# Halliburton Co: Form 10-Q for the period ended Jun 30, 2012

- Company: [Halliburton Co](/companies/hal.md) (CIK 45012)
- Form: 10-Q
- Filed: 2012-07-27
- Accepted by EDGAR: Jul 27, 2012, 14:58 ET
- Period: 2012-06-30
- Accession: 0000045012-12-000204
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/45012/000004501212000204/hal_6302012-10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/45012/000004501212000204/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-04-01 to 2012-06-30 | $7.23bn | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2012-01-01 to 2012-06-30 | $14.10bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2012-04-01 to 2012-06-30 | $1.33bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2012-01-01 to 2012-06-30 | $2.57bn | us-gaap:CostOfGoodsSold |
| Operating income | 3 months, 2012-04-01 to 2012-06-30 | $1.20bn | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-01-01 to 2012-06-30 | $2.22bn | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2012-04-01 to 2012-06-30 | $357.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2012-01-01 to 2012-06-30 | $661.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-04-01 to 2012-06-30 | $737.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2012-01-01 to 2012-06-30 | $1.36bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-04-01 to 2012-06-30 | $0.79 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2012-01-01 to 2012-06-30 | $1.47 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-04-01 to 2012-06-30 | $0.80 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2012-01-01 to 2012-06-30 | $1.48 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-04-01 to 2012-06-30 | 926,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2012-01-01 to 2012-06-30 | 926,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2012-01-01 to 2012-06-30 | $1.14bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2012-01-01 to 2012-06-30 | $1.65bn | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2012-01-01 to 2012-06-30 | $167.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2012-06-30 | $2.17bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-06-30 | $12.53bn | us-gaap:AssetsCurrent |
| Total assets | at 2012-06-30 | $25.57bn | us-gaap:Assets |
| Current liabilities | at 2012-06-30 | $4.44bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-06-30 | $11.01bn | us-gaap:Liabilities |
| Long-term debt | at 2012-06-30 | $4.82bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2012-06-30 | $14.54bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,408 characters.

### EXECUTIVE OVERVIEW

### Organization

We are a leading provider of services and products 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, specialty chemicals, artificial lift, and completion services. The segment consists of Halliburton Production Enhancement, Cementing, Completion Tools, Boots & Coots, and Multi-Chem; 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 Halliburton Drill Bits and Services, Wireline and Perforating, Testing and Subsea, Baroid, Sperry Drilling, Landmark Software and Services, and Consulting and Project Management.

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 70,000 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 2012, we produced revenue of $14.1 billion and operating income of $2.2 billion, reflecting an operating margin of approximately 16%. Revenue increased $2.9 billion, or 26%, from the first half of 2011, while operating income increased $249 million, or 13%. These results were attributable to higher drilling activity in the oil and liquids-rich basins in North America, as well as increased activity in all our international regions, compared to the first half of 2011. The first half of 2012 results, however, were moderated by escalating costs associated with guar gum, a blending additive used in our hydraulic fracturing processes, decreasing activity in natural gas basins, and pricing pressure in certain basins in North America due to an over-supply of hydraulic fracturing equipment. The first half of 2012 results included a $300 million, pre-tax, loss contingency for the Macondo well incident. The first half of 2011 results were negatively impacted by an $11 million, pre-tax, charge for employee separation costs in the Eastern Hemisphere and a $59 million, pre-tax, charge in Libya, primarily related to reserves for certain assets.

### Business outlook

We continue to believe in the strength of the long-term fundamentals of our business. Energy demand is expected to increase in the long term driven by economic growth in developing countries despite current underlying downside risks in the industry, such as sluggish growth in developed countries and supply uncertainties associated with geopolitical tensions in the Middle East. Furthermore, development of new resources is expected to be more complex resulting in increasing service intensity.

In North America, the industry is experiencing a shift from natural gas shale plays to oil and liquids-rich shale plays due to low natural gas prices resulting from continued strong natural gas production despite peak natural gas storage levels. We believe we will continue to see a modest reduction in natural gas drilling over the remainder of the year as operators optimize their budgets by focusing on basins with better economics. While oil and liquids-rich drilling has mostly offset the decline in the first half of 2012, we believe the recent volatility in oil prices and softness in natural gas liquids prices may prompt certain customers to adopt a more cautious tone for the remainder of 2012. We anticipate near-term pricing pressure for our production enhancement services in certain markets and continued cost inflation related to guar gum.

