# Halliburton Co: Form 10-Q for the period ended Jun 30, 2015

- Company: [Halliburton Co](/companies/hal.md) (CIK 45012)
- Form: 10-Q
- Filed: 2015-07-24
- Accepted by EDGAR: Jul 24, 2015, 15:06 ET
- Period: 2015-06-30
- Accession: 0000045012-15-000104
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/45012/000004501215000104/hal_6302015-10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/45012/000004501215000104/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-04-01 to 2015-06-30 | $5.92bn | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2015-01-01 to 2015-06-30 | $12.97bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2015-04-01 to 2015-06-30 | $1.29bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2015-01-01 to 2015-06-30 | $2.60bn | us-gaap:CostOfGoodsSold |
| Operating income | 3 months, 2015-04-01 to 2015-06-30 | $254.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2015-01-01 to 2015-06-30 | −$294.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2015-04-01 to 2015-06-30 | $71.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2015-01-01 to 2015-06-30 | −$170.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-04-01 to 2015-06-30 | $54.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2015-01-01 to 2015-06-30 | −$589.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.06 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2015-01-01 to 2015-06-30 | −$0.70 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.06 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2015-01-01 to 2015-06-30 | −$0.70 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-04-01 to 2015-06-30 | 854,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2015-01-01 to 2015-06-30 | 851,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2015-01-01 to 2015-06-30 | $2.00bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2015-01-01 to 2015-06-30 | $1.22bn | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2015-01-01 to 2015-06-30 | $306.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2015-01-01 to 2015-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-06-30 | $2.76bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-06-30 | $15.22bn | us-gaap:AssetsCurrent |
| Total assets | at 2015-06-30 | $30.61bn | us-gaap:Assets |
| Current liabilities | at 2015-06-30 | $5.00bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-06-30 | $14.89bn | us-gaap:Liabilities |
| Long-term debt | at 2015-06-30 | $7.84bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2015-06-30 | $15.69bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 51,222 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, the Completion and Production segment and the Drilling and Evaluation segment:

- our Completion and Production segment delivers cementing, stimulation, well intervention, pressure control services, well control and prevention services, pipeline and process services, specialty chemicals, artificial lift, and completion products and services. The segment consists of Production Enhancement, Cementing, Completion Tools, Production Solutions (formerly Boots & Coots), Multi-Chem, and Artificial Lift.
- our Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise wellbore placement solutions that enable customers to model, measure, drill, and optimize their well construction activities. The segment consists of Baroid, Sperry Drilling, Wireline and Perforating, Drill Bits and Services, Landmark Software and Services, Testing and Subsea, 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 the United States, Canada, China, Malaysia, Singapore, and the United Kingdom.

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.

### Pending acquisition of Baker Hughes

On November 16, 2014, we and Baker Hughes entered into a merger agreement under which, subject to the conditions set forth in the merger agreement, we will acquire all the outstanding shares of Baker Hughes in a stock and cash transaction. The acquisition is expected to create a leading global oilfield services company and combine the companies’ product and service capabilities to deliver exceptional depth and breadth of solutions to our customers. The closing of the transaction is expected to occur in late 2015. See Note 2 to the condensed consolidated financial statements for further information about the pending acquisition.

### Financial results

We experienced a decline in revenue and margins in the second quarter of 2015, as compared to the second quarter of 2014, due to the depressed crude oil pricing environment. Our consolidated revenue for the second quarter of 2015 was $5.9 billion, a decrease of $2.1 billion, or 26%, from the second quarter of 2014, attributable to reduced activity levels and pricing concessions in both North America and Europe/Africa/CIS regions. The industry experienced an unprecedented decline in North America stimulation activity during the first half of 2015, which significantly impacted our financial results. Since November 2014, the United States experienced an approximately 55% decrease in rig count, which in turn has resulted in pricing pressure across the services industry.

During the first six months of 2015, we had an operating loss of $294 million, as compared to operating income of $2.2 billion in the first six months of 2014. The decrease was primarily due to approximately $1.5 billion of impairments and other charges recorded during the first six months of 2015. These charges were recorded primarily as a result of the recent downturn in the energy market, and consisted of asset impairments and write-offs, impairments of intangible assets, inventory write-downs, severance costs, country and facility closures, and other items. We took actions during the first six months of 2015 by reducing our cost structure, including a global headcount reduction of approximately 16%, to help mitigate the current market conditions that we are experiencing. We anticipate that these collective actions will result in additional cost savings in the second half of 2015. See Note 3 to the condensed consolidated financial statements for further information about these charges. Additionally, our operating results were negatively impacted by reduced activity and pricing pressure in most of our product services lines, particularly stimulation activity, in the United States land market.

### Business outlook

While the first half of 2015 has been challenging for us, as the impact of reduced commodity prices created widespread pricing pressure on a global basis, the pace of rig count decline has slowed and we have seen activity stabilize. We believe the collective cost reduction initiatives we took during the first half of the year will result in cost savings going forward that will help mitigate current market conditions. We continue to believe in the strength of the long-term fundamentals of our business. Despite the expected worldwide activity declines in 2015, energy demand is still anticipated to increase over the long term.

