Halliburton Company — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Halliburton provides products and services to the global oil and gas industry through Completion and Production and Drilling and Evaluation segments. Results were pressured by lower oil prices, reduced customer activity and pricing concessions.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $5.919 billion | $8.051 billion | $12.969 billion | $15.399 billion |
| Operating income (loss) | $254 million | $1.194 billion | $(294) million | $2.164 billion |
| Net income (loss) attributable to Halliburton | $54 million | $774 million | $(589) million | $1.396 billion |
| Diluted EPS | $0.06 | $0.91 | $(0.70) | $1.64 |
- Q2 operating margin was approximately 4.3%, compared with 14.8% a year earlier. Revenue fell 26%; operating income fell 79%.
- For the first half, revenue declined 16%. The reported operating loss included $1.514 billion of impairments and other charges.
- First-half operating cash flow was $1.995 billion, versus $2.075 billion in 2014. Capital expenditures were $1.223 billion; cash and equivalents increased to $2.760 billion from $2.291 billion at year-end 2014.
- At June 30, long-term debt was $7.838 billion and current liabilities were $5.005 billion. Cash exceeded current liabilities; fixed-income investments totaled $93 million. The company reported $3.0 billion of available committed bank credit at quarter-end.
- Cash dividends were $0.18 per share for Q2 and $0.36 per share for the first half. First-half cash dividends paid totaled $306 million.
Material changes and business performance
- Q2 revenue declined in both segments: Completion and Production fell 30% to $3.444 billion; Drilling and Evaluation fell 20% to $2.475 billion. North America revenue fell 39% overall, reflecting steep activity declines and pricing pressure.
- The U.S. average rig count in Q2 was 907, down from 1,852 a year earlier; worldwide count was 2,174 versus 3,402. Management cited a roughly 55% decline in the U.S. rig count from its late-2014 peak.
- Q2 segment operating income was $313 million for Completion and Production and $400 million for Drilling and Evaluation. Drilling and Evaluation income was supported in part by stronger Middle East/Asia activity and cessation of depreciation on assets classified as held for sale.
- The company recorded $306 million of charges in Q2 and $1.514 billion in the first half, including asset and inventory impairments, severance, intangible impairments, and country and facility closures. It also recorded a $199 million Venezuelan currency remeasurement loss in Q1.
- Halliburton reduced its workforce by approximately 16% during the first half. It classified $2.104 billion of assets and $63 million of liabilities as held for sale for businesses it plans to divest in connection with the Baker Hughes transaction.
Outlook, transaction and risks
- Management said the pace of rig-count declines had slowed and activity had stabilized, but expected worldwide activity declines in 2015 and greater international pricing impact in the second half. It expected first-half cost reductions to generate additional savings in the second half. No specific earnings or revenue guidance was provided.
- Planned 2015 capital expenditures were approximately $2.6 billion, down from $3.3 billion in 2014. Management said it intended to continue investing in strategic programs while adjusting spending to market conditions.
- The pending Baker Hughes acquisition was expected to close in late 2015, with possible extension into 2016, subject to regulatory approvals and other conditions. Estimated consideration included approximately 490 million Halliburton shares and $8.3 billion in cash. An $8.6 billion bridge facility had been committed but was undrawn at June 30. Planned divestitures are intended to address competition concerns.
- The Macondo-related loss contingency was $805 million at June 30, including $733 million related to Halliburton’s proposed $1.1 billion MDL settlement. Approximately $367 million was expected to be paid in the second half of 2015. Settlement effectiveness and payment remained subject to conditions and court proceedings. Halliburton was pursuing approximately $170 million of disputed insurance recovery, which was not recognized.
- Venezuela exposure included $521 million of trade receivables, about 9% of gross trade receivables, of which $165 million was classified as long-term. Use of the SIMADI exchange rate drove the $199 million first-quarter loss; further currency and collection risks remained.
- Other disclosed uncertainties included FLSA classification litigation, securities litigation, ongoing Angola and Iraq compliance investigations, environmental matters, and approximately $2.0 billion of outstanding letters of credit, bank guarantees and surety bonds. Management said the previously disclosed risk factors had not materially changed.
- After quarter-end, on July 21, Halliburton entered a new five-year revolving credit agreement with $3.0 billion initial capacity, increasing to $4.5 billion upon closing of the Baker Hughes acquisition and satisfaction of specified conditions.
Important facts for investors to verify
- Whether oilfield activity and pricing stabilize, particularly in North America, and whether planned cost reductions protect margins.
- Regulatory approvals, timing, financing and divestiture proceeds for the Baker Hughes acquisition; assess the resulting debt and dilution.
- Cash timing and final conditions for Macondo settlement payments, and the outcome of insurance recovery efforts.
- Collection and currency risks associated with Venezuelan receivables and the SIMADI exchange mechanism.
- Whether further impairments, restructuring costs or other charges are required if the downturn persists.