Halliburton is one of the global leaders in the provision of oilfield services. Its core activities involve management of geological information, drilling, and structural assessment, shaft development and conclusion, and production optimization. The purpose of this study is to carry out an in-depth analysis of Halliburton’s 2015 annual report. The study involves exploration of the report’s content and analysis of financial statements and giving out recommendations with regard to its business and financial challenges.
Halliburton Company (Halliburton) is one of the top global oilfield administrations provider and supplier. The company operates in the upstream energy sector. It is headquartered in Houston Texas (Halliburton 2). Its core activities involve management of geological information, drilling, and structural assessment, shaft development and conclusion, and production optimization (Halliburton 4). Halliburton operates in an environment where companies do everything from availing data on oil fields to the actual drilling and provision of specialty services and equipment. While the industry has a tendency to depend more on supply and cost management than technical advancements for prosperity, it is not devoid of novelty. New equipment and systems are constantly being developed to optimize the production process and to safeguard the environment (Halliburton 12).
The purpose of this study is to carry out an in-depth analysis of Halliburton’s 2015 annual report. The study involves exploration of the report’s content and analysis of financial statements and giving out recommendations.
Content of the annual report
Halliburton 2015 annual report provides general description of the company’s business strategy, highlights of 2015, leadership and governance, industry overview, financial review and risk mitigation strategies and sustainability efforts. Halliburton’s strategy for 2015 was the delivery of a sustainable business, keeping a balanced portfolio and striving for operational excellence. Sustainable business was to be achieved through a self-funding business plan. The balanced portfolio was to be attained by growing reserves and resources in Africa and Scandinavia. Last but not least, operational excellence was to be achieved by minimizing oil spills and maintaining a strong balance sheet (KPMG 10).
Halliburton has maintained an excellent technical team and commercial team. The company emphasizes on first-rate competencies and teams that can deliver value by combining technical convictions with an unmistakable methodology and plan of action (KPMG 12). In addressing the hierarchical structure, the company intends to retain its core staff and a robust management team. Staff restructuring process is to be finalized by December 2016, with staff and contractors expected to be reduced by roughly 40 percent (KPMG 13).
Halliburton main goal for 2015 was to generate, enhance and realize value for shareholders, yet not to the detriment of the well-being and prosperity of individuals and the environment. Before making a procurement or investment and soliciting for an exploration permit, the company undertakes a thorough screening process, which involves studying the socioeconomic, political and environmental impact of the project. The findings from these studies are used in deciding whether to go on with the project or abandon it altogether (KMPG 21).
Management of risks and prospects is crucial to the company’s success. Halliburton is striving to pursue investment prospects that offer a suitable balance of political, occupational and technological risks and aims to keep these risks at a satisfactory level in line with company’s policy. The company’s framework for identification and management of risks is engraved in its hierarchical structure and is consistent with the global standard for risk management (KPMG 28).
Even though the universal economic recovery carried on all the way through 2015, the downside risk also left an imprint in the general financial environment. The most affected geographical zones were Europe and Asia, which grew at less than 1 percent. In addition, the falling oil prices squeezed the company’s margins and put a lot of pressure on its cash flow. As a result, Halliburton was forced to focus on the core set of projects and low-risk strategies.
With no revenue recorded in the income statement, Halliburton made a loss of $666 million during the financial year ended December 2015 (FY2015), a decrease of 119% compared with the financial year 2014. The shareholders equity also decreased by nearly 5 percent. The decline in profit was mainly attributed to a dip in oil prices and loss on sale of oil and gas assets. The basic income (loss) attributable to stockholders income was (671m) down from $3.5 billion. The share prices dipped after the company’s plan to reduce its workforce by 40 percent. The shares are down by 26 percent and its S&P index is down by 8 percent (Market Watch par.1.).
