Halliburton Company (HAL) — Q1 2020 Earnings Call Transcript

Thank you, Gigi. Good morning and welcome to the Halliburton first quarter 2020 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 31, 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 as well as expenses related to the early extinguishment of debt. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter press release and can also be found in the Quarterly Results & Presentation 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 will turn the call over to Jeff.

Thank you, Abu, and good morning, everyone. We're speaking with you today as billions of people are under some form of quarantine in their homes. Businesses and schools are disrupted and worldwide travel has generally come to a halt. The human and economic impact from the COVID-19 pandemic is being felt globally. At the same time, our industry is facing the dual shock of a massive drop in global oil demand, coupled with a resulting oversupply. As the world is battling the pandemic, I thank our employees for their continued focus during these difficult times. We are a critical part of the global energy infrastructure and an essential service to satisfy both immediate and long-term energy needs. On our customers' work sites and within our facilities, Halliburton people are getting the job done while taking the appropriate steps to protect themselves and others. Our tiered crisis response model has been road-tested in the past through hurricanes and other catastrophic events and it is working well in the current circumstances. Globally, our corporate crisis team monitors the evolving situation across all of our core functions from health and safety to IT infrastructure to supply chain, and provides guidance to support our local response plans. Locally, every country has reviewed their emergency response plans, assessed them for business continuity and activated them in alignment with local authorities. To ensure the safety for all who must go to a work location, we've provided specific direction about how to work in a COVID-19 world and elevated cleaning protocols for our facilities and equipment. We've adjusted shifts and rotations to maximize social distancing, as well as implemented varying levels of medical screenings as appropriate. We are maximizing remote work where possible and are encouraging our employees and customers to collaborate virtually using information-sharing tools. Now, let me cover some headlines for what was a solid first quarter of 2020. We finished the quarter with total company revenue of $5.0 billion, a 12% decrease year-over-year; and adjusted operating income of $502 million, an increase of 18% from the first quarter of 2019. Our Completion and Production division revenue declined 19% compared to the first quarter of 2019 and operating margin expanded 170 basis points. Our Drilling and Evaluation division delivered a strong quarter. Revenue was flat year-over-year and operating margin grew 450 basis points. Our North America revenue declined 25% due to lower activity and pricing in U.S. land. Internationally, we delivered 5% growth this quarter. This marked the 11th consecutive quarter of year-over-year revenue increases for our international business. Finally, free cash flow was effectively neutral for the quarter, which is a significant improvement compared to the first quarter of 2019 and reflects our focus on driving more working capital efficiencies. The first quarter seems like a long time ago, but it is an important demonstration of some key facts. Here's what it tells me. We make commitments and execute on them quickly. We completed the previously announced $300 million in cost savings. We demonstrated the ability to improve our margins and lower our costs of service delivery. And the Halliburton team is well prepared to adjust and deliver under any market conditions. Although we came into 2020 with improving expectations for our financial performance in the North America and international markets, the dislocations resulting from the pandemic and the precipitous decline in oil prices have significantly altered those expectations. Let me describe to you what I see ahead of us, recognizing that the market is still in motion. Activity is in free fall in North America and is slowing down internationally. We cannot predict the duration of the COVID-19 pandemic impact on demand or the pace of any subsequent recovery. At a minimum, we expect the decline in activity to continue through year-end. Though we have not experienced anything like the impact of COVID-19 pandemic before, under adverse market conditions, we know what buttons to push and what levers to pull. And we are doing so with swiftness and resolve. Today's market calls for deeper immediate actions. We're significantly reducing costs, cutting CapEx and managing working capital. I will give more detail on each of these actions in a few minutes. We are unwavering in our commitment to safety and service quality for our customers and our focus on cash flow generation and industry-leading returns for our shareholders. And we believe our near-term actions will not only temper the impact of activity declines on our financial performance but also ensure that we are in a strong position financially and structurally to take advantage of the market’s eventual recovery. Before we get into the operational discussion, let me address a few topics I deem critically important in the near term. First, I believe Halliburton has sufficient liquidity, approximately $5 billion including cash on hand and our undrawn credit facility. Second, in the first quarter, we successfully executed both a tender offer for some of our bonds and a debt offering. As a result, we retired $500 million in total debt and extended the maturity for our $1 billion of senior notes out to 2030. We have focused on debt reduction over the last few years, and we enter this downturn with $2.6 billion less debt than in 2016. We also have a very manageable debt maturity profile with only $1.3 billion coming due through 2024. De-leveraging remains a key priority. We believe our free cash flow generation will be sufficient to pay down upcoming debt maturities in the normal course of business. Finally, our dividend is a lever we can pull, based on our market outlook and valuations. Our Board and management review the dividend quarterly and will act prudently to make adjustments for the long-term success of our business. Let me be clear. We have no intentions to increase leverage to maintain the dividend. We also do not intend to allow the dividend to prevent us from being structurally and financially positioned to take advantage of the eventual market recovery. Now let me describe in more detail what I see unfolding in the markets globally; how we are prepared today compared to the most recent downturn and the actions we are taking to adjust our business to today's market. The market in North America is experiencing the most dramatic and rapid activity decline in recent history. Our customers continue to revise their capital budgets downwards as they swiftly adjust spending levels in response to the lower commodity price. Right now, North American E&P CapEx is trending towards a 50% reduction year-on-year in 2020. Since mid-March, U.S. land rig count has fallen 34% and is expected to continue declining from here. With prices at the wellhead near cash breakeven levels, we expect activity in North America land to further deteriorate during the second quarter and remain depressed through year-end impacting all basins. Our