Halliburton Company — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Halliburton provides services and products to the upstream oil and gas industry through Completion and Production and Drilling and Evaluation. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $7,472 | $7,111 | $21,763 | $21,213 |
| Operating income | $1,108 | $954 | $1,994 | $3,178 |
| Operating margin | 14.8% | 13.4% | 9.2% | 15.0% |
| Net income attributable to Halliburton | $706 | $602 | $1,332 | $1,966 |
| Diluted EPS | $0.79 | $0.65 | $1.45 | $2.12 |
Q3 revenue was a company quarterly record. International revenue was 48% of consolidated revenue in Q3, compared with 45% a year earlier. For the first nine months, revenue increased 3%; revenue outside North America grew 16%, while North American revenue fell 7%. Segment revenue in Q3 rose 5% in both Completion and Production and Drilling and Evaluation. Nine-month Completion and Production revenue declined 1%, while Drilling and Evaluation increased 8%.
Nine-month operating income fell 37%, principally reflecting a $1.0 billion Macondo-related charge recorded in 2013 versus $300 million in 2012. Other 2013 items included a $55 million charitable contribution and $54 million of restructuring charges. Q3 operating income improved 16% year over year despite $54 million of restructuring charges; the prior-year quarter included a $48 million earn-out charge and a $20 million patent-settlement gain.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $2.549 billion; capital expenditures were $2.075 billion. The resulting $474 million difference is a simple operating-cash-flow less capex measure, not a company-defined free-cash-flow figure.
- Cash and equivalents were $1.491 billion at September 30, down from $2.484 billion at December 31, 2012. Cash flow included $4.356 billion for share repurchases, $337 million of dividends, and $2.968 billion net proceeds from long-term borrowings.
- Long-term debt carrying value increased to $7.816 billion from $4.820 billion. The company issued $3.0 billion of senior notes in August, with maturities from 2016 to 2043.
- Halliburton reported $273 million of fixed-income investments and $3.0 billion available under its revolving credit facility. Current assets were $12.890 billion and current liabilities $4.762 billion. Management said it expected remaining-2013 capital spending, working-capital needs and dividends to be funded from operating cash flow.
- Nine-month capital spending was $2.1 billion; fourth-quarter 2013 capital expenditures were forecast at approximately $800 million. The quarterly dividend was $0.125 per share.
Outlook, commentary and material risks
- Management cited long-term energy-demand growth and increasing service intensity, while noting industry downside risks. It expected gradual activity and pricing improvement in some international markets, and stronger international revenue and margins in Q4.
- North American pressure-pumping overcapacity and pricing pressure were expected to persist through the remainder of 2013. Management anticipated seasonal and potentially deeper late-Q4 activity declines in U.S. land markets. Gulf of Mexico revenue and profit were expected to improve in Q4 as additional deepwater rigs arrived and rigs moved into completions.
- Latin America activity was expected to decline in Q4, reflecting a transition in Mexican integrated project work and reduced activity in Brazil.
- Macondo: The recorded loss contingency remained $1.3 billion, including $300 million current and $1.0 billion non-current. Additional reasonably possible losses could not be reasonably estimated; the company warned that further liabilities could materially affect liquidity, results and financial condition. More than 1,800 complaints named Halliburton. The DOJ closed its criminal investigation after Halliburton Energy Services entered a misdemeanor guilty plea related to deletion of computer files, agreed to a $0.2 million fine and three years’ probation. Civil litigation, regulatory matters and potential penalties remained unresolved. Halliburton reported $242 million in Macondo legal fees and related expenses, of which $211 million had been reimbursed or was expected to be covered by insurance.
- Venezuela: Trade receivables were $536 million, including $94 million outstanding for more than one year; collection delays continued. The company also had $184 million of Venezuelan surety bonds outstanding.
- Other matters included ongoing DOJ and SEC investigations concerning Angola and Iraq compliance matters, and a DOJ antitrust information demand regarding pressure-pumping services. The filing states outcomes are uncertain.
- A KBR tax-sharing accounting referee report issued October 9, 2013 found KBR owed Halliburton approximately $105 million plus interest. No recovery was recognized at September 30 because the amount and timing remained uncertain.
Important facts for investors to verify
- Developments in the Macondo MDL, remaining regulatory proceedings, indemnity coverage and whether the $1.3 billion reserve proves adequate.
- Collection progress on Venezuelan receivables and any effects of currency or political developments.
- Whether international growth and margins offset North American pricing pressure, overcapacity and seasonal activity declines.
- Cash generation, debt levels and liquidity following the large 2013 share repurchases and new note issuance.
- Resolution of the KBR tax-sharing claim and the ongoing Angola, Iraq and pressure-pumping inquiries.