Halliburton Company — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Halliburton provides products and services to the upstream oil and gas industry through Completion and Production and Drilling and Evaluation segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $7.234B | $5.935B | $14.102B | $11.217B |
| Operating income | $1.201B | $1.161B | $2.224B | $1.975B |
| Income from continuing operations | $747M | $741M | $1.385B | $1.253B |
| Net income attributable to Halliburton | $737M | $739M | $1.364B | $1.250B |
| Diluted earnings per share | $0.79 | $0.80 | $1.47 | $1.36 |
Revenue and margins: Q2 revenue rose 22% year over year, while operating income rose 3%. The implied operating margin was approximately 16.6%, versus 19.6% a year earlier. For the first half, revenue increased 26% and operating income 13%; management reported an approximately 16% operating margin. Q2 diluted EPS was down one cent year over year; first-half diluted EPS increased 8%.
Segments: Q2 Completion and Production revenue grew 23% to $4.460B, but operating income was essentially flat at $914M. Drilling and Evaluation revenue rose 20% to $2.774B and operating income increased 21% to $393M. First-half segment revenue and operating income increased in both segments; North American Completion and Production profitability was pressured by guar-gum costs and pricing.
Cash flow and investment: First-half operating cash flow was $1.135B, down from $1.388B. Capital expenditures were $1.651B, compared with $1.423B, leaving operating cash flow below capital spending. Cash declined to $2.172B from $2.698B at year-end 2011. First-half dividends paid were $167M.
Balance sheet and liquidity: At June 30, cash was $2.172B, current assets $12.534B, current liabilities $4.440B, and long-term debt carrying value $4.820B. Long-term debt carrying value was unchanged from year-end; its disclosed fair value was $6.3B. Halliburton reported $2.0B of available committed revolving credit, no financial covenants or material adverse change provisions in its bank agreements, and long-term debt maturities spread over time. About $416M of cash held by foreign subsidiaries would be subject to U.S. tax if repatriated; management intended to keep it invested abroad. Credit ratings were A2 (Moody’s) and A (S&P) for long-term debt.
Changes versus prior period and management commentary
- Growth reflected higher U.S. activity in oil and liquids-rich basins and increased international activity. U.S. revenue represented 56% of first-half revenue, versus 54% in the prior-year period.
- U.S. natural-gas-directed rig counts fell 24% year over year in the first half, while oil-directed rig counts increased 41%. The shift contributed to relocation costs and inefficiencies; guar-gum inflation and North American pricing pressure also weighed on margins.
- Corporate and other expenses increased to $487M for the first half from $157M, principally reflecting a $300M Macondo loss contingency, higher legal costs, and strategic investment expenses. First-half 2011 included an $11M employee-separation charge and a $59M Libya-related charge.
- Interest expense increased, primarily following issuance of $1.0B of senior notes in November 2011.
Outlook, contingencies, and risks
- Management expected 2012 capital spending of $3.6B–$3.8B and dividends of approximately $80M per quarter, subject to board approval. It also cited approximately $1.7B remaining under its share-repurchase authorization.
- Management expected continued near-term North American pricing pressure in production enhancement and guar-gum cost inflation. It anticipated a modest further decline in natural-gas drilling, cautious customer spending amid oil-price volatility and softer natural-gas-liquids prices, and gradual international activity improvement. Gulf of Mexico recovery depended on sustained permit approvals and rig arrivals; Libya activity was not expected to return to pre-2011 levels until late 2012 or 2013.
- Macondo: Halliburton accrued a $300M probable loss contingency in Q1 2012, included in cost of services and other liabilities. Additional reasonably possible losses could not be reasonably estimated, and the company warned that liabilities could materially affect liquidity, results, or financial condition. It faced more than 400 complaints and related claims and investigations. The DOJ had not commenced criminal proceedings against Halliburton as of July 27, 2012, but its investigation continued. BP’s proposed settlement with plaintiffs was estimated by BP at about $7.8B; Halliburton said it could not predict the settlement’s effect on claims against it. A court ruling required BP to indemnify certain third-party compensatory claims, but not punitive damages or Clean Water Act civil penalties; other indemnity issues remained unresolved. Halliburton reported $117M of Macondo legal fees reimbursed or expected to be covered by insurance.
- Other legal and environmental matters: Halliburton accrued $29M for the Duncan, Oklahoma matter and reported $75M of total environmental reserves. It also disclosed a $201M arbitration award against KBR related to Barracuda-Caratinga, for which Halliburton had provided indemnification; KBR’s motion to vacate remained pending. A dispute with KBR over tax-sharing obligations included Halliburton’s asserted $256M claim, with no recovery recognized.
- Other risks included ongoing DOJ and SEC inquiries and internal investigations involving Angola and Iraq, hydraulic-fracturing regulation, political and economic instability, cybersecurity, customer payment delays (including in Venezuela), and potential cash-collateral requirements on certain guarantees. Letters of credit, bank guarantees, and surety bonds totaled approximately $1.8B.
Important facts for investors to verify
- How Macondo litigation, regulatory proceedings, BP’s settlement, indemnification rulings, and insurance coverage could change Halliburton’s $300M accrual and ultimate cash exposure.
- Whether operating margins recover as guar-gum costs, North American pricing pressure, and the shift in drilling activity evolve.
- Whether operating cash flow can fund planned capital spending, dividends, and working-capital needs; first-half operating cash flow was below capital expenditures.
- Developments in the Angola and Iraq investigations, Duncan environmental claims, the KBR disputes, and Venezuela customer collections and guarantees.
- Execution of the $3.6B–$3.8B capital-spending plan and the timing of expected Gulf of Mexico and international activity improvements.