Halliburton Co

NYSE:HAL

Earnings Call Transcript 2019-Q2

[Operator]

Good day ladies and gentlemen and welcome to Halliburton's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator instructions] And as a reminder, this conference call is being recorded.

I would now like to turn the conference over to Abu Zeya, Head of Investor Relations. Sir, you may begin.

[Abu Zeya, Senior Director, Investor Relations]

Good morning and welcome to the Halliburton second quarter 2019 conference call. As a reminder, today's call is being webcast and a replay will be available on Halliburton's website for seven days. Joining me today are Jeff Miller, Chairman, President, and CEO; and Lance Loeffler, CFO.

Some of our comments today may include forward-looking statements, reflecting Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31st, 2018; Form 10-Q for the quarter ended March 31st, 2019; recent current reports on Form 8-K and other Securities and Exchange Commission filings.

We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures that exclude the impact of impairments and other charges. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our second quarter press release and can be found in the Quarterly Results section of our website.

After our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A period in order to allow time for others who may be in the queue.

Now, I'll turn the call over to Jeff.

[Jeff Miller, Chairman, President & Chief Executive Officer]

Thank you, Abu. Good morning everyone. Commodity markets navigated some choppy waters during the second quarter. On the one hand, there are global oil demand concerns largely attributed to the uncertainties surrounding the outcome of the U.S.-China trade talks.

On the other hand, oil prices have recently been buoyed by supply side reaction to the extension of OPEC plus production cuts, ongoing output declines in Venezuela, U.S. sanctions on Iranian oil exports, and political instability in Libya and Sudan.

Against this backdrop, Halliburton's execution in the second quarter was outstanding and I am very pleased with our results. We continue to build on the growth momentum internationally and successfully managed the market dynamics in North America.

Before we dive into the details, here are a few highlights for the second quarter. Total company revenue was $5.9 billion and adjusted operating income was $550 million, representing increases of 3% and 29% respectively compared to the first quarter of 2019.

Our Completion and Production division grew revenue 4% and operating income 28% sequentially. Improved completion activity in North America land and our solid execution globally resulted in delivering better-than-expected margins.

Our Drilling and Evaluation division grew operating income 18% quarter-over-quarter with strong improvements coming from our Sperry Drilling and Wireline and Perforating product service lines. Overall, D&E division incremental margin was 44%.

North America demonstrated solid performance this quarter, delivering 2% revenue growth despite the dropping rig count. International revenue grew 6% sequentially, led by activity increases in the Eastern Hemisphere. And finally, we generated approximately $450 million in operating cash flow as well as positive free cash flow in the second quarter.

Now, I'd like to provide some regional commentary beginning with the international markets. I'm excited by what I see internationally, a continued broad-based recovery across multiple geographies, primarily driven by land and shallow water operations.

Our business in the North Sea is extremely busy both in the Norwegian and U.K. sectors. We have significantly increased our market share there by winning large tenders. Currently, we're sold out of drilling and wireline tools in the North Sea.

As activity keeps ramping up, especially with independent operators taking over IOC assets in the U.K., supply and demand balances significantly tightened for tools and I expect that incremental work will come with better pricing.

We see similar dynamics in the Asia-Pacific markets. Malaysia, Australia, and India are all showing strong activity growth. Increased activity leads to better pricing dynamics and we're already seeing the leading edge of pricing improvement in those markets.

For instance, tightness in the supply of open hole wireline tools has allowed us to raise prices in certain markets. As to the broader offshore market, we've seen enough signs to anticipate future growth. In June, the year-over-year change in offshore rig count was up for the 12th consecutive month and appears to be gaining momentum. However, the majority of large offshore projects being sanctioned or awarded today have a 2020 or 2021 start date.

For example this month we announced an integrated offshore drilling services contract win with Kuwait Oil Company. This is the first offshore project in Kuwait since the 1980s and it includes six high-pressure, high-temperature exploration wells on two jack-up rigs in the Arabian Gulf.

Starting next summer, Halliburton will provide well construction services, well testing, coring, coil tubing, and the majority of offshore logistical services under this three-year contract.

Halliburton entered this international recovery a much stronger competitor. Over the last decade, we've taken strategic actions that have increased the market opportunities in which we can compete.

To be specific, first, we made substantial investments to grow our international footprint in the years prior to the downturn. We increased our product service line presence in various geographies expanded our manufacturing capacity in Singapore, and opened technology centers in Saudi Arabia, India, and Brazil. I cannot emphasize enough how important physical footprint is in the international markets. You simply must be present to win.

Second, we made strategic investments and closed technology gaps in product lines that we believe are critical to our success in the international markets. These product lines are Sperry Drilling. I've talked to you a lot about iCruise our new rotary steerable platform. Rotary steerables are used globally for drilling both onshore and offshore wells.

