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

- Company: [Halliburton Co](/companies/hal.md) (CIK 45012)
- Form: 10-Q
- Filed: 2011-10-21
- Accepted by EDGAR: Oct 21, 2011, 17:47 ET
- Period: 2011-09-30
- Accession: 0000045012-11-000354
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/45012/000004501211000354/edsept201110q_final.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/45012/000004501211000354/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-07-01 to 2011-09-30 | $6.55bn | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2011-01-01 to 2011-09-30 | $17.77bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2011-07-01 to 2011-09-30 | $1.11bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2011-01-01 to 2011-09-30 | $3.13bn | us-gaap:CostOfGoodsSold |
| Operating income | 3 months, 2011-07-01 to 2011-09-30 | $1.33bn | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2011-01-01 to 2011-09-30 | $3.31bn | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2011-07-01 to 2011-09-30 | $411.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2011-01-01 to 2011-09-30 | $992.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-07-01 to 2011-09-30 | $683.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2011-01-01 to 2011-09-30 | $1.93bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-07-01 to 2011-09-30 | $0.74 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2011-01-01 to 2011-09-30 | $2.10 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-07-01 to 2011-09-30 | $0.74 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2011-01-01 to 2011-09-30 | $2.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-07-01 to 2011-09-30 | 925,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2011-01-01 to 2011-09-30 | 922,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2011-01-01 to 2011-09-30 | $2.37bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2011-01-01 to 2011-09-30 | $2.16bn | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2011-01-01 to 2011-09-30 | $247.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2011-09-30 | $1.77bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-09-30 | $10.31bn | us-gaap:AssetsCurrent |
| Total assets | at 2011-09-30 | $21.20bn | us-gaap:Assets |
| Current liabilities | at 2011-09-30 | $3.66bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-09-30 | $8.83bn | us-gaap:Liabilities |
| Long-term debt | at 2011-09-30 | $3.82bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2011-09-30 | $12.36bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,369 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 nine months of 2011, we produced revenue of $17.8 billion and operating income of $3.3 billion, reflecting an operating margin of 19%. Revenue increased $5.0 billion, or 39%, from the nine months of 2010, while operating income increased $1.3 billion, or 63%, from the nine months of 2010. These increases were due mainly to increased drilling activity and pricing improvements in North America as well as increased activity in Latin America. Partially offsetting these results were operational disruptions in North Africa and project delays in the Middle East.

### Business outlook

We continue to believe in the strength of the long-term fundamentals of our business. Despite concerns about the global economy, energy demand is expected to continue to increase driven by growth in developing countries. Furthermore, development of new resources is expected to be more complex resulting in increasing service intensity.

In North America, the United States land rig count and horizontal drilling activity continues to grow, led by a shift to oil and liquids-rich shale 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 third quarter 2011 Gulf of Mexico business has continued to improve compared to the first half of the 2011 due to the higher level of drilling permits issued in recent months. However, the pace of permit applications and approvals needs to be sustained at higher levels in order for the Gulf of Mexico business to recover to activity levels experienced before the Macondo well incident. 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 will be sustainable through the remainder of 2011.

Outside of North America, revenue during the nine months of 2011 increased from the prior year, while our operating income declined due to highly competitive service pricing in several markets. Recently, our operations in Egypt recovered from the turmoil experienced in the first quarter of 2011while our activity in Libya remains mostly shut down. Any meaningful recovery in Libya will depend on our customers’ ability to reestablish operations. Despite the events that have transpired and the impact of lower service pricing negotiated during the worldwide recession, we expect gradual margin improvement by the end of the year or early part of 2012 as activity continues to increase and new technologies are introduced.

We are executing several key initiatives in 2011. These initiatives involve increasing manufacturing production in the Eastern Hemisphere and reinventing our service delivery platform to lower our delivery costs. 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-$0.02 per diluted share in each quarter of 2011. We expect that costs associated with these initiatives will impact fourth 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 third quarter of 2011 with cash and equivalents of $1.8 billion compared to $1.4 billion at December 31, 2010. We also held $400 million of short-term, United States Treasury securities classified as marketable securities at September 30, 2011 compared to $653 million at December 31, 2010.

### Significant sources of cash

Cash flows from operating activities contributed $2.4 billion to cash in the nine months of 2011.

During the nine months of 2011, we sold approximately $751 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 $2.2 billion in the nine 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 nine months of 2011, we purchased $501 million in short-term marketable securities.

