Halliburton Company (HAL) — Q2 2022 Earnings Call Transcript

Good morning, and welcome to the Halliburton second quarter 2022 conference call. As a reminder, today’s call is being webcast, and a recorded version will be available on Halliburton’s website following the conclusion of this call. Joining me today are Jeff Miller, Chairman, President, and CEO; and Eric Carre, 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, 2021, Form 10-Q for the quarter ended March 31, 2022, 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 reconciliation to the most directly comparable GAAP financial measures are included in our second quarter earnings 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, David, and good morning, everyone. This was an excellent quarter. Our financial performance shows that our strategy is working and driving value. Let's get right to the highlights. Total company revenue increased 18% sequentially as both North America and international activity continued to improve in unison. Adjusted operating income grew 35% with strong margin performance in both divisions. Our Completion and Production division revenue increased 24%, driven by robust completions activity in North America and international markets. C&P delivered operating margin of 17% in the second quarter, the first time it reached this level since 2014. Our Drilling and Evaluation division revenue grew 12%. Operating margin of 13% was down sequentially as expected due to the seasonal drop-off in software sales, but increased 270 basis points year-on-year. This gives us confidence in the strengthening margin profile of our D&E business. North America revenue grew 26% as both drilling and completions activity marched higher throughout the second quarter. Strong net pricing gains across all product service lines supported sequential margin expansion. International revenue grew 12% sequentially with activity accelerating in all international regions, particularly Latin America and the Middle East. Finally, we recorded a historic best operational performance as measured by nonproductive time for the first six months of this year. I am pleased with the strong performance Halliburton delivered in the first half of this year, and I thank all Halliburton employees for their hard work, contribution to these outstanding results and dedication to superior service quality. Before we discuss our execution in the international and North American markets, let me address recent market volatility. In the second quarter, central banks took actions in an attempt to control inflation, raising concerns about a potential economic slowdown. Despite this near-term volatility, I believe the oil and gas market fundamentals still strongly support a multiyear energy upcycle. From a demand perspective, oil and gas remains a critical component of long-term economic growth. Post-pandemic economic expansion, energy security requirements, and population growth will continue to drive demand. Today, oil and gas supply is tight, despite an environment muted by ongoing China lockdowns and jet fuel demand below historical norms. Meaningful supply solutions will take time; OPEC spare capacity is at historical lows, the strategic petroleum reserve release is unsustainable, and the risk to Russia supply remains high. On the industry side, despite high commodity prices, operators remain disciplined because of investor return requirements, public ESG commitments, and regulatory pressure. In response, service companies invested for returns and did not overbuild. In short, this cycle has been nothing like prior cycles. This means any economic slowdown will not solve the structural oil undersupply problem. At Halliburton, the steps we took to improve operating leverage, lower capital intensity, and strengthen our balance sheet best equip us to outperform under any market conditions. Here's why we believe that. First, we used the pandemic to redesign the cost profile of our business. We structurally removed over $1 billion of costs, the most aggressive cost reductions in our history. This gives us strong and sustainable operating leverage that we see today in meaningful year-on-year margin expansion in both divisions. Second, we fundamentally lowered the capital intensity of our business and set our CapEx target at 5% to 6% of revenue compared to 10% to 11% in the prior upcycle. We advanced our technology so that new generations of equipment would have higher capital velocity. This lower capital profile is key to our strong free cash flow generation. Finally, we prioritize strengthening our balance sheet and retired $1.8 billion of debt since the beginning of 2020. This reduced our cash interest expense and put us within striking distance of our leverage targets. Now, let's turn to our second quarter performance and expectations for the rest of 2022. With energy security firmly in focus, the diversification of supply sources is the central theme in the international markets. Never has energy security been a bigger issue to governments and people all over the world. However, political agendas and years of underinvestment in many markets make it harder to address this critical requirement. As I look across the international markets, our customer spend remains on track to increase by mid-teens this year, with the Middle East and Latin America expected to grow the most on a full year basis. New project announcements across the world, including in the Eastern Mediterranean, Australia, and West Africa, give us confidence in continued activity acceleration in 2023 and beyond. Longer term, we believe the international markets will experience multiple years of growth. Halliburton's international business is better prepared to benefit from the upcycle than ever before. We have a strong portfolio of well construction and completion product service lines. We greatly increased our drilling competitiveness. We are present in all the markets that matter and we have unique growth opportunities in the production space. Let me elaborate. The activity mix in this upcycle is different from prior cycles. Today, operators focus more on developing known resources and less on long-term exploration programs. This means drilling more wellbores. The products and services customers require for drilling more wellbores benefit Halliburton. For example, in one of the largest international offshore markets, over 60% of a typical well service cost goes to drilling fluids, cementing, and completion hardware. This means more operators spend on services where Halliburton has a leading