edsept200810q_final.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] Quarterly
Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For
the quarterly period ended September 30, 2008
OR
[ ] Transition
Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
For the
transition period from _____ to _____
Commission
File Number 001-03492
HALLIBURTON
COMPANY
(a
Delaware Corporation)
75-2677995
5
Houston Center
1401
McKinney, Suite 2400
Houston,
Texas 77010
(Address
of Principal Executive Offices)
Telephone
Number – Area Code (713) 759-2600
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated
filer [X]
Non-accelerated
filer
[ ]
|
Accelerated
filer [ ]
Smaller
reporting
company
[ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
No
X
As of
October 13, 2008, 893,754,815 shares of Halliburton Company common stock, $2.50
par value per share, were outstanding.
HALLIBURTON
COMPANY
Index
|
|
Page No.
|
PART
I.
|
FINANCIAL
INFORMATION
|
3
|
|
|
|
Item
1.
|
Financial
Statements
|
3
|
|
|
|
|
- Condensed
Consolidated Statements of Operations
|
3
|
|
- Condensed
Consolidated Balance Sheets
|
4
|
|
- Condensed
Consolidated Statements of Cash Flows
|
5
|
|
- Notes
to Condensed Consolidated Financial Statements
|
6
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
|
|
|
Results
of Operations
|
21
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
46
|
|
|
|
Item
4.
|
Controls
and Procedures
|
47
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
48
|
|
|
|
Item
1.
|
Legal
Proceedings
|
48
|
|
|
|
Item
1(a).
|
Risk
Factors
|
48
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
48
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
48
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
48
|
|
|
|
Item
5.
|
Other
Information
|
48
|
|
|
|
Item
6.
|
Exhibits
|
49
|
|
|
|
Signatures
|
|
50
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
HALLIBURTON
COMPANY
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of dollars and shares except per share data
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
3,608 |
|
|
$ |
2,951 |
|
|
$ |
9,864 |
|
|
$ |
8,217 |
|
Product
sales
|
|
|
1,245 |
|
|
|
977 |
|
|
|
3,505 |
|
|
|
2,868 |
|
Total
revenue
|
|
|
4,853 |
|
|
|
3,928 |
|
|
|
13,369 |
|
|
|
11,085 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
2,670 |
|
|
|
2,111 |
|
|
|
7,423 |
|
|
|
5,908 |
|
Cost
of sales
|
|
|
1,055 |
|
|
|
845 |
|
|
|
2,940 |
|
|
|
2,423 |
|
General
and administrative
|
|
|
78 |
|
|
|
63 |
|
|
|
221 |
|
|
|
214 |
|
Gain
on sale of assets, net
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(62 |
) |
|
|
(51 |
) |
Total
operating costs and expenses
|
|
|
3,802 |
|
|
|
3,018 |
|
|
|
10,522 |
|
|
|
8,494 |
|
Operating
income
|
|
|
1,051 |
|
|
|
910 |
|
|
|
2,847 |
|
|
|
2,591 |
|
Interest
expense
|
|
|
(35 |
) |
|
|
(39 |
) |
|
|
(112 |
) |
|
|
(118 |
) |
Interest
income
|
|
|
6 |
|
|
|
26 |
|
|
|
35 |
|
|
|
100 |
|
Other,
net
|
|
|
(697 |
) |
|
|
(1 |
) |
|
|
(700 |
) |
|
|
(6 |
) |
Income
from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and minority
interest
|
|
|
325 |
|
|
|
896 |
|
|
|
2,070 |
|
|
|
2,567 |
|
Provision
for income taxes
|
|
|
(343 |
) |
|
|
(152 |
) |
|
|
(869 |
) |
|
|
(695 |
) |
Minority
interest in net income of subsidiaries
|
|
|
(3 |
) |
|
|
(18 |
) |
|
|
(16 |
) |
|
|
(22 |
) |
Income
(loss) from continuing operations
|
|
|
(21 |
) |
|
|
726 |
|
|
|
1,185 |
|
|
|
1,850 |
|
Income
(loss) from discontinued operations, net of income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax (provision) benefit of $(1),
$0, $(1), and $11
|
|
|
– |
|
|
|
1 |
|
|
|
(115 |
) |
|
|
959 |
|
Net
income (loss)
|
|
$ |
(21 |
) |
|
$ |
727 |
|
|
$ |
1,070 |
|
|
$ |
2,809 |
|
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
(0.02 |
) |
|
$ |
0.83 |
|
|
$ |
1.36 |
|
|
$ |
2.00 |
|
Income
(loss) from discontinued operations, net
|
|
|
– |
|
|
|
– |
|
|
|
(0.13 |
) |
|
|
1.04 |
|
Net
income (loss) per share
|
|
$ |
(0.02 |
) |
|
$ |
0.83 |
|
|
$ |
1.23 |
|
|
$ |
3.04 |
|
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
(0.02 |
) |
|
$ |
0.79 |
|
|
$ |
1.30 |
|
|
$ |
1.93 |
|
Income
(loss) from discontinued operations, net
|
|
|
– |
|
|
|
– |
|
|
|
(0.12 |
) |
|
|
0.99 |
|
Net
income (loss) per share
|
|
$ |
(0.02 |
) |
|
$ |
0.79 |
|
|
$ |
1.18 |
|
|
$ |
2.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
$ |
0.27 |
|
|
$ |
0.255 |
|
Basic
weighted average common shares outstanding
|
|
|
876 |
|
|
|
880 |
|
|
|
873 |
|
|
|
925 |
|
Diluted
weighted average common shares outstanding
|
|
|
876 |
|
|
|
917 |
|
|
|
909 |
|
|
|
961 |
|
See notes
to condensed consolidated financial statements.
HALLIBURTON
COMPANY
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
Millions
of dollars and shares except per share data
|
|
2008
|
|
|
2007
|
|
Assets
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
973 |
|
|
$ |
1,847 |
|
Receivables
(less allowance for bad debts of $51 and $49)
|
|
|
3,858 |
|
|
|
3,093 |
|
Inventories
|
|
|
1,824 |
|
|
|
1,459 |
|
Current
deferred income taxes
|
|
|
245 |
|
|
|
376 |
|
Investments
in marketable securities
|
|
|
– |
|
|
|
388 |
|
Other
current assets
|
|
|
467 |
|
|
|
410 |
|
Total
current assets
|
|
|
7,367 |
|
|
|
7,573 |
|
Property,
plant, and equipment, net of accumulated depreciation of $4,431 and
$4,126
|
|
|
4,438 |
|
|
|
3,630 |
|
Goodwill
|
|
|
1,004 |
|
|
|
790 |
|
Noncurrent
deferred income taxes
|
|
|
90 |
|
|
|
348 |
|
Other
assets
|
|
|
947 |
|
|
|
794 |
|
Total
assets
|
|
$ |
13,846 |
|
|
$ |
13,135 |
|
Liabilities
and Shareholders’ Equity
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
964 |
|
|
$ |
768 |
|
Employee
compensation and benefits
|
|
|
607 |
|
|
|
575 |
|
Deferred
revenue
|
|
|
202 |
|
|
|
209 |
|
Current
maturities of long-term debt
|
|
|
183 |
|
|
|
159 |
|
Income
tax payable
|
|
|
52 |
|
|
|
209 |
|
Other
current liabilities
|
|
|
523 |
|
|
|
491 |
|
Total
current liabilities
|
|
|
2,531 |
|
|
|
2,411 |
|
Long-term
debt
|
|
|
2,588 |
|
|
|
2,627 |
|
Employee
compensation and benefits
|
|
|
406 |
|
|
|
403 |
|
Other
liabilities
|
|
|
834 |
|
|
|
734 |
|
Total
liabilities
|
|
|
6,359 |
|
|
|
6,175 |
|
Minority
interest in consolidated subsidiaries
|
|
|
60 |
|
|
|
94 |
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
shares, par value $2.50 per share – authorized 2,000 shares, issued
1,067
|
|
|
|
|
|
|
|
|
and 1,063
shares
|
|
|
2,666 |
|
|
|
2,657 |
|
Paid-in
capital in excess of par value
|
|
|
1,121 |
|
|
|
1,741 |
|
Accumulated
other comprehensive loss
|
|
|
(100 |
) |
|
|
(104 |
) |
Retained
earnings
|
|
|
9,025 |
|
|
|
8,202 |
|
|
|
|
12,712 |
|
|
|
12,496 |
|
Less
173 and 183 shares of treasury stock, at cost
|
|
|
5,285 |
|
|
|
5,630 |
|
Total
shareholders’ equity
|
|
|
7,427 |
|
|
|
6,866 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
13,846 |
|
|
$ |
13,135 |
|
See notes
to condensed consolidated financial statements.
HALLIBURTON
COMPANY
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,070 |
|
|
$ |
2,809 |
|
Adjustments
to reconcile net income to net cash from operations:
|
|
|
|
|
|
|
|
|
Loss
on extinguishment of debt
|
|
|
693 |
|
|
|
– |
|
Depreciation,
depletion, and amortization
|
|
|
535 |
|
|
|
417 |
|
Provision
(benefit) for deferred income taxes
|
|
|
268 |
|
|
|
(82 |
) |
(Income)
loss from discontinued operations
|
|
|
115 |
|
|
|
(959 |
) |
Discontinued
operations
|
|
|
(115 |
) |
|
|
– |
|
Gain
on sale of assets, net
|
|
|
(62 |
) |
|
|
(51 |
) |
Impairment
of assets
|
|
|
23 |
|
|
|
– |
|
Other
changes:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(628 |
) |
|
|
(318 |
) |
Inventories
|
|
|
(365 |
) |
|
|
(320 |
) |
Accounts
payable
|
|
|
204 |
|
|
|
109 |
|
Other
|
|
|
(91 |
) |
|
|
128 |
|
Cash
flows from discontinued operations
|
|
|
– |
|
|
|
31 |
|
Total
cash flows from operating activities
|
|
|
1,647 |
|
|
|
1,764 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,305 |
) |
|
|
(1,064 |
) |
Acquisitions
of assets, net of cash acquired
|
|
|
(408 |
) |
|
|
(447 |
) |
Sales
(purchases) of short-term investments in marketable securities,
net
|
|
|
388 |
|
|
|
(1,113 |
) |
Sales
of property, plant, and equipment
|
|
|
127 |
|
|
|
124 |
|
Other
investing activities
|
|
|
(31 |
) |
|
|
34 |
|
Cash
flows from discontinued operations
|
|
|
– |
|
|
|
(1,474 |
) |
Total
cash flows from investing activities
|
|
|
(1,229 |
) |
|
|
(3,940 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments
on long-term borrowings
|
|
|
(1,896 |
) |
|
|
(3 |
) |
Proceeds
from long-term borrowings, net of offering costs
|
|
|
1,189 |
|
|
|
– |
|
Payments
to reacquire common stock
|
|
|
(504 |
) |
|
|
(1,303 |
) |
Payments
of dividends to shareholders
|
|
|
(239 |
) |
|
|
(235 |
) |
Proceeds
from exercises of stock options
|
|
|
118 |
|
|
|
92 |
|
Other
financing activities
|
|
|
47 |
|
|
|
16 |
|
Cash
flows from discontinued operations
|
|
|
– |
|
|
|
(18 |
) |
Total
cash flows from financing activities
|
|
|
(1,285 |
) |
|
|
(1,451 |
) |
Effect
of exchange rate changes on cash
|
|
|
(7 |
) |
|
|
(17 |
) |
Decrease
in cash and equivalents
|
|
|
(874 |
) |
|
|
(3,644 |
) |
Cash
and equivalents at beginning of period, including $0 and $1,461 related
to
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
|
1,847 |
|
|
|
4,379 |
|
Cash
and equivalents at end of period
|
|
$ |
973 |
|
|
$ |
735 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
payments during the period for:
|
|
|
|
|
|
|
|
|
Interest
from continuing operations
|
|
$ |
117 |
|
|
$ |
118 |
|
Income
taxes from continuing operations
|
|
$ |
738 |
|
|
$ |
689 |
|
See notes
to condensed consolidated financial statements.
HALLIBURTON
COMPANY
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1. Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements were prepared
using generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Regulation S-X. Accordingly,
these financial statements do not include all information or footnotes required
by generally accepted accounting principles for annual financial statements and
should be read together with our 2007 Annual Report on Form 10-K.
