The Daily Magic Formula Stock for 11/02/2008 is Halliburton Co. According to the Magic Formula Investing Web Site, the ebit yield is 21% and the EBIT ROIC is 25-50 %.
Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.
Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.
General description of business
Halliburton Companyâ€™s predecessor was established in 1919 and incorporated under the laws of the State of Delaware in 1924. Halliburton Company provides a variety of services and products to customers in the energy industry.
In November 2006, KBR, Inc. (KBR), which at the time was our wholly owned subsidiary, completed an initial public offering (IPO), in which it sold approximately 32 million shares of KBR common stock at $17.00 per share. Proceeds from the IPO were approximately $508 million, net of underwriting discounts and commissions and offering expenses. On April 5, 2007, we completed the separation of KBR from us by exchanging the 135.6 million shares of KBR common stock owned by us on that date for 85.3 million shares of our common stock. In the second quarter of 2007, we recorded a gain on the disposition of KBR of approximately $933 million, net of tax and the estimated fair value of the indemnities and guarantees provided to KBR, which is included in income from discontinued operations in the consolidated statements of operations.
Subsequent to the KBR separation, in the third quarter of 2007, we realigned our products and services to improve operational and cost management efficiencies, better serve our customers, and become better aligned with the process of exploring for and producing from oil and natural gas wells. We now operate under two divisions, which form the basis for the two operating segments we now report: the Completion and Production segment and the Drilling and Evaluation segment. The two KBR segments have been reclassified as discontinued operations.
See Note 4 to the consolidated financial statements for financial information about our business segments.
Description of services and products
We offer a broad suite of services and products to customers through our two business segments for the exploration, development, and production of oil and gas. We serve major, national, and independent oil and gas companies throughout the world. The following summarizes our services and products for each business segment.
Completion and Production
Our Completion and Production segment delivers cementing, stimulation, intervention, and completion services. This segment consists of production enhancement services, completion tools and services, and cementing services.
Production enhancement services include stimulation services, pipeline process services, sand control services, and well intervention services. Stimulation services optimize oil and gas reservoir production through a variety of pressure pumping services, nitrogen services, and chemical processes, commonly known as hydraulic fracturing and acidizing. Pipeline process services include pipeline and facility testing, commissioning, and cleaning via pressure pumping, chemical systems, specialty equipment, and nitrogen, which are provided to the midstream and downstream sectors of the energy business. Sand control services include fluid and chemical systems and pumping services for the prevention of formation sand production. Well intervention services enable live well intervention and continuous pipe deployment capabilities through the use of hydraulic workover systems and coiled tubing tools and services.
Completion tools and services include subsurface safety valves and flow control equipment, surface safety systems, packers and specialty completion equipment, intelligent completion systems, expandable liner hanger systems, sand control systems, well servicing tools, and reservoir performance services. Reservoir performance services include testing tools, real-time reservoir analysis, and data acquisition services. Additionally, completion tools and services include WellDynamics, an intelligent well completions joint venture, which we consolidate for accounting purposes.
Cementing services involve bonding the well and well casing while isolating fluid zones and maximizing wellbore stability. Our cementing service line also provides casing equipment.
Drilling and Evaluation
Our Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise well-bore placement solutions that enable customers to model, measure, and optimize their well construction activities. This segment consists of Baroid Fluid Services, Sperry Drilling Services, Security DBS Drill Bits, wireline and perforating services, Landmark, and project management.
Baroid Fluid Services provides drilling fluid systems, performance additives, completion fluids, solids control, specialized testing equipment, and waste management services for oil and gas drilling, completion, and workover operations.
Sperry Drilling Services provides drilling systems and services. These services include directional and horizontal drilling, measurement-while-drillin g, logging-while-drilling, surface data logging, multilateral systems, underbalanced applications, and rig site information systems. Our drilling systems offer directional control while providing important measurements about the characteristics of the drill string and geological formations while drilling directional wells. Real-time operating capabilities enable the monitoring of well progress and aid decision-making processes.
Security DBS Drill Bits provides roller cone rock bits, fixed cutter bits, hole enlargement and related downhole tools and services used in drilling oil and gas wells. In addition, coring equipment and services are provided to acquire cores of the formation drilled for evaluation.
Wireline and perforating services include open-hole wireline services that provide information on formation evaluation, including resistivity, porosity, and density, rock mechanics, and fluid sampling. Also offered are cased-hole and slickline services, which provide cement bond evaluation, reservoir monitoring, pipe evaluation, pipe recovery, mechanical services, well intervention, and perforating. Perforating services include tubing-conveyed perforating services and products.
Landmark is a supplier of integrated exploration, drilling, and production software information systems, as well as consulting and data management services for the upstream oil and gas industry.
The Drilling and Evaluation segment also provides oilfield project management and integrated solutions to independent, integrated, and national oil companies. These offerings make use of all of our oilfield services, products, technologies, and project management capabilities to assist our customers in optimizing the value of their oil and gas assets.
Acquisitions and dispositions
In July 2007, we acquired the entire share capital of PSL Energy Services Limited (PSLES), an eastern hemisphere provider of process, pipeline, and well intervention services. PSLES has operational bases in the United Kingdom, Norway, the Middle East, Azerbaijan, Algeria, and Asia Pacific. We paid approximately $330 million for PSLES, consisting of $326 million in cash and $4 million in debt assumed, subject to adjustment for working capital purposes. As of December 31, 2007, we had recorded goodwill of $163 million and intangible assets of $54 million on a preliminary basis until our analysis of the fair value of assets acquired and liabilities assumed is complete. Beginning in August 2007, PSLESâ€™s results of operations are included in our Completion and Production segment.
As a part of our sale of Dresser Equipment Group in 2001, we retained a small equity interest in Dresser Inc.â€™s Class A common stock. Dresser Inc. was later reorganized as Dresser, Ltd., and we exchanged our shares for shares of Dresser, Ltd. In May 2007, we sold our remaining interest in Dresser, Ltd. We received $70 million in cash from the sale and recorded a $49 million gain. This investment was reflected in â€śOther assetsâ€ť on our consolidated balance sheet at December 31, 2006.
