Halliburton Company (HAL) — Q1 2022 Earnings Call Transcript

Good morning, and welcome to the Halliburton first quarter 2022 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 financial 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, 2021, 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. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our first quarter earnings release or 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’ll turn the call over to Jeff.

Thank you, David, and good morning, everyone. I am pleased with Halliburton's first quarter results. Our performance demonstrates the resilience of our unique strategy in action and the importance of our competitive positioning, both in North America and international markets. Here are some highlights from the first quarter. International revenue grew 15% compared to the first quarter of 2021, with activity accelerating across all international markets. Strong growth in Latin America and the Middle East/Asia offset the winter weather impacts in Europe. In North America, revenue grew 37% year-on-year with the acceleration of both drilling and completions activity. Higher utilization in March and net pricing gains drove margin expansion despite weather and sand disruptions earlier in the quarter. Our Completion and Production division revenue grew 26% compared to the first quarter of 2021 on activity increases in North America, Africa, and the Middle East, while operating income increased 17% despite transitory U.S. land/sand delivery disruptions. Our Drilling and Evaluation division grew revenue 22% year-on-year, while margins expanded 440 basis points and started the year at 15% for the first time since 2010. This exceptional performance was largely driven by the strength of our directional drilling and project management businesses. We added three new companies to Halliburton Labs, our clean energy accelerator. This brings the total number of program participants and alumni to 15 companies. Halliburton Labs allows us to actively participate in the future of the clean energy value chain. Finally, we retired $600 million of our $1 billion of debt maturing in 2025 and nearly tripled our quarterly dividend to $0.12 per share. These actions strengthen our balance sheet and reflect our commitment to return cash to shareholders. Before we continue, I want to provide a few comments about the current situation in Ukraine and Russia. This is a tragedy on many dimensions and for us, especially for our people in both countries. As we've all seen, governments in the European Union, the United States, Switzerland, and other countries swiftly enacted far-reaching sanctions on new investment and export controls on goods, supplies, and technologies to Russia. In compliance with sanctions and consistent with our strategy for profitable international growth, we announced that we would begin steps toward a wind-down of our Russian operations, and we remain active in that process. Russia accounts for about 2% of our business. Sanctions and export compliance impact everyone in the oilfield, and operations and supply chains in Russia are, at best, challenged. The situation is far too early and evolving to say more. Moving on to our macro outlook, we expect oil and gas demand will grow over the near and medium-term, driven by economic expansion, energy security concerns, and population growth. At the same time, supply remains under structural threat of scarcity. While the war in Ukraine has created a short-term dislocation in commodity markets, the fundamental supply tightness existed before this geopolitical conflict. Current oil supply tightness and commodity price levels strengthen my confidence in the accelerating multi-year upcycle and very busy years ahead for Halliburton. In addition, I expect an important change in our customers' behavior and priorities will provide structural support to oil prices throughout this upcycle. I believe supply dynamics have fundamentally changed due to investor return requirements, public ESG commitments, and regulatory pressure, which make it more difficult for operators to commit to long-cycle hydrocarbon investments and instead drive investment flexibility through short-cycle barrels. The pursuit of increased investment flexibility leads operators to prioritize short-cycle projects, development over exploration, tiebacks versus new infrastructure, and shale rather than deepwater. Clearly, there are important exceptions where successful long-term projects will be developed, but painting with a broad brush, I believe most investments will be directed primarily towards short-cycle activity in the near and medium-term. The result of this focus is an industry-wide increase in the level of investment flexibility for operators and the subsequent support to commodity prices. With short-cycle barrels, companies make investment decisions annually and can respond more quickly to commodity price signals. As a result, when investment stops, production at a minimum doesn't grow. And in the case of unconventionals, it quickly declines. For example, when the pandemic drove the collapse of oil demand two years ago, U.S. shale companies swiftly reduced activity and production declined 2 million barrels in nine months. In contrast, long-cycle projects have two key elements: a long-time horizon and large upfront capital investment. Once these projects begin, investment continues and production cannot quickly respond to price signals. This tends to result in market oversupply. The pivot to short-cycle barrels creates the opposite effect, a perpetual threat of undersupply that is supportive to commodity prices. I believe this pivot to short-cycle barrels is great for Halliburton and sets up fantastic conditions for us to outperform. Short-cycle activity results in higher relative capital spend by