Business context and reporting period
Halliburton Company filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. It provides oilfield services and products globally through Completion and Production and Drilling and Evaluation. Results are affected by customers’ exploration and production spending, energy prices, activity levels, and service pricing.
Financial results and position
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $7.317 billion | $7.234 billion | $14.291 billion | $14.102 billion |
| Operating income | $984 million | $1.201 billion | $886 million | $2.224 billion |
| Income from continuing operations attributable to Halliburton shareholders | $642 million | $745 million | $629 million | $1.380 billion |
| Net income attributable to Halliburton shareholders | $644 million | $737 million | $626 million | $1.364 billion |
| Diluted earnings per share | $0.69 | $0.79 | $0.67 | $1.47 |
Q2 operating margin was approximately 13.4%, versus 16.6% a year earlier; first-half operating margin was approximately 6.2%, versus 15.8%. The first-half 2013 results include a $1.0 billion pre-tax Macondo-related charge, compared with a $300 million charge in first-half 2012.
Q2 segment revenue was $4.363 billion for Completion and Production, down 2%, and $2.954 billion for Drilling and Evaluation, up 6%. Segment operating income was $732 million and $415 million, respectively. Q2 total revenue was a quarterly record; international revenue represented about 48% of the total.
First-half cash from operations was $1.471 billion, compared with $1.135 billion. Capital expenditures were $1.396 billion, versus $1.651 billion. Cash and equivalents declined to $1.412 billion at June 30 from $2.484 billion at year-end, primarily reflecting capital returns, capital spending, and other cash uses. Long-term debt was $4.820 billion, unchanged from year-end. The company held $277 million in fixed-income investments and had $3.0 billion available under its revolving credit facility.
Current assets were $12.621 billion and current liabilities $4.777 billion at June 30. The Macondo reserve totaled $1.3 billion: $278 million current and approximately $1.0 billion non-current. First-half dividends paid were $231 million; the declared dividend rate was $0.125 per share.
Material changes versus prior comparable periods
- Q2 revenue increased about 1%, but operating income fell 18% and diluted EPS declined from $0.79 to $0.69. Management attributed the earnings pressure principally to lower activity and continued pricing pressure in U.S. land production-enhancement services, as well as a $55 million charitable contribution recorded in the quarter.
- First-half revenue increased about 1%, while operating income fell 60%, chiefly due to the larger Macondo reserve charge and weaker North American activity and pricing. International revenue and operating income outside North America increased 17% and 13%, respectively, year over year.
- North America revenue declined 8% in Q2 and 10% in the first half. International regions generally grew; Drilling and Evaluation showed stronger international activity, while Completion and Production was more affected by the U.S. hydraulic-fracturing downturn.
- Cash declined by $1.072 billion during the first half. The company repurchased approximately 24 million shares for about $1.0 billion and paid $231 million in dividends. It also paid $219 million under a legacy Barracuda-Caratinga guarantee and a $172 million acquisition earn-out.
Outlook, commentary, risks, and unusual items
- Management expressed confidence in long-term industry fundamentals, while noting sluggish developed-market growth and geopolitical supply uncertainty. It expected gradual international activity and pricing improvement, stronger international revenue and margins in the second half of 2013, and activity improvement in North America from seasonal recovery, drilling efficiencies, and multi-well pads.
- Management expected U.S. hydraulic-fracturing overcapacity and pricing pressure to persist through the remainder of 2013. Planned 2013 capital spending was approximately $3.0 billion. No quantified full-year earnings or revenue guidance was provided.
- The board increased share-repurchase authorization to $5.0 billion in July 2013. A subsequent modified Dutch auction tender offer sought to repurchase up to $3.3 billion of shares, with completion conditional in part on new debt financing. Management said it expected, subject to board approval, annual dividends of approximately 15%–20% of net income, adjusted for potential one-time items.
- After quarter-end, Halliburton Energy Services agreed to plead guilty to a misdemeanor concerning deletion of certain post-incident computer files, pay a $0.2 million fine, and serve three years’ probation. The DOJ agreed not to pursue further criminal prosecution relating to Macondo, subject to court approval; Halliburton agreed to continue cooperating.
- Macondo remains a major uncertainty. The first phase of the multidistrict litigation trial had concluded, further phases were pending, and the company faced more than 1,500 related complaints plus regulatory and contribution claims. The $1.3 billion reserve reflects a probable, estimable loss, but additional reasonably possible losses could not be estimated and could materially affect liquidity and results. Insurance and BP indemnification may not cover all claims, penalties, or damages.
- Other exposures include delayed Venezuelan customer payments: $451 million of trade receivables, approximately 7% of gross receivables, at June 30. Approximately $1.9 billion of letters of credit, bank guarantees, and surety bonds were outstanding; some could trigger cash collateralization. DOJ and SEC investigations concerning Angola and Iraq conduct and a DOJ antitrust inquiry regarding pressure-pumping services were ongoing.
- The filing’s Item 5 explains that the statements were revised from the July 22 earnings-release figures to include the $55 million pre-tax charitable contribution and $0.2 million Macondo contingency. The contribution’s after-tax impact was $35 million; revised Q2 operating income was $984 million and continuing income attributable to shareholders was $642 million, or $0.69 per diluted share.
Most important facts for investors to verify
- Progress and outcomes in the Macondo trial, settlement discussions, reserve adequacy, indemnification, and insurance recoveries.
- Whether U.S. land-market activity and hydraulic-fracturing pricing stabilize, and whether anticipated international growth and margin improvement materialize.
- Collection of Venezuelan receivables and any foreign-exchange, guarantee, or collateral demands.
- Funding and execution of the expanded share repurchase and tender offer, including resulting debt and liquidity effects.
- Developments in the Angola, Iraq, antitrust, and securities-litigation matters and any resulting financial or operational consequences.