In January 2007, we acquired all intellectual property, current assets, and existing business associated with Calgary-based Ultraline Services Corporation (Ultraline), a division of Savanna Energy Services Corp. Ultraline is a provider of wireline services in Canada. We paid approximately $178 million for Ultraline and recorded goodwill of $124 million and intangible assets of $41 million. Beginning in February 2007, Ultralineâ€™s results of operations are included in our Drilling and Evaluation segment.
In January 2005, we completed the sale of our 50% interest in Subsea 7, Inc. to our joint venture partner, Siem Offshore (formerly DSND Subsea ASA), for approximately $200 million in cash. As a result of the transaction, we recorded a gain of approximately $110 million during the first quarter of 2005. We accounted for our 50% ownership of Subsea 7, Inc. using the equity method in our Completion and Production segment.
Our business strategy is to secure a distinct and sustainable competitive position as a pure-play oilfield service company by delivering products and services to our customers that maximize their production and recovery and realize proven reserves from difficult environments. Our objectives are to:
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;
knowledge of the reservoir;
We conduct business worldwide in approximately 70 countries. In 2007, based on the location of services provided and products sold, 44% of our consolidated revenue was from the United States. In 2006, 45% of our consolidated revenue was from the United States. In 2005, 43% of our consolidated revenue was from the United States. No other country accounted for more than 10% of our consolidated revenue during these periods. See Note 4 to the consolidated financial statements for additional financial information about geographic operations in the last three years. Because the markets for our services and products are vast and cross numerous geographic lines, a meaningful estimate of the total number of competitors cannot be made. The industries we serve are highly competitive, and we have many substantial competitors. Largely all of our services and products are marketed through our servicing and sales organizations.
Operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, expropriation or other governmental actions, exchange control problems, and highly inflationary currencies. We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country would be material to the conduct of our operations taken as a whole.
Information regarding our exposure to foreign currency fluctuations, risk concentration, and financial instruments used to minimize risk is included in Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€“ Financial Instrument Market Risk and in Note 14 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. Current market conditions have triggered constraints in the supply of certain raw materials, such as sand, cement, and specialty metals. Given high activity levels, particularly in the United States, we are seeking ways to ensure the availability of resources, as well as manage the rising costs of raw materials. Our procurement department is using our size and buying power through several programs designed to ensure that we have access to key materials at competitive prices.
Research and development costs
We maintain an active research and development program. The program improves existing products and processes, develops new products and processes, and improves engineering standards and practices that serve the changing needs of our customers. Our expenditures for research and development activities were $301 million in 2007, $254 million in 2006, and $218 million in 2005, of which over 97% was company-sponsored in each year.
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.
On an overall basis, our operations are not generally affected by seasonality. Weather and natural phenomena can temporarily affect the performance of our services, but the widespread geographical locations of our operations serve to mitigate those effects. Examples of how weather can impact our business include:
the severity and duration of the winter in North America can have a significant impact on gas storage levels and drilling activity for natural gas;
the timing and duration of the spring thaw in Canada directly affects activity levels due to road restrictions;
typhoons and hurricanes can disrupt coastal and offshore operations; and
severe weather during the winter months normally results in reduced activity levels in the North Sea and Russia.
In addition, due to higher spending near the end of the year by customers for software and completion tools and services, Landmark and completion tools results of operations are generally stronger in the fourth quarter of the year than at the beginning of the year.
At December 31, 2007, we employed approximately 51,000 people worldwide compared to approximately 45,000 at December 31, 2006. At December 31, 2007, approximately 12% of our employees were subject to collective bargaining agreements. Based upon the geographic diversification of these employees, we believe any risk of loss from employee strikes or other collective actions would not be material to the conduct of our operations taken as a whole.
We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others:
the Comprehensive Environmental Response, Compensation and Liability Act;
the Resource Conservation and Recovery Act;
the Clean Air Act;
the Federal Water Pollution Control Act; and
the Toxic Substances Control Act.
In addition to the federal laws and regulations, states and other countries where we do business may have numerous environmental, legal, and regulatory requirements by which we must abide. We evaluate and address the environmental impact of our operations by assessing and remediating contaminated properties in order to avoid future liabilities and comply with environmental, legal, and regulatory requirements. On occasion, we are involved in specific environmental litigation and claims, including the remediation of properties we own or have operated, as well as efforts to meet or correct compliance-related matters. Our Health, Safety and Environment group has several programs in place to maintain environmental leadership and to prevent the occurrence of environmental contamination.
We do not expect costs related to these remediation requirements to have a material adverse effect on our consolidated financial position or our results of operations.
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 during 2007, 2006, or 2005.
Mr. Robert L. Crandall, who has served as a Director since 1986, and Mr. W. R. Howell, who has served as a Director since 1991, are both retiring from the Board immediately prior to the Annual Meeting of Stockholders on May 21, 2008. They will not be candidates for reelection for the ensuing year. Ms. Kathleen M. Bader is not standing for reelection for the ensuing year.
Ten Directors are to be elected to serve for the ensuing year and until their successors are elected and qualify. Nine of the nominees listed below are presently Directors of Halliburton. Mr. James T. Hackett is proposed for the first time for election to the Board. The common stock represented by the proxies will be voted to elect the ten nominees as Directors unless we receive contrary instructions. If any nominee is unwilling or unable to serve, favorable and uninstructed proxies will be voted for a substitute nominee designated by the Board. If a suitable substitute is not available, the Board will reduce the number of Directors to be elected. Each nominee has indicated approval of his or her nomination and his or her willingness to serve if elected.
ALAN M. BENNETT , 57, Interim Chief Executive Officer, H&R Block (a tax and financial services provider) since 2007; Senior Vice President and Chief Financial Officer, Aetna, Inc. (a leading provider of health, dental, group life, disability and long-term care benefits), 2001- 2007; Vice President and Corporate Controller, Aetna, Inc., 1998-2001; Vice President and Director of Internal Audit, Aetna, Inc., 1997-1998; Chief Financial Officer, Aetna Business Resources, 1995-1997; joined Halliburton Company Board in 2006; member of the Audit and the Nominating and Corporate Governance Committees; Director of TJX Companies, Inc.
