Halliburton Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. Halliburton provides products and services to the upstream oil and gas industry through Completion and Production and Drilling and Evaluation. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $3.588 billion | $4.853 billion | $10.989 billion | $13.369 billion |
| Operating income | $474 million | $1.051 billion | $1.566 billion | $2.847 billion |
| Operating margin | 13.2% | 21.7% | 14.2% | 21.3% |
| Net income attributable to Halliburton | $262 million | $672 million | $902 million | $1.756 billion |
| Diluted earnings per share | $0.29 | $0.74 | $1.00 | $1.92 |
- For the first nine months, services revenue was $8.137 billion and product sales were $2.852 billion. Revenue fell 18% year over year; operating income declined 45%, reflecting lower customer spending and substantial margin contraction.
- Q3 revenue decreased 26% and operating income fell 55%. North America was the largest source of pressure: Q3 regional revenue was down 43%, while North America operating income across both segments fell to $37 million from $569 million.
- Q3 2009 tax provision was $124 million, a 32% effective rate, versus 34% in Q3 2008. The nine-month effective rate was 31%, versus 32%.
- Cash from operations was $1.630 billion for the first nine months, compared with $1.647 billion in 2008. Capital expenditures were $1.390 billion, implying operating cash flow less capital expenditures of approximately $240 million, versus $342 million in 2008.
- At September 30, cash and equivalents were $1.675 billion and marketable securities were $1.515 billion, primarily U.S. Treasury securities. Current assets were $8.699 billion and current liabilities $2.184 billion.
- Long-term debt was $4.573 billion, with no current maturities; total debt was approximately $4.573 billion versus $2.612 billion at year-end 2008. The increase followed issuance of $2 billion in senior notes. Cash plus marketable securities exceeded debt by approximately $1.383 billion.
- Total shareholders’ equity was $8.576 billion. Cash dividends were $0.09 per share for Q3 and $0.27 per share for the nine-month period.
Material changes and unusual items
- Both segments reported lower revenue and operating income. For the nine months, Completion and Production revenue declined 21% and operating income 49%; Drilling and Evaluation revenue declined 15% and operating income 38%.
- Q3 operating income included a $28 million employee separation charge; the nine-month period included $73 million of employee separation costs. Cost reductions partly offset weaker activity and pricing.
- In February 2009, Halliburton issued $1 billion of senior notes due 2019 at 6.15% and $1 billion due 2039 at 7.45%. Interest expense rose $45 million in Q3 and $96 million for the nine months compared with 2008.
- Halliburton purchased $1.5 billion of Treasury securities during Q2. The nine-month cash-flow statement also reports $369 million of payments related to DOJ/SEC settlements and the KBR indemnity.
- 2008 comparative earnings were affected by accounting changes. Adoption of convertible-debt guidance reversed a previously recorded $693 million loss on settlement to additional paid-in capital, increasing nine-month 2008 net income by $686 million and diluted EPS by $0.76. Adoption of share-based payment guidance reduced 2008 EPS by $0.01. Comparisons should be read with these restatements in mind.
Outlook, risks and contingencies
- Management described near- and mid-term industry conditions as uncertain. It cited recession-related demand weakness, excess oil and gas supply, reduced capital spending, deferred projects, and continued service-price pressure. Management expected pricing pressure until North American gas-directed drilling stabilized and said margins could remain under pressure through 2010.
- U.S. rig counts were approximately 49% below 2008 highs as of October 16, 2009; international rig counts were about 11% below 2008 highs. Management noted that a near-term material improvement in the natural gas market was unlikely without broader demand recovery and supportive seasonal supply conditions.
- Management expected 2009 capital spending of approximately $1.8 billion and quarterly dividends of approximately $80 million, subject to board approval. It cited a $1.2 billion five-year revolving credit facility with no drawings at quarter-end, and approximately $1.5 billion of Treasury securities maturing through September 2010. Credit ratings were A2 (Moody’s) and A (S&P) for long-term debt.
- DOJ and SEC FCPA investigations were resolved in February 2009. Halliburton reported total fines and disgorgement of $579 million, of which KBR consented to pay $20 million; Halliburton had paid $369 million by September 30. The company reported $190 million of remaining DOJ settlement and KBR-indemnity payments scheduled in equal installments over the next four quarters. Other foreign investigations, including possible UK SFO action, remained unresolved; the potential maximum payments under related indemnities could not be estimated.
- Halliburton recorded $262 million for KBR indemnities and guarantees at September 30, including settlement-related obligations; its estimated remaining obligation for other KBR indemnities and guarantees was $72 million. The Petrobras Barracuda-Caratinga arbitration remained pending: Petrobras claimed $220 million plus interest, and Halliburton’s recorded indemnity estimate was not separately specified in the filing text. An arbitration ruling found KBR selected the bolt material; liability and damages remained to be determined.
- Other exposures include approximately $2 billion of outstanding letters of credit, bank guarantees, or surety bonds, including $394 million related to Venezuela and $554 million supporting KBR. Some instruments could require cash collateralization. Halliburton also reported delayed collections from a primary Venezuelan customer, a net Venezuelan investment of about $250 million, and environmental liabilities of $54 million.
- The company said it had not accrued amounts for securities and derivative lawsuits because loss was not considered probable; possible loss ranges could not be estimated. It also noted environmental site liabilities could exceed recorded amounts. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue, pricing, and margins stabilize, particularly in North America, and whether the expected pressure through 2010 materializes.
- Cash conversion, capital spending, debt levels, and the timing and amount of remaining settlement and indemnity payments.
- Collections from Venezuela, including customer payment delays and exposure under Venezuelan surety bonds.
- Developments in foreign FCPA-related investigations and the Petrobras arbitration, including potential indemnity requirements.
- The effects of 2008 accounting restatements when comparing earnings and EPS across periods.