Edgar Filing: HALLIBURTON CO

edjune201010q_final.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended June 30, 2010

[ ] Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from _____ to _____

Commission File Number 001-03492

HALLIBURTON COMPANY

(a Delaware corporation)

75-2677995

3000 North Sam Houston Parkway East

Houston, Texas 77032

(Address of Principal Executive Offices)

Telephone Number – Area Code (281) 871-2699

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

[X]

[ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

[X]

[ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[X]	Accelerated filer	[ ]
Non-accelerated filer	[ ]	Smaller reporting company	[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

[ ]

[X]

As of July 16, 2010, 907,455,032 shares of Halliburton Company common stock, $2.50 par value per share, were outstanding.

HALLIBURTON COMPANY

Index

		Page No.
PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	- Condensed Consolidated Statements of Operations	3
	- Condensed Consolidated Balance Sheets	4
	- Condensed Consolidated Statements of Cash Flows	5
	- Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION	35

Item 1.	Legal Proceedings	35

Item 1(a).	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	52

Item 4.	[Removed and Reserved]	52

Item 5.	Other Information	52

Item 6.	Exhibits	53

Signatures		54

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HALLIBURTON COMPANY

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30						June 30
Millions of dollars and shares except per share data	2010			2009			2010			2009
Revenue:
Services	$	3,371		$	2,542		$	6,216		$	5,492
Product sales		1,016			952			1,932			1,909
Total revenue		4,387			3,494			8,148			7,401
Operating costs and expenses:
Cost of services		2,716			2,163			5,184			4,574
Cost of sales		862			807			1,648			1,635
General and administrative		47			48			105			100
Total operating costs and expenses		3,625			3,018			6,937			6,309
Operating income		762			476			1,211			1,092
Interest expense, net of interest income of $3, $3, $6, and $5		(76	)		(79	)		(152	)		(130	)
Other, net		(9	)		(14	)		(49	)		(19	)
Income from continuing operations before income taxes		677			383			1,010			943
Provision for income taxes		(200	)		(117	)		(321	)		(296	)
Income from continuing operations		477			266			689			647
Income (loss) from discontinued operations, net of income
tax (provision) benefit of $(3), $1, $(0), and $1		6			(1	)		1			(2	)
Net income	$	483		$	265		$	690		$	645
Noncontrolling interest in net income of subsidiaries		(3	)		(3	)		(4	)		(5	)
Net income attributable to company	$	480		$	262		$	686		$	640
Amounts attributable to company shareholders:
Income from continuing operations	$	474		$	263		$	685		$	642
Income (loss) from discontinued operations, net		6			(1	)		1			(2	)
Net income attributable to company	$	480		$	262		$	686		$	640
Basic income per share attributable to company shareholders:
Income from continuing operations	$	0.52		$	0.29		$	0.76		$	0.71
Income (loss) from discontinued operations, net		0.01			−			−			−
Net income per share	$	0.53		$	0.29		$	0.76		$	0.71
Diluted income per share attributable to company shareholders:
Income from continuing operations	$	0.52		$	0.29		$	0.75		$	0.71
Income (loss) from discontinued operations, net		0.01			−			0.01			−
Net income per share	$	0.53		$	0.29		$	0.76		$	0.71

Cash dividends per share	$	0.09		$	0.09		$	0.18		$	0.18
Basic weighted average common shares outstanding		906			898			906			898
Diluted weighted average common shares outstanding		909			900			908			899

See notes to condensed consolidated financial statements.

HALLIBURTON COMPANY

Condensed Consolidated Balance Sheets

(Unaudited)

	June 30,			December 31,
Millions of dollars and shares except per share data	2010			2009
Assets
Current assets:
Cash and equivalents	$	1,160		$	2,082
Receivables (less allowance for bad debts of $87 and $90)		3,453			2,964
Inventories		1,767			1,598
Investments in marketable securities		1,935			1,312
Current deferred income taxes		274			210
Other current assets		614			472
Total current assets		9,203			8,638
Property, plant, and equipment, net of accumulated depreciation of $5,607 and $5,230		6,175			5,759
Goodwill		1,132			1,100
Other assets		1,030			1,041
Total assets	$	17,540		$	16,538
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	1,069		$	787
Current maturities of long-term debt		750			750
Accrued employee compensation and benefits		583			514
Deferred revenue		257			215
Department of Justice (DOJ) settlement and indemnity		48			142
Other current liabilities		608			481
Total current liabilities		3,315			2,889
Long-term debt		3,824			3,824
Employee compensation and benefits		430			462
Other liabilities		587			606
Total liabilities		8,156			7,781
Shareholders’ equity:
Common shares, par value $2.50 per share – authorized 2,000 shares, issued
1,068 shares and 1,067 shares		2,670			2,669
Paid-in capital in excess of par value		357			411
Accumulated other comprehensive loss		(209	)		(213	)
Retained earnings		11,386			10,863
Treasury stock, at cost – 161 and 165 shares		(4,851	)		(5,002	)
Company shareholders’ equity		9,353			8,728
Noncontrolling interest in consolidated subsidiaries		31			29
Total shareholders’ equity		9,384			8,757
Total liabilities and shareholders’ equity	$	17,540		$	16,538

See notes to condensed consolidated financial statements.

HALLIBURTON COMPANY

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
	June 30
Millions of dollars	2010			2009
Cash flows from operating activities:
Net income	$	690		$	645
Adjustments to reconcile net income to net cash from operations:
Depreciation, depletion, and amortization		533			439
Payments of DOJ and Securities and Exchange Commission (SEC)
settlement and indemnity		(94	)		(322	)
Provision for deferred income taxes, continuing operations		(28	)		153
Other changes:
Receivables		(547	)		639
Accounts payable		296			(150	)
Inventories		(162	)		(2	)
Other		120			(384	)
Total cash flows from operating activities		808			1,018
Cash flows from investing activities:
Purchases of investments in marketable securities		(1,182	)		(1,518	)
Sales of investments in marketable securities		550			−
Capital expenditures		(855	)		(950	)
Acquisitions of business assets, net of cash acquired		(190	)		(14	)
Other investing activities		82			62
Total cash flows from investing activities		(1,595	)		(2,420	)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of offering costs		−			1,975
Payments of dividends to shareholders		(163	)		(162	)
Other financing activities		45			47
Total cash flows from financing activities		(118	)		1,860
Effect of exchange rate changes on cash		(17	)		(14	)
Increase (decrease) in cash and equivalents		(922	)		444
Cash and equivalents at beginning of period		2,082			1,124
Cash and equivalents at end of period	$	1,160		$	1,568
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest	$	155		$	91
Income taxes	$	361		$	344

See notes to condensed consolidated financial statements.

HALLIBURTON COMPANY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with our 2009 Annual Report on Form 10-K.

Our accounting policies are in accordance with generally accepted accounting principles in the United States of America. The preparation of financial statements in conformity with these accounting principles requires us to make estimates and assumptions that affect:

-	the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and
-	the reported amounts of revenue and expenses during the reporting period.

Ultimate results could differ from our estimates.

In our opinion, the condensed consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position as of June 30, 2010, the results of our operations for the three and six months ended June 30, 2010 and 2009, and our cash flows for the six months ended June 30, 2010 and 2009. Such adjustments are of a normal recurring nature. In addition, certain reclassifications of prior period balances have been made to conform to 2010 classifications. The results of operations for the three and six months ended June 30, 2010 may not be indicative of results for the full year.

Note 2. Business Segment and Geographic Information

We operate under two divisions, which form the basis for the two operating segments we report: the Completion and Production segment and the Drilling and Evaluation segment.

The following table presents information on our business segments. “Corporate and other” includes expenses related to support functions and corporate executives. Also included are certain gains and losses not attributable to a particular business segment.

Intersegment revenue was immaterial. Our equity in earnings and losses of unconsolidated affiliates that are accounted for by the equity method are included in revenue and operating income of the applicable segment.

	Three Months Ended						Six Months Ended
	June 30						June 30
Millions of dollars	2010			2009			2010			2009
Revenue:
Completion and Production	$	2,393		$	1,752		$	4,357		$	3,780
Drilling and Evaluation		1,994			1,742			3,791			3,621
Total revenue	$	4,387		$	3,494		$	8,148		$	7,401

Operating income:
Completion and Production	$	497		$	243		$	735		$	606
Drilling and Evaluation		318			284			588			588
Total operations		815			527			1,323			1,194
Corporate and other		(53	)		(51	)		(112	)		(102	)
Total operating income	$	762		$	476		$	1,211		$	1,092
Interest expense, net		(76	)		(79	)		(152	)		(130	)
Other, net		(9	)		(14	)		(49	)		(19	)
Income from continuing operations before
income taxes	$	677		$	383		$	1,010		$	943

Receivables

As of June 30, 2010, 33% of our gross trade receivables were from customers in the United States. As of December 31, 2009, 26% of our gross trade receivables were from customers in the United States.

