Halliburton Company (HAL) — Q3 2018 Earnings Call Transcript

Good morning, and welcome to the Halliburton Third Quarter 2018 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, 2017, Form 10-Q for the quarter ended June 30, 2018, 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. 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. As it played out, it was a challenging quarter for the services industry in North America. We didn’t see the typical growth we expect in pressure pumping activity in the third quarter. This negatively impacted pricing and the efficient use of our equipment as customers responded to budget limitations and off-take capacity bottlenecks. As said, I am pleased with our overall financial results for the third quarter. Our team optimized our performance in North America in the face of short term market challenges and the recovery of our international operations continues. Let me cover some of the key headlines. Total company revenue was $6.2 billion, essentially flat quarter-over-quarter, while operating income was $716 million, a 9% decrease compared to the second quarter of 2018, largely due to the softening North American market. We converted nearly 110% of operating income into operating cash flow, generating approximately $780 million during the third quarter with over $2.3 billion generated on a year-to-date basis. We continue to deliver the highest returns in the industry this quarter. Now I’m pleased with our international business, which is showing signs of a steady recovery. Our international revenue increased by 5% quarter-over-quarter with growth in every international region. As expected, North America revenue declined as a result of market softness, but we believe we still have the highest margins. Relative to the overall market, I am pleased with our performance, while our completions-related activity remained relatively flat sequentially; we believe we outperformed the market based on available market data. This demonstrates the customer’s flight to quality and positions us well as the market dynamics improve. And finally, we continue our long term focus on delivering shareholder returns. During the third quarter, we returned over $350 million to shareholders via share repurchases and dividends. Despite the near-term temporary challenges, which I will address in a minute, the macro outlook for the oil and gas industry is the strongest it has been in four years. The combination of economic growth, affordable fuel prices, and demand for petrochemicals sets the stage for continued positive trends. The focal point of the discussion during this current recovery has mostly been the supply side of the equation. The fact is we have more clarity today regarding the sources of supply and their limitations. Temporary issues affecting North America production, the spare capacity limitations in the Middle East and Russia, and significant under-investment in non-OPEC, non-U.S. supply are reflected in today’s strong commodity prices. Simply put, current commodity prices incentivize our global customer base to start unlocking more of their assets, and that’s a good thing for Halliburton. We see it in the increased number of final investment decisions announced by our customers and the projected rig count growth. Now, turning to near-term operations, in North America the market for completion services softened during the third quarter, impacting service company activity and pricing, and Halliburton was not an exception. The combination of off-take capacity constraints and our customers exhausting their budgets led to less demand for completion services than expected. Halliburton’s response was to retain our customers who demonstrate the best efficiency to manage cost, to move equipment to more active operators, to retain our people, to perform additional maintenance, and to continue investing in technology. Looking ahead to the fourth quarter, current feedback from our customers indicates that budget exhaustion and seasonal issues will predictably impact activity. We think operators will take extended breaks, some even starting before Thanksgiving. Therefore, we expect customer activity levels to decrease in the last six weeks of the year. We will do what a rational business would do in this situation. We will work to keep our equipment utilized in the short term when it makes business sense to do so, and we will take steps to position ourselves for a better 2019. You know me, and you know our management team. We understand the North America market better than anyone. We were the first to call out these challenges as we came out of the second quarter. I believe that these headwinds are temporary, and I’ll draw on the arsenal of measures available to me to manage through this brief dislocation in the North America market. Moving on from the fourth quarter, I’m excited about 2019. The catalysts are there for a strong activity rebound. These catalysts are: customer budgets should reload with higher-priced decks and stronger hedge positions, improving operators' free cash flow and creating additional spending power. The rising DUC count will provide a substantial completions backlog ready to be worked down in 2019. Off-take capacity will expand. Our industry is adaptive and creative. This manifests itself yet again in the announced conversion of pipelines in the Permian basin and new processing capacity in the Marcellus. We believe that the market will get better in the first quarter of 2019 and sets up for continued momentum throughout the year. We believe that the fourth quarter of 2018 will be the bottom in North America land. I believe this because I see it. I’m already seeing demand from our customers for 2019. They’re eager to get back to work. I hear it. I’m hearing this from our business development organization who are busy responding to inbound 2019 demand. I feel it. I’m feeling customer urgency come back as operators want reassurance. Our crews will be back out working for them when budgets reset and they restart their full completions programs. Increased activity leads to higher pricing. Once the catalysts I just described materialize, customer urgency will increase and that will help improve pricing. The quality of our technology and services allows us to play at the higher end of the price range, meaning we’re the first to benefit from price recovery. There are obviously a number of moving parts in North America, and the slope of the ramp-up in