Halliburton Company (HAL) — Q1 2019 Earnings Call Transcript

Thank you, Abu, and good morning, everyone. What a difference 90 days make in this market. Commodity prices have rebounded, customer budgets are refreshed and we're back to work. Our results for the first quarter played out as we expected and I'm pleased with how our organization executed both in North America and internationally. Here are the first quarter highlights. Total company revenue of $5.7 billion was essentially flat compared to the first quarter of 2018 and adjusted operating income was $426 million. International revenue increased 11% year-over-year, which was a great first step towards our expectation of high single-digit international growth for all of 2019. Our Drilling and Evaluation division had a strong year-over-year revenue growth of 7% with activity improvements across all geographic regions. Finally, as expected, hydraulic fracturing activity ramped up in U.S land as customers refreshed their budgets. And despite pricing headwinds, our execution resulted in delivering better than expected margins in our Completion and Production division. From a macro perspective, 2019 is off to a strong start. Commodity prices have been rising since the beginning of the year due to tightening oil supplies and stable demand. OPEC plus production cuts and supply disruptions from Venezuela, Iran and Libya have supported market rebalancing. Oil demand trends, particularly in China and India, have also been constructive. Overall, the macro environment remains favorable for our industry. Against this backdrop and with winter behind us, customer activity in both hemispheres has picked up off December lows and continues to trend higher. Although we often discuss the hydraulic fracturing business in North America, it's important to remember that Halliburton has a portfolio of 14 product service lines operating in North America. For example, our artificial lift and cementing businesses showed excellent results in the first quarter, growing both revenue and margin year-over-year. Our artificial lift product line grew top line revenues 55% year-over-year in the first quarter driven by strong demand for ESPs that are now installed much sooner in the life of the well and sometimes right after the wells put on production. Halliburton is the number one cementing provider in U.S. land. Demand for our cementing services continue to be strong in the first quarter. Congratulations to our artificial lift and cementing teams for an outstanding performance. Now let's turn to our North America land hydraulic fracturing business. We experienced an increase in the stages pumped every month this quarter with March finishing on a high note. Overall, the first quarter activity level was modestly higher compared to the first quarter of 2018. As expected, we had pricing headwinds throughout the quarter. However, we believe the worst in the pricing deterioration is now behind us. And as we’ve discussed in the past, the success of our hydraulic fracturing business is not dependent on pricing alone. Given our presence in all basins and exposure to all customer groups, we have the ability to pull other levers such as utilization, cost savings and operational efficiency to drive a better outcome for our business. Let me describe what I believe will happen with hydraulic fracturing supply and demand throughout 2019. On the demand side, it's evolving as we had anticipated. Our customers have announced their 2019 budgets and we expect that overall spend will be down 6% to 10% in North America. Here is how I see the impact of our customers' 2019 budgets on the North America land stimulation services business. I expect that customers will operate within their budgets largely by achieving savings through sand cost deflation and by reducing drilling activity. On the other hand, I believe that net completions activity will remain essentially flat year-on-year as our customers seek to achieve their publicized production targets. In the near-term, our view on North American customer activity heading into the second quarter is shaped by the momentum that we saw building at the end of March. As for the next couple of quarters, I see demand for our services progressing modestly. The cadence of spend across basins for various companies will look different throughout the year, but Halliburton has the scale, range of services and customer relationships that capture more than anyone else out of every dollar spent in North America land this year. Now let's talk about the supply side. Given the demand landscape, the service industry has adjusted accordingly and cut capital spend. Currently, new horsepower is not being added to the market. At the same time, the existing equipment is working a lot harder today, leading to equipment attrition. The key driver of this is service intensity, which quickly translates into shorter equipment lives and higher maintenance costs. Let me give you some data points to put this in perspective. Halliburton is currently pushing 30% more sand volume through equipment than in 2016. The shift to local sand that is finer and more abrasive also leads to more equipment wear. Customers are drilling longer laterals and fracking more stages per well. Last year we fracked 20% more stages per horsepower than we did in 2016. And with increased efficiency, we've improved utilization, achieving more pumping hours per day. Again, more wear and tear. Industry sources estimate that about 7.5 million hydraulic horsepower will need to be rebuilt in 2019 to maintain a flat horsepower supply. This equates to $1.7 billion in equipment spend that I do not see forthcoming as the service companies have cut capital spending plans. As a result of these factors, I believe the capacity attrition will occur naturally throughout the year and that there will be less horsepower available in the market at the end of the year than there is today. Halliburton will significantly reduce North America