Halliburton Company — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise stated. Halliburton provides products and services to the upstream oil and gas industry through Completion and Production and Drilling and Evaluation segments.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $5.282 billion | $3.761 billion; up 40% |
| Operating income | $814 million | $449 million; up 81% |
| Operating margin | 15.4% | 11.9% |
| Net income attributable to Halliburton | $511 million | $206 million |
| Diluted earnings per share | $0.56 | $0.23 |
| Operating cash flow | $565 million | $317 million |
| Capital expenditures | $704 million | $404 million |
- Revenue growth was led by Completion and Production, up 62% to $3.172 billion; Drilling and Evaluation revenue rose 17% to $2.110 billion.
- Completion and Production operating income increased to $660 million from $238 million. Drilling and Evaluation operating income declined to $230 million from $270 million.
- Net cash used for investing activities was $917 million, largely reflecting capital spending and purchases of marketable securities. Cash and equivalents declined $368 million during the quarter to $1.030 billion.
- At March 31, cash and marketable securities totaled $1.882 billion. Long-term debt was $3.824 billion, unchanged from year-end 2010. The $2.0 billion revolving credit facility was fully available; current assets were $9.028 billion and current liabilities $2.919 billion.
- Dividends paid were $82 million, or $0.09 per share. The effective tax rate was 31%, versus 36% a year earlier.
Material changes and management commentary
- North America revenue increased 75%, with growth and improved pricing in U.S. land operations, particularly in unconventional oil and liquids-rich plays. U.S. revenue represented 52% of consolidated revenue, versus 41% in Q1 2010.
- International revenue fell 9% sequentially and international operating income fell 61% sequentially amid seasonal weakness, harsh weather, pricing pressure and North African disruptions. Europe/Africa/CIS revenue was essentially flat year over year, but regional operating income declined sharply.
- A $59 million pretax Libya charge reflected doubtful receivables from Libyan national oil companies and inventory believed compromised by unrest. The company ceased customer activity in Libya because of sanctions.
- Gulf of Mexico activity remained depressed following the Macondo incident. Permits resumed in Q1 2011, but recovery timing and return to pre-suspension activity levels were uncertain. Gulf of Mexico operations represented about 4% of consolidated Q1 2011 revenue, compared with about 6% in Q1 2010.
Outlook, risks and contingencies
- Management expected 2011 capital spending of approximately $3.0 billion and quarterly dividends of about $80 million, subject to board approval. It reported approximately $1.7 billion remaining under its share repurchase authorization.
- Management believed North America revenue and margins were likely sustainable through the remainder of 2011, while noting cost pressures and uncertainty around natural gas activity and the Gulf of Mexico. It anticipated international activity gains and potential margin improvement in the second half of 2011 or early 2012.
- Manufacturing expansion in the Eastern Hemisphere and improved North American service delivery were expected to cost approximately $0.01–$0.02 per diluted share in Q2 2011; these initiatives affected Q1 results by about $0.01 per share.
- Macondo exposure: Halliburton had not accrued a loss because it did not consider a loss probable, but said it could not estimate a possible loss or range. It faced more than 370 pollution-related complaints and multiple personal-injury suits, investigations and cross-claims. The company warned that uninsured or non-indemnified liabilities could materially affect liquidity, results and financial condition. Its contract with BP included indemnification provisions, and it had a $600 million general liability insurance program; coverage and enforceability were uncertain and disputed.
- Other contingencies: Halliburton had accrued $53 million for remaining KBR separation-related liabilities, primarily including the Barracuda-Caratinga matter; Petrobras sought $220 million plus interest in arbitration, with a decision pending. Environmental liabilities were $47 million. Approximately $1.5 billion of letters of credit, bank guarantees and surety bonds were outstanding, including $235 million related to Venezuela.
- Key broader risks included political instability and sanctions, customer payment delays (including in Venezuela), offshore drilling regulation and permitting, hydraulic-fracturing regulation, and oil and gas market volatility.
Important facts for investors to verify
- Developments in Macondo litigation and investigations, the potential scope and enforceability of BP indemnification, and insurance coverage; no loss estimate was available in the filing.
- Whether U.S. land demand and pricing can sustain North American margins, and whether Gulf of Mexico permits translate into a meaningful activity recovery.
- Progress in Libya and broader international markets, including collection of receivables, inventory exposure and the timing of anticipated margin improvement.
- Execution of the approximately $3.0 billion capital-spending plan and its effect on cash, alongside the $2.0 billion available revolver and outstanding guarantees.