EXHIBIT 99.1
ITEM 1. BUSINESS.
GENERAL DESCRIPTION OF BUSINESS. Halliburton Company's predecessor was
established in 1919 and incorporated under the laws of the State of Delaware in
1924. Halliburton Company provides a variety of services, products, maintenance,
engineering and construction to energy, industrial and governmental customers.
Our five business segments are organized around how we manage the
business: Drilling and Formation Evaluation, Fluids, Production Optimization,
Landmark and Other Energy Services and the Engineering and Construction Group.
We sometimes refer to the combination of the Drilling and Formation
Evaluation, Fluids, Production Optimization and Landmark and Other Energy
Services segments as the Energy Services Group.
Dresser Equipment Group is presented as discontinued operations through
March 31, 2001 as a result of the sale in April 2001 of this business unit. See
Note 4 to the financial statements for financial information about our business
segments.
PROPOSED GLOBAL SETTLEMENT. On December 18, 2002, we announced that we
had reached an agreement in principle that, if and when consummated, would
result in a global settlement of all asbestos and silica personal injury claims
against DII Industries, LLC (DII Industries), Kellogg, Brown & Root, Inc.
(Kellogg, Brown & Root) and their current and former subsidiaries.
The agreement in principle provides that:
- up to $2.775 billion in cash, 59.5 million Halliburton shares
(valued at $1.1 billion using the stock price at December 31,
2002 of $18.71) and notes with a net present value expected to
be less than $100 million will be paid to a trust for the
benefit of current and future asbestos personal injury
claimants and current silica personal injury claimants upon
receiving final and non-appealable court confirmation of a
plan of reorganization;
- DII Industries and Kellogg, Brown & Root will retain rights to
the first $2.3 billion of any insurance proceeds with any
proceeds received between $2.3 billion and $3.0 billion going
to the trust;
- the agreement is to be implemented through a pre-packaged
Chapter 11 filing for DII Industries, Kellogg, Brown & Root
and some of their subsidiaries; and
- the funding of the settlement amounts would occur upon
receiving final and non-appealable court confirmation of a
plan of reorganization of DII Industries and Kellogg, Brown &
Root and their subsidiaries in the Chapter 11 proceeding.
Subsequently, as of March 2003, DII Industries and Kellogg, Brown &
Root have entered into definitive written agreements finalizing the terms of the
agreement in principle.
In March 2003, we agreed with Harbison-Walker and the asbestos
creditors committee in the Harbison-Walker bankruptcy to consensually extend the
period of the stay contained in the Bankruptcy Court's temporary restraining
order until July 21, 2003. The court's temporary restraining order, which was
originally entered on February 14, 2002, stays more than 200,000 pending
asbestos claims against DII Industries. The agreement provides that if the
pre-packaged Chapter 11 filing by DII Industries, Kellogg, Brown & Root and
their subsidiaries is not made by July 14, 2003, the Bankruptcy Court will hear
motions to lift the stay on July 21, 2003. The asbestos creditors committee also
reserves the right to monitor progress toward the filing of the Chapter 11
proceeding and seek an earlier hearing to lift the stay if satisfactory progress
toward the Chapter 11 filing is not being made.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Proposed global
settlement" and Note 12 to the financial statements.
DESCRIPTION OF SERVICES AND PRODUCTS. We offer a broad suite of
products and services through our five business segments. The following
summarizes our services and products for each business segment.
ENERGY SERVICES GROUP
The Energy Services Group consists of Drilling and Formation
Evaluation, Fluids, Production Optimization, and Landmark and Other Energy
Services business segments. It provides a wide range of discrete services and
products, as well as integrated solutions to customers for the exploration,
development and production of oil and gas. The Energy Services Group serves
major, national and independent oil and gas companies throughout the world.
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DRILLING AND FORMATION EVALUATION
The Drilling and Formation Evaluation segment is primarily involved in
drilling and evaluating the formations related to bore-hole construction and oil
and gas formation evaluation. Major products and services offered include:
- drilling systems and services;
- drill bits; and
- logging and perforating.
Our Sperry-Sun business line provides drilling systems and services.
These services include directional and horizontal drilling,
measurement-while-drilling, logging-while-drilling, multilateral wells and
related completion systems, and rig site information systems. Our drilling
systems feature bit stability, directional control, borehole quality, low
vibration and high rates of penetration while drilling directional wells.
Drill bits, offered by our Security DBS business line, include roller
cone rock bits, fixed cutter bits, coring equipment and services and other
downhole tools used to drill wells.
