Halliburton Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Halliburton provides services and products to the oil and gas industry through Completion and Production and Drilling and Evaluation segments. Unless noted, amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $5.582 billion | $8.701 billion | $18.551 billion | $24.100 billion |
| Operating income (loss) | $43 million | $1.634 billion | $(251) million | $3.798 billion |
| Net income (loss) attributable to Halliburton | $(54) million | $1.203 billion | $(643) million | $2.599 billion |
| Diluted earnings (loss) per share | $(0.06) | $1.41 | $(0.76) | $3.05 |
| Operating margin | 0.8% | 18.8% | (1.4)% | 15.8% |
Q3 revenue fell 36%; reported operating margin was approximately 0.8%. The nine-month revenue decline was 23%, and the reported operating loss included $1.895 billion of impairments and other charges. Services revenue was $4.103 billion and product sales were $1.479 billion in Q3. Q3 segment revenue and operating income were $3.200 billion and $163 million for Completion and Production, and $2.382 billion and $401 million for Drilling and Evaluation.
- Cash flow: Operating cash flow was $2.021 billion for the first nine months, versus $2.913 billion a year earlier. Capital expenditures were $1.748 billion, dividends paid were $460 million, and cash declined $42 million to $2.249 billion.
- Balance sheet: Cash was $2.249 billion; total debt, including current maturities, was $7.891 billion ($648 million current and $7.243 billion long-term). Total debt was $7.840 billion at December 31, 2014. Current assets were $14.919 billion and current liabilities $5.703 billion.
- Other metrics: Cash dividends were $0.18 per share in Q3. The nine-month effective tax rate was 24.6%; Q3’s was 40.8%.
Material changes and management commentary
- Management attributed weaker results to lower oil prices, reduced customer activity and widespread pricing pressure, particularly in North American stimulation and pressure pumping. Average Q3 WTI crude was $46.42 per barrel versus $97.78 a year earlier; the U.S. rig count was down about 58% from its November 2014 peak.
- Q3 revenue fell 47% in North America, compared with 9% in Middle East/Asia. For the first nine months, North American revenue fell 33%; Middle East/Asia revenue was approximately flat. International revenue made up a larger share of consolidated revenue than in the prior-year periods.
- The company recorded $381 million of Q3 and $1.895 billion of nine-month impairments and other charges, including asset and intangible impairments, inventory write-downs, severance, closures and other items. It reduced its workforce by approximately 21% during the first nine months. The nine-month results also included a $199 million Venezuela foreign-exchange loss.
- Management expected continued pricing and activity pressure. It warned that North American activity could fall further late in 2015 as customer budgets were exhausted, with a slow start to 2016 possible; offshore projects could face further delays. It expected the usual year-end seasonal sales increase to be limited.
- 2015 capital expenditures were expected to be approximately $2.4 billion, down 27% from 2014. Management said it would continue to adjust costs, focus on working capital and capital discipline, and invest selectively in strategic markets and technology.
Outlook, transactions and risks
- Baker Hughes acquisition: Halliburton continued to target a 2015 close, but acknowledged it could move into 2016. Consideration was estimated at approximately 492 million Halliburton shares and $8.3 billion cash. An $8.6 billion bridge financing commitment was in place but undrawn at quarter-end. The merger termination date had been extended to December 16, 2015; closing remained subject to regulatory approvals and other conditions.
- To address regulatory review, Halliburton was marketing certain drilling businesses for sale; those assets were reported as held for sale at $2.082 billion. The company also planned to divest its expandable liner hangers business, which did not yet qualify as held for sale at quarter-end.
- Macondo: The remaining loss-contingency liability was $472 million, including $400 million expected to be paid in 2016. Halliburton had made a $333 million settlement installment during Q3. It stated that settlements and the BP agreement, subject to conditions and appeals, were expected to eliminate additional material exposure. Recovery of approximately $118 million from insurers remained uncertain and was not recognized.
- Liquidity and credit: Halliburton reported $3.0 billion available under its revolving credit facility, which could increase to $4.5 billion after the Baker Hughes acquisition. It also had approximately $2.0 billion of letters of credit, guarantees and surety bonds outstanding. Moody’s long-term rating was A2 and S&P’s was A, with S&P ratings on negative watch following the acquisition announcement.
- Other risks: Venezuelan trade receivables were $639 million, about 11% of gross trade receivables; $176 million was classified as long-term, and collections from the primary customer were delayed. Angola and Iraq compliance investigations by the company and U.S. authorities were ongoing. The filing also describes environmental matters, securities litigation and regulatory proceedings; outcomes and potential costs are uncertain.
Investor verification priorities
- Track whether the Baker Hughes transaction received regulatory approval, closed on schedule, and required the planned divestitures and financing.
- Assess the duration of low oilfield activity and pricing pressure, especially North American stimulation, and compare actual capital spending with the $2.4 billion outlook.
- Review cash generation, debt and credit ratings as acquisition financing and obligations come due.
- Monitor Venezuelan receivable collections and currency restrictions, and the status of Macondo settlement conditions, appeals and insurance recovery.
- Evaluate whether further asset impairments, restructuring charges or other contingent liabilities emerge as market conditions develop.