In North America, we continue to experience pricing pressures, which have impacted our margins. Lower commodity prices have translated into unprecedented reductions in rig count throughout the first six months of the year, which translated into competitive pricing pressure across all of our product service lines. The U.S. rig count has dropped approximately 55% from the peak in late November 2014, but recently the pace of decline has slowed significantly. During the second quarter of 2015, the average rig count in North America declined 40%, sequentially, although our North America revenue declined only 25%. Decremental margins in the second quarter were better than previous cycles, demonstrating that our cost reduction initiatives are helping to offset the current market challenges. We believe that our focus on asset utilization and the efficiencies we expect to realize from our low cost service delivery model will also benefit us during these market conditions.

Internationally, the markets have been more resilient than North America, however they are not immune to the impacts of the lower commodity price environment. Although we have experienced some pricing declines in the first half of the year, we are anticipating a greater impact in the second half of the year. We also continue to work with our customers to improve project economics through technology and improved operating efficiency. Lower activity levels persisted internationally during the second quarter of 2015, including in Latin America where lower revenue and profitability were impacted by continued customer budget cuts throughout the region and the negative currency impact of the new exchange rate in Venezuela. We expect to see further impacts as we continue to utilize this new Venezuelan exchange rate for accounting purposes. See "Business Environment and Results of Operations" for further information about recent changes to exchange rates we are using in Venezuela.

While the intensity and duration of the current market downturn is uncertain, we intend to remain focused and look beyond the down cycle by continuing to invest in capital and strategic programs, and we will make further adjustments as required to adjust to market conditions. Manufacturing our own equipment provides us with the utmost flexibility to adjust our capital spend based on our visibility of the market. As such, given the continued decline in activity levels, we are reducing our capital expenditures for 2015 to $2.6 billion, representing a 21% year-over-year decline.

We plan to continue executing the following strategies in 2015:

\- directing capital and resources into strategic growth markets, including unconventional plays, mature fields, and deepwater;

- leveraging our broad technology offerings to provide value to our customers and enabling them to more efficiently drill and complete their wells;
- exploring additional 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 significant operations;
- investing in technology that will help our customers reduce reservoir uncertainty and increase operational efficiency;
- improving working capital, and managing our balance sheet to maximize our financial flexibility; and
- continuing to seek ways to be one of the most cost efficient service providers in the industry by maintaining capital discipline and leveraging our scale and breadth of operations.

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

### Financial markets, liquidity, and capital resources

We believe we have invested our cash balances conservatively and secured sufficient financing to help mitigate any near-term negative impact on our operations from adverse market conditions. In addition, we have committed financing available to finance the cash portion of the consideration for the pending Baker Hughes acquisition. For additional information, see “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”

### LIQUIDITY AND CAPITAL RESOURCES

We had $2.8 billion and $2.3 billion of cash and equivalents at June 30, 2015 and December 31, 2014, respectively. Additionally, at June 30, 2015, we held $93 million of investments in fixed income securities compared to $103 million at December 31, 2014. These securities are reflected in "Other current assets" and "Other assets" in our condensed consolidated balance sheets. As of June 30, 2015, approximately $1.2 billion of the $2.8 billion of cash and equivalents was held by our foreign subsidiaries, of which $654 million would be subject to United States tax if repatriated. However, our intent is to permanently reinvest these funds outside of the United States and our current plans do not suggest a need to repatriate them to fund our United States operations.

### Significant sources and uses of cash

Cash flows from operating activities were $2.0 billion in the first six months of 2015.

Capital expenditures were $1.2 billion in the first six months of 2015, and were predominantly made in our Production Enhancement, Cementing, Sperry Drilling, Production Solutions, and Wireline and Perforating product service lines.

During the first six months of 2015, our primary components of working capital (receivables, inventories, and accounts payable) decreased by a net $0.9 billion, primarily due to decreased business activity driven by current market conditions.

We paid $306 million in dividends to our shareholders during the first six months of 2015.

### Future sources and uses of cash

We intend to finance the cash portion of the Baker Hughes acquisition through a combination of cash on hand and debt financing. We have obtained a commitment letter for an $8.6 billion senior unsecured bridge facility, which is greater than the expected cash consideration required upon closing of the Baker Hughes acquisition. We have not drawn any amounts under this commitment as of June 30, 2015. We may issue debt securities, obtain bank loans or pursue other debt financings, or use cash on hand in lieu of utilizing all or a portion of the bridge facility. Additionally, we expect to receive cash proceeds from the sale of the businesses we are currently marketing for sale as part of the regulatory review of the pending Baker Hughes acquisition. See Note 2 to the condensed consolidated financial statements for further information about the pending acquisition and related divestitures.

We manufacture our own equipment, which gives us flexibility to assist in mitigating the impact of market conditions.

