# Halliburton Co: Form 10-Q for the period ended Jun 30, 2011

- Company: [Halliburton Co](/companies/hal.md) (CIK 45012)
- Form: 10-Q
- Filed: 2011-07-21
- Accepted by EDGAR: Jul 21, 2011, 17:09 ET
- Period: 2011-06-30
- Accession: 0000045012-11-000273
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/45012/000004501211000273/edjune201110q_final.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/45012/000004501211000273/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-04-01 to 2011-06-30 | $5.93bn | us-gaap:Revenues |
| Revenue | 6 months, 2011-01-01 to 2011-06-30 | $11.22bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2011-04-01 to 2011-06-30 | $1.05bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2011-01-01 to 2011-06-30 | $2.02bn | us-gaap:CostOfGoodsSold |
| Operating income | 3 months, 2011-04-01 to 2011-06-30 | $1.16bn | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2011-01-01 to 2011-06-30 | $1.98bn | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2011-04-01 to 2011-06-30 | $352.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2011-01-01 to 2011-06-30 | $581.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-04-01 to 2011-06-30 | $739.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2011-01-01 to 2011-06-30 | $1.25bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.80 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2011-01-01 to 2011-06-30 | $1.36 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-04-01 to 2011-06-30 | $0.81 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2011-01-01 to 2011-06-30 | $1.37 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-04-01 to 2011-06-30 | 921,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2011-01-01 to 2011-06-30 | 920,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2011-01-01 to 2011-06-30 | $1.39bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2011-01-01 to 2011-06-30 | $1.42bn | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2011-06-30 | $1.44bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-06-30 | $9.54bn | us-gaap:AssetsCurrent |
| Total assets | at 2011-06-30 | $19.96bn | us-gaap:Assets |
| Current liabilities | at 2011-06-30 | $3.17bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-06-30 | $8.30bn | us-gaap:Liabilities |
| Shareholders' equity | at 2011-06-30 | $11.64bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,989 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 half of 2011, we produced revenue of $11.2 billion and operating income of $2.0 billion, reflecting an operating margin of 18%. Revenue increased $3.1 billion, or 38%, from the first half of 2010, while operating income increased $764 million, or 63%, from the first half 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 operational disruptions in North Africa.

### Business outlook

In North America, the United States land rig count and horizontal drilling activity have continued to grow, led by a shift to oil and liquids-rich shale basins because of supportive commodity prices and attractive economics for our customers. 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 second quarter 2011 Gulf of Mexico business has improved somewhat due to the recent issuances of drilling permits by the Bureau of Ocean Energy Management, Regulation and Enforcement (BOE); however, unless the pace of further permitting improves, there is risk the recovery in the Gulf of Mexico could stall in the second half of 2011. See “Business Environment and Results of Operations,” Note 7 to the consolidated financial statements, Part II, Item 1. “Legal Proceedings,” and Part II, Item 1(a), “Risk Factors.” Despite uncertainty about natural gas fundamentals and the Gulf of Mexico recovery, we believe our current North America revenue and margins are likely sustainable through the remainder of 2011.

Outside of North America, second quarter of 2011 revenue increased from the prior year, while our operating income declined due to highly competitive service pricing in several markets. Our operations in Egypt are recovering from the turmoil experienced in the first quarter, while 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. Some of our customers have indicated, however, that they plan to increase their production capabilities in areas outside of North Africa and we expect that this, driven by improved oil price and demand fundamentals, will contribute to activity increases in the second half of the year. Despite the events that have transpired and the impact of lower service pricing negotiated during the worldwide recession, we expect that activity increases throughout the year will lead to margin improvement by the latter half of 2011 or the early part of 2012.

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 each of the first two quarters of 2011. We expect that costs associated with these initiatives will impact third quarter 2011 results by approximately $0.02 per diluted share.

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

### Financial markets, liquidity, and capital resources

Since mid-2008, the global financial markets have been 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 second quarter of 2011 and December 31, 2010 with cash and equivalents of $1.4 billion. We also held $451 million of short-term, United States Treasury securities classified as marketable securities at June 30, 2011 compared to $653 million at December 31, 2010.

### Significant sources of cash

Cash flows from operating activities contributed $1.4 billion to cash in the first six months of 2011.

