Halliburton Co. Director MURRY GERBER bought 30000 shares on 2-03-2012 at $ 36.84
Our business strategy is to secure a distinct and sustainable competitive position as an oilfield service company by delivering products and services to our customers that maximize their production and recovery and realize proven reserves from difficult environments. Our objectives are to:
-create a balanced portfolio of products and services supported by global infrastructure and anchored by technology innovation with a well-integrated digital strategy to further differentiate our company;
-reach a distinguished level of operational excellence that reduces costs and creates real value from everything we do;
-preserve a dynamic workforce by being a preferred employer to attract, develop, and retain the best global talent; and
-uphold the ethical and business standards of the company and maintain the highest standards of health, safety, and environmental performance.
Markets and competition
We are one of the worldâ€™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:
-service delivery (including the ability to deliver services and products on an â€śas needed, where neededâ€ť basis);
-health, safety, and environmental standards and practices;
-global talent retention;
-understanding of the geological characteristics of the hydrocarbon reservoir;
We conduct business worldwide in approximately 80 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 2010, based on the location of services provided and products sold, 46% of our consolidated revenue was from the United States. In 2009 and 2008, 36% and 43% of our consolidated revenue was from the United States. No other country accounted for more than 10% of our consolidated revenue during these periods. See â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€“ Business Environment and Results of Operationsâ€ť and Note 2 to the consolidated financial statements for additional financial information about geographic operations in the last three years. Because the markets for our services and products are vast and cross numerous geographic lines, a meaningful estimate of the total number of competitors cannot be made. The industries we serve are highly competitive, and we have many substantial competitors. Largely, all of our services and products are marketed through our servicing and sales organizations.
Operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, expropriation or other governmental actions, exchange control problems, and highly inflationary currencies. We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country would be material to the conduct of our operations taken as a whole.
Information regarding our exposure to foreign currency fluctuations, risk concentration, and financial instruments used to minimize risk is included in â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€“ Financial Instrument Market Riskâ€ť and in Note 12 to the consolidated financial statements.
Our revenue from continuing operations during the past three years was derived from the sale of services and products to the energy industry. No customer represented more than 10% of consolidated revenue in any period presented.
Raw materials essential to our business are normally readily available. Market conditions can trigger constraints in the supply of certain raw materials, such as sand, cement, and specialty metals. We are always seeking ways to ensure the availability of resources, as well as manage costs of raw materials. Our procurement department is using our size and buying power through several programs designed to ensure that we have access to key materials at competitive prices.
Research and development costs
We maintain an active research and development program. The program improves existing products and processes, develops new products and processes, and improves engineering standards and practices that serve the changing needs of our customers, such as those related to high pressure/high temperature environments. Our expenditures for research and development activities were $366 million in 2010, $325 million in 2009, and $326 million in 2008, of which over 96% was company-sponsored in each year.
We own a large number of patents and have pending a substantial number of patent applications covering various products and processes. We are also licensed to utilize patents owned by others. We do not consider any particular patent to be material to our business operations.
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 8 to the consolidated financial statements, Item 1(a), â€śRisk Factors,â€ť and Item 3, â€śLegal Proceedings.â€ť
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.
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 SECâ€™s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains our reports, proxy and information statements, and our other SEC filings. The address of that site is www.sec.gov . We have posted on our web site our Code of Business Conduct, which applies to all of our employees and Directors and serves as a code of ethics for our principal executive officer, principal financial officer, principal accounting officer, and other persons performing similar functions. Any amendments to our Code of Business Conduct or any waivers from provisions of our Code of Business Conduct granted to the specified officers above are disclosed on our web site within four business days after the date of any amendment or waiver pertaining to these officers. There have been no waivers from provisions of our Code of Business Conduct for the years 2010, 2009, or 2008. 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.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
We are a leading provider of products and services to the energy industry. We serve the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field . Activity levels within our operations are significantly impacted by spending on upstream exploration, development, and production programs by major, national, and independent oil and natural gas companies. We report our results under two segments, Completion and Production and Drilling and Evaluation:
our Completion and Production segment delivers cementing, stimulation, intervention, pressure control, and completion services. The segment consists of production enhancement services, completion tools and services, cementing services, and Boots & Coots; and
our Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise wellbore placement solutions that enable customers to model, measure, and optimize their well construction activities. The segment consists of fluid services, drilling services, drill bits, wireline and perforating services, testing and subsea, software and asset solutions, and integrated project management and consulting services.
The business operations of our segments are organized around four primary geographic regions: North America, Latin America, Europe/Africa/CIS, and Middle East/Asia. We have significant manufacturing operations in various locations, including, but not limited to, the United States, Canada, the United Kingdom, Malaysia, Mexico, Brazil, and Singapore. With over 60,000 employees, we operate in approximately 80 countries around the world, and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.
During the nine months of 2011, we produced revenue of $17.8 billion and operating income of $3.3 billion, reflecting an operating margin of 19%. Revenue increased $5.0 billion, or 39%, from the nine months of 2010, while operating income increased $1.3 billion, or 63%, from the nine months of 2010. These increases were due mainly to increased drilling activity and pricing improvements in North America as well as increased activity in Latin America. Partially offsetting these results were operational disruptions in North Africa and project delays in the Middle East.
We continue to believe in the strength of the long-term fundamentals of our business. Despite concerns about the global economy, energy demand is expected to continue to increase driven by growth in developing countries. Furthermore, development of new resources is expected to be more complex resulting in increasing service intensity.
