U.S. drilling activity has bottomed out and will begin to expand “very slowly” in 2010, the CEO of Baker Hughes Inc. (BHI) said Wednesday.

CEO Chad Deaton led a conference call with energy analysts to discuss the Houston-based oilfield service operator’s 2Q2009 earnings report. Net income fell sharply from the year-ago period to $87 million (28 cents/share) from $379 million ($1.23). Revenue plunged 22% to $2.34 billion from 2Q2008, and it was down 12% from the first three months of this year.

North American profits were impacted by not only by reduced drilling, but “a more severe than normal spring [ice] break-up in Canada, [and] further price deterioration and severance costs, which were partially offset by our cost reduction and productivity improvement programs,” BHI said.

“For North America, the decline in activity has been severe; however, in recent weeks the market has been stabilizing,” said Deaton. “We believe the decline in the U.S. rig count is now behind us, and we expect a gradual increase in drilling activity beginning in 2010. Pricing deterioration has slowed, and with our cost cutting efforts we expect the second quarter 2009 to have marked the bottom for North America profitability.”

The average 2009 U.S. gas and oil rig count is projected to be 1,026, which would be 45% lower than the average 2008 rig count, BHI said. The gas-weighted U.S. rig count is expected to climb about 9% in 2010 to average around 1,120 rigs, said Deaton.

“Economic activity and industrial demand remain weak,” Deaton told analysts. “There’s still ample gas supply to keep North American drilling activity contained for the near term.”

Because of its “relatively heavy” offshore activity, particularly in the deepwater, BHI “is well positioned to beat expectations in the next few years,” said FBR Capital Markets energy analysts in a note. However, the weakness in North American margins, at 2%, left operating income “$51 million below our expectation.” Higher margins, similar to those reported by Smith International, had been expected because of “relatively strong drill bit and fluid margins.”

Over the next 18 months, “there could be lumpiness on the timing of near-term cost reductions in North America” and because of Baker Hughes’ ongoing internal revamp efforts, said FBR analysts. Still, the firm “is emerging as the service company that is most likely to beat growth expectations over the next few years due to its high technology, deepwater traction and reorganization.”

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