hydraulic fracturing CapEx this year. We have sufficient size and scale in the market today and see no reason to invest in growth when it comes at the expense of returns. The capital that we do spend will be mostly directed towards improving efficiency, reducing emissions and refurbishing equipment. I'm frequently asked when we will add hydraulic fracturing capacity again? Let me tell you, I don’t see that happening until the market has better supply and demand balance and substantially better pricing. And despite the ongoing market rebalancing I just described, the market conditions are not conducive to adding capacity. In this market we are focused on maintaining the right level of capital spending to support our business. But most importantly, on continuing to deliver strong cash flow and returns. As the North America land market rebalances over the next few quarters, we will continue to control what we can control. We're positioning ourselves to outperform the market even if demand is substantially different from what we currently expect. I already mentioned our CapEx reduction. That was the first step. Second, we're reorganizing our structure in North America land to be more nimble and operate more efficiently. This will make us more effective in any market. Third, I often talk about continuous improvement. I want to make it clear that this is not a temporary initiative at Halliburton. It's part of who we are as a company. We are constantly looking for ways to eliminate waste and improve productivity in all parts of our organization, from technology to training, from supply chain to field operations. And we will continue to drive cost and capital efficiency throughout our company. Finally, and most importantly, we are a returns driven organization and where pricing concessions would have pushed returns below an acceptable threshold, we've instead elected to stack equipment, including frac fleets. Emerging from the industry's focus on cash flow and returns, we see stable growth over a longer period of time. This sustained growth will be good for Halliburton. It will allow us to leverage our supply chain and logistics infrastructure, drive asset velocity, capture efficiencies around our repair and maintenance programs, and implement technologies at scale to reduce costs and increase production. Therefore, we can be more efficient with our investments. Halliburton is well positioned to navigate the near-term and thrive in the long run. Our company is 100 years old and we got here by evolving with our market and our customers. We will continue to do so in the future. Turning to international markets, I'm excited by what I see. The international recovery continues to build momentum. Halliburton has gained share in key international markets over the last several years. This gives us a strong base to capitalize on the recovery and we expect high single-digit international revenue growth this year. The international recovery was initially led by the national oil companies and focused on mature fields. Now the offshore markets are also entering recovery mode as project economics become more attractive. International offshore spending is projected to be up 14% in 2019 and the average offshore international rig count increased 29% year-over-year in the first quarter. A great example of an emerging offshore rebound is our recent win with Shell in Brazil. In the first quarter, we started work on Shell's three-year integrated well construction campaign in the Santos and Campos basins offshore Brazil. These are some of the most complex, but also most prolific basins in the world. Halliburton is excited to collaborate with Shell on the first green shoots of long-term activity recovery in this critical deepwater market. Middle East activity is increasing, driven by rig additions in Iraq and Saudi Arabia. However, we expect pricing pressures in the Middle East to continue in the near-term. A steady volume of activity and excess equipment capacity in the region continue to drive competitiveness. Going forward, a call on production and tightening spare capacity should lead to positive pricing movements. The North Sea is showing pricing improvement with available drilling equipment capacity essentially absorbed. However, we expect margin pressure to remain for the first half of the year as we optimize performance on our competitively priced long-term contracts and continue to incur mobilization costs. Activity ramp-up continues across Asia Pacific and Africa with the rig counts in both regions now the highest level since the first quarter of 2015. We are starting to see pockets of pricing improvement in these areas as they come back from the downturn low. Latin America activity will improve this year driven by Mexico and Argentina. I'm excited about the near-term growth and long-term potential in that region. As we see more capacity tightness internationally and the pipeline of projects progressively expands, we expect to continue demonstrating rational returns driven growth in the international markets. The pricing discussions with our customers in some markets have become more constructive and we expect this momentum to build going into 2020. As the rationalization of the U.S shale industry unfolds and the international markets ramp-up, Halliburton is best positioned to capitalize on the future opportunities. We make thousands of decisions every day and our global presence, our diversified products and service portfolio, our culture, our processes and our depth of leadership will allow us to win. We will win through responsible capital stewardship, prioritizing capital efficiency, investing in the technologies that deliver differentiation and generating strong cash flow and returns. I will now turn the call over to Lance to provide more details on our financial results. Then I will return to discuss how we are strategically positioned to differentiate ourselves in the current market and deliver returns for our shareholders.

