Halliburton Company — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2019; comparisons are to the third quarter and first nine months of 2018. Halliburton provides products and services to the energy industry through Completion and Production and Drilling and Evaluation segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Revenue | $5.55 billion | $6.17 billion | $17.22 billion | $18.06 billion |
| Operating income | $536 million | $716 million | $1.20 billion | $1.86 billion |
| Net income attributable to Halliburton | $295 million | $435 million | $522 million | $992 million |
| Diluted earnings per share | $0.34 | $0.50 | $0.60 | $1.13 |
| Operating margin | 9.7% | 11.6% | 7.0% | 10.3% |
Operating margins are calculated as operating income divided by revenue. Q3 revenue fell 10% and operating income fell 25% year over year. For the first nine months, revenue declined 5% and operating income declined 35%, including impairment and other charges.
- Q3 segment results: Completion and Production revenue declined 16% to $3.51 billion and operating income declined 27% to $446 million. Drilling and Evaluation revenue rose 2% to $2.04 billion, while operating income fell 17% to $150 million.
- Regional contrast: Q3 North America revenue declined 21% to $2.95 billion, principally due to lower activity and pricing for land stimulation services. International revenue grew 7%, with growth across all international regions.
- Cash flow, first nine months: Operating cash flow was $1.28 billion, down from $2.31 billion. Capital expenditures were $1.19 billion; operating cash flow less capital expenditures was approximately $88 million, versus approximately $830 million in 2018.
- Liquidity and debt: Cash and equivalents were $1.57 billion at September 30, 2019, versus $2.01 billion at year-end 2018. Long-term debt was $10.31 billion; total debt carrying value including short-term amounts was $10.33 billion. The company reported $3.5 billion of available committed revolving credit.
- Capital returns: Dividends paid in the first nine months totaled $472 million. The company repurchased $100 million of shares under its program and had approximately $5.2 billion remaining authorized.
Material changes and unusual items
- Q3 operating performance weakened primarily because of lower North American land stimulation activity and pricing. The U.S. land rig count fell 13% year over year in the quarter, and Halliburton stacked more equipment in Q3 than in the first half of 2019.
- For the first nine months, the company recorded $308 million of impairments and other charges: $150 million of long-lived asset impairments, $77 million of severance, $33 million of inventory write-downs, and $48 million of other charges. No such charges were recorded in Q3 2019. The comparable 2018 period included a $265 million write-down of Halliburton’s remaining Venezuela investment.
- Adoption of the new lease standard in January 2019 added approximately $1.1 billion of operating lease right-of-use assets and liabilities. The company said adoption did not materially affect results of operations.
- Inventories rose 12% from year-end 2018 to $3.38 billion, primarily reflecting strategic inventory builds in artificial lift, completion tools and directional drilling.
Outlook, risks and contingencies
- Management expected North American land activity to decline further in Q4 2019, citing reduced customer spending, an oversupplied gas market, holiday and potential weather impacts, and concern about oil demand softness in 2020. It planned additional cost reductions and expected Q4 2019 rig count and completions activity below Q4 2018.
- Management expected international activity to improve steadily and identified mature fields and shallow-water markets as potential sources of revenue and margin growth. These expectations were subject to economic and market conditions.
- Full-year 2019 capital expenditures were expected to be approximately $1.6 billion, down 20% from 2018. Management said it intended to significantly reduce capital expenditures again in 2020 but provided no specific amount.
- Key risks include oil and gas prices, customer spending and payment delays, competitive pricing, geopolitical and regulatory conditions, and the possibility of a global economic slowdown. S&P’s long-term rating was A- with a negative outlook; Moody’s long-term rating was Baa1 with a stable outlook.
- The company had $64 million accrued for environmental matters, including approximately $14 million for six Superfund sites; actual costs could exceed accruals. Approximately $2.1 billion of letters of credit, guarantees and surety bonds were outstanding; some letters of credit could require cash collateralization.
- Halliburton’s authorization to operate in Venezuela under an OFAC general license had been extended through January 22, 2020. Without a further extension, the company expected to cease operations and might be unable to remove assets remaining there; management did not expect expiration to have a material adverse effect.
Important facts for investors to verify
- Whether North American activity and pricing continue to decline, and how further cost reductions affect margins.
- Whether international growth offsets North American weakness and translates into improved segment profitability.
- Cash generation, inventory levels, and execution of the stated 2019 capital-spending plan and 2020 reductions.
- Debt, revolving-credit availability, customer receivable collectability, and any cash-collateral requirements tied to guarantees.
- Developments in Venezuela licensing, environmental matters, and other contingencies, as well as the assumptions underlying management’s outlook.