Logging and perforating products and services include our Magnetic
Resonance Imaging Logging (MRIL(R)), high-temperature logging, as well as
traditional open-hole and cased-hole logging tools. MRIL(R) tools apply magnetic
resonance imaging technology to the evaluation of subsurface rock formations in
newly drilled oil and gas wells. Open-hole tools provide information on well
visualization, formation evaluation (including resistivity, porosity, lithology
and temperature), rock mechanics and sampling. Cased-hole tools provide
cementing evaluation, reservoir monitoring, pipe evaluation, pipe recovery and
perforating.
FLUIDS
The Fluids segment focuses on fluid management and technologies to
assist in the drilling and construction of oil and gas wells. This segment
offers:
- cementing; and
- drilling fluids systems.
Cementing is the process used to bond the well and well casing while
isolating fluid zones and maximizing wellbore stability. This is accomplished by
pumping cement and chemical additives to fill the space between the casing and
the side of the wellbore. Our cementing service line also provides casing
equipment and services.
Our Baroid business line provides drilling fluid systems and
performance additives for oil and gas drilling, completion and workover
operations. In addition, Baroid sells products to a wide variety of industrial
customers. Drilling fluids usually contain bentonite or barite in a water or oil
base. Drilling fluids primarily improve wellbore stability and facilitate the
transportation of cuttings from the bottom of a wellbore to the surface. The
fluids also help cool the drill bit, seal porous well formations and assist in
pressure control within a wellbore. Fluids are often customized by onsite
engineers for optimum stability and enhanced oil production.
Also included in this segment is our equity method investment in
Enventure Global Technology, LLC, which is an expandable casing joint venture.
PRODUCTION OPTIMIZATION
The Production Optimization segment primarily tests, measures and
provides means to manage and/or improve well production once a well is drilled
and, in some cases, after it has been producing. This segment consists of:
- production enhancement;
- completion products; and
- tools and testing services.
Production enhancement optimizes oil and gas reservoirs through a
variety of pressure pumping services, including fracturing and acidizing, sand
control, coiled tubing, hydraulic workover and pipeline and process services.
These services are used to clean out a formation or to fracture formations to
allow increased oil and gas production.
Completion products include subsurface safety valves and flow control
equipment, surface safety systems, packers and specialty completion equipment,
production automation, well screens, well control services and slickline
equipment and services.
Tools and testing services include underbalanced applications,
tubing-conveyed perforating products and services, drill stem and other well
testing tools, data acquisition services and production applications.
Also included in this segment is our subsea operations conducted in our
50% owned company, Subsea 7, Inc.
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LANDMARK AND OTHER ENERGY SERVICES
The Landmark and Other Energy Services segment provides integrated
exploration and production software information systems, consulting services,
real-time operations, smartwells and integrated solutions.
Landmark Graphics is the leading supplier of integrated exploration and
production software information systems as well as professional and data
management services for the upstream oil and gas industry. Landmark Graphics
software transforms vast quantities of seismic, well log and other data into
detailed computer models of petroleum reservoirs to achieve optimal business and
technical decisions in exploration, development and production activities.
Landmark Graphics broad range of professional services enables our worldwide
customers to optimize technical, business and decision processes. Data
management services provides efficient storage, browsing and retrieval of large
volumes of exploration and petroleum data. The products and services offered by
Landmark Graphics integrate data workflows and operational processes across
disciplines including geophysics, geology, drilling, engineering, production,
economics, finance and corporate planning, and key partners and suppliers.
This segment also provides value-added oilfield project management and
integrated solutions to independent, integrated and national oil companies.
Integrated solutions enhance field deliverability and maximize a customer's
return on investment. These services leverage all of our products and
technologies, as well as project management capabilities.
Also included in this segment is our equity method investment in Well
Dynamics B.V., an intelligent well completions joint venture. Other services
provide installation and servicing of subsea facilities and pipelines.
ENGINEERING AND CONSTRUCTION GROUP
The Engineering and Construction Group segment, operating as KBR,
provides a wide range of services to energy and industrial customers and
government entities worldwide.
KBR offers the following:
- Onshore engineering and construction activities, including
engineering and construction of liquefied natural gas, ammonia
and crude oil refineries and natural gas plants;
- Offshore deepwater engineering and marine technology and
related worldwide fabrication capabilities;
- Government operations, construction, maintenance and logistics
activities for government facilities and installations;
- Plant operations, maintenance and start-up services for both
upstream and downstream oil, gas and petrochemical facilities
as well as operations, maintenance and logistics services for
the power, commercial and industrial markets; and
- Civil engineering, consulting and project management services.
