HALLIBURTON CO (HAL)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the consolidated and combined financial statements included in “Item 8. Financial Statements and Supplementary Data” contained herein.

EXECUTIVE OVERVIEW

Market conditions

Since early 2021, world-wide oil and natural gas supply and demand imbalances and related volatility of oil and natural gas prices (including as a result of the COVID-19 pandemic) have resulted in dramatic fluctuations in oil and natural gas markets. The volatility continued in 2024 as markets were impacted by macroeconomic uncertainty, non-OPEC supply growth, lack of demand recovery in China, geopolitical unrest in the Middle East and the Russia-Ukraine conflict. In the U.S., oil and natural gas production in 2024 remained elevated, despite a generally declining rig count, as a result of the industry's focus on efficiencies and higher service intensity. Lower commodity pricing and U.S. land rig counts generally contributed to softness in the market for energy products and services in North America. The international rig count was relatively flat in 2024, as gains in Africa and the Middle East were offset by reductions in Latin America.

Globally, we continue to be impacted by extended supply chain lead times for the supply of select raw materials. We monitor market trends and work to mitigate cost impacts through economies of scale in global procurement, technology modifications, and efficient sourcing practices. Also, while we have been impacted by inflationary cost increases, primarily related to chemicals, cement, and logistics costs, we generally try to pass much of those increases on to our customers and we believe we have effective solutions to minimize their operational impact.

Financial results

The following graph illustrates our revenue and operating margins for each operating segment over the past three years.

During 2024, we generated total company revenue of $22.9 billion, flat when compared to the $23.0 billion of revenue generated in 2023, with our Completion and Production (C&P) segment revenue decreasing by 3% and our Drilling and Evaluation (D&E) segment revenue increasing by 4%. Total company operating income was $3.8 billion in 2024, compared to $4.1 billion in 2023.

Driven in large part by a decrease in the average North America rig count in 2024 as compared to 2023, our North America revenue decreased 8% in 2024, resulting from lower pressure pumping services in U.S. land, reduced wireline activity, and decreased fluid services in the region. These declines were partially offset by higher drilling activity in the region and improved artificial lift activity in U.S. land.

Internationally, revenue improved 6% in 2024 compared to 2023, led by Middle East/Asia, despite the international average rig count for 2024 being flat compared to 2023.

Our operating performance and liquidity are described in more detail in “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”

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Sustainability and Energy Mix Transition

In 2021, we announced our target to achieve a 40% reduction in our Scope 1 and 2 emissions by 2035 from the 2018 baseline. During 2024, we continued to execute on our priorities to drive down our emissions intensity. At the same time, we support our customers in their emissions reduction efforts by continuously developing and deploying goods and services that are accretive to their goals as well as ours. As the energy mix transition unfolds, we seek to apply our expertise and resources in growth sectors adjacent to our traditional oilfield services space, including carbon capture, utilization, and storage, and geothermal. Finally, we will continue to focus on accelerating the success of clean tech start-ups via Halliburton Labs, which also allows us to participate in the energy mix transition at relatively low risk by investing our expertise, resources, and team without a significant outlay of capital while we learn where we can strategically engage new markets. As of December 31, 2024, Halliburton Labs had 38 participants and alumni organizations.

Additionally, we published our 2023 Annual and Sustainability Report (ASR) in April of 2024, which detailed our strategy and progress on sustainability issues, as well as our efforts on increased environmental reporting transparency, including conducting a climate-risk scenario analysis, and expect to publish our 2024 ASR in April of 2025. Information on our website, including the ASR, is not incorporated by reference into this Annual Report on Form 10-K.

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LIQUIDITY AND CAPITAL RESOURCES

We had $2.6 billion and $2.3 billion of cash and equivalents as of December 31, 2024 and December 31, 2023, respectively.

Significant sources and uses of cash in 2024

Sources of cash:

•Cash flows from operating activities were $3.9 billion. Working capital, which consists of receivables, inventories, and accounts payable, collectively had a negative impact of $103 million, primarily due to increased receivables.

Uses of cash:

•Capital expenditures were $1.4 billion.

•We repurchased 30.5 million shares of our common stock for $1.0 billion.

•We paid $600 million of dividends to our shareholders.

•We repurchased $100 million aggregate principal amounts of various series of our outstanding debt.

Future sources and uses of cash

We manufacture most of our own equipment, which provides us with some flexibility to increase or decrease our capital expenditures based on market conditions. We currently expect capital spending for 2025 to be approximately 6% of revenue. We believe this level of spend will allow us to invest in our key strategic technologies and businesses, including the construction and deployment of our Zeus electric fracturing systems in North America and the international growth of our artificial lift, well intervention, unconventionals, and drilling technologies. We will continue to maintain capital discipline and monitor the rapidly changing market dynamics, and we may adjust our capital spend accordingly.

In 2025, we expect to pay approximately $645 million for contractual purchase obligations (with another $143 million due through 2027), $392 million of interest on debt, and $395 million under our leasing arrangements. Payments for interest on our debt are expected to remain relatively flat for the foreseeable future. See Notes to Consolidated Financial Statements, Note 6 and Note 10 for additional information on expected future payments under our leasing arrangements and debt maturities.

We are not able to reasonably estimate the timing of cash outflows associated with our uncertain tax positions, in part because we are unable to predict the timing of potential tax settlements with applicable taxing authorities. As of December 31, 2024, we had $196 million of gross unrecognized tax benefits, excluding penalties and interest, of which we estimate $176 million may require us to make a cash payment. We estimate that approximately $112 million of the cash payment will not be settled within the next 12 months.

While we maintain focus on liquidity and debt reduction, we are also focused on providing cash returns to our shareholders. In 2023, our Board approved a capital return framework with a goal of returning at least 50% of our annual free cash flow to shareholders through dividends and share repurchases. We returned $1.6 billion of capital to shareholders in 2024 through buybacks and dividends. During 2024, our quarterly dividend rate was $0.17 per common share, or approximately $150 million in the aggregate.

We may utilize share repurchases as part of our capital return framework. Our Board of Directors has authorized a program to repurchase our common stock from time to time. We repurchased 30.5 million shares of common stock during the year ended December 31, 2024. Approximately $3.0 billion remained authorized for repurchases under our program as of December 31, 2024 and may be used for open market and other share purchases.

During 2023, we began our migration to SAP S4 which we now expect to complete in the first half of 2026. We now estimate the total project investment to increase between $20 million and $30 million above our initial $250 million forecast, of which we have incurred $124 million through December 31, 2024. For 2025, we expect to spend approximately $100 million on this project. We believe the new system will provide important efficiency benefits, cost savings, enhanced visibility to our operations, and advanced analytics that will benefit us and our customers.

We do not intend to incur additional debt in 2025, as we believe our cash on hand and earnings from operations are sufficient to cover our obligations for the year.

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Other factors affecting liquidity

Financial position in current market. As of December 31, 2024, we had $2.6 billion of cash and equivalents and $3.5 billion of available committed bank credit under a revolving credit facility with an expiration date of April 27, 2027. We believe we have a manageable debt maturity profile, with approximately $471 million coming due beginning in 2025 through 2027, with the majority coming due in 2025. 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. We believe our cash on hand, cash flows generated from operations, and our available credit facility provide sufficient liquidity to address the challenges and opportunities of the current market and our expected global cash needs for 2025, including capital expenditures, working capital investments, shareholder returns, if any, and debt repurchases, if any, and scheduled interest and principal payments.

Guarantee agreements. In the normal course of business, we have agreements with financial institutions under which approximately $2.8 billion letters of credit, bank guarantees, or surety bonds were outstanding as of December 31, 2024. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization, however, none of these triggering events have occurred. As of December 31, 2024, we had no material off-balance sheet liabilities and were not required to make any material cash distributions to our unconsolidated subsidiaries.

We have entered into credit default swaps (CDSs) with third-party financial institutions that had an aggregate notional amount outstanding as of December 31, 2024 of $739 million related to borrowings provided by the financial institutions to one of our primary customers in Mexico, of which a portion of the proceeds were then utilized by this customer to pay certain of our outstanding receivables. Approximately $186 million of the outstanding amount of the CDSs reduces on a monthly basis over its remaining 14-month term and $203 million reduces on a monthly basis over its remaining 18-month term. The remaining $350 million outstanding amount is expected to increase to as much as $805 million in the first quarter of 2025 and will reduce over its remaining 19-month term beginning February 2025.

Credit ratings. Our credit ratings with Standard & Poor’s (S&P) remained BBB+ for our long-term debt and A-2 for our short-term debt, with a positive outlook. Our credit ratings with Moody's Investors Service remain A3 for our long-term debt and P-2 for our short-term debt, with a stable outlook.

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, as well as unsettled political conditions.

Receivables from our primary customer in Mexico accounted for approximately 8% of our total receivables as of December 31, 2024. While we have experienced payment delays from our primary customer in Mexico, these amounts are not in dispute and we have not historically had, and we do not expect to have, any material write-offs due to collectability of receivables from this customer.

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BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in more than 70 countries throughout the world to provide a comprehensive range of services and products to the energy industry. Our revenue is generated from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. The industry we serve is highly competitive with many substantial competitors in each segment of our business. In 2024, 2023, and 2022, based on the location of services provided and products sold, 40%, 44%, and 45%, respectively, of our consolidated revenue was from the United States. No other country accounted for more than 10% of our revenue.

Activity within our business segments is significantly impacted by spending on upstream exploration, development, and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption.

Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, our customers’ expectations about future prices, global oil supply and demand, the impact on natural gas supply and demand in North America of electrification and data centers power requirements, completions intensity, the world economy, the availability of capital, government regulation, and global stability, which together drive worldwide drilling and completions activity. We expect that many of our customers in North America will continue their strategy of operating within their cash flows and generating returns rather than prioritizing production growth. Lower oil and natural gas prices usually translate into lower exploration and production budgets and lower rig count, while the opposite is usually true for higher oil and natural gas prices. Our financial performance is therefore significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.

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

The historical average rig counts based on the weekly Baker Hughes rig count data were as follows:

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Business outlook

Looking ahead to 2025 and beyond, we anticipate a rise in global oil and natural gas demand. The International Energy Agency anticipates both oil and natural gas demand to continue growing through 2030 underscoring the continued importance of both resources in the global energy mix. In addition, we believe oil supply dynamics have fundamentally changed due to investor return requirements, regulatory initiatives adverse to oil and gas exploration and production, and initiatives that favor alternative energy. We believe that despite these changes, increased investment in existing and new sources of oil and natural gas production is needed to address the increased demand. This will necessitate production from conventional and unconventional, deep-water and shallow-water, and short and long-cycle projects. We expect that increased oil and natural gas production requirements will in turn create demand for our products and services. Furthermore, easing inflationary pressures in Organization for Economic Co-operation (OECD) countries may lead to central bank rate cuts that could sustain economic growth. Additionally, we expect a growing global economy combined with rising living standards in developing nations will increase energy consumption. We expect natural gas demand should increase over time by the burgeoning number of data centers, the rise of artificial intelligence, and the electrification of transportation and other sectors of the economy.

Internationally, we expect flat revenues in 2025 as compared to 2024, with growth in most markets offset by activity reduction in Mexico. We also expect international oil and natural gas exploration and production activity to grow year over year. We expect our North America revenue to decrease in 2025 low to mid–single digits from 2024 levels which we believe will be driven in part by lower negotiated prices for a portion of our fleet.

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RESULTS OF OPERATIONS IN 2024 COMPARED TO 2023

Operating Segments

Completion and Production

Completion and Production revenue was $13.3 billion in 2024, a decrease of $438 million, or 3%, compared to 2023. Operating income was $2.7 billion in 2024, a 4% decrease from $2.8 billion in 2023. These results were driven by lower pressure pumping services in U.S. land. Partially offsetting these declines were increased activity across multiple product service lines in Mexico and the Middle East, improved artificial lift activity in U.S. land, and higher cementing activity in Brazil and Norway.

Drilling and Evaluation

Drilling and Evaluation revenue was $9.7 billion in 2024, an increase of $364 million, or 4%, from 2023. Operating income was $1.6 billion in 2024, an increase of $65 million, or 4%, compared to 2023. These results were driven by increased drilling activity in the Western Hemisphere, higher drilling-related services in Qatar and the United Arab Emirates, as well as improved activity across multiple product service lines in Kuwait and the North Sea. Partially offsetting these improvements were declined wireline activity in North America, decreased fluid services in Brazil, and lower activity across multiple product service lines in Asia Pacific.

Geographic Regions

North America

North America revenue was $9.6 billion in 2024, an 8% decrease compared to 2023, resulting from lower pressure pumping services in U.S. land, reduced wireline activity, and decreased fluid services in the region. These declines were partially offset by higher drilling activity in the region and improved artificial lift activity in U.S. land.

