Halliburton Company (HAL) — Q4 2017 Earnings Call Transcript

Good morning. And welcome to the Halliburton fourth 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 today 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 September 30, 2017, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or publicly update 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 those items which are detailed in our fourth quarter press release. Additional details and reconciliation to the most directly comparable GAAP financial measures are also included in our fourth quarter press release and can be found in the investor download section of 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. Outstanding execution resulted in an excellent fourth quarter and we are in a strong position to take care of opportunities presented by a growing North America market and improving international conditions. 2017 was a dynamic year for the oil and gas sector that marked another step on the road to recovery for our industry. I am pleased with the way our Halliburton team executed our value proposition, maintained strong service quality, generated superior results and industry leading returns. I’d like to thank the outstanding employees of Halliburton for their hard work and focus throughout the entire year and for a tremendous fourth quarter. I am very excited about the way 2018 is shaping up. Commodity prices have moved up. North America unconventional activity should be very busy, international markets are starting to show signs of life and our value proposition is resonating with our customers. I will address each of these in a few minutes. But first, I want to recap the highlights for the full year and fourth quarter. During the course of 2017, we grew our market share, generated industry-leading returns and outperformed our peers across every region. We accomplished this by aligning with customers in the fastest growing market segments and collaborating in engineering solutions to maximize their asset value. Total Company revenue grew 30% and adjusted operating income tripled, finishing the year with total Company revenue of $20.6 billion and adjusted operating income of $2 billion. In North America, we told you, we would win the recovery and we did. We recognized the changing market before anyone else, moved more quickly to reactivate equipment, maintained historically high market share, raised prices and captured key customers before others could; a pretty tough task to pull off, but we did it. Our international business began to show signs of recovery in the latter half of the year, driven primarily by improved performance in the Middle East, the North Sea, and Latin America. Finally, we generated approximately $2.5 billion in operating cash flow and retired $1.4 billion in debt. A few highlights for the fourth quarter: We finished the quarter with total Company revenue of $5.9 billion and adjusted operating income of $764 million, representing a sequential increase of 9% and 21%, respectively. Our Drilling and Evaluation division delivered a strong quarter, achieving nearly 50% incrementals, reflecting improved drilling activity in multiple regions and year-end software sales. As I've said many times before, we are much more than a completions company. Our Completion and Production division revenue grew 8% sequentially, once again outperforming the change in the average U.S. land rig count. We increased our cash position by $440 million in the fourth quarter, demonstrating our commitment to capital discipline and efficient working capital management. This quarter demonstrates the strength and diversity of our portfolio. We have the leading position in hydraulic fracturing, which is clearly important. However, the results this quarter highlight the value of Halliburton's position as a multidisciplinary, integrated service provider with industry leading cementing, completion tools, drilling fluids, drill bits, software product lines, and much improved positions in artificial lift, directional drilling, and wireline. Geographic diversity is also a key component of our strategy, and our international business proved resilient. Middle East activity was consistent throughout 2017, with areas like the North Sea and Brazil coming on strong in the second half of the year. Our geographic diversity provided stability through the cycle and rounded out this quarter's excellent results. In the fourth quarter, our Completion and Production division margins were impacted by two expected transitory headwinds in North America, seasonality and cost inflation. We anticipated that year-end would present some spotty activity caused by holiday schedules, weather, and exhausted customer budgets. The frac calendar remained full due to the tightness in the overall market, but it came at a higher cost due to the increased idle time and mobilization required between jobs. I would rather serve our customers and capture revenue with temporarily lower margins than lose the revenue entirely; that is what our world-class business development organization allows us to do. During the fourth quarter, we also saw cost inflation in sand and trucking. The price of sand escalated over the last few months of 2017, but I believe that increasing sand capacity, particularly from localized mines combined with our supply chain strategy, will reduce costs throughout 2018. Trucking is tight across North America and is particularly challenging in areas like the Permian where activity is strong and locations are remote. We believe our increasing use of containerized sand will help mitigate trucking inflation by reducing the required trucks per well site and demurrage. Now, these headwinds were anticipated, are transitory, and are not a surprise considering where we are in the cycle. Now, let's talk about 2018. To remove any doubt, I am confident that we will achieve our normalized margin goals and here is why. As I've stated before, we have three levers to pull in order to achieve normalized margins, and they’re working. All three levers are important, and the great thing about Halliburton’s scope and scale is that we can pull them all in a meaningful way. Halliburton is the execution company. We are going to pull these levers to reach our normalized margins. The first lever is pricing. The North American completions market remains tight and we are sold out. Therefore, we continue to push pricing across our portfolio. Improving oil price and demand for equipment provides a runway for us to continue to increase our pricing through the first half of the year. The second lever is utilization. Equipment utilization is very impactful for a company of our size. 