Thanks, Jeff. Let's begin with an overview of our first quarter results compared to the first quarter of 2018. Total company revenue for the quarter was $5.7 billion, essentially flat year-over-year, while adjusted operating income was $426 million, a 31% decrease. Now let me take a moment to discuss our divisional results. In our Completion and Production division, revenue was $3.7 billion, a decrease of 4% and operating income was $368 million, a decrease of 26%. These results were primarily driven by increased stimulation activity in North America, which was offset by lower pricing. The Completion and Production division also benefited from higher artificial lift and cementing activity in U.S land, increased stimulation activity in Latin America, and higher completion tool sales in the Middle East/Asia and Latin America regions. In our Drilling and Evaluation division, revenue increased 7% to $2.1 billion, driven by activity improvement across all regions. Operating income was $123 million, a decrease of 35%. These results were primarily driven by mobilization costs that we incurred on multiple international drilling projects, coupled with reduced project management activity and lower pricing in the Middle East. Moving to our geographical results. In North America, revenue decreased 7%, primarily driven by lower pricing in stimulation services, partially offset by higher artificial lift, cementing and stimulation services activity. Latin America revenue increased 28%. This increase was driven by higher activity for the majority of our product service lines in Mexico, increased stimulation work in Argentina and improved fluids activity throughout the region, partially offset by reduced drilling and testing activity in Brazil. Turning to Europe/Africa/CIS, revenue grew 4% driven by higher activity across multiple product service lines in Ghana and the United Kingdom. These results were partially offset by lower drilling activity in Azerbaijan. In Middle East/Asia revenue increased 7% year-over-year, largely resulting from higher completion tool sales across the region, coupled with increased project management activity in India and improved drilling activity in the Middle East. These improvements were offset by reduced fluids activity and lower pricing in the Middle East. In the first quarter, our corporate and other expense totaled $65 million, which is in line with our previous guidance. We expect corporate expense in the second quarter to remain approximately the same. During the quarter, we recognized a pre-tax charge of $61 million, primarily related to a non-cash impairment of legacy sand delivery equipment as we've adopted a more efficient sand logistic solution. Net interest expense for the quarter was $143 million, and we expect it to remain approximately the same for the next reporting period. Our effective tax rate for the first quarter was approximately 21%. Going forward, we expect our second quarter and 2019 full-year effective tax rate to be approximately 23%. Our first quarter cash flow from operations was a use of cash of $44 million, primarily driven by short-term working capital movements. We experienced some customer payment delays that should get resolved as the second quarter progresses. We've also built up inventory primarily for the international rollout of our strategic investments, and we plan to work this inventory down throughout the year. Historically, it's not unusual for our cash flow to be backend loaded and we expect to generate strong operating cash flow for the remainder of 2019. Capital expenditures during the quarter were $437 million with our 2019 full-year CapEx firm at $1.6 billion. On a full-year basis, we expect to generate higher free cash flow than last year by engaging the appropriate levers in different markets. Optimizing capacity and structure in North America, driving pricing improvements and contract optimization internationally, and managing working capital and CapEx. Now turning to our near-term operational outlook, let me provide you with some comments on how we believe the second quarter is shaping up. For our Drilling and Evaluation division, we are anticipating a second quarter rebound from typical seasonal disruptions in drilling activity, offset by ongoing mobilizations. Therefore, we expect sequential revenue to be up low single digits with margins increasing 50 to 150 basis points. In our Completion and Production division, with North America land activity improving and the worst in pricing deterioration behind us, we believe that revenues will increase mid-single digits, while margins should be up 50 to150 basis points. Now I will turn the call back over to Jeff to highlight some of our ongoing strategic initiatives and make a few closing comments.

