HALLIBURTON COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the consolidated and combined financial statements included in "Item 8. Financial Statements and Supplementary Data" contained herein.
EXECUTIVE OVERVIEW
Market conditions Since early 2020, world-wide oil and gas supply and demand imbalances and related volatility of oil and natural gas prices (including as a result of the COVID-19 pandemic) have resulted in dramatic fluctuations in oil and gas markets. The volatility continued in 2022 as markets were impacted by inflationary pressures, changes to OPEC+ production levels, supply chain shortages, demand uncertainty, and geopolitical conflicts includingRussia's invasion of and continued war withUkraine . The West Texas Intermediate (WTI) crude oil price averaged approximately$88 per barrel during the fourth quarter of 2022 and$96 per barrel for the full year of 2022. TheU.S. land average rig count continues to be below pre-pandemic levels, but showed improvement in each quarter of 2022. The Brent crude oil price averaged$89 per barrel during the fourth quarter of 2022 and$101 per barrel for the full year of 2022. The international average rig count showed improvement in the second half of 2022. Globally, we are being impacted by supply chain shortages and increased lead times as the post-pandemic recovery stressed both the supply of raw materials and transportation logistics. We monitor market trends and work to mitigate cost impacts through economies of scale in global procurement, technology modifications, and efficient sourcing practices. Also, while we have been impacted by inflationary cost increases, primarily related to frac sand, chemicals, cement, and logistics costs, we generally try to pass much of those increases on to our customers and we believe we have effective solutions that work to minimize the operational impact. As a result ofRussia's invasion ofUkraine , governments in theEuropean Union ,the United States , theUnited Kingdom ,Switzerland , and other countries enacted new sanctions againstRussia and Russian interests. In order to comply with these sanctions, we ceased pursuing future business inRussia and began to wind down our remaining operations inRussia in March of 2022. During the second quarter of 2022, we made the decision to sell our Russian operations and completed the sale in the third quarter of 2022. We wrote down the disposal group to fair value less costs to sell, resulting in a pre-tax charge of$344 million during the second quarter of 2022. See Note 2 to our consolidated financial statements for additional information.
Financial results The following graph illustrates our revenue and operating margins for each operating segment over the past three years.
[[Image Removed: hal-20221231_g6.jpg]]
During 2022, we generated total company revenue of $20.3 billion , a 33% increase
from the $15.3 billion of revenue generated in 2021, with our Completion and
Production (C&P) segment revenue increasing by 38% and our Drilling and
Evaluation (D&E) segment revenue increasing by 27%. We reported total company
operating income of approximately $2.7 billion in 2022, compared to operating
income of $1.8 billion in 2021. These increases were driven primarily by
increased demand for our products and services in North America land tied to a
substantial improvement in the North America average rig count during 2022. Both
of our segments were negatively impacted by our exit from Russia in the third
quarter of 2022.
HAL 2022 FORM 10-K | 23
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Table of Contents Item 7 | Executive Overview
Our North America revenue increased 51% in 2022 compared to 2021, resulting from
higher activity and pricing in North America land primarily associated with
increased stimulation and well construction services. North America average rig
count increased 47% for 2022 as compared to the average rig count for 2021.
Internationally, revenue improved 20% in 2022 compared to 2021, primarily driven
by higher activity for drilling and completions related services in Latin
America and the Eastern Hemisphere, which were partly offset by our exit from
Russia and lower activity in the North Sea . The international average rig count
increased 13% for 2022 as compared to the average rig count for 2021.
Our operating performance and liquidity are described in more detail in "Liquidity and Capital Resources" and "Business Environment and Results of Operations."
