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

- Company: [Halliburton Co](/companies/hal.md) (CIK 45012)
- Form: 10-Q
- Filed: 2010-10-22
- Accepted by EDGAR: Oct 22, 2010, 15:24 ET
- Period: 2010-09-30
- Accession: 0000045012-10-000345
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/45012/000004501210000345/edsept201010q_final.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/45012/000004501210000345/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2010-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2010-07-01 to 2010-09-30 | $4.67bn | us-gaap:Revenues |
| Revenue | 9 months, 2010-01-01 to 2010-09-30 | $12.81bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2010-07-01 to 2010-09-30 | $894.0m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2010-01-01 to 2010-09-30 | $2.54bn | us-gaap:CostOfGoodsSold |
| Operating income | 3 months, 2010-07-01 to 2010-09-30 | $818.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2010-01-01 to 2010-09-30 | $2.03bn | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2010-07-01 to 2010-09-30 | $249.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2010-01-01 to 2010-09-30 | $570.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2010-07-01 to 2010-09-30 | $544.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2010-01-01 to 2010-09-30 | $1.23bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2010-07-01 to 2010-09-30 | $0.60 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2010-01-01 to 2010-09-30 | $1.35 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2010-07-01 to 2010-09-30 | $0.60 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2010-01-01 to 2010-09-30 | $1.36 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2010-07-01 to 2010-09-30 | 912,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2010-01-01 to 2010-09-30 | 910,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2010-01-01 to 2010-09-30 | $1.36bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2010-01-01 to 2010-09-30 | $1.41bn | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2010-09-30 | $1.88bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2010-09-30 | $9.22bn | us-gaap:AssetsCurrent |
| Total assets | at 2010-09-30 | $18.20bn | us-gaap:Assets |
| Current liabilities | at 2010-09-30 | $3.33bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2010-09-30 | $8.35bn | us-gaap:Liabilities |
| Current portion of debt | at 2010-09-30 | $750.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2010-09-30 | $9.84bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,106 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, pressure control, and completion services. The segment consists of production enhancement services, completion tools and services, cementing services, and Boots and Coots;
- 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 more than 55,000 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 nine months of 2010, we produced revenue of $12.8 billion and operating income of $2.0 billion, reflecting an operating margin of 16%. Revenue increased $1.8 billion or 17% from the first nine months of 2009, while operating income increased $463 million or 30% from the first nine months 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.

### 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 nine months of 2010, due to the concerns about the global recovery, 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. However, during the first nine months of 2010, we saw a rebound in United States land rig count and drilling activity. The trend toward more service-intensive work, especially in the oil and liquids-rich shale plays, has resulted in absorption of much of the industry’s excess oilfield equipment capacity. The shift to oil and liquids-rich plays is mainly the result of stable oil prices. Due to this absorption of excess capacity and our equipment utilization rates surpassing peak levels experienced in the third quarter of 2008, we continue to see price and margin improvements over the prior year for most of our products and services. Despite weaker natural gas fundamentals due to lower prices and higher storage volumes, we believe our North America revenues and margins are likely sustainable through 2011. Our third quarter 2010 Gulf of Mexico business declined sharply due to the impact of the drilling suspension, although we did perform some work on the Macondo relief wells. The drilling suspension was lifted in the fourth quarter of 2010, but we anticipate a further reduction in Gulf of Mexico operations as operators adjust to new regulations.

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. During the first nine months of 2010, our international revenues remained flat while our operating income has continued to decline. However, we expect the global demand growth will have a moderate recovery as international rig count increases. We continue to have concerns around the pace of global economic recovery, which has caused our customers to revise their capital spending budget for the remainder of the year. On a longer term basis, we expect the global economic recovery to accelerate, which will lead to absorption of the industry’s spare capacity and improved international pricing.

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

### 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. On October 12, 2010, the Department of the Interior announced it was lifting the deepwater drilling suspension. Despite the fact that the drilling suspension has been lifted, we anticipate a reduction in our Gulf of Mexico operations in the fourth quarter of 2010. Longer term, we do not know the extent of the impact on revenue or earnings as they are dependent on, among other things, 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.”

### 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 third quarter of 2010 with cash and equivalents of $1.9 billion compared to $2.1 billion at December 31, 2009.

