10-K 1 ed10k2007_final.htm DECEMBER 31, 2007 FORM 10-K FINAL ed10k2007_final.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K

(Mark One)
[X]         Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 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 001-03492

HALLIBURTON COMPANY
(Exact name of registrant as specified in its charter)

Delaware
75-2677995
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
5 Houston Center
1401 McKinney, Suite 2400
Houston, Texas  77010
(Address of principal executive offices)
Telephone Number – Area code (713) 759-2600
   
Securities registered pursuant to Section 12(b) of the Act:
   
 
Name of each Exchange on
Title of each class
which registered
Common Stock par value $2.50 per share
New York Stock Exchange
   
Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes     X         No ______

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes _____    No      X    

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer                                [X]
Accelerated filer                                  [    ]
Non-accelerated filer                                  [   ]
Smaller reporting company                [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes              No       X   

The aggregate market value of Common Stock held by nonaffiliates on June 29, 2007, determined using the per share closing price on the New York Stock Exchange Composite tape of $34.50 on that date was approximately $30,691,000,000.

As of February 14, 2008, there were 880,157,300 shares of Halliburton Company Common Stock, $2.50 par value per share, outstanding.

Portions of the Halliburton Company Proxy Statement for our 2008 Annual Meeting of Stockholders (File No. 001-03492) are incorporated by reference into Part III of this report.
 
 

 

HALLIBURTON COMPANY
Index to Form 10-K
For the Year Ended December 31, 2007

PART I
 
PAGE
Item 1.
Business
        1
Item 1(a).
Risk Factors
        5
Item 1(b).
Unresolved Staff Comments
        5
Item 2.
Properties
        5
Item 3.
Legal Proceedings
        6
Item 4.
Submission of Matters to a Vote of Security Holders
        6
EXECUTIVE OFFICERS OF THE REGISTRANT
        7
PART II
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters,
 
 
and Issuer Purchases of Equity Securities
       10
Item 6.
Selected Financial Data
       11
Item 7.
Management’s Discussion and Analysis of Financial Condition and
 
 
Results of Operation
       11
Item 7(a).
Quantitative and Qualitative Disclosures About Market Risk
       11
Item 8.
Financial Statements and Supplementary Data
       12
Item 9.
Changes in and Disagreements with Accountants on Accounting and
 
 
Financial Disclosure
       12
Item 9(a).
Controls and Procedures
       12
Item 9(b).
Other Information
       12
MD&A AND FINANCIAL STATEMENTS
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
       13
Management’s Report on Internal Control Over Financial Reporting
       45
Reports of Independent Registered Public Accounting Firm
       46
Consolidated Statements of Operations
       48
Consolidated Balance Sheets
       49
Consolidated Statements of Shareholders’ Equity
       50
Consolidated Statements of Cash Flows
       51
Notes to Consolidated Financial Statements
       52
Selected Financial Data (Unaudited)
       86
Quarterly Data and Market Price Information (Unaudited)
       87
PART III
 
 
Item 10.
Directors, Executive Officers, and Corporate Governance
       88
Item 11.
Executive Compensation
       88
Item 12(a).
Security Ownership of Certain Beneficial Owners
       88
Item 12(b).
Security Ownership of Management
       88
Item 12(c).
Changes in Control
       88
Item 12(d).
Securities Authorized for Issuance Under Equity Compensation Plans
       88
Item 13.
Certain Relationships and Related Transactions, and Director
 
 
Independence
       88
Item 14.
Principal Accounting Fees and Services
       89
PART IV
 
 
Item 15.
Exhibits and Financial Statement Schedules
       90
SIGNATURES
       99

(i)

 
 

 

PART I

Item 1.  Business.
General description of business
Halliburton Company’s predecessor was established in 1919 and incorporated under the laws of the State of Delaware in 1924.  Halliburton Company provides a variety of services and products to customers in the energy industry.
In November 2006, KBR, Inc. (KBR), which at the time was our wholly owned subsidiary, completed an initial public offering (IPO), in which it sold approximately 32 million shares of KBR common stock at $17.00 per share.  Proceeds from the IPO were approximately $508 million, net of underwriting discounts and commissions and offering expenses.  On April 5, 2007, we completed the separation of KBR from us by exchanging the 135.6 million shares of KBR common stock owned by us on that date for 85.3 million shares of our common stock.  In the second quarter of 2007, we recorded a gain on the disposition of KBR of approximately $933 million, net of tax and the estimated fair value of the indemnities and guarantees provided to KBR, which is included in income from discontinued operations in the consolidated statements of operations.
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.  The two KBR segments have been reclassified as discontinued operations.
See Note 4 to the consolidated financial statements for financial information about our business segments.
Description of services and products
We offer a broad suite of services and products to customers through our two business segments for the exploration, development, and production of oil and gas.  We serve major, national, and independent oil and gas companies throughout the world.  The following summarizes our services and products for each business segment.
Completion and Production
Our Completion and Production segment 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
Our Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise well-bore placement solutions that enable customers to model, measure, and optimize their well construction activities.  This segment consists of Baroid Fluid Services, Sperry Drilling Services, Security DBS Drill Bits, wireline and perforating services, Landmark, and project management.

 
1

 

Baroid Fluid Services provides drilling fluid systems, performance additives, completion fluids, solids control, specialized testing equipment, 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, surface data logging, 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, hole enlargement and related downhole tools and services 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.
The Drilling and Evaluation 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.
Acquisitions and dispositions
In July 2007, we acquired the entire share capital of PSL Energy Services Limited (PSLES), an eastern hemisphere provider of process, pipeline, and well intervention services.  PSLES has operational bases in the United Kingdom, Norway, the Middle East, Azerbaijan, Algeria, and Asia Pacific.  We paid approximately $330 million for PSLES, consisting of $326 million in cash and $4 million in debt assumed, subject to adjustment for working capital purposes.  As of December 31, 2007, we had recorded goodwill of $163 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 August 2007, PSLES’s results of operations are included in our Completion and Production segment.
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 consolidated balance sheet at December 31, 2006.
In January 2007, we acquired all intellectual property, current assets, and existing business associated with Calgary-based Ultraline Services Corporation (Ultraline), a division of Savanna Energy Services Corp.  Ultraline is a provider of wireline services in Canada.  We paid approximately $178 million for Ultraline and recorded goodwill of $124 million and intangible assets of $41 million.  Beginning in February 2007, Ultraline’s results of operations are included in our Drilling and Evaluation segment.
In January 2005, we completed the sale of our 50% interest in Subsea 7, Inc. to our joint venture partner, Siem Offshore (formerly DSND Subsea ASA), for approximately $200 million in cash.  As a result of the transaction, we recorded a gain of approximately $110 million during the first quarter of 2005.  We accounted for our 50% ownership of Subsea 7, Inc. using the equity method in our Completion and Production segment.
Business strategy
Our business strategy is to secure a distinct and sustainable competitive position as a pure-play oilfield service company by delivering products and services to our customers that maximize their production and recovery and realize proven reserves from difficult environments.  Our objectives are to:

 
2

 

 
-
create a balanced portfolio of products and services supported by global infrastructure and anchored by technology innovation with a well-integrated digital strategy to further differentiate our company;
 
-
reach a distinguished level of operational excellence that reduces costs and creates real value from everything we do;
 
-
preserve a dynamic workforce by being a preferred employer to attract, develop, and retain the best global talent; and
 
-
uphold the ethical and business standards of the company and maintain the highest standards of health, safety, and environmental performance.
Markets and competition
We are one of the world’s largest diversified energy services companies.  Our services and products are sold in highly competitive markets throughout the world.  Competitive factors impacting sales of our services and products include:
 
-
price;
 
-
service delivery (including the ability to deliver services and products on an “as needed, where needed” basis);
 
-
health, safety, and environmental standards and practices;
 
-
service quality;
 
-
global talent retention;
 
-
knowledge of the reservoir;
 
-
product quality;
 
-
warranty; and
 
-
technical proficiency.
We conduct business worldwide in approximately 70 countries.  In 2007, based on the location of services provided and products sold, 44% of our consolidated revenue was from the United States.  In 2006, 45% of our consolidated revenue was from the United States.  In 2005, 43% of our consolidated revenue was from the United States.  No other country accounted for more than 10% of our consolidated revenue during these periods.  See Note 4 to the consolidated financial statements for additional financial information about geographic operations in the last three years.  Because the markets for our services and products are vast and cross numerous geographic lines, a meaningful estimate of the total number of competitors cannot be made.  The industries we serve are highly competitive, and we have many substantial competitors.  Largely all of our services and products are marketed through our servicing and sales organizations.
Operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, expropriation or other governmental actions, exchange control problems, and highly inflationary currencies.  We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country would be material to the conduct of our operations taken as a whole.
Information regarding our exposure to foreign currency fluctuations, risk concentration, and financial instruments used to minimize risk is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Instrument Market Risk and in Note 14 to the consolidated financial statements.
Customers
Our revenue from continuing operations during the past three years was derived from the sale of services and products to the energy industry.  No customer represented more than 10% of consolidated revenue in any period presented.
Raw materials
Raw materials essential to our business are normally readily available.  Current market conditions have triggered constraints in the supply of certain raw materials, such as sand, cement, and specialty metals.  Given high activity levels, particularly in the United States, we are seeking ways to ensure the availability of resources, as well as manage the rising costs of raw materials.  Our procurement department is using our size and buying power through several programs designed to ensure that we have access to key materials at competitive prices.

 
3

 

Research and development costs
We maintain an active research and development program.  The program improves existing products and processes, develops new products and processes, and improves engineering standards and practices that serve the changing needs of our customers.  Our expenditures for research and development activities were $301 million in 2007, $254 million in 2006, and $218 million in 2005, of which over 97% was company-sponsored in each year.
Patents
We own a large number of patents and have pending a substantial number of patent applications covering various products and processes.  We are also licensed to utilize patents owned by others.  We do not consider any particular patent to be material to our business operations.
Seasonality
On an overall basis, our operations are not generally affected by seasonality.  Weather and natural phenomena can temporarily affect the performance of our services, but the widespread geographical locations of our operations serve to mitigate those effects.  Examples of how weather can impact our business include:
 
-
the severity and duration of the winter in North America can have a significant impact on gas storage levels and drilling activity for natural gas;
 
-
the timing and duration of the spring thaw in Canada directly affects activity levels due to road restrictions;
 
-
typhoons and hurricanes can disrupt coastal and offshore operations; and
 
-
severe weather during the winter months normally results in reduced activity levels in the North Sea and Russia.
In addition, due to higher spending near the end of the year by customers for software and completion tools and services, Landmark and completion tools results of operations are generally stronger in the fourth quarter of the year than at the beginning of the year.
Employees
At December 31, 2007, we employed approximately 51,000 people worldwide compared to approximately 45,000 at December 31, 2006.  At December 31, 2007, approximately 12% of our employees were subject to collective bargaining agreements.  Based upon the geographic diversification of these employees, we believe any risk of loss from employee strikes or other collective actions would not be material to the conduct of our operations taken as a whole.
Environmental regulation
We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide.  In the United States, these laws and regulations include, among others:
 
-
the Comprehensive Environmental Response, Compensation and Liability Act;
 
-
the Resource Conservation and Recovery Act;
 
-
the Clean Air 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 may 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.