JAMES R. BOYD , 61, Retired Chairman of the Board, Arch Coal, Inc. (second largest U.S. coal producer); Chairman of the Board, Arch Coal, Inc., 1998-2006; Senior Vice President and Group Operating Officer, Ashland, Inc., 1989-2002; joined Halliburton Company Board in 2006; member of the Compensation and the Health, Safety and Environment Committees; Director of Arch Coal, Inc.
MILTON CARROLL , 57, Chairman of the Board, CenterPoint Energy, Inc. (a public utility holding company) since 2002 and Chairman of Instrument Products, Inc. (a private oil-tool manufacturing company); joined Halliburton Company Board in 2006; member of the Health, Safety and Environment and the Compensation Committees; Chairman and Director of Health Care Service Corporation.
KENNETH T. DERR , 71, Retired Chairman of the Board, Chevron Corporation (an international oil company); Chairman and Chief Executive Officer, Chevron Corporation, 1989-1999; joined Halliburton Company Board in 2001; Chairman of the Compensation Committee and member of the Health, Safety and Environment Committee; Director of Calpine Corporation and Citigroup Inc.
S. MALCOLM GILLIS , 67, University Professor, Rice University since 2004; President, Rice University, 1993-2004; Ervin Kenneth Zingler Professor of Economics, Rice University, 1996-2004; Professor of Economics, Rice University, 1993-2004; joined Halliburton Company Board in 2005; member of the Health, Safety and Environment and the Nominating and Corporate Governance Committees; Director of Service Corporation International, Electronic Data Systems Corporation, Introgen Therapeutics, Inc., AECOM Technology and the Vietnam Education Foundation.
JAMES T. HACKETT, 54, Chairman of the Board, President and Chief Executive Officer of Anadarko Petroleum Corporation (an independent oil and gas exploration and production company) since 2006; President and Chief Executive Officer of Anadarko Petroleum Corporation, 2003 â€“ 2006; President and Chief Operating Officer of Devon Energy Corporation, 2003; Chairman of the Board, President and Chief Executive Officer of Ocean Energy, Inc., 2000 â€“ 2003; President and Chief Executive Officer of Ocean Energy, Inc., 1999 â€“ 2000; Chairman, Chief Executive Officer and President of Seagull Energy Corporation, 1999; Director of Fluor Corporation and Temple-Inland, Inc. and Chairman of the Federal Reserve Bank of Dallas.
DAVID J. LESAR , 54, Chairman of the Board, President and Chief Executive Officer of the Company since 2000; President of the Company, 1997-2000; Executive Vice President and Chief Financial Officer, 1995-1997; joined Halliburton Company Board in 2000.
J. LANDIS MARTIN , 62, Founder and Managing Director, Platte River Ventures, L.L.C. (a private equity investment company) since 2005; Chairman (1989-2005) and Chief Executive Officer (1995-2005), Titanium Metals Corporation; President and Chief Executive Officer, NL Industries, Inc., 1987-2003; Chairman of the Board and Chief Executive Officer, Baroid Corporation (and its predecessor), 1990-1994; joined Halliburton Company Board in 1998; Chairman of the Nominating and Corporate Governance Committee and member of the Audit Committee; Director of Apartment Investment and Management Company and Crown Castle International Corporation.
JAY A. PRECOURT , 70, Chairman of the Board, Hermes Consolidated, Inc. (a gatherer, transporter and refiner of crude oil and refined products) since 1999; Chairman of the Board and Chief Executive Officer, Scissor Tail Energy, LLC, 2000-2005; Vice Chairman and Chief Executive Officer, Tejas Gas Corporation, 1986-1999; President, Tejas Gas Corporation, 1996-1998; joined Halliburton Company Board in 1998; Chairman of the Health, Safety and Environment Committee and member of the Audit Committee.
DEBRA L. REED , 51, President and Chief Executive Officer, Southern California Gas Company and San Diego Gas & Electric Company (regulated utility companies) since 2006; President and Chief Operating Officer, Southern California Gas Company and San Diego Gas & Electric Company, 2004-2006; President and Chief Financial Officer, Southern California Gas Company and San Diego Gas & Electric Company, 2002-2004; President of San Diego Gas & Electric Company, 2000-2001; President, Energy Distribution Services, Southern California Gas Company, 1998-2001; Senior Vice President, Southern California Gas Company, 1995-1998; joined Halliburton Company Board in 2001; member of the Compensation and the Nominating and Corporate Governance Committees; Director of Genentech, Inc.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
We are a leading provider of products and services to the energy industry. We serve the upstream oil and gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field . 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, and completion services. The segment consists of production enhancement services, completion tools and services, and cementing services; and
our Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise well-bore placement solutions that enable customers to model, measure, and optimize their well construction activities. The segment consists of fluid services, drilling services, drill bits, wireline and perforating services, Landmark software and consulting services, and project management 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, Continental Europe, Malaysia, Mexico, Brazil, and Singapore. With more than 55,000 employees, we operate in approximately 70 countries around the world, and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.
During the first nine months of 2008, we produced revenue of $13.4 billion and operating income of $2.8 billion, reflecting an operating margin of 21%. Revenue increased $2.3 billion or 21% over the first nine months of 2007, while operating income improved $256 million or 10% over the first nine months of 2007. Consistent with our initiative to grow our non-North America operations, we experienced 25% revenue growth and 22% operating income growth outside of North America in the first nine months of 2008 compared to the first nine months of 2007. Revenue from our Latin America region increased 34% to $1.8 billion, and operating income increased 47% to $369 million in the first nine months of 2008 compared to the first nine months of 2007. Our Middle East/Asia and Europe/Africa/CIS regions also returned revenue growth in excess of 20% in the first nine months of 2008 compared to the first nine months of 2007.
The long-term outlook for our business remains generally favorable despite the recent volatility in the equity and credit markets and the likelihood of a global decrease in hydrocarbon demand. We believe that any major macroeconomic disruptions may ultimately correct themselves as the underlying trends of smaller and more complex reservoirs, high depletion rates, and the need for continual reserve replacement should drive the long-term need for our services.
