Halliburton Company (HAL) — Q3 2017 Earnings Call Transcript

Good morning. And welcome to the Halliburton third quarter 2017 conference call. As a reminder, 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 CEO; and Chris Weber, CFO. 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 June 30, 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 second quarter fair market value adjustment related to Venezuela. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our third 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 one 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 Jeff.

Thank you, Lance, and good morning everyone. Overall, we had a fantastic quarter, and I’m very pleased with our results. We are hitting on all cylinders just like we said we would and this quarter’s performance is another example of why Halliburton is the execution company. Here are a few highlights from the third quarter. Total company revenue was $5.4 billion, representing a 10% increase compared to our second quarter results, and we generated $1.1 billion of operating cash flow. Once again, we outgrew our peers on a global basis showing that we are taking global market share. Our North American revenue increased by 14%, significantly outpacing the average sequential U.S. land rig count growth of 6%. Total operating income increased 55% to over $630 million, primarily driven by continued strengthening of market conditions in North America and improved profitability in our drilling and evaluation product lines. Our completion and production division revenue increased 13% with 215 basis points of margin expansion, despite the approximately 50 basis point negative impact of Hurricane Harvey. The drilling and evaluation division revenue increased 4% while operating margins expanded by 260 basis points to approximately 9%, demonstrating solid execution in our international franchise. Finally, during the quarter, we completed the acquisition of Summit ESP, which is an important strategic step in building out our production oriented business lines and makes us the number two ESP provider in North America. In August, the Texas Gulf Coast was severely impacted by Hurricane Harvey and our fantastic employees worked closely together to support those in our organization and the entire community affected by the storm. As a result of the weather, we had a few customers temporarily suspend activity in both the Gulf of Mexico and the Eagle Ford. We also experienced increased costs because diesel fuel was temporarily unavailable and reduced efficiency due to sand supply chain disruptions, both of which negatively affected our margins for the quarter. In spite of these disruptions, the sophistication and hard work of our supply chain organization allowed us to quickly adapt to these challenges and continue to execute and deliver superior service quality. Let me take a moment and talk about a few things we said about North America in the second quarter call. We told you the rig count growth would plateau, and that’s exactly what it did. We said our North America sequential revenue would significantly outperform average U.S. land rig count growth, and it did. We told you that our completion and production margins would continue to expand, and they did. We said operators were beginning to optimize as opposed to maximize the use of sand and turn to technology to increase production; this trend held true as we saw average sand per well remain flat sequentially. And finally, we said we would have the highest returns in the industry, and we do as we continue to outgrow our peers and take market share. Now, let me spend some more time on each of these topics. During the quarter, the U.S. land rig count effectively flattened as customers reacted to shareholder input and their own view of market conditions for the balance of the year. However, our revenue increased and we saw improved activity in our completions related product lines due to the natural lag between drilling and completing wells. Today, the industry is drilling approximately the same footage as in 2014 with half the rigs while completions intensity has significantly increased. As the rig count stabilizes, our customers are focused on efficiencies, optimization and making more barrels. These are all things Halliburton does really well, differentiating us from our peers. And I’m pleased with the progress we’ve made this quarter towards normalized margins in North America. Our strategy is working. And as I said in the past, the path to normalized margins begins with customer urgency, and I still see that urgency today. We have three levers to achieve our margin goals. And they’re, one, increasing pricing; two, improving equipment utilization; and three, structurally reducing our costs. Increasing pricing is important, but it’s just one component we can leverage to reach our goal. Ultimately, we will utilize a combination of all three levers to return to normalized margins. All three levers are important, and the great thing about Halliburton’s scope and scale is that we have the ability to pull on them all in a meaningful way. And you know Halliburton is the execution company. We’re going to pull these levers as necessary to get to our normalized margins. The North America completions market remains tight, and we continue to push pricing across our portfolio every day. Demand for our completions equipment and service quality remains strong. The improving oil price outlook provides runway for us to increase our portfolio pricing as we go forward. So, let me be clear; we still have the ability to push price. Equipment utilization comes in a couple of forms. First, it has to be working; and second, it has to be working for the right customers. Our fleet is sold out for the remainder of the year and into 2018. We continue to place our equipment with those customers who know how to effectively and efficiently use us to increase their productivity, which improves our utilization. As for reducing costs, we continue to remove unnecessary costs from our company. It’s also critical that we save costs and increase utilization through the use of technology. Our wellhead ExpressKinect unit is a perfect example. This equipment allows us to increase our utilization by switching wellheads faster and more safely when doing zipper-frac operations. As a result, we’re able to reduce the number of people on location and improve our equipment efficiency. Let’s now take a minute and talk about a few topics that I hear frequently debated in the market. The first is sand. During the third quarter, total sand volume for Halliburton continued to increase, but our average sand per well remained sequentially flat. Data points from the last two quarters and my discussions with customers indicate customers are focused on cost-effective production. They hear a lot of conflicting anecdotes about sand used today because they are based on individual operators and individual basis. But the facts are, for Halliburton, sand per well was down in the Bakken, Rockies and Northeast, and it was up in the Permian Basin. This happened because customers that know the production characteristics of the reservoirs have streamlined their operations to focus on cost per barrel of oil equivalent and are optimizing sand utilization. Conversely, those customers that are still drilling the whole acreage or exploring production boundaries at their reservoirs are continuing to pump jobs with higher sand loads. At the end of the day, Halliburton benefits from both scenarios. The second topic is supply and demand for pressure pumping equipment. Now, first, let me be clear. I believe the market is undersupplied today. At the same time, equipment is being used harder and maintenance costs are higher. As a result, there will be a greater call for new equipment just to replace the active equipment that’s being worn out more quickly, meaning the day when supply and demand come into balance is further out than people think. Now, I believe companies that are not making money will struggle to build new