Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE OVERVIEW
Organization
We are one of the world's largest providers of products and services to the energy industry. We help our customers maximize value 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 throughout the life of the asset. 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
60,000
employees, we operate in more than
80
countries around the world, and our corporate headquarters are in Houston, Texas and Dubai, United Arab Emirates.
Financial results
Commodity prices have improved since the beginning of the year, driven by tightening oil supplies and stable demand, and our customers' budgets have been refreshed, which has led to activity improvements for our services during the first quarter of 2019. However, we experienced pricing headwinds throughout the first quarter in North America, and some pricing pressure internationally, leading to mixed operating results for the Company. We generated total company revenue of
$5.7 billion
during the
first
quarter of
2019
, essentially flat compared to the first quarter of 2018. Total company operating income was
$365 million
during the
first
quarter of
2019
, a 3% improvement compared to operating income of
$354 million
in the
first
quarter of
2018
. These operating results included $61 million and $265 million of impairments and other charges during the first quarters of 2019 and 2018, respectively. Our Completion and Production segment revenue decreased 4% from the
first
quarter of
2018
, driven by lower pricing for stimulation services in North America, while our Drilling and Evaluation segment revenue increased
7
% from the
first
quarter of
2018
, with activity improvements across all geographic regions.
Our North America revenue decreased 7% in the
first
quarter of
2019
, as compared to the
first
quarter of
2018
, primarily driven by lower pricing for stimulation services in U.S. land. While we incurred significant pricing headwinds throughout the first quarter, we believe the worst of the recent pricing deterioration is behind us. We did, however, experience higher pressure pumping and artificial lift activity in the first quarter of 2019 compared to the first quarter of 2018, as the average United States land rig count grew 7%.
Revenue in our international markets increased 11% in the first quarter of
2019
, as compared to the first quarter of
2018
, outperforming a 6% increase in the international rig count. This increase resulted primarily from improved stimulation and fluids activity in Latin America, coupled with higher completion tool sales in Middle East/Asia and improved logging activity in Europe/Africa/CIS. We are seeing evidence of a broad-based recovery across all regions, and we expect continued international revenue growth in 2019. Over the last several years, we continued to gain share in key international markets, providing us with a strong base to capitalize on the anticipated recovery.
Business outlook
We believe supply and demand fundamentals for oilfield services support a theme of multi-year industry growth. Our industry is going through a transformation brought on by the shale revolution and the recent down-cycle. The industry has removed substantial costs from the system and introduced significant efficiencies. Many of our customers in North America appear to have shifted their strategy from production growth to operating within cash flow and generating returns.
In North America, our customers have established their 2019 budgets, activity is improving, and we believe the worst of the recent pricing deterioration is behind us. We work closely with a diverse portfolio of customers who have diverging agendas such as production targets and returns objectives. Given our presence in all basins and exposure to all customer groups, we have the ability to focus on several options to drive a better outcome for our business, including utilization, cost savings and operational efficiency. Building off the momentum we saw towards the end of the first quarter, we believe demand for our services will progress modestly for the remainder of the year.
Overall, we believe the industry's focus on cash flow and returns should lead to stable growth over a longer period of time, which would benefit our business. It allows us to focus on leveraging our supply chain and logistics infrastructure, capture efficiencies around our repair and maintenance programs and implement technologies at scale to reduce cost and increase production, and therefore be more efficient with our investments while generating strong cash flow. As the North America land market rebalances over the next few quarters, we will continue to manage our costs and operating efficiencies in the short-term and believe we are well-positioned for long-term success.
Internationally, while the recovery was initially led by the national oil companies and focused on mature fields, the offshore markets are now entering into recovery mode as project economics are improving. International offshore spending is projected to increase in 2019, and the international offshore rig count is already experiencing growth to support this projection. We expect Latin America activity to improve this year, and this region has long-term growth potential. Activity improvements are also expected in the Middle East following rig additions, with pricing pressure expected to continue. We also expect continued activity growth in Asia Pacific and Africa with modest pricing improvements in these areas. As capacity tightens internationally and the pipeline of projects progressively expands, we expect to continue demonstrating rational, returns-driven growth in the international markets. The pricing discussions with our customers in some markets have become more constructive, and we expect this momentum to build going into 2020. We believe we are well-positioned for the anticipated recovery, and we expect to benefit from responsible capital stewardship, prioritizing capital efficiency, investing in the technologies that deliver differentiation and returns and generating strong cash flow.
