Halliburton Company (HAL) — Q1 2017 Earnings Call Transcript

Good morning, and welcome to the Halliburton first quarter 2017 conference call. Today's call is being webcast, and a replay will be available on Halliburton's website for seven days. Joining me this morning are Jeff Miller, President; and Robb Voyles, Interim CFO. As mentioned on our last quarterly call, due to a long-standing business commitment, Dave Lesar, Halliburton's Chairman and CEO, will not be present this morning but will return for our second quarter call. Today, Jeff will be providing market and operational commentary; and Robb will discuss our quarterly financial results. As a reminder, from our fourth quarter earnings call, we have changed the reporting for our divisions in geographic regions, consistent with our major peer. In doing so, we will now provide revenue and profit for our divisions and revenue only for our four geographic regions: North America; Latin America; Europe/Africa/CIS; and Middle East/Asia. Some of our comments today may include forward-looking statements reflecting Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2016, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures, and unless otherwise noted, in our discussion today, we will be excluding the impact of certain items which consist of impairments and other charges, a class-action lawsuit settlement, and loss on debt extinguishment. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter press release, which can be found on our website. Now, I'll turn the call over to Jeff.

Thank you, Lance, and good morning, everyone. We are the execution company focused on achieving industry-leading returns. I'm thankful to the Halliburton team around the world for their consistent execution and for collaborating and engineering solutions to maximize asset value for our customers in every market where we operate. Now, following our operational update a few weeks ago, the quarter wrapped up in line with what we expected. Our highlights for the quarter were total company revenue of $4.3 billion, representing a 6% increase compared to the fourth quarter of 2016. I'm pleased that our U.S. land revenue increased by nearly 30%, outperforming the average sequential U.S. land rig count growth of 27%. And total North America revenue was up 24% sequentially, significantly outperforming our largest peer. Latin America revenue grew in excess of 8% sequentially, outperforming what is typically a seasonal decline following year-end product sales. Operating income was $203 million, primarily driven by improving market conditions in North America, which were partially offset by activity declines and pricing pressure internationally. We completed the early redemption of $1.4 billion of senior notes during the quarter using cash on hand, reducing both leverage and interest expense going forward. As we described in our operational update, the market is a tale of two cycles. North America activity increased rapidly but not without growing pains, while activity in the rest of the world declined due to seasonal pressures that were exacerbated by current cyclical headwinds. In North America, the first quarter brought a lot of change, both to our strategy and our customers' view of the market. I'm excited because customers are investing to meet production targets; pricing is moving; supply versus demand dynamics are tight; our reactivated equipment is going to work at leading-edge pricing, and we are working to manage our input costs. We said we would outgrow the U.S. land market, and we did. The costs and benefits of our reactivation program continue as we march into the second quarter. To be clear, we're adding reactivated equipment at market-leading prices to stabilize our market share. At the same time, we're repairing margins in the rest of the portfolio. North America incremental margins improved throughout the quarter in spite of absorbing transitory