outlook for the international markets has also changed. In addition to the collapse of oil prices, the industry is dealing with activity interruptions due to the coronavirus pandemic. COVID-19 had minimal impact on our international operations in the first quarter, but the second quarter will be different. We're seeing restricted movements within countries, quarantine requirements for rotational staff, logistics delays due to third-party personnel reductions, and in some cases, entire country closures. Different markets are impacted differently and this will lead to significant operational disruptions at least through the second quarter. Beyond these near-term headwinds, certain international customers are also fundamentally reducing capital spending, deferring exploration and appraisal activity and looking to cut costs on their major ongoing projects. We expect international spending to be down in the range of 10% on a full year basis. OPEC+ production decisions and the duration of the pandemic-related demand and activity disruptions will ultimately determine how much international spending declines this year. International projects and contract structures tend to be longer-term oriented. However, in the face of these unprecedented circumstances, our customers, IOCs, NOCs, and independents alike, are all reassessing their priorities, with some reacting more swiftly than others. We believe the activity changes internationally will not be uniform across all markets. We anticipate that the least affected markets will be the OPEC countries in the Middle East, while offshore Africa and Latin America may see double-digit declines this year. As operators in North America and international markets look for ways to cut spending, pricing is a lever they're seeking to pull. We continue to make pricing decisions based on our overall returns expectations for the business. Given the oversupply of fracturing equipment in North America, pricing levels in this market were already at historical lows coming into 2020. Internationally, the pricing increases we were starting to see will take a pause. We will work to improve efficiencies as a means to optimize costs for both our customers and Halliburton. It is important to remember, we were coming into this downturn from a very different place than in 2014, and we believe these differences prepare us better for what lies ahead. Spending in the North America market was down in 2019. In response, we introduced a new playbook to prioritize returns over market share. We restructured our North America organization, rationalized our real estate footprint, completed a cost-out program, and started addressing our fixed costs through the service delivery improvement strategy. We clearly had momentum from these efforts coming into 2020. Our more efficient Q10 pumps now represent 100% of our fracturing fleet. We also have the largest number of dual-fuel and Tier 4 diesel fuel engines in the market. This fleet composition delivers differentiated service quality and efficiency and will ultimately drive the flight to quality when the market stabilizes in North America. We closed key technology gaps in drilling and open-hole wireline, added new artificial lift and specialty chemicals capabilities to our portfolio, and continue to lower our costs across various product offerings. This has taken significant technology spend, which is now largely behind us. Our CapEx in 2019 was down year-over-year and we further reduced CapEx coming into 2020 to drive capital discipline across all of our business segments. As a result, we do not have the significant oversupply of tools and equipment in the international markets. We have built an operating machine to be effective and successful across cycles. Unfortunately, as we enter this downturn, we will need to make some painful decisions, and I am aware that this will cause great difficulty for our impacted employees. We are implementing the following set of measures that will further reduce our costs and improve our cash generation ability as our customers continue to reduce their spending levels. We are reducing our capital expenditures for 2020 to about $800 million, roughly 50% from 2019 levels. We believe this level of spend will allow us to invest in our key strategic areas while continuing to support our business in the active markets. We will take out about $1 billion of annualized overhead and other costs across our entire business, with most of it happening in the next two quarters. To accomplish this, we are streamlining our global and regional headcount, consolidating multiple facilities, and removing another layer of operations management in North America. We're accelerating our service delivery improvement strategy in North America, redesigning the way we deliver our fracturing services to lower our unit cost and improve margins and returns in the long run. We are cutting our technology budget by 25%. We have stopped discretionary spend across the business and we have eliminated salary increases for all personnel this year, and I and other members of the executive committee have taken pay cuts. Additionally, we will make variable headcount adjustments and rationalize our assets to be in line with the activity reductions we anticipate. As we look to reduce our own input costs, we're also renegotiating prices and terms with our suppliers. Finally, we will continue our efforts on working capital improvements across all three of its components. We believe these actions are necessary given the current environment and will help protect our balance sheet and drive cash flow and returns for our shareholders. As we steer the company through this downturn, we remain focused on the underlying drivers of success and our long-term strategic objectives. We will continue to execute our value proposition, deliver value and efficiency across our product offerings, and remain focused on safety and service quality. We remain committed to being leaders in North America by delivering on our low-cost service improvement strategy. We continue to closely collaborate with our customers and partners on leveraging digital solutions to reduce non-productive time and improve labor and asset efficiency. As I've stated on prior calls, we are in the early innings of our artificial lift and specialty chemicals growth internationally and we plan to continue down this path. We believe these businesses give us exposure to a later cycle market with long-term growth potential. We will continue to spend on technology that reduces our operating costs. We believe this is necessary for the future success of our business. We've been through downturns before. As the market unfolds from here, we believe we have the people, the technology and the depth of experience to outperform our competitors. If required, we will take further actions to adjust to the evolving market. If I've learned something from all of the downturns I've been through in my career, it is that the industry always bounces back. This downturn, although the most severe we have seen in a generation, will be no different. I believe it will reshape our industry and position it better for the next cycle. At some point, returning global economic and oil demand growth, market balancing supply actions by key producing countries and declining non-OPEC production, will likely lead to a new reinvestment cycle. And I believe Halliburton will emerge stronger on the other side like we always have. Now, I will turn the call over to Lance to provide more details on our first quarter financial results.

