Halliburton Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Halliburton provides products and services to the energy industry through Completion and Production and Drilling and Evaluation segments. Results are unaudited.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $6.147 billion | $4.957 billion | $11.887 billion | $9.236 billion |
| Operating income | $789 million | $146 million | $1.143 billion | $349 million |
| Net income attributable to Halliburton | $511 million | $28 million | $557 million | Loss of $4 million |
| Diluted EPS | $0.58 | $0.03 | $0.63 | $0.00 as reported |
- Q2 revenue rose 24%; operating income rose $643 million year over year. Approximate operating margin was 12.8%, versus 2.9% in Q2 2017; the comparison is affected by a $262 million Venezuela-related charge in the prior-year quarter.
- First-half operating cash flow was $1.528 billion, capital expenditures were $1.066 billion, and dividends paid were $316 million. Cash and equivalents declined to $2.058 billion from $2.337 billion at year-end 2017.
- At June 30, cash was $2.058 billion, marketable securities were $414 million, and $3.0 billion was available under the revolving credit facility. Debt carrying value totaled $10.871 billion, including $444 million of short-term borrowings and current maturities and $10.427 billion of long-term debt.
- Current assets were $11.436 billion and current liabilities were $5.107 billion. The company reported $8.843 billion of total shareholders’ equity.
Material changes and drivers
- North America revenue increased 38% in Q2, driven chiefly by U.S. land activity, pressure pumping, drilling services, and artificial lift. North America accounted for 62% of Q2 revenue, versus 56% a year earlier.
- Completion and Production revenue rose 33% and operating income rose 69% in Q2. Drilling and Evaluation revenue rose 9% and operating income rose 53%.
- International revenue increased 6% in Q2, with activity gains offset by pricing pressure. Latin America revenue declined 6%, primarily due to lower activity in Venezuela and Mexico.
- First-half revenue rose 29%; first-half operating income increased to $1.143 billion from $349 million. The 2018 period included $265 million of Venezuela-related impairments and other charges; the 2017 period included $262 million of Venezuela-related charges.
- First-half net interest expense was $277 million, compared with $363 million in 2017, which included $104 million of costs to extinguish $1.4 billion of senior notes.
Outlook, risks, and unusual items
- Management expected 2018 capital expenditures of approximately $2.0 billion. It planned to repay $400 million of notes maturing in August 2018 with cash on hand and was targeting retirement of its $500 million 2021 maturity in the second half of 2018.
- Management intended, subject to board approval, to maintain the quarterly dividend at $0.18 per share and was targeting to begin share repurchases in the second half of 2018. No repurchases under the announced program occurred in the first half; second-quarter employee tax-withholding share purchases were not program repurchases.
- Management saw supportive North American market fundamentals, but cited cost inflation, equipment maintenance, logistics constraints, pipeline capacity limits, customer budget limits, and likely Q3 headwinds to further pricing increases. It expected these activity challenges to be temporary and generally expected resolution in 2019.
- International activity and tendering were improving, but pricing pressure and concessions remained. Management expected tighter capacity could support improved pricing in 2019, depending on commodity prices and equipment absorption.
- In Q1, Halliburton wrote down its remaining Venezuela investment following currency devaluation, sanctions-related payment restrictions, delayed collections, and deteriorating political and economic conditions. The charge was $265 million pre-tax and $312 million net of tax; the company changed Venezuela revenue recognition to a cash basis effective April 1 and said it would continue operating there while managing exposure.
- Other risks include customer delays or defaults on receivables, geopolitical and commodity-price volatility, environmental and regulatory claims, and contingent legal matters. Environmental reserves were $44 million. Approximately $2.0 billion of letters of credit, guarantees, and surety bonds were outstanding; some letters of credit could trigger cash collateralization. The company said these arrangements were not expected to have a material financial-statement effect.
- The six-month effective tax rate was 32.5%, affected by the nondeductible Venezuela write-down, accrued local Venezuela taxes, U.S. tax reform, and geographic earnings mix. Adoption of the new revenue standard had no material reported impact; the new lease standard was planned for adoption January 1, 2019, with impact still under evaluation.
Important facts for investors to verify
- Whether North American activity, pricing, and margins can withstand cost inflation, logistical bottlenecks, and the anticipated Q3 pricing headwinds.
- Whether international activity growth translates into improved pricing and profitability, particularly in 2019.
- Cash generation and capital allocation against the $2.0 billion full-year capex plan, debt maturities, dividends, and contemplated buybacks.
- Remaining exposure to Venezuela, including collections, sanctions and licensing constraints, currency movements, and risks to ongoing operations.
- Potential cash or financial impacts from customer receivables, environmental matters, guarantees, and pending litigation.