Halliburton Company — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Halliburton provides services and products to the oil and natural gas industry through Completion and Production and Drilling and Evaluation segments.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $7.050 billion | $7.348 billion; down 4% |
| Operating income (loss) | $(548) million | $970 million; includes $1.208 billion of 2015 charges |
| Net income (loss) attributable to Halliburton | $(643) million; $(0.76) per diluted share | $622 million; $0.73 per diluted share |
| Operating cash flow | $812 million | $954 million |
| Capital expenditures | $704 million | $643 million |
| Cash flow less capital expenditures | $108 million | $311 million |
| Cash and equivalents | $2.294 billion | $2.291 billion at December 31, 2014 |
| Long-term debt | $7.841 billion | $7.840 billion at December 31, 2014 |
| Total assets / shareholders’ equity | $30.587 billion / $15.623 billion | $32.240 billion / $16.298 billion at December 31, 2014 |
Reported operating margin was approximately negative 7.8%, versus 13.2% a year earlier. Before the separately presented impairment and other charges, segment operating income was $768 million, down from $1.059 billion. Completion and Production revenue was $4.246 billion and operating income $462 million; Drilling and Evaluation revenue was $2.804 billion and operating income $306 million. Both segments’ revenue declined 4%.
Cash increased by $3 million during the quarter. Halliburton reported $3.0 billion available under its revolving credit facility and $105 million in fixed-income investments. It paid $153 million in dividends; the quarterly dividend was $0.18 per share.
Material changes and unusual items
- Revenue fell 4%, while operating results shifted to a loss, primarily due to $1.208 billion of impairments and other charges. These included $309 million of inventory write-downs, $303 million of fixed-asset impairments, $165 million of intangible-asset impairments, and $134 million of severance costs, along with closures and other items.
- Other expense was $224 million, compared with $31 million a year earlier, principally reflecting a $199 million Venezuelan foreign-exchange loss. Halliburton began remeasuring Venezuelan bolívar monetary assets at the SIMADI market rate of 192 bolívares per U.S. dollar, versus its prior 6.3 rate.
- North America revenue declined 9% overall; Europe/Africa/CIS revenue declined 16%. Middle East/Asia revenue increased 13%, supported by activity in Saudi Arabia. Worldwide average rig count was 2,950, down from 3,644.
- Receivables declined to $6.419 billion from $7.564 billion at year-end; inventories declined to $3.467 billion from $3.571 billion. Operating cash flow included a $763 million cash source from receivables, offset in part by other working-capital movements.
Outlook, acquisition, and risks
- Management expected the remainder of 2015 to be challenging, with continued near-term activity declines and pricing pressure. It anticipated further reductions in revenue and operating margins in Q2 and said additional cost reductions might be needed; any resulting charges were expected to be significantly below Q1’s amount. Workforce reductions were expected to generate savings beginning in Q2.
- 2015 capital spending was expected to be approximately $2.8 billion, down from $3.3 billion in 2014. Management cited longer-term energy demand and strategic investment as reasons to continue investing through the downturn.
- The pending Baker Hughes acquisition was expected to close late in the second half of 2015, subject to regulatory approvals and other conditions. Estimated consideration was approximately 490 million Halliburton shares and $8.3 billion cash. Halliburton had an $8.6 billion bridge-financing commitment and had not drawn on it at March 31. In April, it announced plans to market businesses with approximately $2.8 billion of associated assets for sale to address competition concerns.
- Macondo-related liabilities totaled $805 million at quarter-end, including $733 million associated with Halliburton’s proposed $1.1 billion settlement. The settlement and related court rulings remained subject to approvals, conditions, and appeals. Additional loss contingencies could not be reasonably estimated; the company warned developments could materially affect liquidity and results. Approximately $170 million of insurance recovery was being pursued but had not been recognized.
- Other disclosed exposures include Venezuelan customer receivables of $437 million, of which $130 million were classified as long-term; ongoing Angola and Iraq compliance investigations; environmental matters; and an FLSA classification matter for which a liability was recorded. The company also reported approximately $2.0 billion of outstanding letters of credit, bank guarantees, or surety bonds.
- Management said it believed current liquidity and financing flexibility were reasonable. Standard & Poor’s had placed Halliburton’s ratings on negative watch following announcement of the Baker Hughes transaction. Disclosure controls were reported effective, and the filing reported no material change in risk factors from the 2014 Form 10-K.
Important facts for investors to verify
- Whether Q2 activity, pricing, and margins deteriorated as management anticipated, and whether cost reductions delivered the expected savings.
- The final amount, timing, financing mix, regulatory conditions, and divestiture proceeds for the Baker Hughes transaction, including any effect on leverage and credit ratings.
- Developments in Macondo settlement approval and appeals, potential additional liabilities, and the collectability of insurance or indemnity recoveries.
- Collection and currency risks associated with Venezuelan receivables and the effect of further exchange-rate changes.
- Whether the $2.8 billion capital-spending plan and operating cash generation remain adequate amid weaker activity and customer payment risk.