Consolidated revenue in the second quarter of 2005 was $5.2 billion, up 4% from the second quarter of 2004. This increase was largely attributable to higher activity in the Energy Services Group (ESG), approximately half of which was derived from international growth. This was partially offset by lower revenue in KBR on government services projects in the Middle East as well as a reduction in work on offshore EPIC and other oil and gas projects nearing completion in the Energy and Chemicals segment.
Consolidated operating income was $607 million in the second quarter of 2005 compared to a loss of $26 million in the second quarter of 2004. ESG experienced strong performance reflecting increased customer exploration and production spending, higher utilization of assets, and increased pricing. KBR received favorable award fees from its government services work in the Middle East and experienced improved project performance in the Energy and Chemicals segment. The second quarter of 2004 operating loss included a $310 million pretax charge on the Barracuda-Caratinga project.
"We are extremely pleased with our second quarter performance, both for ESG and KBR," said Dave Lesar, chairman, president, and chief executive officer of Halliburton. "ESG posted a 44% incremental margin over the second quarter of 2004 on strong international growth. KBR continues to improve earnings, build backlog, and make progress in resolving government contract issues."
2005 Second Quarter Segment Results
Energy Services Group
ESG posted second quarter of 2005 revenue of $2.5 billion, a $567 million or 30% increase over the second quarter of 2004, and operating income of $522 million, up $251 million or 93% from the same period in the prior year.
Production Optimization operating income for the second quarter of 2005 was $245 million, an increase of $124 million or 102% over the second quarter of 2004. Production enhancement services operating income increased 110%, primarily on increased demand for well stimulation services for natural gas applications, increased utilization of crews and assets, and improved pricing in the United States. West Africa and the North Sea also posted strong results. Completion tools operating income increased 49%, and operating margins increased by over four percentage points due to a change in mix to higher margin product sales and manufacturing efficiencies.
Fluid Systems operating income for the second quarter of 2005 was $135 million, a $58 million or 75% increase over the second quarter of 2004. Cementing services operating income increased 74% due to higher global drilling activity and improved pricing and asset utilization in the United States. Baroid Fluid Services operating income increased 78% on improved performance in Africa, increased deepwater work in the Gulf of Mexico, and strong growth in higher margin completion fluids and surface solutions product lines.
Drilling and Formation Evaluation operating income was $126 million, a $67 million or 114% increase over the prior year second quarter. All regions showed earnings growth, with international operations driving 76% of the increase. Sperry Drilling Services operating income increased 116%, benefiting from improved operating results in West Africa and increased activity in the United States and the North Sea. Logging services operating income increased 83% due to improvement in the United States and West Africa and strong growth in the Middle East. Security DBS drill bits operating income tripled reflecting efficiencies related to facility consolidations, higher activity, and the continued strength of fixed cutter bit volumes.
Digital and Consulting Solutions second quarter of 2005 operating income was $16 million, a $2 million or 14% increase as compared to the prior year period. Landmark's operating income increased by $14 million, primarily driven by higher revenue across all regions. The increase was offset by a $15 million charge for two integrated solutions projects in southern Mexico.
KBR revenue for the second quarter of 2005 was $2.7 billion, a 12% decrease compared to the second quarter of 2004. Operating income for the second quarter of 2005 was $122 million compared to an operating loss of $277 million in the second quarter of 2004.
Government and Infrastructure (G&I) operating income for the second quarter of 2005 was $73 million compared to $19 million in the second quarter of 2004, a 284% increase. The increase primarily resulted from positive developments related to LogCAP award fees. G&I continues to receive favorable job performance ratings for its work supporting the troops in Iraq. As a result, G&I recognized $29 million of income for recent awards on completed work, and increased the award fee accrual rate for its ongoing work under the LogCAP contract from 50% to 72% during the quarter. G&I also realized improved performance at the DML shipyard, partially offset by the completion of the RIO contract in Iraq.
Energy and Chemicals (E&C) operating income totaled $49 million in the second quarter of 2005 compared to a $296 million loss in the second quarter of 2004. Contributing to this increase was strong performance in engineering and project management projects in Angola and the Caspian and income from recently awarded liquefied natural gas (LNG) and gas-to-liquids (GTL) projects. Included in the second quarter of 2004 was a pretax loss of $310 million on the Barracuda-Caratinga project in Brazil.