Thank you, Jeff, and good morning. Let's begin with an overview of our first quarter results compared to the first quarter of 2019. Today, our total company revenue for the quarter was $5 billion, a decrease of 12% year-over-year, while adjusted operating income was $502 million, an 18% increase. As Jeff mentioned, during the quarter, we accomplished the remaining $100 million of the announced $300 million in annualized cost reductions. In the first quarter, we recognized approximately $1.1 billion of pre-tax impairments and other charges to further adjust our cost structure to current market conditions. These charges consisted primarily of non-cash asset impairments, mostly associated with pressure pumping equipment, as well as severance and other costs. In addition, based on the current market environment and its expected impact on our business outlook, we recognized a $310 million non-cash tax adjustment to our deferred tax assets. Now let me take a moment to discuss our divisional results in more detail. In our Completion and Production division, revenue was $3 billion, a decrease of $700 million or 19% when compared to the first quarter of 2019. Operating income was $345 million, a decrease of $23 million or 6%. These results were primarily due to the lower pressure pumping activity and pricing and reduced completion tool sales in North America partially offset by increased cementing activity and completion tool sales in the Eastern Hemisphere. In our Drilling and Evaluation division revenue was $2.1 billion which was flat from the first quarter of 2019, while operating income was $217 million, an increase of $94 million or 76%. Higher activity for drilling-related services in the North Sea and Asia more than offset reduced activity and pricing for multiple product service lines in North America land and lower fluids activity in Latin America. Moving on to our geographical results: In North America, revenue was $2.5 billion, a 25% decrease when compared to the first quarter of 2019. This decline was mainly due to reduced activity and pricing in North America land, primarily associated with pressure pumping, well construction, and completion tool sales. This decline was partially offset by increased artificial lift activity and specialty chemical sales in North America land and stimulation activity in the Gulf of Mexico. In Latin America, revenue was $516 million, a 12% decrease year-over-year, resulting primarily from reduced fluids activity and stimulation services across the region, particularly in Argentina. This was coupled with decreased activity in multiple product service lines in Brazil, Ecuador, and Colombia. These declines were partially offset by increased activity across multiple product service lines in Mexico and Guyana. Turning to Europe/Africa/CIS, revenue was $831 million, an 11% increase year-over-year resulting primarily from increased drilling-related activity in the North Sea, improved well construction activity in Russia, and increased completions activity in Algeria, partially offset by reduced activity in multiple product service lines in Ghana. In Middle East/Asia, revenue was $1.2 billion, a 9% increase year-over-year, largely resulting from increased activity in the majority of product service lines in the United Arab Emirates, Indonesia, and Malaysia, which was partially offset by lower project management activity in India. In the first quarter, our corporate and other expense totaled $60 million and net interest expense was $134 million. Our normalized effective tax rate for the quarter was 21%. We generated $225 million of cash from operations during the quarter. As anticipated, working capital was seasonally a use of cash but significantly lower than the draw we experienced in the first quarter of 2019. As activity declines globally, working capital has historically been a strong source of cash and I expect a similar pattern this year. We have a heightened focus on improving working capital metrics and are working hard to prudently manage customer credit risk in light of the current market conditions. Capital expenditures during the quarter were $213 million. As Jeff mentioned, we have reduced our full-year CapEx budget to approximately $800 million. These cuts are geared towards both our North America business and uncommitted projects internationally. We believe our capital allocation decisions are consistent with our focus on generating cash flow regardless of the market environment. Our free cash flow generation for the quarter was $12 million. A significant improvement compared to the first quarter of 2019. During the quarter, we took actions to manage our debt and maturity profile. We executed two transactions, a debt issuance and a subsequent tender, which lowered our total debt by $500 million. But more importantly, it also reduced our 2023 and 2025 maturities by $1.5 billion. As a result of these transactions, we incurred a net cost of $168 million related to early debt extinguishment. Our total outstanding debt was $9.8 billion as of March 31st. We have no current borrowings under our revolver and no financial covenants in our borrowing facilities for our debt agreements. Now, looking forward, our second-quarter results will be impacted by the severity of the continuing activity declines in North America, customer project suspensions and delays internationally, and the uncertain duration of the pandemic-related disruptions, as well as actions related to the OPEC+ production cuts. These uncertainties and the exact timing of our cost reductions impacting our division results preclude us from providing specific guidance for the second quarter. We will continue to execute the measures that Jeff outlined. In addition to the activity-related variable cost adjustments, we plan to reduce annualized overhead and other costs by about $1 billion. To achieve that, we will have an associated cash cost of approximately $200 million. These reductions will target all of our business lines and support functions globally, and we expect to complete most of these actions within the next few quarters.