Certain
prior period amounts have been reclassified to be consistent with the current
presentation.
Our
accounting policies are in accordance with generally accepted accounting
principles in the United States of America. The preparation of
financial statements in conformity with these accounting principles requires us
to make estimates and assumptions that affect:
|
-
|
the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements;
and
|
|
-
|
the
reported amounts of revenue and expenses during the reporting
period.
|
Ultimate
results could differ from our estimates.
In our
opinion, the condensed consolidated financial statements included herein contain
all adjustments necessary to present fairly our financial position as of
September 30, 2008, the results of our operations for the three and nine months
ended September 30, 2008 and 2007, and our cash flows for the nine months ended
September 30, 2008 and 2007. Such adjustments are of a normal
recurring nature. The results of operations for the three and nine
months ended September 30, 2008 may not be indicative of results for the full
year.
Note
2. KBR Separation
On April
5, 2007, we completed the separation of KBR, Inc. (KBR) from us by exchanging
the 135.6 million shares of KBR common stock owned by us on that date for 85.3
million shares of our common stock. In the second quarter of 2007, we
recorded a gain on the disposition of KBR of approximately $933 million, net of
tax and the estimated fair value of the indemnities and guarantees provided to
KBR as described below, which was included in “Income (loss) from discontinued
operations, net of income tax” on the condensed consolidated statement of
operations. During the second quarter of 2008, adjustments of $117
million, net of tax, to our estimated liability for indemnities and guarantees
were reflected as a loss in “Income (loss) from discontinued operations, net of
income tax.”
We
entered into various agreements relating to the separation of KBR, including,
among others, a master separation agreement, a registration rights agreement, a
tax sharing agreement, transition services agreements, and an employee matters
agreement. The master separation agreement provides for, among other
things, KBR’s responsibility for liabilities related to its business and our
responsibility for liabilities unrelated to KBR’s business. We
provide indemnification in favor of KBR under the master separation agreement
for certain contingent liabilities, including our indemnification of KBR and any
of its greater than 50%-owned subsidiaries as of November 20, 2006, the date of
the master separation agreement, for:
|
- |
fines
or other monetary penalties or direct monetary damages, including
disgorgement, as a result of a claim made or assessed by a governmental
authority in the United States, the United Kingdom, France, Nigeria,
Switzerland, and/or Algeria, or a settlement thereof, related to alleged
or actual violations occurring prior to November 20, 2006 of the United
States Foreign Corrupt Practices Act (FCPA) or particular, analogous
applicable foreign statutes, laws, rules, and regulations in connection
with investigations pending as of that date, including with respect to the
construction and subsequent expansion by a consortium of engineering firms
comprised of Technip SA of France, Snamprogetti Netherlands B.V., JGC
Corporation of Japan, and Kellogg Brown & Root LLC (TSKJ) of a natural
gas liquefaction complex and related facilities at Bonny Island in Rivers
State, Nigeria; and |
|
-
|
all
out-of-pocket cash costs and expenses, or cash settlements or cash
arbitration awards in lieu thereof, KBR may incur after the effective date
of the master separation agreement as a result of the replacement of the
subsea flowline bolts installed in connection with the Barracuda-Caratinga
project. See Note 8 for further discussion of these
matters.
|
Additionally,
we provide indemnities, performance guarantees, surety bond guarantees, and
letter of credit guarantees that are currently in place in favor of KBR’s
customers or lenders under project contract, credit agreements, letters of
credit, and other KBR credit instruments. These indemnities and
guarantees will continue until they expire at the earlier of: (1) the
termination of the underlying project contract or KBR obligations there under;
(2) the expiration of the relevant credit support instrument in accordance with
its terms or release of such instrument by the customer; or (3) the expiration
of the credit agreements. Further, KBR and we have agreed that, until
December 31, 2009, we will issue additional guarantees, indemnification, and
reimbursement commitments for KBR’s benefit in connection with: (a)
letters of credit necessary to comply with KBR’s Egypt Basic Industries
Corporation ammonia plant contract, KBR’s Allenby & Connaught project, and
all other KBR project contracts that were in place as of December 15, 2005; (b)
surety bonds issued to support new task orders pursuant to the Allenby &
Connaught project, two job order contracts for KBR’s Government and
Infrastructure segment, and all other KBR project contracts that were in place
as of December 15, 2005; and (c) performance guarantees in support of these
contracts. KBR is compensating us for these guarantees. We
have also provided a limited indemnity, with respect to FCPA and anti-trust
governmental and third-party claims, to the lender parties under KBR’s revolving
credit agreement expiring in December 2010. KBR has agreed to
indemnify us, other than for the FCPA and Barracuda-Caratinga bolts matter, if
we are required to perform under any of the indemnities or guarantees related to
KBR’s revolving credit agreement, letters of credit, surety bonds, or
performance guarantees described above.
During
the second quarter of 2007, we recorded $190 million, as a reduction of the gain
on the disposition of KBR, to reflect the estimated fair value of the above
indemnities and guarantees, net of the associated estimated future tax benefit.
As noted previously, during the second quarter of 2008, we recorded $117
million, net of tax, in adjustments to our estimated liability for indemnities
and guarantees as a loss from discontinued operations to reflect our most recent
assumptions regarding the resolution of the FCPA investigations and
Barracuda-Caratinga bolt matter. These indemnities and guarantees are
primarily included in “Other liabilities” on the condensed consolidated balance
sheets and totaled $342 million at September 30, 2008.
The tax
sharing agreement provides for allocations of United States and certain other
jurisdiction tax liabilities between us and KBR.
Note
3. Acquisitions and Dispositions
In July
2008, we acquired the remaining 49% equity interest in WellDynamics B.V.
(WellDynamics) from Shell Technology Ventures Fund 1 B.V. (STV Fund) resulting
in our 100% ownership of WellDynamics. WellDynamics is a provider of
intelligent well completion technology and its results of operations are
included in our Completion and Production segment.
In March
2008, we completed the sale of a joint venture interest to our joint venture
partner. As a result of the transaction, we recorded a gain of $35
million during the first quarter of 2008. We accounted for our
interest in the joint venture using the cost method in our Completion and
Production segment.
In July
2007, we acquired the entire share capital of PSL Energy Services Limited
(PSLES), a leading eastern hemisphere provider of process, pipeline, and well
intervention services. PSLES has operational bases in the United
Kingdom, Norway, the Middle East, Azerbaijan, Algeria, and Asia
Pacific. We paid $333 million for PSLES, consisting of $329 million
in cash and $4 million in debt assumed. We recorded goodwill of $156
million and intangible assets of $61 million. Beginning in August
2007, PSLES’s results of operations are included in our Completion and
Production segment.
In
January 2007, we acquired all intellectual property, current assets, and
existing business associated with Calgary-based Ultraline Services Corporation
(Ultraline), a division of Savanna Energy Services Corp. Ultraline is
a provider of wireline services in Canada. We paid approximately $178
million for Ultraline and recorded goodwill of $124 million and intangible
assets of $41 million. Beginning in February 2007, Ultraline’s
results of operations are included in our Drilling and Evaluation
segment.
Note
4. Business Segment Information
We
operate under two divisions, which form the basis for the two operating segments
we report: the Completion and Production segment and the Drilling and
Evaluation segment.
The
following table presents information on our business
segments. “Corporate and other” includes expenses related to support
functions and corporate executives. Also included are certain gains
and losses not attributable to a particular business segment.
Intersegment
revenue was immaterial. Our equity in earnings and losses of
unconsolidated affiliates that are accounted for by the equity method are
included in revenue and operating income of the applicable segment.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion
and Production
|
|
$ |
2,664 |
|
|
$ |
2,187 |
|
|
$ |
7,292 |
|
|
$ |
6,097 |
|
Drilling
and Evaluation
|
|
|
2,189 |
|
|
|
1,741 |
|
|
|
6,077 |
|
|
|
4,988 |
|
Total
revenue
|
|
$ |
4,853 |
|
|
$ |
3,928 |
|
|
$ |
13,369 |
|
|
$ |
11,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion
and Production
|
|
$ |
660 |
|
|
$ |
596 |
|
|
$ |
1,750 |
|
|
$ |
1,628 |
|
Drilling
and Evaluation
|
|
|
472 |
|
|
|
372 |
|
|
|
1,336 |
|
|
|
1,082 |
|
Total
operations
|
|
|
1,132 |
|
|
|
968 |
|
|
|
3,086 |
|
|
|
2,710 |
|
Corporate
and other
|
|
|
(81 |
) |
|
|
(58 |
) |
|
|
(239 |
) |
|
|
(119 |
) |
Total
operating income
|
|
$ |
1,051 |
|
|
$ |
910 |
|
|
$ |
2,847 |
|
|
$ |
2,591 |
|
As of
September 30, 2008, 34% of our gross trade receivables were from customers in
the United States. As of December 31, 2007, 35% of our gross trade
receivables were from customers in the United States. No other
country accounted for more than 10% of our gross trade receivables at these
dates.
Note
5. Inventories
Inventories
are stated at the lower of cost or market. In the United States, we
manufacture certain finished products and have parts inventories for drill bits,
completion products, bulk materials, and other tools that are recorded using the
last-in, first-out method totaling $96 million at September 30, 2008 and $71
million at December 31, 2007. If the average cost method was used,
total inventories would have been $30 million higher than reported at September
30, 2008 and $25 million higher than reported at December 31,
2007. The cost of the remaining inventory was recorded on the average
cost method. Inventories consisted of the following:
|
|
September
30,
|
|
|
December
31,
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
Finished
products and parts
|
|
$ |
1,302 |
|
|
$ |
1,042 |
|
Raw
materials and supplies
|
|
|
445 |
|
|
|
325 |
|
Work
in process
|
|
|
77 |
|
|
|
92 |
|
Total
|
|
$ |
1,824 |
|
|
$ |
1,459 |
|
Finished
products and parts are reported net of obsolescence reserves of $75 million at
September 30, 2008 and $65 million at December 31, 2007.
Note
6. Debt
Our
3.125% convertible senior notes due July 2023 became redeemable at our option on
July 15, 2008. On July 30, 2008, we gave notice of redemption on the
convertible notes. In lieu of redemption, the holders of the convertible
notes could convert each $1,000 principal amount of convertible notes into
53.4069 shares of our common stock. Substantially all of the holders
timely elected to convert during the third quarter of 2008. Upon
conversion, we settled the principal amount of our convertible notes in cash and
the premium on the notes with a combination of $693 million in cash and
approximately $840 million, or 20 million shares, of our treasury stock.
The settlement of the principal amount was funded with the proceeds from the
issuance of senior notes, as described below. We recorded a non-tax
deductible loss of $693 million in the third quarter of 2008, in “Other, net” on
our condensed consolidated statement of operations, related to the portion of
the premium settled in cash.
In
September 2008, we issued $800 million aggregate principal amount of senior
notes due 2038 bearing interest at a fixed rate of 6.7% and $400 million
aggregate principal amount of senior notes due 2018 bearing interest at a fixed
rate of 5.9%. We may redeem some of the notes of each series from time to
time or all of the notes of each series at any time at the redemption prices,
plus accrued and unpaid interest. The notes are general, senior unsecured
indebtedness and rank equally with all of our existing and future senior
unsecured indebtedness.
On
September 25, 2008, we terminated the $2.5 billion, 364-day revolving credit
facility established in July 2008 to provide short-term bridge financing to pay
for the settlement of the convertible notes.
On
October 10, 2008, we entered into an unsecured, six-month revolving credit
facility, with current commitments of $400 million, to give us additional
liquidity and for other general corporate purposes. We are able to draw on the
facility once we have used all of our existing $1.2 billion, five-year revolving
credit facility.