### Significant sources of cash

Cash flows from operating activities contributed $1.4 billion to cash in the first nine months of 2010.

During the first nine months of 2010, we sold approximately $1.6 billion 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. The facility was undrawn as of September 30, 2010. In addition, we have $880 million in United States Treasury securities that will be maturing at various dates through June 2011.

### Significant uses of cash

Capital expenditures were $1.4 billion in the first nine months of 2010 and were predominantly made in the production enhancement, drilling services, wireline and perforating, and cementing product service lines.

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

We paid $383 million to acquire various companies, including Boots & Coots, Inc. (Boots & Coots), during the first nine months of 2010 that should enhance or augment our current portfolio of products and services.

In September 2010, we completed the acquisition of Boots & Coots in a stock and cash transaction valued at approximately $248 million, of which approximately $143 million was paid in cash and approximately 3.4 million shares of our common stock were issued to Boots & Coots stockholders. Subsequent to the acquisition, we retired approximately $39 million of Boots & Coots outstanding debt. Beginning October 2010, Boots & Coots results of operations will be included in our Completion and Production segment.

During the third quarter of 2010, we repurchased 3.5 million shares of our common stock under our share repurchase program at a cost of approximately $114 million at an average price of $32.44 per share.

We paid $245 million in dividends to our shareholders in the first nine months of 2010.

We paid the final amounts due to the Department of Justice (DOJ) in the first nine months of 2010 related to the settlement of Foreign Corrupt Practices Act (FCPA) investigations and under the related indemnity provided to KBR, Inc. (KBR) upon separation. See Notes 5 and 6 to our condensed consolidated financial statements for more information.

*Future uses of cash.* Capital spending for 2010 is expected to be approximately $2.1 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.

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.

In October 2010, we retired $750 million principal amount of our 5.5% senior notes with available cash and equivalents.

Subject to Board of Directors approval, we expect to pay quarterly dividends of approximately $80 million during the remainder of 2010. We also have approximately $1.7 billion remaining available under our share repurchase authorization, which may be used for open market share purchases.

### Other factors affecting liquidity

*Guarantee arrangements.* In the normal course of business, we have agreements with financial institutions under which approximately $1.6 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of September 30, 2010, including $210 million of surety bonds related to Venezuela. See “Business Environment and Results of Operations – International Operations” for further discussion related to Venezuela. In addition, $216 million of the total $1.6 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 $1.9 billion of cash and equivalents and $880 million in investments in marketable securities as of September 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 nine months of 2010, based upon the location of the services provided and products sold, 45% of our consolidated revenue was from the United States. In the first nine months of 2009, 36% 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 September 30 2010 | 2009 | Year Ended December 31 2009 |
| --- | ---: | ---: | ---: |
| West Texas Intermediate | $75.92 | $68.20 | $61.65 |
| United Kingdom Brent | 77.44 | 68.20 | 61.49 |
| Average United States Gas Prices (dollars per thousand |  |  |  |
| cubic feet, or mcf) |  |  |  |
| Henry Hub | $4.41 | $3.26 | $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 September 30 2010 | 2009 | Nine Months Ended September 30 2010 | 2009 |
| --- | ---: | ---: | ---: | ---: |
| Land | 1,604 | 940 | 1,457 | 1,032 |
| Offshore (incl. Gulf of Mexico) | 18 | 34 | 35 | 46 |
| Total | 1,622 | 974 | 1,492 | 1,078 |
| Canada: |  |  |  |  |
| Land | 360 | 186 | 330 | 201 |
| Offshore | 1 | 1 | 2 | 1 |
| Total | 361 | 187 | 332 | 202 |
| International (excluding Canada): |  |  |  |  |
| Land | 798 | 699 | 783 | 718 |
| Offshore | 312 | 270 | 305 | 275 |
| Total | 1,110 | 969 | 1,088 | 993 |
| Worldwide total | 3,093 | 2,130 | 2,912 | 2,273 |
| Land total | 2,762 | 1,825 | 2,570 | 1,951 |
| Offshore total | 331 | 305 | 342 | 322 |