Sustainability and Energy Mix Transition In the first quarter of 2021, we announced our target to achieve 40% reduction in Scope 1 and 2 emissions by 2035 from the 2018 baseline. During 2022, we continued to execute on priorities we set to help us progress toward our 2035 emissions reduction target. As our customers have begun to invest more in reducing emissions and developing projects focused on sustainable energy, we have developed or are developing solutions intended to reduce our own carbon footprint while advancing our customers' decarbonization efforts. As the energy mix transition unfolds, we will continue to seek to apply our expertise and products and services across different developing parts of the energy mix transition. We have also applied our experience and resources in sectors adjacent to our traditional oilfield services sectors, including carbon capture and storage, hydrogen, and geothermal. Finally, we will continue to focus on accelerating the success of clean tech start-ups viaHalliburton Labs . As ofDecember 31, 2022 ,Halliburton Labs had 21 participating companies and alumni.Halliburton Labs allows us to participate in the energy mix transition at relatively low risk by investing our expertise, resources, and team without a significant outlay of capital. Our sustainability efforts have been recognized as we were named to the 2022 Dow Jones Sustainability Indices (DJSI), which recognizes the top 10% most sustainable companies per industry. The DJSI uses ESG criteria to measure and rank the performance of best-in-class companies selected for its list. When compared to our peers, we ranked in the 98th percentile and received high marks in theHuman Capital Development , Risk & Crisis Management, and Business Ethics categories. Additionally, we published our 2021 Annual and Sustainability Report (ASR) in March of 2022, which details our strategy and progress on sustainability issues, as well as our efforts on increased environmental reporting transparency, including conducting a climate scenario analysis. Information on our website, including the ASR report, is not incorporated by reference into this Annual Report on Form 10-K. HAL 2022 FORM 10-K | 24 -------------------------------------------------------------------------------- Table of Contents Item 7 | Liquidity and Capital
Resources
LIQUIDITY AND CAPITAL RESOURCES
As of
Significant sources and uses of cash in 2022 Sources of cash: •Cash flows from operating activities were$2.2 billion . This included a negative impact from the primary components of our working capital (receivables, inventories, and accounts payable) of a net$941 million , primarily associated with increased receivables and inventory.
Uses of cash:
•Debt repayments were$1.2 billion . In February of 2022, we paid$641 million to redeem$600 million aggregate principal amount of our 3.8% senior notes dueNovember 2025 . The payment also included the make-whole premium and accrued interest. In September of 2022, we paid$603 million to redeem$600 million aggregate principal amount of our 3.5% senior notes dueAugust 2023 at par. The payment also included accrued interest.
•Capital expenditures were
•We paid
•We repurchased 6.8 million shares for
Future sources and uses of cash We manufacture most of our own equipment, which provides us with some flexibility to increase or decrease our capital expenditures based on market conditions. Capital spending for 2023 is currently expected to be within our target of approximately 5-6% of revenue. We believe this level of spend will allow us to invest in our key strategic areas. However, we will continue to maintain capital discipline and monitor the rapidly changing market dynamics, and we may adjust our capital spend accordingly. In 2023, we expect to pay approximately$897 million for contractual purchase obligations (with another$292 million due through 2025),$416 million of interest on debt, and approximately$333 million under our leasing arrangements. Payments for interest on our debt arrangements are expected to remain relatively flat for the foreseeable future. See Note 6 and Note 9 to the consolidated financial statements for additional information on expected future payments under our leasing arrangements and debt maturities. We are not able to reasonably estimate the timing of cash outflows associated with our uncertain tax positions, in part because we are unable to predict the timing of potential tax settlements with applicable taxing authorities. As ofDecember 31, 2022 , we had$311 million of gross unrecognized tax benefits, excluding penalties and interest, of which we estimate$259 million may require us to make a cash payment. We estimate that approximately$232 million of the cash payment will not be settled within the next 12 months. While we maintain our focus on liquidity and debt reduction, we are also focused on increasing cash returns to our shareholders. Our Board approved a capital return framework with a goal of returning at least 50% of our annual free cash flow to shareholders through dividends and share repurchases. In January of 2023, we announced that our Board of Directors declared a dividend of$0.16 per common share for the first quarter of 2023, or approximately$145 million . During 2022, our quarterly dividend rate was$0.12 per common share, or approximately$109 million per quarter. Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately$4.9 billion remained authorized for repurchases as ofDecember 31, 2022 and may be used for open market and other share purchases. We do not intend to incur additional debt in 2023, as we believe our cash on hand and earnings from operations are sufficient to cover our obligations for the year. HAL 2022 FORM 10-K | 25