activity will be different in every basin. I continue to believe that all the temporary challenges we face are signs of a great resource, a resource that shifted the world supply and demand dynamics in the last five years. Our customers are resilient and creative. They are addressing these challenges head-on with the grit and determination we’ve come to expect from North America operators. So let me walk you around the various basins in the U.S. In the Northeast, our customers have already met their 2018 production targets. They slowed down activity, and they’re now expanding their processing facilities. Natural gas prices have recently surpassed $3 per MCF and are forecasted to stay there throughout the winter. Pipelines are coming online and starting to move gas out of the Northeast and into more premium-priced markets that will lower differentials and improve economics, allowing our customers in the Northeast to do more with their budgets next year. Similarly, in the DJ basin, operators are waiting for additional pipeline capacity, primarily the DCP pipeline, to help with differentials, while our DJ customers have significantly slowed down completions activity. At the moment, we believe that new pipelines arriving in 2019 will spur them into action again. The ongoing effort to increase Permian off-take capacity has been well covered. Our customers there have responded differently to take-away constraints. Some still have firm take-away capacity, and we continue completing wells for them. Others have options in other basins and have shifted focus elsewhere. Then there are those who don’t have take-away capacity and don’t have options in other basins, and they are deferring completions. In the Eagle Ford, we’re seeing operators who have been highly efficient throughout the year, cutting back activity as a result of deflated budgets. In the Midcon and Rockies, operators are staying within their cash flow obligations for the year. However, our customers in all these basins are preparing to start 2019 afresh on a higher note. Halliburton works in every unconventional basin in the U.S., and we’re the best positioned to understand the market dynamics and take advantage of the expected activity improvement in 2019, wherever it may come first. In the meantime, we are watching the same external data points that you do. Commodity pricing will remain an important factor. With WTI around $70, the appetite to grow production will be much higher. The DUC count in North America is the highest it’s ever been. If our customers start working down DUCs as early as mid-January, Halliburton will be a great beneficiary. Our customers are entering budgeting season. Their 2019 spending plans will greatly depend on where commodity prices are at the end of the year, what hedges are available for purchase, and when their current hedges roll off. The combination of positive outcomes for all of the above would bode well for substantial increases in 2019 budgets. We know how to manage your business and will keep adjusting our cost structure to market conditions, but it does not make sense for us to dramatically reduce costs or infrastructure for what we see as a temporary slowdown in activity levels. We are using this time to improve the health of our fleet, to position our North America land business for future success and outperforming as the market improves. Internationally, I believe the markets are in the early stages of recovery. Modest improvement in activity continues, but competitive pressures remain. Nevertheless, I’m pleased with where our international business is today and think that Halliburton has a strong foundation for international growth in this cycle. We collaborate with our customers to improve their project economics and our profitability through advanced technology and increased operating efficiency. This international recovery, as I see it, has two distinct attributes: first, it starts with mature fields. In today’s environment, customers broadly favor shorter cycle returns and lower risk projects. That manifests itself in the form of development-focused, production-oriented strategies both onshore and offshore. The active markets in the North Sea and in the Middle East attest to that. Second, this recovery will see national oil companies take the lead; many of them have government mandates to grow production and work hard to revitalize their mature asset base, develop unconventional resources for internal consumption, and search for partners to fund offshore exploration. I believe both of these attributes play in Halliburton’s favor. We’re traditionally strong in completion and production technologies that are key to mature fields development. National oil companies look for a collaborative approach to tackling their various challenges, and collaboration is in our DNA. We go to work every day to collaborate and engineer solutions to maximize asset value for our customers. Our international business is a more valuable asset to Halliburton shareholders today than it was even three years ago. We’ve had an international presence since 1926, and we currently operate in over 80 countries. During the last cycle, we made significant investments in our international footprint, including increasing our product service line footprint in various geographies, expanding our manufacturing capacity in Singapore and opening technology centers in Saudi Arabia, India, and Brazil. The recovery in international markets is underway, and we have the right footprint and the right technology portfolio to take advantage of it. We believe we’ve demonstrated this by outgrowing our largest competitor internationally for six of the last eight quarters. Importantly, we are in the returns business, not the market share business. We plan to balance both to outgrow and make returns in the international market. The outlook for global commodity supply and demand is constructive. I’m confident that Halliburton has the right strategy, technology, and services to compete and deliver leading returns in this market. We remain the leader in North America, which I believe is poised for a better 2019. Halliburton is also positioned better than it’s ever been for the international recovery. So now let me turn the call over to Chris to provide a few more details on our financial results. Then I’ll return to discuss how we are strategically positioned to differentiate ourselves in the market and deliver returns for our shareholders.