operators aimed directly at the wellbore for services Halliburton provides as opposed to infrastructure investments required for long-cycle projects. Our strong technology portfolio and market footprint match this activity globally. Halliburton works, innovates, and invests where it matters most for our customers. And finally, Halliburton's value proposition to collaborate and engineer solutions to maximize asset value for our customers explicitly focuses on helping operators maximize returns and cash flow. This makes Halliburton uniquely relevant for this environment. Our five strategic priorities are clear and effective and will drive our behavior in this upcycle. First, we focus on profitable growth in our strong international franchise. Second, we maximize value and cash flow in North America. Third, we accelerate the deployment and integration of automation and digital technologies. Fourth, we drive increased capital efficiency in all parts of our business. And fifth, we actively participate in advancing a sustainable energy future. As demand for Halliburton services increases, both internationally and in North America, we will execute on our five strategic priorities to deliver industry-leading returns and strong free cash flow for our shareholders. As I look across the international markets, I continue to believe our customers' international spend will increase by mid-teens this year. Here are some leading indicators. First, we started with revenues in the first quarter much higher compared to the same period of last year. Second, our completion tool order book increased 50% year-on-year in the first quarter, which represents work generally delivered within the current year. And third, we have a strong pipeline of new projects scheduled to start in the second half of this year, particularly in the Middle East. We expect international activity to gain momentum in the second quarter, led by the Middle East and Latin America and further accelerate in the second half of the year. More importantly, our strong first quarter Drilling and Evaluation division margins demonstrate our focus on profitable international growth. Beyond the shift to short-cycle barrels already discussed, we expect this international upcycle to be structurally different from prior cycles and Halliburton's international business is poised to benefit from it. Here's why. National oil companies and independents comprise a larger portion of the international customer set. As a result of divestitures in the last few years, many international assets now have new owners who require a more collaborative service provider to help unlock remaining reserves and maximize value. Halliburton's collaborative approach, broad technology portfolio, local expertise, and reliable execution help customers achieve their efficiency and production objectives. Halliburton's execution of our technology roadmap has completely transformed our competitiveness in Drilling and Evaluation. We enter this upcycle with the best product portfolio in our history and we see increased customer demand for our high-end technology and a recognition of its value. For example, Halliburton recently deployed our new Strata Examiner Wireline Imaging Service for multiple customers in Norway and Morocco. Strata Examiner helped operators acquire more accurate well data in oil and synthetic-based muds, better evaluate production potential, and save rig time with log-down capability and increased logging speed. Another example is the latest addition to our logging while drilling suite, the StrataStar Azimuthal Resistivity Service for thin interbedded formations. Similar to our premium EarthStar service, the StrataStar combines high fidelity downhole sensors with powerful digital inversion capabilities. Multiple customers in the Middle East, Latin America, U.S. and Canada use it for faster, more accurate reservoir characterization to precisely place wells in the most productive zones and maximize asset value. We also see a slight uptick in offshore exploration activity, albeit from a historically low base. Halliburton's increased competitiveness in drilling and evaluation resulted in a doubling of our contract win rate in global exploration work over the last two years, and we expect to benefit from any additional growth in this higher-margin market. Different from prior cycles, Halliburton's investments in specialty chemicals and artificial lift create unique growth opportunities as we expand the international footprint of these businesses. Last month, I attended the opening of our new chemical reaction plant in Saudi Arabia. Multiple years in the making, this world-class facility establishes our chemicals manufacturing footprint in the Eastern Hemisphere. It is our launch path for profitable growth in the specialty chemicals industry in the Middle East and beyond. This quarter, it will start manufacturing products for our production chemicals contract with a large IOC in Oman and chemicals for our own product service lines. Several years ago, I described digitalization as one of the defining trends in our industry for this decade. Today, digital innovations permeate all segments of the oilfield services market. At Halliburton, our strategy to drive digital and automation creates technological differentiation, contributes to higher international margins, and drives internal efficiencies and cost savings. Here are some examples. On an integrated drilling project in Southeast Asia, Halliburton deployed Well Construction 4.0, our approach to digital transformation of well construction. It improved the rate of penetration by about 40% on initial wells and reduced rig site personnel by 21%. On an integrated project in the Middle East, we combine data science, smart bits drilling automation, and project management services for a more than 40% reduction