# Halliburton Co: Form 10-Q for the period ended Mar 31, 2016

- Company: [Halliburton Co](/companies/hal.md) (CIK 45012)
- Form: 10-Q
- Filed: 2016-05-06
- Accepted by EDGAR: May 6, 2016, 15:57 ET
- Period: 2016-03-31
- Accession: 0000045012-16-000298
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/45012/000004501216000298/hal_03312016-10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/45012/000004501216000298/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $4.20bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-01-01 to 2016-03-31 | $969.0m | us-gaap:CostOfGoodsSold |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | −$3.08bn | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | −$875.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | −$2.41bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | −$2.81 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-01-01 to 2016-03-31 | −$2.81 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-01-01 to 2016-03-31 | 858,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | −$171.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $234.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2016-01-01 to 2016-03-31 | $154.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2016-03-31 | $9.59bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $19.11bn | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $33.93bn | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $7.41bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $20.87bn | us-gaap:Liabilities |
| Long-term debt | at 2016-03-31 | $12.21bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-03-31 | $3.19bn | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-03-31 | $13.02bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,767 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, intervention, pressure control, specialty chemicals, artificial lift, and completion products and services. The segment consists of Production Enhancement, Cementing, Completion Tools, Production Solutions, Pipeline and Process Services, 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 55,000 employees, we operate in approximately 70 countries around the world, and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.

### Termination of Baker Hughes acquisition

In November 2014, we entered into a merger agreement with Baker Hughes to acquire all outstanding shares of Baker Hughes in a stock and cash transaction. On April 30, 2016, primarily because of the challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics, we and Baker Hughes mutually terminated our merger agreement. As a result, we paid Baker Hughes a termination fee of $3.5 billion on May 4, 2016. See Note 2 to the condensed consolidated financial statements and further information.

### Financial results

Market conditions continued to negatively impact our business during the first quarter of 2016. The North America rig count declined to historic lows during the quarter, in the face of continued depressed commodity prices, with the United States land rig count at March 31, 2016 declining almost 80% from the peak in November 2014. This has created further widespread pricing pressure and activity reductions for our products and services on a global basis, and has resulted in significant declines in revenue and operating income during the first quarter of 2016, as compared to the first quarter of 2015.

We generated $4.2 billion of revenue during the first quarter of 2016, a 40% decrease from the $7.1 billion of revenue generated in the first quarter of 2015. We reported an operating loss of $3.1 billion in the first quarter of 2016, as compared to an operating loss of $548 million in the first quarter of 2015. These decreases were due to a decline in activity and pricing in most of our product services lines, particularly stimulation activity in the United States land market, as well as $2.8 billion of impairments and other charges recorded in the first quarter of 2016, which primarily consisted of fixed asset impairments and write-offs, as well as severance costs, impairments of intangible assets, inventory write-downs, facility closures and other items. This compares to $1.2 billion of impairments and other charges recorded in the first quarter of 2015. Additionally, we incurred $538 million of Baker Hughes acquisition-related costs during the first quarter of 2016, primarily resulting from our reversal of assets held for sale accounting, compared to $39 million of Baker Hughes acquisition-related costs in the first quarter of 2015.

During the first quarter of 2016, the impairments and other charges were recorded as a result of the negative market impact on our business and an in-depth review of our underlying structural costs. We focused on streamlining our business model to both match current activity needs as well as to better position us for future growth and margin expansion. There is excess capacity across all of our product service lines, with the largest single component relating to our North America pressure pumping business. Over the last four years, we have been systematically converting our pressure pumping fleet in North America over to the Frac of the Future design. As such, we impaired or wrote off a large portion of our older equipment during the first quarter of 2016. Additionally, we were required to take other actions to reduce some of our infrastructure and further reduce our global workforce in an effort to address current market conditions and better align our workforce with anticipated activity levels in the near-term. Personnel expense is one of the largest cost categories for us and, therefore, we had to execute cost containment measures as they related to employees and their work location. We reduced our global headcount by an additional 6,000 during the first quarter of 2016, and have now unfortunately had to decrease our global workforce by just over one-third since the beginning of 2015 to help mitigate the downturn in the industry. See Note 3 to the condensed consolidated financial statements for further information about these impairments and other charges.