A competitive drilling technology is critical because it's not only a higher-margin business, it's also the cornerstone of integrated well construction services. Because of superior technical specs and the modular design of this tool, we're confident that replacing our legacy platform with iCruise will enhance our competitiveness, save on maintenance costs, and improve asset velocity.

We're already running it in the U.S. as well as in Latin America, the North Sea, and the Middle East. In fact, it delivered the longest lateral and longest well in Argentina's Vaca Muerta shale in its first deployment.

Another Sperry innovation introduced last year is the EarthStar ultra-deep resistivity sensor that turns on the high beams in the reservoir, so we can now see over 200 feet around the wellbore while drilling, more than double the depth of detection of other industry offerings.

This technology is critically important for offshore exploration and has been instrumental to Halliburton securing deepwater drilling contracts in Norway, Brazil, and Guyana.

During the second quarter, a customer in Norway deployed EarthStar on a deepwater exploration well with a very tight drilling window, one of the most complex wells this operator ever planned. Using the data acquired by the tool, we were able to precisely land the well and to identify secondary pay zones directly impacting the well's production potential.

Other product lines we've strengthened are openhole wireline and production testing. These are highly technical and differentiated businesses. Today, Halliburton successfully competes for the most advanced openhole wireline and testing projects around the globe, going head-to-head with our key competitors.

All of these efforts give us a strong base to capitalize on the international recovery, and we expect to deliver high-single-digit international revenue growth this year.

As I highlighted, our Drilling and Evaluation division, driven in large part by our international footprint, performed as expected in the second quarter. The catalysts for the second half D&E margin improvement are all intact, and I have confidence in our team's ability to execute. We expect to see meaningful revenue ramps in Norway and India as mobilization costs wane and execution starts in earnest.

I've talked about the iCruise drilling system and the cost savings it provides to Halliburton. This and other D&E technologies that we're deploying will continue their market penetration and further improve our margin performance. Finally, end-of-year product and software sales should provide additional boost to D&E margins.

As I look ahead, I'm encouraged by the leading edge pricing discussions in various international markets. Although, we cut overall CapEx we have not done so at the expense of growing our international business. Our CapEx reduction is driving the right capital allocation decisions and the right pricing and return discussions.

Once the activity momentum builds internationally, it's hard to slow it down. Given the timing of contract starts and the current awards pipeline, I expect the activity growth to continue into 2020.

Now turning to North America. I am pleased with how Halliburton performed in North America during the quarter. Congratulations to our North America team for a solid execution.

In the second quarter we saw a modest improvement in hydraulic fracturing activity which manifested in mid single-digit increases in both completed stages and pumping hours during the quarter. While our pricing remained stable, we were able to improve margins by reducing costs and maximizing our equipment utilization. This is what I mean when I tell you that we will control what we can control and manage our business to perform well in any market conditions.

It's important to note that second quarter results were not solely based on performance of our hydraulic fracturing business. In fact, other C&P and D&E product service lines made meaningful contributions to both revenue and margins in North America in the second quarter.

The increasing contribution from non-hydraulic fracturing product lines is important. It demonstrates our strategy to profitably grow our share of services per well both in North America and internationally and the results are showing.

Despite the average quarterly rig count in North America dropping 13% since the first quarter, our cementing product line activity remained stable and margins grew quarter-over-quarter. We're able to achieve this with no additional capital by effectively utilizing assets and increasing the number of jobs per cement unit.

As well complexity and lateral lengths increase in U.S. unconventionals, creating dependable well barriers and curing mud losses has become more critical. Built on a century of technical innovation our lost circulation solutions and light cement slurry's delivered results in the most challenging conditions, differentiating Halliburton from the competition.

With tailored cement designs Halliburton executed the longest laterals to date in the DJ, Permian and Marcellus basins, with each lateral over three miles long.

Our wireline and perforating product line continued to generate profitable growth driven by its diverse and competitive technology portfolio and exceptional service quality.

In our North America perforating business, we're quickly gaining share with the proprietary integrated gun system. Halliburton velocity modular guns can be location preassembled and not require any field wiring, which makes them a lot easier faster and safer to deploy than conventional perforating guns.

With velocity guns, we're delivering more than 400 runs between misruns, a fourfold improvement in service quality and efficiency compared to conventional guns. Modular guns have seen a very fast uptake with our customers, growing to 40% of the gun shot by Halliburton in just a year from launch.

Our Artificial Lift business, which consists primarily of electric submersible pumps, continued to outpace the market. It delivered a record second quarter growing both revenue and profitability. ESPs have proven to be a very valuable asset in our production portfolio, serving both the conventional and unconventional markets.

Looking forward, I believe that our customers' activity cadence for the rest of the year will be dictated by their focus on remaining within their announced CapEx budgets and generating free cash flow.

