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HAL > SEC Filings for HAL > Form 10-Q on 25-Jul-2014All Recent SEC Filings

Show all filings for HALLIBURTON CO

Form 10-Q for HALLIBURTON CO


25-Jul-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

Organization
We are a leading provider of services and products to the energy industry. We serve the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field. Activity levels within our operations are significantly impacted by spending on upstream exploration, development, and production programs by major, national, and independent oil and natural gas companies. We report our results under two segments, the Completion and Production segment and the Drilling and Evaluation segment:
- our Completion and Production segment delivers cementing, stimulation, well intervention, pressure control services, well control and prevention services, pipeline and process services, specialty chemicals, artificial lift, and completion products and services. The segment consists of Production Enhancement, Cementing, Completion Tools, Boots & Coots, Multi-Chem, and Artificial Lift.

- our Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise wellbore placement solutions that enable customers to model, measure, drill, and optimize their well construction activities. The segment consists of Baroid, Sperry Drilling, Wireline and Perforating, Drill Bits and Services, Landmark Software and Services, Testing and Subsea, and Consulting and Project Management.

The business operations of our segments are organized around four primary geographic regions: North America, Latin America, Europe/Africa/CIS, and Middle East/Asia. We have significant manufacturing operations in various locations, including the United States, Canada, Malaysia, Mexico, Singapore, and the United Kingdom.
With over 80,000 employees, we operate in approximately 80 countries around the world, and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.
Financial results
Our consolidated revenue for the second quarter of 2014 was $8.1 billion, an increase of $734 million, or 10%, from the second quarter of 2013, attributable to increased stimulation activity and product sales in North America, as well as higher activity across most of our product service lines in the Eastern Hemisphere. On a consolidated basis, almost all of our product service lines experienced revenue growth from the second quarter of 2013. Additionally, during the second quarter of 2014, our revenue outside of North America comprised approximately 46% of consolidated revenue and represents our ongoing strategy to grow our international business and balance our geographic mix. During the first half of 2014, we produced revenue of $15.4 billion and operating income of $2.2 billion. Revenue increased $1.1 billion, or 8%, from the first half of 2013, primarily due to higher production enhancement activity in the United States land market and increased activity in the Eastern Hemisphere, partially offset by lower activity in Latin America. Operating income increased $1.3 billion during the first half of 2014, as compared to the first half of 2013, mainly due to the $1.0 billion, pre-tax, adjustment of our loss contingency related to the Macondo well incident recorded in the first half of 2013. Also contributing to the increase in operating income were strong activity levels for production enhancement services in our United States land market.
Business outlook
We continue to believe in the strength of the long-term fundamentals of our business. Energy demand is expected to increase over the long term driven by economic growth in developing countries despite current underlying downside risks, such as sluggish growth in developed countries and uncertainties associated with geopolitical tensions in North Africa, Iraq, and Russia. Furthermore, development of new resources is expected to be more complex, resulting in higher service intensity.
In North America, our margins have improved during the year which we believe is due to increasing demand for our services and efficiencies in our cost structure, gained through our strategic initiatives and the application of key technologies. The industry has seen a shift from natural gas plays to oil and liquids-rich basins, as customers allocate their budgets to basins with the best economics. In addition, we are continuing to observe a meaningful switch to multi-well pad activity among our customer base, which is resulting in increased drilling and completion service efficiency. We believe the incremental efficiency gains provided by multi-well pad drilling will continue to enable us to leverage our operational scale and expertise.
Outside of North America, both revenue and operating income increased in the first half of 2014, compared to the first half of 2013. We believe that international growth in 2014 will come from volume increases as we deploy resources on our recent contract wins and new projects, continued improvement in markets where we have made strategic investments, the introduction of new technology, and increased pricing and cost recovery on select contracts. We also believe that international unconventional oil and natural gas, mature field, and deepwater projects will contribute to activity improvements over the long term, and we plan to leverage our extensive experience in North America to capitalize on these opportunities. Consistent with our long-term strategy to grow our operations outside of North America, we also expect to continue to invest in capital equipment for our international operations.


