Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the condensed consolidated financial statements included in "Item 1. Financial Statements" contained herein.
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:
•our Completion and Production segment delivers cementing, stimulation, intervention, pressure control, artificial lift, and completion products and services. The segment consists of Production Enhancement, Cementing, Completion Tools, Production Solutions, Artificial Lift, and Pipeline and Process Services.
•our Drilling and Evaluation segment provides field and reservoir modeling, drilling, fluids and specialty chemicals, 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 Project Management.
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 in the United States, Malaysia, Singapore, and the United Kingdom. With approximately 40,000 employees, we operate in more than 70 countries around the world, and our corporate headquarters is in Houston, Texas.
Our value proposition is to collaborate and engineer solutions to maximize asset value for our customers. We work to achieve strong cash flows and returns for our shareholders by delivering technology and services that improve efficiency, increase recovery, and maximize production for our customers. Our strategic priorities are to:
-deliver profitable growth in our international business;
-maximize value and cash flows in our North America business;
-accelerate the deployment and integration of digitalization and automation technologies that create differentiation, both internally and for our customers;
-drive increased capital efficiencies in all parts of our business; and
-actively participate in advancing a sustainable energy future.
The following charts depict revenue split between our two operating segments and our four primary geographic regions for the quarter ended March 31, 2022.
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| | Part I. Item 2 | Executive Overview |
Market conditions, COVID-19 pandemic, and Russia/Ukraine Conflict
Oil and natural gas prices continue to be impacted by the efforts to contain COVID-19, the pace of economic recovery, and changes to OPEC+ production levels. There is increased economic optimism as governments worldwide continue to distribute the COVID-19 vaccines. However, although vaccination campaigns are underway, several regions continue to deal with a rising number of COVID-19 cases. In addition, Russia’s invasion of Ukraine has led to regional instability as discussed below. The foregoing destabilizing factors have caused dramatic fluctuations in global financial markets and uncertainty about world-wide oil supply and demand, which in turn has increased the volatility of oil and natural gas prices. West Texas Intermediate (WTI) oil prices have recovered to pre-pandemic levels, averaging approximately $94 per barrel during the first quarter of 2022. The U.S. land average rig count continues to be well below pre-pandemic levels, but rose 13% in the first quarter of 2022 compared to the fourth quarter of 2021. The Brent crude oil price averaged over $100 per barrel during the first quarter of 2022 and the international average rig count increased 1% as compared to the fourth quarter of 2021. With the current shortage of other sources of energy, and the economic growth associated with what appears to be a global emergence from the pandemic, the demand for and price of oil has increased. Also, while we have been impacted by inflationary cost increases in the United States, primarily related to frac sand and logistics costs, we generally try to pass much of those increases on to our customers and have effective solutions that work to minimize the operational impact.
In February of 2022, Russia invaded Ukraine and is still engaged in active armed conflict against the country. As a result, governments in the European Union, the United States, the United Kingdom, Switzerland, and other countries have enacted additional sanctions against Russia and Russian interests. These sanctions include controls on the export, re-export, and in-country transfer in Russia of certain goods, supplies, and technologies, including some that we use in our business in Russia, and the imposition of restrictions on doing business with certain state-owned Russian customers and other investments and business activities in Russia. In order to comply with these sanctions, we ceased pursuing future business in Russia and began to wind down our remaining operations in Russia in March of 2022. Under the current sanctions, we are required to wind down certain contracts in Russia by May 15, 2022. The total net book value of our assets in Russia at March 31, 2022 was approximately $340 million, and as described in Note 2 to our condensed consolidated financial statements, no impairment has occurred. However, the conflict in Ukraine and related sanctions could potentially impact our assets in Russia, which could cause us to take a charge related to those assets.
