Halliburton Company — Q2 2011 Form 10-Q
Business context and reporting period. Halliburton provides products and services to the upstream oil and gas industry through Completion and Production and Drilling and Evaluation. This unaudited quarterly report covers the three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $5.935 billion | $4.387 billion | $11.217 billion | $8.148 billion |
| Operating income | $1.161 billion | $762 million | $1.975 billion | $1.211 billion |
| Operating margin | 19.6% | 17.4% | 17.6% | 14.9% |
| Net income attributable to Halliburton | $739 million | $480 million | $1.250 billion | $686 million |
| Diluted EPS | $0.80 | $0.53 | $1.36 | $0.76 |
| Operating cash flow | Not separately reported | Not separately reported | $1.388 billion | $808 million |
- Six-month capital expenditures were $1.423 billion, up from $855 million. Cash dividends paid were $165 million; cash and equivalents increased $40 million to $1.438 billion.
- At June 30, 2011, marketable securities were $451 million, total current assets $9.540 billion, and current liabilities $3.166 billion (current ratio approximately 3.0). Long-term debt was $3.824 billion, unchanged from year-end; its disclosed fair value was $4.6 billion.
- Cash plus marketable securities totaled $1.889 billion, below carrying-value long-term debt by approximately $1.935 billion. A new unsecured $2.0 billion five-year revolver was fully available; management reported no financial covenants or material adverse change provisions in bank agreements.
Material changes versus the prior comparable period
- Q2 revenue rose 35% and operating income 52% year over year. For the first half, revenue increased 38% and operating income 63%.
- North America drove the improvement: first-half revenue there increased 68%, supported by higher activity, greater service intensity, and improved pricing in U.S. land operations, particularly unconventional oil and liquids-rich basins.
- Completion and Production revenue grew 56% in the first half and operating income 115%; Drilling and Evaluation revenue grew 17%, while its operating income declined 6% amid weaker Eastern Hemisphere pricing and activity disruptions.
- International revenue was higher, but competitive pricing and North Africa disruptions weighed on results. Revenue outside North America fell to 43% of consolidated first-half revenue from 53% a year earlier.
- First-half operating cash flow improved, while capital spending rose substantially. Receivables and inventories increased by $583 million and $290 million, respectively, in the cash-flow reconciliation.
Outlook, risks, contingencies, and unusual items
- Management expected North America revenue and margins to remain sustainable through the rest of 2011, while noting that cost pressure could limit further margin gains. Natural-gas drilling could remain pressured, potentially offset by liquids-directed activity.
- Management expected international activity to increase through the rest of 2011 and anticipated margin improvement in the latter half of 2011 or early 2012. Competitive pricing and geopolitical uncertainty remained concerns. Gulf of Mexico activity had begun a gradual recovery, but management warned that slow permit issuance could stall it.
- 2011 capital spending was expected to be approximately $3.2 billion. Quarterly dividends of approximately $83 million were expected, subject to board approval. Approximately $1.7 billion remained under the share-repurchase authorization, but no shares were repurchased under the program in Q2.
- Macondo/Deepwater Horizon exposure was the principal contingency. Halliburton had been named in more than 400 pollution-related complaints, at least 40 personal-injury lawsuits involving seven decedents and at least 59 allegedly injured rig personnel, and six additional response-worker injury suits. Other defendants also asserted contribution and indemnity claims. Halliburton reported no accrual because it did not consider a loss probable, and said it could not estimate a reasonably possible loss or range; it warned that uncovered liabilities could materially affect liquidity, results, and financial condition.
- Halliburton cited contractual indemnity from BP and a $600 million general-liability insurance program, but noted potential coverage disputes, exclusions or limits for fines and penalties, and uncertainty over enforceability and collection. The company disputed certain investigative conclusions concerning its cementing and data-logging work and said it would defend the claims.
- Other notable items included a $59 million pretax Libya reserve charge in Q1 for doubtful receivables and inventory, and $11 million of Q2 pretax employee-separation costs. Libya customer activity had ceased following sanctions. The company also had $1.5 billion of letters of credit, guarantees, and surety bonds outstanding, including $240 million related to Venezuela; some instruments could require cash collateralization.
- Other contingencies included a pending KBR-related Barracuda-Caratinga arbitration, with Petrobras seeking $220 million plus interest; Halliburton’s accrued liability for that matter was not separately stated in the provided filing text. Environmental liabilities were $46 million, including approximately $7 million for 10 Superfund sites.
Important facts for investors to verify
- Track Macondo litigation, investigations, indemnity and insurance recoveries, and any change in the company’s loss-probability assessment or ability to estimate exposure.
- Monitor Gulf of Mexico permitting and activity, and whether U.S. land growth and pricing offset international weakness and North Africa disruptions.
- Compare realized capital spending with the approximately $3.2 billion 2011 plan and assess working-capital needs as receivables and inventories grow.
- Review the timing and outcome of the Barracuda-Caratinga arbitration and the collectability of Venezuela receivables and exposure associated with its surety bonds.
- Assess whether international pricing and margins recover as management anticipated, and whether strategic investment and separation costs remain within expectations.