equipment beyond their current fleet, take-or-pay commitments, as they work with constrained budgets and struggle to find capital to fund further purchases. You see many announcements of new fleet deployments, but no announcement of fleet retirements. But, I can tell you, they are happening. Next, completions intensity is not slowing down. We are pumping more sand with less equipment, and as a result, the maintenance costs associated with today’s completion designs are increasing. The design of our equipment gives us an advantage over the market. We have even seen an increase in maintenance costs. I believe deferred maintenance is happening throughout the industry. A proxy for deferred maintenance and the simplest place to see it is in the industry and horsepower creeping crew size. Now, while Halliburton continues to operate with an average fleet size of 36,000 horsepower per crew and have for the last several years, the rest of the industry is now averaging closer to 45,000 horsepower per crew. Deferred maintenance is creating this equipment redundancy on location. The bottom line is that Halliburton has the advantage to respond to customer demand by bringing less equipment to the well site and designing our equipment to require less maintenance cost. As a follow-up to that point, I said last quarter, I’d be crazy to talk about new build equipment in detail terms, and this remains the case. But, what I said has not changed. We are, first and foremost, a returns focused organization. And we will only bring out new build equipment under certain conditions. And those conditions are, one, backed by customer commitment; two, capturing leading-edge pricing, which is accretive to our margins; and finally, three, it generates acceptable return on investment. Turning to the international markets. Outside North America, our more conservative outlook for the last several quarters is proving accurate. Our customers around the world have different breakeven thresholds and production requirements that all face the headwinds of the current commodity price environment. 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. In contrast to North America, where we believe that a $50 oil price drives significant activity, customers tell me the longer duration international markets will react less to absolute oil price but more to a positive view of where price will be for several years. This isn’t surprising, given the longer investment cycle that many of our customers face. I believe that we found a floor in the international rig count earlier this year. However, due to the longer term contractual nature of international markets and the level of continuing price pressure, I expect discounts will offset activity gains over the near term. In this environment, we have to execute and maintain margin by controlling costs. Our international organization is committed to making the toughest of markets sustainable and has continued to rightsize the business during the quarter, demonstrating impressive control over their costs. In addition, customers embrace the way we go to market. We collaborate in engineered solutions to maximize asset value for our customers and it is paying off. In the eastern hemisphere, we achieved a modest improvement in activity in the third quarter but the landscape remains challenged. Pricing pressure and cost cutting remain major themes, and the use of technology to lower the cost per BOE is ever more important. Our products service lines continue to deliver technology that drives our value proposition, maximizing asset value. The Middle East remains our most active international market with the largest part of the work focused on mature fields. Among many important technologies deployed in the region, I’d like to highlight our CoreVault system. This system effectively stores sidewall cores with up to 2.5 times more oil and gas than previously. This additional reservoir characterization and an effective means for doing so allow our customers to make more barrels and reduce costs. In the Middle East, we continue to build on our leading position in project management because of our ability to work closely with our customers and deliver superior service quality. Our most recent contract win is a project to deliver over 300 wells in Oman, and we’ve seen increased project management activity in this region, allowing us to showcase our services and technologies that reduce time and cost on a project. We have seen significant market share growth as we have a proven execution track record and deliver better wells for our customers. In the North Sea, this year has been about reducing production costs through standardization and technology optimization. We have the technology portfolio to solve our customers’ problems from single density, variable slurry cement that can be used for all sections of the well to our data sphere array monitoring system that due to its modular design provides customized reservoir monitoring. We help structurally reduce costs by decreasing the time to drill and complete a well or by producing more barrels. What’s most important to point out is how we collaborate with customers and together we create terrific results. Another example is in the North Sea where our ruthless focus on service quality, collaboration with the operator and rig contractor, driving efficiency on critical path items and responding to customer insight has led to record-breaking performance on a multi-well integrated services contract. This project is truly a collaborative effort, and through the collective thought and execution of the team, they’ve been able to reduce the time to finish a full year scope of work by over 165 days, saving over $170 million. The improved efficiency came from two areas, technique solutions for record-breaking performance and collaboration where our commercially aligned team coordinated collaborative planning and execution. Latin America saw a slight rig count growth in the third quarter, driven by increased activity in Argentina, Mexico, and Brazil. While activity is improving, the pricing pressures across the region make it increasingly important to be efficient as we execute. This quarter in Mexico, we designed and ran a special drill bit to help tackle a particularly difficult reservoir. This design reduced the necessary runs in hole, resulting in a three-day reduction in rig time. This example shows that even in a tough pricing environment, there is an appetite for new technology, especially if there are reduced costs. Finally, in recent days, commodity prices have experienced a modest rebound, as we have seen some signs of tightening in the macro supply-demand picture. However, I still believe that the oil and gas industry will largely remain in a range-bound commodity price environment in the near to medium term. I am confident that Halliburton has the right strategy. In this environment, we’re focused on returns and capital discipline. In this type of sustaining market, I expect that our capital spending should be approximately aligned with our depreciation expense. Our working capital should continue to improve over time as our day sales outstanding declines to traditional levels, and our free cash flow conversion should be in line with or exceed our peers. To deliver these metrics, we’re focused on maximizing asset utilization, improving working capital velocity, and capital discipline. When I take all of those together, I am confident that we will generate solid free cash flow in today’s market environment. Pure and simple, Halliburton is proud to be a service company, and we believe our investors and customers appreciate that. I am confident that we’re working on the right things that create the most value and generate the highest returns. Our strong competitive position is not only a function of geographic footprint, but it’s also the depths of the products and services that we provide to our customers and use to generate industry-leading returns for our shareholders. Now, I’ll turn the call over to Chris for a financial update.