Halliburton’s Capital Structure
There is one category of debt capital available to Halliburton, which is the placement of bonds using debentures that are not convertible. Halliburton’s non-convertible debt for the financially year ending December 2015 stood at $14.69billion (Market Watch par. 2.). Halliburton’s equity finance for the financially year ending December 2015 stood at $15.46 billion. Therefore, the company’s capital structure is $ 0.77 billion (the difference between borrowings and equity). The company’s credit rating stands at A, which means it is more susceptible to adverse effects (Market Watch par. 2.).
Even though financial analysis is somehow complex, a great deal of the company’s financial position can be determined using ratio analysis. The financial ratios are classified into five main categories, namely: profitability tests, Liquidity tests, Activities tests, and Leverage ratios (Poznanski, Sadownik and Gannitsos 1). However, given the nature of the company’s business, we will only focus on profitability tests, Liquidity tests, and Leverage ratios.
These ratios show whether the company is making progress or going down (Gorsky 68). Profitability ratios include Net Profit Margin, Return on Total Assets (ROA) and Return on Stakeholders Equity (ROE) (Poznanski, Sadownik and Gannitsos 2).
Net Profit Margin (NPM)
Net profit margin shows the company’s level of profitability (Poznanski, Sadownik and Giannitsos 2; Lundberg 9). Halliburton’s net profit margin has been on a downward trend since 2011, apart from 2014. The lowest margin was recorded in 2015. The decline is attributed to the falling oil price and excess capacity and pricing pressure for its services, which has led to reduced drilling and inflow of stimulus equipment. The company should focus on improving the revenue per rig, especially in Africa and North American region to reverse the current profitability trend. Revenue generated from Africa and North American has slumped by 6 percent. In addition, the company should intensify operations in each segment.
Table1: Net profit margin.
|Profit Margin Percentage for Halliburton||-2.84||10.65||7.23||9.24||11.43|
Return on Total Assets
Return on Assets ratio of any establishment like Halliburton shows how proficient assets are used to generate returns. ROA for Halliburton Company was also on a downward trend since 2011, except in 2014. It was worse in 2015. Decrease in ROA is a result of a decrease in account receivable and increase in bad debts. The ratio can be improved by enhancing completion equipment sales in South America and efficiency in debt collection. The bad debts have increased by nearly 60 percent in the last four years.
Table 2: Return on Assets.
|ROA for Halliburton||-0.018||0.106||0.0722||0.091||0.128|
Return on Equity
The ratio computes the earning from every unit of equity. It is more reliable than earnings per share when comparing the performance of different companies (Poznanski, Sadownik and Gannitsos 2). ROE is a ratio that determines a company’s success by disclosing the volume of returns it generates out of the money invested by the shareholders. The performance of Halliburton Company was outstanding in 2014 when Net Profit Margin was highest at 10.65% and worst in 2015 when Net Profit Margin was negative. The company should increase the net income and average stockholder’s equity. Besides profit margin, more focus should be on the distribution of idle cash, enhancement of asset turnover and decreasing tax burden.
Table 3: Return on Equity.
|ROE for Halliburton||-0.043||0.211||0.155||0.163||0.228|
Earnings per Share (EPS)
This is the monetary value of returns for every share of an organization’s common stock. In other words, EPS shows the efficiency of earnings from each share. The company’s EPS has been negative for the last five years, except in 2014. It may be because of changes in the global market environment and some economic factors, rather than the poor performance of the company. The earning per share depends on the investors’ confidence in the company and, therefore, the company should strive to improve its already deteriorating image following the dismissal of more than 40 percent of the workforce. Earnings per share can also be enhanced by increasing revenues, reducing expenses and decreasing the number of shares. The number of shares can be reduced by simply buying them back from the shareholders.
Table 4: Earnings per Share.
|EPS for Halliburton in %||-119.13||74.26||-16.84||-7.77||–|
Return on Capital Employed
This is a ratio that gauges the company’s level of efficiency in term of capital utilization.
It is a good indicator since it considers debts and liabilities, unlike ROE which is only concerned with profits.
|ROCE for Halliburton||-1.35||16.16||11.16||14.66||18.69|
Just like other profitability ratios, ROCE for the company has been on a downward trend for the last five years. It became worse in 2015, which is not good for the investors. The company can improve this ratio in a number of ways. The first way is chalking up unnecessary costs by improving operational efficiency. The second way is selling off non-profitable or pointless assets, for instance, machines that have outlasted their usefulness. Last but not least, the company should reduce financial obligations by paying off debts.