Note 3. Inventories

Inventories are stated at the lower of cost or market. In the United States, we manufacture certain finished products and parts inventories for drill bits, completion products, bulk materials, and other tools that are recorded using the last-in, first-out method, which totaled $81 million at June 30, 2010 and $68 million at December 31, 2009. If the average cost method had been used, total inventories would have been $33 million higher than reported at June 30, 2010 and December 31, 2009. The cost of the remaining inventory was recorded on the average cost method. Inventories consisted of the following:

	June 30,		December 31,
Millions of dollars	2010		2009
Finished products and parts	$	1,215	$	1,090
Raw materials and supplies		493		480
Work in process		59		28
Total	$	1,767	$	1,598

Finished products and parts are reported net of obsolescence reserves of $92 million at June 30, 2010 and $94 million at December 31, 2009.

Note 4. Shareholders’ Equity

The following tables summarize our shareholders’ equity activity.

							Noncontrolling
	Total			Company			interest in
	shareholders’			shareholders’			consolidated
Millions of dollars	equity			equity			subsidiaries
Balance at December 31, 2009	$	8,757		$	8,728		$	29
Transactions with shareholders		96			98			(2	)
Comprehensive income:
Net income		690			686			4
Other comprehensive income		4			4			–
Total comprehensive income		694			690			4
Payments of dividends to shareholders		(163	)		(163	)		–
Balance at June 30, 2010	$	9,384		$	9,353		$	31

							Noncontrolling
	Total			Company			interest in
	shareholders’			shareholders’			consolidated
Millions of dollars	equity			equity			subsidiaries
Balance at December 31, 2008	$	7,744		$	7,725		$	19
Transactions with shareholders		80			81			(1	)
Comprehensive income:
Net income		645			640			5
Other comprehensive income		17			17			–
Total comprehensive income		662			657			5
Payments of dividends to shareholders		(162	)		(162	)		–
Balance at June 30, 2009	$	8,324		$	8,301		$	23

The following table summarizes comprehensive income for the quarterly periods presented.

	Three Months Ended
	June 30
Millions of dollars	2010			2009
Net income	$	483		$	265
Other comprehensive income (loss)		(3	)		26
Total comprehensive income	$	480		$	291
Comprehensive income attributable to noncontrolling interest		3			3
Comprehensive income attributable to company		477			288

Accumulated other comprehensive loss consisted of the following:

	June 30,			December 31,
Millions of dollars	2010			2009
Defined benefit and other postretirement liability adjustments	$	(143	)	$	(149	)
Cumulative translation adjustments		(67	)		(65	)
Unrealized gains on investments		1			1
Total accumulated other comprehensive loss	$	(209	)	$	(213	)

Note 5. KBR Separation

During 2007, we completed the separation of KBR, Inc. (KBR) from us by exchanging KBR common stock owned by us for our common stock. In addition, we recorded a liability reflecting the estimated fair value of the indemnities and guarantees provided to KBR as described below. Since the separation, we have recorded adjustments to our liability for indemnities and guarantees to reflect changes to our estimation of our remaining obligation. All such adjustments are recorded in “Income (loss) from discontinued operations, net of income tax.”

We entered into various agreements relating to the separation of KBR, including, among others, a master separation agreement and a tax sharing agreement. The master separation agreement provides for, among other things, KBR’s responsibility for liabilities related to its business and our responsibility for liabilities unrelated to KBR’s business. We provide indemnification in favor of KBR under the master separation agreement for certain contingent liabilities, including our indemnification of KBR and any of its greater than 50%-owned subsidiaries as of November 20, 2006, the date of the master separation agreement, for:

fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of a claim made or assessed by a governmental authority in the United States, the United Kingdom, France, Nigeria, Switzerland, and/or Algeria, or a settlement thereof, related to alleged or actual violations occurring prior to November 20, 2006 of the United States Foreign Corrupt Practices Act (FCPA) or particular, analogous applicable foreign statutes, laws, rules, and regulations in connection with investigations pending as of that date, including with respect to the construction and subsequent expansion by a consortium of engineering firms comprised of Technip SA of France, Snamprogetti Netherlands B.V., JGC Corporation of Japan, and Kellogg Brown & Root LLC (TSKJ) of a natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria; and

all out-of-pocket cash costs and expenses, or cash settlements or cash arbitration awards in lieu thereof, KBR may incur after the effective date of the master separation agreement as a result of the replacement of the subsea flowline bolts installed in connection with the Barracuda-Caratinga project.

Additionally, we provide performance guarantees, surety bond guarantees, and letter of credit guarantees that are currently in place in favor of KBR’s customers or lenders under project contracts, letters of credit, and other KBR credit instruments. These guarantees will continue until they expire at the earlier of: (1) the termination of the underlying project contract or KBR obligations thereunder; or (2) the expiration of the relevant credit support instrument in accordance with its terms or release of such instrument by the customer. KBR has agreed to indemnify us, other than for the FCPA and Barracuda-Caratinga bolts matter, if we are required to perform under any of the guarantees related to KBR’s letters of credit, surety bonds, or performance guarantees described above.

In February 2009, the United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC) FCPA investigations were resolved. The total of fines and disgorgement was $579 million, of which KBR consented to pay $20 million. As of June 30, 2010, we had paid $511 million, consisting of $334 million as a result of the DOJ settlement and the indemnity we provided to KBR upon separation and $177 million as a result of the SEC settlement. Our KBR indemnities and guarantees are primarily included in “Department of Justice (DOJ) settlement and indemnity” and “Other liabilities” on the condensed consolidated balance sheets and totaled $120 million at June 30, 2010 and $214 million at December 31, 2009. Excluding the remaining amount necessary to resolve the DOJ investigation and under the indemnity we provided to KBR, our estimation of the remaining obligation for other indemnities and guarantees provided to KBR upon separation was $72 million at June 30, 2010. See Note 6 for further discussion of the FCPA and Barracuda-Caratinga matters.

The tax sharing agreement provides for allocations of United States and certain other jurisdiction tax liabilities between us and KBR.

Note 6. Commitments and Contingencies

The Gulf of Mexico/Macondo Well incident

The semisubmersible drilling rig, Deepwater Horizon, sank on April 22, 2010 after an explosion and fire onboard the rig that began on April 20, 2010. The Deepwater Horizon was owned by Transocean Ltd. and had been drilling the Macondo/MC252 exploration well in Mississippi Canyon Block 252 in the Gulf of Mexico for the lease operator, BP Exploration & Production, Inc. (BP Exploration), an indirect wholly owned subsidiary of BP p.l.c. Crude oil flowing from the well site has spread across thousands of square miles of the Gulf of Mexico and has reached the United States Gulf Coast. Efforts to contain the flow of hydrocarbons from the well are being led by the United States government and by BP p.l.c., BP Exploration, and their affiliates (collectively, BP). In addition, there were eleven fatalities and a number of injuries as a result of the Macondo Well incident. The cause of the explosion, fire, and resulting oil spill is being investigated by numerous industry participants, governmental agencies, and Congressional committees.

We performed a variety of services on the Macondo well, including cementing, mud logging, directional drilling, measurement-while-drilling, and rig data acquisition services. We had completed the cementing of the final production casing string in accordance with BP Exploration’s requirements approximately 20 hours prior to the Macondo Well incident. We believe that we performed all such work in accordance with BP Exploration’s specifications for its well construction plan and BP Exploration’s instructions.

Investigations. The United States Department of Homeland Security and Department of the Interior have begun a joint investigation into the cause of the Macondo Well incident. The United States Coast Guard, a component of the United States Department of Homeland Security, and the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOE) (formerly known as the Minerals Management Service), a bureau of the United States Department of the Interior, share jurisdiction over the investigation into the Macondo Well incident. In addition, another investigation has been commenced by the Chemical Safety Board, and the President of the United States has established the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling to, among other things, examine the relevant facts and circumstances concerning the causes of the Macondo Well incident and develop options for guarding against future oil spills associated with offshore drilling. We are assisting in efforts to identify the factors that led to the Macondo Well incident and have participated and will continue to participate in various hearings relating to the incident held by, among others, various committees and subcommittees of the House of Representatives and the Senate of the United States.

