edsept200710q_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, 2007
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 1-3492
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, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated
filer X
|
Accelerated
filer
|
Non-accelerated
filer
|
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 19, 2007, 881,153,038 shares of Halliburton Company common stock, $2.50
par value per share, were outstanding.
HALLIBURTON
COMPANY
Index
|
|
Page
No.
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
3-5
|
|
|
|
|
- Condensed
Consolidated Statements of Operations
|
3
|
|
- Condensed
Consolidated Balance Sheets
|
4
|
|
- Condensed
Consolidated Statements of Cash Flows
|
5
|
|
- Notes
to Condensed Consolidated Financial Statements
|
6-21
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
|
|
|
Results
of Operations
|
22-46
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
47
|
|
|
|
Item
4.
|
Controls
and Procedures
|
47
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
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
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
2,951
|
|
|
$ |
2,566
|
|
|
$ |
8,217
|
|
|
$ |
7,073
|
|
Product
sales
|
|
|
977
|
|
|
|
826
|
|
|
|
2,868
|
|
|
|
2,373
|
|
Total
revenue
|
|
|
3,928
|
|
|
|
3,392
|
|
|
|
11,085
|
|
|
|
9,446
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
2,111
|
|
|
|
1,770
|
|
|
|
5,908
|
|
|
|
4,957
|
|
Cost
of sales
|
|
|
845
|
|
|
|
669
|
|
|
|
2,423
|
|
|
|
1,936
|
|
General
and administrative
|
|
|
63
|
|
|
|
84
|
|
|
|
214
|
|
|
|
243
|
|
Gain
on sale of business assets, net
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(51 |
) |
|
|
(12 |
) |
Total
operating costs and expenses
|
|
|
3,018
|
|
|
|
2,522
|
|
|
|
8,494
|
|
|
|
7,124
|
|
Operating
income
|
|
|
910
|
|
|
|
870
|
|
|
|
2,591
|
|
|
|
2,322
|
|
Interest
expense
|
|
|
(39 |
) |
|
|
(40 |
) |
|
|
(118 |
) |
|
|
(124 |
) |
Interest
income
|
|
|
26
|
|
|
|
36
|
|
|
|
100
|
|
|
|
94
|
|
Other,
net
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(2 |
) |
Income
from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
minority
interest
|
|
|
896
|
|
|
|
863
|
|
|
|
2,567
|
|
|
|
2,290
|
|
Provision
for income taxes
|
|
|
(152 |
) |
|
|
(257 |
) |
|
|
(695 |
) |
|
|
(725 |
) |
Minority
interest in net income of subsidiaries
|
|
|
(18 |
) |
|
|
(3 |
) |
|
|
(22 |
) |
|
|
(15 |
) |
Income
from continuing operations
|
|
|
726
|
|
|
|
603
|
|
|
|
1,850
|
|
|
|
1,550
|
|
Income
from discontinued operations, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision
of $0, $61, $11, and
$123
|
|
|
1
|
|
|
|
8
|
|
|
|
959
|
|
|
|
140
|
|
Net
income
|
|
$ |
727
|
|
|
$ |
611
|
|
|
$ |
2,809
|
|
|
$ |
1,690
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.83
|
|
|
$ |
0.60
|
|
|
$ |
2.00
|
|
|
$ |
1.52
|
|
Income
from discontinued operations, net
|
|
|
-
|
|
|
|
0.01
|
|
|
|
1.04
|
|
|
|
0.13
|
|
Net
income per share
|
|
$ |
0.83
|
|
|
$ |
0.61
|
|
|
$ |
3.04
|
|
|
$ |
1.65
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.79
|
|
|
$ |
0.57
|
|
|
$ |
1.93
|
|
|
$ |
1.46
|
|
Income
from discontinued operations, net
|
|
|
-
|
|
|
|
0.01
|
|
|
|
0.99
|
|
|
|
0.13
|
|
Net
income per share
|
|
$ |
0.79
|
|
|
$ |
0.58
|
|
|
$ |
2.92
|
|
|
$ |
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$ |
0.09
|
|
|
$ |
0.075
|
|
|
$ |
0.255
|
|
|
$ |
0.225
|
|
Basic
weighted average common shares outstanding
|
|
|
880
|
|
|
|
1,011
|
|
|
|
925
|
|
|
|
1,021
|
|
Diluted
weighted average common shares outstanding
|
|
|
917
|
|
|
|
1,048
|
|
|
|
961
|
|
|
|
1,062
|
|
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
|
|
2007
|
|
|
2006
|
|
Assets
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
735
|
|
|
$ |
2,918
|
|
Receivables
(less allowance for bad debts of $51 and $40)
|
|
|
3,109
|
|
|
|
2,629
|
|
Inventories
|
|
|
1,560
|
|
|
|
1,235
|
|
Investments
in marketable securities
|
|
|
1,156
|
|
|
|
20
|
|
Current
deferred income taxes
|
|
|
275
|
|
|
|
205
|
|
Current
assets of discontinued operations
|
|
|
-
|
|
|
|
3,898
|
|
Other
current assets
|
|
|
386
|
|
|
|
285
|
|
Total
current assets
|
|
|
7,221
|
|
|
|
11,190
|
|
Property,
plant, and equipment, net of accumulated depreciation of $3,991 and
$3,793
|
|
|
3,337
|
|
|
|
2,557
|
|
Goodwill
|
|
|
731
|
|
|
|
486
|
|
Noncurrent
deferred income taxes
|
|
|
439
|
|
|
|
448
|
|
Noncurrent
assets of discontinued operations
|
|
|
-
|
|
|
|
1,497
|
|
Other
assets
|
|
|
741
|
|
|
|
682
|
|
Total
assets
|
|
$ |
12,469
|
|
|
$ |
16,860
|
|
Liabilities
and Shareholders’ Equity
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
798
|
|
|
$ |
655
|
|
Accrued
employee compensation and benefits
|
|
|
525
|
|
|
|
496
|
|
Income
tax payable
|
|
|
216
|
|
|
|
146
|
|
Deferred
revenue
|
|
|
188
|
|
|
|
171
|
|
Current
maturities of long-term debt
|
|
|
10
|
|
|
|
26
|
|
Current
liabilities of discontinued operations
|
|
|
-
|
|
|
|
2,831
|
|
Other
current liabilities
|
|
|
454
|
|
|
|
409
|
|
Total
current liabilities
|
|
|
2,191
|
|
|
|
4,734
|
|
Long-term
debt
|
|
|
2,796
|
|
|
|
2,783
|
|
Employee
compensation and benefits
|
|
|
503
|
|
|
|
474
|
|
Noncurrent
liabilities of discontinued operations
|
|
|
-
|
|
|
|
981
|
|
Other
liabilities
|
|
|
692
|
|
|
|
443
|
|
Total
liabilities
|
|
|
6,182
|
|
|
|
9,415
|
|
Minority
interest in consolidated subsidiaries
|
|
|
90
|
|
|
|
69
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
shares, par value $2.50 per share – authorized 2,000 shares, issued 1,062
and 1,060
|
|
|
|
|
|
|
|
|
shares
|
|
|
2,655
|
|
|
|
2,650
|
|
Paid-in
capital in excess of par value
|
|
|
1,694
|
|
|
|
1,689
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(178 |
) |
|
|
(437 |
) |
Retained
earnings
|
|
|
7,591
|
|
|
|
5,051
|
|
|
|
|
11,762
|
|
|
|
8,953
|
|
Less
181 and 62 shares of treasury stock, at cost
|
|
|
5,565
|
|
|
|
1,577
|
|
Total
shareholders’ equity
|
|
|
6,197
|
|
|
|
7,376
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
12,469
|
|
|
$ |
16,860
|
|
See
notes to condensed consolidated
financial statements.
HALLIBURTON
COMPANY
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,809
|
|
|
$ |
1,690
|
|
Adjustments
to reconcile net income to net cash from operations:
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
(959 |
) |
|
|
(140 |
) |
Depreciation,
depletion, and amortization
|
|
|
417
|
|
|
|
356
|
|
Provision
(benefit) for deferred income taxes, including $(15) and $23 related
to
discontinued
|
|
|
|
|
|
|
|
|
operations
|
|
|
(82 |
) |
|
|
558
|
|
Gain
on sale of assets
|
|
|
(51 |
) |
|
|
(19 |
) |
Other
changes:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(318 |
) |
|
|
(265 |
) |
Inventories
|
|
|
(320 |
) |
|
|
(252 |
) |
Accounts
payable
|
|
|
109
|
|
|
|
144
|
|
Contributions
to pension plans
|
|
|
(23 |
) |
|
|
(57 |
) |
Other
|
|
|
237
|
|
|
|
(80 |
) |
Cash
flows from continuing operations
|
|
|
1,819
|
|
|
|
1,935
|
|
Cash
flows from discontinued operations
|
|
|
(55 |
) |
|
|
335
|
|
Total
cash flows from operating activities
|
|
|
1,764
|
|
|
|
2,270
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,064 |
) |
|
|
(569 |
) |
Sales
of property, plant, and equipment
|
|
|
124
|
|
|
|
108
|
|
Dispositions
(acquisitions) of business assets, net of cash acquired or
disposed
|
|
|
(447 |
) |
|
|
7
|
|
Sales
(purchases) of short-term investments in marketable securities,
net
|
|
|
(1,113 |
) |
|
|
–
|
|
Investments
– restricted cash
|
|
|
55
|
|
|
|
–
|
|
Other
investing activities
|
|
|
(21 |
) |
|
|
(10 |
) |
Cash
flows from continuing operations
|
|
|
(2,466 |
) |
|
|
(464 |
) |
Cash
flows from discontinued operations
|
|
|
(13 |
) |
|
|
233
|
|
Total
cash flows from investing activities
|
|
|
(2,479 |
) |
|
|
(231 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments
to reacquire common stock
|
|
|
(1,303 |
) |
|
|
(1,056 |
) |
Proceeds
from exercises of stock options
|
|
|
92
|
|
|
|
146
|
|
Borrowings
(repayments) of short-term debt, net
|
|
|
(2 |
) |
|
|
(14 |
) |
Payments
of long-term debt
|
|
|
(3 |
) |
|
|
(323 |
) |
Payments
of dividends to shareholders
|
|
|
(235 |
) |
|
|
(231 |
) |
Tax
benefit from exercise of options and restricted stock
|
|
|
22
|
|
|
|
–
|
|
Other
financing activities
|
|
|
(4 |
) |
|
|
(3 |
) |
Cash
flows from continuing operations
|
|
|
(1,433 |
) |
|
|
(1,481 |
) |
Cash
flows from discontinued operations
|
|
|
(18 |
) |
|
|
(18 |
) |
Total
cash flows from financing activities
|
|
|
(1,451 |
) |
|
|
(1,499 |
) |
Effect
of exchange rate changes on cash
|
|
|
(17 |
) |
|
|
(13 |
) |
Increase
(decrease) in cash and equivalents
|
|
|
(2,183 |
) |
|
|
527
|
|
Cash
and equivalents at beginning of period
|
|
|
2,918
|
|
|
|
2,001
|
|
Cash
and equivalents at end of period
|
|
$ |
735
|
|
|
$ |
2,528
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
payments during the period for:
|
|
|
|
|
|
|
|
|
Interest
from continuing operations
|
|
$ |
118
|
|
|
$ |
135
|
|
Income
taxes from continuing operations
|
|
$ |
689
|
|
|
$ |
202
|
|
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 2006 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, 2007, the results of our operations for the three and nine months
ended September 30, 2007 and 2006, and our cash flows for the nine months ended
September 30, 2007 and 2006. Such adjustments are of a normal
recurring nature. The results of operations for the three and nine
months ended September 30, 2007 may not be indicative of results for the full
year.
As
the
result of realigning our products and services during the third quarter of
2007,
we are now reporting two business segments. See Note 4 for further
information. Additionally, KBR, Inc. (KBR) has been reclassified to
discontinued operations in the condensed consolidated financial
statements. All prior periods presented reflect these
changes.
Note
2. KBR, Inc. Separation
In
November 2006, KBR completed an initial public offering (IPO), in which it
sold
approximately 32 million shares of KBR, Inc. common stock at $17.00 per
share. Proceeds from the IPO were approximately $508 million, net of
underwriting discounts and commissions and offering expenses. The
increase in the carrying amount of our investment in KBR, Inc., resulting from
the IPO, was recorded in “Paid-in capital in excess of par value” on our
condensed consolidated balance sheet at December 31, 2006. On April
5, 2007, we completed the separation of KBR from us by exchanging the 135.6
million shares of KBR, Inc. 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, Inc. of approximately $933 million,
net of tax and the estimated fair value of the indemnities and guarantees
provided to KBR as described below, which is included in income from
discontinued operations on the condensed consolidated statement of
operations.