Our Gulf of Mexico business continues to recover due to an increase in the level of permit approvals for deepwater drilling. We remain optimistic about the recovery of activity in the Gulf of Mexico as our customers adapt to new regulations and new permit approvals are issued. In addition, more deepwater rigs are expected to arrive in the Gulf of Mexico over the course of this year. We believe that an increasing pace of permit applications and approvals needs to be sustained 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.”

Outside of North America, revenue and operating income increased in the first half of 2012 compared to the first half of 2011.We believe competitive pricing for large, long-term international projects will continue throughout 2012. However, for the remainder of the year, we expect to see gradual activity improvements as new rigs, particularly in deepwater, enter the international markets. We also believe that new international unconventional oil and natural gas projects may contribute to activity improvements this year. Recently, our operations in Egypt have recovered from the turmoil experienced in the first quarter of 2011. Although some minor work has been performed in Libya, we are still awaiting well-defined operational plans from our customers. We do not expect activity levels in Libya to recover to pre-2011 levels until late 2012 or 2013.

We are continuing to execute several key initiatives in 2012. These initiatives include increasing manufacturing production in the Eastern Hemisphere and reinventing our service delivery platform to lower our delivery costs.

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

### Financial markets, liquidity, and capital resources

The global financial markets continue to be 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 2012 and the year ended December 31, 2011 with cash and equivalents of $2.2 billion and $2.7 billion. As of June 30, 2012, approximately $416 million of the $2.2 billion of cash and equivalents was held by our foreign subsidiaries that would be subject to tax if repatriated. If these funds are needed for our operations in the United States, we would be required to accrue and pay United States taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the United States and our current plans do not demonstrate a need to repatriate them to fund our United States operations. We also held $50 million of short-term, United States Treasury securities at June 30, 2012 compared to $150 million at December 31, 2011 included in “Other current assets” on our condensed consolidated balance sheets.

### Significant sources of cash

Cash flows from operating activities contributed $1.1 billion to cash in the first half of 2012.

During the first half of 2012, we sold or redeemed approximately $200 million of short-term marketable securities.

### Significant uses of cash

Capital expenditures were $1.7 billion in the first half of 2012, and were predominantly made in Halliburton Production Enhancement, Sperry Drilling, Cementing, and Wireline and Perforating. We have also invested additional working capital to support the growth of our business.

During the first six months of 2012, inventories increased by $727 million, primarily because we procured a large reserve of guar gum when market prices were relatively high. See further discussion in "North America operations."

We paid $167 million in dividends to our shareholders in the first half of 2012.

During the first half of 2012, we purchased $100 million in short-term marketable securities.

*Future uses of cash.* Capital spending for 2012 is expected to range between $3.6 billion to $3.8 billion. The capital expenditures plan for 2012 is primarily directed toward Halliburton Production Enhancement, Sperry Drilling, Cementing, and Wireline and Perforating.

We are continuing to explore opportunities for acquisitions that will enhance or augment our current portfolio of services and products, 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 $80 million per quarter during 2012. 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 an aggregate of approximately $1.8 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of June 30, 2012, including $284 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 have $2.2 billion of cash and equivalents and $50 million in investments in marketable securities as of June 30, 2012 and a total of $2.0 billion of available committed bank credit under our revolving credit facility. Furthermore, we have no financial covenants or material adverse change provisions in our bank agreements and our debt maturities extend over a long period of time. Although a portion of earnings from our foreign subsidiaries is reinvested outside the United States indefinitely, we do not consider this to have a significant impact on our liquidity. We currently believe that our capital expenditures, working capital investments, and dividends, if any, in 2012 can be fully funded through cash from operations.

