# Halliburton Co: Form 10-Q for the period ended Mar 31, 2011

- Company: [Halliburton Co](/companies/hal.md) (CIK 45012)
- Form: 10-Q
- Filed: 2011-04-22
- Accepted by EDGAR: Apr 22, 2011, 18:40 ET
- Period: 2011-03-31
- Accession: 0000045012-11-000194
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/45012/000004501211000194/edmar201110q_final.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/45012/000004501211000194/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-01-01 to 2011-03-31 | $5.28bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2011-01-01 to 2011-03-31 | $970.0m | us-gaap:CostOfGoodsSold |
| Operating income | 3 months, 2011-01-01 to 2011-03-31 | $814.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2011-01-01 to 2011-03-31 | $229.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-01-01 to 2011-03-31 | $511.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-01-01 to 2011-03-31 | $0.56 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-01-01 to 2011-03-31 | $0.56 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-01-01 to 2011-03-31 | 919,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2011-01-01 to 2011-03-31 | $565.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2011-01-01 to 2011-03-31 | $704.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2011-03-31 | $1.03bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-03-31 | $9.03bn | us-gaap:AssetsCurrent |
| Total assets | at 2011-03-31 | $18.99bn | us-gaap:Assets |
| Current liabilities | at 2011-03-31 | $2.92bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-03-31 | $8.05bn | us-gaap:Liabilities |
| Shareholders' equity | at 2011-03-31 | $10.92bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,189 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 & Coots; 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 asset solutions, and integrated project management and consulting services.

The business operations of our segments are organized around four primary geographic regions: North America, 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 over 60,000 employees, we operate in approximately 80 countries around the world and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.

### Financial results

During the first quarter of 2011, we produced revenue of $5.3 billion and operating income of $814 million, reflecting an operating margin of 15%. Revenue increased $1.5 billion, or 40%, from the first quarter of 2010, while operating income increased $365 million, or 81%, from the first quarter of 2010. Overall, these increases were due to increased drilling activity and pricing improvements in North America. Partially offsetting the strong North America results were adverse weather conditions in North America and the North Sea and operational disruptions in North Africa.

### Business outlook

In North America, United States land rig count and drilling activity continued to grow, led by the shift to oil and liquids-rich plays. This shift remains unabated and has provided further opportunities to expand pricing in select basins. We believe that natural gas drilling activity could be under pressure in the near-term until the oversupply situation is corrected; however, any reduction in natural gas drilling may be more than offset by an increase in liquids-directed activity. Our first quarter 2011 Gulf of Mexico business remained muted, but the recent issuances of drilling permits by the Bureau of Ocean Energy Management, Regulation and Enforcement (BOE) suggest that activity levels may increase, possibly in the second half of 2011. Despite uncertainty about natural gas fundamentals and the Gulf of Mexico recovery, we believe our current North America revenues and margins are likely sustainable through the remainder of 2011.

Outside of North America, first quarter of 2011 revenue increased from the prior year, while our operating income declined due to highly competitive pricing in several markets. Our operations in Egypt were disrupted and all customer activity in Libya has ceased due to the recently imposed United States and European sanctions against Libya. The geopolitical outlook in North Africa remains uncertain. However, oil fundamentals remain positive, and as supply disruptions stemming from the political unrest in Libya and other countries continue to exert pressure on the industry’s overall production capacity, we expect that some of our customers will increase activity in the second half of the year. Despite the events that have transpired and the impact of lower pricing negotiated during the downturn, we expect that activity increases throughout the year will lead to a more pronounced margin improvement by the latter half of 2011 or the early part of 2012.

As we announced last quarter, we are executing several key initiatives in 2011. These initiatives involve increasing manufacturing production in the Eastern Hemisphere and improving service delivery in North America. Costs related to these efforts, which are included under “Corporate and other” on our condensed consolidated statements of operations, impacted our results by approximately $0.01 per diluted share in the first quarter of 2011. We expect that costs associated with these initiatives will impact second quarter 2011 results by approximately $0.01 to $0.02 per share.

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 Deepwater Horizon, 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. The United States Gulf of Mexico offshore deepwater drilling suspension issued in May 2010 was later lifted in October 2010. The BOE has recently begun issuing drilling permits in the Gulf of Mexico. We may see activity levels begin to recover in the coming quarters, although there can be no assurance of whether or when operations in the Gulf of Mexico will return to pre-suspension levels. Longer term, we do not know the extent the Macondo well incident or resulting drilling regulations will impact 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 7 to the consolidated financial statements, Part II, Item 1, “Legal Proceedings,” and Part II, Item 1(a), “Risk Factors.”