inflation costs, reactivation costs, and typical seasonal declines in the Gulf of Mexico. In short, our first quarter results reflect that we are not chasing market share at the cost of pricing. Our strategy to deliver industry-leading returns is at the center of everything we do. We see the path to normalized margins and know it's better to invest now to maintain hard-earned market share, so that when we earn normalized margins, it will be on a bigger base of business. We still think this is the smart choice and the right choice. While production increases could moderate the pace of activity increases in the second half of the year, we see sufficient demand for the equipment we're bringing into the market. As we look at the second half of the year, we'll assess our options for continued redeployment beyond our current plans, but have made no decisions. Because we build our own equipment, we have the unique luxury to wait longer than our competitors to make any new build decisions. We believe that the industry's active fleet of pumping equipment is fully utilized. As we get near the bottom of the stacked equipment pile, it will be progressively harder and more expensive for the industry to reactivate equipment. Our experience through many cycles is that when this happens, we see a customer flight to quality due to their strong desire to make better wells and reduce their cost per BOE. Let me reiterate, we foresee increased demand for new build equipment, but will not consider responding to this demand until the economics make sense. We see multiple paths to normalized margins, and we'll maintain optionality to travel the path that gets us there the fastest with the highest market share. The following factors influence our decision on which path to choose: determining where and how we add equipment at leading-edge pricing; chasing price up, not down; evaluating, winding up, and repairing pricing on older contracts; aligning with customers racing to meet production targets or working with us to maximize our collective efficiency; managing our input costs; and finally, a relentless focus on reducing internal costs and implementing technology. Outside of North America, our more conservative outlook for the last several quarters is proving accurate. Customers around the world have different breakeven thresholds and production requirements, but none are immune to the impacts of the current commodity price environment. We continue to see customers defer new projects, most notably in the offshore exploration markets. Due to lower cash flow and project economics, they are more focused than ever on lowering costs. The result of this combination is less activity and more pricing pressure. I believe the first quarter represents the bottom in the Eastern Hemisphere rig count. The full-year average for 2017 will likely only be marginally higher than the full-year average for 2016. Due to the long-term contractual nature of international markets and the ongoing price pressure, I expect discounts will offset activity gains over the near term. In Latin America, we saw sequential improvement in revenue from activity in Brazil and Mexico in the first quarter. While we're seeing an improvement in certain basins, there are a variety of country-specific headwinds that must be overcome for a meaningful recovery in the region. In contrast to North America, we believe that a $50 oil price would drive a significant increase in activity; however, customers tell me that longer duration international markets will react less to an absolute oil price and more to a positive view of where price will be for several years. This isn't a surprise given the longer investment cycle that many of our customers face. In summary, in North America, momentum is building, and we only see it getting better. We believe we've seen the bottom in the international market. I will now turn the call to Robb to cover our financial results.