Note
7. Comprehensive Income (Loss)
The
components of comprehensive income (loss) included the following:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income (loss)
|
|
$ |
(21 |
) |
|
$ |
727 |
|
|
$ |
1,070 |
|
|
$ |
2,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustments
|
|
|
1 |
|
|
|
– |
|
|
|
2 |
|
|
|
– |
|
Realization
of gains included in net income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(24 |
) |
Net
cumulative translation adjustment
|
|
|
1 |
|
|
|
– |
|
|
|
2 |
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
defined benefit and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
postretirement plans
adjustments, net
|
|
|
1 |
|
|
|
– |
|
|
|
4 |
|
|
|
282 |
|
Net
unrealized gains (losses) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
(1 |
) |
|
|
– |
|
|
|
(2 |
) |
|
|
1 |
|
Total
comprehensive income (loss)
|
|
$ |
(20 |
) |
|
$ |
727 |
|
|
$ |
1,074 |
|
|
$ |
3,068 |
|
Accumulated
other comprehensive loss consisted of the following:
|
|
September
30,
|
|
|
December
31,
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
Cumulative
translation adjustments
|
|
$ |
(59 |
) |
|
$ |
(61 |
) |
Defined
benefit and other postretirement liability adjustments
|
|
|
(41 |
) |
|
|
(45 |
) |
Unrealized
gains on investments and derivatives
|
|
|
– |
|
|
|
2 |
|
Total
accumulated other comprehensive loss
|
|
$ |
(100 |
) |
|
$ |
(104 |
) |
Note
8. Commitments and Contingencies
Foreign
Corrupt Practices Act investigations
The
Securities and Exchange Commission (SEC) is conducting a formal investigation
into whether improper payments were made to government officials in Nigeria
through the use of agents or subcontractors in connection with the construction
and subsequent expansion by TSKJ of a multibillion dollar natural gas
liquefaction complex and related facilities at Bonny Island in Rivers State,
Nigeria. The Department of Justice (DOJ) is also conducting a related
criminal investigation. The SEC has also issued subpoenas seeking
information, which we and KBR are furnishing, regarding current and former
agents used in connection with multiple projects, including current and prior
projects, over the past 20 years located both in and outside of Nigeria in which
the Halliburton energy services business, KBR or affiliates, subsidiaries or
joint ventures of Halliburton or KBR, are or were participants. In
September 2006 and October 2007, the SEC and the DOJ, respectively, each
requested that we enter into an agreement to extend the statute of limitations
with respect to its investigation. We have entered into tolling
agreements with the SEC and the DOJ.
TSKJ is a
private limited liability company registered in Madeira, Portugal whose members
are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem
SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC (a
subsidiary of KBR), each of which had an approximate 25% interest in the
venture. TSKJ and other similarly owned entities entered into various
contracts to build and expand the liquefied natural gas project for Nigeria LNG
Limited, which is owned by the Nigerian National Petroleum Corporation, Shell
Gas B.V., Cleag Limited (an affiliate of Total), and Agip International B.V. (an
affiliate of ENI SpA of Italy).
The SEC
and the DOJ have been reviewing these matters in light of the requirements of
the FCPA. In addition to performing our own investigation, we have
been cooperating with the SEC and the DOJ investigations and with other
investigations in France, Nigeria, and Switzerland regarding the Bonny Island
project. The government of Nigeria gave notice in 2004 to the French
magistrate of a civil claim as an injured party in the French
investigation. The Serious Fraud Office in the United Kingdom is also
conducting an investigation relating to the Bonny Island project. Our
Board of Directors has appointed a committee of independent directors to oversee
and direct the FCPA investigations.
The
matters under investigation relating to the Bonny Island project cover an
extended period of time (in some cases significantly before our 1998 acquisition
of Dresser Industries and continuing through the current time
period). We have produced documents to the SEC and the DOJ from the
files of numerous officers and employees of Halliburton and KBR, including
current and former executives of Halliburton and Kellogg Brown & Root Inc.,
both voluntarily and pursuant to company subpoenas from the SEC and a grand
jury, and we are making our employees, and we understand KBR is making its
employees, available to the SEC and the DOJ for interviews. In
addition, the SEC has issued subpoenas to certain of our and Kellogg Brown &
Root Inc.’s current or former executive officers or employees, and to others
including at least one subcontractor of Kellogg Brown & Root
Inc. We further understand that the DOJ has made requests for
information abroad, and we understand that other partners in TSKJ have provided
information to the DOJ and the SEC with respect to the investigations, either
voluntarily or under subpoenas.
The SEC
and DOJ investigations include an examination of whether TSKJ’s engagements of
Tri-Star Investments as an agent and a Japanese trading company as a
subcontractor to provide services to TSKJ were utilized to make improper
payments to Nigerian government officials. In connection with the
Bonny Island project, TSKJ entered into a series of agency agreements, including
with Tri-Star Investments, of which Jeffrey Tesler is a principal, commencing in
1995 and a series of subcontracts with a Japanese trading company commencing in
1996. We understand that a French magistrate has officially placed
Mr. Tesler under investigation for corruption of a foreign public
official. In Nigeria, a legislative committee of the National
Assembly and the Economic and Financial Crimes Commission, which is organized as
part of the executive branch of the government, are or were also investigating
these matters. Our representatives have met with the French
magistrate and Nigerian officials. In October 2004, representatives
of TSKJ voluntarily testified before the Nigerian legislative
committee.
TSKJ
suspended the receipt of services from and payments to Tri-Star Investments and
the Japanese trading company and has considered instituting legal proceedings to
declare all agency agreements with Tri-Star Investments terminated and to
recover all amounts previously paid under those agreements. In
February 2005, TSKJ notified the Attorney General of Nigeria that TSKJ would not
oppose the Attorney General’s efforts to have sums of money held on deposit in
accounts of Tri-Star Investments in banks in Switzerland transferred to Nigeria
and to have the legal ownership of such sums determined in the Nigerian
courts.
As a
result of these investigations, information has been uncovered suggesting that,
commencing at least 10 years ago, members of TSKJ planned payments to Nigerian
officials. We have reason to believe that, based on the ongoing
investigations, payments may have been made by agents of TSKJ to Nigerian
officials. The government has confirmed that it has evidence of such
payments.
In June
2004, all relationships with A. Jack Stanley, who formerly served as a
consultant and chairman of Kellogg Brown & Root, Inc., and another
consultant and former employee of M.W. Kellogg Limited were
terminated. The terminations occurred because of Code of Business
Conduct violations that allegedly involved the receipt of improper personal
benefits from Mr. Tesler in connection with TSKJ’s construction of the Bonny
Island project.
In
September 2008, Mr. Stanley pleaded guilty to conspiring to violate the FCPA,
admitting that he participated in a scheme to bribe Nigerian government
officials and that payments were made by agents of TSKJ to Nigerian officials in
connection with the Bonny Island project. He also pleaded guilty to
conspiracy to commit mail and wire fraud in causing a Kellogg Brown & Root
Inc. consultant to pay kickbacks to Stanley in connection with the Bonny Island
and other liquefied natural gas projects of Kellogg Brown & Root
Inc. Under the plea agreement, Stanley will serve a maximum of 84
months' imprisonment (subject to reduction for future cooperation) and pay
restitution of approximately $11 million. In a related action, the
SEC charged Stanley with violating the anti-bribery provisions of the FCPA and
knowingly falsifying books and records to falsely reflect payments to these
agents of TSKJ as legitimate business expenses and knowingly circumventing
internal accounting controls. Without admitting or denying the
allegations in the complaint, Stanley has consented to the entry of a final
judgment that permanently enjoins him from violating the anti-bribery,
record-keeping, and internal control provisions of the Securities Exchange Act
of 1934. Stanley also has agreed to cooperate with the SEC's and the DOJ's
ongoing investigations.
The
government has also advised Halliburton and KBR that it has evidence of payments
to Nigerian officials by another agent in connection with a separate Kellogg
Brown & Root Inc.-managed project in Nigeria called the Shell EA project and
possibly evidence of payments in connection with other projects in Nigeria,
potentially including energy services projects. In addition,
information uncovered in the summer of 2006 suggests that, prior to 1998, plans
may have been made by employees of The M.W. Kellogg Company (the operations of
which are now conducted by a KBR subsidiary) to make payments to government
officials in connection with the pursuit of a number of other projects in
countries outside of Nigeria. We have reviewed a number of documents
related to Kellogg Brown & Root Inc.’s activities in countries outside of
Nigeria with respect to agents for projects after 1998. Certain
activities discussed in this paragraph involve current or former employees or
persons who were or are consultants to Kellogg Brown & Root Inc. or Kellogg
Brown & Root LLC.
In 2006
and 2007, we or KBR suspended the services of two agents in and outside of
Nigeria, including the agent in connection with the Shell EA project and another
agent who, until such suspension, had worked for Kellogg Brown & Root Inc.
or Kellogg Brown & Root LLC outside of Nigeria on several current projects
and on numerous older projects going back to the early 1980s. Such
suspensions have occurred when possible improper conduct has been discovered or
alleged or when we and KBR have been unable to confirm the agent’s compliance
with applicable law and the Code of Business Conduct.
The SEC
and DOJ are also investigating and have issued subpoenas concerning TSKJ's use
of an immigration services provider, apparently managed by a Nigerian
immigration official, to which approximately $2 million in payments in excess of
costs of visas were allegedly made between approximately 1997 and the
termination of the provider in December 2004. We understand that TSKJ
terminated the immigration services provider after a KBR employee discovered the
issue. We reported this matter to the United States government in
2007. The SEC has indicated that it believes documents concerning
this immigration service provider may have been responsive to earlier
subpoenas. The SEC has issued a subpoena requesting documents among
other things concerning any payment of anything of value to Nigerian government
officials. In response to such subpoena, we have produced and
continue to produce additional documents regarding KBR and Halliburton’s energy
services business use of immigration and customs service providers, which may
result in further inquiries. Furthermore, as a result of these
matters, we have expanded our own investigation to consider any matters raised
by energy services activities in Nigeria.
We and
KBR have and are currently engaged in discussions with the SEC and the DOJ
regarding a settlement of these matters. There can be no assurance
that a settlement will be reached or, if a settlement is reached, the timing of
any such settlement or that the terms of any settlement would not have a
material adverse effect on us.
If
violations of the FCPA were found, a person or entity found in violation could
be subject to fines, civil penalties of up to $500,000 per violation, equitable
remedies, including disgorgement (if applicable) generally of profits, including
prejudgment interest on such profits, causally connected to the violation, and
injunctive relief. Criminal penalties could range up to the greater
of $2 million per violation or twice the gross pecuniary gain or loss from the
violation, which could be substantially greater than $2 million per
violation. Depending on the underlying assumptions used, calculations
of the amount of gross pecuniary gain from the Bonny Island project could range
from a loss to a gain in excess of $300 million. It is possible that both
the SEC and the DOJ could assert that there have been multiple violations, which
could lead to multiple fines. The amount of any fines or monetary
penalties that could be assessed would depend on, among other factors, the
findings regarding the amount, timing, nature, and scope of any improper
payments, whether any such payments were authorized by or made with knowledge of
us, KBR or our or KBR’s affiliates, the amount of gross pecuniary gain or loss
involved, and the level of cooperation provided the government authorities
during the investigations. The government has expressed concern
regarding the level of our cooperation. Agreed dispositions of these
types of violations also frequently result in an acknowledgement of wrongdoing
by the entity and the appointment of a monitor on terms negotiated with the SEC
and the DOJ to review and monitor current and future business practices,
including the retention of agents, with the goal of assuring compliance with the
FCPA.
These
investigations could also result in third-party claims against us, which may
include claims for special, indirect, derivative or consequential damages,
damage to our business or reputation, loss of, or adverse effect on, cash flow,
assets, goodwill, results of operations, business prospects, profits or business
value or claims by directors, officers, employees, affiliates, advisors,
attorneys, agents, debt holders, or other interest holders or constituents of us
or our current or former subsidiaries. In addition, we could incur
costs and expenses for any monitor required by or agreed to with a governmental
authority to review our continued compliance with FCPA law.
As of
September 30, 2008, we are unable to estimate an amount of probable loss or a
range of possible loss related to these matters as it relates to us
directly. Therefore, we have not recorded any amounts as it relates
to us directly, other than for the indemnities provided to KBR, in connection
with these matters in our condensed consolidated financial
statements. We provided indemnification in favor of KBR under the
master separation agreement for certain contingent liabilities, including our
indemnification of KBR and any of its greater than 50%-owned subsidiaries as of
November 20, 2006, the date of the master separation agreement, for fines or
other monetary penalties or direct monetary damages, including disgorgement, as
a result of a claim made or assessed by a governmental authority in the United
States, the United Kingdom, France, Nigeria, Switzerland, and/or Algeria, or a
settlement thereof, related to alleged or actual violations occurring prior to
November 20, 2006 of the FCPA or particular, analogous applicable foreign
statutes, laws, rules, and regulations in connection with investigations pending
as of that date, including with respect to the construction and subsequent
expansion by TSKJ of a natural gas liquefaction complex and related facilities
at Bonny Island in Rivers State, Nigeria. As noted previously, our
estimation of the indemnity obligation regarding FCPA matters is recorded as a
liability in our condensed consolidated financial statements as of September 30,
2008 and December 31, 2007. See Note 2 for additional
information.
