Halliburton Company (HAL) — Q2 2017 Earnings Call Transcript

Good morning. And welcome to the Halliburton second 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 is Dave Lesar, Executive Chairman. Jeff Miller, President and CEO; and Chris Weber, CFO. Before we begin, I'd like to point out that this will be Dave's last time participating in our earnings call given his new role as Executive Chairman. As a reminder, 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, Form 10-Q for the quarter ended March 31, 2017, 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 the early extinguishment of debt and charges related to interest-bearing promissory notes that Halliburton intends to execute with its primary customer in Venezuela. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our second quarter press release, which can be found on our website. Finally, after our prepared remarks, we ask that you please limit yourself to one question and related follow-up during the Q&A period in order to allow more time for others who may be in the queue. Now, I'll turn the call over to Dave.

Thank you, Lance, and good morning to everyone. Our performance this quarter demonstrates that Halliburton is the execution company, and we are the leader in North America. Here are a few key highlights. Total North America revenue increased 24%, outpacing the average sequential US land rig count growth of 21%. North America margins grew into the double digits. And although our international operations continued to be challenged, the numbers came in about as expected. We continue to tailor our business to the market as we wait for our recovery. We outperformed our major peer in every single geo market, demonstrating once again that we continue to grow our market share globally. Since this is my last call, today I want to share with you my view of the evolution of the North America land market, our customer base there, and why I believe it will continue to surprise to the upside. For 25 years, I have had a fantastic front-row seat to the development of US unconventional resources. We have become the largest service company in North America, and that growth didn't happen by accident. First, it was due to the leadership of Jim Brown and his visionary management team. They saw the potential of unconventional resources in the region at the same time as a group of key early mover customers. As a result, we decided to work together using lots of trial and error to unlock this resource. We established enduring customer relationships and gained unparalleled knowledge that still provides us a sustained advantage today. I think it's important to look at the North America unconventional ecosystem to understand our customers' behavior and why their ability to so quickly increase production has expanded rapidly. Currently, there is a strongly held view by energy investors that the US independent operators behave as a group. That view is wrong. When thousands of companies make discrete decisions about the same market, each day they tend to swing the activity and production pendulum too far one way or the other. That is not groupthink; it is the impact of individuals trying to do the right thing for their investors. Our US customer base is not 10 or so countries like OPEC. It is made up of thousands of companies from IOCs to individually owned businesses. When you look at them separately, you see thousands of entrepreneurial, smart, and motivated risk takers. They readily adapt to the quality of their reservoirs, have almost unlimited access to capital, aggressively applying new technology, and quickly adapt their business models and structures to meet changing market conditions. And, yes, sometimes they even take advantage of US restructuring laws. They are the classic American entrepreneurs, and their success should be recognized. In Silicon Valley, such success would be greatly celebrated as another industry disruptor. The unconventional disruption is not widely celebrated beyond the energy space, but it should be. The development of US unconventional resources has been as disruptive to the global energy market as Amazon has been to Big Box retailing or Uber to the taxi business. You don't unleash a wave of cheap, reliable energy that disrupts global geopolitical and energy dynamics without significant consequences. It has made the US more energy independent, has caused OPEC to react, and changed the fundamental economics of offshore production. I believe it has created hundreds of billions of dollars of economic value, added hundreds of millions of dollars to government tax coffers, and provided untold savings for consumers. So unconventional is what I would call a disruptor; so let's celebrate that. I've heard energy investors say that today's customer behavior shows nothing was learned in the last downturn. That simply is not true. Our customers are smart and adaptive. They do learn from the past. Their business DNA is to be survivors, and they are. Look at the reaction in the past several weeks. Today, rig count growth is showing signs of plateauing, and customers are tapping the brakes. This demonstrates that individual companies are making rational decisions in the best interest of their shareholders. This tapping of the brakes is happening all over the place in North America. I can tell you the market will respond; it will rebalance, and these companies will stay alive, survive, and thrive because that's what they do. I said several quarters ago the customer and animal spirits are back, and they are with a vengeance, running free in North America. Here is my last piece of wisdom for you: Do not bet against the animal spirits that our North America customers embody. I never have, and I never will, because that is a bet you will lose. Now today is my last conference call, and I'd like to take a moment to thank our analysts and investors. It has been a pleasure working with you, and although we haven't always agreed, I've always enjoyed the spirited debate and intelligent conversations. I'd also like to thank the employees at Halliburton for their hard work throughout my career. We've been through many cycles, emerging stronger from each one, and I am proud of what we've accomplished together. Even though I'll be absent from future calls, I look forward to the next 18 months serving Halliburton as Executive Chairman. I am happy to leave these calls in the capable hands of Jeff, Chris, and the other members of our experienced management team. I have no doubt they will continue to lead the company as a customer-centric and returns-focused business. And remember one thing: We are the execution company.