During the first six months of 2011, we sold approximately $701 million of short-term marketable securities.

*Further available sources of cash.* On February 22, 2011, we entered into an 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 $1.4 billion in the first six months of 2011 and were predominantly made in the production enhancement, drilling services, cementing, and wireline and perforating product service lines. We have also invested additional working capital to support the growth of our business.

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

We paid $165 million in dividends to our shareholders in the first six months of 2011.

*Future uses of cash.* Capital spending for 2011 is expected to be approximately $3.2 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 to support the expansion of our North America business.

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 $83 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 June 30, 2011, including $240 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 $1.4 billion of cash and equivalents and $451 million in investments in marketable securities as of June 30, 2011 provide us with 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. The full amount of the revolving credit facility was available as of June 30, 2011. We have no financial covenants or material adverse change provisions in our bank agreements. 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 six months of 2011, based upon the location of the services provided and products sold, 54% of our consolidated revenue was from the United States. In the first six months of 2010, 44% 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, other than the United States, 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 June 30 2011 | 2010 | Year Ended December 31 2010 |
| --- | ---: | ---: | ---: |
| West Texas Intermediate | $102.61 | $77.79 | $79.36 |
| United Kingdom Brent | 117.78 | 78.51 | 79.66 |
| Average United States Natural Gas Prices (dollars per |  |  |  |
| thousand cubic feet, or mcf) |  |  |  |
| Henry Hub | $4.38 | $4.45 | $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 June 30 2011 | 2010 | Six Months Ended June 30 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Land | 1,798 | 1,467 | 1,744 | 1,384 |
| Offshore (incl. Gulf of Mexico) | 32 | 41 | 29 | 43 |
| Total | 1,830 | 1,508 | 1,773 | 1,427 |
| Canada: |  |  |  |  |
| Land | 187 | 164 | 386 | 315 |
| Offshore | 1 | 2 | 1 | 3 |
| Total | 188 | 166 | 387 | 318 |
| International (excluding Canada): |  |  |  |  |
| Land | 847 | 782 | 854 | 775 |
| Offshore | 299 | 306 | 302 | 300 |
| Total | 1,146 | 1,088 | 1,156 | 1,075 |
| Worldwide total | 3,164 | 2,762 | 3,316 | 2,820 |
| Land total | 2,832 | 2,413 | 2,984 | 2,474 |
| Offshore total | 332 | 349 | 332 | 346 |

| Oil vs. Natural Gas United States (incl. Gulf of Mexico): | Three Months Ended June 30 2011 | 2010 | Six Months Ended June 30 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Oil | 946 | 544 | 879 | 501 |
| Natural Gas | 884 | 964 | 894 | 926 |
| Total | 1,830 | 1,508 | 1,773 | 1,427 |
| Canada: |  |  |  |  |
| Oil | 114 | 92 | 258 | 174 |
| Natural Gas | 74 | 74 | 129 | 144 |
| Total | 188 | 166 | 387 | 318 |
| International (excluding Canada): |  |  |  |  |
| Oil | 894 | 829 | 902 | 820 |
| Natural Gas | 252 | 259 | 254 | 255 |
| Total | 1,146 | 1,088 | 1,156 | 1,075 |
| Worldwide total | 3,164 | 2,762 | 3,316 | 2,820 |
| Oil total | 1,954 | 1,465 | 2,039 | 1,495 |
| Natural Gas total | 1,210 | 1,297 | 1,277 | 1,325 |

| Drilling Type United States (incl. Gulf of Mexico): | Three Months Ended June 30 2011 | 2010 | Six Months Ended June 30 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Horizontal | 1,039 | 781 | 1,009 | 725 |
| Vertical | 561 | 495 | 538 | 477 |
| Directional | 230 | 232 | 226 | 225 |
| Total | 1,830 | 1,508 | 1,773 | 1,427 |

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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 six months of 2011, however, oil prices have risen dramatically, primarily due to uncertainty regarding the geopolitical issues in North Africa and demand growth from developing countries like China. In response, natural gas drilling activity continues to be curtailed. According to the International Energy Agency’s (IEA) July 2011 “Oil Market Report,” despite lower than expected demand levels during the first half of the year, the 2012 world petroleum demand is forecasted to increase 2% over 2011 levels. Though the global oil supply rose in the second quarter of 2011, continued political instability may lead to the further 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 significant demand growth for developing countries, 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 shale 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 half 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 June 30, 2011, horizontal-directed rig activity represented over 57% of the total rigs in the United States, about 66% 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 second quarter of 2011, North America revenue increased 16% and operating income increased 36% 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 the extent of any further margin improvements for the remainder of 2011.