Capital spending for 2015 is currently expected to be approximately $2.6 billion, a reduction from the $3.3 billion of capital expenditures in 2014, primarily due to the current market environment. We intend to remain focused and look beyond the down cycle by continuing to invest in capital and strategic programs. The capital expenditures plan for the remainder of the year is primarily directed toward our Production Enhancement, Cementing, Sperry Drilling, Production Solutions, and Wireline and Perforating product service lines.

During 2014, we reached an agreement, subject to court approval, to settle a substantial portion of the plaintiffs' claims asserted against us relating to the Macondo well incident. Our Macondo-related loss contingency liability as of June 30, 2015 is $805 million, of which $367 million is expected to be paid during the second half of 2015. See Note 7 to the condensed consolidated financial statements for further information.

Subject to Board of Directors approval, our intention is to pay dividends representing at least 15% to 20% of our net income on an annual basis. Currently, our dividend rate is $0.18 per common share, or approximately $154 million per quarter.

Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately $5.7 billion remains authorized for repurchases as of June 30, 2015 and may be used for open market and other share purchases.

### Other factors affecting liquidity

*Financial position in current market.* As of June 30, 2015, we had $2.8 billion of cash and equivalents, $93 million in fixed income investments, and a total of $3.0 billion of available committed bank credit under our revolving credit facility. In July 2015, we executed a new five-year revolving credit agreement with an initial capacity of $3.0 billion, increasing to $4.5 billion upon closing of the pending Baker Hughes acquisition. See Note 11 to the condensed consolidated financial statements and Part II, Item 5 for further information. 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, during the remainder of 2015 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.

*Guarantee agreements.* In the normal course of business, we have agreements with financial institutions under which approximately $2.0 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of June 30, 2015. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.

*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. After the announcement of the pending Baker Hughes acquisition, Standard & Poor’s placed all of our ratings on negative watch.

*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 as well as unsettled political conditions. If our customers delay 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. See “Business Environment and Results of Operations – International operations – Venezuela” for further discussion related to Venezuela.

### 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 related to the exploration, development, and production of oil and natural gas. A significant amount of our consolidated revenue is derived from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. The industry we serve is highly competitive with many substantial competitors in each segment of our business. During the first six months of 2015, based upon the location of the services provided and products sold, 46% of our consolidated revenue was from the United States, compared to 51% of consolidated revenue from the United States in the first six months of 2014. 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, sanctions, expropriation or other governmental actions, inflation, foreign currency exchange restrictions, and highly inflationary currencies, as well as other geopolitical factors. 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 within our business segments is significantly impacted by spending on upstream exploration, development, and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption.

Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation, and global stability, which together drive worldwide drilling activity. Due to improved drilling and completion efficiencies as more of our customers move to multi-well pad drilling, our financial performance is impacted by well count in the North America market. Additionally, our financial performance is significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.

The following table shows the average oil and natural gas prices for West Texas Intermediate (WTI), United Kingdom Brent crude oil, and Henry Hub natural gas:

|  | Three Months Ended June 30 2015 | 2014 | Year Ended December 31 2014 |
| --- | ---: | ---: | ---: |
| Oil price - WTI (1) | $57.85 | $103.31 | $93.37 |
| Oil price - Brent (1) | 61.69 | 109.66 | 99.04 |
| Natural gas price - Henry Hub (2) | 2.75 | 4.61 | 4.39 |
| (1) Oil price measured in dollars per barrel (2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu |  |  |  |

20

The historical average rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows:

| Land vs. Offshore United States: | Three Months Ended June 30 2015 2014 | Six Months Ended June 30 2015 2014 |
| --- | ---: | ---: |
| Land | 876 1,796 | 1,115 1,760 |
| Offshore (incl. Gulf of Mexico) | 31 56 | 40 56 |
| Total | 907 1,852 | 1,155 1,816 |
| Canada: |  |  |
| Land | 95 200 | 203 363 |
| Offshore | 3 2 | 3 2 |
| Total | 98 202 | 206 365 |
| International (excluding Canada): |  |  |
| Land | 882 1,023 | 912 1,021 |
| Offshore | 287 325 | 303 321 |
| Total | 1,169 1,348 | 1,215 1,342 |
| Worldwide total | 2,174 3,402 | 2,576 3,523 |
| Land total | 1,853 3,019 | 2,230 3,144 |
| Offshore total | 321 383 | 346 379 |
|  | Three Months Ended June 30 | Six Months Ended June 30 |
| **Oil vs. Natural Gas** | 2015 2014 | 2015 2014 |
| United States (incl. Gulf of Mexico): |  |  |
| Oil | 683 1,532 | 897 1,482 |
| Natural gas | 224 320 | 258 334 |
| Total | 907 1,852 | 1,155 1,816 |
| Canada: |  |  |
| Oil | 37 101 | 92 220 |
| Natural gas | 61 101 | 114 145 |
| Total | 98 202 | 206 365 |
| International (excluding Canada): |  |  |
| Oil | 918 1,077 | 960 1,073 |
| Natural gas | 251 271 | 255 269 |
| Total | 1,169 1,348 | 1,215 1,342 |
| Worldwide total | 2,174 3,402 | 2,576 3,523 |
| Oil total | 1,638 2,710 | 1,949 2,775 |
| Natural gas total | 536 692 | 627 748 |

| Drilling Type United States (incl. Gulf of Mexico): | Three Months Ended June 30 2015 | 2014 | Six Months Ended June 30 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Horizontal | 701 | 1,243 | 878 | 1,213 |
| Vertical | 92 | 394 | 111 | 391 |
| Directional | 114 | 215 | 166 | 212 |
| Total | 907 | 1,852 | 1,155 | 1,816 |

21

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.

