Halliburton Company (HAL) — Q2 2020 Earnings Call Transcript

Thank you, Liz. Good morning and welcome to the Halliburton second 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, Form 10-Q for the quarter ended March 31, 2020, 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 a reconciliation to the most directly comparable GAAP financial measures are included in our second quarter press release and can also be found in the quarterly results and 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’ll turn the call over to Jeff.

Thank you, Abu, and good morning everyone. The second quarter of 2020 is now behind us. It was a tough one for many industries, including the oil and gas sector. A global pandemic and the resulting collapse in demand have upended many businesses, and as economies around the world emerge from lockdowns, the path forward remains uneven and uncertain. I am grateful for our employees’ focus, dedication, and perseverance during these difficult times. Employee safety is our top priority, and we continue our efforts to take the appropriate measures to provide a safe working environment for everyone. COVID-19 is altering our everyday lives and business operations, and it is important that we do not let our guard down. Despite this distraction, our safety performance is the best it has ever been with our total recordable incident rate improving more than 20% since the end of last year. There are three key areas I will address on the call today: first, our solid second quarter performance, demonstrating a significant reset that improves the earnings power of our business despite the severity of the activity collapse; second, the market and business outlook for the second half and full year of 2020; and finally, what we are doing today to make sure that Halliburton powers into and wins the eventual recovery. The global activity collapse in the second quarter was swift and severe, much worse than anticipated. U.S. average rig count for the quarter declined 50% sequentially while international rigs dropped 22% with absolute global rig count sinking to the lowest level in recent history. Halliburton’s response to the market disruption was equally swift and aggressive. As I’ll discuss in a few minutes, our organization responded with a tremendous sense of urgency. Let me cover a few headlines related to our financial performance. Total company revenue was $3.2 billion and adjusted operating income was $236 million. Our completion and production division revenue of $1.7 billion was impacted by a drop in market activity in the low teens in international markets and about 70% in U.S. land completions. Despite these headwinds, C&P delivered a solid operating margin of 9.5% in the second quarter. Our drilling and evaluation division revenue of $1.5 billion was down largely in line with lower rig count activity globally, delivering an operating margin of 8.3% in the second quarter. The speed and effectiveness of the cost actions that we have executed helped minimize the sequential decremental margins to 14% in C&P and 16% in D&E. Revenue for North America declined 57% sequentially with our C&P and D&E divisions outperforming the completions and drilling activity declines respectively. International revenue was down 17% sequentially, outperforming the rig count decline. Finally, we generated over $450 million in positive free cash flow in the second quarter. As reflected in these results, our aggressive cost actions are an important part of our earnings power reset. As you recall, we removed $300 million in costs over the prior two quarters. In April, we announced an additional $1 billion in annualized cost reductions. I’m pleased to report today that these actions, which are largely permanent changes to our business, are 75% done. I expect the remaining cost reductions, which are mostly aimed at our international business and real estate rationalization, to be completed by the end of the third quarter. Let’s now discuss our expectations for the second half of 2020. Internationally, we anticipate drilling activity to continue to decline modestly while completions stay resilient into year-end. The activity changes have not been and will not be uniform across all international markets. On a full-year basis, we expect activity in the OPEC countries in the Middle East and the Norwegian sector of the North Sea to be more resilient while Latin America and Africa decline sharply. Some customers are deferring new projects, most notably in the offshore exploration markets. Due to the deeper and longer pullback in Latin America, we now anticipate a mid-teens decline in international customer activity and spend for the full year. In North America land, some green shoots of completion activity are emerging, but I would not characterize this as the start of a meaningful recovery. After customers bring back shut-in production and as WTI remains range-bound around $40, we expect to see a modest uptick in completions activity during the third quarter followed by the usual seasonal deceleration at the end of the year. Drilling activity declines have slowed, and we believe the rig count should find a bottom sometime in the third quarter, but a meaningful inflection point in drilling seems further out. Our full-year customer spend outlook for North America remains unchanged at approximately 50% down compared to 2019, with gas-rich basins outperforming the oilier ones. Further demand weakness from a slower economic recovery or