Well, thanks, Dave, and good morning, everyone. I am pleased with our second quarter results. We continue to execute our strategy to maximize asset value for our customers and deliver differentiated technology and services that we believe will generate superior returns over the long term. Here are some highlights for the second quarter. Total company revenue was $5 billion, representing a 16% increase compared to the first quarter of this year. Total adjusted operating income was $408 million, primarily driven by continued strengthening of market conditions in North America, which were partially offset by pricing pressure internationally. Our North America revenue increased by 24%, outperforming the average sequential US land rig count growth of 21%. The Completion and Production division revenue increased 20%, and operating margins improved by an impressive 700 basis points to approximately 13%, driven by the strength of our production enhancement, cementing, and completion tools product service lines. Cash flow from operations delivered about $350 million. I'd like to take a moment now to welcome some of the Summit ESP and its employees to the Halliburton family. We are pleased to announce this recent transaction and are excited about what it means for us as we continue to strengthen our artificial lift capabilities. Now I'd like to provide some regional commentary around our quarterly performance. I believe we found the bottom of the international rig count in the first quarter; however, I don't expect a near-term rebound in the international markets for several reasons. First, the lengthy contracting cycles will mute any near-term pricing inflection. Second, our international customers need confidence in commodity prices to overcome the duration risk in their projects. We continue to collaborate with our customers to lower the costs on these projects, and while some are moving towards FID, it's important to remember that there is a significant time between planning FID and revenue generation for Halliburton. And finally, I've been consistently more conservative on the international market, and it's played out exactly how I called it. Today, I expect that there will be improvement in activity over the remainder of the year, but these improvements are not concentrated enough to offset the continued pricing pressure. As a result, the international markets will continue to move sideways. With all of this said, it's important to understand that we are now into the third sequential year of significant under-spending in the international markets. This implies that the production decline outside of certain OPEC countries will begin to accelerate, particularly next year as the backlogs of new projects are completed and no additional projects are coming behind. In the meantime, we are actively managing costs while protecting our valuable international position for the eventual market recovery. With the current level of under-investment internationally, production declines are a certainty, and you know where that leads. Our Drilling and Evaluation division is driven in large part by our international footprint. While we experienced a modest increase this quarter, largely driven by increased drilling activity in Latin America and the seasonal rebound in the North Sea and Russia, the overall market continues to move sideways with continued pricing pressure. Now turning to North America. After the operation we gave in the first quarter, some of you were skeptical when we accelerated our equipment reactivation. But based on performance during the second quarter, there is no doubt we successfully executed our plan, and that this decision was not only right but bang on target. Why is that? During the second quarter, we continued to see strong incremental demand for completion equipment from customers. The reactivated equipment we brought back to the market is leading edge pricing and has been accretive to overall margin and is expected to deliver acceptable returns that exceed our cost of capital. Our sand war room and logistics structure allows us to manage the completions intensity our customer demand today. We've been successful in passing along supply cost increases to our customers. Our internal manufacturing capability is a proven differentiator in today's environment. It allows us to be flexible. Being able to build what we need when we need it, particularly in a rapidly changing market, is crucial. Today, we believe the current customer demand has outpaced the supply of completions equipment, and this should create runway for strong utilization through the second half of the year. We remain committed to generating industry-leading returns, and reactivating our equipment was the first step towards delivering the results you have come to expect from us. As some of you've heard me say before, customer urgency is the foundation for the path to normalize margin. Our customers remain urgent; therefore, we believe our path to normalized margins is achievable. We get there through a combination of increasing leading pricing, improved legacy pricing, better utilization, and continued cost control. Let me be clear: Our pressure pumping equipment is sold out in the third quarter. As we gauge the utilization of our equivalent on a 24x7 basis, we see a significant opportunity to improve and drive the downtime out of our calendar. In this environment, it's imperative to be aligned with the most efficient customers where we can create value for them while delivering the best returns for Halliburton. Filling our calendar with high proficient customers is an important part that allows us to achieve our margin goal. Looking forward, it's too early to tell the impact of commodity prices on customer plans for 2018. However, as Dave said earlier, at Halliburton, we never underestimate our customers' ability to adapt to the environment. In the first quarter, we experienced significant inflation in sand prices and increased volumes. As we continue to pass through sand costs to our customers, we expect to see greater technology adoption leading to better wells through engineered solutions. For the first time in years, in the second quarter, we experienced our first decline in average sand pumped per well. Let me repeat that because I think this is important: We saw a decline in the average sand pumped per well. While this is only one data point, it's something we will be watching closely. We believe current sand price levels have encouraged operators to optimize their completion design using more science as opposed to simply maximizing sand to trade for increased production. We maximize returns on our technology investments by being the most effective in the market at lowering our customers' cost per BOE. Our strategy around technology development is to make returns for Halliburton. Very simply, our decision-making process around technology can be summed up in three questions: First, does it reduce cost? Second, does it produce more barrels? Or third, does it do both? As a result, we create cutting-edge technology that sets new standards for service quality and performance while making better wells for our customers. For example, on a recent effort in the Permian Basin, we used our Trans and permeability modifiers to increase production by over 60% compared to previous completion methods. The Trans and permeability enhancer portfolio is our premier offering for flow-enhancing technology. Using proprietary micro-motion technology, Trans and enhancer expands the reservoir contact area and improves fluid flow to increase the recovery factor for our customers. For unconventional matured fields, we developed the bare shield light fluid system tailored to reservoir salt formations and low fracture pressure to reduce circulation loss and washout. This custom tailoring allows us to reduce muddle off, increase drilling efficiency, and ensure zonal isolation for an efficient completion. In today's environment, it's crucial that technology be adaptable to customer demand and improve efficiency. During the second quarter, our industry-leading cementing technology, Neosam, was used in over 350 wells per month, including cementing the longest onshore lateral in history, a well that we are now completing. Neosam delivers high-performance compressive strength, elasticity, and shear bond that lowers density in conventional systems, saving time and providing improved performance. These three examples show the creativity of our chemistry-based research and development teams. We have terrific engineers and scientists looking at every way we can create efficiencies, reduce costs, and make more barrels. Internally, we have a similar initiative of continuous improvement, including reducing the time for R&D projects to come to market, like our very deep resistivity tool which went from design to field in only nine months. Our surface efficiency initiative in hydraulic fracturing has reduced the downtime between stages. We are always pushing to improve our processes and optimize the services that we bring to the market. Overall, I am confident about Halliburton's ability to grow North America margins and maintain a run rate for our international business for the remainder of the year. Our strategy is working well, and we intend to stay the course. We'll continue to drive superior execution and remain absolutely focused on delivering best-in-class returns. North America is clearly serving as the world swing producer, which means this is where the game will be played, and Halliburton is the distinct leader in this market. Now I'd like to welcome Chris Weber to the Halliburton team as our new CFO. Throughout his career, he has been working in consulting, operations, and finance with significant international experience. These combined traits will help Halliburton and make him an excellent fit for our team. With that, I'm going to turn the call over to Chris to provide some details around our financials.

