10-K 1 hal_12312016-10k.htm DECEMBER 31, 2016 FORM 10-K Document



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, 2016
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.)
3000 North Sam Houston Parkway East
Houston, Texas  77032
(Address of principal executive offices)
Telephone Number – Area code (281) 871-2699
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes    [X]    No     [   ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.
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 Halliburton Company Common Stock held by nonaffiliates on June 30, 2016, determined using the per share closing price on the New York Stock Exchange Composite tape of $45.29 on that date, was approximately $38.8 billion.
As of January 31, 2017, there were 866,933,212 shares of Halliburton Company Common Stock, $2.50 par value per share, outstanding.
Portions of the Halliburton Company Proxy Statement for our 2017 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, 2016
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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. We are a leading provider of services and products to the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production throughout the life of the field. We serve major, national and independent oil and natural gas companies throughout the world and operate under two divisions, which form the basis for the two operating segments we report, the Completion and Production segment and the Drilling and Evaluation segment.

Completion and Production delivers cementing, stimulation, intervention, pressure control, specialty chemicals, artificial lift and completion services. The segment consists of the following product service lines:

-
Production Enhancement: includes stimulation services and sand control services. Stimulation services optimize oil and natural gas reservoir production through a variety of pressure pumping services, nitrogen services and chemical processes, commonly known as hydraulic fracturing and acidizing. Sand control services include fluid and chemical systems and pumping services for the prevention of formation sand production.
-
Cementing: involves bonding the well and well casing while isolating fluid zones and maximizing wellbore stability. Our cementing service line also provides casing equipment.
-
Completion Tools: provides downhole solutions and services to our customers to complete their wells, including well completion products and services, intelligent well completions, liner hanger systems, sand control systems and service tools.
-
Production Solutions: includes pressure control services such as coiled tubing, hydraulic workover units and downhole tools.
-
Pipeline & Process Services: includes pre-commissioning and maintenance services, subsea pipeline services, conventional pipeline services and process services.
-
Multi-Chem: includes oilfield production and completion chemicals and services that address production, processing and transportation challenges.
-
Artificial Lift: offers electrical submersible pumps and progressive cavity pumps, including the associated surface package for power, control and monitoring of the entire lift system, and provides installation, maintenance, repair and testing services. The objective of these services is to maximize reservoir and wellbore recovery by applying lifting technology and intelligent field management solutions throughout the life of the well.

Drilling and Evaluation provides field and reservoir modeling, drilling, evaluation and precise wellbore placement solutions that enable customers to model, measure, drill and optimize their well construction activities. The segment consists of the following product service lines

-
Baroid: provides drilling fluid systems, performance additives, completion fluids, solids control, specialized testing equipment and waste management services for oil and natural gas drilling, completion and workover operations.
-
Sperry Drilling: provides drilling systems and services that offer directional control for precise wellbore placement while providing important measurements about the characteristics of the drill string and geological formations while drilling wells. 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.
-
Wireline and Perforating: includes open-hole logging services that provide information on formation evaluation and reservoir fluid analysis, including formation lithology, rock properties and reservoir fluid properties. Also offered are cased-hole and slickline services, which provide perforating, pipe recovery services, through-casing formation evaluation and reservoir monitoring, casing and cement integrity measurements and well intervention services.
-
Drill Bits and Services: provides roller cone rock bits, fixed cutter bits, hole enlargement and related downhole tools and services used in drilling oil and natural gas wells. In addition, coring equipment and services are provided to acquire cores of the formation drilled for evaluation.
-
Landmark Software and Services: supplies integrated exploration, drilling and production software, and related professional and data management services for the upstream oil and natural gas industry.

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-
Testing and Subsea: provides acquisition and analysis of dynamic reservoir information and reservoir optimization solutions to the oil and natural gas industry through a broad portfolio of test tools, data acquisition services, fluid sampling, surface well testing and subsea safety systems.
-
Consulting and Project Management: 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 natural gas assets. In addition, well control and prevention services are included.

See Note 4 to the consolidated financial statements for further financial information related to each of our business segments. We have manufacturing operations in various locations, the most significant of which are located in the United States, Canada, Malaysia, Singapore and the United Kingdom.

Business strategy
Our value proposition is to collaborate and engineer solutions to maximize asset value for our customers. We strive to achieve superior growth and returns for our shareholders by delivering technology and services that improve efficiency, increase recovery and maximize production for our customers. Our objectives are to:
-
create a balanced portfolio of services and products supported by global infrastructure and anchored by technological innovation to further differentiate our company;
-
reach a distinguished level of operational excellence that reduces costs and creates real value;
-
preserve a dynamic workforce by being a preferred employer to attract, develop and retain the best global talent; and
-
uphold our strong ethical and business standards, and maintain the highest standards of health, safety and environmental performance.

For further discussion on our business strategies we plan to continue to execute, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Overview."

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;
-
understanding the geological characteristics of the hydrocarbon reservoir;
-
product quality;
-
warranty; and
-
technical proficiency.

We conduct business worldwide in approximately 70 countries. The business operations of our divisions are organized around four primary geographic regions: North America, Latin America, Europe/Africa/CIS and Middle East/Asia. In 2016, 2015 and 2014, based on the location of services provided and products sold, 41%, 44% and 51% 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Environment and Results of Operations” and Note 4 to the consolidated financial statements for additional financial information about our geographic operations in the last three years. Because the markets for our services and products are vast and cross numerous geographic lines, it is not practicable to provide a meaningful estimate of the total number of our competitors. The industries we serve are highly competitive, and we have many substantial competitors. Most 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, changes in foreign currency exchange rates, foreign currency exchange restrictions and highly inflationary currencies, as well as other geopolitical factors. We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country, other than the United States, would significantly impact the conduct of our operations taken as a whole.


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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 our consolidated revenue in any period presented.

Raw materials
Raw materials essential to our business are normally readily available. Market conditions can trigger constraints in the supply of certain raw materials, such as proppants, hydrochloric acid and gels, including guar gum (a blending additive used in our hydraulic fracturing process). We are always seeking ways to ensure the availability of resources, as well as manage costs of raw materials. Our procurement department uses our size and buying power to enhance our access to key materials at competitive prices.

Research and development costs
We maintain an active research and development program. The program improves products, processes and engineering standards and practices that serve the changing needs of our customers, such as those related to high pressure and high temperature environments, and also develops new products and processes. Our expenditures for research and development activities were $329 million in 2016, $487 million in 2015 and $601 million in 2014. We sponsored over 95% of these expenditures 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 technology covered by patents owned by others, and we license others to utilize technology covered by our patents. We do not consider any particular patent to be material to our business operations.

Seasonality
Weather and natural phenomena can temporarily affect the performance of our services, but the widespread geographical locations of our operations 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 natural gas storage levels and drilling activity;
-
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.

Additionally, customer spending patterns for software and various other oilfield services and products can typically result in higher activity in the fourth quarter of the year.

Employees
At December 31, 2016, we employed approximately 50,000 people worldwide compared to approximately 65,000 at December 31, 2015. At December 31, 2016, approximately 15% of our employees were subject to collective bargaining agreements. Based upon the geographic diversification of these employees, we do not believe any risk of loss from employee strikes or other collective actions would 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. For further information related to environmental matters and regulation, see Note 9 to the consolidated financial statements and Item 1(a), “Risk Factors.”

Hydraulic fracturing process
Hydraulic fracturing is a process that creates fractures extending from the well bore into the rock formation to enable natural gas or oil to move more easily from the rock pores to a production conduit. A significant portion of our Completion and Production segment provides hydraulic fracturing services to customers developing shale natural gas and shale oil. From time to time, questions arise about the scope of our operations in the shale natural gas and shale oil sectors, and the extent to which these operations may affect human health and the environment.


3



We sometimes design and generally implement a hydraulic fracturing operation to 'stimulate' the well's production, at the direction of our customer, once the well has been drilled, cased and cemented. Our customer is generally responsible for providing the base fluid (usually water) used in the hydraulic fracturing of a well. We generally supply the proppant (often sand) and at least a portion of the additives used in the overall fracturing fluid mixture. In addition, we mix the additives and proppant with the base fluid and pump the mixture down the wellbore to create the desired fractures in the target formation. The customer is responsible for disposing of any materials that are subsequently produced or pumped out of the well, including flowback fluids and produced water.

As part of the process of constructing the well, the customer will take a number of steps designed to protect drinking water resources. In particular, the casing and cementing of the well are designed to provide 'zonal isolation' so that the fluids pumped down the wellbore and the oil and natural gas and other materials that are subsequently pumped out of the well will not come into contact with shallow aquifers or other shallow formations through which those materials could potentially migrate to freshwater aquifers or the surface.

The potential environmental impacts of hydraulic fracturing have been studied by numerous government entities and others. In 2004, the United States Environmental Protection Agency (EPA) conducted an extensive study of hydraulic fracturing practices, focusing on coalbed methane wells, and their potential effect on underground sources of drinking water. The EPA’s study concluded that hydraulic fracturing of coalbed methane wells poses little or no threat to underground sources of drinking water. On December 13, 2016, the EPA released a final report, “Hydraulic Fracturing for Oil and Gas: Impacts from the Hydraulic Fracturing Water Cycle on Drinking Water Resources in the United States” representing the culmination of a six-year study requested by Congress. While the EPA report noted a potential for some impact to drinking water sources caused by hydraulic fracturing, the agency confirmed the overall incidence of impacts is low. Moreover, a number of the areas of potential impact identified in the report involve activities for which we are not generally responsible, such as potential impacts associated with withdrawals of surface water for use as a base fluid and management of wastewater.

We have made detailed information regarding our fracturing fluid composition and breakdown available on our internet web site at www.halliburton.com. We also have proactively developed processes to provide our customers with the chemical constituents of our hydraulic fracturing fluids to enable our customers to comply with state laws as well as voluntary standards established by the Chemical Disclosure Registry, www.fracfocus.org.

At the same time, we have invested considerable resources in developing hydraulic fracturing technologies, which offer our customers a variety of especially environment-friendly alternatives related to the use of hydraulic fracturing fluid additives and other aspects of our hydraulic fracturing operations. We created a hydraulic fracturing fluid system comprised of materials sourced entirely from the food industry. In addition, we have engineered a process that uses ultraviolet light to control the growth of bacteria in hydraulic fracturing fluids, allowing customers to minimize the use of chemical biocides. We are committed to the continued development of innovative chemical and mechanical technologies that allow for more economical and environmentally friendly development of the world’s oil and natural gas reserves.

In evaluating any environmental risks that may be associated with our hydraulic fracturing services, it is helpful to understand the role that we play in the development of shale natural gas and shale oil. Our principal task generally is to manage the process of injecting fracturing fluids into the borehole to 'stimulate' the well. Thus, based on the provisions in our contracts and applicable law, the primary environmental risks we face are potential pre-injection spills or releases of stored fracturing fluids and potential spills or releases of fuel or other fluids associated with pumps, blenders, conveyors, or other above-ground equipment used in the hydraulic fracturing process.

Although possible concerns have been raised about hydraulic fracturing operations, the circumstances described above have helped to mitigate those concerns. To date, we have not been obligated to compensate any indemnified party for any environmental liability arising directly from hydraulic fracturing, although there can be no assurance that such obligations or liabilities will not arise in the future.

Working capital
We fund our business operations through a combination of available cash and equivalents, short-term investments and cash flow generated from operations. In addition, our revolving credit facility is available for additional working capital needs.


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, 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 web 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 for the years 2016, 2015, or 2014. Except to the extent expressly stated otherwise, information contained on or accessible from our web site or any other web site is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report.

Executive Officers of the Registrant

The following table indicates the names and ages of the executive officers of Halliburton Company as of February 7, 2017, including all offices and positions held by each in the past five years:
 
Name and Age
Offices Held and Term of Office
 
James S. Brown
(Age 62)
President, Western Hemisphere of Halliburton Company, since January 2008
 
 
 
*
Eric J. Carre
(Age 50)
Executive Vice President, Global Business Lines of Halliburton Company, since May 2016
 
 
Senior Vice President, Drilling and Evaluation Division of Halliburton Company, June 2011 to April 2016
 
 
 
 
Charles E. Geer, Jr.
(Age 46)
Vice President and Corporate Controller of Halliburton Company, since January 2015
 
 
Vice President, Finance of Halliburton Company, December 2013 to December 2014
 
 
Vice President and Chief Accounting Officer of Select Energy Services, April 2011 to November 2013
 
 
 
 
Myrtle L. Jones
(Age 57)
Senior Vice President, Tax of Halliburton Company, since March 2013
 
 
Senior Managing Director of Tax and Internal Audit, Service Corporation International, February 2008 to February 2013
 
 
 
*
David J. Lesar
(Age 63)
Chairman of the Board and Chief Executive Officer of Halliburton Company, since August 2014
 
 
Chairman of the Board, President and Chief Executive Officer of Halliburton Company, August 2000 to July 2014
 
 
 
*
Mark A. McCollum
(Age 57)
Executive Vice President and Chief Financial Officer of Halliburton Company, since July 2016
 
 
Executive Vice President and Chief Integration Officer of Halliburton Company, January 2015 to June 2016
 
 
Executive Vice President and Chief Financial Officer of Halliburton Company, January 2008 to December 2014
 
 
 
 
 
 

5



 
Timothy M. McKeon
(Age 44)
Vice President and Treasurer of Halliburton Company, since January 2014
 
 
Assistant Treasurer of Halliburton Company, September 2011 to December 2013
 
 
 
*
Jeffrey A. Miller
(Age 53)
Member of the Board of Directors and President of Halliburton Company, since August 2014
 
 
Executive Vice President and Chief Operating Officer of Halliburton Company, September 2012 to July 2014
 
 
Senior Vice President, Global Business Development and Marketing of Halliburton Company, January 2011 to August 2012
 
 
 
*
Lawrence J. Pope
(Age 48)
Executive Vice President of Administration and Chief Human Resources Officer of Halliburton Company, since January 2008
 
 
 
 
Joe D. Rainey
(Age 60)
President, Eastern Hemisphere of Halliburton Company, since January 2011
 
 
 
*
Robb L. Voyles (Age 59)
Executive Vice President, Secretary and General Counsel of Halliburton Company, since May 2015
 
 
Executive Vice President and General Counsel of Halliburton Company, January 2014 to April 2015
 
 
Senior Vice President, Law of Halliburton Company, September 2013 to December 2013
 
 
Partner, Baker Botts L.L.P., January 1989 to August 2013
* 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.