Thanks, Lance. Before we close, there are two important themes that I see accelerating in the depths of this downturn. Both will be helpful today, but more importantly, they will create strong competitive advantages for us in the future. First, we are fast-tracking the implementation of our service delivery improvement strategy in North America, as we restructure our overall North America business. We launched the strategy to lower the overall cost of service delivery in the U.S. last year, and we will accelerate these efforts in the current market. Next, this downturn accelerates the adoption of digital technologies by our customers and by Halliburton internally. We are far along the road to delivering the next frontier of digital solutions that will help drive efficiencies in our workforce and reduce capital investments through automation and self-learning processes. In this environment, digitalization will unlock the potential to structurally lower costs and enhance performance across the entire value chain. I have never been more convinced that digital is the future and Halliburton is leading the way. With that, let me summarize our discussion today. To the Halliburton team, the path ahead will be challenging, but I have the utmost confidence in our ability to maintain focus and execute on our value proposition in this extremely difficult environment. Our balance sheet and liquidity positions are solid, and we plan to continue taking actions to strengthen them. We know what buttons to push and what levers to pull, and we will do so quickly around cost, CapEx, and working capital, and we will continue to proactively adjust our business to current market conditions. We know that the industry will recover. It may look different when it does, but we believe the actions we are taking will ensure that we are in a strong position, financially and structurally, to take advantage of the market’s eventual recovery. And now, let’s open it up for questions.