The
following table presents the financial results of KBR, Inc. as discontinued
operations in our condensed consolidated statements of
operations. For accounting purposes, we ceased including KBR’s
operations in our results effective March 31, 2007.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
$ |
-
|
|
|
$ |
2,439
|
|
|
$ |
2,250
|
|
|
$ |
7,114
|
|
Operating
income
|
|
$ |
-
|
|
|
$ |
96
|
|
|
$ |
62
|
|
|
$ |
118
|
|
Net
income
|
|
$ |
-
|
|
|
$ |
10
|
|
|
$ |
23 |
(a) |
|
$ |
141
|
|
|
(a)
|
Net
income for the nine months ended September 30, 2007 represents our
81%
share of KBR, Inc.’s results.
|
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
Halliburton’s responsibility for liabilities unrelated to KBR’s
business. Halliburton provides indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s 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 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 10 for further discussion of these
matters.
|
Additionally,
the Halliburton performance guarantees, surety bond guarantees, and letter
of
credit guarantees that are currently in place in favor of KBR’s customers or
lenders will continue until these guarantees expire at the earlier
of: (1) the termination of the underlying project contract or KBR
obligations thereunder or (2) the expiration of the relevant credit support
instrument in accordance with its terms or release of such instrument by the
customer. 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 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 contracts
that were in place as of December 15, 2005; and (c) performance guarantees
in
support of these contracts. KBR will compensate Halliburton for these
guarantees and indemnify Halliburton if Halliburton is required to perform
under
any of these guarantees.
As
a
result of these agreements, 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. The estimated fair value of these indemnities and guarantees
are primarily included in “Other liabilities” on the condensed consolidated
balance sheet.
The
tax
sharing agreement provides for allocations of United States and certain other
jurisdiction tax liabilities between us and KBR. Under the transition
services agreements, we continue to provide various interim corporate support
services to KBR, and KBR continues to provide various interim corporate support
services to us. The fees are determined on a basis generally intended
to approximate the fully allocated direct and indirect costs of providing the
services, without any profit. Under an employee matters agreement,
Halliburton and KBR have allocated liabilities and responsibilities related
to
current and former employees and their participation in certain benefit
plans. Among other items, the employee matters agreement provided for
the conversion, which occurred upon completion of the separation of KBR, of
stock options and restricted stock awards (with restrictions that had not yet
lapsed as of the final separation date) granted to KBR employees under our
1993
Stock and Incentive Plan (1993 Plan) to options and restricted stock awards
covering KBR common stock. As of April 5, 2007, these awards
consisted of 1.2 million options with a weighted average exercise price per
share of $15.01 and approximately 600,000 restricted shares with a weighted
average grant-date fair value per share of $17.95 under our 1993
Plan.
Note
3. Acquisitions and Dispositions
PSL
Energy Services Limited
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. As a result of the acquisition, we are expecting to enhance
our existing product offerings throughout the eastern hemisphere. We
paid approximately $320 million for PSLES, consisting of $316 million in cash
and $4 million in debt assumed, subject to adjustment for working capital
purposes, and, as of September 30, 2007, we had recorded goodwill of $136
million and intangible assets of $54 million on a preliminary basis until our
analysis of the fair value of assets acquired and liabilities assumed is
complete. Beginning in July 2007, PSLES’s results of operations are
included in our Completion and Production segment.
Dresser,
Ltd. interest
As
a part
of our sale of Dresser Equipment Group in 2001, we retained a small equity
interest in Dresser Inc.’s Class A common stock. Dresser Inc. was
later reorganized as Dresser, Ltd., and we exchanged our shares for shares
of
Dresser, Ltd. In May 2007, we sold our remaining interest in Dresser,
Ltd. We received $70 million in cash from the sale and recorded a $49
million gain. This investment was reflected in “Other assets” on our
condensed consolidated balance sheet at December 31, 2006.
Ultraline
Services Corporation
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. As of September 30, 2007, we had recorded
goodwill of $108 million and intangible assets of $41
million. Beginning in January 2007, Ultraline’s results of operations
are included in our Drilling and Evaluation segment.
Note
4. Business Segment Information
Subsequent
to the KBR separation, in the third quarter of 2007, we realigned our products
and services to improve operational and cost management efficiencies, better
serve our customers, and become better aligned with the process of exploring
for
and producing from oil and natural gas wells. We now operate under
two divisions, which form the basis for the two operating segments we now
report: the Completion and Production segment and the Drilling and
Evaluation segment. All periods presented reflect reclassifications
related to the change in operating segments and the reclassification of certain
amounts between the operating segments and Corporate and other. The
two KBR segments have been reclassified to discontinued operations as a result
of the separation of KBR from us.
Following
is a discussion of our operating segments.
Completion
and Production delivers cementing, stimulation, intervention, and
completion services. This segment consists of production enhancement
services, completion tools and services, and cementing services.
Production
enhancement services include stimulation services, pipeline process services,
sand control services, and well intervention services. Stimulation
services optimize oil and gas reservoir production through a variety of pressure
pumping services, nitrogen services, and chemical processes, commonly known
as
hydraulic fracturing and acidizing. Pipeline process services include
pipeline and facility testing, commissioning, and cleaning via pressure pumping,
chemical systems, specialty equipment, and nitrogen, which are provided to
the
midstream and downstream sectors of the energy business. Sand control
services include fluid and chemical systems and pumping services for the
prevention of formation sand production. Well intervention services
enable live well intervention and continuous pipe deployment capabilities
through the use of hydraulic workover systems and coiled tubing tools and
services.
Completion
tools and services include subsurface safety valves and flow control equipment,
surface safety systems, packers and specialty completion equipment, intelligent
completion systems, expandable liner hanger systems, sand control systems,
well
servicing tools, and reservoir performance services. Reservoir
performance services include testing tools, real-time reservoir analysis, and
data acquisition services. Additionally, completion tools and
services include WellDynamics, an intelligent well completions joint venture,
which we consolidate for accounting purposes.
Cementing
services involve bonding the well and well casing while isolating fluid zones
and maximizing wellbore stability. Our cementing service line also
provides casing equipment.
Drilling
and Evaluation 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. This
segment consists of Baroid Fluid Services, Sperry Drilling Services, Security
DBS Drill Bits, wireline and perforating services, Landmark, and project
management.
Baroid
Fluid Services provides drilling fluid systems, performance additives, solids
control, and waste management services for oil and gas drilling, completion,
and
workover operations.
Sperry
Drilling Services provides drilling systems and services. These
services include directional and horizontal drilling,
measurement-while-drilling, logging-while-drilling, multilateral systems,
underbalanced applications, and rig site information systems. Our
drilling systems offer directional control while providing important
measurements about the characteristics of the drill string and geological
formations while drilling directional wells. Real-time operating
capabilities enable the monitoring of well progress and aid decision-making
processes.
Security
DBS Drill Bits provides roller cone rock bits, fixed cutter bits, and related
downhole tools used in drilling oil and gas wells. In addition,
coring equipment and services are provided to acquire cores of the formation
drilled for evaluation.
Wireline
and perforating services include open-hole wireline services that provide
information on formation evaluation, including resistivity, porosity, and
density, rock mechanics, and fluid sampling. Also offered are
cased-hole and slickline services, which provide cement bond evaluation,
reservoir monitoring, pipe evaluation, pipe recovery, mechanical services,
well
intervention, and perforating. Perforating services include
tubing-conveyed perforating services and products.
Landmark
is a supplier of integrated exploration, drilling, and production software
information systems, as well as consulting and data management services for
the
upstream oil and gas industry.
This
segment also provides oilfield project management and integrated solutions
to
independent, integrated, and national oil companies. These offerings
make use of all of our oilfield services, products, technologies, and project
management capabilities to assist our customers in optimizing the value of
their
oil and gas assets.
The
following table presents information on our business
segments. “Corporate and other” includes corporate expenses and other
operational transactions that do not specifically relate to the business
segments.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion
and Production
|
|
$ |
2,187
|
|
|
$ |
1,896
|
|
|
$ |
6,097
|
|
|
$ |
5,279
|
|
Drilling
and Evaluation
|
|
|
1,741
|
|
|
|
1,496
|
|
|
|
4,988
|
|
|
|
4,167
|
|
Total
revenue
|
|
$ |
3,928
|
|
|
$ |
3,392
|
|
|
$ |
11,085
|
|
|
$ |
9,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion
and Production
|
|
$ |
596
|
|
|
$ |
564
|
|
|
$ |
1,628
|
|
|
$ |
1,543
|
|
Drilling
and Evaluation
|
|
|
372
|
|
|
|
368
|
|
|
|
1,082
|
|
|
|
943
|
|
Corporate
and other
|
|
|
(58 |
) |
|
|
(62 |
) |
|
|
(119 |
) |
|
|
(164 |
) |
Total
operating income
|
|
$ |
910
|
|
|
$ |
870
|
|
|
$ |
2,591
|
|
|
$ |
2,322
|
|
Intersegment
revenue was immaterial. Our equity in earnings and losses of
unconsolidated affiliates that are accounted for by the equity method is
included in revenue and operating income of the applicable segment.
|
|
September
30,
|
|
|
December
31,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
Total
assets:
|
|
|
|
|
|
|
Completion
and Production
|
|
$ |
4,779
|
|
|
$ |
3,636
|
|
Drilling
and Evaluation
|
|
|
4,402
|
|
|
|
3,566
|
|
Shared
energy services
|
|
|
853
|
|
|
|
1,216
|
|
Corporate
and other
|
|
|
2,435
|
|
|
|
3,047
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
5,395
|
|
Total
|
|
$ |
12,469
|
|
|
$ |
16,860
|
|
Not
all
assets are associated with specific segments. Those assets specific
to segments include receivables, inventories, certain identified property,
plant, and equipment (including field service equipment), equity in and advances
to related companies, and goodwill. The remaining assets, such as
cash, are considered to be shared among the segments and are included in “Shared
energy services.”
As
of
September 30, 2007, 36% of our gross trade receivables were from customers
in
the United States. As of December 31, 2006, 39% 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 $74 million at September 30, 2007 and $58
million at December 31, 2006. If the weighted average cost method was
used, total inventories would have been $23 million higher than reported at
September 30, 2007 and $20 million higher than reported at December 31,
2006. Inventories consisted of the following:
|
|
September
30,
|
|
|
December
31,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
Finished
products and parts
|
|
$ |
1,050
|
|
|
$ |
883
|
|
Raw
materials and supplies
|
|
|
394
|
|
|
|
256
|
|
Work
in process
|
|
|
116
|
|
|
|
96
|
|
Total
|
|
$ |
1,560
|
|
|
$ |
1,235
|
|
Finished
products and parts are reported net of obsolescence reserves of $69 million
at
September 30, 2007 and $63 million at December 31, 2006.
Note
6. Investments
Investments
in marketable securities
At
September 30, 2007, we had $1.2 billion invested in marketable securities,
consisting of auction-rate securities and variable-rate demand
notes. Our auction-rate securities and variable-rate demand notes are
classified as available-for-sale and recorded at fair value. At
December 31, 2006, our investments in marketable securities were $20
million.
Restricted
and committed cash
At
September 30, 2007, we had restricted cash of $53 million, which primarily
consisted of collateral for potential future insurance claim reimbursements,
included in “Other assets.” At December 31, 2006, we had restricted
cash of $108 million in “Other assets,” which primarily consisted of similar
items. The $55 million decrease in restricted cash primarily reflects
the release, due to the separation of KBR, of collateral related to potential
insurance claim reimbursements.
Note
7. Debt
The
stock
conversion rate for the $1.2 billion of 3.125% convertible senior notes issued
in June 2003 changed to 53.2993 shares of common stock per each $1,000 principal
amount of the convertible senior notes in the third quarter of 2007 due to
the
increased quarterly dividend paid on the common stock.
On
July
9, 2007, we entered into a new unsecured $1.2 billion five-year revolving credit
facility that replaced our then existing unsecured $1.2 billion five-year
revolving credit facility with generally similar terms and conditions except
that the new facility does not contain any financial covenants. The
purpose of the facility is to provide commercial paper support, general working
capital, and credit for other corporate purposes. There were no cash
drawings under the revolving credit facility as of September 30,
2007.
Note
8. Comprehensive Income
The
components of other comprehensive income included the following:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$ |
727
|
|
|
$ |
611
|
|
|
$ |
2,809
|
|
|
$ |
1,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustments
|
|
|
–
|
|
|
|
14
|
|
|
|
–
|
|
|
|
51
|
|
Realization
of (gains) losses included in net income
|
|
|
–
|
|
|
|
2
|
|
|
|
(24 |
) |
|
|
(14 |
) |
Net
cumulative translation adjustments
|
|
|
–
|
|
|
|
16
|
|
|
|
(24 |
) |
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
pension liability adjustments
|
|
|
–
|
|
|
|
–
|
|
|
|
282
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
net gains (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
derivatives
|
|
|
–
|
|
|
|
(10 |
) |
|
|
1
|
|
|
|
11
|
|
Realization
of gains on investments and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives
included in net
income
|
|
|
–
|
|
|
|
(1 |
) |
|
|
–
|
|
|
|
(1 |
) |
Net
unrealized gains (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
derivatives
|
|
|
–
|
|
|
|
(11 |
) |
|
|
1
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$ |
727
|
|
|
$ |
616
|
|
|
$ |
3,068
|
|
|
$ |
1,737
|
|
Accumulated
other comprehensive income consisted of the following:
|
|
September
30,
|
|
|
December
31,
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
Cumulative
translation adjustments
|
|
$ |
(62 |
) |
|
$ |
(38 |
) |
Pension
liability adjustments
|
|
|
(118 |
) |
|
|
(400 |
) |
Unrealized
gains on investments and derivatives
|
|
|
2
|
|
|
|
1
|
|
Total
accumulated other comprehensive income
|
|
$ |
(178 |
) |
|
$ |
(437 |
) |
Note
9. Asbestos Insurance Recoveries
Several
of our subsidiaries or former subsidiaries, particularly DII Industries LLC
and
Kellogg Brown & Root LLC, had been named as defendants in a large number of
asbestos- and silica-related lawsuits. Effective December 31, 2004,
we resolved all open and future claims in the prepackaged Chapter 11 proceedings
of DII Industries LLC, Kellogg Brown & Root LLC, and our other affected
subsidiaries (which were filed on December 16, 2003) when the plan of
reorganization became final and nonappealable.