Thanks, Jeff. Good morning. Let's start with a summary of our first-quarter results compared sequentially to our fourth-quarter results. Total company revenue for the quarter was $4.3 billion, representing an increase of 6%, while operating income was $203 million. These results were primarily driven by increased activity in our North America land business, offset by the typical seasonal impact in the international markets that were exacerbated by the cyclical headwinds that Jeff described earlier. Let me compare our divisional results to the fourth quarter of 2016. In our Completion and Production division, first-quarter revenue increased by 15% while operating income increased 73%. These results were primarily driven by improved pressure pumping pricing and utilization in our U.S. land business, offset by a seasonal decline in completion tool sales across the Eastern Hemisphere and the Gulf of Mexico. Turning to our Drilling and Evaluation division, revenue and operating income declined by 4% and 51% respectively, primarily as a result of reduced software sales as well as lower pricing and decreased fluid sales across the Middle East-Asia region. Let me take a minute to compare our geographic results. In North America, revenue increased 24% sequentially, primarily driven by increased pricing and activity in our pressure pumping and well construction product service lines. In Latin America, we saw revenue increase by 8%, primarily due to increased activity in well completion, fluid services, and production solutions in Brazil, as well as pressure pumping, fluid services, and project management in Mexico. Turning to Europe-Africa-CIS, revenue declined 11%, resulting primarily from reduced activity in West Africa and weather-related activity reductions in the North Sea and Russia. For Middle East-Asia, revenue declined 12% due to reduced pricing and activity across the region, particularly in completion tool sales, project management, and drilling services. Our Corporate and Other expense totaled $66 million in the first quarter, and we anticipate that our corporate expenses will be a similar amount for the second quarter of 2017. In March 2017, we redeemed $1.4 billion of our senior notes with cash on hand. As a result, we recorded a pre-tax loss of $104 million on the early extinguishment of debt, which included the redemption premium and a write-off of the remaining original debt issuance costs and debt discount, partially offset by a gain from the termination of related interest rate swap agreements. This loss on the early debt extinguishment is included in the $242 million of interest expense for the first quarter. As a function of our reduced debt balance, we expect net interest expense for the second quarter to be approximately $120 million, a savings of close to $20 million. This savings will continue in future quarters. We reported $18 million of other expenses for the quarter. This was lower than we anticipated due to lower volatility associated with foreign exchange movements during the first quarter. Our effective tax rate for the first quarter came in slightly higher than expected at approximately 27%, due to a shift in the geographic mix of our earnings. For the remainder of 2017, we expect the effective tax rate to be approximately 29% to 30%. Cash flow from operations during the first quarter was approximately $5 million, representing $340 million of cash flow from operations, excluding the final Macondo payment. We ended the quarter with approximately $2.1 billion in cash and equivalents. As we progress through 2017, we believe we are well positioned to generate significantly more cash from operations. Turning now to our near-term operational outlook. Market dynamics continue to make forecasting a challenge, but let me provide you with some comments on how we believe the second quarter is shaping up. For our Drilling and Evaluation division, we anticipate a second quarter rebound from typical seasonal weather disruptions in drilling activity, such that sequential revenue will experience a mid-single-digit increase compared to first quarter levels, with margins increasing 75 to 125 basis points. In our Completion and Production division, we believe revenues will increase in the upper teens, while margins will increase by 275 to 325 basis points. As for our regional outlook, as in the first quarter, we expect revenue growth in North America to outperform the average U.S. land rig count growth, which is already up significantly for the second quarter. In Latin America, we anticipate revenues will increase sequentially by mid-single digits. We expect Europe/Africa/CIS revenues to increase by low-double digits due to increased activity after the winter months. We believe Middle East/Asia revenue will remain relatively flat sequentially. Now, I'll turn the call back over to Jeff for a technology review and a few closing comments. Jeff?

