# Halliburton Co: Form 10-Q for the period ended Jun 30, 2017

- Company: [Halliburton Co](/companies/hal.md) (CIK 45012)
- Form: 10-Q
- Filed: 2017-07-28
- Accepted by EDGAR: Jul 28, 2017, 14:05 ET
- Period: 2017-06-30
- Accession: 0000045012-17-000159
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/45012/000004501217000159/hal_06302017-10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/45012/000004501217000159/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-04-01 to 2017-06-30 | $4.96bn | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2017-01-01 to 2017-06-30 | $9.24bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2017-04-01 to 2017-06-30 | $1.02bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $1.94bn | us-gaap:CostOfGoodsSold |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | $146.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | $349.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | −$29.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | −$54.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | $28.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | −$4.0m | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 871,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 868,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | $351.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $592.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2017-01-01 to 2017-06-30 | $312.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2017-06-30 | $2.14bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $10.26bn | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $25.32bn | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $4.07bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-06-30 | $16.37bn | us-gaap:Liabilities |
| Long-term debt | at 2017-06-30 | $10.82bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-06-30 | $336.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-06-30 | $8.92bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,328 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 manufacturing operations in various locations, the most significant of which are located in the United States, Canada, Malaysia, Singapore and the United Kingdom. With over 50,000 employees, we operate in approximately 70 countries around the world, and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.

### Financial results

Market conditions continued to impact our business during the second quarter of 2017, marked by the continued increase in North American land rig count, while ongoing cyclical headwinds affected the international markets. Our North American business continued to improve in the second quarter of 2017, with revenue growth of 24% from the first quarter of 2017, compared to the average United States land rig count sequential increase of 21%. However, the international markets have been slower to recover and continue to face pricing pressure while customers defer new projects and focus on lowering costs. We are actively managing our cost while protecting our international position in anticipation of the eventual market recovery.

We generated total company revenue of $5.0 billion during the second quarter of 2017, a 29% increase from the $3.8 billion of revenue generated in the second quarter of 2016. This increase resulted from improved activity, utilization, and pricing associated with pressure pumping services in the United States land market, partially offset by lower pricing and activity across the international markets. We reported operating income of $146 million in the second quarter of 2017, which included a $262 million pre-tax loss for a fair market value adjustment related to an expected exchange of receivables from our primary customer in Venezuela for an interest-bearing promissory note. This compares to an operating loss of $3.9 billion in the second quarter of 2016, which included a $3.5 billion merger termination fee and $423 million of company-wide impairments and a similar pre-tax loss on exchange for a promissory note in Venezuela. Additionally, our 2017 operating results are benefiting from the structural global cost savings initiatives implemented during the market downturn.

During the first quarter, we made the decision to bring back cold-stacked pressure pumping equipment more rapidly than originally planned because of customer demand and to maintain market share while capturing leading edge pricing, and we continued to execute this reactivation plan in the second quarter. All of the reactivated equipment we have brought back has enhanced our overall margins during the first half of 2017. North America experienced a significant margin improvement from the first to second quarter of 2017 as a result of activity and pricing increases. We anticipate continued margin improvements in the second half of 2017 because of current customer demand levels coupled with the structural cost savings initiatives we executed during the downturn.

### Business outlook

While the past two years were challenging as we navigated through this historic industry downturn, we believe our results reflect our successful execution in a difficult environment and that our strategy has positioned us for the challenges and opportunities ahead. Commodity prices and the North America rig count have improved substantially from first half 2016 lows, and despite recent declines in oil prices, we are benefiting from the market recovery given our improved market share, delivery platform and cost containment strategies.

In North America, improved commodity prices and rig counts from 2016 lows have resulted in a rapidly recovering market through the first half of 2017, particularly in United States unconventionals. Our customers remain focused on lowering cost and producing more barrels of oil equivalent. We are continuing to collaborate and engineer solutions to maximize asset value for our customers and will continue to focus on increasing equipment utilization, managing costs and expanding our surface efficiency model. Additionally, we gained significant North America market share through the downturn by demonstrating to our customers the benefits of our efficiency and technology, coming out of the downturn with our highest North America market share in history. We have been utilizing this increased market share to drive margin improvement. The historically high level of market share we built in the downturn gives us the ability to focus our work with the most efficient customers, and as such, we continued to execute our strategy of high grading the profitability of our portfolio with customers that value our services. During the second quarter, we continued to see strong incremental demand for completions equipment from our customers. We believe current customer demand has outpaced the supply of completions equipment, which should translate into strong utilization through the second half of the year.