In North America, the United States land rig count and horizontal drilling activity continues to grow, led by a shift to oil and liquids-rich shale basins. We believe that natural gas drilling activity could be under pressure in the near-term until the oversupply situation is corrected; however, any reduction in natural gas drilling may be more than offset by an increase in liquids-directed activity. Our third quarter 2011 Gulf of Mexico business has continued to improve compared to the first half of the 2011 due to the higher level of drilling permits issued in recent months. However, the pace of permit applications and approvals needs to be sustained at higher levels in order for the Gulf of Mexico business to recover to activity levels experienced before the Macondo well incident. See â€śBusiness Environment and Results of Operations,â€ť Note 7 to the consolidated financial statements, Part II, Item 1. â€śLegal Proceedings,â€ť and Part II, Item 1(a), â€śRisk Factors.â€ť Despite uncertainty about natural gas fundamentals and the Gulf of Mexico recovery, we believe our current North America revenue and margins will be sustainable through the remainder of 2011.
Outside of North America, revenue during the nine months of 2011 increased from the prior year, while our operating income declined due to highly competitive service pricing in several markets. Recently, our operations in Egypt recovered from the turmoil experienced in the first quarter of 2011while our activity in Libya remains mostly shut down. Any meaningful recovery in Libya will depend on our customersâ€™ ability to reestablish operations. Despite the events that have transpired and the impact of lower service pricing negotiated during the worldwide recession, we expect gradual margin improvement by the end of the year or early part of 2012 as activity continues to increase and new technologies are introduced.
We are executing several key initiatives in 2011. These initiatives involve increasing manufacturing production in the Eastern Hemisphere and reinventing our service delivery platform to lower our delivery costs. Costs related to these efforts, which are included under â€śCorporate and otherâ€ť on our condensed consolidated statements of operations, impacted our results by approximately $0.01-$0.02 per diluted share in each quarter of 2011. We expect that costs associated with these initiatives will impact fourth quarter 2011 results by approximately $0.02 per diluted share.
Our operating performance and business outlook are described in more detail in â€śBusiness Environment and Results of Operations.â€ť
Financial markets, liquidity, and capital resources
Since mid-2008, the global financial markets have been somewhat volatile. While this has created additional risks for our business, we believe we have invested our cash balances conservatively and secured sufficient financing to help mitigate any near-term negative impact on our operations. For additional information, see â€śLiquidity and Capital Resourcesâ€ť and â€śBusiness Environment and Results of Operations.â€ť
LIQUIDITY AND CAPITAL RESOURCES
We ended the third quarter of 2011 with cash and equivalents of $1.8 billion compared to $1.4 billion at December 31, 2010. We also held $400 million of short-term, United States Treasury securities classified as marketable securities at September 30, 2011 compared to $653 million at December 31, 2010.
Significant sources of cash
Cash flows from operating activities contributed $2.4 billion to cash in the nine months of 2011.
During the nine months of 2011, we sold approximately $751 million of short-term marketable securities.
Further available sources of cash . On February 22, 2011, we entered into an unsecured $2.0 billion five-year revolving credit facility that replaced our then existing $1.2 billion unsecured credit facility established in July 2007. The purpose of the facility is to provide commercial paper support, general working capital, and credit for other corporate purposes.
Significant uses of cash
Capital expenditures were $2.2 billion in the nine months of 2011 and were predominantly made in the production enhancement, drilling services, cementing, and wireline and perforating product service lines. We have also invested additional working capital to support the growth of our business.
During the nine months of 2011, we purchased $501 million in short-term marketable securities.
We paid $247 million in dividends to our shareholders in the nine months of 2011.
Future uses of cash. Capital spending for 2011 is expected to be approximately $3.1 billion. The capital expenditures plan for 2011 is primarily directed toward our production enhancement, drilling services, wireline and perforating, cementing, and completion tools product service lines to support the expansion of our North America business.
In October 2011, we completed the acquisition of Multi-Chem Group LLC (Multi-Chem) in an all cash transaction. Multi-Chem is the fourth-largest provider of production chemicals in North America, delivering specialty chemicals, services and solutions. Beginning October 2011, Multi-Chemâ€™s results of operations will be included in our Completion and Production segment. We anticipate fourth quarter 2011 uses of cash related to Multi-Chem and other acquisitions to total approximately $800 million.
We are currently exploring opportunities for acquisitions that will enhance or augment our current portfolio of products and services, including those with unique technologies or distribution networks in areas where we do not already have large operations.
Subject to Board of Directors approval, we expect to pay dividends of approximately $83 million during the remainder of 2011. We also have approximately $1.7 billion remaining available under our share repurchase authorization, which may be used for open market share purchases.
Other factors affecting liquidity
Guarantee agreements. In the normal course of business, we have agreements with financial institutions under which approximately $1.6 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of September 30, 2011, including $276 million of surety bonds related to Venezuela. See â€śBusiness Environment and Results of Operations â€“ International Operationsâ€ť for further discussion related to Venezuela. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.
Financial position in current market. We believe our $1.8 billion of cash and equivalents, $400 million in investments in marketable securities, and $2.0 billion of available bank credit as of September 30, 2011 provide us with sufficient liquidity and flexibility, given the current market environment. Our debt maturities extend over a long period of time. We currently have a total of $2.0 billion of committed bank credit under our revolving credit facility to support our operations and any commercial paper we may issue in the future. The full amount of the revolving credit facility was available as of September 30, 2011. We have no financial covenants or material adverse change provisions in our bank agreements. Although a portion of earnings from our foreign subsidiaries is reinvested overseas indefinitely, we do not consider this to have a significant impact on our liquidity.
Credit ratings. Credit ratings for our long-term debt remain A2 with Moodyâ€™s Investors Service and A with Standard & Poorâ€™s. The credit ratings on our short-term debt remain P-1 with Moodyâ€™s Investors Service and A-1 with Standard & Poorâ€™s.