multiple waves of COVID-19 related activity shutdowns present downside risks to our outlook for the remainder of the year. Though we believe we’re positioning our company to ride out those events should they occur, it is not possible to predict the impact that they may have. Regardless, as demonstrated this quarter, I expect Halliburton to outperform the market under any conditions. As we look into the future, I believe the international and North America markets will present opportunities for Halliburton. Although the timing of commodity price recovery remains uncertain, we are taking the necessary actions to thrive in the current market and to prepare Halliburton to win the eventual recovery. International producers have the opportunity to regain market share as a result of declining U.S. production. This should translate into healthy activity levels internationally as oil demand recovers. International shorter cycle barrels will likely fill a higher proportion of future incremental demand requirements. As economic growth returns, we expect the key producing regions to maintain productive spare capacity so they can quickly meet demand. Offshore, longer cycle barrels and new exploration activity will likely be the farthest out in terms of incremental contribution to the supply stack. Today, we have an excellent international business both in terms of geographic footprint and technology portfolio. Pre-coronavirus, our international business grew revenue every quarter for almost three years, outperforming our largest competitor, and was on the road to meaningful margin improvement. International regions contributed nearly half of our revenue in 2019. They are also historically more resilient on margins, demonstrating the strength of our diverse business. Here’s how we are preparing to win the recovery internationally. We’re driving adoption and expansion of our latest technologies in the international markets. Our EarthStar logging-while-drilling tool has seen a 2.5 times increase in its adoption over the last year, even though it is one of our premium offerings. Our Cerebro in-bit sensor package provides a high-speed look at data captured directly from the bit. Its international adoption has doubled this year compared to the first half of 2019. We’ve successfully completed customer qualifications and are currently deploying the latest wireline tractors and ESP pumps in the Middle East. We are growing and monetizing our digital offerings. They improve performance and efficiency and allow us to introduce new commercial models where all parties share in the benefits of our digital technologies. The Aker BP project in Norway is a demonstration of a customer successfully adopting digital technology to achieve best-in-class performance. We have collaborated with our alliance partners to deploy digitally-enabled new technologies and innovative ways of working. Our contract structure, where all alliance partners benefit from these successes, fosters a collaborative culture and drives further performance improvement. We increased the rate of penetration by 88% over the course of the well campaign, and a third of the wells we drilled on a specific prospect were in the top decile of the industry benchmark for drilling speed. We made great strides in the digital transformation of the well planning cycle, rapidly working towards the goal of planning a well in a day. We applied digital 3D inversion, helping the customer improve their reservoir understanding. This led to re-planning of a whole reservoir section and potential incremental reserves for the customer. We are also advancing alliances with key industry players both within and outside of the oil and gas sector. We recently announced Halliburton and TechnipFMC collaborated to create Odyssey, the world’s first distributed acoustic sensing solution for subsea wells. This collaboration strengthens our digital capabilities in subsea reservoir monitoring and production optimization. We recently signed a five-year strategic agreement with Microsoft and Accenture to advance Halliburton’s digital capabilities in Microsoft Azure. This is an important step in our adoption of new technology and applications to enhance our digital capabilities and customer offerings, drive additional business agility, and reduce capital expenditures. We are also taking actions not only to thrive in the current market but to best position our business in the future. Streamlining our cost structure is part of a continuing effort to reduce our fixed costs and improving components of our working capital through a strong focus on managing collections, deploying digital inventory planning solutions, and extending vendor payment terms. As oil demand recovers, I expect the international business will continue to be a more meaningful contributor to our revenue going forward. I believe that the actions we are taking provide the basis for margin expansion and higher free cash flow conversion internationally in the next up cycle. Turning to North America, we believe that North America production is likely to remain structurally lower in the foreseeable future and have slower growth going forward. With shrinking demand for shale oil and limited access to capital markets, the inevitable rationalization will continue, and we expect to see a more disciplined market with stronger operators and service companies. The activity declines and intra-year cyclicality over the last two years led us to change our approach to this