During 2007, the North America region experienced challenging market conditions as a result of downward pressure on the pricing of our services, as well as reduced activity in Canada. During the first six months of 2008, operating margins in the region continued to decline from prior period levels, primarily as a result of lower effective pricing for our United States fracturing services and cost inflation for fuel and other materials used in our operations. However, as of the third quarter of 2008, prices have stabilized and margins have improved due to increased activity in the United States, recovery in Canada from its seasonal decline, and the positive impacts of fuel surcharges that we negotiated with many of our customers earlier in the year. In addition, we continue to see revenue growth from our customers' development of more complex reservoirs that benefit from our differentiated technologies. Recently, a drop in natural gas prices is creating some uncertainty on future activity levels and has caused some of our customers to adjust the level of their future capital expenditures. However, we believe we may have opportunities to grow our market share in this environment, as our customersâ€™ capital expenditure cuts appear to be directed primarily toward conventional and shallower drilling activity; preserving the focus on unconventional plays where we generally have a stronger position. These more complex, unconventional developments, as noted above, represent the majority of our business. Our strategy of deploying our equipment and services to our larger customers, who normally have longer-term drilling plans and are involved in the more complex developments, should mitigate the effect of short-term fluctuations in commodity prices. In addition, access to capital, with the recent volatility in the credit market, may constrain the growth of industry capacity. We believe that the inability of some service providers to raise capital could lead to a tightening of supply and this, along with the continued shift to more complex, service-intensive developments, may create the opportunity for us to compete effectively for additional market share.
Outside of North America, our international business has not yet experienced any significant impact from the weakening of commodity prices. If a slowdown occurs, history indicates that the effects may be more muted compared to that of North America. While macroeconomic uncertainties could cloud our view, we still believe that growth will continue in 2009. It is likely we may experience delay or curtailing of some new projects, notably new heavy oil and potentially some gas-to-liquids projects. We are monitoring the activities of our customers and are ready to react to any changes in customer spending. In addition, as noted above, the trend toward exploration and exploitation of more complex reservoirs bodes well for the mix of our product line offerings and degree of service intensity on a per rig basis. Therefore, we have been investing and will continue to invest in technology and appropriate levels of capital and infrastructure predominantly outside of North America, consistent with our initiative to grow our operations in that part of the world and balance our geographic portfolio. As our customers award larger tranches of work, pricing competition in the international arena has intensified. However, we are working to partially offset this price competition by value created through the introduction of new technologies, consistency of execution, and fixed cost leverage. In addition, we believe our Latin America region should continue to experience the highest growth rate of all our regions, driven by contract awards in Mexico and higher activity in Brazil and Colombia.
In 2008, we are focusing on:
maintaining optimal utilization of our equipment and resources;
managing pricing, particularly in our North America operations;
hiring and training additional personnel to meet the need for our services;
continuing the globalization of our manufacturing and supply chain processes;
balancing our United States operations by capitalizing on the trend toward horizontal drilling;
leveraging our technologies to provide our customers with the ability to more efficiently drill and complete their wells and to increase their productivity. To that end, we opened one international research and development center with global technology and training missions in 2007, one in the first quarter of 2008, and another in the third quarter of 2008;
maximizing our position to win meaningful international tenders, especially in deepwater fields, complex reservoirs, and high-pressure/high-temper ature environments;
expanding our business with national oil companies, including preparing for a shift to more demand for our integrated project management services;
pursuing strategic acquisitions that enhance our technological position and our product and service portfolio in key geographic areas such as:
in October 2008, we acquired the assets of Pinnacle Technologies, Inc. (Pinnacle), including the Pinnacle brand from CARBO Ceramics Inc. Pinnacle is a provider of microseismic fracture mapping services and tiltmeter mapping services;
in July 2008, we acquired the remaining 49% equity interest in WellDynamics B.V. (WellDynamics) from Shell Technology Ventures Fund 1 B.V (STV Fund). We now own 100% of WellDynamics, a provider of intelligent well completion technology;
in June 2008, we acquired all the intellectual property and assets of Protech Centerform. Protech Centerform is a provider of casing centralization service; and
in May 2008, we acquired all intellectual property, assets, and existing business of Knowledge Systems Inc. (KSI). KSI is a leading provider of combined geopressure and geomechanical analysis software and services;
directing our capital spending primarily toward non-North America operations for service equipment additions and infrastructure. During the third quarter of 2008, we lowered our capital spending forecast marginally due to the temporary cessation of manufacturing in our Houston-area plants because of the hurricane. However, we continue to provide for equipment placements on offshore rigs and to meet the growing demand of our customers in the emerging shale plays in North America. Capital spending for 2008 is expected to be approximately $1.8 billion to $1.9 billion.
Our operating performance is described in more detail in â€śBusiness Environment and Results of Operations.â€ť
Financial markets, liquidity and capital resources
In October 2008, the equity, credit, and commodity markets saw unprecedented volatility. While this created certain additional risks for our business, we have invested our cash balances conservatively, reduced our leverage, and secured sufficient short-term credit capacity to help mitigate any negative impact on our operations. During the third quarter of 2008, we issued an aggregate amount of $1.2 billion in senior notes and settled the principal and conversion premium on our 3.125% convertible senior notes. For additional information, see â€śLiquidity and Capital Resourcesâ€ť, â€śRisk Factorsâ€ť, Note 6 to our condensed consolidated financial statements, and â€śBusiness Environment and Results of Operations.â€ť
Foreign Corrupt Practices Act (FCPA) investigations
The Securities and Exchange Commission (SEC) is conducting a formal investigation into whether improper payments were made to government officials in Nigeria. The Department of Justice (DOJ) is also conducting a related criminal investigation. See Note 8 to our condensed consolidated financial statements and â€śRisk Factorsâ€ť for further information.
LIQUIDITY AND CAPITAL RESOURCES
We ended the third quarter of 2008 with cash and equivalents of $973 million compared to $1.8 billion at December 31, 2007.