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 customersâ€™ cash flow from operations and their access to the credit markets. For example, we have seen a delay in receiving payment on our receivables from one of our primary customers in Venezuela. If our customers delay in 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.
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
We operate in approximately 80 countries throughout the world to provide a comprehensive range of discrete and integrated services and products to the energy industry. The majority of our consolidated revenue is derived from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. We serve the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production throughout the life of the field. Our two business segments are the Completion and Production segment and the Drilling and Evaluation segment. The industries we serve are highly competitive with many substantial competitors in each segment. In the nine months of 2011, based upon the location of the services provided and products sold, 55% of our consolidated revenue was from the United States. In the nine months of 2010, 45% of our consolidated revenue was from the United States. No other country accounted for more than 10% of our revenue during these periods.
Operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, force majeure, war or other armed conflict, expropriation or other governmental actions, inflation, exchange control problems, and highly inflationary currencies. 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 levels within our business segments are significantly impacted by spending on upstream exploration, development, and production programs by major, national, and independent oil and natural gas companies. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption.
Our customersâ€™ cash flows, in many instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets. The opposite is true for higher oil and natural gas prices.
Crude oil prices were relatively stable for most of 2010. Towards the end of 2010 and through the first six months of 2011, oil prices rose dramatically. However, during the third quarter of 2011, oil prices experienced a great deal of volatility, primarily due to concerns about the global economic recovery. According to the International Energy Agencyâ€™s (IEA) October 2011 â€śOil Market Report,â€ť despite lower than expected demand levels during the nine months of 2011, the 2012 world petroleum demand is forecasted to increase 1% over 2011 levels. Despite the recent market volatility and decline in crude oil prices, we believe that any major macroeconomic disruptions may ultimately correct themselves as the underlying trends of significant demand growth for developing countries, smaller and more complex reservoirs, higher depletion rates, and the need for continual reserve replacement should drive the long-term need for our services.
North America operations
Volatility in oil and natural gas prices can impact our customersâ€™ drilling and production activities. The shift in 2010 to oil and liquids-rich shale basins has helped to drive increased service intensity, not only in terms of horsepower required per job, but also in fluid chemistry and other technologies required for these complex reservoirs. This trend has continued through the nine months of 2011, with horizontal oil-directed drilling activity representing the fastest growing segment of the market. As of September 30, 2011, horizontal-directed rig activity represented over 57% of the total rigs in the United States, about 75% higher than peak levels in 2008. These trends have led to increased demand and improved pricing for most of our products and services in our United States land operations. In the third quarter of 2011, North America revenue increased 13% and operating income increased 14% sequentially. Going forward, we believe there will be an increase in overall activity in the United States land market, and this is reinforcing our confidence that margins for North America will be sustainable; however, growing cost pressure could moderate the extent of any further margin improvements for the remainder of 2011.
Deepwater drilling activity in the Gulf of Mexico is continuing to recover due to the issuance of a number of drilling permits. Despite some improvement in the third quarter, we believe risks remain for further growth in the Gulf of Mexico unless the pace of permit issuance is sustained at higher levels for a period of time. Our business in the Gulf of Mexico represented approximately 16% of our North America revenue in the nine months of 2009, approximately 10% in the nine months of 2010, and approximately 6% in the nine months of 2011. In addition, the Gulf of Mexico represented approximately 6% of our consolidated revenue in the nine months of 2009, approximately 5% in the nine months of 2010, and approximately 3% in the nine months of 2011. Longer term, we do not know the extent to which the Macondo well incident or resulting drilling regulations will impact revenue or earnings, as they are dependent on, among other things, governmental approvals for permits, our customersâ€™ actions, and the potential movement of deepwater rigs to or from other markets.
During the third quarter of 2011, revenue outside North America increased 7% and operating income outside of North America increased 23% from the prior quarter, reflecting typical seasonality. This seasonality more than offset activity disruptions caused by the political unrest and sanctions in North Africa and the continued impact of over capacity leading to pricing pressure. The first quarter of 2011 results were impacted by a $59 million, pre-tax, charge in Libya, to reserve for certain doubtful accounts receivable and inventory. Additionally, the second quarter of 2011 results were impacted by a $11 million, pre-tax, charge for employee separation costs, primarily related to our Europe/Africa/CIS regional operations. The third quarter of 2011 results were impacted by a $25 million, pre-tax, impairment charge on an asset held for sale in our Europe/Africa/CIS regional operations.
The pace of international recovery is lagging that of previous cycles at this stage, despite international rig counts exceeding the prior peak reached in September of 2008. One of the contributory factors for the difference is the decline in offshore rig counts that we have seen with the current cycle. Given the service intensity of offshore work, we believe this resulted in a more extensive impact on the industryâ€™s revenues, a more significant capacity overhang, and consequently, a more pronounced drop off in pricing. However, we are anticipating that the industry will experience steady volume increases through the remainder of the year and 2012 as macroeconomic trends support a more favorable operator spending outlook, which we believe will eventually lead to meaningful absorption of equipment supply and result in the ability to begin to improve pricing for our services sometime in the fourth quarter of 2011 and into 2012. We continue to believe in the long-term prospects of the international market and will align our business accordingly. Consistent with our long-term strategy to grow our operations outside of North America, we also expect to continue to invest capital in our international operations.
Venezuela. In December 2010, the Venezuelan government set the fixed exchange rate at 4.3 BolĂvar Fuerte to one United States dollar effective January 1, 2011, eliminating the dual exchange rate scheme implemented in early 2010. This change had no impact on us because we have applied the 4.3 BolĂvar Fuerte fixed exchange rate since the previously disclosed January 2010 devaluation. We continue to work with our primary customer in Venezuela to resolve outstanding issues regarding the payment of invoices in relation to exchange rates and discounts.