Our
indemnification obligation to KBR does not include losses resulting from
third-party claims against KBR, including claims for special, indirect,
derivative or consequential damages, nor does our indemnification apply to
damage to KBR’s business or reputation, loss of, or adverse effect on, cash
flow, assets, goodwill, results of operations, business prospects, profits or
business value or claims by directors, officers, employees, affiliates,
advisors, attorneys, agents, debt holders, or other interest holders or
constituents of KBR or KBR’s current or former subsidiaries.
In
consideration of our agreement to indemnify KBR for the liabilities referred to
above, KBR has agreed that we will at all times, in our sole discretion, have
and maintain control over the investigation, defense and/or settlement of these
FCPA matters until such time, if any, that KBR exercises its right to assume
control of the investigation, defense and/or settlement of the FCPA matters as
it relates to KBR. KBR has also agreed, at our expense, to assist
with our full cooperation with any governmental authority in our investigation
of these FCPA matters and our investigation, defense and/or settlement of any
claim made by a governmental authority or court relating to these FCPA matters,
in each case even if KBR assumes control of these FCPA matters as it relates to
KBR. If KBR takes control over the investigation, defense, and/or
settlement of FCPA matters, refuses a settlement of FCPA matters negotiated by
us, enters into a settlement of FCPA matters without our consent, or materially
breaches its obligation to cooperate with respect to our investigation, defense,
and/or settlement of FCPA matters, we may terminate the indemnity.
Bidding
practices investigation
In
connection with the investigation into payments relating to the Bonny Island
project in Nigeria, information was uncovered suggesting that, possibly
beginning as early as the mid-1980s, Mr. Stanley and other former Kellogg Brown
& Root Inc. employees may have engaged in coordinated bidding with one or
more competitors on certain foreign construction
projects. Halliburton’s indemnity to KBR does not extend to
liabilities for governmental fines or third party claims arising out of these
activities. In September 2008, the DOJ informed Halliburton and KBR
that Mr. Stanley admitted to bid-rigging, claimed that others knew about it, and
stated that the DOJ feels it has a viable wire fraud case based on
bid-rigging.
As of
September 30, 2008, we had not accrued any amounts related to this matter
because we believe that a loss is not probable. An estimate of possible
loss or range of loss related to this matter cannot be made.
Barracuda-Caratinga
arbitration
We also
provided indemnification in favor of KBR under the master separation agreement
for all out-of-pocket cash costs and expenses (except for legal fees and other
expenses of the arbitration so long as KBR controls and directs it), or cash
settlements or cash arbitration awards in lieu thereof, KBR may incur after
November 20, 2006 as a result of the replacement of certain subsea flowline
bolts installed in connection with the Barracuda-Caratinga
project. Under the master separation agreement, KBR currently
controls the defense, counterclaim, and settlement of the subsea flowline bolts
matter. As a condition of our indemnity, for any settlement to be
binding upon us, KBR must secure our prior written consent to such settlement’s
terms. We have the right to terminate the indemnity in the event KBR
enters into any settlement without our prior written consent. Our
estimation of the indemnity obligation regarding the Barracuda-Caratinga
arbitration is recorded as a liability in our condensed consolidated financial
statements as of September 30, 2008 and December 31, 2007. See Note 2
for additional information regarding the KBR indemnification.
At
Petrobras’ direction, KBR replaced certain bolts located on the subsea flowlines
that failed through mid-November 2005, and KBR has informed us that additional
bolts have failed thereafter, which were replaced by Petrobras. These
failed bolts were identified by Petrobras when it conducted inspections of the
bolts. A key issue in the arbitration is which party is responsible
for the designation of the material to be used for the bolts. We
understand that KBR believes that an instruction to use the particular bolts was
issued by Petrobras, and as such, KBR believes the cost resulting from any
replacement is not KBR’s responsibility. We understand Petrobras
disagrees. We understand KBR believes several possible solutions may
exist, including replacement of the bolts. Estimates indicate that
costs of these various solutions range up to $148 million. In March
2006, Petrobras commenced arbitration against KBR claiming $220 million plus
interest for the cost of monitoring and replacing the defective bolts and all
related costs and expenses of the arbitration, including the cost of attorneys’
fees. We understand KBR is vigorously defending and pursuing recovery
of the costs incurred to date through the arbitration process and to that end
has submitted a counterclaim in the arbitration seeking the recovery of $22
million. The
arbitration panel held an evidentiary hearing during the week of March 31,
2008 and took evidence and arguments under advisement.
Securities and related litigation
In June
2002, a class action lawsuit was filed against us in federal court alleging
violations of the federal securities laws after the SEC initiated an
investigation in connection with our change in accounting for revenue on
long-term construction projects and related disclosures. In the weeks
that followed, approximately twenty similar class actions were filed against
us. Several of those lawsuits also named as defendants several of our
present or former officers and directors. The class action cases were
later consolidated, and the amended consolidated class action complaint, styled
Richard Moore, et al. v.
Halliburton Company, et al., was filed and served upon us in April
2003. As a result of a substitution of lead plaintiffs, the case is
now styled Archdiocese of
Milwaukee Supporting Fund (“AMSF”) v. Halliburton Company, et
al. We settled with the SEC in the second quarter of
2004.
In June
2003, the lead plaintiffs filed a motion for leave to file a second amended
consolidated complaint, which was granted by the court. In addition
to restating the original accounting and disclosure claims, the second amended
consolidated complaint included claims arising out of the 1998 acquisition of
Dresser Industries, Inc. by Halliburton, including that we failed to timely
disclose the resulting asbestos liability exposure.
In April
2005, the court appointed new co-lead counsel and named AMSF the new lead
plaintiff, directing that it file a third consolidated amended complaint and
that we file our motion to dismiss. The court held oral arguments on
that motion in August 2005, at which time the court took the motion under
advisement. In March 2006, the court entered an order in which it
granted the motion to dismiss with respect to claims arising prior to June 1999
and granted the motion with respect to certain other claims while permitting
AMSF to re-plead some of those claims to correct deficiencies in its earlier
complaint. In April 2006, AMSF filed its fourth amended consolidated
complaint. We filed a motion to dismiss those portions of the
complaint that had been re-pled. A hearing was held on that motion in
July 2006, and in March 2007 the court ordered dismissal of the claims against
all individual defendants other than our CEO. The court ordered that
the case proceed against our CEO and Halliburton.
In
September 2007, AMSF filed a motion for class certification, and our response
was filed in November 2007. The court held a hearing in March 2008,
and on September 29, 2008, the court informed the parties that the motion for
class certification was denied and that a formal order and opinion would be
issued by November 3, 2008. After the order is issued, AMSF may seek
permission to appeal. The case is set for trial in July
2009.
As of
September 30, 2008, we had not accrued any amounts related to this matter
because we do not believe that a loss is probable. Further, an
estimate of possible loss or range of loss related to this matter cannot be
made.
Asbestos
insurance settlements
At
December 31, 2004, we resolved all open and future asbestos- and silica-related
claims in the prepackaged Chapter 11 proceedings of DII Industries LLC, Kellogg
Brown & Root LLC, and our other affected subsidiaries that had previously
been named as defendants in a large number of asbestos- and silica-related
lawsuits. During 2004, we settled insurance disputes with
substantially all the insurance companies for asbestos- and silica-related
claims and all other claims under the applicable insurance policies and
terminated all the applicable insurance policies.
Under the
insurance settlements entered into as part of the resolution of our Chapter 11
proceedings, we have agreed to indemnify our insurers under certain historic
general liability insurance policies in certain situations. We have
concluded that the likelihood of any claims triggering the indemnity obligations
is remote, and we believe any potential liability for these indemnifications
will be immaterial. Further, an estimate of possible loss or range of
loss related to this matter cannot be made. At September 30, 2008, we
had not recorded any liability associated with these
indemnifications.
M-I,
LLC antitrust litigation
On
February 16, 2007, M-I, LLC, a competitor of ours in the drilling fluids market,
filed an antitrust lawsuit against us alleging that our enforcement of a patent
that was subject to a prior lawsuit was an improper attempt to monopolize the
market for one of our drilling fluids. The lawsuit alleged that one
of our drilling fluids patents was invalid as a result of its allegedly having
been procured by fraud, that our prosecution of an infringement action against
them amounted to predatory action, and that we had falsely advertised our
product. This case was settled in the first quarter of 2008 for an
immaterial amount.
Dirt,
Inc. litigation
In April
2005, Dirt, Inc. brought suit in Alabama against Bredero-Shaw (a joint venture
in which we formerly held a 50% interest that we sold to the other party in the
venture, ShawCor Ltd., in 2002), Halliburton Energy Services, Inc., and ShawCor
Ltd., claiming that Bredero-Shaw disposed of hazardous waste in a construction
materials landfill owned and operated by Dirt, Inc. On November 1,
2007, the trial court in the above-referenced matter entered a judgment in the
total amount of $108 million. In the second quarter of 2008, an
agreement was reached among Dirt, Inc., ShawCor Ltd., and us to settle the suit,
of which we agreed to fund and have funded an immaterial amount.
Environmental
We are
subject to numerous environmental, legal, and regulatory requirements related to
our operations worldwide. In the United States, these laws and
regulations include, among others:
|
-
|
the
Comprehensive Environmental Response, Compensation, and Liability
Act;
|
|
-
|
the
Resource Conservation and Recovery
Act;
|
|
-
|
the
Federal Water Pollution Control Act;
and
|
|
-
|
the
Toxic Substances Control Act.
|
In
addition to the federal laws and regulations, states and other countries where
we do business often have numerous environmental, legal, and regulatory
requirements by which we must abide. We evaluate and address the
environmental impact of our operations by assessing and remediating contaminated
properties in order to avoid future liabilities and comply with environmental,
legal, and regulatory requirements. On occasion, we are involved in
specific environmental litigation and claims, including the remediation of
properties we own or have operated, as well as efforts to meet or correct
compliance-related matters. Our Health, Safety and Environment group
has several programs in place to maintain environmental leadership and to
prevent the occurrence of environmental contamination.
We do not
expect costs related to these remediation requirements to have a material
adverse effect on our consolidated financial position or our results of
operations. Our accrued liabilities for environmental matters were
$64 million as of September 30, 2008 and $72 million as of December 31,
2007. Our total liability related to environmental matters covers
numerous properties.
We have
subsidiaries that have been named as potentially responsible parties along with
other third parties for 8 federal and state superfund sites for which we have
established a liability. As of September 30, 2008, those 8 sites
accounted for approximately $11 million of our total $64 million
liability. For any particular federal or state superfund site, since
our estimated liability is typically within a range and our accrued liability
may be the amount on the low end of that range, our actual liability could
eventually be well in excess of the amount accrued. Despite attempts
to resolve these superfund matters, the relevant regulatory agency may at any
time bring suit against us for amounts in excess of the amount
accrued. With respect to some superfund sites, we have been named a
potentially responsible party by a regulatory agency; however, in each of those
cases, we do not believe we have any material liability. We also
could be subject to third-party claims with respect to environmental matters for
which we have been named as a potentially responsible party.
Letters
of credit
In the
normal course of business, we have agreements with banks under which
approximately $2.3 billion of letters of credit, surety bonds, or bank
guarantees were outstanding as of September 30, 2008, including approximately
$900 million that relate to KBR. These KBR letters of credit, surety
bonds, or bank guarantees are being guaranteed by us in favor of KBR’s customers
and lenders. KBR has agreed to compensate us for these guarantees and
indemnify us if we are required to perform under any of these
guarantees. Some of the outstanding letters of credit have triggering
events that would entitle a bank to require cash collateralization.
Note
9. Income Taxes
Our
effective income tax rates were 106% and 42% for the three and nine months ended
September 30, 2008 and 17% and 27% for the three and nine months ended
September 30, 2007. The increase in the effective tax rate from
2007 to 2008 was primarily related to our inability to recognize a benefit in
the third quarter of 2008 for a $693 million loss on the settlement of our
convertible debt, as United States tax law generally prohibits a company
from recognizing a tax deduction for a repurchase premium paid to retire debt
that is convertible into the stock of the issuing company. In
addition, the third quarter of 2007 included a $133 million favorable income tax
impact from the ability to recognize foreign tax credits previously estimated
not to be fully utilizable.
