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Fitch: Halliburton Settlement Reduces Macondo Payment Risk

CHICAGO--(BUSINESS WIRE)--Halliburton Company's settlement related to a substantial majority of the Macondo plantiffs' class claims alleviates payment uncertainty and is a positive development, according to Fitch Ratings. However, the company remains exposed to future determination of gross negligence, which could heighten payment risk on outstanding litigation involving some Gulf states, among other plaintiffs.

On Tuesday Halliburton reached an agreement to settle punitive claims of a class of plaintiffs arising from the Macondo incident in the Gulf of Mexico. The approximately $1.1 billion settlement, inclusive of legal fees, will be paid into a trust in three installments over the next two years until all appeals are resolved. Fitch believes that that settlement payment and terms are manageable. The combination of the company's $2.4 billion of cash on hand, as of June 30, 2014, and our base case free cash flow expectations of $1.1 billion and $1.4 billion in 2014 and 2015, respectively, provide ample liquidity and mitigate the need for additional debt.

The settlement removes most of the uncertainty surrounding punitive damages payments, but there remain some hurdles prior to the settlement becoming effective, including court approval, appeals and the level of claimant participation. Since both parties have mutually agreed to the settlement, court approval does not appear to be a material issue, but appeals could drag out the process. In addition, the possibility of claimant holdouts, or opt-outs, may arise in the event a pending court ruling places Halliburton in a more negative light.

Positive rating actions remain a possibility over the intermediate term. Importantly, Fitch recognizes that Halliburton may be subject to additional damages, depending on the court ruling regarding gross negligence. Rating actions will continue to be closely linked to ongoing developments in the Macondo litigation and its impact on the company's financial profile. Other nonlitigation factors include the realization of further improvements in North American results, progress towards greater geographical diversification, and the maintenance of mid-cycle debt/EBITDA of 1.0x-1.25x.

Halliburton's long-term Issuer Default Rating is 'A-' and the Rating Outlook is Stable.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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