EXECUTIVE OVERVIEW

Organization
We are a leading provider of services and products 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, pressure control, specialty chemicals, artificial lift, and completion services. The segment consists of Halliburton Production Enhancement, Cementing, Completion Tools, Boots & Coots, and Multi-Chem; 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 Halliburton Drill Bits and Services, Wireline and Perforating, Testing and Subsea, Baroid, Sperry Drilling, Landmark Software and Services, and Consulting and Project Management.

The business operations of our segments are organized around four primary geographic regions: North America, Latin America, Europe/Africa/CIS, and Middle East/Asia. We have significant manufacturing operations in various locations, including, but not limited to, the United States, Canada, the United Kingdom, Malaysia, Mexico, Brazil, and Singapore. With over 70,000 employees, we operate in approximately 80 countries around the world, and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates. Financial results
During the first nine months of 2012, we produced revenue of $21.2 billion and operating income of $3.2 billion, reflecting an operating margin of approximately 15%. Revenue increased $3.4 billion, or 19%, from the first nine months of 2011, while operating income decreased $129 million, or 4%. The increase in revenue was attributable to higher drilling activity in the oil and liquids-rich basins in North America, as well as increased activity in all our international regions, compared to the first nine months of 2011. The decrease in operating income in the first nine months of 2012 was primarily attributable to escalating costs associated with guar gum, a blending additive used in our hydraulic fracturing processes, decreasing activity in natural gas basins, and pricing pressure in certain basins in North America due to an over-supply of hydraulic fracturing equipment. The first nine months of 2012 results were negatively impacted by a $300 million, pre-tax, loss contingency for the Macondo well incident included in Corporate and other expense along with a $48 million, pre-tax, charge related to an earn-out adjustment due to significantly better than expected performance of a past acquisition which is reflected in our North America and Latin America Completion and Production segment results, partially offset by a $20 million, pre-tax, gain recorded in Corporate and other expense related to the settlement of a patent infringement lawsuit. The first nine months of 2011 results were negatively impacted by a $25 million, pre-tax, impairment charge on an asset held for sale in our Europe/Africa/CIS region, an $11 million, pre-tax, charge for employee separation costs in the Eastern Hemisphere and a $59 million, pre-tax, charge in Libya, primarily related to reserves for certain assets.
Business outlook
We continue to believe in the strength of the long-term fundamentals of our business. Energy demand is expected to increase in the long term driven by economic growth in developing countries despite current underlying downside risks in the industry, such as sluggish growth in developed countries and supply uncertainties associated with geopolitical tensions in the Middle East. Furthermore, development of new resources is expected to be more complex, resulting in increasing service intensity.
In North America, the industry is experiencing an activity shift from natural gas plays to oil and liquids-rich basins due to low natural gas prices resulting from continued strong natural gas production. We believe this shift will continue in the near term as operators optimize their budgets by focusing on basins with better economics. While oil and liquids-rich drilling has helped to offset the decline in natural gas drilling in the first nine months of 2012, we believe that some of our customers will curtail activity to operate within their budgetary constraints for the remainder of the year and will take significantly more holiday downtime in the fourth quarter. We anticipate near-term pricing pressure for our production enhancement services and currently intend to direct less capital toward the pressure pumping market in 2013.
Our Gulf of Mexico business has recovered to levels experienced before the Macondo incident due to an increase in the level of permit approvals for deepwater drilling. We remain optimistic about the increased expansion of activity in the Gulf of Mexico as our customers adapt to new regulations and new permit approvals are issued. In addition, more deepwater rigs are expected to arrive in the Gulf of Mexico over the remainder of this year and in 2013 which will provide us with further growth opportunities.