Some will slowdown as they've been very efficient and will scale back completion programs for the rest of the year to stay within their CapEx guidance. Others may drop rigs, but will continue working down their docks. Majors will most likely continue executing their growth plans in the U.S. shale to meet their longer term objectives.

As a result of these different customer behaviors, we expect that activity in North America will be slightly down in the third quarter. We anticipate the slowdown to be more pronounced than gassier basins due to persisting lower gas prices.

Despite the near-term softness in activity, we expect our margins to remain stable next quarter. We are taking the actions that allow us to protect margins and as evidenced by our second quarter C&P performance these actions are working. As we navigate 2019 and beyond our company is executing a different playbook than in the past.

Here's what we are doing to keep delivering returns and cash flows to our investors. First, we recognize the changing behavior of our customers and have changed our own approach to capital spending. In 2019, we decreased CapEx 20% year-on-year and the majority of the reduction came from North America. We have sufficient size and scale in this market and see no reason to invest in growth when it comes at the expense of returns.

The capital that we do spend this year in the U.S. is mostly directed towards increasing efficiency and refurbishing equipment, both with line of sight to improving returns and cash flow.

Second, we're reducing our operating costs. For example, we recently restructured our North America organization, removing several layers of management. The restructuring has changed our cost profile certainly, but it's also increased our market responsiveness.

We are also partnering with our premier supply chain and logistics organization to reduce our input costs. We continue to evaluate cost reduction opportunities across the company and we will manage and right-size our North America operations for the market environment.

Finally, we have stacked additional equipment throughout the quarter and will continue to do so where we do not see acceptable returns. The pressure pumping market remains oversupplied and we're not afraid to reduce our fleet size, as it contributes to righting the supply and demand imbalance. This may impact our top line in the near term, but saves labor and maintenance costs and I believe will lead to better margins.

We are taking these actions while continuing to drive growth in the product service lines that we expect to most positively contribute to profit and cash flow generation in North America. In my view, as unconventionals enter a maturation phase, represented by the pivot from scarcity to abundance, technology will differentiate Halliburton and I'm excited about our prospects.

Customers are required to maximize production for every CapEx dollar they spend and technology that can improve well productivity will be key to their success. These are the challenges that Halliburton solves every day. For example, our automated fracturing service optimizes sand placement per lateral foot and ensures every cluster makes a meaningful contribution to well production.

Our open-hole wireline business is growing in unconventionals, as customers spend time and money evaluating their reservoirs prior to fracturing them. We see increased use of fiber optics across various basins as operators aim to evaluate stimulation performance and make changes in realtime. And I am convinced that no one is better at collaborating with customers to engineer solutions that deliver the lowest cost per barrel than Halliburton.

With that, I'll turn the call over to Lance for a financial update. Lance?

[Lance Loeffler, Chief Financial Officer]

Thank you, Jeff. Let's begin with an overview of our second quarter results compared to the first quarter of 2019. Total company revenue for the quarter was $5.9 billion and adjusted operating income was $550 million, representing increases of 3% and 29% respectively.

Now let me turn to our divisional results. In our Completion and Production division, revenue was $3.8 billion, representing an increase of $143 million or 4%. Operating income was $470 million, an increase of $102 million or 28%. These improvements were primarily driven by increased Cementing activity and completion tool sales internationally, higher artificial lift activity in North America, increased stimulation activity in North America and the Middle East/Asia and increased pipeline services in Europe/Africa/CIS. These results were offset by reduced stimulation activity in Latin America.

In our Drilling and Evaluation division, revenue was $2.1 billion, an increase of $50 million or 2%. Operating income was $145 million, an increase of $22 million or 18%. These improvements were primarily driven by increased wireline activity globally, improved drilling activity in North America, Latin America and Europe/Africa/CIS and higher project management activity in Middle East/Asia. Partially offsetting these increases were reduced fluids activity in Latin America and North America and lower software revenue globally.

Moving on to our geographical results. In North America, revenue in the second quarter of 2019 was $3.3 billion, a 2% increase. Improvements were primarily driven by higher stimulation artificial lift and wireline activity in North America land and higher drilling activity in the Gulf of Mexico. These results were partially offset by a lower software revenue across the region and reduced fluids activity in the Gulf of Mexico.

Latin America revenue was $571 million, a 3% decrease sequentially, resulting primarily from lower software revenue and reduced fluids activity throughout the region, as well as reduced stimulation activity in Argentina. These reductions were partially offset by increased drilling and wireline in activity in Mexico and higher Cementing activity and completion tool sales in Argentina. Even though activity was slightly lower in Latin America this quarter, we expected to step up in the second half of the year, with a ramp up in Argentina, Guyana and Colombia.