DISPOSITIONS IN 2002. During 2002, we disposed of non-core businesses
in our Energy Services Group listed below:
- In January 2002, we sold our 50% interest in European Marine
Contractors Limited, an unconsolidated joint venture reported
with our Landmark and Other Energy Services segment, which
provided offshore pipeline services, to our joint venture
partner, Saipem;
- In August 2002, we sold several properties reported in our
Landmark and Other Energy Services segment that were located
in the United States; and
- In September 2002, we sold our 50% interest in Bredero-Shaw, a
pipecoating joint venture reported in our Landmark and Other
Energy Services segment, to our partner ShawCor Ltd.
These dispositions will have an immaterial impact on our future
operations. In addition, in May 2002, we contributed substantially all of our
Halliburton Subsea assets for 50% of the ownership in a newly formed company,
Subsea 7, Inc., which is reported in our Production Optimization segment.
See Note 2 to the financial statements for additional information
related to 2002 dispositions and the creation of Subsea 7, Inc.
BUSINESS STRATEGY. Our business strategy is to maintain global
leadership in providing energy services and products and engineering and
construction services. We provide these services and products to our customers
as discrete services and products and, when combined with project management
services, as integrated solutions. Our ability to be a global leader depends on
meeting four key goals:
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- establishing and maintaining technological leadership;
- achieving and continuing operational excellence;
- creating and continuing innovative business relationships; and
- preserving a dynamic workforce.
MARKETS AND COMPETITION. We are one of the world's largest diversified
energy services and engineering and construction services companies. We believe
that our future success will depend in large part upon our ability to offer a
wide array of services and products on a global scale. Our services and products
are sold in highly competitive markets throughout the world. Competitive factors
impacting sales of our services and products include: price, service delivery
(including the ability to deliver services and products on an "as needed, where
needed" basis), service quality, product quality, warranty and technical
proficiency. While we provide a wide range of discrete services and products, a
number of customers have indicated a preference for integrated services and
solutions. In the case of the Energy Services Group, integrated services and
solutions relate to all phases of exploration, development and production of
oil, natural gas and natural gas liquids. In the case of the Engineering and
Construction Group, integrated services and solutions relate to all phases of
design, procurement, construction, project management and maintenance of
facilities primarily for energy and government customers.
We conduct business worldwide in over 100 countries. For 2002, the
United States represented 33% of our total revenue and the United Kingdom
represented 12%. No other country accounted for more than 10% of our total
revenue. Since the markets for our services and products are vast and cross
numerous geographic lines, a meaningful estimate of the total number of
competitors cannot be made. The industries we serve are highly competitive and
we have many substantial competitors. Substantially all of our services and
products are marketed through our servicing and sales organizations.
Operations in some countries may be adversely affected by unsettled
political conditions, acts of terrorism, expropriation or other governmental
actions and exchange control and currency problems. We believe the geographic
diversification of our business activities reduces the risk that loss of
operations in any one country would be material to the conduct of our operations
taken as a whole. While Venezuela accounted for less than two percent of our
2002 revenues, the current economic and political instability in Venezuela will
negatively impact our operations until resolved. In addition, as a result of the
breadth of our businesses and the inherently unpredictable impact of the armed
conflict in the Middle East, we are unable to predict their impact on our
results of operations. Moreover, due to rising levels of civil disturbance, a
number of our customers has ceased operations in the Nigerian Delta region.
Energy Services operations in Nigeria accounted for approximately 2% of our
revenues in 2002, and these developments could negatively impact our operations
in 2003. Information regarding our exposures to foreign currency fluctuations,
risk concentration and financial instruments used to minimize risk is included
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Instrument Market Risk" and in Note 19 to the financial
statements.
CUSTOMERS AND BACKLOG. Our revenues from continuing operations during
the past three years were mainly derived from the sale of services and products
to the energy industry. Sales of services and products to the energy industry in
2002 represented 86% of revenues from continuing operations compared to 85% in
2001 and 84% in 2000.
The following schedule summarizes the backlog from continuing
operations of engineering and construction projects at December 31, 2002 and
2001:
Millions of dollars 2002 2001
- ------------------------------------------------------------------
Firm orders $ 8,704 $ 8,118
Government orders firm but not yet funded,
letters of intent and contracts awarded
but not signed 1,330 1,794
- ------------------------------------------------------------------
Total $ 10,034 $ 9,912
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Of the total backlog at December 31, 2002, $9,776 million relates to
KBR operations with the remainder arising from our Energy Services Group.