Thanks, Jeff. Good morning. I’ll start with the summary of our third quarter results compared sequentially to our second quarter results. Total company revenue for the quarter was $5.4 billion, representing an increase of 10% while operating income was $634 million, an increase of 55%. These results were primarily driven by increased activity and pricing in North America. Turning to our division results. In our completion and production division, third quarter revenue increased by 13% while operating income increased 32%, primarily resulting from improved activity in pricing throughout North America land in our pressure pumping, completion tools and cementing product service lines. On the international side, increased completions activity in the Middle East and the start of new contracts in Brazil improved results. In our drilling and evaluation division, revenue and operating income increased by 4% and 44%, respectively. These increases were primarily due to increased drilling activity in the Middle East, North America and Latin America. Globally, we saw sequential improvement in all of our drilling and evaluation product lines. Let’s take a minute to review our geographic results. In North America, revenue increased 14% sequentially, driven by increased utilization and pricing throughout the United States land sector in the majority of our products service lines, primarily pressure pumping as well as higher well completion and pressure pumping activity in Canada. In Latin America, we saw revenue increase by 4%, primarily driven by increased activity in Argentina, production group activity in Brazil, and increased drilling activity in Mexico. These results were partially offset by reduced well completion activity in Venezuela. Turning to Europe, Africa and CIS, revenue increased 6%, primarily due to improved utilization in the majority of our product service lines in the North Sea and improved drilling and well completion services in Russia and Nigeria. The results were partially offset by reduced activity in Angola. For Middle East/Asia, revenue increased 3%, primarily as a result of increased activity in the Middle East and project management activity in Indonesia, partially offset by reduced activity in pricing across Southeast Asia and lower project management activity in Iraq. Our corporate and other expense totaled $71 million in the third quarter, and we expect our fourth quarter will be comparable to this quarter. As a function of our reduced debt balance, we reported $115 million in net interest expense for the quarter. Looking ahead, we expect net interest expense for the fourth quarter to remain at a similar level. Our effective tax rate for the third quarter came in at approximately 27%, slightly lower than expected due to variability in our earnings mix. For the fourth quarter, we expect the effective tax rate to range between 27% and 29%. Cash flow from operations during the third quarter was approximately $1.1 billion. Providing some color on our near-term operational outlook. As is typical for the fourth quarter, a combination of weather, holidays, budget constraints, and year-end sales make forecasting a challenge, but this is how we see it playing out right now. Similar to prior years, we expect our U.S. land results to moderate in the fourth quarter due to the holidays and lower efficiency levels experienced in the winter months, particularly across the Rockies and Northern U.S. In our international business, we believe the typical seasonal uptick in year-end product and software sales will be lower this year versus traditional levels as customer budgets are largely exhausted. Given these factors, in our drilling and evaluation division, we expect North America revenue will change in line with the average U.S. land rig count while international revenue will increase by low-single digits. For our completion and production division, we expect that our North America revenue will outperform the average change in U.S. land rig count by several hundred basis points while international revenue will increase by low single digits. We expect the operating profitability for both of our divisions to increase marginally in the fourth quarter.

