Halliburton Company — 2010 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with the three months ended March 31, 2009 unless otherwise stated. Halliburton provides oilfield products and services through Completion and Production and Drilling and Evaluation. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $3,761 | $3,907 |
| Operating income | $449 | $616 |
| Operating margin | 12.0% | 15.8% |
| Income from continuing operations | $212 | $381 |
| Net income attributable to Halliburton | $206 | $378 |
| Diluted EPS | $0.23 | $0.42 |
| Cash from operations | $317 | $381 |
| Capital expenditures | $404 | $518 |
Revenue fell 4% and operating income fell 27%; operating margin contracted by about 3.8 percentage points. Net income attributable to Halliburton declined 46%. The filing attributes the weaker results mainly to lower international activity, pricing concessions, and margin pressure, partly offset by recovering North American activity. The effective tax rate was 36%, versus 32%.
By segment, Completion and Production revenue was $1,964 (down 3%) and operating income was $238 (down 34%). Drilling and Evaluation revenue was $1,797 (down 4%) and operating income was $270 (down 11%). North American revenue grew 1% overall, while Latin America, Europe/Africa/CIS, and Middle East/Asia revenue declined 11%, 5%, and 8%, respectively.
Balance sheet, liquidity and cash flows
- At March 31, cash and equivalents were $1,383, marketable securities were $1,808, and current assets were $8,814 versus current liabilities of $3,145.
- Debt totaled $4,574: $750 current maturities and $3,824 long-term. Cash plus marketable securities totaled $3,191. The company reported no drawings on its $1.2 billion revolving credit facility.
- Operating cash flow was $317. Investing activities used $970, including $500 of Treasury-security purchases, $404 of capital expenditures, and $113 for acquisitions. Financing activities used $37, including $81 of dividends.
- Cash declined $699 during the quarter, ending at $1,383. The company reported $1.8 billion of Treasury securities maturing at various dates through November 2010.
Outlook, management commentary and notable items
- Management described the near-term industry outlook as uncertain, citing the financial crisis, weak demand, excess oil and natural gas supply, and difficulty forecasting the duration of the cycle. It saw North American drilling and service-intensive shale activity recovering, but warned that elevated gas storage and weaker natural-gas prices could weigh on future activity.
- International activity and margins remained under pressure from contract repricing, weather, project delays, and lower activity in certain markets. Management said project visibility and momentum could support a resurgence in the second half of 2010 and into 2011.
- Expected 2010 capital spending was approximately $2.0 billion. Subject to board approval, the company expected quarterly dividends of approximately $80 million. It intended to repay $750 million of 5.5% senior notes at maturity in October 2010 using available cash.
- In April 2010, Halliburton agreed to acquire Boots & Coots in a stock-and-cash transaction valued at approximately $250 million, subject to shareholder and regulatory approvals. The filing also cites definitive agreements for four other oilfield-services acquisitions.
- Venezuela’s January 2010 currency devaluation resulted in a $31 million foreign-exchange loss and $10 million of additional local tax expense. The company said it was using the 4.3 bolívar-per-dollar rate.
- Halliburton had paid $464 million related to the DOJ and SEC FCPA resolutions as of March 31, 2010, and expected to pay another $95 million in equal installments during Q2 and Q3 2010. The company stated remaining indemnity and guarantee liabilities were $167 million; other KBR indemnities and guarantees, excluding the remaining DOJ/SEC-related amounts, were estimated at $72 million.
Risks and contingencies
- Further FCPA-related investigations in France, Nigeria, the United Kingdom, and Switzerland could lead to penalties or claims. The company could not estimate the maximum potential future payments under its continuing KBR indemnities. The UK Serious Fraud Office was considering possible civil claims or criminal prosecution.
- In the Barracuda-Caratinga arbitration, Petrobras sought $220 million plus interest from KBR over subsea bolt costs; KBR counterclaimed for $22 million. Halliburton’s indemnity estimate was accrued, but an adverse result could materially affect the company. A final hearing was scheduled for early May 2010.
- Environmental liabilities were accrued at $54 million. The company noted that actual costs at certain Superfund sites could exceed accruals. It also identified potential business effects from environmental and climate rules and proposed regulation of hydraulic fracturing.
- Halliburton reported approximately $1.6 billion of outstanding letters of credit, bank guarantees, and surety bonds, including $214 million related to Venezuela and $303 million supporting KBR. Some instruments could require cash collateralization upon specified events.
- Venezuelan risks included delayed customer payments, government action affecting oilfield-service providers, currency changes, and inflation. Net investment in Venezuela was approximately $200 million at quarter-end.
- The company had not accrued amounts for the securities class action or shareholder derivative cases because it did not consider a loss probable; it said possible loss ranges could not be estimated.
Key facts for investors to verify
- Whether North American activity and pricing gains can offset continued international weakness and margin pressure.
- Actual 2010 capital spending, cash generation, dividend payments, and repayment of the October 2010 notes.
- Developments and eventual costs from the outstanding FCPA investigations, KBR indemnities, and Barracuda-Caratinga arbitration.
- Collection of Venezuelan receivables and the financial effects of currency and regulatory developments.
- Closing and final economics of the Boots & Coots and other announced acquisitions.