Halliburton Company (NYSE: HAL) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Halliburton provides products and services to the energy industry through Completion and Production and Drilling and Evaluation segments, operating in more than 70 countries.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Revenue | $5.804 billion | $5.357 billion | +8% |
| Operating income | $1.037 billion | $846 million | +23% |
| Operating margin | 17.9% | 15.8% | +2.1 percentage points |
| Net income attributable to Halliburton | $716 million | $544 million | +32% |
| Diluted earnings per share | $0.79 | $0.60 | +32% |
Q3 net margin was approximately 12.3%, compared with 10.2% a year earlier. Segment revenue rose 11% in Completion and Production and 4% in Drilling and Evaluation. Revenue increased 17% internationally, while North America was approximately flat year over year.
| Nine-month metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $17.279 billion | $14.715 billion | +17% |
| Operating income | $3.025 billion | $1.731 billion | +75% |
| Net income attributable to Halliburton | $1.977 billion | $916 million | +116% |
| Diluted earnings per share | $2.19 | $1.01 | +117% |
Nine-month operating income growth reflects stronger segment results and the absence of $366 million of impairments and other charges recorded in 2022. 2023 results also include $104 million of pre-tax losses on Argentina Blue Chip Swap transactions and $36 million of SAP S/4 migration expense.
Cash flow, balance sheet, and capital returns
- Operating cash flow for the first nine months was $2.048 billion, versus $1.079 billion in 2022. Capital expenditures were $980 million, compared with $661 million. Operating cash flow less capital expenditures was approximately $1.068 billion, versus $418 million.
- Cash and equivalents were $2.036 billion at September 30, 2023, down from $2.346 billion at December 31, 2022. Long-term debt was $7.783 billion, versus $7.928 billion. Cash less reported long-term debt implies net debt of about $5.747 billion.
- Current assets were $11.600 billion and current liabilities $5.419 billion; inventory was $3.336 billion, up from $2.923 billion at year-end. Working-capital movements reduced nine-month operating cash flow by a net $798 million, primarily due to receivables and inventory.
- The company had $3.5 billion available under its committed revolving credit facility, which expires in April 2027. Management said liquidity was sufficient for expected needs. Approximately $475 million of debt maturities were expected from 2025 through 2027.
- Halliburton repurchased 16.1 million shares for $546 million and paid $433 million in dividends during the first nine months. The quarterly dividend was $0.16 per share; approximately $4.3 billion remained authorized for repurchases at September 30.
Material changes and management commentary
International activity was the main driver of Q3 growth: international rig counts rose 11% year over year, while the North America average rig count fell 13%. Management attributed segment gains to stronger international stimulation, completion tool sales, cementing, fluids, wireline, and drilling services. North American land pressure pumping and drilling-related activity were weaker.
Management expects lower North America land activity in Q4 2023 due to seasonality and holidays, and high-teens year-over-year international growth. It expects upstream investment and demand for its products and services to remain strong in 2024 and the foreseeable future. 2023 capital spending is expected to remain within a target of approximately 5–6% of revenue. The company’s capital-return framework targets returning at least 50% of annual free cash flow through dividends and share repurchases.
Market conditions include commodity-price volatility, inflation, supply-chain delays, geopolitical conflicts, and uncertainty about demand and economic growth. Management noted that lower U.S. land rig activity and pricing contributed to North American market softness. Its outlook relies in part on external energy-price and demand forecasts and is subject to change.
Risks, contingencies, and unusual items
- IRS tax dispute: Halliburton received a Notice of Proposed Adjustment concerning the 2016 tax treatment of a $3.5 billion Baker Hughes termination fee. The IRS proposes reclassifying approximately 95% of the deduction. Halliburton disputes the adjustment and plans to contest it. If the IRS position ultimately prevails, the company estimates cash taxes of approximately $650 million, plus interest. No additional payment is currently required; management does not expect resolution within 12 months.
- Customer collections: A primary customer in Mexico represented approximately 10% of receivables at September 30. Halliburton reported payment delays but said amounts were not disputed and it did not expect material write-offs.
- Guarantees and supplier finance: Approximately $2.4 billion of letters of credit, bank guarantees, and surety bonds were outstanding; certain instruments could require cash collateral if triggering events occur, none of which had occurred. Supplier-finance obligations included in accounts payable totaled $320 million.
- Argentina currency controls: Blue Chip Swap transactions resulted in a $104 million pre-tax loss during the first nine months, reflecting restrictions on access to U.S. dollars and remittance of cash.
- SAP S/4 migration: The project is expected to run through the end of 2025, with estimated total investment of approximately $250 million; $36 million had been spent through September 30.
- The company reported that ordinary-course legal and governmental proceedings were not expected by management to have a material adverse effect. It reported no material changes to previously disclosed risk factors and no material change in market-risk exposure.
Most important facts for investors to verify
- Whether international growth and the Q4 high-teens outlook are achieved, and how seasonal North America weakness affects results.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside the pace of capital spending.
- Progress and potential financial exposure from the IRS dispute, including the estimated $650 million tax amount and possible interest.
- Customer payment timing in Mexico and the concentration of receivables.
- Execution and total cost of the SAP S/4 migration, and whether shareholder returns remain consistent with the stated free-cash-flow framework.