Halliburton Company — Q1 2012 Form 10-Q
Business context and reporting period. This quarterly report covers the three months ended March 31, 2012, compared with the same period in 2011. Halliburton provides services and products to the upstream oil and gas industry through Completion and Production and Drilling and Evaluation. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / prior date | Change |
|---|---|---|---|
| Revenue | $6,868 | $5,282 | +30% |
| Operating income | $1,023 | $814 | +26% |
| Operating margin | 14.9% | 15.4% | Down about 0.5 percentage points |
| Income from continuing operations attributable to Halliburton shareholders | $635 | $512 | +24% |
| Net income attributable to Halliburton | $627 | $511 | +23% |
| Diluted earnings per share | $0.68 | $0.56 | +$0.12 |
| Cash from operating activities | $734 | $565 | +$169 |
| Capital expenditures | $782 | $704 | +$78 |
| Cash and equivalents | $2,655 | $2,698 at Dec. 31, 2011 | Down $43 |
| Long-term debt | $4,820 | $4,820 at Dec. 31, 2011 | No change |
| Current assets / current liabilities | $12,018 / $4,310 | $11,577 / $4,121 at Dec. 31, 2011 | Current ratio about 2.8 |
Operating cash flow was below capital expenditures, resulting in negative cash flow after capital spending of approximately $48 million before other investing, financing, and exchange-rate effects. Dividends paid were $83 million; the declared cash dividend was $0.09 per share. The company reported $100 million of short-term Treasury securities and $2.0 billion available under its committed revolving credit facility. The fair value of long-term debt was $6.0 billion, versus its $4.82 billion carrying amount.
Segment and geographic performance
- Completion and Production: revenue of $4,290 million, up 35%; operating income of $1,036 million, up 57%. Growth was led by U.S. land production enhancement and cementing.
- Drilling and Evaluation: revenue of $2,578 million, up 22%; operating income of $368 million, up 60%. Revenue and operating income increased in all regions.
- North America revenue increased 40% and represented 61% of consolidated revenue, compared with 56% a year earlier. Growth reflected higher activity and pricing in U.S. unconventional oil and liquids-rich plays.
Material changes and unusual items
- Q1 2012 operating results included a $300 million pre-tax Macondo-related loss contingency, recorded in cost of services and corporate and other expenses. Corporate and other expenses were $381 million, compared with $76 million in Q1 2011.
- Q1 2011 included a $59 million pre-tax Libya charge for doubtful receivables and inventory, including $36 million in Completion and Production and $23 million in Drilling and Evaluation.
- Net income included an $8 million loss from discontinued operations in Q1 2012, primarily associated with remaining KBR separation-related obligations.
- Inventories rose to $2,916 million from $2,570 million at year-end; receivables increased to $5,336 million from $5,084 million.
Outlook, management commentary, and risks
- Management expected 2012 capital spending of $3.5 billion to $4.0 billion and dividends of approximately $80 million per quarter, subject to Board approval. About $1.7 billion remained under the share repurchase authorization; no open-market repurchases were made in Q1.
- Management cited long-term demand growth and increasing service intensity, while anticipating near-term pricing pressure in certain markets and continued cost inflation. Low U.S. natural gas prices were driving a shift toward oil and liquids-rich drilling; management expected natural-gas drilling declines to continue until oversupply improves.
- Management expected gradual international activity improvement during 2012 but ongoing competitive pricing, particularly on larger projects. It did not expect Libya activity to return to pre-2011 levels until late 2012 or 2013. Gulf of Mexico recovery depended on sustained permitting and customer activity.
- Macondo: Halliburton faced hundreds of lawsuits, cross-claims, investigations, and regulatory proceedings. The $300 million accrual was identified as probable and reasonably estimable, but additional reasonably possible losses could not be estimated and the accrual could change. The company warned that liabilities could materially affect liquidity, results, or financial condition. It disputed findings concerning its work and stated that it intended to defend itself.
- A court ruling required BP to indemnify Halliburton for certain third-party compensatory pollution claims, including in specified circumstances involving gross negligence, but not for punitive damages or Clean Water Act civil penalties; other indemnity issues remained unresolved. Halliburton reported a $600 million general liability insurance program and approximately $100 million of Macondo legal costs reimbursed or expected to be covered through March 2012.
- BP announced a proposed settlement with private plaintiffs, estimated by BP at approximately $7.8 billion, and the related trial was adjourned. Halliburton could not predict the settlement’s effect on claims against it. The BSEE had issued regulatory notices of noncompliance that Halliburton appealed; possible civil penalties remained under review.
- Other exposures included a $32 million accrual for the Duncan, Oklahoma environmental matter; $79 million of total environmental reserves; and $210 million of remaining KBR-related liabilities. Halliburton also disclosed an ongoing Angola compliance investigation involving DOJ and SEC inquiries, and customer payment delays in Venezuela.
- Additional risks include hydraulic-fracturing regulation, geopolitical and currency risks, possible customer collection delays, and cyberattacks. Management said current capital expenditures, working-capital needs, and dividends were expected to be funded from operating cash flow, while acknowledging Macondo could materially affect liquidity.
Most important facts for investors to verify
- Subsequent developments in the Macondo litigation, governmental investigations, regulatory appeals, and the adequacy of the $300 million accrual, including the scope and enforceability of BP indemnification and insurance.
- Whether the projected $3.5–$4.0 billion capital program and planned dividends can be funded from operating cash flow, given Q1 capital expenditures exceeded operating cash flow.
- Trends in U.S. natural-gas versus oil-directed activity, service pricing, cost inflation, and the pace of Gulf of Mexico permit approvals.
- Receivables collection, particularly in Venezuela, and the company’s working-capital and inventory requirements as activity grows.
- Developments in the Duncan environmental claims, Angola investigations, and other contingencies that could change reported reserves or cash needs.