Thanks, Jeff. And good morning, everyone. Let's start with the summary of our second quarter results compared sequentially to our first quarter results. Total company revenue for the quarter was $5 billion, representing an increase of 16%, while operating income doubled to $408 million. These results were primarily driven by improved activity and pricing in our Completion and Production division in North America. Now let me compare our divisional results to the first quarter of 2017. In our Completion and Production division, second quarter revenue increased by 20% while operating income increased 170% primarily driven by increased activity and pricing in our US land pressure pumping business. We also experienced well completion activity primarily in the Gulf of Mexico, North Sea, and Russia, partially offset by pricing pressure in the Middle East. Turning to our Drilling and Evaluation division, revenue and operating income increased by 9% and 2% respectively, primarily due to increased US drilling activity. In the United States, our drilling and evaluation revenue grew in line with rig count. On the international side, revenue was up due to increased drilling activity in Latin America, North Sea, and Russia, partially offset by price pressure across the international markets. Now let me take a minute to compare our geographic results. In North America, revenue increased 24% sequentially, primarily driven by continued improvement in pricing and activity in our US land business, particularly our pressure pumping and well construction product service lines, as well as higher completion tool sales in the Gulf of Mexico. In Latin America, we saw revenue increase by 10%, primarily driven by increased drilling activity in Mexico, Venezuela, and Colombia, as well as higher stimulation activity in Argentina. Turning to Europe-Africa-CIS, revenue increased 12%, primarily due to a seasonal rebound in the North Sea and Russia, resulting in higher drilling, well completions, and pipeline and process service activity. For the Middle East-Asia, revenue increased 2%, primarily as a result of increased fluid services in Asia-Pac and higher wireline and well completion activity in the Middle East, partially offsetting these increases were pricing pressure throughout the region, as well as declines in fluids and stimulation services in the Middle East. Our Corporate and Other expense totaled $114 million in the second quarter, which was higher than originally anticipated, primarily due to approximately $42 million in litigation settlement and one-time executive compensation expense during the quarter, of which $29 million is a loss contingency in connection with an understanding with the SEC staff to settle the previously disclosed investigation of certain past matters related to our operations in Angola and Iraq. The settlement is pending approval from the commissioners of the SEC. Separately, the DOJ has advised us that it has completed its investigation of these matters and will not be taking any action. We anticipate that our corporate expenses will be approximately $70 million for the third quarter of 2017. During the quarter, we also recognized a pretax charge of $262 million for a fair market adjustment required by accounting rules related to an expected exchange of $375 million of our Venezuela receivables for an interest-bearing promissory note of that same value. This note is with our long-standing primary customer in Venezuela; similar to the Venezuela notes exchange we did in the second quarter of 2016, this new instrument will provide a defined payment schedule while generating a return. We intend to hold the notes to maturity and expect to collect 100% of the principal. It's important to note that to date, we've received all payments required by the 2016 notes. As a function of reduced debt balance, we reported a $121 million in net interest expense for the quarter. Looking ahead, we expect net interest expense for the third quarter to remain at a similar level. Our effective tax rate for the second quarter came in lower than expected at approximately 23%, due to certain discrete items related to prior year audits. For the remainder of 2017, we still expect the effective tax rate to be approximately 29% to 30%. Cash flow from operations during the second quarter was approximately $350 million, and we ended the quarter with approximately $2.1 billion in cash and equivalents. These results were largely driven by improvement in day sales outstanding. Historically, our annual cash flow is back-end loaded for the year, and we don't believe that 2017 will be any different. Continued improvement in our earnings and a number of working capital initiatives should strengthen our cash generated from operations as the year progresses. Now I'd like to provide some color on our near-term operational outlook. The macro and micro dynamics make forecasting a challenge, but this is how we see the third quarter playing out. For our Completion and Production division, we expect that our North America sequential revenue will outperform the average US land rig count, while international revenue will remain flat. In addition, we expect margins for the division to increase by 225 to 325 basis points. In our Drilling and Evaluation division, we anticipate North America revenue will grow in line with the average US land rig count, while the international market will remain flat to slightly down. We expect margins for this division to remain relatively flat sequentially. Now I'll turn the call back over to Jeff for a few closing comments.

