# Halliburton Co: Form 10-Q for the period ended Jun 30, 2010

- Company: [Halliburton Co](/companies/hal.md) (CIK 45012)
- Form: 10-Q
- Filed: 2010-07-23
- Accepted by EDGAR: Jul 23, 2010, 16:18 ET
- Period: 2010-06-30
- Accession: 0000045012-10-000226
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/45012/000004501210000226/edjune201010q_final.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/45012/000004501210000226/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2010-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2010-04-01 to 2010-06-30 | $4.39bn | us-gaap:Revenues |
| Revenue | 6 months, 2010-01-01 to 2010-06-30 | $8.15bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2010-04-01 to 2010-06-30 | $862.0m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2010-01-01 to 2010-06-30 | $1.65bn | us-gaap:CostOfGoodsSold |
| Operating income | 3 months, 2010-04-01 to 2010-06-30 | $762.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2010-01-01 to 2010-06-30 | $1.21bn | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2010-04-01 to 2010-06-30 | $480.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2010-01-01 to 2010-06-30 | $686.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2010-04-01 to 2010-06-30 | $0.53 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2010-01-01 to 2010-06-30 | $0.76 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2010-04-01 to 2010-06-30 | $0.53 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2010-01-01 to 2010-06-30 | $0.76 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2010-04-01 to 2010-06-30 | 909,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2010-01-01 to 2010-06-30 | 908,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2010-01-01 to 2010-06-30 | $808.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2010-01-01 to 2010-06-30 | $855.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2010-01-01 to 2010-06-30 | $163.0m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2010-06-30 | $1.16bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2010-06-30 | $9.20bn | us-gaap:AssetsCurrent |
| Total assets | at 2010-06-30 | $17.54bn | us-gaap:Assets |
| Current liabilities | at 2010-06-30 | $3.31bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2010-06-30 | $8.16bn | us-gaap:Liabilities |
| Current portion of debt | at 2010-06-30 | $750.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2010-06-30 | $9.35bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,656 characters.

### EXECUTIVE OVERVIEW

### Organization

We are a leading provider of products and services to the energy industry. We serve the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field. Activity levels within our operations are significantly impacted by spending on upstream exploration, development, and production programs by major, national, and independent oil and natural gas companies. We report our results under two segments, Completion and Production and Drilling and Evaluation:

- our Completion and Production segment delivers cementing, stimulation, intervention, and completion services. The segment consists of production enhancement services, completion tools and services, and cementing services; and
- our Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise wellbore placement solutions that enable customers to model, measure, and optimize their well construction activities. The segment consists of fluid services, drilling services, drill bits, wireline and perforating services, testing and subsea, software, and integrated project management and consulting services.

The business operations of our segments are organized around four primary geographic regions: North America (includes Canada and the United States), Latin America, Europe/Africa/CIS, and Middle East/Asia. We have significant manufacturing operations in various locations, including, but not limited to, the United States, Canada, the United Kingdom, Malaysia, Mexico, Brazil, and Singapore. With approximately 54,000 employees, we operate in approximately 70 countries around the world and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.

### Financial results

During the first half of 2010, we produced revenue of $8.1 billion and operating income of $1.2 billion, reflecting an operating margin of 15%. Revenue increased $747 million or 10% from the first half of 2009, while operating income increased $119 million or 11% from the first half of 2009. Overall, these increases were due to our customers’ higher capital spending throughout 2010, led by increased drilling activity and pricing improvements in North America.

### Gulf of Mexico/Macondo Well incident

On April 22, 2010, the semisubmersible drilling rig, Deepwater Horizon, sank in the Gulf of Mexico after an explosion and fire onboard the rig that began on April 20, 2010. We performed a variety of services on the well, including cementing, mud logging, directional drilling, measurement-while-drilling, and rig data acquisition services. The cause of the explosion, fire, and resulting oil spill is being investigated by numerous industry participants, governmental agencies and Congressional committees, and we have been named in many class action complaints involving pollution damage claims and other lawsuits related to wrongful death and other personal injuries claims. On May 28, 2010, the United States Department of the Interior issued an order imposing a six month suspension on all offshore deepwater drilling projects. A preliminary injunction has been issued blocking enforcement of the suspension on June 22, 2010, and the Department of the Interior issued a new suspension of deepwater drilling on July 12, 2010. We are adjusting the allocation of our Gulf of Mexico existing assets and/or anticipated capital expenditures and redeploying employees throughout the remainder of 2010. As a result of the Macondo Well incident and the deepwater drilling suspension in the Gulf of Mexico, despite our mitigation efforts, we estimate that the suspension will negatively impact our earnings by $0.05 to $0.08 for each quarter for the remainder of the year. Longer term, we do not know the extent of the impact on revenue or earnings as they are dependent among other things on our customers’ actions and the potential movement of deepwater rigs to other markets. For additional information, see “Business Environment and Result of Operations,” Note 6 to the condensed consolidated financial statements, Item 1, “Legal Proceedings,” and Item 1(a), “Risk Factors.”

