenges remain - maintain Neutral rating - Goldman Sachs - 01/30/08 What's changed We lowered our 2008 EPS estimate for BHI by 6% to $5.30. Our new estimate includes lower North American revenue growth assumptions caused by pricing pressures, as well as a reduction to our international growth forecasts due to BHI’s more conservative approach to expansion and acquisitions. We also lowered our 12-month, P/E-based price target to $77 from $85, and remain Neutral-rated on the stock. Going forward, the upside catalyst to the shares would be awards of major international projects such as Manifa or Block 31 (Angola), although there is no clarity on timing or BHI’s competitive position at this time. We have also lowered our 2009-2010 EPS estimates by 11% and 9% to $6.05 and $6.67. Implications BHI clearly provided the most cautious outlook for 2008 among the group. There were two key takeaways that have a broader impact on the sector. (1) The company was considerably more cautious on pricing in North America, citing weakness across several product lines, including fluids, logging, and directional drilling. Beyond pressure pumping, peers have only acknowledged marginal price erosion in various sub-segments, like cased-hole wireline. We believe more widespread price weakness could follow, which would also affect sector-wide margins. (2) BHI attributed its slower international growth outlook to more conservative business practices stemming from its Deferred Prosecution Agreement. We note that other services companies have received inquiries from the DOJ for possible misconduct, and this may become more of an issue for the sector. Valuation BHI is trading at 2008 P-E/EV-DACF of 12.7X/9.1X versus Schlumberger at 15.8X/12.0X, Halliburton at 11.8X/9.2X and Weatherford at 14.7X/10.4X. Key risks Weaker-than-expected global economic growth or lower-than-expected oil company spending internationally.