Thanks, Lance. More than ever we're focused on exercising prudent capital allocation to the right priorities. We have solid long-term strategies aligned with value generation for our shareholders. We will continue to expand in the product service lines and penetrate the markets where we see opportunities to generate growth and returns. As we implement these strategies, we expect to generate economic and technical differentiation that will lead to higher returns and free cash flow. There are three main areas where we're investing this year and I will walk you through each one of them. First, we will continue to enhance the competitiveness of our Sperry drilling product line. I’ve talked to you a lot about iCruise, the new rotary steerable platform we introduced last year. The global rollout of this advanced drilling technology is on track with the tool already working in Argentina, the Middle East and across the U.S shale basins. We are currently building out the tool inventory and by the end of 2019, iCruise will constitute over a third of our rotary steerable fleet. Growth in the higher margin rotary steerable market is extremely encouraging, but conventional motors remain the workhorse of directional drilling, especially on land. Another initiative we undertook at Sperry to increase our competitiveness and differentiation was to launch our Motors Center of Excellence. It is a new approach to drilling motor development that combines specialized engineering and manufacturing capabilities to customize motor designs for specific basin challenges. The center deploys the latest mechanical engineering expertise to build more durable motors that drill faster and allow for longer runs with a higher rate of penetration. We have assembled a dedicated team of scientists in bearing and power section design, polymer chemistry and materials that is focused on accelerating research and development activities to deliver differentiated drilling motors to the industry. As part of our Motors Center of Excellence, last quarter we opened two new reline facilities equipped with state-of-the-art technology and strategically located in Houston and Saudi Arabia to serve our customers in the Western and Eastern Hemispheres. Next we will continue investing in our production businesses, artificial lift and specialty chemicals. They’re critical to both unconventionals and mature fields that fit well within our existing product portfolio and they have a lot of growth potential for Halliburton going forward. This year will be all about international expansion for these businesses. It is already well underway for artificial lift offering. We opened a testing and disassembly facility in the Middle East and are making ESP deliveries in several countries in Latin America and in the Middle East. Plans for international manufacturing of ESPs are in the works as well. I recently went to Saudi Arabia to attend a groundbreaking ceremony for Halliburton's first chemical manufacturing plant in the Eastern Hemisphere. Leveraging the expertise added through the Athlon acquisition last year, we are building a plant that will provide an advantage location for Halliburton to deliver superior service and chemical applications expertise to our Eastern Hemisphere customers. Upon completion in 2020, the plant will have capabilities to manufacture a broad slate of chemicals for stimulation, production, midstream and downstream engineered treatment programs. We will not only supply our customers with next generation specialty chemical solutions, but will also be able to manufacture chemicals for our own drilling fluids, cementing and stimulation businesses. Finally, the third focus area for this year. We will continue to differentiate in a very important, but highly competitive space in hydraulic fracturing. The intense exploration of top-tier acreage, fueled by rapid trial-and-error technology cycles led to the explosive increase in production from U.S. unconventionals that we've seen in the past decade. As shale matures and operators have to step out to second tier acreage, it will become increasingly hard to add enough production capacity to replace a significant legacy decline volume as well as drive new production higher. Going forward, higher activity and more advanced technology will be needed to maintain flat production levels in unconventionals. In light of this, I firmly believe that the future of unconventional technology will be more heavily weighted towards enabling higher well productivity. On a recent application in North Dakota's Williston basin, Prodigi enabled more even distribution of profit and fluid to each cluster, resulting in a 30% increase in cluster efficiency. This is just the beginning of what Prodigi will provide as we continue to work smarter going forward. And Halliburton is best positioned to develop and deploy the advanced technologies that will ultimately improve well performance. With shale maturation, capital discipline on both the operator and the services side and an escalating focus on technology and efficiency, we expect customers to demand both surface execution and subsurface effectiveness. It won't just be about getting the most number of stages fracked today. Improving the quality of those stages and their production output will be just as important. In this environment a strong integrated franchise will matter; size and scale matter, technology depth will matter; superior service quality will matter; customer collaboration will matter; and Halliburton has all of these. In summary, a supply and demand rebalance in North America land over the next few quarters, Halliburton is well positioned to navigate the near-term and thrive in the long run. Second, a broad-based recovery is ongoing internationally and will continue into 2020. Halliburton will keep achieving rational returns driven growth in the international markets. And finally, against this backdrop, Halliburton is focused on the right things. We're investing in the products and services that generate growth and returns, managing our costs and other operating levers and committed to generating strong free cash flow and industry-leading returns. And now, let's open it up for questions.

Thanks. Good morning, guys.

Good morning, Angie. Welcome back.

Thank you. It's great to be back. Jeff, could you elaborate on your statement that the worst of the pricing issues is behind us? Does that indicate that pricing pressure is still present? Additionally, you mentioned your strategies for improving margins, and I know that utilization and operational efficiency play a significant role in that. Could you discuss those strategies and how much more potential you have to enhance them?