 
4

 

Web site access
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 are made available free of charge on our internet web site at www.halliburton.com as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (SEC).  The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  The SEC maintains an internet site that contains our reports, proxy and information statements, and our other SEC filings.  The address of that site is www.sec.gov.  We have posted on our web site our Code of Business Conduct, which applies to all of our employees and Directors and serves as a code of ethics for our principal executive officer, principal financial officer, principal accounting officer, and other persons performing similar functions.  Any amendments to our Code of Business Conduct or any waivers from provisions of our Code of Business Conduct granted to the specified officers above are disclosed on our web site within four business days after the date of any amendment or waiver pertaining to these officers.  There have been no waivers from provisions of our Code of Business Conduct during 2007, 2006, or 2005.

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 1(b).  Unresolved Staff Comments.
None.

Item 2.  Properties.
We own or lease numerous properties in domestic and foreign locations.  The following locations represent our major facilities and corporate offices.

Location
Owned/Leased
Description
Operations:
   
Completion and Production segment:
   
Carrollton, Texas
Owned
Manufacturing facility
Johor, Malaysia
Leased
Manufacturing facility
Monterrey, Mexico
Leased
Manufacturing facility
Sao Jose dos Campos, Brazil
Leased
Manufacturing facility
     
   Drilling and Evaluation segment:
   
Alvarado, Texas
Owned/Leased
Manufacturing facility
Singapore
Leased
Manufacturing facility
The Woodlands, Texas
Leased
Manufacturing facility
     
    Shared facilities:
   
Duncan, Oklahoma
Owned
Manufacturing, technology, and camp facilities
Houston, Texas
Owned
Manufacturing and campus facilities
Houston, Texas
Owned/Leased
Campus facility
Houston, Texas
Leased
Campus facility
Pune, India
Leased
Technology facility
     
Corporate:
   
Houston, Texas
Leased
Corporate executive offices
Dubai, United Arab Emirates
Leased
Corporate executive offices

 
5

 

All of our owned properties are unencumbered.
In addition, we have 133 international and 97 United States field camps from which we deliver our services and products.  We also have numerous small facilities that include sales offices, project offices, and bulk storage facilities throughout the world.
We believe all properties that we currently occupy are suitable for their intended use.

Item 3.  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 Note 10 to the consolidated financial statements.

Item 4.  Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the fourth quarter of 2007.

 
6

 

Executive Officers of the Registrant

The following table indicates the names and ages of the executive officers of Halliburton Company as of February 15, 2008, including all offices and positions held by each in the past five years:

Name and Age
Offices Held and Term of Office
Evelyn M. Angelle
Vice President, Corporate Controller, and Principal Accounting Officer of
(Age 40)
Halliburton Company, since January 2008
 
Vice President, Operations Finance of Halliburton Company,
 
December 2007 to January 2008
 
Vice President, Investor Relations of Halliburton Company,
 
April 2005 to November 2007
 
Assistant Controller of Halliburton Company, April 2003 to March 2005
 
Senior Manager of Ernst & Young, April 1996 to March 2003
   
Peter C. Bernard
Senior Vice President, Business Development and Marketing of
(Age 46)
Halliburton Company, since June 2006
 
Senior Vice President, Digital and Consulting Solutions of Halliburton
 
Company, December 2004 to May 2006
 
President of Landmark Graphics Corporation, May 2004 to December 2004
 
Vice President, Marketing and Managed Accounts of Landmark Graphics
 
Corporation, May 2003 to May 2004
 
Vice President, Strategic Account Business Development, January 2002
 
to May 2003
   
James S. Brown
President, Western Hemisphere of Halliburton Company, since January 2008
(Age 53)
Senior Vice President, Western Hemisphere of Halliburton Company,
 
June 2006 to December 2007
 
Senior Vice President, United States Region of Halliburton Company,
 
December 2003 to June 2006
 
Vice President, Western Area of Halliburton Company, November 2003
 
to December 2003
 
Vice President, Business Development of Halliburton Company, October 2001
 
to October 2003
   
*      Albert O. Cornelison, Jr.
Executive Vice President and General Counsel of Halliburton Company,
(Age 58)
since December 2002
 
Director of KBR, Inc., June 2006 to April 2007
   
C. Christopher Gaut
President, Drilling and Evaluation Division of Halliburton Company,
(Age 51)
since January 2008
 
Director of KBR, Inc., March 2006 to April 2007
 
Executive Vice President and Chief Financial Officer of Halliburton Company,
 
March 2003 to December 2007
 
Senior Vice President, Chief Financial Officer, and Member – Office of the
 
President and Chief Operating Officer of ENSCO International, Inc.,
 
January 2002 to February 2003

 
7

 


Name and Age
Offices Held and Term of Office
David S. King
President, Completion and Production Division of Halliburton Company,
(Age 51)
since January 2008
 
Senior Vice President, Completion and Production Division of Halliburton
 
Company, July 2007 to December 2007
 
Senior Vice President, Production Optimization of Halliburton Company,
 
January 2007 to July 2007
 
Senior Vice President, Eastern Hemisphere of Halliburton Energy Services
 
Group, July 2006 to December 2006
 
Senior Vice President, Global Operations of Halliburton Energy Services Group,
 
July 2004 to July 2006
 
Vice President, Production Optimization of Halliburton Energy Services Group,
 
May 2003 to July 2004
 
Vice President, Production Enhancement of Halliburton Energy Services Group,
 
January 2000 to May 2003
   
*      David J. Lesar
Chairman of the Board, President, and Chief Executive Officer of Halliburton
(Age 54)
Company, since August 2000
   
Ahmed H. M. Lotfy
President, Eastern Hemisphere of Halliburton Company, since January 2008
(Age 53)
Senior Vice President, Eastern Hemisphere of Halliburton Company,
 
January 2007 to December 2007
 
Vice President, Africa Region of Halliburton Company, January 2005 to
 
December 2006
 
Vice President, North Africa Region of Halliburton Company,
 
June 2002 to December 2004
   
*      Mark A. McCollum
Executive Vice President and Chief Financial Officer of Halliburton Company,
(Age 48)
since January 2008
 
Director of KBR, Inc., June 2006 to April 2007
 
Senior Vice President and Chief Accounting Officer of Halliburton Company,
 
August 2003 to December 2007
 
Senior Vice President and Chief Financial Officer of Tenneco Automotive, Inc.,
 
November 1999 to August 2003
   
Craig W. Nunez
Senior Vice President and Treasurer of Halliburton Company,
(Age 46)
since January 2007
 
Vice President and Treasurer of Halliburton Company, February 2006
 
to January 2007
 
Treasurer of Colonial Pipeline Company, November 1999 to January 2006

 
8

 


Name and Age
Offices Held and Term of Office
*      Lawrence J. Pope
Executive Vice President of Administration and Chief Human Resources Officer
(Age 39)
of Halliburton Company, since January 2008
 
Vice President, Human Resources and Administration of Halliburton Company,
 
January 2006 to December 2007
 
Senior Vice President, Administration of Kellogg Brown & Root, Inc.,
 
August 2004 to January 2006
 
Director, Finance and Administration for Drilling and Formation Evaluation
 
Division of Halliburton Energy Services Group, July 2003 to August 2004
 
Division Vice President, Human Resources for Halliburton Energy Services Group,
 
May 2001 to July 2003
   
*      Timothy J. Probert
Executive Vice President, Strategy and Corporate Development of Halliburton
(Age 56)
Company, since January 2008
 
Senior Vice President, Drilling and Evaluation of Halliburton Company,
 
July 2007 to December 2007
 
Senior Vice President, Drilling Evaluation and Digital Solutions of Halliburton
 
Company, May 2006 to July 2007
 
Vice President, Drilling and Formation Evaluation of Halliburton Company,
 
January 2003 to May 2006

*      Members of the Policy Committee of the registrant.

There are no family relationships between the executive officers of the registrant or between any director and any executive officer of the registrant.

 
9

 

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Halliburton Company’s common stock is traded on the New York Stock Exchange.  Information related to the high and low market prices of common stock and quarterly dividend payments is included under the caption “Quarterly Data and Market Price Information” on page 87 of this annual report.  Cash dividends on common stock in the amount of $0.09 per share were paid in June, September, and December of 2007 and $0.075 per share were paid in March of 2007 and March, June, September, and December of 2006.  Our Board of Directors intends to consider the payment of quarterly dividends on the outstanding shares of our common stock in the future.  The declaration and payment of future dividends, however, will be at the discretion of the Board of Directors and will depend upon, among other things, future earnings, general financial condition and liquidity, success in business activities, capital requirements, and general business conditions.
The following graph and table compare total shareholder return on our common stock for the five-year period ending December 31, 2007, with the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Energy Composite Index over the same period.  This comparison assumes the investment of $100 on December 31, 2002, and the reinvestment of all dividends.  The shareholder return set forth is not necessarily indicative of future performance.

 
   
December 31
 
   
2002
   
2003
   
2004
   
2005
   
2006
   
2007
 
Halliburton
  $ 100.00     $ 142.06     $ 217.75     $ 347.23     $ 351.09     $ 432.98  
Standard & Poor’s 500 Stock Index
    100.00       128.68       142.69       149.70       173.34       182.86  
Standard & Poor’s Energy Composite Index
    100.00       125.63       165.25       217.08       269.64       362.40  

    At February 18, 2008, there were 19,110 shareholders of record.  In calculating the number of shareholders, we consider clearing agencies and security position listings as one shareholder for each agency or listing.

 
10

 

Following is a summary of repurchases of our common stock during the three-month period ended December 31, 2007.

