Halliburton Company (HAL) — Q2 2019 Earnings Call Transcript

Good morning and welcome to the Halliburton second quarter 2019 conference call. As a reminder, today's call is being webcast and a replay will be available on Halliburton's website for seven days. Joining me today are Jeff Miller, Chairman, President, and CEO; and Lance Loeffler, 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 31st, 2018; Form 10-Q for the quarter ended March 31st, 2019; recent current reports on Form 8-K and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures that exclude the impact of impairments and other charges. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our second quarter press release and can be found in the Quarterly Results section of our website. 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 time for others who may be in the queue. Now, I'll turn the call over to Jeff.

Thank you, Abu. Good morning everyone. Commodity markets navigated some choppy waters during the second quarter. On the one hand, there are global oil demand concerns largely attributed to the uncertainties surrounding the outcome of the U.S.-China trade talks. On the other hand, oil prices have recently been buoyed by supply-side reactions to the extension of OPEC plus production cuts, ongoing output declines in Venezuela, U.S. sanctions on Iranian oil exports, and political instability in Libya and Sudan. Against this backdrop, Halliburton's execution in the second quarter was outstanding and I am very pleased with our results. We continue to build on the growth momentum internationally and successfully managed the market dynamics in North America. Before we dive into the details, here are a few highlights for the second quarter. Total company revenue was $5.9 billion and adjusted operating income was $550 million, representing increases of 3% and 29% respectively compared to the first quarter of 2019. Our Completion and Production division grew revenue 4% and operating income 28% sequentially. Improved completion activity in North America land and our solid execution globally resulted in delivering better-than-expected margins. Our Drilling and Evaluation division grew operating income 18% quarter-over-quarter with strong improvements coming from our Sperry Drilling and Wireline and Perforating product service lines. Overall, D&E division incremental margin was 44%. North America demonstrated solid performance this quarter, delivering 2% revenue growth despite the dropping rig count. International revenue grew 6% sequentially, led by activity increases in the Eastern Hemisphere. And finally, we generated approximately $450 million in operating cash flow as well as positive free cash flow in the second quarter. Now, I'd like to provide some regional commentary beginning with the international markets. I'm excited by what I see internationally, a continued broad-based recovery across multiple geographies, primarily driven by land and shallow water operations. Our business in the North Sea is extremely busy both in the Norwegian and U.K. sectors. We have significantly increased our market share there by winning large tenders. Currently, we're sold out of drilling and wireline tools in the North Sea. As activity keeps ramping up, especially with independent operators taking over IOC assets in the U.K., supply and demand balances significantly tightened for tools and I expect that incremental work will come with better pricing. We see similar dynamics in the Asia-Pacific markets. Malaysia, Australia, and India are all showing strong activity growth. Increased activity leads to better pricing dynamics and we're already seeing the leading edge of pricing improvement in those markets. For instance, tightness in the supply of open hole wireline tools has allowed us to raise prices in certain markets. As to the broader offshore market, we've seen enough signs to anticipate future growth. In June, the year-over-year change in offshore rig count was up for the 12th consecutive month and appears to be gaining momentum. However, the majority of large offshore projects being sanctioned or awarded today have a 2020 or 2021 start date. For example, this month we announced an integrated offshore drilling services contract win with Kuwait Oil Company. This is the first offshore project in Kuwait since the 1980s and it includes six high-pressure, high-temperature exploration wells on two jack-up rigs in the Arabian Gulf. Starting next summer, Halliburton will provide well construction services, well testing, coring, coil tubing, and the majority of offshore logistical services under this three-year contract. Halliburton entered this international recovery a much stronger competitor. Over the last decade, we've taken strategic actions that have increased the market opportunities in which we can compete. To be specific, first, we made substantial investments to grow our international footprint in the years prior to the downturn. We increased our product service line presence in various geographies, expanded our manufacturing capacity in Singapore, and opened technology centers in Saudi Arabia, India, and Brazil. I cannot emphasize enough how important physical footprint is in the international markets. You simply must be present to win. Second, we made strategic investments and closed technology gaps in product lines that we believe are critical to our success in the international markets. These product lines are Sperry Drilling. I've talked to you a lot about the iCruise, our new rotary steerable platform. Rotary steerables are used globally for drilling both onshore and offshore wells. A competitive drilling technology is critical because it's not only a higher-margin business, it's also the cornerstone of integrated well construction services. Because of superior technical specs and the modular design of this tool, we're confident that replacing our legacy platform with iCruise will enhance our competitiveness, save on maintenance costs, and improve asset velocity. We're already running it in the U.S. as well as in Latin America, the North Sea, and the Middle East. In fact, it delivered the longest lateral and longest well in Argentina's Vaca Muerta shale in its first deployment. Another Sperry innovation introduced last year is the EarthStar ultra-deep resistivity sensor that turns on the high beams in the reservoir, so we can now see over 200 feet around the wellbore while drilling, more than double the depth of detection of other industry offerings. This technology is critically important for offshore exploration and has been instrumental to Halliburton securing deepwater drilling contracts in Norway, Brazil, and Guyana. During the second quarter, a customer in Norway deployed EarthStar on a deepwater exploration well with a very tight drilling window, one of the most complex wells this operator ever planned. Using the data acquired by the tool, we were able to precisely land the well and to identify secondary pay zones directly impacting the well's production potential. Other product lines we've strengthened are openhole wireline and production testing. These are highly technical and differentiated businesses. Today, Halliburton successfully competes for the most advanced openhole wireline and testing projects around the globe, going head-to-head with our key competitors. All of these efforts give us a strong base to capitalize on the international recovery, and we expect to deliver high-single-digit international revenue growth this year. As I highlighted, our Drilling and Evaluation division, driven in large part by our international footprint, performed as expected in the second quarter. The catalysts for the second half D&E margin improvement are all intact, and I have confidence in our team's ability to execute. We expect to see meaningful revenue ramps in Norway and India as mobilization costs wane and execution starts