position. Baroid, our drilling and completion fluids business entered this cycle as the leading fluids provider globally. During the downturn, we brought the chemical supply chain closer to our international customers and localized our workforce. This improved our cost competitiveness and the margins. We introduced new advanced chemistries and now run fluid systems that make better wellbores and create value for our customers and Halliburton through higher margins and lower inventory requirements. Halliburton was founded as a cementing company over 100 years ago. And since then, we never stopped leading and innovating in cementing. Every well in the world, be it a mature producer in the Middle East or a deepwater wellbore in Brazil, must be cemented. The secret to our enduring success in cementing is our capacity and drive to innovate and develop new methods to design, deliver, and validate sustainable well barriers. Our latest innovation is the Cognitive Automated Cementing Platform, which allows us to deliver cement jobs autonomously. With limited human direction and intervention, a standard offshore cementing operation typically requires over 300 commands. The Cognitive platform consolidates and automates this to only five mouse clicks by an onshore operator. We already completed over 70 cementing jobs using the system in the North Sea, delivering safer operations, improved service quality, and cost efficiency. Well completion tools constitute a larger portion of well services spend internationally than in North America, and they are high-tech and high value-add products and services. Halliburton is a global leader in completions technology, especially in advanced completions that include sand control solutions, multilateral wells, and intelligent completions. With over 20 years of multilateral installation experience globally, Halliburton is the market leader in multilaterals, a key technical component in many development wells. They help operators increase reservoir drainage in mature fields, address limited subsea infrastructure, and reduce environmental impact. Over the past few years, we've strengthened our completion tools product service line in Singapore, which is closer to our international customer base and supply chain sources. With our world-class manufacturing facilities, strong local technical support, and continuous innovation, Halliburton completion tools position us to outperform in the international upcycle. Another key well construction service is directional drilling. Over the last five years, we made a concerted effort to improve our drilling technology competitiveness. Our strong D&E margin performance this year demonstrates that our investment is paying off and we expect it to continue as international drilling activity ramps up. Our iCruise intelligent drilling system delivers excellent results. It now constitutes about half of our rotary steerable fleet and has been a key contributor to year-over-year margin improvements, which reflects its higher asset velocity compared to prior generation tools. Last month, for a Middle East customer, Halliburton achieved a new world record, the longest well ever drilled at 50,000 feet measured depth. This extended reach well redefines what's possible with advanced drilling technology. In many regions, as customers face increasing operational challenges and urgency to increase production, I expect that the adoption of integrated contracts will continue to grow. Today, about 20% of our international revenue comes from integrated projects, and this percentage is considerably higher in some markets like Norway, Mexico, and Iraq. Halliburton's strong project management capabilities and a proven track record compress the learning curve and drive cost savings and efficiencies for both us and our customers. The future is without a doubt more collaborative. Customers across the world increasingly call on Halliburton for collaboration, and that perfectly fits with our value proposition to collaborate and engineer solutions to maximize asset value. Geographic presence is very important in the international markets, and today, we are present everywhere that matters, which is different from prior cycles. We expect to benefit from our established footprint, geographic presence, and customer and supplier relationships as international markets grow. Finally, I want to highlight the international growth opportunity Halliburton has in artificial lift and specialty chemicals, which is new for this upcycle. This month, we completed our first year of operations on our electric submersible pump contract in Kuwait. We have already installed almost 200 ESPs, built an artificial lift service facility in the country, and delivered excellent performance for KOC. We also have successful installations in Oman and have ongoing ESP trials in Saudi Arabia. Upon completion of trials at the end of the year, we expect prequalification to participate in Saudi Aramco's future artificial lift tenders. Latin America is another successful market for our artificial lift business, where we operate in all significant land markets and just installed our 500th ESP in Ecuador. Our new chemical reaction plant in Saudi Arabia mixed the first batch of chemicals last month and is on track to meet its ramp-up goals. This year, we expect the plant to manufacture products for our production chemicals contract with a large IOC in Oman, and chemicals for our drilling fluids, specialty chemicals, and hydraulic fracturing product service lines. Today, Halliburton is a much stronger international competitor, and we expect to benefit more from this multiyear upcycle than ever before. This aligns perfectly with our strategy to deliver profitable international growth. Turning to North America. This market remains strong, steadily growing, and all of it sold out. Our strategic priority is to maximize value in North America by focusing on cash flow and returns, not market share. The second quarter saw another step-up in both US land rig activity and stages completed. With the first quarter sand supply interruptions resolved, frac activity steadily increased throughout the quarter. As we look at the second half of 2022, Halliburton remains sold out. As for the overall market, I believe it will be all but sold out for the second half of the year due to service company discipline, long lead times for new fleets, and supply chain bottlenecks for consumables. We expect public companies will steadily execute on their drilling and completion programs. Private E&Ps capitalized on available rigs