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
Financial results
We experienced challenging market dynamics in 2020 as we faced a global
pandemic, record oil demand destruction, and an unprecedented downturn in the
energy industry. Despite these difficulties, we demonstrated resilience and a
strong commitment to our execution culture. We delivered historic results across
our key safety and service quality metrics and demonstrated our ability to
generate competitive cash flow in different business environments. The following
graph illustrates our revenue and operating margins for each operating segment
over the past three years.
[[Image Removed: hal-20201231_g6.jpg]]
During 2020, we generated total company revenue of $14.4 billion , a 36% decrease
from the $22.4 billion of revenue generated in 2019, with our Completion and
Production (C&P) segment declining by 44% and our Drilling and Evaluation (D&E)
segment declining by 21%. We reported a total company operating loss of
approximately $2.4 billion in 2020 driven by $3.8 billion of impairments and
other charges. This compares to operating loss of $448 million in 2019 that was
driven by $2.5 billion of impairments and other charges. A significant decline
in pressure pumping services in North America land during 2020 negatively
impacted operating results.
Our North America revenue declined 52% in 2020 compared to 2019, resulting from
lower activity and pricing in North America land, primarily associated with
reduced stimulation and well construction activity. While the U.S. land rig
count recovered from its August 2020 low, it is still 60% below pre-pandemic
levels. Even without improved pricing, we took advantage of the recovery in
completions and drilling activity in the fourth quarter of 2020 and delivered
margin improvement, demonstrating the operating leverage from our cost
reductions and service delivery improvements in North America .
Internationally, revenue declined 17% in 2020 compared to 2019 primarily driven
by reduced activity for drilling and completions related services across all
international regions. Internationally, rig counts and customer spending
declined more than 20%. Despite this tough backdrop, we improved our overall
international margin in 2020.
Business outlook
Oil prices have returned to pre-pandemic levels. As oil demand recovers, we
anticipate favorable market dynamics, with international short-cycle producers
leading the activity recovery. Our strategic priorities should continue to drive
our success as markets around the world stabilize and begin to grow.
Internationally, we expect activity recovery to vary widely across the regions,
with both a cyclical and seasonal bottoming of activity expected in the first
quarter. While the pace of recovery depends on demand improvement, the second
half of 2021 could see an increase in international activity as compared to the
second half of 2020. We have a strong presence in mature fields completions and
interventions work, a number of resilient integrated contracts around the world,
leverage to unconventional developments in Latin America and the Middle East ,
and opportunities in key active offshore areas. Our new drilling technologies
are penetrating the market and gaining customer confidence, and we have growth
opportunities as we expand our production related businesses internationally.
Also, we have adopted digital solutions which help our customers
reduce cost per barrel, improve economics, and increase efficiencies. Our
digital and other technology advances, geographic expansion of our products and
services, along with continued discipline in cost management and cost
efficiency, should achieve profitable returns-driven growth in international
markets.
In North America , our focused approach to building a leaner and more profitable
business allowed us to improve our operating margins and cash flows in 2020.
Activity has rebounded from its lows in 2020. Completions activity in North
America is expected to continue improving in the first half of 2021, as
commodity prices remain supportive and customers complete their back log of
drilled, but uncompleted wells. For the full year of 2021, provided that the
impact of the pandemic moderates, economic activity continues to increase, and
commodity prices remain strong, we believe that our customers will sustain
activity in order to hold their production flat to 2020 exit levels, with
completions spend expected to outpace drilling.
In 2021, we will focus on executing our key strategic priorities to deliver industry-leading returns and strong free cash flow. Our service delivery improvements, structural cost reductions, deployment of digital and other technologies, and lower capital intensity are expected to deliver on both customers' expectations and shareholder objectives.
Our operating performance and business outlook are described in more detail in "Business Environment and Results of Operations."
