Michael E. Wiley, former president and chief executive officer of Vastar Resources, and then a top executive at Arco before it was acquired by BP, arrived at Baker Hughes Inc. in August 2000 with a tall assignment: turn BHI around. The service company had been languishing on a number of fronts. As the new chairman, president and CEO, he brings enthusiasm-and the fresh viewpoint of a former customer-to the task of reversing the fortunes of BHI, which has somewhat foundered in the last two years. Born and raised near Tulsa, he earned his petroleum engineering degree from the University of Tulsa on a working scholarship from Arco. In 1972, he joined the oil company in Lafayette, Louisiana, as an offshore drilling engineer, and worked his way up the company ladder to president and chief operating officer. An innovative leader at Arco, Wiley, 50, led a strategic initiative to improve performance by maximizing operating margins and establishing cost-effective alliances. Today Baker Hughes operates through six major oilfield divisions: Baker Hughes Inteq, Centrilift, Hughes Christensen, Baker Atlas, Baker Oil Tools and Baker Petrolite. Baker Hughes, the third-largest oil-service company by market capitalization, is making strides. Revenues and EBIT (earnings before interest and taxes) per employee have risen since early 2000 on the winds of increased drilling activity. More important, however, oilfield operating margins are up, approaching 15%-not as much as that of Schlumberger, but almost twice the margins of Halliburton, according to a presentation Wiley made at the recent 29th annual Howard Weil energy conference. From $2.9 billion in 1999, debt has been reduced. The target for year-end 2001 is about $1.9 billion. Of 25 analysts covering the stock, 12 have a Strong Buy on it and 12 rate it Buy. Dain Rauscher Wessels oil-services analyst Jim Wicklund says, "Wiley is highly respected for his leadership ability and is considered one of the top two or three executives in the oil and gas industry...During his leadership tenure at [Arco majority-owned] Vastar Resources, the company had the lowest finding costs in the Gulf of Mexico for four consecutive years." Wicklund is among the analysts with a Strong Buy on BHI. His target is $45 and he estimates 2001 earnings per share will total $1.20, and in 2002, $1.71. BHI is one of Wicklund's top picks for 2001. "While we cannot dispute that BHI still has 'issues,' we believe that these warts are being addressed much more readily and directly than many might have earlier thought." A.G. Edwards & Sons analyst Poe Fratt has a Buy/Aggressive on the stock with a target of $51. "We believe the weakness in the stock price created a good opportunity to buy a company that has become the purest play in the oilfield-service business and is finally on the right track after extensive restructuring during the past 18 months," he says. Investor What perceptions from managing E&P companies Arco and Vastar do you bring to a service company? Wiley It gives me a different perspective from the historical management of Baker Hughes. It allows me to perhaps give some insight to the leadership of the company on what the real, important issues are. For instance, what do the E&P companies think about when they acquire our products and services? Investor How has your management philosophy affected the company's turnaround? Wiley I do not believe there is any one formula or methodology for management and leadership. I think each industry, each business, has its own set of issues and opportunities. You have to be flexible dealing with issues and opportunities as they present themselves. The key is to build a culture of performance that creates value over a long period of time. That is one of our priorities here: to establish a high-performance culture that can make us best in class. Investor Would you characterize that as more a personnel-driven focus than a technology-driven one? Wiley We are trying to balance the importance of our human resources with our capital and technology resources. We're placing a lot of emphasis on the creation of an atmosphere wherein everyone can contribute at his or her full potential. Historically, one of the strengths of Baker Hughes has been its people. Several initiatives were in place when I got here. Some of the things we have tried to do since I arrived, in terms of strategic initiatives, are beginning to bear fruit. Those include a focus on product-line strengths and making sure that our products and services are best in class. We have also strengthened the corporate function so that we are more centrally directed in terms of technology, capital and human resources. We are focused more on corporate leadership and coordination of our interdivisional growth opportunities while still maintaining a lot of decentralized execution and customer contact. We have reestablished financial flexibility in the company through our debt reduction efforts in 2000. Going forward, we are going to build the company around our core strengths, including our wellbore-oriented production, evaluation and completion services. Investor Do you have an image to overcome? Is Baker Hughes known more by its divisions than as a corporate entity? Wiley I think, because of the historical evolution of Baker Hughes, characterized by a large number of autonomous divisions, and as more integration in product delivery was required, it did cause some problems in the culture of the company. We have established a corporate organization to help lead and facilitate divisional growth opportunities. That has already started to work for us. Going forward, Baker Hughes, as an entity, wants to maintain that strong product-line focus, while still being able to deliver to the customer interdivisional packages, if that is what the customer needs. I think we are setting up an organization now that can do that. Investor What would you expect Baker Hughes to look like in 10 years? Wiley Let me describe it in terms of what we are trying to accomplish. We are trying to establish a high-performance culture based on a