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:
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our Completion and Production segment delivers cementing, stimulation, intervention, pressure control, specialty chemicals, artificial lift, and completion products and services. The segment consists of Production Enhancement, Cementing, Completion Tools, Production Solutions, Pipeline and Process Services, Multi-Chem and Artificial Lift.
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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.
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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 manufacturing operations in various locations, the most significant of which are located in the United States, Canada, Malaysia, Singapore and the United Kingdom. With approximately
50,000
employees, we operate in approximately
70
countries around the world, and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.
Financial results
Market conditions continued to impact our business during the first quarter of 2017 marked by the rapid increase in North American land rig count, while continued cyclical headwinds and seasonal pressures affected the international markets. The North America market continues to improve, with the United States land rig count for the first quarter of 2017 having increased 27% from the fourth quarter of 2016, which resulted in sequential revenue growth of 24% in the North America region. However, the international markets have been slower to recover and continue to face pricing pressure and activity declines, while customers defer new projects and focus on lowering costs. We believe the cost challenges are part of the evolution of the cycle and believe that we are positioned to provide long-term profitable opportunities with our margin-focused strategy.
We generated total company revenue of $4.3 billion during the first quarter of 2017, a 2% increase from the $4.2 billion of revenue generated in the first quarter of 2016. This slight increase resulted from rising pressure pumping services and drilling activity in the United States land market offset by lower pricing and activity across the international markets. We reported operating income of $203 million in the first quarter of 2017, compared to operating loss of $3.1 billion in the first quarter of 2016, which included $2.8 billion of company-wide impairments and other charges and $538 million of merger-related costs. Our operating results are now benefiting from the structural global cost savings initiatives implemented during the market downturn.
We made the decision to bring back cold-stacked equipment more rapidly than originally planned because of customer demand, thus forgoing short-term margin increases to maintain our market share. However, we are not pursuing market share at the cost of pricing. We believe that maximizing our profitability in the long term starts with stabilizing our market share. Given the significant level of customer demand we are experiencing, we are able to add equipment and improve our margins by putting this equipment to work at leading edge pricing. As a result of this reactivation of equipment, we hired approximately 2,000 employees in the United States in the first quarter, incurring additional personnel and training costs. We believe we are well-positioned to see an acceleration of our margins towards the end of 2017 because of our strategy to preserve the market share we gained during the downturn.
Business outlook
While the past two years were challenging as we navigated through this historic industry downturn, we believe our results have begun to reflect our successful execution in a difficult environment and that our strategy has positioned us for the challenges and opportunities ahead. Commodity prices and the North America rig count have improved substantially from first half 2016 lows, and we believe we are well positioned to benefit from the impending market recovery given our improved market share, delivery platform and cost containment strategies.
In North America, stabilizing commodity prices and growing rig counts have resulted in a rapidly recovering market, particularly in United States unconventionals. Our customers remain focused on lowering cost and producing more barrels of oil equivalent. We are continuing to collaborate and engineer solutions to maximize asset value for our customers and will continue to take advantage of the recent rig count growth by focusing on increasing equipment utilization, managing costs and expanding our surface efficiency model. Additionally, we gained significant North America market share through the downturn by demonstrating to our customers the benefits of our efficiency and technology, coming out of the downturn with our highest North America market share in history. We have been utilizing this increased market share to drive margin improvement. The historically high level of market share we built in the downturn gives us the ability to focus our work with the most efficient customers and, as such, we continued to execute our strategy of high grading the profitability of our portfolio with customers that value our services. We will continue to reactivate our equipment at leading edge pricing and maintain our focus on execution and service quality.
While the North America market has begun to recover, the international downswing continues to persist. The international markets have been more resilient than North America through most of the downturn, particularly in the Eastern Hemisphere, but pricing and activity levels remain under pressure. Low commodity prices have stressed customer budgets and have impacted economics across deepwater and mature field markets, which led to decreased activity and pricing in the first quarter of 2017, coupled with seasonal and cyclical headwinds, leading to revenue declines and stressed margins in all of our international regions. While we are working with our customers to improve project economics through technology and improved operating efficiency, we continue to anticipate headwinds, and we do not expect to see an inflection point for revenue and margin improvements in the international markets until the latter part of 2017. Due to the longer investment cycles and contractual nature of the international markets, we expect revenue and margins to continue to be under pressure throughout 2017 until the markets fully stabilize. While we believe the first quarter of 2017 represents the bottom in the Eastern Hemisphere rig count, the full year average rig count for 2017 will likely be only marginally higher than the full year average rig count for 2016. In Latin America, we experienced sequential improvement in revenue from activity in Brazil and Mexico. This region is slowly showing signs of improvement but there are significant headwinds that must be overcome for a full recovery. Venezuela continues to experience significant political and economic turmoil.