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. I can tell you that customers rapidly returned to work after the holidays, and we expect improved utilization to drive margin growth. Finally, the third lever is technology that reduces costs and increases efficiency and production. We use our continuous improvement initiatives to focus on designing technology that meets market demand and reduces costs for ourselves and our customers. A great example of this is Snapshot, our digital tracking and analytic system for our hydraulic fracturing equipment. With Snapshot, we can assess what every piece of equipment is doing every moment of the day. This big data application allows us to optimize operations, reduce downtime, minimize maintenance, and compare the efficiency of completion designs. We’re able to compare operations across basins and countries to achieve optimal results from our fleets. These levers, combined with superior service quality, allowed us to triple our margins in C&P since the fourth quarter of 2016. I believe the effort, economics, and enthusiasm that I see today puts Halliburton well along the path to 20% margins in 2018. Now, let’s talk about new builds for a minute. We have a set criterion; it is return driven, and we follow that criterion. That criterion was met in the fourth quarter, and we delivered a handful of spreads to the market. This additional equipment, along with our existing equipment, maintained market share, improved our margins, and generated industry-leading returns. So, let’s get some perspective. We still have less equipment in the field than we did at our peak in 2014. I’m committed to leading returns. We build our own equipment; we manufacture faster, cheaper, and with less lead time. Most importantly, this allows me to make discrete decisions, and I’ll do it through the prism of achieving leading returns. You trusted me to do this in the fourth quarter; you got leading industry returns. My plan is to do this going forward. Bottom-line is, I’m excited about 2018. The supply and demand dynamic is correcting and commodity prices are improving, supporting activity around the globe. Our strategy resonates with our customers. This helped us navigate the downturn and, more importantly, positioned us to win a recovery domestically and abroad. I believe that the U.S. land market will be very busy in 2018, and that demand for horsepower will continue to grow. Rigs continue to get more efficient, but more importantly, completions intensity continues to grow with longer laterals and tighter spacing. As a result, I believe that the rig count to frac spread ratio has narrowed such that today, this ratio is nearly 2 to 1. Consider that for a moment; it has gone from 4 to 1 to 2 to 1 in four years. Tightening rig to spread metrics ignore the impact of increased wear and tear on equipment; there is no doubt that today's industry horsepower is working harder than ever before and that the pace of degradation is increasing on active equipment. The impact of wear and tear on the working fleet is demonstrated by the industry's rise in average horsepower per crew. Today, the industry is forced to employ redundancy measures to mitigate non-productive time on the well site. We know this is happening because we see customers pushing our competitors to bring spreads of 45,000 to 50,000 horsepower to a job while Halliburton remains at 36,000. As a result of drilling efficiency, completions intensity and equipment degradation, I am confident the market will remain tight in 2018. We're using local sand with a few customers in the Permian; I believe this will become an increasing trend as additional capacity is activated. Therefore, sand costs should go down in 2018 as regional sand mines come online and capacity is increased. We have contracted with multiple suppliers to optimize our value proposition and maximize our logistics plan in areas where local sand makes sense. This will not happen overnight, but we are working with our customers and suppliers to ensure that we can provide desired profit at a reasonable cost. As for the international markets, I am encouraged for the first time in three years. Green shoots are appearing in the form of more tender activity and constructive conversations with customers. It's great to hear the change of tone in our discussions with our customers and to be able to work collaboratively with them to create solutions that overcome the challenging economics. While we expect activity to gradually improve throughout the year, an overcapitalized market, pricing pressure, and concessions that have been given throughout the cycle need to be unwound. As a result, I believe the market will improve this year, but the recovery will be choppy. Our strategy is working and winning. A recent example is our contract award with Aker BP in the North Sea. This win demonstrates the power of our value proposition and the strength of the people in this organization. We listened to what the customer wanted and collaborated to create a business model that aligned incentives between the operator and its service providers. This five-year contract for well construction services will showcase our drilling and digital technology. Under the agreement, we execute integrated operations in a three-party collaboration with the operator and the rig contractor without owning a rig or taking on reservoir risk. We take on execution risk, but as the execution company, we welcome this risk and believe this agreement is a win-win for all parties. Throughout the downturn and during the recovery, we invested in new technologies that provide value to our customers and growth opportunities in new markets. Our wireline business is a great example. We broadened our capabilities and developed industry-leading services for formation evaluation and well intervention. We saw positive results from this investment last year with solid market share gains, including some key wins in the Middle East and deepwater Gulf of Mexico. I am pleased with the progress we’ve made in this product service line, and we plan to continue to invest and expand this business. In wireline, we are listening to our customers and responding with technology and solutions to meet their needs and expand our business. We’re doing the same thing with our recently acquired Summit ESP business. Overall, our effective, clear, and sustainable strategy combined with market momentum and our dedicated employees give me confidence that Halliburton is best positioned for the year ahead. We are the execution company. We will provide superior technology and service quality for our customers, resulting in industry-leading returns and positive cash flow for our shareholders. Now, I’ll turn the call over to Chris for a financial update.