As of
September 30, 2008, our unrecognized tax benefits decreased $70 million
from our December 31, 2007 balance to $318 million. The decrease was
primarily related to our review of foreign tax documentation that indicated we
would be unable to benefit certain United States foreign tax
credits.
Note
10. Income (Loss) per Share
Basic
income (loss) per share is based on the weighted average number of common shares
outstanding during the period. Diluted income (loss) per share
includes additional common shares that would have been outstanding if potential
common shares with a dilutive effect had been issued. For the three
months ended September 30, 2008, we have used the basic weighted average shares
in the calculation as the effect of the common stock equivalents would be
antidilutive based upon the net loss from continuing operations. A
reconciliation of the number of shares used for the basic and diluted income per
share calculations is as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of shares
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic
weighted average common shares outstanding
|
|
|
876 |
|
|
|
880 |
|
|
|
873 |
|
|
|
925 |
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes
premium
|
|
|
– |
(a) |
|
|
30 |
|
|
|
30 |
|
|
|
28 |
|
Stock options
|
|
|
– |
(b) |
|
|
6 |
|
|
|
4 |
|
|
|
6 |
|
Restricted
stock
|
|
|
– |
(c) |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
Diluted
weighted average common shares outstanding
|
|
|
876 |
|
|
|
917 |
|
|
|
909 |
|
|
|
961 |
|
Not
included in calculation of diluted earnings per share due to their antidilutive
effect:
|
(a) |
21
million shares for convertible senior notes. |
|
(b)
|
4
million shares due to the third quarter 2008 loss from continuing
operations and 2 million shares due to the option exercise price being
greater than the average market value for stock
options.
|
|
(c) |
2
million shares for restricted stock. |
Excluded
from the computation of diluted income (loss) per share are options to purchase
two million shares of common stock that were outstanding during the nine months
ended September 30, 2008 and four million shares during both the three and nine
months ended September 30, 2007. These options were outstanding
during these quarters but were excluded because they were antidilutive, as the
option exercise price was greater than the average market price of the common
shares.
Effective
April 5, 2007, common shares outstanding were reduced by the 85.3 million shares
of our common stock that we accepted in exchange for the shares of KBR, Inc.
common stock we owned.
Note
11. Retirement Plans
The
components of net periodic benefit cost related to pension benefits for the
three and nine months ended September 30, 2008 and September 30, 2007 were as
follows:
|
|
Three
Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
Millions
of dollars
|
|
United
States
|
|
|
International
|
|
|
United
States
|
|
|
International
|
|
Service
cost
|
|
$ |
– |
|
|
$ |
7 |
|
|
$ |
– |
|
|
$ |
6 |
|
Interest
cost
|
|
|
2 |
|
|
|
13 |
|
|
|
2 |
|
|
|
11 |
|
Expected
return on plan assets
|
|
|
(2 |
) |
|
|
(11 |
) |
|
|
(2 |
) |
|
|
(10 |
) |
Settlements/curtailments
|
|
|
– |
|
|
|
(6 |
) |
|
|
1 |
|
|
|
– |
|
Amortization
of unrecognized loss
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
Net
periodic benefit cost
|
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
10 |
|
|
|
Nine
Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
Millions
of dollars
|
|
United
States
|
|
|
International
|
|
|
United
States
|
|
|
International
|
|
Service
cost
|
|
$ |
– |
|
|
$ |
20 |
|
|
$ |
– |
|
|
$ |
18 |
|
Interest
cost
|
|
|
5 |
|
|
|
39 |
|
|
|
5 |
|
|
|
32 |
|
Expected
return on plan assets
|
|
|
(6 |
) |
|
|
(34 |
) |
|
|
(5 |
) |
|
|
(28 |
) |
Settlements/curtailments
|
|
|
– |
|
|
|
(6 |
) |
|
|
1 |
|
|
|
(1 |
) |
Amortization
of unrecognized loss
|
|
|
3 |
|
|
|
4 |
|
|
|
5 |
|
|
|
7 |
|
Net
periodic benefit cost
|
|
$ |
2 |
|
|
$ |
23 |
|
|
$ |
6 |
|
|
$ |
28 |
|
We
currently expect to contribute approximately $30 million to our international
pension plans in 2008. During the nine months ended September 30,
2008, we contributed $27 million to our international pension
plans. We do not have a required minimum contribution for our
domestic plans; however, we may make additional discretionary
contributions.
The
components of net periodic benefit cost related to other postretirement benefits
for the three and nine months ended September 30, 2008 and September 30, 2007
were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
– |
|
|
$ |
1 |
|
|
$ |
– |
|
|
$ |
1 |
|
Interest
cost
|
|
|
1 |
|
|
|
2 |
|
|
|
4 |
|
|
|
6 |
|
Amortization
of unrecognized gain
|
|
|
(1 |
) |
|
|
– |
|
|
|
(4 |
) |
|
|
– |
|
Net
periodic benefit cost
|
|
$ |
– |
|
|
$ |
3 |
|
|
$ |
– |
|
|
$ |
7 |
|
Note
12. Common Stock
In
February 2006, our Board of Directors approved a share repurchase program of up
to $1.0 billion. In September 2006, our Board of Directors approved
an increase to our existing common share repurchase program of up to an
additional $2.0 billion. In July 2007, our Board of Directors
approved an additional increase to our existing common share repurchase program
of up to $2.0 billion, bringing the entire authorization to $5.0
billion. The program may be used for open market share
purchases. From the inception of this program, we have repurchased
approximately 92 million shares of our common stock for approximately $3.2
billion at an average price of $34.30 per share. These amounts
include the repurchases of approximately 13 million shares of our common stock
for approximately $481 million at an average price of $36.61 per share during
the first nine months of 2008. As of September 30, 2008,
approximately $1.8 billion remained available under this program.
Note
13. New Accounting Standards
In June
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) Emerging Issues Task Force (EITF) 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.”
This FSP provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents, whether paid or
unpaid, are participating securities and shall be included in the computation of
both basic and diluted earnings per share. We will adopt the provisions of
FSP EITF 03-6-1 on January 1, 2009, which will require us to recast prior
periods’ basic and diluted earnings per share to include outstanding unvested
restricted common shares in the weighted average shares outstanding
calculation. We estimate that, had we calculated earnings per share under
these new provisions during the nine months ended September 30, 2008, basic
income per share would have decreased by approximately $0.01 for both continuing
operations and net income per share and diluted income per share would have
decreased by approximately $0.01 for net income per share.
In May
2008, the FASB issued FSP Accounting Principles Board (APB) 14-1, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement).” This FSP clarifies that
convertible debt instruments that may be settled in cash upon conversion,
including partial cash settlement, should separately account for the liability
and equity components in a manner that will reflect the entity’s nonconvertible
debt borrowing rate when interest cost is recognized in subsequent
periods. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years. We will adopt the provisions of FSP APB 14-1 on January
1, 2009 and will be required to retroactively apply its provisions, which means
we will recast our consolidated financial statements for prior
periods.
In
applying this FSP, we estimate approximately $60 million of the carrying value
of the convertible notes to be reclassified to equity as of the July 2003
issuance date. This amount represents the equity component of the
proceeds from the notes, calculated assuming a 4.3% non-convertible
borrowing rate. The discount will be accreted to interest expense
over the five-year term of the notes. Accordingly, approximately $13
million of additional non-cash (pre tax) interest expense, or $0.01 per (after
tax) diluted share, will be recorded in 2006 and 2007 and approximately $7
million of additional non-cash (pre tax) interest expense, or $0.01 per (after
tax) diluted share, will be recorded in 2008. Furthermore, under this
FSP, the $693 million loss to settle our convertible debt in the third quarter
of 2008 will be reclassified to additional paid-in capital.
In March
2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
161, “Disclosure about Derivative Instruments and Hedging Activities – An
Amendment of FASB Statement No. 133.” SFAS No. 161 requires more
disclosures about an entity’s derivative and hedging activities in order to
improve the transparency of financial reporting. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We
will adopt the provisions of SFAS No. 161 on January 1, 2009, which we do not
expect will have a material impact on the disclosures in our consolidated
financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
is intended to increase consistency and comparability in fair value measurements
by defining fair value, establishing a framework for measuring fair value, and
expanding disclosures about fair value measurements. SFAS No. 157
applies to other accounting pronouncements that require or permit fair value
measurements and is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. In February 2008, the FASB issued FSP SFAS 157-1, “Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13,” which removes certain
leasing transactions from the scope of SFAS No. 157, and FSP SFAS 157-2,
“Effective Date of FASB Statement No. 157,” which defers the effective date
of SFAS No. 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis. In October
2008, the FASB also issued FSP SFAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS No. 157 in an inactive market and illustrates how an
entity would determine fair value when the market for a financial asset is not
active. On January 1, 2008, we adopted without material impact on our
consolidated financial statements the provisions of SFAS No. 157 related to
financial assets and liabilities and to nonfinancial assets and liabilities
measured at fair value on a recurring basis. Beginning January 1,
2009, we will adopt the provisions for nonfinancial assets and nonfinancial
liabilities that are not required or permitted to be measured at fair value on a
recurring basis, which include those measured at fair value in goodwill
impairment testing, indefinite-lived intangible assets measured at fair value
for impairment assessment, nonfinancial long-lived assets measured at fair value
for impairment assessment, asset retirement obligations initially measured at
fair value, and those initially measured at fair value in a business
combination. We do not expect the provisions of SFAS No. 157 related
to these items to have a material impact on our consolidated financial
statements.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
EXECUTIVE
OVERVIEW
Organization
We are a
leading provider of products and services to the energy industry. We serve
the upstream oil and gas industry throughout the lifecycle of the reservoir,
from locating hydrocarbons and managing geological data, to drilling and
formation evaluation, well construction and completion, and optimizing
production through the life of the field. Activity
levels within our operations are significantly impacted by spending on upstream
exploration, development, and production programs by major, national, and
independent oil and natural gas companies. We report our results
under two segments, Completion and Production and Drilling and
Evaluation:
|
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|
our
Completion and Production segment delivers cementing, stimulation,
intervention, and completion services. The segment consists of
production enhancement services, completion tools and services, and
cementing services; and
|
|
-
|
our
Drilling and Evaluation segment provides field and reservoir modeling,
drilling, evaluation, and precise well-bore placement solutions that
enable customers to model, measure, and optimize their well construction
activities. The segment consists of fluid services, drilling
services, drill bits, wireline and perforating services, Landmark software
and consulting services, and project management
services.
|
The
business operations of our segments are organized around four primary geographic
regions: North America, Latin America, Europe/Africa/CIS, and Middle
East/Asia. We have significant manufacturing operations in various
locations, including, but not limited to, the United States, Canada, the United
Kingdom, Continental Europe, Malaysia, Mexico, Brazil, and
Singapore. With more than 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.
Financial
results
During
the first nine months of 2008, we produced revenue of $13.4 billion and
operating income of $2.8 billion, reflecting an operating margin of 21%.
Revenue increased $2.3 billion or 21% over the first nine months of 2007, while
operating income improved $256 million or 10% over the first nine months of
2007. Consistent with our initiative to grow our non-North America
operations, we experienced 25% revenue growth and 22% operating income growth
outside of North America in the first nine months of 2008 compared to the first
nine months of 2007. Revenue from our Latin America region increased 34%
to $1.8 billion, and operating income increased 47% to $369 million in the first
nine months of 2008 compared to the first nine months of 2007. Our Middle
East/Asia and Europe/Africa/CIS regions also returned revenue growth in excess
of 20% in the first nine months of 2008 compared to the first nine months of
2007.
Business
outlook
The
long-term outlook for our business remains generally favorable despite the
recent volatility in the equity and credit markets and the likelihood of a
global decrease in hydrocarbon demand. We believe that any major
macroeconomic disruptions may ultimately correct themselves as the underlying
trends of smaller and more complex reservoirs, high depletion rates, and the
need for continual reserve replacement should drive the long-term need for our
services.