In closing, there are a few things I want to highlight. Our second quarter results clearly demonstrate the strength of our franchise in North America and our ability to adapt to a rapidly changing environment. If you believe in energy, you should be invested in North America. Halliburton's relative performance for the balance of the year will remain strong as a result of our ability to grow our North America margins and continue to maintain revenue and margins in our international business. Our strategy is working well, and we intend to stay the course. We'll continue to drive superior execution and remain focused on delivering best-in-class returns. I want to take a moment to thank Dave for his leadership at Halliburton during his 17 years as CEO. He created an amazing legacy, and our employees, customers, and shareholders have benefited greatly from his management of our company. I have had the pleasure of working with Dave for almost 30 years. He is an important mentor to me. Together, we developed the strategy and leadership team for our company, and I look forward to working with him over the next 18 months. Before we open the call up for questions, I'll go ahead and ask the first one myself because I know it's on everyone's mind. What are we doing around new build equipment? The simple answer is that we are, first and foremost, a returns-focused organization. We have the ability to make a series of discrete decisions around equipment and will only bring it out under certain conditions. First, it must be backed by customer commitment; second, it must capture leading edge pricing that is accretive to our margins; and finally, it must generate an acceptable return on investment. Let me remind everyone that we have not invested in our legacy fleet in two and a half years. Prudently managing the health of our fleet is important to maintain the type of service quality and reliability that our customers have come to expect. Therefore, some replacement of equipment will be necessary over time. Our manufacturing center in Duncan is a powerful, competitive differentiator for our organization. It allows us to be nimble and build equipment as needed with short lead times. This flexibility allows us to control the rate at which we manufacture, building as little as 2,000 horsepower at a time if need be. We delivered what we said we would on the reactivation plan. When we build additional equipment, we will do it with the same discipline around returns. Halliburton is the execution company, and you have to trust me to do the right thing, run the business in the right way, and make the right decisions. That answers it. Now let's open it up for other questions.

