Halliburton's Dividend on Shaky Ground as Management Prioritizes Balance Sheet
Halliburton (HAL) has paid uninterrupted dividends for decades, but the firm's streak looks increasingly likely to come to an end in the near future.
The oilfield services provider this morning reported earnings. Unlike in the past, management emphasized that Halliburton would not lean on its balance sheet to protect the dividend during this down cycle:
The oilfield services provider this morning reported earnings. Unlike in the past, management emphasized that Halliburton would not lean on its balance sheet to protect the dividend during this down cycle:
Finally, our dividend is a lever we can pull, based on our market outlook and valuations. 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.
Halliburton is expected to continue generating free cash flow this year, possibly even enough to cover its dividend. But the extremely dim and uncertain outlook for drilling activity suggests it would be most prudent for management to conserve as much capital as possible.
Coupled with management's comments this morning, we are downgrading Halliburton's Dividend Safety Score from Borderline Safe to Very Unsafe. It would not be surprising if the firm announced a major (50-75%+) cut or even a temporary suspension of its dividend after its board meets in May.
Halliburton generates about half of its revenue in North America, where its equipment and services have helped fuel the fracking revolution.
Unfortunately, North American energy producers (Halliburton's customers) are also reeling the most from the collapse in oil prices.
Management said capital expenditures by North American exploration and production companies are trending towards a 50% reduction in 2020. International spending is expected to decline around 10%.
"The market in North America is experiencing the most dramatic and rapid activity decline in recent history...Activity is in free fall in North America and is slowing down internationally. We cannot predict the duration of the COVID-19 pandemic impact on demand or the pace of any subsequent recovery. At a minimum, we expect the decline in activity to continue through year end."
– CEO Jeff Miller
As expected, Halliburton is hunkering down in this environment.
Management plans to reduce the firm's capital expenditures by about $800 million (or 50%) from 2019 levels, and take out $1 billion (about 5% of revenue) of annualized costs, with most of it happening in the next two quarters.
Management also expects to generate cash from working capital (perhaps around $1 billion or more) this year as Halliburton collects receivables from customers and buys less inventory.
For context, Halliburton's annual operating cash flow has hovered near $2.5 billion to $3 billion over the last three years, with average free cash flow of about $1 billion per year during that period.
The company's dividend costs $630 million annually and has a shot at remaining covered by free cash flow this year thanks to the levers management is pulling, though the coverage outlook for 2021 will be much darker if the environment doesn't improve.
Halliburton's cash on hand and undrawn credit facility provide the firm with a solid liquidity position of $5 billion, but the dividend still represents a major use of cash given the unprecedented uncertainty facing the industry.
Understandably, management wants to continue improving Halliburton's balance sheet (BBB+ credit rating from S&P) as they have done since the 2014-16 oil crash. Halliburton has $2.6 billion less debt than in 2016, and the firm says deleveraging remains a "key priority."
Only $1.3 billion of the firm's $9.8 billion of debt comes due through 2024 (including $685 million next year), and Halliburton said it believes its free cash flow generation will be sufficient to pay down upcoming debt maturities in the normal course of business.
Halliburton has survived many cycles since its founding in 1919, and management is positioning the business to ensure it will last through this one as well.
However, income investors shouldn't count on the dividend remaining stable this time around.
A lot of bad news is already reflected in Halliburton's valuation, but investors who decide to hold on need to believe that oil prices will eventually recover and must be comfortable with the potential for a dividend cut in the near future.
Management plans to reduce the firm's capital expenditures by about $800 million (or 50%) from 2019 levels, and take out $1 billion (about 5% of revenue) of annualized costs, with most of it happening in the next two quarters.
Management also expects to generate cash from working capital (perhaps around $1 billion or more) this year as Halliburton collects receivables from customers and buys less inventory.
For context, Halliburton's annual operating cash flow has hovered near $2.5 billion to $3 billion over the last three years, with average free cash flow of about $1 billion per year during that period.
The company's dividend costs $630 million annually and has a shot at remaining covered by free cash flow this year thanks to the levers management is pulling, though the coverage outlook for 2021 will be much darker if the environment doesn't improve.
Halliburton's cash on hand and undrawn credit facility provide the firm with a solid liquidity position of $5 billion, but the dividend still represents a major use of cash given the unprecedented uncertainty facing the industry.
Understandably, management wants to continue improving Halliburton's balance sheet (BBB+ credit rating from S&P) as they have done since the 2014-16 oil crash. Halliburton has $2.6 billion less debt than in 2016, and the firm says deleveraging remains a "key priority."
Only $1.3 billion of the firm's $9.8 billion of debt comes due through 2024 (including $685 million next year), and Halliburton said it believes its free cash flow generation will be sufficient to pay down upcoming debt maturities in the normal course of business.
Halliburton has survived many cycles since its founding in 1919, and management is positioning the business to ensure it will last through this one as well.
However, income investors shouldn't count on the dividend remaining stable this time around.
A lot of bad news is already reflected in Halliburton's valuation, but investors who decide to hold on need to believe that oil prices will eventually recover and must be comfortable with the potential for a dividend cut in the near future.
"If I've learned something from all of the downturns I've been through in my career, it is that the industry always bounces back. This downturn, although the most severe we have seen in a generation, will be no different. I believe it will reshape our industry and position it better for the next cycle.
"At some point, returning global economic and oil demand growth, market balancing supply actions by key producing countries, and declining non-OPEC production will likely lead to a new reinvestment cycle."
– CEO Jeff Miller