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 terms of our insurance settlements, we would
receive cash proceeds with a nominal amount of approximately $1.5 billion and
with a then present value of approximately $1.4 billion for our asbestos- and
silica-related insurance receivables. Cash payments of approximately
$24 million related to these receivables were received in the first nine months
of 2007. At September 30, 2007, the remaining amounts that we will
receive under the terms of the settlement agreements totaled $238 million or
$223 million on a present value basis, to be paid in several installments
through 2010. Of the $223 million recorded at September 30, 2007, $90
million was classified as current.
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. At September 30, 2007, we had not recorded any
liability associated with these indemnifications.
Note
10. 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 anticipate
that we will enter into an appropriate agreement with each of 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. We are not aware of any further developments with
respect to this claim. We also believe that the Serious Fraud Office
in the United Kingdom is 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. Through our committee of independent directors, we
will continue to oversee and direct the 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 KBR, both voluntarily and
pursuant to company subpoenas from the SEC and a grand jury, and we are making
our employees and KBR is making its employees available to the SEC and the
DOJ
for interviews. In addition, the SEC has issued a subpoena to A. Jack
Stanley, who formerly served as a consultant and chairman of Kellogg Brown
&
Root LLC, and to others, including certain of our former and KBR’s current and
former employees, former executive officers of KBR, and at least one
subcontractor of KBR. We further understand that the DOJ has issued
subpoenas for the purpose of obtaining 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 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. 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 (a predecessor of 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 are reviewing a number
of more recently discovered documents related to KBR’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 KBR, and our
investigation is continuing.
In
June
2004, all relationships with Mr. Stanley 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
2006
and 2007, KBR suspended the services of other agents in and outside of Nigeria,
including one agent who, until such suspension, had worked for KBR 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 Halliburton 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 $1.8 million in payments in excess
of costs of visas were allegedly made between approximately 1997 and the
termination of the provider in December 2004 and our 2007 reporting of this
matter to the government. We understand that TSKJ terminated the
immigration services provider after a KBR employee discovered the
issue.
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. 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, 2007, we are unable to estimate an amount of probable loss or
a
range of possible loss related to these matters as it relates to Halliburton
directly. However, we provided indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s 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. We recorded the estimated fair market value of this
indemnity regarding FCPA matters described above upon our separation from
KBR. 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 Halliburton’s 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.
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. 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. The designation of the material to be used for the bolts was
issued by Petrobras, and as such, we understand that 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 $140 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
intends to vigorously defend and pursue 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 final
arbitration hearing is expected to begin in 2008.
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. (the “AMSF
classification”). 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 (the “Dresser
claims”). The memorandum of understanding contemplated settlement of
the Dresser claims as well as the original claims.
In
June
2004, the court entered an order preliminarily approving the
settlement. Following the transfer of the case to another district
judge, the court held that evidence of the settlement’s fairness was inadequate,
denied the motion for final approval of the settlement, and ordered the parties
to mediate. The mediation was unsuccessful.
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 replead 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 repled. 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 response to a
motion by the lead plaintiff, on February 26, 2007, the court ordered the
removal and replacement of their co-lead counsel. Most recently, upon
becoming aware of a United States Supreme Court opinion issued near the end
of
its most recently completed term, the court allowed further briefing on the
motion to dismiss filed on behalf of our CEO. That briefing is
complete, but the court has not yet ruled. In September 2007, AMSF
filed a motion for class certification. Our response to the motion is
due on November 1, 2007. The case is set for trial in July
2009.
As
of
September 30, 2007, we had not accrued any amounts related to this
matter.
Operations
in Iran
We
received and responded to an inquiry in mid-2001 from the Office of Foreign
Assets Control (OFAC) of the United States Treasury Department with respect
to
operations in Iran by a Halliburton subsidiary incorporated in the Cayman
Islands. The OFAC inquiry requested information with respect to
compliance with the Iranian Transaction Regulations. These
regulations prohibit United States citizens, including United States
corporations and other United States business organizations, from engaging
in
commercial, financial, or trade transactions with Iran, unless authorized by
OFAC or exempted by statute. Our 2001 written response to OFAC stated
that we believed that we were in compliance with applicable sanction
regulations. In the first quarter of 2004, we responded to a
follow-up letter from OFAC requesting additional information. We
understand this matter has now been referred by OFAC to the DOJ. In
July 2004, we received a grand jury subpoena from an Assistant United States
District Attorney requesting the production of documents. We are
cooperating with the government’s investigation and responded to the subpoena by
producing documents in September 2004. As of September 30, 2007, we
had not accrued any amounts related to this investigation.
Separate
from the OFAC inquiry, we completed a study in 2003 of our activities in Iran
during 2002 and 2003 and concluded that these activities were in compliance
with
applicable sanction regulations. These sanction regulations require
isolation of entities that conduct activities in Iran from contact with United
States citizens or managers of United States
companies. Notwithstanding our conclusions that our activities in
Iran were not in violation of United States laws and regulations, we announced
in April 2007 that all of our contractual commitments in Iran have been
completed, and we are no longer working in Iran.
David
Hudak and International Hydrocut Technologies Corp.
In
October 2004, David Hudak and International Hydrocut Technologies Corp.
(collectively, Hudak) filed suit against us in the United States District Court
alleging civil Racketeer Influenced and Corporate Organizations Act violations,
fraud, breach of contract, unfair trade practices, and other
torts. The action arose out of Hudak’s alleged purchase from us in
early 1994 of certain explosive charges that were later alleged by the DOJ
to be
military ordnance, the possession of which by persons not possessing the
requisite licenses and registrations is unlawful. As a result of that
allegation by the government, Hudak was charged with, but later acquitted of,
certain criminal offenses in connection with his possession of the explosive
charges. This case was settled in August 2007. The amount
of the settlement was not material.
M-I,
LLC antitrust litigation
On
February 16, 2007, we were informed that M-I, LLC, a competitor of ours in
the
drilling fluids market, had sued us for allegedly attempting to monopolize
the
market for invert emulsion drilling fluids used in deep water and/or in cold
water temperatures. The claims M-I asserted are based upon its
allegation that the patent issued for our Accolade® drilling fluid was invalid
as a result of its allegedly having been procured by fraud on the United States
Patent and Trademark Office and that our subsequent prosecution of an
infringement action against M-I amounted to predatory conduct in violation
of
Section 2 of the Sherman Antitrust Act. In October 2006, a federal
court dismissed our infringement action based upon its holding that the claims
in our patent were indefinite and the patent was, therefore,
invalid. That judgment is now on appeal. M-I also alleges
that we falsely advertised our Accolade® drilling fluid in violation of the
Lanham Act and California law and that our earlier infringement action amounted
to malicious prosecution in violation of Texas state law. M-I seeks
compensatory damages, which it claims should be trebled, as well as punitive
damages and injunctive relief. We believe that M-I’s claims are
without merit and intend to aggressively defend them. As of September
30, 2007, we had not accrued any amounts in connection with this
matter.
Dirt,
Inc. litigation
Dirt,
Inc. has 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. Bredero-Shaw has
offered to take responsibility for clean-up of the site. The
plaintiff has not accepted that offer, and the amount of such clean-up cost
is
disputed, with expert opinions ranging from $6 million to $144
million. Our share of any award for the clean-up costs could be as
much as 50%. The plaintiff is also seeking punitive damages, which
under Alabama law could be an amount up to three times actual damages; we
believe, however, that we have valid legal defenses to the imposition of any
punitive damages against us. We are vigorously defending this action,
which will be tried during the fourth quarter of 2007. We have
accrued our 50% portion of an estimate of what we believe it will cost to
remediate the site.
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
Resources 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
$75 million as of September 30, 2007 and $39 million as of December 31,
2006. 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 11 federal
and state superfund sites for which we have established a
liability. As of September 30, 2007, those 11 sites accounted for
approximately $11 million of our total $75 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, 2007, including $1.3 billion
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
11. Income per Share
Basic
income per share is based on the weighted average number of common shares
outstanding during the period. Diluted income per share includes
additional common shares that would have been outstanding if potential common
shares with a dilutive effect had been issued. A reconciliation of
the number of shares used for the basic and diluted income per share
calculations is as follows:
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of shares
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic
weighted average common shares outstanding
|
|
|
880
|
|
|
|
1,011
|
|
|
|
925
|
|
|
|
1,021
|
|
Dilutive
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
senior notes
premium
|
|
|
30
|
|
|
|
27
|
|
|
|
28
|
|
|
|
30
|
|
Stock
options
|
|
|
6
|
|
|
|
8
|
|
|
|
6
|
|
|
|
9
|
|
Restricted
stock
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Diluted
weighted average common shares outstanding
|
|
|
917
|
|
|
|
1,048
|
|
|
|
961
|
|
|
|
1,062
|
|
Excluded
from the computation of diluted income per share are options to purchase four
million shares of common stock that were outstanding during the three and nine
months ended September 30, 2007 and two million shares that were outstanding
during the three and nine months ended September 30, 2006. 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
12. Income Taxes
In
the
third quarter of 2007, we recorded a $133 million favorable income tax impact
from our ability to recognize United States foreign tax credits we previously
estimated would not be fully benefited. We now believe we can utilize
these credits currently because we have generated additional taxable income
for
2006 and expect to continue to generate a higher level of taxable income largely
from the growth of our international operations.
Effective
January 1, 2007, we adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.” FIN 48, as amended May
2007 by FASB Staff Position FIN 48-1, “Definition of ‘Settlement’ in FASB
Interpretation No. 48,” prescribes a minimum recognition threshold and
measurement methodology that a tax position taken or expected to be taken in
a
tax return is required to meet before being recognized in the financial
statements. It also provides guidance for derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
As
a
result of the adoption of FIN 48, we recognized a decrease of $4 million in
other liabilities to account for a decrease in unrecognized tax benefits and
an
increase of $34 million for accrued interest and penalties, which were accounted
for as a net reduction of $30 million to the January 1, 2007 balance of retained
earnings. Of the $30 million reduction to retained earnings, $10
million was attributable to KBR, which is now reported as discontinued
operations in the condensed consolidated financial statements.
The
following presents a rollforward of our unrecognized tax benefits and associated
interest and penalties.
|
|
Unrecognized
|
|
|
Interest
|
|
Millions
of dollars
|
|
Tax
Benefits
|
|
|
and
Penalties
|
|
Balance
at January 1, 2007
|
|
$ |
266
|
|
|
$ |
47
|
|
Increase
(decrease) in prior year tax positions
|
|
|
50
|
|
|
|
(3 |
) |
Increase
in current year tax positions
|
|
|
10
|
|
|
|
2
|
|
Decrease
related to settlements with taxing authorities
|
|
|
(7 |
) |
|
|
-
|
|
Decrease
related to lapse of statute of limitations
|
|
|
(1 |
) |
|
|
-
|
|
Reclassification
to discontinued operations
|
|
|
(24 |
) |
|
|
(13 |
) |
Balance
at September 30, 2007
|
|
$ |
294
|
|
|
$ |
33
|
|
We
recognize interest and penalties related to unrecognized tax benefits within
the
provision for income taxes on continuing operations in our condensed
consolidated statements of operations.
At
September 30, 2007, $50 million of tax benefits associated with United States
foreign tax credits was included in the balance of unrecognized tax benefits
that could be resolved within the next twelve months. A review of
foreign tax documentation is currently underway and will likely be significantly
progressed within the next twelve months. Also, as of September 30,
2007, a significant portion of our non-United States unrecognized tax benefits,
while not individually significant, could be settled within the next twelve
months. As of September 30, 2007, we estimated that the entire
balance of unrecognized tax benefits, if resolved in our favor, would positively
impact the effective tax rate and, therefore, be recognized as additional tax
benefits in our income statement.
We
file
income tax returns in the United States federal jurisdiction and in various
states and foreign jurisdictions. In most cases, we are no longer
subject to United States federal, state, and local, or non-United States income
tax examination by tax authorities for years before 1998.