Outside of North America, revenue and operating income increased in the first nine months of 2012 compared to the first nine months of 2011. We expect to see gradual activity and pricing improvements in those international markets where we anticipate the addition of deepwater rigs and those in which we have made strategic investments in capital and technologies. We also believe that new international unconventional oil and natural gas projects may contribute to activity improvements into 2013.
We are continuing to execute several key initiatives in 2012. These initiatives include increasing manufacturing production in the Eastern Hemisphere and reinventing our service delivery platform to lower our delivery costs. Our operating performance and business outlook are described in more detail in "Business Environment and Results of Operations." Financial markets, liquidity, and capital resources The global financial markets continue to be somewhat 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 third quarter of 2012 and the year ended December 31, 2011 with cash and equivalents of $2.0 billion and $2.7 billion. As of September 30, 2012, approximately $395 million of the $2.0 billion of cash and equivalents was held by our foreign subsidiaries that would be subject to tax if repatriated. If these funds are needed for our operations in the United States, we would be required to accrue and pay United States taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the United States and our current plans do not demonstrate a need to repatriate them to fund our United States operations. At September 30, 2012, we also held $71 million in fixed income investments, which are reflected in "Other current assets" and "Other assets" in our condensed consolidated balance sheets. We held $150 million of short-term, United States Treasury securities at December 31, 2011 included in "Other current assets" in our condensed consolidated balance sheets.
Significant sources of cash
Cash flows from operating activities contributed $1.9 billion to cash in the first nine months of 2012.
During the first nine months of 2012, we sold approximately $250 million of investment securities.
Significant uses of cash
Capital expenditures were $2.5 billion in the first nine months of 2012, and were predominantly made in Halliburton Production Enhancement, Sperry Drilling, Cementing, and Wireline and Perforating. We have also invested additional working capital to support the growth of our business.
During the first nine months of 2012, inventories increased by $969 million, primarily because we procured a large reserve of guar gum in the second quarter when market prices were relatively high. See further discussion in "Business Environment and Results of Operations - North America operations." We paid $250 million in dividends to our shareholders in the first nine months of 2012.
During the first nine months of 2012, we purchased $171 million of investment securities.
Future uses of cash. Capital spending for 2012 is expected to range between $3.4 billion and $3.5 billion. The capital expenditures plan for 2012 is primarily directed toward Halliburton Production Enhancement, Cementing, Wireline and Perforating, and Sperry Drilling.
We are continuing to explore opportunities for acquisitions that will enhance or augment our current portfolio of services and products, including those with unique technologies or distribution networks in areas where we do not already have large operations.
Subject to Board of Directors approval, we expect to pay dividends of approximately $80 million during the fourth quarter of 2012. We also have approximately $1.7 billion remaining available under our share repurchase authorization, which may be used for open market share purchases. Other factors affecting liquidity
Guarantee agreements. In the normal course of business, we have agreements with financial institutions under which an aggregate of approximately $1.9 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of September 30, 2012, including $273 million of surety bonds related to Venezuela. See "Business Environment and Results of Operations - International operations" for further discussion related to Venezuela. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.
Financial position in current market. As of September 30, 2012, we had $2.0 billion of cash and equivalents, $71 million in fixed income investments, and a total of $2.0 billion of available committed bank credit under our revolving credit facility. Furthermore, we have no financial covenants or material adverse change provisions in our bank agreements, and our debt maturities extend over a long period of time. Although a portion of earnings from our foreign subsidiaries is reinvested outside the United States indefinitely, we do not consider this to have a significant impact on our liquidity. We currently believe that our capital expenditures, working capital investments, and dividends, if any, in 2012 can be fully funded through cash from operations. As a result, we believe we have a reasonable amount of liquidity and, if necessary, additional financing flexibility given the current market environment to fund our potential contingent liabilities, if any. However, as discussed above in Note 6 to the condensed consolidated financial statements, there are numerous future developments that may arise as a result of the Macondo well incident that could have a material adverse effect on our liquidity. 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 continue to see delays 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 80 countries 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 through 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 nine months of both 2012 and 2011, based upon the location of the services provided and products sold, 55% 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, foreign currency exchange restrictions, and highly inflationary currencies. We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country, other than the United States, 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.
Some of the more significant measures 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, government regulation, 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
                                                           September 30                December 31
Average Oil Prices (dollars per barrel)                2012              2011             2011
West Texas Intermediate                         $      91.49         $     90.37     $       95.13
United Kingdom Brent                                  108.80              113.98            111.53