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Latin America

Latin America revenue was $4.2 billion in 2024, a 6% increase compared to 2023, resulting from higher activity across multiple product service lines in Argentina, Mexico, and Ecuador. Partially offsetting these improvements were lower activity across multiple product service lines in Colombia and lower completion tool sales in Brazil.

Europe/Africa/CIS

Europe/Africa/CIS revenue was $3.0 billion in 2024, a 5% increase compared to 2023, resulting from higher activity across multiple product service lines in the North Sea and increased activity across multiple product service lines in Italy. Partially offsetting these improvements were declines in activity across multiple product service lines in West Africa.

Middle East/Asia

Middle East/Asia revenue was $6.1 billion in 2024, an 8% increase compared to 2023, resulting from higher activity across multiple product service lines in Kuwait and Saudi Arabia, higher well construction activity in the United Arab Emirates, and increased activity across multiple product service lines in Australia. Partially offsetting these improvements were lower activity across multiple product service lines in Asia Pacific and Iraq.

Other Operating Items

Impairments and other charges. During 2024, we took a pre-tax charge of $116 million primarily related to severance costs, an impairment of assets held for sale, expenses related to a cybersecurity incident, a gain on a fair value adjustment of an equity investment, and other items. See Notes to Consolidated Financial Statements, Note 2 for further discussion on these charges.

SAP S4 Upgrade Expense. As previously mentioned, during 2023 we began our migration to SAP S4, which we expect to complete in the first half of 2026. In 2024 and 2023, we recognized $124 million and $51 million of expense on our SAP S4 migration, respectively.

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Nonoperating Items

Argentina Blue Chip Swap. The Central Bank of Argentina maintains currency controls that limit our ability to access U.S. dollars in Argentina and remit cash from our Argentine operations. The execution of certain trades known as Blue Chip Swaps, effectively results in a parallel U.S. dollar exchange rate. For the years ended December 31, 2024 and December 31, 2023, we entered into Blue Chip Swap transactions, which resulted in $8 million and $110 million pre-tax losses on investment, respectively.

Argentina Currency Impact. Argentina devalued its peso by more than 50% during December 2023. Consequently, we incurred a loss of $131 million for the year ended December 31, 2023 due to the devaluation of the currency in Argentina.

Argentina Impairment on Investment. In 2022 and 2023, we executed a series of loans to a third party and received notes that are to be repaid in U.S. dollars upon maturity or earlier if certain conditions are met. In 2024, we recorded a loss of $38 million due to the fair value decrease in one of the notes in March 2024, resulting from the deterioration in the outlook of the debtor’s liquidity and financial projections. This is included in “Other, net” on the consolidated statements of operations.

Egypt Currency Impact. In the first quarter of 2024, the Egyptian pound devalued by approximately 35% relative to the U.S. dollar. Consequently, we incurred a loss of $34 million during the year ended December 31, 2024 due to the devaluation of the currency in Egypt. This is included in “Other, net” on the consolidated statements of operations.

Income tax provision. During the year ended December 31, 2024, we recorded a total income tax provision of $718 million on pre-tax income of $3.2 billion, resulting in an effective tax rate of 22.2%. The effective tax rate for 2024 was primarily impacted by our geographic mix of earnings, tax adjustments related to the reassessment of prior year tax accruals, and changes of valuation allowance on some of our deferred tax assets. During 2023, we recorded a total income tax provision of $701 million on pre-tax income of $3.4 billion, resulting in an effective tax rate of 20.8%. See Notes to Consolidated Financial Statements, Note 12 for significant drivers of these tax provisions.

Pillar Two. The OECD enacted model rules for a new global minimum tax framework, also known as Pillar Two, and certain governments globally have enacted, or are in the process of enacting, legislation considering these model rules. These rules did not have a material impact on our taxes for the year ended December 31, 2024.

Internal Revenue Service Notice of Proposed Adjustment. We are subject to taxes in the United States and in numerous jurisdictions where we operate or where our subsidiaries are organized. Our tax returns are routinely subject to examination by the taxing authorities in the jurisdictions where we file tax returns. In most cases we are no longer subject to examination by tax authorities for years before 2013. The only significant operating jurisdiction that has tax filings under review or subject to examination by the tax authorities is the United States. Our United States federal income tax filings for tax years 2016 through 2023, including carry back of 2016 net operating losses to 2014, are currently under review or remain open for review by the Internal Revenue Service (the IRS).

On September 28, 2023, we received a Notice of Proposed Adjustment (NOPA) from the IRS covering our 2016 US tax return. The NOPA proposed an adjustment to reclassify approximately 95% of the $3.5 billion termination fee paid to Baker Hughes in 2016 from an ordinary expense deduction to a capital loss. The termination fee was paid to Baker Hughes under the merger agreement after antitrust regulators in multiple jurisdictions failed to approve our proposed merger. It is common commercial practice to include a termination fee in a merger agreement to compensate the target for damages incurred when the acquisition does not go forward. The IRS’s long-understood position at the time of the payment had been to treat such payments as an ordinary and necessary business expense. We strongly disagree with the proposed adjustment on both a factual and legal basis, and we plan to vigorously contest it.

We expect that resolving this dispute will take substantial time. In 2023, we initiated the IRS administrative appeals process, which is ongoing. Failing a resolution through that process, the matter would ultimately be resolved by the United States federal courts.

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We regularly assess the likelihood of adverse outcomes resulting from tax examinations to determine the adequacy of our tax reserves, and we believe our income tax reserves are appropriately provided for all open tax years. We cannot assure you that the matter will be determined in our favor or against us, and if the matter is ultimately determined unfavorably to us, it could have a material adverse impact on our results of operations and cash flows. Based on tax attributes currently available, we estimate that, should the IRS’s position prevail through its appellate process and subsequent litigation, the proposed adjustment could result in cash taxes due of approximately $640 million (plus interest thereon in the case of amounts due for previous tax years). Our estimates are calculated under current tax law and on the bases of our assumptions regarding taxable income and loss and other tax attributes over the relevant period, which law could change and which assumptions could and likely will differ materially from actual results. In any event, no payment of any additional tax is currently required, nor do we anticipate that the proposed adjustment would materially and adversely impact our ability to meet our expected uses of cash, including future capital expenditures, working capital investments, and scheduled debt repayments, or our ability to return cash to shareholders, even if a final determination of the matter is reached that is adverse to us.

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RESULTS OF OPERATIONS IN 2023 COMPARED TO 2022

Information related to the comparison of our operating results between the years 2023 and 2022 is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K filed with the SEC and is incorporated by reference into this annual report on Form 10-K.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective, or complex judgments and assessments and is fundamental to our results of operations. We identified our most critical accounting estimates to be:

-    forecasting our income tax (provision) benefit, including our future ability to utilize foreign tax credits and the realizability of deferred tax assets (including net operating loss carryforwards), and providing for uncertain tax positions;

-    legal and investigation matters;

-    valuations of long-lived assets, including intangible assets and goodwill; and

-    allowance for credit losses.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report.

Income tax accounting

We recognize the amount of taxes payable or refundable for the current year and use an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We apply the following basic principles in accounting for our income taxes:

-    a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year;

-    a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards;

-    the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered; and

-    the value of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

We determine deferred taxes separately for each tax-paying component (an entity or a group of entities that is consolidated for tax purposes) in each tax jurisdiction. That determination includes the following procedures:

-    identifying the types and amounts of existing temporary differences;

-    measuring the total deferred tax liability for taxable temporary differences using the applicable tax rate;

-    measuring the total deferred tax asset for deductible temporary differences and operating loss carryforwards using the applicable tax rate;

-    measuring the deferred tax assets for each type of tax credit carryforward; and

-    reducing the deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Our methodology for recording income taxes requires a significant amount of judgment and the use of assumptions and estimates. Additionally, we use forecasts of certain tax elements, such as taxable income and foreign tax credit utilization, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results that could have a material impact on our income tax accounts related to continuing operations.

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We have operations in more than 70 countries. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including net income actually earned, net income deemed earned, and revenue-based tax withholding. Our tax filings are routinely examined in the normal course of business by tax authorities. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each jurisdiction, as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved, the timing and nature of income earned and expenditures incurred. The final determination of tax audits or changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our income tax liabilities for a tax year and have an adverse effect on our financial statements. For example, we received a NOPA from the IRS on September 28, 2023. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Nonoperating Items, Internal Revenue Service Notice of Proposed Adjustment” and Notes to Consolidated Financial Statements, Note 12 for further information.

Tax filings of our subsidiaries, unconsolidated affiliates and related entities are routinely examined in the normal course of business by tax authorities. These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process. Predicting the outcome of disputed assessments involves some uncertainty. Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate, and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome. We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest, and penalties, as needed based on this outcome. We provide for uncertain tax positions pursuant to current accounting standards, which prescribe a minimum recognition threshold and measurement methodology that a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. The standards also provide guidance for derecognition classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Legal and investigation matters

As discussed in Notes to Consolidated Financial Statements, Note 11, we are subject to various legal and investigation matters arising in the ordinary course of business. As of December 31, 2024, we have accrued an estimate of the probable and estimable costs for the resolution of some of our legal and investigation matters, which is not material to our consolidated financial statements. For other matters for which the liability is not probable and reasonably estimable, we have not accrued any amounts. Attorneys in our legal department monitor and manage all claims filed against us and review all pending investigations. Generally, the estimate of probable costs related to these matters is developed in consultation with internal and outside legal counsel representing us. Our estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. We attempt to resolve these matters through settlements, mediation, and arbitration proceedings when possible. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, there may be a material adverse effect on our future financial results. We have in the past recorded significant adjustments to our initial estimates of these types of contingencies.

Value of long-lived assets, including intangible assets and goodwill

We carry a variety of long-lived assets on our balance sheet including property, plant, and equipment, goodwill, and other intangibles. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our operating income. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We conduct impairment tests on goodwill annually, during the third quarter, or more frequently whenever events or changes in circumstances indicate an impairment may exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

When conducting an impairment test on long-lived assets, other than goodwill, we first group individual assets based on the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets. This requires some judgment. We then compare estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, we then determine the asset group’s fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on our weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group’s carrying amount exceeds its fair value. See Notes to Consolidated Financial Statements, Note 2 for further discussion of impairments and other charges.

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We perform our goodwill impairment assessment for each reporting unit, which is the same as our reportable segments, the Completion and Production division and the Drilling and Evaluation division, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. We estimate the fair value for each reporting unit using a discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded.

The impairment assessments discussed above incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services, and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts. If market conditions deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record additional impairments of the carrying value of our long-lived assets in the future which could have a material adverse impact on our operating results. See Notes to Consolidated Financial Statements, Note 1 for our accounting policies related to long-lived assets.

Allowance for credit losses

We evaluate our global accounts receivable through a continuous process of assessing our portfolio on an individual customer and overall basis. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, financial condition of our customers, and whether the receivables involve retainages. We also consider the economic environment of our customers, both from a marketplace and geographic perspective, in evaluating the need for an allowance. Based on our review of these factors, we establish or adjust allowances for specific customers. This process involves judgment and estimation, and frequently involves significant dollar amounts. Accordingly, our results of operations can be affected by adjustments to the allowance due to actual write-offs that differ from estimated amounts.

At December 31, 2024, our allowance for credit losses totaled $754 million or 13.9% of notes and accounts receivable before the allowance. At December 31, 2023, our allowance for credit losses totaled $742 million, or 13.9% of notes and accounts receivable before the allowance. The allowance for credit losses in both years is primarily comprised of accounts receivable from our primary customer in Venezuela. A hypothetical 100 basis point change in our estimate of the collectability of our notes and accounts receivable balance as of December 31, 2024 would have resulted in a $54 million adjustment to 2024 total operating costs and expenses. See Notes to Consolidated Financial Statements, Note 5 for further information.

FINANCIAL INSTRUMENT MARKET RISK

We are exposed to market risks primarily associated with changes in foreign currency exchange rates. We selectively manage these exposures through the use of derivative instruments, including forward foreign exchange contracts and foreign exchange options. The objective of our risk management strategy is to minimize the volatility from fluctuations in foreign currency. We do not use derivative instruments for trading purposes. The counterparties to our forward contracts and options are global commercial and investment banks.

We use a sensitivity analysis model to measure the impact of potential adverse movements in foreign currency exchange rates. With respect to foreign exchange sensitivity, after consideration of the impact from our forward foreign exchange contracts and options, a hypothetical 10% adverse change in the value of all our foreign currency positions relative to the U.S. dollar as of December 31, 2024 would result in a $85 million, pre-tax loss for our net monetary assets denominated in currencies other than U.S. dollars.

There are certain limitations inherent in the sensitivity analysis presented, primarily due to the assumption that exchange rates change instantaneously in an equally adverse fashion. In addition, the analysis is unable to reflect the complex market reactions that normally would arise from the market shifts modeled. While this is our best estimate of the impact of the various scenarios, this estimate should not be viewed a forecast.

For further information regarding foreign currency exchange risk and other risks related to interest rates and credit risk, see Notes to Consolidated Financial Statements, Note 16.

