Halliburton Company — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods unless noted. Halliburton provides products and services to the upstream oil and gas industry through Completion and Production and Drilling and Evaluation segments.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $4.665B | $3.588B | $12.813B | $10.989B |
| Operating income | $818M | $474M | $2.029B | $1.566B |
| Operating margin | 17.5% | 13.2% | 15.8% | 14.2% |
| Net income attributable to Halliburton | $544M | $262M | $1.230B | $902M |
| Diluted EPS | $0.60 | $0.29 | $1.35 | $1.00 |
- Nine-month operating cash flow was $1.362B, versus $1.630B. Capital expenditures were $1.412B, implying approximately negative $50M of operating cash flow less capital expenditures.
- At September 30, cash and equivalents were $1.875B and marketable securities were $880M. Current assets were $9.216B against current liabilities of $3.333B.
- Debt totaled $4.574B: $750M current maturities and $3.824B long-term debt. The $1.2B revolving credit facility was undrawn. In October, after quarter-end, Halliburton repaid $750M principal amount of 5.5% senior notes.
- Nine-month dividends were $245M, or $0.27 per share; the company expected quarterly dividends of approximately $80M for the remainder of 2010, subject to Board approval.
Changes and operating drivers
- Q3 revenue rose 30% and operating income 73%; nine-month revenue rose 17% and operating income 30%. Management attributed the improvement principally to higher North American activity, increased demand, and better pricing.
- Completion and Production drove the increase: Q3 revenue grew 46% and operating income 154%; nine-month revenue grew 25% and operating income 59%. Drilling and Evaluation Q3 revenue rose 14%, but operating income declined 4%; nine-month revenue rose 8% while operating income was roughly flat.
- North American land activity and service intensity strengthened, particularly in oil and liquids-rich shale plays. International results were mixed: nine-month revenue outside North America was lower overall, and international operating income weakened.
- Q3 and nine-month operating income included a $50M non-cash impairment charge on a Bangladesh oil and gas property. Q3 2009 included $28M of employee separation costs; the comparable nine-month 2009 period included $73M.
- Q3 discontinued-operations income included a $62M benefit primarily from finalizing a U.S. tax matter. Nine-month other expense included a $31M Venezuelan currency-devaluation loss and $10M of additional Venezuelan tax expense.
Outlook, risks and contingencies
- Management cited long-term industry fundamentals as favorable, but expected near-term growth to be more moderate given uncertainty about the global recovery, oil and gas supply, and the Macondo incident. It viewed North American revenue and margins as likely sustainable through 2011, while anticipating slower rig-count growth and cost pressures that could temper margin gains.
- Management expected international activity to recover gradually and believed spare capacity absorption could support improved pricing in 2011. It forecast approximately $2.1B of capital spending for 2010.
- The Deepwater Horizon/Macondo well was capped in September. Halliburton faced more than 319 pollution-related class-action complaints and 27 wrongful-death or personal-injury suits, alongside government investigations. The company stated it believed its work followed BP’s specifications and intended to defend claims. It had accrued no loss because management did not consider a loss probable; the filing does not provide a reliable potential-loss estimate.
- Halliburton asserted contractual indemnification from BP, but BP reserved its rights and said responsibility was premature to determine. Halliburton also cited a $600M general liability insurance program, while cautioning coverage could be disputed or insufficient; governmental fines might not be indemnified or insured. The deepwater drilling suspension was lifted October 12, but management expected Gulf of Mexico activity to fall further in Q4 and said longer-term effects were uncertain.
- Other material exposures include ongoing foreign investigations and Nigerian charges relating to the TSKJ/Bonny Island project, for which Halliburton has certain KBR indemnification obligations; the Petrobras/KBR Barracuda-Caratinga bolt arbitration, with a $220M claim plus interest; and environmental liabilities of $47M, including $10M for nine Superfund sites. The filing says potential amounts for certain indemnities and claims cannot be estimated.
- Other risks include delayed Venezuelan customer payments and uncertainty over the applicable exchange rate; $210M of Venezuelan surety bonds; regulatory changes affecting offshore drilling and hydraulic fracturing; commodity-price and customer-spending volatility; and political, currency, and compliance risks in international markets.
Important facts for investors to verify
- Developments in Macondo litigation and investigations, BP’s indemnification position, and the extent of insurance coverage.
- Outcomes and potential financial exposure from TSKJ-related investigations and the Barracuda-Caratinga arbitration.
- Whether North American activity and pricing remain strong enough to offset international weakness and Gulf of Mexico regulatory effects.
- Cash conversion and working-capital trends: receivables increased to $3.723B from $2.964B at year-end, while nine-month operating cash flow declined year over year.
- Venezuelan receivable collection, currency treatment, and exposure under outstanding guarantees.
- Execution of the 2010 capital-spending plan and integration of Boots & Coots, acquired in September for approximately $248M in cash and stock.