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Item 1(a). Risk Factors.

The statements in this section describe the known material risks to our business and should be considered carefully.

Trends in oil and natural gas prices affect the level of exploration, development, and production activity of our customers and the demand for our services and products, which could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
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. The level of exploration, development, and production activity is directly affected by trends in oil and natural gas prices, which historically have been volatile and are likely to continue to be volatile.

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 economic factors that are beyond our control. Crude oil prices have fluctuated significantly since 2014, with West Texas Intermediate (WTI) oil spot prices declining from a high of $108 per barrel in June 2014 to a low of $26 per barrel in February 2016, a level which has not been experienced since 2003. Although crude oil prices increased during the second half of 2016 to a high of $54 per barrel in December 2016, market reports indicate prices are not expected to increase materially in 2017. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business Environment and Results of Operations.”

The prolonged reduction in oil and natural gas prices depressed levels of exploration, development, and production activity in 2015 and 2016, and prolonged further reductions could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. Should current market conditions worsen or persist for an extended period of time, we may be required to record additional asset impairments. Such a potential impairment charge could have a material adverse impact on our operating results. Even the perception of longer-term lower oil and natural gas prices by oil and natural gas companies can similarly reduce or defer major expenditures given the long-term nature of many large-scale development projects. We also have a small number of integrated projects that have remuneration tied to hydrocarbon production. Reduction in oil and gas prices can affect the overall returns for these projects, either lengthening the time until the expected returns are realized or by impairing the value of the asset.

Factors affecting the prices of oil and natural gas include:
-
the level of supply and demand for oil and natural gas;
-
governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves;
-
weather conditions and natural disasters;
-
worldwide political, military, and economic conditions;
-
the ability or willingness of the Organization of Petroleum Exporting Countries (OPEC) to set and maintain oil production levels;
-
the level of oil production by non-OPEC countries;
-
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 natural gas; and
-
potential acceleration of the development of alternative fuels.
    
Our business is dependent on capital spending by our customers, and reductions in capital spending could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
Our business is directly affected by changes in capital expenditures by our customers, and further reductions in their capital spending could reduce demand for our services and products and have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. Some of the items that may impact our customer's capital spending include:
-
oil and natural gas prices, including volatility of oil and natural gas prices and expectations regarding future prices;
-
the inability of our customers to access capital on economically advantageous terms;
-
the consolidation of our customers;
-
customer personnel changes; and
-
adverse developments in the business or operations of our customers, including write-downs of reserves and borrowing base reductions under customer credit facilities.


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As a result of the decreases in commodity prices, many of our customers reduced capital spending in 2015 and 2016. While customer budgets are slowly increasing in response to improved market conditions, any prolonged further reduction in commodity prices may result in further capital budget reductions in the future.

Our operations are subject to political and economic instability and risk of government actions that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
We are exposed to risks inherent in doing business in each of the countries in which we operate. Our operations are subject to various risks unique to each country that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. With respect to any particular country, these risks may include:
-
political and economic instability, including:    
civil unrest, acts of terrorism, force majeure, war, other armed conflict, and sanctions;
inflation; and
currency fluctuations, devaluations, and conversion restrictions; and
-
governmental actions that may:    
result in expropriation and nationalization of our assets in that country;
result in confiscatory taxation or other adverse tax policies;
limit or disrupt markets or our operations, restrict payments, or limit the movement of funds;
result in the deprivation of contract rights; and
result in the inability to obtain or retain licenses required for operation.

For example, due to the unsettled political conditions in many oil-producing countries, our operations, revenue, and profits are subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls, and governmental actions. These and other risks described above could result in the loss of our personnel or assets, cause us to evacuate our personnel from certain countries, cause us to increase spending on security worldwide, cause us to cease operating in certain countries, disrupt financial and commercial markets, including the supply of and pricing for oil and natural gas, and generate greater political and economic instability in some of the geographic areas in which we operate. Areas where we operate that have significant risk include, but are not limited to: the Middle East, North Africa, Angola, Azerbaijan, Colombia, Indonesia, Kazakhstan, Mexico, Nigeria, Russia, and Venezuela. In addition, any possible reprisals as a consequence of military or other action, such as acts of terrorism in the United States or elsewhere, could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.

Our operations are subject to cyber-attacks that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
Our operations are becoming increasingly dependent on digital technologies and services. We use these technologies for internal purposes, including data storage, processing, and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyber-attacks. If our systems for protecting against cybersecurity risks prove not to be sufficient, we could be adversely affected by, among other things: loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data; interruption of our business operations; and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees, and other third parties, and may result in claims against us. In addition, these risks could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.

Our operations outside the United States require us to comply with a number of United States and international regulations, violations of which could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
Our operations outside the United States require us to comply with a number of United States and international regulations. For example, our operations in countries outside the United States are subject to the United States Foreign Corrupt Practices Act (FCPA), which prohibits United States companies and their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person or corporate entity, or obtain any unfair advantage. Our activities create the risk of unauthorized payments or offers of payments by our employees, agents, or joint venture partners that could be in violation of anti-corruption laws, even though some of these parties are not subject to our control. We have internal control policies and procedures and have implemented training and compliance programs for our employees and agents with respect to the FCPA. However, we cannot assure that our policies, procedures, and programs always will protect us from reckless or criminal acts committed by our employees or agents. Allegations of violations of applicable anti-corruption laws have resulted and may in the future result in internal, independent, or government investigations. Violations of anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our

8



business, consolidated results of operations, and consolidated financial condition.

In addition, the shipment of goods, services, and technology across international borders subjects us to extensive trade laws and regulations. Our import activities are governed by the unique customs laws and regulations in each of the countries where we operate. Moreover, many countries, including the United States, control the export and re-export of certain goods, services and technology and impose related export recordkeeping and reporting obligations. Governments may also impose economic sanctions against certain countries, persons, and entities that may restrict or prohibit transactions involving such countries, persons and entities, which may limit or prevent our conduct of business in certain jurisdictions. During 2014, the United States and European Union imposed sectoral sanctions directed at Russia’s oil and gas industry. Among other things, these sanctions restrict the provision of U.S. and EU goods, services, and technology in support of exploration or production for deep water, Arctic offshore, or shale projects that have the potential to produce oil in Russia. These sanctions resulted in our winding down and ending work on two projects in Russia in 2014, and have prevented us from pursuing certain other projects in Russia. Our ability to engage in certain future projects in Russia is dependent upon whether or not our involvement in such projects is restricted under U.S. or EU sanctions laws and the extent to which any of our Russian operations may be subject to those laws. Those laws may change from time to time, and any expansion of sanctions against Russia’s oil and gas industry could further hinder our ability to do business in Russia, which could have a material adverse effect on our consolidated results of operations.

The laws and regulations concerning import activity, export recordkeeping and reporting, export control, and economic sanctions are complex and constantly changing. These laws and regulations can cause delays in shipments and unscheduled operational downtime. Moreover, any failure to comply with applicable legal and regulatory trading obligations could result in criminal and civil penalties and sanctions, such as fines, imprisonment, debarment from governmental contracts, seizure of shipments and loss of import and export privileges. In addition, investigations by governmental authorities as well as legal, social, economic, and political issues in these countries could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. 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 other applicable laws.

Changes in, compliance with, or our failure to comply with laws in the countries in which we conduct business may negatively impact our ability to provide services in, make sales of equipment to, and transfer personnel or equipment among some of those countries and could have a material adverse effect on our business and consolidated results of operations.
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 effect on our business and consolidated results of operations.


9



The adoption of any future federal, state, or local laws or implementing regulations imposing reporting obligations on, or limiting or banning, the hydraulic fracturing process could make it more difficult to complete natural gas and oil wells and could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
Various federal legislative and regulatory initiatives have been undertaken which could result in additional requirements or restrictions being imposed on hydraulic fracturing operations. For example, the Department of Interior has issued regulations that apply to hydraulic fracturing operations on wells that are subject to federal oil and gas leases and that impose requirements regarding the disclosure of chemicals used in the hydraulic fracturing process as well as requirements to obtain certain federal approvals before proceeding with hydraulic fracturing at a well site. The Department of Interior has been enjoined from enforcing these regulations by a federal court; however, this decision is being appealed. If they become effective, these regulations would establish additional levels of regulation at the federal level that could lead to operational delays and increased operating costs. The EPA released the final results of its comprehensive research study on the potential adverse impacts that hydraulic fracturing may have on drinking water resources in December 2016. The EPA concluded that hydraulic fracturing activities can impact drinking water resources under some circumstances, including large volume spills and inadequate mechanical integrity of wells. The results of the EPA’s study could spur action towards federal or state legislation and regulation of hydraulic fracturing or similar production operations.

At the same time, legislation and/or regulations have been adopted in many states that require additional disclosure regarding chemicals used in the hydraulic fracturing process but that generally include protections for proprietary information. Legislation and/or regulations are being considered at the state and local level that could impose further chemical disclosure or other regulatory requirements (such as restrictions on the use of certain types of chemicals or prohibitions on hydraulic fracturing operations in certain areas) that could affect our operations. Two states (New York and Vermont) have banned the use of high volume hydraulic fracturing. Moreover, in light of concerns about seismic activity being triggered by the injection of produced waters into underground wells and hydraulic fracturing, certain regulators are also considering additional requirements related to seismic safety for hydraulic fracturing activities. Local jurisdictions in some states have adopted ordinances that restrict or in certain cases prohibit the use of hydraulic fracturing for oil and gas development. In addition, governmental authorities in various foreign countries where we have provided or may provide hydraulic fracturing services have imposed or are considering imposing various restrictions or conditions that may affect hydraulic fracturing operations.

The adoption of any future federal, state, local, or foreign laws or implementing regulations imposing reporting obligations on, or limiting or banning, the hydraulic fracturing process could make it more difficult to complete natural gas and oil wells and could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

Liabilities arising out of the Macondo well incident could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
The semisubmersible drilling rig, Deepwater Horizon, sank on April 22, 2010 after an explosion and fire onboard the rig that began on April 20, 2010. The Deepwater Horizon was owned by Transocean Ltd. and had been drilling the Macondo exploration well in the Gulf of Mexico for the lease operator, BP Exploration and Production, Inc. (BP). We performed a variety of services on that well for BP. There were eleven fatalities and a number of injuries as a result of the Macondo well incident.

Numerous lawsuits relating to the Macondo well incident and alleging damages arising from the blowout were filed against various parties, including BP, Transocean and us, most of which were consolidated in a Multi-District Litigation (MDL) proceeding. In addition, the Bureau of Safety and Environmental Enforcement has issued a notification of Incidents of Noncompliance (INCs) to us relating to the Macondo well incident. We understand that regulations in effect at the time of the alleged violations provide for fines of up to $35,000 per day per violation.

Although the MDL proceeding has concluded and we, BP, Transocean and the plaintiff’s steering committee in the MDL proceeding have settled all claims against each other, our settlement is subject to court approval and other conditions before it becomes effective. In addition, we have appealed the INCs, but the appeal has been suspended pending final resolution, including appeals, of the MDL. If the MDL court does not approve our settlement, and the MDL liability finding is overturned on appeal, liabilities resulting from the Macondo well incident could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. We are unable to predict whether or when the court will approve our MDL settlement or whether or when the conditions of our MDL Settlement will be satisfied.
    
For additional information relating to the Macondo well incident, our MDL Settlement, the status of the MDL and the INCs, see Note 9 to the consolidated financial statements.

10




Liability for cleanup costs, natural resource damages, and other damages arising as a result of environmental laws could be substantial and could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
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 liquidity, consolidated results of operations, and consolidated financial condition.

We are periodically notified of potential liabilities at federal and state 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. 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.

Failure on our part to comply with, and the costs of compliance with, applicable health, safety, and environmental requirements could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
Our business is subject to a variety of health, safety, and 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. Applicable regulatory requirements include, for example, those concerning:
-
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;
-
the use of underground injection wells; and
-
the protection of worker safety both onshore and offshore.

These and other requirements generally are becoming increasingly strict. Sanctions for failure to comply with the 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 liquidity, consolidated results of operations, and consolidated financial condition. We are also exposed to costs arising from regulatory compliance, including compliance with changes in or expansion of applicable regulatory requirements, which could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

Existing or future laws, regulations, treaties or international agreements related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture, and use of carbon dioxide that could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
Changes in environmental requirements related to greenhouse gases and climate change 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. State, national, and international governments and agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws, regulations, treaties, or international agreements related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws, regulations, treaties, or international agreements reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration, and use of carbon

11



dioxide that could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

Our business could be materially and adversely affected by severe or unseasonable weather where we have operations.
Our business could be materially and adversely affected by severe weather, particularly in the Gulf of Mexico, Russia, and the North Sea. Some experts believe global climate change could increase the frequency and severity of extreme weather conditions. Repercussions of severe or unseasonable 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;
-
decreases in demand for natural gas during unseasonably warm winters; and
-
loss of productivity.

Changes in or interpretation of tax law and currency/repatriation control could impact the determination of our income tax liabilities for a tax year.
We have operations in approximately 70 countries. 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 income 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 income tax liabilities for the year. For example, potential United States tax reform could significantly impact our tax expense and the value of our United States deferred tax assets.