### Business outlook

We continue to believe in the strength of the long-term fundamentals of our business. Although we have seen improvements in our business during the first half of 2010, due to the concerns about the global recovery, the general lack of credit availability, the current excess supply of oil and natural gas, and the Gulf of Mexico/Macondo Well incident, the near-term growth for our business may be at a more moderate pace.

In North America, the industry experienced an unprecedented decline in drilling activity and rig count during 2009. These declines, coupled with natural gas storage levels reaching record levels, resulted in severe margin contraction in 2009. Beginning in the fourth quarter of 2009 and continuing through the first half of 2010, we saw a rebound in rig count and drilling activity with the trend toward more service-intensive work, especially in liquids-rich shale plays, resulting in absorption of much of the industry’s excess oilfield equipment capacity. Due to this absorption of excess capacity and our equipment utilization surpassing peak levels experienced in the third quarter of 2008, we were able to achieve price and margin increases over the prior year for most of our services. However, new production resulting from this increased activity, coupled with existing natural gas storage volumes, could weaken natural gas prices and negatively impact drilling activity and slow down our ability to further increase prices in coming quarters. In addition, the recent suspension of deepwater drilling in the Gulf of Mexico is expected to further impact our earnings.

Outside of North America, operating income declined in 2009 from 2008 levels due to a drop in rig count and the impact of pricing concessions that were renegotiated or given in the contract retendering process. In the second quarter of 2010, we experienced moderate improvement in revenue due to a seasonal recovery from inclement weather experienced in Russia, China, Australia, and Indonesia. We also saw improvement in Latin America due to increased activity for directional drilling. Despite improved activity levels in the second quarter, we have continued concerns around the pace of global recovery, which may cause our customers to revise their capital spending budget for the remainder of the year. Further, many regulatory agencies are revisiting regulatory requirements for deepwater drilling, which may delay certain projects.

Our operating performance and business outlook are described in more detail in “Business Environment and Results of Operations.”

### Financial markets, liquidity, and capital resources

Since mid-2008, the global financial markets have been volatile. While this has created additional risks for our business, we believe we have invested our cash balances conservatively and secured sufficient financing to help mitigate any near-term negative impact on our operations. For additional information, see “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”

### LIQUIDITY AND CAPITAL RESOURCES

We ended the second quarter of 2010 with cash and equivalents of $1.2 billion compared to $2.1 billion at December 31, 2009.

### Significant sources of cash

Cash flows from operating activities contributed $808 million to cash in the first six months of 2010.

During the first six months of 2010, we sold approximately $550 million of United States Treasury securities.

*Further available sources of cash.* We have an unsecured $1.2 billion revolving credit facility expiring in 2012 to provide commercial paper support, general working capital, and credit for other corporate purposes. There were no cash drawings under the facility as of June 30, 2010. In addition, we have $1.9 billion in United States Treasury securities that will be maturing at various dates through June 2011.

### Significant uses of cash

Capital expenditures were $855 million in the first six months of 2010 and were predominantly made in the production enhancement, drilling services, wireline and perforating, and cementing product service lines.

During this period, we purchased approximately $1.2 billion in United States Treasury securities, with varying maturity dates of less than one year.

We paid $190 million to acquire various companies during the first six months of 2010 that will enhance or augment our current portfolio of products and services.

We paid $163 million in dividends to our shareholders in the first six months of 2010.

We paid $94 million to the United States Department of Justice (DOJ) in the first six months of 2010 related to the settlement with them and under the indemnity provided to KBR, Inc. (KBR) upon separation.

*Future uses of cash.* Capital spending for 2010 is expected to be approximately $2.0 billion. The capital expenditures plan for 2010 is primarily directed toward our production enhancement, drilling services, wireline and perforating, and cementing product service lines and toward retiring old equipment to replace it with new equipment to improve our fleet reliability and efficiency.

In April 2010, we entered into a definitive merger agreement to acquire Boots & Coots, Inc. in a stock and cash transaction valued at approximately $250 million. Upon closing, which we expect will occur later this summer, we will combine our existing hydraulic workover and pipeline and coiled tubing services in our Completion and Production segment with Boots and Coots’ well intervention and pressure control capabilities. Under the merger agreement, Boots & Coots stockholders will receive $3.00 per share for each share of Boots & Coots common stock they hold, comprised of $1.73 in cash, which we will pay out of available cash and equivalents, and $1.27 in Halliburton common stock, subject to election, proration features, and an exchange ratio based on Halliburton’s five-day average share price prior to closing as further described in the merger agreement. The completion of the transaction will be subject to approval by Boots & Coots’ stockholders, regulatory approvals, and other customary closing conditions.

We are currently exploring other opportunities for acquisitions that will enhance or augment our current portfolio of products and services, including those with unique technologies or distribution networks in areas where we do not already have large operations.