During the second quarter of 2015, WTI and Brent crude oil spot prices averaged approximately $58 and $62 per barrel, respectively, as compared to $103 and $110 per barrel, respectively, during the second quarter of 2014. Crude oil prices continue to be negatively affected as the combination of robust world crude oil supply growth and weak global demand contribute to an increase in the rate of global inventory builds. Additionally, stronger economic performance in the United States has led to a strengthening in the U.S. dollar relative to most other currencies, contributing further to the fall in the U.S. dollar value of crude oil.

WTI crude oil spot prices increased throughout the second quarter of 2015, from a monthly average of approximately $48 per barrel in March to $60 per barrel in June, an increase of approximately 25%, led by the perception of tightening United States supply fundamentals sparked from signs of a slowdown in oil production growth following steep drops in the United States rig count and large spending cuts by producers. Brent crude oil spot prices averaged approximately $61 per barrel in June compared to $56 per barrel in March. Crude oil prices fell in early July, primarily due to financial turmoil in Greece, concerns about lower economic growth in China and continued growth in global petroleum inventories.

According to the United States Energy Information Administration (EIA) July 2015 "Short Term Energy Outlook," Brent prices are projected to average $60 per barrel in 2015 and $67 per barrel in 2016. WTI prices in 2015 and 2016 are expected to average $5 per barrel below Brent prices. The EIA also noted that strong global oil inventory builds are expected to moderate in the second half of the year and provide stability to crude oil prices. Although there are no signs that point to an immediate rebalancing of the market, the International Energy Agency's (IEA) July 2015 "Oil Market Report" forecasts the 2015 and 2016 global demand to average approximately 94 million barrels per day and 95.2 million barrels per day, respectively, which is up 2% and 3%, respectively, from 2014, driven by an increase in all regions except for the Commonwealth of Independent States.

For the second quarter of 2015, the average Henry Hub natural gas price in the United States decreased by 40%, compared to the second quarter of 2014, due to higher natural gas storage levels this year as a result of a mild winter. The Henry Hub natural gas spot price averaged $2.78 per MMBtu in June, a decline of $0.05 per MMBtu from March. The EIA's July 2015 "Short Term Energy Outlook" projects that monthly average spot prices will remain at less than $3 per MMBtu through July, and less than $4 per MMBtu through 2016. Over the long term, the EIA expects that increases in drilling efficiency and growth in oil production will continue to support growing natural gas production in the forecast.

### North America operations

Volatility in oil and natural gas prices can impact our customers’ drilling and production activities, particularly in North America. For the second quarter of 2015, the average oil directed rig count decreased 56%, while the average natural gas directed rig count decreased 32%, compared to the second quarter of 2014.

The United States rig count has dropped approximately 55% from the peak in late November 2014, but recently the pace of decline has slowed significantly. Price erosion continued in the second quarter of 2015 and we believe pricing will remain fluid until activity stabilizes. Pricing declines, however, appear to be decelerating. Current market conditions aside, in the long run, we believe the shift to unconventional oil and liquids-rich basins in the United States land market will continue to drive increased service intensity and will require higher demand in fluid chemistry and other technologies required for these complex reservoirs which will have beneficial implications for our operations.

In the Gulf of Mexico, the average offshore rig count for second quarter 2015 was down 45% compared to the second quarter of 2014. Activity in the Gulf of Mexico is dependent on, among other things, governmental approvals for permits, our customers' actions, and new deepwater rigs entering the market.

### International operations

The average international rig count for the second quarter of 2015 decreased by 13% compared to the second quarter of 2014. Declining crude oil prices have caused several of our customers to reduce their budgets and defer several new projects. Although the international markets have been more resilient than North America, they are not immune to the impacts of the lower commodity price environment and, therefore, our international operations could be further impacted in the second half of the year.

Despite the current market environment, we believe that international unconventional oil and natural gas, mature field, and deepwater projects will contribute to activity improvements over the long term, 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 in capital equipment for our international operations.

*Venezuela.* In February 2015, the Venezuelan government created a new foreign exchange rate mechanism, called the Marginal Currency System, or SIMADI. The new mechanism, which is the third system in a three-tier exchange control mechanism, is a floating market rate for the conversion of Bolívares to United States dollars based on supply and demand. The three-tier exchange rate mechanisms are as follows: (i) the National Center of Foreign Commerce official rate of 6.3 Bolívares per United States dollar, which remains unchanged; (ii) the SICAD I, which will continue to hold periodic auctions for specific sectors of the economy with a rate of 12 Bolívares per United States dollar at June 30, 2015; and (iii) the SIMADI, which replaces the SICAD II system with a market rate of 197 Bolívares per United States dollar at June 30, 2015.