Thanks, Chris. In closing, there are few things I want to highlight. First, I am very pleased with our third quarter results. I want to thank each of our employees for their hard work and commitment to execute at every turn and deliver Halliburton’s value proposition. These results clearly demonstrate the strength of our franchise and our ability to adapt to any environment. Second, Halliburton’s relative performance in 2018 will remain strong as a result of our ability to grow our North America revenue and margins, and improve our position in our international businesses. Finally, our strategy is working and we intend to stay the course. We are focused on delivering superior execution for our customers and achieving industry-leading returns and cash flow conversion for our shareholders. Now, let’s open it up for questions.

Hey, good morning, guys.

Good morning, James.

Jeff, for the first time, I think I can remember that your earnings met or if you exclude some of the Harvey impact, they match Schlumberger’s, which is pretty impressive I think. What part of your strategy would you attribute that to?

Thanks, James. Look, our strategy is pretty simple and very executable, and it’s to be the best service company. And that means we focus on leading returns, margins and revenue growth, and along with that technology, directly focused on returns, collaborating with our customers, the strong BD group, and then delivering service quality. I think that returns focused, I mean that is our strategy and is working.

Got it. And then a follow-up from me to a comment that you made towards the end of your prepared statements. It sounds like spending within or spending levels, CapEx hitting level that depreciation would be really just sustaining CapEx, so little kind of growth in PP&E. Can you perhaps discuss the discipline here on your side with respect to adding equipment to the market?

Look, when we look at the market as it’s playing out, I think we have what we need to execute. And as I described, what we see in front of us in terms of activity as I described international, described North America, I think at that sort of pace, then we ought to have a business that returns solid cash flow from that kind of market. And so, when I’ve described those types of parameters it’s to describe what we see. And you know again, focused on returns means that we are very efficient and we drive a lot of velocity with the equipment that we have, utilization, things of that nature, and spend a lot of time talking about that. But that is, in fact, how we see generating a lot of cash flow.