So, Jeff, I hope we could start with capital allocation and the dividend. Given the forward outlook, the uncertainties, $600 million a year staying on the balance sheet seems pretty useful. I appreciate you have no intention to take on leverage to fund the dividend. You probably have pretty decent free cash this year to cover the dividend, I think especially with working capital benefit. But on a run rate basis, maybe that looks a lot harder exiting 2020. Just I appreciate any additional comments you have about the Board’s decision-making on the dividend. And with respect to timing, how to think about that?

Thank you, Sean. I have explained our approach to the dividend in the prepared remarks. We will review the dividend with our Board on a quarterly basis. We have a Board meeting scheduled for May, and we will update you on any decisions at that time.

Could you compare the $1 billion cost-out plan to the previous $300 million program? I'm interested in the differences between variable and fixed costs that you mentioned, particularly since this seems mainly focused on reducing overhead costs, which are often fixed. Additionally, could you provide more details about the distribution between North America and international in this program?

Yes. The fixed costs that are being removed are significant. For comparison, we eliminated $300 million in fixed costs in the fourth quarter of last year as we adjusted our business approach. This current cost reduction is similar, focusing on fixed costs rather than variable ones. It involves overhead and other fixed items that can be reduced substantially and are not typically reinstated. This is different from crew costs, equipment on location, and supplies. Our strategy in North America has been to enhance our responsiveness in making these decisions and cutting costs efficiently. These fixed costs include layers of management and various discretionary expenses that we can eliminate without needing to bring them back at any point.

And I would add, Sean, that these costs, as you asked about the split between sort of North America and international, I think these are predominantly aimed at North America, but they also include international cost-cutting as well.

Hey, Jeff, I wanted to touch on more of a bigger picture question and it relates to something you said right at the end of your prepared comments. And I certainly agree with you that the industry is going to look a whole lot different as you get through this downturn in the next couple of quarters. While that’ll be interesting to watch, are going to cause a major shakeout, which will be a net winner of. I think there are two things and maybe we touched on a little bit in prepared comments but I would like to explore a little more is your deceleration of your delivery strategy in North America and the digital transformation of the industry. Because those things I think are the most important for Halliburton and for the industry quite frankly going forward on what the industry looks like, whether it's a couple of quarters or more from today's levels and then?