As I said earlier, our strategy is to deliver leading shareholder returns. That shapes all of the decisions that we make. We work closely with our customers, and what we do is clearly aligned with what's most important to them, delivering oil and gas at the lowest cost per BOE, even more so in this challenging commodity price environment. We execute our strategy with three main levers: people, capital investment, and technology. Each is pointed towards generating leading returns. Our people collaborate, listen, and use a broad range of technology to engineer solutions. I know this is working because it wins with our customers. We have leading service quality that translates into larger work allocations and contract awards, which ultimately result in higher market share. Our capital investment strategy is focused on the things that competitively differentiate us. For example, we are developing solutions that drive capital off location and make us more efficient. In hydraulic fracturing, we already make the most efficient pumps and have the most efficient surface configuration. We're doing the same in other parts of our business. For example, our subsea intervention systems are more compact. Our rotary coring tool is the ultra-deepwater market leader; our state-of-the-art completions tools manufacturing allows us to design and deliver lower-cost tools. We have continuous improvement initiatives across all of the company to maximize the efficiency of our capital investment. From a mergers and acquisitions perspective, we're interested in acquiring businesses and technologies that enhance the depth of our product line portfolio or breadth of our offering in specific areas, such as production chemicals and artificial lift. As a returns-focused company, we do not want to get into product lines that we believe would be dilutive to our return profile, such as subsea equipment. There are good companies in this industry segment that we can partner with to provide those capabilities to our customers without diluting our returns. Our customers are more open to technology adoption than ever before and continuously engage with us to help direct our technology investment. I believe that technology is valuable when it satisfies two criteria: first, it meets the customer requirement; and second, it provides a return to Halliburton. We look for technology and equipment that differentiates us from our competitors, helps our customers, and drives our returns. If it doesn't, we'd rather rent it than own it or partner with an expert in that field. We believe differentiated technology and the ability to integrate technology using an open-architecture approach set us apart from our competitors, helps our customers, and drives returns. Through the downturn, we've been active, deepening those investments and relationships that offer the best full-cycle returns. Our competitive technology position is demonstrated by our onshore market leadership in North America and our contract awards and share gains in technology-driven markets, such as deepwater exploration with open-hole wireline and testing; the deep water Gulf of Mexico, where Halliburton now enjoys overall market leadership; and, finally, in the Middle East, where we have a market leadership position in project management. Customer feedback has been overwhelmingly positive. We're aligned with what's most important to them, maximizing asset value, and doing so with our proven commitment to execution service quality and technology. Because we provided an operational update a month ago, we have a few spare minutes today to cover topics we don't normally have time to discuss. I hear a lot of discussion in the industry today about digital initiatives, such as big data, analytics, the Internet of Things, and automation. Let's start with the underlying concept. Our industry challenges remain the same, but today, we have an opportunity to solve problems in a fundamentally different way, enabled by the development of reliable, inexpensive sensors, data processing capabilities in the cloud, and advances in machine learning techniques. Digital technologies are valuable only when they solve a problem. The value is created by the combination of domain expertise with digital technologies. Arguably, the most popular talking point is big data. Big data, standing alone, is nothing but big data collection. It's only valuable when used for automation and optimization. The big data story is still being written. We collect different E&P data types, and because Landmark's DecisionSpace is the go-to platform for the industry, we power the collection and storage of big data more than anyone else. Our customers use DecisionSpace to collect, monitor, analyze, and sometimes control their assets through the life of the field. Each customer is unique and will have specific goals. The open-architecture platform allows customization and enables customers to use their domain expertise to its fullest advantage. Here are some examples of what digital looks like at Halliburton. In production, we're a leader in smart fields, with the Voice of the Oilfield, where digital technologies are combined with subsurface understanding to optimize production. In the Eastern Hemisphere, we completed the first phase of the smart field project in heavy oil. This project included modeling, automated workflows, and optimizing production and injection networks. This was made possible by incorporating new data sources into an analytical framework, allowing our customer to have a constant view of their facilities, reservoir, and operations to monitor and optimize production in real-time. This project has substantially reduced the cost of production, and the process is now being implemented on a series of fields with over 1,000 wells. We have similar projects ongoing with major operators in deepwater as well as unconventionals. In hydraulic fracturing, we continue to innovate and push the envelope by automating the fracturing process. This is accomplished by acquiring data from frac treatments in real-time and applying machine learning to make decisions previously taken by on-site personnel, such as rate or pressure adjustments, volume, and timing the release of materials. We've seen dramatic improvements in fracture efficiencies in the field. We have similar efforts ongoing in our Drilling and Completion arenas, which I'm excited about and will share details about later. Internally, we are far along in rolling out various digital initiatives. For example, in condition-based maintenance, over 90% of our pumps are equipped with IntelliScan, advanced sensors, and algorithms to measure and monitor pump health in real-time. In summary, our industry is in the early stages of defining the digital story. We believe an open digital architecture is a prerequisite for our industry to enable faster innovation and collaboration with our customers. This is why we've invested in and standardized on the industry's only open-standards-based platform, DecisionSpace. We're excited to open up access to this platform code through OpenEarth, a community of E&P scientists and developers, to speed up and lower the cost of digital innovation for the entire industry. In closing, there are a few things I want to highlight. We are the execution company, and I'm excited by the activity I see in North America. We outperformed the U.S. land rig count in North America and expect to do so again in the second quarter. As stated in our operational update, we've nearly doubled our reactivated equipment additions for the full year and are bringing that equipment out in the first half of the year. Our conservative international view is playing out, and I am confident in our ability to handle challenges in these markets. We are focused on achieving industry-leading returns, and I believe we have the best strategy to achieve that. Let's open it up for questions.