These ratios measure the ability of the company to meet its short-term obligations. Liquidity ratios include Current ratio and the Quick ratio (Shams 34).
Current ratio=Current assets/Current liabilities and it should be more than one. However, high current ratio, particularly the current ratio larger than 2 may mean the company is using its resources unproductively. The current ratios for Halliburton Company are above 1.0 in the five-year period, which means the company is able to pay off the current debt. In other words, the company can meet short-term obligations without borrowing. The company can further improve its current ratio by taking the following into consideration: first, postponing the acquisitions that demand cash payments; second, re-amortizing long-term loans; third, minimizing personal draws; lastly, selling off non-profitable or worthless assets.
Table 5: Current Ratio.
|Current Ratio for Halliburton||4.07||2.56||2.73||2.75||2.81|
Quick Ratio (Acid Test)
Quick Ratio= Quick Asset/ Current Asset
Table 6: Acid Test.
|Acid Test for Halliburton||1.68||1.48||1.62||1.73||1.47|
The quick ratio confirms a solid level of Halliburton’s liquidity. It is a more reliable ratio than current ratio as it considers a quick asset and exclude inventory, which may not be converted to cash. The low ratio shows the company is not in a good position. Still, the ratio is increasing, which means the company is increasingly growing. The ratio can further be enhanced through the following: first, paying off current debts and increasing sales so as to boost existing cash or revenue; second, improving the inventory turnover ratio and; disposing of unproductive assets.
Days Sales Outstanding Ratio
The ratio gauges the number of days a company takes to accumulate proceeds after making a sale. It is usually determined on a monthly to yearly basis. A high value implies the company is making credit sales or taking long to collect revenue. On the other hand, low figure means the company is taking less time to collect debts. Days Sales Outstanding Ratio=Account Receivable/Total Credit Sales × Number of Days
|Days Sales Outstanding Ratio||82.12||83.99||76.73||74.11||74.74|
The figures show that the company’s rate of collecting debts has been deteriorating in the last five years. Therefore, the management of account receivables has not been impressive. As opposed to other ratios, 2014 was the worst year for this ratio. The company can improve this ratio by embracing the following: first, making sure the invoices reach the clients as early as possible; second, sanctioning mobile or online payments, which are more convenient and; lastly, restructuring the credit approval process and coming up with new payment plans that will enhance clarity and speed up transactions.
These ratios show the amounts of debt or equity used to finance the business. Businesses are highly leveraged if they use more borrowings than equity. The balance between the two is normally referred to as the capital structure. The main leverage ratios include Debt to Asset ratio and Debt to Equity ratio.
Debt-to-Equity Ratio= Total Liabilities/ Stakeholders’ Equity
Table 7: Debt-to-Equity Ratio.
Based on the Debt-to-Equity ratio, for each dollar of stockholders’ equity, the company has a greater worth of liabilities. A lower Debt-to-Equity ratio, say 0.1, implies that the company is not satisfactorily using low-cost sources of finance, while high Debt-to-Equity ratio shows that the company is confronting a high fiscal threat. A low ratio suggests that Halliburton does not depend heavily on borrowings to finance its projects, which is financially acceptable. However, the ratio was relatively high in 2015, which implies that the company was facing a high monetary risk. As a result, there is a need for the company to inject more equity. The company should stop borrowing when the ratio falls under the unacceptable range, that is, more than 0.9.
Debt to Asset Ratio= Total Debt/Total Assets
Table 8: Debt-to-Asset Ratio.
The table above shows an increasing trend of leverage, which is not good for the business. The company had the highest leverage in 2015. It may be due to long and short-term borrowing to finance deep-water explorations, restructuring, and new acquisitions. The leverage level can be reduced by either maintaining a self-funding business plan or borrowing bit by bit. However, the best option is selling common stock to increase cash reserve that can be used to repay the loans and minimize debt burden.