in earnest. I've talked about the iCruise drilling system and the cost savings it provides to Halliburton. This and other D&E technologies that we're deploying will continue their market penetration and further improve our margin performance. Finally, end-of-year product and software sales should provide an additional boost to D&E margins. As I look ahead, I'm encouraged by the leading edge pricing discussions in various international markets. Although we cut overall CapEx, we have not done so at the expense of growing our international business. Our CapEx reduction is driving the right capital allocation decisions and the right pricing and return discussions. Once the activity momentum builds internationally, it's hard to slow it down. Given the timing of contract starts and the current awards pipeline, I expect the activity growth to continue into 2020. Now turning to North America. I am pleased with how Halliburton performed in North America during the quarter. Congratulations to our North America team for a solid execution. In the second quarter, we saw a modest improvement in hydraulic fracturing activity which manifested in mid-single-digit increases in both completed stages and pumping hours during the quarter. While our pricing remained stable, we were able to improve margins by reducing costs and maximizing our equipment utilization. This is what I mean when I tell you that we will control what we can control and manage our business to perform well in any market conditions. It's important to note that second quarter results were not solely based on the performance of our hydraulic fracturing business. In fact, other C&P and D&E product service lines made meaningful contributions to both revenue and margins in North America in the second quarter. The increasing contribution from non-hydraulic fracturing product lines is important. It demonstrates our strategy to profitably grow our share of services per well both in North America and internationally and the results are showing. Despite the average quarterly rig count in North America dropping 13% since the first quarter, our cementing product line activity remained stable and margins grew quarter-over-quarter. We're able to achieve this with no additional capital by effectively utilizing assets and increasing the number of jobs per cement unit. As well complexity and lateral lengths increase in U.S. unconventionals, creating dependable well barriers and curing mud losses has become more critical. Built on a century of technical innovation, our lost circulation solutions and light cement slurries delivered results in the most challenging conditions, differentiating Halliburton from the competition. With tailored cement designs, Halliburton executed the longest laterals to date in the DJ, Permian, and Marcellus basins, with each lateral over three miles long. Our wireline and perforating product line continued to generate profitable growth driven by its diverse and competitive technology portfolio and exceptional service quality. In our North America perforating business, we're quickly gaining share with the proprietary integrated gun system. Halliburton velocity modular guns can be location preassembled and do not require any field wiring, which makes them a lot easier, faster, and safer to deploy than conventional perforating guns. With velocity guns, we're delivering more than 400 runs between misruns, a fourfold improvement in service quality and efficiency compared to conventional guns. Modular guns have seen a very fast uptake with our customers, growing to 40% of the gun shot by Halliburton in just a year from launch. Our Artificial Lift business, which consists primarily of electric submersible pumps, continued to outpace the market. It delivered a record second quarter growing both revenue and profitability. ESPs have proven to be a very valuable asset in our production portfolio, serving both the conventional and unconventional markets. Looking forward, I believe that our customers' activity cadence for the rest of the year will be dictated by their focus on remaining within their announced CapEx budgets and generating free cash flow. Some will slow down as they've been very efficient and will scale back completion programs for the rest of the year to stay within their CapEx guidance. Others may drop rigs but will continue working down their docks. Majors will most likely continue executing their growth plans in the U.S. shale to meet their longer-term objectives. As a result of these different customer behaviors, we expect that activity in North America will be slightly down in the third quarter. We anticipate the slowdown to be more pronounced in gassier basins due to persisting lower gas prices. Despite the near-term softness in activity, we expect our margins to remain stable next quarter. We are taking the actions that allow us to protect margins and as evidenced by our second quarter C&P performance, these actions are working. As we navigate 2019 and beyond, our company is executing a different playbook than in the past. Here's what we are doing to keep delivering returns and cash flows to our investors. First, we recognize the changing behavior of our customers and have changed our own approach to capital spending. In 2019, we decreased CapEx by 20% year-on-year and the majority of the reduction came from North America. We have sufficient size and scale in this market and see no reason to invest in growth when it comes at the expense of returns. The capital that we do spend this year in the U.S. is mostly directed towards increasing efficiency and refurbishing equipment, both with line of sight to improving returns and cash flow. Second, we're reducing our operating costs. For example, we recently restructured our North America organization, removing several layers of management. The restructuring has changed our cost profile certainly, but it's also increased our market responsiveness. We are also partnering with our premier supply chain and logistics organization to reduce our input costs. We continue to evaluate cost reduction opportunities across the company and we will manage and right-size our North America operations for the market environment. Finally, we have stacked additional equipment throughout the quarter and will continue to do so where we do not see acceptable returns. The pressure pumping market remains oversupplied and we're not afraid to reduce our fleet size, as it contributes to righting the supply and demand imbalance. This may impact our top line in the near term, but saves labor and maintenance costs and I believe will lead to better margins. We are taking these actions while continuing to drive growth in the product service lines that we expect to most positively contribute to profit and cash flow generation in North America. In my view, as unconventionals enter a maturation phase, represented by the pivot from scarcity to abundance, technology will differentiate Halliburton and I'm excited about our prospects. Customers are required to maximize production for every CapEx dollar they spend, and technology that can improve well productivity will be key to their success. These are the challenges that Halliburton solves every day. For example, our automated fracturing service optimizes sand placement per lateral foot and ensures every cluster makes a meaningful contribution to well production. Our open-hole wireline business is growing in unconventionals, as customers spend time and money evaluating their reservoirs prior to fracturing them. We see an increased use of fiber optics across various basins as operators aim to evaluate stimulation performance and make changes in real-time. And I am convinced that no one is better at collaborating with customers to engineer solutions that deliver the lowest cost per barrel than Halliburton. With that, I'll turn the call over to Lance for a financial update.