in average well delivery time. We also deploy our digital solutions to advance a sustainable energy future. In the first quarter, Energean hired Halliburton to assess the carbon storage potential of the Prinos Basin in Greece, who will use our DecisionSpace 365 cloud applications to perform long-term plume modeling, characterize the storage complex, and create a conceptual development plan with performance modeling. We expect to deliver steady, profitable growth in the international markets for the rest of this year. Increased activity and equipment tightness continued to sharpen our pricing discussions with customers. Pricing is increasing on current contract extensions. In the first quarter, the percentage of contract extensions exercised almost doubled compared to the same period last year, as operators generally prefer to extend existing contracts rather than bid work in an inflationary market. Pricing is also increasing on new work. Turning to North America. We see market tightness across all service segments. In the first quarter, the average U.S. rig count increased 14% sequentially and is up 62% year-on-year. Additionally, frac activity surged in March after winter weather and supply chain disruptions occurred earlier in the quarter. Halliburton's hydraulic fracturing fleet remains sold out, and the overall market appears all but sold out for the second half of the year. The market today presents several positive elements, previously absent in North America, and they give me confidence in the continued strength of this market over the coming years. First, in the largest service segment in North America, the hydraulic fracturing market structure has improved. Today, the largest four pressure pumping companies account for about two-thirds of the market. Second, I believe that poor service industry returns over many years in North America ultimately resulted in a closed-loop capital system because access to meaningful outside capital doesn't exist today, and market participants must generate their own cash in order to reinvest and grow their businesses. Broad-based profitability improvements are required to fund growth, not just what appears to be good economics on a single incremental fleet. Finally, I see greater differentiation in hydraulic fracturing equipment types. In prior cycles, fleets were relatively the same. Today, all equipment is not created equal. Significant operational, environmental, and pricing differences exist ranging from electric fleets at the top; dual fuel and Tier 4 diesel in the middle; and finally, Tier 2 diesel equipment at the bottom. We have a terrific fleet composition. Halliburton is the leader in low emissions frac equipment. Our Zeus eFleets have committed contracts, earn attractive returns, and deliver improved performance. Another technology that sets Halliburton apart from the rest of the hydraulic fracturing market is our SmartFleet Intelligent Fracturing System. Customers are adopting this groundbreaking technology, and it has moved from pilot to campaign mode. We are deploying it for multiple operators across different basins and expect a six-fold increase in the number of stages completed with SmartFleet this year. Tightness in North America is not just in hydraulic fracturing equipment. It exists across the whole oil and gas value chain, in spare parts, engines, electronics, and many other inputs that cost more and are sometimes not immediately available. While we generally pass these increased costs on to operators, we also have effective solutions that minimize this operational impact and provide reliable execution for our customers. For example, our sophisticated supply chain organization responded by sourcing sand from Wisconsin when local mines were down in the Permian. In trucking, our collaboration with Vorto provides us with real-time information on the market clearing price for drivers and allows us to manage inflation and significantly reduce logistics-related nonproductive time. Years of low pricing and low returns impacted the North American oilfield services sector and the larger supply chain that supports our industry. Sustainably improved pricing is required to avoid future supply chain disruptions and to invest in the equipment, people, and technology necessary to deliver production growth. I believe our customers understand this. Against this backdrop, we see a long runway for ongoing net pricing improvement across all of our product service lines. In this recovery, Halliburton is focused on maximizing value in North America. For us, this is a margin cycle, not a build cycle. Last quarter, I shared with you my view that North America customer spending would grow more than 25% year-on-year. Today, as I look at a combination of customer activity and inflation, my outlook has improved, and I now expect North America spending to increase by over 35% this year. With respect to activity, over 60% of the U.S. land rig count sits with private companies, and they keep growing, while public E&Ps remain committed to their activity plans. Activity and demand for our services are increasing, both internationally and in North America. With our unique value proposition, clearly defined strategic priorities, and global presence, I expect Halliburton will deliver profitable growth, solid free cash flow, and industry-leading returns and outperform as this upcycle accelerates. 