We intend to utilize the new SIMADI mechanism for liquidity purposes in our Venezuelan operations. During the first quarter of 2015, we began utilizing the SIMADI mechanism to remeasure our net monetary assets denominated in Bolívares, which resulted in us recording a foreign currency loss of $199 million during the first quarter of 2015.

As of June 30, 2015, our total net investment in Venezuela was approximately $618 million, including net monetary assets of $5 million denominated in Bolívares. Also, at June 30, 2015 we had $20 million of surety bond guarantees outstanding relating to our Venezuelan operations. The United States dollar value of our net monetary assets and surety bond guarantees have significantly declined from December 31, 2014 primarily as a result of the currency devaluation in Venezuela.

We are continuing to collect on our receivables from our primary customer in Venezuela. These receivables are not disputed, and we have not historically had material write-offs relating to this customer. Additionally, we routinely monitor the financial stability of our customers. Our total outstanding trade receivables in Venezuela were $521 million, or approximately 9% of our gross trade receivables, as of June 30, 2015, compared to $670 million, or approximately 9% of our gross trade receivables, as of December 31, 2014. This significant decline is primarily driven by the currency devaluation in Venezuela, which more than offset increased activity during the quarter. Of the $521 million receivables in Venezuela as of June 30, 2015, $165 million has been classified as long-term and included within “Other assets” on our condensed consolidated balance sheets.

For additional information, see Part I, Item 1(a), “Risk Factors” in our 2014 Annual Report on Form 10-K.

### RESULTS OF OPERATIONS IN 2015 COMPARED TO 2014

### Three Months Ended June 30, 2015 Compared with Three Months Ended June 30, 2014

| REVENUE: Millions of dollars | Three Months Ended June 30 2015 | 2014 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $3,444 | $4,942 | $(1,498) | (30)% |
| Drilling and Evaluation | 2,475 | 3,109 | (634) | (20) |
| Total revenue | $5,919 | $8,051 | $(2,132) | (26)% |
| By geographic region: |  |  |  |  |
| Completion and Production: |  |  |  |  |
| North America | $2,062 | $3,325 | $(1,263) | (38)% |
| Latin America | 337 | 395 | (58) | (15) |
| Europe/Africa/CIS | 554 | 634 | (80) | (13) |
| Middle East/Asia | 491 | 588 | (97) | (16) |
| Total | 3,444 | 4,942 | (1,498) | (30) |
| Drilling and Evaluation: |  |  |  |  |
| North America | 609 | 1,019 | (410) | (40) |
| Latin America | 430 | 502 | (72) | (14) |
| Europe/Africa/CIS | 541 | 747 | (206) | (28) |
| Middle East/Asia | 895 | 841 | 54 | 6 |
| Total | 2,475 | 3,109 | (634) | (20) |
| Total revenue by region: |  |  |  |  |
| North America | 2,671 | 4,344 | (1,673) | (39) |
| Latin America | 767 | 897 | (130) | (14) |
| Europe/Africa/CIS | 1,095 | 1,381 | (286) | (21) |
| Middle East/Asia | 1,386 | 1,429 | (43) | (3) |

24

| OPERATING INCOME: Millions of dollars | Three Months Ended June 30 2015 | 2014 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $313 | $887 | $(574) | (65)% |
| Drilling and Evaluation | 400 | 414 | (14) | (3) |
| Corporate and other | (153) | (107) | (46) | 43 |
| Impairments and other charges | (306) | — | (306) | 100 |
| Total operating income | $254 | $1,194 | $(940) | (79)% |
| By geographic region: |  |  |  |  |
| Completion and Production: |  |  |  |  |
| North America | $73 | $630 | $(557) | (88)% |
| Latin America | 55 | 48 | 7 | 15 |
| Europe/Africa/CIS | 90 | 96 | (6) | (6) |
| Middle East/Asia | 95 | 113 | (18) | (16) |
| Total | 313 | 887 | (574) | (65) |
| Drilling and Evaluation: |  |  |  |  |
| North America | 57 | 160 | (103) | (64) |
| Latin America | 57 | 13 | 44 | 338 |
| Europe/Africa/CIS | 74 | 90 | (16) | (18) |
| Middle East/Asia | 212 | 151 | 61 | 40 |
| Total | 400 | 414 | (14) | (3) |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 130 | 790 | (660) | (84) |
| Latin America | 112 | 61 | 51 | 84 |
| Europe/Africa/CIS | 164 | 186 | (22) | (12) |
| Middle East/Asia | 307 | 264 | 43 | 16 |

Consolidated revenue decreased $2.1 billion, or 26%, in the second quarter of 2015, as compared to the second quarter of 2014, associated with pricing declines and reduced activity levels in the majority of our product service lines, primarily attributable to pressure pumping in North America, coupled with lower activity and pricing in the Europe/Africa/CIS region, which more than offset strong activity growth for consulting services in Middle East/Asia. Revenue outside of North America was 55% of consolidated revenue in the second quarter of 2015, compared to 46% of consolidated revenue in the second quarter of 2014.