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Table of Contents Item 7 | Liquidity and CapitalResources
Other factors affecting liquidity Financial position in current market. As ofDecember 31, 2022 , we had$2.3 billion of cash and equivalents and$3.5 billion of available committed bank credit under a revolving credit facility executed onApril 27, 2022 with an expiration date ofApril 27, 2027 . We believe we have a manageable debt maturity profile, with approximately$500 million coming due beginning in 2025 through 2027. Furthermore, we have no financial covenants or material adverse change provisions in our bank agreements, and our debt maturities extend over a long period of time. We believe our cash on hand, cash flows generated from operations, and our available credit facility will provide sufficient liquidity to address the challenges and opportunities of the current market and our global cash needs, including capital expenditures, working capital investments, dividends, if any, debt repayment, and contingent liabilities. Guarantee agreements. In the normal course of business, we have agreements with financial institutions under which approximately$2.1 billion letters of credit, bank guarantees, or surety bonds were outstanding as ofDecember 31, 2022 . Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization, however, none of these triggering events have occurred. As ofDecember 31, 2022 , we had no material off-balance sheet liabilities and were not required to make any material cash distributions to our unconsolidated subsidiaries. Credit ratings. Our credit ratings withStandard & Poor's (S&P) remain BBB+ for our long-term debt and A-2 for our short-term debt, with a stable outlook. Our credit ratings with Moody's Investors Service (Moody's) remain Baa1 for our long-term debt and P-2 for our short-term debt, with a stable outlook. Customer receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers' cash flow from operations and their access to the credit markets, as well as unsettled political conditions. Receivables from our primary customer inMexico accounted for approximately 9% of our total receivables as ofDecember 31, 2022 . While we have experienced payment delays inMexico , these amounts are not in dispute and we have not historically had, and we do not expect to have, any material write-offs due to collectability of receivables from this customer. HAL 2022 FORM 10-K | 26 -------------------------------------------------------------------------------- Table of Contents Item 7 | Business
Environment and Results of Operations
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
We operate in more than 70 countries throughout the world to provide a comprehensive range of services and products to the energy industry. Our revenue is generated from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. The industry we serve is highly competitive with many substantial competitors in each segment of our business. In 2022, 2021, and 2020, based on the location of services provided and products sold, 45%, 40%, and 38%, respectively, of our consolidated revenue was fromthe United States . No other country accounted for more than 10% of our revenue. Activity within our business segments is significantly impacted by spending on upstream exploration, development, and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption. Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices and our customers' expectations about future prices, global oil supply and demand, completions intensity, the world economy, the availability of capital, government regulation, and global stability, which together drive worldwide drilling and completions activity. Additionally, during 2023, we generally expect that many of our customers inNorth America will continue their strategy of operating within their cash flows and generating returns rather than prioritizing production growth. Lower oil and natural gas prices usually translate into lower exploration and production budgets and lower rig count, while the opposite is usually true for higher oil and natural gas prices. Our financial performance is therefore significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.
The table below shows the average prices for WTI crude oil, United Kingdom Brent
crude oil, and
2022 2021 2020
Oil price - WTI (1) $ 96.04 $ 67.99 $ 39.23
Oil price - Brent (1) 100.78 70.68 41.76
Natural gas price - Henry Hub (2) 6.29 3.91 2.04
(1) Oil price measured in dollars per barrel. (2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu.
The historical average rig counts based on the weeklyBaker Hughes rig count data were as follows: 2022 2021 2020 U.S. Land 708 465 418 U.S. Offshore 15 15 15 Canada 175 132 89 North America 898 612 522 International 851 755 825 Worldwide total 1,749 1,367 1,347 HAL 2022 FORM 10-K | 27
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Environment and Results of Operations
Business outlook According to theUnited States Energy Information Administration (EIA)January 2023 "Short Term Energy Outlook," the EIA expects Brent crude oil spot prices to average$83 per barrel for the full year of 2023, a decrease of approximately 18% over the full year of 2022 average price per barrel. The EIA anticipates a further decline in prices to$78 per barrel for the full year of 2024 as they believe global oil inventories will build, applying downward pressure on crude oil prices. The EIA expects the WTI crude oil spot prices to average$77 per barrel for the full year of 2023, a decrease of approximately 19% over the full year of 2022 average price per barrel.
