HALLIBURTON CO annual report, FY2010

Halliburton Company — FY 2010 Form 10-K

Reporting period: Year ended December 31, 2010; comparative results are for FY 2009 unless otherwise noted. Halliburton provides oilfield services and products globally through Completion and Production and Drilling and Evaluation. It operated in approximately 80 countries; the United States accounted for 46% of 2010 revenue.

Financial performance

Metric	FY 2010	FY 2009
Revenue	$17.973 billion	$14.675 billion
Operating income	$3.009 billion	$1.994 billion
Operating margin	16.7%	13.6%
Income from continuing operations	$1.802 billion	$1.164 billion
Net income attributable to Halliburton	$1.835 billion; diluted EPS $2.01	$1.145 billion; diluted EPS $1.27
Cash from operating activities	$2.212 billion	$2.406 billion
Capital expenditures	$2.069 billion	$1.864 billion

Revenue increased 22% and operating income rose 51%, primarily on higher North American activity and improved pricing. Completion and Production revenue grew 35% and operating income doubled; Drilling and Evaluation revenue grew 10%, while operating income increased 3%.
North America revenue rose 56% overall. International revenue was essentially flat, while international operating income declined 22% amid competitive pricing and unfavorable activity mix.
Fourth-quarter revenue was $5.160 billion, operating income $980 million, and net income $607 million. Revenue and operating income increased sequentially from Q3; the filing attributes the sharp Gulf of Mexico decline to the drilling suspension’s effects.
Operating cash flow less capital expenditures was approximately $143 million. Operating cash flow declined from 2009, including a $902 million cash use from receivables and a $331 million use from inventories.
At year-end, cash and equivalents were $1.398 billion and marketable securities $653 million, versus $2.082 billion and $1.312 billion, respectively, in 2009. Current assets were $8.886 billion and current liabilities $2.757 billion. Long-term debt was $3.824 billion, down from $4.574 billion; the company repaid $750 million of notes. Cash and securities exceeded debt by approximately $2.051 billion. Its $1.2 billion revolving credit facility was undrawn.
The effective tax rate on continuing operations was 32.1%, compared with 30.8% in 2009. The board paid $0.36 per share in dividends during 2010.

Material changes and unusual items

North American land activity recovered strongly, with growth in horizontal drilling and oil- and liquids-rich plays driving higher service intensity, equipment utilization, and pricing.
Completion and Production’s North America operating income increased by $1.151 billion. Results were partly offset by weaker international profitability in both segments.
FY 2010 operating income included a $50 million non-cash impairment charge for a Bangladesh oil and gas property. Other, net included a $31 million Venezuelan currency devaluation loss; the company also recorded $10 million of additional Venezuelan tax expense.
Discontinued operations included $62 million of income related primarily to finalization of a U.S. tax matter and a $17 million after-tax charge for a KBR-related Nigerian settlement indemnity.
Halliburton acquired Boots & Coots in September for approximately $248 million in cash and stock, and reported $523 million of total business-asset acquisition cash outflows for the year. It paid $177 million during 2010 related to KBR TSKJ matters.

Outlook, risks, and contingencies

Management expected moderate near-term growth given global economic uncertainty and the Macondo incident’s impact on U.S. Gulf of Mexico deepwater activity. Gulf recovery was described as uncertain through the first half, and possibly all, of 2011. Management considered North American revenue and margins sustainable through 2011, while expecting international volume recovery and potential pricing improvement later in 2011.
2011 capital spending was projected at approximately $3.0 billion. Planned initiatives included increased Eastern Hemisphere manufacturing, improved North American service delivery, and a new Houston technology center; related costs were expected to reduce first-quarter 2011 EPS by about $0.02. Subject to board approval, quarterly dividends of approximately $80 million were expected; $1.7 billion remained under the share-repurchase authorization.
Macondo: Halliburton had been named in more than 330 pollution-related complaints and at least 28 personal-injury lawsuits, plus six suits concerning alleged injuries to responders. It had not accrued a liability at December 31, 2010 because management did not consider a loss probable, and it could not estimate a possible loss or range. Its BP contract provides indemnification for many claims, but BP reserved its rights; enforceability, insurance coverage, and potential exposure to fines or penalties remain uncertain. Halliburton cited a $600 million general liability insurance program. The company was not named as a responsible party in the DOJ’s December 2010 CWA/OPA civil action; investigations continued, and no criminal proceedings had been commenced against Halliburton as of February 17, 2011.
National Commission findings cited potential cementing and communication failures involving Halliburton and other parties. Halliburton disputed aspects of the reports and stated it would vigorously defend its work. Increased offshore regulation and permitting delays could further reduce customer activity and demand.
Petrobras’s Barracuda-Caratinga arbitration against KBR seeks $220 million plus interest; Halliburton’s indemnity could expose it to costs, and the panel’s final decision was pending. The filing does not provide a clear final exposure estimate.
The Nigerian government settlement on KBR-related TSKJ matters required $33 million plus $2 million in expenses, paid in 2010. Halliburton’s KBR indemnities continue for certain other matters. Environmental reserves were $47 million, including approximately $10 million for 12 superfund sites.
Additional risks include oil and gas price and customer-spending volatility, Venezuelan collections and government/currency risk, political and regulatory risk, environmental and hydraulic-fracturing regulation, raw-material constraints, and execution risks on fixed-price projects. No material off-balance-sheet arrangements were reported apart from operating leases.

Important facts for investors to verify

Developments in Macondo litigation and investigations, the probability and potential magnitude of losses, BP indemnification, and the applicability of insurance.
Whether Gulf of Mexico drilling and Halliburton’s related activity recover, and whether regulatory requirements create further delays or costs.
Cash conversion and working-capital trends, particularly receivables growth and collections in Venezuela; validate the sustainability of reported operating cash flow.
International segment margins and the timing and extent of pricing recovery, alongside the returns expected from the planned $3.0 billion 2011 capital program.
Final outcome and Halliburton’s indemnity exposure in the Barracuda-Caratinga arbitration, plus any further KBR-related claims or payments.