During the first quarter of
2019
, our capital expenditures were approximately
$437 million
, a decrease of 13% from the first quarter of 2018. These capital expenditures were predominantly in our
Production Enhancement
,
Sperry Drilling
,
Wireline and Perforating
,
Production Solutions
, and
Artificial Lift
product service lines. We expect our full year 2019 capital expenditures will be $1.6 billion, a 20% decrease from 2018, as we significantly reduced our North America pressure pumping capital budget this year as the services industry adjusts to market conditions. The capital that we spend will be mostly directed towards improving efficiency, reducing emissions and refurbishing equipment.
We intend to continue to strengthen our product service lines through a combination of organic growth, investment and selective acquisitions. We plan to continue executing the following strategies in
2019
:
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directing capital and resources that differentiate our service and product offerings into strategic markets, including unconventionals and mature fields;
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collaborating and engineering solutions to maximize asset value for our customers;
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leveraging our broad technology offerings to provide value to our customers and enable 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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seeking additional 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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striving to achieve superior growth and returns for our shareholders.
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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. As of
March 31, 2019
, we had
$1.4 billion
of cash and equivalents and
$3.5 billion
of available committed bank credit under our revolving credit facility. We believe this 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, 2019
, we had
$1.4 billion
of cash and equivalents, compared to
$2.0 billion
of cash and equivalents at December 31, 2018.
Significant sources and uses of cash during the first
three
months of
2019
- Cash flows used in operating activities was
$44 million
. This included what we expect are short-term changes in the primary components of our working capital (receivables, inventories and accounts payable) of a net
$515 million
, primarily related to some customer payment delays and a build-up of inventory primarily for the international roll out of our strategic investments.
- Capital expenditures were
$437 million
and were predominantly made in our
Production Enhancement
,
Sperry Drilling
,
Wireline and Perforating
,
Production Solutions
, and
Artificial Lift
product service lines.
- We paid
$157 million
in dividends to our shareholders.
Future sources and uses of cash
We manufacture most of our own equipment, which allows us flexibility to increase or decrease our capital expenditures based on market conditions. Capital spending for the full year
2019
is currently expected to be approximately $1.6 billion, a decrease of 20% from 2018, as we remain committed to maintaining capital discipline.
Currently, our quarterly dividend rate is
$0.18
per common share, or approximately
$157 million
. Subject to Board of Directors approval, our intention is to continue paying dividends at our current rate during
2019
. Our Board of Directors has authorized a program to repurchase our common stock from time to time. Approximately
$5.3 billion
remained authorized for repurchases as of
March 31, 2019
and may be used for open market and other share purchases.
Other factors affecting liquidity
Financial position in current market.
As of
March 31, 2019
, we had
$1.4 billion
of cash and equivalents and
$3.5 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 our global cash needs for the remainder of
2019
, including capital expenditures, 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
$2.1 billion
of letters of credit, bank guarantees or surety bonds were outstanding as of
March 31, 2019
. 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 A- 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 stable 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.
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
We operate in more than
80
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 quarter of
2019
, based upon the location of the services provided and products sold,
55%
of our consolidated revenue was from the United States, compared to
58%
of consolidated revenue from the United States in the first quarter of 2018.
No other country accounted for more than 10% of our revenue.
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 an interruption 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 and our customers' expectations about future prices, global oil supply and demand, completions intensity, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling and completions activity. Lower oil and natural gas prices usually translate into lower exploration and production budgets and lower rig count, while the opposite is usually true for higher oil and natural gas prices. Our financial performance is therefore significantly affected by 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
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Year Ended
December 31
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2019
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2018
|
2018
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Oil price - WTI
(1)
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$
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54.83
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$
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62.88
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$
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64.94
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Oil price - Brent
(1)
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63.17
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66.81
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71.08
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Natural gas price - Henry Hub
(2)
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2.92
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3.08
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3.17
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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
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Year Ended
December 31
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2019
|
2018
|
2018
|
U.S. Land
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1,022
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951
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1,013
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U.S. Offshore
|
21
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16
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19
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Canada
|
183
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269
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191
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North America
|
1,226
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1,236
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1,223
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International
|
1,030
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971
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988
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Worldwide total
|
2,256
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2,207
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2,211
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Crude oil prices have been extremely volatile over 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. Since the low point experienced in early 2016, oil prices increased substantially, with
WTI oil spot prices reaching a high of $77 per barrel in June 2018. In late 2018, oil prices again declined with WTI oil spot prices reaching a low of $44 per barrel in December, but have since risen to a high of $66 per barrel in April 2019. The average WTI and Brent crude oil spot prices during the first quarter of 2019 were
$55
per barrel and
$63
per barrel, respectively.