               
Total Number of 
 
               
Shares Purchased
 
     Total Number of          
                 as Part of 
 
   
Shares
   
Average Price
   
Publicly Announced
 
Period
 
Purchased (a)
   
Paid per Share
   
Plans or Programs (b)
 
October 1-31
    36,632     $ 38.99        
November 1-30
    1,270,142     $ 36.16       1,261,022  
December 1-31
    640,977     $ 36.58       590,253  
Total
    1,947,751     $ 36.35       1,851,275  

 
(a)
Of the 1,947,751 shares purchased during the three-month period ended December 31, 2007, 96,476 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 through December 31, 2007, we have repurchased approximately 79 million shares of our common stock for approximately $2.7 billion at an average price per share of $33.91.  These numbers include the repurchases of approximately 39 million shares of our common stock for approximately $1.4 billion at an average price per share of $34.93 during 2007.  As of December 31, 2007, $2.3 billion remained available under our share repurchase authorization.

Item 6.  Selected Financial Data.
Information related to selected financial data is included on page 86 of this annual report.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Information related to Management’s Discussion and Analysis of Financial Condition and Results of Operations is included on pages 13 through 44 of this annual report.

Item 7(a).  Quantitative and Qualitative Disclosures About Market Risk.
Information related to market risk is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Financial Instrument Market Risk” on page 32 of this annual report.

 
11

 

Item 8.  Financial Statements and Supplementary Data.

 
Page No.
Management’s Report on Internal Control Over Financial Reporting
     45
Reports of Independent Registered Public Accounting Firm
     46
Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005
     48
Consolidated Balance Sheets at December 31, 2007 and 2006
     49
Consolidated Statements of Shareholders’ Equity for the years ended
 
December 31, 2007, 2006, and 2005
     50
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005
     51
Notes to Consolidated Financial Statements
     52
Selected Financial Data (Unaudited)
     86
Quarterly Data and Market Price Information (Unaudited)
     87

The related financial statement schedules are included under Part IV, Item 15 of this annual report.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

Item 9(a).  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 December 31, 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 December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
See page 45 for Management’s Report on Internal Control Over Financial Reporting and page 47 for Report of Independent Registered Public Accounting Firm on its assessment of our internal control over financial reporting.

Item 9(b).  Other Information.
None.

 
12

 

HALLIBURTON COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

During 2007, our continuing operations produced revenue of $15.3 billion and operating income of $3.5 billion, reflecting an operating margin of 23%.  Revenue increased $2.3 billion or 18% over 2006, while operating income improved $253 million or 8% over 2006.  Internationally, our operations experienced 21% revenue growth and 18% operating income growth in 2007 compared to 2006.  Consistent with our initiative to grow our eastern hemisphere operations, revenue from the eastern hemisphere increased 27% to $6.3 billion in 2007 compared to 2006, comprising nearly 90% of the revenue growth derived internationally.  Moreover, eastern hemisphere quarterly operating margins consistently remained above 20%.
Business outlook
The outlook for our business remains generally favorable.  Despite challenging market conditions in North America, the region realized strong revenue growth in 2007 compared to 2006.  However, downward pressure on pricing in the latter half of 2007, particularly in our United States well stimulation land operations, negatively impacted our operating results.  Based on price levels that were negotiated on contracts that renewed in the fourth quarter of 2007, we anticipate an average price decline for our United States land stimulation work in the mid- to upper-single digits in the first quarter of 2008 relative to the fourth quarter of 2007.  We believe pricing pressure may be partially mitigated by higher levels of asset utilization for our fracturing equipment and our horizontal drilling technologies, as we continue to see increasing demand from our customers due to trends toward production from unconventional reservoirs that were previously not economical.  We believe that these factors may contribute to volume increases in the technologically driven segments of the energy services business, even if rig counts remain relatively flat.  Also, we believe our ability to offer multiple product lines to our customers helps mitigate the impact of pricing pressures in our well stimulation operations.  We have seen North America pricing declines in other product lines as well, including cementing, fluid services, and wireline and perforating, but they continue to be at lower levels than what we have seen in our well stimulation business.  While we anticipate improved activity levels 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 Canada, while we experienced a moderate seasonal recovery in the second half of 2007, our full-year revenue compared to 2006 declined 22% on a 27% decrease in average Canada rig count for the year.  Looking ahead, we are not planning on a significant recovery in Canada in 2008.  Where appropriate, we 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.  The trend toward exploration and exploitation of more complex reservoirs bodes well for the mix of our product line offerings and degree of service intensity on a per rig basis.  Therefore, we have been investing and will continue to invest in infrastructure, capital, and technology predominantly in the eastern hemisphere, consistent with our initiative to grow our operations in that part of the world.
In 2008, we will focus on:
 
-
maintaining optimal utilization of our equipment and resources;
 
-
managing pricing, particularly in our North America operations;
 
-
hiring and training additional personnel to meet the increased demand for our services;
 
-
continuing the globalization of our manufacturing and supply chain processes;
 
-
balancing our United States operations by capitalizing on the trend toward horizontal drilling;
 
-
leveraging our technologies to provide our customers with the ability to more efficiently drill and complete their wells and to increase their productivity. To that end, we opened one international research and development center with global technology and training missions in 2007 and expect to open the second in 2008;
 
-
maximizing our position to win meaningful international tenders, especially in deepwater fields, complex reservoirs, and high-pressure/high-temperature environments;
 
-
cultivating our relationships with national oil companies;

 
13

 

 
-
pursuing strategic acquisitions in line with our core products and services to expand our portfolio in key geographic areas; and
 
-
directing our capital spending primarily toward eastern hemisphere operations for service equipment additions and infrastructure.  Capital spending for 2008 is expected to be approximately $1.7 billion to $1.8 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), which at the time was our wholly owned subsidiary, completed an initial public offering (IPO), in which it sold approximately 32 million shares of KBR common stock.  On April 5, 2007, we completed the separation of KBR from us by exchanging the 135.6 million shares of KBR common stock owned by us on that date for 85.3 million shares of our common stock.  Consequently, KBR operations have been reclassified as discontinued operations in the consolidated financial statements for all periods presented.  See Note 2 to our 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.  The Department of Justice (DOJ) is also conducting a related criminal investigation.  See Note 10 to our consolidated financial statements for further information.
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 through December 31, 2007, we have repurchased approximately 79 million shares of our common stock for approximately $2.7 billion at an average price per share of $33.91.  These numbers include the repurchases of approximately 39 million shares of our common stock for approximately $1.4 billion at an average price per share of $34.93 during 2007.  As of December 31, 2007, $2.3 billion remained available under our share repurchase authorization.

LIQUIDITY AND CAPITAL RESOURCES

We ended 2007 with cash and equivalents of $1.8 billion compared to $2.9 billion at December 31, 2006.
Significant sources of cash
Cash flows from operating activities contributed $2.7 billion to cash in 2007.  Growth in revenue and operating income are attributable to higher customer demand and increased service intensity due to a trend toward exploration and exploitation of more complex reservoirs.  Cash flows from operating activities included $31 million in cash inflows related to discontinued operations.
In May 2007, we sold our remaining interest in Dresser, Ltd. for $70 million in cash.
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 December 31, 2007.

 
14

 

Significant uses of cash
Capital expenditures were $1.6 billion in 2007, with increased focus toward building infrastructure and adding service equipment in support of our expanding operations in the eastern hemisphere.  Capital expenditures were predominantly made in the drilling services, production enhancement, wireline, and cementing product service lines.
During 2007, we repurchased approximately 39 million shares of our common stock under our share repurchase program at a cost of approximately $1.4 billion at an average price per share of $34.93.
During 2007, we invested in approximately $332 million of marketable securities, consisting of auction-rate securities, variable-rate demand notes, and municipal bonds.
We paid $314 million in dividends to our shareholders in 2007.  In May 2007, the Board of Directors authorized a dividend increase of $0.015 per common share, bringing quarterly dividends to $0.09 per common share for the remainder of 2007.
In the third quarter of 2007, we purchased the entire share capital of PSL Energy Services Limited (PSLES), an eastern hemisphere provider of process, pipeline, and well intervention services, for $326 million in cash and $4 million in debt assumed upon acquisition.
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.
Future uses of cash.  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 December 31, 2007, $2.3 billion remained available under our share repurchase authorization.
Capital spending for 2008 is expected to be approximately $1.7 billion to $1.8 billion.  The capital expenditures forecast for 2008 is primarily directed toward our drilling services, wireline and perforating, production enhancement, and cementing operations.  We will continue to explore opportunities for acquisitions that will enhance or augment our current portfolio of products and services, including those with unique technologies or distribution networks in areas where we do not already have large operations.  Further, as market conditions change, we will continue to evaluate the allocation of our cash between acquisitions and stock buybacks in order to provide good return for our shareholders.
Our 3.125% convertible senior notes become redeemable at our option on or after July 15, 2008.  If we choose to redeem the notes prior to their maturity or if the holders choose to convert the notes, we must settle the principal amount of the notes, which totaled $1.2 billion at December 31, 2007, in cash.  We have the option to settle any amounts due in excess of the principal, which also totaled approximately $1.2 billion at December 31, 2007, by delivering shares of our common stock, cash, or a combination of common stock and cash.
Subject to Board of Director approval, we expect to pay dividends of approximately $80 million per quarter in 2008.
The following table summarizes our significant contractual obligations and other long-term liabilities as of December 31, 2007:

   
Payments Due
             
Millions of dollars
 
2008
   
2009
   
2010
   
2011
   
2012
   
Thereafter
   
Total
 
Long-term debt
  $ 159     $ 12     $ 755     $ 3     $ 3     $ 1,854     $ 2,786  
Interest on debt  (a)
    138       129       129       87       87       2,582       3,152  
Operating leases
    180       131       104       74       40       172       701  
Purchase obligations
    1,292       125       39       11       1       8       1,476  
Pension funding obligations
    30                                     30  
Total
  $ 1,799     $ 397     $ 1,027     $ 175     $ 131     $ 4,616     $ 8,145  
 
(a)
Interest on debt includes 89 years of interest on $300 million of debentures at 7.6% interest that become due in 2096.

 
15

 

With the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), we had $425 million of gross unrecognized tax benefits at December 31, 2007, of which we estimate $189 million may require a cash payment.  We estimate that $102 million may be settled within the next 12 months, although the amounts are not agreed with tax authorities.  We are not able to reasonably estimate in which future periods the remaining amounts will ultimately be settled and paid.
Other factors affecting liquidity
Letters of credit.  In the normal course of business, we have agreements with banks under which approximately $2.2 billion of letters of credit, surety bonds, or bank guarantees were outstanding as of December 31, 2007, including $1.1 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 & Poor’s.  Our Moody’s Investors Service rating became effective May 1, 2007, and was an upward revision from our previous Moody’s Investors Service rating of Baa1, which had been in effect since December 2005.  Our Standard & Poor’s rating became effective August 20, 2007, and was an upward revision from our previous Standard & 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 & Poor’s.

BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in approximately 70 countries throughout the world to provide a comprehensive range of discrete and integrated services and products to the energy industry.  The majority of our consolidated revenue is derived from the sale of services and products to major, national, and independent oil and gas companies worldwide.  We serve the upstream oil and 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 as 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 2007, based upon the location of the services provided and products sold, 44% of our consolidated revenue was from the United States.  In 2006, 45% of our consolidated revenue was from the United States.  In 2005, 43% of our consolidated revenue was from the United States.  No other country accounted for more than 10% of our revenue during these periods.
Operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, force majeure, war or other armed conflict, expropriation or other governmental actions, inflation, exchange control problems, and highly inflationary currencies.  We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country would be material to our consolidated results of operations.
Activity levels within our business segments are significantly impacted by spending on upstream exploration, development, and production programs by major, national, and independent oil and gas companies.  Also impacting our activity is the status of the global economy, which impacts oil and 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.

 
16

 

This table shows the average oil and gas prices for West Texas Intermediate (WTI) and United Kingdom Brent crude oil, and Henry Hub natural gas:

Average Oil Prices (dollars per barrel)
 
2007
   
2006
   
2005
 
West Texas Intermediate
  $ 71.91     $ 66.17     $ 56.30  
United Kingdom Brent
  $ 72.21     $ 65.35     $ 54.45  
                         
Average United States Gas Prices (dollars per million British
                       
thermal units, or mmBtu)
                       
Henry Hub
  $ 6.97     $ 6.81     $ 8.79  

The yearly average rig counts based on the Baker Hughes Incorporated rig count information were as follows:

Land vs. Offshore
 
2007
   
2006
   
2005
 
United States:
                 
Land
    1,694       1,558       1,287  
Offshore
    73       90       93  
Total
    1,767       1,648       1,380  
Canada:
                       
Land
    341       467       454  
Offshore
    3       3       4  
Total
    344       470       458  
International (excluding Canada):
                       
Land
    719       656       593  
Offshore
    287       269       258  
Total
    1,006       925       851  
Worldwide total
    3,117       3,043       2,689  
Land total
    2,754       2,681       2,334  
Offshore total
    363       362       355  
                         
Oil vs. Gas
 
2007
   
2006
   
2005
 
United States:
                       
Oil
    297       273       194  
Gas
    1,470       1,375       1,186  
Total
    1,767       1,648       1,380  
Canada:
                       
Oil
    128       110       100  
Gas
    216       360       358  
Total
    344       470       458  
International (excluding Canada):
                       
Oil
    784       709       651  
Gas
    222       216       200  
Total
    1,006       925       851  
Worldwide total
    3,117       3,043       2,689  
Oil total
    1,209       1,092       945  
Gas total
    1,908       1,951       1,744  

 
17

 

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 unconventional reservoirs.  This promotes additional investment by our customers.  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 averaged $72.00 per barrel in 2007 and are expected to average $87.00 per barrel in 2008 according to 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 continued to rise to record levels over the $99 per barrel mark throughout 2007 due to a tight world oil supply and demand balance, ending the year at approximately $96 per barrel.  We expect that oil prices will remain at levels sufficient to sustain, and likely grow, our customers’ current levels of spending 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) January 2008 “Oil Market Report,” the outlook for world oil demand remains strong, with China, the Middle East, and Europe accounting for approximately 52% of the expected demand growth in 2008.  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 2008 to increase 2% over 2007.
North America operations.  Volatility in natural gas prices has the potential to impact our customers' drilling and production activities, particularly in North America.  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 half of 2007 was characterized by increased activity for our United States customers and recovery in the Gulf of Mexico after the hurricane season.  Despite recovery from a traditionally slow second quarter spring break-up season, Canada 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 January 2008, the EIA stated that the Henry Hub spot price averaged $7.17 per thousand cubic feet (mcf) in 2007 and was projected to average $7.78 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 experienced increased pricing pressure from our customers in the North American market in 2007, particularly in Canada and in our United States well stimulation operations.  In the fourth quarter of 2007, we saw price declines for our fracturing services in the United States in the low- to mid-single digits.  While we anticipate improved activity levels 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.

 
18

 

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 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 we expect to open a second facility in Singapore in 2008;
 
-
we are expanding our manufacturing capability and capacity to meet the increasing demands for our services and products.  In 2007, we opened manufacturing plants in Mexico, Brazil, Malaysia, and Singapore.  Having manufacturing facilities closer to our worksites allows us to more efficiently deploy equipment to our field operations, as well as locally source employees 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 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, an eastern hemisphere provider of process, pipeline, and well intervention services.  This acquisition increases 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 September 2007, we acquired the intellectual property and substantially all of the assets and existing business of GeoSmith Consulting Group, LLC, a developer of software components for 3-D interpretation and geometric modeling applications; and
 
-
in November 2007, we acquired the entire share capital of OOO Burservice, a provider of directional drilling services in Russia.
Contract wins in 2007 are positioning us to grow our international operations over the coming years. Examples include:
 
-
a multiservice 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;

 
19

 

 
-
a contract to provide exploration and development testing services in high pressure, high temperature environments in Brazil;
 
-
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;
 
-
a contract to provide completion products and services in Indonesia; and
 
-
a contract to manage the drilling and completion of 58 land wells in the southern region of Mexico.

 
20

 

RESULTS OF OPERATIONS IN 2007 COMPARED TO 2006

REVENUE:
             
Percentage
 
Millions of dollars
 
2007
   
2006
   
Increase
   
Change
 
Completion and Production
  $ 8,386     $ 7,221     $ 1,165       16 %
Drilling and Evaluation
    6,878       5,734       1,144       20  
Total revenue
  $ 15,264     $ 12,955     $ 2,309       18 %

By geographic region:
 
Completion and Production:
                       
North America
  $ 4,655     $ 4,275     $ 380       9 %
Latin America
    756       583       173       30  
Europe/Africa/CIS
    1,767       1,436       331       23  
Middle East/Asia
    1,208       927       281       30  
Total
    8,386       7,221       1,165       16  
Drilling and Evaluation:
                               
North America
    2,478       2,183       295       14  
Latin America
    1,042       931       111       12  
Europe/Africa/CIS
    1,933       1,424       509       36  
Middle East/Asia
    1,425       1,196       229       19  
Total
    6,878       5,734       1,144       20  
Total revenue by region:
                               
North America
    7,133       6,458       675       10  
Latin America
    1,798       1,514       284       19  
Europe/Africa/CIS
    3,700       2,860       840       29  
Middle East/Asia
    2,633       2,123       510       24  

 
21

 


OPERATING INCOME (LOSS):
       
Increase
   
Percentage
 
Millions of dollars
 
2007
   
2006
   
(Decrease)
   
Change
 
Completion and Production
  $ 2,199     $ 2,140     $ 59       3 %
Drilling and Evaluation
    1,485       1,328       157       12  
Corporate and other
    (186 )     (223 )     37       17  
Total operating income
  $ 3,498     $ 3,245     $ 253       8 %

By geographic region:
 
Completion and Production:
                       
North America
  $ 1,404     $ 1,476     $ (72 )     (5 )%
Latin America
    170       130       40       31  
Europe/Africa/CIS
    330       324       6       2  
Middle East/Asia
    295       210       85       40  
Total
    2,199       2,140       59       3  
Drilling and Evaluation:
                               
North America
    552       595       (43 )     (7 )
Latin America
    179       170       9       5  
Europe/Africa/CIS
    414       263       151       57  
Middle East/Asia
    340       300       40       13  
Total
    1,485       1,328       157       12  
Total operating income by region:
                               
(excluding Corporate and other):
                               
North America
    1,956       2,071       (115 )     (6 )
Latin America
    349       300       49       16  
Europe/Africa/CIS
    744       587       157       27  
Middle East/Asia
    635       510       125       25  
 
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 2007 compared to 2006 spanned all four regions in both segments 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 56% of consolidated revenue in 2007 and 55% of consolidated revenue in 2006.
The increase in consolidated operating income was primarily derived from the eastern hemisphere, which increased 26% compared to 2006.  Operating income for 2007 was positively impacted by a $49 million gain recorded on the sale of our remaining interest in Dresser, Ltd. and negatively impacted by $34 million in charges related to the impairment of an oil and gas property and $32 million in charges for environmental reserves.  Operating income for 2006 included a $48 million gain on the sale of lift boats in west Africa and the North Sea and $47 million of insurance proceeds for business interruptions resulting from the 2005 Gulf of Mexico hurricanes.
Following is a discussion of our results of operations by reportable segment.

 
22

 

Completion and Production increase in revenue compared to 2006 was derived from all regions.  Europe/Africa/CIS revenue grew 23% on increased activity from production enhancement services in Europe and Africa.  The region also benefited from increased activity in our intelligent well completions joint venture and increased testing activity and completion product sales in Africa and improved cementing services pricing in the North Sea and Russia.  Middle East/Asia revenue grew 30% from increased completion product sales in Asia, improved completion tools sales in the Middle East, and new cementing services contracts in the Middle East.  North America revenue improved 9% largely driven by increased production enhancement services and cementing services activity in the United States.  The North America revenue increase was partially offset by lower pricing, particularly in fracturing, and decreased production enhancement services activity in Canada.  Latin America revenue increased 30% largely driven by cementing services revenue increasing on new contracts and improved pricing, increased stimulation activity in Mexico, and increased testing activity in Brazil.  International revenue was 47% of total segment revenue in 2007 compared to 45% in 2006.
The Completion and Production segment operating income improvement spanned all regions except North America.  Europe/Africa/CIS operating income grew 2% from increased activity and improved pricing for cementing services in the North Sea.  Europe/Africa/CIS segment operating income in 2006 included a $48 million gain on the sale of lift boats in west Africa and the North Sea.  Middle East/Asia operating income grew 40% from improved completion product deliveries in Asia and the Middle East and additional cementing service projects in the Middle East.  North America operating income decreased 5% largely because the segment received hurricane insurance proceeds of $21 million in 2006 and due to a decline in production enhancement services pricing.  Latin America operating income increased 31% due to new technology and improved pricing for cementing services.
Drilling and Evaluation revenue increase in 2007 compared to 2006 was derived from all four regions.  Europe/Africa/CIS revenue improved 36% from increased drilling services activity throughout the region, new fluid services contracts in the North Sea, and increased wireline and perforating services in Africa.  Middle East/Asia revenue increased 19% from additional drilling service contract awards and activity in the region, new wireline and perforating services contracts in Asia, and increased fluid sales in the Middle East.  North America revenue grew 14% from improvements in all product service lines, particularly wireline and perforating services and drilling services.  The United States benefited from increased land rig activity, particularly for horizontally and directionally drilled wells.  Latin America revenue improved 12% primarily on increased activity in drilling services, fluid services, and wireline and perforating services.  International revenue was 68% of total segment revenue in 2007 compared to 67% in 2006.
Drilling and Evaluation operating income increase compared to 2006 was led by the eastern hemisphere.  Europe/Africa/CIS Drilling and Evaluation operating income grew 57% from increased drilling services activity in Europe and Africa.  Africa also benefited from improved fluid service product mix and new wireline and perforating projects.  Middle East/Asia operating income grew 13% from additional drilling service and wireline and perforating activity in the Middle East and Asia.  Included in the region in 2007 was a $34 million charge related to the impairment of an oil and gas property in Bangladesh.  Latin America operating income increased 5% from increased wireline and perforating activity.  Partially offsetting the improvement was decreased fluid service activity.  North America operating income fell 7% largely because the segment received hurricane insurance proceeds of $26 million in 2006 and recorded a $24 million environmental exposure charge in the third quarter of 2007.
Corporate and other expenses were $186 million in 2007 compared to $223 million in 2006.  2007 included a $49 million gain recorded on the sale of our remaining interest in Dresser, Ltd. and a $12 million charge for executive separation costs.