During
2007, the North America region experienced challenging market conditions as a
result of downward pressure on the pricing of our services, as well as reduced
activity in Canada. During the first six months of 2008, operating
margins in the region continued to decline from prior period levels, primarily
as a result of lower effective pricing for our United States fracturing services
and cost inflation for fuel and other materials used in our
operations. However, as of the third quarter of 2008, prices have
stabilized and margins have improved due to increased activity in the United
States, recovery in Canada from its seasonal decline, and the positive impacts
of fuel surcharges that we negotiated with many of our customers earlier in the
year. In addition, we continue to see revenue growth from our
customers' development of more complex reservoirs that benefit from our
differentiated technologies. Recently, a drop in natural gas prices
is creating some uncertainty on future activity levels and has caused some of
our customers to adjust the level of their future capital expenditures.
However, we believe we may have opportunities to grow our market share in this
environment, as our customers’ capital expenditure cuts appear to be directed
primarily toward conventional and shallower drilling activity; preserving the
focus on unconventional plays where we generally have a stronger
position. These more complex, unconventional developments, as
noted above, represent the majority of our business. Our strategy of
deploying our equipment and services to our larger customers, who normally have
longer-term drilling plans and are involved in the more complex developments,
should mitigate the effect of short-term fluctuations in commodity
prices. In addition, access to capital, with the recent volatility in
the credit market, may constrain the growth of industry capacity. We
believe that the inability of some service providers to raise capital could lead
to a tightening of supply and this, along with the continued shift to more
complex, service-intensive developments, may create the opportunity for us to
compete effectively for additional market share.
Outside
of North America, our international business has not yet experienced any
significant impact from the weakening of commodity prices. If a
slowdown occurs, history indicates that the effects may be more muted compared
to that of North America. While macroeconomic uncertainties could
cloud our view, we still believe that growth will continue in
2009. It is likely we may experience delay or curtailing of some new
projects, notably new heavy oil and potentially some gas-to-liquids
projects. We are monitoring the activities of our customers and are
ready to react to any changes in customer spending. In addition, as
noted above, the trend toward exploration and exploitation of more complex
reservoirs bodes well for the mix of our product line offerings and degree of
service intensity on a per rig basis. Therefore, we have been
investing and will continue to invest in technology and appropriate levels of
capital and infrastructure predominantly outside of North America, consistent
with our initiative to grow our operations in that part of the world and balance
our geographic portfolio. As our customers award larger tranches of
work, pricing competition in the international arena has
intensified. However, we are working to partially offset this price
competition by value created through the introduction of new technologies,
consistency of execution, and fixed cost leverage. In addition, we
believe our Latin America region should continue to experience the highest
growth rate of all our regions, driven by contract awards in Mexico and higher
activity in Brazil and Colombia.
In 2008,
we are focusing on:
|
-
|
maintaining
optimal utilization of our equipment and
resources;
|
|
-
|
managing
pricing, particularly in our North America
operations;
|
|
-
|
hiring
and training additional personnel to meet the need for our
services;
|
|
-
|
continuing
the globalization of our manufacturing and supply chain
processes;
|
|
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|
balancing
our United States operations by capitalizing on the trend toward
horizontal drilling;
|
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|
leveraging
our technologies to provide our customers with the ability to more
efficiently drill and complete their wells and to increase their
productivity. To that end, we
opened one international research and development center with global
technology and training missions in 2007, one in the first quarter of
2008, and another in the third quarter of
2008;
|
|
-
|
maximizing
our position to win meaningful international tenders, especially in
deepwater fields, complex reservoirs, and high-pressure/high-temperature
environments;
|
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|
expanding
our business with national oil companies, including preparing for a shift
to more demand for our integrated project management
services;
|
|
-
|
pursuing
strategic acquisitions that enhance our technological position and our
product and service portfolio in key geographic areas such
as:
|
|
-
|
in
October 2008, we acquired the assets of Pinnacle Technologies, Inc.
(Pinnacle), including the Pinnacle brand from CARBO Ceramics
Inc. Pinnacle is a provider of microseismic fracture mapping
services and tiltmeter mapping
services;
|
|
-
|
in
July 2008, we acquired the remaining 49% equity interest in WellDynamics
B.V. (WellDynamics) from Shell Technology Ventures Fund 1 B.V (STV
Fund). We now own 100% of WellDynamics, a provider of
intelligent well completion
technology;
|
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-
|
in
June 2008, we acquired all the intellectual property and assets of Protech
Centerform. Protech Centerform is a provider of casing
centralization service; and
|
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-
|
in
May 2008, we acquired all intellectual property, assets, and existing
business of Knowledge Systems Inc. (KSI). KSI is a
leading provider of combined geopressure and geomechanical analysis
software and services;
|
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|
directing
our capital spending primarily toward non-North America operations for
service equipment additions and infrastructure. During the
third quarter of 2008, we lowered our capital spending forecast marginally
due to the temporary cessation of manufacturing in our Houston-area plants
because of the hurricane. However, we continue to provide for
equipment placements on offshore rigs and to meet the growing demand of
our customers in the emerging shale plays in North
America. Capital spending for 2008 is expected to be
approximately $1.8 billion to $1.9
billion.
|
Our
operating performance is described in more detail in “Business Environment and
Results of Operations.”
Financial
markets, liquidity and capital resources
In
October 2008, the equity, credit, and commodity markets saw unprecedented
volatility. While this created certain additional risks for our
business, we have invested our cash balances conservatively, reduced our
leverage, and secured sufficient short-term credit capacity to help mitigate any
negative impact on our operations. During the third quarter of 2008,
we issued an aggregate amount of $1.2 billion in senior notes and settled the
principal and conversion premium on our 3.125% convertible senior
notes. For additional information, see “Liquidity and Capital
Resources”, “Risk Factors”, Note 6 to our condensed consolidated financial
statements, and “Business Environment and Results of Operations.”
Foreign
Corrupt Practices Act (FCPA) investigations
The
Securities and Exchange Commission (SEC) is conducting a formal investigation
into whether improper payments were made to government officials in
Nigeria. The Department of Justice (DOJ) is also conducting a related
criminal investigation. See Note 8 to our condensed consolidated
financial statements and “Risk Factors” for further information.
LIQUIDITY
AND CAPITAL RESOURCES
We ended
the third quarter of 2008 with cash and equivalents of $973 million compared to
$1.8 billion at December 31, 2007.
Significant
sources of cash
Cash
flows from operating activities contributed $1.6 billion to cash in the first
nine months of 2008. Growth in revenue and operating income in the
first nine months of 2008 compared to the first nine months of 2007 is
attributable to higher customer demand and increased service intensity due to a
trend toward exploration and exploitation of more complex
reservoirs.
In
September 2008, we issued senior notes due 2038 totaling $800 million and senior
notes due 2018 totaling $400 million, which were used to pay the principal
amount of our 3.125% convertible senior notes.
Early in
2008, we sold approximately $388 million of marketable securities, consisting of
auction-rate securities and variable-rate demand notes.
Further available sources of
cash. We have an unsecured $1.2 billion five-year revolving
credit facility to provide commercial paper support, general working capital,
and credit for other corporate purposes. There were no cash drawings
under the facility as of September 30, 2008.
On
September 25, 2008 we terminated the $2.5 billion, 364-day revolving credit
facility agreement, which we entered into in July 2008 to provide short-term
financing to pay for the settlement of the convertible notes. On
October 10, 2008, we entered into an unsecured, six-month revolving credit
facility, with current commitments of $400 million, in order to give us
additional liquidity and for other general corporate purposes.
Significant
uses of cash
Our
3.125% convertible senior notes due July 2023 became redeemable at our option on
July 15, 2008. On July 30, 2008, we gave notice of redemption on the
convertible notes. In lieu of redemption, the holders of the convertible
notes could convert each $1,000 principal amount of convertible notes into
53.4069 shares of our common stock. Substantially all of the holders
timely elected to convert during the third quarter of 2008. Upon
conversion, we settled the principal amount of our convertible notes in cash and
the premium on our notes with a combination of $693 million in cash and
approximately $840 million, or 20 million shares, of our treasury
stock.
Capital
expenditures were $1.3 billion in the first nine months of 2008, with increased
focus toward building infrastructure and adding service equipment in support of
our expanding operations outside of North America. Capital
expenditures were predominantly made in the drilling services, production
enhancement, cementing, and wireline and perforating product service
lines.
During
the first nine months of 2008, we repurchased approximately 13 million shares of
our common stock under our share repurchase program at a cost of approximately
$481 million at an average price of $36.61 per share.
We paid
$239 million in dividends to our shareholders in the first nine months of
2008.
Future uses of
cash. We have approximately $1.8 billion remaining available
under our share repurchase authorization, which may be used for open market
share purchases. However, at the present time, we are not
repurchasing additional shares in order to maintain our liquidity.
We will
repay $150 million of medium term notes, which will mature in December
2008.
Capital
spending for 2008 is expected to be approximately $1.8 billion to $1.9
billion. The capital expenditures plan for 2008 is primarily directed
toward our drilling services, production enhancement, cementing, and wireline
and perforating product service lines. We are currently exploring
opportunities for acquisitions that will enhance or augment our current
portfolio of products and services, including those with unique technologies or
distribution networks in areas where we do not already have large
operations.
Subject
to Board of Directors approval, we expect to pay dividends of approximately $80
million in the fourth quarter of 2008.
While the
timing is not necessarily under our control, any potential settlements entered
into with the SEC or DOJ related to the Foreign Corrupt Practices Act
investigations may lead to cash payments relating to the indemnity provided to
KBR and for any matters deemed to relate to us directly. See Notes 2
and 8 to our condensed consolidated financial statements for more
information.
Other
factors affecting liquidity
Letters of
credit. In the normal course of business, we have agreements
with banks under which approximately $2.3 billion of letters of credit, surety
bonds, or bank guarantees were outstanding as of September 30, 2008, including
approximately $900 million that relate to KBR. These KBR letters of
credit, surety bonds, or bank guarantees are being guaranteed by us in favor of
KBR’s customers and lenders. KBR has agreed to compensate us for
these guarantees and indemnify us if we are required to perform under any of
these guarantees. Some of the outstanding letters of credit have
triggering events that would entitle a bank to require cash
collateralization.
Financial position in current
market. In recent years, we have reduced our leverage and
improved our liquidity by focusing on debt reduction and improvement to our
credit profile. Our debt maturities extend over a long period of
time. We have no financial covenants or material adverse change
provisions in our bank agreements, and we are working to continue to improve our
short-term credit capacity. For example, we recently entered into an
additional revolving credit facility, as discussed above, providing us with a
total of $1.6 billion of committed bank credit to support our
operations. These revolving credit facilities also support any
commercial paper we may issue in the future. Currently, there are no
borrowings under these revolving credit facilities.
In
addition, we conservatively manage our cash investments by investing principally
in United States Treasury securities and repurchase agreements collateralized by
United States Treasury securities.
Credit
ratings. Our conservatively-managed balance sheet is evidenced
by the strong credit ratings assigned to us by the rating
agencies. Credit ratings for our long-term debt remain A2 with
Moody’s Investors Service and A with Standard & Poor’s. The
credit ratings on our short-term debt remain P-1 with Moody’s Investors Service
and A-1 with Standard & Poor’s.
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. The majority of our consolidated revenue is derived
from the sale of services and products to major, national, and independent oil
and gas companies worldwide. We serve the upstream oil and natural
gas industry throughout the lifecycle of the reservoir: from locating
hydrocarbons and managing geological data, to drilling and formation evaluation,
well construction and completion, and optimizing production throughout the life
of the field. Our two business segments are the Completion and
Production segment and the Drilling and Evaluation segment. The
industries we serve are highly competitive with many substantial competitors in
each segment. In the first nine months of 2008, based upon the
location of the services provided and products sold, 43% of our consolidated
revenue was from the United States. In the first nine months of 2007,
45% of our consolidated revenue was from the United States. No other
country accounted for more than 10% of our revenue during these
periods.
Operations
in some countries may be adversely affected by unsettled political conditions,
acts of terrorism, civil unrest, force majeure, war or other armed conflict,
expropriation or other governmental actions, inflation, exchange control
problems, economic recessions, and highly inflationary currencies. We
believe the geographic diversification of our business activities reduces the
risk that loss of operations in any one country would be material to our
consolidated results of operations.
Activity
levels within our business segments are significantly impacted by spending on
upstream exploration, development, and production programs by major, national,
and independent oil and gas companies. Also impacting our activity is
the status of the global economy, which impacts oil and natural gas
consumption.