Deepwater drilling activity in the Gulf of Mexico is continuing to recover due to the issuance of a number of drilling permits by the BOE. Despite some improvement in the second quarter, we believe risks remain for further growth in the Gulf of Mexico given the pace of permit issuance. Our business in the Gulf of Mexico represented approximately 16% of our North America revenue in the first half of 2009, approximately 12% in the first half of 2010, and approximately 6% in the first half of 2011. In addition, the Gulf of Mexico represented approximately 6% of our consolidated revenue in the first half of 2009, approximately 6% in the first half of 2010, and approximately 3% in the first half of 2011. 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, governmental approvals for permits, our customers’ actions, and the potential movement of deepwater rigs to or from other markets.

### International operations

During the second quarter of 2011, revenue outside North America increased 8% and operating income outside of North America increased 55% from the prior quarter, reflecting typical seasonality. This seasonality more than offset activity disruptions caused by the political unrest and sanctions in North Africa and the continued impact of over capacity leading to pricing pressure. The first quarter of 2011 results were impacted by a $59 million, pre-tax, charge in Libya, to reserve for certain doubtful accounts receivable and inventory. Additionally, the second quarter of 2011 results were impacted by a $11 million, pre-tax, charge for employee separation costs, primarily related to our Europe/Africa/CIS regional operations.

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. Consistent with our long-term strategy to grow our operations outside of North America, we also expect to continue to invest capital in our international operations.

*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.

On May 24, 2011, the United States government imposed sanctions on the state-owned oil company of Venezuela. The sanctions do not, however, apply to that company’s subsidiaries and do not prohibit the export of crude oil to the United States. We do not expect these sanctions to have a material impact on our operations in Venezuela.

As of June 30, 2011, our total net investment in Venezuela was approximately $208 million. In addition to this amount, we have $240 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.

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

- a three-year contract award by Chevron, with extension opportunities, to provide integrated services for shale natural gas exploration in Poland. Under this contract, we will provide drilling services, mud logging, cementing, coiled tubing, slickline services, well testing, completion and hydraulic fracturing, and project management services;
- 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, logging- and measurement- 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 June 30, 2011 Compared with Three Months Ended June 30, 2010

| REVENUE: Millions of dollars | Three Months Ended June 30 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $3,618 | $2,393 | $1,225 | 51% |
| Drilling and Evaluation | 2,317 | 1,994 | 323 | 16 |
| Total revenue | $5,935 | $4,387 | $1,548 | 35% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $2,588 | $1,434 | $1,154 | 80% |
| Latin America | 268 | 212 | 56 | 26 |
| Europe/Africa/CIS | 415 | 459 | (44) | (10) |
| Middle East/Asia | 347 | 288 | 59 | 20 |
| Total | 3,618 | 2,393 | 1,225 | 51 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 857 | 677 | 180 | 27 |
| Latin America | 419 | 355 | 64 | 18 |
| Europe/Africa/CIS | 554 | 522 | 32 | 6 |
| Middle East/Asia | 487 | 440 | 47 | 11 |
| Total | 2,317 | 1,994 | 323 | 16 |
| Total revenue by region: |  |  |  |  |
| North America | 3,445 | 2,111 | 1,334 | 63 |
| Latin America | 687 | 567 | 120 | 21 |
| Europe/Africa/CIS | 969 | 981 | (12) | (1) |
| Middle East/Asia | 834 | 728 | 106 | 15 |

