Presentation for University of Houston

Bauer College of Business Risk

Management Class March, 2007

Agenda

Halliburton Company Information

Risk Management & Insurance Programs

Separating RM Programs in Major Divestiture

Enterprise Risk Management

Halliburton Overview

Second-largest oilfield services company and leading engineering, procurement and construction company

• # 103 on Fortune 500 ranking• Over $22 billion in annual sales• Equity market cap. of over $30 billion• ROCE in excess of 35%• Approximately 100,000 employees in over 100

countries

Operating Group Overview Energy Services Group provides a broad array of products

and services to help customers explore for and produce oil and gas globally

• Approximately $13 billion in annual sales• Equity market cap. of over $30 billion• ROCE in excess of 40%• Approximately 46,000 employees in nearly 100 countries

KBR provides engineering, procurement, construction, and logistics capability to two main customer segments

• Over $9 billion in annual sales• Equity market cap. of nearly $3.75 billion• ROCE of approximately 11%• Nearly 58,000 employees in over 100 countries• Anticipate full separation to be concluded by April, 2007

Halliburton Operations Worldwide

Top Line Strategies

1

KBR separation to enhance shareholder value

Pure play Energy Services company Dominate North America, continue

to grow in the East Distinct competitive advantages

• Global Footprint• Service Quality• Vertical Integration

Growth• Technology• Acquisitions

Halliburton / Energy Services Group

Halliburton Business Segments

HALLIBURTON

Production Optimization

Drilling, Evaluation &

Digital SolutionsFluid Systems

Reservoir evaluation, advanced well

placement, efficient drilling systems and transform wells into

real-time digital asset

Well construction, drilling and completion

fluids and waste management

Enhance recovery of hydrocarbons over the

life of the asset

▪ Revenue: $4 billion▪ Op. Inc. margin: 25.1%

▪ Revenue: $3.6 billion▪ Op. Inc. margin: 22.2%

▪ Revenue: $5.4 billion▪ Op. Inc. margin: 28.5%

Revenue Profile ($13 billion in 2006)

Production Optimization

Drilling, Evaluation &

Digital Solutions

Fluid Systems

27.5%

41.5%

31%

North America

LatinAmerica

Middle East /Asia Pacific

Europe /Africa

50%

11.5%

17%21.5%

Segment Revenue Geographic Revenue

KBR

28%

12%

28%

32%

E&C(Gas Monetization)

$4.2

E&C (Other)

$1.8

G&I (Middle East)

$4.2

G&I (Other)

$4.8

By Segment

63%

37%

Cost-Reimbursable

$9.5B

Fixed Price $5.5B

KBR: A Leading Global Engineering & Construction Service Provider

Headquarters: Houston, TX

LTM Revenue:(1) $9.8 Billion

Operating History: 100+ years

Employees: ~57,700

Engineers: 4,000+ (Avg. 23 yrs. at KBR)

Countries: 45

Two Operating Segments:

Energy & Chemicals (E&C)

Government & Infrastructure (G&I)

Extensive Service Capabilities:

Engineering, procurement, construction, commissioning and start-up (EPC-CS) to the global oil & gas and petrochemical industries

Defense, logistics, contingency support and infrastructure-related services

$15 Billion Backlog at 9/30/06

(1) As of 9/30/06.

By Contract Type

Investment Highlights

Global Market Leader

Best-in-ClassTechnical Expertise

Strong Management

Team

Blue-ChipClient Base

Improving Financial

Profile

Stringent Risk Management

Compelling E&C Growth

Opportunities

Balanced Project Portfolio

NASA

Architect engineer for Johnson Space Center

1964

First North Sea platform

(BP West Sole)

1947

World’s first offshore platform

(Kerr McGee - Gulf of Mexico)

1942

First fluid catalytic cracking facility

DoD – WWII

Completed 359 destroyer escort and

other vessels

KBR: A History of Successful Innovation

2005

World’s largest ammonia plant at groundbreaking

(BFPL Australia)

2004

Largest CO2

sequestration project (In Salah)

2004

World’s largest LNG plant in operation

(SEGAS)

KBR: How We Walk the Talk Regarding Risk

Implementing a transversal risk awareness program throughout the organization

Instituted Business Development Oversight capability to insure transparency and best practices on all new projects and provide a “double regard” on project risk and returns

Separating project management oversight, estimating, scheduling, and project controls outside of business unit

Clearly defined delegation of authority at divisional, corporate, and board levels

KBR’s Objective: To be the industry leader in risk awareness and risk management

IdentifyProspect

Invitation to Bid

Sales

Technical

Review

Commercial

Review

KBR Mgmt.

Executive Comm.

