Halliburton Company (ticker: HAL) announced a loss from continuing operations of $805 million, or ($0.92) per diluted share, for the fourth quarter of 2017. Adjusted income from continuing operations for the fourth quarter of 2017, excluding charges related to United States tax reform and Venezuela receivables, was $462 million, or $0.53 per diluted share.
This compares to income from continuing operations for the third quarter of 2017 of $365 million, or $0.42 per diluted share. Halliburton’s total revenue in the fourth quarter of 2017 was $5.9 billion, a 9% increase from revenue of $5.4 billion in the third quarter of 2017.
Reported operating income was $379 million during the fourth quarter of 2017, compared to operating income of $634 million in the third quarter of 2017. Excluding special items, adjusted operating income for the fourth quarter of 2017 was $764 million.
Total revenue for the full year of 2017 was $20.6 billion, an increase of $4.7 billion, or 30%, from 2016. Reported operating income for 2017 was $1.4 billion, compared to a reported operating loss of $6.8 billion for 2016. Excluding special items, adjusted operating income for 2017 was $2.0 billion, a three-fold improvement from adjusted operating income of $690 million for 2016. Detailed financial charts can be found here.
“I continue to believe we are on the path to normalized margins in North America in 2018. 2017 was a dynamic year for the oil and gas sector that marked another step on the road to recovery for our industry,” said Halliburton President and CEO Jeff Miller.
“Our Drilling and Evaluation division delivered an impressive performance over the second half of 2017, achieving nearly 50% incrementals in the fourth quarter. Our Completion and Production division revenue grew 8% sequentially, outperforming the change in average United States land rig count. The North America completions market is tight, and demand for our completions equipment and our service quality remains strong.
“I am optimistic about what I see in 2018. Commodity prices are supportive of increasing activity in North America and I am encouraged by the increase in tender activity and the positive discussions we are having with our international customers,” said Miller.
Operating segments
Completion and Production
Completion and Production revenue in the fourth quarter of 2017 was $3.8 billion, an increase of $267 million, or 8%, from the third quarter of 2017, while operating income was $552 million, a sequential increase of $27 million, or 5%.
In the United States land sector, higher pressure pumping activity and pricing led to increased revenue while higher costs and seasonality hindered profitability. Additionally, results improved due to year-end completion tool sales in the Gulf of Mexico, higher software sales in Latin America and increased stimulation activity in the Eastern Hemisphere.
Drilling and Evaluation
Drilling and Evaluation revenue in the fourth quarter of 2017 was $2.1 billion, an increase of $229 million, or 12%, from the third quarter of 2017, while operating income was $291 million, an increase of $111 million, or 62%. These increases were primarily due to increased drilling activity in the Middle East and North America and higher software sales and services in Latin America.
Corporate and other events
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law, effective January 1, 2018. Halliburton recorded an aggregate $882 million of non-cash discrete tax charges in the fourth quarter of 2017, primarily as a result of preliminary tax provisions for the net impact of this tax law. Halliburton is continuing its analysis of tax reform impact on the company, and this provisional amount is subject to change.
Regarding Venezuela, Halliburton continues to experience delays in collecting payments on receivables from its primary customer. These delayed payments, combined with recent credit rating downgrades and deteriorating market condition in Venezuela, required Halliburton to record an aggregate charge of $385 million during the fourth quarter under GAAP.
This charge represents a fair market value adjustment on its existing promissory note and a full reserve against other accounts receivables with this customer. Halliburton actively manages its strategic relationship with this customer and will continue to vigorously pursue collections as it does business going forward.
Geographic regions
North America
North America revenue in the fourth quarter of 2017 was $3.4 billion, a 7% increase sequentially. This improvement was driven primarily by increased utilization and pricing throughout the United States land sector in the majority of Halliburton’s product service lines, primarily pressure pumping, as well as higher drilling activity and completion tool sales in the Gulf of Mexico.
International
International revenue in the fourth quarter of 2017 was $2.5 billion, an 11% increase sequentially, resulting primarily from increased activity across multiple product services lines in Latin America, and increases in drilling and stimulation activity in the Eastern Hemisphere.
Latin America revenue in the fourth quarter of 2017 was $615 million, a 16% increase sequentially, driven by increased drilling activity and higher software sales in Brazil, higher software sales in Mexico and increased stimulation activity in Argentina. These results were partially offset by reduced drilling activity in Venezuela.