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| OPERATING INCOME: Millions of dollars | Three Months Ended June 30 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $918 | $497 | $421 | 85% |
| Drilling and Evaluation | 324 | 318 | 6 | 2 |
| Corporate and other | (81) | (53) | (28) | 53 |
| Total operating income | $1,161 | $762 | $399 | 52% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $827 | $310 | $517 | 167% |
| Latin America | 29 | 34 | (5) | (15) |
| Europe/Africa/CIS | 15 | 95 | (80) | (84) |
| Middle East/Asia | 47 | 58 | (11) | (19) |
| Total | 918 | 497 | 421 | 85 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 170 | 131 | 39 | 30 |
| Latin America | 52 | 55 | (3) | (5) |
| Europe/Africa/CIS | 53 | 53 | – | – |
| Middle East/Asia | 49 | 79 | (30) | (38) |
| Total | 324 | 318 | 6 | 2 |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 997 | 441 | 556 | 126 |
| Latin America | 81 | 89 | (8) | (9) |
| Europe/Africa/CIS | 68 | 148 | (80) | (54) |
| Middle East/Asia | 96 | 137 | (41) | (30) |

The 35% increase in consolidated revenue in the second quarter of 2011 compared to the second quarter of 2010 was primarily attributable to increased activity in North America, as the unabated shift to unconventional oil and liquids-rich basins in United States land more than offset geopolitical issues in North Africa and the effects of the suspension of deepwater drilling activity in the Gulf of Mexico. On a consolidated basis, all product service lines experienced revenue growth from the second quarter of 2010. Revenue outside of North America was 42% of consolidated revenue in the second quarter of 2011 and 52% of consolidated revenue in the second quarter of 2010.

The 52% increase in consolidated operating income during the second quarter of 2011 compared to the second quarter of 2010 was attributable to capacity additions, Completion and Production’s higher utilization rates, and a more favorable pricing environment associated with the activity growth in the more service intensive, unconventional oil and liquids-rich basins in United States land. However, operating income in the second quarter of 2011 was adversely impacted by $11 million, pre-tax, of employee separation costs in the Eastern Hemisphere.

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

*Completion and Production* consolidated revenue increased 51% and North America revenue increased 80% compared to the second quarter of 2010, led by production enhancement services as higher activity in unconventional basins generally resulted in increased demand for hydraulic fracturing. Latin America revenue increased 26% with higher demand for all product service lines. Europe/Africa/CIS revenue decreased 10%, primarily due to the impact from the geopolitical disruptions in North Africa and also lower completions activity in Sub-Saharan Africa. Middle East/Asia revenue increased 20%, largely due to higher completions activity across the region and an activity rebound in Australia. Revenue outside of North America was 28% of total segment revenue in the second quarter of 2011 and 40% of total segment revenue in the second quarter of 2010.

Completion and Production segment operating income increased 85% compared to the second quarter of 2010, driven by production enhancement services in United States land. The results were negatively impacted by $6 million, pre-tax, of employee separation costs, primarily in Europe/Africa/CIS. In North America, operating income grew 167%, due to higher activity, utilization rates, and a more favorable pricing environment for production enhancement services in United States land. Latin America operating income decreased 15%, as less favorable pricing in Mexico and higher costs across the region offset higher demand for cementing services in Colombia. Europe/Africa/CIS operating income declined 84% due to the effect of geopolitical disruptions in North Africa and lower completions activity. Middle East /Asia operating income decreased 19% on lower intervention activity across Asia Pacific.

*Drilling and Evaluation* revenue increased 16% compared to the second quarter of 2010, with all regions experiencing revenue growth from the prior year. North America revenue grew 27%, with higher activity and improved pricing in United States land. Latin America revenue increased 18% with higher activity seen across South America. Europe/Africa/CIS revenue increased 6%, primarily due to higher demand for drilling services in the North Sea and higher activity in Angola. Middle East/Asia revenue grew 11% due to increased demand for most product service lines across the region. Revenue outside of North America was 63% of total segment revenue in the second quarter of 2011 and 66% of total segment revenue in the second quarter of 2010.

Drilling and Evaluation operating income was relatively flat compared to the second quarter of 2010, as strong results in United States land offset highly competitive pricing in several Eastern Hemisphere markets. The results were negatively impacted by $5 million, pre-tax, of employee separation costs, primarily in Europe/Africa/CIS. North America operating income increased 30%, as higher activity in United States land offset declines in the Gulf of Mexico. Latin America operating income decreased 5%, as higher activity in Venezuela and Ecuador and strong fluids demand in Brazil was offset by higher costs in Mexico. Europe/Africa/CIS region operating income was flat, as the effects of the geopolitical disruptions in North Africa offset increased drilling activity in the North Sea and improved pricing conditions in Angola. Middle East/Asia operating income decreased 38%, primarily due to lower drilling activity in Saudi Arabia and project delays in Iraq.