Capital expenditures During 2020, our capital expenditures were approximately$728 million , a decrease of 52% from 2019, and were predominantly made in ourSperry Drilling , Production Enhancement, Baroid, Artificial Lift, and Wireline and Perforating product service lines. We intend for our capital expenditures in 2021 to remain relatively flat at$750 million . Our lower capital intensity, aided by technological innovation, should contribute to ongoing cash flow generation. We believe this level of spend will equip us to take advantage of an anticipated recovery in the market as 2021 unfolds. Financial markets, liquidity and capital resources We believe we have invested our cash balances conservatively and secured sufficient financing to help mitigate any near-term negative impact on our operations from adverse market conditions. As ofDecember 31, 2020 , we had$2.6 billion of cash and equivalents and$3.5 billion of available committed bank credit under our revolving credit facility which expires in 2024. We believe this provides us with sufficient liquidity to address the challenges and opportunities of the current market. For additional information on market conditions, see "Liquidity and Capital Resources" and "Business Environment and Results of Operations." HAL 2020 FORM 10-K | 20 -------------------------------------------------------------------------------- Table of Contents Item 7 | Liquidity and Capital
Resources
LIQUIDITY AND CAPITAL RESOURCES
As of
Significant sources and uses of cash in 2020 Sources of cash: •Cash flows from operating activities were$1.9 billion . This included a positive impact from the primary components of our working capital (receivables, inventories, and accounts payable) of a net$800 million , primarily associated with lower customer receivables, partially offset by approximately$350 million of severance payments. Uses of cash: •InMarch 2020 , we executed two transactions resulting in a reduction of gross debt by$500 million . We issued$1.0 billion aggregate principal amount of senior notes and used the net proceeds from issuance along with cash on hand to repurchase$1.5 billion aggregate principal amount of senior notes. Inclusive of the tender premium and fees, these transactions resulted in a net payment of approximately$654 million . •Capital expenditures were$728 million . •We paid$278 million of dividends to our shareholders. •We repurchased approximately 7.4 million shares of our common stock in early March, largely before the significant decline in oil prices, under our share repurchase program, at a total cost of approximately$100 million . 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 2021 is currently expected to be approximately$750 million . We believe this level of spend will allow us to invest in our key strategic areas. We will continue to maintain capital discipline, monitor the rapidly changing market dynamics, and adjust our capital spend accordingly. For additional information on capital expenditures, see "Executive Overview."
We have debt payments of
Based on our market outlook, we reduced our quarterly dividend rate in the second quarter of 2020 from$0.18 per common share to$0.045 per common share and remained at this amount for the rest of 2020, reducing cash outflows by approximately$360 million in 2020. We will continue to maintain our focus on liquidity and review our quarterly dividend considering our priorities of future debt reduction and, as market conditions evolve, reinvesting in our business. Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately$5.1 billion remained authorized for repurchases as ofDecember 31, 2020 and may be used for open market and other share purchases. HAL 2020 FORM 10-K | 21
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Table of Contents Item 7 | Liquidity and Capital Resources
Contractual obligations
The following table summarizes our significant contractual obligations and other
long-term liabilities as of December 31, 2020 :
Payments Due
Millions of dollars 2021 2022 2023 2024 2025 Thereafter Total
Long-term debt (a) $ 695 $ 9 $ 602 $ - $ 1,000 $ 7,604 $ 9,910
Interest on debt (b) 484 460 460 439 439 7,129 9,411
Operating leases 287 233 146 94 70 428 1,258
Finance leases 63 63 62 49 38 55 330
Purchase obligations (c) 385 72 17 6 192 1 673
Other long-term liabilities (d) 26 - - - - - 26
Total $ 1,940 $ 837 $ 1,287 $ 588 $ 1,739 $ 15,217 $ 21,608
(a) Represents principal amounts of long-term debt, including current
maturities of debt, which excludes any unamortized debt issuance costs and
discounts.
(b) Interest on debt includes 76 years of interest on $300 million of
debentures at 7.6% interest that become due in 2096.
(c) Amounts in 2021 primarily represent certain purchase orders for goods and
services utilized in the ordinary course of our business.
(d) Includes pension funding obligations. Amounts for pension funding
obligations, which include international plans and are based on assumptions that
are subject to change, are only included for 2021 as we are currently not able
to reasonably estimate our contributions for years after 2021.