On May 28, 2010, the United States Department of the Interior issued an order imposing a six month suspension on all offshore deepwater drilling projects. A preliminary injunction was issued blocking enforcement of the deepwater drilling suspension on June 22, 2010, and the Department of the Interior issued a new suspension of deepwater drilling on July 12, 2010.

On June 1, 2010, the United States Attorney General announced that the DOJ was launching civil and criminal investigations into the Macondo Well incident to closely examine the actions of those involved, and that the DOJ was working with attorneys general of states affected by the Macondo Well incident. The DOJ announced that it is reviewing, among other traditional criminal statutes, The Clean Water Act, which carries civil penalties and fines as well as criminal penalties, The Oil Pollution Act of 1990, which can be used to hold parties liable for cleanup costs and reimbursement for government efforts, and The Migratory Bird Treaty Act of 1918 and Endangered Species Act of 1973, which provide penalties for injury and death to wildlife and bird species.

Furthermore, in June 2010, we received a letter from the DOJ requesting thirty days advance notice of any event that may involve substantial transfers of cash or other corporate assets outside of the ordinary course of business. In our reply to the June 2010 DOJ letter, we conveyed our interest in briefing the DOJ on the services we provided on the Deepwater Horizon but indicated that we could not bind ourselves to requests that have no demonstrated basis in law or fact.

We intend to cooperate fully with all governmental hearings, investigations, and requests for information relating to the Macondo Well incident.

Litigation. Currently, we have been named along with other unaffiliated defendants in more than 270 class-action complaints involving pollution damage claims and in 15 suits involving multiple plaintiffs that allege wrongful death and other personal injuries arising out of the Macondo Well incident. The pollution damage complaints generally allege, among other things, negligence and gross negligence, property damages, and potential economic losses as a result of environmental pollution and generally seek awards of unspecified economic, compensatory, and punitive damages, as well as injunctive relief. The wrongful death and other personal injury complaints generally allege negligence and gross negligence and seek awards of compensatory damages, including unspecified economic damages and punitive damages. We have retained counsel and are investigating and evaluating the claims, the theories of recovery, damages asserted, and our respective defenses to all of these claims. We intend to vigorously defend any litigation, fines, and/or penalties relating to the Macondo Well incident. Additional lawsuits may be filed against us.

Indemnification and Insurance. Our contract with BP Exploration relating to the Macondo well provides for our indemnification for potential claims and expenses relating to the Macondo Well incident, including those resulting from pollution or contamination (other than claims by our employees, loss or damage to our property, and any pollution emanating directly from our equipment). Also, under our contract with BP Exploration, we have, among other things, generally agreed to indemnify BP Exploration and other contractors performing work on the well for claims for personal injury of our employees and subcontractors, as well as for damage to our property. In turn, we believe that BP’s other contractors performing work on the well have agreed in their contracts with BP to indemnify us for claims for personal injury of their employees or subcontractors as well as for damages to their property. We believe that the indemnification obligations contained in our contract are valid and binding against BP Exploration. BP Exploration contractually assumed responsibility for costs and expenses relating to this event, including claims for gross negligence. Given the potential amounts involved, however, BP Exploration and other indemnifying parties may seek to avoid their indemnification obligations. In particular, while we do not believe there is any justification to do so, BP Exploration, in response to our request for indemnification, has generally reserved all of its rights and stated that it is premature to conclude that it is obligated to indemnify us. In doing so, BP Exploration has asserted that the facts are not sufficiently developed to determine who is responsible, and have cited a variety of possible legal theories based upon the contract and facts still to be developed. In addition, the financial analysts and the press have speculated about the financial capacity of BP, and whether it might seek to avoid indemnification obligations in bankruptcy. We consider the likelihood of a BP bankruptcy to be remote.

In addition to the contractual indemnity, we have a general liability insurance program of $600 million. Our insurance is designed to cover claims by businesses and individuals made against us in the event of property damage, injury or death and, among other things, claims relating to environmental damage. To the extent we incur any losses beyond those covered by indemnification, there can be no assurance that our insurance policies will cover all potential claims and expenses relating to the Macondo Well incident. Insurance coverage can be the subject of uncertainties and, particularly in the event of large claims, potential disputes with insurance carriers. Finally, although we consider it remote, if we were to be subject to governmental fines or penalties, it is possible we might not be indemnified or insured.

As of June 30, 2010, we had not accrued any amounts related to this matter because we do not believe that a loss is probable.

TSKJ matters

Background. As a result of an ongoing FCPA investigation at the time of the KBR separation, we provided indemnification in favor of KBR under the master separation agreement for certain contingent liabilities, including our indemnification of KBR and any of its greater than 50%-owned subsidiaries as of November 20, 2006, the date of the master separation agreement, for fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of a claim made or assessed by a governmental authority in the United States, the United Kingdom, France, Nigeria, Switzerland, and/or Algeria, or a settlement thereof, related to alleged or actual violations occurring prior to November 20, 2006 of the FCPA or particular, analogous applicable foreign statutes, laws, rules, and regulations in connection with investigations pending as of that date, including with respect to the construction and subsequent expansion by TSKJ of a multibillion dollar natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria. As a condition of our indemnity, we have control over the investigation, defense, and/or settlement of these matters. We have the right to terminate the indemnity in the event KBR elects to take control over the investigation, defense, and/or settlement or refuses to agree to a settlement negotiated and presented by us.

TSKJ is a private limited liability company registered in Madeira, Portugal whose members are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC (a subsidiary of KBR), each of which had an approximate 25% beneficial interest in the venture. Part of KBR’s ownership in TSKJ was held through M.W. Kellogg Limited (MWKL), a United Kingdom joint venture and subcontractor on the Bonny Island project, in which KBR beneficially owns a 55% interest. TSKJ and other similarly owned entities entered into various contracts to build and expand the liquefied natural gas project for Nigeria LNG Limited, which is owned by the Nigerian National Petroleum Corporation, Shell Gas B.V., Cleag Limited (an affiliate of Total), and Agip International B.V. (an affiliate of ENI SpA of Italy).

DOJ and SEC investigations resolved. In February 2009, the FCPA investigations by the DOJ and the SEC were resolved with respect to KBR and us. The DOJ and SEC investigations resulted from allegations of improper payments to government officials in Nigeria in connection with the construction and subsequent expansion by TSKJ of the Bonny Island project.

The DOJ investigation was resolved with respect to us with a non-prosecution agreement in which the DOJ agreed not to bring FCPA or bid coordination-related charges against us with respect to the matters under investigation, and in which we agreed to continue to cooperate with the DOJ’s ongoing investigation and to refrain from and self-report certain FCPA violations. The DOJ agreement did not provide a monitor for us.

As part of the resolution of the SEC investigation, we retained an independent consultant to conduct a 60-day review and evaluation of our internal controls and record-keeping policies as they relate to the FCPA, and we agreed to adopt any necessary anti-bribery and foreign agent internal controls and record-keeping procedures recommended by the independent consultant. The review and evaluation were completed during the second quarter of 2009, and we have implemented the consultant’s immediate recommendations and will implement the remaining long-term recommendations by the third quarter of 2010. As a result of the substantial enhancement of our anti-bribery and foreign agent internal controls and record-keeping procedures prior to the review of the independent consultant, we do not expect the implementation of the consultant’s recommendations to materially impact our long-term strategy to grow our international operations. In the third quarter of 2010, the independent consultant will perform a 30-day, follow-up review to confirm that we have implemented the recommendations and continued the application of our current policies and procedures and to recommend any additional improvements.

KBR has agreed that our indemnification obligations with respect to the DOJ and SEC FCPA investigations have been fully satisfied.