and equipment in the first half of the year and will likely maintain a measured level of activity growth for the rest of the year. We continue to believe that North America operator spending growth will eclipse 35% this year. Our customer conversations have already pivoted to 2023 plans well in advance of the typical timeframe. These conversations make it clear that equipment capacity for 2023 is tight. Today, we see a services market in North America that is almost unrecognizable from prior cycles or even a handful of years ago. I believe that the returns focus we now see in the services market is not a temporary phenomenon. The largest, more publicly traded pressure pumping companies now account for about two-thirds of the market. This means that investors force discipline on the majority of the industry today. In addition, industry consolidation, structural changes to customer behavior, and the requirement to self-fund capital investments all drive capital discipline. In short, it's the result of rational economic behavior, and I believe that it is here to stay. Halliburton is well prepared to compete in this new paradigm in North America. We have the largest technology budget in the North American services industry, and our advanced technologies deliver what matters to operators: efficiency, insight, and emissions reduction. For example, today, our customers can reduce environmental impact with our proven Zeus electric frac offering and optimize completions performance by capturing downhole insight with our SmartFleet intelligent fracturing solution. We operate in every major oil and gas basin across the United States using the same design of equipment built by in-house manufacturing to our specifications. This one design approach greatly simplifies equipment maintenance and helps minimize the supply chain challenges for spares and equipment. Finally, we have global capabilities in managing supply chain and labor complexities that we believe give us a distinct competitive advantage over domestic service providers. To conclude on North America. I expect Halliburton to uniquely maximize value in the strong, steadily growing, and all but sold-out market. Globally, supply chain and labor shortages are front and center for many industries as the post-pandemic recovery stressed both raw material supply and transportation logistics. I believe Halliburton manages these shortages better than competitors. Our global business development, supply chain, and technology organizations closely monitor market trends and work to mitigate cost impacts through economies of scale and global procurement, technology modifications, and efficient sourcing practices. For example, as chemical costs increase, we work with our customers to adjust our pricing for cost inflation. Operators appreciate that these price adjustments are required for us to continue delivering our services. Most customers expect and accept these adjustments. Halliburton's world-class technology organization gives us the ability to change formulations for certain products to avoid the most inflationary inputs. We have already implemented these design changes for some of our drilling fluids and completion tool elastomers. Finally, we have internal chemical manufacturing capabilities in the US and Saudi Arabia, which allow us to diversify supply, mitigate risk, and better control input prices. In North America, we employ our global HR capabilities for managing commuter labor to hire out of basin and avoid labor shortage pressures in local markets. This allows us to secure talent from states outside of white hot labor markets in traditional oil and gas basins. At the same time, our voluntary attrition numbers remained stable, both globally and in the US. This demonstrates that once we attract the right talent, we provide them with the right incentives and growth opportunities. Turning now to pricing dynamics that we see playing out in North America and internationally. As I stated before, this is a margin cycle, not a build cycle. In North America, net pricing improvements drove our strong C&P margin expansion in the second quarter, and I expect pricing gains to continue. Here's why. Existing active equipment and experienced crews are in high demand and will continue to be highly sought after to efficiently execute programs in the second half of this year and into 2023. The market remains all but sold out. Supply chain bottlenecks even for diesel fleets make it almost impossible to add incremental capacity this year. Halliburton has the additional advantage that our fleet primarily competes at the higher end of the pricing spectrum. Our portfolio of low emissions equipment commands premium prices, and our customers see value in the efficiency and emissions profile we provide. Internationally, we see structural tightness in many product lines, particularly drilling and wireline. Increasing activity soaks up capacity market-wide. And recently, some customer requests for additional equipment had to go unanswered. As equipment availability continues to tighten, we expect prices will increase further. Due to the long-term nature of international contracts, only about one-third of our work re-prices every year. This means that margin and pricing inflections internationally will always materialize at a slower pace than in North America. We see evidence of customer urgency indicated by customer preference to pursue direct negotiations for contract extensions. The efficiency gains over the last several years have all accrued directly to operators, and there is still a great deal of room in customer economics for service providers to earn a fair and durable return. So it often goes unsaid; a robust and investable service industry is a key enabler of our customers' ability to grow and maintain production to address the world's energy needs. I'm thrilled with Halliburton's performance in the second quarter and our immediate and long-term opportunities. Our team is executing well on near-term tactical objectives, and the long-term strategic priorities provide real tangible value for Halliburton and our shareholders. Halliburton's competitive position is unique among our peers. We have the scale and technology to benefit meaningfully and differentially from the international market expansion, and we are the leader in the strong, steadily growing, and all but sold out North American market. I could not be more excited about the future of Halliburton. Now I will turn the call over to Eric to provide more details on our second quarter financial results.