We paid $247 million in dividends to our shareholders in the nine months of 2011.

*Future uses of cash.* Capital spending for 2011 is expected to be approximately $3.1 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.

In October 2011, we completed the acquisition of Multi-Chem Group LLC (Multi-Chem) in an all cash transaction. Multi-Chem is the fourth-largest provider of production chemicals in North America, delivering specialty chemicals, services and solutions. Beginning October 2011, Multi-Chem’s results of operations will be included in our Completion and Production segment. We anticipate fourth quarter 2011 uses of cash related to Multi-Chem and other acquisitions to total approximately $800 million.

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 dividends of approximately $83 million during the remainder of 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 $1.6 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of September 30, 2011, including $276 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 $1.8 billion of cash and equivalents, $400 million in investments in marketable securities, and $2.0 billion of available bank credit as of September 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 September 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 nine months of 2011, based upon the location of the services provided and products sold, 55% of our consolidated revenue was from the United States. In the nine months of 2010, 45% 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 September 30 2011 | 2010 | Year Ended December 31 2010 |
| --- | ---: | ---: | ---: |
| West Texas Intermediate | $90.37 | $75.92 | $79.36 |
| United Kingdom Brent | 113.98 | 77.44 | 79.66 |
| Average United States Natural Gas Prices (dollars per |  |  |  |
| thousand cubic feet, or Mcf) |  |  |  |
| Henry Hub | $4.28 | $4.41 | $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 September 30 2011 | 2010 | Nine Months Ended September 30 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Land | 1,911 | 1,604 | 1,800 | 1,457 |
| Offshore (incl. Gulf of Mexico) | 34 | 18 | 30 | 35 |
| Total | 1,945 | 1,622 | 1,830 | 1,492 |
| Canada: |  |  |  |  |
| Land | 442 | 360 | 404 | 330 |
| Offshore | 1 | 1 | 2 | 2 |
| Total | 443 | 361 | 406 | 332 |
| International (excluding Canada): |  |  |  |  |
| Land | 859 | 798 | 856 | 783 |
| Offshore | 310 | 312 | 304 | 305 |
| Total | 1,169 | 1,110 | 1,160 | 1,088 |
| Worldwide total | 3,557 | 3,093 | 3,396 | 2,912 |
| Land total | 3,212 | 2,762 | 3,060 | 2,570 |
| Offshore total | 345 | 331 | 336 | 342 |

| Oil vs. Natural Gas United States (incl. Gulf of Mexico): | Three Months Ended September 30 2011 | 2010 | Nine Months Ended September 30 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Oil | 1,048 | 640 | 935 | 547 |
| Natural Gas | 897 | 982 | 895 | 945 |
| Total | 1,945 | 1,622 | 1,830 | 1,492 |
| Canada: |  |  |  |  |
| Oil | 305 | 219 | 274 | 189 |
| Natural Gas | 138 | 142 | 132 | 143 |
| Total | 443 | 361 | 406 | 332 |
| International (excluding Canada): |  |  |  |  |
| Oil | 924 | 858 | 910 | 833 |
| Natural Gas | 245 | 252 | 250 | 255 |
| Total | 1,169 | 1,110 | 1,160 | 1,088 |
| Worldwide total | 3,557 | 3,093 | 3,396 | 2,912 |
| Oil total | 2,277 | 1,717 | 2,119 | 1,569 |
| Natural Gas total | 1,280 | 1,376 | 1,277 | 1,343 |

| Drilling Type United States (incl. Gulf of Mexico): | Three Months Ended September 30 2011 | 2010 | Nine Months Ended September 30 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Horizontal | 1,114 | 885 | 1,042 | 777 |
| Vertical | 590 | 515 | 557 | 490 |
| Directional | 241 | 222 | 231 | 225 |
| Total | 1,945 | 1,622 | 1,830 | 1,492 |

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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.

