Halliburton Company — 2016 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Halliburton provides products and services to the oil and gas industry through Completion and Production and Drilling and Evaluation segments. Results were unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3.833 billion | $5.582 billion | $11.866 billion | $18.551 billion |
| Operating income (loss) | $128 million | $43 million | $(6.831) billion | $(251) million |
| Net income (loss) attributable to Halliburton | $6 million | $(54) million | $(5.614) billion | $(643) million |
| Diluted earnings (loss) per share | $0.01 | $(0.06) | $(6.53) | $(0.76) |
- Q3 revenue fell 31% year over year amid global activity declines and pricing pressure. Operating margin was approximately 3.3%, versus 0.8% in Q3 2015; the prior-year quarter included $381 million of impairments and other charges and $82 million of Baker Hughes-related costs.
- Nine-month revenue fell 36%. The $6.831 billion operating loss included $3.189 billion in impairments and other charges and $4.057 billion in Baker Hughes-related costs, including the $3.5 billion merger termination fee and $464 million of asset reclassification-related charges.
- Q3 segment revenue and operating income: Completion and Production, $2.176 billion and $24 million; Drilling and Evaluation, $1.657 billion and $151 million. North America recorded a $66 million operating loss.
- Nine-month operating cash flow was negative $2.762 billion, compared with positive $2.021 billion in 2015. The company cited the termination-fee payment as a primary driver. Capital expenditures were $625 million, down over 60% year over year.
- Cash and equivalents were $3.289 billion at September 30, down from $10.077 billion at year-end 2015. Long-term debt, including current maturities, was $12.315 billion, compared with $15.346 billion at year-end. Halliburton also had $3.0 billion available under its revolving credit facility and $96 million in fixed-income investments.
- Current assets were $11.760 billion and current liabilities were $3.631 billion. Dividends were $0.18 per share for the quarter; $465 million was paid in dividends during the first nine months.
Material changes and management outlook
- Halliburton and Baker Hughes mutually terminated their merger agreement on April 30, 2016, citing regulatory approval challenges and deteriorating deal economics. Halliburton paid a $3.5 billion termination fee and redeemed $2.5 billion of transaction-related notes; it also repaid $600 million of notes maturing in August.
- Management reported early signs of a potential recovery, including a 14% increase in average U.S. rig count in Q3 versus Q2 and the first sequential North America revenue growth in seven quarters. It cautioned that pricing pressure and excess service equipment remained.
- For Q4, management expected North America revenue to move in line with rig-count changes. It expected international revenue and margins to be flat versus Q3, with year-end seasonal sales likely limited. Management anticipated international rig counts would bottom in the first half of 2017.
- Full-year 2016 capital expenditures were expected to be approximately $850 million. Management said it intended to maintain capital discipline and adjust costs to market conditions.
- Standard & Poor’s lowered Halliburton’s long-term credit rating from A- to BBB+ and changed its outlook to stable; Moody’s maintained Baa1 with a negative outlook.
Risks, contingencies, and unusual items
- Industry conditions remained difficult: lower activity and pricing, especially in North America pressure pumping, weighed on revenue and profitability. Halliburton reduced headcount by approximately 13,000 in the first nine months of 2016.
- Venezuela presented collection and country risks. Net trade receivables there were $564 million, excluding a promissory note; a $200 million receivable exchange generated a $148 million pretax loss. The note’s carrying value was $60 million at quarter-end. Halliburton reported ongoing payment delays and curtailed activity.
- The Macondo-related loss contingency was $413 million at September 30, including $369 million current, expected to be paid in Q1 2017. Settlement approval and appeals remained outstanding. Halliburton said it believed key settlements and indemnification had eliminated additional material exposure, subject to those conditions; approximately $100 million of potential insurance recovery remained unrecognized due to uncertainty.
- DOJ and SEC-related internal investigations concerning operations in Angola and Iraq were ongoing; the company said it could not predict their outcome. Environmental reserves were $53 million, and approximately $1.9 billion of letters of credit, guarantees, and surety bonds were outstanding.
- The Q3 tax benefit was $59 million on a $52 million pretax loss, producing a 114.3% effective tax rate; management cited a tax treaty benefit and differences in domestic and foreign tax effects.
Investor verification priorities
- Track cash generation, liquidity, debt maturities, and the effect of the Baker Hughes termination and debt repayments.
- Compare actual North America and international activity, pricing, margins, and revenue with management’s Q4 expectations.
- Monitor Venezuela collections, the promissory note, and country exposure.
- Follow Macondo settlement approval, appeals, expected payments, and insurance recovery proceedings.
- Assess whether impairments, cost reductions, and lower capital spending affect operating capacity and results in a market recovery.