Thanks, James. That's a great question. The current environment really pushes us to explore new ways of working, especially with a focus on digital technologies. When we fully embrace these changes rather than making gradual adjustments, we can operate more efficiently with fewer people and a smaller physical presence. However, this requires us to let go of the traditional methods many of us are used to and recognize that it's possible to achieve results without relying on the old expectations. While this period has many challenges, I remain optimistic. We can take this opportunity to rethink everything we thought we knew, especially regarding service quality and safety. We should reevaluate everything else with the advanced tools at our disposal, many of which we've developed ourselves or are based on our proprietary cloud platforms. This gives us a strong advantage as we move forward.

And Jeff, are you seeing an embrace from the customers around the digital offerings you have? Have they started to show an increase in inquiries as they look to lower their costs or adapt to this new paradigm? Or is it not happening yet?

We've noticed a significant increase in demand for native cloud services and applications over the past 30 days. This demand is not only about remote work but also about reducing costs, which our customers experience when they adopt cloud technology. Much of what our digital organization, including Landmark, has developed is already available. This has led to an acceleration in demand. Necessity certainly drives demand in this context. I'm encouraged, and as I mentioned earlier, I am more convinced than ever that digitalization, along with Landmark and our broader digital platform, will benefit us greatly in the future.

Hey Lance, regarding working capital, if I look at the last couple of downturns, particularly the last one in 2015, it generated around $1 billion, heavily weighted at the beginning. In 2016, we saw another $1.2 billion predominantly toward the end. Is that the expected scale for this time around in 2020? Could you also walk us through the expected timeline for working capital generation this year? Will it be more concentrated in the second half, or will it start to pick up in the second quarter?

Yes, Bill. Thanks for the question. You're right. Historically we have generated cash from working capital during the last three downturns. I would say on the absolute amounts probably a little bit different profile than particularly the 2015 comparison that you were referencing, just given the fact that on an absolute basis our receivables and inventory are at levels that they were coming off of 2014 record level of revenue. So that's a little bit different, but I still expect the relative behavior to be the same. We should continue to see as the business shrinks over the next three quarters that we continue to generate cash from working capital in the unwind.

And then Jeff with regard to pulling forward the art of the possible in terms of digital automation, remote operations, what percentage reduction do you think that would result in with regard to your average crew size?

Well, I think it could be in the range of half. I mean it is meaningful. But it's not the crews, it's partly crew size, but it's really all of the things that are in between the crew and sort of the overhead of the company. There are a lot of steps that involve designing work and how work gets actually prepared for delivery, the delivery of products and materials. The ability to embrace the automation of all of that is pretty meaningful. I think crew size can come down as well because there are a few things around the crew that are required to deliver all of that input. But I think the more impactful part will be all of the sort of transaction friction between sort of the top of the organization in there.

So Lance, I'll start with you. It's impressive to see the debt reduction, and I know it's a focus for both you and Jeff. Could you elaborate on the steps you're taking to improve your balance sheet? You've successfully reduced debt by $500 million and extended maturities. I understand you have another $685 million due in 2021. Could you discuss your plans for tendering maturities and also address free cash flow?

Yes, Angie. As we said sort of on the prepared remarks, our expectation is that we retire the $685 million that comes due next year through the free cash flow generation that we would expect to achieve this year, but roughly a $200 million coming due in February of next year and the remainder in November. And so we think that we've got ample capacity to pay debt down. And the focus philosophically for Jeff and I is to continue to reduce debt at this company and that's what we're going to continue to chase.

And then maybe Jeff, I mean you made a remark in your prepared comments around flight to quality and clearly we've seen this bifurcation in the market. So maybe you could talk a little bit about the flight to quality in North America and what you're seeing so far? Are you seeing that actually playing out in Q2 or is that a bigger factor there when you see a recovery? And just incremental color around C&P and D&E with regard to Q2 and Q3 in the case of the downturn as we go through the rest of the year?