NONOPERATING ITEMS

Interest expense decreased $11 million in 2007 compared to 2006, primarily due to the repayment in August 2006 of $275 million of our medium-term notes.
Interest income decreased $5 million in 2007 compared to 2006 due to lower average cash balances.

 
23

 

(Provision) benefit for income taxes from continuing operations in 2007 of $907 million resulted in an effective tax rate of 26% compared to an effective tax rate of 31% in 2006.  The provision for income taxes in 2007 included a $205 million favorable income tax impact from the ability to recognize foreign tax credits previously thought not to be fully utilizable.
Income from discontinued operations, net of income tax provision in 2007 primarily consisted of an approximate $933 million net gain recorded on the disposition of KBR.

 
24

 

RESULTS OF OPERATIONS IN 2006 COMPARED TO 2005

REVENUE:
             
Percentage
 
Millions of dollars
 
2006
   
2005
   
Increase
   
Change
 
Completion and Production
  $ 7,221     $ 5,495     $ 1,726       31 %
Drilling and Evaluation
    5,734       4,605       1,129       25  
Total revenue
  $ 12,955     $ 10,100     $ 2,855       28 %

By geographic region:
 
Completion and Production:
                       
North America
  $ 4,275     $ 3,118     $ 1,157       37 %
Latin America
    583       542       41       8  
Europe/Africa/CIS
    1,436       1,123       313       28  
Middle East/Asia
    927       712       215       30  
Total
    7,221       5,495       1,726       31  
Drilling and Evaluation:
                               
North America
    2,183       1,701       482       28  
Latin America
    931       802       129       16  
Europe/Africa/CIS
    1,424       1,151       273       24  
Middle East/Asia
    1,196       951       245       26  
Total
    5,734       4,605       1,129       25  
Total revenue by region:
                               
North America
    6,458       4,819       1,639       34  
Latin America
    1,514       1,344       170       13  
Europe/Africa/CIS
    2,860       2,274       586       26  
Middle East/Asia
    2,123       1,663       460       28  

 
25

 


OPERATING INCOME (LOSS):
       
Increase
   
Percentage
 
Millions of dollars
 
2006
   
2005
   
(Decrease)
   
Change
 
Completion and Production
  $ 2,140     $ 1,524     $ 616       40 %
Drilling and Evaluation
    1,328       840       488       58  
Corporate and other
    (223 )     (200 )     (23 )     (12 )
Total operating income
  $ 3,245     $ 2,164     $ 1,081       50 %

By geographic region:
 
Completion and Production:
                       
North America
  $ 1,476     $ 1,046     $ 430       41 %
Latin America
    130       126       4       3  
Europe/Africa/CIS
    324       203       121       60  
Middle East/Asia
    210       149       61       41  
Total
    2,140       1,524       616       40  
Drilling and Evaluation:
                               
North America
    595       365       230       63  
Latin America
    170       77       93       121  
Europe/Africa/CIS
    263       207       56       27  
Middle East/Asia
    300       191       109       57  
Total
    1,328       840       488       58  
Total operating income by region
                               
(excluding Corporate and other):
                               
North America
    2,071       1,411       660       47  
Latin America
    300       203       97       48  
Europe/Africa/CIS
    587       410       177       43  
Middle East/Asia
    510       340       170       50  
 
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 2006 compared to 2005 predominantly resulted from increased activity, higher utilization of our equipment, and increased pricing due to higher exploration and production spending by our customers.  Revenue in 2005 was impacted by an estimated $80 million in lost revenue due to Gulf of Mexico hurricanes.  International revenue was 55% of consolidated revenue in 2006 and 57% of consolidated revenue in 2005.
The increase in consolidated operating income was primarily due to improved demand due to increased rig activity and improved pricing and asset utilization.  Operating income for 2006 included a $48 million gain on the sale of lift boats in west Africa and the North Sea and $47 million of insurance proceeds for business interruptions resulting from the 2005 Gulf of Mexico hurricanes.  Operating income in 2005 was adversely impacted by an estimated $45 million due to Gulf of Mexico hurricanes.
Following is a discussion of our results of operations by reportable segment.

 
26

 

Completion and Production increase in revenue compared to 2005 was derived from all regions.  Europe/Africa/CIS revenue grew 28% from increased activity from production enhancement services.  Completion tools sales benefited from the addition of Easywell to the completion tool portfolio in Europe and cementing services improved due to increased activity in Russia, the North Sea, and Nigeria and improved pricing and sales in Angola.  Middle East/Asia revenue grew 30% from the addition of Easywell to the completion tool portfolio in Asia, increased WellDynamics activity in Asia, a new contract in Oman for production enhancement services, and new contract start-ups and product sales of cementing services in Asia.  North America revenue improved 37% largely driven by United States onshore operations due to strong demand for stimulation services, coupled with improved equipment utilization and pricing.  Production enhancement services North America revenue also grew due to improved pricing and improved equipment utilization in Canada.  Latin America revenue increased 8%.  International revenue was 45% of total segment revenue in 2006 compared to 48% in 2005.
The Completion and Production segment operating income improvement spanned all regions.  Europe/Africa/CIS operating income improved 60%.  The 2006 Europe/Africa/CIS segment operating income was positively impacted by a $48 million gain on the sale of lift boats in west Africa and the North Sea.  Cementing services results were also favorable as a result of new contracts and increased activity in Europe.  Operating income in 2005 included a $17 million favorable insurance settlement related to a pipe fabrication and laying project in the North Sea.  Middle East/Asia operating income grew 41% primarily from improved production enhancement services product mix and increased completion tools sales in Asia, which were partially offset by decreased WellDynamics activity.  North America operating income increased 41% largely due to an improved production enhancement services product mix and increased cementing services activity in the United States.  The segment received hurricane insurance proceeds of $21 million in 2006 and was negatively impacted by an estimated $24 million in 2005 by hurricanes in the Gulf of Mexico.  The 2005 segment operating income included a $110 million gain on the sale in 2005 of our equity interest in the Subsea 7, Inc. joint venture.  Latin America operating income increased 3% due primarily to increased sand control tools activity in Brazil.
Drilling and Evaluation revenue increase in 2006 compared to 2005 was derived from all four regions in all product service lines.  Europe/Africa/CIS revenue improved 24% from new drilling service contracts in Europe.  The fluid services revenue comparison was also favorable, primarily due to increased activity in the region.  Middle East/Asia revenue grew 26% from new drilling services contracts in Asia and increased drill bits activity in the region.  The region also benefited from increased cased hole activity in Asia and new wireline and perforating contracts.  Lower sales of logging equipment and the expiration of a fluid services contract in Asia partially offset the Middle East/Asia revenue improvement.  North America revenue grew 28% from improved pricing and increased activity in fluid services, wireline and perforating services, and drilling services and increased sales of fixed cutter bits.  Latin America revenue grew 16% with increased fluid services operations, improved wireline and perforating pricing, and increased Landmark consulting services and software sales.  The completion of two fixed-price integrated solutions projects in southern Mexico partially offset the Latin America revenue improvement.  International revenue was 67% of total segment revenue in 2006 compared to 68% in 2005.
Drilling and Evaluation operating income increase compared to 2005 spanned all geographic regions, with the United States as the predominant contributor due to improved pricing and increased rig activity.  Europe/Africa/CIS operating income grew 27% from new drilling service contracts in Europe and stronger software and service sales for Landmark in Europe.  Middle East/Asia operating income grew 57% from higher wireline and perforating services activity in the region, new drilling services contracts in Asia, and increased fluid services activity in Asia.  Latin America operating income more than doubled.  Wireline and perforating results contributed to the Latin America increase due to improved product mix.  Included in Latin America 2005 results was $23 million in losses on two fixed-priced integrated solutions projects.  The segment received hurricane insurance proceeds of $26 million in 2006.  Operating income in 2005 included a $24 million gain related to a patent infringement case settlement, while hurricanes in the Gulf of Mexico negatively impacted segment operating income by an estimated $21 million.
Corporate and other expenses were $223 million in 2006 compared to $200 million in 2005.  The increase was primarily due to increased legal costs and costs incurred for the separation of KBR from Halliburton.  The 2006 segment results included a gain of $10 million from the sale of an investment accounted for under the cost method.