We are subject to foreign exchange risks and limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries or to repatriate assets from some countries.
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 currency exchange risks resulting from changes in foreign currency 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.
As an example, we conduct business in countries that have restricted or limited trading markets for their local currencies. We may accumulate cash in those geographies, but we may be limited in our ability to convert our profits into United States dollars or to repatriate the profits from those countries. In addition, although we have made a provision to income taxes for a portion of our cumulative undistributed foreign earnings, the balance of such foreign earnings and cash we may accumulate in foreign jurisdictions in the future may be subject to taxation if repatriated to the United States. For further information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Environment and Results of Operations" and Note 10 to the consolidated financial statements.

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.
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.


12



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 the market, customer requirements, competitive pressures, and technology trends, our business and consolidated results of operations could be materially and adversely affected, and the value of our intellectual property may be reduced.
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 the market, customer requirements, competitive pressures, and technology trends, our business and consolidated results of operations could be materially and adversely affected, and the value of our intellectual property may be reduced. Likewise, if our proprietary technologies, equipment, facilities, or work processes become obsolete, we may no longer be competitive, and our business and consolidated results of operations could be materially and adversely affected.

If our customers delay paying or fail to pay a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
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.

In most cases, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. In weak economic or commodity price environments, we may experience increased delays and failures due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

Our business in Venezuela subjects us to actions by the Venezuelan government, the risk of delayed payments, and currency risks, which could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
We believe there are risks associated with our operations in Venezuela, which continues to experience significant political and economic turmoil, including the possibility that the Venezuelan government could assume control over our operations and assets. Any delays in receiving payment on our receivables from our primary customer in Venezuela or failure to pay us a significant amount of our outstanding receivables could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

The future results of our Venezuelan operations will be affected by many factors, including the foreign currency exchange rate, actions of the Venezuelan government, and general economic conditions such as continued inflation and future customer payments and spending. For further information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Environment and Results of Operations - International operations - Venezuela."

Some of our customers require bids for contracts in the form of long-term, fixed pricing contracts that may require us to assume additional risks associated with cost over-runs, operating cost inflation, labor availability and productivity, supplier and contractor pricing and performance, and potential claims for liquidated damages.
Some of our customers, primarily NOCs, may require bids for contracts in the form of long-term, fixed pricing contracts that may require us to provide integrated project management services outside our normal discrete business to act as project managers as well as service providers, and may require us to assume additional risks associated with cost over-runs. These customers may provide us with inaccurate information in relation to their reserves, which is a subjective process that involves location and volume estimation, that may result in cost over-runs, delays, and project losses. In addition, NOCs often operate in countries with unsettled political conditions, war, civil unrest, or other types of community issues. These issues may also result in cost over-runs, delays, and project losses.

Providing services on an integrated basis may also require us to assume additional risks associated with operating cost inflation, labor availability and productivity, supplier pricing and performance, and potential claims for liquidated damages. We rely on third-party subcontractors and equipment providers to assist us with the completion of these types of contracts. To the extent that we cannot engage subcontractors or acquire equipment or materials in a timely manner and on reasonable terms, our ability to complete a project in accordance with stated deadlines or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price work, we could experience losses in the performance of these contracts. These delays and additional costs may be substantial, and we may be required to compensate our customers for these delays. This may reduce the profit to be realized or result in a loss on a project.


13



Constraints in the supply of, prices for, and availability of transportation of raw materials can have a material adverse effect on our business and consolidated results of operations.
Raw materials essential to our business, such as proppants, hydrochloric acid, and gels, including guar gum, are normally readily available. Shortage of raw materials as a result of high levels of demand or loss of suppliers during market challenges can trigger constraints in the supply chain of those raw materials, particularly where we have a relationship with a single supplier for a particular resource. Many of the raw materials essential to our business require the use of rail, storage, and trucking services to transport the materials to our jobsites. These services, particularly during times of high demand, may cause delays in the arrival of or otherwise constrain our supply of raw materials. These constraints could have a material adverse effect on our business and consolidated results of operations. In addition, price increases imposed by our vendors for raw materials used in our business and the inability to pass these increases through to our customers could have a material adverse effect on our business and consolidated results of operations.

Our acquisitions, dispositions, and investments may not result in anticipated benefits and may present risks not originally contemplated, which may have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
We continually seek opportunities to maximize efficiency and value through various transactions, including purchases or sales of assets, businesses, investments, or joint venture interests. These transactions are intended to (but may not) result in the realization of savings, the creation of efficiencies, the offering of new products or services, 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 or we may use cash on hand. These transactions may also affect our liquidity, consolidated results of operations, and consolidated financial condition.

These transactions also involve risks, and we cannot ensure that:
-
any acquisitions we attempt will be completed on the terms announced, or at all;
-
any acquisitions would result in an increase in income or provide an adequate return of capital or other anticipated benefits;
-
any acquisitions would be successfully integrated into our operations and internal controls;
-
the due diligence conducted prior to an acquisition would uncover situations that could result in financial or legal exposure, including under the FCPA, or that we will appropriately quantify the exposure from known risks;
-
any disposition would not result in decreased earnings, revenue, or cash flow;
-
use of cash for acquisitions would not adversely affect our cash available for capital expenditures and other uses;
-
any dispositions, investments, or acquisitions, including integration efforts, would not divert management resources; or
-
any dispositions, investments, or acquisitions would not have a material adverse effect on our liquidity, consolidated results of operations, or consolidated financial condition.

Actions of and disputes with our joint venture partners could have a material adverse effect on the business and results of operations of our joint ventures and, in turn, our business and consolidated results of operations.
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 have a material adverse effect on the business and results of operations of our joint ventures and, in turn, our business and consolidated results of operations.

Our ability to operate and our growth potential could be materially and adversely affected if we cannot attract, employ, and retain technical personnel at a competitive cost.
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 attract, employ, and retain technical personnel with the ability to design, utilize, and enhance these services and products. 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 any growth potential could be impaired.

The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business.
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.


14



Item 1(b). Unresolved Staff Comments.

None.

Item 2. Properties.

We own or lease numerous properties in domestic and foreign locations. Our principal properties include manufacturing facilities, research and development laboratories, technology centers and corporate offices. We also have numerous small facilities that include sales, project, and support offices and bulk storage facilities throughout the world. All of our owned properties are unencumbered.

The following locations represent our major facilities by segment:
    
Completion and Production:
Arbroath, United Kingdom; Johor Bahru, Malaysia; and Lafayette, Louisiana
Drilling and Evaluation:
Alvarado, Texas; Nisku, Canada; and The Woodlands, Texas
Shared/corporate facilities:
Carrollton, Texas; Denver, Colorado; Dhahran, Saudi Arabia; Dubai, United Arab Emirates (corporate executive offices); Duncan, Oklahoma; Houston, Texas (corporate executive offices); Kuala Lumpur, Malaysia; London, England; Moscow, Russia; Panama City, Panama; Pune, India; Rio de Janeiro, Brazil; Singapore; and Stavanger, Norway

We believe all properties that we currently occupy are suitable for their intended use.

Item 3. Legal Proceedings.
Information related to Item 3. Legal Proceedings is included in Note 9 to the consolidated financial statements.

Item 4. Mine Safety Disclosures.
Our barite and bentonite mining operations, in support of our fluid services business, are subject to regulation by the federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this annual report.

15



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 our common stock and quarterly dividend payments is included under the caption “Quarterly Data and Market Price Information” on page 74 of this annual report. Quarterly cash dividends on our common stock, which were paid in March, June, September and December of each year, were $0.18 per share for all four quarters of 2015 and 2016. The declaration and payment of future dividends will be at the discretion of the Board of Directors and will depend on, among other things, future earnings, general financial condition and liquidity, success in business activities, capital requirements and general business conditions. Subject to Board of Directors approval, our intention is to continue paying dividends at our current rate during 2017.

The following graph and table compare total shareholder return on our common stock for the five-year period ended December 31, 2016, with the Philadelphia Oil Service Index (OSX) and the Standard & Poor’s 500 ® Index over the same period. This comparison assumes the investment of $100 on December 31, 2011 and the reinvestment of all dividends. The shareholder return set forth is not necessarily indicative of future performance.


hal_1231201xchart-55032.jpg
 
December 31
 
2011
2012
2013
2014
2015
2016
Halliburton
$
100.00

$
101.67

$
150.46

$
117.96

$
103.96

$
167.97

Philadelphia Oil Service Index (OSX)
100.00

92.26

121.15

95.32

71.30

83.08

Standard & Poor’s 500 ® Index
100.00

118.45

156.82

178.28

180.75

202.37



16



At January 31, 2017, we had 12,992 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.

The following table is a summary of repurchases of our common stock during the three-month period ended December 31, 2016.
Period
Total Number
of Shares Purchased (a)
Average
Price Paid per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans or Programs (b)
Maximum
Number (or
Approximate
Dollar Value) of
Shares that may yet
be Purchased Under the Program (b)
October 1 - 31
21,639
$46.45
$5,700,004,373
November 1 - 30
38,246
$47.36
$5,700,004,373
December 1 - 31
239,807
$54.00
$5,700,004,373
Total
299,692
$52.60
 
(a)
All of the 299,692 shares purchased during the three-month period ended December 31, 2016 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 stock.
(b)
Our Board of Directors has authorized a plan to repurchase our common stock from time to time. During the fourth quarter of 2016, we did not repurchase shares of our common stock pursuant to that plan. We have authorization remaining to repurchase up to a total of approximately $5.7 billion of our common stock.

Item 6. Selected Financial Data.
Information related to selected financial data is included on page 73 of this annual report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Information related to Management’s Discussion and Analysis of Financial Condition and Results of Operations is included on pages 19 through 38 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 – Financial Instrument Market Risk” on page 37 of this annual report and Note 14 to the consolidated financial statements on page 66 of this annual report.


17



Item 8. Financial Statements and Supplementary Data.
 
Page No.
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Selected Financial Data (Unaudited)
Quarterly Data and Market Price Information (Unaudited)

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, 2016 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, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

See page 39 for Management’s Report on Internal Control Over Financial Reporting and page 41 for Report of Independent Registered Public Accounting Firm on its assessment of our internal control over financial reporting.

Item 9(b). Other Information.
None.


18



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

EXECUTIVE OVERVIEW

Termination of Baker Hughes acquisition
In November 2014, we entered into a merger agreement with Baker Hughes to acquire all outstanding shares of Baker Hughes in a stock and cash transaction. On April 30, 2016, primarily because of the challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics, we and Baker Hughes mutually terminated our merger agreement. As a result, we paid Baker Hughes a termination fee of $3.5 billion and recognized the tax-deductible expense during 2016. In addition, we mandatorily redeemed $2.5 billion of senior notes during 2016. See Note 2 to the consolidated financial statements for further information.

Financial results
The past several years have continued to be extremely challenging for us, as the impact of reduced commodity prices created widespread pricing pressure and activity reductions on a global basis. 2016 represented the sharpest and deepest industry decline in history. More specifically, the North America market continued to face activity and pricing challenges, with the average United States rig count for the year ended December 31, 2016 having declined nearly 75% from the peak in November 2014. As a result, we recognized significant operating losses in the region during 2016. However, crude prices and the North American rig count have increased significantly since the low points in February 2016 and May 2016, respectively, signaling that we may have hit the bottom of the industry downturn and can begin to look ahead for a market recovery. In the fourth quarter of 2016, the average United States rig count increased 23% compared to the third quarter, and we returned to operating profitability in North America in the fourth quarter after recording operating losses in the first three quarters of the year.

We generated $15.9 billion of revenue during 2016, a 33% decline from the $23.6 billion of revenue generated in 2015. Additionally, we recognized $6.8 billion of operating losses in 2016 compared to $165 million of operating losses in 2015. Our results reflected the negative impact of global activity and pricing reductions, combined with $3.4 billion and $2.2 billion of impairments and other charges recorded in 2016 and 2015, respectively. Additionally, operating results were negatively impacted by Baker Hughes related costs, which were $4.1 billion during 2016 and included a $3.5 billion merger termination fee along with charges resulting from our reversal of assets held for sale accounting, compared to $308 million of Baker Hughes related costs during 2015.

Our operating results towards the latter part of 2016 began to benefit from the impact of the structural global cost savings initiatives we initiated in 2015. We successfully completed our structural cost savings goal of stripping out approximately $1 billion of annualized costs from our business through consolidations of facilities, asset write-offs and headcount reductions. We reduced our global workforce in an effort to address deteriorating market conditions and better align our workforce with anticipated activity levels in the near-term. Personnel expense is one of the largest cost categories for us, and therefore, we implemented cost containment measures as they related to employees and their work locations by reducing our global headcount by approximately 14,000 in 2016 and by approximately 40% since the beginning of 2015.

Business outlook
While 2015 and 2016 were challenging as we navigated through this historic industry downturn, we believe our 2016 results reflect successful execution in a difficult environment and position us for the challenges and opportunities ahead. With improvements in commodity prices and the North America rig count from first half 2016 lows, there are signs of optimism in the industry for a market recovery, which we believe we are well positioned to benefit from given our delivery platform and cost containment strategies.

In North America, low commodity prices and rig counts during 2016 resulted in substantial pricing pressure across all of our product service lines. Our customers remain focused on cost and producing more barrels of oil equivalent. We are continuing to collaborate and engineer solutions to maximize asset value for our customers and will continue to take advantage of the recent rig count growth by focusing on increasing equipment utilization, managing costs and expanding our surface efficiency model. Additionally, we gained significant North America market share through the downturn by demonstrating to our customers the benefits of our efficiency and technology, coming out of the downturn with our highest North America market share in history. We have been utilizing this increased market share to drive margin improvement. The historically high level of market share we built in the downturn gives us the ability to focus our work with the most efficient customers and, as such, we continued to execute our strategy of high grading the profitability of our portfolio with customers that value our

19



services. While our market share has been improving, pricing challenges continue as the industry recovers and equipment availability tightens. We will continue to maintain our focus on execution and service quality.