Halliburton's Iraq-related work contributed approximately $1.4 billion in revenue in the second quarter of 2005 and $48 million of operating income, or a 3.4% margin.
Technology and Significant Achievements
Halliburton had a number of advances in technology and new contract awards.
Energy Services Group new technologies and contract awards:
* ESG won four Hart's E&P meritorious engineering achievement awards for 2005. William Pike, Hart's editor-in-chief, presented the awards at the Offshore Technology Conference in Houston in May. The four winning Halliburton technologies are: the Well Seismic Fusion(TM) technology for exploration; the FasTest(TM) system for subsurface characterization and analysis; BOREMAX(TM) high-performance water- based drilling fluid; and DeepReach(SM) coiled tubing intervention service.
* Halliburton and Intel have announced a collaborative program to identify and promote innovative, industry-leading solutions developed by Halliburton that benefit from the high performance availability and scalability of Intel's advanced computing technology. From wireless fracturing spreads and electronic field tickets to sophisticated knowledge management solutions and real-time operations, Intel is helping Halliburton to Unleash the Energy(TM) in the oil and gas industry today.
* Halliburton's Production Optimization segment developed the SandTrap(SM) service using a formation stabilization system to assist operators with the economical recovery of bypassed hydrocarbons in friable or weakly consolidated reservoir sands. To date, Halliburton's SandTrap(SM) service has been successfully deployed in reservoirs prone to sand production problems in the Gulf of Mexico, California, Indonesia, and Argentina.
* Halliburton's Production Optimization segment has successfully installed the first PoroFlex(R) expandable completion system on the Arabian Peninsula for Saudi Aramco. The sand control technique of expanding screen in an open hole provides a solution for slim-hole side track re-completions that maximize the reservoir exposure while maintaining a sufficiently large internal diameter to allow the desired production rates. In addition, maintaining full bore access facilitates remedial operation during the life of the well.
* Halliburton's Production Optimization segment was awarded a contract to provide its EZ-Gauge(TM) technology on projects in Vietnam for Japan Vietnam Petroleum Company Limited (JVPC), a joint venture company of Nippon Oil Exploration Limited (a subsidiary of Nippon Oil Group), ConocoPhillips, and PetroVietnam Exploration and Production Company (a subsidiary of PetroVietnam). JVPC selected the EZ-Gauge system because it provides a cost-effective, accurate pressure data collection system that is free of downhole electronics. Reliability and longevity of the system is significantly greater than other monitoring technologies.
KBR new contract awards:
* KBR was selected to continue its services as the premier logistics support provider to United States forces deployed in the Balkans region and to provide similar contingency operations support through the United States Army Europe's (USAREUR) area of responsibility. The United States Army Corps of Engineers' Transatlantic Programs Center announced that it awarded the USAREUR Support Contract to KBR for a period of up to five years. The competitively awarded indefinite delivery/indefinite quantity contract will replace the Balkans Support Contract that was awarded to KBR in 1999. The contract has a two-month phase-in period, a one-year base performance period, and four additional options that can be awarded at the government's discretion. The Army may order up to $1.25 billion in services if required, which is the contract's maximum capacity for the five-year period.
* KBR and its joint venture team, including JGC Corporation of Japan and Technip, were awarded a Front End Engineering and Design (FEED) contract for the Angola LNG Project, to be constructed near Soyo in Northern Angola, approximately 300 kilometers north of Luanda. The five million tonnes per annum LNG facility will be operated by a new company to be formed by Sonangol (the Angola national oil company), Chevron, BP, ExxonMobil, and Total.
* KBR and its joint venture partners, including JGC Corporation, Hatch and Clough, have been awarded a FEED contract and option for an Engineering, Procurement, and Construction Management (EPCM) contract for the Greater Gorgon Downstream LNG Project. The downstream project will include two LNG processing trains, each with a capacity of five million tonnes per annum, to be located on Barrow Island, Western Australia. The FEED contract is expected to be followed by the EPCM contract when the project receives final investment decision approval, which is expected in mid-2006.
* KBR has been awarded a contract for a Licensor Engineering Package for conversion of BP West Coast Products, LLC's Carson, California refinery's MTBE unit to the production of iso-octene. Iso-octene is subsequently converted to iso-octane gasoline blend stock. NExOCTANE(TM) technology was developed by Fortum Oil Oy in Finland and is available to United States refiners under direct license from KBR.
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