Yes, Angie, look, I fully expect we see a flight to quality, but at this very moment there's just not a lot of thought going into anything other than reducing capital spend right now. And so in that kind of environment, there isn't much flight because there's not a lot of new things being added. I’m fully confident in our operating capability and the quality of the service we deliver and we maintain that front and center and fully expect the sort of after the industry is able to take a collective breath we will be extremely well positioned and see the same flight to quality that we've always seen.

How should we think about your strategic initiatives in expanding international share in lifts, chemicals, directional and information evaluation in light of the CapEx cuts and market conditions?

We believe that expanding into those markets is a crucial growth opportunity for our businesses. Our preliminary trials are ongoing in several countries, and it doesn't require significant investment to continue pushing strategically into these areas, although I don't expect the growth to meet our previous expectations. The focus is on delivering our services using our current infrastructure. This initiative was one of the reasons we acquired those businesses in the first place. We hope to see an improved market for these services, but our commitment to grow these businesses remains strong. Expanding internationally involves multiple steps, and we will continue our efforts without interruption.

And just circling back to Angie's question, I know the outlook internationally is very opaque, but could you see the vast majority of that annual activity hit in 2Q, and then the second half maybe be more flattish just given a fading impact from COVID offset by the growing impact from the customer CapEx reductions where we’re likely to see activity continue to step down in the second half of the year?

Yes, I think we will see most of the U.S. impact in Q2. It's moving so quickly that our view on the U.S. is a significant reduction in Q2, although we cannot specify an exact number or timing, and likely will trend flat for the rest of the year. The international market behaves differently; taking a frac holiday is quite different from a deepwater rig holiday, as they occur at different rates. We anticipate slowing activity internationally, but it does not always decline at the same pace. When an operator decides to stop activities, it doesn't happen immediately but at a determined future date. Therefore, the effects will extend beyond Q2, even though the disruptions from COVID-19 should resolve quickly. The same operators conserving capital in the U.S. are often the ones looking to do so internationally. National Oil Companies (NOCs) will likely be less affected, while International Oil Companies (IOCs) may face more challenges internationally for the remainder of the year. We will have a clearer picture as we progress through Q2.

I appreciate the current lack of visibility in North America; that is not surprising to anyone. However, your customers are in different health states, including the major companies, E&Ps, and various private firms. Could you discuss how conversations with these customers are progressing and highlight any differences in their current behaviors? It seems to us that everything is happening rapidly, but it would be helpful if you could clarify how each of these customer groups is acting and what they are discussing with you.

Look, I think they're all behaving in the very near term quite similarly. I think they all have a view and I'm not going to just differentiate between the financial position of the market or the different parts of the market. So I would say that's an incredibly aggressive group of competitors. My clients I'm talking about in North America and they're going to each aggressively act independently. The dialogue with them at least with me has been disappointment over the near term, but all, they bit firmly in their teeth looking ahead to what it looks like on the other side. And the dialogue is always that we're going to need to be super competitive and work with Halliburton when we get to the other side. We've had many discussions about what does a recovery or how do we implement the things we're talking about on the other side. So that's generally been a consistent conversation with all customers.

And a separate question on the international side. You said in your remarks, it sounds like the direct impact from the pandemic is mostly to international operations, supply chain, kind of quarantine, having trouble moving people around. Are you seeing the same thing in the U.S.? I haven't really heard that much about that or is it just the fact that the equipment activity is falling so fast that you're not really seeing it, it’s somewhat irrelevant? Can you just talk about kind of the more direct impacts of this pandemic to your operations on the U.S. side?