Significant sources of cash
Cash flows from operating activities contributed $1.6 billion to cash in the first nine months of 2008. Growth in revenue and operating income in the first nine months of 2008 compared to the first nine months of 2007 is attributable to higher customer demand and increased service intensity due to a trend toward exploration and exploitation of more complex reservoirs.
In September 2008, we issued senior notes due 2038 totaling $800 million and senior notes due 2018 totaling $400 million, which were used to pay the principal amount of our 3.125% convertible senior notes.
Early in 2008, we sold approximately $388 million of marketable securities, consisting of auction-rate securities and variable-rate demand notes.
Further available sources of cash. We have an unsecured $1.2 billion five-year revolving credit facility to provide commercial paper support, general working capital, and credit for other corporate purposes. There were no cash drawings under the facility as of September 30, 2008.
On September 25, 2008 we terminated the $2.5 billion, 364-day revolving credit facility agreement, which we entered into in July 2008 to provide short-term financing to pay for the settlement of the convertible notes. On October 10, 2008, we entered into an unsecured, six-month revolving credit facility, with current commitments of $400 million, in order to give us additional liquidity and for other general corporate purposes.
Significant uses of cash
Our 3.125% convertible senior notes due July 2023 became redeemable at our option on July 15, 2008. On July 30, 2008, we gave notice of redemption on the convertible notes. In lieu of redemption, the holders of the convertible notes could convert each $1,000 principal amount of convertible notes into 53.4069 shares of our common stock. Substantially all of the holders timely elected to convert during the third quarter of 2008. Upon conversion, we settled the principal amount of our convertible notes in cash and the premium on our notes with a combination of $693 million in cash and approximately $840 million, or 20 million shares, of our treasury stock.
Capital expenditures were $1.3 billion in the first nine months of 2008, with increased focus toward building infrastructure and adding service equipment in support of our expanding operations outside of North America. Capital expenditures were predominantly made in the drilling services, production enhancement, cementing, and wireline and perforating product service lines.
During the first nine months of 2008, we repurchased approximately 13 million shares of our common stock under our share repurchase program at a cost of approximately $481 million at an average price of $36.61 per share.
We paid $239 million in dividends to our shareholders in the first nine months of 2008.
Future uses of cash. We have approximately $1.8 billion remaining available under our share repurchase authorization, which may be used for open market share purchases. However, at the present time, we are not repurchasing additional shares in order to maintain our liquidity.
We will repay $150 million of medium term notes, which will mature in December 2008.
Capital spending for 2008 is expected to be approximately $1.8 billion to $1.9 billion. The capital expenditures plan for 2008 is primarily directed toward our drilling services, production enhancement, cementing, and wireline and perforating product service lines. 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 $80 million in the fourth quarter of 2008.
While the timing is not necessarily under our control, any potential settlements entered into with the SEC or DOJ related to the Foreign Corrupt Practices Act investigations may lead to cash payments relating to the indemnity provided to KBR and for any matters deemed to relate to us directly. See Notes 2 and 8 to our condensed consolidated financial statements for more information.
Other factors affecting liquidity
Letters of credit. In the normal course of business, we have agreements with banks under which approximately $2.3 billion of letters of credit, surety bonds, or bank guarantees were outstanding as of September 30, 2008, including approximately $900 million that relate to KBR. These KBR letters of credit, surety bonds, or bank guarantees are being guaranteed by us in favor of KBRâ€™s customers and lenders. KBR has agreed to compensate us for these guarantees and indemnify us if we are required to perform under any of these guarantees. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.
Financial position in current market. In recent years, we have reduced our leverage and improved our liquidity by focusing on debt reduction and improvement to our credit profile. Our debt maturities extend over a long period of time. We have no financial covenants or material adverse change provisions in our bank agreements, and we are working to continue to improve our short-term credit capacity. For example, we recently entered into an additional revolving credit facility, as discussed above, providing us with a total of $1.6 billion of committed bank credit to support our operations. These revolving credit facilities also support any commercial paper we may issue in the future. Currently, there are no borrowings under these revolving credit facilities.
In addition, we conservatively manage our cash investments by investing principally in United States Treasury securities and repurchase agreements collateralized by United States Treasury securities .
Credit ratings. Our conservatively-managed balance sheet is evidenced by the strong credit ratings assigned to us by the rating agencies. 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.
RESULTS OF OPERATIONS IN 2008 COMPARED TO 2007
Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007
The increase in consolidated revenue in the third quarter of 2008 compared to the third quarter of 2007 was attributable to higher worldwide activity, particularly in the United States, Europe, and Latin America. Approximately $74 million in revenue was lost during the third quarter of 2008 due to Gulf of Mexico hurricanes. International revenue was 57% of consolidated revenue in the third quarter of 2008 and 56% of consolidated revenue in the third quarter of 2007.
The increase in consolidated operating income was primarily driven by a 63% increase in Latin America. In addition, improved demand from increased rig activity and improved pricing and asset utilization in the United States, Canada, and the Middle East contributed to the increase. The hurricanes in the Gulf of Mexico negatively impacted operating income by approximately $52 million in the third quarter of 2008. Operating income in the third quarter of 2007 was impacted by $32 million in charges for environmental reserves.
Following is a discussion of our results of operations by reportable segments.
Completion and Production revenue increase of 22% compared to the third quarter of 2007 was derived from all regions. Europe/Africa/CIS revenue grew 26% from increased cementing revenue in Europe and higher completion tool sales and activity in Africa. In addition, production enhancement services continued to benefit from the acquisition of PSL Energy Services Limited in the third quarter of 2008. Middle East/Asia revenue grew 6% compared to the third quarter of 2007 from higher production enhancement activity as a result of new contracts throughout the region. North America revenue grew 19%, benefiting from higher asset utilization, increased resources, and stronger demand in Canada and the United States for production enhancement services and cementing products and services. Partially offsetting the improvement in the United States was $34 million in lost revenue due to Gulf of Mexico hurricanes. Latin America revenue grew 55% as a result of higher customer demand, new contracts, and more favorable pricing for cementing products and services throughout the region. Completion tool sales increased throughout the region as well and Mexico continues to benefit from improved vessel utilization. International revenue was 48% of total segment revenue in the third quarter of 2008 and 46% of total segment revenue in the third quarter of 2007.