As a result, we believe we have a reasonable amount of liquidity and, if necessary, additional financing flexibility given the current market environment to fund our potential contingent liabilities, if any. However, as discussed above in Note 6 to the condensed consolidated financial statements, there are numerous future developments that may arise as a result of the Macondo well incident that could have a material adverse effect 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 continue to see delays 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 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 half of 2012, based upon the location of the services provided and products sold, 56% of our consolidated revenue was from the United States. In the first half of 2011, 54% 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, foreign currency exchange restrictions, 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 measures 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 2012 | 2011 | Year Ended December 31 2011 |
| --- | ---: | ---: | ---: |
| West Texas Intermediate | $93.73 | $102.61 | $95.13 |
| United Kingdom Brent | 108.92 | 117.78 | 111.53 |
| Average United States Natural Gas Prices (dollars per thousand cubic feet, or Mcf) |  |  |  |
| Henry Hub | $2.26 | $4.38 | $4.09 |

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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 2012 2011 | Six Months Ended June 30 2012 2011 |
| --- | ---: | ---: |
| Land | 1,924 1,798 | 1,936 1,744 |
| Offshore (incl. Gulf of Mexico) | 46 32 | 44 29 |
| Total | 1,970 1,830 | 1,980 1,773 |
| Canada: |  |  |
| Land | 171 187 | 381 386 |
| Offshore | 2 1 | 2 1 |
| Total | 173 188 | 383 387 |
| International (excluding Canada): |  |  |
| Land | 923 847 | 901 854 |
| Offshore | 306 299 | 308 302 |
| Total | 1,229 1,146 | 1,209 1,156 |
| Worldwide total | 3,372 3,164 | 3,572 3,316 |
| Land total | 3,018 2,832 | 3,218 2,984 |
| Offshore total | 354 332 | 354 332 |
|  | Three Months Ended June 30 | Six Months Ended June 30 |
| **Oil vs. Natural Gas** | 2012 2011 | 2012 2011 |
| United States (incl. Gulf of Mexico): |  |  |
| Oil | 1,372 946 | 1,317 879 |
| Natural gas | 598 884 | 663 894 |
| Total | 1,970 1,830 | 1,980 1,773 |
| Canada: |  |  |
| Oil | 118 114 | 271 258 |
| Natural gas | 55 74 | 112 129 |
| Total | 173 188 | 383 387 |
| International (excluding Canada): |  |  |
| Oil | 980 894 | 961 902 |
| Natural gas | 249 252 | 248 254 |
| Total | 1,229 1,146 | 1,209 1,156 |
| Worldwide total | 3,372 3,164 | 3,572 3,316 |
| Oil total | 2,470 1,954 | 2,549 2,039 |
| Natural gas total | 902 1,210 | 1,023 1,277 |

| Drilling Type United States (incl. Gulf of Mexico): | Three Months Ended June 30 2012 | 2011 | Six Months Ended June 30 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| Horizontal | 1,169 | 1,039 | 1,170 | 1,009 |
| Vertical | 569 | 561 | 585 | 538 |
| Directional | 232 | 230 | 225 | 226 |
| Total | 1,970 | 1,830 | 1,980 | 1,773 |

24

Our customers’ cash flows, in most 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.

WTI oil spot prices fluctuated throughout 2011 between a low of approximately $75 per barrel to a high of approximately $113 per barrel. Brent oil spot prices fluctuated between a low of approximately $94 per barrel to a high of approximately $127 per barrel during this same period. During the first half of 2012, WTI and Brent oil spot prices averaged approximately $98 and $113 per barrel, respectively, consistent with prices experienced in the first half of 2011. Significant decreases, however, have occurred in the second quarter of 2012 as geopolitical tension in the Middle East, global economic uncertainty surrounding the European debt crisis, and the threat of a slowdown in the Chinese economy have impacted demand. The outlook for world petroleum demand for the remainder of 2012 remains mixed, with the International Energy Agency’s July 2012 “Oil Market Report” continuing to forecast 2012 demand to increase approximately 1% over 2011 levels.

Natural gas prices in the United States have declined approximately 45% from the first half of 2011 due to the resiliency of natural gas production coupled with natural gas inventories above five-year historical levels. In response, our customers have curtailed natural gas drilling activity. Despite recent improvement in spot prices, we believe that downward pressure on natural gas prices will continue through the summer injection season. The United States Energy Information Administration's July 2012 “Short Term Energy Outlook” forecast a continued shift in electricity generation from coal to natural gas, but we foresee significant price constraints in the near-term as natural gas competes as a fuel source in the power generation market.

In spite of this tempered outlook, we believe that, over the long term, hydrocarbon demand will generally increase. Increased demand, combined with the underlying trends of smaller and more complex reservoirs, high depletion rates, and the need for continual reserve replacement, should drive the long-term need for our services and products.

