Halliburton Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Halliburton provides products and services to the energy industry through Completion and Production and Drilling and Evaluation segments. Comparisons are with Q1 2017 unless otherwise noted.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $5.740 billion | $4.279 billion |
| Operating income | $354 million | $203 million |
| Net income (loss) | $47 million; $46 million attributable to Halliburton | $(32) million |
| Diluted earnings (loss) per share | $0.05 | $(0.04) |
| Cash from operations | $572 million | $5 million |
| Capital expenditures | $501 million | $265 million |
- Revenue rose 34%. Operating income increased 74%, despite a $265 million pretax Venezuela impairment and other charge. Operating margin was approximately 6.2%, versus 4.7%.
- Net income included a $142 million tax provision on $189 million pretax income, an effective tax rate of 75.4%. The rate was significantly affected by the Venezuela write-down, which was not tax-deductible, and accrued local taxes.
- Cash and equivalents were $2.332 billion at quarter-end. Total debt carrying value was $10.894 billion, including $466 million of short-term borrowings and current maturities; net debt was approximately $8.562 billion.
- Current assets were $11.035 billion and current liabilities $4.969 billion. Halliburton reported $3.0 billion available under its revolving credit facility.
- Operating cash flow less capital expenditures was approximately $71 million, versus negative $260 million in Q1 2017. Working capital (receivables, inventories and payables) used a net $88 million.
- Quarterly dividends were $0.18 per share, totaling $158 million. No shares were repurchased under the announced buyback program; shares acquired during the quarter were employee tax-withholding shares.
Segment and geographic changes
- Completion and Production revenue increased 46% to $3.807 billion; operating income rose to $500 million from $147 million.
- Drilling and Evaluation revenue increased 15% to $1.933 billion; operating income rose to $188 million from $122 million.
- North America revenue increased 58% to $3.517 billion, driven mainly by U.S. land activity, pressure pumping and the acquired artificial lift business. North America generated 61% of consolidated revenue, compared with 52% a year earlier.
- International revenue increased 9% overall. Europe/Africa/CIS rose 19%, Middle East/Asia 7%, while Latin America declined 1% amid activity declines in Venezuela and Mexico.
- Worldwide average rig count increased 12% to 2,207. U.S. average rig count increased 30% to 967.
Outlook, risks and unusual items
- Management expected North American demand growth to continue through the remainder of 2018, while noting supply-chain constraints, including rail, trucking and labor tightness, and cost inflation. The company intended to pursue price increases and improve equipment utilization and operating efficiency.
- Management was encouraged by international tender activity and expected international markets to improve over the next few years, but flagged pricing pressure, prior-cycle concessions and an overcapitalized market as recovery headwinds.
- Full-year 2018 capital expenditures were expected to be approximately $2.0 billion, 53% above 2017. Halliburton intended to maintain its quarterly dividend rate, subject to Board approval, and planned to repay $400 million of senior notes maturing in August 2018 with cash on hand.
- Venezuela’s currency changes, sanctions and delayed customer payments prompted a write-down of all remaining investment: $265 million pretax operating charges plus $47 million of accrued taxes, or $312 million net of tax. Halliburton continued operating there but shifted customer revenue accounting to a cash basis. Further sanctions, government action, currency changes or inability to collect could adversely affect results and liquidity.
- Other exposures include approximately $2.0 billion of outstanding letters of credit, bank guarantees and surety bonds, some of which could trigger cash collateralization; $45 million of environmental accruals, including $8 million associated with eight Superfund sites; and pending securities litigation for which the outcome cannot be predicted. Management did not expect environmental claims to materially affect liquidity, results or financial position, but actual costs could exceed accruals.
- Halliburton adopted the new revenue recognition standard on January 1, 2018 using the modified retrospective method; management said adoption had no material impact. Q1 2017 comparative figures were not restated.
Important facts for investors to verify
- Whether North American activity growth, pricing actions and supply-chain performance translate into sustainable margins as planned.
- Whether international pricing pressure eases and tender activity converts into profitable work.
- Whether Venezuela operations, sanctions and customer collections create further losses or cash constraints after the full investment write-down.
- Whether the $2.0 billion capital expenditure plan, dividend commitments and August 2018 debt repayment are supported by cash generation and liquidity.
- Whether environmental, litigation and guarantee-related exposures remain within recorded accruals and do not require material cash collateral or additional charges.