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ENVIRONMENTAL MATTERS

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Notes to Consolidated Financial Statements, Note 11 and Part I, Item 1(a), “Risk Factors.”

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Forward-looking information is based on projections and estimates, not historical information. Some statements in this Form 10-K are forward-looking and use words like “may,” “may not,” “believe,” “do not believe,” “plan,” “estimate,” “intend,” “expect,” “do not expect,” “anticipate,” “do not anticipate,” “should,” “likely,” and other expressions. We may also provide oral or written forward-looking information in our statements and other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of our operations may vary materially.

We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events or for any other reason. You should review any additional disclosures we make in our press releases and Forms 10-K, 10-Q, and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.

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Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.

Information related to market risk is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Instrument Market Risk” and Notes to Consolidated Financial Statements, Note 16.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the consolidated and combined financial statements included in "Item 8. Financial Statements and Supplementary Data" contained herein.

EXECUTIVE OVERVIEW

Market conditions

Since early 2020, world-wide oil and natural gas supply and demand imbalances and related volatility of oil and natural gas prices (including as a result of the COVID-19 pandemic) have resulted in dramatic fluctuations in oil and natural gas markets. The volatility continued in 2023 as markets were impacted by central bank rate hikes, macroeconomic uncertainty, non-OPEC supply growth, and renewed geopolitical unrest in the Middle East. In the U.S., oil and natural gas production in 2023 remained elevated, despite a generally declining rig count, as a result of the industry's focus on efficiencies, higher service intensity, and high-quality acreage. Lower commodity pricing and U.S. land rig counts generally contributed to softness in the market for energy products and services in North America, particularly in natural gas basins during the second half of 2023. Conversely, the international rig count showed steady growth in 2023 largely driven by national oil companies (NOCs) in the Middle East/Asia and Africa.

Globally, we continue to be impacted by increased supply chain lead times for the supply of select raw materials. We monitor market trends and work to mitigate cost impacts through economies of scale in global procurement, technology modifications, and efficient sourcing practices. Also, while we have been impacted by inflationary cost increases, primarily related to chemicals, cement, and logistics costs, we generally try to pass much of those increases on to our customers and we believe we have effective solutions to minimize their operational impact.

Financial results

The following graph illustrates our revenue and operating margins for each operating segment over the past three years.

During 2023, we generated total company revenue of $23.0 billion, a 13% increase from the $20.3 billion of revenue generated in 2022, with our Completion and Production (C&P) segment revenue increasing by 18% and our Drilling and Evaluation (D&E) segment revenue increasing by 7%. We reported total company operating income of approximately $4.1 billion in 2023, compared to operating income of $2.7 billion in 2022. These increases were driven by increased demand for our products and services in all four of our geographic regions.

Our North America revenue increased 9% in 2023 compared to 2022, despite a 4% decrease in average rig count from 2022, resulting from higher pressure pumping and artificial lift activity in North America land, increased completion tool sales in the Gulf of Mexico, and improved fluid and wireline services across the region.

Internationally, revenue improved 17% in 2023 compared to 2022, primarily driven by higher activity for drilling and completions related services in Latin America, Africa, and the Middle East/Asia, which was partially offset by our exit from Russia in the third quarter of 2022. The international average rig count for 2023 increased 11% compared to 2022.

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Our operating performance and liquidity are described in more detail in “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”

Sustainability and Energy Mix Transition

In the first quarter of 2021, we announced our target to achieve a 40% reduction in our Scope 1 and 2 emissions by 2035 from the 2018 baseline. During 2023, we continued to execute on priorities we set up to help us progress toward our 2035 emissions reduction target. As our customers have begun to invest more in emissions reduction, we have developed or are developing solutions intended to reduce our own carbon footprint while advancing our customers’ decarbonization efforts. As the energy mix transition unfolds, we seek to apply our expertise and products and services across different parts of the energy value chain. We have also applied our experience and resources in sectors adjacent to our traditional oilfield services space, including carbon capture, utilization, and storage, hydrogen, and geothermal. Finally, we will continue to focus on accelerating the success of clean tech start-ups via Halliburton Labs. As of December 31, 2023, Halliburton Labs had 32 participating companies and alumni. Halliburton Labs allows us to participate in the energy mix transition at relatively low risk by investing our expertise, resources, and team without a significant outlay of capital.

Our sustainability efforts were recognized in 2023 as we were named to the Dow Jones Sustainability North America Index for the third consecutive year. The DJSI assesses the sustainability performances of companies using a transparent, rules-based process based on the annual S&P Global Corporate Sustainability Assessment (CSA), among its industry peers.

Additionally, we published our 2022 Annual and Sustainability Report (ASR) in April of 2023, which details our strategy and progress on sustainability issues, as well as our efforts on increased environmental reporting transparency, including conducting a climate-risk scenario analysis. Information on our website, including the ASR, is not incorporated by reference into this Annual Report on Form 10-K.

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LIQUIDITY AND CAPITAL RESOURCES

We had $2.3 billion of cash and equivalents as of December 31, 2023 and December 31, 2022, respectively.

Significant sources and uses of cash in 2023

Sources of cash:

•Cash flows from operating activities were $3.5 billion. Working capital, which consists of receivables, inventories, and accounts payable, collectively had a negative impact of $511 million, primarily due to increased receivables and inventory.

Uses of cash:

•Capital expenditures were $1.4 billion.

•We repurchased 22.7 million shares of our common stock for $800 million.

•We paid $576 million of dividends to our shareholders.

•We repurchased $300 million aggregate principal amounts of various series of our outstanding debt.

Future sources and uses of cash

We manufacture most of our own equipment, which provides us with some flexibility to increase or decrease our capital expenditures based on market conditions. We currently expect capital spending for 2024 to be approximately 6% of revenue. We believe this level of spend will allow us to invest in our key strategic technologies, including the construction and deployment of our Zeus electric fracturing systems in North America, our iStar Intelligent Drilling and Logging Platform, and our iCruise Intelligent Rotary Steerable System. We will continue to maintain capital discipline and monitor the rapidly changing market dynamics, and we may adjust our capital spend accordingly.

In 2024, we expect to pay approximately $518 million for contractual purchase obligations (with another $211 million due through 2026), $397 million of interest on debt, and $391 million under our leasing arrangements. Payments for interest on our debt arrangements are expected to remain relatively flat for the foreseeable future. See Note 6 and Note 10 to the consolidated financial statements for additional information on expected future payments under our leasing arrangements and debt maturities.

We are not able to reasonably estimate the timing of cash outflows associated with our uncertain tax positions, in part because we are unable to predict the timing of potential tax settlements with applicable taxing authorities. As of December 31, 2023, we had $268 million of gross unrecognized tax benefits, excluding penalties and interest, of which we estimate $235 million may require us to make a cash payment. We estimate that approximately $158 million of the cash payment will not be settled within the next 12 months.

While we maintain focus on liquidity and debt reduction, we are also focused on providing cash returns to our shareholders. In January of 2023, our Board approved a capital return framework with a goal of returning at least 50% of our annual free cash flow to shareholders through dividends and share repurchases. We returned $1.4 billion of capital to shareholders in 2023 through buybacks and dividends. During 2023, our quarterly dividend rate was $0.16 per common share, or approximately $144 million in the aggregate. In January 2024, we announced that our Board of Directors declared a dividend of $0.17 per common share for the first quarter of 2024, or approximately $152 million in the aggregate.

We may utilize share repurchases as part of our capital return framework. Our Board of Directors has authorized a program to repurchase our common stock from time to time. We repurchased 22.7 million shares of common stock during the year ended December 31, 2023. Approximately $4.1 billion remained authorized for repurchases under our program as of December 31, 2023 and may be used for open market and other share purchases.

During the second quarter of 2023, we began our migration to SAP S4 which we expect to complete by the end of 2025. The migration is estimated to cost approximately $250 million, of which we have incurred $51 million through December 31, 2023. For 2024, we expect to spend approximately $120 million. We believe the new system will enhance visibility to our operations and provide important efficiency benefits, cost savings, and advanced analytics that will benefit us and our customers.

We do not intend to incur additional debt in 2024, as we believe our cash on hand and earnings from operations are sufficient to cover our obligations for the year.

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Other factors affecting liquidity

Financial position in current market. As of December 31, 2023, we had $2.3 billion of cash and equivalents and $3.5 billion of available committed bank credit under a revolving credit facility with an expiration date of April 27, 2027. We believe we have a manageable debt maturity profile, with approximately $472 million coming due beginning in 2025 through 2027. 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. We believe our cash on hand, cash flows generated from operations, and our available credit facility provide sufficient liquidity to address the challenges and opportunities of the current market and our expected global cash needs for 2024, including capital expenditures, working capital investments, shareholder returns, if any, and debt repurchases, if any, and scheduled interest and principal payments.

Guarantee agreements. In the normal course of business, we have agreements with financial institutions under which approximately $2.6 billion letters of credit, bank guarantees, or surety bonds were outstanding as of December 31, 2023. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization, however, none of these triggering events have occurred. As of December 31, 2023, we had no material off-balance sheet liabilities and were not required to make any material cash distributions to our unconsolidated subsidiaries.

During the fourth quarter of 2023, we entered into a credit default swap (“CDS”) with a third-party financial institution. The notional amount of the CDS, which was $300 million at the end of January 2024, will reduce on a monthly basis over its 26-month term. The CDS relates to a borrowing provided by the financial institution to one of our primary customers in Mexico, a portion of the proceeds of which was utilized by this customer to pay certain of our outstanding receivables.

Credit ratings. Our credit ratings with Standard & Poor’s (S&P) remained BBB+ for our long-term debt and A-2 for our short-term debt, with an upgrade to positive outlook from stable outlook in November 2023. During the third quarter of 2023, our long-term debt rating with Moody's Investors Service (Moody's) was upgraded to A3 from Baa1 and the short-term debt rating remained P-2, with a stable outlook. As of the end of the year our long-term debt rating with Moody's remained A3 and short-term debt rating remained P-2, with a stable outlook.

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, as well as unsettled political conditions.

Receivables from our primary customer in Mexico accounted for approximately 6% of our total receivables as of December 31, 2023. While we have experienced payment delays from our primary customer in Mexico, these amounts are not in dispute and we have not historically had, and we do not expect to have, any material write-offs due to collectability of receivables from this customer.

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BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in more than 70 countries throughout the world to provide a comprehensive range of services and products to the energy industry. Our revenue is generated from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. The industry we serve is highly competitive with many substantial competitors in each segment of our business. In 2023, 2022, and 2021, based on the location of services provided and products sold, 44%, 45%, and 40%, respectively, of our consolidated revenue was from the United States. No other country accounted for more than 10% of our revenue.

Activity within our business segments is significantly impacted by spending on upstream exploration, development, and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption.

Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices and our customers' expectations about future prices, global oil supply and demand, completions intensity, the world economy, the availability of capital, government regulation, and global stability, which together drive worldwide drilling and completions activity. Lower oil and natural gas prices usually translate into lower exploration and production budgets and lower rig count, while the opposite is usually true for higher oil and natural gas prices. Our financial performance is therefore significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.

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

The historical average rig counts based on the weekly Baker Hughes rig count data were as follows:

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Business outlook

Looking ahead, we expect oil and natural gas demand to continue to grow over the next several years as easing inflationary pressures across the Organization for Economic Co-operation and Development (OECD) countries increase the likelihood for central bank rate cuts, abating fears of a macroeconomic slowdown. We believe long-term expansion of the global economy will continue to increase demands on all forms of energy. We expect oil and natural gas remains a critical component of the global energy mix. The International Energy Agency's December 2023 "Oil Market Report" forecasts 2024 global oil demand to reach 102.7 million barrels per day, an increase of 1% from 2023.

We believe that oil demand growth will be driven by resilient global economic growth and increases in transportation activity. In addition, we think oil supply dynamics have fundamentally changed due to, among other things, investor return requirements, and regulatory initiatives adverse to oil and natural gas exploration and production and that promote alternative energy, any of which could limit supply growth. We believe that despite the changes in oil supply dynamics, increased investment in existing and new sources of production is the only solution to increase supply and that production will be needed from conventional and unconventional, deep-water and shallow-water, and short and long-cycle projects. We expect that increased production requirements will in turn create demand for our products and services.

Internationally, we expect oil and natural gas exploration and production activity to grow during 2024. Although we anticipate regional differences in growth rates for 2024, we believe the Middle East/Asia regions will likely experience the greatest increases in activity, with other regions closely behind. We expect growth in both onshore and offshore markets, as well as services related to carbon capture, utilization, and storage. The “Short Term Energy Outlook” published by the United States Energy Information Administration (EIA) predicts that U.S. oil production will average 13.1 million barrels per day in 2024, an increase of 1% as compared to 2023. As a result, we expect stable exploration and production activity levels in the U.S.