### Business outlook

The past several quarters have continued to be extremely challenging for us, as the impact of reduced commodity prices created widespread pricing pressure and activity reductions on a global basis. We have taken actions since late 2014 to help mitigate the effect on our business from the downturn in the energy market, and we will continue to evaluate our cost structure and make further adjustments as required.

In North America, we experienced pricing pressures, which impacted our margins. Lower commodity prices resulted

in unprecedented reductions in rig count since the peak in 2014, which in turn resulted in substantial pricing pressure across all of our product service lines. While our global revenue declined 40% in the first quarter of 2016 as compared to the first quarter of 2015, revenue in North America declined 49% over the same period. We anticipate 2016 being another challenging year for us in North America, and we will continue to adapt our cost structure to market conditions, which we believe will position us well when the market ultimately recovers.

The international markets have been more resilient than North America, but they are not immune to the impacts of the lower commodity price environment. We experienced pricing concessions and activity reductions in our international operations in the first quarter of 2016, the impact of which was only partially mitigated by our cost management initiatives. In the first quarter of 2016, despite a 31% reduction in our international revenues compared to the first quarter of 2015, we were able to keep operating margins relatively stable, primarily due to a relentless focus on cost management. We have continued to work with customers during this downturn to improve project economics through technology and improved operating efficiency, but expect margins to be negatively impacted by lower activity levels and pricing pressure throughout 2016. For the remainder of 2016, we expect all international regions to experience activity declines and price reductions relative to 2015 levels due to challenging economics and budget constraints, although the Middle East/Asia region is expected to be the most resilient, as recent mature field project awards are anticipated to move forward. Also, during the first quarter of 2016, we made the decision to begin curtailing activity in Venezuela.

While the intensity and duration of the current industry downturn is uncertain, we are continuing to execute on our two-pronged strategy in the downturn. The first part being to control what we can control in the short term, and the second is to look beyond the cycle and prepare for the anticipated recovery. We will make further adjustments as required to adjust to market conditions. Manufacturing our own equipment provides us with flexibility to adjust our capital spend based on our visibility of the market. Given the continued decline in activity levels, we reduced our capital expenditures to $234 million in the first quarter of 2016, down from $704 million in the first quarter of 2015. We continue to believe in the strength of the long-term fundamentals of our business. Despite the worldwide activity declines and challenges we expect to face throughout 2016, energy demand is still anticipated to increase over the long term.

We are continuing to execute the following strategies in 2016:

\- 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;
- 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; and

\- collaborating with our customers to maximize production at the lowest cost per barrel of oil equivalent (BOE).

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 conjunction with the termination of the Baker Hughes transaction, $2.5 billion of debt that we issued in late 2015 will be mandatorily redeemed. At the end of the first quarter of 2016, we had approximately $9.6 billion of cash and equivalents available. Taking into account the debt redemption plus the $3.5 billion termination fee, we would still have had approximately $3.6 billion in cash and cash equivalents at the end of the first quarter. We also have $3.0 billion available under our revolving credit facility which, with our cash balance, we believe provides us with sufficient liquidity to address the challenges and opportunities of the current market. For additional information on market conditions and termination of the merger agreement with Baker Hughes, see “Liquidity and Capital Resources,” “Business Environment and Results of Operations,” and Note 2 to the condensed consolidated financial statements.

### LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2016, we had $9.6 billion of cash and equivalents, compared to $10.1 billion at December 31, 2015. Additionally, at March 31, 2016, we held $98 million of investments in fixed income securities held by our foreign subsidiaries compared to $96 million at December 31, 2015. These securities are reflected in "Other current assets" and "Other assets" in our condensed consolidated balance sheets. As of March 31, 2016, approximately $1.7 billion of the $9.7 billion of our cash and equivalents and fixed income securities was held by our foreign subsidiaries, of which $1.0 billion 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

\- Operating cash flows was a use of $171 million during the first three months of 2016, partially driven by cash payments for severance costs and Baker Hughes acquisition-related costs during the period.

