Fitch Affirms Halliburton at 'A-'; Outlook Revised to Negative

CHICAGO--()--Fitch Ratings has affirmed Halliburton Company's (Halliburton; NYSE: HAL) Long-term Issuer Default Rating (IDR) at 'A-'. The Rating Outlook has been revised to Negative from Stable.

The Negative Outlook reflects the uncertain outcome of the Department of Justice's (DOJ) lawsuit to block Halliburton's pending acquisition of Baker Hughes due to competitive concerns and potential impacts on the company's forecasted leverage profile. In a break-up scenario, Halliburton would have to pay a $3.5 billion fee to Baker Hughes. Halliburton issued $7.5 billion of debt in November 2015 to help fund the $8.3 billion cash portion of the pending transaction. The issuance also contemplated the potential break-up funding need and includes a special mandatory redemption clause that requires Halliburton to redeem the total $2.5 billion in senior notes due in 2020 and 2022.

Fitch believes that the combined entities are likely to exhibit an 'A-' credit profile if the acquisition is completed, subject to the cash flow implications of divestitures. While the divestiture proceeds received are a material consideration, Fitch anticipates that this cash would largely be allocated to share repurchases to offset the equity impact of the acquisition. However, if the Baker Hughes transaction is not completed, the additional debt incurred ($5.0 billion) and subsequent lack of additional cash flows, including realized synergies that are expected from the transaction, could pressure the rating without a material improvement in E&P capital spending trends and/or a clearly defined plan by Halliburton to address its capital structure.

Approximately $15.3 billion of debt is affected by today's rating action. A full list of rating actions follows at the end of this press release.

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 strong investment-grade leverage profile. An additional consideration is the added scale and, in some cases, technological improvements the potential Baker Hughes transaction could 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, heightened acquisition risk following the DOJ lawsuit, and management's willingness, in a no transaction scenario, to maintain a capital structure consistent with its current 'A' category rating.

POTENTIAL ACQUISITION IMPROVES SCALE, ASSET QUALITY

The proposed 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 if the deal is consummated.

DOJ LITIGATION HEIGHTENS EXECUTION RISK

The DOJ's recent lawsuit, however, heightens execution risk. This action could result in either Halliburton or Baker Hughes walking away from the transaction, further negotiated remedies, or a court proceeding. Fitch views the possibility that Halliburton or Baker Hughes walks away from the transaction as unlikely near-term given their recent joint statement to contest the DOJ's efforts. Fitch recognizes, however, that the prospect of this happening would increase to the extent required remedies are onerous or the court proceedings are protracted.

ACQUISTIION PROFILE CONSISTENT WITH 'A-' RATING

Fitch's base case projects that, in an acquisition scenario, Halliburton will be roughly free cash flow (FCF) neutral, including dividends and a Macondo settlement payment, in 2016. The Fitch base case results in debt/EBITDA of nearly 4.5x in 2016, which assumes a Q2 2016 Baker Hughes acquisition. The leverage profile is projected to steadily improve thereafter, given expectations for realized transaction synergies, as well as Fitch's supportive hydrocarbon price forecast assumptions, approaching 2.0x - 2.1x by 2018. Fitch also views the company's ability to manage its FCF profile, consistent with recent results and actions taken in previous downcycles, to maintain adequate liquidity and limit the need for debt funding as credit supportive.

RATING PRESSURED WITHOUT ACQUISITON AND DEBT REDUCTION

Fitch's alternative base case projects that, in a break-up scenario, Halliburton's leverage profile is still consistent with the current 'A-' rating if management pays down nearly $1.5 billion of debt at maturity through 2018. However, without debt reduction, Halliburton's credit profile would be more consistent with a 'BBB+' rating.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Halliburton include:

--WTI oil price that trends up from $35/barrel in 2016 to a longer-term price of $65/barrel;

--Henry Hub gas price that trends up from $2.25/mcf in 2015 to a longer-term price of $3.25/mcf;

--Revenues reflect continued E&P spending weakness, particularly in the U.S., in 2016 followed by a modest uptick in market demand;

--Capital expenditures are forecast to be $1.6 billion in 2016, consistent with company guidance, followed by spending generally consistent with historical levels;

--Baker Hughes transaction that closes in Q2 2016 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 paid in 2016;

--Dividends that remain relatively flat;

--Share repurchases that are balanced with cash flows, divestiture proceeds, and other non-debt sources of cash.

RATING SENSITIVITIES

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 or, in a break-up scenario, gross debt reduction;

--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 or, in a break-up scenario, limited or no gross debt reduction;

--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 nearly $10.1 billion, as of Dec. 31, 2015, with approximately $7.5 billion related to the Nov. 2015 debt issuance to help fund the Baker Hughes acquisition or break-up fee. Approximately $1.5 billion of cash and equivalents are held by foreign subsidiaries, of which $861 million would be subject to U.S. tax if repatriated. The company intends to reinvest these funds internationally. In addition, the company had $96 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 Dec. 31, 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, $1 billion, and $1.25 billion of existing senior unsecured notes maturing in 2016, 2017, 2018, 2019, and 2020, 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; 6.15% senior notes due September 2019, and 2.7% senior notes due November 2020. Fitch notes that the 2020 notes are subject to a special mandatory redemption if the Baker Hughes transaction is not completed on or prior to Nov. 13, 2016. The company is not subject to material financial covenants. Other covenants consist of lien limitations and transaction restrictions.

The company had contractual obligations of under $1.2 billion during 2016, as of Dec. 31, 2015. These obligations consist of purchase commitments ($873 million), non-cancellable operating lease payments ($257 million), and other, primarily pension-related, obligations ($37 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 cash position and our base case operating cash flow profile mitigate the need for any Macondo-related debt

FULL LIST OF RATING ACTIONS

Fitch has affirmed Halliburton Company's ratings and revised the Rating Outlook as follows:

Halliburton Company

--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 to Negative from Stable.

Additional information is available on www.fitchratings.com

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869259

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002213

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002213

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Dino Kritikos
Director
+1-312-368-3150
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brad Bell
Associate Director
+1-312-368-3149
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dino Kritikos
Director
+1-312-368-3150
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brad Bell
Associate Director
+1-312-368-3149
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com