We currently intend to retire our $750 million principal amount of 5.5% senior notes at maturity in October 2010 with available cash and equivalents.

Subject to Board of Directors approval, we expect to pay quarterly dividends of approximately $80 million during 2010. We also have approximately $1.8 billion remaining available under our share repurchase authorization, which may be used for open market share purchases.

As a result of the resolution of the DOJ and Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) investigations, we will make the final payment of $48 million during the third quarter of 2010 for the settlement with the DOJ and under the indemnity provided to KBR upon separation. See Notes 5 and 6 to our condensed consolidated financial statements for more information.

### Other factors affecting liquidity

*Guarantee arrangements.* In the normal course of business, we have agreements with financial institutions under which approximately $1.5 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of June 30, 2010, including $198 million of surety bonds related to Venezuela. In addition, $213 million of the total $1.5 billion relates to KBR letters of credit, bank guarantees, or surety bonds that are being guaranteed by us in favor of KBR’s customers and lenders. KBR has agreed to compensate us for these guarantees and indemnify us if we are required to perform under any of these guarantees. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.

*Financial position in current market.* We believe our $1.2 billion of cash and equivalents and $1.9 billion in investments in marketable securities as of June 30, 2010 provide sufficient liquidity and flexibility, given the current market environment. Our debt maturities extend over a long period of time. We currently have a total of $1.2 billion of committed bank credit under our revolving credit facility to support our operations and any commercial paper we may issue in the future. We have no financial covenants or material adverse change provisions in our bank agreements. Currently, there are no borrowings under the revolving credit facility. Although a portion of earnings from our foreign subsidiaries is reinvested overseas indefinitely, we do not consider this to have a significant impact on our liquidity.

In addition, we manage our cash investments by investing principally in United States Treasury securities and in investment funds that principally hold United States Treasury securities.

*Credit ratings.* Credit ratings for our long-term debt remain A2 with Moody’s Investors Service and A with Standard & Poor’s. The credit ratings on our short-term debt remain P-1 with Moody’s Investors Service and A-1 with Standard & Poor’s.

*Customer receivables.* In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. For example, we have seen a delay in receiving payment on our receivables from one of our primary customers in Venezuela. If our customers delay in paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

### BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in approximately 70 countries throughout the world to provide a comprehensive range of discrete and integrated services and products to the energy industry. The majority of our consolidated revenue is derived from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. We serve the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production throughout the life of the field. Our two business segments are the Completion and Production segment and the Drilling and Evaluation segment. The industries we serve are highly competitive with many substantial competitors in each segment. In the first six months of 2010, based upon the location of the services provided and products sold, 44% of our consolidated revenue was from the United States. In the first six months of 2009, 37% of our consolidated revenue was from the United States. No other country accounted for more than 10% of our revenue during these periods.

Operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, force majeure, war or other armed conflict, expropriation or other governmental actions, inflation, exchange control problems, and highly inflationary currencies. We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country would be materially adverse to our consolidated results of operations.

Activity levels within our business segments are significantly impacted by spending on upstream exploration, development, and production programs by major, national, and independent oil and natural gas companies. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption. See Item 1(a), “Risk Factors,” for further information.

Some of the more significant barometers of current and future spending levels of oil and natural gas companies are oil and natural gas prices, the world economy, the availability of credit, and global stability, which together drive worldwide drilling activity. Our financial performance is significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the following tables.

This table shows the average oil and natural gas prices for West Texas Intermediate (WTI), United Kingdom Brent crude oil, and Henry Hub natural gas:

| Average Oil Prices (dollars per barrel) | Three Months Ended June 30 2010 | 2009 | Year Ended December 31 2009 |
| --- | ---: | ---: | ---: |
| West Texas Intermediate | $77.79 | $59.44 | $61.65 |
| United Kingdom Brent | 78.51 | 58.70 | 61.49 |
| Average United States Gas Prices (dollars per thousand |  |  |  |
| cubic feet, or mcf) |  |  |  |
| Henry Hub | $4.45 | $3.83 | $4.06 |

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The quarterly and year-to-date average rig counts based on the Baker Hughes Incorporated rig count information were as follows:

| Land vs. Offshore United States: | Three Months Ended June 30 2010 | 2009 | Six Months Ended June 30 2010 | 2009 |
| --- | ---: | ---: | ---: | ---: |
| Land | 1,467 | 886 | 1,384 | 1,078 |
| Offshore (incl. Gulf of Mexico) | 41 | 50 | 43 | 53 |
| Total | 1,508 | 936 | 1,427 | 1,131 |
| Canada: |  |  |  |  |
| Land | 164 | 90 | 315 | 209 |
| Offshore | 2 | 1 | 3 | 1 |
| Total | 166 | 91 | 318 | 210 |
| International (excluding Canada): |  |  |  |  |
| Land | 782 | 711 | 775 | 727 |
| Offshore | 306 | 271 | 300 | 277 |
| Total | 1,088 | 982 | 1,075 | 1,004 |
| Worldwide total | 2,762 | 2,009 | 2,820 | 2,345 |
| Land total | 2,413 | 1,687 | 2,474 | 2,014 |
| Offshore total | 349 | 322 | 346 | 331 |