In the United States Energy Information Administration (EIA) April 2019 "Short Term Energy Outlook," the EIA projects Brent prices to average $65 per barrel in 2019 and $62 per barrel in 2020, while WTI prices are projected to average approximately $8 less per barrel in the first half of 2019, before the discount to Brent gradually falls to approximately $4 in late 2019 through 2020.
Crude oil production in the United States is now projected to average 12.4 million barrels per day in 2019, a 14% increase from 2018. Additionally, the EIA projects that U.S. production will increase 6% in 2020, to average 13.1 million barrels per day. The International Energy Agency's (IEA) April 2019 "Oil Market Report" forecasts the 2019 global demand to average approximately 100.6 million barrels per day, which is up 1.5% from 2018, driven by an increase in the Asia Pacific region, while all other regions remain approximately the same.
The Henry Hub natural gas spot price averaged
$2.92
per MMBtu in the first quarter of 2019, a decrease of $0.16 per MMBtu, or 5%, from the first quarter of 2018. The EIA April 2019 “Short Term Energy Outlook” projects Henry Hub natural gas prices to average $2.82 per MMBtu in 2019 and $2.77 per MMBtu in 2020.
North America operations
During the first quarter of 2019, the average United States land rig count increased 7%, as compared to the first quarter of 2018, and completions activity continued to strengthen with higher pressure pumping and artificial lift activity during the quarter. However, we continued to face significant pricing headwinds throughout the first quarter of 2019, although we believe the worst of the recent pricing deterioration is behind us. Overall, customer spending for the full year 2019 is expected to decrease in North America as compared to 2018. We expect that less spending by operators and low pricing will result in lower capital spending by service companies, which in turn will lead to a decrease in the available supply of equipment. If operators and service companies adjust to this new environment, we believe supply and demand for the U.S. pressure pumping market will rebalance throughout the year.
International operations
The average international rig count for the first quarter of 2019 was up 6% compared to the first quarter of 2018. As capacity tightens internationally and if the pipeline of projects progressively expands as we expect, we plan to continue demonstrating rational, returns-driven growth in the international markets. While the international markets are continuing to improve, the markets are in the early stages of a recovery and pricing pressure remains a challenge in a competitive landscape. The international recovery was originally focused on mature fields as customers broadly favored shorter cycle returns and lower risk projects. We believe the offshore markets are now also entering a recovery, as project economics become more attractive. International offshore spending is projected to increase in 2019, and the international offshore rig count is already experiencing growth to support this projection. We believe we are well-positioned for continued growth as a result of the significant investments we made to grow our global footprint in the last cycle.
RESULTS OF OPERATIONS IN
2019
COMPARED TO
2018
Three Months Ended
March 31, 2019
Compared with
Three Months Ended
March 31, 2018
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Revenue:
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Three Months Ended
March 31
|
Favorable
|
Percentage
|
Millions of dollars
|
2019
|
2018
|
(Unfavorable)
|
Change
|
Completion and Production
|
$
|
3,662
|
|
$
|
3,807
|
|
$
|
(145
|
)
|
(4
|
)%
|
Drilling and Evaluation
|
2,075
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|
1,933
|
|
142
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|
7
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|
Total revenue
|
$
|
5,737
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|
$
|
5,740
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$
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(3
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)
|
—
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%
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By geographic region:
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North America
|
$
|
3,275
|
|
$
|
3,517
|
|
$
|
(242
|
)
|
(7
|
)%
|
Latin America
|
587
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|
457
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|
130
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28
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|
Europe/Africa/CIS
|
748
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|
716
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32
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4
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|
Middle East/Asia
|
1,127
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|
1,050
|
|
77
|
|
7
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|
Total revenue
|
$
|
5,737
|
|
$
|
5,740
|
|
$
|
(3
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)
|
—
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%
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Operating income (loss):
|
Three Months Ended
March 31
|
Favorable
|
Percentage
|
Millions of dollars
|
2019
|
2018
|
(Unfavorable)
|
Change
|
Completion and Production
|
$
|
368
|
|
$
|
500
|
|
$
|
(132
|
)
|
(26
|
)%
|
Drilling and Evaluation
|
123
|
|
188
|
|
(65
|
)
|
(35
|
)
|
Total
|
491
|
|
688
|
|
(197
|
)
|
(29
|
)
|
Corporate and other
|
(65
|
)
|
(69
|
)
|
4
|
|
6
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|
Impairments and other charges
|
(61
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)
|
(265
|
)
|
204
|
|
77
|
|
Total operating income
|
$
|
365
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|
$
|
354
|
|
$
|
11
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|
3
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%
|
Consolidated revenue was
$5.7 billion
in the
first
quarter of
2019
, essentially flat compared to the
first
quarter of
2018
. Consolidated operating income was
$365 million
during the
first
quarter of
2019
, a
3%
increase from operating income of
$354 million
in the
first
quarter of
2018
. We experienced improvements across the majority of our product service lines, primarily as a result of higher artificial lift activity in U.S. land, higher logging activity globally, and higher completion tool sales in Middle East/Asia and Latin America. These improvements were offset as a result of pricing pressure, primarily related to stimulation services, and mobilization costs on multiple drilling projects internationally. Operating results were also impacted by $61 million and $265 million of impairments and other charges during the first quarter of 2019 and 2018, respectively. Revenue from North America was
57%
of consolidated revenue in the
first
quarter of
2019
, compared to
61%
of consolidated revenue in the
first
quarter of
2018
.