KBRBoard

Division Executive

Prospecting Risk Review Stages

Corporate

BusinessDevelop-

mentOversight

Fixed Price Contracts < $25MM$25 to

$250MM >$250MM

Authorization Limits

ProjectExecution

OngoingMonthly Review

Stringent Risk Review Process Targets Improved Results

Risk Management

Risk Management Risk Management AccountingAccounting

Medical Medical ManagementManagement

Global Insurance Global Insurance Programs & SystemsPrograms & Systems

ClaimsClaims

Risk Management Risk Management Services Services

Enterprise Risk Enterprise Risk ManagementManagement

Litigation Litigation ManagementManagement

RM ServicesRM Services

- Design, implement and administer project insurance programs

- Identify and evaluate risk exposures

- Business acquisition and execution support

Global Insurance ProgramsGlobal Insurance Programs

- Design and place Company and worldwide insurance plans

- Implement and administer insurance policies

- Manage internal communication and support

Global Claims

- Employee Claims

- General Liability Claims- Eastern Hemisphere Auto Liability Claims- Cargo Claims- Personal Effects Claims

- Property Claims

- Hull and Aircraft Claims

Medical Management

- Return to work- Medical case management- Absence case management

- STD, LTD, FMLA- Health care provider

management- Medical treatment protocols- Corporate Medical Director

Risk Management Accounting

- Retained risk program administration

- Record maintenance- Accounting system & compliance- Reporting

- Invoice processing and payment- Cost distribution

Other Activity

- Law Department / Liability Claims- Investigate & manage claims - Identify and evaluate risk exposures- Loss prevention support

- RM systems and data management- Underwriting and compliance info- Reporting

Business Services

Conduct risk management due diligence for acquisitions and mergers

Identify exposures arising from business activities Determine desired means of managing exposures to risk of loss Obtain insurance required by and in accordance with applicable laws Review contract proposals for consistency with insurance programReview bids to determine project specific insurance and bond needsProvide evidence of insurance coverage or other required documentation to operating groups, customers, regulatory agencies, and courtsExecute project insurance and bonding requirements

Insurance Purchasing Philosophy

The Company will assess the effects on its business activity of casualty, commercial, operational, financial and environmental risks, applying consistent techniques in the management of those risks.

Insurance transfer mechanisms will be employed only in the following circumstances:

catastrophic risks where feasible and economical

exposures that can be insured at a cost less than expected losses

where required by law or contract

General Liability – 3rd party liability or civil liability Auto Liability – Liability resulting from use of vehicles Workers’ Compensation – Statutory requirements Employer’s Liability – Covers liability to employees Excess Liability Cargo Property – Fixed facilities Vessels - Hull & Machinery Protection & Indemnity Other Corporate Coverages

Fiduciary Liability Crime Director’s & Officer’s Liability

Global Insurance Placements

Halliburton Co. Summary of Insurance (as of February 2007)

*

$135-140M - AWAC

GL - Ded. $5M AL - Ded. $5M EL - Ded. $5M Ded. $1M Ded. Nil Ded. $250K Ded. $250K Ded. $1M Ded. $10K Ded. $2M Ded. $1MDed. $2.5M Ded. $10M

Crime$25M -

AW

AC

/

Axis/L

lo

$10-25M Hartford Ins.$20-30M - Ded - $10M

$10MM XS of 5MM - Lloyd's $10M - HCC $10M$3MM XS of 2MM - Lloyds (part of deductible)

$10MM XS of 40MM - Ace USA $40-55M HCC Global

$25M Per Shipment / $50M Aggragate Cap

ELU - $25M$25MM XS of 15MM - AIG $25-40M National Union

Watercraft Cargo WC$55-70M AWAC CNA - $10MAxis - $10M

Per Schedule Lloyd's

Stat. Limits Ace, USA

$100M USAIG

Per Schedule Lloyd's / St. Paul /

Navigators

Fiduciary Liability$70-85 Max Re, LTD

$1

00

M - L

ex

ing

ton

Ins

. Co

.

$50MM XS of 50MM - XL (Bermuda)$85-100M RSUI

$100M Lloyd's / St. Paul /

Navigators

Well Control AircraftOffshore Property

$110-120M HCC Global

$100-110M Starr

$225M X

S o

f 25M - S

R In

ternatio

nal In

s. Co

mp

any

D&O

Side A DIC$185-195M ACE

$170-185M Arch

$150-160M Starr

$140-150M Hartford

$120-135M RLI

$150MM XS $450MM Bermuda Companies (ACE /Starr Excess)

Onshore Property

$400M X

S o

f $100M - X

L In

suran

ce Co

mp

any (B

urm

ud

a)

$250 XS

of 250M

- Llo

yd's, L

on

do

n an

d S

R In

ternatio

nal

Insu

rance C

o.