 
27

 

NONOPERATING ITEMS

Interest expense decreased $31 million in 2006 compared to 2005, primarily due to the redemption in April 2005 of $500 million of our floating rate senior notes, the repayment in October 2005 of $300 million of our floating rate senior notes, and the repayment in August 2006 of $275 million of our medium-term notes.
Interest income increased $75 million in 2006 compared to 2005 due to higher cash investment balances.
Other, net increased $15 million in 2006 compared to 2005.  The 2005 year included costs related to our accounts receivable securitization facility, which had no outstanding amounts.
(Provision) benefit for income taxes from continuing operations in 2006 of $1 billion resulted in an effective tax rate of 31%.  The tax benefit for 2005 resulted from recording favorable adjustments in 2005 totaling $805 million to our valuation allowance against the deferred tax asset related to asbestos and silica liabilities.  Our strong 2005 earnings, coupled with an upward revision in our estimate of future domestic taxable income in 2006, drove these adjustments.
Income from discontinued operations, net of income tax provision in 2006 and 2005 primarily consisted of our results of KBR.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires the use of judgments and estimates.  Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimations and how they can impact our financial statements.  A critical accounting estimate is one that requires our most difficult, subjective, or complex estimates and assessments and is fundamental to our results of operations.  We identified our most critical accounting policies and estimates to be:
 
-
forecasting our effective tax rate, including our future ability to utilize foreign tax credits and the realizability of deferred tax assets, and providing for uncertain tax positions;
 
-
percentage-of-completion accounting for long-term, construction-type contracts;
 
-
legal and investigation matters;
 
-
valuations of indemnities;
 
-
pensions; and
 
-
allowance for bad debts.
We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies.  This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report.
We have discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosure presented below.
Income tax accounting
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), “Accounting for Income Taxes,” which requires recognition of the amount of taxes payable or refundable for the current year and an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns.  We apply the following basic principles in accounting for our income taxes:
 
-
a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year;
 
-
a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards;

 
28

 

 
-
the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered; and
 
-
the value of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
We determine deferred taxes separately for each tax-paying component (an entity or a group of entities that is consolidated for tax purposes) in each tax jurisdiction.  That determination includes the following procedures:
 
-
identifying the types and amounts of existing temporary differences;
 
-
measuring the total deferred tax liability for taxable temporary differences using the applicable tax rate;
 
-
measuring the total deferred tax asset for deductible temporary differences and operating loss carryforwards using the applicable tax rate;
 
-
measuring the deferred tax assets for each type of tax credit carryforward; and
 
-
reducing the deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Our methodology for recording income taxes requires a significant amount of judgment in the use of assumptions and estimates.  Additionally, we use forecasts of certain tax elements, such as taxable income and foreign tax credit utilization, as well as evaluate the feasibility of implementing tax planning strategies.  Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results.  Unforeseen events may significantly impact these variables, and changes to these variables could have a material impact on our income tax accounts related to both continuing and discontinued operations.
We have operations in approximately 70 countries other than the United States.  Consequently, we are subject to the jurisdiction of a significant number of taxing authorities.  The income earned in these various jurisdictions is taxed on differing bases, including income actually earned, income deemed earned, and revenue-based tax withholding.  The final determination of our tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction.  Changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our tax liabilities for a tax year.
Tax filings of our subsidiaries, unconsolidated affiliates, and related entities are routinely examined in the normal course of business by tax authorities.  These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process.  Predicting the outcome of disputed assessments involves some uncertainty.  Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate, and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome.  We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest, and penalties as needed based on this outcome.  We provide for uncertain tax positions pursuant to 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.
We had recorded a valuation allowance based on the anticipated inability to utilize future foreign tax credits in the United States as of the end of 2006.  This valuation allowance is reassessed quarterly based on a number of estimates, including future creditable foreign taxes and future taxable income.  Factors such as actual operating results, material acquisitions or dispositions, and changes to our operating environment could alter the estimates, which could have a material impact on the valuation allowance.  Given that we fully utilized the United States net operating loss and began utilizing foreign tax credits in the United States in 2006, the valuation allowance balance has been reduced to zero as of the end of 2007.  In addition, the provision for income taxes in 2007 included a favorable income tax adjustment from the ability to recognize foreign tax credits previously generated in 2005 and 2006 thought not to be fully utilizable.  We now believe we can utilize these credits currently because we have generated additional taxable income and expect to continue to generate a higher level of taxable income largely from the growth of our international operations.

 
29

 

Percentage of completion
Revenue from long-term contracts to provide well construction and completion services is reported on the percentage-of-completion method of accounting.  This method of accounting requires us to calculate job profit to be recognized in each reporting period for each job based upon our projections of future outcomes, which include:
 
-
estimates of the total cost to complete the project;
 
-
estimates of project schedule and completion date;
 
-
estimates of the extent of progress toward completion; and
 
-
amounts of any probable unapproved claims and change orders included in revenue.
Progress is generally based upon physical progress related to contractually defined units of work.  At the outset of each contract, we prepare a detailed analysis of our estimated cost to complete the project.  Risks related to service delivery, usage, productivity, and other factors are considered in the estimation process.  Our project personnel periodically evaluate the estimated costs, claims, change orders, and percentage of completion at the project level.  The recording of profits and losses on long-term contracts requires an estimate of the total profit or loss over the life of each contract.  This estimate requires consideration of total contract value, change orders, and claims, less costs incurred and estimated costs to complete.  Anticipated losses on contracts are recorded in full in the period in which they become evident.  Profits are recorded based upon the total estimated contract profit times the current percentage complete for the contract.
When calculating the amount of total profit or loss on a long-term contract, we include unapproved claims as revenue when the collection is deemed probable based upon the four criteria for recognizing unapproved claims under the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”  Including probable unapproved claims in this calculation increases the operating income (or reduces the operating loss) that would otherwise be recorded without consideration of the probable unapproved claims.  Probable unapproved claims are recorded to the extent of costs incurred and include no profit element.  In all cases, the probable unapproved claims included in determining contract profit or loss are less than the actual claim that will be or has been presented to the customer.
At least quarterly, significant projects are reviewed in detail by senior management.  There are many factors that impact future costs, including but not limited to weather, inflation, labor and community disruptions, timely availability of materials, productivity, and other factors as outlined in our “Risk Factors.”  These factors can affect the accuracy of our estimates and materially impact our future reported earnings.
Legal and investigation matters
As discussed in Note 10 of our consolidated financial statements, as of December 31, 2007, we have accrued an estimate of the probable and estimable costs for the resolution of some of these legal and investigation matters.  For other matters for which the liability is not probable and reasonably estimable, we have not accrued any amounts.  Attorneys in our legal department monitor and manage all claims filed against us and review all pending investigations.  Generally, the estimate of probable costs related to these matters is developed in consultation with internal and outside legal counsel representing us.  Our estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies.  The precision of these estimates is impacted by the amount of due diligence we have been able to perform.  We attempt to resolve these matters through settlements, mediation, and arbitration proceedings when possible.  If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, our future financial results may be adversely affected.  We have in the past recorded significant adjustments to our initial estimates of these types of contingencies.

 
30

 

Indemnity valuations
We provided indemnification in favor of KBR for certain contingent liabilities related to Foreign Corrupt Practices Act (FCPA) investigations and the Barracuda-Caratinga bolts matter.  See Note 2 to the consolidated financial statements for further information.  FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others – An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,” requires recognition of third-party indemnities at their inception.  Therefore, in accordance with FIN 45, we recorded our estimate of the fair market value of these indemnities as of the date of KBR’s separation.  The amounts recorded for the FCPA and Barracuda-Caratinga indemnities were based upon analyses conducted by a third-party valuation expert.  The valuation models employed a probability-weighted cost analysis, with certain assumptions based upon the accumulation of data and knowledge of the relevant issues.  Periodically, a determination will be made as to whether any material changes in facts or circumstances have occurred that would impact assumptions used in the third-party valuation.
Pensions
Our pension benefit obligations and expenses are calculated using actuarial models and methods, in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).”  Two of the more critical assumptions and estimates used in the actuarial calculations are the discount rate for determining the current value of plan benefits and the expected rate of return on plan assets.  Other critical assumptions and estimates used in determining benefit obligations and plan expenses, including demographic factors such as retirement age, mortality, and turnover, are also evaluated periodically and updated accordingly to reflect our actual experience.
Discount rates are determined annually and are based on the prevailing market rate of a portfolio of high-quality debt instruments with maturities matching the expected timing of the payment of the benefit obligations.  Expected long-term rates of return on plan assets are determined annually and are based on an evaluation of our plan assets, historical trends, and experience, taking into account current and expected market conditions.  Plan assets are comprised primarily of equity and debt securities.  As we have both domestic and international plans, these assumptions differ based on varying factors specific to each particular country or economic environment.
The discount rate utilized in 2007 to determine the projected benefit obligation at the measurement date for our United States non-terminating pension plans ranged from 6.03% to 6.19%, an increase from the 5.75% discount rate that was utilized in 2006.  The discount rate utilized to determine the projected benefit obligation at the measurement date for our United Kingdom pension plan, which constitutes 76% of our international plans and 67% of all plans, increased from 5.0% at September 30, 2006 to 5.7% at September 30, 2007.  The following table illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for the United Kingdom pension plan.

   
Effect on
 
         
 Pension Benefit
 
   
Pension Expense
   
Obligation
 
Millions of dollars
 
in 2007
   
at December 31, 2007
 
25-basis-point decrease in discount rate
  $ 3     $ 40  
25-basis-point increase in discount rate
  $ (3 )   $ (38 )

 
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Our defined benefit plans reduced pretax earnings by $48 million in 2007, $45 million in 2006, and $37 million in 2005.  Included in the amounts were earnings from our expected pension returns of $47 million in 2007, $37 million in 2006, and $35 million in 2005.  Unrecognized actuarial gains and losses were being recognized over a period of one to 24 years, which represented the expected remaining service life of the employee group.  Our unrecognized actuarial gains and losses arose from several factors, including experience and assumptions changes in the obligations and the difference between expected returns and actual returns on plan assets.  Actual returns were $68 million in 2007, $65 million in 2006, and $83 million in 2005.  The difference between actual and expected returns is deferred and recorded net of tax in other comprehensive income as actuarial gain or loss and is recognized as future pension expense.  Our net actuarial loss, net of tax, at December 31, 2007 was $46 million.  On a pretax basis, $3 million of our net actuarial loss at December 31, 2007 will be recognized as a component of our expected 2008 pension expense.  During 2007, we made contributions to fund our defined benefit plans of $41 million, which included $16 million contributed to our United Kingdom plan.  We expect to make additional contributions in 2008 of approximately $30 million.
The actuarial assumptions used in determining our pension benefits may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, and longer or shorter life spans of participants.  While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect our financial position or results of operations.
Allowance for bad debts
We evaluate our accounts receivable through a continuous process of assessing our portfolio on an individual customer and overall basis.  This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, financial condition of our customers, and whether the receivables involve retentions.  We also consider the economic environment of our customers, both from a marketplace and geographic perspective, in evaluating the need for an allowance.  Based on our review of these factors, we establish or adjust allowances for specific customers and the accounts receivable portfolio as a whole.  This process involves a high degree of judgment and estimation, and frequently involves significant dollar amounts.  Accordingly, our results of operations can be affected by adjustments to the allowance due to actual write-offs that differ from estimated amounts.  Our estimates of allowances for bad debts have historically been accurate.  Over the last five years, our estimates of allowances for bad debts, as a percentage of notes and accounts receivable before the allowance, have ranged from 1.5% to 7.3%.  At December 31, 2007, allowance for bad debts totaled $49 million or 1.6% of notes and accounts receivable before the allowance, and at December 31, 2006, allowance for bad debts totaled $40 million or 1.5% of notes and accounts receivable before the allowance.  A 1% change in our estimate of the collectibility of our notes and accounts receivable balance as of December 31, 2007 would have resulted in a $31 million adjustment to 2007 total operating costs and expenses.