While the international markets have been more resilient than North America through most of the downturn, particularly in the Eastern Hemisphere, low commodity prices have stressed customer budgets and impacted economics across deepwater and mature fields. As a result, activity levels and pricing are at significant lows. While we are working with our customers to improve project economics through technology and improved operating efficiency, any activity improvements for the remainder of 2017 will likely be offset by continued pricing pressure. However, we are now in the third year of significant underspending in the international markets. This implies that production declines will likely accelerate in the medium term as the backlog of new projects are completed and additional projects are not coming behind them. These eventual declines should help support higher commodity prices and increased international E&P spending.

During the first half of 2017, we had $592 million of capital expenditures, an increase of 32% from the first half of 2016. We plan to continue adjusting capital spending during 2017 to align with market conditions. We have successfully executed our deployment strategy of reactivating our cold-stacked pressure pumping equipment to respond to customer demand and continue to convert our hydraulic fracturing fleet to Q10 pumps to support our surface efficiency model. We remain committed to generating industry-leading returns and reactivating our equipment was the first step towards that objective. We continue to be focused on achieving leading edge pricing, driving better utilization, and continuous cost control.

We intend to continue to strengthen our product service lines through a combination of organic growth, investment and selective acquisitions. See Note 9 to the condensed consolidated financial statements for acquisitions we closed in July 2017. We are continuing to execute the following strategies in 2017:

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

- leveraging our broad technology offerings to provide value to our customers and enable 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 and engineering solutions to maximize asset value for our customers.

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. We closed the second quarter of 2017 at $2.1 billion of cash and equivalents, which included $225 million of proceeds from the issuance of commercial paper during the second quarter in anticipation of acquisitions that closed in July. We also have $3.0 billion available under our revolving credit facility which, combined 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, see “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”

### LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2017, we had $2.1 billion of cash and equivalents, compared to $4.0 billion at December 31, 2016. Additionally, we held $102 million of investments in fixed income securities at June 30, 2017, compared to $92 million at December 31, 2016. These securities are reflected in "Other current assets" and "Other assets" in our condensed consolidated balance sheets. Approximately $1.3 billion of our total cash position as of June 30, 2017 was held by our foreign subsidiaries, a substantial portion of which is available to be repatriated into the United States to fund our U.S. operations or for general corporate purposes, with a portion subject to certain country-specific restrictions. We have provided for U.S. federal income taxes on cumulative undistributed foreign earnings where we have determined that such earnings are not indefinitely reinvested.

### Significant sources and uses of cash

#### Sources of cash:

\- Cash flows from operating activities were $351 million during the first six months of 2017.

\- We issued $225 million of commercial paper in the second quarter of 2017 with a weighted average interest rate of 1.39% and maturities not more than 30 days. We began to utilize this commercial paper program in the second quarter in anticipation of the business acquisitions we closed in July 2017.

#### Uses of cash:

\- We early redeemed $1.4 billion of senior notes during the first quarter of 2017, which resulted in a payment of approximately $1.5 billion, inclusive of the redemption premium.

\- We made the final installment settlement payment related to the Macondo well incident in the amount of $335 million, as well as our third and final legal fees payment of $33 million during the first six months of 2017.

\- Capital expenditures were $592 million in the first six months of 2017, and were predominantly made in our Production Enhancement, Sperry Drilling, Production Solutions, Baroid, and Wireline and Perforating product service lines.

\- We paid $312 million in dividends to our shareholders during the first six months of 2017.

\- During the first six months of 2017, working capital (receivables, inventories and accounts payable) increased by a net $222 million, primarily due to increased business activity.

\- We paid $54 million in the second quarter of 2017 to settle a class action lawsuit. See Note 5 to the condensed consolidated financial statements for further information.

\- We repaid $45 million of senior notes that matured during the second quarter of 2017.

### Future sources and uses of cash

Capital spending for 2017 is currently expected to be approximately $1.3 billion.

In the third quarter of 2017, we expect to pay approximately $630 million for three acquisitions. See Note 9 to the condensed consolidated financial statements for further discussion.

