Halliburton Company — Q3 2017 Form 10-Q
Business context and period: The filing covers the three and nine months ended September 30, 2017. Halliburton provides products and services to the energy industry through Completion and Production and Drilling and Evaluation segments. Results are closely tied to customer exploration and production spending and oil and gas activity.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $5.444 billion | $3.833 billion | $14.680 billion | $11.866 billion |
| Operating income (loss) | $634 million | $128 million | $983 million | $(6.831) billion |
| Net income (loss) attributable to Halliburton | $365 million | $6 million | $361 million | $(5.614) billion |
| Diluted EPS | $0.42 | $0.01 | $0.41 | $(6.53) |
| Operating cash flow | Not presented separately | Not presented separately | $1.457 billion | $(2.762) billion |
Q3 operating margin was approximately 11.6%, versus 3.3% a year earlier; nine-month operating margin was approximately 6.7%. Revenue increased 42% in Q3 and 24% for the nine-month period. Q3 growth was led by North America, where revenue rose 91%; the Completion and Production segment grew 63%, while Drilling and Evaluation grew 15%.
At September 30, cash and equivalents were $1.898 billion, down from $4.009 billion at December 31, 2016. Current assets were $10.144 billion and current liabilities $4.601 billion. Carrying-value debt totaled $10.938 billion, down from $12.384 billion at year-end. The company reported $3.0 billion available on its revolving credit facility and $105 million of fixed-income investments. Nine-month capital expenditures were $934 million, dividends paid were $469 million, and cash declined $2.111 billion.
Material changes and unusual items
- Q3 operating income improved by $506 million year over year, reflecting higher activity, utilization and pricing, particularly in U.S. pressure pumping. The company also cited structural cost savings.
- Nine-month 2017 results included a $262 million pre-tax fair-value adjustment associated with a proposed exchange of $375 million of Venezuelan receivables for a promissory note. The exchange had not been finalized by the filing date.
- Nine-month 2016 results included $4.057 billion of merger-related costs and a termination fee and $3.189 billion of impairments and other charges. These prior-year items explain much of the year-over-year improvement in operating results.
- Halliburton paid approximately $630 million in Q3 to acquire Summit ESP, Ingrain Inc. and Optimization Petroleum Technology. It also paid about $29 million to resolve an SEC investigation and agreed to engage an independent compliance consultant; the DOJ said it would take no action.
- The company paid a $54 million share of a securities class-action settlement in Q2; the settlement received final court approval in July 2017.
- Operating cash flow included a $478 million U.S. tax refund, primarily related to carrying back 2016 net operating losses. Cash uses included debt repayments, acquisitions, capital spending, dividends and Macondo-related payments.
Outlook, management commentary and risks
Management described North America as rapidly recovering, with increased demand, pricing and utilization, and said it was reactivating pressure-pumping equipment to meet customer demand. International markets remained slower to recover, with activity reductions and pricing pressure; management expected near-term activity gains to be offset by pricing pressure. Capital spending for full-year 2017 was expected to be approximately $1.3–$1.4 billion. The company intended to maintain its quarterly dividend of $0.18 per share, subject to Board approval.
Key risks include delayed or missed payments from the Venezuelan customer, sanctions or further deterioration in Venezuela, and possible impairment of Venezuelan receivables. Net trade receivables in Venezuela were $429 million at September 30, including $267 million classified as long-term. The customer missed the first scheduled principal payment on a $200 million note, citing banking complications; management believed payment would be made but warned further delays or defaults could cause material charges. Other risks include commodity-price volatility, international pricing pressure, customer spending changes, geopolitical conditions, and environmental and legal contingencies. Environmental reserves were $44 million; the filing cautions actual costs could exceed accrued amounts. Approximately $2.0 billion of letters of credit, bank guarantees and surety bonds were outstanding.
Management stated that cash, operating cash generation and available credit were expected to provide sufficient liquidity for needs through the remainder of 2017. The company had no financial covenants or material-adverse-change provisions in its bank agreements. Credit ratings were BBB+ / A-2 from S&P and Baa1 / P-2 from Moody’s, each with a stable outlook.
Important facts for investors to verify
- Whether the Venezuelan customer makes the overdue principal payment and whether the proposed $375 million receivables-for-note exchange is completed under applicable sanctions.
- Whether North American pricing, utilization and margins can be sustained, and whether international pricing pressure offsets any activity recovery.
- Whether full-year capital spending stays within the $1.3–$1.4 billion outlook while liquidity, debt and working capital remain manageable.
- The effects of acquisition integration, the SEC settlement’s compliance consultant review, and any changes in litigation or environmental exposures.
- How the new revenue-recognition standard, expected to be adopted January 1, 2018 using the modified retrospective method, affects reported results; management expected no material impact.