*Corporate and other* expenses were $81 million in the second quarter of 2011 compared to $53 million in the second quarter of 2010. The increase was primarily due to $12 million of costs associated with strategic investments in our operating model and creating competitive advantage by repositioning our technology, supply chain, and manufacturing infrastructure.

### NONOPERATING ITEMS

*Interest expense, net of interest income* decreased $13 million in the second quarter of 2011 compared to the second quarter of 2010, primarily due to less interest expense as a result of the retirement of $750 million principal amount of our 5.5% senior notes in October 2010.

### RESULTS OF OPERATIONS IN 2011 COMPARED TO 2010

### Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010

| REVENUE: Millions of dollars | Six Months Ended June 30 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $6,790 | $4,357 | $2,433 | 56% |
| Drilling and Evaluation | 4,427 | 3,791 | 636 | 17 |
| Total revenue | $11,217 | $8,148 | $3,069 | 38% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $4,809 | $2,559 | $2,250 | 88% |
| Latin America | 508 | 414 | 94 | 23 |
| Europe/Africa/CIS | 816 | 844 | (28) | (3) |
| Middle East/Asia | 657 | 540 | 117 | 22 |
| Total | 6,790 | 4,357 | 2,433 | 56 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 1,618 | 1,256 | 362 | 29 |
| Latin America | 791 | 648 | 143 | 22 |
| Europe/Africa/CIS | 1,064 | 1,057 | 7 | 1 |
| Middle East/Asia | 954 | 830 | 124 | 15 |
| Total | 4,427 | 3,791 | 636 | 17 |
| Total revenue by region: |  |  |  |  |
| North America | 6,427 | 3,815 | 2,612 | 68 |
| Latin America | 1,299 | 1,062 | 237 | 22 |
| Europe/Africa/CIS | 1,880 | 1,901 | (21) | (1) |
| Middle East/Asia | 1,611 | 1,370 | 241 | 18 |

32

| OPERATING INCOME: Millions of dollars | Six Months Ended June 30 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $1,578 | $735 | $843 | 115% |
| Drilling and Evaluation | 554 | 588 | (34) | (6) |
| Corporate and other | (157) | (112) | (45) | 40 |
| Total operating income | $1,975 | $1,211 | $764 | 63% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $1,441 | $447 | $994 | 222% |
| Latin America | 65 | 63 | 2 | 3 |
| Europe/Africa/CIS | (11) | 134 | (145) | (108) |
| Middle East/Asia | 83 | 91 | (8) | (9) |
| Total | 1,578 | 735 | 843 | 115 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 288 | 224 | 64 | 29 |
| Latin America | 92 | 72 | 20 | 28 |
| Europe/Africa/CIS | 75 | 144 | (69) | (48) |
| Middle East/Asia | 99 | 148 | (49) | (33) |
| Total | 554 | 588 | (34) | (6) |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 1,729 | 671 | 1,058 | 158 |
| Latin America | 157 | 135 | 22 | 16 |
| Europe/Africa/CIS | 64 | 278 | (214) | (77) |
| Middle East/Asia | 182 | 239 | (57) | (24) |

The 38% increase in consolidated revenue in the first six months of 2011 compared to the first six months of 2010 was primarily due to higher drilling activity and increased demand for Completion and Production services in North America. Revenue outside North America was 43% of consolidated revenue in the first six months of 2011 and 53% of consolidated revenue in the first six months of 2010.

The 63% increase in consolidated operating income in the first six months of 2011 compared to the first six months of 2010 was primarily due to higher demand and a more favorable pricing environment for Completion and Production services in North America as operators continued the shift towards the more service intensive oil and liquids-rich basins. Operating income in the first six months of 2011 was adversely impacted by $11 million, pre-tax, of employee separation costs in the Eastern Hemisphere during the second quarter of 2011 and a $59 million, pre-tax, charge in Libya, to reserve for certain doubtful accounts receivable and inventory during the first quarter of 2011.