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, everyone. Let me begin with a summary of our first quarter results compared to the first quarter of 2021. Total company revenue for the quarter was $4.3 billion, an increase of 24%. Adjusted operating income was $533 million, or a 44% increase compared to the operating income of $370 million in the first quarter of 2021. These results were primarily driven by increased activity across all regions and improved pricing in North America. In the first quarter, we recorded pre-tax charges of $64 million. Of these, impairments and other charges totaled $22 million, including $16 million of receivables related to the write-off of all of our assets in Ukraine. The remainder of the charges totaled $42 million and was related to the redemption premium and unamortized expenses associated with the early retirement of $600 million of our 2025 senior notes. Now let me discuss our division results in more detail. Starting with our Completion and Production division, revenue was $2.4 billion, an increase of 26%, while operating income was $296 million, or an increase of 17%. These results were primarily driven by increased pressure pumping services and artificial lift activity in the Western Hemisphere, higher completion tool sales throughout the Western Hemisphere in the Middle East, increased cementing activity in Africa and Middle East Asia, and improved well intervention services in North America land and the Eastern Hemisphere. These improvements were partially offset by lower activity across multiple product service lines in Europe and lower completion tool sales throughout Asia. In our Drilling and Evaluation division, revenue was $1.9 billion, an increase of 22%, while operating income was $294 million, or a 72% increase. These results were due to increased drilling-related services globally; improved wireline activity in North America land, Latin America, and the Middle East; increased testing services internationally; and higher project management activity in Latin America, India, and Oman. Partially offsetting these increases were lower project management activity in Iraq as well as lower fluid services in the Caribbean, Brunei, and Mozambique. Moving on to our geographic results. In North America, revenue increased 37%. This increase was primarily driven by improved pressure pumping activity and drilling-related services in North America land, higher stimulation, artificial lift, and drilling-related activity in Canada, and higher completion tool sales in the Gulf of Mexico. These increases were partially offset by reduced fluid services in the Gulf of Mexico. Turning to Latin America, revenue increased 22% due to improved activity across multiple product service lines in Brazil, Argentina, and Mexico; increased well construction services in Colombia; higher completion tool sales in Guyana; improved project management activity in Ecuador and Colombia; increased testing services and wireline activity across the region; and increased artificial lift activity in Ecuador. Partially offsetting these increases were reduced fluid services in the Caribbean and lower project management and stimulation activity in Mexico. In Europe/Africa/CIS, revenue increased 7%. This improvement was primarily driven by higher activity across multiple product service lines in Egypt, increased drilling-related activity in Azerbaijan, increased well intervention and testing services across the region, improved well construction services in West Africa, and higher completion tool sales and cementing activity in Angola. These increases were partially offset by reduced activity across multiple product service lines in the United Kingdom, reduced well construction services and completion tool sales in Norway, and decreased fluid services in Mozambique. In the Middle East/Asia region, revenue increased 17%, primarily resulting from improved well construction services in Saudi Arabia and Oman, increased wireline activity and completion tool sales in the Middle East, and increased testing services across the region. These increases were partially offset by reduced project management activity in Iraq, lower completion tool sales throughout Asia, decreased fluid services in Brunei, and lower stimulation activity in Bangladesh. Our corporate and other expense for the quarter totaled $57 million, and I expect that to serve as a good quarterly run rate for the remainder of the year. Net interest expense for the quarter was $107 million. I expect this level of interest expense to drift slightly lower in the second quarter as a result of a full quarter impact of our reduced debt balance. Our normalized effective tax rate for the first quarter was approximately 21%. Based on our anticipated geographic earnings mix, we expect our second quarter effective tax rate to be approximately 24%. Capital expenditures for the quarter were $189 million. Our expected CapEx spend for the full year remains at approximately $1 billion, and we anticipate that our remaining capital expenditures will increase quarter-over-quarter into the end of the year. Our first quarter cash flow from operations and free cash flow was a use of cash of $50 million and $183 million, respectively. These results were primarily driven by investment in working capital, consistent with our strong activity growth. As is typical for our business in an upcycle, we expect our cash flow to be back-end loaded for the year. We still expect to generate strong free cash flow for the remainder of 2022. Finally, turning to our near-term operational outlook, let me provide you with some comments on how we see the second quarter unfolding. In our Drilling and Evaluation division, we expect the seasonal revenue decline in software sales to be offset by further improvements in global drilling activity. Therefore, second quarter revenue is anticipated to grow low- to mid-single-digits. As a result of the falloff of software sales, we expect D&E margins to decline by 125 to 175 basis points. In the Completions and Production division, activity is accelerating globally and scarcity will drive pricing in North America in the second quarter. As such, we expect second quarter revenue to grow in the mid-teens and margins to improve by 350 to 400 basis points.

