Halliburton to keep deleveraging in downturn, cuts costs to save cash

By Devika Patel

Knoxville, Tenn., April 20 – Halliburton Co.’s management believes it is in a good position despite a “dramatic” downturn in the oil and gas industry, having recently de-levered significantly with plans to keep deleveraging.

The company also plans to enact several measures to reduce costs and improve cash generation during this crisis in order to ensure the company weathers the downturn and also is in a good position “to take advantage of the eventual market recovery,” its top executive said.

“The market in North America is experiencing the most dramatic and rapid activity decline in recent history,” chairman, president and chief executive officer Jeff Miller said on the company’s first quarter ended March 31 earnings conference call on Monday.

“Our customers continue to revise their capital budgets downwards as they swiftly adjust spending levels in response to the lower commodity price.

“Our outlook for the international markets has also changed.

“In addition to the collapse of oil prices, the industry is dealing with activity interruptions due to the coronavirus pandemic,” Miller said.

The company expects an impact from the virus in the second quarter’s results.

“Covid-19 had minimal impact on our international operations in the first quarter, but the second quarter will be different,” Miller said.

“We are seeing restricted movements within countries, quarantine requirements for rotational staff, logistics delay due to third-party personnel reductions, and in some cases entire country closures.

“Different markets are impacted differently and this will lead to significant operational disruptions at least through the second quarter,” Miller said.

Internationally, the outlook is also grim.

“Beyond these near-term headwinds, certain international customers are also fundamentally reducing capital spending, deferring exploration and appraisal activity and looking to cut costs on their major ongoing projects,” Miller said.

“We expect international spending to be down in the range of 10% on a full year basis.

“Opec Plus production decisions and the duration of the pandemic-related demand and activity disruptions will ultimately determine how much the international spending declines this year.” Miller said.

The company is in good shape going into this downturn. There is enough liquidity and a manageable debt profile, thanks to recent actions.

“First, I believe, Halliburton has sufficient liquidity, approximately $5 billion, including cash on hand and our undrawn credit facility,” Miller said.

“Second, in the first quarter, we successfully executed both a tender offer for some of our bonds and a debt offering.

“As a result, we retired $500 million in total debt and extended the maturity for our $1 billion of senior notes out to 2030.

“We have focused on debt reduction over the last few years, and we entered this downturn with $2.6 billion less debt than in 2016.

“We also have a very manageable debt maturity profile with only $1.3 billion coming due through 2024,” Miller said.

The company plans to keep deleveraging.

“Deleveraging remains a key priority.

“We believe our free cash flow generation will be sufficient to pay down upcoming debt maturities in the normal course of business,” Miller said.

Last quarter, the company sold debt and completed a tender, which lowered total debt by $500 million.

“During the quarter, we took actions to manage our debt and maturity profile,” executive vice president and chief financial officer Lance Loeffler said on the call.

“We executed two transactions, a debt issuance and a subsequent tender, which lowered our total debt by $500 million but, more importantly, it also reduced our 2023 and 2025 maturities by $1.5 billion,” Loeffler said.

The company also may consider cutting its dividend if needed.

“Our dividend is a lever we can pull, based on our market outlook and valuations,” Miller said.

“Our board and management review the dividend quarterly and will act prudently to make adjustments for the long-term success of our business.

“Let me be clear, we have no intentions to increase leverage to maintain the dividend.

“We also do not intend to allow the dividend to prevent us from being structurally and financially positioned to take advantage of the eventual market recovery,” Miller said.

The company had already reduced capital expenditures in 2019, and plans to further reduce capex in 2020.

“Our capex in 2019 was down year-over-year, and we further reduced capex coming into 2020 to drive capital discipline across all of our business segments,” Miller said.

He said the company is implementing measures that will further reduce its costs and improve its cash generation ability as its customers continue to reduce their spending levels.

“We are reducing our capital expenditures for 2020 to about $800 million, roughly 50% from 2019 levels,” Miller said.

“We believe this level of spend will allow us to invest in our key strategic areas, while continuing to support our business in the active markets,” Miller said.

The company is also streamlining its head counts and consolidating facilities and removing management layers.

“We will take out about $1 billion of annualized overhead and other costs across our entire business, with most of it happening in the next two quarters,” Miller said.