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We have experienced strong results in the Eastern Hemisphere, driven by the Middle East/Asia region, which we expect to continue as our highest growth region for the full year 2014, despite the potential for activity disruptions in Iraq later this year. In Latin America, it has been a challenging year, primarily as a result of reduced activity in Brazil and the timing of contract approvals and our recent mobilization of integrated project management work in Mexico; however, we believe activity will improve for the remainder of the year, driven by higher software and consulting services and increased integrated project activity. As such, this does not change our long-term outlook for Latin America, which we expect to contribute significantly to our future growth and profitability.
We are continuing to execute several key initiatives in 2014, which include the following strategies:
- focusing on unconventional plays, mature fields, and deepwater markets by leveraging our broad technology offerings to provide value to our customers through integrated solutions and enabling them to more efficiently drill and complete their wells;

- exploring opportunities for acquisitions that will enhance or augment our current portfolio of services and products, including those with unique technologies or distribution networks in areas where we do not already have significant operations;

- making key investments in technology and infrastructure to maximize growth opportunities. To that end, we are continuing to migrate our technology and manufacturing capacity, as well as our supply chain, closer to our customers in the Eastern Hemisphere;

- improving working capital, and managing our balance sheet to maximize our financial flexibility. We are deploying a project to improve service delivery that we expect to result in, among other things, significant improvements to our current order-to-cash and purchase-to-pay processes;

- growing our international revenues and margins by continuing to invest capital and resources in these markets;

- improving our North America margins by leveraging technologies and reducing costs through more efficient operations; and

- continuing to seek ways to be one of the most cost efficient service providers in the industry by maintaining capital discipline and leveraging our scale and breadth of operations.

Our operating performance and business outlook are described in more detail in "Business Environment and Results of Operations." Financial markets, liquidity, and capital resources We believe we have invested our cash balances conservatively and secured sufficient financing to help mitigate any near-term negative impact on our operations from adverse market conditions. For additional information, see "Liquidity and Capital Resources" and "Business Environment and Results of Operations."


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LIQUIDITY AND CAPITAL RESOURCES

Cash and equivalents were $2.4 billion at both June 30, 2014 and December 31, 2013. As of June 30, 2014, approximately $327 million of the $2.4 billion of cash and equivalents was held by our foreign subsidiaries and would be subject to United States tax if repatriated. However, our intent is to permanently reinvest these funds outside of the United States and our current plans do not suggest a need to repatriate them to fund our United States operations. At June 30, 2014, we also held $281 million of investments in fixed income securities compared to $373 million at December 31, 2013. These securities are reflected in "Other current assets" and "Other assets" in our condensed consolidated balance sheets.
Significant sources and uses of cash
Cash flows from operating activities were $2.1 billion in the first half of 2014.
Capital expenditures were $1.4 billion in the first half of 2014, and were predominantly made in our Production Enhancement, Sperry Drilling, Cementing, Wireline and Perforating, and Testing and Subsea product service lines. In the first quarter of 2014, we repurchased approximately 8.9 million shares of our common stock for a total cost of $500 million.
During the first half of 2014, our primary components of working capital (receivables, inventories, and accounts payable) increased by a net $457 million, primarily due to increased business activity.
We paid $254 million in dividends to our shareholders in the first half of 2014.
During the first half of 2014, we paid $240 million for acquisitions of various businesses to further enhance our existing product service lines.
During the first quarter of 2014, we received a $155 million income tax refund, including interest, for agreed upon tax items for the tax years 2003 through 2006 and 2008 through 2009.
Future sources and uses of cash
In 2013, we were awarded $105 million by an arbitrator regarding amounts owed by KBR under our Tax Sharing Agreement with KBR. KBR is contesting the award and, although the arbitrator recently issued a supplemental report that reaffirmed the original award, there is uncertainty as to the ultimate timing and amount of any payment. See Note 5 to the condensed consolidated financial statements for further information.
Capital spending for 2014 is currently expected to be approximately $3.3 billion. The capital expenditures plan for 2014 is primarily directed toward our Production Enhancement, Sperry Drilling, Cementing, Boots & Coots, and Wireline and Perforating product service lines, with an increasing amount dedicated to our operations in North America.
Subject to Board of Directors approval, our intention is to pay dividends representing at least 15% to 20% of our net income on an annual basis. Currently, our dividend rate is $0.15 per common share, or approximately $128 million per quarter. On July 15, 2014, our board of directors increased the authorization to repurchase our common stock by approximately $4.8 billion, to a new total remaining repurchase capacity of $6.0 billion, which may be used for open market and other share purchases.
We are continuing to explore opportunities for acquisitions that will enhance or augment our current portfolio of services and products, including those with unique technologies or distribution networks in areas where we do not already have significant operations.
Other factors affecting liquidity
Financial position in current market. As of June 30, 2014, we had $2.4 billion of cash and equivalents, $281 million in fixed income investments, and a total of $3.0 billion of available committed bank credit under our revolving credit facility. Furthermore, we have no financial covenants or material adverse change provisions in our bank agreements, and our debt maturities extend over a long period of time. Although a portion of earnings from our foreign subsidiaries is reinvested outside the United States indefinitely, we do not consider this to have a significant impact on our liquidity. We currently believe that our capital expenditures, working capital investments, and dividends, if any, during the remainder of 2014 can be fully funded through cash from operations. As a result, we believe we have a reasonable amount of liquidity and, if necessary, additional financing flexibility given the current market environment to fund our potential contingent liabilities, if any. However, as discussed in Note 6 to the condensed consolidated financial statements, there are numerous future developments that may arise as a result of the Macondo well incident that could have a material adverse effect on our liquidity.
Guarantee agreements. In the normal course of business, we have agreements with financial institutions under which approximately $2.4 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of June 30, 2014. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.
Credit ratings. Credit ratings for our long-term debt remain A2 with Moody's Investors Service and A with Standard & Poor's. The credit ratings on our short-term debt remain P-1 with Moody's Investors Service and A-1 with Standard & Poor's.