Thanks, Angie. I believe the worst is behind us. This doesn't mean there aren't challenges, but as we assess the market and its direction, it does suggest that while there may be some lingering effects, I won't commit to specifics regarding our strategy. However, I can assure you that we're not seeing where thresholds are unmet, which gives me confidence. Additionally, when we look at activity levels and tightening capacity, all of this should improve as the year progresses, which I see as supportive of the notion that the pricing pressures have passed.

Okay. With the tightening capacity and the ongoing attrition, what are your thoughts on pricing for the second half of the year, or is that more likely to be a concern for 2020?

I'm not going to predict a specific date for when things will change. However, I believe we will experience tighter capacity throughout the year. I've mentioned how intensively our equipment is being utilized. Additionally, we observe similar capital discipline from our customers, and this focus on managing capital expenditures will significantly contribute to market balance. While the market is not balanced at this moment, I anticipate it will be more balanced later in the year.

Okay. Can you provide more details about the reorganization in the U.S.? Is there an opportunity for cost savings with this reorganization, or is it primarily focused on operational changes?

Look there's always cost associated with reorganization, but let me focus on making us more efficient and more nimble. A couple of years ago we took a fair amount of cost out, but most of that cost came in the form of an organization that would operate more efficiently and more quickly and it's really what we're doing here. This is not targeted at frontline by any means. What this is more around how do we brighten the lines and more quickly operate, make decisions and go to market. Now efficiency or lower cost is useful in any market in terms of driving performance, but that's not the intent.

Right. Great. Thanks. I'll turn it over.

Thanks.

Hey, good morning, guys.

Good morning, James.

Good morning, James.

So, Jeff and Lance, regarding North America, I have a couple of quick questions. First, are you stacking fleets now if you're not seeing the right return? Second, are you observing any movement toward rebundling? Previously, operators debundled when their spending was unrestricted, but now that their budgets have decreased, is there a possibility that rebundling, reorganizing, and enhancing collaboration within the business might begin to happen? I'm interested in your thoughts on both of these issues.

Yes. Thanks, James. On the first topic, we did stack equipment in the first quarter and I'm not going to go any further than that, but as we look at the market and look at returns on equipment that causes to make those decisions and we will continue to manage our business around returns. The second question though was around rebundling and look I've always had a view that over time those things that make sense to come back together do. I think we are early days of that, but there is just such an elegance and efficiency around how things fit together. That doesn't mean we're not very competitive with each slice and I think we demonstrated that. But at some point once the pieces and parts have been examined you start to see, wow, it's a lot simpler to put those pieces and parts back together but to come, James, but I feel good about where we are in that process.

Okay. Okay, got it. And then on the international side, Jeff it sounds like you’re a bit more bullish now than you were maybe a quarter ago. I guess, one, is that fair to say? And then, the second is kind of top line looks like it's going to be pretty strong this year. It has been strong, you’ve been outperforming. When do you think the bottom line or the incrementals start to outpace normalized incrementals?

Yes, thanks. I think what gives me more confidence is how broad-based this recovery looks today. We're starting to see growth not just in isolated areas, but nearly every region I mentioned shows some form of positive change, along with an expanding base of offshore activity and increased tendering activity as we move into 2020. Regarding margins, I will focus my comments on D&E. We expect stronger incrementals moving forward. In the first quarter, there was a mix of factors involved, including mobilizations typically occurring at midyear and changes in service mix, as well as a significant pricing impact from the Middle East. Much of the tender activity that began in 2018 started to materialize in earnest on January 1 of this year, which contributed to what we observed.

Okay.

But what’s important, I think is, we expect strong incrementals in the Q2 for that business and clearly Q1 in my view is a bottom for D&E margins.

Got it. Okay, great. Thanks, Jeff. Thanks, Lance.

Thank you.

Thanks, James.

Thank you. Good morning.

Good morning, Judson.

Hey, Jeff, you mentioned earlier the significant changes that can happen in 90 days. Could you elaborate on how the year has evolved in North America, particularly regarding shifts in customer sentiment or discussions? Additionally, how has visibility for the upcoming quarters or the latter half of the year changed, especially as the macro environment has started to stabilize?