The invasion of and ongoing conflict in Ukraine will likely continue to cause disruption and instability in Russia, Ukraine, and other markets in which we operate. Litigation may result, both by us in the event of any expropriation or nationalization of our assets and by others against us as a result of our wind down due to sanctions compliance. We may also incur employee severance costs in connection with the wind down. It is not possible at this time to predict the ultimate consequences of the conflict in Ukraine or the responses of governments or others to the conflict, which could include, among other things, additional sanctions, greater regional instability or expansion of the conflict, embargoes, geopolitical shifts, litigation, and impacts on macroeconomic conditions, commodities, currency exchange rates, supply chains, and financial markets.
Financial results
The following graph illustrates our revenue and operating margins for each operating segment for the first quarter of 2021 and 2022.
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| | Part I. Item 2 | Executive Overview |
During the first quarter of 2022, we generated total company revenue of $4.3 billion, a 24% increase as compared to the first quarter of 2021. We reported operating income of $511 million during the first quarter of 2022 that included $22 million of impairments and other charges. This compares to operating income of $370 million during the first quarter of 2021. Our Completion and Production segment revenue increased 26% in the first quarter of 2022 as compared to the first quarter of 2021, primarily due to increased pressure pumping services in North America land, while margins decreased primarily from sand delivery disruptions in North America land and normal seasonal first quarter weakness in pipeline services. Our Drilling and Evaluation segment revenue increased 22% in the first quarter of 2022 as compared to the first quarter of 2021, driven primarily by improvements in drilling-related services activity globally, and operating margins improved primarily from increased high margin activity from our directional drilling, project management, and wireline businesses.
In North America, our revenue increased 37% in the first quarter of 2022, as compared to the first quarter of 2021, driven by increased pressure pumping services in North America land, as well as increased activity in most other product service lines. While the average North America rig count increased 64% from the first quarter of 2021, it is still below pre-pandemic levels.
Revenue in our international markets increased 15% in the first quarter of 2022, as compared to the first quarter of 2021, primarily driven by higher activity for drilling and completions related services across all regions. The international rig count increased 18% in the first quarter of 2022 as compared to the first quarter of 2021.
Sustainability and Energy Advancement
We continue to pursue our strategic initiatives around advancing cleaner, affordable energy, and supporting sustainable energy advancements, using innovation and technology to reduce the environmental impact of producing oil and gas. As such, we are continuing to develop and deploy low-carbon solutions to help oil and gas operators lower their current emissions profiles while also using our existing technologies in renewable energy applications. In addition, Halliburton Labs, our clean energy accelerator, added three new companies in the first quarter of 2022, bringing the total number of participants and alumni to fifteen.
Our operating performance and liquidity are described in more detail in "Liquidity and Capital Resources" and “Business Environment and Results of Operations.”
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| | Part I. Item 2 | Liquidity and Capital Resources |
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2022, we had $2.2 billion of cash and equivalents, compared to $3.0 billion of cash and equivalents at December 31, 2021.
Significant sources and uses of cash during the first three months of 2022
Uses of cash:
•Cash usage from operating activities was $50 million, which included a negative net impact of $386 million from the primary components of our working capital (receivables, inventories, and accounts payable).
•In February of 2022, we paid $641 million to redeem $600 million aggregate principal amount of our 3.8% senior notes due 2025. The payment also included the make-whole premium and accrued interest.
•Capital expenditures were $189 million.
•We paid $108 million in dividends to our shareholders.
Future sources and uses of cash
We manufacture most of our own equipment, which provides us with significant flexibility to increase or decrease our capital expenditures based on market conditions. We expect capital spending for the full year 2022 will be approximately $1 billion. We believe this level of spend will allow us to adequately invest in key strategic areas. However, we will continue to maintain capital discipline and monitor the rapidly changing market dynamics, and we may adjust our capital spend accordingly.
Our first quarter of 2022 dividend rate was $0.12 per common share as announced by our Board of Directors in January of 2022. We expect dividend payments to remain approximately the same in the second quarter of 2022 and we will continue to maintain our focus on liquidity and review our quarterly dividend considering our priorities of debt reduction and, as market conditions evolve, reinvesting in our business.
Our Board of Directors has authorized a program to repurchase our common stock from time to time. No repurchases occurred during the first quarter of 2022 under this program. Approximately $5.1 billion remained authorized for repurchases as of March 31, 2022 and may be used for open market and other share purchases.
