Halliburton Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Halliburton provides services and products to the global oil and gas industry through Completion and Production and Drilling and Evaluation segments.
Financial performance
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $7.348 billion | $6.974 billion; up 5% |
| Operating income (loss) | $970 million | $(98) million |
| Net income (loss) attributable to Halliburton | $622 million | $(18) million |
| Diluted earnings (loss) per share | $0.73 | $(0.02) |
| Operating cash flow | $954 million | $349 million |
| Capital expenditures | $643 million | $685 million |
| Cash and equivalents | $2.123 billion | $2.356 billion at Dec. 31, 2013 |
| Long-term debt | $7.816 billion | $7.816 billion at Dec. 31, 2013 |
| Total assets / shareholders’ equity | $29.256 billion / $13.752 billion | $29.223 billion / $13.615 billion at Dec. 31, 2013 |
| Quarterly dividend per share | $0.15 | $0.125 |
Revenue growth reflected increased Eastern Hemisphere activity and higher U.S. land production-enhancement activity, partly offset by lower Latin American activity. The $1.1 billion year-over-year improvement in operating income primarily reflects the $1.0 billion Macondo loss contingency recorded in Q1 2013, rather than a comparable increase in underlying operating performance.
- Completion and Production: Revenue of $4.420 billion, up 8%; operating income of $661 million, up 7%.
- Drilling and Evaluation: Revenue of $2.928 billion, up 2%; operating income of $398 million, down 2%.
- International revenue was 47% of consolidated revenue in both periods. Eastern Hemisphere revenue and operating income rose 11% and 16%, respectively; Latin America revenue fell 9%.
- Interest expense, net, increased to $93 million from $71 million, primarily following the August 2013 issuance of $3.0 billion of senior notes. The effective tax rate on continuing operations was 27.1%.
Liquidity and capital resources
Operating cash flow was $954 million, while investing cash flow was $(674) million and financing cash flow was $(514) million. Halliburton spent $500 million repurchasing shares and paid $127 million in dividends. At March 31, it also held $378 million of fixed-income investments and reported $3.0 billion of available committed revolving credit. Management said expected 2014 capital spending, working-capital needs and dividends could be funded from operating cash flow. About $402 million of cash was held by foreign subsidiaries and intended to remain invested abroad.
Working-capital items—receivables, inventories and accounts payable—increased by a net $120 million during the quarter. The company had approximately $2.1 billion of outstanding letters of credit, bank guarantees and surety bonds; some facilities could require cash collateralization.
Outlook, risks and unusual items
- Outlook: 2014 capital expenditures were expected to be approximately $3 billion. Management expected North American margins to expand over the remainder of 2014 and anticipated continued Eastern Hemisphere growth. It characterized Latin America as challenging in 2014, citing reduced Brazilian activity and the transition of Mexican projects. No specific consolidated revenue or earnings guidance was provided.
- Market conditions: North American results faced pressure from lower pressure-pumping prices, severe-weather disruptions and higher logistics costs. Management cited multi-well pad drilling and customer efficiency gains as both industry trends and opportunities. Results remain sensitive to customer spending, commodity prices, rig activity, geopolitical conditions and regulation.
- Macondo litigation: The company maintained a $1.3 billion reserve ($278 million current and approximately $1.0 billion noncurrent). It said additional reasonably possible losses could not be reasonably estimated. The MDL trial’s first two phases had concluded, with court rulings pending; a third phase addressing DOJ Clean Water Act claims was scheduled for January 2015. A finding of gross negligence could expose Halliburton to substantial liability, including punitive damages. The company cited contractual indemnity from BP for certain compensatory claims and a $600 million general-liability insurance program, but noted coverage and indemnity limitations and uncertainty.
- Venezuela: Trade receivables reached $577 million, about 9% of gross trade receivables, including $233 million classified as long-term. Collection delays continued. Halliburton used the official exchange rate; using the SICAD I rate would have produced a reported $48 million foreign-currency loss on its net monetary position for the quarter.
- Other contingencies: The company reported ongoing DOJ and SEC investigations involving Angola and Iraq compliance matters and a DOJ inquiry concerning pressure-pumping services. Environmental reserves, excluding Macondo, were $60 million. A KBR tax-sharing arbitrator award of approximately $105 million plus interest remained contested and was not recognized in the financial statements.
- Other notable items: Halliburton repurchased approximately 8.9 million shares for $500 million, with about $1.2 billion remaining under its authorization. Its subsidiary’s 2013 guilty plea in the Macondo matter involved a $0.2 million criminal fine and three years’ probation; the DOJ closed its criminal investigation of Halliburton.
Most important facts for investors to verify
- How pending Macondo rulings, claims, indemnification and insurance coverage may affect the $1.3 billion reserve and potential future cash requirements.
- Whether Venezuela receivables can be collected and how currency controls or exchange-rate changes could affect reported assets and earnings.
- Whether reported earnings growth is supported by ongoing segment performance, given the large prior-year Macondo charge affecting the comparison.
- Whether North American margin improvement and Eastern Hemisphere growth materialize, and whether Latin American weakness persists.
- Whether the $3 billion capital-spending plan, share repurchases and dividends remain consistent with operating cash generation and liquidity needs.
- The outcome and potential financial consequences of the KBR arbitration and the ongoing compliance and antitrust investigations.