Thanks, Jeff. Let’s start with a summary of our fourth quarter results compared sequentially to the third quarter. Total company revenue for the quarter was $5.9 billion, and adjusted operating income was $764 million, representing a sequential increase of 9% and 21%, respectively. These results were primarily driven by increased global drilling activity and year-end software and product sales. Moving to our division results. In our Drilling and Evaluation division, revenue increased by 12%, operating income increased by 62%, and operating margins improved by 420 basis points. These increases were primarily due to year-end software sales, which were stronger than expected and increased drilling activity in the Middle East, Brazil, and North America. In our Completion and Production division, fourth quarter revenue increased by 8%, operating income increased by 5%, and operating margin was generally flat. Revenues were up primarily due to improved pressure pumping activity and pricing in U.S. land, completion tool sales in the Gulf of Mexico and Latin America, as well as increased stimulation activity in the Eastern Hemisphere. The operating margin was impacted by the seasonality and cost inflation headwinds that Jeff just described. In North America, revenue increased by 7%, primarily driven by increased utilization and pricing throughout the United States land sector in the majority of our product service lines, primarily pressure pumping, as well as higher drilling activity and completion tool sales in the Gulf of Mexico. Latin America revenue increased by 16%, primarily driven by increased drilling activity and software sales in Brazil, as well as higher software sales in Mexico and increased stimulation activity in Argentina; these results were partially offset by reduced drilling activity in Venezuela. Turning to Europe, Africa, CIS, we saw revenue grow by 7%, primarily due to improved drilling activity in the North Sea coupled with increased activity in Algeria and Egypt. These results were partially offset by a reduction in completion tool sales in Nigeria. In the Middle East/Asia region, revenue increased by 12%. These results were primarily driven by increased drilling and stimulation activity in the Middle East and year-end sales in China. Regarding Venezuela, we continue to experience delays in collecting payments on receivables from our primary customer. These delayed payments, combined with recent credit rating downgrades and deteriorating market conditions, required us to record an aggregate charge of $385 million under GAAP. This charge represents a fair market value adjustment on our existing promissory note and a full reserve against our other accounts receivables with this customer. In addition, we will no longer accrete the value of our promissory note beginning in 2018. We actively manage our strategic relationship with this customer, and we will continue to vigorously pursue collections as we do business going forward. In the fourth quarter, our corporate and other expense totaled $79 million, which was slightly higher than anticipated as a result of an environmental charge. For the first quarter of 2018, we anticipate that our corporate expenses will be approximately $70 million. Net interest expense for the quarter was $115 million, in line with our guidance. For the first quarter of 2018, we expect our net interest expense to be approximately $140 million as we will no longer accrete the value of our promissory note in Venezuela. Our effective tax rate for the fourth quarter, excluding tax reform and Venezuela-related charges, came in at approximately 27%. In December, the President signed a comprehensive tax reform bill. That, among other things, lowered the corporate income tax rate from 35% to 21% and moved the country towards a territorial tax system. For Halliburton, this tax reform bill is a significant positive. We expect it to lower our effective tax rate percentage from the high 20s to the 21% to 23% range, reflecting the new U.S. corporate rate plus state and local taxes along with our geographic earnings mix. The lower effective tax rate will positively impact our future earnings and help level the playing field with our foreign domicile competitors. During the fourth quarter, we recorded an $882 million non-cash charge, primarily as a result of a preliminary provision for the net impact of tax reform. As I mentioned, this is a non-cash charge. Given our current U.S. tax attributes, we do not expect to pay any cash tax on our deemed repatriation tax obligations. We expect our 2018 full year and first quarter effective tax rate to be approximately 23% based on our expected geographic earnings mix. Turning to cash flow. We generated approximately $440 million of cash in the quarter, improving our cash position at year-end to $2.4 billion. The increase in cash was primarily due to strong cash flows from operations, which included working capital improvements and continued disciplined capital spending. Our 2017 capital expenditures came in at approximately $1.4 billion, slightly below our depreciation and amortization expense of $1.5 billion. We expect capital expenditures to be approximately in line with our depreciation and amortization expense in 2018. This CapEx guidance includes deployment of new Sperry Drilling tools and the continued investment in our artificial lift and production chemical product lines and industry-leading pressure pumping fleet. Given the current operating strength of our business and the favorable outlook just described earlier, we are actively evaluating our options around usage of cash, which could include debt retirement, funding acquisitions and organic growth projects, or return of capital to shareholders. Now, turning to the first quarter, our 10-year historical average for adjusted earnings per share from the fourth to the first quarter is a decline of 16%. Because of improving North America land operations, we believe it will be about half that in the first quarter. Let me turn it back to Jeff for a few closing comments.