Thanks, Lance. Let me summarize what we've talked about today. We believe that this accelerating multi-year upcycle is different and more sustainable than prior cycles due to operators' focus on short-cycle barrels. Halliburton's strategic priorities are clear and effective and drive outperformance. Our technology portfolio and market presence mean that we are poised for profitable growth in the international markets. In the tight North America market, we remain focused on maximizing value and improving returns. And finally, I expect Halliburton to continue to deliver profitable growth, strong free cash flow, and industry-leading returns in this upcycle. And now, let's open it up for questions.

Hi. Good morning, Jeff.

Good morning, Dave.

Your sales team in the U.S. has been cautious for the past five or six years, managing software returns. However, your customers are now experiencing record cash flows largely due to low service costs. As you mentioned, equipment is nearly sold out in the U.S., activity is increasing, oil prices are around 100, and the fundamentals are very strong. I don't think I've seen a better opportunity to raise prices. Could you share how you are advising your sales team regarding pricing? Additionally, what feedback are you getting from exploration and production companies? I recognize there may be some initial discomfort with the new prices, but the circumstances are likely to worsen over the next year. I don't see any additional capacity being developed, and exploration and production costs are only going to rise. If you could provide some context on the entire pricing discussion, I would really appreciate it. Thank you.

Yes, I will do that. I believe the most significant point is that we are consistently pushing for higher prices. We instruct our sales team on the volume of equipment and expect it to yield greater earnings. The sold-out conditions clarify this for both our team and our customers. Additionally, this process is iterative and will continue to evolve. We are adjusting prices now and will keep doing so throughout the year. I anticipate we will continue to increase prices as there is some sticker shock due to inflation affecting the entire industry. Our input costs are rising significantly, but we are managing to outpace those costs in terms of net pricing. It’s accurate to frame it as sticker shock. Last quarter, we noted some movement among customers as they explored options in the marketplace. We plan to keep progressing in this area.

So, Jeff, I understand it's early to discuss 2023. However, a lot has changed in the past 90 days, especially regarding global hydrocarbon movement. I was curious if it's accurate to say that your revenue expectations for next year have significantly increased, particularly in relation to the international outlook you've mentioned. Additionally, while 35% incremental margins seem to be the baseline for double-digit growth, could that figure potentially be closer to 40% or even 45% based on pricing trends reminiscent of the mid-2000s? It doesn’t appear to be an unreasonable expectation.

Yes, Dave, I'm really excited about the outlook. I don't want to refine a two-year outlook every quarter, but clearly, trajectories change each quarter. I'm very excited about those changes. Everything we see, including the aspect of energy security, indicates a busier North America and strong growth internationally. What's crucial is that we're witnessing both trends simultaneously, which we haven't seen in a long time, and this positions us very well.

Thank you.

Hey, good morning, Jeff. Good morning, Lance.

Hey, good morning, James.

Good morning, James.

So Jeff, you talked a lot about short-cycle barrels, which makes a ton of sense, given the situation the world's in now being short oil in a pretty significant way that, that would be the focus today. When do you think that, if it does, that the cycle turns into one of a more balanced mix of short-cycle barrels and some longer-cycle barrels, some of the more complex, maybe more offshore or just maybe bigger development-type projects?

Well, I think that what we see offshore generally today are tiebacks or development-type activity. But I think when I look further into the future, it's a combination of sort of ESG pressure is clearly one…

Right.

Capital returns are essential, and I don't anticipate any significant changes to that soon. We observe a marketplace that will offer more options for our clients and, in some ways, for us as well. Our long-term strategy for maximizing value in North America involves positioning ourselves appropriately. In areas where we have options, we see this reflected in our capital expenditure spending. However, it takes considerable time and upfront investment to initiate these projects. Looking further ahead, while there is potential for a return to earlier trends, I don't believe that is evident in our current perspective.