While the North America market appears to have begun to recover, the international downswing continues to persist. The international markets have been more resilient than North America through most of the downturn, particularly in the Eastern Hemisphere, but pricing and activity levels remain under pressure as the industry nears what we believe is the bottom of the international cycle. Low commodity prices have stressed customer budgets and have impacted economics across deepwater and mature field markets, which led to decreased activity and pricing throughout 2016, leading to revenue declines and stressed margins in all three of our international regions. These headwinds still persist, and we do not expect to see an inflection of revenue and margin improvements in the international markets until the latter part of 2017. In the meantime, our international customers remain focused on cash flow, and traditional contracting cycles will likely hinder any substantial rebound coming off the bottom of the cycle. We expect to see a bottoming of the Eastern Hemisphere rig count in the first half of 2017, driven by both cyclical and traditional seasonal impacts, and therefore we expect revenue and margins to continue to be under pressure during 2017 until the market stabilizes. In Latin America, rig activity remains low across the region, while Venezuela continues to experience significant political and economic turmoil. However, we are committed to the Latin America region and believe that oil and gas is a critical element to the region’s broader economic recovery. We continue to work with our global customers during this downturn to improve project economics through technology and improved operating efficiency.

We maintained capital discipline during 2016 and adjusted to market conditions, reducing our capital expenditures to $798 million during the year, representing a 63% reduction over 2015. We plan to increase capital spending to approximately $1.0 billion in 2017, which includes reactivating some of our cold stacked pressure pumping equipment and continuing to convert our hydraulic fracturing fleet to Q10 pumps to support our surface efficiency strategy.

As a result of the actions we have taken over the past few years, we believe we are well positioned for the impending market recovery and will scale up our delivery platform by addressing our product service lines one step at a time through a combination of organic growth, investment and selective acquisitions. We plan to continue executing the following strategies in 2017:
- directing capital and resources into strategic growth markets, primarily unconventional plays and mature fields;
-
leveraging our broad technology offerings to provide value to our customers and enabling them to more efficiently drill and complete their wells;
-
exploring additional opportunities for acquisitions that will enhance or augment our current portfolio of services and products, including those with unique technologies or distribution networks in areas where we do not already have significant operations;
-
investing in technology that will help our customers reduce reservoir uncertainty and increase operational efficiency;
-
improving working capital and managing our balance sheet to maximize our financial flexibility;
-
continuing to seek ways to be one of the most cost efficient service providers in the industry by maintaining capital discipline and leveraging our scale and breadth of operations; and
- collaborating and engineering solutions to maximize asset value for our customers.

Our operating performance and business outlook are described in more detail in “Business Environment and Results of Operations.”

Financial markets, liquidity and capital resources
During 2016, in conjunction with the termination of the Baker Hughes transaction, we paid a $3.5 billion termination fee and mandatorily redeemed $2.5 billion of debt. We also paid off an additional $600 million of senior notes that matured during 2016, closing out the year at $4.0 billion of cash and cash equivalents. This represents a $6.1 billion reduction in our cash position since December 31, 2015. However, we focused on cash flows and generated almost $1 billion of cash during the second half of 2016. This was driven by improved working capital metrics, including a significant reduction of days sales outstanding, disciplined capital spending and tax refunds collected from our carry back of net operating losses we recognized in previous periods.

We believe we have invested our cash balances conservatively and secured sufficient financing to help mitigate any near-term negative impact on our operations from adverse market conditions. We will continue to execute capital discipline over the next year during this challenged market environment. Given the size of our cash position and the potential impact of U.S. tax reform, we are actively evaluating our options and opportunities around uses of cash, which could include paying off debt, funding acquisitions and organic growth projects or shareholder return opportunities. We also have $3.0 billion available under our revolving credit facility which, with our cash balance, we believe provides us with sufficient liquidity to address the challenges and opportunities of the current market. If determined appropriate, we may seek to raise additional capital in the

20



future through sales of equity or additional indebtedness. For additional information on market conditions, see “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”

21



LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2016, we had $4.0 billion of cash and equivalents, compared to $10.1 billion at December 31, 2015. Additionally, we held $92 million of investments in fixed income securities at December 31, 2016, compared to $96 million at December 31, 2015. These securities are reflected in "Other current assets" and "Other assets" in our consolidated balance sheets. Approximately $1.8 billion of our total cash position as of December 31, 2016 was held by our foreign subsidiaries, a substantial portion of which is available to be repatriated into the United States to fund our U.S. operations or for general corporate purposes, with a portion subject to certain country-specific restrictions. See Note 10 for further discussion on U.S. federal income taxes we recorded during 2016 relating to cumulative undistributed foreign earnings.

Significant sources and uses of cash in 2016
Sources of cash:
- We improved working capital (receivables, inventories and accounts payable) by a net $1.2 billion during the year, driven by efficient working capital management during the year.
- We received a series of United States tax refunds aggregating $513 million during the second half of 2016, primarily related to the carryback of our net operating losses recognized in 2015. This was partially offset by tax payments for normal business operations in various foreign jurisdictions.
Uses of cash:
- Cash flows from operating activities were a negative $1.7 billion in 2016, driven primarily by the $3.5 billion termination fee paid to Baker Hughes during the second quarter.
- Capital expenditures were $798 million in 2016. The capital expenditures in 2016 were predominantly made in our Production Enhancement, Sperry Drilling, Production Solutions, Cementing and Baroid product service lines.
- We mandatorily redeemed $2.5 billion of senior notes in the second quarter and repaid $600 million of senior notes that matured during the third quarter.
- We paid $620 million of dividends to our shareholders in 2016.

Future sources and uses of cash
We manufacture most of our own equipment, which allows us flexibility to increase or decrease our capital expenditures based on market conditions. Capital spending for 2017 is currently expected to be approximately $1.0 billion, an increase of over 20% from 2016. The capital expenditures plan for 2017 is primarily directed towards our Production Enhancement, Sperry Drilling, Production Solutions, Wireline and Perforating and Baroid Drilling product service lines. This includes reactivating some of our cold stacked pressure pumping equipment and continuing to convert our hydraulic fracturing fleet to Q10 pumps to support our surface efficiency strategy.

Currently, our quarterly dividend rate is $0.18 per share, or approximately $156 million per quarter. Subject to Board of Directors approval, our intention is to continue paying dividends at our current rate during 2017. Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately $5.7 billion remains authorized for repurchases as of December 31, 2016, and may be used for open market and other share purchases. There were no repurchases made under the program during the year ended December 31, 2016.

We expect to receive a United States tax refund in the amount of approximately $475 million during the second half of 2017, primarily related to the carryback of our net operating losses recognized in 2016. Additionally, we had $427 million of gross unrecognized tax benefits at December 31, 2016, of which we estimate $257 million may require a cash payment by us. We estimate that $253 million of the cash payment will not be settled within the next 12 months. We are not able to reasonably estimate in which future periods this amount will ultimately be settled and paid.

During 2014, we reached an agreement, subject to court approval, to settle a substantial portion of the plaintiffs' claims asserted against us relating to the Macondo well incident. During 2016, we made a $33 million payment in accordance with our MDL Settlement. Our total Macondo-related loss contingency liability as of December 31, 2016 was $413 million, of which $369 million is expected to be paid in the first quarter of 2017. In December 2016, we reached an agreement in principle to settle a class action lawsuit and incurred a charge of $54 million. We expect to make the related payment in 2017 when the settlement is finalized and approved by the court. See Note 9 to the consolidated financial statements for further information.

Given the size of our cash position and the potential impact of U.S. tax reform, we are actively evaluating our options and opportunities around uses of cash, which could include paying off debt, funding acquisitions and organic growth projects or shareholder return opportunities.

22




Contractual obligations
The following table summarizes our significant contractual obligations and other long-term liabilities as of December 31, 2016:
 
Payments Due
 
 
Millions of dollars
2017
2018
2019
2020
2021
Thereafter
Total
Long-term debt (a)
$
163

$
841

$
1,028

$
24

$
702

$
9,729

$
12,487

Interest on debt (b)
611

609

584

526

516

8,856

11,702

Operating leases
164

135

100

68

52

185

704

Purchase obligations (c)
468

54

34

26

18

39

639

Other long-term liabilities (d)
31






31

Total
$
1,437

$
1,639

$
1,746

$
644

$
1,288

$
18,809

$
25,563

(a)
Represents principal amounts of long-term debt, including capital lease obligations and current maturities of debt, which excludes any unamortized debt issuance costs and discounts. See Note 8 to the consolidated financial statements.
(b)
Interest on debt includes 80 years of interest on $300 million of debentures at 7.6% interest that become due in 2096.
(c)
Amount in 2017 primarily represents certain purchase orders for goods and services utilized in the ordinary course of our business.
(d)
Includes pension funding obligations. Amounts for pension funding obligations, which include international plans and are based on assumptions that are subject to change, are only included for 2017 as we are currently not able to reasonably estimate our contributions for years after 2017.

Other factors affecting liquidity
Financial position in current market. As of December 31, 2016, we had $4.0 billion of cash and equivalents, $92 million in fixed income investments and a total of $3.0 billion of available committed bank credit under our revolving credit facility. Furthermore, we have no financial covenants or material adverse change provisions in our bank agreements, and our debt maturities extend over a long period of time. We currently believe that cash on hand, cash flows generated from operations and our available credit facility will provide sufficient liquidity to manage our global cash needs in 2017, including capital expenditures, working capital investments, dividends, if any, and contingent liabilities.

Guarantee agreements. In the normal course of business, we have agreements with financial institutions under which approximately $2.0 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of December 31, 2016. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.

Credit ratings. During 2016, in conjunction with the termination of our merger agreement with Baker Hughes and as a result of general market conditions, Standard & Poor’s changed our credit ratings for our long-term debt from A to BBB+ and changed our credit ratings on our short-term debt from A-1 to A-2, with all of our ratings on stable outlook. Moody's Investors Service changed our credit ratings for our long-term debt from A2 to Baa1 and changed our credit ratings on our short-term debt from P-1 to P-2, with all of our ratings on negative outlook.

Customer receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets as well as unsettled political conditions. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. See “Business Environment and Results of Operations – International operations – Venezuela” for further discussion related to receivables from our primary customer in Venezuela.



23



BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in approximately 70 countries throughout the world to provide a comprehensive range of services and products to the upstream oil and natural gas industry. A significant amount of our consolidated revenue is derived from the sale of services and products to major, national and independent oil and natural gas companies worldwide. The industry we serve is highly competitive with many substantial competitors in each segment of our business. In 2016, 2015 and 2014, based on the location of services provided and products sold, 41%, 44% and 51%, respectively, 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, sanctions, expropriation or other governmental actions, inflation, changes in foreign currency exchange rates, foreign currency exchange restrictions and highly inflationary currencies, as well as other geopolitical factors. We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country, other than the United States, would be materially adverse to our consolidated results of operations.

Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption.

Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. Due to improved drilling and completion efficiencies as more of our customers move to multi-well pad drilling, our financial performance in North America is impacted by well count in the North America market. Additionally, our financial performance is significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the following tables.

The following table shows the average oil and natural gas prices for West Texas Intermediate (WTI), United Kingdom Brent crude oil and Henry Hub natural gas:
 
2016
2015
2014
Oil price - WTI (1)
$
43.14

$
48.69

$
93.37

Oil price - Brent (1)
43.55

52.36

99.04

Natural gas price - Henry Hub (2)
2.52

2.63

4.39

 
 
 
 
(1) Oil price measured in dollars per barrel
(2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu



24



The historical average rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows:
Land vs. Offshore
2016
2015
2014
United States:
 
 
 
Land
486

943

1,804

Offshore (incl. Gulf of Mexico)
23

35

57

Total
509

978

1,861

Canada:
 

 

 

Land
128

189

378

Offshore
2

2

2

Total
130

191

380

International (excluding Canada):
 
 
 
Land
734

884

1,011

Offshore
221

283

326

Total
955

1,167

1,337

Worldwide total
1,594

2,336

3,578

Land total
1,348

2,016

3,193

Offshore total
246

320

385

 
 
 
 
Oil vs. Natural Gas
2016
2015
2014
United States (incl. Gulf of Mexico):
 
 
 
Oil
409

751

1,528

Natural gas
100

227

333

Total
509

978

1,861

Canada:
 
 
 
Oil
63

84

218

Natural gas
67

107

162

Total
130

191

380

International (excluding Canada):
 
 
 
Oil
726

916

1,070

Natural gas
229

251

267

Total
955

1,167

1,337

Worldwide total
1,594

2,336

3,578

Oil total
1,198

1,751

2,816

Natural gas total
396

585

762


Drilling Type
2016
2015
2014
United States (incl. Gulf of Mexico):
 
 
 
Horizontal
400
744
1,274
Vertical
60
139
376
Directional
49
95
211
Total
509
978
1,861

Crude oil prices have been extremely volatile during the past few years. WTI oil spot prices declined significantly towards the second half of 2014 with a peak price of $108 per barrel in June 2014, and continued to decline throughout 2015, ranging from a high of $61 per barrel to a low of $35 per barrel. WTI oil spot prices declined further into February 2016 to a low of $26 per barrel, a level which had not been experienced since 2003. Brent crude oil spot prices declined from a high of $115 per barrel in June 2014, and continued to decline throughout 2015, ranging from a high of $66 per barrel to a low of $35 per barrel, and declined further to $26 per barrel in January 2016. Commodity prices have increased from the low point experienced in early 2016 to highs of $54 per barrel in December 2016 for WTI and $55 per barrel in December 2016 for Brent.

25



While prices continue to fluctuate, we believe this price improvement signals the turning point in the North American market and believe that the international market should begin to improve in the latter half of 2017.