OPERATING SEGMENTS
Completion and Production
Completion and Production revenue in the
first
quarter of
2019
was
$3.7 billion
, a decrease of
$145 million
, or
4%
, from the
first
quarter of
2018
. Operating income in the
first
quarter of
2019
was
$368 million
, a decrease of
$132 million
, or
26%
, from the
first
quarter of
2018
. These decreases were primarily driven by lower pricing for stimulation services in U.S. land, partially offset by higher artificial lift activity in U.S. land, increased stimulation activity in Latin America, and higher completion tool sales in Middle East/Asia and Latin America.
Drilling and Evaluation
Drilling and Evaluation revenue in the
first
quarter of
2019
was $
2.1 billion
, an increase of
$142 million
, or
7
%, from the
first
quarter of
2018
, with activity improvements across all geographic regions. This increase primarily related to higher logging and project management activity globally and improved fluids activity in Latin America. Operating income in the
first
quarter of
2019
was
$123 million
, a decrease of
$65 million
, or
35
%, compared to the
first
quarter of
2018
, resulting primarily
from mobilization costs that we incurred on multiple drilling projects internationally, coupled with reduced project management activity and lower pricing in the Middle East.
GEOGRAPHIC REGIONS
North America
North America revenue in the
first
quarter of
2019
was $
3.3 billion
, a
7%
decrease compared to the
first
quarter of
2018
. This decrease was primarily driven by lower pricing for stimulation services in U.S. land, partially offset by higher artificial lift, cementing, and stimulation services activity.
Latin America
Latin America revenue in the
first
quarter of
2019
was $
587 million
, a
28
% increase compared to the
first
quarter of
2018
, resulting primarily from higher activity for the majority of our product service lines in Mexico, higher stimulation activity in Argentina and improved fluids activity throughout the region. This was partially offset by reduced drilling and testing activity in Brazil.
Europe/Africa/CIS
Europe/Africa/CIS revenue in the
first
quarter of
2019
was $
748 million
, a
4
% increase compared to the
first
quarter of
2018
, primarily driven by higher activity across multiple product service lines in Ghana and the United Kingdom. These results were partially offset by lower drilling related activity in Azerbaijan.
Middle East/Asia
Middle East/Asia revenue in the
first
quarter of
2019
was $
1.1 billion
, a
7%
increase compared to the
first
quarter of
2018
, largely resulting from higher completion tool sales across the region, coupled with increased project management activity in India and improved drilling activity in the Middle East. These improvements were partially offset by reduced fluids activity and lower pricing in the Middle East.
OTHER OPERATING ITEMS
Impairments and other charges
were
$61 million
in the three months ended
March 31, 2019
, primarily related to an impairment of fixed assets. See
Note 2
to the condensed consolidated financial statements for further discussion on the first quarter charge. This compares to $265 million of impairments and other charges in the three months ended
March 31, 2018
, representing a write-down of all of our remaining investment in Venezuela.
NONOPERATING ITEMS
Effective tax rate
. During the three months ended
March 31, 2019
, we recorded a total income tax provision of $
40 million
on pre-tax income of $
192 million
, resulting in an effective tax rate of 20.9%. During the three months ended
March 31, 2018
, we recorded a total income tax provision of $
142 million
on pre-tax income of $
189 million
, resulting in an effective tax rate of 75.4%. Our effective tax rate during the first quarter of 2018 was significantly impacted by our investment write-down in Venezuela for which we are not recognizing a corresponding tax benefit since the write-down is not tax-deductible, along with additional accrued local Venezuela taxes we recognized in our tax provision. Our effective tax rates for both periods were also impacted by the geographic mix of earnings during the respective periods.
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 9
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.