OFF BALANCE SHEET ARRANGEMENTS

At December 31, 2007, we had no material off balance sheet arrangements, except for operating leases.  For information on our contractual obligations related to operating leases, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Future uses of cash.”

FINANCIAL INSTRUMENT 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.  From time to time, we may selectively manage these exposures through the use of derivative instruments to mitigate our market risk from these exposures.  The objective of our risk management program is to protect our cash flows related to sales or purchases of goods or services from market fluctuations in currency rates.  We do not use derivative instruments for trading purposes.  Our use of derivative instruments includes the following types of market risk:
 
-
volatility of the currency rates;
 
-
time horizon of the derivative instruments;

 
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-
market cycles; and
 
-
the type of derivative instruments used.
We do not consider any of these risk management activities to be material.  See Note 1 to the consolidated financial statements for additional information on our accounting policies on derivative instruments.  See Note 14 to the consolidated financial statements for additional disclosures related to financial instruments.
Interest rate risk
We have exposure to interest rate risk from our long-term debt.
The following table represents principal amounts of our long-term debt at December 31, 2007 and related weighted average interest rates on the repaid amounts by year of maturity for our long-term debt.

Millions of dollars
 
2008
   
2009
   
2010
   
2011
   
2012
   
Thereafter
   
Total
 
Fixed-rate debt:
                                         
Repayment amount ($US)
  $ 150     $ 3     $ 753     $ 3     $ 4     $ 1,856     $ 2,769  
Weighted average
                                                       
interest rate on
                                                       
repaid amount
    5.6 %     5.6 %     5.5 %     5.5 %     5.5 %     4.7 %     5.0 %
Variable-rate debt:
                                                       
Repayment amount ($US)
  $ 9     $ 9     $ 3     $     $     $     $ 21  
Weighted average
                                                       
interest rate on
                                                       
repaid amount
    8.5 %     8.5 %     8.5 %                       8.5 %

The fair market value of long-term debt was $4.1 billion as of December 31, 2007.  The excess of the fair value of long-term debt over the carrying amount of long-term debt is primarily due to the impact of the increased value of our common stock on our 3.125% convertible senior notes.

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 Resource Conservation and Recovery Act;
 
-
the Clean Air 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 may 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 $72 million as of December 31, 2007 and $39 million as of December 31, 2006.  Our total liability related to environmental matters covers numerous properties, including the property in regard to which Dirt, Inc. has brought suit 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.  See Note 10 to our consolidated financial statements for further information regarding this matter.

 
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We have subsidiaries that have been named as potentially responsible parties along with other third parties for 9 federal and state superfund sites for which we have established a liability.  As of December 31, 2007, those 9 sites accounted for approximately $10 million of our total $72 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 PRONOUNCEMENTS

Effective January 1, 2007, we adopted 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 consolidated financial statements.  See Note 11 to our consolidated financial statements for further information.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).”  SFAS No. 158 requires an employer to:
 
-
recognize on its balance sheet the funded status (measured as the difference between the fair value of plan assets and the benefit obligation) of pension and other postretirement benefit plans;
 
-
recognize, through comprehensive income, certain changes in the funded status of a defined benefit and postretirement plan in the year in which the changes occur;
 
-
measure plan assets and benefit obligations as of the end of the employer’s fiscal year; and
 
-
disclose additional information.
The requirements to recognize the funded status of a benefit plan and the additional disclosure requirements were effective for fiscal years ending after December 15, 2006.  Accordingly, we adopted SFAS No. 158 for our fiscal year ending December 31, 2006.  See Note 15 to our consolidated financial statements for further information.
The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end is effective for fiscal years ending after December 15, 2008.  We did not elect early adoption of these additional SFAS No. 158 requirements and will adopt these requirements for our fiscal year ending December 31, 2008.

 
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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value, and expanding disclosures about fair value measurements.  SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  In November 2007, the FASB deferred for one year the application of the fair value measurement requirements to nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis.  On January 1, 2008, we adopted without material impact on our consolidated financial statements the provisions of SFAS No. 157 related to financial assets and liabilities and to nonfinancial assets and liabilities measured at fair value on a recurring basis.  Beginning January 1, 2009, we will adopt the provisions for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis, which we do not expect to have a material impact on our consolidated 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 No. 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 No. 159 is effective for fiscal years beginning after November 15, 2007.  We adopted SFAS No. 159 on January 1, 2008 and did not elect to apply the fair value method to any eligible assets or liabilities at that time.
In December 2007, the FASB issued Statement No. 141(Revised 2007), “Business Combinations” (SFAS No. 141(R)).  SFAS No. 141(R) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.  SFAS No. 141(R) also changes the accounting treatment for certain specific items.  SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008.  We will adopt the provisions of SFAS No. 141(R) for business combinations on or after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.”  SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  This statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity.  SFAS No. 160 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008.  We will adopt the provision of SFAS No. 160 on January 1, 2009 and have not yet determined the impact on our consolidated financial statements.
In December 2007, the FASB ratified the consensus reached on EITF 07-1, “Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property.”  EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties.  EITF 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  We will adopt EITF 07-1 on January 1, 2009, which we do not expect to have a material impact on our consolidated financial statements.

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information.  Forward-looking information is based on projections and estimates, not historical information.  Some statements in this Form 10-K 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.

 
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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.

RISK FACTORS

Foreign Corrupt Practices Act Investigations
The 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 appropriate tolling agreements with the SEC and the DOJ.
TSKJ is a private limited liability company registered in Madeira, Portugal whose members are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC (a subsidiary of KBR), each of which had an approximate 25% interest in the venture.  TSKJ and other similarly owned entities entered into various contracts to build and expand the liquefied natural gas project for Nigeria LNG Limited, which is owned by the Nigerian National Petroleum Corporation, Shell Gas B.V., Cleag Limited (an affiliate of Total), and Agip International B.V. (an affiliate of ENI SpA of Italy).
The SEC and the DOJ have been reviewing these matters in light of the requirements of the FCPA.  In addition to performing our own investigation, we have been cooperating with the SEC and the DOJ investigations and with other investigations in France, Nigeria, and Switzerland regarding the Bonny Island project.  The government of Nigeria gave notice in 2004 to the French magistrate of a civil claim as an injured party in the French investigation.  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.
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 we understand 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 and KBR’s current or former executive officers or employees, 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.

 
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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.  We understand that TSKJ terminated the immigration services provider after a KBR employee discovered the issue.  We reported this matter to the United States government in 2007.  The SEC has issued a subpoena requesting documents among other things concerning any payment of anything of value to Nigerian government officials.  In response to such subpoena, we have produced and continue to produce additional documents regarding KBR and Halliburton’s energy services business use of immigration and customs service providers, which may result in further inquiries.  Furthermore, as a result of these matters, we have expanded our own investigation to consider any matters raised by energy services activities in Nigeria.

 
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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 December 31, 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 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.

 
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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 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.  A key issue in the arbitration is which party is responsible for the designation of the material to be used for the bolts.  We understand that KBR believes that an instruction to use the particular bolts was issued by Petrobras, and as such, KBR believes the cost resulting from any replacement is not KBR’s responsibility.  We understand Petrobras disagrees.  We understand KBR believes several possible solutions may exist, including replacement of the bolts.  Estimates indicate that costs of these various solutions range up to $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 is vigorously defending and pursuing recovery of the costs incurred to date through the arbitration process and to that end has submitted a counterclaim in the arbitration seeking the recovery of $22 million.  The arbitration panel has set an evidentiary hearing in April 2008.

Impairment of Oil and Gas Properties
At December 31, 2007, we had interests in oil and gas properties totaling $110 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 in which we have a 25% non-operating interest.  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.
In December 2007, we learned that the drilling program in which we were engaged on one of two prospects in Bangladesh was unsuccessful.  Consequently, we recorded a $34 million charge for the write-off of our drilling costs and impairment of the leasehold carrying value.  This charge is included in our results of operations for 2007.  We expect to know the results of the drilling activity on the second prospect by the end of the first quarter of 2008.  Depending on the results, we could incur additional charges.
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.

Geopolitical and International Environment
International and political events
A significant portion of our revenue is derived from our non-United States operations, which exposes us to risks inherent in doing business in each of the countries in which we transact business.  The occurrence of any of the risks described below could have a material adverse effect on our consolidated results of operations and consolidated financial condition.
Our operations in countries other than the United States accounted for approximately 56% of our consolidated revenue during 2007 and 55% of our consolidated revenue during 2006.  Operations in countries other than the United States are subject to various risks unique to each country.  With respect to any particular country, these risks may include:

 
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-
expropriation and nationalization of our assets in that country;
 
-
political and economic instability;
 
-
civil unrest, acts of terrorism, force majeure, war, or other armed conflict;
 
-
natural disasters, including those related to earthquakes and flooding;
 
-
inflation;
 
-
currency fluctuations, devaluations, and conversion restrictions;
 
-
confiscatory taxation or other adverse tax policies;
 
-
governmental activities that limit or disrupt markets, restrict payments, or limit the movement of funds;
 
-
governmental activities that may result in the deprivation of contract rights; and
 
-
governmental activities that may result in the inability to obtain or retain licenses required for operation.
Due to the unsettled political conditions in many oil-producing countries, our revenue and profits are subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls, and governmental actions.  Countries where we operate that have significant political risk include:  Algeria, Indonesia, Nigeria, Russia, Venezuela, and Yemen.  In addition, military action or continued unrest in the Middle East could impact the supply and pricing for oil and gas, disrupt our operations in the region and elsewhere, and increase our costs for security worldwide.
In addition, investigations by governmental authorities (see “Foreign Corrupt Practices Act investigations” above), as well as legal, social, economic, and political issues in Nigeria, could materially and adversely affect our Nigerian business and operations.
Our facilities and our employees are under threat of attack in some countries where we operate.  In addition, the risks related to loss of life of our personnel and our subcontractors in these areas continue.
We are also subject to the risks that our employees, joint venture partners, and agents outside of the United States may fail to comply with applicable laws.
Military action, other armed conflicts, or terrorist attacks
Military action in Iraq, military tension involving North Korea and Iran, as well as the terrorist attacks of September 11, 2001 and subsequent terrorist attacks, threats of attacks, and unrest, have caused instability or uncertainty in the world’s financial and commercial markets and have significantly increased political and economic instability in some of the geographic areas in which we operate.  Acts of terrorism and threats of armed conflicts in or around various areas in which we operate, such as the Middle East, Nigeria, and Indonesia, could limit or disrupt markets and our operations, including disruptions resulting from the evacuation of personnel, cancellation of contracts, or the loss of personnel or assets.
Such events may cause further disruption to financial and commercial markets and may generate greater political and economic instability in some of the geographic areas in which we operate.  In addition, any possible reprisals as a consequence of the war and ongoing military action in Iraq, such as acts of terrorism in the United States or elsewhere, could materially and adversely affect us in ways we cannot predict at this time.
Income taxes
We have operations in approximately 70 countries other than the United States.  Consequently, we are subject to the jurisdiction of a significant number of taxing authorities.  The income earned in these various jurisdictions is taxed on differing bases, including net income actually earned, net income deemed earned, and revenue-based tax withholding.  The final determination of our tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction, as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred.  Changes in the operating environment, including changes in or interpretation of tax law and currency/repatriation controls, could impact the determination of our tax liabilities for a tax year.