Thanks, Jeff. I’m going to start with a summary of our third quarter results compared to the second quarter of 2018. Total Company revenue for the quarter was $6.2 billion, which was relatively flat. Total operating income for the quarter was $716 million, representing a 9% sequential decline. Moving to our division results. In our completion and production division, revenue was relatively flat, while operating income decreased by 8%. Revenue was flat, primarily due to lower pricing in our U.S. pressure pumping business, offset by increased incompletion tool sales and well intervention services in the Eastern Hemisphere. Operating income was down primarily due to the lower pricing and higher maintenance expense in our U.S. pressure pumping business. As previously discussed, the higher maintenance expense was expected as we performed incremental maintenance in anticipation of 2019 activity. In our drilling and evaluation division, revenue was also relatively flat, while operating income decreased by 5%. These results were primarily due to drilling fluid activity declines in North America, partially offset by increased drilling-related services in Latin America. In North America, revenue decreased by 2%, primarily driven by lower pricing and stimulation services in the United States land sector and reduced drilling fluids activity in North America, partially offset by increased activity in our production chemicals and artificial lift product service lines in the United States land sector. Latin America revenue grew by 9%, resulting primarily from increased demand for stimulation services in Mexico and drilling-related services throughout the region, particularly in Argentina, Brazil, and Ecuador. These increases were partially offset by decreased software sales in Mexico. Turning to Europe, Africa, CIS revenue increased by 4%, primarily driven by higher pipeline services across the region, coupled with increased completion tool sales in the North Sea. In the Middle East Asia region, revenue increased by 4%, largely resulting from increased completion tool sales and well intervention services throughout the region, partially offset by lower pricing and stimulation services in the Middle East. In the third quarter, our corporate and other expense totaled $78 million, up $7 million compared to the second quarter, primarily due to the implementation of cost-saving projects. For the fourth quarter, we expect our corporate and other expense to be approximately $75 million. Net interest expense for the quarter was $140 million, and we expect it to remain approximately the same in the fourth quarter. We reported $42 million of other expense for the quarter, up from $19 million in the second quarter. The increase is primarily due to foreign exchange losses that were driven by the strong U.S. dollar and the devaluation of certain emerging market currencies, some of which we have limited ability to hedge. For the fourth quarter, we think $40 million is a good estimate for other expense. Our effective tax rate for the third quarter came in at approximately 19%, which was lower than anticipated due to discrete tax benefits. Looking ahead, we expect our fourth quarter effective tax rate to range between 20% and 21%. Turning to cash flow, we ended the quarter with a total cash balance of $2.1 billion. We generated approximately $780 million of cash from operations during this quarter. Capital expenditures during the quarter were approximately $410 million, and our full-year 2018 CapEx guidance remains unchanged at approximately $2 billion. Before I turn to the fourth quarter guidance, I want to take a minute to discuss capital allocation, which we view like everything else at Halliburton through our returns-focused lens. We had three uses for our excess cash: return of cash to shareholders, debt retirement, and growth. Regarding return of cash to shareholders, we pay a solid dividend and we initiated share repurchases during the quarter, buying back $200 million in shares. Going forward, we will continue to consider share repurchases when we have excess cash. Regarding debt retirement, this quarter, we repaid our $400 million note that matured in August. With this payment complete, we have now paid down $2 billion in debt over the last two years, which is a great accomplishment. We have previously discussed repaying our $500 million 2021 maturity; however, we have decided not to do that this year. As we evaluate current potential opportunities, including share repurchases, we believe that there are more attractive opportunities for using this cash. Regarding growth, we will continue to pursue value-accretive growth opportunities, be they both on M&A or stepped-out organic growth. Investing in the business increases the value of our company, and Halliburton has a great track record of making smart investment decisions that generate industry-leading returns, and we plan to continue to do so. Now, turning to the guidance for the fourth quarter. As is typical, a combination of weather, holidays, budget constraints, and year-end sales make forecasting a challenge, but this is how we currently see it playing out. In our C&P division, we expect the results to be down in the fourth quarter, primarily due to the North America land market, where we expect the activity level of our pressure pumping customers to decrease by a low double-digit percentage in the fourth quarter. This will mean lower utilization for our equipment, less efficient operations, and continued pricing pressure. Also, as Jeff mentioned earlier, we will continue performing incremental maintenance in the fourth quarter to prepare for a busy 2019. In our D&E division, we expect our results to improve slightly, primarily due to typical year-end sales. As a result, we expect earnings per share in the fourth quarter to be in the range of $0.37 to $0.40. And with that, I will now turn the call back over to Jeff.