I believe the stabilizing macro environment is crucial. Ninety days ago, we faced uncertainty regarding commodity prices, and the fourth quarter was challenging for many. In the last three months, the predicted changes in commodity prices have occurred, and customers are returning to work steadily. Each month has shown positive growth, shaping our outlook. Conversations with customers and the upcoming calendar reflect a constructive view for the next few quarters, especially in the latter half of the year. We have several considerations regarding this, particularly the current production targets, which necessitate some completion activity. Additionally, part of the capital expenditure reduction may be realized through factors like lower sand or service prices and possibly a slight decrease in rig counts. I'm also curious about how smaller operators will navigate the latter half of the year, as they may be the most opportunistic. Their smaller asset base means that investing in completions is crucial not only for asset value but also for the overall worth of the company.

I appreciate the information provided. For my follow-up, I have a question for Lance. Your guidance indicates that C&P revenues are expected to rise in the mid-single digits. However, it seems that pricing remains slightly unfavorable as we enter the second quarter. Could you share your thoughts on how much the effects of the pricing weakness in the first quarter will influence C&P revenue growth in the second quarter? I'm trying to understand the balance between volume and the impact of pricing pressure.

Thank you, Jud. It relates to what Jeff mentioned earlier. We might see some ongoing effects from pricing, but these are more than compensated for by the level of activity we observe, which is what shapes our guidance. So, it's primarily driven by volume with a slight influence from pricing.

Okay. All right. I appreciate the color. I will turn it back.

Thanks. Good morning.

Hi, Bill.

Good morning. Jeff, when you talk about the second half, is your frac calendar based on specific visibility that informs it, or is it more of a reasonable expectation that completions need to increase for various reasons, such as meeting customer budgets or filling Permian pipelines? Please clarify the difference between optionality and the actual visibility that is currently developing.

Yes, Bill, we have visibility for the calendar extending a couple of quarters ahead, which gives us a specific outlook. As we look further into the year, especially in the second half, there are indicators we monitor, such as whether production targets are being met, the rig count with smaller operators, and how those might change. Additionally, the activity levels could vary across different basins. We are actively engaging with customers, and their outlooks appear to be quite mixed regarding how they intend to manage their activities throughout the year. We are asking these kinds of questions much earlier than in the past, and I feel confident in Halliburton's outlook for the remainder of the year, thanks to our business development team's ability to refine our strategies and performance.

Thank you. Regarding international margins, it appears that the primary factor contributing to weaker D&E margins in Q1 was the mobilization expense associated with various drilling projects, which is a temporary issue. I'm interested to know how widespread the mobilization challenges were in Q1 outside of the North Sea. Additionally, when do we expect this issue to ease, and does it not present a significant margin opportunity in the second half of the year?

Yes, Bill. This is Lance. Look, I think there's opportunity and we do expect D&E margins to improve throughout the course of the year. I think we've been pretty vocal around that. While the mobilization sure will provide that uplift, it's not to discount the pricing pressure that we continue to see in the Middle East.

Okay.

As we progress through the first half of this year, we expect D&E margins to significantly improve in the second half, resulting in flat year-over-year margins in D&E.

Okay. So it's flat year-over-year margins for FY19 or second half versus second half?

Flat year for FY19.

Okay. Thank you very much, sir.

Yes.

Yes, good morning.

Good morning, Scott.

Good morning, Scott.

Jeff, you mentioned in your prepared remarks that the U.S market is likely settling into one that’s less volatile, which would be good for you. It sounds like mainly a demand comment and obviously there's only so much you can control. Have you thought about ways of further reducing the volatility from your side, and how do you think about customer exposure? Does the growth of the majors presents an opportunity to tender into some contracts, which maybe stickier and longer term? Is there an ability to look at the E&Ps, given that they are settling into a spending cadence that maybe steadier? Is there an ability to go after some longer term deals with them? How do you think about overall reducing the volatility in the business?

Yes, we are certainly considering the points you've raised. Historically, we've optimized our frac fleet to focus on customers that we believe can provide the highest margins. However, with the increasing scale of shale industrialization, those dynamics are changing, and we are well positioned to grow alongside these relationships. We plan to pursue these opportunities but will always prioritize the best returns for our shareholders.

Got it. And then you mentioned 20% efficiency gains in frac over the last two years, how should we think about those gains in '19 and '20? Are you seeing efficiency improvement on par is starting to slow, just some color on that trend as well would be great.