market, but what has not changed is our commitment to the single largest oilfield services market and to our leadership position in it. While the North America market will be structurally smaller, we believe that it will be more profitable for us. Our service delivery improvement strategy lowers our fixed and service costs and will drive higher contribution margin with the goal to make Halliburton the most competitive from a cost structure perspective. This strategy has resulted in sustainable changes to how we organize and execute every day in the business and positions us to deliver higher profitability and free cash flow in North America. Our playbook is clear — returns in cash generation matter more than ever, and growth for the sake of market share is a thing of the past. We believe that our size and scale combined with our ability to quickly respond to changing market conditions are strong advantages for us, helping to drive the unit costs down and enabling us to capture work across multiple basins and resource types. The $1.3 billion in cost cuts, a combination of the $300 million in prior cuts and the $1 billion in further reductions, are largely aimed at North America. Let me remind you what we have done to reset the earnings power in this key market. We are changing the fundamentals of how we deliver our services, and I expect this will drive a higher contribution margin and lower our fixed costs. We reduced our maintenance cost per horsepower hour by over a third compared to the 2019 run rate by redesigning our maintenance and value-engineering processes. This has been scale tested as a permanent change in how we execute our operations and is independent of the market activity levels. We’ve also made permanent reductions to our workforce. We have flattened our North America organization, removing layers of management. We are using digital and remote operations to reduce the number of frac engineers required to monitor jobs by establishing real-time operations centers and using cloud-based solutions to modernize data flow between the rig site and the back office. We are reducing our real estate footprint by over 100 facilities, which not only removes costs but fits with our digital and remote operations strategy. In addition to these strategic changes, we will continue to take advantage of our unique competitive strengths. We offer a full suite of oilfield services through 13 product service lines in North America, and we will continue to emphasize our non-frac revenue streams, resulting in a more balanced business portfolio. We continue to deliver differentiated technologies across our product lines, many of them using advances in automation and digitalization. These technologies either lower our costs or improve production results for our customers. Finally and critically, none of the improvements internationally and in North America happen without our fantastic competitive and committed team focused on achieving all of these objectives and protecting the gains we make over time. Turning to capital spending, 2020 will be the second year in a row that we have significantly reduced our capex, which will largely be directed towards our international business. Because we size our capital budget based on a committed project pipeline and anticipate returns, we believe that this year, just like in 2019, this capex reduction will not hamper our ability to outperform the market. We will continue to exercise thoughtful capital allocation to the best returning opportunities. The capital intensity of our business has come down, and as we think about the future, we project that capex spend as a percentage of revenue will be closer to 5 to 6% versus the historical norms of 10 to 11%. There are several reasons why we were able to drive this change and positively impact our free cash flow going forward. We now build our equipment cheaper, and it lasts longer. Advances in sensing technologies and material sciences are lowering the total cost of ownership for our tools. Design improvements such as component modularity make asset velocity better than ever. This means we need to build fewer tools to support the same level of business. For example, the iCruise drilling system has modular components and standardized electronic inserts for all tool sizes, allowing for 20% better asset velocity. Digitalization reduces our capital footprint. We’re removing equipment from the location and replacing costly hardware with software solutions. We do not anticipate large technology recapitalization programs similar to the build-out of our leading Q10 pumps and the iCruise drilling systems. Finally, the North America business now has structurally lower capital requirements. It is a mature market, and frack job intensity is plateauing. The Halliburton I have just described to you is charting a fundamentally different course. The growth in digital technologies, the position of strength in the international markets, the sharper approach to North America, and a lower capex profile, all of that comes from the hard work that we have been doing over the last few years. We are not waiting for an up cycle to drive significant free cash flow and returns for our shareholders. We believe that the strategic actions we are taking today will further boost our earnings power and free cash flow generation ability as we power into and win the eventual recovery. Now I’ll turn the call over to Lance to provide more details on our second quarter financial results.