Thank you, Jeff. Let's begin with an overview of our second quarter results compared to the first quarter of 2019. Total company revenue for the quarter was $5.9 billion and adjusted operating income was $550 million, representing increases of 3% and 29% respectively. Now let me turn to our divisional results. In our Completion and Production division, revenue was $3.8 billion, representing an increase of $143 million or 4%. Operating income was $470 million, an increase of $102 million or 28%. These improvements were primarily driven by increased Cementing activity and completion tool sales internationally, higher artificial lift activity in North America, increased stimulation activity in North America and the Middle East/Asia and increased pipeline services in Europe/Africa/CIS. These results were offset by reduced stimulation activity in Latin America. In our Drilling and Evaluation division, revenue was $2.1 billion, an increase of $50 million or 2%. Operating income was $145 million, an increase of $22 million or 18%. These improvements were primarily driven by increased wireline activity globally, improved drilling activity in North America, Latin America and Europe/Africa/CIS, and higher project management activity in the Middle East/Asia. Partially offsetting these increases were reduced fluids activity in Latin America and North America and lower software revenue globally. Moving on to our geographical results. In North America, revenue in the second quarter of 2019 was $3.3 billion, a 2% increase. Improvements were primarily driven by higher stimulation artificial lift and wireline activity in North America land and higher drilling activity in the Gulf of Mexico. These results were partially offset by lower software revenue across the region and reduced fluids activity in the Gulf of Mexico. Latin America revenue was $571 million, a 3% decrease sequentially, resulting primarily from lower software revenue and reduced fluids activity throughout the region, as well as reduced stimulation activity in Argentina. These reductions were partially offset by increased drilling and wireline in activity in Mexico and higher Cementing activity and completion tool sales in Argentina. Even though activity was slightly lower in Latin America this quarter, we expected to step up in the second half of the year, with a ramp-up in Argentina, Guyana, and Colombia. Turning to Europe/Africa/CIS. Revenue was $823 million, a 10% increase sequentially, primarily driven by higher activity across multiple product service lines in the North Sea and increased well construction services in Russia, partially offset by reduced software revenue throughout the region. In the Middle East/Asia, revenue was $1.2 billion, a 7% increase sequentially, largely resulting from higher completion tool sales and increased pressure pumping, wireline and project management activity throughout the region, coupled with improved drilling activity in Asia. These results were partially offset by lower drilling activity in the Middle East. In the second quarter, our corporate and other expense totaled $65 million and we expect it to remain at these levels for the third quarter. During the second quarter, we recognized a pre-tax charge of $247 million, consisting primarily of asset impairments and severance costs. As Jeff discussed earlier, we continue to adjust our cost structure and footprint to the current operating environment in North America. Net interest expense for the quarter was $144 million and we expect it to remain approximately the same for the next reporting period. Our effective tax rate for the second quarter was approximately 23%. Going forward, we anticipate our third quarter and 2019 full year effective tax rate to be 22% based on our expected earnings mix. We generated approximately $450 million of cash from operations during this quarter. We made progress in collecting our receivables while our inventory slightly increased related to our strategic technology deployments. We expect inventory to be consumed through the rest of the year, and I see the second quarter as a step in the right direction as we generated positive free cash flow. We will continue to target working capital as a key focus for the organization. On a full-year basis, we believe working capital levels will be essentially flat with 2018. And for the full year, we still expect to generate free cash flow at or above 2018 levels. Capital expenditures during the quarter were $408 million and our 2019 full-year CapEx guidance remains unchanged. While our CapEx of $1.6 billion this year is similar to our DD&A level, we anticipate capital spend in 2020 to be significantly less than that. This level of spend will still allow us to capitalize on the international growth while being responsive to the market conditions in North America. At Halliburton, CapEx is at the core of our strategy execution. Our capital allocation behavior drives the right returns discussions both internally and with our customers and this is consistent with our focus on generating strong cash flow for our investors regardless of the market environment. Finally, we continue our focus on delivering shareholder returns. During the second quarter, we returned approximately $260 million to shareholders via share repurchases and dividends. Now, turning to our near-term operational outlook. Let me provide you with some comments on how we believe the third quarter is shaping up. For our Drilling and Evaluation division, we expect activity increases in the North Sea and Asia to be offset by lower activity in Africa and North America. All-in, we expect sequential revenue to be up low single digits with margins increasing 125 to 175 basis points as we see the impact of the catalyst for D&E margin improvement that Jeff described earlier. At our Completion and Production division, lower activity in North America will be offset by higher activity internationally and the impact of our cost reduction efforts. As a result, we believe that sequential revenue will be down low single digits with margins expected to remain essentially flat.

