Halliburton Company — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Halliburton provides oilfield services and products through Completion and Production and Drilling and Evaluation, operating in approximately 80 countries.
Financial performance and position
Unless stated otherwise, amounts are in millions of dollars.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $7,111 | $6,548 | $21,213 | $17,765 |
| Operating income | $954 | $1,332 | $3,178 | $3,307 |
| Operating margin | 13.4% | 20.3% | 15.0% | 18.6% |
| Income from continuing operations attributable to shareholders | $608 | $848 | $1,988 | $2,099 |
| Net income attributable to Halliburton | $602 | $683 | $1,966 | $1,933 |
| Diluted net income per share | $0.65 | $0.74 | $2.12 | $2.10 |
- Q3 revenue grew 9%, but operating income declined 28%; nine-month revenue grew 19%, while operating income fell 4%.
- Q3 segment results: Completion and Production revenue was $4,293 and operating income $591; Drilling and Evaluation revenue was $2,818 and operating income $430. Completion and Production operating income fell 45% year over year, while Drilling and Evaluation operating income increased 17%.
- Nine-month segment revenue and operating income: Completion and Production $13,043 and $2,541; Drilling and Evaluation $8,170 and $1,191.
- For the first nine months, operating cash flow was $1,913, capital expenditures were $2,519, and dividends paid were $250. Operating cash flow less capital expenditures was negative $606. Cash declined by $666 to $2,032 from year-end 2011.
- At September 30, cash was $2,032, current assets $12,766, current liabilities $4,598, and long-term debt $4,820. Debt was unchanged from December 31, 2011. Cash less long-term debt was approximately negative $2,788.
- Shareholders’ equity was $15,191, compared with $13,216 at year-end 2011. The quarterly dividend was $0.09 per share.
Material changes and management commentary
- Management attributed revenue growth to increased drilling in North American oil and liquids-rich basins and stronger activity across international regions. International activity and pricing improved selectively.
- North American production-enhancement profitability weakened under hydraulic-fracturing pricing pressure and higher guar gum costs. Management also cited excess fracturing equipment capacity and reduced natural-gas activity.
- Reported nine-month operating income included a $300 pre-tax Macondo loss contingency, a $48 pre-tax acquisition earn-out adjustment, and a $20 pre-tax patent-settlement gain. Prior-year results included a $25 impairment charge, $11 of employee separation costs, and a $59 Libya reserve charge.
- Q3 2012 included a $48 pre-tax earn-out charge and a $20 pre-tax patent-settlement gain. Q3 2011 included a $25 pre-tax impairment charge. The 2011 discontinued-operations loss included a $163 charge related to the Barracuda-Caratinga arbitration.
Outlook, liquidity, risks, and contingencies
- Management expected 2012 capital spending of $3.4–$3.5 billion, with fourth-quarter dividends of approximately $80 million subject to Board approval. It had approximately $1.7 billion remaining under its share-repurchase authorization.
- Management anticipated customer budget constraints and more holiday downtime in Q4 2012, continued near-term pricing pressure for production-enhancement services, and subdued Canadian activity. It planned to direct less capital toward pressure pumping in 2013. Management expected gradual international improvement and saw longer-term opportunities in deepwater and unconventional projects.
- Liquidity included $2.0 billion cash, $71 million of fixed-income investments, and $2.0 billion available under a committed revolving credit facility. Approximately $395 million of cash held by foreign subsidiaries would be subject to U.S. tax if repatriated; management intended to keep those funds abroad. The company reported no material change in market-risk exposure since year-end and held long-term debt ratings of A2 (Moody’s) and A (S&P).
- Macondo: Halliburton recorded a $300 million liability for an estimated probable loss. It said additional reasonably possible losses could not be reasonably estimated and that the ultimate impact could materially affect liquidity, results, and financial condition. The company faced more than 400 complaints, government investigations, and cross-claims. It had not been named a responsible party in the DOJ’s civil action under the Clean Water Act or Oil Pollution Act, but BP sought contribution. Halliburton disputed allegations and relied in part on BP indemnification; court rulings excluded punitive damages and certain penalties from that indemnity. The MDL trial was scheduled to begin in January 2013. Halliburton reported approximately $140 million of Macondo legal fees reimbursed or expected to be covered by insurance; insurance coverage for all claims and penalties was not assured.
- Other matters included an approximately $201 million Barracuda-Caratinga arbitration award against former subsidiary KBR, for which Halliburton had indemnification obligations, and a pending KBR tax-sharing dispute involving Halliburton’s claim for $256 million. No recovery or liability was recorded for that tax dispute.
- Halliburton reported ongoing DOJ and SEC-related internal investigations involving Angola and Iraq compliance matters. Its Duncan, Oklahoma environmental matter had a $26 million accrual; total environmental reserves were $72 million.
- Other risks included hydraulic-fracturing regulation, political and currency risks (including Venezuela), customer payment delays, and potential cash collateral requirements on some of the $1.9 billion in letters of credit, bank guarantees, and surety bonds outstanding.
Most important facts for investors to verify
- Whether North American pressure-pumping pricing and guar costs stabilize, and the effect of planned lower 2013 pressure-pumping capital allocation.
- Whether the $300 million Macondo accrual remains adequate as litigation, regulatory proceedings, indemnification disputes, and insurance recovery develop.
- Whether cash generation improves relative to capital spending and working-capital needs, particularly given the substantial inventory increase and negative operating-cash-flow-less-capex result.
- Progress and potential financial impact of the KBR indemnification and tax-sharing matters, Angola and Iraq investigations, and Duncan environmental claims.
- Execution against 2012 capital-spending plans and the timing of expected international and Gulf of Mexico activity growth.