“To accomplish this, we are streamlining our global and regional head count, consolidating multiple facilities and removing another layer of operations management in North America,” Miller said.

The company has stopped discretionary spending, is cutting executive salaries and trying to renegotiate terms with its suppliers.

“Additionally, we will make variable headcount adjustments and rationalize our assets to be in line with the activity reductions we anticipate,” Miller said.

“As we look to reduce our own input costs, we are also renegotiating prices and terms with our suppliers.

“We believe these actions are necessary given the current environment and will help protect our balance sheet and drive cash flow and returns for our shareholders,” Miller said.

Despite having a solid balance sheet and good liquidity, the company needs to take these actions to adjust to current market conditions.

The long-term outlook is positive, Miller said.

“We know that the industry will recover. It may look different when it does, but we believe the actions we are taking will ensure that we are in a strong position, financially and structurally, to take advantage of the market’s eventual recovery,” Miller said.

Cash and equivalents were $1,385,000,000 as of March 31, 2020, compared to $2,268,000,000 as of Dec. 31, 2019.

Long-term debt was $9,633,000,000 as of March 31, 2020, compared to $10,316,000,000 as of Dec. 31, 2019. Total outstanding debt was $9.8 billion as of March 31 and the company has no borrowings under its revolver and no financial covenants for its debt agreements.

On Feb. 19, Halliburton priced $1 billion of 2.92% 10-year senior notes (Baa1/A-) at a spread of Treasuries plus 135 basis points.

The notes were sold at 99.974 to yield 2.923%.

The notes were initially talked to price at the Treasuries plus 150 bps area.

J.P. Morgan Securities LLC, Citigroup Global Markets Inc., HSBC Securities (USA) Inc., Mizuho Securities USA Inc., BofA Securities, Inc., Deutsche Bank Securities Inc., TD Securities (USA) LLC and Wells Fargo Securities LLC were the bookrunners.

Proceeds will be used for cash tender offers for up to $1.5 billion of the company’s 3.25% senior notes due 2021, its 3.5% senior notes due 2023 and its 3.8% senior notes due 2025.

On March 4, Halliburton announced the pricing terms and early results of its cash tender offers to purchase up to $1.5 billion of its senior notes from three series.

Halliburton offered to purchase, subject to the maximum tender amount, the following notes, listed in order of acceptance priority level:

• Up to $500 million of its $1.1 billion outstanding 3.5% senior notes due 2023 (Cusip: 406216BD2);

• Up to $1 billion of its $2 billion outstanding 3.8% senior notes due 2025 (Cusip: 406216BG5); and

• Up to $100 million of its $500 million outstanding 3.25% senior notes due 2021 (Cusip: 406216AZ4).

By the early tender date, 10 a.m. ET on March 4, holders had tendered $527,679,000 of the 3.5% notes, of which $499,939,000 were accepted for purchase; $1,065,350,000 of the 3.8% notes, of which $999,996,000 were accepted for purchase; and $228,308,000 of the 3.25% notes, none of which were accepted for purchase.

The proration factor for the 3.5% notes was 94.8% and the proration factor for the 3.8% notes was 93.89%.

The total consideration for the 3.5% notes was $1,079.64 per $1,000 of notes, based on the 1.375% U.S. Treasury due Feb. 15, 2023 and a fixed spread of 30 basis points.

The total consideration for the 3.8% notes was $1,133.36 per $1,000 of notes, based on the 1.375% U.S. Treasury due Jan. 31, 2025 and a fixed spread of 55 bps.

Pricing was calculated at 10 a.m. ET on March 4.

Holders who tendered their notes at or prior to the early tender deadline were eligible to receive the total consideration, which included an early tender premium of $30 per $1,000 principal amount of notes accepted for purchase.

Halliburton also paid accrued interest to but excluding the applicable settlement date.

The tender offers expired at 11:59 p.m. ET on March 17; however, Halliburton said on March 4 that it would not accept any more tendered notes for purchase, as the cap had been met.

The tender offer was subject to a financing condition, in addition to the maximum tender offer amount, the tender sub-caps for each series, the acceptance priority levels and proration. The financing condition was met on March 3, as the company sold $1 billion of 2.92% 10-year senior notes.

Halliburton is an oil field services company based in Houston.

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