WTI and Brent crude oil spot prices had a monthly average in December 2016 of $52 per barrel and $53 per barrel, respectively. The market reactions to the OPEC plan to cut production by 1.2 million barrels per day beginning in January 2017, as well as growing domestic and global consumption, have contributed to rising oil prices. However, prices are expected to remain relatively unchanged for the beginning of 2017 as significant economic and geopolitical events are expected to affect market participants' expectations and demand growth and as global oil inventory builds at a slower rate. Crude oil production in the United States is projected to average 9.0 million barrels per day in 2017, largely due to increases in offshore Gulf of Mexico production and rising tight oil production.

In the United States Energy Information Administration (EIA) January 2017 "Short Term Energy Outlook," the EIA projects that Brent prices will average $53 per barrel in 2017, while WTI prices will average about $1 less per barrel. The EIA also notes that price projections are highly uncertain due to the current values of futures and options contracts. The International Energy Agency's (IEA) January 2017 "Oil Market Report" forecasts the 2017 global demand to average approximately 97.8 million barrels per day, which is up 1% from 2016, driven by an increase in the Asia Pacific region, while all other regions remain approximately the same.

The average full year 2016 Henry Hub natural gas price in the United States decreased approximately 4% from 2015. However, the Henry Hub natural gas spot price averaged $3.59 per MMBtu in December 2016, an increase of $0.60 per MMBtu, or 20%, from September 2016. Production decline, increased demand for natural gas to fuel electricity generation and inventories falling below the five-year average contributed to the highest natural gas prices since December 2014. The EIA January 2017 “Short Term Energy Outlook” projects Henry Hub natural gas prices to average $3.55 per MMBtu in 2017. The EIA also expects natural gas consumption to increase in 2017, primarily because of higher residential and commercial consumption based on a forecast of colder winter temperatures and, to a lesser extent, due to new fertilizer and chemical projects in the industrial sector.

North America operations
The average North America oil-directed rig count declined 363 rigs, or 43%, for the full year 2016 as compared to 2015, while the average North America natural gas-directed rig count decreased 167 rigs, or 50%, during the same period. In the United States land market during 2016, there was a decline of 48% in the average rig count compared to 2015.

The United States average rig count for December 2016 reflected a drop of 67% since its peak in November 2014. Price erosion for our services continued during the majority of 2016. However, the rig count has begun to show improvement with a 23% increase in the average fourth quarter United States rig count when compared to the third quarter, and is expected to continue improving in the first half of 2017. As a result of the recent uptick in activity and the structural changes to our delivery platform we made during this down cycle, we returned to operating profitability in North America in the fourth quarter of 2016 after recording operating losses in the first three quarters of the year. We anticipate our North America revenue for the first quarter of 2017 will perform in-line with changes in the rig count. In the long run, we believe the continuing shifts to unconventional oil and liquids-rich basins in the United States land market will continue to drive increased service intensity and will create higher demand in fluid chemistry and other technologies required for these complex reservoirs, which will have positive implications for our operations as the energy market recovers.

In the Gulf of Mexico, the average offshore rig count for 2016 was down 34% compared to 2015. Low commodity prices have stressed budgets and have impacted economics across the deepwater market, which has led to decreased activity and pricing throughout 2016. These headwinds still persist today. We believe there will continue to be challenges in 2017 on deepwater project economics. Additionally, activity in the Gulf of Mexico is dependent on, among the factors described above, governmental approvals for permits, our customers' actions, and the entry and exit of deepwater rigs in the market.

International operations
The average international rig count for 2016 decreased by 18% compared to 2015, as the international markets remain stressed as they near the bottom of the cycle. Depressed crude oil prices have caused many of our customers to reduce their budgets and defer several new projects; however, we have continued to work with our customers to improve project economics through technology and improved operating efficiency. In Latin America, the rig count hit a 15-year low across the region during 2016, and Venezuela continues to experience significant political and economic turmoil. While our fourth quarter results in the region were solid, headwinds persist in the larger Latin American markets and until these are alleviated, we do not believe we will see improvement. However, we are committed to the region and believe that oil and gas is a critical element to the region’s broader economic recovery. For our Eastern Hemisphere business, we expect to see an inflection in the rig count in

26



the latter half of 2017, supported by strengthening activity in the land-based mature field markets but decreased activity in the deepwater markets.

Venezuela. In February 2015, the Venezuelan government created a three-tier foreign exchange rate system, which included the National Center of Foreign Commerce official rate of 6.3 Bolívares per United States dollar, the SICAD and the SIMADI. During the first quarter of 2015, we began utilizing the SIMADI floating rate mechanism to remeasure our net monetary assets denominated in Bolívares, with an initial market rate of 192 Bolívares per United States dollar, resulting in a foreign currency loss of $199 million recorded during the first quarter of 2015.

In February 2016, the Venezuelan government revised the three-tier exchange rate system to a new dual-rate system designed to streamline access to dollars for production and essential imports as well as to combat inflation. The dual-rate exchange mechanisms are as follows: (i) the DIPRO, which replaced and devalued the official rate from 6.3 to 10.0 Bolívares per United States dollar, and represents a protected rate made available for vital imports such as food, medicine and raw materials for production; and (ii) the DICOM, which replaces the SIMADI and which is intended to be a free floating system that will fluctuate according to market supply and demand. The DICOM had a market rate of 674 Bolívares per United States dollar at December 31, 2016. We are utilizing the DICOM to remeasure our net monetary assets denominated in Bolívares, and the revised system and continued devaluation did not materially affect our financial statements for the year ended December 31, 2016.

As of December 31, 2016, our total net investment in Venezuela was approximately $820 million, with only $1 million of net monetary liabilities denominated in Bolívares, and we had an additional $38 million of surety bond guarantees outstanding relating to our Venezuelan operations.

We have continued to experience delays in collecting payments on our receivables from our primary customer in Venezuela. These receivables are not disputed, and we have not historically had material write-offs relating to this customer. Additionally, we routinely monitor the financial stability of our customers. During the second quarter of 2016, we executed a financing agreement with our primary customer in Venezuela in an effort to actively manage these customer receivables, resulting in an exchange of $200 million of outstanding trade receivables for an interest-bearing promissory note. We recorded the note at its fair market value at the date of exchange, which resulted in a $148 million pre-tax loss on exchange in the second quarter. This instrument provides a more defined schedule around the timing of payments, while we generate a return awaiting payment. We are using an effective interest method to accrete the carrying amount to its par value as it matures. We received interest payments on this promissory note during the third and fourth quarters, and the carrying amount of the note was $70 million as of December 31, 2016. In the fourth quarter of 2016, we agreed to exchange this promissory note for a new note with the same maturity and coupon, but which is expected to be tradeable in a more liquid market. We intend to hold the new note to maturity. 

Our total outstanding net trade receivables in Venezuela were $610 million as of December 31, 2016, excluding the $200 million promissory note receivable discussed above, compared to $704 million as of December 31, 2015, which represents 15% and 14% of total company trade receivables at the respective balance sheet dates. The majority of our Venezuela receivables are United States dollar-denominated receivables. Of the $610 million receivables in Venezuela as of December 31, 2016, $409 million has been classified as long-term and included within “Other assets” on our consolidated balance sheets. As a result of current conditions in Venezuela and the continued delays in collecting payments on our receivables in the country, we began curtailing activity in Venezuela during the first quarter of 2016.

For additional information, see Part I, Item 1(a), “Risk Factors.”


27



RESULTS OF OPERATIONS IN 2016 COMPARED TO 2015

REVENUE:
 
 
Favorable
Percentage
Millions of dollars
2016
2015
(Unfavorable)
Change
Completion and Production
$
8,882

$
13,682

$
(4,800
)
(35
)%
Drilling and Evaluation
7,005

9,951

(2,946
)
(30
)
Total revenue
$
15,887

$
23,633

$
(7,746
)
(33
)%

 
 
 
 
By geographic region:
 
 
 
 
North America
$
6,770

$
10,856

$
(4,086
)
(38
)%
Latin America
1,860

3,149

(1,289
)
(41
)
Europe/Africa/CIS
2,993

4,175

(1,182
)
(28
)
Middle East/Asia
4,264

5,453

(1,189
)
(22
)
Total
$
15,887

$
23,633

$
(7,746
)
(33
)%

OPERATING INCOME:
 
 
Favorable
Percentage
Millions of dollars
2016
2015
(Unfavorable)
Change
Completion and Production
$
107

$
1,069

$
(962
)
(90
)%
Drilling and Evaluation
794

1,519

(725
)
(48
)
Total
901

2,588

(1,687
)
(65
)
Corporate and other
(4,322
)
(576
)
(3,746
)
650

Impairments and other charges
(3,357
)
(2,177
)
(1,180
)
54

Total operating loss
$
(6,778
)
$
(165
)
$
(6,613
)
4,008
 %

 
 
 
 
By geographic region:
 
 
 
 
North America
$
(201
)
$
458

$
(659
)
(144
)%
Latin America
111

440

(329
)
(75
)
Europe/Africa/CIS
269

523

(254
)
(49
)
Middle East/Asia
722

1,167

(445
)
(38
)
Total
$
901

$
2,588

$
(1,687
)
(65
)%

Consolidated revenue in 2016 decreased 33% compared to 2015, associated with widespread pricing pressure and activity reductions on a global basis, primarily attributable to stimulation activity, well completion services and pricing declines in North America. Revenue outside of North America was 57% of consolidated revenue in 2016 and 54% of consolidated revenue in 2015.

We reported a consolidated operating loss of $6.8 billion in 2016, as compared to an operating loss of $165 million in 2015. Operating results were negatively impacted by $3.4 billion and $2.2 billion of impairments and other charges recorded during 2016 and 2015, respectively. Additionally, we incurred $4.1 billion of Baker Hughes related costs during 2016, primarily due to the $3.5 billion termination fee and $464 million of charges resulting from our reversal of assets held for sale accounting, compared to $308 million of Baker Hughes related costs during 2015. Also impacting consolidated operating results was a significant decline in stimulation activity and pricing declines in North America and reduced well completion services across all regions as a result of the global downturn in the energy market. See Note 2 to the consolidated financial statements for further discussion of the Baker Hughes transaction and financial statement impact of terminating our merger agreement and Note 3 to the consolidated financial statements for further information about impairments and other charges.


28



OPERATING SEGMENTS

Completion and Production
Completion and Production (C&P) revenue was $8.9 billion in 2016, a decrease of $4.8 billion, or 35%, compared to 2015, due to a decline in activity and pricing in the majority of our product services lines, particularly North America pressure pumping services which drove the majority of the C&P revenue decline. International revenue declined as a result of reductions in well completion services and stimulation activity in all regions.

C&P operating income was $107 million in 2016, compared to $1.1 billion of operating income in 2015, with decreased profitability across all regions as a result of global activity and pricing reductions, primarily in North America stimulation activity and completion of well services across all regions.

Drilling and Evaluation
Drilling and Evaluation (D&E) revenue was $7.0 billion in 2016, a decrease of $2.9 billion, or 30%, from 2015. Reductions were seen across all product service lines due to the low rig count, lower pricing and customer budget constraints worldwide.

D&E operating income was $794 million in 2016, a decrease of $725 million, or 48%, compared to 2015, driven by a decline in activity and pricing across all regions, particularly drilling and logging activity in Middle East/Asia region and reduced fluid services in Latin America.

GEOGRAPHIC REGIONS

North America
North America revenue was $6.8 billion in 2016, a 38% decline compared to 2015, relative to a 45% decline in average North America rig count. We had an operating loss of $201 million in 2016, compared to $458 million of operating income in 2015. These declines were driven by reduced activity and pricing pressure throughout the United States land market, specifically relating to stimulation and drilling activity.

Latin America
Latin America revenue was $1.9 billion in 2016, a 41% reduction compared to 2015, with operating income of $111 million in 2016, a 75% decline from 2015. These reductions were primarily related to our decision to curtail activity in Venezuela and currency weakness in the country, reduced activity across all product service lines in Mexico and lower drilling activity in Brazil and Colombia.

Europe/Africa/CIS
Europe/Africa/CIS revenue was $3.0 billion in 2016, a decline of 28% compared to 2015, with operating income of $269 million in 2016, a 49% decrease compared to 2015. These decreases were driven by a reduction of activity in the North Sea, Angola, Nigeria and Congo, along with lower drilling activity, completion tools sales and pressure pumping services throughout the region.

Middle East/Asia
Middle East/Asia revenue was $4.3 billion in 2016, a reduction of 22% compared 2015, with operating income of $722 million in 2016, a 38% decrease from 2015. This was the result of pricing concessions across the region, along with reduced activity for pressure pumping services in the Middle East, Indonesia and Australia, and a decline in drilling and logging activity in Indonesia, Malaysia and the Middle East.


OTHER OPERATING ITEMS

Corporate and other expenses were $4.3 billion in 2016, as compared to $576 million in 2015, primarily driven by Baker Hughes related costs. During 2016, we incurred a $3.5 billion termination fee and $464 million of charges resulting from our reversal of assets held for sale accounting, as compared to $308 million of Baker Hughes related costs during 2015. See Note 2 to the consolidated financial statements for further discussion of the Baker Hughes transaction and the financial statement impact of terminating our merger agreement.


29



Impairments and other charges. Primarily as a result of the downturn in the energy market and its corresponding impact on the company’s business outlook, we recorded a total of approximately $3.4 billion in company-wide charges during 2016, which consisted of fixed asset impairments and write-offs, inventory write-downs, impairments of intangible assets, severance costs, country and facility closures, a loss on exchange for a promissory note from our primary customer in Venezuela and other charges. This compares to $2.2 billion of impairments and other charges recorded in 2015 which consisted of fixed asset impairments and write-offs, inventory write-downs, impairments of intangible assets, severance costs, country and facility closures and other charges. See Note 3 to the consolidated financial statements for further information.