We have maintained capital discipline and adjusted to market conditions during the market downturn over the past two years. During the first quarter of 2017, we had $265 million of capital expenditures, an increase of 13% from the first quarter of 2016. We plan to continue adjusting capital spending during 2017 to align with market conditions. We will continue executing our deployment strategy of converting our hydraulic fracturing fleet to Q10 pumps to support our surface efficiency model and reactivating our cold-stacked pressure pumping equipment to respond to customer demand as long as the economics make sense. While near-term production increases could moderate the pace of activity increases in the second half of the year, we believe there is sufficient demand for the equipment we are bringing into the market. As we look at the second half of the year, we are assessing our options for continued redeployment beyond our current plans but have made no decisions.
As a result of the actions we have taken over the past few years, we believe we are well positioned for the potential market recovery and will scale up our delivery platform by addressing our product service lines one step at a time through a combination of organic growth, investment and selective acquisitions. We are continuing to execute the following strategies in
2017
:
- directing capital and resources into strategic growth markets, including unconventional plays and mature fields;
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leveraging our broad technology offerings to provide value to our customers and enabling them to more efficiently drill and complete their wells;
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exploring additional 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;
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investing in technology that will help our customers reduce reservoir uncertainty and increase operational efficiency;
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improving working capital and managing our balance sheet to maximize our financial flexibility;
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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; and
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- collaborating and engineering solutions to maximize asset value for our customers.
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. In the first quarter of 2017, we redeemed an aggregate principal amount of $1.4 billion of senior notes, which consisted of $400 million due in 2018 and $1.0 billion due in 2019. We also made the final installment payment of $335 million related to the settlement reached for the Macondo well incident, closing the quarter at $2.1 billion of cash and equivalents. This represents a $1.9 billion reduction in our cash position from December 31, 2016. We also have $3.0 billion available under our revolving credit facility which, with our cash balance, we believe provides us with sufficient liquidity to address the challenges and opportunities of the current market. For additional information on market conditions, see “Liquidity and Capital Resources” and “Business Environment and Results of Operations.”
LIQUIDITY AND CAPITAL RESOURCES
As of
March 31, 2017
, we had
$2.1 billion
of cash and equivalents, compared to $4.0 billion at December 31, 2016. Additionally, we held
$92 million
of investments in fixed income securities at
March 31, 2017
and
December 31, 2016
. These securities are reflected in "Other current assets" and "Other assets" in our condensed consolidated balance sheets. Approximately
$1.7 billion
of our total cash position as of
March 31, 2017
was held by our foreign subsidiaries, a substantial portion of which is available to be repatriated into the United States to fund our U.S. operations or for general corporate purposes, with a portion subject to certain country-specific restrictions. We have provided for U.S. federal income taxes on cumulative undistributed foreign earnings where we have determined that such earnings are not indefinitely reinvested.
Significant sources and uses of cash
Sources of cash:
- Cash flows from operating activities were
$5 million
during the first
three
months of
2017
.
- We improved working capital (receivables, inventories and accounts payable) by a net
$32 million
during the first
three
months of
2017
, driven by efficient working capital management.
Uses of cash:
- We early redeemed $1.4 billion of senior notes during the first
three
months of
2017
, which resulted in a payment of approximately $1.5 billion, inclusive of the redemption premium.
- We made the final installment settlement payment related to the Macondo well incident in the amount of $335 million during the first
three
months of
2017
.
- Capital expenditures were
$265 million
in the first
three
months of
2017
, and were predominantly made in our
Production Enhancement
,
Production Solutions
,
Sperry Drilling
,
Baroid
, and
Wireline and Perforating
product service lines.
- We paid
$156 million
in dividends to our shareholders during the first
three
months of
2017
.
Future sources and uses of cash
We manufacture our own equipment, which allows us flexibility to increase or decrease our capital expenditures based on market conditions. The capital expenditures plan for 2017 is primarily directed towards our
Production Enhancement
,
Sperry Drilling
,
Production Solutions
,
Wireline and Perforating
, and
Baroid
product service lines. This includes reactivating some of our cold-stacked pressure pumping equipment and continuing to convert our hydraulic fracturing fleet to Q10 pumps to support our surface efficiency strategy. While near term production increases could moderate the pace of activity increases in the second half of the year, we believe there is sufficient demand for the equipment we are bringing into the market.