Crude oil prices were relatively stable for most of 2010. Towards the end of 2010 and through the first six months of 2011, oil prices rose dramatically. However, during the third quarter of 2011, oil prices experienced a great deal of volatility, primarily due to concerns about the global economic recovery. According to the International Energy Agency’s (IEA) October 2011 “Oil Market Report,” despite lower than expected demand levels during the nine months of 2011, the 2012 world petroleum demand is forecasted to increase 1% over 2011 levels. Despite the recent market volatility and decline in crude oil prices, we believe that any major macroeconomic disruptions may ultimately correct themselves as the underlying trends of significant demand growth for developing countries, smaller and more complex reservoirs, higher 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 nine months of 2011, with horizontal oil-directed drilling activity representing the fastest growing segment of the market. As of September 30, 2011, horizontal-directed rig activity represented over 57% of the total rigs in the United States, about 75% 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 third quarter of 2011, North America revenue increased 13% and operating income increased 14% sequentially. Going forward, we believe there will be an increase in overall activity in the United States land market, 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. Despite some improvement in the third quarter, we believe risks remain for further growth in the Gulf of Mexico unless the pace of permit issuance is sustained at higher levels for a period of time. Our business in the Gulf of Mexico represented approximately 16% of our North America revenue in the nine months of 2009, approximately 10% in the nine months of 2010, and approximately 6% in the nine months of 2011. In addition, the Gulf of Mexico represented approximately 6% of our consolidated revenue in the nine months of 2009, approximately 5% in the nine months of 2010, and approximately 3% in the nine months of 2011. Longer term, we do not know the extent to which 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 third quarter of 2011, revenue outside North America increased 7% and operating income outside of North America increased 23% 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 third quarter of 2011 results were impacted by a $25 million, pre-tax, impairment charge on an asset held for sale in 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 and 2012 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 fourth quarter of 2011 and into 2012. 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 September 30, 2011, our total net investment in Venezuela was approximately $191 million. In addition to this amount, we have $276 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 September 30, 2011 Compared with Three Months Ended September 30, 2010

| REVENUE: Millions of dollars | Three Months Ended September 30 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $4,025 | $2,655 | $1,370 | 52% |
| Drilling and Evaluation | 2,523 | 2,010 | 513 | 26 |
| Total revenue | $6,548 | $4,665 | $1,883 | 40% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $2,950 | $1,706 | $1,244 | 73% |
| Latin America | 297 | 208 | 89 | 43 |
| Europe/Africa/CIS | 433 | 437 | (4) | (1) |
| Middle East/Asia | 345 | 304 | 41 | 13 |
| Total | 4,025 | 2,655 | 1,370 | 52 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 926 | 675 | 251 | 37 |
| Latin America | 509 | 360 | 149 | 41 |
| Europe/Africa/CIS | 558 | 510 | 48 | 9 |
| Middle East/Asia | 530 | 465 | 65 | 14 |
| Total | 2,523 | 2,010 | 513 | 26 |
| Total revenue by region: |  |  |  |  |
| North America | 3,876 | 2,381 | 1,495 | 63 |
| Latin America | 806 | 568 | 238 | 42 |
| Europe/Africa/CIS | 991 | 947 | 44 | 5 |
| Middle East/Asia | 875 | 769 | 106 | 14 |

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| OPERATING INCOME: Millions of dollars | Three Months Ended September 30 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $1,068 | $609 | $459 | 75% |
| Drilling and Evaluation | 369 | 271 | 98 | 36 |
| Corporate and other | (105) | (62) | (43) | 69 |
| Total operating income | $1,332 | $818 | $514 | 63% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $960 | $458 | $502 | 110% |
| Latin America | 43 | 28 | 15 | 54 |
| Europe/Africa/CIS | 15 | 73 | (58) | (79) |
| Middle East/Asia | 50 | 50 | − | − |
| Total | 1,068 | 609 | 459 | 75 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 175 | 115 | 60 | 52 |
| Latin America | 94 | 49 | 45 | 92 |
| Europe/Africa/CIS | 51 | 66 | (15) | (23) |
| Middle East/Asia | 49 | 41 | 8 | 20 |
| Total | 369 | 271 | 98 | 36 |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 1,135 | 573 | 562 | 98 |
| Latin America | 137 | 77 | 60 | 78 |
| Europe/Africa/CIS | 66 | 139 | (73) | (53) |
| Middle East/Asia | 99 | 91 | 8 | 9 |

The 40% increase in consolidated revenue in the third quarter of 2011 compared to the third quarter of 2010 was primarily attributable to increased activity in North America, as the shift to unconventional oil and liquids-rich basins in the United States land market more than offset geopolitical issues in North Africa. On a consolidated basis, all product service lines experienced revenue growth from the third quarter of 2010. Revenue outside of North America was 41% of consolidated revenue in the third quarter of 2011 and 49% of consolidated revenue in the third quarter of 2010.