Note
13. Retirement Plans
The
components of net periodic benefit cost related to pension benefits for the
three and nine months ended September 30, 2007 and September 30, 2006 were
as
follows:
|
|
Three
Months Ended September 30
|
|
|
|
2007
|
|
|
2006
|
|
Millions
of dollars
|
|
United
States
|
|
|
International
|
|
|
United
States
|
|
|
International
|
|
Components
of net periodic
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
-
|
|
|
$ |
6
|
|
|
$ |
-
|
|
|
$ |
6
|
|
Interest
cost
|
|
|
2
|
|
|
|
11
|
|
|
|
2
|
|
|
|
9
|
|
Expected
return on plan assets
|
|
|
(2 |
) |
|
|
(10 |
) |
|
|
(2 |
) |
|
|
(7 |
) |
Settlements/curtailments
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recognized
actuarial loss
|
|
|
2
|
|
|
|
3
|
|
|
|
1
|
|
|
|
1
|
|
Net
periodic benefit cost
|
|
$ |
3
|
|
|
$ |
10
|
|
|
$ |
1
|
|
|
$ |
9
|
|
|
|
Nine
Months Ended September 30
|
|
|
|
2007
|
|
|
2006
|
|
Millions
of dollars
|
|
United
States
|
|
|
International
|
|
|
United
States
|
|
|
International
|
|
Components
of net periodic
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
-
|
|
|
$ |
18
|
|
|
$ |
-
|
|
|
$ |
17
|
|
Interest
cost
|
|
|
5
|
|
|
|
32
|
|
|
|
5
|
|
|
|
26
|
|
Expected
return on plan assets
|
|
|
(5 |
) |
|
|
(28 |
) |
|
|
(5 |
) |
|
|
(21 |
) |
Settlement/curtailments
|
|
|
1
|
|
|
|
(1 |
) |
|
|
-
|
|
|
|
-
|
|
Recognized
actuarial loss
|
|
|
5
|
|
|
|
7
|
|
|
|
4
|
|
|
|
5
|
|
Net
periodic benefit cost
|
|
$ |
6
|
|
|
$ |
28
|
|
|
$ |
4
|
|
|
$ |
27
|
|
We
currently expect to contribute approximately $26 million to our international
pension plans in 2007. During the nine months ended September 30,
2007, we contributed $23 million to our international pension plans, and we
plan
to contribute $3 million in the fourth quarter of 2007. We do not
have a required minimum contribution for our domestic plans; however, we made
immaterial additional discretionary contributions in the third quarter of
2007. We do not expect to make additional contributions to our
domestic plans in the fourth quarter of 2007.
The
components of net periodic benefit cost related to other postretirement benefits
for the three and nine months ended September 30, 2007 and September 30, 2006
were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components
of net periodic
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1
|
|
|
$ |
-
|
|
|
$ |
1
|
|
|
$ |
1
|
|
Interest
cost
|
|
|
2
|
|
|
|
3
|
|
|
|
6
|
|
|
|
7
|
|
Net
periodic benefit cost
|
|
$ |
3
|
|
|
$ |
3
|
|
|
$ |
7
|
|
|
$ |
8
|
|
Note
14. 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. This additional authorization may be used for open market
share purchases or to settle the conversion premium on our 3.125% convertible
senior notes, should they be redeemed. From the inception of this
program, we have repurchased approximately 77 million shares of our common
stock
for approximately $2.6 billion at an average price per share of
$33.85. These numbers include the repurchases of approximately 37
million shares of our common stock for approximately $1.3 billion at an average
price per share of $34.87 during the first nine months of 2007. As of
September 30, 2007, $2.4 billion remained available under this
program.
Note
15. New Accounting Standards
In
June
2006, the FASB ratified the consensus reached on Emerging Issues Task Force
Issue No. 06-3 (EITF 06-3), “How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That
Is,
Gross versus Net Presentation).” EITF 06-3 requires a company to
disclose its policy regarding the presentation of tax receipts on the face
of
the income statement. The scope of this guidance includes any tax
assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer and may include,
but is not limited to, sales, use, value added, and some excise
taxes. The provisions of EITF 06-3 are effective for periods
beginning after December 15, 2006. Therefore, we adopted EITF 06-3 on
January 1, 2007. We present taxes collected from customers on a net
basis.
In
September 2006, the FASB issued Staff Position (FSP) AUG AIR-1, “Accounting for
Planned Major Maintenance Activities,” which prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance
activities. The provisions of this FSP are effective for the first
fiscal year beginning after December 15, 2006. We did not elect early
adoption and, therefore, adopted FSP AUG AIR-1 on January 1, 2007 without
material impact to our financial statements.
In
September 2006, the FASB issued Statement No. 157 (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. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We
will adopt the provisions of SFAS No. 157 beginning January 1, 2008 and are
currently evaluating the impact of this statement on our financial
statements.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
EXECUTIVE
OVERVIEW
During
the first nine months of 2007, our continuing operations produced revenue of
$11.1 billion and operating income of $2.6 billion, reflecting an operating
margin of 23%. Revenue increased $1.6 billion or 17% over the first
nine months of 2006. Operating income improved $269 million or 12%
over the first nine months of 2006. Internationally, our operations
experienced 20% revenue growth and 22% operating income growth during the first
nine months of 2007 compared to the same period in 2006, most of which was
derived from our eastern hemisphere operations.
Business
outlook
The
outlook for our business remains generally favorable. In the early
months of 2007, we were negatively impacted by decreased activity in North
America, particularly the well stimulation market in Canada and the United
States Rocky Mountains. This decline was primarily attributable to
poor weather and customer delays to certain completion and stimulation
plans. However, we have seen a recovery in our United States land
operations throughout the second and third quarters, particularly for our
fracturing and cementing services. In the third quarter, we saw
increasing downward pressure on pricing, particularly in our United States
pressure pumping land operations. We are also beginning to see
pricing pressures in other product lines, including fluid services, drill bits,
and wireline and perforating. Seasonal restrictions during the winter
months may negatively impact activity levels in our North America land
operations in the fourth quarter of 2007 and early 2008. However,
based on natural gas price forecasts and our customers’ drilling plans, we
expect activity levels to increase in 2008. While we foresee
continued growth in our United States land operations, we do think there is
downside risk to our operating margins if pricing continues to erode or if
natural gas prices decline significantly. In such a case, any
increases in North American revenue may not offset the deterioration in our
North American margins and our operating income. In Canada, we
experienced a seasonal recovery in the third quarter from the traditionally
slow
second quarter spring break-up season. Looking ahead, however, we are
not expecting a significant recovery in the foreseeable future. Where
appropriate, we have reduced personnel and moved equipment to higher utilization
areas.
Outside
of North America, our outlook remains positive. Worldwide demand for
hydrocarbons continues to grow, and the reservoirs are becoming more
complex. Therefore, we have been investing and will continue to
invest in infrastructure, capital, and technology predominantly in the eastern
hemisphere, consistent with our initiative to grow our operations in that part
of the world. Outside of the seasonal impact of winter weather in
Russia and the North Sea, we expect to realize continued expansion in the Middle
East, Africa, Russia, the North Sea, and Asia.
For
the
remainder of 2007, we are focusing on:
|
-
|
maintaining
optimal utilization of our equipment and
resources;
|
|
-
|
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
recently opened one and have plans for two more international research
and
development centers with global technology and training
missions;
|
|
-
|
expanding
our manufacturing capability and capacity with new manufacturing
plants,
such as three that opened in Mexico, Brazil, and Malaysia in the
first
half of 2007 and one in Singapore expected to open by
year-end;
|
|
-
|
hiring
and training additional personnel to meet the increased demand for
our
services;
|
|
-
|
pursuing
strategic acquisitions in line with our core products and services
to
expand our portfolio in key geographic areas. Consistent with
this objective:
|
|
-
|
in
July 2007, we acquired the United Kingdom-based PSL Energy Services
Limited, a leading eastern hemisphere provider of process, pipeline,
and
well intervention services;
|
|
-
|
also
in July 2007, we entered into a definitive agreement to purchase
the
entire share capital of OOO Burservice, a leading provider of directional
drilling services in Russia;
and
|
|
-
|
in
September 2007, we acquired the intellectual property and substantially
all of the assets and existing business of GeoSmith Consulting Group,
LLC,
a leading developer of software components for 3-D interpretation
and
geometric modeling applications;
and
|
|
-
|
increasing
capital spending, primarily directed toward eastern hemisphere operations
for service equipment additions and infrastructure related to recent
project wins. Capital spending for 2008 is expected to be
approximately $1.5 billion to $1.7
billion.
|
Our
operating performance is described in more detail in “Business Environment and
Results of Operations.”
Separation
of KBR, Inc.
In
November 2006, KBR, Inc. (KBR) completed an initial public offering (IPO),
in
which it sold approximately 32 million shares of KBR, Inc. common
stock. The increase in the carrying amount of our investment in KBR,
Inc., resulting from the IPO, was recorded in “Paid-in capital in excess of par
value” on our condensed consolidated balance sheet at December 31,
2006. On April 5, 2007, we completed the separation of KBR from us by
exchanging the 135.6 million shares of KBR, Inc. common stock owned by us on
that date for 85.3 million shares of our common stock. Consequently,
KBR operations have been reclassified to discontinued operations in the
condensed consolidated financial statements for all periods
presented. Income from discontinued operations related to our 81%
share of KBR’s results in the first nine months of 2007 was $23 million after
tax or $0.02 per share. In the second quarter of 2007, we recorded a
gain on the disposition of KBR, Inc. of approximately $933 million, net of
tax
and the estimated fair value of the indemnities and guarantees provided to
KBR
as described below, which is included in income from discontinued operations
on
the condensed consolidated statement of operations.
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
Halliburton’s responsibility for liabilities unrelated to KBR’s
business. Halliburton provides indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s 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 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 10 to our condensed consolidated financial
statements for further discussion of these
matters.
|
Additionally,
the Halliburton performance guarantees, surety bond guarantees, and letter
of
credit guarantees that are currently in place in favor of KBR’s customers or
lenders will continue until these guarantees expire at the earlier
of: (1) the termination of the underlying project contract or KBR
obligations thereunder or (2) the expiration of the relevant credit support
instrument in accordance with its terms or release of such instrument by the
customer. 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 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 contracts
that were in place as of December 15, 2005; and (c) performance guarantees
in
support of these contracts. KBR will compensate Halliburton for these
guarantees and indemnify Halliburton if Halliburton is required to perform
under
any of these guarantees.
As
a
result of these agreements, 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. The estimated fair value of these indemnities and guarantees
are primarily included in “Other liabilities” on the condensed consolidated
balance sheet.
The
tax
sharing agreement provides for allocations of United States and certain other
jurisdiction tax liabilities between us and KBR. Under the transition
services agreements, we continue to provide various interim corporate support
services to KBR, and KBR continues to provide various interim corporate support
services to us. The fees are determined on a basis generally intended
to approximate the fully allocated direct and indirect costs of providing the
services, without any profit. Under an employee matters agreement,
Halliburton and KBR have allocated liabilities and responsibilities related
to
current and former employees and their participation in certain benefit
plans. Among other items, the employee matters agreement provided for
the conversion, which occurred upon completion of the separation of KBR, of
stock options and restricted stock awards (with restrictions that had not yet
lapsed as of the final separation date) granted to KBR employees under our
1993
Stock and Incentive Plan (1993 Plan) to options and restricted stock awards
covering KBR common stock. As of April 5, 2007, these awards
consisted of 1.2 million options with a weighted average exercise price per
share of $15.01 and approximately 600,000 restricted shares with a weighted
average grant-date fair value per share of $17.95 under our 1993
Plan.
See
Note
10 to our condensed consolidated financial statements for further
information.
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 anticipate
that we will enter into an appropriate agreement with each of 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. We are not aware of any further developments with
respect to this claim. We also believe that the Serious Fraud Office
in the United Kingdom is 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. Through our committee of independent directors, we
will continue to oversee and direct the 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 KBR, both voluntarily and
pursuant to company subpoenas from the SEC and a grand jury, and we are making
our employees and KBR is making its employees available to the SEC and the
DOJ
for interviews. In addition, the SEC has issued a subpoena to A. Jack
Stanley, who formerly served as a consultant and chairman of Kellogg Brown
&
Root LLC, and to others, including certain of our former and KBR’s current and
former employees, former executive officers of KBR, and at least one
subcontractor of KBR. We further understand that the DOJ has issued
subpoenas for the purpose of obtaining 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 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. 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 (a predecessor of 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 are reviewing a number
of more recently discovered documents related to KBR’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 KBR, and our
investigation is continuing.
In
June
2004, all relationships with Mr. Stanley 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
2006
and 2007, KBR suspended the services of other agents in and outside of Nigeria,
including one agent who, until such suspension, had worked for KBR 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 Halliburton 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 $1.8 million in payments in excess
of costs of visas were allegedly made between approximately 1997 and the
termination of the provider in December 2004 and our 2007 reporting of this
matter to the government. We understand that TSKJ terminated the
immigration services provider after a KBR employee discovered the
issue.
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. 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, 2007, we are unable to estimate an amount of probable loss or
a
range of possible loss related to these matters as it relates to Halliburton
directly. However, we provided indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s 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. We recorded the estimated fair market value of this
indemnity regarding FCPA matters described above upon our separation from
KBR. See Note 2 to our condensed consolidated financial statements
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 Halliburton’s 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.
Other
corporate matters
Subsequent
to the KBR separation, in the third quarter of 2007, we realigned our products
and services to improve operational and cost management efficiencies, better
serve our customers, and become better aligned with the process of exploring
for
and producing from oil and natural gas wells. We now operate under
two divisions, which form the basis for the two operating segments we now
report: the Completion and Production segment and the Drilling and
Evaluation segment.
In
May
2007, the Board of Directors increased the quarterly dividend by $0.015 per
common share, or 20%, to $0.09 per share.
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. This additional authorization may be used for open market
share purchases or to settle the conversion premium on our 3.125% convertible
senior notes, should they be redeemed. From the inception of this
program, we have repurchased approximately 77 million shares of our common
stock
for approximately $2.6 billion at an average price per share of
$33.85. These numbers include the repurchases of approximately 37
million shares of our common stock for approximately $1.3 billion at an average
price per share of $34.87 during the first nine months of 2007. As of
September 30, 2007, $2.4 billion remained available under this
program.