Currently, our quarterly dividend rate is $0.18 per common share, or approximately
$156 million
. Subject to the approval of our Board of Directors, our intention is to continue paying dividends at our current rate.
Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately
$5.7 billion
remains authorized for repurchases as of
March 31, 2017
and may be used for open market and other share purchases. There were no repurchases made under the program during the
three
months ended
March 31, 2017
.
We expect to receive a United States tax refund in the amount of approximately $534 million during the second half of 2017, primarily related to the carryback of our net operating losses recognized in 2016.
Other factors affecting liquidity
Financial position in current market.
As of
March 31, 2017
, we had
$2.1 billion
of cash and equivalents,
$92 million
in fixed income investments, and
$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. We believe our cash on hand, cash flows generated from operations and our available credit facility will provide sufficient liquidity to address the challenges and opportunities of the current market and manage our global cash needs for the remainder of 2017, including capital expenditures, scheduled debt maturities, working capital investments, dividends, if any, and contingent liabilities.
Guarantee agreements.
In the normal course of business, we have agreements with financial institutions under which approximately
$2.0 billion
of letters of credit, bank guarantees or surety bonds were outstanding as of
March 31, 2017
. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.
Credit ratings.
Our credit ratings with Standard & Poor’s (S&P) remain BBB+ for our long-term debt and A-2 for our short-term debt, with a stable outlook. Our credit ratings with Moody’s Investors Service (Moody's) remain Baa1 for our long-term debt and P-2 for our short-term debt, with a negative outlook.
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 receivables from our primary customer in Venezuela.
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
We operate in approximately
70
countries throughout the world to provide a comprehensive range of services and products to the energy industry. 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. During the first
three
months of
2017
, based upon the location of the services provided and products sold, 49% of our consolidated revenue was from the United States, compared to 41% of consolidated revenue from the United States in the first
three
months of 2016. 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, sanctions, expropriation or other governmental actions, inflation, changes in foreign currency exchange rates, 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, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. Lower oil and natural gas prices usually translate into lower exploration and production budgets. Our financial performance is significantly affected by well count in North America, as well as oil and natural gas prices and worldwide rig activity, which are summarized in the tables below.
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:
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Three Months Ended
March 31
|
Year Ended
December 31
|
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2017
|
2016
|
2016
|
Oil price - WTI
(1)
|
$
|
51.77
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|
$
|
33.18
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$
|
43.14
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Oil price - Brent
(1)
|
53.68
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33.70
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43.55
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Natural gas price - Henry Hub
(2)
|
3.01
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2.00
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|
2.52
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(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:
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Three Months Ended
March 31
|
Year Ended
December 31
|
Land vs. Offshore
|
2017
|
2016
|
2016
|
United States:
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Land
|
722
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|
524
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|
486
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|
Offshore (incl. Gulf of Mexico)
|
20
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|
27
|
|
23
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Total
|
742
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|
551
|
|
509
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Canada:
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Land
|
294
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|
170
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|
128
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|
Offshore
|
1
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|
3
|
|
2
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Total
|
295
|
|
173
|
|
130
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|
International (excluding Canada):
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Land
|
738
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|
790
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|
734
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Offshore
|
201
|
|
226
|
|
221
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Total
|
939
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|
1,016
|
|
955
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|
Worldwide total
|
1,976
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|
1,740
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|
1,594
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|
Land total
|
1,754
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|
1,484
|
|
1,348
|
|
Offshore total
|
222
|
|
256
|
|
246
|
|
|
|
|
|
|
Three Months Ended
March 31
|
Year Ended
December 31
|
Oil vs. Natural Gas
|
2017
|
2016
|
2016
|
United States (incl. Gulf of Mexico):
|
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|
|
|
Oil
|
594
|
|
441
|
|
409
|
|
Natural gas
|
148
|
|
110
|
|
100
|
|
Total
|
742
|
|
551
|
|
509
|
|
Canada:
|
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|
|
|
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|
Oil
|
162
|
|
82
|
|
63
|
|
Natural gas
|
133
|
|
91
|
|
67
|
|
Total
|
295
|
|
173
|
|
130
|
|
International (excluding Canada):
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|
Oil
|
718
|
|
770
|
|
726
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|
Natural gas
|
221
|
|
246
|
|
229
|
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Total
|
939
|
|
1,016
|
|
955
|
|
Worldwide total
|
1,976
|
|
1,740
|
|
1,594
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Oil total
|
1,474
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|
1,293
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|
1,198
|
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Natural gas total
|
502
|
|
447
|
|
396
|
|
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|
|
|
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|
|
Three Months Ended
March 31
|
Year Ended
December 31
|
Drilling Type
|
2017
|
2016
|
2016
|
United States (incl. Gulf of Mexico):
|
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|
Horizontal
|
610
|
|
435
|
|
400
|
|
Vertical
|
69
|
|
63
|
|
60
|
|
Directional
|
63
|
|
53
|
|
49
|
|
Total
|
742
|
|
551
|
|
509
|
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Crude oil prices have been extremely volatile during the past few years. WTI oil spot prices declined significantly beginning in 2014 from a peak price of $108 per barrel in June 2014 to a low of $26 per barrel in February 2016, a level which had not been experienced since 2003. Brent crude oil spot prices declined from a high of $115 per barrel in June 2014 to $26 per barrel in January 2016. Commodity prices have increased from the low point experienced in early 2016 to highs of $54 per barrel and $55 per barrel in December 2016 for WTI and Brent, respectively.