\- Capital expenditures were $234 million in the first three months of 2016, and were predominantly made in our Production Enhancement, Cementing, Sperry Drilling, Baroid and Wireline and Perforating product service lines.

\- During the first three months of 2016, our primary components of working capital (receivables, inventories, and accounts payable) decreased by a net $92 million, primarily due to decreased business activity driven by current market conditions.

\- We paid $154 million in dividends to our shareholders during the first three months of 2016.

### Future sources and uses of cash

As a result of the termination of our merger agreement with Baker Hughes, we paid Baker Hughes a termination fee of $3.5 billion on May 4, 2016. We are also required to redeem $2.5 billion of the senior notes issued in late 2015 at a price of 101% plus accrued and unpaid interest. We expect to redeem those notes in the second quarter of 2016. See Note 2 to the condensed consolidated financial statements for further information.

We manufacture our own equipment, which allows us flexibility to increase or decrease our capital expenditures based on market conditions. Capital spending for 2016 is currently expected to be approximately $850 million, a reduction of over 60% from the $2.2 billion of capital expenditures in 2015, primarily due to the current market environment and demonstrates our commitment to live within our cash flows during this challenging period for the industry. The capital expenditures plan for the remainder of the year is primarily directed toward our Production Enhancement, Sperry Drilling, Production Solutions, Wireline and Perforating and Cementing 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 total Macondo-related loss contingency liability as of March 31, 2016 was $472 million, of which $400 million is expected to be paid in 2016. 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 March 31, 2016 and may be used for open market and other share purchases. There were no repurchases made under the program during the three months ended March 31, 2016.

### Other factors affecting liquidity

*Financial position in current market.* As of March 31, 2016, we had $9.6 billion of cash and equivalents, $98 million in fixed income investments, and a total of $3.0 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, after taking into account the $2.5 billion debt redemption and $3.5 billion termination fee discussed above, that our cash on hand, cash flows generated from operations and our available credit facility will provide sufficient liquidity to address the challenges and opportunities of the current market and manage our global cash needs for the remainder of 2016, including capital expenditures, working capital investments, dividends, if any, and contingent liabilities.

*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 March 31, 2016. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.

*Credit ratings.* Our credit ratings with Moody’s Investors Service (Moody's) remain A2 for our long-term debt and P-1 for our short-term debt. Moody's has placed the ratings on review for downgrade. On May 4, 2016, in conjunction with the termination of our merger agreement with Baker Hughes, Standard & Poor’s changed our long-term rating from A to A-, while placing them on CreditWatch with negative implications, and changed our short-term rating from A-1 to A-2.

*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 receivables from our primary customer in Venezuela.

### BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in approximately 70 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 three months of 2016, based upon the location of the services provided and products sold, 41% of our consolidated revenue was from the United States, compared to 48% of consolidated revenue from the United States in the first three months of 2015. This decline reflects the impact our North America operations are experiencing from the downturn in the energy market. 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, changes in foreign currency exchange rates, 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. Our financial performance is significantly affected by well count in North America, as well as 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 March 31 2016 | 2015 | Year Ended December 31 2015 |
| --- | ---: | ---: | ---: |
| Oil price - WTI (1) | $33.18 | $48.54 | $48.69 |
| Oil price - Brent (1) | 33.70 | 53.95 | 52.36 |
| Natural gas price - Henry Hub (2) | 2.00 | 2.90 | 2.63 |
| (1) Oil price measured in dollars per barrel (2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu |  |  |  |