Yes, I think we are seeing that. Through a degree we are reaching some sort of maximum velocity here just in terms of hours a day. If I would think back there have been some big sort of milestones in efficiency when Halliburton has been at the front edge of each of those. So the first was going from 12 to 24-hour a day operations, that was a big step. Next was more around zipper fracs as opposed to single well fracs and then multi-well pads as opposed to single well pads. All of those are sort of structural step changes. We’ve done a lot at the margin around being more efficient and our focus is taking capital off location not putting more capital on location. And so we do some things to drive our capital efficiency, but the big steps, I don’t necessarily see those today. What I really see over the next cycle or the next few years is more emphasis around what’s happening around the well bore as opposed to on surface and you hear a lot of discussion around that. But I say that to include everything from parent child, the spacing, the velocity, the all of these other things that we believe and I believe will have more impact on productivity and efficiency over the next three, five years.

If you had to put a number on the efficiency improvement this year, what would you peg it at?

I don't know. Less than it's been. I would just call it 5%, 10% maybe in that range.

Okay, appreciate it. Thank you.

Thank you.

Thank you. Good morning.

Good morning, Sean.

Sean.

So you mentioned, you've got a lot of different levers to drive cash flow depending on what the market gives you. I think a lot of your 2019 CapEx budget was committed prior to the reduction that you took end of the year. So, conceptually, if 2020 looks a lot like 2019, in other words, activity in North America is comparable, international's improving modestly, could your CapEx budget take another cut lower as some of the recent growth initiatives in Drilling & Production start to roll off?

Thanks, Sean. In terms of the relationship between capital expenditures and revenue, we're currently at a rate of just over 6%, which is lower than the average of around 10% we've seen over the past decade. We've been clear about where we're focusing our spending within the $1.6 billion of capital expenditures this year. I believe that a rate of approximately 7% is a reasonable target for next year. While the specific areas of investment may shift, the overall pace of capital spending as we reinvest in the business seems solid.

When considering our outlook, we are concentrating on growth that focuses on returns. This year, we are continuing to invest in strategic initiatives, including expanding our Sperry iCruise fleet and pursuing international growth. We are aligning our spending with about 6% to 7% of revenues, which seems sustainable to me and does not indicate a change in our strategy. In this market, that level of spending is suitable for generating returns.

Thank you for your feedback. I would like to clarify your comments about pricing pressure in the Middle East. Are you suggesting that this pressure is coming from customers, or is it simply related to the contracts we secured last year?

What we are observing this quarter is the initiation of contracts at lower prices. This doesn't necessarily indicate that the trend has stopped, but it is definitely what we are currently witnessing. As we look ahead, our focus will be on optimizing and improving profitability over time.

Would you say that the magnitude of the decline is due to the mobilization and that pricing is basically in line with what you would have expected for the quarter?

Yes, that's what we generally thought we'd see, and we also observed several factors I mentioned in my comments regarding mobilization, pricing, and the challenging weather in the North Sea this quarter, which was tougher than we anticipated.

Very good. Okay, thank you.

Thanks, Sean.

Your line is now open.

Hey, good morning, everybody.

Good morning, Kurt.

I have a follow-up question. When discussing the overall spending activity, with U.S. spending levels down 6% to 10% and international spending up in the high single digits, can we assume that in total Completion and Production revenues would increase? You mentioned completion activity is rising, so I would expect overall C&P revenues to be up year-on-year, possibly in the high single-digit range. However, given that drilling activity is down in the U.S., that might offset growth internationally for Drilling and Evaluation. I'm trying to understand if it's reasonable to think of C&P revenues increasing year-on-year while D&E remains flat.

The way I see it, Kurt, is that we expect our completions activity to remain relatively flat year-over-year. Even though spending is decreasing in North America, this is reflected in lower sand prices or reduced drilling costs rather than in actual completions activity. When considering Drilling and Evaluation, especially influenced by international markets, we observe a general recovery with some pricing improvements, though it is also impacted by the competitive landscape in the Middle East. So, it’s a matter of balancing all these factors.

Got it. I appreciate that, Lance. Jeff, I have a follow-up question for you. I know you've consistently focused on returns, which is a key principle for the company. Could you share your thoughts on return thresholds? When considering our overall cycle, do you view it as a 3-year, 5-year, or 10-year period? Any general insights on that would be appreciated.

When I consider returns, I think about sustained growth over time. I also believe that the era of growth at any cost is finished, which is why I view returns-focused growth as the right approach. I feel very positive about Halliburton in this environment. We have always prioritized returns, starting with margins by improving pricing and managing costs. We consistently manage costs in this context. Additionally, disciplined investing plays a key role; we become selective with our capital when necessary and make sure we are investing in the right businesses.

