Halliburton Company — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Halliburton provides products and services to the energy industry through Completion and Production and Drilling and Evaluation. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $8.051 billion | $7.317 billion | $15.399 billion | $14.291 billion |
| Operating income | $1.194 billion | $984 million | $2.164 billion | $886 million |
| Net income attributable to Halliburton | $774 million | $644 million | $1.396 billion | $626 million |
| Diluted earnings per share | $0.91 | $0.69 | $1.64 | $0.67 |
| Operating margin | 14.8% | 13.4% | 14.1% | 6.2% |
- Q2 revenue rose 10% year over year, while operating income increased 21%. Revenue growth reflected higher North American stimulation activity and product sales and broad-based growth in the Eastern Hemisphere.
- For the first half, revenue increased 8%. Operating income rose $1.278 billion, substantially because the prior-year period included a $1.0 billion Macondo loss-contingency charge. Excluding that comparison effect, operations also benefited from stronger North America and Eastern Hemisphere activity.
- Q2 segment results: Completion and Production revenue was $4.942 billion and operating income $887 million; Drilling and Evaluation revenue was $3.109 billion and operating income $414 million. The latter segment’s operating income was essentially flat year over year.
- First-half operating cash flow was $2.075 billion, versus $1.471 billion; capital expenditures were $1.375 billion, versus $1.396 billion. Cash flow less capital expenditures was approximately $700 million, compared with $75 million.
- Cash and equivalents were $2.360 billion at June 30, 2014. Long-term debt was $7.816 billion, unchanged from year-end 2013. Current assets were $14.165 billion and current liabilities $5.369 billion. The company also reported $281 million of fixed-income investments and $3.0 billion of available committed revolving credit.
- First-half dividends paid were $254 million; the quarterly dividend was $0.15 per share. The company repurchased $500 million of stock in the first half. On July 15, 2014, the board increased remaining repurchase capacity to $6.0 billion.
Outlook, commentary, and material risks
- Management expected 2014 capital spending of approximately $3.3 billion and said remaining-year capital expenditures, working-capital needs, and dividends were expected to be funded from operating cash flow. The filing provides no specific consolidated revenue or earnings forecast.
- Management expected North America margins to expand over the rest of 2014 and the Middle East/Asia region to remain the strongest growth region. Latin America activity was expected to improve, though the region had been challenged by lower activity in Brazil and timing of Mexico project approvals and mobilization.
- Management cited long-term energy-demand and service-intensity opportunities, while identifying sluggish developed-market growth and geopolitical tensions—including Iraq, North Africa, and Russia—as downside risks. Possible Iraq disruptions could affect Eastern Hemisphere activity.
- Macondo remains the principal contingency. The recorded liability was $1.3 billion ($278 million current and approximately $1.0 billion non-current). Additional reasonably possible losses could not be reasonably estimated. MDL rulings, claims, investigations, and potential penalties remained pending; an adverse outcome could materially affect liquidity and results.
- Halliburton maintains that BP’s contract generally requires indemnification for certain third-party compensatory claims, but the court ruled that indemnity does not cover punitive damages or Clean Water Act civil penalties. The availability and scope of indemnity and insurance remain uncertain. Of $294 million in Macondo legal fees and related expenses incurred through June 30, $263 million had been reimbursed or was expected to be covered by insurance.
- Venezuelan trade receivables increased to $618 million, about 9% of gross trade receivables; $232 million was classified as long-term. The company reported delayed collections and continued to use the official exchange rate. Alternative exchange rates could have produced a $43 million to $93 million second-quarter foreign-exchange loss on the net monetary position.
- Other matters include ongoing DOJ and SEC investigations into Angola and Iraq compliance issues and a DOJ inquiry concerning pressure-pumping services. The company said it could not predict their outcomes. A KBR tax-sharing arbitration report awarded Halliburton approximately $105 million plus interest, but no recovery was recognized pending resolution of disputes and court proceedings.
Most important facts for investors to verify
- Whether pending Macondo litigation, court rulings, or regulatory action change the $1.3 billion recorded liability or create additional, currently unestimable exposure.
- Whether BP indemnification and insurance reimbursements are ultimately available, particularly for legal costs and any claims not covered by existing rulings.
- Collection timing and recoverability of Venezuelan receivables, and any impact from currency restrictions or exchange-rate changes.
- Whether expected North American margin expansion and Latin American recovery materialize, given regional activity and geopolitical risks.
- How the $3.3 billion capital-spending plan, working-capital requirements, and expanded share-repurchase authorization affect cash generation and leverage.