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RESULTS OF OPERATIONS IN 2023 COMPARED TO 2022

Operating Segments

Completion and Production

Completion and Production revenue was $13.7 billion in 2023, an increase of $2.1 billion, or 18%, compared to 2022. Operating income was $2.8 billion in 2023, a 39% increase from $2.0 billion in 2022. These results were primarily driven by higher pressure pumping activity in North America land, as well as improved completion tool sales globally. Partially offsetting these increases was decreased activity in Russia due to our exit from the country.

Drilling and Evaluation

Drilling and Evaluation revenue was $9.3 billion in 2023, an increase of $614 million, or 7%, from 2022. Operating income was $1.5 billion in 2023, an increase of $251 million, or 19%, compared to 2022. These results were primarily attributable to increased fluid services and drilling activity globally and higher wireline activity in the Western Hemisphere, Africa, and the Middle East/Asia. Partially offsetting these increases were decreased activity in Russia due to our exit from the country and lower project management activity in Saudi Arabia.

Geographic Regions

North America

North America revenue was $10.5 billion in 2023, a 9% increase compared to 2022, resulting from improved pressure pumping and artificial lift activity in North America land, increased fluid and wireline services across the region, and higher completion tool sales in the Gulf of Mexico. Partially offsetting these increases were lower drilling-related activity and decreased well intervention services in North America land.

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Latin America

Latin America revenue was $4.0 billion in 2023, a 25% increase compared to 2022, resulting from improvements across multiple product service lines in Brazil, Mexico, and Argentina. Partly offsetting these increases was lower project management activity in the Caribbean, Ecuador, and Colombia.

Europe/Africa/CIS

Europe/Africa/CIS revenue was $2.9 billion in 2023, a 6% increase compared to 2022, resulting from increased activity across multiple product service lines in Africa and higher drilling-related services in Norway. Partially offsetting these increases were the sale of our Russian operations during the third quarter of 2022, as well as decreased wireline activity, lower completion tool sales and decreased testing services in Norway, and lower drilling-related activity and decreased testing services in Algeria.

Middle East/Asia

Middle East/Asia revenue was $5.7 billion in 2023, an 18% increase compared to 2022, resulting from increased activity across multiple product service lines in Saudi Arabia, the United Arab Emirates, Qatar, Indonesia, and Malaysia, and higher drilling services and improved wireline activity in Thailand. Partially offsetting these improvements were lower project management activity in Saudi Arabia and lower stimulation activity and decreased well intervention services in Kuwait.

Other Operating Items

Impairments and other charges. During 2023, there were no amounts recorded in impairment and other charges. During 2022, we recognized $366 million of charges, primarily related to a $344 million write down of all our net assets in Russia as a result of our decision to sell our Russia operations due to the sanctions enacted against Russia arising from the conflict in Ukraine. See Note 2 to the consolidated financial statements for further discussion on these charges.

SAP S4 Upgrade Expense. As previously mentioned, in the second quarter of 2023 we began our migration to SAP S4, which we expect to complete by the end of 2025. In 2023, we recognized $51 million of expense on our SAP S4 migration.

Nonoperating Items

Argentina Blue Chip Swap. The Central Bank of Argentina maintains currency controls that limit our ability to access U.S. dollars in Argentina and remit cash from our Argentine operations. The execution of certain trades known as Blue Chip Swaps, effectively results in a parallel U.S. dollar exchange rate. This parallel rate, which cannot be used as the basis to remeasure our net monetary assets in U.S. dollars under U.S. GAAP, was 20% higher than Argentina's official exchange rate at December 31, 2023. For the year ended December 31, 2023, we entered into Blue Chip Swap transactions, which resulted in a $110 million pre-tax loss on investment.

Argentina Currency Impact. Argentina devalued its peso by more than 50% during December 2023. Consequently, we incurred a loss of $131 million for the year ended December 31, 2023 due to the devaluation of the currency in Argentina.

Loss on early extinguishment of debt. During the year ended December 31, 2022, we recorded a $42 million loss on the early redemption of $600 million aggregate principal amount of our 3.8% senior notes due November 2025, which included premiums and unamortized expenses. See Note 10 to the consolidated financial statements for further information.

Income tax provision. During the year ended December 31, 2023, we recorded a total income tax provision of $701 million on pre-tax income of $3.4 billion, resulting in an effective tax rate of 20.8%. The effective tax rate for 2023 was primarily impacted by our geographic mix of earnings, tax adjustments related to the reassessment of prior year tax accruals, and changes of valuation allowance on some of our deferred tax assets. During 2022, we recorded a total income tax provision of $515 million on pre-tax income of $2.1 billion, resulting in an effective tax rate of 24.4%. See Note 12 to the consolidated financial statements for significant drivers of these tax provisions.

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Pillar Two. The OECD recently enacted model rules for a new global minimum tax framework, also known as Pillar Two, and certain governments globally have enacted, or are in the process of enacting, legislation considering these model rules. We have considered the possible implication of the legislation passed or in consideration of being passed, and we do not believe these rules will have a material impact on our taxes in the near future.

Internal Revenue Service Notice of Proposed Adjustment. We are subject to taxes in the United States and in numerous jurisdictions where we operate or where our subsidiaries are organized. Our tax returns are routinely subject to examination by the taxing authorities in the jurisdictions where we file tax returns. In most cases we are no longer subject to examination by tax authorities for years before 2012. The only significant operating jurisdiction that has tax filings under review or subject to examination by the tax authorities is the United States. Our United States federal income tax filings for tax years 2016 through 2022, including carry back of 2016 net operating losses to 2014, are currently under review or remain open for review by the Internal Revenue Service (the IRS).

On September 28, 2023, we received a Notice of Proposed Adjustment (NOPA) from the IRS covering our 2016 US tax return. The NOPA proposed an adjustment to reclassify approximately 95% of the $3.5 billion termination fee paid to Baker Hughes in 2016 from an ordinary expense deduction to a capital loss. The termination fee was paid to Baker Hughes under the merger agreement after antitrust regulators in multiple jurisdictions failed to approve our proposed merger. It is common commercial practice to include a termination fee in a merger agreement to compensate the target for damages incurred when the acquisition does not go forward. The IRS’s long-understood position at the time of the payment had been to treat such payments as an ordinary and necessary business expense. We strongly disagree with the proposed adjustment on both a factual and legal basis, and we plan to vigorously contest it.

We expect that resolving this dispute will take substantial time. In December 2023, we initiated the IRS administrative appeals process, which may take more than 12 months to complete. Failing a resolution through that process, the matter would ultimately be resolved by the United States federal courts.

We regularly assess the likelihood of adverse outcomes resulting from tax examinations to determine the adequacy of our tax reserves, and we believe our income tax reserves are appropriately provided for all open tax years. We cannot assure you that the matter will be determined in our favor or against us, and if the matter is ultimately determined unfavorably to us, it could have a material adverse impact on our results of operations and cash flows. Based on tax attributes currently available, we estimate that, should the IRS's position prevail through its appellate process and subsequent litigation, the proposed adjustment could result in cash taxes due of approximately $650 million (plus interest thereon in the case of amounts due for previous tax years). Our estimates are calculated under current tax law and on the bases of our assumptions regarding taxable income and loss and other tax attributes over the relevant period, which law could change and which assumptions could and likely will differ materially from actual results. In any event, no payment of any additional tax is currently required, nor do we anticipate that the proposed adjustment would materially and adversely impact our ability to meet our expected uses of cash, including future capital expenditures, working capital investments, and scheduled debt repayments, or our ability to return cash to shareholders, even if a final determination of the matter is reached that is adverse to us.

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RESULTS OF OPERATIONS IN 2022 COMPARED TO 2021

Information related to the comparison of our operating results between the years 2022 and 2021 is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2022 Form 10-K filed with the SEC and is incorporated by reference into this annual report on Form 10-K.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective, or complex judgments and assessments and is fundamental to our results of operations. We identified our most critical accounting estimates to be:

-    forecasting our income tax (provision) benefit, including our future ability to utilize foreign tax credits and the realizability of deferred tax assets (including net operating loss carryforwards), and providing for uncertain tax positions;

-    legal and investigation matters;

-    valuations of long-lived assets, including intangible assets and goodwill; and

-    allowance for credit losses.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report.

Income tax accounting

We recognize the amount of taxes payable or refundable for the current year and use an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We apply the following basic principles in accounting for our income taxes:

-    a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year;

-    a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards;

-    the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered; and

-    the value of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

We determine deferred taxes separately for each tax-paying component (an entity or a group of entities that is consolidated for tax purposes) in each tax jurisdiction. That determination includes the following procedures:

-    identifying the types and amounts of existing temporary differences;

-    measuring the total deferred tax liability for taxable temporary differences using the applicable tax rate;

-    measuring the total deferred tax asset for deductible temporary differences and operating loss carryforwards using the applicable tax rate;

-    measuring the deferred tax assets for each type of tax credit carryforward; and

-    reducing the deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Our methodology for recording income taxes requires a significant amount of judgment and the use of assumptions and estimates. Additionally, we use forecasts of certain tax elements, such as taxable income and foreign tax credit utilization, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results that could have a material impact on our income tax accounts related to continuing operations.

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We have operations in more than 70 countries. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including net income actually earned, net income deemed earned, and revenue-based tax withholding. Our tax filings are routinely examined in the normal course of business by tax authorities. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each jurisdiction, as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved, the timing and nature of income earned and expenditures incurred. The final determination of tax audits or changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our income tax liabilities for a tax year and have an adverse effect on our financial statements. For example, we received a NOPA from the IRS on September 28, 2023. See "Managements's Discussion and Analysis of Financial Condition and Results of Operations - Nonoperating Items, Internal Revenue Service Notice of Proposed Adjustment" and Note 12 to the consolidated financial statements for further information.

Tax filings of our subsidiaries, unconsolidated affiliates and related entities are routinely examined in the normal course of business by tax authorities. These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process. Predicting the outcome of disputed assessments involves some uncertainty. Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate, and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome. We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest, and penalties, as needed based on this outcome. We provide for uncertain tax positions pursuant to current accounting standards, which prescribe a minimum recognition threshold and measurement methodology that a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. The standards also provide guidance for derecognition classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Legal and investigation matters

As discussed in Note 11 of our consolidated financial statements, we are subject to various legal and investigation matters arising in the ordinary course of business. As of December 31, 2023, we have accrued an estimate of the probable and estimable costs for the resolution of some of our legal and investigation matters, which is not material to our consolidated financial statements. For other matters for which the liability is not probable and reasonably estimable, we have not accrued any amounts. Attorneys in our legal department monitor and manage all claims filed against us and review all pending investigations. Generally, the estimate of probable costs related to these matters is developed in consultation with internal and outside legal counsel representing us. Our estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. We attempt to resolve these matters through settlements, mediation, and arbitration proceedings when possible. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, there may be a material adverse effect on our future financial results. We have in the past recorded significant adjustments to our initial estimates of these types of contingencies.

Value of long-lived assets, including intangible assets and goodwill

We carry a variety of long-lived assets on our balance sheet including property, plant, and equipment, goodwill, and other intangibles. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our operating income. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We conduct impairment tests on goodwill annually, during the third quarter, or more frequently whenever events or changes in circumstances indicate an impairment may exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

When conducting an impairment test on long-lived assets, other than goodwill, we first group individual assets based on the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets. This requires some judgment. We then compare estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, we then determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on our weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. See Note 2 to the consolidated financial statements for further discussion of impairments and other charges.

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We perform our goodwill impairment assessment for each reporting unit, which is the same as our reportable segments, the Completion and Production division and the Drilling and Evaluation division, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. We estimate the fair value for each reporting unit using a discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded.

The impairment assessments discussed above incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services, and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts. If market conditions deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record additional impairments of the carrying value of our long-lived assets in the future which could have a material adverse impact on our operating results. See Note 1 to the consolidated financial statements for our accounting policies related to long-lived assets.

Allowance for credit losses

We evaluate our global accounts receivable through a continuous process of assessing our portfolio on an individual customer and overall basis. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, financial condition of our customers, and whether the receivables involve retainages. We also consider the economic environment of our customers, both from a marketplace and geographic perspective, in evaluating the need for an allowance. Based on our review of these factors, we establish or adjust allowances for specific customers. This process involves judgment and estimation, and frequently involves significant dollar amounts. Accordingly, our results of operations can be affected by adjustments to the allowance due to actual write-offs that differ from estimated amounts.

At December 31, 2023, our allowance for credit losses totaled $742 million, or 13.9% of notes and accounts receivable before the allowance. At December 31, 2022, our allowance for credit losses totaled $731 million, or 14.7% of notes and accounts receivable before the allowance. The allowance for credit losses in both years is primarily comprised of accounts receivable from our primary customer in Venezuela. A hypothetical 100 basis point change in our estimate of the collectability of our notes and accounts receivable balance as of December 31, 2023 would have resulted in a $54 million adjustment to 2023 total operating costs and expenses. See Note 5 to the consolidated financial statements for further information.