### Financial markets, liquidity, and capital resources

Since mid-2008, the global financial markets have been somewhat 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 first quarter of 2011 with cash and equivalents of $1.0 billion compared to $1.4 billion at December 31, 2010. We also held $852 million of short-term, United States Treasury securities classified as marketable securities at March 31, 2011 compared to $653 million at December 31, 2010.

### Significant sources of cash

Cash flows from operating activities contributed $565 million to cash in the first quarter of 2011.

During the first quarter of 2011, we sold approximately $300 million of short-term marketable securities.

*Further available sources of cash.* On February 22, 2011, we entered into a new unsecured $2.0 billion five-year revolving credit facility that replaced our then existing $1.2 billion unsecured credit facility established in July 2007. The purpose of the facility is to provide commercial paper support, general working capital, and credit for other corporate purposes.

### Significant uses of cash

Capital expenditures were $704 million in the first quarter of 2011 and were predominantly made in the production enhancement, drilling services, cementing, and wireline and perforating product service lines.

During the first quarter of 2011, we purchased $501 million in short-term marketable securities.

We paid $82 million in dividends to our shareholders in the first quarter of 2011.

*Future uses of cash.* Capital spending for 2011 is expected to be approximately $3.0 billion. The capital expenditures plan for 2011 is primarily directed toward our production enhancement, drilling services, wireline and perforating, cementing, and completion tools product service lines.

We are currently exploring 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.

Subject to Board of Directors approval, we expect to pay quarterly dividends of approximately $80 million during 2011. 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 agreements.* 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 March 31, 2011, including $235 million of surety bonds related to Venezuela. See “Business Environment and Results of Operations – International Operations” for further discussion related to Venezuela. 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 $1.0 billion of cash and equivalents and $852 million in investments in marketable securities as of March 31, 2011 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 $2.0 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. The full amount of the revolving credit facility was available as of March 31, 2011. 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.

*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 80 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 quarter of 2011, based upon the location of the services provided and products sold, 52% of our consolidated revenue was from the United States. In the first quarter of 2010, 41% 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.

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, government regulation, 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 March 31 2011 | 2010 | Year Ended December 31 2010 |
| --- | ---: | ---: | ---: |
| West Texas Intermediate | $93.54 | $78.64 | $79.36 |
| United Kingdom Brent | 104.96 | 76.25 | 79.66 |
| Average United States Gas Prices (dollars per thousand |  |  |  |
| cubic feet, or mcf) |  |  |  |
| Henry Hub | $4.29 | $5.30 | $4.52 |

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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 March 31 2011 2010 | Year Ended December 31 2010 |
| --- | ---: | ---: |
| Land | 1,690 1,300 | 1,509 |
| Offshore (incl. Gulf of Mexico) | 26 45 | 32 |
| Total | 1,716 1,345 | 1,541 |
| Canada: |  |  |
| Land | 585 466 | 349 |
| Offshore | 2 4 | 2 |
| Total | 587 470 | 351 |
| International (excluding Canada): |  |  |
| Land | 862 768 | 789 |
| Offshore | 304 295 | 305 |
| Total | 1,166 1,063 | 1,094 |
| Worldwide total | 3,469 2,878 | 2,986 |
| Land total | 3,137 2,534 | 2,647 |
| Offshore total | 332 344 | 339 |
|  | Three Months Ended | Year Ended |
|  | March 31 | December 31 |
| **Oil vs. Natural Gas** | 2011 2010 | 2010 |
| United States (incl. Gulf of Mexico): |  |  |
| Oil | 812 456 | 593 |
| Natural gas | 904 889 | 948 |
| Total | 1,716 1,345 | 1,541 |
| Canada: |  |  |
| Oil | 403 256 | 201 |
| Natural gas | 184 214 | 150 |
| Total | 587 470 | 351 |
| International (excluding Canada): |  |  |
| Oil | 912 810 | 840 |
| Natural gas | 254 253 | 254 |
| Total | 1,166 1,063 | 1,094 |
| Worldwide total | 3,469 2,878 | 2,986 |
| Oil total | 2,127 1,522 | 1,634 |
| Natural gas total | 1,342 1,356 | 1,352 |

| Drilling Type United States (incl. Gulf of Mexico): | Three Months Ended March 31 2011 | 2010 | Year Ended December 31 2010 |
| --- | ---: | ---: | ---: |
| Horizontal | 978 | 663 | 822 |
| Vertical | 512 | 459 | 501 |
| Directional | 226 | 223 | 218 |
| Total | 1,716 | 1,345 | 1,541 |

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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.