Interest Coverage Ratio
This ratio is used to establish a company’s capability to pay interest on the unsettled balance. In other words, it gauges the company’s safety margin as regards to interest payment within a given time. When a company has a low the interest coverage ratio, then it has a high debt burden. Therefore, a company with interest coverage ratio of less than 1.5 has a high leverage.
Interest coverage ratio= EBIT/Interest expense
|Interest coverage ratio||-1.09||12.9||9.15||13.83||17.6|
From 2011 to 2014, the company was doing relatively well until 2015. The figures show that in 2015, the company was highly leveraged. This may be as usually due to long and short-term borrowing to finance deep-water explorations, restructuring, and new acquisitions. Just like debt-to-asset ratio, the company can improve its interest coverage ratio by selling some assets or inject more equity to reduce the debt burden.
Halliburton’s Corporate Social and Environmental Responsibility
The company’s approach to sustainable development is guided by its development strategy and goals, which include welcoming corporate neighbors, avoiding any damage to the environment, providing socioeconomic benefits, and authenticating its advancement through a transparent process. The company is also guided by its Code of Business Conduct and Corporate Governance Guideline, which requires that any form of interaction between the company and key stakeholders should be based on fair dealing, mutual respect and strict adherence to moral and legal values.
General training on the code of conduct is available to all the company’s staff and violation of Code of Business Conduct attracts stiff penalty. This ensures that all company employees’ area treated fairly and equally. Major changes in the organization normally involve extensive consultation among key stakeholders. In addition, employee safety and general welfare are given a high priority. The same applies to environmental protection and support to local communities.
Conclusion and Recommendation
The analysis shows that even though the company is stable, its profit margins and EPS are decreasing at an alarming rate. ROA and ROE are also on a downward trend since 2011, except in 2014. They are worse in 2015. In addition, there is an increasing trend of leverage as evident in the company’s leverage ratios, which is not good for the business. This may be due to long and short-term borrowing to finance deep-water explorations, restructuring and new acquisitions. In order to reverse the trend, the company should strive to keep a balanced portfolio and maintain operational excellence as suggested on its strategy for 2015. This will involve exploring new ways of increasing revenue, going slow on legacy payments, injecting more equity and focusing on productive segments that can sustain long-term growth.
Gorsky, Alex. Company Analysis, Cincinnati, Ohio Print: J & J Inc., 2014. Print.
Halliburton. Halliburton’s Company Business Overview, Oregon: University of Oregon Investment Group, 2010. Print.
KPMG. “Delivering value from discovery and development”. Halliburton PLC Annual Report and accounts, 2015. Print.
Lundberg, Curt. “Toward Theory More Relevant for Practice.” Current Topics in Management 6.1 (2001): 15-24. Print.
Market Watch. Annual Financials for Halliburton Company. 2016. Web.
Poznanski, Julie, Bryn Sadownik and Irene Gannitsos. Financial Ratio Analysis. 2013. Web.
Shams, Ishtiaque. Financial Analysis of HSBC, Mohakhali, Dhaka: BRAC University, 2013. Print.