The EIA's report projects
The EIA reported crude oil production inthe United States averaged 11.9 million barrels per day in 2022 and expects production to average 12.4 million barrels per day in 2023, an approximate 4% increase. In addition, the EIA expects crude oil production inthe United States to rise to 12.8 million barrels per day in 2024.The International Energy Agency's January 2023 "Oil Market Report" forecasts 2023 global oil demand to reach 101.7 million barrels per day, an increase of approximately 2% from 2022. We continue to expect that oil and gas demand will grow over the next several years, despite the actions taken by central banks in an attempt to control inflation by increasing interest rates and the resulting concern about a potential economic slowdown. We believe the demand will be driven by economic expansion, energy security concerns, relaxed COVID restrictions inChina , and population growth. In addition, we think supply dynamics have fundamentally changed due to investor return requirements, publicly stated environmental, social, and governance commitments, and regulatory pressure, all of which resulted in low inventory levels (compared to historical levels) and production below expectations. We believe many years of increased investment in existing and new sources of production is the only solution to increase supply and that production will be needed from conventional and unconventional, deep-water and shallow-water, and short and long-cycle projects. Internationally, we expect activity to grow at least 14-16% during 2023 with most new activity coming from theMiddle East andLatin America , both in onshore and offshore markets. InNorth America , we expect strong activity and anticipate customer spending to increase by at least 15% during 2023 as compared to 2022. HAL 2022 FORM 10-K | 28 -------------------------------------------------------------------------------- Table of Contents Item 7 | Results of
Operations in 2022 Compared to 2021
RESULTS OF OPERATIONS IN 2022 COMPARED TO 2021
Favorable Percentage
Millions of dollars 2022 2021 (Unfavorable) Change
Revenue:
By operating segment:
Completion and Production $ 11,582 $ 8,410 $ 3,172 38 %
Drilling and Evaluation 8,715 6,885 1,830 27
Total revenue $ 20,297 $ 15,295 $ 5,002 33 %
By geographic region:
North America $ 9,597 $ 6,371 $ 3,226 51 %
Latin America 3,197 2,362 835 35
Europe/Africa/CIS 2,691 2,719 (28) (1)
Middle East/Asia 4,812 3,843 969 25
Total revenue $ 20,297 $ 15,295 $ 5,002 33 %
Operating income:
By operating segment:
Completion and Production $ 2,037 $ 1,238 $ 799 65 %
Drilling and Evaluation 1,292 801 491 61
Total operations 3,329 2,039 1,290 63
Corporate and other (256) (227) (29) (13)
Impairments and other charges (366) (12) (354) n/m
Total operating income $ 2,707 $ 1,800 $ 907 50 %
n/m = not meaningful
Operating Segments
Completion and Production
Completion and Production revenue was $11.6 billion in 2022, an increase of $3.2
billion , or 38%, compared to 2021. Operating income was $2.0 billion in 2022, a
65% increase from $1.2 billion in 2021. These results were primarily driven by
higher utilization and pricing for pressure pumping services in the Western
Hemisphere, additional completion tool sales in the Western Hemisphere and Saudi
Arabia , increased artificial lift activity in North America land, and increased
well intervention services in North America and the Eastern Hemisphere.
Partially offsetting these increases were decreased activity in Russia due to
our exit from the country, lower completion tool sales and cementing activity in
Norway , and decreased stimulation activity in Oman .
Drilling and Evaluation
Drilling and Evaluation revenue was $8.7 billion in 2022, an increase of $1.8
billion , or 27%, from 2021. Operating income was $1.3 billion in 2022, an
increase of $491 million , or 61%, compared to 2021. These results were primarily
related to increased drilling-related services in the Western Hemisphere, Middle
East /Asia , West Africa , Egypt , and Eastern Mediterranean, along with higher
wireline activity and testing services globally. Project management activity
increased in Latin America , India , and Saudi Arabia . Partially offsetting these
increases were reduced activity in Russia due to our exit from the country and
decreased drilling-related services in Norway .