Consolidated operating income decreased $940 million, or 79%, during the second quarter of 2015, as compared to the second quarter of 2014, driven by a significant decline in pressure pumping activity and pricing declines in North America, coupled with $306 million of impairments and other charges recorded in the second quarter of 2015, which were primarily associated with the recent downturn in the energy market. See Note 3 to the condensed consolidated financial statements for further information about impairments and other charges for the second quarter of 2015.

#### Completion and Production

Revenue decreased $1.5 billion, or 30%, in the second quarter of 2015, compared to the second quarter of 2014.

- North America revenue dropped 38%, as a result of steep rig count declines, pricing concessions, and reduced stimulation activity in the United States land market.
- Latin America revenue decreased 15%, mainly due to reduced activity and pricing in Mexico, primarily associated with pressure pumping services. Partially offsetting this reduction was an increase in pipeline and process services activity and pricing in Brazil, coupled with improved activity for artificial lift and production solutions services in Venezuela.
- Europe/Africa/CIS revenue decreased 13%, as a result of reduced pipeline and process services activity throughout the region, decreased cementing and completion tools sales in Norway, and lower activity and currency weakness in Russia. Partially offsetting these reductions were increased completion tools sales in Angola and Nigeria.
- Middle East/Asia revenue fell 16%, mainly due to decreased pressure pumping services in Australia and a reduction in all product service lines in Malaysia.
- Revenue outside of North America was 40% of total segment revenue in the second quarter of 2015, compared to 33% of total segment revenue in the second quarter of 2014.

Operating income was $313 million, a decrease of $574 million, or 65%, compared to the second quarter of 2014.

- North America operating income declined 88%, primarily due to the fall in rig counts and pricing pressure impacting stimulation activity and profitability.
- Latin America operating income increased by 15%, primarily as a result of improved activity and profitability across most product service lines in Venezuela, but specifically production solutions.
- Europe/Africa/CIS operating income decreased by 6%, mainly due to a drop across all product service lines in Egypt, partly offset by improved stimulation services and completion tools sales in Angola.
- Middle East/Asia operating income fell by 16%, mainly due to reduced lower margins in Australia and Malaysia related to lower activity.

#### Drilling and Evaluation

Revenue decreased $634 million, or 20%, in the second quarter of 2015, compared to the second quarter of 2014.

- North America revenue dropped 40% due to a drop in activity across all product service lines, primarily as a result of pricing concessions and reduced activity levels for fluid and drilling services.
- Latin America revenue decreased 14%, primarily due to reduced activity and pricing of testing services in Brazil, along with a reduction related to the currency impact of the new exchange rate in Venezuela.
- Europe/Africa/CIS revenue decreased 28% as a result of decreased pricing for fluid services in Norway and currency weakness in Russia, coupled with a reduction in drilling services in the United Kingdom and Norway.
- Middle East/Asia revenue grew 6%, mainly due to strong activity growth across most product service lines in Saudi Arabia, along with increased project management activity in Iraq and Indonesia.
- Revenue outside of North America was 75% of total segment revenue in the second quarter of 2015, compared to 67% of total segment revenue in the second quarter of 2014.

Operating income was $400 million, a decrease of $14 million, or 3%, compared to the second quarter of 2014. All regions benefited from the cessation of recognizing depreciation expense on assets held for sale. See Note 2 to the condensed consolidated financial statements for further information.

- North America operating income decreased 64%, primarily due to decreased fluid service and logging in the United States land market.
- Latin America operating income quadrupled, primarily due to improved profitability for drilling services in Brazil, increased drilling services activity in Venezuela and Mexico, and increased software sales in Mexico. Partially offsetting these increases were reduced profitability in Ecuador and a decline in logging activity in Venezuela.
- Europe/Africa/CIS operating income declined 18%, mainly due to decreased fluid pricing in Norway as well as a drop in drilling services in Angola.
- Middle East/Asia operating income improved by 40%, driven by strong activity growth across most product service lines in Saudi Arabia, specifically drilling services.

*Corporate and other* was $153 million of expenses in the second quarter of 2015, compared to $107 million of expenses in the second quarter of 2014, primarily due to $83 million of costs related to the pending Baker Hughes acquisition.

*Impairments and other charges.* Primarily as a result of the recent downturn in the energy market and its corresponding impact on the company’s business outlook, we recorded a total of approximately $306 million in company-wide charges during the second quarter of 2015 related to asset impairments and write-offs and severance costs. See Note 3 to the condensed consolidated financial statements for further information.

### NONOPERATING ITEMS

*Interest expense, net of interest income* increased $12 million in the second quarter of 2015, as compared to the second quarter of 2014, primarily due to fees associated with the $8.6 billion senior unsecured bridge facility commitment related to the acquisition of Baker Hughes.