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Customer receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers' cash flow from operations and their access to the credit markets as well as unsettled political conditions. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition. See "Business Environment and Results of Operations - International operations - Venezuela" for further discussion related to Venezuela.


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BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS

We operate in approximately 80 countries throughout the world to provide a comprehensive range of discrete and integrated services and products to the energy industry related to the exploration, development, and production of oil and natural gas. A significant amount of our consolidated revenue is derived from the sale of services and products to major, national, and independent oil and natural gas companies worldwide. The industry we serve is highly competitive with many substantial competitors in each segment of our business. In the first half of 2014, based upon the location of the services provided and products sold, 51% of our consolidated revenue was from the United States, compared to 49% of consolidated revenue from the United States in the first half of 2013. No other country accounted for more than 10% of our revenue during these periods. Operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, force majeure, war or other armed conflict, expropriation or other governmental actions, inflation, foreign currency exchange restrictions, and highly inflationary currencies, as well as other geopolitical factors. We believe the geographic diversification of our business activities reduces the risk that loss of operations in any one country, other than the United States, would be materially adverse to our consolidated results of operations.
Activity within our business segments is significantly impacted by spending on upstream exploration, development, and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption.
Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, the world economy, the availability of credit, government regulation, and global stability, which together drive worldwide drilling activity. Our financial performance is significantly affected by oil and natural gas prices and worldwide rig activity, which are summarized in the following tables. Additionally, due to improved drilling and completion efficiencies as
more of our customers move to multi-well pad drilling, our financial performance is impacted by well count in the North America market.
The following table shows the average oil and natural gas prices for West Texas Intermediate (WTI), United Kingdom Brent crude oil, and Henry Hub natural gas:

                                           Three Months Ended           Year Ended
                                                June 30                 December 31
                                          2014              2013           2013
Oil price - WTI (1)                $          103.31   $      94.09   $       97.99
Oil price - Brent (1)                         109.66         102.74          108.71
Natural gas price - Henry Hub (2)               4.61           4.01            3.73

(1) Oil price measured in dollars per barrel
(2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu


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The historical average rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows:

                                         Three Months Ended        Six Months Ended
                                               June 30                 June 30
Land vs. Offshore                            2014         2013       2014        2013
United States:
Land                                      1,796          1,709     1,760        1,708
Offshore (incl. Gulf of Mexico)              56             52        56           52
Total                                     1,852          1,761     1,816        1,760
Canada:
Land                                        200            152       363          344
Offshore                                      2              2         2            2
Total                                       202            154       365          346
International (excluding Canada):
Land                                      1,023            974     1,021          966
Offshore                                    325            332       321          324
Total                                     1,348          1,306     1,342        1,290
Worldwide total                           3,402          3,221     3,523        3,396
Land total                                3,019          2,835     3,144        3,018
Offshore total                              383            386       379          378

                                         Three Months Ended        Six Months Ended
                                               June 30                 June 30
Oil vs. Natural Gas                          2014         2013       2014        2013
United States (incl. Gulf of Mexico):
Oil                                       1,532          1,398     1,482        1,365
Natural gas                                 320            363       334          395
Total                                     1,852          1,761     1,816        1,760
Canada:
Oil                                         101             95       220          247
Natural gas                                 101             59       145           99
Total                                       202            154       365          346
International (excluding Canada):
Oil                                       1,077          1,026     1,073        1,023
Natural gas                                 271            280       269          267
Total                                     1,348          1,306     1,342        1,290
Worldwide total                           3,402          3,221     3,523        3,396
Oil total                                 2,710          2,519     2,775        2,635
Natural gas total                           692            702       748          761


                                         Three Months Ended        Six Months Ended
                                               June 30                 June 30
Drilling Type                                2014         2013       2014        2013
United States (incl. Gulf of Mexico):
Horizontal                                1,243          1,088     1,213        1,108
Vertical                                    394            455       391          448
Directional                                 215            218       212          204
Total                                     1,852          1,761     1,816        1,760