| Oil vs. Natural Gas United States (incl. Gulf of Mexico): | Three Months Ended June 30 2010 | 2009 | Six Months Ended June 30 2010 | 2009 |
| --- | ---: | ---: | ---: | ---: |
| Oil | 544 | 201 | 501 | 242 |
| Natural Gas | 964 | 735 | 926 | 889 |
| Total | 1,508 | 936 | 1,427 | 1,131 |
| Canada: |  |  |  |  |
| Oil | 92 | 40 | 174 | 82 |
| Natural Gas | 74 | 51 | 144 | 128 |
| Total | 166 | 91 | 318 | 210 |
| International (excluding Canada): |  |  |  |  |
| Oil | 829 | 757 | 820 | 783 |
| Natural Gas | 259 | 225 | 255 | 221 |
| Total | 1,088 | 982 | 1,075 | 1,004 |
| Worldwide total | 2,762 | 2,009 | 2,820 | 2,345 |
| Oil total | 1,465 | 998 | 1,495 | 1,107 |
| Natural Gas total | 1,297 | 1,011 | 1,325 | 1,238 |

| Drilling Type United States (incl. Gulf of Mexico): | Three Months Ended June 30 2010 | 2009 | Six Months Ended June 30 2010 | 2009 |
| --- | ---: | ---: | ---: | ---: |
| Horizontal | 781 | 389 | 725 | 440 |
| Vertical | 495 | 373 | 477 | 474 |
| Directional | 232 | 174 | 225 | 217 |
| Total | 1,508 | 936 | 1,427 | 1,131 |

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Our customers’ cash flows, in many instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets. The opposite is true for higher oil and natural gas prices.

During the latter portion of 2008 and throughout much of 2009, there was an unprecedented decline in oil and natural prices and demand for our services due to the worldwide recession. Since then, prices have rebounded. According to the International Energy Agency’s (IEA) July 2010 “Oil Market Report,” 2010 world petroleum demand is forecasted to increase 2% over 2009 levels. Despite the reduction in demand from peak levels in 2008 due to the worldwide recession, we believe that, over the long term, any major macroeconomic disruptions may ultimately correct themselves as the underlying trends of smaller and more complex reservoirs, high depletion rates, and the need for continual reserve replacement should drive the long-term need for our services.

### North America operations

Volatility in natural gas prices can impact our customers' drilling and production activities, particularly in North America. In 2009, the region experienced an unprecedented decline in rig count and drilling activity due to the decline in natural gas prices. Beginning in the fourth quarter of 2009 and continuing through the second quarter of 2010, drilling activity has improved especially in service-intensive, liquids-rich, shale plays. As of June 30, 2010, rig counts had increased approximately 32% from the end of 2009. Current horizontal rigs represent over 50% of total rigs in the United States and are about 33% higher than the levels at the peak rig count of third quarter 2008. These trends have led to increased demand and increased pricing for most of our products and services in our United States land operations. In the second quarter of 2010, North America revenue increased 24% and operating income increased over 90% from the prior quarter driven by the increase in overall activity and completions intensity. Going forward, we expect that the overall rig count will continue to grow, but at a slower rate. We also expect further pricing opportunities from our already high utilization rate; however, growing cost pressure will serve to somewhat slow down the rate of improvement in our margins.

*Gulf of Mexico/Macondo well incident.* The semisubmersible drilling rig, Deepwater Horizon, sank in the Gulf of Mexico on April 22, 2010 after an explosion and fire onboard the rig that began on April 20, 2010. We performed a variety of services on the well, including cementing, mud logging, directional drilling, measurement-while-drilling, and rig data acquisition services. The cause of the explosion, fire, and resulting oil spill is being investigated by numerous industry participants and governmental agencies. On May 28, 2010, the United States Department of the Interior issued an order imposing a six month suspension on all offshore deepwater drilling projects. A preliminary injunction has been issued blocking enforcement of the suspension on June 22, 2010, and the Department of the Interior issued a new suspension of deepwater drilling on July 12, 2010.

We are assessing our plans in light of the Macondo Well incident relating to the Deepwater Horizon and the prospective regulatory response, including any new temporary or permanent Bureau of Ocean Energy Management, Regulation, and Enforcement (BOE) rules. We are also engaged in discussions with our customers in the Gulf of Mexico and are relocating equipment and personnel to other markets as appropriate. In this connection, we expect that Gulf of Mexico deepwater activity may be in hiatus for at least six months and possibly longer. However, there is potential for continuing operations in the Gulf of Mexico under the current BOE rules both as to shallow water operations and certain well activities such as water injection and workover operations, but some of these operations have been delayed as well due to the more stringent permitting process.