NONOPERATING ITEMS

Interest expense, net increased $192 million in 2016, as compared to 2015. This was primarily due to additional interest resulting from the $7.5 billion of senior notes issued in November 2015, coupled with $41 million of redemption fees and associated costs, which were recorded through interest expense, related to the $2.5 billion of senior notes mandatorily redeemed during the second quarter of 2016. Additionally, we recognized $25 million of interest income in 2016 related to interest receipts and accretion on the promissory note from our primary customer in Venezuela, as we continue to accrete the carrying amount of the promissory note to its par value as it matures. See Note 14 to the consolidated financial statements for further information on our promissory note in Venezuela.

Other, net was a $208 million loss in 2016, as compared to a $324 million loss in 2015, driven by foreign currency exchange losses in various countries primarily due to the strengthening U.S. dollar. These losses included a $53 million loss in 2016 for the devaluation of the Egyptian pound and a $199 million loss in 2015 as a result of utilizing the new currency exchange mechanism in Venezuela. Also impacting both periods were foreign currency exchange losses in Brazil and Argentina. See "Business Environment and Results of Operations" for further information regarding Venezuela.

Effective tax rate. During 2016, we recorded a total income tax benefit of $1.9 billion on pre-tax losses of $7.6 billion, resulting in an effective tax rate of 24.4%. During 2015, we recorded a total income tax benefit $274 million on pre-tax losses of $936 million, resulting in an effective tax rate of 29.3%. See Note 10 to the consolidated financial statements for significant drivers of these effective tax rates.



30



RESULTS OF OPERATIONS IN 2015 COMPARED TO 2014

REVENUE:
 
 
Favorable
Percentage
Millions of dollars
2015
2014
(Unfavorable)
Change
Completion and Production
$
13,682

$
20,253

$
(6,571
)
(32
)%
Drilling and Evaluation
9,951

12,617

(2,666
)
(21
)
Total revenue
$
23,633

$
32,870

$
(9,237
)
(28
)%

 
 
 
 
By geographic region:
 
 
 
 
North America
$
10,856

$
17,698

$
(6,842
)
(39
)%
Latin America
3,149

3,875

(726
)
(19
)
Europe/Africa/CIS
4,175

5,490

(1,315
)
(24
)
Middle East/Asia
5,453

5,807

(354
)
(6
)
Total
$
23,633

$
32,870

$
(9,237
)
(28
)%

OPERATING INCOME:
 
 
Favorable
Percentage
Millions of dollars
2015
2014
(Unfavorable)
Change
Completion and Production
$
1,069

$
3,670

$
(2,601
)
(71
)%
Drilling and Evaluation
1,519

1,740

(221
)
(13
)
Total
2,588

5,410

(2,822
)
(52
)
Corporate and other
(576
)
(184
)
(392
)
213

Impairments and other charges
(2,177
)
(129
)
(2,048
)
1,588

Total operating income (loss)
$
(165
)
$
5,097

$
(5,262
)
(103
)%

 
 
 
 
By geographic region:
 
 
 
 
North America
$
458

$
3,216

$
(2,758
)
(86
)%
Latin America
440

431

9

2

Europe/Africa/CIS
523

689

(166
)
(24
)
Middle East/Asia
1,167

1,074

93

9

Total
$
2,588

$
5,410

$
(2,822
)
(52
)%

Consolidated revenue in 2015 decreased 28% compared to 2014, associated with widespread pricing pressure and activity reductions on a global basis, primarily attributable to pressure pumping in North America and Europe/Africa/CIS. Revenue outside of North America was 54% of consolidated revenue in 2015 and 46% of consolidated revenue in 2014.

We reported a consolidated operating loss of $165 million in 2015, as compared to operating income of $5.1 billion in 2014. This $5.3 billion decrease was primarily driven by a significant decline in pressure pumping activity and pricing declines in North America as a result of the global downturn in the energy market. Also impacting consolidated operating income was $2.2 billion of impairments and other charges recorded in 2015 and $308 million of Baker Hughes related costs. See Note 3 to the consolidated financial statements for further information about impairments and other charges.


31



OPERATING SEGMENTS

Completion and Production
Completion and Production (C&P) revenue declined $6.6 billion in 2015, or 32%, compared to 2014, due to activity decreases across all regions, mainly North America pressure pumping services which drove the majority of the C&P revenue decline. International revenue fell as a result of reductions in well completion services and pressure pumping activity across all regions.

C&P operating income was $1.1 billion in 2015, a decrease of $2.6 billion, or 71% compared to 2014, driven predominantly by the decline in North America pressure pumping services and decreased profitability across all regions as a result of global activity and pricing reductions.

Drilling and Evaluation
Drilling and Evaluation (D&E) revenue decreased $2.7 billion in 2015, or 21%, compared to 2014, primarily due to reduced drilling and logging activity in all regions due to the low rig count, lower pricing and customer budget constraints worldwide. Revenue declines were partially offset by increased project management services throughout Middle East/Asia.

D&E operating income was $1.5 billion in 2015, a decrease of 13% compared to 2014, partly due to decreased drilling and logging activity primarily in North America, partially offset by increased project management services and fluid activity in Middle East/Asia.

GEOGRAPHIC REGIONS

North America
North America revenue was $10.9 billion in 2015, a 39% decline compared to 2014, relative to a 48% decline in average North America rig count. Operating income was $458 million in 2015, a substantial reduction from the $3.2 billion of operating income reported in 2014. These reductions were driven by a decline in activity across a majority of product service lines, predominately in the United States land market as a result of steep rig count declines, pricing concessions and reduced stimulation activity.

Latin America
Latin America revenue was $3.1 billion in 2015, a 19% reduction compared to 2014, with operating income of $440 million in 2015, a 2% increase from 2014. These results were impacted by reduced activity and pricing in Mexico, primarily associated with pressure pumping and production solution services, along with reduced offshore activity in Brazil. Operating income benefited from depreciation cessation related to assets held for sale during 2015 along with improved pipeline and fluid services in Venezuela and well completions activity in Brazil.

Europe/Africa/CIS
Europe/Africa/CIS revenue was $4.2 billion in 2015, a decline of 24% compared to 2014, with operating income of $523 million in 2015, a 24% decrease compared to 2014. These decreases were driven by reduced fluid services and currency weakness in Norway, lower pressure pumping services and currency weakness in Russia and decreased drilling and fluid activity throughout the entire region.

Middle East/Asia
Middle East/Asia revenue was $5.5 billion in 2015, a reduction of 6% compared to 2014, with operating income of $1.2 billion in 2015, a 9% increase from 2014. These results were impacted by decreased pressure pumping activity in Australia and reduced drilling activity across the region. Operating income benefited from depreciation cessation related to assets held for sale during 2015 along with increased project management and fluid services activity in the Middle East.

OTHER OPERATING ITEMS

Corporate and other expenses increased to $576 million in 2015 compared to $184 million in 2014, primarily due to $308 million of Baker Hughes related costs recorded in 2015, as compared to $17 million in 2014. Additionally, in 2014, we recorded a reduction of our Macondo-related loss contingency liability and an expected insurance recovery totaling $195 million.

Impairments and other charges. As a result of the downturn in the energy market and its corresponding impact on our business outlook, we recorded a total of approximately $2.2 billion in company-wide charges during 2015, which consisted of fixed asset impairments, inventory write-downs, impairments of intangible assets, severance costs, country and facility closures

32



and other charges. During 2014, $129 million was recorded for impairments and other charges. See Note 3 to the consolidated financial statements for further information.

NONOPERATING ITEMS

Interest expense, net increased $64 million in 2015, compared to 2014, primarily due to fees associated with the bridge facility commitment related to the Baker Hughes transaction and additional interest expense associated with the $7.5 billion of senior notes issued in November 2015. See Note 8 to the consolidated financial statements for further information.

Other, net was a $324 million loss in 2015, as compared to a $2 million loss in 2014, primarily due to a $199 million foreign exchange loss we incurred in Venezuela in the first quarter of 2015 as a result of utilizing the new currency exchange mechanism, coupled with foreign currency exchange losses in Brazil and Argentina. See Note 3 to the consolidated financial statements and "Business Environment and Results of Operations" for further information about Venezuela.

Effective tax rate. Our effective tax rate was 29.3% for 2015 and 27.1% for 2014. The effective tax rates in both periods were positively impacted by lower tax rates in certain foreign jurisdictions. The effective tax rate for 2015 was also impacted by the tax effects of the $2.2 billion of impairments and other charges, a change in mix of geographic earnings in which we experienced low levels of United States income during the year, additional valuation allowances booked on foreign deferred tax assets, a $199 million foreign currency exchange loss in Venezuela and non-deductible Baker Hughes related costs. The effective tax rate for 2014 was positively impacted by a $201 million net operating loss valuation allowance released as a result of a reorganization of our legal entity structure in Brazil. See Note 10 to the consolidated financial statements for further information regarding income taxes.


    

33



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 judgments and assessments and is fundamental to our results of operations. We identified our most critical accounting estimates to be:
-
forecasting our effective income tax rate, including our future ability to utilize foreign tax credits and the realizability of deferred tax assets, and providing for uncertain tax positions;
-
legal, environmental and investigation matters;
-
valuations of long-lived assets, including intangible assets and goodwill;
-
purchase price allocation for acquired businesses;
-
pensions;
-
allowance for bad debts; and
-
percentage-of-completion accounting for long-term, integrated project management contracts.

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.

Income tax accounting
We recognize the amount of taxes payable or refundable for the current year and use 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;
-
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.


34



We have operations in approximately 70 countries. 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 income 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 income 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 current accounting standards, which prescribe 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. The standards also provide guidance for derecognition classification, interest and penalties, accounting in interim periods, disclosure and transition.

Legal, environmental and investigation matters
As discussed in Note 9 of our consolidated financial statements, as of December 31, 2016, we have accrued an estimate of the probable and estimable costs for the resolution of some of our legal, environmental 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 accuracy of these estimates is impacted by, among other things, the complexity of the issues and 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.

Value of long-lived assets, including intangible assets and goodwill
We carry a variety of long-lived assets on our balance sheet including property, plant and equipment, goodwill and other intangibles. We conduct impairment tests on long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our earnings. We review the carrying value of these assets based upon estimated future cash flows while taking into consideration assumptions and estimates including the future use of the asset, remaining useful life of the asset and service potential of the asset. See Note 3 for further discussion on the significant impairment charges we recorded on our long-lived assets during the years ended December 31, 2016, 2015 and 2014 as a result of the downturn in the energy market.

Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We test goodwill for impairment annually, during the third quarter, or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For purposes of performing the goodwill impairment test our reporting units are the same as our reportable segments, the Completion and Production division and the Drilling and Evaluation division. See Note 1 to the consolidated financial statements for our accounting policies related to long-lived assets and intangible assets, as well as the results of our goodwill impairment assessment.

The quantitative impairment test we perform for goodwill utilizes certain assumptions, including forecasted revenue and costs assumptions. If the crude oil market remains at low levels for a sustained period of time, we could record an impairment of the carrying value of our goodwill in the future. If crude oil prices decline further or remain at low levels, to the extent appropriate we expect to perform our goodwill impairment assessment on a more frequent basis to determine whether an impairment is required.

35



Acquisitions-purchase price allocation
We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and widely accepted valuation techniques such as discounted cash flows. We engage third-party appraisal firms to assist in fair value determination of inventories, identifiable intangible assets and any other significant assets or liabilities when appropriate. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Our acquisitions may also include contingent consideration, or earn-out provisions, which provide for additional consideration to be paid to the seller if certain future conditions are met. These earn-out provisions are estimated and recognized at fair value at the acquisition date based on projected earnings or other financial metrics over specified periods after the acquisition date. These estimates are reviewed during the specified period and adjusted based on actual results.

Pensions
Our pension benefit obligations and expenses are calculated using actuarial models and methods. Two of the more critical assumptions and estimates used in the actuarial calculations are the discount rate for determining the current value of benefit obligations and the expected long-term rate of return on plan assets used in determining net periodic benefit cost. Other critical assumptions and estimates used in determining benefit obligations and cost, including demographic factors such as retirement age, mortality and turnover, are 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 and historical trends and experience, taking into account current and expected market conditions. These assumptions differ based on varying factors specific to each particular country or economic environment.

The discount rate utilized in 2016 to determine the projected benefit obligation at the measurement date for our United Kingdom pension plan, which constituted 84% of our international plans’ pension obligations, was 2.55%, compared to a discount rate of 3.90% utilized in 2015. The expected long-term rate of return assumption used for our United Kingdom pension plan expense was 5.4% in 2016 and 6.0% in 2015.

The following table illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for our United Kingdom pension plan.
 
Increase (Decrease) on
Millions of dollars
Pretax Pension Expense in 2016
Pension Benefit Obligation at December 31, 2016
50-basis-point decrease in discount rate
$
2

$
104

50-basis-point increase in discount rate
(2
)
(96
)
50-basis-point decrease in expected long-term rate of return
4

NA

50-basis-point increase in expected long-term rate of return
(4
)
NA


Our international defined benefit plans reduced pretax income by $30 million in 2016, $42 million in 2015 and $36 million in 2014. Included in these amounts was income from expected return on plan assets of $40 million in 2016, $48 million in 2015 and $52 million in 2014. Actual returns on international plan assets totaled $132 million in 2016, compared to $34 million in 2015. Our net actuarial loss, net of tax, related to international pension plans was $290 million at December 31, 2016 and $205 million at December 31, 2015. In our international plans where employees earn additional benefits for continued service, actuarial gains and losses will be recognized in operating income over a period of five to 16 years, which represents the estimated average remaining service of the participant group expected to receive benefits. In our international plans where benefits are not accrued for continued service, actuarial gains and losses will be recognized in operating income over a period of 17 to 30 years, which represents the estimated average remaining lifetime of the benefit obligations. These ranges reflect varying maturity levels among the plans.

During 2016, we made contributions of $19 million to our international defined benefit plans. We expect to make contributions of approximately $15 million to our international defined benefit plans in 2017.