Okay. Okay. That's fair enough. And then Jeff, we hear a lot about and we've been talking to a lot of the NOCs, particularly the ones in the Middle East and North Africa, who are reworking their budgets or have been over the last seven, eight weeks and using a little bit higher oil price estimation. And I'm curious what they're telling you and probably your competitors as well about how these budget increases will flow through? I mean these are, in some cases, fairly bureaucratic operators. And so their ability to change and to get capital into the field and get service companies lined up in rigs and frac spreads, et cetera, takes some time. So I know you're certainly more optimistic now than you were probably yesterday, a day before and six weeks ago, but are – do you think you see a lot of this in the back half, or are we really starting to talk about a 2023, 2024, 2025 story for a lot of these big NOCs?

Look, I think we're going to see building activity sooner than that. I think it builds throughout the balance of 2022 and then probably continues to get legs in 2023, likely beyond. I think the key is that $100 oil, everything is busy. And people want to be busy, but the question is, can they be busy? And what we've seen is really seven years of underinvestment around the entire world spending about half of what we used to spend. And that's not something that's overcome in a day or a year or – that just takes time to get momentum. And I talked there are clearly all of Middle East, not the same. Clearly, there are NOCs that take a very long view and will build into growing production over time. But that's not the case everywhere. Lot of activity for us, but I think – and we'll see that sooner. But I don't think that you see the real long cycle-type work. It's just going to take quite a bit of time.

All right. All right. Okay. That's very helpful. Thanks, Jeff.

Thank you.

Hey, good morning, everybody.

Good morning, Chase.

Hey, Chase.

So I guess I wanted to follow-up on the margin guidance on the C&P side. Obviously, pretty strong sequential increase, I think you said 350 to 400 bps of margin improvement on the C&P side. So Lance, I don't know if you could step back and kind of walk us through some of the moving pieces. Obviously, 1Q was a little bit softer than we all thought. But just kind of walk us through price, so maybe some costs coming out or things just to help us kind of get confidence in that big sequential increase in margins on the C&P side?

Yeah. And you're right, Chase. A lot of noise in Q1, we've discussed before sort of the air pocket that exists as we move across the calendar year with completion tool sales and the profitability that goes with that. And certainly, the headwinds that we faced with sand supply early in the first quarter. But I think the real underpinning of the guidance is what we're beginning to see now on pricing in North America, and it really beginning to take hold. I mean, as Jeff said, we've been very careful about the equipment we've told you were sold out. So it's not like we're adding incremental equipment. This is really a pricing story for North America as it begins to turn.

Okay. I guess, the follow-up is really on pricing. Obviously, pretty tight US market, you're really starting to gain momentum on the pricing side. And Lance, if we were to kind of squint really hard and look at leading-edge pricing, can we say that leading-edge pricing is starting to feel like it's back to kind of 2018 levels, or are we kind of a long way from being able to kind of make that comparison just yet?

I think it's a little early, but I think that we're heading in that direction, and we'll get there, we'll eclipse that as we go throughout the course of the second and third quarter.

Yeah. I think what's important, though, Chase, is that it's not the marginal fleet at the front edge of the curve, it's really the entire business that needs to get the recovery. And I think that's what we're in the process of doing. So does the leading edge make sense? Yes. But the fact is, as I described in my comments, an incremental fleet is not really the decision point here. It's the recovery of the whole business in order to generate free cash flow.

And improved returns.

Great. Makes sense. I’ll turn it back over.

Good morning, team. Jeff, if I heard you right, you talked about North America growing 35% in terms of CapEx this year versus your previous estimate of 25%. Can you talk a little bit about what gives you confidence around that view? Is the composition of that more of the privates, or do you actually see it showing up in public E&Ps? And is that activity-driven, or is it inflation-driven? Any color around the margin because that's a material increase in your macro expectations.

There has been significant inflation, particularly in input costs, which have increased between 20% and 100%, depending on the item. This inflation affects our operations. Rig counts have risen by 45%, and frac crew costs are up by 20%. Public companies are maintaining their activity outlook, but without necessarily increasing activity. On the other hand, private companies are experiencing more activity and continued growth. Each operator has different strategies and is managing their operations effectively. It's clear that inflation and activity levels are crucial, with private sector growth playing an important role. Overall, I believe we've improved our outlook compared to last quarter.