Appendix 1: Halliburton’s Annual Balance Sheet
|Fiscal year is January-December. All values USD millions.||2011||2012||2013||2014||2015|
|Cash & Short Term Investments||2.85B||2.75B||2.6B||2.35B||10.14B|
|Total Accounts Receivable||5.08B||5.79B||6.18B||7.56B||5.32B|
|Accounts Receivables, Net||5.08B||5.79B||6.18B||7.56B||5.32B|
|Accounts Receivables, Gross||5.22B||5.88B||6.3B||7.7B||5.46B|
|Bad Debt/Doubtful Accounts||(137M)||(92M)||(117M)||(137M)||(145M)|
|Work in Progress||96M||129M||140M||211M||122M|
|Progress Payments & Other||–||–||–||–||–|
|Other Current Assets||1.08B||1.36B||1.62B||1.59B||3.74B|
|Miscellaneous Current Assets||1.08B||1.36B||886M||928M||2.68B|
|Total Current Assets||11.58B||13.09B||13.7B||15.07B||21.61B|
|Net Property, Plant & Equipment||8.49B||10.26B||11.32B||12.48B||10.91B|
|Property, Plant & Equipment – Gross||15.59B||18.31B||20.8B||23.48B||20.7B|
|Land & Improvements||123M||145M||213M||217M||232M|
|Computer Software and Equipment||–||–||–||–||–|
|Other Property, Plant & Equipment||–||–||–||–||–|
|Total Investments and Advances||–||128M||134M||47M||33M|
|Other Long-Term Investments||–||128M||134M||47M||33M|
|Long-Term Note Receivable||–||–||183M||256M||175M|
|Net Other Intangibles||–||–||–||–||–|
|Tangible Other Assets||1.83B||1.8B||1.71B||2.06B||2.11B|
|Liabilities & Shareholders’ Equity|
|ST Debt & Current Portion LT Debt||–||–||–||14M||659M|
|Short Term Debt||–||–||–||–||–|
|Current Portion of Long Term Debt||–||–||–||14M||659M|
|Income Tax Payable||–||–||–||–||–|
|Other Current Liabilities||2.3B||2.71B||2.66B||3.06B||2.68B|
|Miscellaneous Current Liabilities||1.43B||1.78B||1.63B||2.02B||1.84B|
|Total Current Liabilities||4.12B||4.75B||5.03B||5.88B||5.36B|
|Long-Term Debt excl. Capitalized Leases||4.82B||4.82B||7.82B||7.84B||14.69B|
|Capitalized Lease Obligations||–||–||–||–||–|
|Provision for Risks & Charges||534M||607M||584M||691M||529M|
|Deferred Taxes – Credit||–||–||–||–||–|
|Deferred Taxes – Debit||–||–||–||–||–|
|Other Liabilities (excl. Deferred Income)||986M||1.44B||2.18B||1.53B||872M|
|Preferred Stock (Carrying Value)||–||–||–||–||–|
|Redeemable Preferred Stock||–||–||–||–||–|
|Non-Redeemable Preferred Stock||–||–||–||–||–|
|Common Equity (Total)||13.2B||15.77B||13.58B||16.27B||15.46B|
|Common Stock Par/Carry Value||2.68B||2.68B||2.68B||2.68B||2.68B|
|ESOP Debt Guarantee||–||–||–||–||–|
|Cumulative Translation Adjustment/Unrealized For. Exch. Gain||(66M)||(69M)||(69M)||(70M)||(78M)|
|Unrealized Gain/Loss Marketable Securities||1M||–||–||–||–|
|Total Shareholders’ Equity||13.2B||15.77B||13.58B||16.27B||15.46B|
|Accumulated Minority Interest||18M||25M||34M||31M||33M|
|Liabilities & Shareholders’ Equity||23.68B||27.41B||29.22B||32.24B||36.94B|
Appendix 2: Halliburton’s Annual Income Statement
|Fiscal year is January-December. All values USD millions.||2011||2012||2013||2014||2015|
|Cost of Goods Sold (COGS) incl. D&A||19.41B||23.31B||24.34B||26.91B||21.11B|
|COGS excluding D&A||18.05B||21.68B||22.44B||24.79B||19.28B|
|Depreciation & Amortization Expense||1.36B||1.63B||1.9B||2.13B||1.84B|
|Amortization of Intangibles||–||–||–||–||–|
|Research & Development||401M||460M||588M||601M||–|
|Other Operating Expense||–||–||–||–||484M|