Thank you, Jeff, and good morning. Let me begin with a summary of our second quarter results, compared to the first quarter of 2022. Total company revenue for the quarter was $5.1 billion, and adjusted operating income was $718 million, an increase of 18% and 35%, respectively. Higher equipment utilization and net pricing gains supported these strong results. In the second quarter, we recorded a pre-tax charge of $344 million as a result of our decision to exit Russia due to sanctions. Now let me take a moment to discuss our division results in more detail. Starting with our Completion and Production division, revenue was $2.9 billion, an increase of 24% while operating income was $499 million, an increase of 69%. These results were driven by increased pressure pumping services in the Western Hemisphere; higher completion tool sales globally; increased artificial lift activity in North America land and Kuwait; and improved cementing activity in the Eastern Hemisphere. These improvements were partially offset by lower stimulation activity in Oman and decreased artificial lift activity in Latin America. In our Drilling and Evaluation division, revenue was $2.2 billion, a 12% increase, while operating income was $286 million, a decrease of 3%. This revenue increase was due to higher fluid services and wireline activity globally, increased project management activity in Latin America and the Middle East, and increased drilling services in Latin America. Operating income decrease was driven by seasonally lower software sales globally and decreased drilling services in Brazil. Moving on to our geographic results. In North America, revenue grew 26%, primarily driven by increased pressure pumping services and artificial lift activity in North America land, increased fluid services, wireline activity, well intervention services, higher completion tool sales across the region, and increased cementing activity in the Gulf of Mexico. These increases were partially offset by lower stimulation activity in the Gulf of Mexico. Turning to Latin America. Revenue increased 16% due to improved activity across multiple product service lines in Argentina and Colombia, increased stimulation and well construction services in Mexico, increased drilling related services in the Caribbean, improved stimulation activity in Brazil, and higher project management activity in Ecuador. Partially offsetting these increases were decreased drilling related services in Brazil and lower artificial lift activity in Argentina and Ecuador. In Europe/Africa/CIS, revenue increased 6% resulting from higher activity across multiple product service lines in Angola and Eastern Mediterranean, improved cementing activity, pipeline services, wireline activity, and testing services across the region, and increased through its services and completion tool sales in the UK. These increases were partially offset by the impact of the winddown of our business in Russia and decreased drilling services in Norway. In the Middle East/Asia region, revenue increased 14%, primarily resulting from higher activity across multiple product service lines in the Middle East, Australia, and Brunei. These increases were partially offset by reduced stimulation activity in Oman. All regions experienced a seasonal decline in software sales. In the second quarter, our corporate and other expense was $67 million, which was higher than expected due to the timing of employee incentives. For the third quarter, we expect our corporate expense to be slightly lower. Net interest expense for the quarter was $101 million and should remain about flat for the third quarter. Other net expense for the quarter was $42 million, primarily related to currency losses driven by the strength of the US dollar. For the third quarter, we expect this expense to remain about flat. Our normalized effective tax rate for the second quarter came in at approximately 22%. Based on our anticipated geographic earnings mix, we expect our third quarter effective tax rate to be slightly higher. Capital expenditures for the quarter were $221 million and will steadily increase for the remainder of the year. For the full year, we expect our CapEx to remain at 5% to 6% of revenue. Turning to cash flow. We generated $376 million of cash from operations and $215 million of free cash flow during the second quarter. Working capital investments grew to support the 18% sequential revenue growth. As is typical for our business in an upcycle, we anticipate free cash flow for the year to be back-end loaded and expect to generate free cash flow at or above last year's level. Now let me turn to our near-term outlook. In the Completion and Production division, we expect third quarter revenue to grow in the mid-single digits and margins to improve 75 to 125 basis points. In our Drilling and Evaluation division, we expect our third quarter revenue to grow in the low to middle single digits. As a result of activity improvements, we expect D&E margins to be flat to up 50 basis points. I will now turn the call back to Jeff.