Thank you, Jeff, and good morning. Let’s start with a summary of our second quarter results compared to the first quarter of 2020. Total company revenue for the quarter was $3.2 billion and adjusted operating income was $236 million, representing decreases of 37% and 53% respectively. In the second quarter, we recognized $2.1 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 mainly associated with pressure pumping equipment and real estate, as well as inventory write-offs, severance, and other costs. As a result of this charge, we realized a $49 million reduction in depreciation and amortization expense in the second quarter. This impact is reflected in our division results with approximately two-thirds associated with our C&P division and the remainder related to our D&E division. We expect our third quarter depreciation and amortization expense to be approximately $225 million, reflecting one month of additional impact. As Jeff mentioned, by the end of the second quarter, we also accomplished approximately 75% of the annualized $1 billion in cost reductions, and we intend to complete most of the remaining actions by the end of the third quarter. The cash cost associated with the various cost actions in the second quarter was approximately $180 million. We anticipate that we will incur an additional cash cost of approximately $60 million in the third quarter as we continue to make further structural adjustments. Moving to our division results, our completion and production revenue was $1.7 billion, a decrease of 44%, while operating income was $159 million, a decrease of 54%. These declines were largely a result of a decrease in pressure pumping activity globally primarily driven by U.S. land and Latin America, coupled with lower artificial lift activity in U.S. land. These were partially offset by improved completion tool sales internationally. Our drilling and evaluation revenue was $1.5 billion, a decrease of 27%, while operating income was $127 million, a decrease of 41%. These declines were primarily due to a global reduction in drilling-related services and lower software sales internationally. In North America, revenue was $1 billion, a 57% decrease. This decline was driven by reduced activity in U.S. land primarily associated with pressure pumping, well construction, artificial lift, and wireline activity coupled with reduced activity across multiple product service lines in the Gulf of Mexico. Latin America revenue was $346 million, a 33% decrease resulting primarily from decreased activity across multiple product service lines in Argentina, Colombia, and Brazil, and lower software sales in Mexico. Turning to Europe-African-CIS, revenue was $691 million, a 17% decrease resulting primarily from reduced well construction and pressure pumping activity and lower software sales across the region. This was partially offset by increased fluids activity and completion tool sales in Norway and improved cementing activity and completion tool sales in Russia. In the Middle East-Asia region, revenue was $1.1 billion, a 10% decrease largely resulting from reduced activity across the majority of product service lines in the Middle East, Malaysia, and India, partially offset by improved drilling activity and completion tool sales in China and Kuwait. In the second quarter, our corporate and other expense totaled $50 million, and this amount should serve as the new quarterly run rate for the rest of the year. Our interest expense for the quarter was $124 million. For the third quarter, we expect it will be closer to $130 million. Other expense for the quarter was $48 million, primarily driven by our foreign exchange exposure and currency weakness in Argentina. Looking ahead, we expect it will be approximately $30 million for the third quarter. Our normalized effective tax rate for the second quarter was approximately 25%, driven by certain discrete tax items and a lower earnings base. For the third quarter and full year, we expect our effective tax rate to be approximately 24% and 20% respectively. Capital expenditures for the quarter were $142 million, and our full year 2020 capex estimate of $800 million remains unchanged. Turning to cash flow, we generated $598 million of cash from operations during the second quarter. As anticipated, working capital was a source of cash. As activity declines globally, working capital has historically been a strong source of cash, and we expect to see continued benefits from working capital for the rest of this year. Free cash flow generation for the quarter was $456 million. Our year-to-date and expected earnings performance for the remainder of the year combined with working capital benefits and lower capex should result in full-year free cash flow of over $1 billion. Finally, while we remain cautious about the forecasted pace of economic recovery and the potential for additional COVID-related shutdowns, let me provide you with some comments on how we see the third quarter playing out based on our outlook. Sequentially, we expect overall company revenue to decline low single digits in the third quarter. Lower average rig activity across most regions will impact our D&E division while modest completions activity improvements should drive C&P division revenue to be flat to slightly up. The full quarter benefit and continued execution of our cost reductions should offset the impact of lower activity on our profitability. As a result, we expect to deliver higher sequential operating income and modestly higher margin.