We expect to receive a United States tax refund in the amount of approximately $480 million during the second half of 2017, primarily related to the carryback of our net operating losses recognized in 2016.

Currently, our quarterly dividend rate is $0.18 per common share, or approximately $156 million. Subject to the approval of our Board of Directors, our intention is to continue paying dividends at our current rate.

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, 2017 and may be used for open market and other share purchases. There were no repurchases made under the program during the six months ended June 30, 2017.

We expect to pay $29 million for a resolution on an SEC investigation of certain past matters related to our operations in Angola and Iraq. See Note 5 to the condensed consolidated financial statements for further information.

### Other factors affecting liquidity

*Financial position in current market.* As of June 30, 2017, we had $2.1 billion of cash and equivalents, which included $225 million of proceeds from the issuance of commercial paper during the second quarter, $102 million in fixed income investments, and $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. We believe our cash on hand, cash flows generated from operations, and cash flows generated from the issuance of commercial paper 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 2017, 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 June 30, 2017. 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 Standard & Poor’s (S&P) remain BBB+ for our long-term debt and A-2 for our short-term debt, with a stable outlook. Our credit ratings with Moody’s Investors Service (Moody's) remain Baa1 for our long-term debt and P-2 for our short-term debt, and Moody's changed the outlook from negative to stable during the second quarter of 2017.

*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 services and products to the energy industry. 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 2017, based upon the location of the services provided and products sold, 51% of our consolidated revenue was from the United States, compared to 39% of consolidated revenue from the United States in the first six months of 2016. 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. Lower oil and natural gas prices usually translate into lower exploration and production budgets. Our financial performance is significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the tables below, and well count in North America.

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 2017 | 2016 | Year Ended December 31 2016 |
| --- | ---: | ---: | ---: |
| Oil price - WTI (1) | $48.24 | $45.41 | $43.14 |
| Oil price - Brent (1) | 49.67 | 45.52 | 43.55 |
| Natural gas price - Henry Hub (2) | 3.08 | 2.14 | 2.52 |
| (1) Oil price measured in dollars per barrel (2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu |  |  |  |

18

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 2017 2016 | Six Months Ended June 30 2017 2016 |
| --- | ---: | ---: |
| Land | 874 398 | 798 458 |
| Offshore (incl. Gulf of Mexico) | 21 24 | 21 25 |
| Total | 895 422 | 819 483 |
| Canada: |  |  |
| Land | 116 47 | 205 106 |
| Offshore | 1 1 | 1 2 |
| Total | 117 48 | 206 108 |
| International (excluding Canada): |  |  |
| Land | 758 719 | 748 754 |
| Offshore | 200 224 | 201 225 |
| Total | 958 943 | 949 979 |
| Worldwide total | 1,970 1,413 | 1,974 1,570 |
| Land total | 1,748 1,164 | 1,751 1,318 |
| Offshore total | 222 249 | 223 252 |
|  | Three Months Ended June 30 | Six Months Ended June 30 |
| **Oil vs. Natural Gas** | 2017 2016 | 2017 2016 |
| United States (incl. Gulf of Mexico): |  |  |
| Oil | 718 335 | 656 386 |
| Natural gas | 177 87 | 163 97 |
| Total | 895 422 | 819 483 |
| Canada: |  |  |
| Oil | 53 17 | 107 48 |
| Natural gas | 64 31 | 99 60 |
| Total | 117 48 | 206 108 |
| International (excluding Canada): |  |  |
| Oil | 738 720 | 728 745 |
| Natural gas | 220 223 | 221 234 |
| Total | 958 943 | 949 979 |
| Worldwide total | 1,970 1,413 | 1,974 1,570 |
| Oil total | 1,509 1,072 | 1,491 1,179 |
| Natural gas total | 461 341 | 483 391 |

| Drilling Type United States (incl. Gulf of Mexico): | Three Months Ended June 30 2017 | 2016 | Six Months Ended June 30 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Horizontal | 751 | 326 | 681 | 378 |
| Vertical | 77 | 51 | 73 | 56 |
| Directional | 67 | 45 | 65 | 49 |
| Total | 895 | 422 | 819 | 483 |

19

Crude oil prices have been extremely volatile during the past few years. WTI oil spot prices declined significantly beginning in 2014 from a peak price of $108 per barrel in June 2014 to a low of $26 per barrel in February 2016, a level which had not been experienced since 2003. Brent crude oil spot prices declined from a high of $115 per barrel in June 2014 to $26 per barrel in January 2016. Since the low point experienced in early 2016, oil spot prices have increased to highs this year of $54 per barrel and $56 per barrel in February 2017 for WTI and Brent, respectively, before dipping down to a low of $42 per barrel and $44 per barrel in June 2017 for WTI and Brent, respectively.