Thanks, Eric. To summarize our discussion today, we are still in the early innings of a multiyear upcycle. The oil supply and demand fundamentals remain constructive for both international and North American markets. The steps we took to improve operating leverage, lower capital intensity, and strengthen our balance sheet set Halliburton up to outperform under any market conditions. Internationally, Halliburton is a much stronger competitor, and we expect to benefit more from this multiyear upcycle than ever before. This aligns perfectly with our strategy to deliver profitable international growth. In North America, I expect Halliburton to uniquely maximize value in the strong, steadily growing, and all but sold out market. We will continue to execute on our strategic priorities and remain committed to driving profitable growth, margin expansion, strong free cash flow, and returns for our shareholders as this multiyear upcycle unfolds. And now let's open it up for questions.

Hey, good morning, Jeff. Good morning, Eric.

Good morning, James.

Good morning, James.

So Jeff, as you think about the cycle from here, we're clearly setting up for a pretty strong and healthy upcycle where the operating leverage is really in the early days of showing up. But how do you think about the next several quarters, maybe several years if you want to take it that far, playing out in terms of the cycle? There seems to be a growing – at least from what I can tell, growing urgency from the customer base to bring production or accelerate activity levels from here. And so we could be in a position where you see growth that moves much higher than kind of the steady growth we've seen so far, but could be at a tipping point.

James, yes, agree in terms of the outlook. In fact, what I see is a lot of duration in this cycle. I mean, obviously, it's been moving up, and I expect it continues to move up. But the reality is if operators can be busy, particularly international, they are. And the tightness around oil supply is not something that's resolved quickly after seven or eight years of underinvestment. And so while I'm excited about the inflection and the improvement in the upcycle that we see, I have to say I'm equally excited about the duration. This is multiples of years, a decade in the making. It's many years in the undoing in terms of producing. And so I think this is a fantastic time for operators and an even better time for Halliburton.

Right. Right. Okay. That makes sense. And then from a competitive standpoint, are you seeing the discipline that maybe we hadn't seen in prior years from your competitors, but it seems now like everybody kind of is on the same page as it's returns, its margin? And so are you seeing the same kind of pricing discipline that I know you guys are exhibiting in the market?

Look, pricing is improving around the world. And it's a rational – it's the allocation of assets, and it's moving them to the highest returning opportunities. And that's not unique to Halliburton in terms of expectation of return. I mean, we clearly want to improve our returns and plan to do so. But that's part of this different cycle, different market dynamics in the sense that returns and return of cash matter to our shareholders. And the best way to do that is to not just improve utilization but improved returns on every asset. And clearly, the approach we're taking and our whole strategy internationally is built around profitable growth, which is, I think, precisely what you saw this quarter and what you'll continue to see from Halliburton in the future.