Completion and Production segment operating income increase of 11% compared to the third quarter of 2007 was primarily driven by Latin America. Latin America operating income increased 115% as a result of increased demand for completion tools in Brazil and higher vessel utilization in Mexico. Europe/Africa/CIS operating income increased 15% with the most significant impact coming from higher customer demand and increased production enhancement activity in Europe. Middle East/Asia operating income was flat with higher demand for and better mix of production enhancement products and services in the Middle East balancing out declines in sales of completion tools and cementing services in Asia Pacific. North America operating income increased 3% compared to the third quarter of 2007, primarily due to more favorable pricing and product mix for production enhancement in Canada and higher demand for completion tools in the United States. The increase in North America was partially offset by a $25 million negative impact from Gulf of Mexico hurricanes.
Drilling and Evaluation revenue increase of 26% compared to the third quarter of 2007 was derived from all four regions and all product service lines. Europe/Africa/CIS revenue increased 17% due to higher customer demand for fluid services in Europe and wireline and perforating services in Africa. Landmark software and consulting services also contributed to the improved results. Middle East/Asia revenue grew 32%, benefiting from increased demand for new technologies and drilling services throughout the region. In addition, growing rig count and higher demand for fluid services contributed to the increase. North America revenue increased 26% compared to the third quarter of 2007 from higher activity across all product service lines primarily due to increased rig count. Partially offsetting the improvement in North America was $40 million in lost revenue due to Gulf of Mexico hurricanes. Latin America revenue grew 32% as a result of increased demand and more beneficial pricing for drilling, wireline and perforating, and project management services. International revenue was 68% of total segment revenue in both the third quarter of 2008 and in the third quarter of 2007.
The increase in segment operating income compared to the third quarter of 2007 was predominantly led by North America and Middle East/Asia. Europe/Africa/CIS operating income decreased 14% as a result of declines in activity for drilling services in Europe partially offset by increased software sales in Europe and higher demand for wireline and perforating services throughout the region. Middle East/Asia operating income increased 42% over the third quarter of 2007, primarily due to higher drilling services activity and demand for new technologies throughout the region. North America operating income increased 55% as a result of increased activity in all product service lines including higher demand for fluid services and increased drilling services activity in the United States. Negatively impacting the region was a loss of $27 million due to Gulf of Mexico hurricanes in the third quarter of 2008. North America results for the third quarter of 2007 included $24 million in charges for environmental reserves.
Latin America operating income increased 27% with higher drilling activity and increased demand for wireline and perforating services. Landmark software and consulting services also contributed to the improved results.
Corporate and other expenses were $81 million in the third quarter of 2008 compared to $58 million in the third quarter of 2007. The increase was primarily due to a $22 million acquisition-related charge for WellDynamics related to employee compensation awards. The third quarter of 2007 included $8 million in charges for environmental reserves.
Interest expense decreased $4 million in the third quarter of 2008 compared to the third quarter of 2007 primarily due to the settlement of the 3.125% convertible senior notes.
Interest income decreased $20 million in the third quarter of 2008 compared to the third quarter of 2007 due to lower interest rates and lower investment balances.
Other, net in the third quarter of 2008 included the loss of $693 million for the portion of the premium paid in cash on the settlement of our convertible senior notes.
Provision for income taxes on continuing operations in the third quarter of 2008 of $343 million resulted in an effective tax rate of 106% compared to an effective tax rate on continuing operations of 17% in the third quarter of 2007. The increase in the effective tax rate from 2007 to 2008 is primarily related to the non-tax deductibility of the $693 million loss on the portion of the premium on our convertible debt that we settled in cash. In addition, the third quarter of 2007 included a $133 million favorable income tax impact from the ability to recognize foreign tax credits previously estimated not to be fully utilizable.
Minority interest in net income of subsidiaries decreased $15 million compared to the third quarter of 2007 primarily related to our joint ventures in Egypt and Saudi Arabia.
Today's call is being webcast and a replay will be available on Halliburton's website for seven days. A podcast download will also be available. The press release announcing the third quarter results is available on the Halliburton website.
Joining me today are Dave Lesar, CEO, Mark McCollum, CFO, and Tim Probert, Executive Vice President, Strategy and Corporate Development. In today's call Dave will provide opening remarks, Mark will discuss our overall financial performance and liquidity position, and Tim will provide comments on our operations and business outlook. We will welcome questions after we complete our prepared remarks.
Before turning the call over to Dave, I'd 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 differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2007, our Form 10-Q for the quarter ended June 30, 2008, and recent current reports on Form 8-K.
Please note that we will be using the term international to refer to our operations outside the U.S. and Canada, and we will refer to the combination of U.S. and Canada as North America.
Now I'll turn the call over to Dave Lesar.
In the third quarter the stock and commodity markets saw unprecedented volatility which, of course, has been very unsettling to investors. Amidst all this, we have remained very focused on delivering solid growth and returns while executing on our strategy of balancing our portfolio both geographically and by product service line. I'm happy to share with your our third quarter results today.
Third quarter operating income reached a new milestone with over $1 billion generated for the first time in operating income. All of our product service lines had record revenues. The company posted year-over-year revenue growth of 24%, with our International business registering growth of 25%. Latin America continued its momentum, with 42% revenue growth over prior years, and International margins of 22% exceeded our stated target.
Currently we've not experienced any business impact from the equity and credit market volatility, and despite the growing prospects of a global economic slowdown and related decrease in hydrocarbon demand, we continue to believe in the long-term fundamentals of the oil and gas industry. We expect that any major macroeconomic disruptions will ultimately correct themselves as the underlying trends of smaller and more complex accumulations, higher depletion rates, and a need for continued reserve replacement will drive the long-term demand for our services.
We remain committed to investing in technology and appropriate levels of capital and infrastructure to ensure we align ourselves with the industry's long-term growth trajectory.
Let me now turn to the results of North America and discuss our prospects for the remainder of the year and onward.