Other factors affecting liquidity
Financial position in current market. As of March 31, 2022, we had $2.2 billion of cash and equivalents and $3.5 billion of available committed bank credit under our revolving credit facility. We believe we have a manageable debt maturity profile, with approximately $1.1 billion coming due through the end of 2027. 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 our global cash needs, including capital expenditures, working capital investments, dividends, if any, and contingent liabilities.
Guarantee agreements. In the normal course of business, we have in place agreements with financial institutions under which approximately $1.9 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of March 31, 2022. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization, however, none of these triggering events have occurred. As of March 31, 2022, we had no material off-balance sheet liabilities and were not required to make any material cash distributions to our unconsolidated subsidiaries.
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 stable outlook.
Customer receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to risk that our customers may delay or fail 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. Given the nature and significance of the pandemic and disruption in the oil and gas industry, we have experienced delayed customer payments and payment defaults associated with customer liquidity issues.
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| | Part I. Item 2 | Liquidity and Capital Resources |
Receivables from our primary customer in Mexico accounted for approximately 11% of our total receivables as of March 31, 2022. While we have experienced payment delays in Mexico, these amounts are not in dispute and we have not historically had, and we do not expect, any material write-offs due to collectability of receivables from this customer.
HAL Q1 2022 FORM 10-Q | 15
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| | Part I. Item 2 | Business Environment and Results of Operations |
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
We operate in more than 70 countries throughout the world to provide a comprehensive range of services and products to the energy industry. Our revenue is generated 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 2022, based upon the location of the services provided and products sold, 43% of our consolidated revenue was from the United States, compared to 39% of consolidated revenue from the United States in the first three months of 2021. No other country accounted for more than 10% of our revenue.
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 capital, government regulation, and global stability, which together drive worldwide drilling and completions activity. Additionally, many of our customers in North America have shifted their strategy from production growth to operating within cash flow and generating returns, and we generally expect that to continue throughout 2022. 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 table below shows the average oil and natural gas prices for WTI, United Kingdom Brent crude oil, and Henry Hub natural gas.
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31 | Year Ended December 31 |
| | 2022 | 2021 | 2021 | |
Oil price - WTI (1) | $ | 94.45 | | $ | 57.79 | | $ | 67.99 | | |
Oil price - Brent (1) | 100.30 | | 60.82 | | 70.68 | | |
Natural gas price - Henry Hub (2) | 4.66 | | 3.56 | | 3.91 | | |
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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. | |
The historical average rig counts based on the weekly Baker Hughes rig count data were as follows:
| | | | | | | | | | | | | |
| Three Months Ended March 31 | | Year Ended December 31 |
| 2022 | 2021 | | | 2021 |
U.S. Land | 619 | | 378 | | | | 465 | |
U.S. Offshore | 16 | | 15 | | | | 15 | |
Canada | 198 | | 145 | | | | 132 | |
North America | 833 | | 538 | | | | 612 | |
International | 823 | | 698 | | | | 755 | |
Worldwide total | 1,656 | | 1,236 | | | | 1,367 | |
Business outlook
According to the United States Energy Information Administration (EIA) April 2022 "Short Term Energy Outlook," the Brent spot price is expected to average $108 for the second quarter of 2022, with an expected full year average of $103, a rise of approximately $32 per barrel, or 45%, as compared to the full year 2021. According to the EIA, WTI prices are expected to average $102 per barrel in the second quarter of 2022 and $98 per barrel for the full year 2022. The EIA's 2022 WTI forecast for 2022 would result in an increase of $30 per barrel, or 44%, compared to the full year 2021. The 2023 price forecasts are highly uncertain at this point, in part due to Russian sanctions and the continuing conflict in Ukraine, but the EIA expects an average Brent spot price of $93 per barrel in 2023.