$500M - A

IG / Z

urich

/ AC

E

$100MM XS $350MM Bermuda Companies (Arch/AWAC/XL)

$250MM XS of 100MM Lloyd's & London Companies

$250M - G

reat Lakes In

suran

ce Co

mp

any (M

un

ich R

e)

Excess LiabilityGL AL EL

Separating RM Programs in Major Divestiture

Divestiture Scenario

Existing organization: Parent Company with two major operating divisions (Energy Services Group and KBR)

• RM organization• Insurance programs

Plan: Separation into two independent companies• Reasons• Method• Timing

RM/Insurance Considerations• Establishment of RM function and capability• Design and implementation of new, separate insurance placements for KBR• Create top rate program(s) while minimizing cost impact to both groups• Complete separation by or contemporaneously with effective date of

transaction

Risk Assessment and Enterprise Risk Management

First – Risk Assessment Process

Why implement a formal risk assessment process at Halliburton?

To satisfy NYSE corporate governance rules and Sarbanes Oxley internal controls requirements that dictate Halliburton have a formal approach for identification, evaluation and management of risks faced by the Company.

Purpose

To develop and implement a plan that will enable the Company to demonstrate its activities to assess its business risk exposures and the effectiveness with which those risks are managed. Risks are defined as any events the occurrence of which has the potential for significant impact to the Company.

What we did to develop and put a Halliburton risk assessment process in place

A team was formed to establish a system for:- Identification and categorization of risk exposures- Determination of executive responsibility for each

risk category- Assessment of specific risk’s impact on Company

success- Ascertain controls in place for management of the

risks- Develop documentation and reports to

demonstrate functioning of the process

Basic Risk Categories

·   Strategic – Factors that may interfere with the execution of Halliburton’s strategies and objectives such as reputation risks, adverse publicity, investor and analyst confidence and general and industry economic conditions.

·   Financial - Risks associated with Halliburton's capital structure, liquidity, margin erosion, tax burden, foreign exchange volatility and credit risks.

·   Legal & Regulatory - Traditional liability and regulatory compliance, as well as the vulnerability of intellectual capital and effectiveness of business transactions.

Basic Risk Categories, cont’d

 . Human Capital – Critical areas such as employee selection, retention and turnover, compensation, executive effectiveness, depth and succession planning.

·   Political – The affect of domestic and international politics, in addition to traditional nationalization, confiscation and trade disruption risks.

·   Operational & Project –Business-specific exposures such as contract performance, project and business entity management, customer relations, environmental damage and crisis management.

·   Technology - Product and process obsolescence, systems security and effectiveness and network liability.

Management Responsibility for Risk Exposures

Category Responsible Executive Position

Strategic Risks Corporate CEO

Financial Risks Corporate CFO

Legal & Regulatory Risks Corporate General Counsel

Human Capital Risks HR VP

Political Risks Corporate General Counsel

Operational & Project Risks Corporate COO

Technology Risks CIO/VP Tech (ESG)

Risk Ranking Scoring System

Significance: This rating is based on the potential negative impact to the Company if a single significant adverse event or situation or a continuing series of connected events occurred within a specific risk exposure. The score is based on the largest monetary impact realistically possible for a particular event.

1 – Less than $5mm 2 – Between $5 - $50mm 3 – Between $50 - $125mm 4 – Between $125 - $500mm 5 – More than $500mm

Risk Ranking Scoring System, cont’d

Likelihood: This rating is the quantification of how often a loss will occur within a specific risk exposure. The score here is based on how often it is thought that an event of the most significance within the particular risk exposure will happen.

1 – Extremely rare, not expected to occur once in 20 years2 – Rare, may occur once in 10 years3 – Periodic will probably happen in the next 5 years4 – Recurrent, almost certain to happen in the next 2 years5 – Frequent, multiple times per year

