Halliburton (HAL) Delays Q1 Conf. Call; Issues Update on Operations, Outlook (BHI)

Halliburton (NYSE: HAL) announced that, due to the upcoming April 30, 2016, deadline in its merger agreement with Baker Hughes, the conference call scheduled for Monday, April 25, 2016, to discuss the first quarter 2016 financial results is postponed until Tuesday, May 3, 2016. As previously announced, Halliburton and Baker Hughes agreed to extend the time period under the merger agreement to obtain regulatory approvals to no later than April 30, 2016, after which the parties may continue to seek relevant regulatory approvals or either of the parties may terminate the merger agreement.

Total company revenue of $4.2 billion for the first quarter of 2016 represents a 17% decline sequentially, compared to a 21% decline in the worldwide rig count. Disruptive market conditions persisted in the first quarter, as U.S. rig counts reached a record low and the worldwide rig count is at the lowest level since 1999.

*** The Street sees Q1 revenue of $4.16 billion.

“Life has changed in the energy industry, especially in North America, and over the past several quarters we have taken the steps to adapt to that fact,” said Dave Lesar, Chairman and CEO. “Operators globally are under immense pressure, and many of our North America customers are fighting to maintain some value for their shareholders. Our goal is to work with those customers to get through these tough times.

“Our customers have taken defensive actions to solidify their finances including significant reductions to headcount and capital spend. While these were necessary actions, it clearly will result in production declines in the back half of 2016. But even when operators feel better about the markets, they will still face issues of balance sheet repair and we believe they will be cautious in adding rigs back. As activity levels recover, we believe there will be a structural shift to lowering cost per barrel of oil equivalent, through more collaborative business models with service providers, more aggressive application of our industry-leading technologies, and less duplicative costs,” added Lesar.

North America

“In North America, the industry experienced another tough quarter with the average U.S. rig count down 27% sequentially. By comparison, our revenue was down 17%, outperforming our peer group, and our completions activity was only down single digits sequentially, demonstrating our clients’ continued flight to quality. What we are experiencing today is far beyond headwinds; it is unsustainable. My definition of an unsustainable market is one where all service companies are losing money in North America, which is where we are now. However, our margins have continued to show resilience despite the aggressive activity and pricing declines we have seen since the peak, with decremental margins of only 22% for the quarter,” said Jeff Miller, President.

“From the peak in the fourth quarter of 2014, the U.S. rig count has declined almost 80%, setting a new record low. By comparison, our North America revenue is down 62% over the same period, again outperforming our peers, and operating income has only now slipped to a quarterly loss position. The second quarter average land rig count is already down more than 20% sequentially, and setting new record lows every week. Nevertheless, we believe we will see the landing point for the U.S. rig count during the second quarter. Once we see stability in the rig count, our cost cutting measures will start to catch up. Previous downturns indicate that there is typically at least a one quarter lag after the rig count flattens before we see our margins begin to improve.

“Our technology is squarely directed towards reducing cost per barrel of oil equivalent and continued client uptake validates our approach. We continue to work with the key customers that have the best acreage and are willing to work with us in a collaborative way. In some cases today, this may mean doing work at a loss, but our intention is to deepen our collaborative relationship with these strategic customers through this market, and when the recovery comes we believe these operators – and therefore Halliburton – will be best-positioned for the upside.

International

“The international markets continue to hold up better than North America, but they are certainly not immune to the macro challenges,” continued Miller. “At current commodity prices, many of our customers’ international projects are not economical. We believe much work remains to realize the value that can be achieved through collaboration. This conversation takes many forms, including eliminating redundant activities that do not add value, finding productive but not excessive solutions, and improving well designs to help make more barrels.