Turning to Europe/Africa/CIS. Revenue was $823 million, a 10% increase sequentially, primarily driven by higher activity across multiple product service lines in the North Sea and increased well construction services in Russia, partially offset by reduced software revenue throughout the region.

In Middle East/Asia revenue was $1.2 billion, a 7% increase sequentially, largely resulting from higher completion tool sales and increased pressure pumping, wireline and project management activity throughout the region, coupled with improved drilling activity in Asia. These results were partially offset by lower drilling activity in the Middle East.

In the second quarter, our corporate and other expense totaled $65 million and we expect it to remain at these levels for the third quarter. During the second quarter, we recognized a pre-tax charge of $247 million, consisting primarily of asset impairments and severance costs. As Jeff discussed earlier, we continue to adjust our cost structure and footprint to the current operating environment in North America.

Net interest expense for the quarter was $144 million and we expect it to remain approximately the same for the next reporting period. Our effective tax rate for the second quarter was approximately 23%. Going forward, we anticipate our third quarter and 2019 full year effective tax rate to be 22% based on our expected earnings mix.

We generated approximately $450 million of cash from operations during this quarter. We made progress in collecting our receivables while our inventory slightly increased related to our strategic technology deployments. We expect inventory to be consumed through the rest of the year and I see second quarter as a step in the right direction as we generated positive free cash flow. We will continue to target working capital as a key focus for the organization. On a full year basis, we believe, working capital levels will be essentially flat with 2018. And for the full year, we still expect to generate free cash flow at or above 2018 levels.

Capital expenditures during the quarter were $408 million and our 2019 full year CapEx guidance remains unchanged. While our CapEx of $1.6 billion this year is similar to our DD&A level, we anticipate capital spend in 2020 to be significantly less than that. This level of spend will still allow us to capitalize on the international growth while being responsive to the market conditions in North America.

At Halliburton, CapEx is at the core of our strategy execution. Our capital allocation behavior drives the right returns discussions both internally and with our customers and this is consistent with our focus on generating strong cash flow for our investors regardless of the market environment.

Finally, we continue our focus on delivering shareholder returns. During the second quarter we returned approximately $260 million to shareholders via share repurchases and dividends.

Now, turning to our near-term operational outlook. Let me provide you with some comments on how we believe the third quarter is shaping up. For our Drilling and Evaluation division, we expect activity increases in the North Sea and Asia to be offset by lower activity in Africa and North America.

All-in, we expect sequential revenue to be up low single digits with margins increasing 125 to 175 basis points as we see the impact of the catalyst for D&E margin improvement that Jeff described earlier.

At our Completion and Production division, lower activity in North America will be offset by higher activity internationally and the impact of our cost reduction efforts. As a result, we believe that sequential revenue will be down low single digits with margins expected to remain essentially flat.

Now I'll turn the call back over to Jeff for the closing comments. Jeff?

[Jeff Miller, Chairman, President & Chief Executive Officer]

Thanks, Lance. To summarize our discussion today, momentum is building internationally and activity improvement should continue into 2020. Leading edge pricing is trending upward as equipment supply and demand balance tightens in various geographies.

Halliburton has the footprint and the expanded technology portfolio to capitalize on this international growth. We recognize the changing behavior of our North American customers and are executing a new playbook to keep generating returns and free cash flow.

Halliburton is taking the right actions to be successful in this market. We have cut overall CapEx in 2019 and plan to do so in 2020 as well. This is driving the right capital allocation decisions and pricing and returns discussions. We are reducing our operating costs. We have restructured our North American organization and are also partnering with our premier supply chain and logistics organization to reduce our input costs.

We have stacked additional equipment throughout the quarter and will continue to do so with a focus on returns. We are strategically growing our share of services per well by increasing the competitiveness of our non-hydraulic fracturing product service lines.

And finally, we're developing technologies that will improve well productivity, a requirement of a mature unconventional market. We remain focused on delivering consistent execution, generating superior financial performance and providing industry leading shareholder returns.

And now let's open it up for questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from James West with Evercore ISI. Your line is open. James, your line is open. Please check your mute button.

[Jeff Miller, Chairman, President & Chief Executive Officer]

James, you there?

[Operator]

Our next question comes from Angie Sedita with Goldman Sachs. Your line is open.

[Angie Sedita, Goldman Sachs]

Thanks. Good Morning, guys.

[Jeff Miller, Chairman, President & Chief Executive Officer]

Good morning, Angie.

[Angie Sedita, Goldman Sachs]

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

[Jeff Miller, Chairman, President & Chief Executive Officer]

Yeah. Thanks, Angie. International doesn’t move as fast as for example North America. So, when we see a trajectory, it tends to stay on that trajectory. And I'm encouraged by 2020 because of the number of FIDs and types of things that we're seeing today that really don't get started until 2020.

