Halliburton Q1 2016 operational update

Halliburton has announced that, in light of 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. 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.

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

Total company revenue of US$4.2 billion for Q1 2016 represents a 17% decline sequentially, in comparison to a 21% decline in the worldwide rig count. Disruptive market conditions persisted in the first quarter, as US rig counts reached a record low and the worldwide rig count is at the lowest level since 1999. “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 boe, 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 US 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 US 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 US 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 realise 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 overcapitalised, especially in North America. To reflect our current estimate of market requirements, we took a US$2.1 billion after-tax restructuring charge in the first quarter related primarily to asset write-offs and severance costs.

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