Thanks, Chris. Let me sum it up. I’m really happy with our 2017 results. They reflect our successful strategy and execution and put Halliburton in a great position. I’m excited about what I see for Halliburton in 2018. The macro is self-correcting. Commodity prices have improved. Unconventional activity is strong. The international markets are recovering. We expect to generate significant cash flow. Our value proposition is resonating with customers. And all of this together will continue to result in industry-leading returns. Now, let’s open it up for questions.

Good morning, guys. Good quarter, that needs to be said. This quarter that as we said. My question instead of dealing with domestic really is about international. We all talked last year about how the rig count probably bottomed in the middle of the year, but pricing was difficult. Jeff, you mentioned that it started to improve a little bit in the second half. Can you talk about how far concessions and pricing went down and what’s going on with pricing internationally now?

Yes. Thanks, Jim. We’re in every market around the world, so we have great visibility into that. And the short answer is there's still a lot of pressure. When I describe green shoots, I’m talking about activity. But that activity is spread thinly. A lot of capital available in the marketplace, and because activity is spread thinly, it doesn’t create the kind of tightness for a price inflection. The concessions given were significant and, in some ways, are continuing into 2018; some of those haven’t even been implemented. Trust me, my tone has changed, and I see price inflection, but I don’t think it’s until later in 2018, and certainly we will see it in 2019.

And just continuing on that, I know you had talked last year about the hope and expectation that we would get to normalized margins in the U.S. market, and you made that comment again that you expect to get there in 2018 for domestic. When do we hit normalized margins over the next couple of years in the international sector? I know that’s a big crystal ball question, Jeff. But I mean, just in general, how many years do you think it will take before we reach the level that we’re getting to in 2018?

