Fitch Affirms Halliburton Co.'s IDR at 'A-'; Outlook Stable

Fitch Ratings has affirmed Halliburton Company's (Halliburton; NYSE: HAL) long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'A-'. The company's short-term ratings were affirmed at 'F2'. The Rating Outlook remains Stable.

Approximately $7.8 billion of debt is affected by today's rating action. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Halliburton's ratings consider its leading position in the oil & gas services sector, positive near-term trends for U.S. service providers (49% of consolidated revenues is U.S.-based for the year ended Dec. 31, 2013), strengthening international operations, favorable medium-term outlook for offshore service providers, and manageable current and projected leverage profile (Fitch calculated latest 12 month [LTM] debt/EBITDA of 1.3x as of March 31, 2014; Fitch base case forecasts, excluding any Macondo payments, improvement to under 1.1x in 2015). These considerations are offset by the possibility for efficiency- and overcapacity-driven U.S. onshore market weakness, softening offshore market over the near term, heightened execution and political risk across some international markets, increased focus on returning cash to shareholders, and Macondo litigation uncertainty.

MIXED, POSITIVE NEAR-TERM TRENDS

North America was challenged in 2013 by lower activity levels and weak pricing power. However, the company is experiencing a rebound in U.S. activity with a large proportion of idle equipment coming back online during the first half of 2014, though pricing improvements remain elusive. Management is encouraged by the expanding service intensity levels in the U.S. with a trend to longer laterals, increased stage density, and rising volumes per stage. Some evidence for improvement is provided by the realization of regional pressure pumping price increases (e.g., Permian and Bakken) and limited new capacity coming online. Fitch assumes modest additional activity growth with continued pricing power weakness over the near term primarily due to overcapacity in the pressure pumping market.

The international market is mixed with the Middle East exhibiting positive trends as overall rig counts increase, while Latin America remains stagnant mainly due to Petrobras delays. Fitch notes that political events internationally (e.g., Russia, Iraq, Venezuela, etc.) have, to this point, had minimal impact on financial results. These regions represent a relatively small proportion, less than 5% each, of consolidated revenues. Fitch anticipates that Latin America (roughly 15% of consolidated revenues) will remain a near-term headwind, while other international regions will generally continue to experience growth. Petrobras and its planned five-year, $220 billion capital budget has been slow to ramp-up and execution remains a challenge. Market sentiment is that Petrobras activity will pick up in late-2015/early-2016, which should provide a boost to Halliburton's results.

Fitch believes that improvements in U.S. activity and Eastern Hemisphere growth will more than compensate for any Latin American weakness over the near term. Management indicated that it expects operating margins to continue to improve throughout 2014 with a cumulative 200 basis points (bps) improvement and multi-year 'normalized' target of over 20%. Further, management believes international unconventional, mature field, and deepwater projects will provide growth opportunities longer term. Fitch assumes steady, mid-single digit consolidated revenue growth and some margin improvements over the short term with a bump in results beginning in 2016. This coincides with the market's expectation for a ramp-up in Brazil activity.

IMPROVING FINANCIAL PROFILE FORECASTED

Fitch's base case, excluding any potential Macondo payments, forecasts Halliburton will be over $1.1 billion and nearly $1.4 billion free cash flow (FCF) positive in 2014 and 2015, respectively, using the Fitch oil & gas price deck. These FCF estimates consider dividend payments consistent with management's dividend target of 15%-20% of net income. Fitch expects Halliburton to utilize its FCF surplus primarily to fund share repurchases in order to meet its goal of returning 30%-35% of annual operating cash flow to shareholders by 2016, as well as pursue complementary acquisitions. Fitch's base case results in debt/EBITDA of about 1.2x and under 1.1x in 2014 and 2015, respectively. Thereafter, Fitch believes Halliburton's leverage levels could fall below 1.0x, subject to the terms of the pending Macondo-related settlement or ruling.