On May 24, 2011, the United States government imposed sanctions on the state-owned oil company of Venezuela. The sanctions do not, however, apply to that companyâ€™s subsidiaries and do not prohibit the export of crude oil to the United States. We do not expect these sanctions to have a material impact on our operations in Venezuela.
As of September 30, 2011, our total net investment in Venezuela was approximately $191 million. In addition to this amount, we have $276 million of surety bond guarantees outstanding relating to our Venezuelan operations.
Completion and Production segment operating income increased 75% compared to the third quarter of 2010, primarily driven by production enhancement services in the United States land market. The results were negatively impacted by a $25 million, pre-tax, impairment charge on an asset held for sale in the Europe/Africa/CIS region. In North America, operating income grew 110%, due to higher activity, improved equipment utilization, and a more favorable pricing environment for production enhancement services in the United States land market. Latin America operating income improved 54%, as a result of heightened demand for cementing services in Brazil, Colombia, and Argentina and completion tools throughout the region, which were offset by increased production enhancement costs in Mexico. Europe/Africa/CIS operating income declined 79%, due to an impairment charge on an asset held for sale and the effect of geopolitical disruptions in North Africa. Middle East /Asia operating income stayed flat, as a weather-related rebound in Australia and higher margin completion tools sales in Indonesia and Malaysia were offset by lower direct sales in China.
Drilling and Evaluation revenue increased 26% compared to the third quarter of 2010, with all regions experiencing revenue growth from the third quarter of 2010. North America revenue grew 37%, primarily due to higher activity and improved pricing in the United States land market and a recovery of activity in the United States Gulf of Mexico. Latin America revenue increased 41%, driven by higher drilling activities in Mexico and Brazil. Europe/Africa/CIS revenue increased 9%, as higher drilling activities in Norway and Algeria were offset by geopolitical disruptions in North Africa. Middle East/Asia revenue grew 14%, primarily due to the commencement of activity in Iraq, which was offset by lower demand for drilling services in Indonesia and Malaysia. Revenue outside of North America was 63% of total segment revenue in the third quarter of 2011 and 66% of total segment revenue in the third quarter of 2010.
Drilling and Evaluation operating income increased 36% compared to the third quarter of 2010, as strong results in North America and Latin America were partially offset by startup costs from the commencement of work in Iraq. In addition, operating income increased significantly compared to the third quarter of 2010 due to a $50 million impairment charge for an oil and gas property in Bangladesh in the prior year. North America operating income increased 52%, due to higher wireline activity in the United States land market and increased demand for drilling activities throughout the region. Latin America operating income increased 92%, driven by strong demand for drilling activities in Mexico, software sales in Colombia, and testing and subsea activity in Brazil. Europe/Africa/CIS region operating income decreased 23%, primarily due to increased wireline costs throughout the region and geopolitical disruptions in North Africa. Middle East/Asia operating income increased 20%, as the 2010 results were impacted by the impairment charge. This was partially offset by 2011 startup costs associated with the commencement of work in Iraq.
Corporate and other expenses were $105 million in the third quarter of 2011 compared to $62 million in the third quarter of 2010. The increase was due to higher legal and environmental costs and approximately $18 million of costs associated with strategic investments in our operating model and creating competitive advantage by repositioning our technology, supply chain, and manufacturing infrastructure.
Interest expense, net of interest income decreased $14 million in the third quarter of 2011 compared to the third quarter of 2010, primarily due to less interest expense as a result of the retirement of $750 million principal amount of our 5.5% senior notes in October 2010 and lower interest rates on a portion of our debt as a result of our interest rate swaps.
Income (loss) from discontinued operations, net in the third quarter of 2011 included a $163 million charge related to a ruling in an arbitration proceeding between Barracuda & Caratinga Leasing Company B.V. and our former subsidiary, KBR, whom we agreed to indemnify.
We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note 7 to the condensed consolidated financial statements, Part II, Item 1, â€śLegal Proceedingsâ€”Environmental ,â€ť and Part II, Item 1(a), â€śRisk Factors.â€ť
NEW ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting Standards Board (FASB) issued an update to existing guidance on the presentation of comprehensive income. This update will require the presentation of the components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. In addition, companies are also required to present reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. The update is effective for fiscal years and interim periods beginning after December 15, 2011. We will adopt the new disclosure requirements for comprehensive income beginning January 1, 2012 and are currently evaluating the provisions of this update.
The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Forward-looking information is based on projections and estimates, not historical information. Some statements in this Form 10-Q are forward-looking and use words like â€śmay,â€ť â€śmay not,â€ť â€śbelieves,â€ť â€śdo not believe,â€ť â€śexpects,â€ť â€śdo not expect,â€ť â€śanticipates,â€ť â€śdo not anticipate,â€ť â€śshould,â€ť and other expressions. We may also provide oral or written forward-looking information in other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of operations may vary materially.
We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events, or for any other reason. You should review any additional disclosures we make in our press releases and Forms 10-K, 10-Q, and 8-K filed with or furnished to the Securities and Exchange Commission (SEC). We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.
Good morning, and welcome to the Halliburton Fourth Quarter 2011 Conference Call. Today's call is being webcast, and a replay will be available on Halliburton's website for 7 days. The press release announcing the fourth quarter results is available on the Halliburton website. Joining me today are Dave Lesar, CEO; Mark McCollum, CFO; and Tim Probert, President, Strategy and Corporate Development.
I would like to remind our audience that some of today's comments may include forward-looking statements, reflecting Halliburton's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2010, Form 10-Q for the quarter ended September 30, 2011 and recent current reports on Form 8-K.
Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release, announcing the fourth quarter results, which, as I have mentioned, can be found on our website. We'll welcome questions after we complete our prepared remarks. Dave?