Great and thanks. Good morning, Jeff.

Good morning, Dave.

So I was just wondering. With a strong catch-up in completion activity that you saw on U.S. land this quarter, is it fair to say you think we're entering a new completion-intensive phase of this cycle? And I was hoping you could talk a little bit about how you see that relationship between rigs and completion activity now. You had previously talked about 900 being the new 2,000 in terms of full industry utilization. I was just wondering if you could go into that math a little bit and see if that's adjusted at all.

Thanks, Dave. There's no doubt that the pace of completions activity is catching up with the rig count, and we expect to see that relationship continue into next quarter most certainly. It is partly around the increasing intensity that continues to build. When I said 900 was the new 2,000, I probably overshot that number in a sense that we are seeing that kind of tightness in the marketplace today.

As a related, as we're talking about preserving market share that you've mentioned and reactivating it, clearly you did this. I've seen some of this capacity from smaller competitors out there. There are two questions around that. One, what do you think are the biggest impediments for the industry bringing this back? Do you think there's going to be shortages of repair? Is it finding and training crews? Is it something else? And secondarily, you had talked in your prepared remarks about a flight to quality. I was just wondering if we're starting to see that yet. Are customers starting to experience poor jobs or equipment delivery delays, or is that a little bit further out?

Look, the flight to quality is happening, and that is what we see when equipment comes into the market. Most importantly, as clients get urgent, reliability, service quality, and technology even matter more. We are confident that that pivot to what we deliver will continue throughout the marketplace. As for things that are tight, equipment broadly is tight for the industry today. Sand is one of those things that will recover in terms of availability. There's a lot of capacity coming into the market. From a people perspective, we're confident with where we are; we retained our most experienced people through the downturn, and we know how to hire folks. We hired 21,000 in 2014.

Great. Thanks, Jeff.

Good morning, guys.

Good morning, Jim.

Good morning, Jim.

I actually heard an advertisement on the radio the other day here in Dallas for a Halliburton job fair in Abilene. So that's the first time I've heard that, so I guess your hiring efforts are going farther afield than Midland.

Yes.

The Gulf of Mexico, my sources are telling me, Jeff, that you guys have just won some work from Chevron and Shell in the Gulf of Mexico that previously had been held by a competitor. You guys are a little bit smaller in the Gulf of Mexico than your nearest competitor. I was wondering if you could tell us if this is true, who it is, and how did you do it?

I'm not going to tell you about customers, but I think we know what the customer set is in the Gulf of Mexico. Yes, we've been quite successful in the Gulf of Mexico, and it's really built around our strategy, Jim. It's collaborating and engineering solutions to maximize asset value for our customers, so we're clearly focused on the things that are important to them. The other thing I think it tells you is that our technology portfolio is extremely competitive, and I think we've demonstrated that by what we're doing in deepwater in the Gulf of Mexico and in other places.

Okay. If I could follow up on the U.S., you guys said in your operational update that you're definitely accelerating pressure pumping capacity. Would it be fair to say that in Q3, you'd probably have about twice as much pressure pumping capacity in the field than you had on January 1? I know that new contracts are getting a big price hike. I think you all confirmed something close to 25% for Q1. Would all the equipment you have in the field be benefiting from that higher price by, say, Q3?

Jim, I think the amount of equipment that we're adding is not nearly as much as you're suggesting. However, what I will tell you is that we are working constantly on the broader portfolio. Without giving you a time, we have seen quite a bit of progress since the beginning of the year. I can't predict precisely that timing, but the right things are happening. In the sense of customer urgency, we're seeing that supply and demand tightness. The bottom line is we really like the way the market is shaping up. I think we're on that path.

I guess what I'm really asking is that, I know that new fleets are going to work at a nice price hike from where we were, say, exiting Q4, but the equipment that you already had in the field in Q4, how long does it take before the new prices for new equipment hit all the legacy activity and equipment you already have in the field? How long should that take to flow through?

That should happen over the next, I would say, four quarters, depending on pace and efficiency of customers. But it's something we manage every day.

Is this new equipment going to work on contract, or more like commitment?

Jim, everyone would like to commit equipment at this point in the marketplace. I think we're being very thoughtful about where we place equipment. We are aligned with the right customers in the right markets. We also move equipment around, and that's part of where we see the flight to quality happen as we move equipment around.

Okay. Thanks, guys. I appreciate it.

Hey, good morning, guys.

Good morning.

Good morning.

Jeff, as you think about the second half of the year in North America, given all the equipment you've put back to work, and the pricing power that you're now achieving, what do you see as the momentum of North American margins going forward? I know we don't want to get too far ahead of ourselves here, but incremental margins were, as you have talked about previously, light this quarter, but they should, in my mind, at least explode in the back half. Is that a fair assessment? When you're running your models and thinking about your earnings power for North America, what do you see?