Thanks, Lance. To sum up our discussion today, our second quarter performance in a tough market demonstrates our organization’s ability to execute swiftly and aggressively, and we expect to complete our remaining cost actions in the third quarter. We have an excellent international business, and it is ready to deliver margin expansion and higher free cash flow conversion in the next up cycle. The actions we have taken in North America, including our service delivery improvement strategy, we believe will enable us to have higher profitability and free cash flow even in a structurally lower environment. We are moving full steam ahead with the deployment of digital technologies for our customers and internally, and finally, Halliburton is charting a fundamentally different course. I believe the strategic actions we are taking today will further boost our earnings power and free cash flow generation ability as we power into and win the eventual recovery. Now let’s open it up for questions.

Hey, good morning guys.

Morning, James.

Congratulations on navigating a challenging quarter. Jeff, you've mentioned that you're taking a fundamentally different approach, which seems quite fitting. We share a vision for the future of the oilfield that includes digital initiatives, lower capital intensity, and higher returns as key components of that strategy. Could you elaborate on your progress in different areas of this journey, particularly regarding digital advancements, the cost structure in North America where you've made significant strides, and also the international aspect and technology delivery?

Yes, thanks, James, and again when I look through the noise of the COVID disruption and industry consolidation and rationalization, clearly we do focus on what is that new course, and we are working on those things right now. I talked about a number of them in my commentary, but we are focused on doubling down on the technology that’s important, drilling, iCruise, EarthStar, Cerebro, digital, growing our lift in chemicals businesses, which I described in the commentary, and then feeding that technology into our fantastic international business, finally delivering on North America service delivery improvement strategy while at the same time demonstrating structurally lower capex built on capital efficiency in an organization that executes under any conditions. So yes, we are charting a different course. Progress along digital, we’d talk about each quarter different things that we’re doing. We’re making terrific progress around Halliburton 4.0, feel very good about the kinds of contracts we’re signing today and the work that’s being done behind the scenes to continue to advance that, and obviously you saw some of our announcements with partners this quarter.

Okay, so you feel good about the path you’re charting here. What about on the customer side? It seems to me it’s a fundamentally different mindset from the customers as well. What’s their approach or their adoption of these new technologies, particularly on the digital side, and how is that progressing? Are there impediments to change now, or are they really aligning with your view and others' views?

I've always said that digital needs to evolve. It's something that develops over time and often with partners. We have discussed our partners, and there is definitely a desire for it. When I consider it in the context of reservoir drilling and production, those are the opportunities that can be taken advantage of today. That's why when we discuss our progress and the initiatives we're undertaking, we're approaching them in focused areas, not because we see them as isolated in the long run, but because that's how they can be effectively addressed at this moment.

I see, okay. Thanks, Jeff.

Thanks, good morning. What an impressive quarter. The numbers are almost unbelievable, so kudos to your team. International markets, as you mentioned, are crucial for growth, and you pointed out some of the initiatives there. Can you elaborate on cost-cutting opportunities and how we might further improve margins? D&E margins had a positive shift in Q1, but could you discuss any additional efforts in cost reduction? I know there is a focus on generating more free cash flow from international markets, which account for over 50% of your revenue, so please share more about that aspect of international.

Yes, thanks Angie. Look, I think we are positioned in the right markets, the strong markets. We’ve got the technology uptake that’s so important in those markets, and then what we’re doing around lower capital efficiency, or improving capital efficiency, plays straight into that. I expect that we will continue to see progress in those markets, and they will be stronger over time.

Okay, so maybe you can talk a little bit about the evolution here in your capex profile. I think that’s really shone through here in ’19 and ’20 in becoming a lower capital-intensive company, and really re-thinking the U.S. land market. Maybe can you talk a little further about that capex profile, how you’re looking at the market differently particularly in the U.S., and the long-term ability to generate more cash flow, free cash flow?

Thank you. When I consider the equipment we are developing and how we are using it more efficiently, as well as reducing costs, these are the aspects we focus on. We aim to enhance returns by leveraging our digital capabilities to cut expenses. We have streamlined operations by eliminating around 100 facilities, achieved through significant changes in our work processes, which has allowed us to use less capital. This impacts everything from maintenance to workforce locations. This perspective is primarily for North America, but the skills and capabilities we've developed are applicable globally, and I anticipate that we will continue to reduce costs across our business. So when I mention charting a new direction, I refer to our digital international strength and a leaner organization aimed at enhancing technology and efficiency. I believe that our focus on being lean and efficient will consistently enable us to lower costs, including internationally.

Great, thanks Jeff. I’ll turn it over.

Thank you.

Good morning, and thank you. Lance, I have a couple of questions for you regarding cash flow. First, do you anticipate that the working capital improvement in the second half of the year will be as significant as it was in the second quarter? Additionally, it’s challenging to be precise about some aspects related to this.

Bill, you’re breaking up on me. I’m sorry, I didn’t get all of your question.

Sorry, can you hear me now?

It’s a little muffled.

Yes, the question was whether working capital as a source of cash will be as significant in the second half of the year as it was in the second quarter. Additionally, regarding your cash cost savings, it's hard to provide a definitive answer. In the event of a regime change in November, how do you view your cash costs? Specifically, do you have enough cash and tax shield to counterbalance a potential increase in the corporate tax rate? Thank you.

Let me address the first part of your question about the working capital unwind and the momentum in the second half of the year. We had a strong cash flow related to the unwind in working capital in the second quarter, and I expect that momentum to carry into the third and fourth quarters. It may not be as strong, given the revenue declines we experienced in the second quarter and the changes in receivables and payables. Nevertheless, it's encouraging to see the organization maintaining efficiency in generating cash flow from working capital. While the third quarter may not be as robust, I still anticipate continued momentum from the unwind in the upcoming quarters. Could you please repeat the second question? I believe you were asking about administrative expenses, but I had trouble hearing you.