Thanks, Chris. As I see it, this cycle is shaping up to be a marathon, not a sprint. The key to successfully running a marathon, as I can tell you from personal experience, is being physically and mentally prepared for the long run. Now I’d like to highlight what Halliburton is doing today to be ready for this sustained cycle. I talked to you a lot about technology. Let me remind you why it’s important. We expand our technology portfolio to gain scale, grow market share, create competitive advantage, and win both internationally and in North America. We are deliberately investing in technologies and capabilities that we believe will do three things: drive growth, create meaningful differentiation, and deliver returns. In our drilling and evaluation division, we recently launched the new iCruise Rotary Steerable System. It’s the most intelligent drilling tool in the market. It combines smart technology with advanced electronics, sophisticated algorithms, multiple sensors, and high-speed processors with some of the highest mechanical specifications on the market. This tool has already been deployed for customers in three U.S. unconventional basins as well as internationally. We are excited about the iCruise System, not only because it delivers fast drilling, accurate well placement, and reliable repeatable performance for our customers, but also because the simple, modular design of this tool and its self-diagnostic capabilities means that its maintenance takes a lot less time, which increases asset velocity, reduces repair and maintenance costs, and improves returns for Halliburton. Our EarthStar ultra-deep resistivity service, another innovation from the Sperry Drilling product line played a large part in helping us win several important contracts in the North Sea. This new logging and drilling center delivers the unique ability to map reservoir and fluid boundaries more than 200 feet from the wellbore, over twice the depth of current industry offerings. It gives operators a much clearer view of the reservoir, helping to precisely geosteer their wells and to achieve higher production, lowering cost per BOE. Adoption of this new well placement technology is occurring not only in the North Sea and other offshore markets but even in North American unconventional. We plan to build on this momentum to grow our business in these markets to drive differentiation and deliver returns for Halliburton. As I’ve said, Halliburton makes technology investments to deliver growth, differentiation, and returns. So what does this look like in our completions business? Halliburton is the market leader in completions and hydraulic fracturing, and we continue to innovate. Our technology and operations teams are constantly working on new opportunities for advancement, for creating meaningful differentiation from our competitors, and for saving costs for us and our customers. For the last several years, we’ve made significant investments in our surface efficiency strategy. We’ve introduced technologies like ExpressKinect, Wellhead Connection Unit, ExpressSand system, and IntelliScan equipment monitoring software. They have helped us achieve a 50% reduction in rig up, rig down time, cut cycle time between stages in half, and reduced our maintenance cost per horsepower hour. These investments drive returns for Halliburton. They allow us to charge a premium for our equipment. They improve our asset velocity, and they have reduced the required capital on the well site. While the industry has been focused on implementing surface efficiencies to squeeze costs out of the system, I believe that the next step forward in efficiency will come from higher well productivity achieved through better subsurface understanding. In our quest to provide the lowest cost per barrel of oil equivalent, we will refocus on increasing the number of barrels for our customers through subsurface insight. To this end, in addition to service efficiency, we’re investing in the technology to help our customers improve well productivity. This is our intelligent frac strategy. I’m pleased to see the growing customer interest and willingness to pay a premium for better well placement and better fracturing efficiency, which leads to more barrels and lower cost. During the third quarter, we launched our Prodigi AB intelligent fracturing service, and by the end of 2018 it will be deployed in every unconventional basin in the U.S. If the inaugural element of our Intelligent frac strategy and the first commercial solution on the Prodigi platform. When we hydraulically fracture a well, we force fluid and sand into the rock thousands of feet below the surface. The Prodigi AB Service utilizes algorithms to fine-tune the pump rate based on reservoir response without human intervention. It allows for real-time adjustments to treating pressure during initial pumping conditions, which leads to consistently higher breakdown efficiency and improves proppant placement. Prodigi AB has been deployed on over 500 stages across multiple customers and basins. In a recent trial, Prodigi AB demonstrated our ability to achieve consistent breakdown across the entire stage, which leads to better well productivity for our customers. Additionally, Prodigi AB lowers treating pressure by nearly 10% and cuts pumping times by 10 to 15 minutes per stage. This means reduced wear and tear on our equipment and lower maintenance costs. Well productivity is not only dependent on job execution but is also greatly affected by job design. Our Prodigi AB assists with consistent job execution, and the newest addition to the Halliburton Intelligent frac portfolio, GOHFER, Fracture Modeling Software, ensures that we have the right designs to execute. We’ve recently acquired this industry-leading fracture simulator, which is used globally for conventional and unconventional well completion designs, analysis, and optimization. This acquisition enhances our frac business, and I'm excited to welcome GOHFER into the Halliburton family. As I said earlier, this will be a mature fields led recovery. Halliburton is investing in our portfolio of production capabilities that will allow us to grow market share, differentiation, and returns in this market. Our production group grew revenues 36% year-over-year as we’ve made significant strides expanding our position in artificial lift and production chemicals, all key capabilities in the mature fields domain. It's been over a year since we bought Summit. In that time, we’ve expanded our market share in the U.S. and started delivering this product offering into the international markets. We've experienced exceptional growth, and I can tell you there are still significant growth opportunities ahead. We’re bringing the full power of the Halliburton global footprint to bear and taking our ESP offering to the Middle East and Latin America. The customer feedback is positive, and we intend to grow this business into a global market leader. As you may remember, in the second quarter we entered into the reactive chemistry space through the acquisition of Athlon Solutions. We expect Athlon will enhance growth and profitability in our Multi-Chem product service line and across our chemistry portfolio. This acquisition is the first step in developing our reactive chemistry capability in North America and complements our ongoing efforts to manufacture chemicals in the international markets. I'm excited about these additional capabilities and look forward to their future growth and contribution. Athlon and Summit are two great examples of how we use targeted M&A to enhance our portfolio and drive returns. Halliburton maximizes returns on our technology investment by being the most effective in the market at lowering our customers' cost per BOE. This is what gives us significant market share in North America and internationally, and this is why Halliburton is well-positioned to compete, win, and deliver industry-leading returns in both of these markets. In summary, we know the North American market and will manage through the temporary challenges. The catalysts for a 2019 rebound are clear, and Halliburton is best positioned to take advantage of what we expect to be a sustained up-cycle. We believe that the international markets are in the early stages of recovery. Despite competitive pressures, Halliburton is well-positioned internationally to win and make returns. And finally, we are a returns-focused company. Everything my team and I do is aimed at continuously delivering industry-leading returns. Now, let’s open it up for questions.