So the Kuwait, for example, doesn't really begin until the middle of next year though it was won now. And so, the FIDs that we're seeing now, give me confidence about the trajectory for 2020. You're early to call growth rates for next year. But yeah, I think you meant 2019 when I see a similar kind of growth trajectory 2019 that carried over into 2020. And yeah that seems reasonable to me.

[Angie Sedita, Goldman Sachs]

Okay. Okay, helpful. And then on the North America land market, some -- first kudos for being proactive on stacking equipment in this market versus flighting for share. You commented that you're seeing pricing as stable, and one of your peers said they are seeing some pricing softness. So maybe you could talk a little bit about pricing and then the degree of drop off that we could see in Q3 and even into Q4 as far as activity?

[Jeff Miller, Chairman, President & Chief Executive Officer]

Yeah, Angie let me start with pricing. I mean from our perspective it was stable for us through Q2. That doesn't mean there isn't occasionally something that we see in terms of pricing behavior by a competitor. But on balance, very stable. As we look at the balance of the year certainly from an activity standpoint, I've said it would be down slightly in Q3. Obviously, Q4 always comes with weather seasonality all of that, I suspect given budgets that we would see more step down as well around that.

But I think what's really important here is as you described it the way we're approaching the market, I mean our playbook is different. We're very sharp around taking costs out where we see it needs to come out. We've demonstrated that we do stack equipment, will stack equipment and are just dead focused on returns and margins. And so that's kind of the way we see the second half of the year.

Obviously customer spend through Q2, we don't know that yet. But when we do know that, I think that will also be instructive on the second half of the year. We talk to our customers, so we know what they're thinking, but the fact is we need to look at where those budgets come out in Q2.

And I guess just one follow-up on international pricing you'd ask that question Angie. We're seeing international pricing. It is getting traction. It's getting traction around tool shortages and demand in certainly the North Sea. We've seen it in a few other markets as well. And I think that's part of what we see from our standpoint anyway that the capital discipline that we're driving is driving the right conversations with customers, and quite frankly the right choices by us.

[Angie Sedita, Goldman Sachs]

Great. Thanks. I'll turn it over.

[Operator]

Thank you. Our next question comes from Sean Meakim with JPMorgan. Your line is open.

[Sean Meakim, JPMorgan]

Thanks. Hi, good morning.

[Jeff Miller, Chairman, President & Chief Executive Officer]

Good morning, Sean.

[Sean Meakim, JPMorgan]

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

[Jeff Miller, Chairman, President & Chief Executive Officer]

Yes. Thanks, Sean. I mean, we're in the early planning around CapEx for 2020. Clearly, we're in the early planning stages. But I wouldn't have highlighted if it wasn't going to be meaningful. So, just to kind of discuss CapEx 2020, we believe firmly that we don't sacrifice growth and opportunities internationally, and we still have room to grow in North America if customer budgets support that, important, the kind of behavior and decisions that capital scarcity is driving, and we will then continue that into 2020.

With respect to electric fleets, this is -- this is something we also we know a lot about and we've been testing those and had a fleet in the field for some time now. So, this isn't new to us. But it's also -- we're going to be thoughtful about where and how we deploy capital. So, as we look at that particular space, that's -- the market is over-supplied.

And so, when we get to the end of every year, when we think about CapEx, some part of the fleet rolls off every year and we look at that. And at that point, we're presented with choices and this is around replacement. Do we replace that asset with a quiet fleet or a dual fuel fleet or in this case could be an electric fleet? So, I mean, I see that lift from our standpoint as an evolution, but we don't see customers willing to pay more for that today. So that's kind of how we frame electric right now.

[Sean Meakim, JPMorgan]

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

[Lance Loeffler, Chief Financial Officer]

Yes. Sean thanks for the question. So, look over the last two years, we've generated over $1 billion of free cash flow and I expect that that trend continues in 2019. Now we've got work to do in the second half of the year, but the path to that free cash flow generation first starts with sort of margin improvement in 2H, particularly with our D&E business, right? But it also includes making progress on collection. We saw DSO improvement from Q1 to Q2 and I suspect that that will continue throughout the course of the second half of the year.

In terms of inventory that you mentioned, it is true. We've invested a considerable amount in inventory in the first half of the year as we continue to deploy iCruise and our Sperry technology deployment as well as I expect us to burn that down in the second half of the year in addition to the normal traditional completion tool delivery that we expect in the back half of the year. So, I think both of those will be momentum adding to our free cash flow.

Now, I'd also point out too, our rate of spend in CapEx was heavier in the first half of the year which is not unusual. We reiterated our guidance around the $1.6 billion of spend in this year. So it will have a slower rate of spend in the second half as well.

[Sean Meakim, JPMorgan]

Got it. Thank you for all the details.

[Operator]

Thank you. Our next question comes from James West with Evercore ISI. Your line is open.