Our business in the Gulf of Mexico represented approximately 12% of our North America revenue in 2008, approximately 16% in 2009 and approximately 12% in the first half of 2010, and approximately 5% of our consolidated revenue in 2008, approximately 6% in 2009 and approximately 6% in the first half of 2010. Currently, approximately 65% of our Gulf of Mexico business is related to deepwater activities. Over time, our margins in the Gulf of Mexico generally have been less volatile than our United States onshore margins. Generally, our average margins in the Gulf of Mexico have been similar to the average of our United States onshore margins over the last three years.

We are adjusting the allocation of our Gulf of Mexico existing assets and/or anticipated capital expenditures to some degree during the remainder of 2010. At the time of the Macondo Well incident, we employed approximately 2,200 people in the Gulf of Mexico, and we have begun redeploying approximately 20% of our employees. As a result of the Macondo Well incident and the deepwater drilling suspension in the Gulf of Mexico, despite our mitigation efforts, we estimate that the suspension will negatively impact our earnings by $0.05 to $0.08 per quarter for the remainder of 2010. Longer term, we do not know the extent of the impact on revenue or earnings, as they are dependent, among other things, on our customers’ actions and the potential movement of deepwater rigs to other markets.

In this respect, we referenced earlier in 2010 the following contract wins that are at least partially affected as a result of the hiatus in Gulf of Mexico deepwater activity:

|  |  |
| --- | --- |
| ▪ | a five-year, $1.5 billion contract to provide a broad base of products and services to an international oil company for its |
|  | work associated with North America; and |
| ▪ | several wins totaling $1 billion, including $700 million to provide deepwater drilling fluid services in the Gulf of Mexico, |
|  | Brazil, Indonesia, Angola, and other countries and $300 million for shelf- and land-related work. |

### International operations

Consistent with our long-term strategy to grow our operations outside of North America, we expect to continue to invest capital in our international operations. During 2009, operating income declined from 2008 levels due to a drop in rig count and the impact of pricing concessions that were renegotiated or given in the contract retendering process. During the second quarter of 2010, revenue outside of North America increased 11% and operating income grew 35% when compared to the prior quarter, primarily due to increased activity in Latin America and seasonal recovery in much of the eastern hemisphere. Despite improved activity levels in the second quarter, we have continued concerns around the pace of global recovery, which may cause our customers to revise their capital spending budget for the remainder of the year. In light of this possibility, international agencies are reassessing the regulatory process, which may potentially cause short-term delays in the execution of certain projects.

*Venezuela.* We historically had remeasured our net Bolívar Fuerte-denominated monetary asset position at the official, fixed exchange rate of 2.15 Bolívar Fuerte to United States dollar. In January 2010, the Venezuelan government announced a devaluation of the Bolívar Fuerte under a new two-exchange rate system; a 2.6 Bolívar Fuerte to United States dollar rate for essential products and a 4.3 Bolívar Fuerte to United States dollar rate for non-essential products. In the first quarter of 2010, as a result of the devaluation, we recorded a foreign exchange loss of $31 million, which was not tax deductible in Venezuela. We also recorded $10 million of additional tax expense for local Venezuelan income tax purposes as a result of a taxable gain on our net United States dollar-denominated monetary asset position in the country. Based on our best understanding of the two-exchange rate system for non-essential products, we are now utilizing the 4.3 Bolívar Fuerte to United States dollar exchange rate. However, no formal notification has been received from the central bank, which has resulted in uncertainty in the marketplace, including with our primary customer, as to the proper exchange rate to use for energy service industry transactions.

As of June 30, 2010, our total net investment in Venezuela was approximately $188 million. In addition to this amount, we also have $198 million of surety bond guarantees outstanding relating to our Venezuelan operations.

### Initiatives and recent contract awards

Following is a brief discussion of some of our recent and current initiatives:

- increasing our market share in more economic, unconventional shale plays and deepwater markets by leveraging our broad technology offerings to provide value to our customers through integrated solutions and the ability to more efficiently drill and complete their wells;
- making key investments in technology and capital to accelerate growth opportunities;
- improving working capital, operating within our cash flow, and managing our balance sheet to maximize our financial flexibility;
- continuing to seek ways to be one of the most cost efficient service providers in the industry by using our scale and breadth of operations; and
- expanding our business with national oil companies.

25

Contract wins positioning us to grow our operations over the long term include:

- a deepwater, multi-services contract in Angola valued at approximately $1.3 billion for the provision of cementing, production enhancement, completion tools, wireline, and perforating services;
- a contract valued at approximately $750 million from a major exploration and production company for stimulation services in the Williston basin;
- a two-year contract, plus options, with ConocoPhillips China Inc., valued at approximately $40 million, which includes provisions for directional-drilling and logging-while-drilling services on the Peng Lai Development in China's Bohai Bay; and
- frac pack and gravel pack deepwater completions awards in Brazil.