Thanks, Lance. To summarize our discussion today, momentum is building internationally and activity improvement should continue into 2020. Leading edge pricing is trending upward as equipment supply and demand balance tightens in various geographies. Halliburton has the footprint and the expanded technology portfolio to capitalize on this international growth. We recognize the changing behavior of our North American customers and are executing a new playbook to keep generating returns and free cash flow. Halliburton is taking the right actions to be successful in this market. We have cut overall CapEx in 2019 and plan to do so in 2020 as well. This is driving the right capital allocation decisions and pricing and returns discussions. We are reducing our operating costs. We have restructured our North American organization and are also partnering with our premier supply chain and logistics organization to reduce our input costs. We have stacked additional equipment throughout the quarter and will continue to do so with a focus on returns. We are strategically growing our share of services per well by increasing the competitiveness of our non-hydraulic fracturing product service lines. And finally, we're developing technologies that will improve well productivity, a requirement of a mature unconventional market. We remain focused on delivering consistent execution, generating superior financial performance and providing industry-leading shareholder returns. And now let's open it up for questions.

James, you there?

Thanks. Good morning, guys.

Good morning, Angie.

So I thought I was interested in your comments. Let's start on the international side for a change and the momentum you're seeing going into even 2020. Maybe you can give us a little incremental color on the degree of momentum we could see next year. Could we see similar growth levels for revenue in the international markets as you did in 2018? And then on the pricing side, do you expect it to continue to be region-specific or could it become more widespread?