In comparison to the previous two years, crude oil prices were relatively stable for most of 2010. Toward the end of 2010 and through the first quarter of 2011, however, oil prices have risen dramatically, primarily due to uncertainty regarding the geopolitical issues in North Africa. Natural gas prices, on the other hand, have declined 19% from the first quarter of 2010. In response, natural gas drilling activity continues to be curtailed. According to the International Energy Agency’s (IEA) April 2011 “Oil Market Report,” despite lower than expected demand levels during the first part of the year due to higher oil prices, the 2011 world petroleum demand is still forecasted to increase 2% over 2010 levels. Reductions in the global oil supply, driven by political instability, could lead to the continued escalation of oil prices and subsequently lower demand, which could delay the current economic recovery. Despite this and the heightened geopolitical uncertainties, 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 oil and natural gas prices can impact our customers’ drilling and production activities. The shift in 2010 to oil and liquids-rich basins has helped to drive increased service intensity, not only in terms of horsepower required per job, but also in fluid chemistry and other technologies required for these complex reservoirs. This trend has continued through the first quarter of 2011, with horizontal oil-directed drilling activity representing the fastest growing segment of the market. While rig counts increased modestly from the end of 2010, as of March 31, 2011, horizontal-directed rig activity represented over 57% of the total rigs in the United States, about 50% higher than peak levels in 2008. These trends have led to increased demand and improved pricing for most of our products and services in our United States land operations. In the first quarter of 2011, North America revenue increased 13% sequentially and operating income increased 16% sequentially. Going forward, we believe there will be an increase in overall activity in United States land, and this is reinforcing our confidence that margins for North America will be sustainable; however, growing cost pressure could moderate any margin improvements for the remainder of 2011.

*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 Deepwater Horizon, including cementing, mud logging, directional drilling, measurement-while-drilling, and rig data acquisition services. The cause of the explosion, fire, and resulting oil spill has been or is being investigated by numerous industry participants, congressional committees, and governmental agencies, including the United States Coast Guard and the BOE, who share jurisdiction over the investigation, the Chemical Safety Board, the National Academy of Science and the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling (National Commission) established by the President of the United States. For additional information, see Part II, Item 1, “Legal Proceedings.” In May 2010, the United States Department of the Interior effectively suspended all offshore deepwater drilling projects in the United States Gulf of Mexico. The suspension was lifted in October 2010. Since that time the Department of the Interior has issued guidance and regulations for drillers that intend to resume deepwater drilling activity. The Department of the Interior’s regulations focus in part on increased safety and environmental issues, drilling equipment, and the requirement that operators submit drilling applications demonstrating regulatory compliance with respect to, among other things, required independent third-party inspections, certification of well design and well control equipment and emergency response plans in the event of a blowout.

Despite the fact that the drilling suspension has been lifted, we have experienced a significant reduction in our Gulf of Mexico operations since the Macondo well incident and have not seen a material increase in the level of drilling activity in the Gulf of Mexico. However, due to the issuance of drilling permits by the BOE for the Gulf of Mexico in the first quarter of 2011, activity may begin to recover in the coming quarters although there can be no assurance of whether or when operations in the Gulf of Mexico will return to pre-suspension levels.

We continue to assess our plans in light of the Macondo well incident and the current and prospective regulatory response, including any temporary or permanent BOE rules. During 2010, we 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 15% of our North America revenue in the first quarter of 2009, approximately 13% in the first quarter of 2010, and approximately 6% in the first quarter of 2011. In addition, the Gulf of Mexico represented approximately 6% of our consolidated revenue in the first quarter of 2009, approximately 6% in the first quarter of 2010, and approximately 4% in the first quarter of 2011. Historically, approximately 48% of our Gulf of Mexico business has been 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.