Europe/Africa/CIS revenue in the fourth quarter of 2017 was $776 million, a 7% increase sequentially, primarily due to higher drilling activity in the North Sea, coupled with increased activity in Algeria and Egypt. These results were partially offset by a reduction in completion tool sales in Nigeria.
Middle East/Asia revenue in the fourth quarter of 2017 was $1.1 billion, a 12% increase sequentially, primarily resulting from increased drilling and stimulation activity in the Middle East and year-end sales in China.
Conference call Q&A
Q: North America will be great this year, so I want to ask about international recovery. When will some green shoots start showing up in revenue and which geographic markets are the most exciting?
President and CEO Jeff Miller: So I think that progression is ratable, that is how I would describe it. I think we see growing confidence and added rigs sort of progressively through 2018, obviously with some inflection coming later in those stages. But I don’t see it as a spike. It’s the confidence building and as we grow into that activity.
But what I’m most excited about internationally would certainly be the North Sea. I think that’s a market that’s going to have legs in 2018 and we’ll see activity growing there, and we’re certainly excited about how we’re positioned there. Clearly excited about, I think, the Middle East broadly, again, I think we’ll continue to be resilient, then we’ll have some pockets of better activity.
Q: Turning back to the U.S. a little bit, when you think about the market in 2018 industry-wide, have you done any work or have any thoughts on how much newbuild equipment could be coming into the market in 2018 from the industry? And how much newbuild equipment could come in where you think it would be a concern as far as dampening the outlook for pricing?
Miller: I think the activity in the market, to start with, is undersupplied. We’re well aware of what’s in the marketplace today and where that’s going, and everything I see, given the increasing intensity in completions, actually the drawing in of that ratio of rigs to spreads, from 4:1 to 2:1, which really is an example of what that intensity looks like, gives me a lot of confidence that it stays tight.
And that metric I’m talking about doesn’t take into account wear and tear on equipment, which I think we’ve demonstrated is quite real, certainly through the downturn as we look at equipment that never came back in the market and the way that it’s working right now.
Q (continued): In 2017 there was a big focus on your legacy equipment – where do we stand today, how much of that equipment is still beneath the market as far as the spot and your thoughts on timing there?
Miller (continued): Well, I think from my perspective, as I said originally, that would take about four quarters. And it’s taken about four quarters for things to turn over. And so as we look ahead, we’ve got a lot of ability to move to, because of the tightness, opportunities with pricing as we go into 2018. In fact, I’m quite confident that we’ll see all three of our levers executed, that being price, utilization and technology.
Q: I wanted to ask for a little more color on how to think about margin progression for both Completion and Production (C&P) and Drilling and Evaluation (D&E), both for the first quarter and just thinking about the rest of the year.
EVP and CFO Chris Weber: Yes, kind of in line with our guidance, expect Q4 to be down. You’ve got the typical benefit of year-end product sales in the fourth quarter and seasonal pullback in activity in the first quarter in certain international markets.
But going forward, looking at C&P, very much in line with what Jeff said. Normalized margin target is still there and we’re working towards it, and for us to be able to do that, C&P’s going to have to be a big driver of that and so very much committed to achieving that sometime in 2018.
Q (continued): But I guess it’s fair to think that if you’re going to hit normalized margins, you’d probably do it before certainly the fourth quarter given the seasonality impact, so you’d hit it during one of the high points of your typical – your best two quarters are typically the second and third quarters. Is that a fair way to think about it though?
Miller (continued): Yeah. We certainly are confident to get there. And, yes, it starts with customer urgency, which we see. It starts with – and the second component of that is to be sold out, which we are. So those two give me a lot of confidence around our ability to move on price and to deliver – when we deliver or to deliver the 20% normalized margins, obviously, C&P division will be performing very, very well.
D&E, just to follow that up, look, D&E is a solid business for us. I talk about our franchise. We expect to see – D&E has made consistent progress through the downturn both in share and margin recovery and so I suspect that we continue with that also for the fullness of the year.
Q (continued): And then if I can just step back and ask you about international again. Could you give us a little bit more color on where do you feel like you’ve executed your international strategy the best, whether it be product lines or regions?