WTI and Brent crude oil spot prices had a monthly average in March 2017 of $49 per barrel and $52 per barrel, respectively. As crude oil production rose in the United States in early March, crude oil prices declined as crude oil inventories increased to a multi-decade high. The price declined even though the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers voluntarily cut crude oil production in the first quarter of 2017. However, the United States Energy Information Administration (EIA) does predict the market to maintain balance in 2017, forecasting the average Brent crude oil spot price at $54 per barrel in their April 2017 "Short Term Energy Outlook," while WTI prices are projected to average about $2 less per barrel.
Crude oil production in the United States is now projected to average 9.2 million barrels per day in 2017, a 3% increase from 2016. The International Energy Agency's (IEA) April 2017 "Oil Market Report" forecasts the 2017 global demand to average approximately 97.9 million barrels per day, which is up 1% from 2016, driven by an increase in the Asia Pacific region, while all other regions remain approximately the same.
The average Henry Hub natural gas price in the United States was $2.88 per MMBtu in March 2017, a decrease of $0.71 per MMBtu, or 20%, from December 2016, driven by unseasonably warm temperatures during January and February. However, natural gas prices have risen approximately 66% since March 2016 due to increased demand for natural gas to fuel electricity generation in addition to lower inventory levels, which was caused by production declines and higher exports. The EIA April 2017 “Short Term Energy Outlook” expects exports to increase more than production, which would move inventories closer to the five-year average, resulting in rising natural gas prices to a projected EIA average of $3.10 per MMBtu in 2017.
North America operations
While the United States land average rig count for the first quarter has dropped 62% since its peak in November 2014, the rig count has begun to rebound in line with the commodity price environment. The United States land rig count continued its rapid increase in the first quarter of 2017, with a 27% improvement over the fourth quarter of 2016 and 38% improvement over the first quarter of 2016. North America oil-directed rig count increased 233 rigs, or 45%, in the first quarter of 2017 as compared to the first quarter of 2016, while the natural gas-directed rig count in North America increased 80 rigs, or 40%, during the same period. As a result of the recent uptick in activity and the structural changes to our delivery platform we made during this down cycle, we returned to operating profitability in North America in the fourth quarter of 2016 and first quarter of 2017 after recording operating losses in the first three quarters of 2016.
In the Gulf of Mexico, the average offshore rig count for the first quarter of 2017 was down 26% compared to the first quarter of 2016. Low commodity prices have stressed budgets and have impacted economics across the deepwater market, which has led to decreased activity and pricing throughout 2016. These headwinds still persist today. We believe there will continue to be challenges in 2017 on deepwater project economics. Additionally, activity in the Gulf of Mexico is dependent on, among the factors described above, governmental approvals for permits, our customers' actions, and the entry and exit of deepwater rigs in the market.
International operations
The average international rig count for the first quarter of 2017 decreased by 8% compared to the first quarter of 2016. Depressed crude oil prices have caused many of our customers to reduce their budgets and defer several new projects; however, we have continued to work with our customers to improve project economics through technology and improved operating efficiency. In Latin America, the rig count hit a 15-year low across the region during 2016, and Venezuela continues to experience significant political and economic turmoil. Latin America is slowly showing signs of improvement, but there are significant headwinds that must be overcome to obtain a full recovery. For the Eastern Hemisphere, while we believe the first quarter represents the bottom of the rig count, the full year average rig count for 2017 will likely be only marginally higher than the full year average rig count for 2016. Further, due to the longer term contractual nature of international markets and the level of continuing price pressure, we expect discounts will offset activity gains over the near term.