Thank you. Good morning. And first let me say, Dave, congratulations on a great career as CEO of Halliburton. I enjoyed working with you over the last several years. Okay, thanks. First question, I wanted to circle back on the impact of reactivation in Q2 and how to think about any impact on our third quarter. It was talked about in terms of negatively impacting margins on your first quarter call. You still had incrementals in CMP close to 50%. Could you maybe walk us through how you were able to offset some of the reactivation costs? And to what extent will reactivation costs impact the third quarter? Do you intend to reactivate any more equipment, or is it more refurbs or new builds at this point?

Look, Jud. Thanks. Bottom line is the costs were lower than expected in Q2. That's because we got there faster and cheaper than we thought. Our Duncan manufacturing team simply outperformed both by speed and by bringing down the cost of everything. The other thing that happened is our people went back to work faster, and that's principally because of all of the demand that we saw for our equipment. I suppose one other thing is we were successful in bringing back a large quantity of former Halliburton employees, which is something we always wanted to do, but that also meant they were able to go back to work more quickly with substantially less training. As we look ahead to Q3, obviously there will be new challenges to deal with. For example, our employees haven't had raises in three years. So we plan to, for example, provide our employees with raises. But I would like to defer to Chris' guidance on completion and production. We said we outperformed the rig count growth on revenue and continued to improve margin. So that's truly how we see that.

Okay. And just as my follow-up, just to kind of think about the progress on or just to CMP for now. One of the scenarios that talked about is if oil prices stay between 45 and 50, that we continue to step up in terms of completion activity in the next couple of quarters, then maybe level off. Is getting to normalized margins a realistic scenario in your mind? And if so, do we hit those by the fourth quarter, or would it be reasonable to anticipate being at normalized margins next year if activity were to kind of level off at 4Q levels?

Look, we are not backing off our expectation on normalized margins. As I said, I won’t give you a date, but I suspect it would be into 2018. But it starts with customer urgency, as I've described. And that really means hitting targets, and that's where we absolutely shine. That's what our value proposition does. We still see supply and demand tightness. I mean, our calendar is full as we look out, so I don’t see any change in my outlook.

Hey, good morning, gentlemen. And Dave, my congrats as well on one hell of a run at Halliburton. Jeff, I know you answered my question already to a certain extent at the end of your prepared comments there. But as we think about new builds in the market, you laid out your three criteria for new build. Are we at those criteria yet, and are you contemplating new builds as we speak besides replacement of increment and new builds?

Yes, look, I am going to go back to what I said on this, James. I'd be crazy to lay out our market strategy in detail here. But I laid out the conditions, which are committed client contracts or commitments from clients, leading edge pricing, and then the ability to generate adequate return. The short answer is we haven’t built anything so far this quarter, but I’d say if the opportunity presents itself, then we have the ability and the capability to quickly meet that demand with Duncan.

