Is Halliburton Going to Make You Rich?
Halliburton (HAL) reported its 4th quarter 2015 results on 25th January. The company’s total revenue in the fourth quarter of 2015 was $ 5.1 billion, down 9 % compared to $ 5.6 billion in the third quarter of 2015. Income from continued operations excluding special items for the fourth quarter was $ 270 million or $ 0.31 per diluted share compared to $ 265 million or $ 0.31 per diluted share for the third quarter.
The total revenue of full year 2015 was $ 23.6 billion, down from $ 32.8 billion of full year 2014. Full year adjusted income from continued operations declined 61 % from $ 3.4 billion, or $ 4.02 per diluted share in 2014 to $ 1.3 billion, or $ 1.56 per diluted share in 2015. The company’s full year revenue declined 28 % year-over-year but outperformed a 35 % decline in both the average worldwide rig count and global drilling and completions spend.
In the international business, the company saw a 16 % decline in annual revenue compared to the previous year which was still better compared to its largest competitor, Schlumberger, sequentially as well as on a full-year basis for both revenue and margins. Fourth quarter international revenue and operating income declined sequentially by 5 % and 10 %, respectively, as a result of price concessions and activity declines. Despite the pricing pressure and activity cuts by its customers, the company was well able to improve its operating margins during the year due to a relentless focus on cost management.
The revenue at home (North America) declined 39 % compared to 2014, as a result of unprecedented declines in activity, with the U.S. land rig count plummeting 64 % from its peak of 2014. However, relative to the overall market, the company’s performance was not that bad. From the 2014 peak, Halliburton’s completions-related activity declined approximately 33 % relative to the 64 % reduction in the US land rig count. Fourth quarter revenue declined sequentially by 13 % but operating margin improved by about 160 basis points to 1.9 %. This clearly demonstrates the customer flight to quality that has emerged during this downturn. And Halliburton was able to deliver that quality to its customers consistently. This positions it well to benefit from the market's eventual recovery.
The Baker Hughes Deal:
One of the significant updates that came with the fourth quarter earnings release was about the pending acquisition of Baker Hughes. The news that the European Commission has decided to initiate a Phase II review of Halliburton’s pending acquisition of Baker Hughes was already out earlier last month. Pursuant to applicable regulations, Phase II generally provides the Commission with 90 working days to review the pending transaction. Halliburton and Baker Hughes will continue to work constructively with the Commission. Halliburton expects to offer a substantial remedies package that it believes will address any substantive competition concerns. The transaction has already cleared the regulatory hurdles in Canada, Colombia, Ecuador, Kazakhstan, South Africa and Turkey. So that’s quite a good progress in that direction.
On the other face of the coin, the US Department of Justice (DoJ) made it clear to both the companies in December that it does not believe that the previously announced proposed divestitures were sufficient to address the its concerns. However DoJ was ready to assess further proposals. So, Halliburton presented an enhanced set of proposed divestitures in order to seek their approval.
Now, both Baker Hughes and Halliburton have agreed to extend the period to obtain required regulatory approvals to no later than April 30, 2016. If the deal goes through, it will result into an even stronger company that achieve substantial efficiencies, enabling it to compete aggressively to provide efficient, innovative and low-cost services to its customers and value to its shareholders.
Capital Spending, Divestitures and Debt:
The oilfield services giant terminated 22,000 people in 2015 all over the world representing a quarter of its workforce. As a result, its full year capital spending got slashed by a third to $ 2.2 billion, down from $ 3.3 billion in 2014. Moreover, if oil prices fail to recover, then more jobs may be cut. For 2016, the company has planned another large cut (27.3 %) in capital spending to $ 1.6 billion.
Halliburton originally planned to sell-off $ 7.5 billion of annual revenue generating assets to address antitrust concerns. But, now it looks like the company will be forced to shed more assets to satisfy the European Commission and the DoJ.
At the end of 2015, the total debt on Halliburton’s balance sheet was $ 15.35 billion while cash was $ 10 billion which is similar to Schlumberger in terms of debt to cash ratio. But the debt to equity ratio of HAL is close to double of SLB due to the $ 7.5 billion debt raised by the former in the fourth quarter. While this could be a cause of concern, Halliburton’s asset divestiture plans should abate the debt situation.
Halliburton has delivered a result with a number of bright spots. But as 2016 is expected to be even tougher by one and all, more downside could be imminent in the near future. Further, we need to wait for the picture of the Baker Hughes deal to become clearer before deciding to go for this stock.