26

### RESULTS OF OPERATIONS IN 2010 COMPARED TO 2009

### Three Months Ended June 30, 2010 Compared with Three Months Ended June 30, 2009

| REVENUE: Millions of dollars | Three Months Ended June 30 2010 | 2009 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $2,393 | $1,752 | $641 | 37% |
| Drilling and Evaluation | 1,994 | 1,742 | 252 | 14 |
| Total revenue | $4,387 | $3,494 | $893 | 26% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $1,434 | $795 | $639 | 80% |
| Latin America | 212 | 227 | (15) | (7) |
| Europe/Africa/CIS | 459 | 439 | 20 | 5 |
| Middle East/Asia | 288 | 291 | (3) | (1) |
| Total | 2,393 | 1,752 | 641 | 37 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 677 | 464 | 213 | 46 |
| Latin America | 355 | 317 | 38 | 12 |
| Europe/Africa/CIS | 522 | 532 | (10) | (2) |
| Middle East/Asia | 440 | 429 | 11 | 3 |
| Total | 1,994 | 1,742 | 252 | 14 |
| Total revenue by region: |  |  |  |  |
| North America | 2,111 | 1,259 | 852 | 68 |
| Latin America | 567 | 544 | 23 | 4 |
| Europe/Africa/CIS | 981 | 971 | 10 | 1 |
| Middle East/Asia | 728 | 720 | 8 | 1 |

27

| OPERATING INCOME: Millions of dollars | Three Months Ended June 30 2010 | 2009 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $497 | $243 | $254 | 105% |
| Drilling and Evaluation | 318 | 284 | 34 | 12 |
| Corporate and other | (53) | (51) | (2) | (4) |
| Total operating income | $762 | $476 | $286 | 60% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $310 | $52 | $258 | 496% |
| Latin America | 34 | 53 | (19) | (36) |
| Europe/Africa/CIS | 95 | 69 | 26 | 38 |
| Middle East/Asia | 58 | 69 | (11) | (16) |
| Total | 497 | 243 | 254 | 105 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 131 | 28 | 103 | 368 |
| Latin America | 55 | 53 | 2 | 4 |
| Europe/Africa/CIS | 53 | 86 | (33) | (38) |
| Middle East/Asia | 79 | 117 | (38) | (32) |
| Total | 318 | 284 | 34 | 12 |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 441 | 80 | 361 | 451 |
| Latin America | 89 | 106 | (17) | (16) |
| Europe/Africa/CIS | 148 | 155 | (7) | (5) |
| Middle East/Asia | 137 | 186 | (49) | (26) |

The 26% increase in consolidated revenue in the second quarter of 2010 compared to the second quarter of 2009 was due to increased drilling activity, especially in the unconventional natural gas and oil basins in North America. Revenue outside North America was 52% of consolidated revenue in the second quarter of 2010 and 64% of consolidated revenue in the second quarter of 2009.

The increase in consolidated operating income compared to the second quarter of 2009 as a result of significant increases in North America drilling activity across both segments and the impact of improved pricing in North America.

Following is a discussion of our results of operations by reportable segment.

*Completion and Production* revenue increased compared to the second quarter of 2009 as a result of greater activity in North America, where revenue increased 80%. This growth was due to a substantial increase in demand for production enhancement services in our United States land operations. Latin America revenue fell 7% as increased demand for cementing and production enhancement services in Colombia and Argentina was outweighed by our customer's budget constraints in Mexico and activity declines in Venezuela. Europe/Africa/CIS revenue increased 5% from increased demand for completion tools in Norway and Angola and higher activity for production enhancement services in Algeria and Congo partially offset by declines in the United Kingdom. Middle East/Asia revenue remained relatively flat as declines in cementing and completion tools activity were offset by activity increases for production enhancement services in Southeast Asia. Revenue outside of North America was 40% of total segment revenue in the second quarter of 2010 and 55% of total segment revenue in the second quarter of 2009.

The increase in Completion and Production operating income compared to the second quarter of 2009 was most significant in North America, where operating income grew by $258 million from the second quarter of 2009. The increase in North America was primarily attributable to higher activity for production enhancement services in United States land. Latin America operating income decreased 36% due to lower demand across all product service lines in Mexico and Brazil. Europe/Africa/CIS operating income increased 38%, primarily due to higher demand and lower costs for production enhancement services across all regions of Africa and higher sales for completion tools in Norway. Middle East/Asia operating income fell 16%, mostly due to lower demand for production enhancement in India and Australia.