Other matters. In addition to the DOJ and the SEC investigations, we are aware of other investigations in France, Nigeria, the United Kingdom, and Switzerland regarding the Bonny Island project. In the United Kingdom, the Serious Fraud Office (SFO) is considering civil claims or criminal prosecution under various United Kingdom laws and appears to be focused on the actions of MWKL, among others. Violations of these laws could result in fines, restitution and confiscation of revenues, among other penalties, some of which could be subject to our indemnification obligations under the master separation agreement. Our indemnity for penalties under the master separation agreement with respect to MWKL is limited to 55% of such penalties, which is KBR’s beneficial ownership interest in MWKL. MWKL is cooperating with the SFO’s investigation. Whether the SFO pursues civil or criminal claims, and the amount of any fines, restitution, confiscation of revenues or other penalties that could be assessed would depend on, among other factors, the SFO’s findings regarding the amount, timing, nature and scope of any improper payments or other activities, whether any such payments or other activities were authorized by or made with knowledge of MWKL, the amount of revenue involved, and the level of cooperation provided to the SFO during the investigations. MWKL has informed the SFO that it intends to self-report corporate liability for corruption-related offenses arising out of the Bonny Island project. MWKL has received confirmation that it has been admitted into the plea negotiation process under the Guidelines on Plea Discussions in Cases of Complex or Serious Fraud, which have been issued by the Attorney General for England and Wales.

The DOJ and SEC settlements and the other ongoing investigations could result in third-party claims against us, which may include claims for special, indirect, derivative or consequential damages, damage to our business or reputation, loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business prospects, profits or business value or claims by directors, officers, employees, affiliates, advisors, attorneys, agents, debt holders, or other interest holders or constituents of us or our current or former subsidiaries.

Our indemnity of KBR and its majority-owned subsidiaries continues with respect to other investigations within the scope of our indemnity. Our indemnification obligation to KBR does not include losses resulting from third-party claims against KBR, including claims for special, indirect, derivative or consequential damages, nor does our indemnification apply to damage to KBR’s business or reputation, loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business prospects, profits or business value or claims by directors, officers, employees, affiliates, advisors, attorneys, agents, debt holders, or other interest holders or constituents of KBR or KBR’s current or former subsidiaries.

At this time, other than the claims being considered by the SFO, no claims by governmental authorities in foreign jurisdictions have been asserted against the indemnified parties. Therefore, we are unable to estimate the maximum potential amount of future payments that could be required to be made under our indemnity to KBR and its majority-owned subsidiaries related to these matters. See Note 5 for additional information.

Barracuda-Caratinga arbitration

We also provided indemnification in favor of KBR under the master separation agreement for all out-of-pocket cash costs and expenses (except for legal fees and other expenses of the arbitration so long as KBR controls and directs it), or cash settlements or cash arbitration awards, KBR may incur after November 20, 2006 as a result of the replacement of certain subsea flowline bolts installed in connection with the Barracuda-Caratinga project. Under the master separation agreement, KBR currently controls the defense, counterclaim, and settlement of the subsea flowline bolts matter. As a condition of our indemnity, for any settlement to be binding upon us, KBR must secure our prior written consent to such settlement’s terms. We have the right to terminate the indemnity in the event KBR enters into any settlement without our prior written consent.

At Petrobras’ direction, KBR replaced certain bolts located on the subsea flowlines that failed through mid-November 2005, and KBR has informed us that additional bolts have failed thereafter, which were replaced by Petrobras. These failed bolts were identified by Petrobras when it conducted inspections of the bolts. We understand KBR believes several possible solutions may exist, including replacement of the bolts. Initial estimates by KBR indicated that costs of these various solutions ranged up to $148 million. In March 2006, Petrobras commenced arbitration against KBR claiming $220 million plus interest for the cost of monitoring and replacing the defective bolts and all related costs and expenses of the arbitration, including the cost of attorneys’ fees. The arbitration panel held an evidentiary hearing in March 2008 to determine which party is responsible for the designation of the material used for the bolts. On May 13, 2009, the arbitration panel held that KBR and not Petrobras selected the material to be used for the bolts. Accordingly, the arbitration panel held that there is no implied warranty by Petrobras to KBR as to the suitability of the bolt material and that the parties' rights are to be governed by the express terms of their contract. The parties presented evidence and witnesses to the panel in May 2010, and the final hearing is scheduled for August 2010. Our estimation of the indemnity obligation regarding the Barracuda-Caratinga arbitration is recorded as a liability in our condensed consolidated financial statements as of June 30, 2010 and December 31, 2009. See Note 5 for additional information regarding the KBR indemnification.

Securities and related litigation

In June 2002, a class action lawsuit was filed against us in federal court alleging violations of the federal securities laws after the SEC initiated an investigation in connection with our change in accounting for revenue on long-term construction projects and related disclosures. In the weeks that followed, approximately twenty similar class actions were filed against us. Several of those lawsuits also named as defendants several of our present or former officers and directors. The class action cases were later consolidated, and the amended consolidated class action complaint, styled Richard Moore, et al. v. Halliburton Company, et al., was filed and served upon us in April 2003. As a result of a substitution of lead plaintiffs, the case is now styled Archdiocese of Milwaukee Supporting Fund (AMSF) v. Halliburton Company, et al. We settled with the SEC in the second quarter of 2004.

In June 2003, the lead plaintiffs filed a motion for leave to file a second amended consolidated complaint, which was granted by the court. In addition to restating the original accounting and disclosure claims, the second amended consolidated complaint included claims arising out of the 1998 acquisition of Dresser Industries, Inc. by Halliburton, including that we failed to timely disclose the resulting asbestos liability exposure.

In April 2005, the court appointed new co-lead counsel and named AMSF the new lead plaintiff, directing that it file a third consolidated amended complaint and that we file our motion to dismiss. The court held oral arguments on that motion in August 2005, at which time the court took the motion under advisement. In March 2006, the court entered an order in which it granted the motion to dismiss with respect to claims arising prior to June 1999 and granted the motion with respect to certain other claims while permitting AMSF to re-plead some of those claims to correct deficiencies in its earlier complaint. In April 2006, AMSF filed its fourth amended consolidated complaint. We filed a motion to dismiss those portions of the complaint that had been re-pled. A hearing was held on that motion in July 2006, and in March 2007 the court ordered dismissal of the claims against all individual defendants other than our Chief Executive Officer (CEO). The court ordered that the case proceed against our CEO and Halliburton.

In September 2007, AMSF filed a motion for class certification, and our response was filed in November 2007. The court held a hearing in March 2008, and issued an order November 3, 2008 denying AMSF’s motion for class certification. AMSF then filed a motion with the Fifth Circuit Court of Appeals requesting permission to appeal the district court’s order denying class certification. The Fifth Circuit granted AMSF’s motion. Both parties filed briefs, and the Fifth Circuit heard oral argument in December of 2009. The Fifth Circuit affirmed the district court’s order denying class certification. On May 13, 2010, AMSF filed a writ of certiorari in the United States Supreme Court. The brief in opposition to the petition for writ of certiorari is due on August 18, 2010. As of June 30, 2010, we had not accrued any amounts related to this matter because we do not believe that a loss is probable. Further, an estimate of possible loss or range of loss related to this matter cannot be made.

Shareholder derivative cases

In May 2009, two shareholder derivative lawsuits involving us and KBR were filed in Harris County, Texas naming as defendants various current and retired Halliburton directors and officers and current KBR directors. These cases allege that the individual Halliburton defendants violated their fiduciary duties of good faith and loyalty to the detriment of Halliburton and its shareholders by failing to properly exercise oversight responsibilities and establish adequate internal controls. The District Court consolidated the two cases and the plaintiffs filed a consolidated petition against current and former Halliburton directors and officers only containing various allegations of wrongdoing including violations of the FCPA, claimed KBR offenses while acting as a government contractor in Iraq, claimed KBR offenses and fraud under United States government contracts, Halliburton activity in Iran, and illegal kickbacks. Our Board of Directors has designated a special committee of independent directors to oversee the investigation of the allegations made in the lawsuits and make recommendations to the Board on actions that should be taken. As of June 30, 2010, we had not accrued any amounts related to this matter because we do not believe that a loss is probable. Further, an estimate of possible loss or range of loss related to this matter cannot be made.

Environmental

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others:

-		the Comprehensive Environmental Response, Compensation, and Liability Act;
-		the Resource Conservation and Recovery Act;
-		the Clean Air Act;
-		the Federal Water Pollution Control Act; and
-		the Toxic Substances Control Act.

In addition to the federal laws and regulations, states and other countries where we do business often have numerous environmental, legal, and regulatory requirements by which we must abide. We evaluate and address the environmental impact of our operations by assessing and remediating contaminated properties in order to avoid future liabilities and comply with environmental, legal, and regulatory requirements. On occasion, we are involved in specific environmental litigation and claims, including the remediation of properties we own or have operated, as well as efforts to meet or correct compliance-related matters. Our Health, Safety and Environment group has several programs in place to maintain environmental leadership and to prevent the occurrence of environmental contamination.