North America revenue for the quarter grew a solid 13% sequentially despite the hurricane disruptions. We have previously stated that the shift toward new emerging plays will benefit our differentiated technologies, and we started to see evidence of this in the third quarter. Our U.S. Land operations showed strong sequential growth of 13%, as it benefited from the higher technical requirements needed to unlock the value of these new resource plays. For instance, Sperry's revenue growth of 16% sequentially resulted from good penetration of our MWD and LWD technologies.
North American margins of 25% reflect strong performance in U.S. Land due to higher activity and the success of our surcharge program. The uptick in margin performance in U.S. Land overcame the impact of the hurricane and the two gains recognized on the sale of assets in the second quarter, resulting in flat North American margins sequentially.
The drop in natural gas prices is creating uncertainty on future activity levels, and it's caused some of our E&P customers to adjust the level of the capital expenditures. Despite this, we see secular trends in the market could provide us with unique opportunities.
First, as operators make modifications to their drilling plans, their capital expenditure cuts appear to be directed primarily towards conventional and shallower drilling activities, preserving their focus on unconventional plays where we have a stronger position. This can translate to a more favorable business mix for us, utilizing our services and technology intensive offerings.
Second, access to capital may constrain the growth of service industry capacity. The inability of some service providers to raise capital to lead to a tightening of supply and this, along with favorable activity mix, creates the opportunity for market share gains in a constrained activity environment.
And third, our strategy of aligning our people and equipment to the largest players in North America should temper the impact of a slowdown to our business while production levels adjust to balance the supply and demand relationship. A significant portion of our revenues in North America consists of large independents and international oil companies. These large independents and IOCs tend to have longer drilling plans and they're not as vulnerable as private E&Ps for the short-term fluctuations in the commodity markets. If we have spare capacity available we will then be able to serve other customers in the market.
And finally, we believe that the natural gas market has been and will continue to be self-correcting.
These trends may not entirely counteract the effects of a slowdown in activity, however we think we're in a good position to handle any operational downturn and we will use this environment to strengthen the long-term health of our U.S. franchise.
Turning to our International business, revenue continues its upward momentum, with 25% year-over-year growth led by Latin America growing by more than 40%. All of our key markets in Latin America have grown substantially, but most notable is Brazil, where we experienced year-over-year growth of 70% in the third quarter. We have seen higher utilization of our reservoir evaluation and sand control technologies and expect to see continued growth in this market as we assist Petrobras and other IOCs in their deepwater projects.
Sequentially, International revenues and operating income were up 4% and 5%, respectively, as all regions except Europe/Africa saw a good flow through from increased revenue. Europe/Africa operating income was down 6% sequentially as some contracts in the North Sea have expired and we are currently redeploying equipment and personnel to [break in audio] locations. Additionally, we experienced increased operational costs and an unfavorable business mix in West Africa.
International margins for the quarter were 22%. As we mentioned in previous calls, we will see regional fluctuations between quarters depending on where projects are mobilized and started. Our International business has not yet experienced the impact of the weakening global economy or the decline in commodity prices. At this time, barring a significant or prolonged global recession, we expect that our International growth will continue, perhaps albeit at a slower rate than 2008.
Now let me turn the call over to Mark, who'll provide more details on our financial performance.
I'll begin with our operational highlights and I'll be comparing our third quarter results sequentially to the second quarter.
Our revenue in the third quarter was $4.9 billion, up $366 million or 8% from the second quarter, led by Production Enhancement, which registered growth of 15%. On a geographic basis, North America led all regions with 13% growth driven by higher activity in U.S. Land and a seasonal recovery in Canada. This was partially offset by a decline in the Gulf of Mexico due to the hurricanes.
Operating income increased $102 million or 11% from the second quarter of 2008, representing incremental margins of 28%. Our third quarter results included a $22 million WellDynamics acquisition-related charge which was included in Corporate and Other. Our second quarter results included a $25 million gain on the sale of two investments which was recognized in North America in the Drilling and Evaluation segment and a charge of $30 million for the settlement of the ReedHycalog patent dispute, which was included in Corporate and Other.
Now I'll highlight the segment results:
Completion and Production revenue increased $227 million or 9% from the second quarter, while operating income increased $99 million or 18%. The higher revenue was led by Production Enhancement, driven by increased activity in U.S. Land, the seasonal recovery in Canada from spring breakup, and completions activity in Brazil.
Looking at Completion and Production on a geographic basis, North America Completion and Production revenue increased 15% due to strong activity for U.S. Land in Canada, partially offset by decreased revenue in the Gulf of Mexico due to the hurricanes. Operating income was up 28% due to better fleet utilization in U.S. Land and Canada.
Third quarter operating income also reflected the benefit of successfully negotiating fuel surcharges in the second quarter, which contributed approximately 70 basis points in sequential margin improvement. These surcharges are generally billed on a one-quarter lag and reflect the higher fuel costs we experienced in the second quarter. Since fuel costs have moderated in the third quarter, we don't expect as much impact on margins in the fourth quarter.
Also, as we've seen in previous years, we expect activity will decline in the fourth quarter due to environmental stipulations in the Rockies and the extended holiday weekends.
In Latin America, Completion and Production revenue increased 16% in the third quarter due to strong activity in Mexico, Brazil and Colombia. We experienced increased demand for completions and sand control systems across all areas of the region, but most notably in Brazil, where we've seen good application of our completions technologies in deepwater activity.
In the Europe/Africa CIS region, Completion and Production revenue increased 2% and operating income was flat compared to second quarter levels. Strong activity in the Caspian and higher vessel utilization and pipeline processing activity in the North Sea were offset by the absence of a favorable pricing adjustment recognized in the second quarter in West Africa. In addition, we experienced higher completion tool sales in Libya.
In Middle East/Asia, Completion and Production posted a sequential revenue decrease of 4% as decreased regional cementing activity and lower completion tool sales were partially offset by higher Production Enhancement activity in Australia and in India. Despite lower revenue, the segment had an increase in operating income of 2% due to a favorable mix in completion tools.
Now turning to our Drilling and Evaluation segment, revenue increased $139 million or 7%, with strong sequential revenue growth in all product service lines. Operating income, however, declined by 2% due to the impact from hurricane disruptions and the gains we recognized last quarter from the sale of two investments. Further, the second quarter for D&E was also favorably impacted by a pricing adjustment in West Africa.