Top Ten Risks – Absolute BasisCorporate Level

Risk Absolute Consequence

Absolute Likelihood Severity

1 Mass Toxic Tort Liability >$500 million Recurrent Extreme

2 Damage to Reputation/Image >$500 million Recurrent Extreme

3 Unfavorable Public Relations >$500 million Recurrent Extreme

4 Unsuccessful Projects >$500 million Recurrent Extreme

5 Failure to Maintain Adequate Internal Financial Controls

>$500 million Periodic High

6 Legal Mistakes in Business Transactions >$500 million Periodic High

7 Shareholder Class Action and Derivative Liability

>$500 million Periodic High

8 Loss of Investor/Analyst Confidence >$500 million Periodic High

9 Adverse Action by Competition >$500 million Periodic High

10 General Economic Slowdown >$500 million Periodic High

Top Ten Risks – Controlled BasisCorporate Level

Name Controlled Consequence

Controlled Likelihood

Controlled Risk

1 Unsuccessful Projects $125-$500 million Recurrent Extreme

2 Damage to Reputation/Image >$500 million Periodic High

3 Adverse Action by Competition >$500 million Periodic High

4 General Economic Slowdown >$500 million Periodic High

5 Inaccurate Budget/Business Planning $125-$500 million Periodic High

6 Failure to Maintain Adequate Internal Financial Controls

>$500 million Rare High

7 Loss of Investor/Analyst Confidence >$500 million Rare High

8 Unavailability of Catastrophic Insurance Coverage

>$500 million Rare High

9 Inadequate Planning in M&A Implementation

>$500 million Rare High

10 Retained Risk from Divestitures >$500 million Rare High

4. Joint Venture Management Failure

Description: Financial losses from unsuccessful business performance. Improper accounting leading to misstatements in accounts.

Absolute With Controls

Significance 3 3

Likelihood 5 3

Gross Total Score 15 9

Adjusted Classification High Moderate

Controls: Specific process for approval of and formation of joint venturesManagement oversightInternal audit for compliance with company procedures

Next Stage – Enterprise Risk Management

ERM Progress – 2004 To Date Risk Assessment

• Established ESG ELT Risk Committee in Q3 2006

• Efforts focused so far on following areas:

− Legal

− Business operations

− Information technology

− Internal controls and SEC documentation

• Completed “ballpark” assessment of largest exposures

− High margin of error

− Need for better and more detailed process

Risk Mitigation

• Insurance program

• Contractual risk transfer

• Company policies and internal controls (i.e. HSE, financial controls, COBC hotline, etc.)

• Increased awareness of exposures and consequences

Monitoring

• In compliance with regulatory requirements

• Documented risk assessment work to date

• Annual Audit Committee updates

ERM Objectives Enhance existing risk management process that leads to:

• Higher returns on capital

• Better margins

− Reduce severity and frequency of losses

• Reduced cash-flow volatility

• Lower risk profiles for acquisitions

• Reduced risk of unsuccessful projects and poor execution

• Remaining in compliance with NYSE rule and Sarbanes Oxley guidance that require a formal approach to identification, evaluation, and management of risks faced by the Company

• Incremental costs less than $500,000 annually

Risk management process overview:• Risk Assessment

− Identify, understand, and prioritize exposures

− Prioritize based on size of exposure and likelihood of occurrence

• Risk Mitigation

− Avoidance or transfer of unacceptable levels of risk

• Monitoring

− Ongoing monitoring of existing and new exposures and proper documentation of process

ERM OrganizationHalliburton Senior Management

Operations Advisory Committee-Sr. VP Division (2)-Sr. VP Strategy

-Sr. VP Western Hemisphere-Sr. VP Eastern Hemisphere

-Sr. VP Technology-Sr. VP BD

ERM CommitteeChairman: Craig Nunez-Director Risk Management

-VP Internal Audit and Controls-Law Department Representative

Corporate Advisory Committee-Sr. VP & CAO

-Sr. VP Commercial Law-VP HR & Administration

-Sr. VP Litigation-CIO

-Sr. VP Supply Chain Management-VP Corporate Development

-VP Tax Services

Resources-Charles Muchmore

George Jones-Robert Bush-Tim McKeon

-Abu Zeya-Richard Whiles

Subject Matter Experts ("SME")To be determined as needed

Roles of ERM Participants

ERM Committee

• Lead ERM process and make decisions

• Recruit Subject Matter Experts (“SME’s”)

• Utilize resources when necessary

• Liaise with Audit Committee

• Obtain input and assistance from the Advisory Committees as appropriate

Subject Matter Experts

• Called upon to provide expertise and assistance in their area as needed

Advisory Committees

• No decision making responsibility

• Sounding boards for initiatives created in ERM

• Door-opener within the organization to facilitate implementation of ERM

2007 Plan Risk Assessment

• Refine estimates of previously identified exposures

• Perform assessments in remaining areas:

− Business operations

− Mergers & Acquisitions group

− Legal

− IT

− Business Development

− Finance & Accounting

− Supply Chain Management

− Human Resources

Risk Mitigation

• Reassess insurance philosophy in light of findings

• Continue to quantify value of mitigation efforts

• Transfer mitigation best practices among business lines and geographic regions

Monitoring

• Fully integrate risk management into a sustainable process

• Continue documentation of new information

• Communication and training

• Report to Board Audit Committee by December 2007

Q&A