I think it’s not this year; it’s probably not 2019 either. That ramp is slower, Jim, because of the contractual nature of the market and it’s really driven off of tightness in the U.S. What we are seeing is the kind of commodity price support that will build that confidence with our customers, which will then create the tightness that creates the path back. I think our value proposition is perfectly suited to drive back towards those normalized international margins, as we are focused on maximizing asset value. Quite frankly, I think this paradigm will continue.

Well, I'd rather see a staged recovery, first domestic and then international that last a couple of years than everything peaking at the same time. And that certainly doesn't look like it's going to happen. Jeff, thank you very much. I appreciate it, guys.

Hey, good morning guys and great quarter.

Good morning, James.

I want to continue discussing the international aspect, as North America is expected to perform well this year, and I’ll leave the details to others. Regarding the international recovery you mentioned, we have previously talked about some seasonality in the first quarter. How should we anticipate the timing of those initial signs of growth starting to reflect in revenue? Additionally, which geographic markets are you particularly enthusiastic about?

Yes, thanks. I think that that progression is ratable, as I would describe that. We see growing confidence and added rigs sort of progressively through 2018, obviously with some inflection coming later in those stages, as I’ve said. But, I don't see it as a spike; it's a confidence building and we grow into that activity. What I’m most excited about internationally would certainly be the North Sea. I think that's a market that's going to have legs in 2018, and we'll see activity growing there. We’re also certainly excited about how we're positioned in the Middle East broadly. Again, I think we’ll continue to be resilient and have some pockets of better activity.

Okay. I believe that over the last couple of upturns, you have developed the international infrastructure for Halliburton. You have utilized most of the capital you likely need and have secured the market share to support that cost structure. While it’s understandable to always want more, it seems to me that you don’t really need to invest significantly in capital. This appears to be more about taking advantage of the revenue as it comes in and achieving strong incremental margins or cash returns as the cycle gains momentum internationally, is that correct?

Yes, that is fair, James. I mean, look, we're very excited about that franchise. And I've said that throughout even the downturn, that investment we made four years ago and five years ago in building out that footprint is a valuable piece of our franchise. Yes, the capital is largely in place to execute on that, and that should be a very good business for us.

So, Jeff, turning back to the U.S. a little bit. When you think about the market in 2018, just industry-wide, have you done any work or any thoughts on how much new build equipment is expected to come into the market in 2018 from the industry? And how much new build equipment could come in where you think it would be a concern as far as tampering or dampening the outlook for pricing?

Well, Angie, I think the activity in the market is undersupplied. We’re well aware of what’s in the marketplace today and/or that’s going. Everything I see, given the increasing intensity in completions, actually drives in that ratio of rigs to spreads, which from 4 to 1 to 2 to 1, which really is an example of what that intensity looks like gives me a lot of confidence that it stays tight. That metric I’m talking about doesn’t take into account wear and tear on equipment, which I think we’ve demonstrated is quite real, certainly through the downturn as we look at equipment that has not come back into the market and how it’s working right now.

And then, in 2017, it really was a big focus on your legacy equipment and where we stand today. How much of that equipment is still beneath the market, and thoughts on timing there?

From my perspective, I originally mentioned that it would take about four quarters, and it has taken about four quarters for things to change. Looking ahead, we have significant opportunities for movement due to the tightness in the market, particularly with pricing as we enter 2018. I am quite confident that we will successfully implement all three of our strategies: price, utilization, and technology.

I wanted to ask if you could provide more insight into margin progression for both C&P and D&E, for the first quarter and the rest of the year. I understand there will be a seasonal pullback internationally, but it seems you still expect normalized margins in North America. You faced some seasonality that affected you in the fourth quarter, so I'm looking to understand the outlook for both businesses over the next few quarters. Any additional details would be appreciated.

I mean, in line with our guidance, expect Q1 to be down. You’ve got the typical benefit of year-end product sales in the fourth quarter and seasonal pullback in activity in the first quarter in certain international markets. But going forward, looking at C&P, very much in line with what Jeff said, the normalized margin target is still there and we’re working towards it. For us to be able to do that, C&P is going to have to be a big driver of that, and so, we're very much committed to achieving that sometime in 2018.