|EBIT after Unusual Expense||–||4.16B||3.14B||5.1B||(165M)|
|Non-Operating Interest Income||5M||7M||8M||13M||16M|
|Equity in Affiliates (Pretax)||–||–||–||–||–|
|Gross Interest Expense||268M||305M||339M||396M||463M|
|Income Tax – Current Domestic||1.14B||742M||294M||995M||(686M)|
|Income Tax – Current Foreign||334M||328M||485M||734M||636M|
|Income Tax – Deferred Domestic||27M||180M||(6M)||(97M)||38M|
|Income Tax – Deferred Foreign||(57M)||(15M)||(125M)||(357M)||(262M)|
|Income Tax Credits||–||–||–||–||–|
|Equity in Affiliates||–||–||–||–||–|
|Other After Tax Income (Expense)||–||–||–||–||–|
|Consolidated Net Income||3.01B||2.59B||2.12B||3.44B||(662M)|
|Minority Interest Expense||5M||10M||10M||1M||4M|
|Extraordinaries & Discontinued Operations||(166M)||58M||19M||64M||(5M)|
|Extra Items & Gain/Loss Sale Of Assets||–||–||–||–||–|
|Cumulative Effect – Accounting Chg||–||–||–||–||–|
|Net Income After Extraordinaries||2.84B||2.64B||2.13B||3.5B||(671M)|
|Net Income Available to Common||2.84B||2.64B||2.13B||3.5B||(671M)|
|Basic Shares Outstanding||918M||926M||898M||848M||853M|
|Diluted Shares Outstanding||922M||928M||902M||852M||853M|
Appendix 3: Halliburton’s Annual Cash Flow
|Fiscal year is January-December. All values USD millions.||2011||2012||2013||2014||2015|
|Net Income before Extraordinaries||2.84B||2.63B||2.13B||3.5B||(667M)|
|Depreciation, Depletion & Amortization||1.36B||1.63B||1.9B||2.13B||1.84B|
|Depreciation and Depletion||–||–||–||–||–|
|Amortization of Intangible Assets||–||–||–||–||–|
|Deferred Taxes & Investment Tax Credit||–||–||–||–||(224M)|
|Investment Tax Credit||–||–||–||–||–|
|Funds from Operations||4.33B||4.68B||4.88B||4.9B||2.48B|
|Changes in Working Capital||(649M)||(1.03B)||(437M)||(840M)||422M|
|Net Operating Cash Flow||3.68B||3.65B||4.45B||4.06B||2.91B|
|Capital Expenditures (Fixed Assets)||(2.95B)||(3.57B)||(2.93B)||(3.28B)||(2.18B)|
|Capital Expenditures (Other Assets)||–||–||–||–||–|
|Net Assets from Acquisitions||(880M)||(214M)||(94M)||(231M)||(39M)|
|Sale of Fixed Assets & Businesses||–||395M||241M||338M||168M|
|Purchase/Sale of Investments||500M||(248M)||27M||261M||(3M)|
|Purchase of Investments||(501M)||(506M)||(329M)||(183M)||(109M)|
|Sale/Maturity of Investments||1B||258M||356M||444M||106M|
|Net Investing Cash Flow||(3.19B)||(3.69B)||(2.87B)||(3.14B)||(2.19B)|
|Cash Dividends Paid – Total||(330M)||(333M)||(465M)||(533M)||(614M)|
|Change in Capital Stock||117M||74M||(4.08B)||(468M)||167M|
|Repurchase of Common & Preferred Stk.||(43M)||(33M)||(4.36B)||(800M)||–|
|Sale of Common & Preferred Stock||160M||107M||277M||332M||167M|
|Proceeds from Stock Options||–||–||–||–||–|
|Other Proceeds from Sale of Stock||160M||107M||277M||332M||167M|
|Issuance/Reduction of Debt, Net||978M||–||2.97B||–||7.44B|
|Change in Current Debt||–||–||–||–||–|
|Change in Long-Term Debt||978M||–||2.97B||–||7.44B|
|Issuance of Long-Term Debt||978M||–||2.97B||–||7.44B|
|Reduction in Long-Term Debt||–||–||–||–||–|
|Net Financing Cash Flow||833M||(172M)||(1.75B)||(1.03B)||7.08B|
|Exchange Rate Effect||(27M)||(8M)||49M||41M||(9M)|
|Net Change in Cash||1.3B||(214M)||(128M)||(65M)||7.79B|
|Free Cash Flow||731M||88M||1.51B||779M||722M|