Some of
the more significant barometers of current and future spending levels of oil and
natural gas companies are oil and natural gas prices, the world economy, and
global stability, which together drive worldwide drilling
activity. Our financial performance is significantly affected by oil
and natural gas prices and worldwide rig activity, which are summarized in the
following tables.
This
table shows the average oil and natural gas prices for West Texas Intermediate
(WTI) and United Kingdom Brent crude oil, and Henry Hub natural
gas:
|
|
Three
Months Ended
|
|
|
Year
Ended
|
|
|
|
September
30
|
|
|
December
31
|
|
Average Oil Prices
(dollars per barrel)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
West
Texas Intermediate
|
|
$ |
117.88 |
|
|
$ |
75.16 |
|
|
$ |
71.91 |
|
United
Kingdom Brent
|
|
|
114.83 |
|
|
|
74.62 |
|
|
|
72.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average United States Gas
Prices (dollars per million British
|
|
|
|
|
|
|
|
|
|
|
|
|
thermal units, or
mmBtu)
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry
Hub
|
|
$ |
9.09 |
|
|
$ |
6.00 |
|
|
$ |
6.97 |
|
The
quarterly and year-to-date average rig counts based on the Baker Hughes
Incorporated rig count information were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Land
vs. Offshore
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
United
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,910 |
|
|
|
1,716 |
|
|
|
1,807 |
|
|
|
1,682 |
|
Offshore
|
|
|
68 |
|
|
|
72 |
|
|
|
64 |
|
|
|
78 |
|
Total
|
|
|
1,978 |
|
|
|
1,788 |
|
|
|
1,871 |
|
|
|
1,760 |
|
Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
431 |
|
|
|
346 |
|
|
|
369 |
|
|
|
337 |
|
Offshore
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
Total
|
|
|
432 |
|
|
|
348 |
|
|
|
370 |
|
|
|
340 |
|
International
(excluding Canada):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
796 |
|
|
|
733 |
|
|
|
778 |
|
|
|
714 |
|
Offshore
|
|
|
299 |
|
|
|
287 |
|
|
|
297 |
|
|
|
287 |
|
Total
|
|
|
1,095 |
|
|
|
1,020 |
|
|
|
1,075 |
|
|
|
1,001 |
|
Worldwide
total
|
|
|
3,505 |
|
|
|
3,156 |
|
|
|
3,316 |
|
|
|
3,101 |
|
Land
total
|
|
|
3,137 |
|
|
|
2,795 |
|
|
|
2,954 |
|
|
|
2,733 |
|
Offshore
total
|
|
|
368 |
|
|
|
361 |
|
|
|
362 |
|
|
|
368 |
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Oil
vs. Natural Gas
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
United
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
398 |
|
|
|
298 |
|
|
|
367 |
|
|
|
285 |
|
Natural Gas
|
|
|
1,580 |
|
|
|
1,490 |
|
|
|
1,504 |
|
|
|
1,475 |
|
Total
|
|
|
1,978 |
|
|
|
1,788 |
|
|
|
1,871 |
|
|
|
1,760 |
|
Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
177 |
|
|
|
122 |
|
|
|
158 |
|
|
|
127 |
|
Natural Gas
|
|
|
255 |
|
|
|
226 |
|
|
|
212 |
|
|
|
213 |
|
Total
|
|
|
432 |
|
|
|
348 |
|
|
|
370 |
|
|
|
340 |
|
International
(excluding Canada):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
849 |
|
|
|
798 |
|
|
|
831 |
|
|
|
780 |
|
Natural Gas
|
|
|
246 |
|
|
|
222 |
|
|
|
244 |
|
|
|
221 |
|
Total
|
|
|
1,095 |
|
|
|
1,020 |
|
|
|
1,075 |
|
|
|
1,001 |
|
Worldwide
total
|
|
|
3,505 |
|
|
|
3,156 |
|
|
|
3,316 |
|
|
|
3,101 |
|
Oil
total
|
|
|
1,424 |
|
|
|
1,218 |
|
|
|
1,356 |
|
|
|
1,192 |
|
Natural
Gas total
|
|
|
2,081 |
|
|
|
1,938 |
|
|
|
1,960 |
|
|
|
1,909 |
|
Our
customers’ cash flows, in many instances, depend upon the revenue they generate
from the sale of oil and natural gas. Lower oil and natural gas
prices usually translate into lower exploration and production
budgets. The opposite is true for higher oil and natural gas
prices.
WTI oil
spot prices averaged $72 per barrel in 2007 and are expected to average $112 per
barrel in 2008, according to the Energy Information Administration
(EIA). However, the current slowdown in economic growth and the more
recent financial markets crisis have contributed to a sharp decline from record
crude oil prices in July of approximately $145 per barrel to approximately $74
per barrel as of October 20, 2008. Despite the recent market
volatility, decline in crude oil prices, and reduction in some of our customers’
capital spending, we believe that any major macroeconomic disruptions may
ultimately correct themselves as the underlying trends of smaller and more
complex reservoirs, high depletion rates, and the need for continual reserve
replacement should drive the long-term need for our services.
According
to the International Energy Agency’s (IEA) October 2008 “Oil Market Report,” the
outlook for world oil demand is still positive, but has been lowered for both
2008 and 2009 from earlier 2008 estimates, with Asia, the Middle East, and Latin
America accounting for nearly all of the expected demand growth in
2008. The IEA forecasts world petroleum demand in 2008 to increase 1%
over 2007.
North America
operations. Volatility in natural gas prices can impact our
customers' drilling and production activities, particularly in North
America. During 2007, we experienced a significant decline in
activity from 2006 levels in our North America operations, especially in
Canada. This decline caused us to move equipment and personnel from
Canada to other areas in 2007. Canada has now recovered from its
decline, and we expect some increase in activity throughout the remainder of
2008 from 2007 levels. Natural gas prices have fallen from the levels
seen during early parts of the summer, but are above levels seen in
2006. The announced reduction in some of our customers’ capital
spending could result in a decline in rig counts below those previously
anticipated. However, we believe we may have opportunities to grow
our market share in this environment as our customers’ capital expenditure
cuts appear to be directed primarily toward conventional and shallower
drilling activity; preserving the focus on unconventional plays where we
generally have a stronger position. The services we provide to our
customers related to these more complex, unconventional developments represent
the majority of our business. Our strategy of deploying our equipment
and services to our larger customers, who normally have longer-term drilling
plans and are involved in the more complex developments, should mitigate the
effect of short-term fluctuations in commodity prices. In addition,
access to capital, with the recent volatility in the credit market, may
constrain growth of industry capacity. We believe that the inability
of some service providers to raise capital could lead to a tightening of supply
and this, along with the continued shift to more complex, service-intensive
developments, may create the opportunity for us to compete effectively for
additional market share. In early October 2008, the EIA noted that
the Henry Hub spot price averaged $7.17 per thousand cubic feet (mcf) in 2007,
is projected to average $9.67 per mcf in 2008, and then is expected to decrease
to an average of $8.17 per mcf in 2009.
We
experienced increased pricing pressure from our customers in the North American
market in 2007 and in the first quarter of 2008, particularly in Canada and in
our United States well stimulation operations. However, more
recently, prices and margins have stabilized. In addition, we have
seen a positive impact in the third quarter of 2008 from fuel surcharges we
negotiated with many of our customers earlier in the year. As noted
above, we also continue to see a shift in our customers’ drilling plans to more
unconventional drilling activity, such as emerging shale plays, that favors our
differentiated technologies.
Focus on international
growth. Consistent with our strategy to grow our operations
outside of North America, we expect to continue to invest capital and increase
manufacturing capacity to bring new tools online to serve the need for our
services. While macroeconomic uncertainties could cloud our view, we
still believe that growth will continue in 2009. It is likely we may
experience delay or curtailing of some new projects, notably new heavy oil and
potentially some gas-to-liquids projects. If a slowdown occurs,
history indicates that the effects may be more muted compared to that of North
America. In spite of the recent fall in commodity prices, we remain
committed to investing in technology and appropriate levels of capital and
infrastructure to ensure we align ourselves with the industry’s long-term growth
trajectory.
As our
customers award larger tranches of work, pricing competition in the
international arena has intensified. However, we are working to
partially offset this price competition by introduction of new technologies,
consistency of execution, and fixed cost leverage. Following is a
brief discussion of some of our current initiatives:
|
-
|
in
order to continue to supply our customers with leading-edge services and
products, we have increased our technology spending and are making our
research and development efforts more geographically
diverse. To that end, we opened a technology center in India in
2007 and in Singapore in the first quarter of 2008 and a research and
development laboratory in Norway in the third quarter of
2008;
|
|
-
|
we
have expanded our manufacturing capability and capacity to meet the need
for our services and products and to support our growth. In
2007 and 2008, we opened four new regional manufacturing facilities in
Asia and Latin America. These new centers will enable us to be
more responsive to our international customers while, building regional
supply networks that support local
economies;
|
|
-
|
as
our workforce becomes more global, the need for regional training centers
increases. As a result, we have expanded our number of regional
training centers to meet this need. We now have 12 training
centers worldwide that integrate new workers and advance the technical
skills of our workforce;
|
|
-
|
expanding
our business with national oil companies, including preparing for a shift
to more demand for our integrated project management services;
and
|
|
-
|
part
of our growth strategy includes acquisitions that will enhance or augment
our current portfolio of products and services, including those with
unique technologies or distribution networks in areas where we do not
already have large operations;
|
|
-
|
in
October 2008, we acquired the assets of Pinnacle, including the Pinnacle
brand from CARBO Ceramics Inc. Pinnacle is a leading provider
of microseismic fracture mapping services and tiltmeter mapping
services;
|
|
-
|
in
July 2008, we acquired the remaining 49% equity interest of WellDynamics
from STV Fund. We now own 100% of WellDynamics, a provider of
intelligent well completion
technology;
|
|
-
|
in
June 2008, we acquired all the intellectual property and assets of Protech
Centerform in Houston, Ravenna, Italy, and Aberdeen,
Scotland. Protech Centerform is a provider of casing
centralization service;
|
|
-
|
in
May 2008, we acquired all intellectual property, assets, and existing
business of KSI, a leading provider of combined geopressure and
geomechanical analysis software and services;
and
|
Recent
contract wins positioning us to grow our international operations over the
coming years include:
|
-
|
a
contract to manage the drilling and completion of 58 onshore wells in the
southern region of Mexico;
|
|
-
|
a
contract to perform workover and sidetrack services in the United
Kingdom;
|
|
-
|
a
contract to provide completion equipment and services, tubing conveyed
perforating services and SmartWell® completion technology for numerous oil
and natural gas fields on the Norwegian continental shelf. The
contract also allows for the provision of other products and
services;
|
|
-
|
a
three-year contract to provide directional drilling,
logging-while-drilling, cementing, wireline and perforating, coiled
tubing, and stimulation services in support of the offshore portion of the
Manifa mega-project in Saudi Arabia;
and
|
|
-
|
a
three-year contract to provide a range of completion equipment for onshore
oil and gas wells in Abu Dhabi.