Geographic Regions
North America North America revenue was$9.6 billion in 2022, a 51% increase compared to 2021, resulting from higher activity and pricing across the region, primarily associated with pressure pumping activity, drilling-related services, and completion tool sales. Higher artificial lift activity inNorth America land, along with additional wireline activity and well intervention services inNorth America land and theGulf of Mexico , also contributed to this increase. HAL 2022 FORM 10-K | 29 -------------------------------------------------------------------------------- Table of Contents Item 7 | Results of
Operations in 2022 Compared to 2021
Latin America Latin America revenue was$3.2 billion in 2022, a 35% increase compared to 2021, resulting primarily from improvements across multiple product service lines inMexico ,Argentina , andColombia , increased project management activity and well construction services inEcuador , higher completion tool sales inBrazil and theCaribbean , additional pressure pumping activity inBrazil , and improved project management activity in Suriname. Partly offsetting these increases were lower well intervention and drilling-related services inBrazil .
Europe /Africa /CIS revenue was$2.7 billion in 2022, a 1% decrease compared to 2021. The decrease was mostly driven by lower activity inRussia due to our exit from the country and reduced activity inNorway . This decline was partially offset by increases in multiple product service lines inEgypt ,Angola , and Eastern Mediterranean, combined with higher drilling-related services inWest Africa and increased well intervention services across the region.Middle East /Asia Middle East /Asia revenue was$4.8 billion in 2022, a 25% increase compared to 2021. The increase was primarily from improvements across multiple product service lines inSaudi Arabia ,Kuwait ,India , andUnited Arab Emirates , higher well construction services inOman ,Indonesia , andIraq , and additional completion tool sales and cementing activity inQatar . Partially offsetting these increases were lower stimulation and well intervention services inOman .
Other Operating Items
Impairments and other charges. During 2022, we recognized$366 million of charges, primarily related to a$344 million write down of all our net assets inRussia as a result of our decision to sell ourRussia operations due to the sanctions enacted againstRussia arising from the conflict inUkraine . In the first quarter of 2022, we recognized a pre-tax charge of$22 million to write down all of our assets inUkraine , including$16 million in receivables, due to the ongoing conflict betweenRussia andUkraine . During 2021, we recognized$12 million of net charges. These charges included$36 million of depreciation catch-up expense on our Pipeline and Process Services business assets previously classified as held for sale,$15 million of severance costs, and$35 million of other items, partially offset by a$74 million gain related to the closing of a structured transaction for ourNorth America real estate assets. See Note 2 to the consolidated financial statements for further discussion on these charges.
Nonoperating Items
Loss on early extinguishment of debt. During the year endedDecember 31, 2022 , we recorded a$42 million loss on the early redemption of$600 million aggregate principal amount of our 3.8% senior notes dueNovember 2025 , which included premiums and unamortized expenses. See Note 9 to the consolidated financial statements for further information. Income tax (provision) benefit. During the year endedDecember 31, 2022 , we recorded a total income tax provision of$515 million on pre-tax income of$2.1 billion , resulting in an effective tax rate of 24.4%. The effective tax rate for 2022 was primarily impacted by our geographic mix of earnings, tax adjustments related to the reassessment of prior year tax accruals, and changes of valuation allowance on some of our deferred tax assets. During 2021, we recorded a total income tax benefit of$216 million on pre-tax income of$1.3 billion , resulting in an effective tax rate of -17.2%. We recorded a tax benefit of approximately$500 million during 2021, primarily due to the partial release of a valuation allowance on our deferred tax assets. This release was based on improved market conditions and reflects our expectation to utilize these deferred tax assets. See Note 11 to the consolidated financial statements for significant drivers of these tax (provisions) benefits. HAL 2022 FORM 10-K | 30 -------------------------------------------------------------------------------- Table of Contents Item 7 | Results of
Operations in 2021 Compared to 2020
RESULTS OF OPERATIONS IN 2021 COMPARED TO 2020
Information related to the comparison of our operating results between the years 2021 and 2020 is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Form 10-K filed with theSEC and is incorporated by reference into this annual report on Form 10-K. HAL 2022 FORM 10-K | 31
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Table of Contents Item 7 | Critical Accounting Estimates
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires the use of judgments and
estimates. Our critical accounting policies are described below to provide a
better understanding of how we develop our assumptions and judgments about
future events and related estimates and how they can impact our financial
statements. A critical accounting estimate is one that requires our most
difficult, subjective, or complex judgments and assessments and is fundamental
to our results of operations. We identified our most critical accounting
estimates to be:
- forecasting our income tax (provision) benefit, including our future ability
to utilize foreign tax credits and the realizability of deferred tax assets
(including net operating loss carryforwards), and providing for uncertain tax
positions;
- legal and investigation matters;
- valuations of long-lived assets, including intangible assets and goodwill; and
- allowance for credit losses.
