Halliburton Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. Halliburton provides products and services to the energy industry through its Completion and Production and Drilling and Evaluation segments. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $5.737 billion | $5.740 billion |
| Operating income | $365 million | $354 million |
| Operating margin | 6.4% | 6.2% |
| Income before taxes | $192 million | $189 million |
| Income tax provision / effective rate | $40 million / 20.9% | $142 million / 75.4% |
| Net income attributable to Halliburton | $152 million | $46 million |
| Diluted EPS | $0.17 | $0.05 |
| Operating cash flow | $(44) million | $572 million |
| Capital expenditures | $437 million | $501 million |
| Cash and equivalents, March 31 | $1.380 billion | $2.332 billion, March 31, 2018 |
| Total debt, carrying value | $10.332 billion | $10.348 billion, December 31, 2018 |
Revenue was essentially unchanged. Operating income rose 3%, while net income increased substantially, reflecting lower impairments and a much lower effective tax rate. The prior-year tax rate was elevated by the nondeductible Venezuela investment write-down and additional local Venezuela taxes. Operating cash flow turned negative, primarily as receivables and inventory used cash. The company attributed a net $515 million working-capital use to short-term changes, including customer payment delays and inventory buildup for international investments. Dividends paid were $157 million, or $0.18 per share.
Segments and geographic performance
- Completion and Production: Revenue fell 4% to $3.662 billion; operating income decreased 26% to $368 million. Lower U.S. land stimulation pricing was the main pressure, partly offset by higher artificial lift activity and stronger activity and tool sales in certain international markets.
- Drilling and Evaluation: Revenue increased 7% to $2.075 billion, with activity improving across regions; operating income declined 35% to $123 million. International project mobilization costs, reduced project management activity, and lower Middle East pricing weighed on results.
- North America: Revenue declined 7% to $3.275 billion, primarily from lower U.S. land stimulation pricing.
- International: Revenue grew 11% overall. Latin America increased 28%, Europe/Africa/CIS 4%, and Middle East/Asia 7%.
Liquidity, debt, and other financial matters
- Cash declined from $2.008 billion at December 31, 2018 to $1.380 billion at March 31, 2019. Investing cash outflow was $411 million, including $437 million of capital expenditures; financing cash outflow was $155 million, primarily dividends.
- Halliburton reported $10.307 billion of long-term debt on the balance sheet and $10.332 billion total debt at carrying value, including short-term borrowings and current maturities. A new $3.5 billion revolving credit facility, available in full at quarter-end, expires March 5, 2024. Management stated that cash, operating cash flow, and available credit should meet 2019 needs. The company reported no financial covenants or material adverse change provisions in its bank agreements.
- Operating lease accounting adoption added approximately $1.1 billion of right-of-use assets and lease liabilities on January 1, 2019; it did not materially affect Q1 results of operations. At March 31, operating lease liabilities were $1.013 billion in total.
- Credit ratings remained S&P A- long-term and A-2 short-term, and Moody’s Baa1 long-term and P-2 short-term, each with a stable outlook.
Outlook, risks, and unusual items
- Management expected 2019 capital expenditures of approximately $1.6 billion, down 20% from 2018, and anticipated modest North America service demand progression for the remainder of the year. It believed the worst recent North America pricing deterioration was behind it, while noting customer spending was expected to decrease year over year in the region.
- Management expected continued international revenue growth in 2019, with improving activity and offshore spending, but acknowledged continuing pricing pressure in some markets. It described international recovery as being at an early stage.
- Q1 2019 included $61 million of impairments and other charges, primarily related to legacy sand delivery equipment/fixed assets. Q1 2018 included $265 million for writing down the remaining Venezuela investment.
- Environmental reserves were $49 million, including approximately $14 million related to six Superfund sites. The filing cautions that actual environmental liabilities could exceed accrued amounts, although the company did not expect environmental costs to materially adversely affect liquidity, results, or financial position.
- Approximately $2.1 billion of letters of credit, bank guarantees, and surety bonds were outstanding; some letters of credit could require cash collateralization under specified triggering events. Customer payment delays or defaults could materially affect liquidity and results.
- The filing reported no material change in previously disclosed risk factors and no material change in market-risk exposure since December 31, 2018. The Magruder securities case was dismissed with prejudice in March 2019, and the plaintiff did not appeal.
Important facts for investors to verify
- Whether the negative operating cash flow and working-capital use, particularly customer collection delays and inventory growth, reverse in subsequent quarters.
- Whether North America pricing stabilizes and whether the expected modest activity improvement materializes despite lower expected customer spending.
- Whether international activity growth converts into improved segment operating income, given mobilization costs and ongoing pricing pressure.
- Whether the $1.6 billion capital expenditure outlook, dividend plans, and liquidity remain consistent with cash generation and debt obligations.
- Whether environmental and guarantee exposures, including potential cash collateralization, change materially; the filing does not quantify the maximum possible exposure for these matters.