We do not expect costs related to these remediation requirements to have a material adverse effect on our consolidated financial position or our results of operations. Our accrued liabilities for environmental matters were $48 million as of June 30, 2010 and $53 million as of December 31, 2009. Our total liability related to environmental matters covers numerous properties.

We have subsidiaries that have been named as potentially responsible parties along with other third parties for nine federal and state superfund sites for which we have established a liability. As of June 30, 2010, those nine sites accounted for approximately $10 million of our total $48 million liability. For any particular federal or state superfund site, since our estimated liability is typically within a range and our accrued liability may be the amount on the low end of that range, our actual liability could eventually be well in excess of the amount accrued. Despite attempts to resolve these superfund matters, the relevant regulatory agency may at any time bring suit against us for amounts in excess of the amount accrued. With respect to some superfund sites, we have been named a potentially responsible party by a regulatory agency; however, in each of those cases, we do not believe we have any material liability. We also could be subject to third-party claims with respect to environmental matters for which we have been named as a potentially responsible party.

Guarantee arrangements

In the normal course of business, we have agreements with financial institutions under which approximately $1.5 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of June 30, 2010, including $198 million of surety bonds related to Venezuela. In addition, $213 million of the total $1.5 billion relates to KBR letters of credit, bank guarantees, or surety bonds that are being guaranteed by us in favor of KBR’s customers and lenders. KBR has agreed to compensate us for these guarantees and indemnify us if we are required to perform under any of these guarantees. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.

Note 7. Income per Share

Basic income per share is based on the weighted average number of common shares outstanding during the period. Diluted income per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued.

A reconciliation of the number of shares used for the basic and diluted income per share calculations is as follows:

	Three Months Ended				Six Months Ended
	June 30				June 30
Millions of shares	2010		2009		2010		2009
Basic weighted average common shares outstanding		906		898		906		898
Dilutive effect of stock options		3		2		2		1
Diluted weighted average common shares outstanding		909		900		908		899

Excluded from the computation of diluted income per share are options to purchase six million shares of common stock that were outstanding during both the three and six months ended June 30, 2010 and eight million and nine million shares that were outstanding during the three and six months ended June 30, 2009. These options were outstanding during these periods but were excluded because they were antidilutive, as the option exercise price was greater than the average market price of the common shares.

Note 8. Fair Value of Financial Instruments

At June 30, 2010, we held $1.9 billion of United States Treasury securities with maturities that extend through June 2011. These securities are accounted for as available-for-sale and recorded at fair value in “Investments in marketable securities.”

The carrying amount of cash and equivalents, receivables, short-term notes payable, and accounts payable, as reflected in the condensed consolidated balance sheets, approximates fair market value due to the short maturities of these instruments. We have no financial instruments measured at fair value using unobservable inputs. The following table presents the fair values of our other financial assets and liabilities and the basis for determining their fair values:

					Quoted prices
					in active		Significant
					markets for		observable inputs
	Carrying				identical assets		for similar assets or
Millions of dollars	Value		Fair value		or liabilities		liabilities
June 30, 2010
Marketable securities	$	1,935	$	1,935	$	1,935	$	–
Long-term debt		4,574		5,102		4,157		945	(a)
December 31, 2009
Marketable securities	$	1,312	$	1,312	$	1,312	$	–
Long-term debt		4,574		5,301		4,874		427	(a)

(a) Calculated based on the fair value of other actively-traded Halliburton debt.

Note 9. Retirement Plans

The components of net periodic benefit cost related to pension benefits for the three and six months ended June 30, 2010 and June 30, 2009 were as follows:

	Three Months Ended June 30
	2010				2009
Millions of dollars	United States		International		United States		International
Service cost	$	–	$	5	$	–	$	7
Interest cost		2		13		1		11
Expected return on plan assets		(1)		(11)		(2)		(9)
Settlements/curtailments		–		–		1		1
Recognized actuarial loss		–		1		1		1
Net periodic benefit cost	$	1	$	8	$	1	$	11

	Six Months Ended June 30
	2010				2009
Millions of dollars	United States		International		United States		International
Service cost	$	–	$	10	$	–	$	13
Interest cost		3		25		3		21
Expected return on plan assets		(3)		(22)		(4)		(17)
Settlements/curtailments		–		–		1		1
Recognized actuarial loss		1		2		1		2
Net periodic benefit cost	$	1	$	15	$	1	$	20

Note 10. Accounting Standards Recently Adopted

On January 1, 2010, we adopted the provisions of a new accounting standard which provides amendments to previous guidance on the consolidation of variable interest entities. This standard clarifies the characteristics that identify a variable interest entity (VIE) and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This standard requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with a VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s condensed consolidated balance sheet, significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s condensed consolidated financial statements. The standard is effective for fiscal years beginning after November 15, 2009. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

Organization

We are a leading provider of products and services to the energy industry. We serve the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field. Activity levels within our operations are significantly impacted by spending on upstream exploration, development, and production programs by major, national, and independent oil and natural gas companies. We report our results under two segments, Completion and Production and Drilling and Evaluation:

our Completion and Production segment delivers cementing, stimulation, intervention, and completion services. The segment consists of production enhancement services, completion tools and services, and cementing services; and

our Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise wellbore placement solutions that enable customers to model, measure, and optimize their well construction activities. The segment consists of fluid services, drilling services, drill bits, wireline and perforating services, testing and subsea, software, and integrated project management and consulting services.

The business operations of our segments are organized around four primary geographic regions: North America (includes Canada and the United States), Latin America, Europe/Africa/CIS, and Middle East/Asia. We have significant manufacturing operations in various locations, including, but not limited to, the United States, Canada, the United Kingdom, Malaysia, Mexico, Brazil, and Singapore. With approximately 54,000 employees, we operate in approximately 70 countries around the world and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.

Financial results

During the first half of 2010, we produced revenue of $8.1 billion and operating income of $1.2 billion, reflecting an operating margin of 15%. Revenue increased $747 million or 10% from the first half of 2009, while operating income increased $119 million or 11% from the first half of 2009. Overall, these increases were due to our customers’ higher capital spending throughout 2010, led by increased drilling activity and pricing improvements in North America.

Gulf of Mexico/Macondo Well incident

On April 22, 2010, the semisubmersible drilling rig, Deepwater Horizon, sank in the Gulf of Mexico after an explosion and fire onboard the rig that began on April 20, 2010. We performed a variety of services on the well, including cementing, mud logging, directional drilling, measurement-while-drilling, and rig data acquisition services. The cause of the explosion, fire, and resulting oil spill is being investigated by numerous industry participants, governmental agencies and Congressional committees, and we have been named in many class action complaints involving pollution damage claims and other lawsuits related to wrongful death and other personal injuries claims. On May 28, 2010, the United States Department of the Interior issued an order imposing a six month suspension on all offshore deepwater drilling projects. A preliminary injunction has been issued blocking enforcement of the suspension on June 22, 2010, and the Department of the Interior issued a new suspension of deepwater drilling on July 12, 2010. We are adjusting the allocation of our Gulf of Mexico existing assets and/or anticipated capital expenditures and redeploying employees throughout the remainder of 2010. As a result of the Macondo Well incident and the deepwater drilling suspension in the Gulf of Mexico, despite our mitigation efforts, we estimate that the suspension will negatively impact our earnings by $0.05 to $0.08 for each quarter for the remainder of the year. Longer term, we do not know the extent of the impact on revenue or earnings as they are dependent among other things on our customers’ actions and the potential movement of deepwater rigs to other markets. For additional information, see “Business Environment and Result of Operations,” Note 6 to the condensed consolidated financial statements, Item 1, “Legal Proceedings,” and Item 1(a), “Risk Factors.”

Business outlook

We continue to believe in the strength of the long-term fundamentals of our business. Although we have seen improvements in our business during the first half of 2010, due to the concerns about the global recovery, the general lack of credit availability, the current excess supply of oil and natural gas, and the Gulf of Mexico/Macondo Well incident, the near-term growth for our business may be at a more moderate pace.

In North America, the industry experienced an unprecedented decline in drilling activity and rig count during 2009. These declines, coupled with natural gas storage levels reaching record levels, resulted in severe margin contraction in 2009. Beginning in the fourth quarter of 2009 and continuing through the first half of 2010, we saw a rebound in rig count and drilling activity with the trend toward more service-intensive work, especially in liquids-rich shale plays, resulting in absorption of much of the industry’s excess oilfield equipment capacity. Due to this absorption of excess capacity and our equipment utilization surpassing peak levels experienced in the third quarter of 2008, we were able to achieve price and margin increases over the prior year for most of our services. However, new production resulting from this increased activity, coupled with existing natural gas storage volumes, could weaken natural gas prices and negatively impact drilling activity and slow down our ability to further increase prices in coming quarters. In addition, the recent suspension of deepwater drilling in the Gulf of Mexico is expected to further impact our earnings.