Yes, thanks. Good morning, Jeff. Staying on the pressure pumping side just for a second here, your strategy in downturn is to gain share and stimulation. You talked about all your equipment deployed. So, I guess, I’m wondering right now, does pricing out there currently support new build economics? It seems like we’re in another one of those crossroads between maximizing returns or continuing to protect share. Can you discuss your thinking, please?

I believe that our focus will always be on returns. Obviously, we need market share to enhance volume and scale, which is where efficiency becomes more significant. Regarding the building question, I will reiterate what I've mentioned over the last few quarters: we must meet client needs, set competitive pricing, and ensure satisfactory returns. However, there is considerable potential in utilization, and improved market share often stems from better utilization. Therefore, I feel that the number of strategies available to us in the market is underestimated when viewing this situation as black and white.

Thanks, Jeff. Kind of a different question, more strategic question, back in September, you talked about how HAL is not interested in financing E&P projects. It’s been a subject, something up quite a bit lately. Can you update us on your thoughts around performance based contracts and is there any desire on Halliburton’s part to invest in these types of projects alongside your customers?

Yes, thank you. We refer to this as integrated asset management, which is fundamentally a question of capital allocation; it involves deciding where to invest our capital for the best returns. Alongside achieving better returns, I believe a crucial factor is asset velocity, which is essential for delivering returns to shareholders. Therefore, we won’t be tying up our cash in projects that we believe will have longer durations and potentially lower returns. We have made some smaller acquisitions and explored this area, and when we proceed, we will use other people’s capital to sustain those types of returns.

Thank you. Good morning. Jeff and Chris, I wanted to comment on your positive observations regarding visibility and the continued strength in pricing and tightness in the frac value chain. What should we anticipate for incrementals moving forward? In Q3, C&P was in the low 30s, typically indicative of volumetric incremental ramps in pricing, and I understand there was some impact from Harvey. In the current market we expect, while not extremely active, still tight with pricing supporting your utilization, you mentioned that there is room for improvement. Should we not expect incrementals to be higher than what we saw at the end of the third quarter?

Yes, this is Chris. We’re not giving guidance on incrementals. We’re focused on margin expansion. We talked about margin improvement and our profitability. When we look at the pace that we’re at, I mean, we got almost a thousand basis points of margin expansion in few quarters of C&P. And Jeff spent a lot of time talking about the path towards those normalized margins, the levers that we have to pull. So, we’re confident of that path. Now, remember C&P is more than just frac and P&E in North America. We’ve also got our production business lines; we’re investing in those business lines, looking to grow in line with that Summit acquisition. So, there are other elements of that, but we feel strongly about that path with the levers that we have to pull that Jeff laid out.

Okay. And if we could drill down on pricing just a little bit more. I guess the narrative, industry-wide coming into this quarter was that leading-edge pricing was still supportive of new build economics. But slope of the event that we witnessed year-to-date was flattening, not flattened, but flattening, and there was still continued convergence between leading edge and legacy pricing. Is that a fair summation as to where pricing stands today?

Yes. Bill, I think that’s reasonable. Our guys push price all of the time. And so, maybe not accelerating the way it did in the spring, but still opportunity and momentum in North America. I think if we look at Q3, a bit of a cause just as commodity prices bounced into the 40s, but we talked about, first and foremost finding the right customer to drive efficiency, and it doesn’t change the demand for our services today, and along with that comes ability to move on price.

So, I appreciate the color on returning to normalized margins for North America. And maybe you could provide a little bit more about two of the levers, right, utilization and cost cutting, a little bit more color there on how much more you think you have to be done on utilization side as well as on the cost cutting, and maybe even a little bit about the timeline on how much we could see that clearing into 2018?

Well, I think if the question’s around the path to normalized margins, I’ve always said, it starts with customer urgency. We see that, calendar power being also important in terms of driving utilization and working with the efficient client. In terms of how far there is to move, each of those levers has a fair amount of ways to move. I won’t give you the specifics, but it’s one of those things that we work every day. But it’s the precision around, for example, what happens on location being able to measure all of those steps. And again, the measurement scale is a bit of a different matter. But, what’s special about that is that now when we make changes and drive efficiency, again driving better utilization, we can drive across just a fleet at a time. From a cost perspective, we’re constantly working that. I’ve talked about our continuous improvement being one of the pillars of our strategy but really, Angie that’s what we do to systematically drive cost out of all of the components of our business. And oftentimes that includes technology; I referred to some of that in my script. But, it’ll also be technology that takes all kinds of forms, some is customer-facing, a lot of it internally facing, so that all of that value accrues to us in terms of reducing costs. I hope that helps.