In 2010, we adjusted the allocation of our Gulf of Mexico existing assets and/or anticipated capital expenditures to some degree but kept all of our infrastructure and most of our personnel intact during the drilling suspension, which gives us the ability to respond to our customers quickly. As activity recovers, we expect to realize the benefits of this strategy and may begin redeploying some personnel and equipment back to the Gulf of Mexico in the coming quarters. Longer term, we do not know the extent the Macondo well incident or resulting drilling regulations will impact revenue or earnings, as they are dependent on, among other things, our customers’ actions and the potential movement of deepwater rigs to other markets.

### 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 the first quarter of 2011, revenue outside North America decreased 9% from the prior quarter and operating income outside of North America decreased 61% from the prior quarter, as the typical seasonality-related declines that historically occur in the first quarter of the year were further exacerbated by harsher weather, activity disruptions caused by the political unrest and sanctions in North Africa, and the continued impact of over capacity leading to pricing pressure. Additionally, the first quarter of 2011 results were impacted by a $59 million, pre-tax, charge in Libya, primarily related to recognizing doubtful accounts receivable with the Libyan national oil companies as a result of recent United States and European sanctions against Libya and certain inventory that we believe has been compromised in the unrest.

The pace of international recovery is lagging that of previous cycles at this stage, despite international rig counts exceeding the prior peak reached in September of 2008. One of the contributory factors for the difference is the decline in offshore rig counts that we have seen with the current cycle. Given the service intensity of offshore work, we believe this resulted in a more extensive impact on the industry’s revenues, a more significant capacity overhang, and consequently, a more pronounced drop off in pricing. However, we are anticipating that the industry will experience steady volume increases through the remainder of the year as macroeconomic trends support a more favorable operator spending outlook, which we believe will eventually lead to meaningful absorption of equipment supply and result in the ability to begin to improve pricing for our services sometime in the second half of 2011. We continue to believe in the long-term prospects of the international market and will align our business accordingly.

*Venezuela.* In December 2010, the Venezuelan government set the fixed exchange rate at 4.3 Bolívar Fuerte to one United States dollar effective January 1, 2011, eliminating the dual exchange rate scheme implemented in early 2010. This change had no impact on us because we have applied the 4.3 Bolívar Fuerte fixed exchange rate since the previously disclosed January 2010 devaluation. We continue to work with our primary customer in Venezuela to resolve outstanding issues regarding the payment of invoices in relation to exchange rates and discounts.

As of March 31, 2011, our total net investment in Venezuela was approximately $187 million. In addition to this amount, we have $235 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 the more economic, unconventional 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;
- exploring 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;
- making key investments in technology and capital to accelerate growth opportunities. To that end, we are continuing to push our technology and manufacturing development, as well as our supply chain, closer to our customers in the Eastern Hemisphere, and we are building a new, world class technology center in Houston, Texas;
- improving working capital, and managing our balance sheet to maximize our financial flexibility. In early 2011, we launched a global project to improve service delivery that we expect to result in, among other things, additional investments in our systems and significant improvements to our current order-to-cash and purchase-to-pay processes.
- 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.

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

- contract awards by Statoil, with the potential to exceed more than $200 million in value, to provide directional drilling, logging-while-drilling, cementing, drilling fluids, and completion equipment and services for two high-pressure and high-temperature (HP/HT) fields offshore Norway;
- contract awards for equipment and services on two offshore blocks in the South China Sea as part of the first ultra-HP/HT oil and gas drilling project in Asia. Under these contracts, we will provide several-HP/HT technologies for drilling, completions, cementing, and testing, including two industry-first technologies;
- a three-year contract extension by Chevron Thailand, which includes provisions for directional drilling, measurement-while-drilling, and logging-while-drilling services for the ongoing offshore developments in the Gulf of Thailand;
- a contract by Exxon Mobil Iraq Limited to provide drilling services for 15 wells in the West Qurna (Phase I) oil field located in southern Iraq. This is in addition to work awarded in this field by the same customer in 2010. Under this contract, we will provide a complete range of well construction services, utilizing three drilling rigs to deliver the wells; and
- a contract by Statoil to provide integrated drilling and well services in offshore Norway with options up to eight years in duration with extended scope and activity. We will provide directional drilling services, logging- and measurement-while-drilling services, surface data logging, drill bits, hole enlargement and coring services, cementing and pumping services, drilling and completion fluids, completion services, and project management.