Due to the uncertainty with respect to the timing of potential future cash
outflows associated with our uncertain tax positions, we are not able to
reasonably estimate the period of cash settlement with the respective taxing
authorities. Therefore, gross unrecognized tax benefits have been excluded from
the contractual obligations table above. We had $355 million of gross
unrecognized tax benefits, excluding penalties and interest, at December 31,
2020 , of which we estimate $211 million may require a cash payment by us. We
estimate that $193 million of the cash payment will not be settled within the
next 12 months.
Other factors affecting liquidity
Financial position in current market. As of December 31, 2020 , we had $2.6
billion of cash and equivalents and $3.5 billion of available committed bank
credit under our revolving credit facility. Furthermore, we have no financial
covenants or material adverse change provisions in our bank agreements, and our
debt maturities extend over a long period of time. We 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 $1.9 billion of letters of
credit, bank guarantees, or surety bonds were outstanding as of December 31,
2020 . 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.
Credit ratings. Our credit ratings with Standard & Poor's (S&P) remain BBB+ for
our long-term debt and A-2 for our short-term debt, with a negative 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 negative outlook.
Customer receivables. In line with industry practice, we bill our customers for
our services in arrears and are, therefore, subject to our customers delaying or
failing to pay our invoices. In weak economic environments, we may experience
increased delays and failures to pay our invoices due to, among other reasons, a
reduction in our customers' cash flow from operations and their access to the
credit markets, as well as unsettled political conditions. Given the nature and
significance of the pandemic and disruption in the oil and gas industry, we have
experienced delayed customer payments and payment defaults associated with
customer liquidity issues and bankruptcies. If our customers delay paying or
fail to pay us a significant amount of our outstanding receivables, it could
have a material adverse effect on our liquidity, consolidated results of
operations, and consolidated financial condition. See Note 5 to the consolidated
financial statements for further discussion.
HAL 2020 FORM 10-K | 22
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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 2020, 2019, and 2018, based on the location of services provided and products sold, 38%, 51%, and 58%, respectively, of our consolidated revenue was fromthe United States . No other country accounted for more than 10% of our revenue. Operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, force majeure, war or other armed conflict, sanctions, expropriation or other governmental actions, inflation, changes in foreign currency exchange rates, foreign currency exchange restrictions and highly inflationary currencies, as well as other geopolitical factors. We believe the geographic diversification of our business activities reduces the risk that an interruption of operations in any one country, other thanthe United States , would be materially adverse to our consolidated results of operations. Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption. The COVID-19 pandemic and efforts to mitigate its effect have had a substantial negative impact on the global economy and demand for oil. 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, many of our customers inNorth America have shifted their strategy from production growth to operating within cash flow and generating returns. 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 oil and natural gas prices for WTI, United
Kingdom Brent crude oil, and
2020 2019 2018
Oil price - WTI (1) $ 39.23 $ 56.98 $ 64.94
Oil price - Brent (1) 41.76 64.36 71.08
Natural gas price - Henry Hub (2) 2.04 2.54 3.17
(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 weekly
2020 2019 2018
U.S. Land 418 920 1,013
U.S. Offshore 15 23 19
Canada 89 134 191
North America 522 1,077 1,223
International 825 1,098 988
Worldwide total 1,347 2,175 2,211
HAL 2020 FORM 10-K | 23-------------------------------------------------------------------------------- Table of Contents Item 7 | Business
Environment and Results of Operations