LIQUIDITY
AND CAPITAL RESOURCES
We
ended
the third quarter of 2007 with cash and equivalents of $735 million compared
to
$2.9 billion at December 31, 2006. The decrease in cash and
equivalents was primarily because we repurchased 37 million shares of our common
stock at a cost of $1.3 billion under our share repurchase program and invested
$1.1 billion in various marketable securities in the first nine months of 2007,
consisting of auction-rate securities, variable-rate demand notes, and municipal
bonds.
Significant
sources of cash
Cash
flows from operations contributed $1.8 billion to cash in the first nine months
of 2007. This included $55 million in cash outflows related to
discontinued operations.
In
May
2007, we sold our remaining interest in Dresser, Ltd. for $70 million in
cash.
We
received approximately $24 million in asbestos- and silica-related insurance
proceeds in the first nine months of 2007 and expect to receive additional
amounts as follows:
Millions
of dollars
|
|
|
|
October
1 through December 31, 2007
|
|
$ |
23
|
|
2008
|
|
|
67
|
|
2009
|
|
|
132
|
|
2010
|
|
|
16
|
|
Total
|
|
$ |
238
|
|
Further
available sources of cash. On July 9, 2007, we entered into a
new unsecured $1.2 billion five-year revolving credit facility that replaced
our
then existing unsecured $1.2 billion five-year revolving credit
facility. The purpose of the new facility is 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, 2007.
Significant
uses of cash
Capital
expenditures were $1.1 billion in the first nine months of 2007.
During
the first nine months of 2007, we invested in approximately $1.1 billion of
marketable securities, consisting of auction-rate securities, variable-rate
demand notes, and municipal bonds.
In
January 2007, we acquired all of the intellectual property, current assets,
and
existing wireline services business associated with Ultraline Services
Corporation, a division of Savanna Energy Services Corp., for approximately
$178
million.
In
the
third quarter of 2007, we purchased the entire share capital of PSL Energy
Services Limited (PSLES), a leading eastern hemisphere provider of process,
pipeline, and well intervention services, for $316 million.
In
July
2007, the Board of Directors declared a dividend of $0.09 per common share
for
the third quarter of 2007, payable on September 25, 2007 to shareholders of
record at the close of business on September 3, 2007. We paid $235
million in dividends to our shareholders in the first nine months of
2007.
During
the first nine months of 2007, we repurchased approximately 37 million shares
of
our common stock at a cost of approximately $1.3 billion at an average price
per
share of $34.87, under our share repurchase program.
During
the first nine months of 2007, we invested approximately $242 million in
technology, including $216 million for company-sponsored research and
development.
Future
uses of cash. Capital spending for 2007 is expected to be
approximately $1.5 billion. The capital expenditures forecast for
2007 is primarily directed toward our drilling services, wireline and
perforating, production enhancement, and cementing
operations. Capital spending for 2008 is expected to be approximately
$1.5 billion to $1.7 billion.
In
October 2007, the Board of Directors declared a dividend of $0.09 per common
share for the fourth quarter of 2007, payable on December 20, 2007 to
shareholders of record at the close of business on December 3,
2007. Thus, we expect to pay dividends of approximately $80 million
in the fourth quarter of 2007.
In
July
2007, our Board of Directors approved an increase to our existing common share
repurchase program of up to an additional $2.0 billion, bringing the entire
authorization to $5.0 billion. This additional authorization may be
used for open market share purchases or to settle the conversion premium over
the face amount of our 3.125% convertible senior notes, should they be
redeemed. As of September 30, 2007, $2.4 billion remained available
under this program.
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, 2007, including
$1.3 billion 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.
Credit
ratings. The credit ratings for our long-term debt are A2 with
Moody’s Investors Service and A with Standard and Poor’s. Our Moody’s
rating became effective May 1, 2007, and was an upward revision from our
previous Moody’s rating of Baa1, which had been in effect since December
2005. Our Standard and Poor’s rating became effective August 20,
2007, and was an upward revision from our previous Standard and Poor’s rating of
BBB+, which had been in effect since May 2006. The credit ratings on
our short-term debt are P1 with Moody’s Investors Service and A1 with Standard
and Poor’s.
BUSINESS
ENVIRONMENT AND RESULTS OF OPERATIONS
We
operate in nearly 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 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. Our two business segments are the Completion and
Production segment and the Drilling and Evaluation
segment. The two KBR segments have been reclassified to discontinued
operations as a result of the separation of KBR.
The
industries we serve are highly competitive with many substantial competitors
in
each segment. In the first nine months of 2007, based upon the
location of the services provided and products sold, 45% of our consolidated
revenue was from the United States. In the first nine months of 2006,
46% 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 controls,
or
currency devaluation. 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 gas
consumption.
Some
of
the more significant barometers of current and future spending levels of oil
and
gas companies are oil and gas prices, the world economy, and global stability,
which together drive worldwide drilling activity. Our financial
performance is significantly affected by oil and gas prices and worldwide rig
activity, which are summarized in the following tables.
This
table shows the average oil and gas prices for West Texas Intermediate (WTI)
and
United Kingdom Brent crude oils, and Henry Hub natural gas:
|
|
Three
Months Ended
|
|
|
Year
Ended
|
|
|
|
September
30
|
|
|
December
31
|
|
Average
Oil Prices (dollars per barrel)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
West
Texas Intermediate
|
|
$ |
75.16
|
|
|
$ |
70.80
|
|
|
$ |
66.17
|
|
United
Kingdom Brent
|
|
|
74.62
|
|
|
|
70.03
|
|
|
|
65.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
United States Gas Prices (dollars per million
British
|
|
|
|
|
|
|
|
|
|
|
|
|
thermal
units, or
mmBtu)
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry
Hub
|
|
$ |
6.00
|
|
|
$ |
6.35
|
|
|
$ |
6.81
|
|
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
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
United
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,716
|
|
|
|
1,624
|
|
|
|
1,682
|
|
|
|
1,533
|
|
Offshore
|
|
|
72
|
|
|
|
95
|
|
|
|
78
|
|
|
|
91
|
|
Total
|
|
|
1,788
|
|
|
|
1,719
|
|
|
|
1,760
|
|
|
|
1,624
|
|
Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
346
|
|
|
|
490
|
|
|
|
337
|
|
|
|
477
|
|
Offshore
|
|
|
2
|
|
|
|
4
|
|
|
|
3
|
|
|
|
3
|
|
Total
|
|
|
348
|
|
|
|
494
|
|
|
|
340
|
|
|
|
480
|
|
International
(excluding Canada):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
733
|
|
|
|
671
|
|
|
|
714
|
|
|
|
648
|
|
Offshore
|
|
|
287
|
|
|
|
270
|
|
|
|
287
|
|
|
|
269
|
|
Total
|
|
|
1,020
|
|
|
|
941
|
|
|
|
1,001
|
|
|
|
917
|
|
Worldwide
total
|
|
|
3,156
|
|
|
|
3,154
|
|
|
|
3,101
|
|
|
|
3,021
|
|
Land
total
|
|
|
2,795
|
|
|
|
2,785
|
|
|
|
2,733
|
|
|
|
2,658
|
|
Offshore
total
|
|
|
361
|
|
|
|
369
|
|
|
|
368
|
|
|
|
363
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
Oil
vs. Gas
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
United
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
298
|
|
|
|
306
|
|
|
|
285
|
|
|
|
269
|
|
Gas
|
|
|
1,490
|
|
|
|
1,413
|
|
|
|
1,475
|
|
|
|
1,355
|
|
Total
|
|
|
1,788
|
|
|
|
1,719
|
|
|
|
1,760
|
|
|
|
1,624
|
|
Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
122
|
|
|
|
122
|
|
|
|
127
|
|
|
|
104
|
|
Gas
|
|
|
226
|
|
|
|
372
|
|
|
|
213
|
|
|
|
376
|
|
Total
|
|
|
348
|
|
|
|
494
|
|
|
|
340
|
|
|
|
480
|
|
International
(excluding Canada):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
798
|
|
|
|
720
|
|
|
|
780
|
|
|
|
703
|
|
Gas
|
|
|
222
|
|
|
|
221
|
|
|
|
221
|
|
|
|
214
|
|
Total
|
|
|
1,020
|
|
|
|
941
|
|
|
|
1,001
|
|
|
|
917
|
|
Worldwide
total
|
|
|
3,156
|
|
|
|
3,154
|
|
|
|
3,101
|
|
|
|
3,021
|
|
Oil
total
|
|
|
1,218
|
|
|
|
1,148
|
|
|
|
1,192
|
|
|
|
1,076
|
|
Gas
total
|
|
|
1,938
|
|
|
|
2,006
|
|
|
|
1,909
|
|
|
|
1,945
|
|
Our
customers’ cash flows, in many instances, depend upon the revenue they generate
from the sale of oil and gas. Higher oil and gas prices usually
translate into higher exploration and production budgets. Higher
prices also improve the economic attractiveness of marginal exploration
areas. This promotes additional investment by our customers in the
sector. The opposite is true for lower oil and gas
prices.
After
declining from record highs during the third and fourth quarters of 2006, WTI
oil spot prices were expected to average $68.84 per barrel in 2007 and $73.50
per barrel in 2008 per the Energy Information Administration
(EIA). Between mid-December 2006 and mid-January 2007, the WTI crude
oil price fell about $12 per barrel to a low of $50.51 per barrel, as warm
weather reduced demand for heating fuels throughout most of the United
States. However, the WTI price recovered to over $66 per barrel by
the end of March 2007, as the weather turned colder than normal and geopolitical
tensions intensified. Crude oil prices have continued to rise to
record levels over the $80 per barrel mark throughout the second and third
quarters of 2007 due to a tight world oil supply and demand
balance. We expect that oil prices will remain at these historically
high levels due to a combination of the following factors:
|
-
|
continued
growth in worldwide petroleum demand, despite high oil
prices;
|
|
-
|
projected
production growth in non-Organization of Petroleum Exporting Countries
(non-OPEC) supplies is not expected to accommodate world wide demand
growth;
|
|
-
|
OPEC’s
commitment to control production;
|
|
-
|
modest
increases in OPEC’s current and forecasted production capacity;
and
|
|
-
|
geopolitical
tensions in major oil-exporting
nations.
|
According
to the International Energy Agency’s (IEA) October 2007 “Oil Market Report,” the
outlook for world oil demand remains strong, with China, the Middle East, and
North America accounting for approximately 84% of the expected demand growth
in
2007. Excess oil production capacity is expected to remain
constrained and that, along with increased demand, is expected to keep supplies
tight. Thus, any unexpected supply disruption or change in demand
could lead to fluctuating prices. The IEA forecasts world petroleum
demand growth in 2007 to increase 2% over 2006.
Volatility
in natural gas prices has the potential to impact our customers' drilling and
production activities, particularly in the United States. In the
first quarter of 2007, we experienced lower than anticipated customer activity
in North America, particularly the pressure pumping market in Canada and the
United States Rockies. Some of this activity decline was attributable
to poor weather, including an early spring break-up season in Canada and severe
weather early in 2007 in the United States Rockies and mid-continent
regions. In addition, the unusually warm start to the United States
2006/2007 winter caused concern about natural gas storage levels, which
negatively impacted the price of natural gas. This uncertainty made
many of our customers more cautious about their drilling and production plans
in
the early part of 2007. The second and third quarters of 2007 were
characterized by increased activity for our United States customers and growth
in the eastern hemisphere. Despite recovery from a traditionally slow
second quarter spring break-up season, Canada has experienced a significant
decline in activity as compared to 2006. Beginning in late 2006, we
began moving equipment and personnel from Canada to the United States and Latin
America to address the anticipated slowdown. In October 2007, the EIA
projected that the Henry Hub spot price will average $7.21 per thousand cubic
feet (mcf) in 2007 and $7.86 per mcf in 2008.
It
is
common practice in the United States oilfield services industry to sell services
and products based on a price book and then apply discounts to the price book
based upon a variety of factors. The discounts applied typically
increase to partially offset price book increases. We are currently
experiencing increased pricing pressure from our customers in the North American
market, particularly in Canada and in our United States well stimulation
operations. We have also begun to experience some pricing pressures
in the United States in several other product lines, including cementing, fluid
services, drill bits, and wireline and perforating.