Jim, this is Robb. I'm not sure about what you would characterize as explosion, but this is a transition quarter for us in terms of how we're reporting our operating income in areas. Given that it is a transition, and given the rapid expansion of North America, I can say that margins improved throughout the quarter, and our exit incrementals for North America approximated what we'd anticipated for the whole quarter. We really like the momentum going into the second quarter, and we fully anticipate that momentum to continue through the year.

Okay, that's helpful, Robb. Thanks. Robb and Jeff, I saw you guys about five, six weeks ago or so, and at that time, we were starting to talk about new build capacity. Jeff, you indicated you’d make that call as we got closer to mid-year. I suspect you and Robb, too, probably have Jim Brown in your office every day asking for CapEx and trying to build new equipment. So how are you thinking about that right now? When do you think you'll make that decision to start adding incremental capacity, think about new builds to the market?

Fortunately, Jim Brown lives in Denver, and he can't be in our office.

Sorry for calling you, yeah.

We also have the call ID, so we don't always answer the phone. What we were trying to articulate in our prepared remarks is that we have not made that decision yet. We're constantly monitoring the situation, looking closely at capacity in the marketplace, our customer relationships, and their demands. The bottom line is we're not going to bring new build equipment into the market unless and until we see the kind of margins we want to achieve, and that's normalized margins and a good return on that equipment. We're fortunate that we manufacture our own equipment. We've got a lot of optionality in that area, and we can react rapidly when we need to. At this point, we're comfortable with where we are, and we've not made any decisions on new builds.

Okay, fair enough. All right, thanks, Robb.

Sure.

Thanks. Good morning. So on the guidance, it looks like the incremental for the second quarter for CPS is in the vicinity of about 25%. I'm curious; when you conducted your call a few weeks back on the operational update, Dave talked about aspirational North America margins over the course of the next several quarters and then a couple of years in the 20% arena. To do that, we had to land a sort of glide path of 40% to 45% sequential incrementals for several quarters. I'm curious, with regard to CPS, I think you guys had an 18% incremental in Q1, a guided 25% incremental for Q2. Relative to that aspired 40% to 45% North American incremental, what do CPS incrementals have to be to achieve that 20% North America margin?

Bill, I think the outlook we gave on the operational update is accurate. Without a precise number, we need to continue to put the equipment to work that we have in the marketplace. I expect we'll be on a glide path that materializes over the balance of the year that takes us to those normalized margins, and that should be reflected as we move through the second half of the year and into next year.

My takeaway from the call a few weeks back is that what was burdening your incrementals was a combination of insufficient net pricing traction, ramp-up and reactivation friction, and supply chain cost inflation. I'm curious if you could briefly talk about each of those with regard to how we're evolving and what we can expect.

With respect to bringing equipment back out, we laid out the path to these assets through mid-year. At that point, that burden is behind us. Regarding supply chain, we're working on that every single day and the short-term supply shortages generated by year-end activity should begin to abate as we move through Q2. This includes sand shortages, and those are the most prominent couple of items that come under control as we move through the year.

And with regard to net pricing traction, I think an earlier questioner said 25% on new equipment rolling out. Is that correct? What kind of pricing traction are you getting with regard to equipment in the field currently working?

Yes. There’s great momentum. We talked about moving up at the leading edge, and we're seeing pricing improvement in every basin where we work around North America. On the legacy portfolio, it is getting traction and we're making progress every day. We expect that momentum to continue as we move through the year.

Okay, thanks.

Good morning.

Good morning.

Good morning, Scott.

I want to follow up from Bill's question. I think we all understand that margins should improve nicely in the second half of the year as these restart costs fade, but do you need additional pricing to reach those 20% plus normalized margins in North America, or can you get there through the repricing of active spreads and reaching full utilization? I realize you're not going to be reporting geomarket margins anymore, but conceptual color on this point would help us all forecast.