Crude prices declined in June 2017 despite the voluntary production cuts made by the Organization of the Petroleum Exporting Countries (OPEC) in the first quarter of 2017. This is in part due to strong activity in the United States shale sector and higher production from Libya and Nigeria, which are not covered by the OPEC agreement. The United States Energy Information Administration (EIA) forecasts the average Brent crude oil price to be $50 per barrel in their July 2017 "Short Term Energy Outlook," while WTI prices are projected to average about $2 less per barrel. Crude oil production in the United States is now projected to average 9.3 million barrels per day in 2017, a 4% increase from 2016. The International Energy Agency's (IEA) July 2017 "Oil Market Report" forecasts the 2017 global demand to average approximately 98 million barrels per day, which is up 1% from 2016.

The average Henry Hub natural gas spot price in the United States was $2.98 per MMBtu in June 2017, a moderate increase of $0.10 per MMBtu, or 3%, from March 2017. However, natural gas prices have risen 72% from a low of $1.73 in March 2016, due to increased demand for natural gas to fuel electricity generation in addition to lower inventory levels, which was caused by production declines and higher exports. The EIA July 2017 “Short Term Energy Outlook” expects an increase in residential and commercial consumption due to closer-to-normal winter temperatures expected this winter following last year's warmer winter, as well as an increase in export growth resulting in rising natural gas prices to a projected EIA average spot price of $3.10 per MMBtu in 2017.

### North America operations

The United States land rig count continued its rapid increase in the second quarter of 2017, with a 21% improvement over the first quarter of 2017 and 120% improvement over the second quarter of 2016. North America oil-directed rig count increased 419 rigs, or 119%, in the second quarter of 2017 as compared to the second quarter of 2016, while the natural gas-directed rig count in North America increased 123 rigs, or 104%, during the same period. As a result of the recent uptick in activity and the structural changes to our delivery platform we made during this down cycle, we returned to operating profitability in North America in the fourth quarter of 2016 after recording operating losses in the first three quarters of 2016, with continued profitability improvements in the first two quarters of 2017.

In the Gulf of Mexico, the average offshore rig count for the second quarter of 2017 was down three rigs, or 13%, compared to the second quarter of 2016. Low commodity prices have stressed budgets and have impacted economics across the deepwater market, negatively impacting activity and pricing. These headwinds still persist today, and we believe there will continue to be challenges in 2017 on deepwater project economics. Activity in the Gulf of Mexico is dependent on, among the factors described above, 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 second quarter of 2017 increased by 2% compared to the second quarter of 2016. Depressed 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. In Latin America, the rig count hit a 15-year low across the region during 2016, and Venezuela continues to experience significant political and economic turmoil. Latin America is slowly showing signs of improvement, but there are significant headwinds that must be overcome to obtain a full recovery. For the Eastern Hemisphere, while we believe the first quarter represented the bottom of the international rig count, the full year average rig count for 2017 will likely be only marginally higher than the full year average rig count for 2016. Due to the longer term contractual nature of international markets and the level of continuing price pressure, we expect discounts will offset activity gains over the near term. We expect revenue and margins to continue to be under pressure throughout 2017 and do not expect significant growth until the markets fully stabilize. We are now in the third year of significant underspending in the international markets. This implies that production declines will likely accelerate in the medium term as the backlog of new projects are completed and additional projects are not coming behind them. These eventual declines should help support higher commodity prices and increased international E&P spending.

*Venezuela.* The Venezuelan government currently has a dual-rate foreign exchange system: (i) the DIPRO, which represents a protected rate of 10.0 Bolívares per United States dollar made available for vital imports such as food, medicine and raw materials for production; and (ii) the DICOM, which is intended to be a free floating system that will fluctuate according to market supply and demand. The DICOM continues to significantly devalue and had a market rate of 2,640 Bolívares per United States dollar at June 30, 2017, as compared to a market rate of 276 Bolívares per United States dollar in early 2016 when the DICOM was created. We are utilizing the DICOM to remeasure our net monetary assets denominated in Bolívares. The continued devaluation of the Bolívar under the DICOM did not materially affect our financial statements for the six months ended June 30, 2017 due to our immaterial net monetary position in the local currency.