All right. Okay. Got it. Thanks, guys.

Thank you.

Great. Thanks. Good morning, Jeff.

Good morning, David.

Good morning. So nice increase in the North America top line this quarter, well above the rig count, wondering if you could put this into context for us in terms of the customer base that was sort of the incremental driver here? Was it the privates or the public, I guess, is sort of the core question. Along those same lines, I was just wondering if you could talk about your customer mix and how you're thinking about it. On the one hand, with all the equipment shortages, I would think you could push pricing further with the private. But on the other hand, of course, you get the more visibility, the larger E&P program. So I was just wondering if you could maybe talk about that optimal customer mix today? And does a potential for any recession come into consideration in terms of that mix.

Yeah. Let me start with the first part of that question. The activity was really in both camps. We saw a lot of activity. Obviously, a lot of the interruptions in the first quarter were out of the way. And so we had a full utilization quarter, which was certainly a positive from an activity perspective, and that applied equally to privates and publics. Really from a pricing standpoint, it's important that we're iteratively moving on pricing, and I would argue that's again, consistent in both groups. And from a visibility standpoint, I think it's important to note, A, we love our customer mix today. I want to be clear. And it may be slightly weighted towards publics, but that is really – the privates we work for are big privates. And there are some privates that are bigger than public out there in the marketplace and work for them. And they have terrific visibility as well. So, I mean, the privates, just like the publics, fully understand, A, that OPEC spare capacity is not there, or they would be meeting their quotas. They have great visibility of the supply and demand for oil in our business. And that dialogue has been about 2023 capacity for Halliburton to provide either more equipment or more services, not recession. I can promise you that it's not the discussion; the discussion and what we see in our business is activity demand moving up. We see a tighter 2023 than we see in 2022. So all of these signals in our business are extremely positive.

Absolutely, I agree. And also, I think also noteworthy how your margins are now back to 2014 levels. That's really impressive, I would say. A separate question, Jeff, on the Middle East, you highlighted a 14% increase in revenue this quarter. A bunch of contracts are starting up. You mentioned project management. That Kuwait ESP project is moving well. It sounds like there's more tenders to come. Question, are we already starting to see the ramp-up in the Middle East? Maybe you could just kind of give us your sense of what's going on in the ground in terms of mobilization and the pace of activity. I think you highlighted kind of service discipline over there in terms of pricing. So hopefully, that's looking pretty good. But maybe just tell us what's happening on the ground today? I know we've been waiting for this for a while.

I believe we are still in the early stages in the Middle East. There is definitely more activity happening, but when it comes to the supply chain and equipment, such as rigs, they don’t just start working again immediately. My perspective is that there is significantly more demand for services in the Middle East than what we are currently experiencing. As equipment gets mobilized and projects kick off, I anticipate that we will see a lot more activity in the near future.

Good to hear. Thanks, Jeff.

Yeah. Thank you.

Next question please.

Good morning, Jeff.

Good morning.

Jeff, I was wondering if you could talk a little bit about how is contracting philosophy in North America this cycle? Is it consistent with typical cycles? But I want to get your thoughts on that. You've been essentially sold out for some time now, and we're just trying to gauge the velocity of pricing gains, which could manifest in the second half of this year versus 2023 when a lot of your customers are armed with new budgets?

Yeah. Look, I'd be crazy to get into all of those details on a call. But philosophically, I mean, in practical – in practice, I mean, prices are moving iteratively. And I think that's an important component of what we're seeing when the market's tight like this. We ratably look at the best opportunity for assets and what that drives this approach to pricing, which is one that we've seen until now. And so as we look out into the future, in a market like this, we maintain optionality, but we also have very good customers with deep relationships. And because of that, there's a premium on equipment that is working and efficient, particularly in a market that looks like this. And so, look, our customers understand that a vibrant service industry is a critical component of their ability to deliver what they have to deliver. And so I think that as we look out through this year and really into next year, we ought to continue to see improvement in pricing.

