Halliburton Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Halliburton provides products and services to the upstream oil and gas industry through Completion and Production and Drilling and Evaluation segments. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $6.548B | $4.665B | $17.765B | $12.813B |
| Operating income | $1.332B | $818M | $3.307B | $2.029B |
| Income from continuing operations | $850M | $486M | $2.103B | $1.175B |
| Net income attributable to Halliburton | $683M | $544M | $1.933B | $1.230B |
| Diluted EPS | $0.74 | $0.60 | $2.10 | $1.35 |
- Year-to-date revenue rose 39% and operating income rose 63%; management reported a 19% operating margin for the nine-month period. Q3 operating margin was approximately 20% based on reported figures.
- Q3 segment revenue and operating income: Completion and Production $4.025B and $1.068B; Drilling and Evaluation $2.523B and $369M. Year-to-date segment revenue was $10.815B and $6.950B, respectively; operating income was $2.646B and $923M.
- Q3 revenue growth was led by North America, where the shift toward unconventional oil and liquids-rich drilling supported higher activity, utilization and pricing. Nine-month U.S. revenue was 55% of consolidated revenue, compared with 45% in 2010.
- For the nine months, operating cash flow was $2.366B, versus $1.362B. Capital expenditures were $2.164B, versus $1.412B; operating cash flow less capital expenditures was approximately $202M. Cash and equivalents increased to $1.775B from $1.398B at year-end 2010.
- At September 30, cash was $1.775B, marketable securities were $400M, current assets were $10.306B and current liabilities were $3.656B. Long-term debt was $3.824B, unchanged from year-end. A new $2.0B five-year revolving facility was fully available; the filing reports no financial covenants or material-adverse-change provisions in the bank agreements.
- Cash dividends were $0.09 per share in Q3 and $0.27 per share for nine months. The company paid $247M in dividends year to date.
Changes, outlook and management commentary
- Performance improved substantially from 2010, driven principally by North American activity and pricing. Completion and Production operating income grew 97% year to date; Drilling and Evaluation operating income grew 7%.
- International operating income remained pressured by competitive pricing, capacity overhang, North African disruptions and startup costs, despite higher activity in several markets. Libya activity remained mostly shut down; Egypt operations had recovered from first-quarter disruption.
- Management expected North American revenue and margins to be sustainable through the remainder of 2011, while noting cost pressures and uncertainty around natural gas activity and the Gulf of Mexico recovery. It anticipated gradual international margin improvement by year-end or early 2012 as activity increased and new technologies were introduced.
- Management expected 2011 capital spending of approximately $3.1B. It anticipated about $800M of Q4 cash use for Multi-Chem and other acquisitions, and, subject to Board approval, approximately $83M of remaining-2011 dividends. Multi-Chem was acquired in October 2011 in an all-cash transaction.
- Strategic operating-model and manufacturing initiatives reduced diluted EPS by approximately $0.01–$0.02 in each 2011 quarter; management expected an approximately $0.02-per-share impact in Q4.
Unusual items, contingencies and risks
- Macondo/Deepwater Horizon: Halliburton had not accrued a loss as of September 30, 2011, considered a loss not probable, and said it could not estimate a reasonably possible loss or range. The filing warns that liabilities not covered by indemnity or insurance could materially affect liquidity, results and financial condition. Halliburton was named in more than 400 pollution-related complaints and numerous injury cases, and faced contribution and indemnity claims from other parties. It disputed investigative findings and was pursuing claims against BP, including to enforce contractual indemnity. The company cited a $600M general-liability insurance program but noted coverage and indemnity uncertainties.
- In October 2011, after quarter-end, the BSEE issued Halliburton regulatory notices of noncompliance relating to Macondo, with possible fines of up to $35,000 per day per violation. No amount was accrued; the company could appeal, and possible penalties were still under review.
- KBR/Barracuda-Caratinga: A third-quarter arbitration award of $201M against KBR was indemnified by Halliburton and recorded as a liability. The related discontinued-operations charge was $163M after tax; it contributed to Q3 and year-to-date net income being below continuing-operations income.
- Other exposures: The company reported an ongoing Angola FCPA-related internal investigation with DOJ and SEC inquiries; it could not predict the outcome. Environmental liabilities were $58M. Approximately $1.6B of letters of credit, guarantees and surety bonds were outstanding, including $276M related to Venezuela; some instruments may trigger cash collateralization. Halliburton also reported delayed payment on receivables from a primary Venezuelan customer and a $191M net investment in Venezuela.
- Other identified risks include offshore permitting and regulatory changes following Macondo, possible hydraulic-fracturing regulation, political instability and foreign-exchange exposure. Management stated that a hypothetical 10% adverse currency move would result in an estimated $58M pretax loss on net monetary assets.
Important facts for investors to verify
- Track Macondo litigation, BSEE notices and any fines, and whether BP indemnity and insurance respond as expected; the filing provided no loss estimate.
- Monitor North American pricing, cost inflation and activity mix, together with Gulf of Mexico permit issuance and the pace of international margin recovery.
- Assess cash conversion and investment needs: year-to-date operating cash flow less capital expenditures was approximately $202M, while full-year capital spending was forecast at $3.1B.
- Review the KBR arbitration liability and the effect of acquisitions, including the October 2011 Multi-Chem purchase, on cash, leverage and results.
- Follow the Angola investigation, Venezuela collections and guarantee exposure, and other regulatory or environmental contingencies.