[James West, Evercore ISI]

Hey, good morning, guys.

[Jeff Miller, Chairman, President & Chief Executive Officer]

Hi James.

[James West, Evercore ISI]

So you can hear me now, right?

[Jeff Miller, Chairman, President & Chief Executive Officer]

Yes. We can hear you.

[James West, Evercore ISI]

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

[Jeff Miller, Chairman, President & Chief Executive Officer]

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

[James West, Evercore ISI]

Okay. Good. Fair enough. And pricing obviously is a big part of that margin profile. What's the level -- when you're having these conversations, I know you're on the road a lot in the international markets, what's the level of push back on pricing, or is the market now understanding hey, we're tight. Equipment's tight and you need to generate adequate return?

[Jeff Miller, Chairman, President & Chief Executive Officer]

Well it's a mixed bag. I mean I would say that our state customers look at that scenario and realize that service pricing isn't adequate and returns aren't adequate and need the work done well and we have a lot more success with those customers and that's a bigger group of customer. It gets to be a bigger group of customer all of the time. It also helps when we say or demonstrate that tools are sold out and we can do that by making choices and so that also helps.

Our service quality that Halliburton has is a level quite frankly I've never seen it before. And so what we have to offer is a fantastic product and so we're very comfortable talking about pricing today.

[James West, Evercore ISI]

Got it. Thanks Jeff.

[Operator]

Thank you. Our next question comes from Scott Gruber with Citi.

[Scott Gruber, Citi]

Yes, good morning.

[Jeff Miller, Chairman, President & Chief Executive Officer]

Good morning Scott.

[Scott Gruber, Citi]

So I wanted to come back to e-frac. I realize it's early days for the technology, but assuming that a strong demand pull does materialize for the technology, would you look at e-frac capacity at a rate that approximates your share in the market relative to the industry build-out?

Would you look to invest more slowly to enhance free cash flow even at the risk of seeing your share within e-frac that it's smaller than your current share? How do you think about balancing e-frac share with free cash flow and is that an important factor for you?

[Jeff Miller, Chairman, President & Chief Executive Officer]

Look returns are first and foremost for us. And so we looked at all of this in terms of returns. From a share perspective, the pace that I'm describing actually is perfectly adequate if we're happy with the returns and the technology deployment to keep up with where we are in the market. That's just sort of a normal replacement schedule that we're already on. It's just how we make those choices around what we replace.

From our perspective it's going to have to be a more efficient lower capital endeavor or somehow make better returns than what's out there today or it doesn't proliferate. That's not saying we don't participate, but what I'm saying is I want to make certain that the Halliburton approach around really power and pumps, we love the pumps that we have together are making a return. And at least where we see it today it's not a -- it's more capital for the same or less returns so that's not really where we want to be.

[Scott Gruber, Citi]

Got you. And then just turning to D&E. Lance based on the guidance that you provided it does look like a more material ramp in revenue and margin that's required in 4Q to achieve the flattish year-on-year. Something like almost maybe over 100% incrementals. Not sure if that's possible.

I'm just trying to play around with some numbers and using mid-single-digit growth. But that rate it looks like the incrementals would have to be quite large. How are you thinking about 4Q shaping up from a revenue and incremental perspective if the elements are still there for flattish margins on the year-over-year basis?

[Lance Loeffler, Chief Financial Officer]

Look I think we'll see -- we'll continue to see continued momentum in terms of the activity that we're doing in places like the North Sea and India. We're also going to have in the fourth quarter we've got visibility this year just given the strength of the international recovery more than we've had in prior -- in the last several years around software sales that will also be a tailwind to that.

But I think to come back to it, look D&E produced 44% I believe incrementals just 1Q to 2Q. I think that clearly the international recovery helps that business and what we've been talking about.

But what we're trying to describe right in terms of the tale of two halves is a business that, while it was weighed down by certain things or from certain timing perspectives as we continue to deploy our new Sperry technology is that you're going to see a market difference in the two halves of the year. And I think that's the message that we're trying to communicate to The Street.

[Scott Gruber, Citi]

Got it. Appreciate the color.

[Lance Loeffler, Chief Financial Officer]

Thanks.

[Operator]

Thank you. Our next question comes from Bill Herbert with Simmons. Your line is open.

[Bill Herbert, Simmons]

Thanks good morning. Lance just sticking with D&E for a second here. So get the fact. I mean you've been consistently persuasive with regard to the difference between first half and second half in terms of what drives D&E margins.

But just trying to get -- is the -- to reiterate the question, is the conviction relatively high and we're going to be in the neighborhood of flat margins year-over-year for D&E second half which implies kind of 13% to 14% margins in Q4? Sorry to beat a dead horse here.