The 63% increase in consolidated operating income during the third quarter of 2011 compared to the third 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 the United States land market. However, operating income in the third quarter of 2011 was adversely impacted by a $25 million, pre-tax, impairment charge on an asset held for sale in the Europe/Africa/CIS region.

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

*Completion and Production* consolidated revenue increased 52% and North America revenue increased 73% compared to the third 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 43%, with Brazil and Mexico leading higher demand throughout the region for all product service lines. Europe/Africa/CIS revenue remained flat, as increased Boots & Coots activity in Norway and Angola was offset by geopolitical disruptions in North Africa and lower completion tools sales in Nigeria. Middle East/Asia revenue increased 13%, due to a weather-related rebound in Australia and completion tools sales improving in both Indonesia and Malaysia while declining in China. Revenue outside of North America was 27% of total segment revenue in the third quarter of 2011 and 36% of total segment revenue in the third quarter of 2010.

Completion and Production segment operating income increased 75% compared to the third quarter of 2010, primarily driven by production enhancement services in the United States land market. The results were negatively impacted by a $25 million, pre-tax, impairment charge on an asset held for sale in the Europe/Africa/CIS region. In North America, operating income grew 110%, due to higher activity, improved equipment utilization, and a more favorable pricing environment for production enhancement services in the United States land market. Latin America operating income improved 54%, as a result of heightened demand for cementing services in Brazil, Colombia, and Argentina and completion tools throughout the region, which were offset by increased production enhancement costs in Mexico. Europe/Africa/CIS operating income declined 79%, due to an impairment charge on an asset held for sale and the effect of geopolitical disruptions in North Africa. Middle East /Asia operating income stayed flat, as a weather-related rebound in Australia and higher margin completion tools sales in Indonesia and Malaysia were offset by lower direct sales in China.

*Drilling and Evaluation* revenue increased 26% compared to the third quarter of 2010, with all regions experiencing revenue growth from the third quarter of 2010. North America revenue grew 37%, primarily due to higher activity and improved pricing in the United States land market and a recovery of activity in the United States Gulf of Mexico. Latin America revenue increased 41%, driven by higher drilling activities in Mexico and Brazil. Europe/Africa/CIS revenue increased 9%, as higher drilling activities in Norway and Algeria were offset by geopolitical disruptions in North Africa. Middle East/Asia revenue grew 14%, primarily due to the commencement of activity in Iraq, which was offset by lower demand for drilling services in Indonesia and Malaysia. Revenue outside of North America was 63% of total segment revenue in the third quarter of 2011 and 66% of total segment revenue in the third quarter of 2010.

Drilling and Evaluation operating income increased 36% compared to the third quarter of 2010, as strong results in North America and Latin America were partially offset by startup costs from the commencement of work in Iraq. In addition, operating income increased significantly compared to the third quarter of 2010 due to a $50 million impairment charge for an oil and gas property in Bangladesh in the prior year. North America operating income increased 52%, due to higher wireline activity in the United States land market and increased demand for drilling activities throughout the region. Latin America operating income increased 92%, driven by strong demand for drilling activities in Mexico, software sales in Colombia, and testing and subsea activity in Brazil. Europe/Africa/CIS region operating income decreased 23%, primarily due to increased wireline costs throughout the region and geopolitical disruptions in North Africa. Middle East/Asia operating income increased 20%, as the 2010 results were impacted by the impairment charge. This was partially offset by 2011 startup costs associated with the commencement of work in Iraq.

*Corporate and other* expenses were $105 million in the third quarter of 2011 compared to $62 million in the third quarter of 2010. The increase was due to higher legal and environmental costs and approximately $18 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 $14 million in the third quarter of 2011 compared to the third 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 and lower interest rates on a portion of our debt as a result of our interest rate swaps.

*Income (loss) from discontinued operations, net* in the third quarter of 2011 included a $163 million charge related to a ruling in an arbitration proceeding between Barracuda & Caratinga Leasing Company B.V. and our former subsidiary, KBR, whom we agreed to indemnify.

