Halliburton Company — Q3 2018 Form 10-Q
Business context and reporting period
Oilfield services and products provider operating in more than 80 countries, with Completion and Production and Drilling and Evaluation segments. This filing covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017. Results are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $6.172bn | $5.444bn | $18.059bn | $14.680bn |
| Operating income | $716m | $642m | $1.859bn | $991m |
| Net income attributable to Halliburton | $435m | $365m | $992m | $361m |
| Diluted EPS | $0.50 | $0.42 | $1.13 | $0.41 |
| Operating margin | 11.6% | 11.8% | 10.3% | 6.8% |
Q3 revenue increased 13% year over year, while operating income rose 12%; nine-month revenue increased 23% and operating income 88%. Nine-month improvement reflected stronger activity, particularly North American pressure pumping, and included Venezuela-related charges in both years. Q3 segment revenue grew 18% in Completion and Production and 5% in Drilling and Evaluation. By region, Q3 North America revenue rose 18%, Middle East/Asia 12%, Europe/Africa/CIS 5%, while Latin America declined 2%.
For the first nine months, operating cash flow was $2.305bn, capital expenditures were $1.475bn, and operating cash flow less capital expenditures was approximately $830m. Cash declined to $2.057bn from $2.337bn at year-end. Cash dividends were $473m; share repurchases totaled $200m. At September 30, total debt carrying value was $10.459bn, versus $10.942bn at year-end; cash was $2.057bn. Current assets were $11.436bn and current liabilities $4.953bn. Halliburton reported $3.0bn available under its revolving credit facility.
Material changes and unusual items
- Compared with Q2 2018, revenue was flat and operating income decreased 9%, which management attributed largely to a softer North American market, lower stimulation pricing, and increased U.S. pressure-pumping maintenance.
- The company wrote down its remaining Venezuela investment in Q1 2018: a $265m pre-tax charge in operating expenses and a $312m net-of-tax impact, including accrued local taxes. Revenue from Venezuelan customers was moved to cash-basis accounting effective April 1.
- The 2017 nine-month comparison included a $262m Venezuela fair-value charge and $104m of early debt-extinguishment costs. Nine-month 2018 interest expense was $417m versus $478m in 2017.
- The Q3 effective tax rate was 18.8% versus 27.2% a year earlier; the nine-month rate was 27.1% versus 18.5%, affected in 2018 by nondeductible Venezuela losses and accrued local taxes. Adoption of the new revenue standard had no material reported impact.
Outlook, commentary, and risks
Management expected North American pipeline/offtake constraints, exhausted customer budgets, and holiday downtime to weigh on Q4 2018 activity. It anticipated a 2019 rebound as budgets refresh and takeaway capacity expands, while planning to adjust costs and maintain equipment. Management described international markets as recovering, but early in the cycle and subject to pricing pressure. Full-year 2018 capital expenditures were expected to be approximately $2.0bn; the quarterly dividend was $0.18 per share, subject to board approval.
Key risks include volatile energy prices and customer spending, North American pricing and activity pressure, customer collection delays, and geopolitical, currency, sanctions, and payment risks in Venezuela. The filing describes $1.9bn of outstanding letters of credit, guarantees, and surety bonds, some of which could trigger cash collateralization. Environmental reserves were $44m; the company cautioned actual costs could exceed accruals. A securities case remained pending; management stated it intended to defend it. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether North American activity, pricing, and takeaway capacity developed as management expected for Q4 2018 and 2019.
- Cash conversion and working-capital demands: inventories increased $491m and receivables increased $490m from year-end.
- Venezuela exposure following the write-down, cash-basis revenue policy, sanctions developments, and customer payment collection.
- Actual capital spending versus the approximately $2.0bn full-year outlook, and the balance between investment, dividends, and repurchases.
- Debt, revolver availability, contingent guarantee collateral requirements, and potential environmental or litigation exposures.