22

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 March 31 2016 2015 | Year Ended December 31 2015 |
| --- | ---: | ---: |
| Land | 524 1,331 | 943 |
| Offshore (incl. Gulf of Mexico) | 27 49 | 35 |
| Total | 551 1,380 | 978 |
| Canada: |  |  |
| Land | 170 306 | 189 |
| Offshore | 3 3 | 2 |
| Total | 173 309 | 191 |
| International (excluding Canada): |  |  |
| Land | 790 943 | 884 |
| Offshore | 226 318 | 283 |
| Total | 1,016 1,261 | 1,167 |
| Worldwide total | 1,740 2,950 | 2,336 |
| Land total | 1,484 2,580 | 2,016 |
| Offshore total | 256 370 | 320 |
|  | Three Months Ended March 31 | Year Ended December 31 |
| **Oil vs. Natural Gas** | 2016 2015 | 2015 |
| United States (incl. Gulf of Mexico): |  |  |
| Oil | 441 1,091 | 751 |
| Natural gas | 110 289 | 227 |
| Total | 551 1,380 | 978 |
| Canada: |  |  |
| Oil | 82 145 | 84 |
| Natural gas | 91 164 | 107 |
| Total | 173 309 | 191 |
| International (excluding Canada): |  |  |
| Oil | 770 1,002 | 916 |
| Natural gas | 246 259 | 251 |
| Total | 1,016 1,261 | 1,167 |
| Worldwide total | 1,740 2,950 | 2,336 |
| Oil total | 1,293 2,238 | 1,751 |
| Natural gas total | 447 712 | 585 |

| Drilling Type United States (incl. Gulf of Mexico): | Three Months Ended March 31 2016 | 2015 | Year Ended December 31 2015 |
| --- | ---: | ---: | ---: |
| Horizontal | 435 | 1,038 | 744 |
| Vertical | 63 | 213 | 139 |
| Directional | 53 | 129 | 95 |
| Total | 551 | 1,380 | 978 |

23

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.

WTI oil spot prices declined significantly towards the second half of 2014 from a high of $108 per barrel in June 2014, and continued to decline throughout 2015, ranging from a high of $61 per barrel in June 2015 to a low of $35 per barrel in December 2015. WTI oil spot prices reduced further into February 2016 to a low of $26 per barrel, a level which has not been experienced since 2002. Brent crude oil spot prices declined from a high of $115 per barrel in June 2014, and ranged from a high of $66 per barrel in May 2015 to a low of $35 per barrel in December 2015, and declined further to $26 per barrel in January 2016. Crude oil prices continue to be negatively affected compared to their 2014 and 2015 highs, 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.

Brent and WTI crude oil spot prices each had a monthly average in March 2016 of $38 per barrel. Prices continue to remain low as OPEC producers continue the policy of defending market share in a low oil price environment and as global oil inventories continue to build. Crude oil production in the United States averaged an estimated 9.0 million barrels per day in March 2016 but is forecasted to fall to an average of 8.6 million barrels per day in 2016.

In the United States Energy Information Administration (EIA) April 2016 "Short Term Energy Outlook," the EIA projects that Brent and WTI prices will average $35 per barrel in 2016. The EIA also notes that price projections reflect a scenario in which the large inventory builds and the unknown capacity of global oil storage will keep Brent prices near first quarter levels throughout 2016. Although there are no signs that point to an immediate rebalance of the market, the International Energy Agency's (IEA) April 2016 "Oil Market Report" forecasts the 2016 global demand to average approximately 95.9 million barrels per day, which is up 1% from 2015, driven by an increase in the Asia Pacific region, while all other regions remain approximately the same.

For the first quarter of 2016, the average Henry Hub natural gas price in the United States decreased approximately 6% from the fourth quarter of 2015 as the warm winter resulted in higher natural gas storage levels. The Henry Hub natural gas spot price averaged $1.73 per MMBtu in March 2016, a decline of $0.20 per MMBtu, or 10%, from December 2015. Inventory levels at record highs, production growth, and forecasts for warmer-than-normal temperatures contributed to natural gas prices remaining low. The EIA March 2016 “Short Term Energy Outlook” projects Henry Hub natural gas prices to average $2.18 per MMBtu in 2016. Over the long term, the EIA expects natural gas consumption to increase primarily in the electric power sector and to a lesser extent in the industrial sector as new fertilizer and chemical projects become available.