Yes, sorry about that. In the event of a regime change in early November, I believe Biden is referring to a 28% corporate tax rate. I'm just curious whether, with your tax shield, net operating losses, and other factors, you expect to be affected in 2021.

No, we don't, Bill. We do have the net operating losses, and there are always other ways that Halliburton continues to pay cash taxes, but at the federal tax level, we expect to benefit from tax shields due to the net operating losses.

Thank you very much.

Thanks, Bill.

Thank you, good morning.

Good morning, Sean.

So the decrementals were very impressive - you know, a huge difference compared to what we saw in 2015 and 2016. I was hoping we could just get a better sense of the run rate for C&P going forward. Impairments helped with lower D&A, I appreciate you quantifying that for 3Q. It looks like a 400 basis point assistance from 1Q to 3Q. Were there margin benefits from the inventory write-downs? I’m just curious if completions activity gets a little better in 3Q, does the margin follow at the EBITDA line, so looking past EBIT to the EBITDA line?

I believe the changes we've discussed and the guidance we've provided have played a significant role in the margin reset we announced today. These margins have been positively influenced by some accounting adjustments and impairments we've recognized in the first half of the year. However, it's important to highlight that we've also made considerable strides in cost reductions, which we see as lasting improvements. This effort spans all areas of our operations, including drilling, digital initiatives, production, and fracking in North America, as Jeff mentioned. As we focus on enhancing our margins, we will continue to pursue further cost-cutting opportunities. This foundational work positions us well for stronger profit margins as activity levels increase, driven by the expectation of improved financial performance resulting from these permanent cost reductions and adjustments.

Let me follow that up by saying that the new course we are taking involves significantly lower costs and a reset around expenditures. We are focusing our efforts on becoming more efficient in North America regarding our investments and managing our cost structure, while we continue to enhance technology in international markets. Additionally, we are implementing lower capital expenditures. All of these changes stem from a transformation in our business processes and mindset, which will ultimately lead to substantially reduced costs and improved margins and cash flow.

Right, got it. I appreciate that. So then just as a follow-up, if we think that EBIT will be higher quarter over quarter, modestly higher margins as a percentage, does that follow same for EBITDA? Do you think EBITDA can grow quarter over quarter?

Well, I think the implications with everything that we’ve described, Sean, on our prepared remarks will tell you that EBITDA is relatively flat, even though the top line is coming down.

Hey, good morning Jeff. Obviously international is a bigger part of your business now going forward. Just wondering, in your outlook as you think about international markets, how they’re trending, how you’ve thought about pricing in that outlook, and in particular in the second half of the year. Hearing some reports about pricing concessions being asked for the NOCs, particularly in the Middle East, so I was just wondering if you could talk about that and whether you think that’s a concern or risk for the industry. I know you have a lot of other contracts, LSTK contracts and whatnot, so maybe you can just talk about both sets, if you wouldn’t mind, please?

Yes, I think the fact is pricing never recovered internationally, and at this point we haven’t seen many tenders so we don’t have much of a view of that. But bottom line is there’s much less capital internationally - I mean, the excess capital just isn’t there maybe the way that it is in the U.S., so that’s probably getting sorted out in the U.S. as well. Most of the dialogue has been more around working on efficiencies, how to drive more efficient operations both for our customers and for us, and less so around pricing. It doesn’t mean that they don’t get asked about, but at the same time the only effective path forward is to drive better efficiency, utilization of technology, and that sort of thing internationally. I’d say that applies to NOCs and IOCs.

So you’re not being asked to lower prices on existing work?

Yes, I understand, and I would say that certainly the first response is let’s look for ways to drive better efficiency, not address pricing, because most of these contracts that are in place today were lit arguably at the bottom international cycle, which was in 2016.

Fair point. You mentioned digital quite a bit on today’s call. Just curious about something as you’re looking forward. In terms of where you want to be, let’s just think two or three years down the road here, do you think you can pull all the technology out internally; in other words, can you create all this organically, or do you need to look outside? I guess if I look back in the past, looking back in the mid-90s, technology acquisitions were critical obviously to you and some of your biggest competitors - I’m thinking about Landmark, of course. How are you thinking about that going forward? Is that something you’re going to have look outside of Halliburton? Is it a combination? Just your broader views on that, please.