### North America operations

Depressed natural gas prices can impact our customers’ drilling and production activities, particularly in North America. The decline in natural gas prices compared to the first half of 2011 has accelerated the shift from natural gas shale plays to oil and liquids-rich shale plays. For the first half of 2012, the average natural gas directed rig count fell by 248 rigs, or 24%, from the first half of 2011, while the average oil directed rig count has increased by 460 rigs, or 41%, over the same period. This transition has resulted in additional relocation costs and inefficiencies, which negatively impacted our margins in the first half of 2012. Increased costs for certain raw materials, particularly for guar gum, also adversely affected our margins in the second quarter of 2012. The seasonal Canadian spring break-up, a period when road conditions hinder the movement of heavy equipment, had a negative impact on our results in the second quarter of 2012 due to the growth we have experienced in this market in recent years. We anticipate that this market will recover in the second half of the year as road conditions improve. In the long run, we believe the shift to oil and liquids-rich shale basins will continue to drive increased service intensity, but also in fluid chemistry and other technologies required for these complex reservoirs. Production enhancement pricing, however, may be challenging as competition increases in these oil and liquids-rich plays and our contracts come up for renewal.

In May 2010, the United States Department of the Interior effectively suspended all offshore deepwater drilling projects in the United States Gulf of Mexico. The suspension was lifted in October 2010, but permits were not issued for an extended period of time, and we experienced a significant reduction in our Gulf of Mexico operations. In the first quarter of 2011, the issuance of drilling permits resumed. Deepwater drilling activity in the Gulf of Mexico continues to recover due to an increase in drilling permit approvals. We believe we will see an increase in the level of permit approvals through the remainder of 2012, leading to additional deepwater rigs arriving in the Gulf of Mexico. Over the long term, our results in the Gulf of Mexico 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

In 2011, pricing pressures from over capacity and geopolitical disruptions in North Africa had a negative impact on international operating income. In the second half of 2012 and into 2013, we continue to anticipate that the industry will experience steady volume increases as macroeconomic trends support a more favorable operator spending outlook and new rigs are scheduled to enter the market. We believe these trends will eventually lead to meaningful absorption of equipment supply. The average international rig count has improved by 53 rigs, or 5%, since the first half of 2011. Despite this increased volume, we continue to believe that international pricing will remain competitive, particularly for larger projects. We also believe that international unconventional oil and natural gas and deepwater projects will contribute to activity improvements, and we plan to leverage our extensive experience in North America to optimize these opportunities. 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.* As of June 30, 2012, our total net investment in Venezuela was approximately $247 million. In addition to this amount, we have $284 million of surety bond guarantees outstanding relating to our Venezuelan operations.

### Initiatives

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

- increasing our market share in the more economic, unconventional plays, mature fields, 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 services and products, 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;
- improving working capital, and managing our balance sheet to maximize our financial flexibility. We are deploying 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.

26

### RESULTS OF OPERATIONS IN 2012 COMPARED TO 2011

### Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

| REVENUE: Millions of dollars | Three Months Ended June 30 2012 | 2011 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $4,460 | $3,618 | $842 | 23% |
| Drilling and Evaluation | 2,774 | 2,317 | 457 | 20 |
| Total revenue | $7,234 | $5,935 | $1,299 | 22% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $3,167 | $2,588 | $579 | 22% |
| Latin America | 340 | 268 | 72 | 27 |
| Europe/Africa/CIS | 551 | 415 | 136 | 33 |
| Middle East/Asia | 402 | 347 | 55 | 16 |
| Total | 4,460 | 3,618 | 842 | 23 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 973 | 857 | 116 | 14 |
| Latin America | 539 | 419 | 120 | 29 |
| Europe/Africa/CIS | 605 | 554 | 51 | 9 |
| Middle East/Asia | 657 | 487 | 170 | 35 |
| Total | 2,774 | 2,317 | 457 | 20 |
| Total revenue by region: |  |  |  |  |
| North America | 4,140 | 3,445 | 695 | 20 |
| Latin America | 879 | 687 | 192 | 28 |
| Europe/Africa/CIS | 1,156 | 969 | 187 | 19 |
| Middle East/Asia | 1,059 | 834 | 225 | 27 |