| Oil vs. Natural Gas United States (incl. Gulf of Mexico): | Three Months Ended September 30 2010 | 2009 | Nine Months Ended September 30 2010 | 2009 |
| --- | ---: | ---: | ---: | ---: |
| Oil | 640 | 279 | 547 | 253 |
| Natural Gas | 982 | 695 | 945 | 825 |
| Total | 1,622 | 974 | 1,492 | 1,078 |
| Canada: |  |  |  |  |
| Oil | 219 | 105 | 189 | 90 |
| Natural Gas | 142 | 82 | 143 | 112 |
| Total | 361 | 187 | 332 | 202 |
| International (excluding Canada): |  |  |  |  |
| Oil | 858 | 756 | 833 | 774 |
| Natural Gas | 252 | 213 | 255 | 219 |
| Total | 1,110 | 969 | 1,088 | 993 |
| Worldwide total | 3,093 | 2,130 | 2,912 | 2,273 |
| Oil total | 1,717 | 1,140 | 1,569 | 1,117 |
| Natural Gas total | 1,376 | 990 | 1,343 | 1,156 |

| Drilling Type United States (incl. Gulf of Mexico): | Three Months Ended September 30 2010 | 2009 | Nine Months Ended September 30 2010 | 2009 |
| --- | ---: | ---: | ---: | ---: |
| Horizontal | 885 | 420 | 777 | 432 |
| Vertical | 515 | 375 | 490 | 441 |
| Directional | 222 | 179 | 225 | 205 |
| Total | 1,622 | 974 | 1,492 | 1,078 |

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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) October 2010 “Oil Market Report,” 2010 world petroleum demand is forecasted to increase 2% over 2009 levels. Emerging economies are becoming a more significant factor in the recovery, while mature economies play a lesser role. The outlook thus faces great uncertainties, as the global recovery remains fragile. 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 third quarter of 2010, drilling activity has improved. Also, the shift to oil and liquids-rich activity continues to drive service intensity through horizontal drilling and completions complexity. As of September 30, 2010, rig counts had increased approximately 40% from the end of 2009. Current horizontal rigs represent over 50% of total rigs in the United States and are about 40% 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 third quarter of 2010, North America revenue increased 13% sequentially and operating income increased 30%. 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. On October 12, 2010, the Department of the Interior announced it was lifting the deepwater drilling suspension.

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. For the past two quarters we have engaged in discussions with our customers in the Gulf of Mexico and relocated equipment and personnel to other markets. Our business in the Gulf of Mexico represented approximately 12% of our North America revenue in 2008, approximately 16% in 2009 and approximately 10% in the first nine months of 2010, and approximately 5% of our consolidated revenue in 2008, approximately 6% in 2009 and approximately 5% in the first nine months of 2010. Currently, approximately 44% of our Gulf of Mexico business is related to deepwater activities. 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, though less volatile.

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. Despite the fact that the drilling suspension has been lifted, we anticipate a further reduction in our Gulf of Mexico operations in the fourth quarter. 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. The tepid recovery that we are seeing is consistent with the behavior of the previous cycles at this stage. We believe that volume increases will be steady, but measured, which will eventually lead to meaningful absorption of equipment supply and result in pricing power sometime in 2011. 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 third quarter of 2010, revenue outside of North America remained flat and operating income decreased 18% when compared to the prior quarter, primarily due to a non-cash impairment charge for an oil and gas property in Bangladesh. Despite steady activity levels in the third 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, 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 September 30, 2010, our total net investment in Venezuela was approximately $167 million. In addition to this amount, we also have $210 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:

- an integrated services contract by ExxonMobil Iraq Ltd. for refurbishment of wells in the West Qurna (Phase 1) field in southern Iraq;
- a multi-million dollar contract with Eni to provide a range of integrated energy services, including wireline logging, perforating, acidizing, and well testing, for the redevelopment of the Zubair field in southern Iraq;
- a letter of intent by Shell Iraq Petroleum Development B.V. for the development of the Majnoon field in southern Iraq. The contract is still subject to final approval by the appropriate Iraqi authorities;
- 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.