The actuarial assumptions used in determining our pension benefit obligations 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

36



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. See Note 15 to the consolidated financial statements for further information related to defined benefit and other postretirement benefit plans.

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 retainages. 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 1.6% to 4.3%. At December 31, 2016, allowance for bad debts totaled $175 million, or 4.3% of notes and accounts receivable before the allowance. At December 31, 2015, allowance for bad debts totaled $145 million, or 2.7% of notes and accounts receivable before the allowance. A hypothetical 100 basis point change in our estimate of the collectability of our notes and accounts receivable balance as of December 31, 2016 would have resulted in a $41 million adjustment to 2016 total operating costs and expenses. See Note 5 to the consolidated financial statements for further information.

Percentage of completion
Revenue from certain long-term, integrated project management contracts to provide well construction and completion services is reported on the percentage-of-completion method of accounting. 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. 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.

At least quarterly, significant projects are reviewed in detail by senior management. There are many factors that impact future costs, including weather, inflation, labor and community disruptions, timely availability of materials, productivity and other factors as outlined in Part I, Item 1(a), “Risk Factors.” These factors can affect the accuracy of our estimates and materially impact our future reported earnings. See Note 1 to the consolidated financial statements for further information.

OFF BALANCE SHEET ARRANGEMENTS

At December 31, 2016, we had no material off balance sheet arrangements, except for operating leases. In the normal course of business, we have agreements with financial institutions under which approximately $2.0 billion of letters of credit, bank guarantees or surety bonds were outstanding as of December 31, 2016. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization. None of these off balance sheet arrangements either has, or is likely to have, a material effect on our consolidated financial statements. For information on our contractual obligations related to operating leases, see Note 9 to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual obligations.”

FINANCIAL INSTRUMENT MARKET RISK

We are exposed to market risk from changes in foreign currency exchange rates and interest rates. We selectively manage these exposures through the use of derivative instruments, including forward foreign exchange contracts, foreign exchange options and interest rate swaps. The objective of our risk management strategy is to minimize the volatility from fluctuations in foreign currency and interest rates. We do not use derivative instruments for trading purposes. The counterparties to our forward contracts, options and interest rate swaps are global commercial and investment banks.

We use a sensitivity analysis model to measure the impact of a 10% adverse movement of foreign currency exchange rates against the United States dollar. A hypothetical 10% adverse change in the value of all our foreign currency positions relative to the United States dollar as of December 31, 2016 would result in a $47 million, pre-tax, loss for our net monetary assets denominated in currencies other than United States dollars.

37




With respect to interest rates sensitivity, after consideration of the impact from the interest rate swaps, a hypothetical 100 basis point increase in the LIBOR rate would result in approximately an additional $15 million of interest charges for the year ended December 31, 2016.

There are certain limitations inherent in the sensitivity analyses presented, primarily due to the assumption that interest rates and exchange rates change instantaneously in an equally adverse fashion. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled. While this is our best estimate of the impact of the various scenarios, these estimates should not be viewed as forecasts.

For further information regarding foreign currency exchange risk, interest rate risk and credit risk, see Note 14 to the consolidated financial statements.

ENVIRONMENTAL MATTERS

We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note 9 to the consolidated financial statements and Part I, Item 1(a), “Risk Factors.”

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,” “believe,” “do not believe,” “plan,” “estimate,” “intend,” “expect,” “do not expect,” “anticipate,” “do not anticipate,” “should,” “likely” and other expressions. We may also provide oral or written forward-looking information in other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and results of operations may vary materially.

We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events, or for any other reason. You should review any additional disclosures we make in our press releases and Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.


38



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, 2016 based upon criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of December 31, 2016, our internal control over financial reporting is effective.

The effectiveness of Halliburton’s internal control over financial reporting as of December 31, 2016 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein.

HALLIBURTON COMPANY

by




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

Chief Executive Officer
 
Chief Financial Officer


39




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, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of Halliburton 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

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, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 7, 2017 expressed an unqualified opinion on the effectiveness of Halliburton Company’s internal control over financial reporting.



/s/ KPMG LLP
Houston, Texas
February 7, 2017



40





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, 2016, based on criteria established in Internal Control – Integrated Framework (2013) 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 financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Halliburton Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Halliburton Company and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated February 7, 2017 expressed an unqualified opinion on those consolidated financial statements.



/s/ KPMG LLP
Houston, Texas
February 7, 2017


41



HALLIBURTON COMPANY
Consolidated Statements of Operations

 
Year Ended December 31
Millions of dollars and shares except per share data
2016
2015
2014
Revenue:
 
 
 
Services
$
11,140

$
16,981

$
24,535

Product sales
4,747

6,652

8,335

Total revenue
15,887

23,633

32,870

Operating costs and expenses:
 
 
 
Cost of services
11,253

16,014

20,855

Cost of sales
3,770

5,099

6,479

Baker Hughes related costs and termination fee
4,057

308

17

Impairments and other charges
3,357

2,177

129

General and administrative
228

200

293

Total operating costs and expenses
22,665

23,798

27,773

Operating income (loss)
(6,778
)
(165
)
5,097

Interest expense, net of interest income of $59, $16, and $13
(639
)
(447
)
(383
)
Other, net
(208
)
(324
)
(2
)
Income (loss) from continuing operations before income taxes
(7,625
)
(936
)
4,712

Income tax benefit (provision)
1,858

274

(1,275
)
Income (loss) from continuing operations
(5,767
)
(662
)
3,437

Income (loss) from discontinued operations, net
(2
)
(5
)
64

Net income (loss)
$
(5,769
)
$
(667
)
$
3,501

Net (income) loss attributable to noncontrolling interest
6

(4
)
(1
)
Net income (loss) attributable to company
$
(5,763
)
$
(671
)
$
3,500

Amounts attributable to company shareholders:
 
 
 
Income (loss) from continuing operations
$
(5,761
)
$
(666
)
$
3,436

Income (loss) from discontinued operations, net
(2
)
(5
)
64

Net income (loss) attributable to company
$
(5,763
)
$
(671
)
$
3,500

Basic income per share attributable to company shareholders:
 
 
 
Income (loss) from continuing operations
$
(6.69
)
$
(0.78
)
$
4.05

Income (loss) from discontinued operations, net

(0.01
)
0.08

Net income (loss) per share
$
(6.69
)
$
(0.79
)
$
4.13

Diluted income per share attributable to company shareholders:
 
 
 
Income (loss) from continuing operations
$
(6.69
)
$
(0.78
)
$
4.03

Income (loss) from discontinued operations, net

(0.01
)
0.08

Net income (loss) per share
$
(6.69
)
$
(0.79
)
$
4.11

 
 
 
 
Basic weighted average common shares outstanding
861

853

848

Diluted weighted average common shares outstanding
861

853

852

See notes to consolidated financial statements.
 
 
 


42



HALLIBURTON COMPANY
Consolidated Statements of Comprehensive Income

 
Year Ended December 31
Millions of dollars
2016
2015
2014
Net income (loss)
$
(5,769
)
$
(667
)
$
3,501

Other comprehensive income, net of income taxes:
 
 
 
Defined benefit and other post retirement plans adjustment
(92
)
105

(84
)
Unrealized loss on cash flow hedges

(67
)

Other
1

(2
)
(7
)
Other comprehensive income (loss), net of income taxes
(91
)
36

(91
)
Comprehensive income (loss)
$
(5,860
)
$
(631
)
$
3,410

Comprehensive (income) loss attributable to noncontrolling interest
6

(4
)
(1
)
Comprehensive income (loss) attributable to company shareholders
$
(5,854
)
$
(635
)
$
3,409

See notes to consolidated financial statements.
 
 
 



43



HALLIBURTON COMPANY
Consolidated Balance Sheets

 
December 31
Millions of dollars and shares except per share data
2016
2015
Assets
Current assets:
 
 
Cash and equivalents
$
4,009

$
10,077

Receivables (net of allowances for bad debts of $175 and $145)
3,922

5,317

Inventories
2,275

2,993

Prepaid income taxes
585

527

Other current assets
886

1,156

Total current assets
11,677

20,070

Property, plant and equipment (net of accumulated depreciation of $11,198 and $11,576)
8,532

12,117

Goodwill
2,414

2,385

Deferred income taxes
1,960

552

Other assets
2,417

1,818

Total assets
$
27,000

$
36,942

Liabilities and Shareholders’ Equity
Current liabilities:
 
 
Accounts payable
$
1,764

$
2,019

Accrued employee compensation and benefits
544

862

Liabilities for Macondo well incident
369

400

Deferred revenue
261

298

Taxes other than income
218

293

Current maturities of long-term debt
163

659

Other current liabilities
704

806

Total current liabilities
4,023

5,337

Long-term debt
12,214

14,687

Employee compensation and benefits
574

479

Other liabilities
741

944

Total liabilities
17,552

21,447

Shareholders’ equity:
 
 
Common shares, par value $2.50 per share (authorized 2,000 shares,
              issued 1,070 and 1,071 shares)
2,674

2,677

Paid-in capital in excess of par value
201

274

Accumulated other comprehensive loss
(454
)
(363
)
Retained earnings
14,141

20,524

Treasury stock, at cost (204 and 215 shares)
(7,153
)
(7,650
)
Company shareholders’ equity
9,409

15,462

Noncontrolling interest in consolidated subsidiaries
39

33

Total shareholders’ equity
9,448

15,495

Total liabilities and shareholders’ equity
$
27,000

$
36,942

See notes to consolidated financial statements.
 
 


44



HALLIBURTON COMPANY
Consolidated Statements of Cash Flows

 
Year Ended December 31
Millions of dollars
2016
2015
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(5,769
)
$
(667
)
$
3,501

Adjustments to reconcile net income (loss) to cash flows from operating activities:
 
 
 
Impairments and other charges
3,357

2,177

129

Depreciation, depletion and amortization
1,503

1,835

2,126

Deferred income tax benefit, continuing operations
(1,501
)
(224
)
(454
)
Cash impact of impairments and other charges - severance payments
(273
)
(304
)
(28
)
Payment related to the Macondo well incident
(33
)
(333
)
(569
)
Changes in assets and liabilities:
 
 
 
Receivables
899

1,468

(1,381
)
Inventories
552

153

(271
)
Accounts payable
(219
)
(603
)
489

Other
(219
)
(596
)
520

Total cash flows provided by (used in) operating activities
(1,703
)
2,906

4,062

Cash flows from investing activities:
 
 
 
Capital expenditures
(798
)
(2,184
)
(3,283
)
Proceeds from sales of property, plant and equipment
222

168

338

Payments to acquire businesses, net of cash acquired
(31
)
(39
)
(231
)
Other investing activities
(103
)
(137
)
38

Total cash flows used in investing activities
(710
)
(2,192
)
(3,138
)
Cash flows from financing activities:
 
 
 
Payments on long-term borrowings
(3,171
)
(8
)
(4
)
Dividends to shareholders
(620
)
(614
)
(533
)
Proceeds from issuance of common stock
186

167

332

Proceeds from issuance of long-term debt, net
74

7,440


Payments to reacquire common stock


(800
)
Other financing activities
(9
)
96

(25
)
Total cash flows provided by (used in) financing activities
(3,540
)
7,081

(1,030
)
Effect of exchange rate changes on cash
(115
)
(9
)
41

Increase (decrease) in cash and equivalents
(6,068
)
7,786

(65
)
Cash and equivalents at beginning of year
10,077

2,291

2,356

Cash and equivalents at end of year
$
4,009

$
10,077

$
2,291

Supplemental disclosure of cash flow information:
 
 
 
Cash payments (receipts) during the period for:
 
 
 
Interest
$
659

$
380

$
384

Income taxes
$
(20
)
$
370

$
1,269

See notes to consolidated financial statements.
 
 
 


45



HALLIBURTON COMPANY
Consolidated Statements of Shareholders' Equity
 
Company Shareholders’ Equity
 
 
Millions of dollars
Common Shares
Paid-in Capital in Excess of Par Value
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Noncontrolling interest in Consolidated Subsidiaries
Total
Balance at December 31, 2013
$
2,680

$
415

$
(8,049
)
$
18,842

$
(307
)
$
34

$
13,615

Comprehensive income (loss):
 

 

 

 

 

 

 
Net income



3,500


1

3,501

Other comprehensive loss




(92
)

(92
)
Common shares repurchased


(800
)



(800
)
Stock plans
(1
)
(161
)
718




556

Cash dividends ($0.63 per share)



(533
)


(533
)
Other

55




(4
)
51

Balance at December 31, 2014
$
2,679

$
309

$
(8,131
)
$
21,809

$
(399
)
$
31

$
16,298

Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)



(671
)

4

(667
)
Other comprehensive income




36


36

Stock plans
(2
)
(39
)
481




440

Cash dividends ($0.72 per share)



(614
)


(614
)
Other

4




(2
)
2

Balance at December 31, 2015
$
2,677

$
274

$
(7,650
)
$
20,524

$
(363
)
$
33

$
15,495

Comprehensive income (loss):
 

 

 

 

 

 

 

Net loss



(5,763
)

(6
)
(5,769
)
Other comprehensive loss




(91
)

(91
)
Stock plans
(3
)
(69
)
497




425

Cash dividends ($0.72 per share)



(620
)


(620
)
Other

(4
)



12

8

Balance at December 31, 2016
$
2,674

$
201

$
(7,153
)
$
14,141

$
(454
)
$
39

$
9,448

See notes to consolidated financial statements.
 
 
 
 


46



HALLIBURTON COMPANY
Notes to Consolidated Financial Statements

Note 1. Description of Company and Significant Accounting Policies

Description of Company
Halliburton Company’s predecessor was established in 1919 and incorporated under the laws of the State of Delaware in 1924. We are a leading provider of services and products to the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion and optimizing production throughout the life of the field. We serve major, national and independent oil and natural gas companies throughout the world and operate under two divisions, which form the basis for the two operating segments we report, the Completion and Production segment and the Drilling and Evaluation segment.