Miller (continued): Well, look, for us, it all starts with our value proposition, which is to collaborate and engineer solutions that maximize asset value for our customers. But if we think about that like a platform and then we add superior assets to that, then our team is very effective at delivering integrated solutions where it’s a project management type outcome, but also discrete solutions.
And so I’m very pleased with what we’ve done in the Middle East and then what we’ve done in Brazil and all around the world. But it really comes back to service, quality is fantastic and when we deliver that, all of our solutions are well aligned with our customers. And that, again, takes a geographic view as well as a service line view because we’re aligned with maximizing asset value for our customers. And I think that’s a key paradigm in the future that we believe in and that’s what we do.
Q: So E&P capital discipline has been one of the themes we’ve been hearing about quite a bit. I was wondering if you can give us your take on how you think E&P behavior is changing, or could change with this cycle.
Some of the E&Ps are talking about trimming some of their rig counts but they also might be using some lower price tags. Can you just give us your sense of what your conversations are like right now as we start with 2018 and how you think E&P behavior could change?
Miller: Yeah. Great question. And look, we listen to our customers, and because we listen and don’t lecture, we understand the message that they get from their shareholders. And there are many different customers with many different strategies. Clearly, there’s a group that’s interested in generating more cash and being more disciplined.
There’s another group that has acreage that they absolutely want to prove up and their stakeholders want them to do that. And so I think you can’t paint North America with a single brush, certainly in that regard. But what I can tell you is that both sets of customers are going to be working and busy in 2018, and I expect busier in 2018 than they were in 2017.
Q (continued): What about the useful life of your frac equipment in 2014 versus today? And then within that context, with the amount of capacity that’s coming on in 2018, do you have a sense as to how much do you think needs to be replaced for attrition?
Miller (continued): Yeah, I’ll start with attrition. I think attrition is a real dynamic, though it may take the form of – I used the word degradation on the call this quarter just because in many cases, what happens, it becomes too expense to bring back. But there’s quite a bit of cost associated, I think, for the industry in terms of keeping that equipment in the marketplace.
So that’s a real number, but it’s difficult to give you a number on that, though, it drove – if you try to look at what was in the market before the downturn and what didn’t make it back after the downturn, I think is indicative of sort of the pace of degradation or attrition that happens.
But the market today, clearly, is undersupplied, in our view. And I think – you asked about increased intensity or more stage counts and longer laterals is going to drive more wear and tear on equipment, just simply the number of reps.
When I compare it to 2014, I’m more confident just because we’ve increased or we’ve deepened the amount of Q10 technology we have in the market, which consistently bears up better to that kind of stress, ergo the reason we’re able to execute with less horsepower on location than what we see in the market.
Q4 technology update
Electromagnetic Pipe Xaminer® V
Halliburton announced the release of the Electromagnetic Pipe Xaminer® V (EPX™ V) service – the industry’s first technology allowing operators to pinpoint casing defects and metal corrosion in up to five tubular strings within the well.
Geometrix™ 4D Shaped Cutters
Halliburton announced the release of Geometrix™ 4D Shaped Cutters, a line of four distinct geometric profiles to help improve cutting efficiency and increase control to reduce drilling costs.
Sperry Drilling’s JetPulse™
Sperry Drilling announced the release of JetPulse™ high-speed telemetry service, which provides consistent, high-data rate transmission of drilling and formation evaluation measurements. This new telemetry system helps operators make faster decisions to optimize well placement and improve well control while increasing drilling efficiency.
Marine Sentry™ 3000
In October 2017, Halliburton announced the release of Marine Sentry™ 3000, a rotating control device that provides a pressure control solution by creating a seal around the drill string and tool joints for safer containment of fluids during conventional or controlled pressure drilling operations.
BaraShale™ Lite Fluid System
Halliburton announced the release of BaraShale™ Lite Fluid System, a high-performance water-based fluid designed to maintain full salt saturation with reduced density, helping to prevent lost circulation and minimize waste disposal costs. Operators in formations containing salt layers and low fracture pressure face major challenges while drilling.
Akwa Ibom Oil and Gas Training and Research Center
In November 2017, Halliburton announced that it worked with the Akwa Ibom state government to inaugurate and open Nigeria’s first oil and gas training center fully-equipped with oilfield operations tools.