Yeah. Thanks, Angie. International doesn't move as fast as, for example, North America. So, when we see a trajectory, it tends to stay on that trajectory. And I'm encouraged by 2020 because of the number of FIDs and types of things that we're seeing today that really don't get started until 2020. So the Kuwait, for example, doesn't really begin until the middle of next year though it was won now. And so, the FIDs that we're seeing now, give me confidence about the trajectory for 2020. You're early to call growth rates for next year. But yeah, I think you meant 2019 when I see a similar kind of growth trajectory 2019 that carried over into 2020. And yeah that seems reasonable to me.

Okay, that's helpful. Regarding the North America land market, congratulations on being proactive by stacking equipment in this market instead of competing for share. You mentioned that pricing is stable, while one of your competitors noted some softness in pricing. Could you discuss pricing further and the potential decline in activity we might expect in Q3 and into Q4?

Yeah, Angie let me start with pricing. I mean from our perspective it was stable for us through Q2. That doesn't mean there isn't occasionally something that we see in terms of pricing behavior by a competitor. But on balance, very stable. As we look at the balance of the year certainly from an activity standpoint, I've said it would be down slightly in Q3. Obviously, Q4 always comes with weather seasonality all of that, I suspect given budgets that we would see a more pronounced step down as well around that. But I think what's really important here is as you described it the way we're approaching the market, I mean our playbook is different. We're very sharp around taking costs out where we see it needs to come out. We've demonstrated that we do stack equipment, will stack equipment and are just dead focused on returns and margins. And so that's kind of the way we see the second half of the year. Obviously, customer spend through Q2, we don't know that yet. But when we do know that, I think that will also be instructive on the second half of the year. We talk to our customers, so we know what they're thinking, but the fact is we need to look at where those budgets come out in Q2. And I guess just one follow-up on international pricing you'd ask that question Angie. We're seeing international pricing. It is getting traction. It's getting traction around tool shortages and demand certainly in the North Sea. We've seen it in a few other markets as well. And I think that's part of what we see from our standpoint anyway that the capital discipline that we're driving is driving the right conversations with customers, and quite frankly the right choices by us.

Great. Thanks. I'll turn it over.

Thanks. Hi, good morning.

Good morning, Sean.

So Jeff, you mentioned that you're working from a different playbook, given this is a different cycle and I certainly agree with that approach. And it seems like your thinking is evolving in terms of how you're looking at CapEx next year. Could you maybe just walk us through a little bit of flex points? I know it's still a bit early in the year, but how you're thinking about some of the flex around putting that budget together. I think one of the most common questions investors are wrestling with now is, for Halliburton, with the largest legacy frac fleet, how electric frac may or may not factor into those thoughts into next year? Could you help maybe frame that out for us a little bit?

Yes, thanks, Sean. We're currently in the early stages of planning our capital expenditures for 2020. I want to emphasize that this is important for us. As we discuss our CapEx for 2020, we are committed to pursuing growth and international opportunities while also recognizing that there is still potential for growth in North America, depending on customer budgets. It’s crucial to consider how the scarcity of capital is influencing behaviors and decisions, which we will carry into 2020. Regarding electric fleets, we have considerable experience and have been testing them for some time. This isn't a new area for us, but we will be strategic about our capital deployment. The market for electric fleets is currently oversaturated. At the end of each year, we evaluate our fleet, which includes assessing any retiring assets and making decisions about replacements. We contemplate whether to replace these with a quieter fleet, a dual-fuel fleet, or potentially an electric fleet. While we view this transition as an evolution, we currently don’t see customers willing to pay a premium for electric options. That outlines our perspective on electric fleets at this point.

I appreciate that. Thank you for that feedback. And then Lance, I mean, can we talk a little bit more about working capital? You mentioned the inventory build in the first half of the year and your expectation that that will convert to a source of cash in the back half. How would you characterize collections across the different operator types at this stage? Are we in a fairly normalized environment or there's still some challenges here? How would you frame out that impact as we look at the back half of 2019?

Yes. Sean, thanks for the question. So, look, over the last two years, we've generated over $1 billion of free cash flow and I expect that that trend continues in 2019. Now we've got work to do in the second half of the year, but the path to that free cash flow generation first starts with sort of margin improvement in 2H, particularly with our D&E business, right? But it also includes making progress on collection. We saw DSO improvement from Q1 to Q2 and I suspect that that will continue throughout the course of the second half of the year. In terms of inventory that you mentioned, it is true. We've invested a considerable amount in inventory in the first half of the year as we continue to deploy iCruise and our Sperry technology deployment as well as I expect us to burn that down in the second half of the year in addition to the normal traditional completion tool delivery that we expect in the back half of the year. So, I think both of those will be momentum adding to our free cash flow. Now, I'd also point out too, our rate of spend in CapEx was heavier in the first half of the year which is not unusual. We reiterated our guidance around the $1.6 billion of spend in this year. So it will have a slower rate of spend in the second half as well.