Use of estimates
Our financial statements are prepared in conformity with United States generally accepted accounting principles, requiring us to make estimates and assumptions that affect:
-
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and
-
the reported amounts of revenue and expenses during the reporting period.

We believe the most significant estimates and assumptions are associated with the forecasting of our effective income tax rate and the valuation of deferred taxes, legal and environmental reserves, long-lived asset valuations, purchase price allocations, pensions, allowance for bad debts and percentage-of-completion accounting for long-term contracts. Ultimate results could differ from our estimates.

Basis of presentation
The consolidated financial statements include the accounts of our company and all of our subsidiaries that we control or variable interest entities for which we have determined that we are the primary beneficiary. All material intercompany accounts and transactions are eliminated. Investments in companies in which we do not have a controlling interest, but over which we do exercise significant influence, are accounted for using the equity method of accounting. If we do not have significant influence, we use the cost method of accounting. In addition, certain reclassifications of prior period balances have been made to conform to the current period presentation.

Revenue recognition
Overall. Our services and products are generally sold based upon purchase orders or contracts with our customers that include fixed or determinable prices but do not include right of return provisions or other significant post-delivery obligations. Our products are produced in a standard manufacturing operation, even if produced to our customer’s specifications. We recognize revenue from product sales when title passes to the customer, the customer assumes risks and rewards of ownership, collectability is reasonably assured and delivery occurs as directed by our customer. Service revenue, including training and consulting services, is recognized when the services are rendered and collectability is reasonably assured. Rates for services are typically priced on a per day, per meter, per man-hour or similar basis.

Software sales. Sales of perpetual software licenses, net of any deferred maintenance and support fees, are recognized as revenue upon shipment. Sales of time-based licenses are recognized as revenue over the license period. Maintenance and support fees are recognized as revenue ratably over the contract period, usually a one-year duration.

Percentage of completion. Revenue from certain long-term, integrated project management contracts to provide well construction and completion services is reported on the percentage-of-completion method of accounting. Progress is generally based upon physical progress related to contractually defined units of work. Physical percent complete is determined as a combination of input and output measures as deemed appropriate by the circumstances. All known or anticipated losses on contracts are provided for when they become evident. Cost adjustments that are in the process of being negotiated with customers for extra work or changes in the scope of work are included in revenue when collection is deemed probable.

New Accounting Pronouncement. In May 2014, a new revenue recognition standard was issued that will supersede existing revenue recognition guidance. See Note 16 for additional information.


47



Research and development
Research and development costs are expensed as incurred. Research and development costs were $329 million in 2016, $487 million in 2015 and $601 million in 2014.

Cash equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Inventories
Inventories are stated at the lower of cost or market. Cost represents invoice or production cost for new items and original cost less allowance for condition for used material returned to stock. Production cost includes material, labor and manufacturing overhead. Some domestic manufacturing and field service finished products and parts inventories for drill bits, completion products and bulk materials are recorded using the last-in, first-out method. The remaining inventory is recorded on the average cost method. We regularly review inventory quantities on hand and record provisions for excess or obsolete inventory based primarily on historical usage, estimated product demand and technological developments.

Allowance for bad debts
We establish an allowance for bad debts through a review of several factors, including historical collection experience, current aging status of the customer accounts and financial condition of our customers. Our policy is to write off bad debts when the customer accounts are determined to be uncollectible.

Property, plant and equipment
Other than those assets that have been written down to their fair values due to impairment, property, plant and equipment are reported at cost less accumulated depreciation, which is generally provided on the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are used for tax purposes, wherever permitted. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Planned major maintenance costs are generally expensed as incurred. Expenditures for additions, modifications and conversions are capitalized when they increase the value or extend the useful life of the asset.

Goodwill and other intangible assets
We record as goodwill the excess purchase price over the fair value of the tangible and identifiable intangible assets acquired. Changes in the carrying amount of goodwill are detailed below by reportable segment.
Millions of dollars
Completion and Production
Drilling and Evaluation
Total
Balance at December 31, 2014:
$
1,606

$
724

$
2,330

Current year acquisitions
27

26

53

Purchase price adjustments for previous acquisitions
1

1

2

Balance at December 31, 2015:
$
1,634

$
751

$
2,385

Current year acquisitions
31


31

Purchase price adjustments for previous acquisitions
(2
)

(2
)
Other
16

(16
)

Balance at December 31, 2016:
$
1,679

$
735

$
2,414


The reported amounts of goodwill for each reporting unit are reviewed for impairment on an annual basis, during the third quarter and more frequently should negative conditions exist such as significant current or projected operating losses. In 2016, 2015 and 2014 we performed a quantitative impairment test. This two-step quantitative process compares the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any.

In performing our quantitative impairment tests, we estimated the fair value for each reporting unit using a discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. Our discounted cash flow analysis for each reporting unit includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, the timing of an anticipated market recovery and the timing of expected future cash flows. As such, these analyses incorporate inherent uncertainties that are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated

48



assumptions utilized in our forecasts. As a result of our annual goodwill impairment assessments performed in 2016, 2015 and 2014, we determined that the fair value of each reporting unit exceeded its net book value and, therefore, no goodwill impairments were deemed necessary.

We amortize other identifiable intangible assets with a finite life on a straight-line basis over the period which the asset is expected to contribute to our future cash flows, ranging from two to fifteen years. The components of these other intangible assets generally consist of patents, license agreements, non-compete agreements, trademarks and customer lists and contracts.

Evaluating impairment of long-lived assets
When events or changes in circumstances indicate that long-lived assets other than goodwill may be impaired, an evaluation is performed. For an asset classified as held for use, the estimated future undiscounted cash flows associated with the asset are compared to the asset’s carrying amount to determine if a write-down to fair value is required. When an asset is classified as held for sale, the asset’s book value is evaluated and adjusted to the lower of its carrying amount or fair value less cost to sell. In addition, depreciation and amortization is ceased while it is classified as held for sale.

Income taxes
We recognize the amount of taxes payable or refundable for the year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances.

We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes on continuing operations in our consolidated statements of operations.

Taxes are provided as necessary with respect to foreign earnings that are not permanently reinvested. During 2016, we concluded that we no longer intend to permanently reinvest a portion of our cumulative undistributed foreign earnings outside of the United States and recorded corresponding U.S. federal income tax expenses. See Note 10 for further information. We have not provided income taxes on a portion of our cumulative undistributed earnings of non-United States subsidiaries because such earnings are intended to be reinvested indefinitely to finance foreign activities. These additional foreign earnings could be subject to additional tax if remitted, or deemed remitted, as a dividend; however, it is not practicable to estimate the additional amount, if any, of taxes payable.

Derivative instruments
At times, we enter into derivative financial transactions to hedge existing or projected exposures to changing foreign currency exchange rates and interest rates. We do not enter into derivative transactions for speculative or trading purposes. We recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value and reflected through the results of operations. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against:
-
the change in fair value of the hedged assets, liabilities or firm commitments through earnings; or
-
recognized in other comprehensive income until the hedged item is recognized in earnings.

The ineffective portion of a derivative’s change in fair value is recognized in earnings. Recognized gains or losses on derivatives entered into to manage foreign currency exchange risk are included in “Other, net” on the consolidated statements of operations. Gains or losses on interest rate derivatives are included in “Interest expense, net.”


49



Foreign currency translation
Foreign entities whose functional currency is the United States dollar translate monetary assets and liabilities at year-end exchange rates, and nonmonetary items are translated at historical rates. Revenue and expense transactions are translated at the average rates in effect during the year, except for those expenses associated with nonmonetary balance sheet accounts, which are translated at historical rates. Gains or losses from remeasurement of monetary assets and liabilities due to changes in exchange rates are recognized in our consolidated statements of operations in “Other, net” in the year of occurrence.

Stock-based compensation
Stock-based compensation cost is measured at the date of grant, based on the calculated fair value of the award and is recognized as expense over the employee’s service period, which is generally the vesting period of the equity grant. Additionally, compensation cost is recognized based on awards ultimately expected to vest, therefore, we have reduced the cost for estimated forfeitures based on historical forfeiture rates. Forfeitures are estimated at the time of grant and revised in subsequent periods to reflect actual forfeitures. See Note 12 and Note 16 for additional information related to stock-based compensation.

Note 2. Acquisitions and Dispositions
    
Termination of Baker Hughes acquisition
In November 2014, we entered into a merger agreement with Baker Hughes to acquire all outstanding shares of Baker Hughes in a stock and cash transaction. On April 30, 2016, we and Baker Hughes mutually terminated our merger agreement primarily because of the challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics.

In April 2015, we had announced our decision to market for sale our Fixed Cutter and Roller Cone Drill Bits, our Directional Drilling, and our Logging-While-Drilling/Measurement-While-Drilling businesses in connection with the anticipated Baker Hughes transaction. Accordingly, beginning in April 2015, the assets and liabilities for these businesses, which are included within our Drilling and Evaluation operating segment, were classified as held for sale and the corresponding depreciation and amortization expense ceased at that time. Since our proposed divestitures no longer met the assets held for sale accounting criteria at March 31, 2016, we reclassified these businesses to assets held and used in the consolidated balance sheets for both periods presented. We recorded corresponding charges during 2016 totaling $464 million within "Baker Hughes related costs and termination fee" in our consolidated statements of operations, which included $329 million of accumulated unrecognized depreciation and amortization expense for these businesses during the period the associated assets were classified as held for sale, along with $135 million of capitalized and other divestiture-related costs. Beginning April 1, 2016, all depreciation and amortization expense associated with these businesses were included in operating costs and expenses on our consolidated statements of operations.

The reclassification of assets held for sale to assets held and used resulted in the following changes from amounts previously reported on our consolidated balance sheets as of December 31, 2015: $2.1 billion decrease in "Assets held for sale;" $576 million increase in "Inventories;" $1.2 billion increase in "Property, plant and equipment;" $276 million increase in "Goodwill;" $57 million increase in "Other assets;" $24 million increase in "Accrued employee compensation and benefits;" $46 million decrease in "Other current liabilities;" and $22 million increase in "Employee compensation and benefits."

In conjunction with the termination of our merger agreement, we paid Baker Hughes a termination fee of $3.5 billion in May 2016 and recognized this expense during the second quarter. The termination also triggered a mandatory redemption of $2.5 billion of the senior notes we had issued in November 2015 in contemplation of the transaction. We redeemed those notes in May 2016 using cash on hand at a price of 101% of their principal amount, plus accrued and unpaid interest. The notes redeemed included the $1.25 billion of 2.7% senior notes due in 2020 and $1.25 billion of 3.375% senior notes due in 2022. The redemption resulted in $41 million of fees and associated expenses included in interest expense on our consolidated statements of operations for the year ended December 31, 2016.

Note 3. Impairments and Other Charges
    
We carry a variety of long-lived assets on our balance sheet including property, plant and equipment, goodwill and other intangibles. We conduct impairment tests on long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable, and we conduct impairment tests on goodwill annually. We review the recoverability of the carrying value of our assets based upon estimated future cash flows while taking into consideration assumptions and estimates including the future use of the asset, remaining useful life of the asset and service potential of the asset. Additionally, inventories are valued at the lower of cost or market.


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Market conditions have negatively impacted our business during 2016 with continued depressed commodity prices and widespread pricing pressure and activity reductions for our products and services on a global basis. As a result of these conditions and their corresponding impact on our business outlook, we determined the carrying amount of a number of our long-lived assets exceeded their respective fair values due to projected declines in asset utilization. We assessed the fair value of our long-lived assets based on a discounted cash flow analysis, which required the use of significant unobservable inputs such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, and a discount rate based on our weighted average cost of capital.

Over the last four years, we have been systematically converting our pressure pumping fleet in North America over to a new pump and blender design. As such, we impaired or wrote off a large portion of our older equipment, primarily during the first quarter of 2016. Additionally, market conditions during 2016 required us to take other actions to reduce some of our infrastructure and further reduce our global workforce in an effort to mitigate the impact of the industry downturn and better align our workforce with anticipated activity levels in the near-term. This resulted in a headcount reduction of approximately 14,000 for the year ended December 31, 2016 and corresponding severance charges recognized during the period. We also determined that the cost of some of our inventory exceeded its market value, resulting in associated write-downs of its carrying value during the year ended December 31, 2016.

We executed a financing agreement with our primary customer in Venezuela during the second quarter of 2016 in an effort to actively manage outstanding receivables in the country, resulting in an exchange of $200 million of outstanding trade receivables for an interest-bearing promissory note. We recorded the note at its fair market value at the date of exchange based on available pricing data points for similar assets in an illiquid market, which resulted in a $148 million pre-tax loss on exchange during the second quarter. For additional information, see Note 14 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Environment and Results of Operations.”

As a result of the events described above, we recorded impairments and other charges of approximately $3.4 billion, $2.2 billion and $129 million during the years ended December 31, 2016, 2015 and 2014, respectively. Total impairments and other charges consisted of fixed asset impairments and write-offs, severance costs, impairments of intangible assets, inventory write-downs, country and facility closures, a loss on exchange for the Venezuela promissory note and other items.

The following table presents various charges we recorded during the years ended December 31, 2016, 2015 and 2014 as a result of the downturn in the energy industry and other matters, all of which were recorded within "Impairments and other charges" on our consolidated statements of operations:
 
Year Ended December 31
Millions of dollars
2016
2015
2014
Industry downturn:
 
 
 
Fixed asset impairments
$
2,550

$
760

$
47

Severance costs
315

352

28

Inventory write-downs
166

484

24

Intangible asset impairments
88

212

10

Other
67

201

20

Other matters:
 
 
 
Venezuela promissory note loss
148



Country closures
39

80


Other
(16
)
88


Total impairments and other charges