Average United States Natural Gas
Prices (dollars per thousand cubic feet, or
Mcf)
Henry Hub                                       $       2.85         $      4.28     $        4.09

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

                                            Three Months Ended               Nine Months Ended
                                               September 30                     September 30
Land vs. Offshore                           2012           2011             2012              2011
United States:
Land                                         1,855          1,911          1,909               1,800
Offshore (incl. Gulf of Mexico)                 50             34             46                  30
Total                                        1,905          1,945          1,955               1,830
Canada:
Land                                           324            442            362                 404
Offshore                                         1              1              1                   2
Total                                          325            443            363                 406
International (excluding Canada):
Land                                           966            859            923                 856
Offshore                                       293            310            303                 304
Total                                        1,259          1,169          1,226               1,160
Worldwide total                              3,489          3,557          3,544               3,396
Land total                                   3,145          3,212          3,194               3,060
Offshore total                                 344            345            350                 336

                                            Three Months Ended               Nine Months Ended
                                               September 30                     September 30
Oil vs. Natural Gas                         2012           2011             2012              2011
United States (incl. Gulf of Mexico):
Oil                                          1,419          1,048          1,351                 935
Natural gas                                    486            897            604                 895
Total                                        1,905          1,945          1,955               1,830
Canada:
Oil                                            241            305            261                 274
Natural gas                                     84            138            102                 132
Total                                          325            443            363                 406
International (excluding Canada):
Oil                                          1,006            924            976                 910
Natural gas                                    253            245            250                 250
Total                                        1,259          1,169          1,226               1,160
Worldwide total                              3,489          3,557          3,544               3,396
Oil total                                    2,666          2,277          2,588               2,119
Natural gas total                              823          1,280            956               1,277


                                            Three Months Ended               Nine Months Ended
                                               September 30                     September 30
Drilling Type                               2012           2011             2012              2011
United States (incl. Gulf of Mexico):
Horizontal                                   1,153          1,114          1,164               1,042
Vertical                                       531            590            567                 557
Directional                                    221            241            224                 231
Total                                        1,905          1,945          1,955               1,830