Yes, we would expect to continue to make pricing gains. However, there are many other levers we have once we start to move the full portfolio up on pricing. We’re also seeing the customer urgency that leads to hyper-utilization. As the excess capacity comes out of the marketplace, we regain a lot of control over the calendar, which we don't have all of today. These factors contribute to a path to normalized margins—not solely dependent on price to repair the portfolio.

Got it. Just to be clear, you would need some incremental pricing above and beyond leading edge to reach those normalized margins?

Yes, some at leading edge but more importantly, repairing the broader portfolio.

Got it. Just a follow-up on strategy. We heard from your largest competitor on Friday regarding their strategy to enter various aspects of the value chain in North America. Can you provide an update regarding your strategy toward investing across the value chain and broader integration in North America? Has anything changed as some of the different links in that chain start to tighten?

No, we want to invest in those things where we believe we add unique value, clearly that's our equipment, and the technology we can roll out to make that more efficient. As we look up and down the value chain, we aim to be surgical about those things we believe we need to own, such as the logistics piece.

Got it, appreciate the color.

Thanks.

Thanks. Good morning, guys.

Good morning, Angie.

So Jeff, going back to the construction comments that you made in your prepared remarks and the Q&A here, you said that given that you build in-house, you can wait longer before you start to build. Can you give us some perspective on your construction time for that equipment? Has the cost structure changed from building this cycle versus the last cycle?

I would say that we've seen the cost come down somewhat around building equipment. We also think about how we take cost out of things and still achieve effective market-leading equipment. With respect to timing, I'm not going to give you the precise timing, but it will be faster than anyone else since we control that part of the value chain in our manufacturing facility. It allows us to make no decision at this time, and I believe we can wait fairly deep into the cycle before we make any kind of decision about bringing out new equipment.

Okay, that's helpful. Regarding the cost pass-throughs, correct me if I’m wrong, but I thought a third of your sand that you're purchasing is on the spot market. Can you talk about the lag on passing through the cost to your customers? Are you seeing challenges, at least with your legacy equipment, in getting the cost pass-throughs fully redeemed?

That's very competitive in terms of how we work with our customers, which are different. We see a path to manage inflation, and I believe some element of that inflation will abate as we get later into the year.

Finally, on pricing, besides frac and maybe directional drilling, are you seeing pricing gains in any other product lines?

We're seeing pricing gains in the well construction service lines. However, those never fell quite as far, so I don't think they have as far to move back up. We are seeing some tightness in those service lines.

Great, thanks, I'll turn it over.

Thank you.

Thanks, good morning. I wanted to touch base on your international outlook. Jeff, you mentioned something about operator budgets. The absolute oil price may not be as important as perception on stability and where it's going to be for the next several quarters. If we're in a $50 to $55 world for an extended period, what is your sense on how international revenue would progress? How can we think about your margins in this environment? It sounds like price pressure continues in certain areas.

The stress in that market is simply a cost issue. We need to bring costs down to make many plays more competitive. Our customers are working on that now, but that doesn't change the macro view that as North America becomes more competitive, it poses challenges for other markets. Our strategy works with our customers but does so slowly, as we look at bringing costs down. I think deeper markets will be the slowest to recover, but there is room to move around in mature fields, and they will likely recover ahead of these markets in terms of activity.

As we think about your international businesses, do you have other levers you could pull if the revenue outlook is flat for a period? Do you have levers to get your international margins higher to adjust for a new normal, if it comes to that?

Yes, we do. We are constantly working on continuous improvement initiatives that take cost out of both our business and our equipment. There are breakthroughs as we look at how to make things work more effectively. Our value proposition is how we collaborate and engineer solutions, much of which is how we systematically take costs out, ultimately improving our margins.

Okay, and just my follow-up is on North America. If I were to think about your portfolio today in the U.S. in pressure pumping, can you share what percentage is at leading-edge pricing, and how much is under legacy pricing?

It's moving all the time, so I'm not able to share specifics. What I'll tell you is that everything is moving up but at different rates, as commitments roll off and new opportunities arise. The entire fleet is on that path moving upward.