*Drilling and Evaluation* revenue increased compared to the second quarter of 2009, primarily due to improved pricing and higher drilling activity in North America. North America revenue grew 46% on increased demand for all products and services in United States land and the Gulf of Mexico. Also, Canada contributed to the increase with higher activity for drilling fluid services and drilling services. Latin America revenue increased 12% as higher activity across all product service lines in Argentina and Brazil outweighed declines associated with the currency devaluation in Venezuela. Europe/Africa/CIS revenue declined 2% as higher demand for drilling fluid services in Norway, Russia, and the Caspian was offset by decreased demand for all products and services in Africa. Middle East/Asia revenue rose 3% as increased demand for drilling fluid services across the region and wireline and perforating services in the Middle East was partially offset by decreased demand for wireline and perforating services and testing and subsea services in Asia. Revenue outside of North America was 66% of total segment revenue in the second quarter of 2010 and 73% of total segment revenue in the second quarter of 2009.

The increase in Drilling and Evaluation operating income compared to the second quarter of 2009 was due to higher activity and improved pricing in North America. North America operating income increased $103 million, primarily due to strong increases in activity across most product service lines in United States land and the Gulf of Mexico. In addition, Canada operating income increased from higher demand for drilling services and wireline and perforating services. Latin America operating income grew 4%, primarily due to increased demand for testing and subsea services in Brazil and increased Landmark software sales in Argentina and Venezuela. These increases were partially offset by higher costs and lower activity in Mexico. Europe/Africa/CIS operating income fell 38% as increased demand for drilling fluid services in Norway and Sakhalin was offset by decreased demand for all products and services in Africa. Middle East/Asia operating income decreased 32% due to higher costs and lower demand for drilling services, wireline and perforating services, and testing and subsea services in most of Asia Pacific.

### NONOPERATING ITEMS

*Other, net* in the second quarter of 2010 included a $9 million loss on foreign exchange.

### RESULTS OF OPERATIONS IN 2010 COMPARED TO 2009

### Six Months Ended June 30, 2010 Compared with Six Months Ended June 30, 2009

| REVENUE: Millions of dollars | Six Months Ended June 30 2010 | 2009 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $4,357 | $3,780 | $577 | 15% |
| Drilling and Evaluation | 3,791 | 3,621 | 170 | 5 |
| Total revenue | $8,148 | $7,401 | $747 | 10% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $2,559 | $1,866 | $693 | 37% |
| Latin America | 414 | 459 | (45) | (10) |
| Europe/Africa/CIS | 844 | 865 | (21) | (2) |
| Middle East/Asia | 540 | 590 | (50) | (8) |
| Total | 4,357 | 3,780 | 577 | 15 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 1,256 | 1,076 | 180 | 17 |
| Latin America | 648 | 641 | 7 | 1 |
| Europe/Africa/CIS | 1,057 | 1,074 | (17) | (2) |
| Middle East/Asia | 830 | 830 | – | – |
| Total | 3,791 | 3,621 | 170 | 5 |
| Total revenue by region: |  |  |  |  |
| North America | 3,815 | 2,942 | 873 | 30 |
| Latin America | 1,062 | 1,100 | (38) | (3) |
| Europe/Africa/CIS | 1,901 | 1,939 | (38) | (2) |
| Middle East/Asia | 1,370 | 1,420 | (50) | (4) |

30

| OPERATING INCOME: Millions of dollars | Six Months Ended June 30 2010 | 2009 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $735 | $606 | $129 | 21% |
| Drilling and Evaluation | 588 | 588 | – | – |
| Corporate and other | (112) | (102) | (10) | (10) |
| Total operating income | $1,211 | $1,092 | $119 | 11% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $447 | $218 | $229 | 105% |
| Latin America | 63 | 107 | (44) | (41) |
| Europe/Africa/CIS | 134 | 146 | (12) | (8) |
| Middle East/Asia | 91 | 135 | (44) | (33) |
| Total | 735 | 606 | 129 | 21 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 224 | 92 | 132 | 143 |
| Latin America | 72 | 107 | (35) | (33) |
| Europe/Africa/CIS | 144 | 177 | (33) | (19) |
| Middle East/Asia | 148 | 212 | (64) | (30) |
| Total | 588 | 588 | – | – |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 671 | 310 | 361 | 116 |
| Latin America | 135 | 214 | (79) | (37) |
| Europe/Africa/CIS | 278 | 323 | (45) | (14) |
| Middle East/Asia | 239 | 347 | (108) | (31) |

The 10% increase in consolidated revenue in the first six months of 2010 compared to the first six months of 2009 was primarily due to higher rig counts and increased demand for our products and services in North America. Revenue outside North America was 53% of consolidated revenue in the first six months of 2010 and 60% of consolidated revenue in the first six months of 2009.

The increase in consolidated operating income in the first six months of 2010 compared to the first six months of 2009 primarily stemmed from improved pricing and increased demand in North America. Operating income in the first six months of 2009 was adversely impacted by a $45 million charge associated with employee separation costs. Following is a discussion of our results of operations by reportable segment.