Yes, broadly I treat that the same as we do most of our M&A, in the sense that when we see opportunities to accelerate R&D or we see things that are important adds, we make them, and we’ve continued to do smaller transactions around our digital offerings, so we’re very thoughtful around the build versus buy approach, and that’s a lot of the valuation. We feel like we can, through partners and others, get into all of the things we need to do and deliver platform solutions, and so there’s not a big transformational thing that’s in our minds. More importantly in my view is continuing to advance the R&D around digital.

Thanks, Jeff.

Hey, good morning everybody. I guess we’ll kind of stick on this digital and remote operations that you guys have been talking about through the quarter, the past couple quarters. I guess first, how should we think about the structural margin improvement from these cost savings initiatives on the remote operations and automation side, and how much benefit did you see in 2Q? Then the second part of the question is really how easily can competitors replicate this strategy over time?

Thank you, Chase. In the second quarter, our digital technology and approach significantly contributed to the cost reductions we experienced. However, I wouldn't say the current level of activity is enough to drive substantial incremental improvements. While any growth in activity will certainly yield strong results, I'm using real estate rationalization as an example of the kinds of reductions we can achieve through our digital solutions. For our customers, I mentioned an example in my earlier remarks highlighting how our digital solutions are enhancing performance for both them and us, and I believe we will continue to see the importance of this. Scaling digital solutions is quite challenging. I understand the complexities involved and know we are collaborating with some of the best partners in the industry. It requires substantial effort and a commitment to ensuring that our platforms are scalable and consistently reliable. Therefore, I feel confident about our direction.

Okay, great. Appreciate the color. One quick follow-up on the capex side. You mentioned 5 to 6% of revenues being spent on capex. Can you confirm that’s a long-term capex number and maybe how much of that is maintenance versus growth, and then if this implies that maybe on the international side that the market share gain strategy is less of a focus over the medium to longer term?

Yes, I think that the 5 to 6% versus the 10 to 11% is a longer-term outlook that’s based on capital efficiency, just to how we build things and how we take them to market, how fast we move them around, all of the things that drive lower capital requirements. I believe those changes are largely permanent also. When I think about how that plays out internationally, I think that same efficiency, a lot of the technology and tools that I described, particularly around capital efficiency, whether it’s iCruise or Cerebro or some of those technologies, are inherently lower capital requirements when they’re being used. Obviously, we went through a period of building that out over the last year, but operationally they operate at probably 20% less— you know, more efficient, better velocity. I think we have that to reap internationally over time.

Perfect. All right, I’ll turn it back over. Thanks, Jeff.

Thank you.

Yes, good morning.

Good morning, Scott.

The big question for you and peers has been how to make a profit in a smaller U.S. market, and you guys obviously took a great stride here in Q2 to proving that’s very possible. Lance, you mentioned strong incrementals during the recovery here, and I realize we’re just starting to poke our heads out of the bunker from one of the worst downturns we’ve ever seen, but if we do get back to 500 or 600 rigs operating in the U.S., which is more or less consensus I think, what’s a reasonable range to think about where C&P margins could rise to?

Scott, I’ll talk to that. Look, I think as you look into the future and to what the recovery may look like in North America, and the picture that you painted around activity, I think this is going to continue to be a good business that delivers mid-teens margins and produce a heck of a lot of free cash flow. Given the things that we’ve talked about on this call today operationally and the way that we’re becoming sharper in North America with our service delivery improvement initiatives, on top of just structurally lower capex requirements to achieve that business, drives a really nice free cash flow profile, we believe.

Yes, I believe that in North America.

No, go ahead, Jeff.

I’ll only add one thing to that, because as we look at North America, if we just sort of assumed a flat level of production in ’21 and then we moved that forward into ‘22, we see all of the attrition and tightening that is happening. I think we were well on this path at the end of last year coming into this year, and we saw solid performance in Q1. We expect we get back to a market that’s probably size and shape, at least from the supply and demand of equipment standpoint, something that looks like Q1 2020 sometime further out, and the approach that we’re taking, I think will work very well for us.

Got it. Then just given your technology investments on the D&E side and given the cost reset on that side of the business as well, kind of just where you stand in terms of the market share gains internationally, do you think when we’re at mid-cycle in the next cycle, is the gap between C&P margin and D&E margins much smaller than what we’ve seen in the last few cycles?