Hey, good morning, guys.

Good morning, James.

Jeff, I was wondering if you could expand a bit on your catalysts you see for 2019, being a much better year for the industry both North America and International. I mean, we agree with that, but I’m curious as – since you’re closer, obviously, to your customers than perhaps we are. Could you maybe talk through some of those major key catalysts that you see driving significant growth next year?

Yes. Thanks, James. Yes. The outlook or the catalysts are clearer than probably they’ve ever been, which is a bit of a rarity in our business, but as we now look at the budget resets we know that has to happen, we know that will happen, our customers have done a good job of working sort of within their budget this year. But as we look at 2019 and higher commodity prices, that really sets up well for adding to budgets in the next year. And at the same time, if we look at DUCs, DUCs are at historical highs. Those are the kind of things that get worked off. We get back to the higher global oil price, that has an impact on hedging as hedges roll off, new hedges get put on. So again, all of these are things that we can see and certainly leaves me to a view that Q1 is better than Q4, and that momentum would then build on the back of all of those catalysts. As far as the timing of those catalysts, I look like they happen next year. I’m not going to try to call it timing, but I’m confident that they happen. The internationally, similarly the underspend that’s happened for the last three years is pretty extraordinary, and I think that just the requirement to reinvest in a lot of these places is driving what I see as the recovery.

Got you. And maybe just to follow up on the international side, Jeff, it seems to me like the portfolio strategy that was put in place by you and your largest competitor, perhaps starting a year, a year and a half ago to make sure you’re set up in the right market for the right contracts. It should be mostly over at this point, and it should be time to get going on pricing. Is that a fair statement?

Well, it stays fairly competitive internationally. And so I can point to anecdotes where we are able to get pricing, but the bigger projects remain very competitive. When I look at those kinds of projects, certainly, we have a bias for returns. But I think we’ve demonstrated that we can grow in that market, not growing that market, but at the same time I think the competitive pressure is probably more than we think. Those contracts will get worked off, will get worked through and optimized, but I do think that will take a little bit of time.

Okay. Got it. Thanks, Jeff.

Yes. Good morning. So, Jeff, I just want to clarify the earnings bottom comment, is that just a comment on North America or is that a global comment? Basically, I’m curious if North American recovery in 1Q can more than offset the seasonal weakness abroad that we think we’ll see in 1Q?

Yes, that's not a global comment. Focusing on North America, I'm quite optimistic about what we're observing. The fourth quarter appears to be the lowest point. Instead of specifying the timing and pace, we've discussed the catalysts expected for next year. Considering the technology we're investing in, particularly in surface and subsurface efficiency, I feel positive about the outlook for 2019. On the international front, we will still experience the usual seasonality from the first to the second and third quarters, which follows a fairly predictable pattern. Therefore, while I'm excited about the ongoing international recovery, it differs somewhat from the North American situation we are considering.

Got it. And then just an unrelated follow-up on the new Rotary system, the iCruise system, do you think that system closes the technology gap with Schlumberger and Baker?