MACONDO REMAINS A CREDIT OVERHANG

Macondo civil litigation related to the multi-district litigation trial remains outstanding. Settlement discussions have stalled. As of June 30, 2014, Halliburton maintained a loss contingency of $1.3 billion. This excludes any potential insurance recoveries. As indicated in our last review, the criminal investigation concluded in July 2013 with a Halliburton affiliate pleading guilty to the deletion of certain computer files created after the Macondo incident. The affiliate agreed to pay a $0.2 million fine and three years' probation. The DOJ agreed to not pursue further criminal prosecution.

Fitch continues to believe that the size and timing of a cash settlement or ruling material enough on its own to lead to a negative rating action is possible, but unlikely. Positive rating actions are a possibility over the near-to-medium term, but the uncertain outcome of the Macondo litigation and its financial impact remain an overhang.

ADEQUATE LIQUIDITY POSITION

Halliburton had cash and equivalents of $2.4 billion, as of June 30, 2014, from $2.1 billion with $402 million held by foreign subsidiaries, as of March 31, 2014, which would be subject to U.S. tax if repatriated. The company intends on reinvesting these funds internationally. Additionally, the company had $378 million in fixed income investments, as of March 31, 2014, consisting of municipal bonds, corporate bonds, and other Level 2 debt instruments. Fitch notes that the company is maintaining heightened levels of cash & investments to cover potential Macondo-related payments.

Supplemental liquidity is provided by the company's $3 billion senior unsecured credit facility due April 2018. No revolver balances were outstanding as of March 31, 2014. Further, the company maintains a commercial paper program consistent with the size of the credit facility that has not been materially utilized 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, and $800 million of debt maturing in 2016, 2017, and 2018, respectively. These represent the company's 1% senior notes due August 2016, 7.53% senior notes due May 2017, 2% senior notes due August 2018, and 5.9% senior noted due September 2018. The company is not subject to material financial covenants. Other covenants consist of lien limitations and transaction restrictions.

The company had over $4.5 billion in other contingent obligations on a multi-year, undiscounted basis as of Dec. 31, 2013. These obligations consist of purchase commitments ($3.5 billion), noncancellable operating lease payments ($946 million), and other, primarily pension-related, obligations ($54 million).

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Resolution of the Macondo litigation on credit neutral terms that reduces payment and funding uncertainty;

--Further improvement in North American results, on an activity and pricing basis, suggesting strengthening market conditions;

--Progress in achieving greater geographical diversification that reverses North America's increasing proportional share of consolidated revenues/margins;

--Mid-cycle debt/EBITDA of 1.0x-1.25x on a sustained basis.

Positive rating actions are a possibility over the near-to-medium term and will be closely linked to the outcome of the Macondo litigation and its impact on the company's financial profile.

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;

--Acquisitions and/or shareholder friendly actions that are inconsistent with the capital structure and expected cash flow profile;

--Macondo settlement/ruling that requires the payment of an exceptionally high fine with unfavorable payment terms that deteriorates financial flexibility;

--Mid-cycle debt/EBITDA over 2.0x on a sustained basis.

Halliburton's financial flexibility places it firmly within the current 'A-' rating. Fitch does not anticipate a negative rating action in the near term without a very weak market environment and/or a Macondo settlement/ruling with materially credit negative terms.

Fitch has affirmed Halliburton's ratings as follows:

Halliburton Company

--Long-term IDR at 'A-';

--Senior unsecured notes/debentures at 'A-';

--Senior unsecured bank facility at 'A-';

--Short-term IDR at 'F2';

--Commercial paper program at 'F2'.

The Rating Outlook remains Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'2014 Outlook: North American Oil & Gas' (Dec. 12, 2013);

--'Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)' (Feb. 4, 2014);

--'Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services Sectors' (Aug. 12, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

2014 Outlook: North American Oil & Gas (Strong Oil Prices Continue to Support Energy Complex)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726499

Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733556

Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and Services Sectors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715859

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=841414

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