David J. Lesar
Thank you, Kelly, and good morning to everyone. Before discussing our fourth quarter results, let me begin with a few of our key accomplishments in 2011. First, I'm very proud to say that this was a record year for our company, with revenues of $24.8 billion, operating income of $4.7 billion and with growth, margins and returns that led our peer group. To put this in perspective, our business has nearly doubled in size over the last 5 years, primarily from organic growth.
From a division perspective, we achieved record revenues in both our Completion and Production and Drilling and Evaluation divisions, and I want to thank all our employees for their help in making it happen. The cornerstones of our strategy remain unchanged and include maintaining leadership in unconventional plays, participating in the deepwater expansion and impacting the decline curve in mature fields.
This year, we commercialized key technologies consistent with these growth themes, and Tim will discuss them later. As the industry leader in unconventional shale plays, we performed the first shale fracs in numerous countries around the globe, including Argentina, Mexico, Saudi Arabia, Australia and Poland. We are now starting to invest more heavily in building out our pressure pumping footprint in the international marketplace. We are also continuing to invest in our deepwater business and have secured key contract wins in East Africa, Vietnam, Malaysia, Australia, China, Brazil and other markets and are building infrastructure to support this work.
In addition, it's important to note that our service quality continues to be recognized by our customers, as Tim will also discuss. We believe this improving market position and service quality reputation will benefit us as new build deepwater rigs are scheduled to arrive in the coming years. Our customers are looking for deepwater alternatives that have the capability and technology, and increasingly, that company is Halliburton.
And lastly, we continue to build our capabilities in servicing mature fields and supported that effort with some critical acquisitions in specialty chemicals and artificial lift in 2011 that enabled us to broaden the scope of our mature field offerings to our customers. The most significant of these was Multi-Chem. We expect that synergies and sales, manufacturing and distribution will enable us to deliver additional value to our customers and shareholders as we expand the global footprint of this product line.
I'm very pleased with our results in the fourth quarter as we set new company records in both our North America and international operations. Revenues of $7.1 billion represents the highest quarterly revenue in the company's history, with North America, Latin America and the Middle East/Asia regions all achieving new record levels. Operating income of $1.4 billion was also a company record and was driven by strong performance in North America and the Latin America regions, where we had year-over-year revenue growth of 56% and 46%, respectively.
Let me start by providing some commentary on North America. The shift from natural gas to liquids-rich plays continues and was quite apparent in the fourth quarter. The U.S. rig count grew 3% sequentially, with oil-directed rigs up 8% and natural gas rigs down 2%. The shift toward oil and liquids-rich plays are a direct result of the stability of higher -- of oil prices and higher operator returns for these resources. Completing these wells requires higher levels of service intensity due to advanced fluid and completion technologies and creates an additional opportunity for us to otherwise differentiate ourselves from the competition.
We have highlighted for some time the dramatic impact that oil-directed horizontal activities has had on the North America market. For instance, in addition to natural gas rigs targeting liquids-rich plays, the oil rig count now represents more than 60% of the total in North America, a level we have not seen in decades. Our customers' sources of revenue has also shifted dramatically toward oil, with the sale of U.S. oil and liquids representing approximately 70% of total upstream revenue today. This compares with an approximate 50-50 split just 5 years ago. And our customer mix continues to shift toward IOCs, NOCs and large independents, who tend to have a more stable spending pattern and more sophisticated supply chain management and away from those customers who might be more financially challenged in the current market. We are also seeing a trend toward higher average footage drilled per well, up to approximately 7,000 feet from 5,000 feet just 5 years ago. And finally, today, reserve development demands 4x as much horsepower per rig as compared to 2004. So clearly, there's been a dramatic shift over the past several years, and all of this bodes well for a continuation of high demand in the North America unconventional markets.
So what will that market look like going forward? The last time the breakeven price for oil development was so far below prevailing oil prices was back in the early '80s, when the rig count was more than double what it is today. And despite the vast amount of work we've done in North America in recent years, there's only been a modest increase in net oil production, as new supplies are barely offsetting declines for mature North America basins. As a result, we expect continued liquids-driven activity growth in the coming years, as our customers invest in their resources and optimize their development technologies, and we plan to continue to expand our capability and drive efficiency through technology and logistical improvements to enable this growth.
Now looking at the results for the fourth quarter. Our North America revenue grew sequentially by 6% versus a 3% rig count due to strong activity in the Eagle Ford, Permian Basin, Marcellus, Gulf of Mexico and Canada. Despite this strong revenue growth, operating income declined slightly from the third quarter. And let me go over those reasons.
First, our recent acquisitions and the associated M&A costs that went with them had an impact of approximately one margin point on our North America margins in the fourth quarter. Second, as you know, the Rockies and the Bakken are 2 areas where we have a particularly high market share, and both markets experienced some seasonal impacts yielding inefficiencies, particularly with our commuter crews. The third quarter is historically our most profitable quarter each year in these 2 particular areas, and this year was no different. The impact of the holidays was more pronounced this year in these areas, as customers chose not to compete -- to complete wells through the Christmas holidays. Thirdly, cost inflation continues to have a negative impact. There is a delay between vendor price increases and when we are able to pass through these increases to our customers. In the natural gas basins, this is becoming more difficult, and we plan to go back to our vendors for price relief in some areas. This will take some time. Fourth, logistics and proppant supply. While we have a very sophisticated logistics group, there are times when issues arrive that are not within our control. We experienced logistical and proppant supply disruptions in several areas in the fourth quarter, and this impacted the Bakken, Rockies, South Texas and the Permian, all of which had a negative impact on margins. And finally, we experienced inefficiencies associated with frac fleet relocations to address the challenges the industry is facing in 2012, and I'll say more about that in a few minutes. Also, spot natural gas prices are down 33% in the last 50 days due to the resiliency of natural gas production in a mild winter. In response, we have seen the U.S. natural gas rig count decline 9% over that same period of time, and this change is clearly impacting the industry as we move into 2012, as service companies' resources relocate to the oil basins.
