Halliburton Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Halliburton provides products and services to the global oil and gas industry through Completion and Production and Drilling and Evaluation segments.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $4.198 billion | $7.050 billion |
| Operating loss | $3.079 billion | $548 million |
| Net loss attributable to Halliburton | $2.412 billion | $643 million |
| Diluted loss per share | $2.81 | $0.76 |
| Operating cash flow | $(171) million | $812 million |
| Capital expenditures | $234 million | $704 million |
- Revenue fell 40%, reflecting lower activity and pricing across most product lines, particularly North American pressure pumping. North America revenue declined 49%; international revenue declined 31%.
- Operating results included $2.766 billion of impairments and other charges, versus $1.208 billion a year earlier, and $538 million of Baker Hughes acquisition-related costs, versus $39 million. Fixed-asset impairments and write-offs were $2.445 billion; severance costs were $135 million.
- Interest expense, net, was $165 million, up from $106 million, primarily due to debt issued in late 2015. Other, net, was a $47 million loss versus a $224 million loss, mainly because Q1 2015 included a $199 million Venezuela currency loss. The effective tax rate on continuing operations was 26.6%; the company recorded a $112 million valuation allowance on certain deferred tax assets.
Balance sheet and liquidity
- At March 31, 2016, cash and equivalents were $9.593 billion; total debt carrying value, including current maturities, was $15.393 billion. Current maturities were $3.186 billion and long-term debt was $12.207 billion.
- Total current assets were $19.105 billion and current liabilities were $7.412 billion. Cash declined $484 million during the quarter. The company had $3.0 billion available under its revolving credit facility.
- Operating cash use was partly driven by severance and acquisition-related payments. The company paid $154 million in dividends during the quarter.
Material changes and business outlook
- Halliburton and Baker Hughes mutually terminated their merger agreement on April 30, 2016, after regulatory approval challenges and deteriorating deal economics. Halliburton paid a $3.5 billion termination fee on May 4; the expense is to be recognized in Q2 2016, not Q1.
- Following termination, Halliburton was required to redeem $2.5 billion of senior notes at 101% of principal plus accrued interest, expected in Q2. Management estimated that, after the fee and redemption, it would retain approximately $3.6 billion of cash based on the March 31 balance.
- Management expected 2016 to remain challenging. It anticipated further international activity declines and price reductions relative to 2015, with Middle East/Asia expected to be the most resilient region; North America was also expected to remain difficult. Management said pricing pressure could continue until activity stabilizes.
- Expected 2016 capital expenditures were approximately $850 million, more than 60% below 2015. Management said cash, operating cash generation and available credit should provide sufficient liquidity for the remainder of 2016, including planned spending, dividends and contingencies.
- The company reduced headcount by more than 6,000 in Q1 and said its workforce had declined by just over one-third since the beginning of 2015. It continued cost controls and planned to adjust its cost structure as market conditions require.
Risks, contingencies and unusual items
- Industry downturn: Depressed oil prices, low rig counts, customer budget cuts and pricing pressure reduced activity globally. The U.S. land rig count was nearly 80% below its November 2014 peak. Continued weak conditions could cause further charges, including potential goodwill impairment; no goodwill impairment was recorded at March 31.
- Venezuela: Net trade receivables were $756 million, including $190 million classified as long-term. The company reported collection delays from its primary customer and began curtailing activity in the country. Venezuela represented more than 10% of trade receivables.
- Macondo: The recorded loss contingency was $472 million, including $400 million current. Halliburton said settlements and indemnification arrangements had eliminated additional material exposure, subject to settlement conditions and appeals. Approximately $100 million of potential insurance recovery remained unresolved and was not recognized.
- Investigations and other legal matters: Internal investigations concerning Angola and Iraq conduct and potential FCPA and other compliance issues were ongoing with DOJ and SEC engagement; outcomes could not be predicted. The company also disclosed continuing securities litigation and environmental obligations, including $49 million accrued for environmental matters.
- Approximately $2.0 billion of letters of credit, bank guarantees and surety bonds were outstanding; some letters of credit could trigger cash collateral requirements. Moody’s had placed ratings on review for downgrade; on May 4, S&P lowered Halliburton’s long-term rating to A- and short-term rating to A-2, with negative CreditWatch implications.
Investor verification points
- Confirm the timing and full cash impact of the $3.5 billion termination fee and the $2.5 billion debt redemption, including the effect on post-quarter liquidity and debt maturities.
- Track revenue, pricing, margins and cash generation as rig activity and customer spending change, especially in North America.
- Assess whether Venezuela receivables are collected and whether further activity curtailments or currency changes affect exposure.
- Monitor Macondo settlement and appeal conditions, insurance recovery, and the outcomes of the Angola and Iraq investigations.
- Review the assumptions behind asset valuations and impairment charges if weak industry conditions persist.