### North America operations

Volatility in oil and natural gas prices can impact our customers’ drilling and production activities. In the first quarter of 2016, North America oil directed rig count declined 113 rigs, or 18%, from the fourth quarter of 2015 and decreased 713 rigs, or 58%, when compared to the first quarter of 2015. During the first quarter of 2016, the natural gas-directed rig count in North America decreased 85 rigs, or 30%, from the fourth quarter of 2015 and 252 rigs, or 56%, from the first quarter of 2015. In the United States land market in the first quarter of 2016, there were declines of 28% and 61%, in the average rig count compared to the fourth quarter of 2015 and first quarter of 2015, respectively.

The United States land rig count has dropped nearly 80% since its peak in November 2014. Price erosion for our services continued during the first quarter of 2016, specifically in North America, and we believe pricing pressure will continue until activity stabilizes. 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 create higher demand in fluid chemistry and other technologies required for these complex reservoirs, which will have positive implications for our operations when the energy market ultimately recovers.

In the Gulf of Mexico, the average offshore rig count for the first quarter of 2016 was down 7% compared to the fourth quarter of 2015 and down 45% compared to the first quarter of 2015. Activity in the Gulf of Mexico is dependent on, among the factors described above and other things, governmental approvals for permits, our customers' actions, and the entry and exit of deepwater rigs in the market.

### International operations

The average international rig count for the first quarter of 2016 decreased by 8% compared to the fourth quarter of 2015 and declined 19% compared to the first quarter of 2015. Declining crude oil prices have caused many of our customers to reduce their budgets and defer several new projects; however, we have continued to work with our customers to improve project economics through technology and improved operating efficiency. Although the international markets have continued to be 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 near term.

*Venezuela.* In February 2015, the Venezuelan government created a three-tier foreign exchange rate system, which included the National Center of Foreign Commerce official rate of 6.3 Bolívares per United States dollar, the SICAD, and the SIMADI. During the first quarter of 2015, we began utilizing the SIMADI floating rate mechanism to remeasure our net monetary assets denominated in Bolívares, with an initial market rate of 192 Bolívares per United States dollar, resulting in a foreign currency loss of $199 million recorded during the first quarter of 2015.

In February 2016, the Venezuelan government revised the three-tier exchange rate system to a new dual-rate system designed to streamline access to dollars for production and essential imports as well as combat inflation. The dual-rate exchange mechanisms are as follows: (i) the DIPRO, which replaced and devalued the official rate from 6.3 to 10.0 Bolívares per United States dollar, and represents a protected rate made available for vital imports such as food, medicine, and raw materials for production; and (ii) the DICOM, which replaces the SIMADI and which is intended to be a free floating system that will fluctuate according to market supply and demand and had a market rate of 276 Bolívares per United States dollar at March 31, 2016. We are utilizing the DICOM to remeasure our net monetary assets denominated in Bolívares, and the revised system did not materially affect our financial statements for the three months ended March 31, 2016.

As of March 31, 2016, our total net investment in Venezuela was approximately $807 million, with only $10 million of net monetary assets denominated in Bolívares, and we had an additional $35 million of surety bond guarantees outstanding relating to our Venezuelan operations at March 31, 2016. Our total outstanding net trade receivables in Venezuela were $756 million as of March 31, 2016, compared to $704 million as of December 31, 2015, representing over 10% of our trade receivables for both periods. The majority of these receivables in Venezuela are United States dollar-denominated receivables. Of the $756 million receivables in Venezuela as of March 31, 2016, $190 million has been classified as long-term and included within “Other assets” on our condensed consolidated balance sheets. We have continued to experience delays in collecting payment 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. During the first quarter of 2016, we made the decision to begin curtailing activity in Venezuela.

For additional information, see Part I, Item 1(a), “Risk Factors” in our 2015 Annual Report on Form 10-K.