set of core values including performance, teamwork and learning. We can accomplish that by continuing to focus around the wellbore in evaluation, production and drilling services. I do not anticipate any major diversification from that. Investor Baker Hughes is a technology company. What do you see as the most serious technological challenges facing the industry today? Wiley I don't know that they are any different than they have always been. The challenge is to increase productivity with the resources at hand, whether that is from a production, reserves, cost or quality perspective. As the industry evolves, there is going to be continued pressure to do things more efficiently, to add value in different ways. Those increased values can, and have, come from technology over time. I think that will continue. One of the biggest challenges is the source of the continued investment in resources that will be required to develop technology and, from a service perspective, to be able to obtain fair value for that investment. The industry, in time, has shifted more and more to reliance on the service companies to develop that technology. I do not see that trend changing. Investor Do you see any impending constraints on the resources required to meet the challenges you describe? Wiley The service sector, as well as the upstream sector, is faced with a potential constraint in its ability to attract and motivate high-caliber people, those who are very technically oriented, whether they be college graduates or seasoned technicians. A second area of constraint is that returns on investment are not at the level that they should be to attract the amounts of investments that will be required for technology and expansion in time. The returns in this end of the business have to improve. Investor How will the constraints be met? Wiley It will require a number of things, including continued advancements in productivity and elimination of the excess capacity drag in some sectors of the business. These issues have to be addressed. There is no alternative. Investor What are some of the most promising technological advances in the industry? Wiley You will continue to see advances in steerable drilling systems, in multilateral completion technology, in intelligent completions, in real-time monitoring and telemetry for production, in seismic, in drillbit technology, and in most areas of fundamental oilfield technology. You see continuation of the trend to more and more drillpipe-conveyed evaluation and testing. Investor How important is information technology and knowledge management to the upstream industry and, specifically, to the service industry? Wiley I think the whole e-business concept is going to play an important role going forward. It is one of the tools that will help us leverage our institutional expertise. Baker Hughes has already launched a knowledge-management system. Anyone in the world can tap into experts no matter where they are. That will continue to evolve. Baker Hughes is a founding member of the OFS portal also. We will be launching Baker Hughes Direct, a series of storefronts for some of our divisions, this year. The question is how are these tools going to be used and what value will they bring to us in the long term. There will have to be some adaptation, some accommodation. Most of our products are not commodity items. Even for most of the things we manufacture, lot sizes are small because they are for built-to-purpose applications. These products definitely require a lot of interaction between the customer and our technical people. Some of the development that will occur will facilitate that interaction, but the interaction will still have to take place. I think there is a lot of value in e-business for those that can figure out how to use it. Investor Do you think the industry has unrealistic expectations with regard to e-business? Wiley I don't think we do internally. We have an appreciation for its possibilities. I think, perhaps, some outside the industry have higher expectations about what will actually take place over time. But we are confident that there is real value to be obtained. Investor Has the merger and acquisition bubble burst, or is there room for further rationalization in the industry? Wiley As I have said, I think there are still some sectors with excess capacity. Those need to be rationalized. The evidence is that the returns just are not there. I think, therefore, that you will continue to see attempts by various businesses to improve their returns and part of that will be achieved through some forms of combinations, be they mergers, acquisitions, joint ventures or acquisitions. Investor Do you think the service sector and operators are moving closer together? Wiley I think the historical relationship has evolved. There are still some issues that come up because of the historical relationship, but I think there is a lot better cooperation now between customers and the service industry, and that occurs earlier in the process than it used to. There is a lot of collaboration in technology development. From both sides, information and ideas are shared more freely than they have been in the past. That prepares each to understand and meet the others' needs more effectively. I am not sure that the relationship has ever been as antagonistic as some have painted it. I think that real problems exist in the traditional procurement initiatives. As the oil companies have switched their focus from basic procurement to issues of broader value creation-what we provide versus how much our goods and services cost-the pendulum is swinging back to a more balanced relationship. Investor What are the two most pressing problems that the service industry must solve? Wiley First, we have to improve returns to attract investment and to be able to invest in technology. Second, history tells us we have not seen the last of the up-and-down economic cycles in this industry. So, we also have to manage better these inevitable cycles and continue to attract, maintain and motivate our work forces. That is a big one.