As of June 30, 2017, our total net investment in Venezuela was approximately $608 million, with only $1 million of net monetary assets denominated in Bolívares, and we had an additional $37 million of surety bond guarantees outstanding relating to our Venezuelan operations.

Although we have continued to experience delays in collecting payments on our receivables from our primary customer in Venezuela, our outstanding receivables are not disputed, and we continue to believe that they are collectable. In assessing the collectability of these receivables, we considered our historical collection experience with this customer, including both payments received prior to this historical industry downturn and continued collections at reduced levels during the downturn, and the fact that we have not historically had material write-offs relating to this customer. We also took into account the continued importance to the Venezuelan economy of oil production, our strategic relationship with this customer, our current activity levels and our current intention to continue to provide services to this customer, and an evaluation of this customer’s financial solvency. We also incorporated assumptions regarding potential future events based on market pricing data points. We are actively managing our relationship with this customer, with ongoing dialogue between key executives of both companies, including discussions regarding this customer's intention to pay long-aged trade receivables.

In the second quarter of 2016, we exchanged $200 million of accounts receivables with our primary customer in Venezuela for an interest-bearing promissory note with a par value of the same amount. We recognized a pre-tax loss on the exchange of $148 million, representing the difference between the par value and fair market value of the note. We are accreting the carrying amount of the note to its par value, this customer has made all scheduled interest payments, and the carrying amount of this note is $98 million as of June 30, 2017. In addition, we currently expect to exchange an additional $375 million of outstanding accounts receivable with this customer for an interest-bearing promissory note with a par value of the same amount. As such, we recognized a pre-tax loss of $262 million in the second quarter of 2017 for a fair market value adjustment related to this expected exchange within "Impairments and other charges" on our condensed consolidated statements of operations. Although we recognized these fair value adjustments, we intend to hold both notes to maturity and collect the entire principal amounts. While we made a business decision during the second quarter of 2017 to convert certain accounts receivable to notes, we have the intent and ability to hold all remaining receivables in Venezuela until collection. We do not intend to accept further notes as payment if offered, and we will continue to monitor political and economic conditions in Venezuela.

We continue to believe our Venezuela receivables are collectable, with appropriate classification between short-term and long-term on our condensed consolidated balance sheets. While we have continued to experience delays in collecting payments on outstanding receivables in Venezuela, we have collected approximately $600 million on receivables in Venezuela since this historic industry downturn began in late 2014. We believe our collectability assumptions to be reasonable according to the current facts and circumstances. However, differences in actual experience or changes in facts and circumstances may materially affect our financial position or results of operations. Our assumptions and related judgments are sensitive to the political and economic conditions in Venezuela. If conditions in Venezuela worsen or if low commodity prices persist for an extended period of time, we may be required to record adjustments to our receivables balance. Our financial results can be affected by adjustments to these receivables, including any allowance for bad debts, actual write-offs of uncollectable amounts that differ from estimated amounts, fair value adjustments on existing receivables, and potential defaults on the promissory notes we hold.

Subsequent to the fair market value adjustment associated with the expected promissory note exchange, our total outstanding net trade receivables in Venezuela were $399 million as of June 30, 2017, compared to $610 million as of December 31, 2016, which represents 9% and 15% of total company trade receivables for the respective periods. The majority of our Venezuela receivables are United States dollar-denominated receivables. Of the $399 million of receivables in Venezuela as of June 30, 2017, $186 million have been classified as long-term and included within “Other assets” on our condensed consolidated balance sheets. See Note 7 to the condensed consolidated financial statements for additional information about the promissory notes and Part II, Item 1(a), “Risk Factors,” for additional information on risks associated with our operations in Venezuela, including recent sanctions imposed on a current employee of our primary customer in Venezuela which could delay or prevent our ability to execute the expected promissory note exchange.