### RESULTS OF OPERATIONS IN 2016 COMPARED TO 2015

### Three Months Ended March 31, 2016 Compared with Three Months Ended March 31, 2015

| REVENUE: Millions of dollars | Three Months Ended March 31 2016 | 2015 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $2,324 | $4,246 | $(1,922) | (45)% |
| Drilling and Evaluation | 1,874 | 2,804 | (930) | (33) |
| Total revenue | $4,198 | $7,050 | $(2,852) | (40)% |
| By geographic region: |  |  |  |  |
| North America | $1,794 | $3,542 | $(1,748) | (49)% |
| Latin America | 541 | 949 | (408) | (43) |
| Europe/Africa/CIS | 778 | 1,097 | (319) | (29) |
| Middle East/Asia | 1,085 | 1,462 | (377) | (26) |
| Total revenue | $4,198 | $7,050 | $(2,852) | (40)% |

| OPERATING INCOME: Millions of dollars | Three Months Ended March 31 2016 | 2015 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $30 | $462 | $(432) | (94)% |
| Drilling and Evaluation | 241 | 306 | (65) | (21) |
| Total | 271 | 768 | (497) | (65) |
| Corporate and other | (584) | (108) | (476) | 441 |
| Impairments and other charges | (2,766) | (1,208) | (1,558) | 129 |
| Total operating loss | $(3,079) | $(548) | $(2,531) | 462% |
| By geographic region: |  |  |  |  |
| North America | $(39) | $279 | $(318) | (114)% |
| Latin America | 48 | 122 | (74) | (61) |
| Europe/Africa/CIS | 57 | 86 | (29) | (34) |
| Middle East/Asia | 205 | 281 | (76) | (27) |
| Total | $271 | $768 | $(497) | (65)% |

Consolidated revenue was $4.2 billion in the first quarter of 2016, a decrease of $2.9 billion, or 40%, as compared to the first quarter of 2015, associated with widespread pricing pressure and activity reductions on a global basis, primarily attributable to pressure pumping in North America. Revenue outside of North America was 57% of consolidated revenue in the first quarter of 2016, compared to 50% of consolidated revenue in the first quarter of 2015, which reflects the greater impact our North America operations are experiencing as it relates to the downturn in the energy market.

Consolidated operating loss was $3.1 billion during the first quarter of 2016 compared to operating loss of $548 million in the first quarter of 2015. These results were negatively impacted by $2.8 billion and $1.2 billion of impairments and other charges recorded in the three months ended March 31, 2016 and 2015, respectively. Additionally, we incurred $538 million of Baker Hughes acquisition-related costs during the first quarter of 2016, primarily relating to charges resulting from our reversal of assets held for sale accounting, compared to $39 million of Baker Hughes acquisition-related costs in the first quarter of 2015. Also contributing to these operating losses were significant declines in pressure pumping activity and pricing declines in North America as a result of the global downturn in the energy market. See Note 2 to the condensed consolidated financial statements for further discussion of the Baker Hughes transaction and financial statement impact of terminating our merger agreement, and Note 3 to the condensed consolidated financial statements for further information about impairments and other charges.

### OPERATING SEGMENTS

#### Completion and Production

Completion and Production (C&P) revenue in the first quarter of 2016 was $2.3 billion, a decrease of $1.9 billion, or 45%, from the first quarter of 2015, due to a decline in activity and pricing in most of our product services lines, particularly North America pressure pumping services which drove the majority of the C&P revenue decline. International revenue also declined as a result of reductions in activity in all regions, coupled with lower pricing in Saudi Arabia, Mexico and the North Sea.

C&P operating income in the first quarter was $30 million, which decreased $432 million, or 94%, compared to the first quarter of 2015, with decreased profitability across all regions as a result of global activity and pricing reductions, primarily in North America pressure pumping services.

#### Drilling and Evaluation

Drilling and Evaluation (D&E) revenue in the first quarter of 2016 was $1.9 billion, a decrease of $930 million, or 33%, from the first quarter of 2015. Reductions were seen across all product service lines due to the low rig count, lower pricing and customer budget constraints worldwide.

D&E first quarter operating income was $241 million, which decreased $65 million, or 21%, compared to the first quarter of 2015, driven by a decline in activity and pricing across all regions, particularly drilling activity in the North Sea, fluid sales in Latin America and drill bit sales in North America.