### RESULTS OF OPERATIONS IN 2011 COMPARED TO 2010

### Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

| REVENUE: Millions of dollars | Nine Months Ended September 30 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $10,815 | $7,012 | $3,803 | 54% |
| Drilling and Evaluation | 6,950 | 5,801 | 1,149 | 20 |
| Total revenue | $17,765 | $12,813 | $4,952 | 39% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $7,759 | $4,265 | $3,494 | 82% |
| Latin America | 805 | 622 | 183 | 29 |
| Europe/Africa/CIS | 1,249 | 1,281 | (32) | (2) |
| Middle East/Asia | 1,002 | 844 | 158 | 19 |
| Total | 10,815 | 7,012 | 3,803 | 54 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 2,544 | 1,931 | 613 | 32 |
| Latin America | 1,300 | 1,008 | 292 | 29 |
| Europe/Africa/CIS | 1,622 | 1,567 | 55 | 4 |
| Middle East/Asia | 1,484 | 1,295 | 189 | 15 |
| Total | 6,950 | 5,801 | 1,149 | 20 |
| Total revenue by region: |  |  |  |  |
| North America | 10,303 | 6,196 | 4,107 | 66 |
| Latin America | 2,105 | 1,630 | 475 | 29 |
| Europe/Africa/CIS | 2,871 | 2,848 | 23 | 1 |
| Middle East/Asia | 2,486 | 2,139 | 347 | 16 |

34

| OPERATING INCOME: Millions of dollars | Nine Months Ended September 30 2011 | 2010 | Increase (Decrease) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $2,646 | $1,344 | $1,302 | 97% |
| Drilling and Evaluation | 923 | 859 | 64 | 7 |
| Corporate and other | (262) | (174) | (88) | 51 |
| Total operating income | $3,307 | $2,029 | $1,278 | 63% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $2,401 | $905 | $1,496 | 165% |
| Latin America | 108 | 91 | 17 | 19 |
| Europe/Africa/CIS | 4 | 207 | (203) | (98) |
| Middle East/Asia | 133 | 141 | (8) | (6) |
| Total | 2,646 | 1,344 | 1,302 | 97 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 463 | 339 | 124 | 37 |
| Latin America | 186 | 121 | 65 | 54 |
| Europe/Africa/CIS | 126 | 210 | (84) | (40) |
| Middle East/Asia | 148 | 189 | (41) | (22) |
| Total | 923 | 859 | 64 | 7 |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 2,864 | 1,244 | 1,620 | 130 |
| Latin America | 294 | 212 | 82 | 39 |
| Europe/Africa/CIS | 130 | 417 | (287) | (69) |
| Middle East/Asia | 281 | 330 | (49) | (15) |

The 39% increase in consolidated revenue in the nine months of 2011 compared to the nine 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 42% of consolidated revenue in the nine months of 2011 and 52% of consolidated revenue in the nine months of 2010.

The 63% increase in consolidated operating income in the nine months of 2011 compared to the nine 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 nine months of 2011 was adversely impacted by a $25 million, pre-tax, impairment charge on an asset held for sale in the Europe/Africa/CIS region, $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. Operating income in the nine months of 2010 was adversely impacted by a $50 million impairment charge for an oil and gas property in Bangladesh in the third quarter of 2010.

*Completion and Production* revenue increased by 54% driven by North America revenue growth of 82% compared to the nine months of 2010. The activity increase in North America was led by production enhancement services in the United States land market as higher activity in unconventional basins resulted in increased demand for hydraulic fracturing. Latin America revenue rose 29% on higher activity for all product service lines across the region. Europe/Africa/CIS revenue was relatively flat, as the activity disruptions in North Africa and lower completions activity in Nigeria offset higher activity for our Boots & Coots product service line in Angola and Norway. Middle East/Asia revenue increased 19% with higher activity levels in Malaysia, Indonesia, and Australia. Revenue outside North America was 28% of total segment revenue in the nine months of 2011 and 39% of total segment revenue in the nine months of 2010.

Completion and Production operating income increased 97% compared to the nine months of 2010. This increase was driven by the North America region, where operating income grew $1.5 billion on higher activity for production enhancement services in unconventional basins located in the United States land market. Latin America operating income increased 19%, as higher demand for cementing services in the region offset higher costs in Mexico. Europe/Africa/CIS operating income declined 98% primarily due to an impairment charge on an asset held for sale in the third quarter of 2011 and 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 6% due to higher costs across most of the region and startup costs associated with the commencement of work in Iraq, which were partially offset by higher activity levels in Malaysia, Indonesia, and Australia.

*Drilling and Evaluation* revenue increased 20% compared to the nine months of 2010 as drilling activity improved across all regions, most significantly in North America. North America revenue grew 32% on substantial activity increases in the United States land market. Latin America revenue rose 29% as a result of increased demand for most product service lines in Brazil, Venezuela, and Colombia. Europe/Africa/CIS revenue was relatively flat, as higher drilling activity in Norway 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, increased fluids demand in Indonesia, and higher wireline direct sales in China. Revenue outside North America was 63% of total segment revenue in the nine months of 2011 and 67% of total segment revenue in the nine months of 2010.

