Fitch Rates Halliburton Co.'s Senior Unsecured Notes 'A-'
KEY RATING DRIVERS
Halliburton's ratings consider its operational and financial flexibility, leading position in the oil & gas services sector with strong asset quality and a global footprint, strengthening international operations, and manageable through-the-cycle pro forma leverage profile. An additional consideration is the added scale and, in some cases, technological improvements the pending Baker Hughes transaction will provide. These strengths are offset by the possibility of a prolonged oilfield services recovery, particularly in the U.S. (50% - 55% of historical revenues), due to the weak oil & gas pricing environment, acquisition integration risk, and management's willingness to balance shareholder activity consistent with its current 'A' category rating.
PENDING BAKER HUGHES ACQUISITION IMPROVES SCALE, ASSET QUALITY; HEIGHTENS EXECUTION RISK
The pending Baker Hughes acquisition is expected to improve on Halliburton's leading position in the fragmented North American (N.A.) oilfield services market by increasing its scale and, in some cases, enhancing its technology and offerings. This should help moderate margin pressure in the current weak oil & gas pricing environment and enhance the combined company's operating and financial profiles over the medium term, as well as improve its competitiveness internationally. Fitch understands, however, that geographic diversification will remain substantially unchanged post-close. Additionally, Fitch believes that the consolidation of the 'Big Three' into the 'Bigger Two' may trigger some customer attrition as international and national oil companies could look to maintain diversity among their service providers.
Management's intention is to fund the Baker Hughes transaction with cash (\\$8.3 billion) and stock. Fitch calculates, assuming 100% of the cash portion is debt-funded, pro forma latest 12 months (LTM) debt/EBITDA, as of Sept. 30, 2015, to be 2.1x with and 2.7x without the nearly \\$2 billion in identified cost synergies. Fitch believes that the assumed funding mix will retain the company's manageable leverage profile. However, Fitch recognizes that there is considerable execution risk, though it has been somewhat mitigated by the establishment of a Halliburton integration team that, in conjunction with Baker Hughes, is developing a post-close plan to efficiently integrate both companies.
Another consideration is the potential cancellation of the acquisition that would trigger a \\$3.5 billion break-up fee payable to Baker Hughes. The \\$7.5 billion senior notes issuance contemplates this potential funding need and includes a special mandatory redemption clause that requires Halliburton redeem the total \\$2.5 billion in senior notes due in 2020 and 2022. Fitch calculates LTM debt/EBITDA, as of Sept. 30, 2015, to be over 2.5x in a special mandatory redemption scenario.
DOWNCYCLE & ACQUISITION WIDEN LEVERAGE METRICS; MANAGEABLE PROFILE EXPECTED OVER MEDIUM TERM
Fitch's base case projects that Halliburton will be modestly free cash flow (FCF) positive, including dividends and a Macondo settlement payment, in 2015 following another budgeted reduction in capital spending. The Fitch base case results in debt/EBITDA of nearly 4.3x in 2015, which assumes a late 2015 Baker Hughes acquisition. The leverage profile is projected to steadily improve thereafter, given Fitch's supportive hydrocarbon price forecast assumptions, reaching below 2.0x by 2018. Fitch also views the company's ability to manage its FCF profile, consistent with previous downcycles, to maintain adequate liquidity and limit the need for debt funding as credit supportive.