In North America, Drilling and Evaluation revenue increased 9%, led by Sperry with sequential growth of 16% as this product line continues to benefit from the trend of increased horizontal drilling. Further, all product lines benefited from the seasonal recovery in Canada. Operating income for the quarter decreased 12% due to the impact of the hurricane disruptions and the gain on the asset sales last quarter.
D&E's Latin America revenue increased 2%, driven by increased utilization of MWD, LWD technologies by Petrobras for their deepwater projects. Additionally, we saw strong demand for our fluid services in Venezuela this quarter. These increases were partially offset by lower drilling activity in Northern Mexico due to weather-related issues and lower efficiencies delivering [civil] works on well locations. This lower activity, along with unfavorable mix for Sperry in Ecuador, resulted in D&E's Latin America operating income being down 9%.
With regard to the Alliance II project in Southern Mexico, we are currently operating on seven PEMEX-supplied rigs, but right now we anticipate no additional rigs for the remainder of the project.
In the Europe/Africa region, Drilling and Evaluation revenue increased 1% while operating income declined 10%. As mentioned, the second quarter included a favorable pricing adjustment in West Africa which impacted the comparisons between the quarters. In addition, we had weaker results in the North Sea and we'll be redeploying equipment to other locations.
A highlight for this region is the continued growth of directional drilling technologies in Russia. For the third quarter, Sperry in Russia grew 31% from the prior year.
Drilling and Evaluation revenue and operating income in the Middle East/Asia region grew 14% and 29%, respectively. The increase was driven by higher activity in Sperry across the region, with sequential revenue growth of 22%. Additionally, we experienced strong wireline and baroid revenues in Asia.
Now I'll address some additional financial items. As you know, we've worked very hard to reduce our leverage and improve our liquidity and credit profile in recent years. We currently have $2.8 billion of debt outstanding, down from $3.9 billion at the end of 2004. Our debttototalcapital ratio stands at 27%, down from 50% at year end 2004. We have an undrawn $1.2 billion revolving credit facility that extends to July 2012, and we just entered into an additional six-month revolving credit facility on similar terms that adds another $400 million of credit capacity should we need it to fund operations.
The convertible bonds outstanding at the end of the second quarter, which represented an approximately $2.7 billion total liability, has been extinguished. We were able to pay it off in the third quarter with a combination of cash on hand, the issuance of treasury stock, and the proceeds from a new $1.2 billion bond offering during the early part of September before the credit markets became difficult.
While we took an accounting charge of $693 million, representing the cash portion of the premium paid, this transaction had the impact of reducing our fully diluted share count by approximately 15 million shares.
At September 30, 2008 we held $973 million of cash and cash equivalents. We manage our cash investments conservatively and are currently investing principally in U.S. Treasury securities and repurchase agreements backed by U.S. Treasuries. We suffered no losses to date in our cash investment portfolio despite meltdowns in several sectors of the money markets.
The effective tax rate for continuing operations was 106% for the third quarter of 2008. Excluding the non-tax deductible loss of $693 million on the note redemption, the effective tax rate was slightly above the guidance we provided in the second quarter. The sequential increase in the tax rate was driven by higher relative earnings from the United States versus foreign subsidiaries this quarter. We expect our fourth quarter 2008 effective tax rate to return to the 30% to 32% range.
We expect our depreciation, depletion and amortization will continue to average approximately $190 million for the fourth quarter.
And finally, we're marginally lowering our capital expenditures guidance for full year 2008 to $1.8 to $1.9 billion due largely to the temporary shutdown of manufacturing in our Houston area plants because of the hurricane that directly hit the city.
Dave provided commentary on our strong quarter [break in audio] in North America, and I would like to add some thoughts on this because it has important implications for our business in 2009.
He noted the natural gas supply/demand balance has been exacerbated by the credit crunch and will lead to drilling activity below current levels in 2009. Here, the ongoing shift from conventional to unconventional drilling will continue to influence Halliburton's business. Service intensity for our stimulation business expresses revenue per well has grown 15% annually since the first quarter of 2006 as the activity mix has changed towards these more [break in audio] wells.
Also, horizontally directed rigs have increased to roughly 30% of total rigs active in the U.S. in response to their use to develop these shale resources. These wells translate to a service intensity of between two and five times greater than those of a conventional vertical well.
Technology continues to be a significant differentiator. This quarter we closed the acquisition of Pinnacle Technologies from CARBO Ceramics, and are pleased to welcome the 150 or so Pinnacle professionals to the organization. Pinnacle's stimulation monitoring and analysis services minimize fracturing uncertainty, rapidly verify [inaudible], and optimize reservoir drainage.
Pinnacle is also a catalyst for our VeriStim service, a key workflow of our digital asset, which combines microseismic monitoring with distributed temperature sensing and a variety of post-well tools to deliver the most effective hydrocarbon recovery from the asset.
In summary, we expect differentiated technology and this strong service intensity trend to provide a favorable overlay for Halliburton on reduced 2009 North America rig count.
For our International business, while macroeconomic uncertainties cloud our view at this point, we still believe growth will continue in the fourth quarter and in 2009, but at a lower rate than that which we have experienced in the first three quarters of 2008. As our International customers prioritize their activities, it's likely we may experience delay or curtailing of some new projects, notably new heavy oil and potentially some GTL projects. We may also see a slightly increased orientation away from exploration and towards production and development projects as 2009 unfolds.
Let me finish up by just saying that we had another solid quarter, strong revenue and margin growth. However, the global events that have transpired in the last few weeks have produced an environment of uncertainty.
However, in North America we believe our customer concentration, differentiated technologies, and position in more service-intensive assets should enable us to manage our way through any reduction in overall activity.
Internationally, we continue to expect growth as we leverage our worldwide infrastructure, but perhaps at a slower rate than 2008.
Long-term, we continue to believe that the fundamental trends in this industry will favor our company's expertise in well construction and production technologies. I want to thank all of our 55,000 plus employees for their achievements this quarter.