Focus
on international growth. Consistent with our strategy to grow
our international operations, we expect to continue to invest capital and
increase manufacturing capacity to bring new tools online to serve the high
demand for our services. Following is a brief discussion of some of
our recent initiatives:
|
-
|
we
have opened a corporate office in Dubai, United Arab Emirates,
allowing us
to focus more attention on customer relationships in that part
of the
world, particularly with national oil
companies;
|
|
-
|
in
order to continue to supply our customers with leading-edge services
and
products, we have increased our technology spending during 2007
as
compared to the prior year. Our plans are progressing for new
international research and development centers with global technology
and
training missions. We opened one in Pune, India in the third
quarter of 2007, and a second facility, which will be in Singapore,
is
expected to open by year-end;
|
|
-
|
we
are expanding our manufacturing capability and capacity during
2007 to
meet the increasing demands for our services and products. In
the first nine months of 2007, we opened manufacturing plants in
Mexico,
Brazil, and Malaysia, and we plan to open an additional plant in
Singapore
by year-end. Having manufacturing facilities closer to our
worksites will allow us to more efficiently deploy equipment to
our field
operations, as well as increase our use of local people and
materials;
|
|
-
|
as
our workforce becomes more global, the need for regional training
centers
increases. To meet the increasing need for technical training,
we opened a new training center in Tyumen, Russia during the first
quarter
of 2007. We have also recently expanded training centers in
Malaysia, Egypt, and Mexico; and
|
|
-
|
part
of our growth strategy includes select 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
January 2007, we acquired Ultraline Services Company, a provider
of
wireline services in Canada. Prior to this acquisition, we did
not have meaningful wireline and perforating operations in
Canada;
|
|
-
|
in
May 2007, we acquired the intellectual property, assets, and existing
business associated with Vector Magnetics LLC’s active ranging technology
for steam-assisted gravity drainage
applications;
|
|
-
|
in
July 2007, we acquired PSL Energy Services Limited, a leading eastern
hemisphere provider of process, pipeline, and well intervention
services. This acquisition will increase our eastern hemisphere
production enhancement operations significantly, putting us in a
strong
position in pipeline processing services both in the eastern hemisphere
and globally;
|
|
-
|
in
July 2007, we entered into a definitive agreement to purchase the
entire
share capital of OOO Burservice, a leading provider of directional
drilling services in Russia; and
|
|
-
|
in
September 2007, we acquired the intellectual property and substantially
all of the assets and existing business of GeoSmith Consulting Group,
LLC,
a leading developer of software components for 3-D interpretation
and
geometric modeling applications.
|
Recent
contract wins are positioning us to grow our international operations over
the
coming years. Examples include:
|
-
|
a
contract to provide hydraulic fracturing services on the Right Bank
of the
Priobskye field in Siberia. The scope of work includes
providing services for 327 wells;
|
|
-
|
a
multiservices contract for work in the Tyumen region of
Russia. We will be providing drilling fluids, waste management,
cementing, drill bits, directional drilling, and logging-while-drilling
services;
|
|
-
|
a
contract to provide acidizing, acid fracturing, water control, and
nitrogen stimulation services for a customer in the Bay of Campeche,
Mexico;
|
|
-
|
a
contract to provide deepwater sand control completion technology
in two
offshore fields of India;
|
|
-
|
a
contract to provide completion products and services to a group of
energy
companies for operations throughout Malaysia for a term of five
years;
|
|
-
|
a
contract to provide exploration and development testing services
in high
pressure, high temperature environments in Latin
America;
|
|
-
|
a
five-year contract for sand control completions for over 200 wells
in
offshore China;
|
|
-
|
a
three-year contract to provide a full range of subsurface services,
including drilling and formation evaluation, slickline, fluids, cementing
services and production enhancement in Papua New Guinea;
and
|
|
-
|
a
contract to provide completion products and services in
Indonesia.
|
RESULTS
OF OPERATIONS IN 2007 COMPARED TO 2006
Three
Months Ended September 30, 2007 Compared with Three Months Ended September
30,
2006
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
REVENUE:
|
|
September
30
|
|
|
Increase
|
|
|
Percentage
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Completion
and Production
|
|
$ |
2,187
|
|
|
$ |
1,896
|
|
|
$ |
291
|
|
|
|
15 |
% |
Drilling
and Evaluation
|
|
|
1,741
|
|
|
|
1,496
|
|
|
|
245
|
|
|
|
16
|
|
Total
revenue
|
|
$ |
3,928
|
|
|
$ |
3,392
|
|
|
$ |
536
|
|
|
|
16 |
% |
By
geographic region:
|
|
Completion
and Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$ |
1,227
|
|
|
$ |
1,159
|
|
|
$ |
68
|
|
|
|
6 |
% |
Latin
America
|
|
|
193
|
|
|
|
152
|
|
|
|
41
|
|
|
|
27
|
|
Europe/Africa/CIS
|
|
|
439
|
|
|
|
352
|
|
|
|
87
|
|
|
|
25
|
|
Middle
East/Asia
|
|
|
328
|
|
|
|
233
|
|
|
|
95
|
|
|
|
41
|
|
Total
|
|
|
2,187
|
|
|
|
1,896
|
|
|
|
291
|
|
|
|
15
|
|
Drilling
and Evaluation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
620
|
|
|
|
579
|
|
|
|
41
|
|
|
|
7
|
|
Latin
America
|
|
|
263
|
|
|
|
238
|
|
|
|
25
|
|
|
|
11
|
|
Europe/Africa/CIS
|
|
|
493
|
|
|
|
369
|
|
|
|
124
|
|
|
|
34
|
|
Middle
East/Asia
|
|
|
365
|
|
|
|
310
|
|
|
|
55
|
|
|
|
18
|
|
Total
|
|
|
1,741
|
|
|
|
1,496
|
|
|
|
245
|
|
|
|
16
|
|
Total
revenue by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
1,847
|
|
|
|
1,738
|
|
|
|
109
|
|
|
|
6
|
|
Latin
America
|
|
|
456
|
|
|
|
390
|
|
|
|
66
|
|
|
|
17
|
|
Europe/Africa/CIS
|
|
|
932
|
|
|
|
721
|
|
|
|
211
|
|
|
|
29
|
|
Middle
East/Asia
|
|
|
693
|
|
|
|
543
|
|
|
|
150
|
|
|
|
28
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS):
|
|
September
30
|
|
|
Increase
|
|
|
Percentage
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Completion
and Production
|
|
$ |
596
|
|
|
$ |
564
|
|
|
$ |
32
|
|
|
|
6 |
% |
Drilling
and Evaluation
|
|
|
372
|
|
|
|
368
|
|
|
|
4
|
|
|
|
1
|
|
Corporate
and other
|
|
|
(58 |
) |
|
|
(62 |
) |
|
|
4
|
|
|
|
7
|
|
Total
operating income
|
|
$ |
910
|
|
|
$ |
870
|
|
|
$ |
40
|
|
|
|
5 |
% |
By
geographic region:
|
|
Completion
and Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$ |
387
|
|
|
$ |
411
|
|
|
$ |
(24 |
) |
|
|
(6 |
)% |
Latin
America
|
|
|
34
|
|
|
|
37
|
|
|
|
(3 |
) |
|
|
(8 |
) |
Europe/Africa/CIS
|
|
|
92
|
|
|
|
66
|
|
|
|
26
|
|
|
|
39
|
|
Middle
East/Asia
|
|
|
83
|
|
|
|
50
|
|
|
|
33
|
|
|
|
66
|
|
Total
|
|
|
596
|
|
|
|
564
|
|
|
|
32
|
|
|
|
6
|
|
Drilling
and Evaluation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
110
|
|
|
|
162
|
|
|
|
(52 |
) |
|
|
(32 |
) |
Latin
America
|
|
|
48
|
|
|
|
45
|
|
|
|
3
|
|
|
|
7
|
|
Europe/Africa/CIS
|
|
|
115
|
|
|
|
72
|
|
|
|
43
|
|
|
|
60
|
|
Middle
East/Asia
|
|
|
99
|
|
|
|
89
|
|
|
|
10
|
|
|
|
11
|
|
Total
|
|
|
372
|
|
|
|
368
|
|
|
|
4
|
|
|
|
1
|
|
Total
operating income by region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
Corporate and
other):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
497
|
|
|
|
573
|
|
|
|
(76 |
) |
|
|
(13 |
) |
Latin
America
|
|
|
82
|
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
|
Europe/Africa/CIS
|
|
|
207
|
|
|
|
138
|
|
|
|
69
|
|
|
|
50
|
|
Middle
East/Asia
|
|
|
182
|
|
|
|
139
|
|
|
|
43
|
|
|
|
31
|
|
|
Note
1
|
–
|
All
periods presented reflect the new segment structure and the
reclassification of certain amounts between the segments/regions
and
“Corporate and other.”
|
The
increase in consolidated revenue in the third quarter of 2007 compared to the
third quarter of 2006 was attributable to higher worldwide activity,
particularly in the United States, Africa, and Europe. Approximately
$17 million in estimated revenue was lost during the third quarter of 2007
due
to Gulf of Mexico hurricanes. International revenue was 56% of
consolidated revenue in the third quarter of 2007 and 54% of consolidated
revenue in the third quarter of 2006.
The
increase in consolidated operating income stems from a 40% increase in the
eastern hemisphere and was due to increased customer activity, pricing gains,
and new contracts primarily in Europe, Africa, and Asia
Pacific. Partially offsetting the increase in operating income was
$32 million in charges for environmental reserves in the third quarter of
2007.
Following
is a discussion of our results of operations by reportable segment.
Completion
and Production increase in revenue compared to the third quarter of 2006
was led by a 30% increase in revenue from completion tools sales and
services. Increased completion tool sales and services primarily
resulted from a large completion tools sale in Asia Pacific, increased activity
in our WellDynamics joint venture in Africa, and increased completions in the
United States. Production enhancement services revenue grew 10%
largely driven by higher utilization of fracturing crews and equipment in the
United States, better prices and increased fracturing activity in Mexico, and
the recent acquisition of PSLES in Europe. Partially offsetting
production enhancement services revenue was a decline in Canada’s
activity. Cementing services revenue increased 17%, which stemmed
from increased activity in the United States, new contracts, increased activity,
and better prices in Latin America, and increased activity in
Eurasia. International revenue was 46% of total segment revenue in
the third quarter of 2007 and 44% of total segment revenue in the third quarter
of 2006.
The
Completion and Production segment operating income improvement compared to
the
third quarter of 2006 was led by completion tools sales. Completion
tools sales and services operating income grew 58%, with eastern hemisphere
operating income increasing 63%. The completion tools operating
income increase was led by a large completion tool sale in Asia, increased
activity in our WellDynamics joint venture in Africa, and increased completion
activity in the United States. Cementing operating income increased
10% compared to the prior year third quarter with improved pricing and increased
activity in Europe and additional contracts in Latin
America. Production enhancement services operating income declined 7%
from lower margins in the United States and reduced activity in
Canada.
Drilling
and Evaluation revenue increase for the third quarter of 2007 compared to
the third quarter of 2006 was driven by 21% growth in drilling services
revenue. Drilling services revenue increased primarily from higher
utilization of assets in the United States, new contracts and improved pricing
in Europe, and increased activity in Africa. Wireline and perforating
services revenue improved 23% on a large direct sale in Asia and improved
pricing and increased activity in Latin America. Drill bits revenue
increased 8% due to revenue growth in the United States and the North
Sea. Fluid services revenue, which grew 15%, benefited from improved
sales in the North Sea. Landmark revenue increased 16%, with growth
in all four regions, due to stronger software sales and consulting
services. Project management services revenue declined 14% due to the
completion of a project in Mexico. International revenue was 68% of
total segment revenue in the third quarter of 2007 and 66% of total segment
revenue in the third quarter of 2006.
The
increase in segment operating income was predominantly due to a 14% increase
in
drilling services operating income in Europe, new contracts and improved asset
utilization in Russia, and increased activity in Africa. Wireline and
perforating services operating income increased 22%, with the eastern hemisphere
contributing 67% of the increase. The wireline and perforating
services increase was primarily due to favorable pricing in Latin America and
increased direct sales in Asia Pacific. Fluid services operating
income declined 46%, primarily from recording an additional reserve related
to a
North America environmental matter in the third quarter of
2007. Drill bits operating income improved 12% over the prior year
third quarter benefiting from high specification work in the North Sea,
including successful runs of the XR™ Reamer hole enlargement tool, and improved
fixed cutter bit sales in the United States. Landmark’s
year-over-year operating income grew 39% with increases in all four regions
on
improved sales of software and consulting services. Project
management’s operating income fell 29% from the prior year quarter due to the
completion of a project in Mexico.
Corporate
and other expenses were $58 million in the third quarter of 2007 compared
to $62 million in the third quarter of 2006. The decrease was
primarily due to reduced legal fees. Also, third quarter of 2007
included charges for additional reserves related to environmental
matters.
NONOPERATING
ITEMS
Interest
income decreased $10 million compared to the third quarter of 2006 due to
lower cash balances.
Provision
for income taxes from continuing operations of $152 million in the third
quarter of 2007 resulted in an effective tax rate of 17% compared to an
effective tax rate of 30% in the third quarter of 2006. The provision
for income taxes in 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. We now believe we can utilize
these credits currently because we have generated additional taxable income
for
2006 and expect to continue to generate a higher level of taxable income largely
from the growth of our international operations.
Minority
interest in net income of subsidiaries increased $15 million compared to
the third quarter of 2006 related primarily to our joint ventures in
Egypt, Malaysia, and Saudi Arabia.
Income
from discontinued operations, net of income tax in the third quarter of
2006 primarily consisted of the results of KBR, Inc.