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| | Part I. Item 2 | Business Environment and Results of Operations |
The EIA April 2022 “Short Term Energy Outlook” projects Henry Hub natural gas prices to average $5.68 per MMBtu during the second quarter of 2022 and $5.23 per MMBtu for the full year 2022, and to decrease to $4.01 per MMBtu in 2023. The 2023 forecasted decline in prices reflects expectations that storage levels will be higher during 2023 as compared to 2022.
Per the International Energy Agency's (IEA) April 2022 "Oil Market Report", surging COVID-19 cases and mobility restrictions in Asia have led to a downward revision in global oil demand expectations for the second quarter of 2022 and for the full year of 2022. Also according to the IEA, OPEC+ countries have stated they do not believe there is a supply shortage and therefore they intend to maintain their output targets. The IEA forecasts global oil demand to average 99.4 million barrels per day in 2022, a 1.9 million barrel per day increase from 2021. The EIA projects crude oil production in the United States will average 12.01 million barrels per day in 2022, an approximate 7% increase from 2021, and to average 12.95 million barrels per day in 2023, an increase of 8% from 2022.
We expect oil and gas demand will grow over the next several years driven by economic expansion, energy security concerns, and population growth. We believe supply dynamics have fundamentally changed due to investor return requirements, public Environmental, Social, and Governance (ESG) commitments, and regulatory pressure, all of which contribute to making it more difficult for operators to commit to long-cycle hydrocarbon investments and instead drive investment flexibility through short-cycle production strategies. There are important exceptions where successful long-term projects will be developed, but we believe that most investments will be directed towards short-cycle activity over the next several years.
Internationally, we continue to believe our customers’ spend will increase in the range of 14% to 16 % this year and that international activity will gain momentum in the second quarter of 2022 led by the Middle East and Latin America and further accelerate in the second half of 2022. In North America, we expect net pricing improvement across all of our product service lines and customer spending to increase by over 35% this year.
HAL Q1 2022 FORM 10-Q | 17
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| Part I. Item 2 | Results of Operations in 2022 Compared to 2021 (QTD) |
RESULTS OF OPERATIONS IN 2022 COMPARED TO 2021
Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021
| | | | | | | | | | | | | | |
Revenue: | Three Months Ended March 31 | Favorable | Percentage |
Millions of dollars | 2022 | 2021 | (Unfavorable) | Change |
Completion and Production | $ | 2,353 | | $ | 1,870 | | $ | 483 | | 26 | % |
Drilling and Evaluation | 1,931 | | 1,581 | | 350 | | 22 | |
Total revenue | $ | 4,284 | | $ | 3,451 | | $ | 833 | | 24 | % |
| | | | |
By geographic region: | | | | |
North America | $ | 1,925 | | $ | 1,404 | | $ | 521 | | 37 | % |
Latin America | 653 | | 535 | | 118 | | 22 | |
Europe/Africa/CIS | 677 | | 634 | | 43 | | 7 | |
Middle East/Asia | 1,029 | | 878 | | 151 | | 17 | |
Total revenue | $ | 4,284 | | $ | 3,451 | | $ | 833 | | 24 | % |
| | | | | | | | | | | | | | |
Operating income: | Three Months Ended March 31 | Favorable | Percentage |
Millions of dollars | 2022 | 2021 | (Unfavorable) | Change |
Completion and Production | $ | 296 | | $ | 252 | | $ | 44 | | 17 | % |
Drilling and Evaluation | 294 | | 171 | | 123 | | 72 | |
Total | 590 | | 423 | | 167 | | 39 | |
Corporate and other | (57) | | (53) | | (4) | | (8) | |
Impairments and other charges | (22) | | — | | (22) | | n/m |
Total operating income | $ | 511 | | $ | 370 | | $ | 141 | | 38% |
n/m = not meaningful | | | | |
Operating Segments
Completion and Production
Completion and Production revenue in the first quarter of 2022 was $2.4 billion, an increase of $483 million, or 26%, when compared to the first quarter of 2021, while operating income was $296 million, an increase of $44 million, or 17%. These results were driven by increased pressure pumping services and artificial lift activity in the Western Hemisphere, higher completion tool sales throughout the Western Hemisphere and the Middle East, increased cementing activity in Africa and Middle East/Asia, and improved well intervention services in North America land and the Eastern Hemisphere. These improvements were partially offset by lower activity across multiple product service lines in Europe and lower completion tool sales throughout Asia.