It's reasonable to expect that if you were to achieve normalized margins, you would likely do so well before the fourth quarter, especially considering the seasonal effects. This would typically occur during one of the peak periods in your best two quarters, which are usually in the second and third quarters. Does that seem like a fair assessment?

Yes, we are confident that we can achieve this goal. It begins with customer urgency, which we are experiencing, and the fact that we are sold out contributes to our confidence in our ability to adjust pricing and achieve normalized margins of 20%. The C&P division is expected to perform very well. Additionally, the D&E division is a strong part of our business. I expect D&E to make consistent improvements during this downturn in terms of both market share and margin recovery, and I anticipate this trend will continue throughout the year.

I appreciate it. If I could ask about international once again, you've mentioned that the last few quarters have been very strong and that you're gaining market share. Could you provide more insight into where you feel your international strategy has been most effectively executed, whether that pertains to specific product lines or regions? I'd like to hear more about the areas where you're most satisfied with your performance and execution, as well as your outlook for the market in 2018. Thank you.

For us, it all starts with our value proposition, which is collaborating engineered solutions and maximizing asset value for our customers. If we think about that as a platform, then we add superior assets to that, and our team is very effective at delivering integrated solutions, whether it’s a project management type outcome or discrete solutions. I’m very pleased with what we’ve done in the Middle East and Brazil and all around the world. It comes back to service quality, which is fantastic, and when we deliver that, all of our solutions are well-aligned with our customers. Again, that takes a geographic view as well as a service line view, as we align with maximizing asset value for our customers. That’s a key paradigm and the feature that we believe in, and that’s what we do.

Good morning. Chris, I assume that when we're speaking of your targeted 20% normalized margin, that's for North American C&P. I'm just curious as to what the spread is right now between North American C&P margins and overall C&P Margins. In other words, what overall C&P margin do we need to hit over the course of 2018 for you to hit your, quote unquote, targeted normalized margins?

Normalized margins obviously focus on North America. C&P is the biggest driver of North America results. So, those are going to need to be in line.

Okay. So, basically, you say in line, so we would expect to hit an overall C&P margin to 20%?

They're going to need to be in the same ballpark.

I believe there are additional factors to consider. We've indicated that it includes international activity and various elements that make it up. However, I think it's a valid representation of what we observe in North America.

That's great, Jeff. Thanks. On a different note, you clearly explained the constraints in the fourth quarter regarding margin in relation to revenue growth for C&P. If you're aiming for a high teens or even 20% margin in 2018 for C&P, considering the seasonal factors in Q1, you must have a solid perspective on pricing realization and net pricing improvement throughout 2018 to achieve that margin, as you typically provide well-rounded guidance.

Yes. That’s what we see. Again, I’d describe it in terms of levers, so price is an important part of that, but so are some of the other things.

Okay. Jeff, you mentioned that you're sold out for the first half. Is your frac calendar starting to fill up for the second half of the year?

Yes. I mean, Bill, when I say foreseeable future, it’s as far out as I can see. Now, it has limits in terms of whether that visibility is perfect or not. But, yes, I'm confident that we have work in 2018, and that’s why I’m really excited about 2018.

And then, finally for me, we've got a historically tight domestic labor market and an especially tight labor market in the Midland basin and other energy markets, North Dakota, Oklahoma, Louisiana, and Texas as a whole. The difference between the unemployment rates today versus where we were at the trough unemployment rates in 2008 and 2014 is that we have a lot of runway for growth and what looks to be a sustained increase in U.S. production. How are you dealing with these labor constraints given this tight market and what is expected to be an even tighter going forward?

Bill, I trust in the strength and sophistication of our HR organization. We’re the biggest service company in North America, and that means we operate this business. We operate it across the entirety of the U.S., though, as you say, some markets are tighter than others. But, we’re able to recruit and even recruit in non-traditional oilfield markets as well. These are really good jobs in the oilfield. We mitigate the labor issues through a national recruiting effort. And it’s important to remember that this is the same human resources machine that hired 21,000 people in 2014. So, I’m confident that we find the people to do the work.

