Halliburton Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Halliburton provides products and services to the global energy industry through its Completion and Production and Drilling and Evaluation segments.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $4.279 billion | $4.198 billion |
| Operating income (loss) | $203 million | $(3.079) billion |
| Net income (loss) attributable to company | $(32) million | $(2.412) billion |
| Diluted loss per share | $(0.04) | $(2.81) |
| Cash provided by (used in) operations | $5 million | $(171) million |
| Capital expenditures | $265 million | $234 million |
Revenue increased 2% year over year. Operating margin was approximately 4.7%, versus an operating loss in the prior-year quarter, which included $2.766 billion of impairments and other charges and $538 million of merger-related costs. Q1 2017 operating income was reduced by $66 million of corporate and other expenses. Net results remained negative, including $242 million of net interest expense, which included $104 million of costs from early debt extinguishment.
- Segments: Completion and Production revenue rose 12% to $2.604 billion and operating income increased to $147 million from $30 million. Drilling and Evaluation revenue fell 11% to $1.675 billion and operating income declined 49% to $122 million.
- Geography: North America revenue increased 24% to $2.231 billion. Revenue declined in Latin America (14%), Europe/Africa/CIS (22%), and Middle East/Asia (10%).
- Balance sheet and liquidity: Cash and equivalents were $2.107 billion at March 31, down from $4.009 billion at year-end. Current assets were $9.828 billion and current liabilities $3.842 billion. Long-term debt was $10.812 billion, with $97 million current maturities; total debt carrying value, including current maturities, was $10.909 billion, down from $12.377 billion at year-end. The company reported $3.0 billion available under its revolving credit facility and $92 million of fixed-income investments.
- Cash uses and shareholder returns: The company repaid approximately $1.5 billion, including premiums, to redeem $1.4 billion of senior notes; paid the final $335 million Macondo settlement installment; and paid $156 million in dividends. The quarterly dividend remained $0.18 per share. No shares were repurchased under the announced repurchase program.
Material changes and management commentary
North American activity rebounded sharply: the U.S. land rig count averaged 722, up 38% year over year and 27% from Q4 2016. Management attributed the region’s growth to stronger stimulation activity, pricing, and utilization. International markets remained weak amid reduced activity, pricing pressure, seasonal effects, and customer budget constraints. Management said international revenue and margins could remain under pressure through 2017, with improvement not expected until later in the year; it viewed Q1 as potentially the bottom for Eastern Hemisphere rig count, while expecting the 2017 average to be only marginally above 2016.
Halliburton reactivated cold-stacked equipment faster than initially planned to meet demand and preserve market share, while stating it would not pursue share at the cost of pricing. It hired approximately 2,000 U.S. employees during the quarter and incurred added personnel and training costs. Management anticipated margin acceleration toward the end of 2017, subject to market conditions, and planned to adjust capital spending to activity and economics. It also expected an approximately $534 million U.S. tax refund in the second half of 2017.
Risks, contingencies, and unusual items
- Venezuelan net trade receivables were $636 million, including $441 million classified as long-term; the company continued to experience collection delays. Its total net investment in Venezuela was approximately $834 million. The $200 million-par promissory note had a carrying value of $83 million.
- The final $335 million Macondo settlement installment was paid in Q1, and the final $33 million legal-fee installment was paid in April. Halliburton stated it believed there was no additional material financial exposure related to the incident.
- A securities litigation settlement fund of $100 million received preliminary court approval. Halliburton accrued the full amount and recorded a $46 million insurance receivable; final court approval remained pending. A separate related case remained unresolved.
- DOJ and SEC investigations concerning operations in Angola and Iraq remained subject to discussions and potential resolution; the outcome and timing were uncertain.
- Environmental liabilities accrued were $49 million. Approximately $2.0 billion of letters of credit, guarantees, and surety bonds were outstanding; some letters of credit may require cash collateralization upon triggering events.
- Debt redemption reduced cash and debt, but generated $104 million of early-extinguishment costs. Adoption of an accounting standard for intra-entity asset transfers resulted in a $384 million reduction to retained earnings at January 1, 2017, without an equivalent current-period cash outflow.
Important facts for investors to verify
- Whether North American activity and pricing gains translate into sustained margin improvement as equipment is reactivated and costs rise.
- Collection and recoverability of Venezuelan receivables, including the long-term balance, and the promissory note’s payment performance.
- Final approval and funding of the securities settlement, and developments in the remaining litigation and regulatory investigations.
- Actual timing and receipt of the expected $534 million tax refund, and liquidity after debt repayment, settlement payments, capital spending, and dividends.
- International demand, pricing, and rig-count trends relative to management’s expectation of later-year stabilization.