Drilling and Evaluation
Drilling and Evaluation revenue in the first quarter of 2022 was $1.9 billion, an increase of $350 million, or 22%, when compared to the first quarter of 2021, while operating income was $294 million, an increase of $123 million, or 72%. These results were due to increased drilling-related services globally, improved wireline activity in North America land, Latin America, and the Middle East, increased testing services internationally, and higher project management activity in Latin America, India, and Oman. Partially offsetting these increases were lower project management activity in Iraq, as well as lower fluid services in the Caribbean, Brunei, and Mozambique. Operating margins improved primarily from increased high margin activity from our directional drilling, project management, and wireline businesses.
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| Part I. Item 2 | Results of Operations in 2022 Compared to 2021 (QTD) |
Geographic Regions
North America
North America revenue in the first quarter of 2022 was $1.9 billion, a 37% increase compared to the first quarter of 2021. This increase was primarily driven by increased pressure pumping activity and drilling-related services in North America land, higher stimulation, artificial lift, and drilling-related activity in Canada, and higher completion tool sales in the Gulf of Mexico. These increases were partially offset by reduced fluid services in the Gulf of Mexico.
Latin America
Latin America revenue in the first quarter of 2022 was $653 million, a 22% increase compared to the first quarter of 2021 due to improved activity across multiple product service lines in Brazil, Argentina, and Mexico, increased well construction services in Colombia, higher completion tool sales in Guyana, improved project management activity in Ecuador and Colombia, increased testing services and wireline activity across the region, and increased artificial lift activity in Ecuador. Partially offsetting these increases were reduced fluid services in the Caribbean and lower project management and stimulation activity in Mexico.
Europe/Africa/CIS
Europe/Africa/CIS revenue in the first quarter of 2022 was $677 million, a 7% increase compared to the first quarter of 2021. This improvement was primarily driven by higher activity across multiple product service lines in Egypt, increased drilling-related activity in Azerbaijan, increased well intervention and testing services across the region, improved well construction services in West Africa, and higher completion tool sales and cementing activity in Angola. These increases were partially offset by reduced activity across multiple product service lines in the United Kingdom, reduced well construction services and completion tool sales in Norway, and decreased fluid services in Mozambique.
Middle East/Asia
Middle East/Asia revenue in the first quarter of 2022 was $1.0 billion, a 17% increase compared to the first quarter of 2021, resulting from improved well construction services in Saudi Arabia and Oman, increased wireline activity and completion tool sales in the Middle East, and increased testing services across the region. These increases were partially offset by reduced project management activity in Iraq, lower completion tool sales throughout Asia, decreased fluid services in Brunei, and lower stimulation activity in Bangladesh.
Other Operating Items
Impairments and other charges. During the three months ended March 31, 2022, we recognized a pre-tax charge of $22 million, primarily related to the write down of all of our assets in Ukraine, including $16 million in receivables, due to the ongoing conflict in Ukraine. See Note 2 to the condensed consolidated financial statements for further discussion on these charges.
Nonoperating Items
Loss on early extinguishment of debt. During the three months ended March 31, 2022, we recorded a $42 million loss on the early redemption of $600 million aggregate principal amount of our 3.8% senior notes, which included premiums and unamortized expenses. See Note 6 to the condensed consolidated financial statements for further information.
Effective tax rate. During the three months ended March 31, 2022, we recorded a total income tax provision of $68 million on a pre-tax income of $332 million, resulting in an effective tax rate of 20.5% for the quarter. During the three months ended March 31, 2021, we recorded a total income tax provision of $52 million on a pre-tax income of $223 million, resulting in an effective tax rate of 23.5%.
HAL Q1 2022 FORM 10-Q | 19
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| | Part I. Item 2 | Forward-Looking Information |
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.