*Completion and Production* revenue increased by 56% driven by North America revenue growth of 88% compared to the first six months of 2010. The activity increase in North America was led by production enhancement services in United States land as higher activity in unconventional basins resulted in increased demand for hydraulic fracturing. Latin America revenue rose 23% on increased demand for cementing services across the region and higher activity across all product service lines in Argentina and Brazil. Europe/Africa/CIS revenue was down 3%, as the activity disruptions in North Africa and lower completions activity in Nigeria and Angola offset higher vessel utilization in the North Sea. Middle East/Asia revenue increased 22% with higher activity across all product service lines in Malaysia and Australia and increased demand for cementing services across most of the region. Revenue outside North America was 29% of total segment revenue in the first six months of 2011 and 41% of total segment revenue in the first six months of 2010.

Completion and Production operating income increased 115% compared to the first six months of 2010. This increase was driven by the North America region, where operating income grew $994 million on higher activity and more favorable pricing for production enhancement services in unconventional basins located in United States land. Latin America operating income increased 3%, as higher demand for cementing services in the region offset higher costs across most of the region. Europe/Africa/CIS operating income declined 108% primarily due to the activity disruptions in North Africa, including the reserve charge for certain account receivables and inventory recognized in the first quarter of 2011. Middle East/Asia operating income decreased 9% due to higher costs and a less favorable product mix across most of the region.

*Drilling and Evaluation* revenue increased 17% compared to the first six months of 2010 as drilling activity improved across all regions, most significantly in North America. North America revenue grew 29% on substantial activity increases in United States land. Latin America revenue rose 22% as a result of increased demand for most product service lines in Venezuela, Brazil and Colombia. Europe/Africa/CIS revenue was relatively flat, as higher drilling activity in the United Kingdom and Angola was offset by lower activity in Libya and Kazakhstan. Middle East/Asia revenue increased 15% due to the commencement of work in Iraq and higher drilling activity in Indonesia. Revenue outside North America was 63% of total segment revenue in the first six months of 2011 and 67% of total segment revenue in the first six months of 2010.

Drilling and Evaluation operating income decreased 6% compared to the first six months of 2010, as lower activity associated with the disruptions in North Africa and less favorable pricing in the Eastern Hemisphere offset activity increases in United States land. North America operating income grew 29% on higher drilling activity and more favorable pricing in United States land. Latin America operating income rose 28%, as activity increases in Venezuela and an improved product mix for fluid services in Brazil. Europe/Africa/CIS region operating income fell 48% primarily due to costs associated with activity disruptions in North Africa, including the reserve charge for certain account receivables and inventory recognized in the first quarter of 2011. Middle East/Asia operating income decreased 33% mainly due to lower activity and higher costs for drilling services in Oman and Malaysia and startup costs associated with the commencement of work in Iraq.

*Corporate and other* expenses were $157 million in the first six months of 2011 compared to $112 million in the first six months of 2010. The increase was primarily due to higher legal costs and additional expenses associated with strategic investments in our operating model and creating competitive advantage by repositioning our technology, supply chain, and manufacturing infrastructure.

### NONOPERATING ITEMS

*Interest expense, net of interest income* decreased $20 million in the first six months of 2011 compared to the first six months of 2010 primarily due to less interest expense as a result of the retirement of $750 million principal amount of our 5.5% senior notes in October 2010.

*Other, net* decreased $40 million in the first six months of 2011 compared to the first six months of 2010 primarily due to a $31 million loss on foreign exchange recognized in the first quarter of 2010 in connection with the devaluation of the Venezuelan Bolívar Fuerte.

### ENVIRONMENTAL MATTERS

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note 7 to the condensed consolidated financial statements, Part II, Item 1, “Legal Proceedings—Environmental,” and Part II, Item 1(a), “Risk Factors.”

### NEW ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (FASB) issued an update to existing guidance on the presentation of comprehensive income. This update will require the presentation of the components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. In addition, companies are also required to present reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. The update is effective for fiscal years and interim periods beginning after December 15, 2011. We will adopt the new disclosure requirements for comprehensive income beginning January 1, 2012 and are currently evaluating the provisions of this update.

### 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, 5,437 characters.

We are exposed to market risk from changes in foreign currency exchange rates and interest rates. We selectively manage these exposures through the use of derivative instruments. The objective of our risk management strategy is to minimize the volatility from fluctuations in foreign currency and interest rates. We do not use derivative instruments for trading purposes.