And Jeff, we clearly build in the rig count here and we're seeing an intention for to come into 2023 a little bit hotter from a production standpoint. But when we talk to producers, the constraint continues to be around labor and pressure pumping equipment. Do you see new capacity being added into the market by your competitors? And ultimately, will that be a constraint on the US production profile over the next couple of years?

Yes, I believe it will be a constraint. Referring back to my earlier points about a closed-loop system for generating cash to build equipment, there's still a lot of equipment repair and replacement needed in the marketplace. Therefore, I see labor and equipment as constraints. This perspective drives our long-term view of fleet health, and we maintain one of the healthiest fleets available. Within our capital budget, we consistently replace aging equipment and are planning for fleet composition in 2023 and 2024. Our position in this regard is quite unique. However, I don't see any significant capacity or meaningful capital available for any build cycle at this time. The reality is that this industry is still recovering.

Thank you, guys.

Yes, good morning. I just want to come back to the C&P margin outlook, especially given what's happening in the marketplace here with your improvement in frac pricing. When I look at the margins and the incrementals, obviously a lot of noise in 1Q, which you've talked about, but when I look at margins embedded in your guide versus the second half of last year, that the incremental still look pretty modest. But going forward, obviously, a building completion tool backlog, frac prices improving, but obviously, pretty stout inflation coming through the system. How should we think about those factors impacting C&P incrementals in the second half? Can we see incrementals rise into the 40s, although inflation constrained those incrementals kind of in the 30s? How should we think about it?

Yes. Well, if we look at the Q2, I mean, the way you described it, everything we're doing is driving better margins in C&P, whether it's the operating leverage in the business, moving on price, equipment is tight. I think the Q2 guide puts us in that sort of range. Yes, there's a lot of inflation on other inputs to the business that we are recovering, but even recovering the cost of those other inputs will have a bit of a dilutive impact on overall margins, but that doesn't change the recovery for us and the speed and the momentum of that recovery. And so I feel very good about where we're going and expect incrementals to be at the high end of what a range would be as we move through this process.

Got it. One of the concerns we've heard regarding the timing of the next round of pricing in frac is about when we will actually see it. Your pricing leverage is improving, but when do you expect the next increase to come? Is it likely in the second or third quarter, or will we have to wait until late in the year during the next budget cycle to see the next significant step up? How quickly does the next round of pricing in frac come into play?

Yes, it's important to discuss the strategy for different customers and our current position. This is an ongoing process; we don't wait for next year to reassess. We are actively adjusting in real time. Given the current environment of $100 oil, this reflects part of the cost involved in delivering that price. As the industry continues to recover, we will keep refining our pricing throughout the year rather than planning for the following year.

Got it. Understood. Thanks, Jeff.

Good morning team. The situation in Russia has shifted the paradigm not only for crude, obviously, but also natural gas and coal, both of which land on the shoulders of natural gas everywhere else. So, we've seen that strip move radically recently. What do you think the customer response will be from US and international producers of natural gas with regard to activity response to what might be a structural higher strip just like crude that maybe hasn't shown up yet in the fundamentals of your business through April?

Yes. Look, I think, Ian, that has to strengthen certainly in terms of activity, and I expect we'll see that in the important gas-producing countries internationally, we will see more of that activity and even likely in the US. But the fact is, there still are some important constraints in place around pipeline capacity and whatnot that is serving to keep some of that market constrained today. But look, our business in the gas basins is improving and is busy and really not too dissimilar from kind of the demand response or the activity response that we see from oil.

Okay. Jeff, regarding the outlook on C&P margins, there were significant weather and sand bottlenecks that affected Q1, and we are expecting a solid recovery for Q2. Does your margin guidance for Q2 assume that the sand issue is fully resolved, or is there still potential for further margin recovery due to ongoing sand bottlenecks, as you suggested for Q2 later in the year?