“We are pleased with the tone of these recent discussions, as they play to Halliburton’s strengths. Our ability to reduce cost helps us win and retain work, and our service quality has continued to improve in the face of a distracting market. We have improved our service quality by 36% over the last five years, as measured by reduction of down time, and our safety metrics have improved consistently over the last few years. When it comes to customers awarding work, price is always a factor, but in any pricing environment, better service quality actually results in the lowest cost solution. Although the pipeline of opportunities is substantially smaller in this market, we continue to win our share of new international work across the globe.”

Restructuring

“There is no doubt this is one of the most challenging markets the industry has ever experienced, as we face a more than 30% decline in global drilling and completion spend for the second straight year. Further, we expect to see an additional 50% decline in North America spend in 2016, following last year’s 40% decline. Given this outlook, we took a rational, hard-nosed look at our business, from three perspectives: what our customers are doing, what our competitors are doing, and what we can do. Here’s what we concluded:

“Many customers are struggling to survive and maintain some value for their investors. They are doing this by cutting their capital costs, drilling their best acreage, pushing service pricing down, stretching payment terms, and radically restructuring their balance sheets through debt to equity conversions or dilutive equity deals.

“A large number of competitors, especially in North America, are rebasing their cost structures downward, in many cases by converting their debt to equity, and underinvesting in areas such as maintenance and technology, while continuing to price service work at less than cost.

“At Halliburton, we revisited every cost from manufacturing to delivery logistics to field operations. This included looking hard at capital equipment needs, required headcount and service delivery infrastructure.

“It was easy to conclude after this assessment that the industry is grossly overcapitalized, especially in North America. To reflect our current estimate of market requirements, we took a $2.1 billion after-tax restructuring charge in the first quarter related primarily to asset write-offs and severance costs.

Capital Equipment

“There is excess service capacity across all of our product lines, with the largest single component relating to our North America pressure pumping business.

“Over the last four years we have been systematically converting our pressure pumping fleet in North America to the Frac of the Future design. Our Q10 system is operating more efficiently and better than expected; even when compared to our prior generation of industry-leading horsepower, the difference is dramatic. The reality of today’s market is that operational reliability is the name of the game, as it leads to lower cost per barrel. The Q10 system is the most reliable in the market today, contributing greatly to the flight to quality by our customers. While some of our older equipment is actually better than what our competition has now, it is not better than the Q10 and there is simply no need for it in this market. Therefore, we have impaired a large portion of our older, non-Q10 pumping equipment.

“It is important to note that we did generate outstanding returns for our shareholders over the lifespan of this equipment. Even after the impairment we took this quarter, the average return on this equipment was approximately 20 percent, which is significantly higher than our cost of capital and we believe is best-in-class among our peer group. Depending on the age and condition of this equipment, it has either been permanently removed from the fleet, or it has been cold-stacked. When market conditions improve, we have multiple levers we can pull, including accelerating the manufacturing and deployment of additional Q10 units.

Headcount

“Responding to the reality of the market, we force-fit our employee headcount to available activity levels. This provides sustainable structural savings without compromising our ability to add personnel to serve the market when it recovers. This included consolidating management roles across countries and centralizing support functions. This resulted in a workforce reduction of more than 6,000 during the first quarter. Since the downturn began in late 2014, we have reduced our global headcount by approximately one-third.

Service Infrastructure

“By the end of the first quarter, we had closed, or are currently in the process of closing, over one hundred different service points worldwide. These closures ranged from elimination of underutilized stock points to the consolidation of individual service centers.

“In addition, our view of the fundamental changes to the market has led us to take action and reduce the infrastructure that had been maintained in anticipation of the pending Baker Hughes acquisition. We are not making any decisions that would permanently impair our logistical infrastructure, or ability to flex back up, but we see no scenario in the current market where we need this additional infrastructure. We have demonstrated in the past that we have the ability to react quickly in a recovery and expand the business while maintaining higher incremental margins than our competitors.

“In summary, the actions during the first quarter were difficult decisions, but were the right thing to do for the health of the business, and to help mitigate the market reckoning facing our industry. We believe these actions present an opportunity for us to slingshot out of the recovery, with higher incremental margins than we have typically seen in other cycles.