Fair enough, Jeff. I wanted to talk a little bit about specialty chemicals and artificial lift. You've highlighted how this provides some unique growth opportunities for how the cycle – I was wondering if you could maybe help us think about just at a high level, what are some revenue or growth opportunities for how from these two segments? Again, we're just trying to estimate what this could mean for your full cycle earnings power?

Yes. I want to – I'm going to – it's a meaningful opportunity. I mean I think if you go look at the total available market for artificial lift, for example, we have a leading position. Actually, some it's number one in the US today, and we are just beginning internationally. We've got talked about the growth we've seen, but it is a drop in the bucket compared to what that total available market is out there for lift internationally. And of course, we're super pleased with the technology at Summit, and it's just a matter of growing that business internationally, which the examples I've given you are examples of us doing that. But I would say this is the – there is the beginnings on what's possible.

Yes. Fair enough. Thanks a lot, Jeff.

Thank you. Next question.

Yes. Good morning. Real quick, just kind of a follow-up on the 2Q guide and maybe we'll just chalk it up to conservatism. But if we think about the top line, I think if you kind of blend things together from your segment guidance, it kind of implies a 4% or 5% sequential growth in top line. But if we kind of step back and think about expectations for North America and International, I would have expected both North America and international revenues to actually outpace that 4% to 5%. So just kind of help us connect the dots and maybe Russia is a little bit of a drag in 3Q, but just kind of help us connect the dots between North America and international relative to your guidance.

I believe the first half has exceeded expectations. It’s a strong year, and I anticipate we will surpass 35%. The international forecast includes Russia's exit in Q3, so our guidance of 3% to 5% accounts for that, which aligns with our initial predictions. We expected increased spending outside of Russia to make up for the loss, and that's exactly what we're witnessing. North America is showing steady growth, which appears strong in the first half and continues to trend upwards. The market sentiment is very positive. While we need to quantify it, performance has been robust so far, consistently exceeding expectations.

Okay. Makes sense.

This is clearly not a step back. This is a step forward in both hemispheres, both US and international.

Yes, that makes sense. You have a track record of exceeding expectations, so we'll leave it at that. Regarding leverage ratios, they are decreasing quickly. Your outlook remains strong, and it appears that by early next year, you might reach a leverage ratio of 1 times. This positions you to focus more on returning cash to shareholders over the next six to twelve months. Could you elaborate on your thoughts about buybacks versus dividends and provide an overall framework for returning cash to shareholders?

Yes, I’ll address that. It's Eric here. The key takeaway is that our company priorities remain unchanged. To summarize, we aim to pay down more debt and return additional cash to shareholders. Currently, we are inclined to increase the base dividend, while also planning to tackle dilution in the future. Since the beginning of 2020, we've made considerable strides toward these goals, retiring $1.8 billion in debt, with $600 million of that this year. Looking ahead, we have about $1 billion due between 2023 and 2025. Once that's managed, we will have a clean slate until 2030, which will provide us significant flexibility. Additionally, in Q1 of this year, we successfully paid down debt and increased the dividend by nearly triple. These actions can be undertaken simultaneously. Lastly, we fully anticipate continuing to enhance shareholder distributions as the upcycle progresses.

Okay. Perfect. I’ll turn it back over. Thanks, Eric. Thanks, Jeff.

Thank you. Next question, please.

Yes. Thank you, Jeff. Thank you, team. First question is just the 400 basis point margin improvement target, clearly making progress towards it. Maybe just talk about your views on when you think you can get there and whether there's some upside skew given the commodity macro.

Thank you. My long-term outlook remains positive, and in fact, I am more optimistic than before. I want to avoid updating that every quarter, but my view on the market trajectory is influenced by the current supply shortage and the limited oil availability worldwide. Additionally, energy security has become a priority for many countries and regions, which will likely bolster my outlook regarding activity levels. Increasing oil production will require more development efforts and tie-back projects. Halliburton is well-positioned in areas such as drilling fluids, cementing, and completion tools, and the advancements we've made in various sectors of our business align favorably with this outlook. While I am not providing an updated forecast, I hope this gives you a clear indication that we feel confident about the future.

Yes. That's good color. And then the follow-up is on working capital and free cash flow. To your point. Free cash flow did come a little softer than we were expecting, but a lot of that is working capital, which is consistent with an upcycle. So just talk about the back half progression in free cash flow as you see it and anything that would need to keep them up.