*Completion and Production* revenue increase compared to the first six months of 2009 was the result of higher activity in North America. North America revenue increased 37%, primarily due to increased activity in the United States in cementing services and production enhancement. Latin America revenue fell 10% due to declines in all product service lines from customer budget constraints in Mexico and reduced activity in Venezuela. Europe/Africa/CIS revenue declined 2% from lower activity in the United Kingdom and decreased demand for completion tools in West Africa and the Caspian partially offset by production enhancement improvements in Africa and higher cementing activity in Russia. Middle East/Asia revenue fell 8%, largely due to a decrease in demand for cementing services and production enhancement services in the Middle East. Lower completion tools sales in most of Asia and decreased demand for production enhancement services in India also contributed to the decline in revenue for the region. Revenue outside North America was 41% of total segment revenue in the first six months of 2010 and 51% of total segment revenue in the first six months of 2009.

The Completion and Production segment operating income increased compared to the first six months of 2009 was due to the North America region, where operating income grew by $229 million, largely due to increases in production enhancement services and cementing services which benefitted from increased rig count, especially horizontal drilling activity. Latin America operating income fell 41%, primarily due to customer budget constraints and lower natural gas prices in Mexico. Europe/Africa/CIS operating income declined 8% from declines in Europe in all product service lines. Middle East/Asia operating income decreased 33% due to activity declines throughout the region.

*Drilling and Evaluation* revenue increased compared to the first six months of 2009 primarily as a result of increased activity in North America, where revenue grew 17%. Latin America revenue remained relatively flat as increased demand for all products and services in Brazil was offset by the currency devaluation in Venezuela and lower demand for wireline and perforating services in Mexico. Europe/Africa/CIS revenue decreased 2% as increased drilling activity in Norway and the Commonwealth of Independent States (CIS) was offset by lower drilling activity throughout Africa. Middle East/Asia revenue remained flat as decreased demand for drilling services throughout most of the region and testing and subsea services in most of Asia Pacific offset increased demand for drilling fluid services in Australia and Malaysia and wireline and perforating services in the Middle East. Revenue outside North America was 67% of total segment revenue in the first six months of 2010 and 70% of total segment revenue in the first six months of 2009.

Segment operating income compared to the first six months of 2009 remained flat due to increased activity in North America being offset by lower activity internationally. North America operating income increased $132 million from improved pricing and increased demand for all products and services. Latin America operating income fell 33%, primarily due to higher costs in Mexico and Colombia and lower demand for wireline and perforating services in Mexico. The Europe/Africa/CIS region operating income fell 19% as decreased demand and higher costs for drilling services, wireline and perforating services, and drilling fluid services in Africa offset higher drilling activity and an improved product mix for drilling fluid services in Norway. Middle East/Asia operating income decreased 30% over the first six months of 2009 mainly due to higher costs throughout most of the region, lower drilling activity in Saudi Arabia and decreased demand for drilling services in most of Asia Pacific.

*Corporate and other* expenses were $112 million in the first six months of 2010 compared to $102 million in the first six months of 2009. The 10% increase was primarily related to higher legal and environmental costs in the first half of 2010.

### NONOPERATING ITEMS

*Interest expense* increased $23 million in the first six months of 2010 compared to the first six months of 2009 primarily due to the issuance of $2 billion in senior notes in March of 2009.

*Other, net* in the first six months of 2010 included a $31 million loss on foreign exchange associated with the devaluation of the Venezuelan Bolívar Fuerte.

### ENVIRONMENTAL MATTERS

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note 6 to the condensed consolidated financial statements, Item 1, “Legal Proceedings—Environmental,” and Item 1(a), “Risk Factors.”

### NEW ACCOUNTING PRONOUNCEMENTS

In October 2009, the Financial Accounting Standards Board (FASB) issued an update to existing guidance on revenue recognition for arrangements with multiple deliverables. This update will allow companies to allocate consideration received for qualified separate deliverables using estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable. Additional disclosures discussing the nature of multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required. We will adopt this update for new revenue arrangements entered into or materially modified beginning January 1, 2011. We do not expect the provisions of this update to have a material impact on our condensed consolidated financial statements.

### FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Forward-looking information is based on projections and estimates, not historical information. Some statements in this Form 10-Q are forward-looking and use words like “may,” “may not,” “believes,” “do not believe,” “expects,” “do not expect,” “anticipates,” “do not anticipate,” and other expressions. We may also provide oral or written forward-looking information in other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of operations may vary materially.

We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events, or for any other reason. You should review any additional disclosures we make in our press releases and Forms 10-K, 10-Q, and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.

## Market risk

As filed, 260 characters.

For quantitative and qualitative disclosures about market risk, see Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in our 2009 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2009.

## Controls and procedures

As filed, 1,433 characters.

In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2010 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting that occurred during the three months ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Jul 23, 2010.
Source: SEC EDGAR, the filing index for accession 0000045012-10-000226. Last ingested by Listed: Nov 2, 2026, 13:24 ET. No prices; not investment advice.