Venezuela.
The Venezuelan government currently has a dual-rate foreign exchange system: (i) the DIPRO, which represents a protected rate of 10.0 Bolívares per United States dollar made available for vital imports such as food, medicine and raw materials for production; and (ii) the DICOM, which is intended to be a free floating system that will fluctuate according to market supply and demand. The DICOM had a market rate of 708 Bolívares per United States dollar at
March 31, 2017
. We are utilizing the DICOM to remeasure our net monetary assets denominated in Bolívares. The continued devaluation of the Bolívar under the DICOM did not materially affect our financial statements for the
three
months ended
March 31, 2017
.
As of
March 31, 2017
, our total net investment in Venezuela was approximately
$834 million
, with only $6 million of net monetary liabilities denominated in Bolívares, and we had an additional
$39 million
of surety bond guarantees outstanding relating to our Venezuelan operations.
We have continued to experience delays in collecting payments 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. Additionally, we routinely monitor the financial stability of our customers.
Our total outstanding net trade receivables in Venezuela were
$636 million
as of
March 31, 2017
, compared to
$610 million
as of
December 31, 2016
, which represents
15%
of total company trade receivables for both periods. The majority of our Venezuela receivables are United States dollar-denominated receivables. Of the
$636 million
of receivables in Venezuela as of
March 31, 2017
,
$441 million
have been classified as long-term and included within “Other assets” on our condensed consolidated balance sheets.
In addition, we currently hold an interest-bearing promissory note with our primary customer in Venezuela with a par value of
$200 million
. This instrument provides a more defined schedule around the timing of payments, while generating a return while we await payment. We are using an effective interest method to accrete the carrying amount to its par value as it matures. We have been receiving quarterly interest payments on this note in accordance with the dates outlined in the agreement, and the carrying amount of the note was
$83 million
as of March 31, 2017.
For additional information, see Part I, Item 1(a), “Risk Factors” in our
2016
Annual Report on Form 10-K.
Three Months Ended
March 31, 2017
Compared with
Three Months Ended
March 31, 2016
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|
REVENUE:
|
Three Months Ended
March 31
|
Favorable
|
Percentage
|
Millions of dollars
|
2017
|
2016
|
(Unfavorable)
|
Change
|
Completion and Production
|
$
|
2,604
|
|
$
|
2,324
|
|
$
|
280
|
|
12
|
%
|
Drilling and Evaluation
|
1,675
|
|
1,874
|
|
(199
|
)
|
(11
|
)
|
Total revenue
|
$
|
4,279
|
|
$
|
4,198
|
|
$
|
81
|
|
2
|
%
|
|
|
|
|
|
By geographic region:
|
|
|
|
|
North America
|
$
|
2,231
|
|
$
|
1,794
|
|
$
|
437
|
|
24
|
%
|
Latin America
|
463
|
|
541
|
|
(78
|
)
|
(14
|
)
|
Europe/Africa/CIS
|
604
|
|
778
|
|
(174
|
)
|
(22
|
)
|
Middle East/Asia
|
981
|
|
1,085
|
|
(104
|
)
|
(10
|
)
|
Total revenue
|
$
|
4,279
|
|
$
|
4,198
|
|
$
|
81
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME:
|
Three Months Ended
March 31
|
Favorable
|
Percentage
|
Millions of dollars
|
2017
|
2016
|
(Unfavorable)
|
Change
|
Completion and Production
|
$
|
147
|
|
$
|
30
|
|
$
|
117
|
|
390
|
%
|
Drilling and Evaluation
|
122
|
|
241
|
|
(119
|
)
|
(49
|
)
|
Total
|
269
|
|
271
|
|
(2
|
)
|
(1
|
)%
|
Corporate and other
|
(66
|
)
|
(584
|
)
|
518
|
|
89
|
|
Impairments and other charges
|
—
|
|
(2,766
|
)
|
2,766
|
|
—
|
|
Total operating income (loss)
|
$
|
203
|
|
$
|
(3,079
|
)
|
$
|
3,282
|
|
—
|
|
Consolidated revenue was
$4.3 billion
in the first
three
months of
2017
, an increase of
$81 million
, or
2%
, as compared to the first
three
months of
2016
, primarily due to increased North America stimulation activity, partially offset by reduced drilling activity on a global basis.