 
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Foreign exchange and currency risks
A sizable portion of our consolidated revenue and consolidated operating expenses is in foreign currencies.  As a result, we are subject to significant risks, including:
 
-
foreign exchange risks resulting from changes in foreign exchange rates and the implementation of exchange controls; and
 
-
limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries.
We conduct business in countries, such as Venezuela, that have nontraded or “soft” currencies which, because of their restricted or limited trading markets, may be more difficult to exchange for “hard” currency.  We may accumulate cash in soft currencies, and we may be limited in our ability to convert our profits into United States dollars or to repatriate the profits from those countries.
We selectively use hedging transactions to limit our exposure to risks from doing business in foreign currencies.  For those currencies that are not readily convertible, our ability to hedge our exposure is limited because financial hedge instruments for those currencies are nonexistent or limited.  Our ability to hedge is also limited because pricing of hedging instruments, where they exist, is often volatile and not necessarily efficient.
In addition, the value of the derivative instruments could be impacted by:
 
-
adverse movements in foreign exchange rates;
 
-
interest rates;
 
-
commodity prices; or
 
-
the value and time period of the derivative being different than the exposures or cash flows being hedged.

Customers and Business
Exploration and production activity
Demand for our services and products depends on oil and natural gas industry activity and expenditure levels that are directly affected by trends in oil and natural gas prices.
Demand for our services and products is particularly sensitive to the level of exploration, development, and production activity of, and the corresponding capital spending by, oil and natural gas companies, including national oil companies.  Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty, and a variety of other factors that are beyond our control.  Any prolonged reduction in oil and natural gas prices will depress the immediate levels of exploration, development, and production activity, often reflected as changes in rig counts.  Perceptions of longer-term lower oil and natural gas prices by oil and gas companies or longer-term higher material and contractor prices impacting facility costs can similarly reduce or defer major expenditures given the long-term nature of many large-scale development projects.  Lower levels of activity result in a corresponding decline in the demand for our oil and natural gas well services and products, which could have a material adverse effect on our revenue and profitability.  Factors affecting the prices of oil and natural gas include:
 
-
governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves;
 
-
global weather conditions and natural disasters;
 
-
worldwide political, military, and economic conditions;
 
-
the level of oil production by non-OPEC countries and the available excess production capacity within OPEC;
 
-
economic growth in China and India;
 
-
oil refining capacity and shifts in end-customer preferences toward fuel efficiency and the use of natural gas;
 
-
the cost of producing and delivering oil and gas;
 
-
potential acceleration of development of alternative fuels; and
 
-
the level of demand for oil and natural gas, especially demand for natural gas in the United States.

 
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Historically, the markets for oil and gas have been volatile and are likely to continue to be volatile.  Spending on exploration and production activities by large oil and gas companies have a significant impact on the activity levels of our businesses.  In the current environment where oil and gas demand exceeds supply, the ability to rebalance supply with demand may be constrained by the global availability of rigs.  Full utilization of rigs could lead to limited growth in revenue.  In addition, the extent of the growth in oilfield services may be limited by the availability of equipment and manpower.
Capital spending
Our business is directly affected by changes in capital expenditures by our customers.  Some of the changes that may materially and adversely affect us include:
 
-
the consolidation of our customers, which could:
 
-
cause customers to reduce their capital spending, which would in turn reduce the demand for our services and products; and
 
-
result in customer personnel changes, which in turn affect the timing of contract negotiations;
 
-
adverse developments in the business and operations of our customers in the oil and gas industry, including write-downs of reserves and reductions in capital spending for exploration, development, and production; and
 
-
ability of our customers to timely pay the amounts due us.
Customers
We depend on a limited number of significant customers.  While none of these customers represented more than 10% of consolidated revenue in any period presented, the loss of one or more significant customers could have a material adverse effect on our business and our consolidated results of operations.
Acquisitions, dispositions, investments, and joint ventures
We continually seek opportunities to maximize efficiency and value through various transactions, including purchases or sales of assets, businesses, investments, or joint ventures.  These transactions are intended to result in the realization of savings, the creation of efficiencies, the generation of cash or income, or the reduction of risk.  Acquisition transactions may be financed by additional borrowings or by the issuance of our common stock.  These transactions may also affect our consolidated results of operations.
These transactions also involve risks, and we cannot ensure that:
 
-
any acquisitions would result in an increase in income;
 
-
any acquisitions would be successfully integrated into our operations and internal controls;
 
-
the due diligence prior to an acquisition would uncover situations that could result in legal exposure or that we will appropriately quantify the exposure from known risks;
 
-
any disposition would not result in decreased earnings, revenue, or cash flow;
 
-
any dispositions, investments, acquisitions, or integrations would not divert management resources; or
 
-
any dispositions, investments, acquisitions, or integrations would not have a material adverse effect on our results of operations or financial condition.
We conduct some operations through joint ventures, where control may be shared with unaffiliated third parties.  As with any joint venture arrangement, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major issues.  We also cannot control the actions of our joint venture partners, including any nonperformance, default, or bankruptcy of our joint venture partners.  These factors could potentially materially and adversely affect the business and operations of the joint venture and, in turn, our business and 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.
Law and regulatory requirements
In the countries in which we conduct business, we are subject to multiple and, at times, inconsistent regulatory regimes, including those that govern our use of radioactive materials, explosives, and chemicals in the course of our operations.  Various national and international regulatory regimes govern the shipment of these items.  Many countries, but not all, impose special controls upon the export and import of radioactive materials, explosives, and chemicals.  Our ability to do business is subject to maintaining required licenses and complying with these multiple regulatory requirements applicable to these special products.  In addition, the various laws governing import and export of both products and technology apply to a wide range of services and products we offer.  In turn, this can affect our employment practices of hiring people of different nationalities because these laws may prohibit or limit access to some products or technology by employees of various nationalities.  Changes in, compliance with, or our failure to comply with these laws may negatively impact our ability to provide services in, make sales of equipment to, and transfer personnel or equipment among some of the countries in which we operate and could have a material adverse affect on the results of operations.
Raw materials
Raw materials essential to our business are normally readily available.  Current market conditions have triggered constraints in the supply chain of certain raw materials, such as sand, cement, and specialty metals.  The majority of our risk associated with the current supply chain constraints occurs in those situations where we have a relationship with a single supplier for a particular resource.

 
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Intellectual property rights
We rely on a variety of intellectual property rights that we use in our services and products.  We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented, or challenged.  In addition, the laws of some foreign countries in which our services and products may be sold do not protect intellectual property rights to the same extent as the laws of the United States.  Our failure to protect our proprietary information and any successful intellectual property challenges or infringement proceedings against us could materially and adversely affect our competitive position.
Technology
The market for our services and products is characterized by continual technological developments to provide better and more reliable performance and services.  If we are not able to design, develop, and produce commercially competitive products and to implement commercially competitive services in a timely manner in response to changes in technology, our business and revenue could be materially and adversely affected, and the value of our intellectual property may be reduced.  Likewise, if our proprietary technologies, equipment and facilities, or work processes become obsolete, we may no longer be competitive, and our business and revenue could be materially and adversely affected.
Reliance on management
We depend greatly on the efforts of our executive officers and other key employees to manage our operations.  The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business.
Technical personnel
Many of the services that we provide and the products that we sell are complex and highly engineered and often must perform or be performed in harsh conditions.  We believe that our success depends upon our ability to employ and retain technical personnel with the ability to design, utilize, and enhance these services and products.  In addition, our ability to expand our operations depends in part on our ability to increase our skilled labor force.  The demand for skilled workers is high, and the supply is limited.  A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both.  If either of these events were to occur, our cost structure could increase, our margins could decrease, and our growth potential could be impaired.
Weather
Our business could be materially and adversely affected by severe weather, particularly in the Gulf of Mexico where we have operations.  Repercussions of severe weather conditions may include:
 
-
evacuation of personnel and curtailment of services;
 
-
weather-related damage to offshore drilling rigs resulting in suspension of operations;
 
-
weather-related damage to our facilities and project work sites;
 
-
inability to deliver materials to jobsites in accordance with contract schedules; and
 
-
loss of productivity.
Because demand for natural gas in the United States drives a significant amount of our business, warmer than normal winters in the United States are detrimental to the demand for our services to gas producers.

 
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Halliburton Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in the Securities Exchange Act Rule 13a-15(f).
Internal control over financial reporting, no matter how well designed, has inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2007 based upon criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our assessment, we believe that, as of December 31, 2007, our internal control over financial reporting is effective.

HALLIBURTON COMPANY

by




                  /s/  David J. Lesar
                                          /s/  Mark A. McCollum
David J. Lesar
Mark A. McCollum
Chairman of the Board,
Executive Vice President and
President, and Chief Executive Officer
Chief Financial Officer

 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders
Halliburton Company:


We have audited the accompanying consolidated balance sheets of Halliburton Company and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Halliburton Company and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 11, 12 and 15, respectively, to the consolidated financial statements, the Company changed its methods of accounting for uncertainty in income taxes as of January 1, 2007, its method of accounting for stock-based compensation plans as of January 1, 2006, and its method of accounting for defined benefit and other postretirement plans as of December 31, 2006, respectively.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Halliburton Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 20, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.



/s/  KPMG LLP
Houston, Texas
February 20, 2008

 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders
Halliburton Company:

We have audited Halliburton Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Halliburton Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financi