### RESULTS OF OPERATIONS IN 2017 COMPARED TO 2016

### Three Months Ended June 30, 2017 Compared with Three Months Ended June 30, 2016

| REVENUE: Millions of dollars | Three Months Ended June 30 2017 | 2016 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $3,132 | $2,114 | $1,018 | 48% |
| Drilling and Evaluation | 1,825 | 1,721 | 104 | 6 |
| Total revenue | $4,957 | $3,835 | $1,122 | 29% |
| By geographic region: |  |  |  |  |
| North America | 2,770 | 1,516 | $1,254 | 83% |
| Latin America | 508 | 476 | 32 | 7 |
| Europe/Africa/CIS | 679 | 795 | (116) | (15) |
| Middle East/Asia | 1,000 | 1,048 | (48) | (5) |
| Total revenue | $4,957 | $3,835 | $1,122 | 29% |

| OPERATING INCOME: Millions of dollars | Three Months Ended June 30 2017 | 2016 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $397 | $(32) | $429 | — |
| Drilling and Evaluation | 125 | 154 | (29) | (19)% |
| Total | 522 | 122 | 400 | — |
| Corporate and other | (114) | (3,579) | 3,465 | 97 |
| Impairments and other charges | (262) | (423) | 161 | 38 |
| Total operating income (loss) | $146 | $(3,880) | $4,026 | — |

Consolidated revenue was $5.0 billion in the second quarter of 2017, an increase of $1.1 billion, or 29%, as compared to the second quarter of 2016, primarily associated with improvements in both pressure pumping services and drilling activity in North America. Revenue from North America was 56% of consolidated revenue in the second quarter of 2017, compared to 40% of consolidated revenue in the second quarter of 2016, which reflects the improvement that our North America operations are experiencing as the oil and gas industry recovers.

Consolidated operating income was $146 million during the second quarter of 2017, which included a $262 million pre-tax loss for a fair market value adjustment related to an expected exchange of receivables from our primary customer in Venezuela for an interest-bearing promissory note. This compared to an operating loss of $3.9 billion in the second quarter of 2016, which included a $3.5 billion merger termination fee and $423 million of impairments and other charges. Additionally, operating results improved primarily from increased activity, utilization and pricing associated with pressure pumping services.

### OPERATING SEGMENTS

#### Completion and Production

Completion and Production revenue in the second quarter of 2017 was $3.1 billion, an increase of $1.0 billion, or 48%, from the second quarter of 2016. Operating income in the second quarter of 2017 was $397 million, an increase of $429 million compared to the second quarter of 2016. Improved operating results were primarily related to increased activity, utilization and pricing associated with pressure pumping services and higher completion tool sales in the United States land market, partially offset by reduced completion tool sales in our international operations.

#### Drilling and Evaluation

Drilling and Evaluation revenue in the second quarter of 2017 was $1.8 billion, an increase of $104 million, or 6%, from the second quarter of 2016. Improved drilling activity and logging services in the United States land market were partially offset by reduced activity and pricing for drilling related services in the Eastern Hemisphere.

Operating income in the second quarter of 2017 was $125 million, a decrease of $29 million, or 19%, compared to the second quarter of 2016, driven by the impact of pricing pressures and activity reductions in the Eastern Hemisphere for drilling related services, partially offset by improved pricing and activity for drilling related services in the United States land market.

### GEOGRAPHIC REGIONS

#### North America

North America revenue in the second quarter of 2017 was $2.8 billion, an 83% improvement compared to the second quarter of 2016, with increases across almost all of our product service lines, primarily pressure pumping services, drilling activity, completion tool sales and logging services in the United States land market. This was driven by improved customer demand in our United States land sector with increases in both pricing and utilization.

#### Latin America

Latin America revenue in the second quarter of 2017 was $508 million, a 7% increase compared to the second quarter of 2016, primarily as a result of increased pressure pumping and drilling activity in Colombia and drilling and stimulation activity in Brazil, partially offset by decreases in drilling activity in Mexico.

#### Europe/Africa/CIS

Europe/Africa/CIS revenue in the second quarter of 2017 was $679 million, a decline of 15% compared to the second quarter of 2016. The decreases during the quarter were primarily from lower completion tool sales in Angola and Nigeria, reduced drilling activity in the North Sea and Angola, and lower activity for pressure pumping services throughout the region. These decreases were partially offset by improved results in Russia for cementing and fluid services.

#### Middle East/Asia

Middle East/Asia revenue in the second quarter of 2017 was $1.0 billion, a reduction of 5% compared to the second quarter of 2016, due to reduced drilling activity and direct sales throughout the region, specifically in Indonesia and Thailand, partially offset by improved project management activity in Iraq.

