Halliburton Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Halliburton provides oilfield services and products through its Completion and Production and Drilling and Evaluation segments.
Financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $3.835 billion | $5.919 billion | $8.033 billion | $12.969 billion |
| Operating income (loss) | $(3.880) billion | $254 million | $(6.959) billion | $(294) million |
| Net income (loss) attributable to Halliburton | $(3.208) billion | $54 million | $(5.620) billion | $(589) million |
| Diluted EPS | $(3.73) | $0.06 | $(6.54) | $(0.70) |
| Cash from operating activities | Not separately reported for quarter | $(3.803) billion | $1.995 billion |
Margins: Q2 operating margin was approximately -101% and net margin approximately -84%, heavily affected by the Baker Hughes termination fee and other charges. Excluding those unusual costs, the filing does not present a single adjusted consolidated margin. For the quarter, Completion and Production posted a $32 million operating loss, while Drilling and Evaluation earned $154 million.
Balance sheet and liquidity: At June 30, cash and equivalents were $3.108 billion, total debt was $12.921 billion ($763 million current and $12.158 billion long-term), and total shareholders’ equity was $9.777 billion. Cash fell from $10.077 billion at year-end 2015. The company reported $3.0 billion available on its revolving credit facility. It expected to repay $600 million of notes due August 2016 with cash on hand.
Cash flow and capital returns: First-half investing cash outflow was $393 million, including $447 million of capital expenditures. Financing cash outflow was $2.732 billion, including $2.525 billion of debt repayments and $309 million of dividends. The quarterly dividend was $0.18 per share.
Material changes and unusual items
- Revenue declined 35% in Q2 and 38% in the first half, reflecting lower activity and pricing worldwide, particularly North American pressure pumping. Q2 revenue fell in both segments: Completion and Production decreased 39%, and Drilling and Evaluation decreased 30%.
- On April 30, 2016, Halliburton and Baker Hughes terminated their merger agreement. Halliburton paid a $3.5 billion termination fee in May, recorded in Q2, and redeemed $2.5 billion of merger-related notes at 101% of principal, plus accrued interest. Debt-redemption fees and expenses included in interest expense were $41 million.
- First-half Baker Hughes-related costs totaled $4.057 billion, including the termination fee and $464 million of charges associated with reversing held-for-sale accounting for planned divestitures.
- Impairments and other charges were $423 million in Q2 and $3.189 billion in the first half. First-half charges included $2.537 billion of fixed-asset impairments, $261 million of severance, and a $148 million loss on exchanging $200 million of Venezuelan receivables for a promissory note valued at $52 million.
- First-half operating cash flow was negative $3.803 billion, primarily due to payment of the Baker Hughes termination fee. Capital expenditures were down more than 60% year over year.
- The Q2 income tax benefit was $902 million, a 22% effective rate on a $4.1 billion pretax loss. The filing cites tax expense on certain undistributed foreign earnings and other tax items affecting the rate.
Outlook, risks, and contingencies
- Management said commodity prices and North American rig counts had improved from early-2016 lows and could signal a market recovery. It expected a modest North American rig-count improvement in the second half, continued North American revenue outperformance versus rig counts, and possible margin recovery. These are expectations, not guarantees.
- Management expected international margins to remain pressured for the rest of 2016; Latin America was expected to remain the most challenged region, with no fundamental improvement anticipated. Eastern Hemisphere activity was expected to decline.
- Full-year 2016 capital expenditures were expected to be approximately $850 million. Management said it intended to maintain the $0.18 quarterly dividend, subject to board approval, and expected a $400 million U.S. tax refund in the second half.
- Venezuela remained a notable collection and country risk. Net trade receivables there were $581 million at June 30, including $134 million classified as long-term; the company had curtailed activity. The $200 million receivable exchanged for a note was recorded at $52 million fair value, and collection remains subject to risk.
- Macondo-related loss contingency was $439 million at June 30, including $367 million current. The company’s $1.1 billion settlement remained subject to court approval and appeals; final approval was scheduled for November 2016. Halliburton also pursued approximately $100 million of disputed insurance recoveries, which were not recognized.
- Investigations into Angola and Iraq conduct and compliance matters were ongoing; the company said it could not predict their outcome. Other risks include customer payment delays, commodity and activity volatility, and potential cash-collateral demands under some of its $1.9 billion in letters of credit, guarantees, and surety bonds.
- Credit ratings were downgraded during the quarter. S&P subsequently assigned BBB+ with stable outlook on July 29, 2016; Moody’s had Baa1 with negative outlook.
Most important facts for investors to verify
- Whether activity, pricing, and North American margins recovered as management anticipated, and whether the expected 2016 capex and tax refund materialized.
- Cash generation, debt repayment and refinancing needs, including the August 2016 maturity, revolver availability, and impact of credit ratings.
- Collection and valuation of Venezuelan receivables and the promissory note, and whether further impairments or losses arise.
- Final approval and payment schedule for the Macondo settlement, remaining appeals, and recovery of disputed insurance amounts.
- Whether further restructuring, asset impairments, or legal and regulatory developments produce material charges or cash outflows.