Now we've talked in the past about how we believe it is important to have a balanced portfolio of business in both dry natural gas basins and liquids plays because a large number of our customers have operations in both. Our strategy was to support these customers in the natural gas basins with a hyper-efficiency business model that went beyond just 24-hour operations. We stayed with these customers in the natural gas basins even as other competitors left to chase work in the oil plays. This strategy has worked well and deepened our relationship with these customers. Our understanding with them was that in return for staying with them in the natural gas basins, we would get their work in the liquids-rich plays as equipment became available. This strategy is now playing out to our advantage. As natural gas prices are falling to the sub-250 level, we are proactively working with these customers to now serve them in the oil plays as they shift their capital spend to liquids and away from natural gas.
We have moved or are in the process of moving 8 frac fleets from primarily natural gas plays to liquids plays. This requires redeployment of people and equipment. It disrupts a very efficient operation, and as well, it is requiring us to make adjustments to our supply chain. It's important to understand that these fleets that are moving are not looking for work but in each case now are committed to an existing customer or one who we could not serve before and, in each case, has or will deplace a competitor in the liquids plays.
So while beneficial to us in the long run, these moves do not come out and do not come about without a short-term impact on our margins. First, we lose the productivity of these hyper-efficient 24-hour crews as they move away from locations with a solid infrastructure and a higher level of expertise. Then when they start in a new location, they're not as efficient as they get used to new operating procedures and how the reservoir responds. And finally, there's a doubling up on some costs, as we generally have to use commuter crews while a local crew is changed -- is trained in the new operation.
So we believe that these pressures that come from this on revenues and margins will be limited. The additional benefit we get from these moves is that even more of our revenue will be generated in the liquids plays, while we still have the ability to increase prices, which will help to offset inflation pressure. Furthermore, the shift to the oil basins requires more expensive materials, particularly gels and proppants, which are already in tight supply. Additionally, we believe that the movement of service capacity out of the natural gas basins will eventually help remove the overhang in natural gas supply. So with great success, we dealt with a number of these significant logistical challenges in 2011, and we see them being able to accommodate the tremendous growth that we see as we move into 2011, even though it's created some near-term uncertainty and pressure on margins.
The concern about what will happen in the dry gas basins is a real one. However, there are customers who will continue to drill in these basins, as they have a low-cost gas basis, a hedge bought before the collapse of pricing or contracts to send their natural gas to markets where the pricing is better. These are our customers, and they will continue to need our services in the natural gas areas. And in most cases, we have a long-term contract with them that value the efficiencies we bring, so they can continue to make money even at lower prices. We have not yet exhausted the demand for fleets that we can relocate to those customers who want our services in the liquids basins, and we will continue to do that as necessary. We have established a great position in the U.S. market. And in these uncertain times, I believe that will pay off big for us.
As we look at the market dynamics today and even apply a downside scenario to how it might play out, based on frac equipment adds as well as reduced gas drilling, which would accelerate the equilibrium in the market for pumping, it is clear to us that the strength of liquids demand will provide a cushion to equipment coming out of the dry gas basins. We also believe that there will be a net overall increase in rig count in 2012. Meaning that in our view, the increase in liquids-directed rigs will more than offset the decline in natural gas rigs. We believe a much more pessimistic scenario is currently priced into our stock, and we do not see that happening.
In the Gulf of Mexico, we continue to see a gradual increase in activity levels with our fourth quarter revenue surprisingly now exceeding pre-moratorium levels. We believe we will see an increase in the level of permit approvals in 2012, leading to additional deepwater rigs arriving over the next several quarters. Margins for the Gulf are expected to improve but not to pre-moratorium levels until later this year or into next year as our customers adapt to new regulations.
So while we expect some inefficiency and, therefore, a downward pressure on margins in the near term due to the shift in our geographic and commodity mix that I just discussed, we believe that the idea that North American margins will collapse is a ridiculous one. We believe the increased activity from our customers due to support of liquid prices, good access to capital and continued increases in service intensity are very supportive of a healthy market in 2012. Keep in mind, we have also been spending money on improving our cost structure, as we outlined in our Analyst Day, to stay ahead of the competition. And finally, we remain focused on providing superior service to ensure that we are the provider of choice and to maximize the value for our customers.
So overall, we are very optimistic about 2012 and fully expect that North America revenue and operating income will increase over 2011, although we could see margins normalize somewhat through 2012, and we'll have a better view of this absolutely as the year goes on.
Now let's turn to our international results. Latin America had another outstanding quarter, posting sequential revenue growth of 9% compared to a rig count decline of 1%, and their operating income grew 24%. Mexico led the growth with higher drilling activity, consulting services and software sales. Also contributing to the stellar quarter was Colombia, with higher drilling activity, and Brazil. Compared to the fourth quarter of 2010, these 3 countries combined and grew an impressive 50% year-over-year. Our Eastern Hemisphere experienced 11% sequential revenue growth compared to a rig count growth of 3%, while operating margin improved to 13%, driven by year-end sales of software, completion tools and other equipment.
Also contributing to the strong quarter were improved results in Iraq, Algeria and East Africa. We continue to show progress in the markets that have been negatively impacting our margins over the past few quarters. For instance, in Iraq, we are running 5 rigs today, 2 more than at the end of the third quarter. We expect to add additional drilling and workover rigs in 2012, which will enable us to be profitable as activity levels increase. Overall, we remain enthusiastic about the future of our Iraq operations despite the challenges we went through in 2011.