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### RESULTS OF OPERATIONS IN 2011 COMPARED TO 2010

### Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010

| REVENUE: Millions of dollars | Three Months Ended March 31 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $3,172 | $1,964 | $1,208 | 62% |
| Drilling and Evaluation | 2,110 | 1,797 | 313 | 17 |
| Total revenue | $5,282 | $3,761 | $1,521 | 40% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $2,221 | $1,125 | $1,096 | 97% |
| Latin America | 240 | 202 | 38 | 19 |
| Europe/Africa/CIS | 401 | 385 | 16 | 4 |
| Middle East/Asia | 310 | 252 | 58 | 23 |
| Total | 3,172 | 1,964 | 1,208 | 62 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 761 | 579 | 182 | 31 |
| Latin America | 372 | 293 | 79 | 27 |
| Europe/Africa/CIS | 510 | 535 | (25) | (5) |
| Middle East/Asia | 467 | 390 | 77 | 20 |
| Total | 2,110 | 1,797 | 313 | 17 |
| Total revenue by region: |  |  |  |  |
| North America | 2,982 | 1,704 | 1,278 | 75 |
| Latin America | 612 | 495 | 117 | 24 |
| Europe/Africa/CIS | 911 | 920 | (9) | (1) |
| Middle East/Asia | 777 | 642 | 135 | 21 |

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| OPERATING INCOME: Millions of dollars | Three Months Ended March 31 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $660 | $238 | $422 | 177% |
| Drilling and Evaluation | 230 | 270 | (40) | (15) |
| Corporate and other | (76) | (59) | (17) | 29 |
| Total operating income | $814 | $449 | $365 | 81% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $614 | $137 | $477 | 348% |
| Latin America | 36 | 29 | 7 | 24 |
| Europe/Africa/CIS | (26) | 39 | (65) | (167) |
| Middle East/Asia | 36 | 33 | 3 | 9 |
| Total | 660 | 238 | 422 | 177 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 118 | 93 | 25 | 27 |
| Latin America | 40 | 17 | 23 | 135 |
| Europe/Africa/CIS | 22 | 91 | (69) | (76) |
| Middle East/Asia | 50 | 69 | (19) | (28) |
| Total | 230 | 270 | (40) | (15) |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 732 | 230 | 502 | 218 |
| Latin America | 76 | 46 | 30 | 65 |
| Europe/Africa/CIS | (4) | 130 | (134) | (103) |
| Middle East/Asia | 86 | 102 | (16) | (16) |

The 40% increase in consolidated revenue in the first quarter of 2011 compared to the first quarter of 2010 was a result of strong activity in United States land, followed by more moderate growth in Latin America and Middle East/Asia. Revenue from Europe/Africa/CIS was essentially flat, primarily due to disruptions caused by political unrest and sanctions in North Africa. Revenue outside of North America was 44% of consolidated revenue in the first quarter of 2011 and 55% of consolidated revenue in the first quarter of 2010.

The 81% increase in consolidated operating income during the first quarter of 2011 compared to the first quarter of 2010 was attributable to considerable activity growth in United States land and the continued shift to the more service intensive unconventional oil and liquids-rich basins. This shift more than offset the activity disruptions in North Africa and the ongoing effects of the suspension of deepwater activity in the Gulf of Mexico. Operating income in the first quarter of 2011 was adversely impacted by a $59 million, pre-tax, charge primarily for recognizing doubtful accounts receivable with the Libyan national oil companies as a result of recent United States and European sanctions against Libya and certain inventory that we believe has been compromised in the unrest.

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

*Completion and Production* revenue increased 62% compared to the first quarter of 2010 as a result of the continued growth of activity in North America. North America revenue increased 97%, primarily due to increased demand and improved pricing for production enhancement services in United States land and Canada. Latin America revenue increased 19% due to higher activity for production enhancement services and cementing services in Argentina and Colombia, which was offset by lower activity in Mexico. Europe/Africa/CIS revenue increased 4% due to higher activity in Algeria and Angola, which was partially offset by project delays in Kazakhstan and disruptions in North Africa. Middle East/Asia revenue increased 23% largely due to higher sales of completion tools in Malaysia and the commencement of activity in Iraq. Revenue outside of North America was 30% of total segment revenue in the first quarter of 2011 and 43% of total segment revenue in the first quarter of 2010.