[Lance Loeffler, Chief Financial Officer]

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

[Jeff Miller, Chairman, President & Chief Executive Officer]

That means, Bill the mobilizations we clearly see those and those are finishing, finishing now. Sperry technology implementation certainly helps. There are other D&E technologies that we're rolling out. They're equally helpful. I talked about some of them on the call velocity guns other things ramping.

And then the visibility around not just software but year-end product sales is better than it's been in the past. And so, I think we're confident around -- the catalysts are intact. We can't prescribe the cadence necessarily, but certainly second half ramps up.

[Bill Herbert, Simmons]

No, right. Thank you. And again I get the conceptual build influx. I'm just trying to get to a specific number within reason, but I hear you. Second question for me kind of multifaceted, first, if you could rank the C&P margin improvement, contribution quarter-on-quarter.

And what I'm trying to get as is to what extent did product sales drive the margin improvement? And then also what percentage of your frac fleet is stacked now? Thank you.

[Jeff Miller, Chairman, President & Chief Executive Officer]

I'll sort of start with sort of your question around sort of the allocation on C&P margins. But I think look -- Completion Tools had a great, great quarter. But I think the majority of what we're doing in terms of making sure that we're managing costs in North America is reflected in some of the C&P performance as well. I mean, we're being decisive or moving quickly and we're seeing the results and I think that's what's important.

[Bill Herbert, Simmons]

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

[Jeff Miller, Chairman, President & Chief Executive Officer]

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

[Bill Herbert, Simmons]

Okay. Thank you, sir.

[Jeff Miller, Chairman, President & Chief Executive Officer]

Thanks, Bill.

[Operator]

Thank you. Our next question comes from Chase Mulvehill with Bank of America Merrill Lynch. Your line is open.

[Chase Mulvehill, Bank of America Merrill Lynch]

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

[Jeff Miller, Chairman, President & Chief Executive Officer]

Yeah. So this is very competitive tool. In fact, we're fortunate, because we've got a solid manufacturing business in Alvarado, Texas where we've been building and making charges for years. So as velocity guns go into the market highly effective. We have the ability to tailor those as required for different configurations, which is a benefit certainly to us. And it's also part of bringing down in my view the overall, I'd just say cost.

This is the effectiveness around integrated wireline in North America. So we can change actually the way that we work to get to a lower cost and better performance, which is different than just having two things sitting out there together.

It changes the -- not just the number of people, but who is doing what allows us -- the velocity guns allow us to change the certainly the technical content on-location reduces the number of misruns or misfires. And I'm really excited about the volume. I mean, we described it as 40% of the goal gun shot by Halliburton, which is a lot of guns. But we see actually the potential to continue to drive unit cost of those guns down as the volume continues to grow. So that -- it's one of the things that just gets more competitive over time.

[Chase Mulvehill, Bank of America Merrill Lynch]

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

[Jeff Miller, Chairman, President & Chief Executive Officer]

Look, those are all things we look at. I think the really the rotary steerables and motors are very different animals in the marketplace. What we're doing in rotary steerables is really exciting for many. I mean, this is a fantastic piece of kit, and it's very integrated into sort of data and real-time and not just real-time, but automation, so, really excited about that.

I've always been clear that we didn't want to be aligned with just one, for example, contractor. I believe that if you look at North America, it's an open architecture market, and there is a lot of choice that can be exercised by customers. So, we've always been really careful to make sure of what we put in the market is functional with lots of providers. And so that's sort of a one thing certainly around the rotary steerables.

In the motor, I talked last quarter about our Motors Center of Excellence. And I'm really excited about that, because it allows us now to customize solutions for our clients around motor performance. So there is a lot of variability in terms of the rock and performance of motors. And having that in-house allows us not only to do the customization, but also retain the learning and bake that into a very efficient sort of turnaround in 24-hour type business.

So that's something that how we align it with operator is interesting, but the way I think more about it is, how does it from a value proposition standpoint work best for us and I think we've got it there now.

[Chase Mulvehill, Bank of America Merrill Lynch]

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

[Jeff Miller, Chairman, President & Chief Executive Officer]

Thanks.

[Operator]

Thank you. Our next question comes from Kurt Hallead with RBC. Your line is open.

[Kurt Hallead, RBC]

Hey, good morning.

[Jeff Miller, Chairman, President & Chief Executive Officer]

Good morning, Kurt.

[Lance Loeffler, Chief Financial Officer]

Good morning, Kurt.

[Kurt Hallead, RBC]

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

[Jeff Miller, Chairman, President & Chief Executive Officer]

Yeah. I think the -- we're always managing the fleet, I guess, is the way I would say that. And there's clearly always -- when we have a big fleet it gives us the ability to retire, replenish, repair, and in my view replace and so we take all of that together. Some equipment that stack is ready to go back.