Jeff, just following on the normalized margining question for C&P. How do you think about normalized margins in the D&E segment? I realize it will take longer to get there given the international exposure, but roughly where would you peg those at in the new environment after all your share gains?

Look, I see them in the same ballpark just over maybe a different timeframe. But certainly, I mean, those businesses are substantial; they’ve got great value propositions, they've grown share, and deliver terrific results as well. I could pick on individual technologies, but it is BaraShale Lite, for example, which is a fantastic breakthrough and fluids technology that improves efficiency and is just a better solution. We’ve got a number of those, and those are the kinds of things that as they get rolled out, move margins up, but it takes share to start with though.

And then, Jeff, you had positive commentary on pricing during your remarks. Typically, investors take that and interpret it as positive pricing for frac. But, we're also hearing about positive traction across a lot of the minor product lines in the U.S. today. Can you put some color on the pricing trends you're seeing in cements, wireline, directional coil? You have underappreciated exposure, I think, to some of these product lines. So some color here would be great. And do you actually see greater pricing traction in these wirelines versus frac or is it about on par today?

I think you see all of that, to a degree, moving together. We'd always said that those other service lines didn’t fall as fast as frac. So, the comeback would be less dramatic and pronounced than frac. But clearly, there is a flight to quality around those other service lines as well. We do have pricing traction in those other service lines.

Good morning, Jeff. So, E&P capital discipline has been one of the themes we've been hearing about quite a bit. I was wondering if you could give us your take on how you think E&P behavior is changing or could change with this cycle? Kind of hearing some of the E&Ps are talking about trimming some of their rig counts but they're selling to using some lower pricing. Can you give us your sense of what your conversations are like right now as we kind of start with 2018 and how you think E&P behavior could change?

Yes, great question. We listen to our customers. Because we listen and don't lecture, we understand the message that they get from their shareholders. There are many different customers with many different strategies. Clearly, there is a group that's interested in generating more cash and being more disciplined. Another group has acreage that they want to prove up, and their stakeholders want them to do that. You can't think North America was a single brush certainly in that regard. But, those sets of customers are going to be working and busy in 2018, and I expect they will be busier in 2018 than they were in 2017.

And then, perhaps we can go back to the capacity side. You made a few comparisons with 2014. Maybe one comparison I’m very interested in is how you think about the useful life of your frac equipment in 2014 versus today. Within that context, with the amount of capacity that’s coming on in 2018, do you have a sense as to how much needs to be replaced for attrition? We've heard various numbers; I was curious your take on what you think that attrition number is.

I will begin with attrition; it’s a significant factor. It may manifest in the form of increased costs associated with bringing back equipment, which makes it challenging to keep in the market. While it’s hard to quantify this cost precisely, it reflects the rate of attrition we are experiencing. In our perspective, the market is currently undersupplied. We believe that greater intensity, more stage counts, and longer laterals will lead to increased wear and tear on our equipment.

First for Jeff, in the past, you’ve given numbers on how the frac sand intensity per well has been changing; any updates on that?

No, Waqar. I would describe that dynamic as really how optimization appears. We will keep an eye on that, but we haven’t seen a lot of change in the last quarter.

And then, at our energy conference in early January, many of the E&P remarked that they were seeing broad-based service price inflations in the range of 5% to 15% in the U.S. Now, would you agree with that kind of range, or do you think that that number still underestimates what the price inflation could be in 2018?

I think that underestimates it. But, I’m not going to call out where we see pricing. That’s competitive for us, and I think it’s also a function of where you are in the marketplace. Where you start drives what that percentage is. Nevertheless, tightness and urgency, which all begin with customer urgency, which we clearly see today, is the support for that price.

And then, just one final question. You mentioned about stimulation business picking up outside of the U.S. as well. I can see it in Argentina and maybe Saudi. Are there any other markets as well where the stimulation business is increasing internationally?