FINANCIAL INSTRUMENT MARKET RISK

We are exposed to market risk from changes in foreign currency exchange rates and interest rates. We selectively manage these exposures through the use of derivative instruments, including forward foreign exchange contracts, foreign exchange options, and interest rate swaps. The objective of our risk management strategy is to minimize the volatility from fluctuations in foreign currency and interest rates. We do not use derivative instruments for trading purposes. The counterparties to our forward contracts, options, and interest rate swaps are global commercial and investment banks.

We use a sensitivity analysis model to measure the impact of potential adverse movements in foreign currency exchange rates and interest rates. With respect to foreign exchange sensitivity, after consideration of the impact from our forward foreign exchange contracts and options, a hypothetical 10% adverse change in the value of all our foreign currency positions relative to the United States dollar as of December 31, 2023 would result in a $85 million, pre-tax loss for our net monetary assets denominated in currencies other than United States dollars. As of December 31, 2023, we did not have any interest rate swaps outstanding and our outstanding debt has fixed interest rates.

There are certain limitations inherent in the sensitivity analysis presented, primarily due to the assumption that exchange rates and interest rates change instantaneously in an equally adverse fashion. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled. While this is our best estimate of the impact of the various scenarios, these estimates should not be viewed as forecasts.

For further information regarding foreign currency exchange risk, interest rate risk, and credit risk, see Note 16 to the consolidated financial statements.

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ENVIRONMENTAL MATTERS

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note 11 to the consolidated financial statements and "Part I, Item 1(a). “Risk Factors.”

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Forward-looking information is based on projections and estimates, not historical information. Some statements in this Form 10-K are forward-looking and use words like “may,” “may not,” “believe,” “do not believe,” “plan,” “estimate,” “intend,” “expect,” “do not expect,” “anticipate,” “do not anticipate,” “should,” “likely,” and other expressions. We may also provide oral or written forward-looking information in our statements and other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of our operations may vary materially.

We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events or for any other reason. You should review any additional disclosures we make in our press releases and Forms 10-K, 10-Q, and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.

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Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.

Information related to market risk is included in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Instrument Market Risk” and Note 16 to the consolidated financial statements.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the consolidated and combined financial statements included in "Item 8. Financial Statements and Supplementary Data" contained herein.

EXECUTIVE OVERVIEW

Market conditions

Since early 2020, world-wide oil and gas supply and demand imbalances and related volatility of oil and natural gas prices (including as a result of the COVID-19 pandemic) have resulted in dramatic fluctuations in oil and gas markets. The volatility continued in 2022 as markets were impacted by inflationary pressures, changes to OPEC+ production levels, supply chain shortages, demand uncertainty, and geopolitical conflicts including Russia's invasion of and continued war with Ukraine. The West Texas Intermediate (WTI) crude oil price averaged approximately $88 per barrel during the fourth quarter of 2022 and $96 per barrel for the full year of 2022. The U.S. land average rig count continues to be below pre-pandemic levels, but showed improvement in each quarter of 2022. The Brent crude oil price averaged $89 per barrel during the fourth quarter of 2022 and $101 per barrel for the full year of 2022. The international average rig count showed improvement in the second half of 2022.

Globally, we are being impacted by supply chain shortages and increased lead times as the post-pandemic recovery stressed both the supply of raw materials and transportation logistics. We monitor market trends and work to mitigate cost impacts through economies of scale in global procurement, technology modifications, and efficient sourcing practices. Also, while we have been impacted by inflationary cost increases, primarily related to frac sand, chemicals, cement, and logistics costs, we generally try to pass much of those increases on to our customers and we believe we have effective solutions that work to minimize the operational impact.

As a result of Russia’s invasion of Ukraine, governments in the European Union, the United States, the United Kingdom, Switzerland, and other countries enacted new sanctions against Russia and Russian interests. In order to comply with these sanctions, we ceased pursuing future business in Russia and began to wind down our remaining operations in Russia in March of 2022. During the second quarter of 2022, we made the decision to sell our Russian operations and completed the sale in the third quarter of 2022. We wrote down the disposal group to fair value less costs to sell, resulting in a pre-tax charge of $344 million during the second quarter of 2022. See Note 2 to our consolidated financial statements for additional information.

Financial results

The following graph illustrates our revenue and operating margins for each operating segment over the past three years.

During 2022, we generated total company revenue of $20.3 billion, a 33% increase from the $15.3 billion of revenue generated in 2021, with our Completion and Production (C&P) segment revenue increasing by 38% and our Drilling and Evaluation (D&E) segment revenue increasing by 27%. We reported total company operating income of approximately $2.7 billion in 2022, compared to operating income of $1.8 billion in 2021. These increases were driven primarily by increased demand for our products and services in North America land tied to a substantial improvement in the North America average rig count during 2022. Both of our segments were negatively impacted by our exit from Russia in the third quarter of 2022.

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Our North America revenue increased 51% in 2022 compared to 2021, resulting from higher activity and pricing in North America land primarily associated with increased stimulation and well construction services. North America average rig count increased 47% for 2022 as compared to the average rig count for 2021.

Internationally, revenue improved 20% in 2022 compared to 2021, primarily driven by higher activity for drilling and completions related services in Latin America and the Eastern Hemisphere, which were partly offset by our exit from Russia and lower activity in the North Sea. The international average rig count increased 13% for 2022 as compared to the average rig count for 2021.

Our operating performance and liquidity are described in more detail in “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”

Sustainability and Energy Mix Transition

In the first quarter of 2021, we announced our target to achieve 40% reduction in Scope 1 and 2 emissions by 2035 from the 2018 baseline. During 2022, we continued to execute on priorities we set to help us progress toward our 2035 emissions reduction target. As our customers have begun to invest more in reducing emissions and developing projects focused on sustainable energy, we have developed or are developing solutions intended to reduce our own carbon footprint while advancing our customers’ decarbonization efforts. As the energy mix transition unfolds, we will continue to seek to apply our expertise and products and services across different developing parts of the energy mix transition. We have also applied our experience and resources in sectors adjacent to our traditional oilfield services sectors, including carbon capture and storage, hydrogen, and geothermal. Finally, we will continue to focus on accelerating the success of clean tech start-ups via Halliburton Labs. As of December 31, 2022, Halliburton Labs had 21 participating companies and alumni. Halliburton Labs allows us to participate in the energy mix transition at relatively low risk by investing our expertise, resources, and team without a significant outlay of capital.

Our sustainability efforts have been recognized as we were named to the 2022 Dow Jones Sustainability Indices (DJSI), which recognizes the top 10% most sustainable companies per industry. The DJSI uses ESG criteria to measure and rank the performance of best-in-class companies selected for its list. When compared to our peers, we ranked in the 98th percentile and received high marks in the Human Capital Development, Risk & Crisis Management, and Business Ethics categories.

Additionally, we published our 2021 Annual and Sustainability Report (ASR) in March of 2022, which details our strategy and progress on sustainability issues, as well as our efforts on increased environmental reporting transparency, including conducting a climate scenario analysis. Information on our website, including the ASR report, is not incorporated by reference into this Annual Report on Form 10-K.

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LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2022, we had $2.3 billion of cash and equivalents, compared to $3.0 billion of cash and equivalents at December 31, 2021.

Significant sources and uses of cash in 2022

Sources of cash:

•Cash flows from operating activities were $2.2 billion. This included a negative impact from the primary components of our working capital (receivables, inventories, and accounts payable) of a net $941 million, primarily associated with increased receivables and inventory.

Uses of cash:

•Debt repayments were $1.2 billion. In February of 2022, we paid $641 million to redeem $600 million aggregate principal amount of our 3.8% senior notes due November 2025. The payment also included the make-whole premium and accrued interest. In September of 2022, we paid $603 million to redeem $600 million aggregate principal amount of our 3.5% senior notes due August 2023 at par. The payment also included accrued interest.

•Capital expenditures were $1.0 billion.

•We paid $435 million of dividends to our shareholders.

•We repurchased 6.8 million shares for $250 million.

Future sources and uses of cash

We manufacture most of our own equipment, which provides us with some flexibility to increase or decrease our capital expenditures based on market conditions. Capital spending for 2023 is currently expected to be within our target of approximately 5-6% of revenue. We believe this level of spend will allow us to invest in our key strategic areas. However, we will continue to maintain capital discipline and monitor the rapidly changing market dynamics, and we may adjust our capital spend accordingly.

In 2023, we expect to pay approximately $897 million for contractual purchase obligations (with another $292 million due through 2025), $416 million of interest on debt, and approximately $333 million under our leasing arrangements. Payments for interest on our debt arrangements are expected to remain relatively flat for the foreseeable future. See Note 6 and Note 9 to the consolidated financial statements for additional information on expected future payments under our leasing arrangements and debt maturities.

We are not able to reasonably estimate the timing of cash outflows associated with our uncertain tax positions, in part because we are unable to predict the timing of potential tax settlements with applicable taxing authorities. As of December 31, 2022, we had $311 million of gross unrecognized tax benefits, excluding penalties and interest, of which we estimate $259 million may require us to make a cash payment. We estimate that approximately $232 million of the cash payment will not be settled within the next 12 months.

While we maintain our focus on liquidity and debt reduction, we are also focused on increasing cash returns to our shareholders. Our Board approved a capital return framework with a goal of returning at least 50% of our annual free cash flow to shareholders through dividends and share repurchases.

In January of 2023, we announced that our Board of Directors declared a dividend of $0.16 per common share for the first quarter of 2023, or approximately $145 million. During 2022, our quarterly dividend rate was $0.12 per common share, or approximately $109 million per quarter.

Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately $4.9 billion remained authorized for repurchases as of December 31, 2022 and may be used for open market and other share purchases.

We do not intend to incur additional debt in 2023, as we believe our cash on hand and earnings from operations are sufficient to cover our obligations for the year.

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Other factors affecting liquidity

Financial position in current market. As of December 31, 2022, we had $2.3 billion of cash and equivalents and $3.5 billion of available committed bank credit under a revolving credit facility executed on April 27, 2022 with an expiration date of April 27, 2027. We believe we have a manageable debt maturity profile, with approximately $500 million coming due beginning in 2025 through 2027. 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. We believe our cash on hand, cash flows generated from operations, and our available credit facility will provide sufficient liquidity to address the challenges and opportunities of the current market and our global cash needs, including capital expenditures, working capital investments, dividends, if any, debt repayment, and contingent liabilities.

Guarantee agreements. In the normal course of business, we have agreements with financial institutions under which approximately $2.1 billion letters of credit, bank guarantees, or surety bonds were outstanding as of December 31, 2022. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization, however, none of these triggering events have occurred. As of December 31, 2022, we had no material off-balance sheet liabilities and were not required to make any material cash distributions to our unconsolidated subsidiaries.

Credit ratings. Our credit ratings with Standard & Poor’s (S&P) remain BBB+ for our long-term debt and A-2 for our short-term debt, with a stable outlook. Our credit ratings with Moody’s Investors Service (Moody's) remain Baa1 for our long-term debt and P-2 for our short-term debt, with a stable outlook.

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, as well as unsettled political conditions.

Receivables from our primary customer in Mexico accounted for approximately 9% of our total receivables as of December 31, 2022. While we have experienced payment delays in Mexico, these amounts are not in dispute and we have not historically had, and we do not expect to have, any material write-offs due to collectability of receivables from this customer.

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BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in more than 70 countries throughout the world to provide a comprehensive range of services and products to the energy industry. Our revenue is generated from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. The industry we serve is highly competitive with many substantial competitors in each segment of our business. In 2022, 2021, and 2020, based on the location of services provided and products sold, 45%, 40%, and 38%, respectively, of our consolidated revenue was from the United States. No other country accounted for more than 10% of our revenue.

Activity within our business segments is significantly impacted by spending on upstream exploration, development, and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption.

Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices and our customers' expectations about future prices, global oil supply and demand, completions intensity, the world economy, the availability of capital, government regulation, and global stability, which together drive worldwide drilling and completions activity. Additionally, during 2023, we generally expect that many of our customers in North America will continue their strategy of operating within their cash flows and generating returns rather than prioritizing production growth. Lower oil and natural gas prices usually translate into lower exploration and production budgets and lower rig count, while the opposite is usually true for higher oil and natural gas prices. Our financial performance is therefore significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.

The table below shows the average prices for WTI crude oil, United Kingdom Brent crude oil, and Henry Hub natural gas.

The historical average rig counts based on the weekly Baker Hughes rig count data were as follows:

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Business outlook

According to the United States Energy Information Administration (EIA) January 2023 "Short Term Energy Outlook," the EIA expects Brent crude oil spot prices to average $83 per barrel for the full year of 2023, a decrease of approximately 18% over the full year of 2022 average price per barrel. The EIA anticipates a further decline in prices to $78 per barrel for the full year of 2024 as they believe global oil inventories will build, applying downward pressure on crude oil prices. The EIA expects the WTI crude oil spot prices to average $77 per barrel for the full year of 2023, a decrease of approximately 19% over the full year of 2022 average price per barrel.