RESULTS
OF OPERATIONS IN 2007 COMPARED TO 2006
Nine
Months Ended September 30, 2007 Compared with Nine Months Ended September 30,
2006
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
REVENUE:
|
|
September
30
|
|
|
Increase
|
|
|
Percentage
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Completion
and Production
|
|
$ |
6,097
|
|
|
$ |
5,279
|
|
|
$ |
818
|
|
|
|
15 |
% |
Drilling
and Evaluation
|
|
|
4,988
|
|
|
|
4,167
|
|
|
|
821
|
|
|
|
20
|
|
Total
revenue
|
|
$ |
11,085
|
|
|
$ |
9,446
|
|
|
$ |
1,639
|
|
|
|
17 |
% |
By
geographic region:
|
|
Completion
and Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$ |
3,449
|
|
|
$ |
3,171
|
|
|
$ |
278
|
|
|
|
9 |
% |
Latin
America
|
|
|
551
|
|
|
|
424
|
|
|
|
127
|
|
|
|
30
|
|
Europe/Africa/CIS
|
|
|
1,259
|
|
|
|
1,009
|
|
|
|
250
|
|
|
|
25
|
|
Middle
East/Asia
|
|
|
838
|
|
|
|
675
|
|
|
|
163
|
|
|
|
24
|
|
Total
|
|
|
6,097
|
|
|
|
5,279
|
|
|
|
818
|
|
|
|
15
|
|
Drilling
and Evaluation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
1,816
|
|
|
|
1,621
|
|
|
|
195
|
|
|
|
12
|
|
Latin
America
|
|
|
757
|
|
|
|
672
|
|
|
|
85
|
|
|
|
13
|
|
Europe/Africa/CIS
|
|
|
1,382
|
|
|
|
1,013
|
|
|
|
369
|
|
|
|
36
|
|
Middle
East/Asia
|
|
|
1,033
|
|
|
|
861
|
|
|
|
172
|
|
|
|
20
|
|
Total
|
|
|
4,988
|
|
|
|
4,167
|
|
|
|
821
|
|
|
|
20
|
|
Total
revenue by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
5,265
|
|
|
|
4,792
|
|
|
|
473
|
|
|
|
10
|
|
Latin
America
|
|
|
1,308
|
|
|
|
1,096
|
|
|
|
212
|
|
|
|
19
|
|
Europe/Africa/CIS
|
|
|
2,641
|
|
|
|
2,022
|
|
|
|
619
|
|
|
|
31
|
|
Middle
East/Asia
|
|
|
1,871
|
|
|
|
1,536
|
|
|
|
335
|
|
|
|
22
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS):
|
|
September
30
|
|
|
Increase
|
|
|
Percentage
|
|
Millions
of dollars
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Completion
and Production
|
|
$ |
1,628
|
|
|
$ |
1,543
|
|
|
$ |
85
|
|
|
|
6 |
% |
Drilling
and Evaluation
|
|
|
1,082
|
|
|
|
943
|
|
|
|
139
|
|
|
|
15
|
|
Corporate
and other
|
|
|
(119 |
) |
|
|
(164 |
) |
|
|
45
|
|
|
|
27
|
|
Total
operating income
|
|
$ |
2,591
|
|
|
$ |
2,322
|
|
|
$ |
269
|
|
|
|
12 |
% |
By
geographic region:
|
|
Completion
and Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$ |
1,069
|
|
|
$ |
1,108
|
|
|
$ |
(39 |
) |
|
|
(4 |
)% |
Latin
America
|
|
|
122
|
|
|
|
93
|
|
|
|
29
|
|
|
|
31
|
|
Europe/Africa/CIS
|
|
|
240
|
|
|
|
187
|
|
|
|
53
|
|
|
|
28
|
|
Middle
East/Asia
|
|
|
197
|
|
|
|
155
|
|
|
|
42
|
|
|
|
27
|
|
Total
|
|
|
1,628
|
|
|
|
1,543
|
|
|
|
85
|
|
|
|
6
|
|
Drilling
and Evaluation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
390
|
|
|
|
428
|
|
|
|
(38 |
) |
|
|
(9 |
) |
Latin
America
|
|
|
129
|
|
|
|
112
|
|
|
|
17
|
|
|
|
15
|
|
Europe/Africa/CIS
|
|
|
297
|
|
|
|
186
|
|
|
|
111
|
|
|
|
60
|
|
Middle
East/Asia
|
|
|
266
|
|
|
|
217
|
|
|
|
49
|
|
|
|
23
|
|
Total
|
|
|
1,082
|
|
|
|
943
|
|
|
|
139
|
|
|
|
15
|
|
Total
operating income by region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
Corporate and
other):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
1,459
|
|
|
|
1,536
|
|
|
|
(77 |
) |
|
|
(5 |
) |
Latin
America
|
|
|
251
|
|
|
|
205
|
|
|
|
46
|
|
|
|
22
|
|
Europe/Africa/CIS
|
|
|
537
|
|
|
|
373
|
|
|
|
164
|
|
|
|
44
|
|
Middle
East/Asia
|
|
|
463
|
|
|
|
372
|
|
|
|
91
|
|
|
|
24
|
|
|
Note
1
|
–
|
All
periods presented reflect the new segment structure and the
reclassification of certain amounts between the segments/regions
and
“Corporate and other.”
|
The
increase in consolidated revenue in the first nine months of 2007 compared
to
the first nine months of 2006 spanned all four regions and was attributable
to
higher worldwide activity, particularly in Europe, Africa, and the United
States. Revenue derived from the eastern hemisphere contributed 58%
to the total revenue increase. International revenue was 55% of
consolidated revenue in the first nine months of 2007 and 54% of consolidated
revenue in the first nine months of 2006.
The
increase in consolidated operating income in the first nine months of 2007
compared to the first nine months of 2006 spanned all regions except North
America and was predominantly due to the operating income increase in the
eastern hemisphere, which increased 34% compared to the first nine months of
2006. Operating income in the first nine months of 2007 was
positively impacted by a $49 million gain recorded on the sale of our remaining
interest in Dresser, Ltd. and was negatively impacted by $44 million in charges
for environmental reserves.
Following
is a discussion of our results of operations by reportable
segments.
Completion
and Production revenue increase compared to the first nine months of 2006
was driven by an 11% increase in revenue from production enhancement
services. Production enhancement services revenue benefited from
increased resources and improved weather conditions in the United States,
increased stimulation activity in Mexico, additional projects in the North
Sea,
and higher utilization of equipment in Angola. The production
enhancement services revenue improvement was partially offset by decreased
activity in Canada. Sales of completion tools and services grew 28%
due to increased testing activity and increased activity in our intelligent
well completions joint venture in Africa, increased completion product
sales in Asia, increased testing activity in Brazil, and increases in the United
States. Cementing services revenue increased 17% compared to the
first nine months of 2006 due primarily to new contracts in the Middle East,
new
contracts and improved pricing in Latin America, and increased activity and
pricing gains in the United States. International revenue was 46% of
total segment revenue in the first nine months of 2007 and 45% of total segment
revenue in the first nine months of 2006.
The
increase in segment operating income in the first nine months of 2007 compared
to the first nine months of 2006 was led by completion tools sales and services
operating income, which increased 54% and spanned all
regions. Contributing to the completion tools sales and services
increase were increased product sales in Asia, increased testing activity and
improved product mix in Africa, and increased completion product sales in the
Gulf of Mexico. Cementing services grew 10% from new technology and
improved pricing in Latin America and increased activity and improved pricing
in
the North Sea. Production enhancement services operating income
declined 6% compared to the first nine months of 2006 due to decreased activity
in Canada, the United States, and Russia. Partially offsetting the
decline in production enhancement services operating income were increased
fracturing activity in Africa and additional projects in the North
Sea.
Drilling
and Evaluation revenue increase compared to the first nine months of 2006
was driven by a 26% increase in drilling services revenue, which spanned all
four regions. The increase in drilling services revenue was primarily
the result of additional contract awards in the United States, the Middle East,
and Asia Pacific. Also contributing to drilling services revenue
improvement was increased drilling activity in Eurasia. Wireline and
perforating services revenue grew 23% benefiting from new projects in Africa,
increased rig count in the United States, and a new contract in Asia
Pacific. Fluid services revenue increased 20% compared to the first
nine months of 2006 on increased land rig activity in the United States, new
contracts in the North Sea, and increased activity in
Africa. Increased United States rig count and fixed cutter activity
in the United States and Europe contributed to the 13% increase in drill bits
revenue. Landmark revenue grew 17%, which spanned all four regions,
with the largest increases occurring in Latin America and Eurasia due to
stronger software sales and consulting services. Project management
revenue declined 21% due to the completion of a project in
Mexico. International revenue was 67% of total segment revenue in the
first nine months of 2007 and 66% of total segment revenue in the first nine
months of 2006.
The
increase in segment operating income in the first nine months of 2007 compared
to the first nine months of 2006 came from all geographic regions except North
America. Drilling services operating income grew 33% over the first
nine months of 2006 primarily from increased drilling activity in United States
land operations, Europe, Eurasia, and the Middle East. Wireline and
perforating services operating income improved 17% from new projects in Africa
and increased activity in Latin America. Partially offsetting
wireline and perforating services operating income was the slowdown in
Canada. Fluid services operating income fell 18% compared to the
first nine months of 2006 primarily due to an additional provision recorded
for
an environmental exposure in North America and decreased activity in Canada
and
Latin America. Drill bits operating income increased 23% compared to
the first nine months of 2006 due primarily to increased rig count and fixed
cutter activity in the United States. Landmark operating income
increased 36% compared to the first nine months of 2006 from stronger software
sales and consulting services. Project management operating income
declined 21% due to lower gas production in the Gulf of Mexico.
Corporate
and other expenses were $119 million in the first nine months of 2007 and
$164 million in the first nine months of 2006. The first nine months
of 2007 included a $49 million gain recorded on the sale of our remaining
interest in Dresser, Ltd.
NONOPERATING
ITEMS
Interest
expense decreased $6 million in the first nine months of 2007 compared to
the first nine months of 2006 due to the repayment in August 2006 of our $275
million 6.0% medium-term notes.
Interest
income increased $6 million in the first nine months of 2007 compared to
the first nine months of 2006 due to higher interest-rate-driven earnings on
higher balances of cash and marketable investments.
Other,
net in the first nine months of 2007 primarily included losses on the
Canadian dollar and the Indonesian rupiah.
Provision
for income taxes from continuing operations of $695 million in the first
nine months of 2007 resulted in an effective tax rate of 27% compared to an
effective tax rate of 32% in the first nine months of 2006. The
provision for income taxes in 2007 included a $133 million favorable income
tax
impact from the ability to recognize foreign tax credits previously estimated
not to be fully utilizable. We now believe we can utilize these
credits currently because we have generated additional taxable income for 2006
and expect to continue to generate a higher level of taxable income largely
from
the growth of our international operations.
Minority
interest in net income of subsidiaries increased $7 million compared to the
first nine months of 2006 related primarily to our joint ventures in Egypt,
Malaysia, and Saudi Arabia.
Income
from discontinued operations, net of income tax in the first nine months of
2007 primarily consisted of the approximate $933 million net gain recorded
on
the disposition of KBR, Inc.
ENVIRONMENTAL
MATTERS
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
Resources 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
$75 million as of September 30, 2007 and $39 million as of December 31,
2006. 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 11 federal
and state superfund sites for which we have established a
liability. As of September 30, 2007, those 11 sites accounted for
approximately $11 million of our total $75 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.
NEW
ACCOUNTING STANDARDS
Effective
January 1, 2007, we adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.” FIN 48, as amended May
2007 by FASB Staff Position FIN 48-1, “Definition of ‘settlement’ in FASB
Interpretation No. 48,” prescribes a minimum recognition threshold and
measurement methodology that a tax position taken or expected to be taken in
a
tax return is required to meet before being recognized in the financial
statements. It also provides guidance for derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
As
a
result of the adoption of FIN 48, we recognized a decrease of $4 million in
other liabilities to account for a decrease in unrecognized tax benefits and
an
increase of $34 million for accrued interest and penalties, which were accounted
for as a net reduction of $30 million to the January 1, 2007 balance of retained
earnings. Of the $30 million reduction to retained earnings, $10
million was attributable to KBR, which is now reported as discontinued
operations in the condensed consolidated financial statements. See
Note 12 to our condensed consolidated financial statements for further
information.
In
June
2006, the FASB ratified the consensus reached on Emerging Issues Task Force
Issue No 06-3 (EITF 06-3), “How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That
Is,
Gross versus Net Presentation).” EITF 06-3 requires a company to
disclose its policy regarding the presentation of tax receipts on the face
of
the income statement. The scope of this guidance includes any tax
assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer and may include,
but is not limited to, sales, use, value added, and some excise
taxes. The provisions of EITF 06-3 are effective for periods
beginning after December 15, 2006. Therefore, we adopted EITF 06-3 on
January 1, 2007. We present taxes collected from customers on a net
basis.
In
September 2006, the FASB issued Staff Position (FSP) AUG AIR-1, “Accounting for
Planned Major Maintenance Activities,” which prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance
activities. The provisions of this FSP are effective for the first
fiscal year beginning after December 15, 2006. We did not elect early
adoption and, therefore, adopted FSP AUG AIR-1 on January 1, 2007 without
material impact to our financial statements.
In
September 2006, the FASB issued Statement No. 157 (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. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We
will adopt the provisions of SFAS No. 157 beginning January 1, 2008 and are
currently evaluating the impact of this statement on our financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115” (SFAS 159). SFAS 159 permits entities to measure
eligible assets and liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported
in
earnings. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We will adopt SFAS 159 on January 1, 2008, and are
currently evaluating the impact of this statement on our financial
statements.
FORWARD-LOOKING
INFORMATION
The
Private Securities Litigation Reform Act of 1995 provides safe harbor provisions
for forward-looking information. Forward-looking information is based
on projections and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking and use words like “may,” “may
not,” “believes,” “do not believe,” “expects,” “do not expect,” “anticipates,”
“do not anticipate,” and other expressions. We may also provide oral
or written forward-looking information in other materials we release to the
public. Forward-looking information involves risk and uncertainties
and reflects our best judgment based on current information. Our
results of operations can be affected by inaccurate assumptions we make or
by
known or unknown risks and uncertainties. In addition, other factors
may affect the accuracy of our forward-looking information. As a
result, no forward-looking information can be guaranteed. Actual
events and the results of operations may vary materially.