### OTHER OPERATING ITEMS

*Corporate and other* expenses decreased to $114 million in the second quarter of 2017, compared to $3.6 billion of expenses in the second quarter of 2016. During the second quarter of 2017, we incurred approximately $42 million of charges for litigation settlements, the majority of which related to the anticipated resolution of an SEC investigation and one-time executive compensation charges. See Note 5 to the condensed consolidated financial statements for further information. During the second quarter of 2016, we incurred a $3.5 billion charge for a merger termination fee and related costs.

*Impairments and other charges* were $262 million in the three months ended June 30, 2017, which related to a fair market value adjustment related to an expected exchange of receivables from our primary customer in Venezuela for an interest-bearing promissory note. See “Business Environment and Results of Operations” for further discussion. This compares to $423 million in company-wide charges during the three months ended June 30, 2016, which consisted of severance costs, asset impairments and write-offs, and a loss on exchange for a promissory note in Venezuela.

### NONOPERATING ITEMS

*Interest expense, net* decreased $75 million in the second quarter of 2017, compared to the second quarter of 2016, primarily due to interest savings from the early extinguishment of $1.4 billion of senior notes in the first quarter of 2017.

*Effective tax rate*. During the three months ended June 30, 2017, we recorded a total income tax benefit of $29 million on a pre-tax loss of $1 million, which included approximately a net $20 million tax benefit associated with global prior year audits. During the three months ended June 30, 2016, we recorded a total income tax benefit of $902 million on pre-tax losses of $4.1 billion. The effective tax rates in both periods were also impacted by the geographic mix of earnings for the respective periods.

### Six Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016

| REVENUE: Millions of dollars | Six Months Ended June 30 2017 | 2016 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $5,736 | $4,438 | $1,298 | 29% |
| Drilling and Evaluation | 3,500 | 3,595 | (95) | (3) |
| Total revenue | $9,236 | $8,033 | $1,203 | 15% |
| By geographic region: |  |  |  |  |
| North America | $5,001 | $3,310 | $1,691 | 51% |
| Latin America | 971 | 1,017 | (46) | (5) |
| Europe/Africa/CIS | 1,283 | 1,573 | (290) | (18) |
| Middle East/Asia | 1,981 | 2,133 | (152) | (7) |
| Total revenue | $9,236 | $8,033 | $1,203 | 15% |

| OPERATING INCOME: Millions of dollars | Six Months Ended June 30 2017 | 2016 | Favorable (Unfavorable) | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Completion and Production | $544 | $(2) | $546 | — |
| Drilling and Evaluation | 247 | 395 | (148) | (37)% |
| Total | 791 | 393 | 398 | 101 |
| Corporate and other | (180) | (4,163) | 3,983 | 96 |
| Impairments and other charges | (262) | (3,189) | 2,927 | 92 |
| Total operating income (loss) | $349 | $(6,959) | $7,308 | — |

Consolidated revenue was $9.2 billion in the first six months of 2017, an increase of $1.2 billion, or 15%, as compared to the first six months of 2016, primarily due to increased North America pressure pumping services, partially offset by reduced drilling activity on a global basis. Revenue from North America was 54% of consolidated revenue in the first six months of 2017, compared to 41% of consolidated revenue in the first six months of 2016, which reflects the improvement that our North America operations are experiencing as the oil and gas industry recovers.

Consolidated operating income was $349 million in the first six months of 2017, which included a $262 million pre-tax loss for a fair market value adjustment related to an expected exchange of receivables from our primary customer in Venezuela for an interest-bearing promissory note. This compares to an operating loss of $7.0 billion during the first six months of 2016, which includes $4.1 billion for a merger termination fee and related costs and $3.2 billion of impairments and other charges. Additionally, operating results improved primarily from increased activity, utilization and pricing associated with pressure pumping services.

### OPERATING SEGMENTS

#### Completion and Production

Completion and Production revenue in the first six months of 2017 was $5.7 billion, an increase of $1.3 billion, or 29%, from the first six months of 2016. Operating income in the first six months of 2017 was $544 million, compared to an operating loss of $2 million in the first six months of 2016. Improved operating results were primarily related to increased activity, utilization and pricing associated with pressure pumping services in the United States land market. International revenue declined as a result of reductions in completion tool sales across all regions and pressure pumping services in Europe/Africa/CIS.