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### RESULTS OF OPERATIONS IN 2010 COMPARED TO 2009

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

| REVENUE: Millions of dollars | Three Months Ended September 30 2010 | 2009 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $2,655 | $1,821 | $834 | 46% |
| Drilling and Evaluation | 2,010 | 1,767 | 243 | 14% |
| Total revenue | $4,665 | $3,588 | $1,077 | 30% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $1,706 | $807 | $899 | 111% |
| Latin America | 208 | 223 | (15) | (7) |
| Europe/Africa/CIS | 437 | 483 | (46) | (10) |
| Middle East/Asia | 304 | 308 | (4) | (1) |
| Total | 2,655 | 1,821 | 834 | 46 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 675 | 478 | 197 | 41 |
| Latin America | 360 | 319 | 41 | 13 |
| Europe/Africa/CIS | 510 | 529 | (19) | (4) |
| Middle East/Asia | 465 | 441 | 24 | 5 |
| Total | 2,010 | 1,767 | 243 | 14 |
| Total revenue by region: |  |  |  |  |
| North America | 2,381 | 1,285 | 1,096 | 85 |
| Latin America | 568 | 542 | 26 | 5 |
| Europe/Africa/CIS | 947 | 1,012 | (65) | (6) |
| Middle East/Asia | 769 | 749 | 20 | 3 |

27

| OPERATING INCOME: Millions of dollars | Three Months Ended September 30 2010 | 2009 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $609 | $240 | $369 | 154% |
| Drilling and Evaluation | 271 | 283 | (12) | (4) |
| Corporate and other | (62) | (49) | (13) | 27 |
| Total operating income | $818 | $474 | $344 | 73% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $458 | $9 | $449 | 4,989% |
| Latin America | 28 | 45 | (17) | (38) |
| Europe/Africa/CIS | 73 | 107 | (34) | (32) |
| Middle East/Asia | 50 | 79 | (29) | (37) |
| Total | 609 | 240 | 369 | 154 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 115 | 28 | 87 | 311 |
| Latin America | 49 | 52 | (3) | (6) |
| Europe/Africa/CIS | 66 | 94 | (28) | (30) |
| Middle East/Asia | 41 | 109 | (68) | (62) |
| Total | 271 | 283 | (12) | (4) |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 573 | 37 | 536 | 1,449 |
| Latin America | 77 | 97 | (20) | (21) |
| Europe/Africa/CIS | 139 | 201 | (62) | (31) |
| Middle East/Asia | 91 | 188 | (97) | (52) |

The 30% increase in consolidated revenue in the third quarter of 2010 compared to the third quarter of 2009 was a result of strong activity in United States land, primarily in the Completion and Production segment. Revenue outside North America was 49% of consolidated revenue in the third quarter of 2010 and 64% of consolidated revenue in the third quarter of 2009.

The increase in consolidated operating income compared to the third quarter of 2009 was attributable to strong activity and also improved pricing as the shift to unconventional natural gas and oil basins continues to drive service intensity and completions complexity. Operating income in the third quarter of 2010 was adversely impacted by a $50 million non-cash impairment charge for an oil and gas property in Bangladesh. Operating income in the third quarter of 2009 was adversely impacted by $28 million in charges associated with employee separation costs.

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

*Completion and Production* revenue increased 46% compared to the third quarter of 2009. North America revenue grew 111%. This growth was attributable to an increase in demand for production enhancement services in our United States land operations. Latin America revenue fell 7% as the curtailment of activity in Mexico offset increased sales across all product service lines in Argentina and Colombia. Europe/Africa/CIS revenue decreased 10% as lower activity for production enhancement services in Europe offset increased demand across all product service lines in Nigeria. Middle East/Asia revenue was essentially flat with improved activity in China offset by declines in India. Revenue outside of North America was 36% of total segment revenue in the third quarter of 2010 and 56% of total segment revenue in the third quarter of 2009.

The increase in Completion and Production operating income compared to the third quarter of 2009 was most significant in North America, where operating income grew by $449 million. The increase in North America was primarily attributable to higher activity and improved pricing for production enhancement and cementing services in United States land. Latin America operating income decreased 38% due to activity declines in Mexico. Europe/Africa/CIS operating income decreased 32%, largely due to higher costs and a decline in activity for production enhancement services. Middle East/Asia operating income fell 37%, due to a decline in completion tools sales in Asia and lower activity for production enhancement services in India and Australia.