Yes. That does help. I appreciate that. And then, as an unrelated follow-up. Maybe you could talk a little bit about your fleet today and just as a reminder, how much of your frac fleet that’s in the field today is Q10 versus legacy assets and just thoughts on the life of those assets and replacement or upgrades over time?

Thanks, Angie. That’s likely about 60% of the fleet being Q10 right now. A few years ago, we made a significant effort to retrofit the fleet with Q10, and we don’t face the same requirements today. When discussing capital, this is why I feel confident about the capital progress we’ve outlined in this market since there’s a natural replacement that occurs over time. I will address that with Q10s, but I don’t expect it to resemble what you may have observed in the past. The Q10s have performed well, and we are still entering the market with significantly less horsepower compared to competitors. Considering the industry's pace of replacement, I believe we will greatly exceed that, which will reflect positively in our returns.

Thanks. Good morning. I would like to follow up on Angie’s question. You mentioned the three levers you have to reach normalized margins. I’m interested to know if one of these levers is currently a more significant driver than the others, or if they are all relatively equal, or if one is expected to have a greater impact. Additionally, can you provide any insight on the timing for achieving that level? Is it still a realistic goal for 2018?

Yes. Short answer, yes, Jud, on to get there in 2018. The pulling on the different levers, you know us; we’re going to pull every lever we got. But those are the big levers that when we pull them, have the more meaningful impact. So, I’m not going to break one above the other necessarily, actually all three of them are very powerful. And we’re working on this.

Okay. That’s fair. My follow-up question is about the strategy on artificial lift and the production side of the business that you mentioned in your prepared comments. Is the strategy to grow the Summit platform across Halliburton's global operations, or do you see other opportunities that could complement Summit in both production chemicals and artificial lift?

Thanks. The opportunity for us to grow in production aligns well with our strategy of collaborating on engineered solutions. The addition of Summit has been great, and I want to recognize our new employees from Summit, as it is an impressive and scalable business. Our plan is to expand that beyond the U.S. to our international operations, and those efforts are already in progress. Regarding chemicals, I anticipate that growth will be more organic rather than through acquisitions, though there may be some small additions in that area. Our team is diligently working on this every day, and I believe we will systematically build it out and provide updates from time to time as it evolves, though not necessarily every quarter, but we’ll offer more insights as it continues to develop.

The biggest issue, of course now we’re talking about what 2019 earnings are going to be, but for the last several weeks, you had an oil price high enough that E&Ps have been hedging. The head of Total mentioned at a London conference that U.S. E&Ps have been hedging like crazy. You guys have a little bit of visibility into 2018. I realize your customers really haven’t set their budgets yet. But, the discussions that you are having, are they more constructive now than they were before? Can you give us what little outlook you may be able to have for 2018, as we sit here today?

Yes, our board is engaged through the first part of 2018, and I likely speak to fewer customers than my business development team, with whom I have daily discussions. We are having positive conversations about 2018 and encouraging discussions. The $50 oil during the planning cycle is beneficial, and this is an ideal time for planning. They are absolutely preparing for next year, and hedges are being established. When we engage with our customers, we prioritize listening to them rather than lecturing, which allows us to understand the messages they receive from their stakeholders. This is crucial because my personal discussions vary; some focus heavily on returns, while others are interested in the properties they currently hold due to shareholder interests. Ultimately, we aim to serve both customer bases, and I feel optimistic as we approach 2018.

That’s positive; I’ll take that, good. Second question if I could. Jud mentioned artificial lift; we all know Dover is in the market. Your balance sheet is a little over-levered. Can you talk about what the plan is Chris, maybe through 2017 and through 2018 in terms of balance sheet ratios and freedom to do deals?