Outside of North America, operating income declined in 2009 from 2008 levels due to a drop in rig count and the impact of pricing concessions that were renegotiated or given in the contract retendering process. In the second quarter of 2010, we experienced moderate improvement in revenue due to a seasonal recovery from inclement weather experienced in Russia, China, Australia, and Indonesia. We also saw improvement in Latin America due to increased activity for directional drilling. Despite improved activity levels in the second quarter, we have continued concerns around the pace of global recovery, which may cause our customers to revise their capital spending budget for the remainder of the year. Further, many regulatory agencies are revisiting regulatory requirements for deepwater drilling, which may delay certain projects.

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

Financial markets, liquidity, and capital resources

Since mid-2008, the global financial markets have been volatile. While this has created additional risks for our business, we believe we have invested our cash balances conservatively and secured sufficient financing to help mitigate any near-term negative impact on our operations. For additional information, see “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”

LIQUIDITY AND CAPITAL RESOURCES

We ended the second quarter of 2010 with cash and equivalents of $1.2 billion compared to $2.1 billion at December 31, 2009.

Significant sources of cash

Cash flows from operating activities contributed $808 million to cash in the first six months of 2010.

During the first six months of 2010, we sold approximately $550 million of United States Treasury securities.

Further available sources of cash. We have an unsecured $1.2 billion revolving credit facility expiring in 2012 to provide commercial paper support, general working capital, and credit for other corporate purposes. There were no cash drawings under the facility as of June 30, 2010. In addition, we have $1.9 billion in United States Treasury securities that will be maturing at various dates through June 2011.

Significant uses of cash

Capital expenditures were $855 million in the first six months of 2010 and were predominantly made in the production enhancement, drilling services, wireline and perforating, and cementing product service lines.

During this period, we purchased approximately $1.2 billion in United States Treasury securities, with varying maturity dates of less than one year.

We paid $190 million to acquire various companies during the first six months of 2010 that will enhance or augment our current portfolio of products and services.

We paid $163 million in dividends to our shareholders in the first six months of 2010.

We paid $94 million to the United States Department of Justice (DOJ) in the first six months of 2010 related to the settlement with them and under the indemnity provided to KBR, Inc. (KBR) upon separation.

Future uses of cash. Capital spending for 2010 is expected to be approximately $2.0 billion. The capital expenditures plan for 2010 is primarily directed toward our production enhancement, drilling services, wireline and perforating, and cementing product service lines and toward retiring old equipment to replace it with new equipment to improve our fleet reliability and efficiency.

In April 2010, we entered into a definitive merger agreement to acquire Boots & Coots, Inc. in a stock and cash transaction valued at approximately $250 million. Upon closing, which we expect will occur later this summer, we will combine our existing hydraulic workover and pipeline and coiled tubing services in our Completion and Production segment with Boots and Coots’ well intervention and pressure control capabilities. Under the merger agreement, Boots & Coots stockholders will receive $3.00 per share for each share of Boots & Coots common stock they hold, comprised of $1.73 in cash, which we will pay out of available cash and equivalents, and $1.27 in Halliburton common stock, subject to election, proration features, and an exchange ratio based on Halliburton’s five-day average share price prior to closing as further described in the merger agreement. The completion of the transaction will be subject to approval by Boots & Coots’ stockholders, regulatory approvals, and other customary closing conditions.

We are currently exploring other opportunities for acquisitions that will enhance or augment our current portfolio of products and services, including those with unique technologies or distribution networks in areas where we do not already have large operations.

We currently intend to retire our $750 million principal amount of 5.5% senior notes at maturity in October 2010 with available cash and equivalents.

Subject to Board of Directors approval, we expect to pay quarterly dividends of approximately $80 million during 2010. We also have approximately $1.8 billion remaining available under our share repurchase authorization, which may be used for open market share purchases.

As a result of the resolution of the DOJ and Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) investigations, we will make the final payment of $48 million during the third quarter of 2010 for the settlement with the DOJ and under the indemnity provided to KBR upon separation. See Notes 5 and 6 to our condensed consolidated financial statements for more information.

Other factors affecting liquidity

Guarantee arrangements. In the normal course of business, we have agreements with financial institutions under which approximately $1.5 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of June 30, 2010, including $198 million of surety bonds related to Venezuela. In addition, $213 million of the total $1.5 billion relates to KBR letters of credit, bank guarantees, or surety bonds that are being guaranteed by us in favor of KBR’s customers and lenders. KBR has agreed to compensate us for these guarantees and indemnify us if we are required to perform under any of these guarantees. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.

Financial position in current market. We believe our $1.2 billion of cash and equivalents and $1.9 billion in investments in marketable securities as of June 30, 2010 provide sufficient liquidity and flexibility, given the current market environment. Our debt maturities extend over a long period of time. We currently have a total of $1.2 billion of committed bank credit under our revolving credit facility to support our operations and any commercial paper we may issue in the future. We have no financial covenants or material adverse change provisions in our bank agreements. Currently, there are no borrowings under the revolving credit facility. Although a portion of earnings from our foreign subsidiaries is reinvested overseas indefinitely, we do not consider this to have a significant impact on our liquidity.

In addition, we manage our cash investments by investing principally in United States Treasury securities and in investment funds that principally hold United States Treasury securities.

Credit ratings. Credit ratings for our long-term debt remain A2 with Moody’s Investors Service and A with Standard & Poor’s. The credit ratings on our short-term debt remain P-1 with Moody’s Investors Service and A-1 with Standard & Poor’s.

Customer receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. For example, we have seen a delay in receiving payment on our receivables from one of our primary customers in Venezuela. If our customers delay in paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.

BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in approximately 70 countries throughout the world to provide a comprehensive range of discrete and integrated services and products to the energy industry. The majority of our consolidated revenue is derived from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. We serve the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production throughout the life of the field. Our two business segments are the Completion and Production segment and the Drilling and Evaluation segment. The industries we serve are highly competitive with many substantial competitors in each segment. In the first six months of 2010, based upon the location of the services provided and products sold, 44% of our consolidated revenue was from the United States. In the first six months of 2009, 37% of our consolidated revenue was from the United States. No other country accounted for more than 10% of our revenue during these periods.

Operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, force majeure, war or other armed conflict, expropriation or other governmental actions, inflation, exchange control problems, and highly inflationary currencies. We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country would be materially adverse to our consolidated results of operations.

Activity levels within our business segments are significantly impacted by spending on upstream exploration, development, and production programs by major, national, and independent oil and natural gas companies. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption. See Item 1(a), “Risk Factors,” for further information.

Some of the more significant barometers of current and future spending levels of oil and natural gas companies are oil and natural gas prices, the world economy, the availability of credit, and global stability, which together drive worldwide drilling activity. Our financial performance is significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the following tables.

This table shows the average oil and natural gas prices for West Texas Intermediate (WTI), United Kingdom Brent crude oil, and Henry Hub natural gas:

	Three Months Ended				Year Ended
	June 30				December 31
Average Oil Prices (dollars per barrel)	2010		2009		2009
West Texas Intermediate	$	77.79	$	59.44	$	61.65
United Kingdom Brent		78.51		58.70		61.49

Average United States Gas Prices (dollars per thousand
cubic feet, or mcf)
Henry Hub	$	4.45	$	3.83	$	4.06

The quarterly and year-to-date average rig counts based on the Baker Hughes Incorporated rig count information were as follows:

	Three Months Ended				Six Months Ended
	June 30				June 30
Land vs. Offshore	2010		2009		2010		2009
United States:
Land		1,467		886		1,384		1,078
Offshore (incl. Gulf of Mexico)		41		50		43		53
Total		1,508		936		1,427		1,131
Canada:
Land		164		90		315		209
Offshore		2		1		3		1
Total		166		91		318		210
International (excluding Canada):
Land		782		711		775		727
Offshore		306		271		300		277
Total		1,088		982		1,075		1,004
Worldwide total		2,762		2,009		2,820		2,345
Land total		2,413		1,687		2,474		2,014
Offshore total		349		322		346		331

	Three Months Ended				Six Months Ended
	June 30				June 30
Oil vs. Natural Gas	2010		2009		2010		2009
United States (incl. Gulf of Mexico):
Oil		544		201		501		242
Natural Gas		964		735		926		889
Total		1,508		936		1,427		1,131
Canada:
Oil		92		40		174		82
Natural Gas		74		51		144		128
Total		166		91		318		210
International (excluding Canada):
Oil		829		757		820		783
Natural Gas		259		225		255		221
Total		1,088		982		1,075		1,004
Worldwide total		2,762		2,009		2,820		2,345
Oil total		1,465		998		1,495		1,107
Natural Gas total		1,297		1,011		1,325		1,238

	Three Months Ended				Six Months Ended
	June 30				June 30
Drilling Type	2010		2009		2010		2009
United States (incl. Gulf of Mexico):
Horizontal		781		389		725		440
Vertical		495		373		477		474
Directional		232		174		225		217
Total		1,508		936		1,427		1,131

Our customers’ cash flows, in many instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets. The opposite is true for higher oil and natural gas prices.