*Drilling and Evaluation* revenue increased compared to the third quarter of 2009, with year-over-year increases in all regions except Europe/Africa/CIS. North America revenue grew 41% with higher activity in United States land and Canada being partially offset by lower drilling fluid service activity in the Gulf of Mexico. Latin America revenue increased 13% as activity reductions in Mexico were offset by increased demand for all product services lines in Brazil, Colombia, and Argentina. Europe/Africa/CIS revenue declined 4% as higher activity in Russia was offset by project delays in Algeria and lower activity in Nigeria and Kazakhstan. Middle East/Asia revenue increased 5% as the commencement of operations in Iraq and Philippines were partially offset by lower direct sales in China. Revenue outside of North America was 66% of total segment revenue in the third quarter of 2010 and 73% of total segment revenue in the third quarter of 2009.

The decrease in Drilling and Evaluation operating income compared to the third quarter of 2009 was most significant in Asia, due to a non-cash impairment charge to an oil and gas property in Bangladesh, partially offset by higher activity and improved pricing in United States land. North America operating income increased $87 million, with the region benefiting from the strong increase in demand for drilling services in United States land. Latin America operating income fell 6%, due to the activity reductions in Mexico. Europe/Africa/CIS operating income fell 30% due to lower drilling activity, project delays, and higher costs in Africa. Middle East/Asia operating income decreased 62%, primarily due to a non-cash impairment charge to an oil and gas property in Bangladesh and lower direct sales in China.

*Corporate and other* expenses were $62 million in the third quarter of 2010 compared to $49 million in the third quarter of 2009 due to higher pension expenses and legal costs.

### NONOPERATING ITEMS

*Income from discontinued operations, net* in the third quarter of 2010 included $62 million of income primarily related to the finalization of a United States tax matter with the Internal Revenue Service.

### RESULTS OF OPERATIONS IN 2010 COMPARED TO 2009

### Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

| REVENUE: Millions of dollars | Nine Months Ended September 30 2010 | 2009 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $7,012 | $5,601 | $1,411 | 25% |
| Drilling and Evaluation | 5,801 | 5,388 | 413 | 8 |
| Total revenue | $12,813 | $10,989 | $1,824 | 17% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $4,265 | $2,673 | $1,592 | 60% |
| Latin America | 622 | 682 | (60) | (9) |
| Europe/Africa/CIS | 1,281 | 1,348 | (67) | (5) |
| Middle East/Asia | 844 | 898 | (54) | (6) |
| Total | 7,012 | 5,601 | 1,411 | 25 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 1,931 | 1,554 | 377 | 24 |
| Latin America | 1,008 | 960 | 48 | 5 |
| Europe/Africa/CIS | 1,567 | 1,603 | (36) | (2) |
| Middle East/Asia | 1,295 | 1,271 | 24 | 2 |
| Total | 5,801 | 5,388 | 413 | 8 |
| Total revenue by region: |  |  |  |  |
| North America | 6,196 | 4,227 | 1,969 | 47 |
| Latin America | 1,630 | 1,642 | (12) | (1) |
| Europe/Africa/CIS | 2,848 | 2,951 | (103) | (3) |
| Middle East/Asia | 2,139 | 2,169 | (30) | (1) |

30

| OPERATING INCOME: Millions of dollars | Nine Months Ended September 30 2010 | 2009 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $1,344 | $846 | $498 | 59% |
| Drilling and Evaluation | 859 | 871 | (12) | (1) |
| Corporate and other | (174) | (151) | (23) | 15 |
| Total operating income | $2,029 | $1,566 | $463 | 30% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $905 | $227 | $678 | 299% |
| Latin America | 91 | 152 | (61) | (40) |
| Europe/Africa/CIS | 207 | 253 | (46) | (18) |
| Middle East/Asia | 141 | 214 | (73) | (34) |
| Total | 1,344 | 846 | 498 | 59 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 339 | 120 | 219 | 183 |
| Latin America | 121 | 159 | (38) | (24) |
| Europe/Africa/CIS | 210 | 271 | (61) | (23) |
| Middle East/Asia | 189 | 321 | (132) | (41) |
| Total | 859 | 871 | (12) | (1) |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 1,244 | 347 | 897 | 259 |
| Latin America | 212 | 311 | (99) | (32) |
| Europe/Africa/CIS | 417 | 524 | (107) | (20) |
| Middle East/Asia | 330 | 535 | (205) | (38) |

The 17% increase in consolidated revenue in the first nine months of 2010 compared to the first nine 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 52% of consolidated revenue in the first nine months of 2010 and 62% of consolidated revenue in the first nine months of 2009.