Drilling and Evaluation operating income increased 7% compared to the nine months of 2010, as activity increases in the United States land market offset lower activity associated with the disruptions in North Africa and less favorable pricing in the Eastern Hemisphere. North America operating income grew 37% on higher drilling activity and more favorable pricing, primarily in the United States land market. Latin America operating income rose 54% as a result of activity increases in Venezuela and Mexico and an improved product mix for fluid services in Brazil. Europe/Africa/CIS region operating income fell 40% 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 22% mainly due to lower activity and higher costs in Saudi Arabia, Oman, and Malaysia and startup costs associated with the commencement of work in Iraq.

*Corporate and other* expenses were $262 million in the nine months of 2011 compared to $174 million in the nine months of 2010. The increase was primarily due to higher legal and environmental 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 $34 million in the nine months of 2011 compared to the nine 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 and lower interest rates on a portion of our debt as a result of our interest rate swaps.

*Other, net* decreased $38 million in the nine months of 2011 compared to the nine 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.

*Income (loss) from discontinued operations, net* for the nine months of 2011 included a $163 million charge related to a ruling in an arbitration proceeding between Barracuda & Caratinga Leasing Company B.V. and our former subsidiary, KBR, whom we agreed to indemnify.

### 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, 5,227 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, including forward exchange contracts and interest rate swaps. 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. The counterparties to our forward exchange contracts and interest rate swaps are global commercial banks.

There are certain limitations inherent in the sensitivity analyses presented, primarily due to the assumption that interest rates and exchange rates change instantaneously in an equally adverse fashion. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled. While this is our best estimate of the impact of the various scenarios, these estimates should not be viewed as forecasts.

### Foreign exchange risk

We have operations in many international locations and are involved in transactions denominated in currencies other than the U.S. dollar, our functional currency, which exposes us to foreign currency exchange rate 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 attempt to selectively manage significant exposures to potential foreign exchange losses based on 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 minimize the risk that our cash flows from the sale and purchase of services and products in foreign currencies will be adversely affected by changes in exchange rates.

We use forward exchange contracts to manage our exposure to fluctuations in the currencies of the countries in which we do the majority of our international business. These forward exchange contracts are not treated as hedges for accounting purposes, generally have an expiration date of one year or less, and are not exchange traded. While forward exchange contracts are subject to fluctuations in value, the fluctuations are generally offset by the value of the underlying exposures being managed. The use of some of these contracts may limit our ability to benefit from favorable fluctuations in foreign exchange rates.

Forward exchange 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 exposure in non-traded currencies and recognize that pricing for the services and products offered in these countries should account for the cost of exchange rate devaluations. We have historically incurred transaction losses in non-traded currencies.

The notional amounts of open forward exchange contracts were $207 million at September 30, 2011 and $356 million at December 31, 2010. The notional amounts of our forward 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 contracts are typically not material. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the contracts, such as exchange rates.

We use a sensitivity analysis model to measure the impact of a 10% adverse movement of foreign currency exchange rates against the U.S. dollar. A hypothetical 10% adverse change in the value of all our foreign currency positions relative to the U.S. dollar as of September 30, 2011 would result in a $58 million pre-tax loss for our net monetary assets denominated in currencies other than U.S. dollars.

### Interest rate risk

We are subject to interest rate risk on our long-term debt. Our marketable securities and short-term borrowings do not give rise to significant interest rate risk due to their short-term nature. We had fixed rate long-term debt totaling $3.8 billion at September 30, 2011 and December 31, 2010, respectively, with none maturing before 2017.

During the second quarter of 2011, we entered into a series of interest rate swaps relating to two of our debt instruments with a total notional amount of $1 billion at a weighted-average, LIBOR-based, floating rate of 3.37% as of September 30, 2011. 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. 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.

After consideration of the impact from the interest rate swaps, a hypothetical 100 basis point increase in the LIBOR rate would result in approximately an additional $4 million of interest charges for the nine months ended September 30, 2011.

## Controls and procedures

As filed, 1,443 characters.

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

Filed Oct 21, 2011.
Source: SEC EDGAR, the filing index for accession 0000045012-11-000354. Last ingested by Listed: Nov 2, 2026, 13:24 ET. No prices; not investment advice.