Got it. Thank you for all the details.

Hey, good morning, guys.

Hi James.

So you can hear me now, right?

Yes. We can hear you.

Okay. Good. All right, good. Sorry about that. That was a phone issue today. So my first question Jeff, international here we're starting to see some acceleration. As you look out into 2020 likely to see volumes at or maybe even above kind of current growth levels, plus you're going to get some offshore, plus you got some pricing. Could we be in a scenario where we start to dip into the kind of double-digit type of growth internationally in 2020?

Yes. I mean James, I'm not ready to call 2020 at this point, but there's no reason not to believe that's possible. I think, the thing we're going to stay dead focused on though going into 2020 are going to be margins and we want profitable growth. And I think, we demonstrated with where we are we can grow and we've grown quite a bit internationally. But we're going to again keep a sharp eye on margins as that market unfolds.

Okay. Fair enough. Pricing is clearly a major factor in that margin profile. During your discussions, considering your frequent travels in international markets, how much resistance do you encounter regarding pricing? Is the market now recognizing that equipment is in short supply and that there’s a need to achieve a reasonable return?

Well it's a mixed bag. I mean I would say that our state customers look at that scenario and realize that service pricing isn't adequate and returns aren't adequate and need the work done well and we have a lot more success with those customers and that's a bigger group of customers. It gets to be a bigger group of customers all of the time. It also helps when we say or demonstrate that tools are sold out and we can do that by making choices and so that also helps. Our service quality that Halliburton has is a level quite frankly I've never seen it before. And so what we have to offer is a fantastic product and so we're very comfortable talking about pricing today.

Got it. Thanks Jeff.

Yes, good morning.

Good morning Scott.

So I wanted to come back to e-frac. I realize it's early days for the technology, but assuming that a strong demand pull does materialize for the technology, would you look at e-frac capacity at a rate that approximates your share in the market relative to the industry build-out? Would you look to invest more slowly to enhance free cash flow even at the risk of seeing your share within e-frac that it's smaller than your current share? How do you think about balancing e-frac share with free cash flow and is that an important factor for you?

Returns are our top priority. We evaluate everything based on returns. From a share perspective, the pace I'm describing is suitable if we are satisfied with the returns and the deployment of technology to keep pace with the market. It aligns with our existing replacement schedule, and we base our decisions on what to replace on that. We need to ensure that it is a more efficient and lower capital investment or yields better returns than what is currently available, or we will not expand. This isn't to say we won't participate; it's important to ensure that Halliburton’s approach to power and pumps is yielding returns. Currently, it seems that it requires more capital for the same or lower returns, which isn't our preferred position.

Got you. And then just turning to D&E. Lance based on the guidance that you provided it does look like a more material ramp in revenue and margin that's required in 4Q to achieve the flattish year-on-year. Something like almost maybe over 100% incrementals. Not sure if that's possible. I'm just trying to play around with some numbers and using mid-single-digit growth. But that rate it looks like the incrementals would have to be quite large. How are you thinking about 4Q shaping up from a revenue and incremental perspective if the elements are still there for flattish margins on the year-over-year basis?

I believe we'll continue to see momentum in the activities we're undertaking in areas like the North Sea and India. In the fourth quarter, we have visibility this year, thanks to the strength of the international recovery, which will positively impact our software sales more than in previous years. To highlight, D&E generated 44% incrementals from the first to the second quarter, indicating that the international recovery is beneficial for that business and aligns with our discussions. We're aiming to convey that we are experiencing a significant distinction between the first and second halves of the year, influenced by certain challenges and the timing of deploying our new Sperry technology. This is the key message we want to communicate.

Got it. Appreciate the color.

Thanks.

Thanks, good morning. Lance, I want to focus on D&E for a moment. You've consistently highlighted the difference in what influences D&E margins between the first and second halves of the year. Can you confirm if there's a strong belief that we will see flat margins year-over-year for D&E in the second half, which would suggest margins around 13% to 14% in Q4? I apologize for pressing on this.

Yes. Look I think Bill, I said on the prior call that we'd be sort of flattish or in the ballpark. I think look, there's a lot of stuff that we've got to go out and execute but the tailwinds behind what we have looking forward for D&E for the second half of the year paint a very different picture in terms of margin profile than they did in the first half.

