HALLIBURTON CO (HAL) FY 2021 MD&A

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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[table omitted - see filing]