Revenue from North America was
52%
of consolidated revenue in the first
three
months of
2017
, compared to
43%
of consolidated revenue in the first
three
months of
2016
, which reflects the rapid increase in activity our North America operations are experiencing as it relates to the recovery of the energy market.
Consolidated operating income was
$203 million
in the first
three
months of
2017
driven by significant increases in pressure pumping activity in North America and consulting and project management in Latin America. This compares to an operating loss of
$3.1 billion
during the first
three
months of
2016
, in part due to the negative impact of
$2.8 billion
of impairments and other charges and
$538 million
of merger-related costs.
OPERATING SEGMENTS
Completion and Production
Completion and Production revenue in the first
three
months of
2017
was
$2.6 billion
, an increase of
$280 million
, or
12%
, from the first
three
months of
2016
. Operating income in the first
three
months of
2017
was
$147 million
, compared to
$30 million
in the first
three
months of
2016
. These increases were primarily due to improved pressure pumping pricing and utilization in the United States land market. International revenue declined as a result of reduced completion tool sales across all regions.
Drilling and Evaluation
Drilling and Evaluation revenue in the first
three
months of
2017
was
$1.7 billion
, a decrease of
$199 million
, or
11%
, from the first
three
months of
2016
. Operating income in the first
three
months of
2017
was
$122 million
, a decrease of
$119 million
, or
49%
, compared to the first
three
months of
2016
. These reductions were experienced globally across the majority of our product service lines, particularly reduced drilling services, logging services, software sales and offshore activity in the international regions, partially offset by an increase in project management in Latin America.
GEOGRAPHIC REGIONS
North America
North America revenue in the first
three
months of
2017
was
$2.2 billion
, a
24%
increase compared to the first
three
months of
2016
, relative to a 43% increase in average North America rig count. These results were driven by improved customer demand in our United States land sector with increased pricing and utilization, primarily related to pressure pumping services.
Latin America
Latin America revenue in the first
three
months of
2017
was
$463 million
, a
14%
reduction compared to the first
three
months of
2016
, primarily due to decreased activity in production solutions and drilling activity in Mexico, Argentina and Venezuela, and reduced stimulation activity in Argentina.
Europe/Africa/CIS
Europe/Africa/CIS revenue in the first
three
months of
2017
was
$604 million
, a
22%
decrease from the first
three
months of
2016
, primarily from reduced drilling and logging activity in Angola and a decline in well completion services in Angola, Algeria and the North Sea as a result of continued cyclical headwinds for both activity and pricing across the area.
Middle East/Asia
Middle East/Asia revenue in the first
three
months of
2017
was
$981 million
, a
10%
decrease from the first
three
months of
2016
, due to decreased drilling activity and pressure pumping services across the region, and reduced logging services in Asia Pacific.
OTHER OPERATING ITEMS
Corporate and other
expenses were
$66 million
in the first
three
months of
2017
compared to
$584 million
in the first
three
months of
2016
. During the first
three
months
of 2016, we incurred
$538 million
of merger-related costs, of which $464 million related to the reversal of assets held for sale accounting.
NONOPERATING ITEMS
Interest expense, net
was
$242 million
in the first
three
months of
2017
, as compared to
$165 million
in the first
three
months of
2016
. This increase was primarily due to $104 million in costs related to the early extinguishment of $1.4 billion of senior notes. See Note 4 to the condensed consolidated financial statements for further information.
Effective tax rate
. Our effective tax rate on continuing operations for the quarter ended March 31, 2017 and March 31, 2016 was 44.2% and 26.6%, respectively. The effective tax rates in both periods were impacted by the geographic mix of earnings for the respective period. The effective tax rate for March 31, 2016 was also impacted by the establishment of a valuation allowance on certain deferred tax assets equaling $112 million as well as the tax effects of impairments and other charges recorded during the period.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. For information related to environmental matters, see
Note 6
to the condensed consolidated financial statements.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Forward-looking information is based on projections and estimates, not historical information. Some statements in this Form 10-Q are forward-looking and use words like “may,” “may not,” “believe,” “do not believe,” “plan,” “estimate,” “intend,” “expect,” “do not expect,” “anticipate,” “do not anticipate,” “should,” “likely” and other expressions. We may also provide oral or written forward-looking information in other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of our operations may vary materially.
We do not assume any responsibility to publicly update any of our forward-looking statements regardless of whether factors change as a result of new information, future events or for any other reason. You should review any additional disclosures we make in our press releases and Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.