#### Drilling and Evaluation

Drilling and Evaluation revenue in the first six months of 2017 was $3.5 billion, a decrease of $95 million, or 3%, from the first six months of 2016. Operating income in the first six months of 2017 was $247 million, a decrease of $148 million, or 37%, compared to the first six months of 2016. These reductions were experienced across the majority of our product service lines, particularly drilling and logging activity decreases, as well as pricing pressures in the Eastern Hemisphere. The reductions were partially offset by an increase in drilling and logging activity in our North America operations.

### GEOGRAPHIC REGIONS

#### North America

North America revenue in the first six months of 2017 was $5.0 billion, a 51% increase compared to the first six months of 2016. These results were driven by improved customer demand in our United States land sector with increases in both pricing and utilization, primarily related to pressure pumping services, drilling activity and completion tool sales.

#### Latin America

Latin America revenue in the first six months of 2017 was $971 million, a 5% reduction compared to the first six months of 2016, primarily due to reduced activity in the majority of our product service lines in Venezuela and Mexico, as well as reduced completion tool sales in Brazil and drilling activity in Argentina. These decreases were partially offset by increased stimulation and drilling activity in Brazil, increased activity for pressure pumping, drilling and logging services in Colombia, and improved drilling and project management activity in Ecuador.

#### Europe/Africa/CIS

Europe/Africa/CIS revenue in the first six months of 2017 was $1.3 billion, an 18% decrease from the first six months of 2016, primarily resulting from a reduction in well completion services and pressure pumping activity across the region, as well as reductions in drilling services and completion tool sales in Nigeria, and drilling and logging activity in Angola.

#### Middle East/Asia

Middle East/Asia revenue in the first six months of 2017 was $2.0 billion, a 7% decrease from the first six months of 2016, due to pricing pressure and reduced drilling activity in the Middle East, a decrease in activity for the majority of our product service lines in Indonesia, and reduced drilling and logging activity in Thailand. These decreases were partially offset by improved project management activity in Iraq and higher stimulation activity in the Middle East.

### OTHER OPERATING ITEMS

*Corporate and other* expenses were $180 million in the first six months of 2017 compared to $4.2 billion in the first six months of 2016. During the first six months of 2017, we incurred approximately $42 million of charges for litigation settlements, the majority of which related to the anticipated resolution of an SEC investigation and one-time executive compensation charges. See Note 5 to the condensed consolidated financial statements for further information. During the first six months of 2016, we incurred $4.1 billion of charges for a merger termination fee and related costs.

*Impairments and other charges* were $262 million in the six months ended June 30, 2017, related to fair market value adjustment related to an expected exchange of receivables from our primary customer in Venezuela for an interest-bearing promissory note. See “Business Environment and Results of Operations” for further discussion. This compares to $3.2 billion in company-wide charges during the six months ended June 30, 2016, which consisted of fixed asset impairments and write-offs, inventory write-downs, impairments of intangible assets, severance costs, facility closures, a loss on exchange for a promissory note in Venezuela, and other charges.

### NONOPERATING ITEMS

*Interest expense, net* was $363 million in the first six months of 2017, as compared to $361 million in the first six months of 2016. During the first quarter of 2017 we incurred $104 million in costs related to the early extinguishment of $1.4 billion of senior notes, while in the second quarter of 2016 we incurred $41 million of debt redemption fees and associated expenses related to the $2.5 billion of debt mandatorily redeemed. The first six months of 2017 reflects the corresponding interest savings from these debt payments.

*Effective tax rate*. During the six months ended June 30, 2017, we recorded a total income tax benefit of $54 million on pre-tax losses of $58 million, which included approximately a net $20 million tax benefit associated with global prior year audits. During the six months ended June 30, 2016, we recorded a total income tax benefit of $1.8 billion on pre-tax losses of $7.4 billion. The effective tax rates in both periods were also impacted by the geographic mix of earnings for the respective periods.

### 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 5 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 2016 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2016.

## Controls and procedures

As filed, 1,427 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, 2017 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 quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Jul 28, 2017.
Source: SEC EDGAR, the filing index for accession 0000045012-17-000159. Last ingested by Listed: Nov 2, 2026, 13:24 ET. No prices; not investment advice.