Yes, we’re seeing less of the direct impact just because the workforce is all U.S. Most of the travel can be done in a car, not on a plane. So most of the supply chain is North America based. It's a very little that we actually source outside the U.S. and so I think that's the reason more than any other that we don't see the disruption in the U.S. and obviously we see the commodity price impact in the U.S. But internationally, even if it's not a U.S.-based workforce, we have a very globally based workforce with 140 nations that work for Halliburton and most of those international. So that's where we get into some of that supply chain. Well, people interruption though, let me compliment our international folks and operations. I mean they ramped up very quickly. The interruptions to this point have been very limited and it’s because that group has literally sprung to action to manage. I just can't tell you how many people moves and supply chain moves that they've overcome.

So does that give you a little bit of comfort in the second part of the year for international that if you are more impacted today from the pandemic, but as that eases, maybe that gives you a little bit of help in the back part of the year?

I believe the COVID interruptions have given me confidence in our team's ability to find an effective operating rhythm, which they usually excel at. However, the impact of commodity prices is something we will need to navigate through in Q2, which may reflect a change from our initial expectations. We were anticipating an increase, but now we're looking at a potential decrease of about 10%. Still, we won't have a clear understanding of this until the situation stabilizes.

Jeff, you spent a significant amount of time in the previous conference call discussing the digital dynamic, and you emphasized it again today. Last time, you mentioned that the digital dynamic might not have a substantial near-term impact on revenue generation. I wanted to reconnect on this topic considering all the disruptions in the industry and the various discussions you’ve mentioned about rethinking and reshaping the industry moving forward. Do you have any updates or insights on how much revenue digital could potentially generate, whether this year or if you anticipate it accelerating into next year?

I believe the acceleration is unfolding as I've mentioned. While we aren't currently witnessing any revenue growth, there has been a notable increase in new users over the past month. In our iEnergy cloud, we are seeing significance, though it's challenging to quantify revenue meaningfully at this moment. However, the potential for cost reduction through these implementations is present and is having an immediate impact. For instance, with our integrated projects, this accelerates customer acceptance and creates demand among our own teams to use tools that enable remote work and de-manning of rigs—tools we've been developing over recent years. We've discussed implementing these in the North Sea with Aker BP and others. It's difficult to look at those tools now and not question why they aren't being used. Therefore, I'm optimistic about the pace of adoption. I anticipate that while the impact will be felt over the coming years, existing tools will be embraced more quickly in this market.

Thank you for that insight, Jeff. I have a follow-up for Lance. In previous downturns, the decremental margin linked to such cycles usually hovered around 40%. I understand you're not providing specific guidance, and I appreciate that. I'm trying to assess whether, as we navigate this downturn with lower price points for U.S. fracking, we can expect a similar consideration for international pricing during this recent upturn. Should we anticipate decrementals around 40% or possibly lower? Moreover, once we determine that decremental impact, I'm assuming we would add back $1 billion in cost savings to whatever we come up with. Lance, does that sound like a reasonable approach?

Yes, I think that's a reasonable perspective. I won't specify an exact number regarding decrementals in this cycle. However, I can say that we are currently reducing costs to mitigate those decrementals throughout the entire duration of this downturn. Our goal is to lower our unit costs and enhance our operating leverage. Therefore, I believe your thinking aligns with our approach. If you assume some decrementals, the $1 billion in overhead and additional costs we announced, alongside the $300 million we've already cut in the fourth quarter of last year and the first quarter of this year, should have a significant impact and help ease the decrementals during this downturn.

Yes. Thank you, Gigi. Before we wrap up the call, I'd like to leave you with a few closing comments. First, I thank the Halliburton employees for their dedication to safe, reliable service through these difficult times. I have the utmost confidence in their ability to deliver our value proposition under any conditions. Second, our balance sheet and liquidity position are solid, and we plan to continue taking actions to strengthen them. We are taking swift actions to address cost, CapEx, and working capital, and we'll continue to proactively adjust our business to current market conditions. Finally, we know the industry will recover and believe the actions we are taking will ensure that we are in a strong position, financially and structurally, to take advantage of the market's eventual recovery. Look forward to speaking with you next quarter.