During the latter portion of 2008 and throughout much of 2009, there was an unprecedented decline in oil and natural prices and demand for our services due to the worldwide recession. Since then, prices have rebounded. According to the International Energy Agency’s (IEA) July 2010 “Oil Market Report,” 2010 world petroleum demand is forecasted to increase 2% over 2009 levels. Despite the reduction in demand from peak levels in 2008 due to the worldwide recession, we believe that, over the long term, any major macroeconomic disruptions may ultimately correct themselves as the underlying trends of smaller and more complex reservoirs, high depletion rates, and the need for continual reserve replacement should drive the long-term need for our services.

North America operations

Volatility in natural gas prices can impact our customers' drilling and production activities, particularly in North America. In 2009, the region experienced an unprecedented decline in rig count and drilling activity due to the decline in natural gas prices. Beginning in the fourth quarter of 2009 and continuing through the second quarter of 2010, drilling activity has improved especially in service-intensive, liquids-rich, shale plays. As of June 30, 2010, rig counts had increased approximately 32% from the end of 2009. Current horizontal rigs represent over 50% of total rigs in the United States and are about 33% higher than the levels at the peak rig count of third quarter 2008. These trends have led to increased demand and increased pricing for most of our products and services in our United States land operations. In the second quarter of 2010, North America revenue increased 24% and operating income increased over 90% from the prior quarter driven by the increase in overall activity and completions intensity. Going forward, we expect that the overall rig count will continue to grow, but at a slower rate. We also expect further pricing opportunities from our already high utilization rate; however, growing cost pressure will serve to somewhat slow down the rate of improvement in our margins.

Gulf of Mexico/Macondo well incident. The semisubmersible drilling rig, Deepwater Horizon, sank in the Gulf of Mexico on April 22, 2010 after an explosion and fire onboard the rig that began on April 20, 2010. We performed a variety of services on the well, including cementing, mud logging, directional drilling, measurement-while-drilling, and rig data acquisition services. The cause of the explosion, fire, and resulting oil spill is being investigated by numerous industry participants and governmental agencies. On May 28, 2010, the United States Department of the Interior issued an order imposing a six month suspension on all offshore deepwater drilling projects. A preliminary injunction has been issued blocking enforcement of the suspension on June 22, 2010, and the Department of the Interior issued a new suspension of deepwater drilling on July 12, 2010.

We are assessing our plans in light of the Macondo Well incident relating to the Deepwater Horizon and the prospective regulatory response, including any new temporary or permanent Bureau of Ocean Energy Management, Regulation, and Enforcement (BOE) rules. We are also engaged in discussions with our customers in the Gulf of Mexico and are relocating equipment and personnel to other markets as appropriate. In this connection, we expect that Gulf of Mexico deepwater activity may be in hiatus for at least six months and possibly longer. However, there is potential for continuing operations in the Gulf of Mexico under the current BOE rules both as to shallow water operations and certain well activities such as water injection and workover operations, but some of these operations have been delayed as well due to the more stringent permitting process.

Our business in the Gulf of Mexico represented approximately 12% of our North America revenue in 2008, approximately 16% in 2009 and approximately 12% in the first half of 2010, and approximately 5% of our consolidated revenue in 2008, approximately 6% in 2009 and approximately 6% in the first half of 2010. Currently, approximately 65% of our Gulf of Mexico business is related to deepwater activities. Over time, our margins in the Gulf of Mexico generally have been less volatile than our United States onshore margins. Generally, our average margins in the Gulf of Mexico have been similar to the average of our United States onshore margins over the last three years.

We are adjusting the allocation of our Gulf of Mexico existing assets and/or anticipated capital expenditures to some degree during the remainder of 2010. At the time of the Macondo Well incident, we employed approximately 2,200 people in the Gulf of Mexico, and we have begun redeploying approximately 20% of our employees. As a result of the Macondo Well incident and the deepwater drilling suspension in the Gulf of Mexico, despite our mitigation efforts, we estimate that the suspension will negatively impact our earnings by $0.05 to $0.08 per quarter for the remainder of 2010. Longer term, we do not know the extent of the impact on revenue or earnings, as they are dependent, among other things, on our customers’ actions and the potential movement of deepwater rigs to other markets.

In this respect, we referenced earlier in 2010 the following contract wins that are at least partially affected as a result of the hiatus in Gulf of Mexico deepwater activity:

▪		a five-year, $1.5 billion contract to provide a broad base of products and services to an international oil company for its
		work associated with North America; and
▪		several wins totaling $1 billion, including $700 million to provide deepwater drilling fluid services in the Gulf of Mexico,
		Brazil, Indonesia, Angola, and other countries and $300 million for shelf- and land-related work.

International operations

Consistent with our long-term strategy to grow our operations outside of North America, we expect to continue to invest capital in our international operations. During 2009, operating income declined from 2008 levels due to a drop in rig count and the impact of pricing concessions that were renegotiated or given in the contract retendering process. During the second quarter of 2010, revenue outside of North America increased 11% and operating income grew 35% when compared to the prior quarter, primarily due to increased activity in Latin America and seasonal recovery in much of the eastern hemisphere. Despite improved activity levels in the second quarter, we have continued concerns around the pace of global recovery, which may cause our customers to revise their capital spending budget for the remainder of the year. In light of this possibility, international agencies are reassessing the regulatory process, which may potentially cause short-term delays in the execution of certain projects.

Venezuela. We historically had remeasured our net Bolívar Fuerte-denominated monetary asset position at the official, fixed exchange rate of 2.15 Bolívar Fuerte to United States dollar. In January 2010, the Venezuelan government announced a devaluation of the Bolívar Fuerte under a new two-exchange rate system; a 2.6 Bolívar Fuerte to United States dollar rate for essential products and a 4.3 Bolívar Fuerte to United States dollar rate for non-essential products. In the first quarter of 2010, as a result of the devaluation, we recorded a foreign exchange loss of $31 million, which was not tax deductible in Venezuela. We also recorded $10 million of additional tax expense for local Venezuelan income tax purposes as a result of a taxable gain on our net United States dollar-denominated monetary asset position in the country. Based on our best understanding of the two-exchange rate system for non-essential products, we are now utilizing the 4.3 Bolívar Fuerte to United States dollar exchange rate. However, no formal notification has been received from the central bank, which has resulted in uncertainty in the marketplace, including with our primary customer, as to the proper exchange rate to use for energy service industry transactions.

As of June 30, 2010, our total net investment in Venezuela was approximately $188 million. In addition to this amount, we also have $198 million of surety bond guarantees outstanding relating to our Venezuelan operations.

Initiatives and recent contract awards

Following is a brief discussion of some of our recent and current initiatives:

-	increasing our market share in more economic, unconventional shale plays and deepwater markets by leveraging our broad technology offerings to provide value to our customers through integrated solutions and the ability to more efficiently drill and complete their wells;
-	making key investments in technology and capital to accelerate growth opportunities;
-	improving working capital, operating within our cash flow, and managing our balance sheet to maximize our financial flexibility;
-	continuing to seek ways to be one of the most cost efficient service providers in the industry by using our scale and breadth of operations; and
-	expanding our business with national oil companies.

Contract wins positioning us to grow our operations over the long term include:

-	a deepwater, multi-services contract in Angola valued at approximately $1.3 billion for the provision of cementing, production enhancement, completion tools, wireline, and perforating services;
-	a contract valued at approximately $750 million from a major exploration and production company for stimulation services in the Williston basin;
-	a two-year contract, plus options, with ConocoPhillips China Inc., valued at approximately $40 million, which includes provisions for directional-drilling and logging-while-drilling services on the Peng Lai Development in China's Bohai Bay; and
-	frac pack and gravel pack deepwater completions awards in Brazil.

