Halliburton Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Halliburton provides products and services to the energy industry through Completion and Production and Drilling and Evaluation segments. Results reflect the emerging COVID-19-related collapse in oil demand and the February OPEC+ production dispute.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $5,037 | $5,737 |
| Operating income (loss) | $(571) | $365 |
| Net income (loss) attributable to Halliburton | $(1,017) | $152 |
| Diluted EPS | $(1.16) | $0.17 |
| Cash from operating activities | $225 | $(44) |
| Capital expenditures | $213 | $437 |
- Revenue declined 12%. Services revenue was $3,684 versus $4,352; product sales were $1,353 versus $1,385.
- The operating loss included $1,073 of impairments and other charges, versus $61 a year earlier. Charges comprised $1,016 of long-lived asset impairments, $32 of severance and $25 of other costs. The impairment total included $588 for hydraulic fracturing equipment, primarily in North America, and $151 for drilling equipment. No goodwill impairment was recorded.
- Pre-tax loss was $896; the income tax provision was $119, an effective rate of -13.3%. Halliburton recorded a $310 valuation allowance on deferred tax assets, including foreign tax credits.
- Operating cash flow improved by $269 year over year. Receivables, inventory and accounts payable together used approximately $200 of cash. Operating cash flow less capital expenditures was approximately $12, compared with approximately $(481) in Q1 2019.
- Segment operating results before corporate costs and impairments: Completion and Production revenue was $2,962, down 19%, and operating income was $345, down 6%; Drilling and Evaluation revenue was $2,075, flat, and operating income was $217, up 76%. Operating margins were approximately 11.6% and 10.5%, respectively, versus 10.0% and 5.9% a year earlier.
Balance sheet, debt and liquidity
- At March 31, cash and equivalents were $1,385, down from $2,268 at year-end. Current assets were $10,655 and current liabilities $5,053, for working capital of $5,602 and a current ratio of approximately 2.1.
- Debt carrying value, including current maturities, was $9,826, versus $10,327 at December 31; cash-adjusted debt was approximately $8,441, versus $8,059. Total shareholders’ equity was $6,843, down from $8,025.
- Halliburton reported $3.5 billion of available committed revolving credit and said it had no financial covenants or material adverse change provisions in its bank agreements. Management considered available liquidity sufficient for anticipated needs. Credit ratings were BBB+ / A-2 at S&P and Baa1 / P-2 at Moody’s, both with negative outlooks.
- In March, Halliburton issued $1.0 billion of 2.92% senior notes due 2030 and tendered $1.5 billion of notes due 2023 and 2025. The transactions reduced debt by $500 million and generated a $168 million extinguishment loss. Cash financing also included $158 million of dividends and $100 million of share repurchases.
Material changes and outlook
- North America revenue fell 25%, reflecting lower activity and pricing, especially in pressure pumping, well construction and completion tools. International revenue increased 5%; Europe/Africa/CIS rose 11% and Middle East/Asia rose 9%, partly offsetting declines in Latin America.
- Management expected activity and pricing to weaken further, with significant revenue and profitability reductions for the remainder of 2020. North America activity was expected to decline at least through year-end; international activity was also expected to decline at least through year-end, with regional variation and project suspensions or delays.
- Full-year 2020 capital spending was forecast at approximately $800 million, 48% below 2019. Planned cost actions included workforce reductions, facility consolidation, lower technology and discretionary spending, and further cost restructuring. The filing gives no clear numerical revenue or earnings guidance.
- Management said the duration and full effects of the pandemic and market disruption could not be reasonably estimated. WTI fell from a high of $63 per barrel in early January to $14 in late March; OPEC+ agreed to production cuts in April, but management noted continuing downward price pressure.
- Management expected to reassess the quarterly $0.18-per-share dividend as conditions evolved. It also planned further goodwill impairment evaluation in Q2; additional impairments could be required if market conditions or forecast assumptions deteriorated.
Risks, contingencies and unusual items
- Key risks include prolonged weak oil demand and prices, customer budget cuts, service pricing pressure, delayed or defaulted receivables, supply-chain and operating disruptions, customer or supplier force majeure claims, credit-rating downgrades, and further asset impairments. Halliburton also cited workforce, facility, cybersecurity and potential litigation risks related to the pandemic.
- Approximately $2.0 billion of letters of credit, bank guarantees and surety bonds were outstanding; some letters of credit could require cash collateralization upon triggering events. Management did not expect ordinary-course legal proceedings to materially adversely affect consolidated results or financial position.
- In April, updated U.S. sanctions licensing restrictions required Halliburton to cease its primary operations in Venezuela. The company said removal of its remaining assets was unlikely, but did not expect a material adverse effect because its investment had previously been written down and operations were limited.
Important facts for investors to verify
- Whether subsequent activity, commodity prices and customer spending validate the assumptions used in the $1.016 billion long-lived-asset impairment assessment and the Q2 goodwill review.
- Whether operating cash flow, collections and available credit remain adequate as customer liquidity risks and activity declines develop.
- Whether the $800 million capital-spending plan, workforce and facility actions, and the stated dividend policy are maintained or revised.
- Whether negative credit-rating outlooks, potential customer defaults, contingent collateral requirements or Venezuela-related asset risks change materially.