Okay, fair enough. And then, Jeff, as my follow-up here, we have seen some additions by smaller companies that are most of the ones that either IPOed or tried to IPO needing to show some growth to do that. But as you look at your major competitors and across the pressure pumping marketplace, do you see much additional or incremental horsepower being added outside of kind of what’s probably the natural attrition in the market?

No. I mean, our view has always been that there would be attrition. We see that, and today our view is that the market is in fact sold out. That's part of the reason we see ducks building and other things. We really have the same amount of horsepower that's been in the market, changed hands in a couple of instances, but with respect to the headline amount of horsepower that was there in 2014, we are well short of that today.

Thank you. Good morning. Jeff, a quick question here for you. Just given the absence of reactivation friction, or at least not as much as in the third quarter, sort of pricing that you are gleaning given the under-supply nature of the frac market and the sense of urgency that you talked about. And yes, there was some wage inflation, but why would incrementals in the third quarter for CMP be better than what they were in the second quarter? Because your guidance implies assuming a low double-digit rate of revenue extension somewhere kind of in the 40% to 45% margin range, and strikes me as conservative based on the fact as you have laid them out.

Well, first of all, I won’t lay all of that out. When we think about what Dave said in terms of tapping the brakes, we see some tapping of the brakes which in my view is better described as going from 80 miles an hour to 70 miles an hour. But it hasn’t limited the ability to push on price. Our guys are absolutely doing that every day. As I said, we still see customer urgency. So we are not losing on price all the time, but I think if we go back to Chris' guidance, I mean that's solid progress, particularly as I described the macro environment we’ve all talked about.

Okay. With regard to the cadence of reactivation during the second quarter. Would you describe those as having been relatively evenly distributed over the course of Q2, front-end loaded or back-end loaded?

I think they were distributed sort of ratably in Q1, Q2. There wasn’t any particularly weighting one way or the other.

Thanks. Good morning. Certainly an impressive quarter to be your last one, Dave, and you will certainly be missed. We wish you well in your new role. My question for Jeff or Dave is on the completion of frac intensity. Is it fair to say that you haven't seen that year peak? And if so, when you think about North American revenues going into 2018 in a flat rig market, should we still see revenues starting to flatten out as well, or could you see some growth in that revenue cadence with the completion intensity? So thoughts on 2018 and its flattening rig market.

Well, Ange, it's too early to call on 2018. What I would say is that we see a solid ramp in terms of ability to execute and deliver on the things that we talked about with respect to normalized margins. We do see currently ducks building; there is back and waiting for activity. Quite frankly, the science continues to drive the business. I think in terms of peak, it’s probably going to be more science-based in the future and maybe less volume-driven.

Alright. Fair enough. And then on pricing and pressure pumping. Thoughts on the outlook for pricing as we go into the back half of 2017 and even into 2018. Have you started to see deceleration in recent weeks? And going back to those flat rig market thoughts on pricing in a flat rig market.

As I mentioned, I won’t disclose our pricing strategy during this call. However, I want to emphasize that we consistently push our prices. Our services are in high demand, especially in a market where urgency and fulfilling targets are crucial for our customers. The high proficiency and technology we offer are extremely valuable in this context. I am confident that we are making progress. We have discussed our advantages regarding competitive pricing, our legacy fleet, and our focus on cost and efficiency. We continuously work on all these aspects.

Hi, good morning. So Jeff, you made a point of emphasis around sand demand perhaps starting to get smarter. But is it fair to say that service intensity likely continues to increase on an average well basis going forward? And how would you characterize the rate of change in overall service intensity?

Yes, the intensity continues to rise both in terms of rate and the number of stages. I’ve always believed that sand is a finite resource and not free. As we begin to impose constraints on sand regarding its availability and cost, it has led to a more rational impact, influencing decisions about its usage and total volume. In my prepared remarks, I mentioned some examples of technology that demonstrate how equipment works harder based on how it is applied. This is just one data point, but it’s something I will continue to monitor.

Absolutely. And I wanted to touch on the acquisition of Summit. Could you give us maybe a little more detail on the expansion strategy for that new business? As you bring about M&A, is there other tuck-ins needed to keep filling up that lift portfolio or can you build up Summit here to really get where you think you need to go?