We
do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events, or for any other reason. You should review any
additional disclosures we make in our press releases and Forms 10-K, 10-Q,
and
8-K filed with or furnished to the SEC. We also suggest that you
listen to our quarterly earnings release conference calls with financial
analysts.
While
it
is not possible to identify all factors, we continue to face many risks and
uncertainties that could cause actual results to differ from our forward-looking
statements and potentially materially and adversely affect our financial
condition and results of operations.
Due
to
the separation of KBR, Inc., a number of risk factors previously disclosed
in
our 2006 annual report on Form 10-K are no longer applicable to our continuing
business operations, including: “United States Government Contract
Work,” “Bidding practices investigation,” “Possible Algerian investigation,”
“Risk related to award of new gas monetization and upstream projects,”
“Government spending,” “Risks related to contracts,” and “Other KBR
risks.”
The
risk
factors discussed below update the remaining risk factors previously disclosed
in our 2006 annual report on Form 10-K.
RISK
FACTORS
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 anticipate
that we will enter into an appropriate agreement with each of 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. We are not aware of any further developments with
respect to this claim. We also believe that the Serious Fraud Office
in the United Kingdom is 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. Through our committee of independent directors, we
will continue to oversee and direct the 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 KBR, both voluntarily and
pursuant to company subpoenas from the SEC and a grand jury, and we are making
our employees and KBR is making its employees available to the SEC and the
DOJ
for interviews. In addition, the SEC has issued a subpoena to A. Jack
Stanley, who formerly served as a consultant and chairman of Kellogg Brown
&
Root LLC, and to others, including certain of our former and KBR’s current and
former employees, former executive officers of KBR, and at least one
subcontractor of KBR. We further understand that the DOJ has issued
subpoenas for the purpose of obtaining 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 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. 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 (a predecessor of 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 are reviewing a number
of more recently discovered documents related to KBR’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 KBR, and our
investigation is continuing.
In
June
2004, all relationships with Mr. Stanley 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
2006
and 2007, KBR suspended the services of other agents in and outside of Nigeria,
including one agent who, until such suspension, had worked for KBR 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 Halliburton 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 $1.8 million in payments in excess
of costs of visas were allegedly made between approximately 1997 and the
termination of the provider in December 2004 and our 2007 reporting of this
matter to the government. We understand that TSKJ terminated the
immigration services provider after a KBR employee discovered the
issue.
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. 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, 2007, we are unable to estimate an amount of probable loss or
a
range of possible loss related to these matters as it relates to Halliburton
directly. However, we provided indemnification in favor of KBR under
the master separation agreement for certain contingent liabilities, including
Halliburton’s 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. We recorded the estimated fair market value of this
indemnity regarding FCPA matters described above upon our separation from
KBR. See Note 2 to our condensed consolidated financial statements
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 Halliburton’s 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.
Operations
in Iran
We
received and responded to an inquiry in mid-2001 from the Office of Foreign
Assets Control (OFAC) of the United States Treasury Department with respect
to
operations in Iran by a Halliburton subsidiary incorporated in the Cayman
Islands. The OFAC inquiry requested information with respect to
compliance with the Iranian Transaction Regulations. These
regulations prohibit United States citizens, including United States
corporations and other United States business organizations, from engaging
in
commercial, financial, or trade transactions with Iran, unless authorized by
OFAC or exempted by statute. Our 2001 written response to OFAC stated
that we believed that we were in compliance with applicable sanction
regulations. In the first quarter of 2004, we responded to a
follow-up letter from OFAC requesting additional information. We
understand this matter has now been referred by OFAC to the DOJ. In
July 2004, we received a grand jury subpoena from an Assistant United States
District Attorney requesting the production of documents. We are
cooperating with the government’s investigation and responded to the subpoena by
producing documents in September 2004.
Separate
from the OFAC inquiry, we completed a study in 2003 of our activities in Iran
during 2002 and 2003 and concluded that these activities were in compliance
with
applicable sanction regulations. These sanction regulations require
isolation of entities that conduct activities in Iran from contact with United
States citizens or managers of United States
companies. Notwithstanding our conclusions that our activities in
Iran were not in violation of United States laws and regulations, we announced
in April 2007 that all of our contractual commitments in Iran have been
completed, and we are no longer working in Iran.
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. See
Note 2 to our condensed consolidated financial statements 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. The designation of the material to be used for the bolts was
issued by Petrobras, and as such, we understand that 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 $140 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
intends to vigorously defend and pursue 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 final
arbitration hearing is expected to begin in 2008.
Impairment
of Oil and Gas Properties
We
have
interests in oil and gas properties totaling $126 million, net of accumulated
depletion, which we account for under the successful efforts
method. The majority of this amount is related to one property in
Bangladesh. These oil and gas properties are assessed for impairment
whenever changes in facts and circumstances indicate that the properties’
carrying amounts may not be recoverable. The expected future cash
flows used for impairment reviews and related fair-value calculations are based
on judgmental assessments of future production volumes, prices, and costs,
considering all available information at the date of review. We are
currently engaged in a drilling program on two prospects in
Bangladesh. If the results of the program are unsuccessful, this
could result in the write-off of our drilling costs and a portion of the
carrying value of the leasehold.
A
downward trend in estimates of production volumes or prices or an upward trend
in costs could result in an impairment of our oil and gas properties, which
in
turn could have a material and adverse effect on our results of
operations.
Environmental
Requirements
Our
businesses are subject to a variety of environmental laws, rules, and
regulations in the United States and other countries, including those covering
hazardous materials and requiring emission performance standards for
facilities. For example, our well service operations routinely
involve the handling of significant amounts of waste materials, some of which
are classified as hazardous substances. We also store, transport, and
use radioactive and explosive materials in certain of our
operations. Environmental requirements include, for example, those
concerning:
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-
|
the
containment and disposal of hazardous substances, oilfield waste,
and
other waste materials;
|
|
-
|
the
importation and use of radioactive
materials;
|
|
-
|
the
use of underground storage tanks;
and
|
|
-
|
the
use of underground injection wells.
|
Environmental
and other similar requirements generally are becoming increasingly
strict. Sanctions for failure to comply with these requirements, many
of which may be applied retroactively, may include:
|
-
|
administrative,
civil, and criminal penalties;
|
|
-
|
revocation
of permits to conduct business; and
|
|
-
|
corrective
action orders, including orders to investigate and/or clean up
contamination.
|
Failure
on our part to comply with applicable environmental requirements could have
a
material adverse effect on our consolidated financial condition. We
are also exposed to costs arising from environmental compliance, including
compliance with changes in or expansion of environmental requirements, which
could have a material adverse effect on our business, financial condition,
operating results, or cash flows.
We
are
exposed to claims under environmental requirements and, from time to time,
such
claims have been made against us. In the United States, environmental
requirements and regulations typically impose strict
liability. Strict liability means that in some situations we could be
exposed to liability for cleanup costs, natural resource damages, and other
damages as a result of our conduct that was lawful at the time it occurred
or
the conduct of prior operators or other third parties. Liability for
damages arising as a result of environmental laws could be substantial and
could
have a material adverse effect on our consolidated results of
operations.
We
are
periodically notified of potential liabilities at state and federal superfund
sites. These potential liabilities may arise from both historical
Halliburton operations and the historical operations of companies that we have
acquired. Our exposure at these sites may be materially impacted by
unforeseen adverse developments both in the final remediation costs and with
respect to the final allocation among the various parties involved at the
sites. 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. The relevant regulatory
agency may bring suit against us for amounts in excess of what we have accrued
and what we believe is our proportionate share of remediation costs at any
superfund site. We also could be subject to third-party claims,
including punitive damages, with respect to environmental matters for which
we
have been named as a potentially responsible party.
Changes
in environmental requirements may negatively impact demand for our
services. For example, oil and natural gas exploration and production
may decline as a result of environmental requirements (including land use
policies responsive to environmental concerns). A decline in
exploration and production, in turn, could materially and adversely affect
us.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
We
are
exposed to financial instrument market risk from changes in foreign currency
exchange rates, interest rates, and, to a limited extent, commodity
prices. We selectively manage these exposures through the use of
derivative instruments to mitigate our market risk from these
exposures. The objective of our risk management is to protect our
cash flows related to sales or purchases of goods or services from market
fluctuations in currency rates. Our use of derivative instruments
includes the following types of market risk:
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-
|
volatility
of the currency rates;
|
|
-
|
time
horizon of the derivative
instruments;
|
|
-
|
the
type of derivative instruments
used.
|
We
do not
use derivative instruments for trading purposes. We do not consider
any of these risk management activities to be material.
Item
4. Controls and Procedures
In
accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15,
we
carried out an evaluation, under the supervision and with the participation
of
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures as of the end
of
the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of September 30, 2007
to
provide reasonable assurance that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the Securities
and
Exchange Commission’s rules and forms. Our disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in reports filed or submitted under the Exchange Act
is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
There
has
been no change in our internal control over financial reporting that occurred
during the three months ended September 30, 2007 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
Information
related to various commitments and contingencies is described in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” in
“Forward-Looking Information” and “Risk Factors,” and in Notes 2, 9, and 10 to
the condensed consolidated financial statements.
Item
1(a). Risk Factors
Information
related to risk factors is described in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under “Forward-Looking
Information” and “Risk Factors.”
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Following
is a summary of our repurchases of our common stock during the three-month
period ended September 30, 2007.
|
|
|
Total
Number of
|
|
|
|
Shares
Purchased
|
|
|
|
as
Part of
|
|
Total
Number
|
|
Publicly
|
|
Of
Shares
|
Average
Price
|
Announced Plans
|
Period
|
Purchased
(a)
|
Paid
per Share
|
or
Programs (b)
|
July
1-31
|
1,286,042
|
$
36.48
|
1,231,495
|
August
1-31
|
9,391,655
|
$
33.28
|
9,382,335
|
September
1-30
|
500,124
|
$
34.93
|
486,800
|
Total
|
11,177,821
|
$
33.72
|
11,100,630
|
(a)
|
Of
the 11,177,821 shares purchased during the three-month period ended
September 30, 2007, 77,191 shares were acquired from employees in
connection with the settlement of income tax and related benefit
withholding obligations arising from vesting in restricted stock
grants. These shares were not part of a publicly announced
program to purchase common shares.
|
(b)
|
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. This additional
authorization may be used for open market share purchases or to settle
the
conversion premium on our 3.125% convertible senior notes, should
they be
redeemed. From the inception of this program, we have
repurchased approximately 77 million shares of our common stock for
approximately $2.6 billion at an average price per share of
$33.85. These numbers include the repurchases of approximately
37 million shares of our common stock for approximately $1.3 billion
at an
average price per share of $34.87 during the first nine months of
2007. As of September 30, 2007, $2.4 billion remained available
under this program.
|
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
10.1
|
Form
of Indemnification Agreement for Officers (incorporated by reference
to
Exhibit
|
|
10.1
to Halliburton’s Form 8-K filed August 3, 2007, File No.
1-3492).
|
|
|
10.2
|
Form
of Indemnification Agreement for Directors (incorporated by reference
to
Exhibit
|
|
10.2
to Halliburton’s Form 8-K filed August 3, 2007, File No.
1-3492).
|
|
|
* 10.3
|
2008
Halliburton Elective Deferral Plan, as amended and restated effective
January 1, 2008.
|
|
|
* 10.4
|
Halliburton
Company Supplemental Executive Retirement Plan, as amended and
restated
|
|
effective
January 1, 2008.
|
|
|
* 10.5
|
Halliburton
Company Benefit Restoration Plan, as amended and restated
effective
|
|
January
1, 2008.
|
|
|
* 10.6
|
Halliburton
Annual Performance Pay Plan, as amended and restated
effective
|
|
January
1, 2007.
|
|
|
* 10.7
|
Halliburton
Management Performance Plan, as amended and restated
effective
|
|
January
1, 2007.
|
|
|
* 10.8
|
Halliburton
Company Pension Equalizer Plan, as amended and restated
effective
|
|
March
1, 2007.
|
|
|
* 10.9
|
Halliburton
Company Directors’ Deferred Compensation Plan, as amended and
restated
|
|
effective
January 1, 2007.
|
|
|
* 10.10
|
Retirement
Plan for the Directors of Halliburton Company, as amended and
restated
|
|
effective
July 1, 2007.
|
|
|
* 10.11
|
First
Amendment to the Retirement Plan for the Directors of Halliburton
Company,
|
|
effective
September 1, 2007.
|
|
|
* 31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
of
2002.
|
|
|
* 31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
of
2002.
|
|
|
** 32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
|
|
of
2002.
|
|
|
** 32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
|
|
of
2002.
|
|
|
*
|
Filed
with this Form 10-Q
|
**
|
Furnished
with this Form 10-Q
|
SIGNATURES
As
required by the Securities Exchange Act of 1934, the registrant has authorized
this report to be signed on behalf of the registrant by the undersigned
authorized individuals.
HALLIBURTON
COMPANY
/s/ C.
Christopher
Gaut
|
/s/ Mark
A.
McCollum
|
C.
Christopher Gaut
|
Mark
A. McCollum
|
Executive
Vice President and
|
Senior
Vice President and
|
Chief
Financial Officer
|
Chief
Accounting Officer
|
Date: October
26,
2007