Look, primary activity as we’ve always said in Argentina from an unconventional perspective has the kind of rocks and the beginnings of infrastructure that make that, we’re very excited about that. We’ve got solid pumping businesses in a number of markets around the world that we’re excited about. I’m also excited about the ability to apply multi-staged frac to tight reservoirs that have historically been under-produced. You see those in a few other countries around the world and also in some offshore markets where we create value.

In the prepared comments, I don’t think I caught a CapEx budget for 2018. So, maybe you could just give us a sense of what your spend is going to look like this year and maybe what kind of flex there could be in North America depending on what the market gives you?

Yes. Right now, we’ve said that 2018 CapEx would be in line with D&A. We think D&A is going to be around $1.6 billion in 2018.

And then, just one more point of clarification. On the one key you guided, you talked about a half of a sequential drop you’ve experienced historically just given the faster start in North America. Was that an earnings-before-taxes comment, or was that EPS? I'm just curious how tax reform impacts the sequential change there as well.

Yes. That’s EPS. Obviously, tax reform does impact it, but don’t forget we’re losing that interest accretion on the promissory note in Venezuela. That’s why we guided to the higher net interest expense in the first quarter. So, it’s going to be a push.

I would follow up if I could on Chris's comments about actively evaluating options to use cash. Just, I'm not expecting you to lay it all for us, but to the extent possible if you can give us any thoughts on timing, order of preference, and where you'd like to see some of your debt metrics going forward. Thanks.

Yes. We’ve discussed before that we’ve got that $400 million maturity coming due in August this year, and we intend to retire that. After that, we’re looking to see where we could deploy capital based on returns. If we don't have opportunity there, we’ll look at returning it to shareholders via share buybacks and dividends.

Timna, I'm glad to be talking about that again.

This is a good point. Do you have a sense of your timing? Can you just talk about is there an urgency there? Are you content to wait and look at opportunities? Is the M&A market particularly attractive versus organic opportunities?

I wouldn't describe it as urgent. As Jeff mentioned, we're enthusiastic about having internal discussions to determine when and what the right timing may be. Regarding debt metrics, we previously noted that we aim for a mid-30s debt-to-cap ratio and want our debt-to-EBITDA to remain below 2.5 times.

Hey. Good morning, Jeff. Quick question for Chris. When we think about free cash flow conversion over the next few years, if I kind of look at 2018, it looks like your free cash flow conversion versus kind of net income based on your CapEx guidance is going to be about 80%. As we think about going forward, is that a fair number when we think about free cash flow conversion?

Yes. What we said is that we expect to achieve a free cash flow conversion kind of in line or greater than peers. That’s what we're working towards. That largely comes through capital discipline. Obviously if the market is very strong and we see lots of opportunities to put capital to work at great returns, we'll have to look at that. But, in a sustaining market environment, free cash flow conversion, in line or better than peers is what we're shooting for.

Okay, great. And then thinking about where the pressure pumping horsepower demand is today in U.S. onshore, maybe if you want to take a stab at that, and just kind of how undersupplied do you think the market is today?

I think it's undersupplied. Clearly, we've estimated about 1.5 million horsepower probably somewhere like that. What continues to keep it there is the degradation on equipment and the intensity growing around completions. That’s meaningful; that’s longer laterals and tighter spacing. In some cases more sand; in some cases less, but in either case simply more activity driving the demand. The flight to quality we see towards our assets, our platform, and approach to work; I’m excited about 2018.

And how much share have you been able to hold through the recovery? Have you been able to kind of maintain peak share or have you given some of that back?

We said all along, we reached sort of the highest share we’ve ever had as we worked through the downturn. Our intent has been to settle at a higher than our historical share through the recovery, and that’s what we’ve done.

Thank you, Candice. Before we close up, I’d like to just reinforce a couple of key points. First, I’m excited about what I see for Halliburton in 2018. The commodity prices have improved, unconventional activity is strong, and finally, we expect to generate significant cash flows and industry-leading returns. So, I look forward to talking to you next quarter. Candice, you can close out the call.