27

| OPERATING INCOME: Millions of dollars | Three Months Ended June 30 2012 | 2011 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $914 | $918 | $(4) | —% |
| Drilling and Evaluation | 393 | 324 | 69 | 21 |
| Corporate and other | (106) | (81) | (25) | 31 |
| Total operating income | $1,201 | $1,161 | $40 | 3% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $691 | $827 | $(136) | (16)% |
| Latin America | 54 | 29 | 25 | 86 |
| Europe/Africa/CIS | 95 | 15 | 80 | 533 |
| Middle East/Asia | 74 | 47 | 27 | 57 |
| Total | 914 | 918 | (4) | — |
| Drilling and Evaluation: |  |  |  |  |
| North America | 166 | 170 | (4) | (2) |
| Latin America | 84 | 52 | 32 | 62 |
| Europe/Africa/CIS | 64 | 53 | 11 | 21 |
| Middle East/Asia | 79 | 49 | 30 | 61 |
| Total | 393 | 324 | 69 | 21 |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 857 | 997 | (140) | (14) |
| Latin America | 138 | 81 | 57 | 70 |
| Europe/Africa/CIS | 159 | 68 | 91 | 134 |
| Middle East/Asia | 153 | 96 | 57 | 59 |

The 22% increase in consolidated revenue in the second quarter of 2012 compared to the second quarter of 2011 was primarily attributable to increased activity in the United States, as the demand for production enhancement, completion tools, and cementing work continued to rise. On a consolidated basis, all product service lines experienced revenue growth from the second quarter of 2011. Revenue outside of North America was 43% of consolidated revenue in the second quarter of 2012 and 42% of consolidated revenue in the second quarter of 2011.

The 3% increase in consolidated operating income during the second quarter of 2012 compared to the second quarter of 2011 was driven by strong international results, particularly in the Europe/Africa/CIS region, which were offset by rising costs and pricing pressure for production enhancement services in the more service intensive, unconventional oil and liquids-rich basins in the United States land market. 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 23% and North America revenue increased 22% compared to the second quarter of 2011, led by production enhancement services as higher activity in unconventional basins generally resulted in increased demand for pressure-pumping services. Latin America revenue grew 27%, with higher demand for production enhancement services in Mexico and cementing services in Brazil. Europe/Africa/CIS revenue increased 33%, driven by strong demand for completion tools and pressure-pumping services in Angola, additional work in Mozambique, and higher cementing activity in Norway. Middle East/Asia revenue grew 16%, driven by higher activity levels in Oman, Australia, and Southeast Asia, which were partially offset by lower product sales in China. Revenue outside of North America was 29% of total segment revenue in the second quarter of 2012 and 28% of total segment revenue in the second quarter of 2011.

Completion and Production segment operating income was essentially flat compared to the second quarter of 2011, as increased costs and price erosion for production enhancement services in the United States land market were offset by higher demand for cementing services and completion tools worldwide. The second quarter of 2011 results were negatively impacted by $6 million, pre-tax, of employee separation costs in the Eastern Hemisphere. In North America, operating income decreased 16% compared to the second quarter of 2011 due to increased costs, particularly for guar gum, and pricing pressure in production enhancement services in the United States land market. Latin America operating income grew 86% as a result of increased demand for production enhancement services in Mexico and cementing services in Brazil, as well as higher activity levels in Venezuela. Europe/Africa/CIS operating income improved by $80 million due to higher activity levels in Nigeria and the Caspian, as well as additional completion tools sales in Angola. Middle East/Asia operating income increased 57% due to cost controls in Iraq, higher cementing activity in Oman, and increased completion tools activity in Southeast Asia.

*Drilling and Evaluation* revenue increased 20% compared to the second quarter of 2011, with all regions experiencing revenue growth. North America revenue increased 14%, primarily due to higher drilling fluids demand in the United States. Latin America revenue was up 29%, driven by higher activity in Brazil, Mexico, and Colombia. Europe/Africa/CIS revenue increased 9% due to higher activity levels in Tanzania, direct sales in Poland, and increased demand for drilling services in Angola. Middle East/Asia revenue grew 35%, primarily due to increased activity levels in Malaysia, Iraq, and China and direct sales in Saudi Arabia, which were partially offset by lower drilling activity in Indonesia. Revenue outside of North America was 65% of total segment revenue in the second quarter of 2012 and 63% of total segment revenue in the second quarter of 2011.