Yes. So, I mean, just in terms of the balance sheet and we’ve talked about the desire to further delever. I mean, we retired the $1.4 billion earlier this year. We’ve got a maturity in August of next year, $400 million that we plan to retire. We like to see our credit metrics normalize, debt to EBITDA under 2.5 times, debt to cap moving back into 30s and so focused on working towards those metrics.

And Jim, I’ll just add the discussion around. Production and some of these things is part of what makes that C&P group a big group, and there are a lot of moving parts in there.

I wonder if you could talk a little bit more about any future improvement, international in particular, your comments on taking market share, if you can elaborate a little bit on how and where you have been doing that and if you have further rightsizing internationally?

Yes. Thanks, Tim. I think that team absolutely executing in the marketplace. I think we are taking share by virtue of the performance that we saw this quarter and we’ve seen for several quarters. But, I think probably what’s more important when we think about international is I think we have a more realistic view what that market is. For example, we’re seeing more activity or at least signs of activity in the form of FIDs and things. But those are not tenders; those don’t convert the service revenue quickly. We did find the bottom, but I think that those are very competitive markets with a lot of visibility around the activity in those international markets. And so, I do believe that the pricing pressure will persist and likely offset a lot of the gains that you might expect from that kind of activity, particularly as we go into 2018.

Okay. So, rightsizing may continue there, it sounds like?

Yes. And I think that’s just part of a process. It’s a combination of our continuous improvement activities where we’re consistently looking at technology to drive cost out. But, it’s hard; it is taking those things and turning it into how do we operate at a lower cost point. And I would say that that team has done that consistently. That’s not a projection. They will just manage all the levers that they have to manage.

I would like to follow up on Harvey to see if there are any ongoing effects heading into the fourth quarter, and whether that has influenced the third quarter.

I think that’s behind us at the end of Q3.

Jeff, I wanted to start with your digital transformation strategy. I think Halliburton is doing more than many investors realize. Can you discuss your broader strategy around this effort, such as the OpenEarth initiative, the Microsoft alliance? And importantly, are E&Ps more willing to share data in the credit environment or how do you work around the reluctance to share data if not and still deliver value enhancing tools?

Yes, I'm very excited about our strategy, which we've clearly outlined. At its core, it is an open architecture strategy that simplifies usage for customers. Competition around data among customers will always exist, and they are increasingly scrutinizing their own data ownership and control. I anticipate they will seek to have more control. It is quite competitive for our customers. Therefore, we want to ensure we provide the right set of tools that they can effectively utilize. These tools are designed to be adaptable to meet their needs. I would describe it more as a platform and a philosophy rather than just tools. For instance, our collaboration with Microsoft allows us to leverage significant investments in research and development and cloud solutions that will assist our customers. Additionally, we are very focused on returns. When I reflect on our activities, we are intentional about where we create value and what it demonstrates to us, rather than spreading our efforts too thinly across the industry.

Got it, appreciate the color. And unrelated follow-up on the domestic frac market and the sand per well trend. What are you hearing from your customers regarding their potential response to falling sand prices as the new local Permian mines come on? Do you anticipate them using more sand per well? Does that uptrend begin to anew? Do they simply go out and drill more wells, which you may hear about through in discussions around fleet expansion? How do you think they respond to falling sand prices, particularly in the Permian?

I believe that the initiatives we are implementing will lead to reduced costs, providing our clients with greater flexibility. However, I think the more significant factor in the Permian region is that operators are gaining a better understanding of the reservoirs and how to optimize production at a lower cost per barrel of oil equivalent. This is why I've highlighted the Permian as a region where we see an increase in sands used per well. This reflects a market that is evolving through knowledge rather than purely optimization, which aligns with the careful investment strategies of our customers. When they choose to increase their activities, it's for strategic reasons. In West Texas, we see that operators are starting to better understand the reservoirs, while in other regions of the country, optimization is more prevalent. I do expect that this will lead to more available cash for further projects, which is certainly a positive development. However, I wouldn't rule out the possibility of optimization occurring in West Texas at some point as well.

Good morning, Jeff. So, quick question on the C&P margin side. It came a little bit light of market expectations. Can you talk about what you are seeing as potential bottlenecks on the U.S. completion side and if they had an impact in 3Q?