“We believe our focus on execution and technology geared to deliver the lowest cost per barrel will allow our customers to make better wells and allow Halliburton to outperform our peers. And we continue to believe that the longer it takes the recovery to occur, the sharper it will be, that North America will offer the greatest upside, and that Halliburton will be positioned to outperform,” concluded Lesar.

Geographic Regions

North America

North America revenue in the first quarter of 2016 was $1.8 billion, a 17% decrease sequentially, relative to a 27% decline in average U.S. rig count. We had an operating loss of $39 million. These declines were driven by reduced activity throughout the United States land sector, particularly pressure pumping services, along with a decrease in completion tools sales in the Gulf of Mexico. Across the major North America basins, we are seeing continued uptake of our AccessFracTM system to help our customers maximize reservoir contact, including starting a new program with a major customer in the Duvernay formation in Canada.

International

International revenue in the first quarter of 2016 was $2.4 billion, an 18% decrease sequentially, driven primarily by decreased activity across the majority of our product service lines, specifically pressure pumping services, completion tools sales and drilling services. International first quarter operating income was $310 million, which decreased $192 million, or 38%, sequentially, driven by lower completion tools and software sales.

Latin America revenue in the first quarter of 2016 was $541 million, a 22% decrease sequentially, with operating income of $48 million, a 51% decrease sequentially. These declines were a result of reduced activity in Mexico, Brazil and Colombia. In addition, during the quarter we made the decision to begin curtailing activity in Venezuela. From a product line perspective, Baroid, Cementing and Landmark experienced the largest sequential declines in both revenue and operating income. During the quarter, we saw a continued expansion of unconventional technology into Latin America, including the Illusion® Frac Plug and our FracInsight® software in Argentina, as well as the first deployment of our DecisionSpace® 3D Asset Management Center in Ecuador.

Europe/Africa/CIS revenue in the first quarter of 2016 was $778 million, a 19% decline sequentially, with operating income of $57 million, a 54% decrease sequentially. The decline for the quarter was primarily driven by a sharp reduction of activity in the North Sea due to seasonal weather-related activity declines, along with lower completion tools sales and drilling activity in Angola and Nigeria. We saw increased uptake of our customized chemistry solutions in the North Sea throughout the first quarter, including our Baroid BaraECD® drilling fluid system and both iCem® and WellLife® cementing software, which helped our customer successfully pump a critical phase of their well.

Middle East/Asia revenue in the first quarter of 2016 was $1.1 billion, a 15% decline sequentially, with operating income of $205 million, a 27% decrease sequentially. This was primarily the result of significant reductions in activity and pricing throughout the Asia Pacific markets. Middle East operations declined modestly as a result of ongoing pricing concessions. We continued to provide solutions to our customers in the mature fields segments of Middle East/Asia. First, we deployed our recently released SpectrumSM Diagnostic Services with production logging for a major NOC customer. We also delivered WellLock® resin solutions to multiple customers in the Middle East, remediating a well and providing a secondary barrier where standard cement could not reach.

Operating Segments

Completion and Production

Completion and Production (C&P) revenue in the first quarter of 2016 was $2.3 billion, a decrease of $507 million, or 18%, from the fourth quarter of 2015, due to a decline in activity and pricing in most of our product services lines, particularly North America pressure pumping services which drove the majority of the C&P revenue decline. International revenue also declined as a result of reductions in activity in all regions coupled with lower pricing in Angola, Australia, and the North Sea.

C&P operating income in the first quarter was $30 million, which decreased $114 million, or 79%, compared to the fourth quarter of 2015, with decreased profitability across all regions as a result of global activity and pricing reductions, primarily in North America pressure pumping services.

Drilling and Evaluation

Drilling and Evaluation (D&E) revenue in the first quarter of 2016 was $1.9 billion, a decrease of $377 million, or 17%, from the fourth quarter of 2015. Reductions were seen across all product lines due to the historically low rig count, lower pricing, and customer budget constraints worldwide.