Yes, I would expect so. I mean, again, we have expectations that that business continues to improve also, and we were well on the way to doing that really up until we got into the pandemic situation and where we are today, but none of the fundamentals have changed around what we’re doing other than, I think, a sharper cost structure around these things.

Appreciate it, thank you.

Thank you.

Thank you. I wanted to ask first on the third quarter outlook for completions. I think you mentioned up for your North America C&P business. Do you see that outperforming the market; in other words, do you think that the market could be flat to down but Halliburton’s up, or do you also see the market up in the third quarter?

For completions, I think we’re off the bottom in May and I think you’ll see a little bit of an uptick in Q3 as DUCs get completed. Drilling, we think will be down a little bit, and I think that will be many of our customers managing decline rates into the end of the year. But you know, our view of the market is it stays with making returns and taking on the work that we believe we can execute well, so I think that’s what the overall market will do and I think we’ll be in around that.

Great, thanks for that, Jeff. Then you guys had mentioned in the press release and then a few times on this call about winning the recovery. Maybe if you could offer for us a little bit more color on what that means, what are the metrics we should be looking for from you guys in terms of claiming victory on that front?

I think that’s returns and cash flows. We spent a lot of time talking about free cash flow and returns, and that’s what we’re setting up for today. I think we get well through whatever this period of time is until we see commodity prices tighten. I think we do well through this near term, but then when we start to see tightening, we’re going to have the right cost structure that scales very efficiently with strong incrementals, and it delivers a lot of free cash flow and very, very good returns. That’s what winning the recovery looks like to me.

Is there a threshold or target that we should be looking for in terms of the percentage of revenue related to free cash flow?

I think we ought to get closer to that point before we start setting targets around that, but my expectations are that it’s a very strong performance by Halliburton. But it’s out there a ways.

Great, thank you.

Thank you.

Hey, good morning.

Morning, Kurt.

Jeff, I was just curious, when you provided the outlook here for the second half of 2020, you indicated an uptick in completion activity in the third quarter and then a seasonal decline in the fourth quarter. I’m just curious on that, just given how rapid the decline in that overall activity was and how sharp the decline in overall spending has been for 2020, so I guess you’re picking up that dynamic from your discussions with customers, so they’re going to get a little more active in the third quarter and just pull back again in the fourth? It seems a little bit counterintuitive, just given how sharply spend and activity has already been cut.

Yes, look - I think it’s going to rest more around DUC activity as we go into the second half of the year, so on a relative basis, more pronounced Q3, less pronounced Q4 would be my impression. I think every customer is working their own strategy around what do they need to do as they go into 2021, which will be obviously a time where some stability needs to return to productive capacity and those sorts of things. So is it more modest in Q4? It may be, but my overall outlook is it will be relatively biased even if you just take into account holidays and all the sorts of things that happen in Q4, along with weather. This isn’t the kind of market where you power through terrible weather in an effort to try to get to some point, I don’t think, in Q4.

Okay, that’s good color. Just maybe one quick follow-up here. It looks like the run rate on capex will be a little bit higher in the second half than it was in the first half. You indicated that your capex is project pipeline driven, so is it safe to assume here that you’re starting to see an increase in potential project activity going out into 2021?

No, I think what we see are some long lead time items that we do. We talked about projects being deferred but not necessarily cancelled, so we have to manage all of that together, so precisely where those things fall in the calendar is where they fall. I think what’s most important to think about around capital really is the overall efficiency that we’ve driven into both the tools, the process, the asset velocity which will structurally help us keep that at a much lower point than it has been in the past.

Okay, great. Appreciate that follow-up. Thanks.

Thank you.

Thank you, Liz. Before we wrap up today’s call, I’d like to leave you with a few closing comments. Our second quarter performance demonstrates Halliburton’s ability to execute swiftly and aggressively. The actions we have taken in North America we believe will enable higher profitability and free cash flow, even in a structurally lower environment. We have an excellent international business and are moving full steam ahead with the deployment of digital technologies, both for our customers and internally. Most importantly, Halliburton is charting a fundamentally different course. I believe the strategic actions we are taking today will meaningfully reset our earnings power and free cash flow ability as we power into and win the eventual recovery. I look forward to speaking with you again next quarter. Liz, please close out the call.