### Foreign exchange risk

Techniques in managing foreign exchange risk include, but are not limited to, foreign currency borrowing and investing and the use of currency derivative instruments. We selectively manage significant exposures to potential foreign exchange losses considering current market conditions, future operating activities, and the associated cost in relation to the perceived risk of loss. The purpose of our foreign currency risk management activities is to protect us from the risk that the eventual dollar cash flows resulting from the sale and purchase of services and products in foreign currencies will be adversely affected by changes in exchange rates.

We manage our currency exposure through the use of currency derivative instruments as it relates to the major currencies, which are generally the currencies of the countries in which we do the majority of our international business. These instruments are not treated as hedges for accounting purposes and generally have an expiration date of one year or less. Forward exchange contracts, which are commitments to buy or sell a specified amount of a foreign currency at a specified price and time, are generally used to manage identifiable foreign currency commitments. Forward exchange contracts are generally used to manage exposures related to assets and liabilities denominated in a foreign currency. None of the forward contracts are exchange traded. The counterparties to our forward exchange contracts are global commercial banks. While derivative instruments are subject to fluctuations in value, the fluctuations are generally offset by the value of the underlying exposures being managed. The use of some contracts may limit our ability to benefit from favorable fluctuations in foreign exchange rates.

Foreign currency contracts are not utilized to manage exposures in some currencies due primarily to the lack of available markets or cost considerations (non-traded currencies). We attempt to manage our working capital position to minimize foreign currency commitments in non-traded currencies and recognize that pricing for the services and products offered in these countries should cover the cost of exchange rate devaluations. We have historically incurred transaction losses in non-traded currencies.

*Notional amounts and fair market values.* The notional amounts of open foreign exchange forward contracts were $374 million at June 30, 2011 and $356 million at December 31, 2010. The notional amounts of our foreign exchange contracts do not generally represent amounts exchanged by the parties and, thus, are not a measure of our exposure or of the cash requirements related to these contracts. As such, cash flows related to these instruments are typically not material. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as exchange rates. The estimated fair market value of our foreign exchange contracts was not material at either June 30, 2011 or December 31, 2010.

### Interest rate risk

The following table represents principal amounts of our long-term debt, all of which are at fixed rates, at June 30, 2011 and December 31, 2010 and related weighted average interest rates on the repayment amounts by year of maturity.

| Millions of dollars | 2011 | 2017 and Thereafter | Total |
| --- | ---: | ---: | ---: |
| Repayment amount | $– | $3,834 | $3,834 |
| Weighted average |  |  |  |
| interest rate on |  |  |  |
| repayment amount | – | 6.85% | 6.85% |

The fair market value of long-term debt was $4.6 billion as of June 30, 2011 and December 31, 2010.

During the second quarter of 2011, we entered into a series of interest rate swaps relating to two of our debt instruments. The impacts of these swaps are not reflected in the table above. We use interest rate swaps to manage the economic effect of fixed rate obligations associated with certain senior notes so that the interest payable on the senior notes effectively becomes linked to variable rates. The counterparties to our interest rate swaps are global commercial banks.

*Notional amounts and fair market values.* The first series of swaps were for a notional amount of $600 million in order to hedge a portion of the changes in the fair value of our 6.15% senior notes due 2019. Under the terms of these swaps, we will receive interest at a fixed rate of 6.15% and will pay interest at a floating rate of three-month LIBOR plus a spread semiannually. The second series of swaps were for a notional amount of $400 million in order to hedge changes in the fair value of our 5.9% senior notes due 2018. Under the terms of these swaps, we will receive interest at a fixed rate of 5.9% and will pay interest at a floating rate of three-month LIBOR plus a spread semiannually. These interest rate swaps, which expire when the underlying debt matures, are designated as fair value hedges of the underlying debt and are determined to be highly effective. The fair value of the swap agreements was not material at June 30, 2011.

## Controls and procedures

As filed, 1,433 characters.

In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 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 June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Jul 21, 2011.
Source: SEC EDGAR, the filing index for accession 0000045012-11-000273. Last ingested by Listed: Nov 2, 2026, 13:24 ET. No prices; not investment advice.