Halliburton Company — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. 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 millions of dollars.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $4,387 | $3,494 | $8,148 | $7,401 |
| Operating income | $762 | $476 | $1,211 | $1,092 |
| Operating margin | 17.4% | 13.6% | 14.9% | 14.8% |
| Net income attributable to Halliburton | $480 | $262 | $686 | $640 |
| Diluted earnings per share | $0.53 | $0.29 | $0.76 | $0.71 |
| Operating cash flow | Not separately provided for the quarter | $808 | $1,018 |
Q2 revenue rose 26% year over year and operating income rose 60%; the increase in operating margin reflected stronger North American activity and pricing. For the first half, revenue grew 10% and operating income 11%. First-half operating cash flow less capital expenditures was negative $47 million ($808 million less $855 million), before acquisitions, dividends and other investing or financing flows.
- Segments, Q2: Completion and Production revenue was $2,393 and operating income $497, up 37% and 105%, respectively. Drilling and Evaluation revenue was $1,994 and operating income $318, up 14% and 12%.
- Balance sheet at June 30: Cash and equivalents were $1.160 billion and marketable securities $1.935 billion, versus $2.082 billion and $1.312 billion, respectively, at year-end 2009. Current assets were $9.203 billion and current liabilities $3.315 billion.
- Debt and liquidity: Long-term debt, including current maturities, totaled $4.574 billion; $750 million of 5.5% senior notes was due October 2010, and management intended to repay it from available cash. The company had a $1.2 billion undrawn revolving credit facility maturing in 2012. Management said cash and securities provided sufficient liquidity; long-term credit ratings were A2 (Moody’s) and A (S&P).
- Other cash uses: First-half capital expenditures were $855 million; 2010 capital spending was expected to be about $2.0 billion. First-half dividends were $163 million. The company expected a final $48 million DOJ settlement/indemnity payment in Q3.
Material changes versus the prior comparable period
- Growth was led by North America, where Q2 revenue increased 68% and operating income by 451% across the segments, principally from higher activity and improved pricing, especially in U.S. land and liquids-rich shale plays.
- International results were mixed. First-half revenue outside North America declined as a share of total revenue to 53% from 60%; international activity and pricing remained weaker in several regions. Drilling and Evaluation first-half operating income was flat, as North American gains were offset by international declines.
- First-half interest expense increased $23 million, primarily reflecting the $2 billion senior-note issuance in March 2009. Other expense included a $31 million foreign-exchange loss tied to Venezuela’s currency devaluation; the company also recorded $10 million of additional Venezuelan tax expense in Q1.
- Cash and equivalents declined $922 million from year-end 2009. Operating cash flow was lower than in the first half of 2009, while purchases of short-term Treasury securities, capital spending and acquisitions contributed to cash use.
Outlook, risks and contingencies
- Management cited improved first-half activity and long-term industry fundamentals, but expected near-term growth to be more moderate amid uncertainty about global recovery, credit availability, oil and gas supply, and customer spending. It expected North American rig growth to continue at a slower pace and warned that gas supply and storage could constrain pricing gains.
- Macondo/Deepwater Horizon: Halliburton had performed cementing and other services on the well. It faced more than 270 pollution-related class-action complaints and 15 suits alleging wrongful death or personal injury, alongside government investigations. Halliburton said it believed its work followed BP’s specifications and instructions. It had not accrued a loss because it did not consider a loss probable.
- The BP contract provides indemnification for many claims and expenses, subject to stated exceptions. BP had reserved its rights and said responsibility was premature to determine. Halliburton also cited a $600 million general liability insurance program, while warning that coverage, indemnification and potential governmental penalties could be disputed or insufficient. The company estimated the deepwater suspension would reduce earnings by $0.05–$0.08 per quarter for the remainder of 2010; the longer-term impact was unclear. It was redeploying employees and equipment.
- Other contingencies: Halliburton’s KBR-related indemnities and guarantees totaled $120 million at June 30, including a $72 million estimated remaining obligation for indemnities and guarantees other than the specified FCPA settlement balance. Foreign investigations related to the Bonny Island project continued. Petrobras’s arbitration against KBR sought $220 million plus interest over subsea bolts; Halliburton had recorded a liability for its indemnity, but the filing does not state its amount.
- Environmental liabilities were $48 million, including approximately $10 million for nine Superfund sites; actual costs could exceed accruals. The company also had about $1.5 billion of letters of credit, bank guarantees and surety bonds outstanding, including $213 million related to KBR and $198 million related to Venezuela.
- A proposed acquisition of Boots & Coots, valued at about $250 million in cash and stock, was expected to close later in summer 2010, subject to approvals and customary conditions. Halliburton reported $188 million of net investment in Venezuela and warned of delayed customer payments and exchange-rate uncertainty.
Important facts for investors to verify
- Progress and financial consequences of the Macondo investigations, litigation, regulatory changes and deepwater drilling restrictions, including the enforceability and collectability of BP indemnification and the scope of insurance coverage.
- Whether North American activity and pricing gains can offset international weakness, cost inflation and possible moderation in customer spending.
- Receivables collection and currency treatment in Venezuela, as well as the potential exposure from KBR indemnities, the Petrobras arbitration and other foreign investigations.
- Cash generation, capital spending, repayment of the October 2010 notes, and completion and integration of the Boots & Coots transaction.