Yes, thank you, Sean. The Summit deal is an excellent match with exceptional people, which I can confidently say. It has significantly contributed to our artificial lift business. Merging with Summit positions us as a strong second in the US ESP technology market, and we truly appreciate their value proposition. They have a great focus on customer response and have built their systems accordingly to do it effectively. Our strategy moving forward is to leverage our presence to generate even more value, starting in the US and expanding internationally. We’ve discussed mergers and acquisitions previously, and we remain keen on expanding our production group to include all types of lift technologies. I’m pleased with our progress in ESP, and I’ve also mentioned that our approach to chemicals will likely be more organic with less focus on M&A, though we will still pursue some opportunities in that area.

Good morning, everyone. Dave, it's been a fantastic almost two decades. You're not leaving just yet, so we'll catch up outside of the conference call. Congratulations on your incredible journey. Jeff, you made a great observation regarding international pricing. While overall activity is rapidly decreasing, several markets lack sufficient activity to see a significant improvement in pricing. Where do you anticipate seeing international activity rise enough that we won't have to lower our prices and we can start to see a recovery?

Jim, it’s going to be in some spot markets, whether it's a discovery or there is enough sort of base load of activity to move quickly. If I had to guess, there are probably some places in Latin America that might fill that bill. But as far as a broad region, that’s really part of the issue, Jim. It’s like peanut butter being spread around the world, and it gets enough traction in a particular spot. That's what makes it tough. So, yes, I think we are moving sideways for a while.

And in drilling and evaluation, you noted that you had a $150 million increase in revenue but only a $3 million increase in income. That clearly points to price issues. I'm just wondering if you had a seasonal recovery in the North Sea and in Russia. Those are two markets we normally don't associate with Halliburton being leading edge. Were those two of your better markets or your worse markets? Can you talk about just on the drilling and evaluation side? Where do those two markets fit?

Yes, I mean on a relative basis, they are relatively smaller but quite frankly very good markets for us. I really want to give kudos to Joe Rainey and their team who have absolutely executed and built those businesses. So those are businesses that are in my view gaining traction in the DNA part of our business. Better alignment around customers, particularly in Russia today, is very encouraging.

Great. So, Dave, considering all your time on the road, I believe you've earned some downtime. Best of luck with your next venture. Jeff, could you discuss pricing a bit? You mentioned securing leading-edge pricing on your reactivated equipment, but I'm curious about your legacy fleets. I know you’ve been focused on maintaining those relationships. What is the current pricing difference between the legacy and newly available equipment, and when do you expect that gap to close? Will it be by the end of the year, or does it usually take about 12 months to narrow that gap? What are your thoughts?

Look, that's something that is closing, I’d say sort of every day as we work it. But let’s go back to why there is a spread there. It’s because we are aligning with very good customers; they are very efficient, and so we want to be part of their business. We believe we can do a lot to help drive down their overall cost and lower their cost per BOE. That’s why we never abandoned half the market to go move somewhere else. We absolutely want to support all of our customers. So I am not going to give that spread, but I’ll tell you it’s something. As I said in Q1, that we would be closing in on that over four quarters. So look for some time early in 2018 to have that done.

Thanks for the question. Can you tell me what percentage of your current fleet includes the modern Q10 pump? I would appreciate some insights on how this pump affects the useful life of your equipment compared to what else is on the market. You've mentioned attrition before, but I'm curious about how your equipment stands out compared to competitors and why that should influence our perspective.

Yes. So I mean I'd say we are probably in the 60% range for the following reactivation. The important thing about that equipment is that it is built for total cost of ownership. We don’t sell this equipment in the market. Our guys at Duncan are absolutely motivated by one thing: What is the most resilient, efficient piece of equipment? I go out and check to make sure that it's competitively priced, which it is, but the more important thing is cost is what it does for our guys in the field and the way that it is integrated. It runs at a higher rate, uses all the available horsepower, and it is more efficient by about 20% compared to what we see in the market. When I think about how we make the best returns in the marketplace, we always think about how to drive capital off of location, and the first thing to do is have more efficient pumps on location.