Drilling and Evaluation operating income increased 21% compared to the second quarter of 2011, as profitability improved in all international regions. The second quarter of 2011 results were negatively impacted by $5 million, pre-tax, of employee separation costs in the Eastern Hemisphere. North America operating income was essentially flat, as increases in drill bit services were offset by increased costs in the United States land market. Latin America operating income improved 62%, driven by strong demand for testing and subsea services in Brazil, higher activity levels in Colombia and Venezuela. Europe/Africa/CIS operating income increased 21% as a result of higher activity in Nigeria and the Caspian region, which more than offset increased costs in Norway. Middle East/Asia operating income grew 61%, primarily due to increased wireline activity in Saudi Arabia and higher product sales and cost reductions in China.

*Corporate and other* expenses increased $25 million in the second quarter of 2012 compared to the second quarter of 2011, 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* increased $17 million in the second quarter of 2012 compared to the second quarter of 2011, primarily due to the issuance of $1.0 billion senior notes in November 2011.

### Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

| REVENUE: Millions of dollars | Six Months Ended June 30 2012 | 2011 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $8,750 | $6,790 | $1,960 | 29% |
| Drilling and Evaluation | 5,352 | 4,427 | 925 | 21 |
| Total revenue | $14,102 | $11,217 | $2,885 | 26% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $6,349 | $4,809 | $1,540 | 32% |
| Latin America | 646 | 508 | 138 | 27 |
| Europe/Africa/CIS | 1,007 | 816 | 191 | 23 |
| Middle East/Asia | 748 | 657 | 91 | 14 |
| Total | 8,750 | 6,790 | 1,960 | 29 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 1,959 | 1,618 | 341 | 21 |
| Latin America | 1,013 | 791 | 222 | 28 |
| Europe/Africa/CIS | 1,161 | 1,064 | 97 | 9 |
| Middle East/Asia | 1,219 | 954 | 265 | 28 |
| Total | 5,352 | 4,427 | 925 | 21 |
| Total revenue by region: |  |  |  |  |
| North America | 8,308 | 6,427 | 1,881 | 29 |
| Latin America | 1,659 | 1,299 | 360 | 28 |
| Europe/Africa/CIS | 2,168 | 1,880 | 288 | 15 |
| Middle East/Asia | 1,967 | 1,611 | 356 | 22 |

30

| OPERATING INCOME: Millions of dollars | Six Months Ended June 30 2012 | 2011 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $1,950 | $1,578 | $372 | 24% |
| Drilling and Evaluation | 761 | 554 | 207 | 37 |
| Corporate and other | (487) | (157) | (330) | 210 |
| Total operating income | $2,224 | $1,975 | $249 | 13% |

*By geographic region:*

| Completion and Production: |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| North America | $1,562 | $1,441 | $121 | 8% |
| Latin America | 109 | 65 | 44 | 68 |
| Europe/Africa/CIS | 152 | (11) | 163 | 1,482 |
| Middle East/Asia | 127 | 83 | 44 | 53 |
| Total | 1,950 | 1,578 | 372 | 24 |
| Drilling and Evaluation: |  |  |  |  |
| North America | 356 | 288 | 68 | 24 |
| Latin America | 151 | 92 | 59 | 64 |
| Europe/Africa/CIS | 104 | 75 | 29 | 39 |
| Middle East/Asia | 150 | 99 | 51 | 52 |
| Total | 761 | 554 | 207 | 37 |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 1,918 | 1,729 | 189 | 11 |
| Latin America | 260 | 157 | 103 | 66 |
| Europe/Africa/CIS | 256 | 64 | 192 | 300 |
| Middle East/Asia | 277 | 182 | 95 | 52 |

The 26% increase in consolidated revenue in the first six months of 2012 compared to the first six months of 2011 was due to higher activity across all regions, especially increased demand for Completion and Production services and drilling activity in the United States. Revenue outside North America was 41% of consolidated revenue in the first six months of 2012 and 43% of consolidated revenue in the first six months of 2011.