The EIA's report projects Henry Hub natural gas prices to average $4.90 per MMBtu for the full year of 2023, an approximate 24% decrease over 2022 full year averages.

The EIA reported crude oil production in the United States averaged 11.9 million barrels per day in 2022 and expects production to average 12.4 million barrels per day in 2023, an approximate 4% increase. In addition, the EIA expects crude oil production in the United States to rise to 12.8 million barrels per day in 2024.

The International Energy Agency's January 2023 "Oil Market Report" forecasts 2023 global oil demand to reach 101.7 million barrels per day, an increase of approximately 2% from 2022.

We continue to expect that oil and gas demand will grow over the next several years, despite the actions taken by central banks in an attempt to control inflation by increasing interest rates and the resulting concern about a potential economic slowdown. We believe the demand will be driven by economic expansion, energy security concerns, relaxed COVID restrictions in China, and population growth. In addition, we think supply dynamics have fundamentally changed due to investor return requirements, publicly stated environmental, social, and governance commitments, and regulatory pressure, all of which resulted in low inventory levels (compared to historical levels) and production below expectations. We believe many years of increased investment in existing and new sources of production is the only solution to increase supply and that production will be needed from conventional and unconventional, deep-water and shallow-water, and short and long-cycle projects.

Internationally, we expect activity to grow at least 14-16% during 2023 with most new activity coming from the Middle East and Latin America, both in onshore and offshore markets. In North America, we expect strong activity and anticipate customer spending to increase by at least 15% during 2023 as compared to 2022.

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RESULTS OF OPERATIONS IN 2022 COMPARED TO 2021

Operating Segments

Completion and Production

Completion and Production revenue was $11.6 billion in 2022, an increase of $3.2 billion, or 38%, compared to 2021. Operating income was $2.0 billion in 2022, a 65% increase from $1.2 billion in 2021. These results were primarily driven by higher utilization and pricing for pressure pumping services in the Western Hemisphere, additional completion tool sales in the Western Hemisphere and Saudi Arabia, increased artificial lift activity in North America land, and increased well intervention services in North America and the Eastern Hemisphere. Partially offsetting these increases were decreased activity in Russia due to our exit from the country, lower completion tool sales and cementing activity in Norway, and decreased stimulation activity in Oman.

Drilling and Evaluation

Drilling and Evaluation revenue was $8.7 billion in 2022, an increase of $1.8 billion, or 27%, from 2021. Operating income was $1.3 billion in 2022, an increase of $491 million, or 61%, compared to 2021. These results were primarily related to increased drilling-related services in the Western Hemisphere, Middle East/Asia, West Africa, Egypt, and Eastern Mediterranean, along with higher wireline activity and testing services globally. Project management activity increased in Latin America, India, and Saudi Arabia. Partially offsetting these increases were reduced activity in Russia due to our exit from the country and decreased drilling-related services in Norway.

Geographic Regions

North America

North America revenue was $9.6 billion in 2022, a 51% increase compared to 2021, resulting from higher activity and pricing across the region, primarily associated with pressure pumping activity, drilling-related services, and completion tool sales. Higher artificial lift activity in North America land, along with additional wireline activity and well intervention services in North America land and the Gulf of Mexico, also contributed to this increase.

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Latin America

Latin America revenue was $3.2 billion in 2022, a 35% increase compared to 2021, resulting primarily from improvements across multiple product service lines in Mexico, Argentina, and Colombia, increased project management activity and well construction services in Ecuador, higher completion tool sales in Brazil and the Caribbean, additional pressure pumping activity in Brazil, and improved project management activity in Suriname. Partly offsetting these increases were lower well intervention and drilling-related services in Brazil.

Europe/Africa/CIS

Europe/Africa/CIS revenue was $2.7 billion in 2022, a 1% decrease compared to 2021. The decrease was mostly driven by lower activity in Russia due to our exit from the country and reduced activity in Norway. This decline was partially offset by increases in multiple product service lines in Egypt, Angola, and Eastern Mediterranean, combined with higher drilling-related services in West Africa and increased well intervention services across the region.

Middle East/Asia

Middle East/Asia revenue was $4.8 billion in 2022, a 25% increase compared to 2021. The increase was primarily from improvements across multiple product service lines in Saudi Arabia, Kuwait, India, and United Arab Emirates, higher well construction services in Oman, Indonesia, and Iraq, and additional completion tool sales and cementing activity in Qatar. Partially offsetting these increases were lower stimulation and well intervention services in Oman.

Other Operating Items

Impairments and other charges. During 2022, we recognized $366 million of charges, primarily related to a $344 million write down of all our net assets in Russia as a result of our decision to sell our Russia operations due to the sanctions enacted against Russia arising from the conflict in Ukraine. In the first quarter of 2022, we recognized a pre-tax charge of $22 million to write down all of our assets in Ukraine, including $16 million in receivables, due to the ongoing conflict between Russia and Ukraine. During 2021, we recognized $12 million of net charges. These charges included $36 million of depreciation catch-up expense on our Pipeline and Process Services business assets previously classified as held for sale, $15 million of severance costs, and $35 million of other items, partially offset by a $74 million gain related to the closing of a structured transaction for our North America real estate assets. See Note 2 to the consolidated financial statements for further discussion on these charges.

Nonoperating Items

Loss on early extinguishment of debt. During the year ended December 31, 2022, we recorded a $42 million loss on the early redemption of $600 million aggregate principal amount of our 3.8% senior notes due November 2025, which included premiums and unamortized expenses. See Note 9 to the consolidated financial statements for further information.

Income tax (provision) benefit. During the year ended December 31, 2022, we recorded a total income tax provision of $515 million on pre-tax income of $2.1 billion, resulting in an effective tax rate of 24.4%. The effective tax rate for 2022 was primarily impacted by our geographic mix of earnings, tax adjustments related to the reassessment of prior year tax accruals, and changes of valuation allowance on some of our deferred tax assets. During 2021, we recorded a total income tax benefit of $216 million on pre-tax income of $1.3 billion, resulting in an effective tax rate of -17.2%. We recorded a tax benefit of approximately $500 million during 2021, primarily due to the partial release of a valuation allowance on our deferred tax assets. This release was based on improved market conditions and reflects our expectation to utilize these deferred tax assets. See Note 11 to the consolidated financial statements for significant drivers of these tax (provisions) benefits.

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RESULTS OF OPERATIONS IN 2021 COMPARED TO 2020

Information related to the comparison of our operating results between the years 2021 and 2020 is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Form 10-K filed with the SEC and is incorporated by reference into this annual report on Form 10-K.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective, or complex judgments and assessments and is fundamental to our results of operations. We identified our most critical accounting estimates to be:

-    forecasting our income tax (provision) benefit, including our future ability to utilize foreign tax credits and the realizability of deferred tax assets (including net operating loss carryforwards), and providing for uncertain tax positions;

-    legal and investigation matters;

-    valuations of long-lived assets, including intangible assets and goodwill; and

-    allowance for credit losses.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report.

Income tax accounting

We recognize the amount of taxes payable or refundable for the current year and use an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We apply the following basic principles in accounting for our income taxes:

-    a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year;

-    a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards;

-    the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered; and

-    the value of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

We determine deferred taxes separately for each tax-paying component (an entity or a group of entities that is consolidated for tax purposes) in each tax jurisdiction. That determination includes the following procedures:

-    identifying the types and amounts of existing temporary differences;

-    measuring the total deferred tax liability for taxable temporary differences using the applicable tax rate;

-    measuring the total deferred tax asset for deductible temporary differences and operating loss carryforwards using the applicable tax rate;

-    measuring the deferred tax assets for each type of tax credit carryforward; and

-    reducing the deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Our methodology for recording income taxes requires a significant amount of judgment and the use of assumptions and estimates. Additionally, we use forecasts of certain tax elements, such as taxable income and foreign tax credit utilization, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results that could have a material impact on our income tax accounts related to continuing operations.

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We have operations in more than 70 countries. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including net income actually earned, net income deemed earned, and revenue-based tax withholding. Our tax filings are routinely examined in the normal course of business by tax authorities. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each jurisdiction, as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved, the timing and nature of income earned and expenditures incurred. The final determination of tax audits or changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our income tax liabilities for a tax year and have an adverse effect on our financial statements.

Tax filings of our subsidiaries, unconsolidated affiliates and related entities are routinely examined in the normal course of business by tax authorities. These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process. Predicting the outcome of disputed assessments involves some uncertainty. Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate, and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome. We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest, and penalties, as needed based on this outcome. We provide for uncertain tax positions pursuant to current accounting standards, which prescribe a minimum recognition threshold and measurement methodology that a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. The standards also provide guidance for derecognition classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Legal and investigation matters

As discussed in Note 10 of our consolidated financial statements, we are subject to various legal and investigation matters arising in the ordinary course of business. As of December 31, 2022, we have accrued an estimate of the probable and estimable costs for the resolution of some of our legal and investigation matters, which is not material to our consolidated financial statements. For other matters for which the liability is not probable and reasonably estimable, we have not accrued any amounts. Attorneys in our legal department monitor and manage all claims filed against us and review all pending investigations. Generally, the estimate of probable costs related to these matters is developed in consultation with internal and outside legal counsel representing us. Our estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. We attempt to resolve these matters through settlements, mediation, and arbitration proceedings when possible. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, there may be a material adverse effect on our future financial results. We have in the past recorded significant adjustments to our initial estimates of these types of contingencies.

Value of long-lived assets, including intangible assets and goodwill

We carry a variety of long-lived assets on our balance sheet including property, plant, and equipment, goodwill, and other intangibles. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our operating income. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We conduct impairment tests on goodwill annually, during the third quarter, or more frequently whenever events or changes in circumstances indicate an impairment may exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

When conducting an impairment test on long-lived assets, other than goodwill, we first group individual assets based on the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets. This requires some judgment. We then compare estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, we then determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on our weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. See Note 2 to the consolidated financial statements for further discussion of impairments and other charges.

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We perform our goodwill impairment assessment for each reporting unit, which is the same as our reportable segments, the Completion and Production division and the Drilling and Evaluation division, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. We estimate the fair value for each reporting unit using a discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded.

The impairment assessments discussed above incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services, and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts. If market conditions deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record additional impairments of the carrying value of our long-lived assets in the future which could have a material adverse impact on our operating results. See Note 1 to the consolidated financial statements for our accounting policies related to long-lived assets.

Allowance for credit losses

We evaluate our global accounts receivable through a continuous process of assessing our portfolio on an individual customer and overall basis. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, financial condition of our customers, and whether the receivables involve retainages. We also consider the economic environment of our customers, both from a marketplace and geographic perspective, in evaluating the need for an allowance. Based on our review of these factors, we establish or adjust allowances for specific customers. This process involves judgment and estimation, and frequently involves significant dollar amounts. Accordingly, our results of operations can be affected by adjustments to the allowance due to actual write-offs that differ from estimated amounts.

At December 31, 2022, our allowance for credit losses totaled $731 million, or 14.7% of notes and accounts receivable before the allowance. At December 31, 2021, our allowance for credit losses totaled $754 million, or 17.8% of notes and accounts receivable before the allowance. The allowance for credit losses in both years is primarily comprised of accounts receivable from our primary customer in Venezuela. A hypothetical 100 basis point change in our estimate of the collectability of our notes and accounts receivable balance as of December 31, 2022 would have resulted in a $50 million adjustment to 2022 total operating costs and expenses. See Note 5 to the consolidated financial statements for further information.

FINANCIAL INSTRUMENT MARKET RISK

We are exposed to market risk from changes in foreign currency exchange rates and interest rates. We selectively manage these exposures through the use of derivative instruments, including forward foreign exchange contracts, foreign exchange options, and interest rate swaps. The objective of our risk management strategy is to minimize the volatility from fluctuations in foreign currency and interest rates. We do not use derivative instruments for trading purposes. The counterparties to our forward contracts, options, and interest rate swaps are global commercial and investment banks.

We use a sensitivity analysis model to measure the impact of potential adverse movements in foreign currency exchange rates and interest rates. With respect to foreign exchange sensitivity, after consideration of the impact from our forward foreign exchange contracts and options, a hypothetical 10% adverse change in the value of all our foreign currency positions relative to the United States dollar as of December 31, 2022 would result in a $90 million, pre-tax loss for our net monetary assets denominated in currencies other than United States dollars. As of December 31, 2022, we did not have any interest rate swaps outstanding and our outstanding debt has fixed interest rates.

There are certain limitations inherent in the sensitivity analysis presented, primarily due to the assumption that exchange rates and interest rates change instantaneously in an equally adverse fashion. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled. While this is our best estimate of the impact of the various scenarios, these estimates should not be viewed as forecasts.

For further information regarding foreign currency exchange risk, interest rate risk, and credit risk, see Note 15 to the consolidated financial statements.