|
RESULTS
OF OPERATIONS IN 2008 COMPARED TO 2007
Three
Months Ended September 30, 2008 Compared with Three Months Ended September 30,
2007
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
REVENUE:
|
|
September
30
|
|
|
|
|
|
Percentage
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
Change
|
|
Completion
and Production
|
|
$ |
2,664 |
|
|
$ |
2,187 |
|
|
$ |
477 |
|
|
|
22 |
% |
Drilling
and Evaluation
|
|
|
2,189 |
|
|
|
1,741 |
|
|
|
448 |
|
|
|
26 |
|
Total
revenue
|
|
$ |
4,853 |
|
|
$ |
3,928 |
|
|
$ |
925 |
|
|
|
24 |
% |
By
geographic region:
|
|
Completion
and Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
1,462 |
|
|
$ |
1,227 |
|
|
$ |
235 |
|
|
|
19 |
% |
Latin America
|
|
|
300 |
|
|
|
193 |
|
|
|
107 |
|
|
|
55 |
|
Europe/Africa/CIS
|
|
|
554 |
|
|
|
439 |
|
|
|
115 |
|
|
|
26 |
|
Middle
East/Asia
|
|
|
348 |
|
|
|
328 |
|
|
|
20 |
|
|
|
6 |
|
Total
|
|
|
2,664 |
|
|
|
2,187 |
|
|
|
477 |
|
|
|
22 |
|
Drilling
and Evaluation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
784 |
|
|
|
620 |
|
|
|
164 |
|
|
|
26 |
|
Latin America
|
|
|
347 |
|
|
|
263 |
|
|
|
84 |
|
|
|
32 |
|
Europe/Africa/CIS
|
|
|
578 |
|
|
|
493 |
|
|
|
85 |
|
|
|
17 |
|
Middle
East/Asia
|
|
|
480 |
|
|
|
365 |
|
|
|
115 |
|
|
|
32 |
|
Total
|
|
|
2,189 |
|
|
|
1,741 |
|
|
|
448 |
|
|
|
26 |
|
Total
revenue by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
2,246 |
|
|
|
1,847 |
|
|
|
399 |
|
|
|
22 |
|
Latin America
|
|
|
647 |
|
|
|
456 |
|
|
|
191 |
|
|
|
42 |
|
Europe/Africa/CIS
|
|
|
1,132 |
|
|
|
932 |
|
|
|
200 |
|
|
|
21 |
|
Middle
East/Asia
|
|
|
828 |
|
|
|
693 |
|
|
|
135 |
|
|
|
19 |
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
OPERATING
INCOME:
|
|
September
30
|
|
|
Increase
|
|
|
Percentage
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
Completion
and Production
|
|
$ |
660 |
|
|
$ |
596 |
|
|
$ |
64 |
|
|
|
11 |
% |
Drilling
and Evaluation
|
|
|
472 |
|
|
|
372 |
|
|
|
100 |
|
|
|
27 |
|
Corporate
and other
|
|
|
(81 |
) |
|
|
(58 |
) |
|
|
(23 |
) |
|
|
(40 |
) |
Total
operating income
|
|
$ |
1,051 |
|
|
$ |
910 |
|
|
$ |
141 |
|
|
|
15 |
% |
By
geographic region:
|
|
Completion
and Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
398 |
|
|
$ |
387 |
|
|
$ |
11 |
|
|
|
3 |
% |
Latin America
|
|
|
73 |
|
|
|
34 |
|
|
|
39 |
|
|
|
115 |
|
Europe/Africa/CIS
|
|
|
106 |
|
|
|
92 |
|
|
|
14 |
|
|
|
15 |
|
Middle
East/Asia
|
|
|
83 |
|
|
|
83 |
|
|
|
— |
|
|
|
— |
|
Total
|
|
|
660 |
|
|
|
596 |
|
|
|
64 |
|
|
|
11 |
|
Drilling
and Evaluation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
171 |
|
|
|
110 |
|
|
|
61 |
|
|
|
55 |
|
Latin America
|
|
|
61 |
|
|
|
48 |
|
|
|
13 |
|
|
|
27 |
|
Europe/Africa/CIS
|
|
|
99 |
|
|
|
115 |
|
|
|
(16 |
) |
|
|
(14 |
) |
Middle
East/Asia
|
|
|
141 |
|
|
|
99 |
|
|
|
42 |
|
|
|
42 |
|
Total
|
|
|
472 |
|
|
|
372 |
|
|
|
100 |
|
|
|
27 |
|
Total
operating income by region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding Corporate and
other):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
569 |
|
|
|
497 |
|
|
|
72 |
|
|
|
14 |
|
Latin America
|
|
|
134 |
|
|
|
82 |
|
|
|
52 |
|
|
|
63 |
|
Europe/Africa/CIS
|
|
|
205 |
|
|
|
207 |
|
|
|
(2 |
) |
|
|
(1 |
) |
Middle
East/Asia
|
|
|
224 |
|
|
|
182 |
|
|
|
42 |
|
|
|
23 |
|
The
increase in consolidated revenue in the third quarter of 2008 compared to the
third quarter of 2007 was attributable to higher worldwide activity,
particularly in the United States, Europe, and Latin
America. Approximately $74 million in revenue was lost during the
third quarter of 2008 due to Gulf of Mexico hurricanes. International
revenue was 57% of consolidated revenue in the third quarter of 2008 and 56% of
consolidated revenue in the third quarter of 2007.
The
increase in consolidated operating income was primarily driven by a 63% increase
in Latin America. In addition, improved demand from increased rig
activity and improved pricing and asset utilization in the United States,
Canada, and the Middle East contributed to the increase. The
hurricanes in the Gulf of Mexico negatively impacted operating income by
approximately $52 million in the third quarter of 2008. Operating
income in the third quarter of 2007 was impacted by $32 million in charges for
environmental reserves.
Following
is a discussion of our results of operations by reportable
segments.
Completion and Production
revenue increase of 22% compared to the third quarter of 2007 was derived from
all regions. Europe/Africa/CIS revenue grew 26% from increased
cementing revenue in Europe and higher completion tool sales and activity in
Africa. In addition, production enhancement services continued to
benefit from the acquisition of PSL Energy Services Limited in the third quarter
of 2008. Middle East/Asia revenue grew 6% compared to the third
quarter of 2007 from higher production enhancement activity as a result of new
contracts throughout the region. North America revenue grew 19%,
benefiting from higher asset utilization, increased resources, and stronger
demand in Canada and the United States for production enhancement services and
cementing products and services. Partially offsetting the improvement
in the United States was $34 million in lost revenue due to Gulf of Mexico
hurricanes. Latin America revenue grew 55% as a result of higher
customer demand, new contracts, and more favorable pricing for cementing
products and services throughout the region. Completion tool sales
increased throughout the region as well and Mexico continues to benefit from
improved vessel utilization. International revenue was 48% of total
segment revenue in the third quarter of 2008 and 46% of total segment revenue in
the third quarter of 2007.
Completion
and Production segment operating income increase of 11% compared to the third
quarter of 2007 was primarily driven by Latin America. Latin America
operating income increased 115% as a result of increased demand for completion
tools in Brazil and higher vessel utilization in
Mexico. Europe/Africa/CIS operating income increased 15% with the
most significant impact coming from higher customer demand and increased
production enhancement activity in Europe. Middle East/Asia operating
income was flat with higher demand for and better mix of production enhancement
products and services in the Middle East balancing out declines in sales of
completion tools and cementing services in Asia Pacific. North
America operating income increased 3% compared to the third quarter of 2007,
primarily due to more favorable pricing and product mix for production
enhancement in Canada and higher demand for completion tools in the United
States. The increase in North America was partially offset by a $25
million negative impact from Gulf of Mexico hurricanes.
Drilling and Evaluation
revenue increase of 26% compared to the third quarter of 2007 was derived from
all four regions and all product service lines. Europe/Africa/CIS
revenue increased 17% due to higher customer demand for fluid services in Europe
and wireline and perforating services in Africa. Landmark software
and consulting services also contributed to the improved
results. Middle East/Asia revenue grew 32%, benefiting from increased
demand for new technologies and drilling services throughout the
region. In addition, growing rig count and higher demand for fluid
services contributed to the increase. North America revenue increased
26% compared to the third quarter of 2007 from higher activity across all
product service lines primarily due to increased rig count. Partially
offsetting the improvement in North America was $40 million in lost revenue due
to Gulf of Mexico hurricanes. Latin America revenue grew 32% as a
result of increased demand and more beneficial pricing for drilling, wireline
and perforating, and project management services. International
revenue was 68% of total segment revenue in both the third quarter of 2008 and
in the third quarter of 2007.
The
increase in segment operating income compared to the third quarter of 2007 was
predominantly led by North America and Middle
East/Asia. Europe/Africa/CIS operating income decreased 14% as a
result of declines in activity for drilling services in Europe partially offset
by increased software sales in Europe and higher demand for wireline and
perforating services throughout the region. Middle East/Asia
operating income increased 42% over the third quarter of 2007, primarily due to
higher drilling services activity and demand for new technologies throughout the
region. North America operating income increased 55% as a result of
increased activity in all product service lines including higher demand for
fluid services and increased drilling services activity in the United
States. Negatively impacting the region was a loss of $27 million due
to Gulf of Mexico hurricanes in the third quarter of 2008. North
America results for the third quarter of 2007 included $24 million in charges
for environmental reserves.
Latin
America operating income increased 27% with higher drilling activity and
increased demand for wireline and perforating services. Landmark
software and consulting services also contributed to the improved
results.
Corporate and other expenses
were $81 million in the third quarter of 2008 compared to $58 million in the
third quarter of 2007. The increase was primarily due to a $22
million acquisition-related charge for WellDynamics related to employee
compensation awards. The third quarter of 2007 included $8 million in
charges for environmental reserves.
NONOPERATING
ITEMS
Interest expense decreased $4
million in the third quarter of 2008 compared to the third quarter of 2007
primarily due to the settlement of the 3.125% convertible senior
notes.
Interest income decreased $20
million in the third quarter of 2008 compared to the third quarter of 2007 due
to lower interest rates and lower investment balances.
Other, net in the third
quarter of 2008 included the loss of
$693 million for the portion of the premium paid in cash on the settlement of
our convertible senior notes.
Provision for income taxes on
continuing operations in the third quarter of 2008 of $343 million resulted in
an effective tax rate of 106% compared to an effective tax rate on continuing
operations of 17% in the third quarter of 2007. The increase in the
effective tax rate from 2007 to 2008 is primarily related to the non-tax
deductibility of the $693 million loss on the portion of the premium on our
convertible debt that we settled in cash. In addition, the third
quarter of 2007 included a $133 million favorable income tax impact from the
ability to recognize foreign tax credits previously estimated not to be fully
utilizable.
Minority interest in net income of
subsidiaries decreased $15 million compared to the third quarter of 2007
primarily related to our joint ventures in Egypt and Saudi
Arabia.
RESULTS
OF OPERATIONS IN 2008 COMPARED TO 2007
Nine
Months Ended September 30, 2008 Compared with Nine Months Ended September 30,
2007
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
REVENUE:
|
|
September
30
|
|
|
|
|
|
Percentage
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
Change
|
|
Completion
and Production
|
|
$ |
7,292 |
|
|
$ |
6,097 |
|
|
$ |
1,195 |
|
|
|
20 |
% |
Drilling
and Evaluation
|
|
|
6,077 |
|
|
|
4,988 |
|
|
|
1,089 |
|
|
|
22 |
|
Total
revenue
|
|
$ |
13,369 |
|
|
$ |
11,085 |
|
|
$ |
2,284 |
|
|
|
21 |
% |
By
geographic region:
|
|
Completion
and Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
3,901 |
|
|
$ |
3,449 |
|
|
$ |
452 |
|
|
|
13 |
% |
Latin America
|
|
|
801 |
|
|
|
551 |
|
|
|
250 |
|
|
|
45 |
|
Europe/Africa/CIS
|
|
|
1,532 |
|
|
|
1,259 |
|
|
|
273 |
|
|
|
22 |
|
Middle
East/Asia
|
|
|
1,058 |
|
|
|
838 |
|
|
|
220 |
|
|
|
26 |
|
Total
|
|
|
7,292 |
|
|
|
6,097 |
|
|
|
1,195 |
|
|
|
20 |
|
Drilling
and Evaluation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
2,197 |
|
|
|
1,816 |
|
|
|
381 |
|
|
|
21 |
|
Latin America
|
|
|
952 |
|
|
|
757 |
|
|
|
195 |
|
|
|
26 |
|
Europe/Africa/CIS
|
|
|
1,674 |
|
|
|
1,382 |
|
|
|
292 |
|
|
|
21 |
|
Middle
East/Asia
|
|
|
1,254 |
|
|
|
1,033 |
|
|
|
221 |
|
|
|
21 |
|
Total
|
|
|
6,077 |
|
|
|
4,988 |
|
|
|
1,089 |
|
|
|
22 |
|
Total
revenue by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
6,098 |
|
|
|
5,265 |
|
|
|
833 |
|
|
|
16 |
|
Latin America
|
|
|
1,753 |
|
|
|
1,308 |
|
|
|
445 |
|
|
|
34 |
|
Europe/Africa/CIS
|
|
|
3,206 |
|
|
|
2,641 |
|
|
|
565 |
|
|
|
21 |
|
Middle
East/Asia
|
|
|
2,312 |
|
|
|
1,871 |
|
|
|
441 |
|
|
|
24 |
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
OPERATING
INCOME:
|
|
September
30
|
|
|
Increase
|
|
|
Percentage
|
|
Millions
of dollars
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
Completion
and Production
|
|
$ |
1,750 |
|
|
|