Fitch's key assumptions within the rating case for Halliburton include:
--WTI oil price that trends up from \\$50/barrel in 2015 to a longer-term price of \\$70/barrel;
--Henry Hub gas price that trends up from \\$3/mcf in 2015 to a longer-term price of \\$3.75/mcf;
--Continued weakness in U.S. activity with signs of stabilization during the first half of 2016 followed by a modest uptick in market demand;
--Mixed international results with the Middle East exhibiting pockets of strength and other regions generally challenged near-term;
--Capital expenditures are forecast to be \\$2.4 billion in 2015, consistent with company guidance, followed by spending consistent with historical levels;
--Baker Hughes transaction, generally consistent with management expectations, is forecast to close in late 2015 with the cash portion fully debt-funded and the estimated \\$2 billion in synergies progressively realized over the next few years;
--The final Macondo settlement payment is assumed to be paid in 2016;
--Dividends are projected to remain flat near-term followed by increases generally consistent with management's 15%-20% payout target;
--Share repurchases are assumed to remain balanced with cash flows, divestiture proceeds, and other non-debt sources of cash.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Further improvement in N.A. results, on an activity and pricing basis, suggesting strengthening market conditions;
--Progress in achieving greater geographical diversification that reverses N.A.'s increasing proportional share of consolidated revenues/margins;
--Successful integration of Baker Hughes and realization of estimated acquisition synergies;
--Mid-cycle debt/EBITDA of 1.25x - 1.5x on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Prolonged period of depressed market pricing and/or activity levels that leads to a weak oil & gas services outlook;
--Inability to efficiently integrate Baker Hughes leading to lower than expected operational and financial synergies;
--Acquisitions and/or shareholder-friendly actions that are inconsistent with the capital structure and expected cash flow profile;
--Mid-cycle debt/EBITDA over 2.0x on a sustained basis.
ADEQUATE LIQUIDITY POSITION
Halliburton had cash and equivalents of over \\$2.2 billion, as of Sept. 30, 2015, with \\$1.4 billion held by foreign subsidiaries, of which \\$848 million would be subject to U.S. tax if repatriated. The company intends to reinvest these funds internationally. In addition, the company had \\$89 million in fixed income investments consisting of corporate bonds and other Level 2 debt instruments.
Supplemental liquidity is provided by the company's \\$3 billion senior unsecured credit facility due July 2020. The credit facility increases to \\$4.5 billion upon completion of the Baker Hughes acquisition, subject to the satisfaction of additional conditions. No revolver balances were outstanding as of Sept. 30, 2015. Further, the company maintains a commercial paper program consistent with the size of the credit facility that has not been materially used historically and does not currently have an outstanding balance.
MANAGEABLE MATURITIES PROFILE AND OTHER LIABILITIES
Over the next five years, Halliburton has \\$600 million, \\$45 million, \\$800 million, and \\$1 billion of existing senior unsecured notes maturing in 2016, 2017, 2018, and 2019, respectively. These represent the company's 1.0% senior notes due August 2016; 7.53% senior notes due May 2017; 2.0% senior notes due August 2018; 5.9% senior noted due September 2018; and 6.15% senior notes due September 2019. The company is not subject to material financial covenants. Other covenants consist of lien limitations and transaction restrictions.
The company had over \\$3.1 billion in other contingent obligations on a multi-year, undiscounted basis as of Dec. 31, 2014. These obligations consist of purchase commitments (\\$2 billion), non-cancellable operating lease payments (\\$969 million), and other, primarily pension-related, obligations (\\$54 million).
Macondo litigation and payment risk has been substantially mitigated by the \\$1.1 billion settlement of punitive claims and the U.S. district court's finding of Halliburton not being grossly negligent for the spill, as well as the validity and enforceability of its indemnity and release clauses within the BP plc contract. The settlement payment will be paid into a trust in three installments over the next two years until all appeals are resolved. The first two settlement payments have already been made with the final payment of approximately \\$400 million remaining. Fitch believes that the combination of the company's \\$2.2 billion of cash on hand as of Sept. 30, 2015, and our base case operating cash flow profile provide ample liquidity and mitigate the need for any Macondo-related debt.
FULL LIST OF RATINGS
--Long-term IDR 'A-';
--Senior unsecured notes/debentures 'A-';
--Senior unsecured bank facility 'A-';
--Short-term IDR 'F2';
--Commercial paper program 'F2'.
The Rating Outlook is Stable.