That means we clearly see the mobilizations finishing now. The implementation of Sperry technology certainly helps, and we are rolling out other D&E technologies that are equally beneficial. I mentioned some of them during the call, including velocity guns and other initiatives. Additionally, the visibility around not just software but year-end product sales is better than it has been in the past. I think we are confident that the catalysts are still in place. While we can't predict the exact cadence, the second half is expected to see an increase.

No, right. Thank you. And again I get the conceptual build influx. I'm just trying to get to a specific number within reason, but I hear you. Second question for me kind of multifaceted, first, if you could rank the C&P margin improvement, contribution quarter-on-quarter. And what I'm trying to get as is to what extent did product sales drive the margin improvement? And then also what percentage of your frac fleet is stacked now? Thank you.

I'll start with your question about the allocation of C&P margins. Completion Tools had an outstanding quarter. However, the majority of our efforts to manage costs in North America are also reflected in some of the C&P performance. We are making quick and decisive moves, and we are seeing positive results, which I believe is the key point.

Okay. And with regard to the percentage of your fleet that's stacked?

Yeah. Bill, I mean, we're not going into competitive specifics. I think you're in the market so you have a sense of what that is. I think the point is that we are continuing to stack equipment when it doesn't make sense. And I think that will come with slightly lower revenues, but certainly higher margins.

Okay. Thank you, sir.

Thanks, Bill.

Hey, good morning. So, I guess, I wanted to talk a little bit about the preassembled perf gun solution that you mentioned earlier on the call. Could you talk about the solution that you have and maybe compare it to some of the market leaders out there? And then maybe just kind of talk about how this impacts the integrated frac solution that you're trying to push out into the market?

This tool is highly competitive, and we are fortunate to have a strong manufacturing operation in Alvarado, Texas, where we have been producing charges for many years. As velocity guns enter the market, they prove to be very effective. We can customize these guns for various configurations, which benefits us. I believe this approach helps reduce overall costs by optimizing our integrated wireline services in North America. We can adapt our operations to achieve lower costs and improved performance, rather than just having two separate elements. The velocity guns enable us to enhance on-location technical content and decrease the likelihood of misruns or misfires. I’m really excited about the volume we’re seeing. We've indicated that Halliburton has accounted for 40% of goal gun shots, which is significant. We see the potential to further reduce unit costs for these guns as volume grows, making it increasingly competitive over time.

Okay. All right. That makes sense. Appreciate the color. And then coming back to Sperry a little bit, I mean, obviously you guys have been investing a lot in Sperry. Could you talk about when we think about Sperry and potentially leveraging and working closer with land rig companies and the opportunity to kind of have a better penetration to some of your kind of leading edge Sperry technology?

Look, those are all things we look at. I think the really the rotary steerables and motors are very different animals in the marketplace. What we're doing in rotary steerables is really exciting for many. I mean, this is a fantastic piece of kit, and it's very integrated into sort of data and real-time and not just real-time, but automation, so, really excited about that. I've always been clear that we didn't want to be aligned with just one, for example, contractor. I believe that if you look at North America, it's an open architecture market, and there is a lot of choice that can be exercised by customers. So, we've always been really careful to make sure of what we put in the market is functional with lots of providers. And so that's sort of a one thing certainly around the rotary steerables. In the motor, I talked last quarter about our Motors Center of Excellence. And I'm really excited about that because it allows us now to customize solutions for our clients around motor performance. So there is a lot of variability in terms of the rock and performance of motors. And having that in-house allows us not only to do the customization but also retain the learning and bake that into a very efficient sort of turnaround in 24-hour type business. So that's something that how we align it with operator is interesting, but the way I think more about it is, how does it from a value proposition standpoint work best for us and I think we've got it there now.

All right. I appreciate the color. Very helpful. Thanks Jeff.

Thanks.

Hey, good morning.

Good morning, Kurt.

Good morning, Kurt.

Hey. So I have first question. I appreciate the color in the context of you guys stacking equipment and being capital disciplined on as it relates to U.S. frac-related businesses. Wondering if you guys can give us some sense on what the attrition dynamics might be, whether that's industry or as you look at your own frac fleet? How are you thinking about stacking equipment versus let's just say retiring equipment?