Okay. That's helpful. And maybe one follow-up just on the attrition comment, Jeff, you referenced earlier that 7.5 million horsepower will need to be rebuilt in '19 and you wouldn't think the spending level required to rebuild that equipment would happen. So in the context of attrition then, how much horsepower do you think could shake out of the market this year?

Kurt, this is Lance. It's difficult to quantify precisely. Attrition in the pressure pumping industry has always been challenging to define. However, we can see its impact on our fleet, and our prepared remarks included some statistics that highlight its significance. And today we know that there's under-investment. We know that there's more pressure than ever on all of the fleet in North America around wear and tear and therefore the repair and maintenance costs associated with it and the burden that a lot of our space has had to shoulder it, I think, look, at the end of the day, there's going to be some that are just going to flat out, be retired.

Got it. Right. That’s helpful. Thank you very much.

Thanks, Kurt.

Thanks.

Hey, thanks, guys.

Hi, Dan.

One of the follow-up on the international outlook, you put up a 11% growth in the first quarter, the guide for the second quarter sounds like about 10% first half growth year-on-year and presumably the mobilization costs you are calling out suggests continued growth in the back half. So just wondering what keeps you with a little bit more of a conservative high single-digit revenue number for the year?

We want to have a realistic perspective on the market trends we’re observing. Much of the tender activity we see now likely won’t commence until 2020, though we do see momentum building. I’ve mentioned a focus on returns-driven growth, which involves ensuring we invest in the right initiatives. We feel optimistic about the future. I believe we will experience growth as I outlined for 2019, and this should carry on into 2020 as broad offshore activities commence, moving beyond discussions to actual tenders. We remain positive, but we will also manage our business carefully.

Yes, just being conservative. Lance, I wanted to follow-up on Bill's question on the D&E margins. So, in order to keep them flat year-on-year it sounds like we need to exit the year in the fourth quarter low double digits. And so just wondering as you look past mobilization cost that you are incurring, is that a number that you sort of see without pricing and without big contract wins from here on out, but basically is how de-risked is that low double-digit margin?

Well, look, I mean we are going to have to work towards it, no doubt. But I think the tailwind that you get as you begin to put revenues across the costs that we’ve been running and around the actions that we are taking in the North Sea and those mobilizations, I also think that we expect to start to see some benefit as we get more Sperry tools in the market. I think we told you that a third of the Sperry fleet will be iCruise by the end of the year, we are working hard to get those tools out, that’s part of the working capital build that you saw on the inventory side that I mentioned in my commentary around the international strategic investments and so those are the things that give me confidence that we can continue to build on what we need to get to those commitments.

All right. Thank you.

Thanks, Dan.

Hi. Thank you. First question just back to the pricing discussion for North America, Jeff, you noted the 14 product service lines that Halliburton offers. Is there any distinction among those lines in terms of where pricing is bottoming, specifically everybody is focused on frac, but as you mentioned you are a big player in cementing, there's been some concern about cementing competition. Just curious if there's any distinction you could offer on those product lines?

Yes, it's a very competitive space in North America, so I won't provide any further details on pricing or the status of other service lines. Hydraulic fracturing is currently the largest segment in North America, and it is likely the most oversupplied. I will leave it at that.

Okay. Thanks for that. And then, Lance, in terms of the outlook for free cash flow growth for the year, big working capital consumption here in the first quarter, which is seasonal. Would you anticipate working capital for the year to be a neutral, a positive, or negative?

I believe we will see significant advantages as we address the accounts receivable that have accumulated in the first quarter. I expect we will continue to reduce much of the inventory we have built up, and I anticipate that at some point during the year, the working capital will generate cash.

Okay, super. Thanks so much.

Thanks, Marc.

Thanks, Marc.

Yes. Thank you, Candice. Before we wrap up the call, I would just like to highlight a few points. First, I’m excited about the broad-based international recovery that we see unfolding and Halliburton is well positioned to take advantage of this growth. Second, I believe that demand for North America completions will be up modestly over the next few quarters and that capacity will tighten over the balance of the year. Finally, our focus on capital discipline, capacity tightening, and cost management will deliver leading returns and free cash flow in excess of last year. Look, I look forward to speaking with you again next quarter. Candice, please close out the call.