We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report. Income tax accounting We recognize the amount of taxes payable or refundable for the current year and use an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We apply the following basic principles in accounting for our income taxes:
- a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year;
- a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards;
- the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered; and
- the value of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
We determine deferred taxes separately for each tax-paying component (an entity or a group of entities that is consolidated for tax purposes) in each tax jurisdiction. That determination includes the following procedures:
- identifying the types and amounts of existing temporary differences;
- measuring the total deferred tax liability for taxable temporary differences using the applicable tax rate;
- measuring the total deferred tax asset for deductible temporary differences and operating loss carryforwards using the applicable tax rate;
- measuring the deferred tax assets for each type of tax credit carryforward; and
- reducing the deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Our methodology for recording income taxes requires a significant amount of
judgment and the use of assumptions and estimates. Additionally, we use
forecasts of certain tax elements, such as taxable income and foreign tax credit
utilization, as well as evaluate the feasibility of implementing tax planning
strategies. Given the inherent uncertainty involved with the use of such
variables, there can be significant variation between anticipated and actual
results that could have a material impact on our income tax accounts related to
continuing operations.
HAL 2022 FORM 10-K | 32
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Table of Contents Item 7 | Critical AccountingEstimates
We have operations in more than 70 countries. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including net income actually earned, net income deemed earned, and revenue-based tax withholding. Our tax filings are routinely examined in the normal course of business by tax authorities. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each jurisdiction, as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved, the timing and nature of income earned and expenditures incurred. The final determination of tax audits or changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our income tax liabilities for a tax year and have an adverse effect on our financial statements. Tax filings of our subsidiaries, unconsolidated affiliates and related entities are routinely examined in the normal course of business by tax authorities. These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process. Predicting the outcome of disputed assessments involves some uncertainty. Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate, and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome. We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest, and penalties, as needed based on this outcome. We provide for uncertain tax positions pursuant to current accounting standards, which prescribe a minimum recognition threshold and measurement methodology that a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. The standards also provide guidance for derecognition classification, interest and penalties, accounting in interim periods, disclosure, and transition. Legal and investigation matters As discussed in Note 10 of our consolidated financial statements, we are subject to various legal and investigation matters arising in the ordinary course of business. As ofDecember 31, 2022 , we have accrued an estimate of the probable and estimable costs for the resolution of some of our legal and investigation matters, which is not material to our consolidated financial statements. For other matters for which the liability is not probable and reasonably estimable, we have not accrued any amounts. Attorneys in our legal department monitor and manage all claims filed against us and review all pending investigations. Generally, the estimate of probable costs related to these matters is developed in consultation with internal and outside legal counsel representing us. Our estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. We attempt to resolve these matters through settlements, mediation, and arbitration proceedings when possible. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, there may be a material adverse effect on our future financial results. We have in the past recorded significant adjustments to our initial estimates of these types of contingencies. Value of long-lived assets, including intangible assets and goodwill We carry a variety of long-lived assets on our balance sheet including property, plant, and equipment, goodwill, and other intangibles. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our operating income.Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We conduct impairment tests on goodwill annually, during the third quarter, or more frequently whenever events or changes in circumstances indicate an impairment may exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When conducting an impairment test on long-lived assets, other than goodwill, we first group individual assets based on the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets. This requires some judgment. We then compare estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group to its carrying amount. If the undiscounted cash flows are less than the asset group's carrying amount, we then determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management's short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on our weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. See Note 2 to the consolidated financial statements for further discussion of impairments and other charges. HAL 2022 FORM 10-K | 33 -------------------------------------------------------------------------------- Table of Contents Item 7 | Critical Accounting