We're always managing the fleet. Having a large fleet allows us to retire, replenish, repair, and replace equipment. Some of the equipment we have is ready to go back, while others are being retired, giving us options on how and when to replace them. We approach the fleet management with caution. It's clear that equipment is working harder and attrition is happening in the market. We don't see an increase in capital spending or new equipment entering the market, which contributes to attrition. While it's challenging to predict the pace of attrition without a demand for equipment, I anticipate there will be a need at some point. However, the physical demands of pumping fluid and sand through steel are impacting all fleets across North America.

That's great information, Jeff. Lance, you provided some valuable insights on the D&E margin dynamics for the rest of the year. Could you also share your thoughts on Completion and Production? Generally, when a business segment experiences a revenue decline, margins tend to decrease as well. However, you have shared specific data that indicates that, despite a forecasted revenue decline for C&P in the third quarter, margins are expected to remain stable. Do you believe there is enough internal business momentum, with your cost structure reduced and efficiencies improved, to keep margins stable even if C&P experiences further decline in the fourth quarter?

Yeah. I mean that's a good question, Kurt. Look I think, obviously, we've got one quarter out so I'll save any of the specificity for next quarter's call in the fourth quarter. But I mean that's the intent. That's what we're working towards right? I mean that's what we talk about in terms of continuing to manage cost in North America and controlling what we can control. But we'll give a better view when we get to the third quarter call on what fourth quarter looks like for C&P.

Okay. That’s great. Nice, really appreciate the color. Thank you.

Thanks.

Hey, Jeff, could you elaborate on the development of the new playbook in North America? I know Mark Richard, the new head of the Western Hemisphere, has been sharing his insights. It seems that historically, HAL has aimed for market share during downturns, but now you're stacking equipment. It appears that EBITDA per fleet might be improving as well. Would this serve as early confirmation of the playbook? Please provide some background on how you developed this new strategy.

Yes, the answer is yes. What you're witnessing is our new strategy in action. However, we acknowledge that there has been a shift in customer spending patterns. When that happens, we need to focus on achieving the best returns. What was an effective strategy a few years ago, when customer spending was at a different pace, needs to evolve. That's what you're currently seeing. We intend to be very strategic with our capital during this downturn, or rather, the slowing activity we've identified for Q3. We want to ensure that if there's a slight decrease, we will adjust our capital expenditure accordingly. Most importantly, we are not waiting for a rebound. We have proven that we can efficiently scale our workforce and equipment based on demand, so I feel confident in our approach of pulling back when prices dip below acceptable return levels, allowing others to operate at a lower return cost. I hope that's clear. This is not just our thought process; it's how we are actively implementing the new strategy.

In this new playbook, do you assess each of your product and service lines individually? In other words, do they each have to meet specific return requirements? How are you approaching this, especially since we've previously discussed bundled and integrated models? It seems like now we will be defining each product line to stand independently. Is that an accurate understanding?

Yeah, that's fair. Though I would say we like integrated work and we do a lot of that in the North Sea, we do a lot of that around the world and we're happy doing that when it's available in North America. But at the same time, yes, everything has to make a return. And part of the reorganization in North America was around cost, but equally so was around speed of decision-making and executing each of those service lines. And I'm really pleased to report with the North America spend down in the first half of the year, our non-frac revenue per rig was up 13% year-on-year. So, that's evidence of that sharp focus around all of those service lines.

One of the service lines you mentioned is Artificial Lift, which you've identified as a key contributor to the increased revenue in North America. Could you elaborate on the overall market for lift and how it's performing compared to other product lines? What is the spending trend and the pace of lift installations this year? We're aware of the impact of ESP capital on drilling completions. How is the lift sector faring? Do you anticipate it will continue to perform well? Please share some insights on how the market is evolving.

Yes. Dave, I mean I feel like that's OpEx spend by clients and it's really important that they produce and support production and that means every well needs to work. And that's part of the reason we've talked about growing our production business. And I say growing and building out production because OpEx and production matters a lot to our customers. And I think that's what you're seeing in the ESP business because it's an effective way for clients to prove production. But chemicals in some ways falls along the same lines, so excited about those businesses.

Okay. Thanks Jeff.

Thanks, Dave.

Yes. Thank you, Shannon. Before we close, I'd just like to reemphasize a couple of points. First, I'm excited about the international recovery, the growth for the balance of 2019, and the momentum that's building into 2020. In North America, we plan to execute our new playbook reducing costs, stacking fleets, and reducing CapEx that drives better margins and free cash flows for 2019 and 2020. Our focus on non-frac service lines is a terrific opportunity for Halliburton and our organization is well-positioned to deliver profitable growth. Look forward to talking to you again next quarter and Shannon, please close out the call.