Yes. I'm very enthusiastic about this technology. It is performing as I expected. Its performance is excellent, and importantly, it achieves this at a lower cost, which enhances our returns. As I mentioned in my comments, it is active in three markets; in North America, we have it available internationally as well. It is accomplishing what I believed it could do. Essentially, like everything, this is a process, and there will be more developments in the future.

Got it. Thank you.

Thanks. Hey, good morning.

Good morning, Sean.

So it seems to me the key for investors here is going to be getting confidence that 4Q is in fact the bottom, and I think many folks will remember the challenges the industry had to start last this most recent year. So how do you characterize the interplay between C&P volumes and pricing in 3Q? And we had top line flat margin off 140 bps? And just what’s the read-through to 2019 to give you confidence that frac pricing gets back on track?

I’ll address the third quarter aspect. In our C&P division, particularly in North America, pricing is the primary factor driving our results. Activity has remained relatively flat compared to the previous quarter. We are seeing a decline in activity in relation to what we would typically anticipate for the third quarter, but sequentially, it’s mostly stable, emphasizing the pricing situation during this period. Looking ahead to the fourth quarter, we expect increased activity as we observe our customers pulling back due to budget constraints and seasonal effects taking place.

Yes. So, when we look ahead I’ve described the catalyst. I’ve been less prescriptive on the timing of those catalysts but they start to happen in 2019. And I think that – I’ve talked to customers, they’re eager to get to work. Obviously there’s seasonality that happens in the fourth quarter and into Q1, but we get on the road to a better market as those things that do happen, happen. So for example, by that I mean budgets they do reset, companies get back to work. And I think generally there's bias to do more next year, not less, particularly with where the price is. So without being as prescriptive, those things start to happen in 2019.

Okay. Fair enough. Chris, maybe could we get a little bit more granularity on the decision-making around the debt repayment, maybe kind of stepping back from that as opposed to some other choices for allocating cash as we go into 2019. Just curious kind of how you should set investor expectations towards the long-term goals on debt-to-cap versus the other priorities that you are obviously also focused on?

We’re focused on a strong balance sheet. I mean this doesn’t change our perspective on our target debt metrics. We’ve talked debt-to-EBITDA being underneath two and half times which definitely, line of sight on that, debt-to-cap being in the mid 30s. And that will take time to work towards. Maybe we have a strong balance sheet today. I think it will continue to get stronger over time. But when we look at just opportunities for using that cash right now and we take into account the progress that we've made repaying debt, $2 billion over the last two years, $400 million of that in the third quarter. And again in relation to opportunities that we see now including share repurchases we just feel like there's better uses for that cash right now.

Okay. Fair enough. Thanks a lot.

Good morning. Jeff, can you discuss with regard to Q1, which basins do you think will be strongest earliest and which ones will lag relative to Q4 in terms of activity?

Yes, Bill, each area behaves differently. I would say the Eagle Ford is likely to respond more quickly to budget resets. We can expect a reaction in the Northern Region, like the DJ, Eagle Ford, and Bakken as those areas adjust. It will happen over time. Weather can play a role, but getting back to work broadly is certainly the most significant factor, and customers are eager to do so. I believe the budget and capital discipline we've seen this year is influencing the market, and as things reset, there will be a greater willingness to increase activity. Bill.

Okay. I want to understand your conversations with customers focused on the Permian. Are they indicating that with the budget updates, strong commodity prices, and better hedging opportunities in Q1, they are also ready to move forward? Or do you think they will hold back a bit, waiting for additional pipeline capacity to become available throughout 2019?

Yes. The trouble, Bill, every customer is different, and each has their own strategy and response to what is out there. So I’m careful when I make blanket statements. So, if you just step back and look at the kind of consolidation that’s happened in that market, that certainly doesn't happen to do less, the kind of activity that we see out there. So the timing and pace, I think will be an individual decision by different customers, but clearly there’ll be a reloading that goes into next year.

Okay. That's fair. And then Chris, with regard to your guidance, I’m sorry, I think I understood C&P down double digits for reasons you expressed. I think I heard you say D&E up in the fourth quarter. Would margins for D&E be flat to up in Q4 or how would you expect that to unfold?

I think we’ll see slight improvement in both revenue and margins in D&E. Like I said, largely driven by year-end product sales or I should say software sales from Landmark which should be difficult.

Okay. That leads me to my last question. This suggests that the C&P margin might be around 12.5% at its lowest point. Do you anticipate that to be the lowest margin for C&P?

Right now, Jeff talked about the North America land reaching a bottom in the fourth quarter. I don't want to call a bottom on anything else at this point, but we do think from an activity perspective North America land in the fourth quarter feels like a bottom.

Okay.