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Our customers' cash flows, in most instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets, while the opposite is true for higher oil and natural gas prices.
WTI oil spot prices fluctuated throughout 2013 between a low of $87 per barrel to a high of $98 per barrel. Brent crude oil spot prices fluctuated between a low of $97 per barrel and high of $119 per barrel during this same period. During the first half of 2014, WTI oil spot prices ranged between $91 per barrel and $108 per barrel, while Brent crude oil spot prices ranged between $103 per barrel and $115 per barrel. According to the United States Energy Information Administration (EIA), the current conflict in Iraq, which has created concerns that the conflict could trigger supply disruptions, and a delay in Libyan oil exports have contributed to increases in the WTI and Brent crude oil spot prices. This has helped Brent crude oil spot prices reach their highest daily level of the year towards the end of the second quarter of 2014. Additionally, crude oil inventory levels at the Cushing, Oklahoma storage hub, which is the delivery point for WTI, have fallen by more than half since the start of the year, in part because of the relocation of crude oil to refining centers along the Gulf Coast through new pipelines. This has caused a reduction to the differential between WTI and Brent crude oil spot prices, which has narrowed from an average of more than $13 per barrel early in 2014 to approximately $6 per barrel in June of 2014.
According to the International Energy Agency's (IEA) July 2014 "Oil Market Report," 2014 global oil demand is expected to average approximately 92.7 million barrels per day, which is up 1.3% from 2013. Although the latest European, Chinese, and Iraq economic conditions have caused some alarm, the IEA still forecasts overall demand momentum to accelerate modestly in 2014. During the first half of 2014, average Henry Hub natural gas prices in the United States increased approximately 31% compared to the first half of 2013, due to an increase in natural gas storage withdrawals related to an unseasonably harsh winter in the early part of 2014. Higher natural gas prices this year contributed to a decline in natural gas consumption in the power sector, and the EIA July 2014 "Short Term Energy Outlook" forecasts natural gas spot prices will remain near current levels until the start of the next winter heating season, with natural gas consumption in the power sector to increase next year. North America operations
Volatility in oil and natural gas prices can impact our customers' drilling and production activities, particularly in North America. For the first half of 2014, the average natural gas directed rig count fell by 15 rigs, or 3%, while the average oil directed rig count increased 6%, compared to the first half of 2013. In the first half of 2014 our North America revenue and operating income both increased 10% relative to the first half of 2013. Service intensity levels have continued to expand, as completion volumes per well for the first half of 2014 increased over the first half of 2013. We are optimistic about the potential of increased activity in the second half of the year and expect our North America margins to expand over the remainder of 2014.
In the United States land market, there was a moderate increase in rig count over the past year, driven by an increase in horizontal rigs in the Mid-Continent Region and Permian Basin. We see service intensity expanding across many basins which is evidenced by longer laterals, increased stage counts, and rising volumes per stage. This trend is beneficial to our overall business and should enable us to leverage our broad technology offerings. In the Gulf of Mexico, our deepwater activity outlook remains positive as we are expecting additional rigs to arrive by the end of 2014. Over the long term, the continued growth in the Gulf of Mexico is dependent on, among other things, governmental approvals for permits, our customers' actions, and new deepwater rigs entering the market.
International operations
The industry experienced steady volume increases in the first half of 2014, with average international rig count improving by 4% compared to the first half of 2013. In the Eastern Hemisphere, we continue to execute our growth strategy. Relative to the first half of 2013, we grew our Eastern Hemisphere revenue and operating income by 10% and 17%, respectively, as a result of growth in both the Middle East/Asia and Europe/Africa/CIS regions. We had strong growth in our Saudi Arabia operations due to increased activity in all of our product service lines. We are seeing our Eastern Hemisphere activity expand at a steady rate and expect this trend to continue for the remainder of 2014, despite the potential for further activity disruptions in Iraq later this year.
In Latin America, although it has been a challenging year, we remain optimistic that activity will improve in the second half of the year, driven primarily by an increase in integrated project activity. Over the long term, we are optimistic about our position in Latin America and the future growth potential of this market. Constitutional changes for energy reform in Mexico seem to be progressing, and we believe the opportunity for foreign investment in this market will be beneficial to our business.
Venezuela. As of June 30, 2014, our total net investment in Venezuela was approximately $493 million, including net monetary assets of $106 million denominated in Bolívares. Also, at June 30, 2014 we had $239 million of surety bond guarantees outstanding relating to our Venezuelan operations.


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We have experienced delays in collecting payment on our receivables from our primary customer in Venezuela. These receivables are not disputed, and we have not historically had material write-offs relating to this customer. . . .

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