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ENVIRONMENTAL MATTERS

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note 10 to the consolidated financial statements and "Part I, Item 1(a). “Risk Factors.”

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Forward-looking information is based on projections and estimates, not historical information. Some statements in this Form 10-K are forward-looking and use words like “may,” “may not,” “believe,” “do not believe,” “plan,” “estimate,” “intend,” “expect,” “do not expect,” “anticipate,” “do not anticipate,” “should,” “likely,” and other expressions. We may also provide oral or written forward-looking information in other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of our operations may vary materially.

We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events or for any other reason. You should review any additional disclosures we make in our press releases and Forms 10-K, 10-Q, and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.

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Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.

Information related to market risk is included in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Instrument Market Risk” and Note 15 to the consolidated financial statements.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the consolidated and combined financial statements included in "Item 8. Financial Statements and Supplementary Data" contained herein.

EXECUTIVE OVERVIEW

Financial results

The oil and gas industry continued to be impacted from shutdowns and mitigation efforts related to the COVID-19 pandemic during 2021, though there are signs that business activity around the world has adjusted and continues to improve. Despite these difficulties, in 2021 we demonstrated resilience and a strong commitment to our execution culture and delivered increased revenues, operating income, and cash flows from operations. The following graph illustrates our revenue and operating margins for each operating segment over the past three years.

During 2021, we generated total company revenue of $15.3 billion, a 6% increase from the $14.4 billion of revenue generated in 2020, with our Completion and Production (C&P) segment increasing by 7% and our Drilling and Evaluation (D&E) segment increasing by 4%. These increases were driven primarily by increased demand for our products and services in North America land tied to a substantial improvement in the North America land rig count during 2021. We reported total company operating income of approximately $1.8 billion in 2021. This compares to operating loss of $2.4 billion in 2020 that was driven by $3.8 billion of impairments and other charges as a result of the unprecedented downturn in the oil and gas industry, including a significant decline in pressure pumping services in North America land, caused by the COVID-19 pandemic.

Internationally, revenue improved 2% in 2021 compared to 2020, primarily driven by higher activity for drilling and completions related services in Latin America which were partly offset by lower activity in the Eastern Hemisphere. Despite an 8% reduction in the international rig count during 2021, we improved our overall international margin.

Our North America revenue increased 11% in 2021 compared to 2020, resulting from higher activity and pricing in North America land primarily associated with increased stimulation and well construction services. While the North America land rig count is increasing, it is still below pre-pandemic levels. Even without improved pricing, we took advantage of the recovery in completions and drilling activity in 2021 and delivered margin improvement, demonstrating the operating leverage from our cost reductions and service delivery improvements in North America.

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Sustainability and Energy Advancement

In the first quarter of 2021, we announced our target to achieve 40% reduction in Scope 1 and 2 emissions by 2035 from the 2018 baseline. This is consistent with our goal to reduce the carbon footprint and environmental impact of our operations and follows our commitment to set science-based targets. We continue to pursue our strategic initiatives around advancing cleaner, affordable energy, and using innovation and technology to reduce the environmental impact of producing oil and gas. We are continuing to develop and deploy low-carbon solutions to help oil and gas operators lower their current emissions profiles while also using our existing technologies in renewable energy applications. In addition, Halliburton Labs added eleven participating companies during 2021. Through Halliburton Labs, we gain insight into the energy transition value chain and foster the development of technologies that may help reduce the world’s carbon footprint. Also, for 2021, we were named to the Dow Jones Sustainability Index North America for Energy Equipment and Services, which highlights the top 10% most sustainable North America companies in identified industries, as determined by S&P Global through their Corporate Sustainability Assessment.

Our operating performance and liquidity are described in more detail in “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”

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LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2021, we had $3.0 billion of cash and equivalents, compared to $2.6 billion of cash and equivalents at December 31, 2020.

Significant sources and uses of cash in 2021

Sources of cash:

•Cash flows from operating activities were $1.9 billion. This included a positive impact from the primary components of our working capital (receivables, inventories, and accounts payable) of a net $285 million, primarily associated with increased payables.

Uses of cash:

•In February of 2021, we repaid the $185 million principal balance of our 8.75% senior debentures at maturity.

•In August of 2021, we redeemed the entire $500 million aggregate principal amount outstanding of our 3.25% senior notes at par.

•Capital expenditures were $799 million.

•We paid $161 million of dividends to our shareholders.

Future sources and uses of cash

We manufacture most of our own equipment, which provides us with some flexibility to increase or decrease our capital expenditures based on market conditions. Capital spending for 2022 is currently expected to be $1.0 billion, remaining within our target of approximately 5-6% of revenue. We believe this level of spend will allow us to invest in our key strategic areas. However, we will continue to maintain capital discipline and monitor the rapidly changing market dynamics, and we may adjust our capital spend accordingly.

In 2022, we expect to pay approximately $443 million of interest on debt and approximately $351 million under our leasing arrangements. Payments for interest on our debt arrangements are expected to remain relatively flat for the foreseeable future. See Note 6 and Note 9 to the consolidated financial statements for additional information on expected future payments under our leasing arrangements and debt maturities.

We are not able to reasonably estimate the timing of cash outflows associated with our uncertain tax positions, in part because we are unable to predict the timing of potential tax settlements with applicable taxing authorities. As of December 31, 2021, we had $352 million of gross unrecognized tax benefits, excluding penalties and interest, of which we estimate $266 million may require us to make a cash payment. We estimate that approximately $198 million of the cash payment will not be settled within the next 12 months.

In January of 2022, we announced that our Board of Directors declared a dividend of $0.12 per share for the first quarter of 2022, or approximately $107 million, which represents a $0.075 increase from the quarterly dividend paid during 2021.

Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately $5.1 billion remained authorized for repurchases as of December 31, 2021 and may be used for open market and other share purchases.

In January of 2022, we announced that on February 23, 2022, we will redeem $600 million aggregate principal amount of our 3.8% senior notes that mature in November 2025. The aggregate principal amount currently outstanding is approximately $1.0 billion. We plan to use cash on hand to fund the redemption.

We do not intend to incur additional debt in 2022, as we believe our cash on hand and earnings from operations are sufficient to cover our obligations for the year.

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Other factors affecting liquidity

Financial position in current market. As of December 31, 2021, we had $3.0 billion of cash and equivalents and $3.5 billion of available committed bank credit under our revolving credit facility. We believe we have a manageable debt maturity profile, with approximately $1.6 billion coming due through 2026, which includes the $600 million debt we will redeem on February 23, 2022 as described above. 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. We believe our cash on hand, cash flows generated from operations, and our available credit facility will provide sufficient liquidity to address the challenges and opportunities of the current market and our global cash needs, including capital expenditures, working capital investments, dividends, if any, debt repayment, and contingent liabilities.

Guarantee agreements. In the normal course of business, we have agreements with financial institutions under which approximately $1.9 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of December 31, 2021. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization, however, none of these triggering events have occurred. As of December 31, 2021, we had no material off-balance sheet liabilities and were not required to make any material cash distributions to our unconsolidated subsidiaries.

Credit ratings. Our credit ratings with Standard & Poor’s (S&P) remain BBB+ for our long-term debt and A-2 for our short-term debt, with a stable outlook. Our credit ratings with Moody’s Investors Service (Moody's) remain Baa1 for our long-term debt and P-2 for our short-term debt, with a stable outlook.

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. 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, particularly in weak economic environments, as well as unsettled political conditions. Given the nature and significance of the pandemic and disruption in the oil and gas industry, we have experienced delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies.

Receivables from our primary customer in Mexico accounted for approximately 10% of our total receivables as of December 31, 2021. While we have experienced payment delays in Mexico, these amounts are not in dispute and we have not

historically had, and we do not expect, any material write-offs due to collectability of receivables from this customer.

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BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in more than 70 countries throughout the world to provide a comprehensive range of services and products to the energy industry. Our revenue is generated from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. The industry we serve is highly competitive with many substantial competitors in each segment of our business. In 2021, 2020, and 2019, based on the location of services provided and products sold, 40%, 38%, and 51%, respectively, of our consolidated revenue was from the United States. No other country accounted for more than 10% of our revenue.

Activity within our business segments is significantly impacted by spending on upstream exploration, development, and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption. The COVID-19 pandemic and efforts to mitigate its effect had a substantial negative impact on the global economy and demand for oil in 2020 and 2021. As discussed earlier, although there are signs of improvement in many areas around the world, the potential for new lockdowns and other mitigation efforts to deal with an increase in infection rates or new variants remains a key risk for oil demand.

Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices and our customers' expectations about future prices, global oil supply and demand, completions intensity, the world economy, the availability of capital, government regulation, and global stability, which together drive worldwide drilling and completions activity. Additionally, many of our customers in North America have shifted their strategy from production growth to operating within cash flow and generating returns, and we generally expect that to continue in 2022. Lower oil and natural gas prices usually translate into lower exploration and production budgets and lower rig count, while the opposite is usually true for higher oil and natural gas prices. Our financial performance is therefore significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.

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

The historical average rig counts based on the weekly Baker Hughes rig count data were as follows:

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Business outlook

We believe that commodity prices will remain supportive of our business through 2022. According to the United States Energy Information Administration (EIA) January 2022 "Short Term Energy Outlook," the EIA expects Brent crude oil spot prices to average $75 per barrel for the full year of 2022, an increase of approximately 6% over the full year of 2021 average price per barrel. The EIA expects the WTI spot prices to average $71 per barrel for the full year of 2022, an increase of approximately 4% over full year of 2021 average price per barrel. On January 31, 2022, the Brent crude oil spot price was $89 per barrel and the WTI spot price was $88 per barrel.

The EIA's report projects Henry Hub natural gas prices to average $3.79 per MMBtu for the full year of 2022, a slight decrease over full year of 2021 averages. On January 31, 2022, the Henry Hub natural gas price was $4.87 per MMBtu.

The International Energy Agency's (IEA) January 2022 "Oil Market Report" (OMR) forecasts 2022 global oil demand to reach 100.8 million barrels per day, an increase of 4% from 2021. The EIA reported crude oil production in the United States averaged 11.2 million barrels per day in 2021, and the EIA expects production to average 11.8 million barrels per day in 2022, an approximate 5% increase. In addition, the EIA expects crude oil production in the United States to rise to 12.4 million barrels per day in 2023.

The recent surge of new COVID-19 cases related to the Omicron variant dampened the expectations of some economists regarding economic recovery and increasing demand for oil. For example, due to travel restrictions put in place as a result of Omicron, the global oil demand forecast for 2022 was originally revised down by forecasters, including the IEA and EIA, primarily to account for projected reduced jet fuel use. However, the wave of infections related to the Omicron variant appears to be less severe and potentially of shorter duration than prior waves. Consequently, we and the IEA, do not believe that this surge should overturn the recovery in oil demand that is underway. With widespread vaccination campaigns, and the apparent lower rates of serious illness, and hospitalization resulting from the recent wave, we expect that this wave is likely to have a more muted impact on the economy and demand for oil than previous COVID-19 waves.

Based on our expectations regarding the Omicron variant's impact on the demand for oil and assuming a more severe variant does not become widespread during 2022, we expect international activity growth to maintain momentum and customer spending to increase in the range of 14-16% in 2022, led by operators with shorter-cycle production opportunities committing additional capital to meet increasing oil demand. Internationally, we anticipate projects in the Middle East, Russia, and Latin America to attract the most investment, with lower levels of activity increases in Africa and Europe. While large tenders remain competitive, we see pricing traction on new work and contract renewals, including integrated contracts. We also expect to accelerate work on projects that were delayed or slowed due to pandemic-related travel restrictions.

In North America, consistent with historical trends, the recovery in activity was faster and more pronounced than in the international markets. North America drilling activity outpaced completions as operators prepared well inventory for 2022. Given the stronger commodity price environment, we anticipate customer spending to grow more than 25% in 2022, as compared to 2021, with the highest increase coming from private operators. We expect this will enable us to secure net pricing gains for our fracturing fleet as well as our drilling, cementing, drill bits, and artificial lift businesses. We expect most publicly traded exploration and production (E&Ps) companies to continue to prioritize returns, while delivering production into a supportive market.

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RESULTS OF OPERATIONS IN 2021 COMPARED TO 2020

Consolidated revenue in 2021 was $15.3 billion, an increase of $850 million, or 6%, compared to 2020, mainly due to higher activity and pricing in North America land and Latin America, primarily associated with stimulation services and well construction services. Also, artificial lift activity in North America land and wireline activity in Latin America showed improvements. Partially offsetting these increases were declines in completion tool sales and drilling-related services in the Eastern Hemisphere and lower stimulation activity in Middle East/Asia. Revenue from North America was 42% of consolidated revenue in 2021 and 40% of consolidated revenue in 2020.