The oil and gas industry experienced an unprecedented disruption during 2020 as a result of a combination of factors, including the substantial decline in global demand for oil caused by the COVID-19 pandemic and subsequent mitigation efforts. This disruption created a substantial surplus of oil and a decline in oil prices. West Texas Intermediate (WTI) oil spot prices decreased during the first quarter of 2020 from a high of$63 per barrel in early January of 2020 to approximately$21 per barrel by the end of the first quarter of 2020. Although oil prices recovered moderately to approximately$48 per barrel by the end ofDecember 2020 , WTI oil spot prices averaged approximately$43 per barrel during the fourth quarter of 2020 and$39 per barrel during the year 2020, which was approximately 25% and 31%, respectively, less than the average price per barrel during the same periods in 2019. As a result, oil and gas activity declined significantly during 2020, with the global rig count sinking to the lowest level since 1973. TheU.S. and international average rig counts dropped 54% and 25%, respectively, during 2020, contributing to a global rig count decline of 38% since 2019. Crude oil prices traded within a wide range during 2020. After averaging$63 a barrel inJanuary 2020 , Brent prices fell to an average of$18 a barrel in April, the lowest monthly average price sinceFebruary 1999 . The low prices were the result of significant declines in oil consumption that caused a sharp rise in global oil inventories. However, Brent prices increased through much of the rest of 2020 as rising oil demand and reduced production caused global oil inventories to fall. Prices rose to a monthly average of$50 a barrel in December due to expectations of future economic recovery based on the roll out of multiple COVID-19 vaccines. In the early part ofJanuary 2021 , Brent prices reached their highest levels in 10 months afterSaudi Arabia announced a one-month unilateral cut in its crude oil production for February and March that is in addition to its OPEC+ commitments. Oil prices are back to pre-pandemic levels, driven by global vaccine distribution, an unfolding demand recovery, OPEC+ agreement on production volume, and a declining production base. However, the surge in COVID-19 infections globally and the expected gradual return of spare production capacity make us cautious about near term recovery. In theUnited States Energy Information Administration (EIA)January 2021 "Short Term Energy Outlook," the EIA projected Brent prices to average$53 per barrel in 2021, while WTI prices were projected to average approximately$3.00 less per barrel than Brent prices.The International Energy Agency's (IEA)January 2021 "Oil Market Report" forecasts 2021 global demand to average approximately 96.6 million barrels per day, an increase of 6% from 2020. The recent widespread escalation of COVID-19 cases remains a significant factor impacting oil demand. Vaccination campaigns are underway; however, several regions, including areas ofthe United States , are dealing with a rebound in the pandemic resulting in tighter mobility constraints and less travel. There is also concern about whether vaccines will be effective against different strains of the virus that have developed and may develop in the future. The Henry Hub natural gas spot price inthe United States averaged$2.04 per MMBtu in 2020, a decrease of$0.50 per MMBtu, or 20%, from 2019. The EIA expectsHenry Hub natural gas prices to rise to annual average of$3.01 per MMBtu in 2021 and forecasts prices will rise to an average of$3.27 per MMBtu in 2022.North America operations The averageNorth America rig count decreased 52% for the full year 2020 as compared to 2019. The decline in activity was rapid, but both rig count and completions activity have started to recover off their 2020 lows. We responded swiftly and aggressively to the market conditions, and as business conditions improve, our actions resulted in margin improvements through the second half of 2020. In the first quarter of 2021, we expect positive activity momentum to continue, with completions activity increasing more than drilling. The EIA estimates that annualU.S. crude oil production averaged 11.3 million barrels per day as of the year ended 2020, down 1.0 million barrels per day compared to the year ended 2019 as a result of well curtailment and a drop in drilling activity related to low oil prices. The EIA expects production to again decline in 2021, averaging 11.1 million barrels per day, and to increase to an annual average of 11.5 million barrels per day in 2022, as prices and drilling conditions become more favorable. We continue to focus on driving strategic changes, building on the operating leverage we have created in the business, and maximizing our cash flow generation inNorth America . International operations Full year international revenue for 2020 declined 17%, while rig counts and customer spending were down more than 20% as compared to 2019. The pace of recovery depends on the trajectory of demand improvement, and in the second half of 2021, we expect to see an increase in international activity compared to the second half of 2020. We are well positioned to benefit from this increase. We have a strong presence in mature fields completions and interventions work, resilient integrated contracts around the world, leverage to unconventional developments inLatin America and theMiddle East , and a leading position in key active offshore areas. The EIA expects the recent rise in COVID-19 infections, the re-imposition of some restrictions, and ongoing changes to consumer behaviors due to the pandemic will continue to adversely affect global oil demand in the first half of 2021. Despite the uncertainty, the EIA forecasts economic activity to return to pre-pandemic levels in 2021 based partly on assumptions regarding the effect of recent vaccine rollouts and reopening efforts. As inthe United States , HAL 2020 FORM 10-K | 24 -------------------------------------------------------------------------------- Table of Contents Item 7 | Business
