Net income in the second quarter of 2006 was $591 million, or $0.55 per diluted share. Second quarter 2006 income from discontinued operations was $82 million after tax, or $0.07 per diluted share, and included a pretax gain of $123 million on the sale of KBR's Production Services group. Net income in the second quarter of 2005 was $392 million, or $0.38 per diluted share.
Consolidated revenue in the second quarter of 2006 was $5.5 billion, up 12% from the second quarter of 2005. This increase was largely attributable to higher activity in the Energy Services Group (ESG), partially offset by lower revenue in KBR, primarily on government services projects in the Middle East.
Consolidated operating income was $718 million in the second quarter of 2006 compared to $596 million in the second quarter of 2005. ESG experienced improved performance reflecting increased rig activity, higher utilization of assets, and increased pricing. KBR's results in the second quarter of 2006 included a charge against operating income, before minority interest, of $148 million (or $0.04 per diluted share after minority interest and tax) on a consolidated 50% owned gas-to-liquids project in Escravos, Nigeria. The charge was related to schedule delays and cost increases resulting from site issues and scope changes encountered on the project.
“I am extremely pleased with the quarter for the Energy Services Group, where we had record revenue, operating income, and operating margins, despite the expected seasonal impact from the Canadian spring breakup,” said Dave Lesar, chairman, president, and chief executive officer of Halliburton. “ESG's operating margins were above 25 percent on strong demand for our services, with impressive Eastern Hemisphere sequential revenue growth of 14 percent and operating income margins of 21 percent. We are expecting continued strong performance in the future. Although we are disappointed by the projected cost increases on the KBR Escravos project, we are addressing our concerns with the customer. The balance of KBR's second quarter 2006 performance was strong. We remain committed to a full and complete separation of KBR from Halliburton in the near term through an initial public offering and/or a tax free spin-off to our shareholders.”
2006 SECOND QUARTER SEGMENT RESULTS
Energy Services Group
ESG posted revenue of $3.1 billion in the second quarter of 2006, a $645 million or 26% increase over the second quarter of 2005. ESG posted operating income of $791 million, up $269 million or 52% from the same period in the prior year. ESG's operating margin was 25% during the second quarter of 2006.
Production Optimization operating income for the second quarter of 2006 was $357 million, an increase of $126 million or 55% over the second quarter of 2005. Production Enhancement services operating income grew 65%, with improvement in all regions, driven by strong demand for well stimulation services, increased utilization of crews and assets, and improved pricing in the United States. Production Enhancement also benefited from higher activity in Algeria, Malaysia, and Kazakhstan. Completion Tools operating income increased 23% due to higher sales in the United States, Asia Pacific, and Africa.
Fluid Systems operating income for the second quarter of 2006 was $193 million, a $58 million or 43% increase over the second quarter of 2005. Cementing services operating income increased 43% due to higher drilling activity and improved pricing in the United States and improved sales and service activity in Russia, the North Sea, and Asia Pacific. These results were partially offset by lower offshore activity in Mexico. Baroid Fluid Services operating income grew 44% on strong drilling activity and pricing improvements in the United States and higher activity in Latin America and Russia.
Drilling and Formation Evaluation operating income for the second quarter of 2006 was $189 million, a $49 million or 35% increase over the prior year second quarter. Sperry Drilling Services operating income increased 28%, benefiting from increased drilling activity in the United States, Australia, and the North Sea. Logging services operating income increased 42% due to improved pricing and increased activity in the United States, Latin America, the Middle East, and Asia Pacific. Security DBS Drill Bits operating income improved 39% over the prior year second quarter, reflecting improved pricing and fixed cutter activity in North America and Europe, as well as improved roller cone bit demand in the Middle East.
Digital and Consulting Solutions operating income in the second quarter of 2006 was $52 million, more than tripling operating income of the prior year period. Landmark's operating income grew 55% due to improved sales of software and consulting and customer support services in all four regions. Second quarter of 2005 results included a $15 million loss on the integrated solutions projects in southern Mexico.
KBR revenue for the second quarter of 2006 was $2.4 billion, a $73 million or 3% decline compared to the second quarter of 2005, primarily due to decreased military support activities in Iraq. KBR posted a second quarter of 2006 operating loss of $41 million due primarily to a $148 million charge on the Escravos gas-to-liquids project for projected future increased costs to complete the project. The charge relates to significant disruptions encountered in the Western Niger Delta region. In addition, the project is experiencing delays and cost increases relating to site soil conditions, scope changes, and various engineering and construction modifications. Discussions of these matters are underway with the customer with a view to reduce KBR's risk exposure. KBR operating income in the second quarter of 2005 was $111 million.
Government and Infrastructure operating income for the second quarter of 2006 was $68 million, a $4 million or 6% decrease compared to the second quarter of 2005. Results in the second quarter of 2006 included an impairment charge of $17 million on an equity investment in a joint venture road project in the United Kingdom. Second quarter of 2005 results reflected $29 million of award fee income under the LogCAP contract.
Energy and Chemicals posted an operating loss of $109 million in the second quarter of 2006 primarily related to the Escravos gas-to-liquids project. Other projects in the segment posted strong operating margins, consistent with recent prior quarters. Operating income was $39 million in the second quarter of 2005.
Halliburton's Iraq-related work contributed approximately $1.3 billion in revenue in the second quarter of 2006 and $47 million of operating income, a 3.7% margin, before corporate expenses and taxes.
Technology and Significant Achievements
Halliburton made a number of advances in technology and new contract awards.
Energy Services Group new contract awards and technologies:
KBR new technologies and contract awards:
Halliburton, founded in 1919, is one of the world's largest providers of products and services to the petroleum and energy industries. The company serves its customers with a broad range of products and services through its Energy Services Group and KBR.
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