The 13% increase in consolidated operating income in the first six months of 2012 compared to the first six months of 2011 was primarily due to improved Completion and Production activities in Europe/Africa/CIS and North America regions, partially offset by the impact of cost inflation for guar gum and pricing pressures for production enhancement services in North America. 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 29% driven by North America revenue growth of 32% compared to the first six months of 2011. The activity increase in North America was led by production enhancement services in United States land resulting from higher activity in unconventional basins. Latin America revenue grew 27% due to increased activity across Mexico and Venezuela as well as additional cementing work in Brazil. Europe/Africa/CIS revenue increased 23% due to higher activity in the region, especially completion tools in Angola, cementing in Norway and Mozambique, and all services in Nigeria. Middle East/Asia revenue grew 14%, with higher demand for cementing in Oman and Australia, higher completion tools activities in Indonesia and Brunei, and increased Boots & Coots services in India and Saudi Arabia. Revenue outside North America was 27% of total segment revenue in the first six months of 2012 and 29% of total segment revenue in the first six months of 2011.

Completion and Production operating income increased 24% compared to the first six months of 2011. This increase reflected higher profitability in all our regions, especially in the Europe/Africa/CIS region. North America operating income increased 8% due to higher cementing and completion tools activity in the United States, which was partially offset by pricing pressures in production enhancement and cost inflation for guar gum in the United States land market. Latin America operating income grew 68%, primarily due to a combination of higher cementing activity in Brazil and lower cementing costs in Argentina, as well as increased production enhancement services in Mexico. Europe/Africa/CIS operating income increased $163 million, primarily due to increased activity for all services in Nigeria and the North Sea, in addition to recovery in North Africa after activity disruptions in the first quarter of 2011. Middle East/Asia operating income grew 53% due to higher cementing activity in Oman, increased Boots & Coots services in Iraq, and higher completion tools sales in Indonesia and Brunei.

*Drilling and Evaluation* revenue increased 21% compared to the first six months of 2011 as fluids and wireline activity improved across all regions, most significantly in North America. North America revenue increased 21% on substantial fluids and wireline activity increases in the United States and increased drilling services in Canada. Latin America revenue grew 28% as a result of increased demand for all services in Brazil and Colombia and most services in Mexico, Ecuador, and Venezuela. Europe/Africa/CIS revenue increased 9% due to higher fluids and drilling activity in Angola and Tanzania and direct sales in Poland, which were partially offset by reduced activity in the North Sea. Middle East/Asia revenue grew 28% due to direct sales in Saudi Arabia, higher fluids and drilling activity in Malaysia, and increased activity in Iraq, partially offset by reduced drilling services in Indonesia. Revenue outside North America was 63% of total segment revenue in the first six months of 2012 and 2011.

Drilling and Evaluation operating income increased 37% compared to the first six months of 2011 due to higher profitability in all our regions, particularly in the Western Hemisphere. North America operating income increased 24% due to higher fluids and wireline services, as well as increased wireline profitability in Canada. Latin America operating income grew 64%, primarily due to higher fluids and testing activity in Brazil and increased drilling services in Colombia, Ecuador, and Venezuela, which were partially offset by reduced consulting services and higher costs in Mexico. Europe/Africa/CIS region operating income increased 39%, primarily due to higher drilling activity in Nigeria, Angola, and Tanzania and the recovery of first quarter 2011 disruptions in North Africa, which were partially offset by a decrease in activity and profitability in Norway. Middle East/Asia operating income grew 52% mainly due to increased fluids and wireline activity in Saudi Arabia and direct sales in China, partially offset by losses in Iraq and lower drilling activity in Indonesia.

*Corporate and other* expenses were $487 million in the first six months of 2012 compared to $157 million in the first six months of 2011. The increase was primarily due to a $300 million, pre-tax, loss contingency related to the Macondo well incident that was recorded in the first quarter of 2012. The remaining increase is 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* increased $22 million in the first six months of 2012 compared to the first six months of 2011 primarily due to the issuance of $1.0 billion senior notes in November 2011.

### ENVIRONMENTAL MATTERS

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

### FORWARD-LOOKING INFORMATION

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

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

## Market risk

As filed, 269 characters.

For quantitative and qualitative disclosures about market risk, see Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in our 2011 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 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, 2012 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, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Jul 27, 2012.
Source: SEC EDGAR, the filing index for accession 0000045012-12-000204. Last ingested by Listed: Nov 2, 2026, 13:24 ET. No prices; not investment advice.