I think as I described earlier specific to margins in C&P, we are making investments in other things, like production group is in that group. And so, there is more going on in that than purely North America frac. But, as it is a different question in terms of what kind of bottlenecks do we see, obviously, the Hurricane drove some bottlenecks here and across the country. I think that as mines come on, a lot of the bottlenecks you hear about around sand get alleviated. Again, when you have a bit of a differentiated view to those things given where we are and the fact our ability to buy at scale, particularly with respect to sand, but then equally around people, again, we talk about people lot and our ability to hire at the national level for people, I think gives us a differentiated position as we view those bottlenecks.

Okay. And the guidance for 4Q on the margin side, you said profitability will be marginally better in 4Q. Was that percentage margins or an absolute margin dollar when you said marginally better?

Percentage margins.

Okay. So, the last one, on the three levers that you mentioned with pricing utilization and cost reduction, how close are we to optimizing each of these levers?

A plenty of room to move on all three. I mean that’s what we do every day; we’re always working on those.

So, Chris noted in the marginally better margins, but on the D&E specifically, trying to get a better sense of sustainability of that 3Q run rate, given pricing remains pretty challenging internationally, activities up but not dramatically. Could you give a little more context with that move in the margin to give a sense of the look forward?

If the question is whether there are any one-offs included, the truth is that there aren’t any; that group is performing exceptionally well, and I would say they are systematically reducing costs. They are securing the necessary contracts and we are continuing to integrate technology into the D&E group, which I believe is proving beneficial. I think there is still significant potential for growth there. However, the progress will likely come in stages as we move into next year.

Thank you for that, Jeff. That's helpful. I would like to follow up on the expansion plans for production and Summit. How do you view the strategic choice of owning assets compared to partnering with Halliburton to extend your global reach?

With respect to production specifically, we will invest in areas where we can uniquely drive value; in situations where we can't, we will look to partner. This aligns well with the strategy we are currently executing. Generally speaking, we are not hesitant to pursue partnerships with companies that operate in areas we are not interested in, as these can be part of the value chain. We have shown the ability to do this effectively. For instance, we work closely with rig contractors and have achieved significant success in our project management business, leading to lower costs and better returns for both us and the rig contractors compared to what we would see if we were jointly investing.

I was wondering if you can give us an update, generate significant amount of cash and maybe kind of run through the priorities on that cash again for us between growth, dividend, buying back stock. And when you think about the growth dynamics, where would you be directing that? It sounds like North America, but just looking for some color on that.

Yes, this is Chris. I’ll take that. As I mentioned earlier, in terms of use of free cash flow, we are still focused on debt retirement and we have the $400 million maturity next year that we intend to pay off. We’ll consider growth opportunities, both acquisitions and organic, and want to be value accretive, generate industry-leading service company returns, and that’s in terms of absolute level and the speed with which we realize those returns or short duration or rapid payback. And after that, we’ll look at returning cash to shareholders and considering both dividends and share buybacks.

Okay, great. And maybe follow-up to one of the prior questions when you kind of talk about your three levers, trying to get back to normalized earnings. In your mind, Jeff, which one of those three would probably carry the most weight in 2018, as you see it right now?

We’ll have to see when 2018 arrives, Kurt. We utilize all the available options, and I invest equal time in each of them. To echo Chris’s earlier point, we’ve made significant progress over the last two quarters, and we will continue to leverage all of those strategies as we head into next year.

Yes, and this is Chris. Like we said, we’re on the path, fourth quarter with the seasonality and weather, holidays, customer budgets, I mean, obviously not representative of what that normal path looks like, but with the margin guidance, the revenue guidance that we provided, we think that’s generally aligned with consensus estimate.

Okay. Thank you, Shannon. Look, I’d like to wrap the call up with a couple of key takeaways today. First, the third quarter results demonstrate the strength of our franchise and the effectiveness of our strategy. I thank all of our employees for their commitment to execution. Finally, I expect Halliburton’s relative performance in 2018 will remain strong as a result of our ability to grow North America revenue and margins and improve our position in our international businesses. So, I look forward to talking with you next quarter. Shannon, you may close out the call.