Libya's production is coming back online, and although we have performed some minor work in the country, we are still awaiting well-defined operational plans from our customers. In Sub-Saharan Africa, we continue to see improvements in Angola and Nigeria. And while startup costs have negatively impacted operating margins in East Africa, we saw overall sequential improvement in this market.
And lastly, we've been taking action over the past few quarters to improve profitability in our Europe/Africa/CIS region, and we've made substantial progress in our restructuring efforts and believe we are now well positioned to deliver improved profitability in these markets in 2012.
We have been consistent in our outlook for our international operations. We anticipate international pricing will continue to remain competitive, particular in regard to larger projects. In 2012, we expect to see a gradual improvement, resulting from new rigs entering the market and increased customer budgets, which we believe will be skewed toward deepwater and international unconventional projects. With tight supply and demand fundamentals for oil and international natural gas prices that are often well above North America prices, we believe the drivers of the sustained activity in the Eastern Hemisphere are sound.
So in summary, we expect to see our Eastern Hemisphere margins progress through 2012, with a full year average in the mid-teens, as new projects ramp up, new technologyâ€™s introduced and the negative impact of the areas we've mentioned previously continue to abate, which means that we should have Eastern Hemisphere margins in the mid- to upper teens by the end of the year.
We believe that our growth prospects are so strong across all of our businesses that we are increasing our capital spending to the range of $3.5 billion to $4 billion in 2012. However, we do not expect to increase our pressure pumping horsepower additions beyond the 2011 levels, and we plan to spend -- to send more of this horsepower into our international markets. But we will, of course, maintain our ability to flex the capital as the year goes forward.
So 2011 was a very successful year for the company with revenue growth of 38% and operating income growth of 57%. We saw record activity levels, and we will continue to expand on our market position. I believe we will continue to build on this success, which should put us in the unique position to continue to achieve our objectives of superior growth, margins and returns versus our competitors.
I'll let Mark give you a little bit more detail.
Mark A. McCollum
Thanks, Dave, and good morning, everyone. Let me provide you with our fourth quarter financial highlights. Our revenue in the fourth quarter was $7.1 billion, up 8% sequentially from the third quarter. Total operating income for the fourth quarter was $1.4 billion, up 7% from the previous quarter. Our results in the fourth quarter included a $24 million charge in Corporate and Other related to an environmental matter. As a reminder, our third quarter results included an asset impairment charge of $25 million in the U.K. sector of the North Sea. Now going forward, I'll be comparing our fourth quarter results sequentially to the third quarter of 2011, excluding the impact of these charges.
North America revenue grew 6%, while operating income declined 1% compared to the previous quarter. As Dave mentioned, the impact of seasonality, cost inflation and recent acquisitions negatively impacted our North America margins during the quarter. As a reminder, we historically see our first quarter results affected by weather-related seasonality in the Rockies and the Northeast U.S., where we have a high percentage of 24-hour crews, and it's typical to see a sequential revenue and margin decline in the first quarter. In addition, we're expecting some short-term inefficiencies as a result of rigs and equipment moving from natural gas to oil-directed basins. We're anticipating these issues will result in a sequential margin decline of approximately 100 basis points in the first quarter for North America.
Internationally, revenue and operating income grew 11% and 37%, respectively, driven by activity improvements across all our regions and seasonal increases in softwares, completion tools and direct equipment sales at the end of the year. Our international margins improved to 15.2%. About half of the margin increase resulted from our seasonal increase in software and direct sales. The other half of the margin increase was driven by activity improvement in our other operations. Now for the first quarter of 2012, we're anticipating the typical sequential decline in international revenue and margins due to the absence of these year-end seasonal activities, as well as the typical weather-related weakness in the North Sea and Eurasia. As a reminder, this international activity decline has historically impacted our first quarter results by approximately $0.10 per share after tax, and we have no reason to believe it will be materially different in 2012.
Now I'll highlight the segment results. Completion and Production revenue increased $303 million or 8% due to activity growth in North America, and operating income was essentially flat as improved international profitability offset a slight decline in North America. Looking at Completion and Production on a geographic basis, North America revenue increased by 7% from higher U.S. land, offshore and Canadian activity. Operating income declined by 2%, primarily due to the holiday downtime, cost inflation, acquisition impacts and fleet moves that Dave described earlier. In Latin America, Completion and Production posted a 5% sequential increase in revenue, while operating income grew by 19% as a result of increased stimulation work in Mexico and higher cementing activity in Colombia and Mexico. In Europe/Africa/CIS, Completion and Production revenue and operating income increased 15% and 10%, respectively, due to improved vessel utilization in the North Sea, increased cementing work in Angola and higher stimulation activity and completion tools sales in Algeria and Nigeria. In Middle East/Asia, Completion and Production revenue and operating income increased by 8% and 4%, respectively, due to increased work in Iraq, improved stimulation activity in Australia and increased direct sales within the region.
In our Drilling and Evaluation division, revenue increased $213 million or 8%, and operating income was up 30% due to the year-end seasonality of higher software and direct sales, as well as higher activity levels in Mexico, Iraq, Colombia, Brazil and East Africa. In North America, Drilling and Evaluation's revenue and operating income were up 4% and 2%, respectively, due to higher wireline and drill bits activity in both the U.S. land and the Gulf of Mexico, as well as increased software sales in the U.S. and Canada. Drilling and Evaluation's Latin America revenue and operating income increased by 11% and 27%, respectively, primarily due to higher activity levels in Mexico and increased testing and subsea work in Brazil. We also benefited from strong project management activity in Mexico on the Alliance 2 and Remolino projects. In the Europe/Africa/CIS region, Drilling and Evaluation revenue and operating income were up 5% and 27%, respectively, due to increased wireline and directional drilling activity across the region, along with the seasonal year-end increase in software sales. Drilling and Evaluation's Middle East/Asia revenue was up 17%, and operating income was almost 1.5x greater than prior quarter levels due to increased direct sales in Asia and higher drilling activity in Iraq.