Completion and Production segment operating income increased 177% compared to the first quarter of 2010, with improvement seen across all regions except Europe/Africa/CIS. The results were negatively impacted by activity disruptions caused by political unrest and sanctions in North Africa, including a $36 million, pre-tax, charge primarily for recognizing doubtful accounts receivable with the Libyan national oil companies as a result of recent United States and European sanctions against Libya and certain inventory that we believe has been compromised in the unrest. In North America, operating income grew 348%, primarily due to increased demand and improved pricing. Latin America operating income increased 24% primarily due to higher activity and improved pricing for production enhancement services in Argentina and Colombia, which were partially offset by lower activity in Mexico. Europe/Africa/CIS operating income declined 167%, as activity disruptions caused by political unrest and sanctions in North Africa and project delays in Kazakhstan negatively impacted the region’s results. Middle East/Asia operating income increased 9% with higher demand for completion tools and production enhancement services in Malaysia and China being partially offset by the startup costs associated with Iraq.

*Drilling and Evaluation* revenue increased 17% compared to the first quarter of 2010 due to higher activity in the Western Hemisphere and the commencement of work in Iraq. North America revenue grew 31% on higher activity and improved pricing in United States land. Latin America revenue increased 27% on higher activity in Brazil, Colombia, and Venezuela. Europe/Africa/CIS revenue decreased 5%, primarily due to project delays in Kazakhstan, lower drilling activity in the North Sea, and activity disruptions caused by political unrest and sanctions in North Africa. Middle East/Asia revenue increased 20% due to the commencement of work in Iraq, increased activity in Saudi Arabia, and higher drilling activity in Indonesia. Revenue outside of North America was 64% of total segment revenue in the first quarter of 2011 and 68% of total segment revenue in the first quarter of 2010.

Drilling and Evaluation operating income decreased 15% compared to the first quarter of 2010, primarily due to disruptions caused by political unrest and sanctions in North Africa, including a $23 million, pre-tax, charge primarily for recognizing doubtful accounts receivable with the Libyan national oil companies as a result of recent United States and European sanctions against Libya and certain inventory that we believe has been compromised in the unrest. North America operating income increased 27%, as higher drilling activity in United States land offset the decline in the Gulf of Mexico. Latin America operating income grew 135%, primarily due to higher activity in Mexico and Venezuela. Europe/Africa/CIS region operating income decreased 76% due to the activity disruptions caused by political unrest and sanctions in North Africa and lower drilling activity in the North Sea. Middle East/Asia operating income decreased 28% over the first quarter of 2010, primarily due to lower activity and higher costs in Saudi Arabia and certain locations in Asia Pacific and also the startup costs associated with Iraq.

*Corporate and other* expenses were $76 million in the first quarter of 2011 compared to $59 million in the first quarter of 2010. The 29% increase was due to higher legal costs and to additional expenses associated with strategic investments in our business model to reposition our supply chain, technology, and manufacturing infrastructure.

### NONOPERATING ITEMS

*Interest expense, net of interest income* decreased $7 million in the first quarter of 2011 compared to the first quarter of 2010, as there was less interest expense due to the retirement of $750 million principal amount of our 5.5% senior notes in October 2010.

*Other, net* decreased $36 million compared to the first quarter of 2010, as the first quarter of 2010 included a $31 million foreign exchange loss associated with the devaluation of the Venezuelan Bolívar Fuerte.

*Provision for income taxes* of $229 million in the first quarter of 2011 resulted in an effective tax rate of 31%, compared to an effective tax rate of 36% in the first quarter of 2010. The first quarter of 2011 effective tax rate was favorably impacted by the recognition of foreign tax credits due to a legal entity status change made with respect to a foreign entity. The higher effective tax rate in the first quarter of 2010 was primarily due to the non tax-deductibility of the $31 million foreign exchange loss related to the devaluation of the Bolívar Fuerte in Venezuela. Also, as a result of the devaluation, we recognized $10 million of additional tax expense for local Venezuelan income tax purposes due to a taxable gain on our net United States dollar-denominated monetary asset position in the country.

### 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 7 to the condensed consolidated financial statements, Part II, Item 1, “Legal Proceedings—Environmental,” and Part II, Item 1(a), “Risk Factors.”

### 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,” “should,” 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, 269 characters.

For quantitative and qualitative disclosures about market risk, see Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in our 2010 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2010.

## Controls and procedures

As filed, 1,435 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 March 31, 2011 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 March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Apr 22, 2011.
Source: SEC EDGAR, the filing index for accession 0000045012-11-000194. Last ingested by Listed: Nov 2, 2026, 13:24 ET. No prices; not investment advice.