Environment and Results of Operations
the pace of oil consumption growth internationally may, to a significant extent, depend on the manufacture and distribution of effective vaccines on a global scale.Venezuela . TheU.S. Government imposed sanctions againstVenezuela have effectively required us to discontinue our operations there. Consequently, in connection with us winding down our operations inVenezuela , we wrote down all of our remaining investment inVenezuela in 2020. As ofDecember 29, 2020 we no longer have any employees inVenezuela , although we continue to maintain our local entity, facilities, and equipment in-country, as permitted under applicable law. We are not currently conducting any other operational activities inVenezuela . HAL 2020 FORM 10-K | 25 -------------------------------------------------------------------------------- Table of Contents Item 7 | Results of
Operations in 2020 Compared to 2019
RESULTS OF OPERATIONS IN 2020 COMPARED TO 2019
Revenue: Favorable Percentage
Millions of dollars 2020 2019 (Unfavorable) Change
Completion and Production $ 7,839 $ 14,031 $ (6,192) (44) %
Drilling and Evaluation 6,606 8,377 (1,771) (21)
Total revenue $ 14,445 $ 22,408 $ (7,963) (36) %
By geographic region:
North America $ 5,731 $ 11,884 $ (6,153) (52) %
Latin America 1,668 2,364 (696) (29)
Europe/Africa/CIS 2,813 3,285 (472) (14)
Middle East/Asia 4,233 4,875 (642) (13)
Total $ 14,445 $ 22,408 $ (7,963) (36) %
Operating loss: Favorable Percentage
Millions of dollars 2020 2019 (Unfavorable) Change
Completion and Production $ 995 $ 1,671 $ (676) (40) %
Drilling and Evaluation 569 642 (73) (11)
Total 1,564 2,313 (749) (32)
Corporate and other (201) (255) 54 21
Impairments and other charges (3,799) (2,506) (1,293) (52)
Total operating loss $ (2,436) $ (448) $ (1,988) n/m
n/m = not meaningful
Consolidated revenue in 2020 was $14.4 billion , a decrease of $8.0 billion , or
36%, compared to 2019, mainly due to lower activity and pricing in North America
land, primarily associated with stimulation services and well construction.
Revenue from North America was 40% of consolidated revenue in 2020 and 53% of
consolidated revenue in 2019.
We reported a consolidated operating loss of $2.4 billion in 2020 driven in part
by $3.8 billion of impairments and other charges. This compares to an operating
loss of $448 million in 2019, driven by $2.5 billion of impairments and other
charges. A significant decline in stimulation activity and pricing in North
America land during 2020 negatively impacted operating results, partially offset
by increase in stimulation activity and completion tool sales in the Middle
East /Asia . See Note 2 to the consolidated financial statements for further
discussion on impairments and other charges.
OPERATING SEGMENTS
Completion and Production Completion and Production revenue was$7.8 billion in 2020, a decrease of$6.2 billion , or 44%, compared to 2019. Operating income was$1.0 billion in 2020, a 40% decrease from$1.7 billion in 2019. These results were primarily driven by reduced activity and pricing for pressure pumping services, lower completion tool sales, and reduced artificial lift activity inNorth America land. Partially offsetting these results were higher completion tool sales in the Eastern Hemisphere. Drilling and Evaluation Drilling and Evaluation revenue was$6.6 billion in 2020, a decrease of$1.8 billion , or 21%, from 2019. These results were primarily driven by lower activity for drilling-related services inNorth America land, lower project management activity in theMiddle East /Asia , and a global decrease in wireline activity. Operating income was$569 million in 2020, a decrease of$73 million , or 11%, compared to 2019. These results were primarily driven by a decline in drilling activity inNorth America land, coupled with lower project management activity in the HAL 2020 FORM 10-K | 26 -------------------------------------------------------------------------------- Table of Contents Item 7 | Results of
Operations in 2020 Compared to 2019
GEOGRAPHIC REGIONS
North America North America revenue was$5.7 billion in 2020, a 52% decrease compared to 2019, resulting from lower activity and pricing inNorth America land, primarily associated with reduced stimulation, well construction, artificial lift, and wireline activity. This decline was partially offset by increased stimulation activity in theGulf of Mexico and project management inNorth America land.Latin America Latin America revenue was$1.7 billion in 2020, a 29% decrease compared to 2019, resulting primarily from decreased activity in multiple product service lines inArgentina ,Colombia ,Ecuador , andBrazil , partially offset by increased project management activity inMexico and drilling-related services inGuyana .