The increase in consolidated operating income in the first nine months of 2010 compared to the first nine months of 2009 primarily stemmed from improved pricing and increased demand in North America. Operating income in the first nine months of 2010 was adversely impacted by a $50 million non-cash impairment charge for an oil and gas property in Bangladesh. Operating income in the first nine months of 2009 was adversely impacted by $73 million in charges 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 nine months of 2009 was the result of higher activity in North America. North America revenue increased 60%, primarily due to increased activity in the United States in cementing services and production enhancement. Latin America revenue fell 9% due to declines in all product service lines from reduced activity in Mexico and Venezuela. Europe/Africa/CIS revenue declined 5% from lower activity in the United Kingdom and decreased demand for production enhancement services in Europe and the Caspian partially offset by increased demand for completion tools in Norway and Angola and higher cementing activity in Russia. Middle East/Asia revenue fell 6%, largely due to a decrease in demand for cementing services and production enhancement services in the Middle East. Lower completion tool sales in Malaysia and India and decreased demand for production enhancement services in India and Australia also contributed to the decline in revenue for the region. Revenue outside North America was 39% of total segment revenue in the first nine months of 2010 and 52% of total segment revenue in the first nine months of 2009.

The Completion and Production segment operating income increase compared to the first nine months of 2009 was due to the North America region, where operating income grew by $678 million, largely due to increases in production enhancement services and cementing services which benefitted from increased rig count associated with higher horizontal drilling activity and improved pricing. Latin America operating income fell 40%, primarily due to lower activity in Mexico. Europe/Africa/CIS operating income declined 18% from declines in Europe in completion tools and production enhancement services. Middle East/Asia operating income decreased 34% due to activity declines throughout the region.

*Drilling and Evaluation* revenue increased compared to the first nine months of 2009 primarily as a result of increased activity in North America, where revenue grew 24%. Latin America revenue grew 5% 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 was essentially flat for the period as higher drilling activity and increased demand for drilling fluid services in Norway and the Commonwealth of Independent States (CIS) was offset by lower drilling activity and decreased demand for drilling fluid services throughout Africa. Middle East/Asia revenue remained flat as increased demand for drilling fluid services in Australia and Malaysia and wireline and perforating services in the Middle East offset decreased demand for drilling services throughout most of the region. Revenue outside North America was 67% of total segment revenue in the first nine months of 2010 and 71% of total segment revenue in the first nine months of 2009.

Segment operating income compared to the first nine months of 2009 remained flat due to increased activity in North America being offset by lower activity internationally. North America operating income increased $219 million from improved pricing and increased demand for all products and services. Latin America operating income fell 24%, primarily due to lower drilling activity in Mexico and Colombia. The Europe/Africa/CIS region operating income fell 23% as decreased demand and higher costs for drilling services, wireline and perforating services, and drilling fluid services in Africa offset higher drilling services and an improved product mix for drilling fluid services in Norway. Middle East/Asia operating income decreased 41% over the first nine months of 2009 mainly due to a non-cash impairment charge to an oil and gas property in Bangladesh, higher costs throughout most of the region, lower drilling services in Saudi Arabia, and decreased demand for drilling services, wireline and perforating services, and testing and subsea services in most of Asia Pacific.

*Corporate and other* expenses were $174 million in the first nine months of 2010 compared to $151 million in the first nine months of 2009. The 15% increase was primarily related to higher legal and environmental costs in the first nine months of 2010.

### NONOPERATING ITEMS

*Interest expense, net of interest income* increased $21 million in the first nine months of 2010 compared to the first nine months of 2009 primarily due to the issuance of $2 billion in senior notes in March of 2009.

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

*Income from discontinued operations, net* for the first nine months of 2010 included $62 million of income primarily related to the finalization of a United States tax matter with the Internal Revenue Service.

### 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 Securities and Exchange Commission (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, 1,443 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 September 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 September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Oct 22, 2010.
Source: SEC EDGAR, the filing index for accession 0000045012-10-000345. Last ingested by Listed: Nov 2, 2026, 13:24 ET. No prices; not investment advice.