Business context and reporting period
Halliburton Company filed this Form 10-Q for the quarter ended September 30, 2014. It provides oilfield services and products worldwide through Completion and Production and Drilling and Evaluation. Unless otherwise noted, figures are in U.S. dollars.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $8.701 billion | $7.472 billion | $24.100 billion | $21.763 billion |
| Operating income | $1.634 billion | $1.108 billion | $3.798 billion | $1.994 billion |
| Income from continuing operations | $1.139 billion | $709 million | $2.533 billion | $1.344 billion |
| Net income attributable to Halliburton | $1.203 billion | $706 million | $2.599 billion | $1.332 billion |
| Diluted earnings per share | $1.41 | $0.79 | $3.05 | $1.45 |
Revenue rose 16% in the quarter and 11% for the nine-month period. Operating income increased 47% and 90%, respectively. Operating margin was approximately 18.8% in Q3 2014 versus 14.8% in Q3 2013, and 15.8% for the first nine months of 2014 versus 9.2% in 2013.
- Cash flow: Nine-month operating cash flow was $2.913 billion, capital expenditures were $2.284 billion, and cash declined $327 million to $2.029 billion. Operating cash flow less capital expenditures was approximately $629 million.
- Liquidity and debt: At September 30, cash and equivalents were $2.029 billion, fixed-income investments were $280 million, and available committed revolving credit was $3.0 billion. Long-term debt was $7.816 billion, unchanged from year-end 2013.
- Capital returns: Halliburton repurchased $800 million of stock and paid $381 million in dividends in the first nine months. Approximately $5.7 billion remained authorized for repurchases.
- Balance sheet: Total assets were $31.583 billion and total liabilities were $16.065 billion at September 30, 2014.
Material changes versus the prior comparable period
- Q3 revenue growth was led by U.S. land stimulation activity and higher activity across service lines, particularly in the Eastern Hemisphere. Completion and Production revenue increased 20%; Drilling and Evaluation revenue increased 10%.
- For the first nine months, Completion and Production revenue rose 14%, while Drilling and Evaluation revenue rose 6%. Latin America was weaker: regional revenue declined 3% and Drilling and Evaluation operating income declined 39% for the nine-month period.
- Reported operating income benefited from $195 million of favorable Macondo-related adjustments in 2014. The comparable 2013 nine-month period included a $1.0 billion increase in the Macondo loss contingency, a $55 million charitable contribution charge, and $54 million of restructuring charges. These items make year-over-year operating income growth less representative of underlying operations.
- Q3 net income included $66 million of income from discontinued operations, primarily a $63 million gain from settling a tax-sharing dispute with former subsidiary KBR.
- Cash and equivalents decreased from $2.356 billion at December 31, 2013. Receivables, inventories, and accounts payable increased by a net $1.0 billion, primarily reflecting higher activity.
Outlook, management commentary, risks and unusual items
- Management cited long-term energy demand and increasingly complex resource development as supportive of service demand. It expected Eastern Hemisphere activity to keep expanding and anticipated that region’s strongest quarter of 2014 in Q4, partly due to seasonal software and equipment sales. Management expected Latin American activity to improve for the remainder of the year after a challenging period.
- 2014 capital expenditures were expected to be approximately $3.2 billion. In October, the Board approved a 20% increase in the quarterly dividend, from $0.15 to $0.18 per share. No full-year earnings or revenue guidance was stated in the provided filing text.
- Macondo: Halliburton agreed, subject to court approval and other conditions, to pay $1.1 billion to settle a substantial portion of claims, in three installments over two years; approximately $395 million was expected to be paid over the next year. The recorded Macondo loss contingency was $1.2 billion at quarter-end. The court assigned Halliburton 3% of fault and found its conduct negligent, but not grossly negligent; the ruling was subject to appeal. The settlement was not final, other claims remained unresolved, and the company warned that further developments could materially affect liquidity and results.
- Halliburton recorded $95 million of expected insurance recovery related to the settlement. Insurers disputed a further potential $200 million recovery, which was not recognized in the financial statements.
- Venezuela: Trade receivables were $653 million, about 9% of gross trade receivables, including $215 million classified as long-term. The company reported collection delays and continued to remeasure Bolivar-denominated net assets at the official exchange rate. It estimated that using alternative 2014 exchange mechanisms could have produced a $69 million to $128 million currency loss for Q3.
- Other disclosed exposures included ongoing securities litigation, investigations concerning operations and third-party agents in Angola and Iraq, and a DOJ inquiry involving pressure-pumping services. The company said outcomes could not be predicted. It also had approximately $2.4 billion of letters of credit, bank guarantees, and surety bonds outstanding; certain arrangements could require cash collateralization.
Important facts for investors to verify
- Whether the Macondo settlement received final court approval, its payment timing, and the outcome of appeals and remaining claims.
- Whether Halliburton recovered the disputed $200 million of insurance proceeds and how Macondo estimates or indemnification claims changed after quarter-end.
- Collection progress on Venezuelan receivables, their classification, and any foreign-exchange or customer-credit impacts.
- Whether operating performance excluding the $195 million Macondo benefit and other unusual prior-year charges supports the reported improvement.
- Actual 2014 capital spending, cash generation, share repurchases, and the effect of the higher dividend on liquidity.