*Effective tax rate*. Our effective tax rate on continuing operations for the quarter ended June 30, 2015 and June 30, 2014 was 56.1% and 27.8%, respectively. The effective tax rates in both periods were positively impacted by lower tax rates in certain foreign jurisdictions. However, the effective tax rate for the quarter ended June 30, 2015 was adversely impacted by the tax effects of the $306 million of impairments and other charges as well as the $83 million of Baker Hughes acquisition-related costs recorded during the period, as certain of these charges were not deductible and thus did not carry a corresponding tax benefit. The effect on our tax rate was exacerbated by our low level of pre-tax income during the period.

### Six Months Ended June 30, 2015 Compared with Six Months Ended June 30, 2014

| REVENUE: Millions of dollars | Six Months Ended June 30 2015 | 2014 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $7,690 | $9,362 | $(1,672) | (18)% |
| Drilling and Evaluation | 5,279 | 6,037 | (758) | (13) |
| Total revenue | $12,969 | $15,399 | $(2,430) | (16)% |
| By geographic region: |  |  |  |  |
| Completion and Production: |  |  |  |  |
| North America | $4,839 | $6,252 | $(1,413) | (23)% |
| Latin America | 731 | 750 | (19) | (3) |
| Europe/Africa/CIS | 1,082 | 1,241 | (159) | (13) |
| Middle East/Asia | 1,038 | 1,119 | (81) | (7) |
| Total | 7,690 | 9,362 | (1,672) | (18) |
| Drilling and Evaluation: |  |  |  |  |
| North America | 1,374 | 1,993 | (619) | (31) |
| Latin America | 985 | 1,006 | (21) | (2) |
| Europe/Africa/CIS | 1,110 | 1,439 | (329) | (23) |
| Middle East/Asia | 1,810 | 1,599 | 211 | 13 |
| Total | 5,279 | 6,037 | (758) | (13) |
| Total revenue by region: |  |  |  |  |
| North America | 6,213 | 8,245 | (2,032) | (25) |
| Latin America | 1,716 | 1,756 | (40) | (2) |
| Europe/Africa/CIS | 2,192 | 2,680 | (488) | (18) |
| Middle East/Asia | 2,848 | 2,718 | 130 | 5 |

28

| OPERATING INCOME: Millions of dollars | Six Months Ended June 30 2015 | 2014 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $775 | $1,548 | $(773) | (50)% |
| Drilling and Evaluation | 706 | 812 | (106) | (13) |
| Corporate and other | (261) | (196) | (65) | 33 |
| Impairments and other charges | (1,514) | — | (1,514) | 100 |
| Total operating income (loss) | $(294) | $2,164 | $(2,458) | (114)% |
| By geographic region: |  |  |  |  |
| Completion and Production: |  |  |  |  |
| North America | $307 | $1,076 | $(769) | (71)% |
| Latin America | 120 | 96 | 24 | 25 |
| Europe/Africa/CIS | 145 | 174 | (29) | (17) |
| Middle East/Asia | 203 | 202 | 1 | — |
| Total | 775 | 1,548 | (773) | (50) |
| Drilling and Evaluation: |  |  |  |  |
| North America | 102 | 316 | (214) | (68) |
| Latin America | 114 | 65 | 49 | 75 |
| Europe/Africa/CIS | 105 | 158 | (53) | (34) |
| Middle East/Asia | 385 | 273 | 112 | 41 |
| Total | 706 | 812 | (106) | (13) |
| Total operating income by region |  |  |  |  |
| (excluding Corporate and other): |  |  |  |  |
| North America | 409 | 1,392 | (983) | (71) |
| Latin America | 234 | 161 | 73 | 45 |
| Europe/Africa/CIS | 250 | 332 | (82) | (25) |
| Middle East/Asia | 588 | 475 | 113 | 24 |

Consolidated revenue decreased $2.4 billion, or 16%, in the first six months of 2015, as compared to the first six months of 2014, associated with pricing declines and reduced activity levels, primarily attributable to stimulation services in the United States land market, as well as lower pricing and activity in all of our product service lines in the Europe/Africa/CIS, which were partially offset by higher consulting services and drilling and fluid services in Middle East/Asia Pacific. Revenue outside of North America was 52% of consolidated revenue in the first six months of 2015, compared to 46% of consolidated revenue in the first six months of 2014.

Consolidated operating income decreased $2.5 billion, or 114%, in the first six months of 2015, as compared to the first six months of 2014, primarily as a result of $1.5 billion of impairments and other charges recorded in the first half of 2015, which were primarily associated with the recent downturn in the energy market. See Note 3 to the condensed consolidated financial statements for further information. Additionally, our consolidated operating income decline was attributable to reduced stimulation activity in the United States land market, partially offset by higher activity and margins experienced in the Middle East/Asia Pacific and Latin America.

#### Completion and Production

Revenue decreased $1.7 billion, or 18%, in the first six months of 2015, compared to the first six months of 2014.