Okay, great. Thank you.

Thank you very much. High-level question for me on North America. In the last cycle, you had your SandKing systems that delivered tremendous efficiencies to the industry. Today, we're seeing a range of third-party last-mile and storage systems coming into the industry that deliver increased efficiency cycle-over-cycle for sand logistics. In the last cycle, the infrastructure broke down around 50 million tons. It might have been over that. You can clearly handle more. What is the bottleneck that creeps into the industry? When do you think that will become evident? What are the other black swans, in other words? Could you offer us that, Jeff?

I’d say the definition of a black swan is we don't see it, but the...the gray swans. The industry has demonstrated the ability to overcome all of these challenges. One reason I'm careful about how we invest is what part of this we own. I think logistics will get tight, and it probably gets tight over the still year. I like our position particularly because of our investment in logistics and rail, and I'm confident there. Getting costs down, you referenced how we handle sand and move it around. Containerized solutions will likely remove a lot of demurrage and allow us to move more sand more quickly—another good case of technology having an impact. On the people side, I think getting staffed up will be challenging. I do believe logistics will tighten over time.

You highlighted investment in a new coil tubing system, for example. Are there other product lines that because of changes in relative science or new ways of doing things could become problematic?

No, we're in the market all the time. I tried to walk you through some of how we view technology and how we approach that. We're very effective in the market at addressing things that we want to invest in, and we feel create value for us. We do those things that will be commoditized over time or where rents don't clearly accrue to us. This has been our approach over time.

I would agree with that. The bottleneck might be very short in life; my focus is more on industry bottlenecks as opposed to Halliburton-specific bottlenecks.

As I said, I think it will be around people over time and the North American market; staffing will be challenging. I do think logistics will get tight over time as well.

Just one follow-up on Iraq. You mentioned in your press release commentary that you're going back to work for Shell. Could you give us your view on activity in Iraq? The rig count has come down a lot, and there aren't many service companies talking about Iraq anymore. What's going on regarding investments in existing fields and infrastructure there?

From a pay standpoint, it's steady as she goes. We've had success with project management—our position in that market is strong. That's been a launch pad for us to more effectively move into other parts of the Middle East and other parts of the world. We're encouraged by our position in that market. The Middle East, overall, has been generally resilient, but it's an important piece of business to us.

Thank you very much.

Thank you.

Hi. Good morning.

Good morning, Sean.

Jeff, could you discuss what you're seeing in terms of competitive dynamics between the basins in North America? Are things materially different for Halliburton in the Permian versus, say, the Bakken and Eagle Ford, or is there less incremental activity so far but also for your competitors?

We've stayed invested in all basins throughout cycles, which is important to us. We have the basin expertise to work in all. To a degree, we are basin agnostic on how we're positioned. The Permian Basin does have the most activity; among others, I like how we're positioned in each market.

Is it fair to say that you're back to working mostly all your fleets at 24/7 operation to this point?

Yes, fleets are busy. We're beginning to see the calendar firm up around customers with more than one rig and those sorts of things, which inspires improved utilization.

Okay. Just on international, you talked about better cash generation expectation in the next couple of quarters. Assuming with international customers, where are you still seeing challenges, and where are you getting traction in collections?

In general, we're seeing collections improving, except for a few countries. While not at the end of the last cycle, we see a path, and our organization is strong in connecting with customers, so we expect to see working capital improve over the balance of the year. Thank you.

Okay, thanks, Jeff.

Thank you, Candice. I'd like to wrap up the call with a couple of key points. First, we're excited about the way North America is shaping up and believe that we'll outgrow the rig count in North America. Our reactivated equipment is going to work at leading-edge market pricing, while we wind up and repair pricing on our legacy portfolio. These mark the path towards normalized margins. While our more conservative international view is playing out, the international rig count has bottomed. Our strategy to collaborate and engineer solutions to maximize asset value aligns with what's most important to our customers. I'm confident that our team can handle the challenges in these markets. With that, thank you, and I look forward to talking with you next quarter. Candice, please close out the call.