Estimates
We perform our goodwill impairment assessment for each reporting unit, which is the same as our reportable segments, the Completion and Production division and the Drilling and Evaluation division, comparing the estimated fair value of each reporting unit to the reporting unit's carrying value, including goodwill. We estimate the fair value for each reporting unit using a discounted cash flow analysis based on management's short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded. The impairment assessments discussed above incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services, and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts. If market conditions deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record additional impairments of the carrying value of our long-lived assets in the future which could have a material adverse impact on our operating results. See Note 1 to the consolidated financial statements for our accounting policies related to long-lived assets. Allowance for credit losses We evaluate our global accounts receivable through a continuous process of assessing our portfolio on an individual customer and overall basis. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, financial condition of our customers, and whether the receivables involve retainages. We also consider the economic environment of our customers, both from a marketplace and geographic perspective, in evaluating the need for an allowance. Based on our review of these factors, we establish or adjust allowances for specific customers. This process involves judgment and estimation, and frequently involves significant dollar amounts. Accordingly, our results of operations can be affected by adjustments to the allowance due to actual write-offs that differ from estimated amounts. AtDecember 31, 2022 , our allowance for credit losses totaled$731 million , or 14.7% of notes and accounts receivable before the allowance. AtDecember 31, 2021 , our allowance for credit losses totaled$754 million , or 17.8% of notes and accounts receivable before the allowance. The allowance for credit losses in both years is primarily comprised of accounts receivable from our primary customer inVenezuela . A hypothetical 100 basis point change in our estimate of the collectability of our notes and accounts receivable balance as ofDecember 31, 2022 would have resulted in a$50 million adjustment to 2022 total operating costs and expenses. See Note 5 to the consolidated financial statements for further information.
FINANCIAL INSTRUMENT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange rates and interest rates. We selectively manage these exposures through the use of derivative instruments, including forward foreign exchange contracts, foreign exchange options, and interest rate swaps. The objective of our risk management strategy is to minimize the volatility from fluctuations in foreign currency and interest rates. We do not use derivative instruments for trading purposes. The counterparties to our forward contracts, options, and interest rate swaps are global commercial and investment banks. We use a sensitivity analysis model to measure the impact of potential adverse movements in foreign currency exchange rates and interest rates. With respect to foreign exchange sensitivity, after consideration of the impact from our forward foreign exchange contracts and options, a hypothetical 10% adverse change in the value of all our foreign currency positions relative tothe United States dollar as ofDecember 31, 2022 would result in a$90 million , pre-tax loss for our net monetary assets denominated in currencies other thanUnited States dollars. As ofDecember 31, 2022 , we did not have any interest rate swaps outstanding and our outstanding debt has fixed interest rates. There are certain limitations inherent in the sensitivity analysis presented, primarily due to the assumption that exchange rates and interest rates change instantaneously in an equally adverse fashion. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled. While this is our best estimate of the impact of the various scenarios, these estimates should not be viewed as forecasts.
For further information regarding foreign currency exchange risk, interest rate risk, and credit risk, see Note 15 to the consolidated financial statements.
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Table of Contents Item 7 | Environmental Matters
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note 10 to the consolidated financial statements and "Part I, Item 1(a). "Risk Factors." FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Forward-looking information is based on projections and estimates, not historical information. Some statements in this Form 10-K are forward-looking and use words like "may," "may not," "believe," "do not believe," "plan," "estimate," "intend," "expect," "do not expect," "anticipate," "do not anticipate," "should," "likely," and other expressions. We may also provide oral or written forward-looking information in other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of our 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 theSEC . We also suggest that you listen to our quarterly earnings release conference calls with financial analysts. HAL 2022 FORM 10-K | 35 --------------------------------------------------------------------------------
Item 7(a) | Quantitative and Qualitative Disclosures About
Table of Contents Market Risk
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk. Information related to market risk is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Instrument Market Risk" and Note 15 to the consolidated financial statements.
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