### GEOGRAPHIC REGIONS

#### North America

North America revenue in the first quarter of 2016 was $1.8 billion, a 49% decline compared to the first quarter of 2015, relative to a 57% decline in average North America rig count. We had an operating loss of $39 million, a substantial reduction from the $279 million of operating income reported in the first quarter of 2015. These declines were driven by reduced activity and pricing pressure throughout the United States land market.

#### Latin America

Latin America revenue in the first quarter of 2016 was $541 million, a 43% reduction compared to the first quarter of 2015, with operating income of $48 million, a 61% decline from the first quarter of 2015, primarily as a result of reduced activity and currency devaluation in Venezuela, as well as reduced activity in Mexico and Brazil. From a product service line perspective, Baroid and Cementing experienced the largest declines in both revenue and operating income.

#### Europe/Africa/CIS

Europe/Africa/CIS revenue in the first quarter of 2016 was $778 million, which declined by 29% compared to the first quarter of 2015, with operating income of $57 million, a 34% decrease compared to the first quarter of 2015. The decreases during the quarter were driven by a sharp reduction of activity in the North Sea, along with lower cementing activity, completion tools sales and drilling activity in Nigeria.

#### Middle East/Asia

Middle East/Asia revenue in the first quarter of 2016 was $1.1 billion, a reduction of 26% compared to the first quarter of 2015, with operating income of $205 million, a 27% decrease from the first quarter of 2015. This was the result of reduced activity for pressure pumping services in Saudi Arabia and Australia, and a decline in drilling activity in Australia and Malaysia, along with pricing concessions across the region.

### OTHER OPERATING ITEMS

*Corporate and other* increased to $584 million of expenses in the first quarter of 2016, compared to $108 million of expenses in the first quarter of 2015, primarily due to the impact of Baker Hughes acquisition-related costs. We recorded charges totaling $464 million as a result of our reclassification of assets held for sale to assets held and used as of March 31, 2016, which includes $329 million of accumulated unrecognized depreciation and amortization expense during the period the associated assets were classified as held for sale, including the first quarter of 2016, along with $135 million of capitalized and other divestiture-related costs incurred during the first quarter. See Note 2 to the condensed consolidated financial statements for further discussion of the Baker Hughes transaction and the financial statement impact of terminating our merger agreement. Partially offsetting these costs were savings from the cost containment measures we undertook to align ourselves with the current market.

*Impairments and other charges.* As a result of the continued downturn in the oil and gas industry and its corresponding impact on our business outlook, we recorded a total of approximately $2.8 billion in company-wide charges during the first quarter of 2016 related to fixed asset impairments and write-offs and severance costs, compared to $1.2 billion of similar charges recorded in the first quarter of 2015. See Note 3 to the condensed consolidated financial statements for further information.

### NONOPERATING ITEMS

*Interest expense, net* increased $59 million in the first quarter of 2016, compared to first quarter of 2015, primarily due to additional interest expense associated with the $7.5 billion of debt issued in November 2015.

*Other, net* was a $47 million loss in the first quarter of 2016, compared to a $224 million loss in the first quarter of 2015. This $177 million decrease is primarily due to a $199 million Venezuela foreign exchange loss we incurred in the first quarter of 2015. See "Business Environment and Results of Operations" for further information.

*Effective tax rate*. Our effective tax rate on continuing operations for the quarter ended March 31, 2016 and March 31, 2015 was 26.6% and 27.4%, respectively. As mentioned above, market conditions continued to negatively impact our business in the first quarter of 2016. As a result of these conditions and their corresponding impact on our business outlook, during the three months ended March 31, 2016, we established a valuation allowance on certain deferred tax assets equaling $112 million. In addition, the effective tax rates in both periods were impacted by the tax effects of impairments and other charges recorded during the period. Lastly, the effective tax rates in both periods were impacted 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 2015 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2015.

## Controls and procedures

As filed, 1,435 characters.

In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting that occurred during the three months ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed May 6, 2016.
Source: SEC EDGAR, the filing index for accession 0000045012-16-000298. Last ingested by Listed: Nov 2, 2026, 13:24 ET. No prices; not investment advice.