D&E first quarter operating income was $241 million, which decreased $158 million, or 40%, compared to the fourth quarter of 2015, driven by a decline in activity and pricing across all regions, particularly drilling activity, logging activity and software sales in the United States, Mexico and China.

Management Change

“Kelly Youngblood, Halliburton’s Vice President of Investor Relations, has elected to take a CFO position at another company. I thank him for his 27 years with Halliburton, and wish him well. We are pleased to welcome Lance Loeffler to the role of Vice President, Investor Relations, effective immediately. Lance has served as Halliburton’s Vice President of Corporate Development since 2014,” said Lesar.

Selective Technology & Highlights

• Halliburton’s Testing and Subsea business announced it had released the DashTM 3 inch Subsea Safety System to provide electrohydraulic control of Halliburton’s subsea safety tree. Previously, control was provided through direct hydraulic pressure from the surface, but the Dash system helps increase reliability and provide more cost-efficient operations by applying the speed of electrohydraulic actuation to core safety functions. The system fully integrates with Halliburton’s RezConnectTM Well Testing System. The design was recently deployed on a deepwater well in Latin America in over 7,500 feet of water, where it demonstrated a six second downhole safety shut-in followed by an eight second surface shut-in and disconnect.
• Halliburton's Production Solutions business announced it had introduced SpectrumSM Real-Time Coiled Tubing Services that help improve well intervention operations and production by integrating coiled tubing with downhole measurement tools, fiber optic sensing and telemetry. The new family of services consists of Spectrum Diagnostic Services and Spectrum Intervention Services. Spectrum Diagnostic Services uses fiber-optic distributed sensing to assess reservoir performance and completions effectiveness by simultaneously monitoring a time series of data, as opposed to taking single snapshots in time. Applications for Spectrum Diagnostic Services include determining stimulation cluster efficiency, fracture mapping, production profiling, leak detection, and assessing wellbore integrity. Spectrum Intervention Services uses fiber optics to provide subsurface and downhole insight from a bottom-hole assembly. The services have multiple applications in unconventional fields, deep water and mature fields, including milling, wellbore cleanouts, fishing, perforating, and stimulation.
• Halliburton successfully installed China's first intelligent completion in Bohai Bay. The completion provided four zones of selective injection, which enabled the customer to get real-time pressure and temperature data for the reservoir and optimize the injection strategy accordingly. In the Bohai Bay mature fields, pressure maintenance is critical, and up until now injection could not be controlled and directed into the individual zones from the surface. The cost for conventional intervention methods can be high and if one zone has an issue, trying to troubleshoot the problem zone can be difficult and can add to the cost. Intelligent wells now give the operator “eyes and ears” to be able to detect issues in real time and respond quickly if issues occur. Additionally, it is possible to provide pinpoint water injection to the best zones to ensure the optimization strategy for the customer is met — all with zero intervention.

• Halliburton recently performed a customized, multistage fracturing and fines migration control solution on an IGAPO well in Ecuador. The procedure resulted in recovery of more than 450 barrels of oil per day, completed in only 70% of the usual time required for conventional fracture jobs. Halliburton designed and executed an unconventional, multistage SurgiFrac® service that combined the ceramic proppant coated with the SandWedge® conductivity enhancement system for three fracturing stages. Included in the design of the solution was the CW-FracSM service for the first stage, which was producing at an estimated 60 percent water cut. The treatment was effective and three fractures were completed with no operational issues. It was the first multistage fracturing service, the first application of Pinpoint and conductivity endurance treatments, and the first well completion of this complexity in Ecuador.

You May Also Be Interested In

• CDW to acquire data and AI firm Lovelytics for $525 million
• NPK International CFO to retire by August 2027, successor search begins
• Advent International proposes $1.02-per-share buyout of Definitive Healthcare