I mean the cyclicality will occur internationally, Bill. There are other things in there that – there’s Latin America, there is North Sea. We do quite a bit of C&P work in a lot of different markets. So, just don't want to call that right now.

Okay. Thank you very much.

Thanks. Good morning. Jeff, I have a question for you as we look at the industry. As we approach year-end, many people are wondering about the excess frac capacity that remains idle. The efficiency improvements across the industry have been significant. Looking ahead to 2019, how should we think about the industry regaining pricing power? Do you anticipate any comments on pricing leverage potentially shifting with an increase in activity in 2019?

Yes. Thanks. I mean there's a couple of things. It starts with customer urgency. And what we're seeing with budgets right now is sort of the opposite of customer urgency. When we see that creep back in around higher commodity prices, more activity to do, I expect we'll see opportunities for pricing leverage swing back to service providers. We saw that early this year. We saw quite a bit at the year before. I don’t expect it to be different. I think the equipment today, I’ve said it many times, is working harder than it’s ever worked, and that means equipment is wearing out at a pace that it's not as abundant as one might think. I think the second piece though that over time is – and I don’t want to talk about technology over time being around the subsurface, which I spent time talking about Prodigi which is a beginning piece of that and also GOHFER this quarter, but many other things we’re doing around modeling that really ask how do we make more barrels, or how do customers make more barrels per well, and I think that's going to be very important over time.

Okay. All right and thank you. And my follow-up is in the past you’ve referenced the ability to get to 20% margins. Do you feel like with the way the industry is kind of situated today, and not putting a timeframe on it, but is that still an expectation or a goal for Halliburton over the intermediate term? I guess, is that achievable in your mind given the technology initiatives, efficiency initiatives, and kind of how you see pricing playing out?

Yes. Thanks. When I step back and look at it, right now, we're on, and I think, the best business in the big service market today. And under the right conditions, can we get there? Yes. I believe we can. But that doesn't change what we're doing today in terms of addressing the market, making the best returns in the market and truly investing in this market for the long-term.

Okay. Thanks. I’ll turn it back.

Thanks.

Good morning, guys. What we really like is the exact day and the hours if you can provide it, of the inflection when things are going to start getting better? And whether it would be a weekday or weekend? Jud questions were most critical, I think, because investors aren’t sure where margins bottom or will be when activity starts to recover, or at least pricing starts to recover? And you already noted that the pricing is being more impactful right now than utilization, and you talked a little bit about efficiency. One thing we're hearing is that you guys and your peers are getting so efficient in terms of fracking that maybe we don't need as many frac spreads out there as we did before. And we’ve seen this happen with drilling rigs as they went through a significant period of efficiency. Is the same thing going to happen to pressure pumping over the next couple of years, guys?

I don’t believe that’s the case. There is considerable demand for our services, and the equipment is pushed to work harder. The advancements in pump technology will ultimately enhance efficiency over time. However, the more significant aspect of efficiency I mentioned earlier pertains to productivity and investment, which I believe will significantly increase demand for what we offer. The core resource is limited, so as we implement our intelligent frac strategy, customers will need to adapt in order to succeed, which will likely lead to increased consumption.

How much more, and you talk some about your technologies that you’re developing, and all that’s exceptionally impressive, for an old simulation engineer anyway. How much more efficiency, however you want to describe it, how much more efficiency can we wring out and hydraulically fracturing unconventional wells? Where can we go if we've taken Permian wells from 257 IPs to 2000, where does this all in? Where do we get to the point where we’re so much steady state and how efficient are we at that point?

Well, I think the efficiency lever is progressively harder to pull in terms of amount of time. I mean, literally more sand, bigger stages, takes longer to pump. I mean, you start to reach, generally, limits around what faster looks like. And there's a lot of debate at the minutia level around A versus B, but realistically, overall, how much more does that move? When I think about making better wells over time, I think that will be more and more significant, just because the complexity of how this gets done will increase. And typically, it involves working equipment harder, even if not necessarily faster, which I think keeps us all very busy over a much longer period of time, over the long-term. And so for that, I mean, I just continue to see the demand certainly for what we do, and I think that technology component will become progressively more important.

And my follow-up, if I could. We listened to one company the other day talk about the benefits of being vertically integrated in sand. You’re noticeably not. Can you tell us what the benefit of not being vertically integrated in sand is?

Well, yes, I look at everything through a returns lens. And back up. When we allocate capital and we think about what we do, I look first at what do we do that’s unique? What can we do that is unique and drive differentiation? And with respect to sand, we do more around moving it and pumping it, and that’s really our uniqueness. So you see us spend our capital on either equipment or technology around that equipment that don't add much technically to a grain of sand. And we’ve got great partners that we work with, and I think we have always found that there's plenty of sand in the marketplace and the best thing to do is make the best returns. And I don’t see that for us with sand.