Now let me address some additional financial items. Our Corporate and Other expense included approximately $23 million for continued investment in our initiative to reinvent our service delivery platform in North America and to reposition our supply chain, manufacturing and technology infrastructure to better support our projected international growth. These activities will continue in 2012, and we anticipate the impact of these investments will be approximately $0.02 to $0.03 per share, after tax, in the first quarter. In total, we anticipate that corporate expenses will range between $95 million and $105 million per quarter during 2012.
In November 2011, we issued $1 billion of senior notes. This new debt issuance will increase our interest expense by approximately $10 million per quarter, and we're projecting overall interest expense for 2012 to be approximately $75 million per quarter. Our effective tax rate was 33% for the fourth quarter and 32% for the full year. Looking forward, we currently expect the 2012 effective tax rate will be approximately 33% to 34%. And finally, we expect depreciation and amortization to be approximately $1.6 billion during 2012.
Timothy J. Probert
Thanks, Mark, and good morning, everyone. I wanted to provide some additional detail on the accomplishments that Dave alluded to and some of the technologies which not only have made a substantial contribution to our success in 2011 but will, we believe, underpin our focus areas for growth in unconventional deepwater mature assets in 2012.
In the North America unconventional market, we've made great progress in deploying elements of our frac-of-the-future strategic initiative. We're rolling out our first series of Q10 pumps that have demonstrated significant reliability and maintenance advantages in field testing over our current fleet, already generally considered to be the best in the industry. Aggressive deployment of SandCastle storage and advanced dry polymer blenders in 2011 is expected to also provide ongoing improvements in capital efficiency and environmental performance. We've been particularly pleased with the performance of our GEM wireline analysis tool, which offers rapid evaluation of complex petrophysical properties, called "Shale Expert." It's been widely used in unconventional fields in the U.S. and internationally. We introduced our new RapidFrac sliding sleeve system that provides our customers with a dramatic increase in efficiency for the completion of horizontal unconventional reservoirs. We were also the first to deliver a cemented version of this technology. We realized a 10% reduction in crew size this year, and we expect ongoing improvements as we increase remote job monitoring and complete the deployment of our field mobility program, which will deliver enhanced operations and logistics efficiency.
So in total, we believe our frac-of-the-future initiative will make us the most cost-effective service provider in the industry. We expect it to be fully rolled out in North America by the end of 2012 and will serve as a platform for our investment in international unconventional growth too.
We continue to feel positive about international unconventionals. Customer consulting agreements have given us an opportunity to screen some 150 worldwide unconventional basins and 60 in detail. We are very encouraged by the properties we see in many of these basins and are responding accordingly with capital investment.
Drilling on LWD technology deployment moved rapidly in 2011. Geosteering activity dropped and replaced wellbores and reservoir sections was up 75% year-on-year, driven by unconventional and deepwater activity. Much of this was based on our award-winning ADR deep-reading resistivity technology. Sampling technology while drilling has had a special emphasis for us. Our recent GeoTap IDS run offshore was used to gather over 50 pressure and multiple-reservoir fluid samples during drilling operations; an industry first. This allowed the customer to save over 80 hours of rig time and eliminated the need for a competitor's wireline run. We also set numerous records in high-pressure, high-temperature applications in 2011, both for our wireline and drilling technologies. And we continue to see new wins based on this differentiated technology, as our customers increasingly exploit deeply buried reservoirs.
The exciting worldwide launch of DecisionSpace Desktop in 2011 was very well received in the market and contributed to a record profit year for Landmark. Over 1,600 individual licenses were established in the first year, and 46 of our 50 largest customers have either migrated or are in the process of migrating their data to the DecisionSpace platform. Integrated Project Management activities are on a steep upward trajectory. Despite a slow start in Iraq, revenues for our Project Management segment nearly doubled from 2010. We see this as a major growth platform, and the pipeline in 2012 is strengthening notably in mature assets.
So while we've been pleased with the growth of the technology portfolio and its ability to underpin our top line and margin growth in 2012, we're also very focused on execution and service quality. We're pleased with our performance this year. For example, Sperry drilling and wireline rates of nonproductive time continue to strengthen by 24% and 26%, respectively, from 2009 to 2011. And we continue to receive positive customer feedback, including a top performance review from a European IOC for formation evaluation. The combination of fit-for-purpose technology with excellent execution provides us a strong foundation for 2012 growth. Dave?
David J. Lesar
Thanks, Tim. So obviously, a lot of moving parts this quarter. Let me summarize what I think should be the takeaways. One, we do not believe that there will be a collapse in margins in pressure pumping in the U.S. Therefore, our revenues and operating income are expected to increase in 2012 in North America. We expect our revenue growth will be in excess of the rig count growth in both the Eastern and Western Hemispheres. We expect our deepwater revenue growth will be in excess of the deepwater rig count growth, while we continue to earn from our customers kudos for our distinctive service quality. And although it will have a short-term impact on our margins, we are proactively moving equipment from dry gas basins to liquids plays, and this equipment is immediately displacing competition. We expect our Eastern Hemisphere margins to return to the mid- to high teens by the end of 2012, as we gain traction on new projects and growing our revenue faster than rig count. And lastly, our positive view of the market supports a capital spending of $3.5 billion to $4 billion. But let me reiterate, pressure pumping horsepower additions are not expected to increase over 2011, and we believe more of those will go to the international markets.
So let's turn it over to questions at this point.