No, I think the sand is largely behind us. That was a good example of underinvestment in supply chain. And as it was turned back on, it had a lot of maintenance, lack of maintenance thereof, and we even participated with some of our vendors to help them get things back online and I believe that's largely behind us. Look, I think the important point here is this trend is moving up. We're going to see all sorts of things, but our guide accounts for sort of all of the things that we see. And I think that we are just in this place where we're going to continue seeing improvement sort of over whatever the labor bottlenecks happen to be, those are going to all be overcome consistently as we move through the year and really beyond. I mean I think that we'll continue to power through all of that and continue to see solid incremental growth at margins.

Super. Thanks, Jeff.

Yes, thank you.

Yes. Thank you. I know it's a bit early to say precisely, but just returning to the topic of international pricing. Do you see meaningful constraints in either your available equipment in select markets or your availability of labor, or is that more of a US issue at this point?

I believe the tightness we discuss in the US is also reflected internationally, albeit in smaller segments due to operating in 70 different countries. We are observing increased tightness in tools and specifically in labor, which is currently driving the rise in extensions. The higher number of extensions we are experiencing at increased prices is a positive indicator, as it stems from tightening markets and the necessity for services. Equipment availability is becoming more constrained, and new projects are yielding better pricing. While the pace of improvement is slower than in the US, I anticipate it will continue to advance. Large tenders are still competitive, yet they are absorbing significant equipment resources. This tightness in the market is creating opportunities for Halliburton; we have been able to meet supply needs when others have not, thanks to our supply chain and access to raw materials. Instances where customers reach out for additional resources and we can fulfill those requests highlight the increasing tightness in the market.

Got it. That's helpful information. Regarding the supply chain, there have been many changes in the world over the past month or two. Have you identified any critical areas that you're keeping an eye on? Are there any specific factors we should consider as you increase activity for the remainder of the year?

No, I don't think so. I mean I think what we're going to just see is the lengthening of delivery times. Things take longer to deliver, and therefore, planning matters more than ever. Obviously planning on our part, but also planning on the parts of our customers. And again, it is creating opportunity for us. And I think along the way, the key here is, we can't and won't subsidize operators in this process. So, we've been very transparent in terms of the cost to acquire things, the timing to acquire things. And I think that, again, our supply chain organization is very sophisticated and it outperforms. And so, I put Halliburton right at the top of that when it comes to solving those kinds of shortages, bottlenecks, whatever it may be.

Got it. Thank you very much.

Thank you.

Thanks. Good morning, gentlemen.

Good morning, Stephen.

Two things for me. Just to start with, with the world evolving and you mentioned kind of the pull on short-cycle barrels, how do you think about CapEx? How do you think about investing in assets which have 5-year-plus lives in an environment where things have changed so dramatically?

We assess the returns on equipment based on the timeframe we know it will be effective. We have clear visibility not only on the initial project but also on its overall return cycle. We expect to see returns over the life of the contract. For instance, with eFleets, we recognize that they need to achieve a return on and of capital during their initial contract period. We approach many projects with that mindset. As operators maintain flexibility in their budgets for decision-making, we do the same. This approach enables us to confidently pursue profitable growth internationally, as evidenced by our D&E margins, while also maximizing value in North America, which is reflected in our strategy there. I am very confident in our strategy, and I believe it aligns well with the market conditions we are witnessing.

Thanks. Regarding the concentration of frac equipment among a few operators and the observed consolidation, have you noticed any changes in behavior from all the market participants? Do you believe this is simply due to the market being sold out? Are you seeing your competitors improving their pricing strategies?

Look, I can't comment there. I mean, what I see is an industry broadly that has underperformed for a long time. And I know in our own case, for Halliburton, in order to reinvest in even replacement equipment, we need fundamentals that are better and returns that are higher in order to generate the cash back to my point around maximizing value in North America. We're only going to do that if the investment is produced by the equipment that is working in the marketplace. And so independent of what others are doing, that's what we are doing. And when I look across the marketplace, I see a whole industry that has largely suffered the same thing. And so that's just pure economics at work there.

Great. Thank you.

Yeah. Thank you, Michelle. Look, before we end the call, let me just close with these comments. I am confident in my outlook on the strength of this market upcycle. And I expect Halliburton will deliver profitable growth, strong free cash flow, and industry-leading returns as this upcycle accelerates. The pivot to short-cycle barrels only confirms this upcycle staying power. Look forward to speaking with you next quarter. Michelle, let's close out the call.