Europe /Africa /CIS revenue was$2.8 billion in 2020, a 14% decrease compared to 2019. The decrease was due to lower activity for multiple product service lines throughout the region, primarily inNigeria ,Egypt , andUnited Kingdom , partially offset by increased completion tool sales in theNorth Sea ,Algeria , andAzerbaijan , and drilling-related activity in theNorth Sea .Middle East /Asia Middle East /Asia revenue was$4.2 billion in 2020, a 13% decrease compared to 2019. The decrease was due to lower activity throughout the region, primarily related to project management, stimulation inSaudi Arabia , and well construction activity, partially offset by increased completion tool sales and pipeline services in theMiddle East /Asia .
OTHER OPERATING ITEMS
Impairments and other charges were$3.8 billion in 2020, consisting of asset and real estate impairments, primarily associated with pressure pumping and drilling equipment, as well as severance and other costs incurred as we continued to adjust our cost structure during the year. This compares to$2.5 billion of impairments and other charges recorded in 2019, consisting of asset impairments, primarily associated with pressure pumping and drilling equipment, as well as severance and other costs incurred as we adjusted our cost structure during the year. 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, 2020 , we recorded a$168 million loss on the early extinguishment of debt, which included a tender premium, unamortized discounts and costs on the retired notes, and tender fees. See Note 9 to the consolidated financial statements for further information. Income tax (provision) benefit. Our tax (provisions) benefits are sensitive to the geographic mix of earnings and our ability to use our deferred tax assets. During 2020, we recorded a total income tax benefit of$278 million on a pre-tax loss of$3.2 billion , resulting in an effective tax rate of 8.6%. During 2019, we recorded a total income tax provision of$7 million on a pre-tax loss of$1.1 billion , resulting in an effective tax rate of -0.6%. See Note 11 to the consolidated financial statements for significant drivers of these tax (provisions) benefits. HAL 2020 FORM 10-K | 27 -------------------------------------------------------------------------------- Table of Contents Item 7 | Results of
Operations in 2019 Compared to 2018
RESULTS OF OPERATIONS IN 2019 COMPARED TO 2018
Information related to the comparison of our operating results between the years 2019 and 2018 is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 201 9 Form 10-K filed with theSEC and is incorporated by reference into this annual report on Form 10-K. HAL 2020 FORM 10-K | 28 --------------------------------------------------------------------------------
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 2020 FORM 10-K | 29
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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, 2020 , 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 impairments and other charges recorded during the year endedDecember 31, 2020 . HAL 2020 FORM 10-K | 30
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Table of Contents Item 7 | Critical AccountingEstimates
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 further 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, 2020 , our allowance for credit losses totaled$824 million , or 22.5% of notes and accounts receivable before the allowance. AtDecember 31, 2019 , our allowance for credit losses totaled$776 million , or 15.4% of notes and accounts receivable before the allowance. The allowance for credit losses in both years is primarily comprised of accounts receivable with 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, 2020 would have resulted in a$37 million adjustment to 2020 total operating costs and expenses. See Note 5 to the consolidated financial statements for further information.
OFF BALANCE SHEET ARRANGEMENTS
AtDecember 31, 2020 , we had no material off balance sheet arrangements. In the normal course of business, we have agreements with financial institutions under which approximately$1.9 billion of letters of credit, bank guarantees or surety bonds were outstanding as ofDecember 31, 2020 . 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.
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 foreign forward 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, 2020 would result in a$83 million , pre-tax, loss for our net monetary assets denominated in currencies other thanUnited States dollars. With respect to interest rates sensitivity, after consideration of the impact from our interest rate swap, a hypothetical 100 basis point increase in the LIBOR rate would result in approximately an additional$1 million of interest charges for the year endedDecember 31, 2020 . HAL 2020 FORM 10-K | 31 -------------------------------------------------------------------------------- Table of Contents Item 7 | Financial Instrument Market
Risk
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 analysis 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.
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 2020 FORM 10-K | 32 --------------------------------------------------------------------------------
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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