CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Halliburton Company's (Halliburton; NYSE: HAL) Issuer Default Rating (IDR) at 'A-' and senior unsecured ratings at 'A-', as follows:
--Issuer Default Rating (IDR) at 'A-';
--Senior unsecured notes/debentures at 'A-';
--Senior unsecured bank facility at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Halliburton's ratings are supported by the company's leading position in the energy services sector, its geographic and operational diversity, growing contributions from international operations, and its strong credit profile.
Offsetting factors include the rig count declines in North America over the last 12 months, persistent oversupply in the North American pressure pumping market that acts as a headwind on margins, management's actions that demonstrate returning cash to shareholders is a priority, the cyclicality of the industry, and the potential impact of a materially lower oil price scenario on a sustained basis.
Leverage and Free Cash Flow:
For the quarter ending June 30, 2013, Halliburton generated latest 12-months' (LTM) EBITDA of approximately $5.7 billion and finished the period with debt of $4.8 billion. As a result, debt-to-EBITDA is currently at 0.84x. LTM free cash flow (FCF) is $282 million (after dividends, before share repurchases).
Liquidity, Capital Structure and Maturities:
Halliburton maintains liquidity from cash, equivalents and marketable securities ($1.7 billion at June 30, 2013); its fully available revolving credit facility, revised up to $3 billion from $2 billion in the second quarter of 2013; and generation of operating cash flows $4.0 billion for the LTM period. The first existing bond maturity is $400 million due September 2018.
Share Repurchase Announcement:
Halliburton announced on July 25th that it has commenced a tender offer for up to $3.3 billion of its common equity.
Under the maximum hypothetical scenario that $3.3 billion is repurchased and funded 100% with new debt, proforma leverage would be 1.42x. Combined with expectations for positive free cash flow and modest EBITDA growth, this leverage is consistent with the current rating.
Fitch notes that according to Halliburton's public announcement, 'the tender offer will be subject to a financing condition, specified in the Offer to Purchase'.
Macondo Update:
Halliburton announced it has reached an agreement with the Department of Justice that eliminates the potential for future criminal charges related to Macondo activities. A Halliburton subsidiary agreed to plead guilty to a misdemeanor violation associated with the deletion of records, to pay the statutory maximum fine of $200,000 and accept a term of three years probation. Halliburton also announced a $55 million contribution to the National Fish and Wildlife Foundation.
This agreement is a modest credit positive because it provides certainty on criminal charges, but the greater focus for the credit rating is on the civil trial and its potential outcomes.
Halliburton currently has accrued a $1.3 billion accounting reserve related to the Macondo incident. This is before any potential insurance recoveries.
In its March 31, 2013 10-Q filing HAL noted: 'Our most recent settlement offer includes both Halliburton common stock and cash payments, with the cash components payable over an extended period of time.'
In its June 30, 2013 10-Q filing HAL noted: 'We are continuing to participate in court-facilitated settlement discussions to resolve a substantial portion of the private claims pending in the MDL trial. However, the pace of those settlement discussions has recently slowed as we understand BP is challenging certain provisions of its settlement with the PSC, including a recent appeal to the Fifth Circuit Court of Appeals.'
According to all of the available evidence, Fitch believes a settlement or ruling that has a cash component large enough to be the sole driver of a negative rating action is possible but unlikely. Macondo liability is only one of many rating factors and will be considered in combination with other key rating drivers and sensitivities such as future operational performance and future share repurchase announcements.
The Multi-District Litigation (MDL) trial is ongoing.
Operational Performance:
Second quarter results for Halliburton were strong considering the lower North American rig count year over year. EBITDA margin increased from 19.4% to 21.6% quarter over quarter, which provides support for the expectation that the pressure pumping market is past the trough and in slow rebound. However materially lower oil prices would have the potential to drive margins lower. Strong international performance in the eastern hemisphere is also credit positive and offsets current weakness in Latin America.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Sustained positive free cash flow through the cycle and leverage on a debt to EBITDA basis below 1.0x;
--Material international growth further diversifying performance from the cyclical North America market;
--Ultimate resolution of the Deepwater Horizon and Macondo oil spill litigation on acceptable terms, in addition to other credit supportive factors.
However, the likelihood of future positive rating action is reduced by management's actions that demonstrate returning cash to shareholders is a priority.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Sustained leverage on a debt to EBITDA basis approaching 2.0x;
--A major drop in the North American rig count driven by significant and persistent decreases in oil prices;
--Significantly leveraging share repurchase activity or major dividend increases beyond currently announced plans;
--A leveraging acquisition;
--Recognition of a major liability stemming from ultimate resolution of the Deepwater Horizon and Macondo oil spill litigation;
--Tail risk of major regulatory reform of oil and gas drilling in the United States could potentially disrupt economics and negatively impact many oil and gas industry participants including Halliburton.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Short-Term Ratings Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685553
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=797983
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