- North America revenue fell by 23% as a result of decreased stimulation activity in the United States land market related to a significant drop in rig count coupled with pricing declines.
- Latin America revenue decreased by 3%, as a decrease in pressure pumping activity in Mexico was partially offset by increased activity levels in the majority of our product service lines in Venezuela.
- Europe/Africa/CIS revenue declined by 13%, driven by reduced well completion activity in Norway and lower pressure pumping services in Russia.
- Middle East/Asia revenue dropped 7%, primarily due to decreased pressure pumping activity and pricing in Australia and lower completion tools sales in Indonesia and Malaysia, which more than offset improved stimulation activity levels in Saudi Arabia.
- Revenue outside of North America was 37% of total segment revenue in the first six months of 2015, compared to 33% of total segment revenue in the first six months of 2014.

Operating income declined by $773 million, or 50%, in the first six months of 2015, compared to the first six months of 2014.

- North America operating income decreased 71% as a result of reduced pressure pumping services and price degradation in the United States land market.
- Latin America operating income grew 25%, primarily due to higher activity and profitability across most of our product service lines in Venezuela.
- Europe/Africa/CIS operating income decreased 17% as a result of declined cementing services in Norway, as well as reduced stimulation activity and well completions in Egypt and Cameroon.
- Middle East/Asia operating income remained flat, as increased stimulation activity and completion tools sales in Saudi Arabia and higher profitability and cementing services in Oman and Qatar were offset by declined pressure pumping services in Australia.

#### Drilling and Evaluation

Revenue decreased $758 million, or 13%, in the first six months of 2015, compared to the first six months of 2014.

- North America revenue fell by 31%, due to decreases across the majority of our product service lines in the United States land market.
- Latin America revenue decreased 2%, primarily due to a drop in drilling and logging activity in Ecuador and Colombia and a decline in offshore activity in Brazil. These decreases were partially offset by higher activity levels in most of our product service lines in Venezuela, Mexico and Argentina.
- Europe/Africa/CIS revenue declined by 23% as a result of reduced fluid activity in Norway, lower drilling and fluid activity in Russia, and decreased drilling and logging activity in Angola.
- Middle East/Asia revenue increased 13% as a result of increased activity in all of our product services lines in Saudi Arabia and improved project management services in Indonesia, Iraq, and India, partially offset by lower drilling and fluid services in Malaysia.
- Revenue outside of North America was 74% of total segment revenue in the first six months of 2015, compared to 67% of total segment revenue in the first six months of 2014.

Operating income fell $106 million, or 13%, in the first six months of 2015, compared to the first six months of 2014. All regions benefited from the cessation of recognizing depreciation expense on assets held for sale. See Note 2 to the condensed consolidated financial statements for further information.

- North America operating income decreased 68% due to a decline in drilling and logging services in the United States land market and continued pricing pressure across all product service lines.
- Latin America operating income improved by 75%, mainly due to rising software sales and consulting services in Mexico, higher drilling activity in Venezuela and Brazil, and increased fluid services in Venezuela.
- Europe/Africa/CIS operating income fell by 34%, as a result declined drilling and logging activity in Angola, as well as reduced drilling and fluid services in Russia and the United Kingdom.
- Middle East/Asia operating income increased 41%, primarily due to an increase across most of our product service lines in Saudi Arabia and higher logging and offshore activity and project management in Iraq.

*Corporate and other* expenses were $261 million in the first six months of 2015 compared to $196 million in the first six months of 2014. The increase was primarily due to $122 million of costs related to the pending Baker Hughes acquisition.

*Impairments and other charges.* Primarily as a result of the recent downturn in the energy market and its corresponding impact on the company’s business outlook, we recorded a total of approximately $1.5 billion in company-wide charges during the first six months of 2015, which consisted of asset impairments and write-offs, inventory write-downs, impairments of intangible assets, severance costs, facility closures, and other charges. See Note 3 to the condensed consolidated financial statements for further information.

### NONOPERATING ITEMS

*Interest expense, net of interest income* increased $25 million in the first six months of 2015, as compared to the first six months of 2014, primarily due to fees associated with the $8.6 billion senior unsecured bridge facility commitment related to the pending acquisition of Baker Hughes.

*Other, net* was $247 million in the first half of 2015, as compared to $55 million in the first half of 2014, primarily due to a $199 million foreign exchange loss we incurred in Venezuela in the first quarter of 2015 as a result of utilizing the new SIMADI currency exchange mechanism. See Note 3 to the condensed consolidated financial statements and "Business Environment and Results of Operations" for further information.

*Effective tax rate*. Our effective tax rate was 22.6% for the six months ended June 30, 2015, which includes positive tax effects of the $1.5 billion of impairments and other charges recorded during the first half of the year. Our effective tax rate was 27.5% for the six months ended June 30, 2014. The effective tax rates in both periods were positively affected by lower tax rates in certain foreign jurisdictions.

### 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.

### 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,” “believe,” “do not believe,” “plan,” “estimate,” “intend,” “expect,” “do not expect,” “anticipate,” “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 our 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 2014 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2014.

## Controls and procedures

As filed, 1,441 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, 2015 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 and six months ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Jul 24, 2015.
Source: SEC EDGAR, the filing index for accession 0000045012-15-000104. Last ingested by Listed: Nov 2, 2026, 13:24 ET. No prices; not investment advice.