Some equipment that comes out of the system is actually the equipment I was describing that is being retired where we have choice around how we replace that equipment and at what pace. So, I think the -- we're really careful with the fleet that way. There's no question that equipment is working harder and attrition is occurring in the marketplace. We don't see capital spend going up. We just don't see new equipment coming into the market and we know how hard it's working. So, all of that conspires to drive attrition.

As I've always said it's hard to see the pace of attrition until there's a call on the equipment. I suspect there will be at some point, but I do know that the physics of pumping fluid and sand through steel is having its effect on broadly the fleet in North America, all fleets in North America.

[Kurt Hallead, RBC]

Yeah. That's great color. Appreciate that, Jeff. And then maybe for Lance. You gave some really good additional color on the D&E margin dynamics for the rest of the year. I was wondering if you'd maybe give us some insights as well on Completion and Production. And typically when you see a revenue decline in a certain business segment the margins would decline along with it. You guys have given specific data points here that suggest that even though revenues are going to decline for C&P in the third quarter margins are going to kind of hold flat. Do you think they have that kind of internal business momentum where your cost structure is down, your efficiencies are at such a level that even if C&P were to decline again in the fourth quarter you can -- your margins could be stable?

[Lance Loeffler, Chief Financial Officer]

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

[Kurt Hallead, RBC]

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

[Lance Loeffler, Chief Financial Officer]

Thanks.

[Operator]

Thank you. Our next question comes from David Anderson with Barclays. Your line is open.

[David Anderson, Barclays]

Hey, Jeff I was just wondering if you could maybe just dig into a little bit on the evolution of this new playbook in North America. I know you have a new head of Western Hemisphere, Mark Richard in there who is I think been putting his view in there as well.

But as far as -- as long as I can remember HAL always sought market share during the downturn now you're stacking equipment. It sounds like EBITDA per fleet may be improving as well. I guess -- is that almost early confirmation of the playbook? But probably if you can just give us a little background as to how you arrived at this new playbook?

[Jeff Miller, Chairman, President & Chief Executive Officer]

Yeah. Just to cut to the chase, yes. The answer is yes. What you're seeing is that new playbook in action. But the -- what we recognize is there's a change in the customer spending patterns. And when that changes it has to -- we want to address the best returns. And so what was the right playbook several years ago when there was a different cadence and pace of customers spend today needs to change and so that's what you're seeing in action. And so we're going to be super sharp around capital into the downturn. I say the downturn but what we see is slowing activity that I described for Q3.

What we want to make sure is that we are -- if it's slightly down we want to be slightly there with our CapEx. But most importantly -- not our CapEx our capital equipment. But what's most important to us is that we're not waiting on the spring back. We've demonstrated we know how to add people back to the system and equipment back when it's required, so I'm quite comfortable that reflects down when the prices go below something that is making a return for us and we'll let somebody else do that at below return cost. So I hope that's clear. But that's the way we're thinking about – that’s not how we're thinking about it that's how we're executing on the new playbook.

[David Anderson, Barclays]

So in this new playbook, do you view each of your product lines and service lines separately? In other words each one of them have to basically hit certain return hurdles? How are you viewing -- because in the past we've talked about bundled models and integrated model and whatnot, but this sounds like we'll get more defining each one of our product lines has to stand on its own. Is that fair to say?

[Jeff Miller, Chairman, President & Chief Executive Officer]

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

[David Anderson, Barclays]

So, one of those service lines you called out is Artificial Lift and you talked about that being a driver of the higher NAM revenue. I was just wondering if you could just talk about that market in general in lift and how that compares -- how other lines product lines are trending. How is the spend and the pace of lift installations? How has that trended this year?

We all know about the ESP capital that's -- what it's doing to drilling completions. But what's going on with lift? Is that still kind of holding up pretty well? Do you expect it to hold up well? Could you just provide a little color on how the market is trending.

[Jeff Miller, Chairman, President & Chief Executive Officer]

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

[David Anderson, Barclays]

Okay. Thanks Jeff.

[Jeff Miller, Chairman, President & Chief Executive Officer]

Thanks, Dave.

[Operator]

Thank you. This concludes the question-and-answer session. I would now like to turn the conference back over to Jeff Miller for closing remarks.

[Jeff Miller, Chairman, President & Chief Executive Officer]

Yes. Thank you, Shannon. Before we close, I'd just like to reemphasize a couple of points. First, I'm excited about the international recovery, the growth for the balance of 2019, and the momentum that's building into 2020. In North America, we plan to execute our new playbook reducing costs, stacking fleets, and reducing CapEx that drives better margins and free cash flows for 2019 and 2020.

Our focus on non-frac service lines is a terrific opportunity for Halliburton and our organization is well-positioned to deliver profitable growth. Look forward to talking to you again next quarter and Shannon, please close out the call.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining and have a wonderful day.