RESULTS OF OPERATIONS IN 2010 COMPARED TO 2009

Three Months Ended June 30, 2010 Compared with Three Months Ended June 30, 2009

	Three Months Ended
REVENUE:	June 30				Increase		Percentage
Millions of dollars	2010		2009		(Decrease)		Change
Completion and Production	$	2,393	$	1,752	$	641		37	%
Drilling and Evaluation		1,994		1,742		252		14
Total revenue	$	4,387	$	3,494	$	893		26	%

By geographic region:
Completion and Production:
North America	$	1,434	$	795	$	639		80	%
Latin America		212		227		(15	)	(7	)
Europe/Africa/CIS		459		439		20		5
Middle East/Asia		288		291		(3	)	(1	)
Total		2,393		1,752		641		37
Drilling and Evaluation:
North America		677		464		213		46
Latin America		355		317		38		12
Europe/Africa/CIS		522		532		(10	)	(2	)
Middle East/Asia		440		429		11		3
Total		1,994		1,742		252		14
Total revenue by region:
North America		2,111		1,259		852		68
Latin America		567		544		23		4
Europe/Africa/CIS		981		971		10		1
Middle East/Asia		728		720		8		1

	Three Months Ended
OPERATING INCOME:	June 30						Increase			Percentage
Millions of dollars	2010			2009			(Decrease)			Change
Completion and Production	$	497		$	243		$	254			105	%
Drilling and Evaluation		318			284			34			12
Corporate and other		(53	)		(51	)		(2	)		(4	)
Total operating income	$	762		$	476		$	286			60	%

By geographic region:
Completion and Production:
North America	$	310	$	52	$	258		496	%
Latin America		34		53		(19	)	(36	)
Europe/Africa/CIS		95		69		26		38
Middle East/Asia		58		69		(11	)	(16	)
Total		497		243		254		105
Drilling and Evaluation:
North America		131		28		103		368
Latin America		55		53		2		4
Europe/Africa/CIS		53		86		(33	)	(38	)
Middle East/Asia		79		117		(38	)	(32	)
Total		318		284		34		12
Total operating income by region
(excluding Corporate and other):
North America		441		80		361		451
Latin America		89		106		(17	)	(16	)
Europe/Africa/CIS		148		155		(7	)	(5	)
Middle East/Asia		137		186		(49	)	(26	)

The 26% increase in consolidated revenue in the second quarter of 2010 compared to the second quarter of 2009 was due to increased drilling activity, especially in the unconventional natural gas and oil basins in North America. Revenue outside North America was 52% of consolidated revenue in the second quarter of 2010 and 64% of consolidated revenue in the second quarter of 2009.

The increase in consolidated operating income compared to the second quarter of 2009 as a result of significant increases in North America drilling activity across both segments and the impact of improved pricing in North America.

Following is a discussion of our results of operations by reportable segment.

Completion and Production revenue increased compared to the second quarter of 2009 as a result of greater activity in North America, where revenue increased 80%. This growth was due to a substantial increase in demand for production enhancement services in our United States land operations. Latin America revenue fell 7% as increased demand for cementing and production enhancement services in Colombia and Argentina was outweighed by our customer's budget constraints in Mexico and activity declines in Venezuela. Europe/Africa/CIS revenue increased 5% from increased demand for completion tools in Norway and Angola and higher activity for production enhancement services in Algeria and Congo partially offset by declines in the United Kingdom. Middle East/Asia revenue remained relatively flat as declines in cementing and completion tools activity were offset by activity increases for production enhancement services in Southeast Asia. Revenue outside of North America was 40% of total segment revenue in the second quarter of 2010 and 55% of total segment revenue in the second quarter of 2009.

The increase in Completion and Production operating income compared to the second quarter of 2009 was most significant in North America, where operating income grew by $258 million from the second quarter of 2009. The increase in North America was primarily attributable to higher activity for production enhancement services in United States land. Latin America operating income decreased 36% due to lower demand across all product service lines in Mexico and Brazil. Europe/Africa/CIS operating income increased 38%, primarily due to higher demand and lower costs for production enhancement services across all regions of Africa and higher sales for completion tools in Norway. Middle East/Asia operating income fell 16%, mostly due to lower demand for production enhancement in India and Australia.

Drilling and Evaluation revenue increased compared to the second quarter of 2009, primarily due to improved pricing and higher drilling activity in North America. North America revenue grew 46% on increased demand for all products and services in United States land and the Gulf of Mexico. Also, Canada contributed to the increase with higher activity for drilling fluid services and drilling services. Latin America revenue increased 12% as higher activity across all product service lines in Argentina and Brazil outweighed declines associated with the currency devaluation in Venezuela. Europe/Africa/CIS revenue declined 2% as higher demand for drilling fluid services in Norway, Russia, and the Caspian was offset by decreased demand for all products and services in Africa. Middle East/Asia revenue rose 3% as increased demand for drilling fluid services across the region and wireline and perforating services in the Middle East was partially offset by decreased demand for wireline and perforating services and testing and subsea services in Asia. Revenue outside of North America was 66% of total segment revenue in the second quarter of 2010 and 73% of total segment revenue in the second quarter of 2009.

The increase in Drilling and Evaluation operating income compared to the second quarter of 2009 was due to higher activity and improved pricing in North America. North America operating income increased $103 million, primarily due to strong increases in activity across most product service lines in United States land and the Gulf of Mexico. In addition, Canada operating income increased from higher demand for drilling services and wireline and perforating services. Latin America operating income grew 4%, primarily due to increased demand for testing and subsea services in Brazil and increased Landmark software sales in Argentina and Venezuela. These increases were partially offset by higher costs and lower activity in Mexico. Europe/Africa/CIS operating income fell 38% as increased demand for drilling fluid services in Norway and Sakhalin was offset by decreased demand for all products and services in Africa. Middle East/Asia operating income decreased 32% due to higher costs and lower demand for drilling services, wireline and perforating services, and testing and subsea services in most of Asia Pacific.

NONOPERATING ITEMS

Other, net in the second quarter of 2010 included a $9 million loss on foreign exchange.

RESULTS OF OPERATIONS IN 2010 COMPARED TO 2009

Six Months Ended June 30, 2010 Compared with Six Months Ended June 30, 2009

	Six Months Ended
REVENUE:	June 30				Increase		Percentage
Millions of dollars	2010		2009		(Decrease)		Change
Completion and Production	$	4,357	$	3,780	$	577		15	%
Drilling and Evaluation		3,791		3,621		170		5
Total revenue	$	8,148	$	7,401	$	747		10	%

By geographic region:
Completion and Production:
North America	$	2,559	$	1,866	$	693		37	%
Latin America		414		459		(45	)	(10	)
Europe/Africa/CIS		844		865		(21	)	(2	)
Middle East/Asia		540		590		(50	)	(8	)
Total		4,357		3,780		577		15
Drilling and Evaluation:
North America		1,256		1,076		180		17
Latin America		648		641		7		1
Europe/Africa/CIS		1,057		1,074		(17	)	(2	)
Middle East/Asia		830		830		–		–
Total		3,791		3,621		170		5
Total revenue by region:
North America		3,815		2,942		873		30
Latin America		1,062		1,100		(38	)	(3	)
Europe/Africa/CIS		1,901		1,939		(38	)	(2	)
Middle East/Asia		1,370		1,420		(50	)	(4	)

	Six Months Ended
OPERATING INCOME:	June 30						Increase			Percentage
Millions of dollars	2010			2009			(Decrease)			Change
Completion and Production	$	735		$	606		$	129			21	%
Drilling and Evaluation		588			588			–			–
Corporate and other		(112	)		(102	)		(10	)		(10	)
Total operating income	$	1,211		$	1,092		$	119			11	%

By geographic region:
Completion and Production:
North America	$	447	$	218	$	229		105	%
Latin America		63		107		(44	)	(41	)
Europe/Africa/CIS		134		146		(12	)	(8	)
Middle East/Asia		91		135		(44	)	(33	)
Total		735		606		129		21
Drilling and Evaluation:
North America		224		92		132		143
Latin America		72		107		(35	)	(33	)
Europe/Africa/CIS		144		177		(33	)	(19	)
Middle East/Asia		148		212		(64	)