Approximately 70% of the Energy Services Group 2002 backlog relates to Subsea 7,
Inc. in the Production Optimization segment and the balance relates to Landmark
and Other Energy
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Services segment. We estimate that 43% of the total backlog existing at December
31, 2002 will be completed during 2003. Approximately 37% of total backlog
relates to fixed-price contracts with the remaining 63% relating to cost
reimbursable contracts. In addition, backlog relating to engineering,
procurement, installation and commissioning contracts for the offshore oil and
gas industry totaled $904 million at December 31, 2002. For contracts that are
not for a specific amount, backlog is estimated as follows:
- operations and maintenance contracts that cover multiple years
are included in backlog based upon an estimate of the work to
be provided over the next twelve months; and
- government contracts that cover a broad scope of work up to a
maximum value are included in backlog at the estimated amount
of work to be completed under the contract based upon periodic
consultation with the customer.
For projects where we act as project manager, we only include our scope
of each project in backlog. For projects related to unconsolidated joint
ventures, we only include our percentage ownership of each joint venture's
backlog. Our backlog excludes contracts for recurring hardware and software
maintenance and support services offered by Landmark Graphics. Backlog is not
indicative of future operating results because backlog figures are subject to
substantial fluctuations. Arrangements included in backlog are in many instances
extremely complex, nonrepetitive in nature and may fluctuate in contract value
and timing. Many contracts do not provide for a fixed amount of work to be
performed and are subject to modification or termination by the customer. The
termination or modification of any one or more sizeable contracts or the
addition of other contracts may have a substantial and immediate effect on
backlog.
RAW MATERIALS. Raw materials essential to our business are normally
readily available. Where we rely on a single supplier for materials essential to
our business, we are confident that we could make satisfactory alternative
arrangements in the event of an interruption in supply.
RESEARCH AND DEVELOPMENT COSTS. We maintain an active research and
development program. The program improves existing products and processes,
develops new products and processes and improves engineering standards and
practices that serve the changing needs of our customers. Our expenditures for
research and development activities totaled $233 million in both 2002 and 2001
and $231 million in 2000. Further information relating to our expenditures for
research and development is included in Note 1 to the financial statements.
PATENTS. We own a large number of patents and have pending a
substantial number of patent applications covering various products and
processes. We are also licensed to utilize patents owned by others. Included in
"Other assets" are patents, net of accumulated amortization, totaling $58
million as of December 31, 2002 and $49 million as of December 31, 2001. We do
not consider any particular patent or group of patents to be material to our
business operations.
SEASONALITY. Weather and natural phenomena can temporarily affect the
performance of our services, but the widespread geographical locations of our
operations serve to mitigate those effects. Examples of how weather can impact
our business include:
- the severity and duration of the winter in North America can
have a significant impact on gas storage levels and drilling
activity for natural gas;
- the timing and duration of the spring thaw in Canada directly
affects activity levels due to road restrictions;
- typhoons and hurricanes can disrupt offshore operations; and
- severe weather during the winter months normally results in
reduced activity levels in the North Sea.
EMPLOYEES. At December 31, 2002, we employed approximately 83,000
people worldwide compared to 85,000 at December 31, 2001. At December 31, 2002,
approximately five percent of our employees were subject to collective
bargaining agreements. Based upon the geographic diversification of these
employees, we believe any risk of loss from employee strikes or other collective
actions would not be material to the conduct of our operations taken as a whole.
ENVIRONMENTAL REGULATION. We are subject to numerous environmental,
legal and regulatory requirements related to our operations worldwide. In the
United States, these laws and regulations include the Comprehensive
Environmental Response, Compensation and Liability Act, the Resources
Conservation and Recovery Act, the Clean
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Air Act, the Federal Water Pollution Control Act and the Toxic Substances
Control Act, among others. In addition to the federal laws and regulations,
states where we do business may have equivalent laws and regulations with 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.
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. We have subsidiaries that have been named as potentially
responsible parties along with other third parties for ten federal and state
superfund sites for which we have established a liability. As of December 31,
2002, those ten sites accounted for $8 million of our total $48 million
liability. See Note 12 to the financial statements.
WEBSITE ACCESS. The Company's annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act of 1934 are made available free of charge on the Company's internet website
at www.halliburton.com as soon as reasonably practicable after the Company has
electronically filed such material with, or furnished it to, the Securities and
Exchange Commission.
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