Yeah. Good morning, Neil. It's Eric. So the headline is expect free cash flow to follow the typical upcycle profile. So basically, very heavily loaded towards the second half of the year. And we feel very good about the outlook of the business. The working capital build in Q2 was really to support our growth. So our revenues went up 18%, about $800 million Q2 over Q1. But what was really good is that the efficiency of our working capital improved versus the prior cycle. So – and we have to do that while managing inflation, managing longer lead time in the supply chain. So we're very pleased with how our organization has managed the situation and the overall progress we're making. So as we get into H2, I think the situation will evolve, and we fully expect to deliver on the free cash flow targets despite the working capital headwinds we had in H1.

Thank you, guys.

Next question.

Thanks, and good morning, gentlemen. Two things for me. I think the first is, when you look at the domestic frac business, and you obviously, you talked about consolidation; you guys have stuck to your plans on CapEx. Are you seeing much out there as far as the new builds in the industry? And maybe talk a little bit about lead times for new equipment at this point?

The lead times remain quite lengthy, likely around a year to see any significant changes. The market has shifted, and we haven't made any substantial additions to this business in six years, which is a considerable period. In terms of our operations, we're primarily focused on replacing aging equipment rather than increasing capacity. This involves retiring equipment that can no longer operate or has been damaged during use, which is common. It's essential to address the attrition at the lower end of our fleet, contributing to why we maintain one of the healthiest fleets in the industry. Another significant trend is the transition to lower emissions, which also doesn’t expand capacity but represents a conversion. The supply chain challenges I mentioned earlier are genuine. With the consolidation in the industry and limited capital available for investment, I suspect others share my perspective on the fleet, suggesting we may not see any capacity increases.

Thank you. And then when we think about – you mentioned the pricing dynamics that you've seen. Obviously, things are strong. Has there been any pushback from the E&P side? I mean, I know they're always not trying to take a lot higher prices, but have you seen any material pushback, or just because it's so tight, it's been fairly easy discussions.

It's always a discussion, respectfully. But I also think what underpins this is how important the service industry is to delivering on what our operators need to do. And I think there's clearly a recognition of that. And so always a discussion, always some back and forth, but realistically, our operators require quality services, and that means fleets that are well-maintained, fleets that are – attrition is dealt with. And better efficiency in our case, better technology. All of that is appreciated and realized that that has to make solid returns for it to remain vibrant. And I think that's what underpins those conversations.

Great. Thank you.

Thank you. Next question.

Thank you. Jeff, you mentioned you had been speaking to some customers about 2023. What kind of increases are they talking about for North America and International?

I believe it's aligned with generating returns, but with an upward trend. Let's begin with the assurance of supply. On an international scale, it's largely about the capacity to provide. Operators, especially in the US, recognize the importance of returns for shareholders, and we do as well. We anticipate a steady, yet healthy increase as we have indicated, with a significant duration to this cycle which is beneficial for us and our shareholders. This duration will have a meaningful positive impact. If you consider how we've enhanced the capital efficiency of our business, our clients share that perspective. Consequently, we expect to see increased activity due to demand for the commodity. The discussion is more about whether we can add capacity or extra resources, especially in light of lead times and commitments related to our own capital. Broadly, the industry's focus on capital will be directed toward the highest returning opportunities for that equipment, which will shape our discussions.

Okay. Thanks. And on D&E, do you think you can get back to first quarter margins this year?

Yes, the short answer is yes. I'm really pleased with the progress we've made with D&E margins. I’ve always maintained a long-term view on D&E margins, expecting them to be higher each year than the previous one, and I anticipate next year will be better than this year. There is some seasonality in the D&E business, influenced by our global operations and the components involved. However, my target and expectation is that we will see a consistent increase in that seasonality each year, which is what we have experienced.

Great. Thanks so much.

Thank you. Next question.

Okay. Thank you, Olivia. Before we close out the call, let me just reiterate, Halliburton's performance during the strong quarter demonstrates that we're executing on the right strategy in the international and North American markets to drive value for shareholders throughout this multiyear upcycle. I look forward to speaking with you next quarter. Please close out the call.