We reported consolidated operating income of $1.8 billion in 2021. This compares to an operating loss of $2.4 billion in 2020, driven by $3.8 billion of impairments and other charges taken in 2020. An increase in activity and pricing for stimulation and well construction services in North America land and Latin America during 2021 positively impacted operating results. Also, global wireline activity and project management activity in Latin America and Middle East/Asia improved. These increases were partially offset by lower software sales globally. See Note 2 to the consolidated financial statements for further discussion on impairments and other charges.

OPERATING SEGMENTS

Completion and Production

Completion and Production revenue was $8.4 billion in 2021, an increase of $571 million, or 7%, compared to 2020. Operating income was $1.2 billion in 2021, a 24% increase from $995 million in 2020. These results were primarily driven by increased activity and pricing for pressure pumping services in North America land, Latin America, and Europe Africa/CIS, higher artificial lift activity in North America land, increased well intervention services in Latin America, and increased pipeline services in China, Russia, and the United Kingdom. Partially offsetting these results were decreases in completion tool sales in the Eastern Hemisphere, Canada, and the Gulf of Mexico, along with lower pressure pumping services in Middle East/Asia, the Gulf of Mexico, and Canada.

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Drilling and Evaluation

Drilling and Evaluation revenue was $6.9 billion in 2021, an increase of $279 million, or 4%, from 2020. Operating income was $801 million in 2021, an increase of $232 million, or 41%, compared to 2020. These results were primarily related to increased drilling-related services in the Western Hemisphere, improved project management activity in Ecuador, Mexico, Oman, Saudi Arabia, increased well control activity in Nigeria, and increased wireline activity and testing services in Latin America. These improvements were partially offset by reduced drilling-related services in the Eastern Hemisphere, lower wireline activity and testing services in Saudi Arabia, a decline in software sales globally, and lower project management activity in India and Iraq.

GEOGRAPHIC REGIONS

North America

North America revenue was $6.4 billion in 2021, an 11% increase compared to 2020, resulting from higher activity and pricing in North America land, primarily associated with pressure pumping services, drilling-related services, and artificial lift activity. These increases were partially offset by lower pressure pumping services in Canada and completion tool sales in Canada and the Gulf of Mexico. Also, software sales and wireline activity were lower across the region.

Latin America

Latin America revenue was $2.4 billion in 2021, a 42% increase compared to 2020, resulting primarily from improvements in stimulation activity, well construction services, wireline activity, completion tool sales, and testing services in Argentina, coupled with increased fluid services in the Caribbean and Brazil. Also improving were pressure pumping services, project management activity, testing services, drilling services, and completion tool sales in Mexico, along with improved drilling services in Brazil and increased well intervention services across the region. In addition, project management activity was higher in Ecuador. Partly offsetting these increases were lower completion tool sales in Trinidad and reduced software sales across the region.

Europe/Africa/CIS

Europe/Africa/CIS revenue was $2.7 billion in 2021, a 3% decrease compared to 2020. The decrease was driven by lower activity across multiple product service lines in Russia combined with lower fluid services and completion tool sales across the region, coupled with reduced cementing activity in Nigeria. These declines were partially offset by increases in completion tool sales and cementing activity in Norway, testing services in Algeria, project management activity in Nigeria, pressure pumping services in Angola, pipeline services in the United Kingdom, and wireline activity across the region.

Middle East/Asia

Middle East/Asia revenue was $3.8 billion in 2021, a 9% decrease compared to 2020. The decrease was primarily from reduced activity across multiple product service lines in Saudi Arabia, Indonesia, and United Arab Emirates, lower completion tool sales and pressure pumping services across the region, and reduced project management activity in India and Iraq. Partially offsetting these decreases were higher project management activity and drilling services in Oman and increased pipeline services in China.

OTHER OPERATING ITEMS

Impairments and other charges. During 2021, we recognized $12 million of net charges. This includes $36 million of depreciation catch-up expense related to assets previously classified as held for sale related to our Pipeline and Process Services business, $15 million of severance costs, and $35 million of other items, partially offset by a $74 million gain related to the closing of the structured transaction for our North America real estate assets. This compares to $3.8 billion of impairments and other charges recorded in 2020, consisting of asset impairments primarily associated with pressure pumping and drilling equipment, as well as severance and other costs incurred as we adjusted our cost structure during the year. See Note 2 to the consolidated financial statements for further discussion on these charges.

NONOPERATING ITEMS

Loss on early extinguishment of debt. During the year ended December 31, 2020, we recorded a $168 million loss on the early extinguishment of debt, which included a tender premium, unamortized discounts and costs on the retired notes, and tender fees. See Note 9 to the consolidated financial statements for further information.

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Income tax (provision) benefit. Our tax (provisions) benefits are sensitive to the geographic mix of earnings and our ability to use our deferred tax assets. During 2021, we recorded a total income tax benefit of $216 million on pre-tax income of $1.3 billion, resulting in an effective tax rate of -17.2%. We recorded a tax benefit of approximately $500 million during 2021, primarily due to the partial release of a valuation allowance on our deferred tax assets. This release was based on improved market conditions and reflects our expectation to utilize these deferred tax assets. During 2020, we recorded a total income tax benefit of $278 million on pre-tax loss of $3.2 billion, resulting in an effective tax rate of 8.6%. See Note 11 to the consolidated financial statements for significant drivers of these tax (provisions) benefits.

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RESULTS OF OPERATIONS IN 2020 COMPARED TO 2019

Information related to the comparison of our operating results between the years 2020 and 2019 is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K filed with the SEC and is incorporated by reference into this annual report on Form 10-K.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective, or complex judgments and assessments and is fundamental to our results of operations. We identified our most critical accounting estimates to be:

-    forecasting our income tax (provision) benefit, including our future ability to utilize foreign tax credits and the realizability of deferred tax assets (including net operating loss carryforwards), and providing for uncertain tax positions;

-    legal and investigation matters;

-    valuations of long-lived assets, including intangible assets and goodwill; and

-    allowance for credit losses.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report.

Income tax accounting

We recognize the amount of taxes payable or refundable for the current year and use an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We apply the following basic principles in accounting for our income taxes:

-    a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year;

-    a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards;

-    the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered; and

-    the value of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

We determine deferred taxes separately for each tax-paying component (an entity or a group of entities that is consolidated for tax purposes) in each tax jurisdiction. That determination includes the following procedures:

-    identifying the types and amounts of existing temporary differences;

-    measuring the total deferred tax liability for taxable temporary differences using the applicable tax rate;

-    measuring the total deferred tax asset for deductible temporary differences and operating loss carryforwards using the applicable tax rate;

-    measuring the deferred tax assets for each type of tax credit carryforward; and

-    reducing the deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Our methodology for recording income taxes requires a significant amount of judgment and the use of assumptions and estimates. Additionally, we use forecasts of certain tax elements, such as taxable income and foreign tax credit utilization, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results that could have a material impact on our income tax accounts related to continuing operations.

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We have operations in more than 70 countries. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including net income actually earned, net income deemed earned, and revenue-based tax withholding. Our tax filings are routinely examined in the normal course of business by tax authorities. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each jurisdiction, as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved, the timing and nature of income earned and expenditures incurred. The final determination of tax audits or changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our income tax liabilities for a tax year and have an adverse effect on our financial statements.

Tax filings of our subsidiaries, unconsolidated affiliates and related entities are routinely examined in the normal course of business by tax authorities. These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process. Predicting the outcome of disputed assessments involves some uncertainty. Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate, and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome. We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest, and penalties, as needed based on this outcome. We provide for uncertain tax positions pursuant to current accounting standards, which prescribe a minimum recognition threshold and measurement methodology that a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. The standards also provide guidance for derecognition classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Legal and investigation matters

As discussed in Note 10 of our consolidated financial statements, we are subject to various legal and investigation matters arising in the ordinary course of business. As of December 31, 2021, we have accrued an estimate of the probable and estimable costs for the resolution of some of our legal and investigation matters, which is not material to our consolidated financial statements. For other matters for which the liability is not probable and reasonably estimable, we have not accrued any amounts. Attorneys in our legal department monitor and manage all claims filed against us and review all pending investigations. Generally, the estimate of probable costs related to these matters is developed in consultation with internal and outside legal counsel representing us. Our estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. We attempt to resolve these matters through settlements, mediation, and arbitration proceedings when possible. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, there may be a material adverse effect on our future financial results. We have in the past recorded significant adjustments to our initial estimates of these types of contingencies.

Value of long-lived assets, including intangible assets and goodwill

We carry a variety of long-lived assets on our balance sheet including property, plant and equipment, goodwill, and other intangibles. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our operating income. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We conduct impairment tests on goodwill annually, during the third quarter, or more frequently whenever events or changes in circumstances indicate an impairment may exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

When conducting an impairment test on long-lived assets, other than goodwill, we first group individual assets based on the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets. This requires some judgment. We then compare estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group to its carrying amount. If the undiscounted cash flows are less than the asset group’s carrying amount, we then determine the asset group's fair value by using a discounted cash flow analysis. This analysis is based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets within the asset group, and a discount rate based on our weighted average cost of capital. An impairment loss is measured and recorded as the amount by which the asset group's carrying amount exceeds its fair value. See Note 2 to the consolidated financial statements for further discussion of impairments and other charges.

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We perform our goodwill impairment assessment for each reporting unit, which is the same as our reportable segments, the Completion and Production division and the Drilling and Evaluation division, comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. We estimate the fair value for each reporting unit using a discounted cash flow analysis based on management’s short-term and long-term forecast of operating performance. This analysis includes significant assumptions regarding discount rates, revenue growth rates, expected profitability margins, forecasted capital expenditures, and the timing of expected future cash flows based on market conditions. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is measured and recorded.

The impairment assessments discussed above incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services, and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts. If market conditions deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record additional impairments of the carrying value of our long-lived assets in the future which could have a material adverse impact on our operating results. See Note 1 to the consolidated financial statements for our accounting policies related to long-lived assets.

Allowance for credit losses

We evaluate our global accounts receivable through a continuous process of assessing our portfolio on an individual customer and overall basis. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, financial condition of our customers, and whether the receivables involve retainages. We also consider the economic environment of our customers, both from a marketplace and geographic perspective, in evaluating the need for an allowance. Based on our review of these factors, we establish or adjust allowances for specific customers. This process involves judgment and estimation, and frequently involves significant dollar amounts. Accordingly, our results of operations can be affected by adjustments to the allowance due to actual write-offs that differ from estimated amounts.

At December 31, 2021, our allowance for credit losses totaled $754 million, or 17.8% of notes and accounts receivable before the allowance. At December 31, 2020, our allowance for credit losses totaled $824 million, or 22.5% of notes and accounts receivable before the allowance. The allowance for credit losses in both years is primarily comprised of accounts receivable from our primary customer in Venezuela. A hypothetical 100 basis point change in our estimate of the collectability of our notes and accounts receivable balance as of December 31, 2021 would have resulted in a $42 million adjustment to 2021 total operating costs and expenses. See Note 5 to the consolidated financial statements for further information.

FINANCIAL INSTRUMENT MARKET RISK

We are exposed to market risk from changes in foreign currency exchange rates and interest rates. We selectively manage these exposures through the use of derivative instruments, including forward foreign exchange contracts, foreign exchange options, and interest rate swaps. The objective of our risk management strategy is to minimize the volatility from fluctuations in foreign currency and interest rates. We do not use derivative instruments for trading purposes. The counterparties to our forward contracts, options, and interest rate swaps are global commercial and investment banks.

We use a sensitivity analysis model to measure the impact of potential adverse movements in foreign currency exchange rates and interest rates. With respect to foreign exchange sensitivity, after consideration of the impact from our foreign forward contracts and options, a hypothetical 10% adverse change in the value of all our foreign currency positions relative to the United States dollar as of December 31, 2021 would result in a $83 million, pre-tax, loss for our net monetary assets denominated in currencies other than United States dollars. As of December 31, 2021, we did not have any interest rate swaps outstanding.

There are certain limitations inherent in the sensitivity analysis presented, primarily due to the assumption that exchange rates and interest rates change instantaneously in an equally adverse fashion. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled. While this is our best estimate of the impact of the various scenarios, these estimates should not be viewed as forecasts.

For further information regarding foreign currency exchange risk, interest rate risk, and credit risk, see Note 15 to the consolidated financial statements.

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ENVIRONMENTAL MATTERS

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note 10 to the consolidated financial statements and "Part I, Item 1(a). “Risk Factors.”

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Forward-looking information is based on projections and estimates, not historical information. Some statements in this Form 10-K are forward-looking and use words like “may,” “may not,” “believe,” “do not believe,” “plan,” “estimate,” “intend,” “expect,” “do not expect,” “anticipate,” “do not anticipate,” “should,” “likely,” and other expressions. We may also provide oral or written forward-looking information in other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of our operations may vary materially.

We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events or for any other reason. You should review any additional disclosures we make in our press releases and Forms 10-K, 10-Q, and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.

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Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.

Information related to market risk is included in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Instrument Market Risk” and Note 15 to the consolidated financial statements.

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