Our customers' cash flows, in most 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, while the opposite is true for higher oil and natural gas prices.
WTI oil spot prices fluctuated throughout 2011 between a low of approximately $75 per barrel to a high of approximately $113 per barrel. Brent oil spot prices fluctuated between a low of approximately $94 per barrel to a high of approximately $127 per barrel during this same period. During the first nine months of 2012, WTI and Brent oil spot prices averaged approximately $96 and $112 per barrel, consistent with prices experienced in the first nine months of 2011. Prices have remained somewhat volatile as geopolitical tension in the Middle East, global economic uncertainty surrounding the European debt crisis, and slower growth expectations in China and Brazil have impacted demand. The outlook for world petroleum demand for the remainder of 2012 remains mixed, with the International Energy Agency's September 2012 "Oil Market Report" continuing to forecast 2012 demand to increase approximately 1% over 2011 levels. Natural gas prices in the United States have declined approximately 40% from the first nine months of 2011 due to the resiliency of natural gas production coupled with natural gas inventories above five-year historical levels. In response, our customers have curtailed natural gas drilling activity. The United States Energy Information Administration's October 2012 "Short Term Energy Outlook" forecast a continued shift in electricity generation from coal to natural gas, but we foresee significant price constraints in the near-term as natural gas competes as a fuel source in the power generation market. In spite of this tempered outlook, we believe that, over the long term, hydrocarbon demand will generally increase. Increased demand, combined with 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 and products.
North America operations
Across the North America market, we have seen customers curtail spending and believe they will continue to decrease activity to operate within their stated budgets for the remainder of 2012. Depressed natural gas prices can impact our customers' drilling and production activities, particularly in North America. For the first nine months of 2012, the average natural gas directed rig count fell by 321 rigs, or 31%, from the first nine months of 2011, while the average oil directed rig count has increased by 403 rigs, or 33%, over the same period. The curtailment of natural gas activity along with the influx of stimulation equipment into the industry have resulted in overcapacity and pricing pressure for hydraulic fracturing services, which we expect to persist through early 2013. In addition, our higher priced guar inventory continues to negatively impact our margins for our Production Enhancement services, and we expect our guar cost to remain at similar high levels for the remainder of 2012 as we continue to work through our inventory. In Canada, the rebound in rig activity from spring break-up was significantly less than expected. We expect activity levels in Canada to remain subdued in the fourth quarter. In the long run, however, we believe the shift to unconventional oil, liquids-rich, and natural gas basins in North America will continue to drive increased service intensity and will require higher demand in fluid chemistry and other technologies required for these complex reservoirs which will have beneficial implications to our operations.
In May 2010, the United States Department of the Interior effectively suspended all offshore deepwater drilling projects in the United States Gulf of Mexico in response to the Macondo incident. The suspension was lifted in October 2010, but permits were not issued for an extended period of time, and we experienced a significant reduction in our Gulf of Mexico operations. In the first quarter of 2011, the issuance of drilling permits resumed and deepwater drilling activity in the Gulf of Mexico has currently reached levels experienced before the Macondo incident. In some cases, the timing of certain of our customers' projects was disrupted during the third quarter of 2012 due to Hurricane Issac. Over the long term, the continued growth in the Gulf of Mexico is dependent on, among other things, governmental approvals for permits, our customers' actions, and new deepwater rigs entering the market. International operations
In the first nine months of 2012 the industry experienced steady volume increases, with average international rig count improving by 6% since the first nine months of 2011. These volume increases have led to meaningful absorption of equipment supply and we are now seeing opportunities for price improvements in select geographies. While activity increases may continue into 2013, we anticipate that they will remain steady as we believe that operator spending outlook will be impacted by ongoing macroeconomic concerns. We also believe that international unconventional oil and natural gas and deepwater projects will contribute to activity improvements over the long term, and we plan to leverage our extensive experience in North America to optimize these opportunities. Consistent with our long-term strategy to grow our operations outside of North America, we also expect to continue to invest in capital equipment for our international operations.
Venezuela. As of September 30, 2012, our total net investment in Venezuela was approximately $300 million, including net monetary assets of $77 million denominated in Bolívar Fuerte. In addition to these amounts, we have $273 million of surety bond guarantees outstanding relating to our Venezuelan operations. Our operations in Venezuela will be impacted by future fluctuations in the value of the Bolívar Fuerte, including a potential devaluation. For additional information, see Part II, Item 1(a), "Risk Factors" in this Form 10-Q and Part I, Item 1(a) in our 2011 Annual Report on Form 10-K.

Initiatives
Following is a brief discussion of some of our recent and current initiatives:
- focusing on unconventional plays, mature fields, 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;
- exploring opportunities for acquisitions that will enhance or augment our current portfolio of services and products, including those with unique technologies or distribution networks in areas where we do not already have large operations;
- making key investments in technology and capital to accelerate growth opportunities. To that end, we are continuing to push our technology and manufacturing development, as well as our supply chain, closer to our customers in the Eastern Hemisphere;
- improving working capital, and managing our balance sheet to maximize our financial flexibility. We are deploying a global project to improve service delivery that we expect to result in, among other things, additional investments in our systems and significant improvements to our current order-to-cash and purchase-to-pay processes;
- 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.

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