Okay. Thanks guys and good guide down for Q4. Reset the bar. Good job. Thank you.

Thanks.

Hey, good morning, Jeff. I just want to talk a little international here for a change of pace. You had some really nice growth you showed here sequentially. I was just wondering if you could talk about which parts of your international business you think have the most potential for 2019. And do you think a double-digit international revenue growth for the full year is achievable?

Yes. Look, I’m real excited about our drilling activity. I talked about technology, but what we’re doing with Sperry and how that has an impact on all of our business, I think that's important. I think I’m also excited about C&P internationally. We’ve got a pretty big book of that out to go do, and I think there’s a lot of demand in markets to address either unconventional or tight formations in an effort to make more production. But I also think if we look out at 2019, it’s a bit of a mixed bag in the sense that there are going to be markets like Asia Pacific and Europe, Africa, Eurasia that, in my view, recover more so, pretty strongly on a percentage basis just given where they started. But there are other parts of the market, the Middle East, that have been fairly resilient throughout the downturn. And so that, while fantastic business and market, may mute to a degree that absolute amount of growth. But to be seen, if I look at next year, we're looking on the plan now. But are we high single digits? Are we double digits? That feels like about the range.

Then you had mentioned spare capacity issues internationally. You just referred to your C&P side, your drilling side. Is that where you see the tightness? Are you suggesting that there’s an improving pricing outlook out there? Can you just kind of touch on that a little bit for a few minutes?

Yes, I believe the drilling equipment is currently the most constrained aspect of the market. As we move into 2019, this will likely lead to improved pricing. We have ongoing discussions with customers every day, and while large projects remain competitive, there is a mixture of challenges and opportunities. I think we can optimize our strategies throughout 2019, and I expect it to be a better year than last year as the market recovers.

And then just last thing. On the offshore side, do you think offshore contributes much to next year's number, or is that more of a 2020 event based on your conversations with your IOC customers?

Yes. If we look at offshore operations, particularly deep water compared to shelf, deep water will certainly play a role. We've discussed the North Sea and its potential as it gains momentum into next year. Generally speaking, mature fields will be the focus. If we differentiate between mature fields and offshore or onshore, it seems that mature fields represent a stronger part of the business. From Halliburton's perspective, this aligns perfectly with what we do in completions, and I mentioned our work with wireline and case-fill wireline among other services. Overall, it looks very promising for us.

Thanks, Jeff.

Thanks.

Hey and good morning. Thanks for fitting me in here. So, I just want to follow on the recent line of questioning here in the context of international growing high single digits, low double digits, without really kind of holding to you until you get your budgets done. Do you think North America, on a year-on-year basis, will outpace international?

It’s difficult to compare since they vary significantly in size and pace. I believe international growth will occur for various reasons, mainly due to government mandates for increased production. North America has a more dynamic, capital market-driven growth that may allow it to respond more rapidly to changes in oil prices than in the past. While I want to highlight the factors that could drive this change, I think we need to complete our planning first. From a growth perspective, North America seems to have stronger potential, but time will tell.

Thanks, Jeff. And from a maintenance standpoint, is this the intensity, the maintenance do you think been greater, is it going to be greater during this kind of pause than what’s it’s been over the last couple of years and do you think that could ultimately do additional industry-wide fleet attrition?

Well, I would think for Halliburton, and I think we’ll do more maintenance as we go through the Q4 as I described just to be ready for 2019. I think broadly, the size of stages, pressure, and rate all conspire to work the equipment harder than it’s ever worked. And so I think we put a lot of effort into managing maintenance how we manage maintenance, the technology of maintenance. We got a tech group that looks at maintenance and so I think all of those things are important to our performance in North America more specifically around doing maintenance; we know it’s important and plan to do it as we get through Q4.

Right. And then if maybe finish up, what’s your take, Jeff on electric frac fleets in the potential adoption by the marketplace?

Look, I’m going to say it’s too early to call only – we’re looking at all types of technology all of the time, but what underpins all of that is returns and uptake and sustainability. And so that’s again I think it’s early to call out one, but we are certainly looking at it among other things.

All right. Always appreciate the color. Thank you.

You bet. Thank you.

Yes, thanks Nicole. Look before we close out the call, just like to make a couple of final points. First, I believe Q4 represents the bottom of the temporary North America dislocation. We can see the NAM recovery catalyst and expect Halliburton to benefit as they manifest. Second, I’m excited about the early stage international recovery and believe Halliburton is better positioned than ever for success. And then finally, our strategy and focus on capital allocation positions Halliburton to continue delivering industry-leading returns. So I look forward to talking with you next quarter, and Nicole, please close out the call.