Hey, good morning. And Dave, congratulations and all the best. So, Jeff, you run up a very interesting comment a little bit earlier about seeing first quarter here where sand used per well has declined. Wondering if you might be able to elaborate on that a little bit more? Do you sense that as you mentioned that it is truly purely an economic decision? Do you think it's an anomaly? Do you think there is a shortage of sand that's driving it? Just trying to get kind of look for a little bit more color on what you may be seeing?

Look, I think it's really part of the science of frac, and it’s not the other thing; it’s not that customers are running from the economics, but they are making thoughtful economic decisions. As the availability or the applicability of science improves, we collectively understand better how to make more barrels. That gives put to work with a clearly an economic backdrop. What you are seeing is really the nature evolution of, okay, as inputs move up for better ways to get more barrels, and in some cases we are seeing that. This is not across the board, but on an overall basis that was the data point we saw.

Thank you. Regarding the international aspect, you mentioned the spreading the peanut butter analogy, but it seems like there's more concentrated activity happening in several countries in Latin America. Do you believe you could gain pricing power in that region before others?

I won’t go into our pricing strategy, but I can say that Latin America is similar in terms of contract cycles and the typical length of contracts, which generally has a dampening effect. There is a significant amount of equipment available worldwide, and while I am optimistic about that, it’s not enough to alter the overall direction.

Thank you. And Dave, congratulations again; you'll be certainly missed, and your comments will be missed greatly on the calls. My question relates to the Permian sand that's been recently... new capacity additions have been announced, and there is a good chance that prices are going to fall sharply in the Permian for EMP companies there. What impact does that have for pressure pumping companies as sand prices fall in the Permian? Is it neutral, negative, or positive? Also, how do you think about your own investment in trans-loading and rail transportation? Would that change if most of the sand is regionally sourced?

That's great for us and beneficial for our customers. It helps us reduce costs per BOE. I've often explained why we don’t own mines, and this situation illustrates why we prefer not to be tied to certain investments as technology evolves. Our trans-load infrastructure is valuable. The biggest challenge realistically is accessing the Permian Basin, and using local sand creates a new opportunity for reducing costs. We continuously seek ways to deliver sand at a lower price, and I believe our containerized solutions are well-suited for this development.

Okay. Do you see any long-term negative effects related to costs for rail cars or other leased items, either for your company or for the industry as a whole?

No. I mean, that stuff works all over the country and that’s fairly localized solution. I like what we are invested in. We’ve always been careful. Again, we target about 50% of our capacities managed internally. We do that so we can flex with the market, and that’s how I see this.

Thank you very much. And again, Dave, congratulations for the very solid runs at Halliburton. Jeff, question to you again regarding the sand logistics and the changes in completion again. I mean before you highlighted that Halliburton doesn’t really have any interest in owning sand, but once the fork is on the logistics because of the changing nature of the type of proppants preferred. So could you talk a little bit about the kind of capacity thing added at the moment in West Texas, largely some 100 mesh, some 470, and address that in context of other proppants? How do you see the mix evolving, and how does that impact Halliburton?

Well, look, we are largely agnostic to the type of sand. The reality is we study sand closely to understand how to better design chemistry to make better fracs. Cost is always a component of that. We have seen other media sort of go in and out of vogue, and we've got market risk out, which is an NO style solution or micro style solution. So I think that obviously what's being talked about today is consistent with what I hear from customers, but the drive for better science is always ongoing. That’s one of the reasons our labs are constantly looking at how to take what’s available and make it better or to substitute with things that are better. So the reduction that you saw on a per well basis. Was that a function of shortages of sand pricing and therefore forcing the industry to adopt different methods, or do you see this trend continuing even if sand gets bottlenecked? It's just one data point, so I will definitely keep an eye on that. I would say this focuses more on design and what our clients are really concentrated on, which is achieving the lowest cost per barrel of oil equivalent and maximizing production at a reduced cost. They clearly want to create solutions that utilize less sand while still delivering the same or more barrels.

Thank you, Candice. Before we close, there are a couple of points I'd like to highlight. First, our second quarter performance demonstrates the strength of our North American franchise and our ability to adapt to a rapidly changing environment. Second, Halliburton's relative performance for the balance of this year will remain strong as a result of our ability to grow North America margins and maintain revenue and margins internationally. We look forward to talking with you next quarter. Candice, you may now close out the call.