Halliburton Co

NYSE:HAL

Earnings Call Analysis

Halliburton Shows Strong Free Cash Flow Amid Mixed Segment Results

Halliburton's second quarter 2024 revenue remained steady at $5.8 billion, while operating income rose by 5% sequentially to $1 billion, with an 18% operating margin. The Completion and Production division saw flat revenue at $3.4 billion but a 5% increase in operating income. The Drilling and Evaluation division remained flat at $2.4 billion. International growth compensated for a 3% revenue decrease in North America. Halliburton expects third-quarter revenue for its Completion and Production division to decline by 1% to 3%, with margins down 75 to 125 basis points, while the Drilling and Evaluation division is forecasted to see revenue grow by 2% to 4% and margins increase by 25 to 75 basis points.

Solid Financial Performance

In the second quarter of 2024, Halliburton reported a net income of $0.80 per share and total company revenue of $5.8 billion, remaining flat sequentially. Operating income increased by 5% to $1 billion, resulting in an operating margin of 18%, up by 69 basis points compared to the previous quarter. Despite a challenging North American market, these strong financials highlight the company's resilience and adept handling of international operations【4:1†source】【4:3†source】.

Strength in International Markets

The international segment was particularly robust, generating $3.4 billion in revenue, marking an 8% increase year-over-year. Key growth areas included Latin America, which saw a 10% rise, and the Middle East/Asia, up 5% sequentially, driven by high activity levels and tightness in equipment across major basins. Halliburton expects this momentum to continue, anticipating around 10% revenue growth in international markets for the full year【4:2†source】【4:5†source】.

Challenges and Strategy in North America

North America, the largest oilfield services market, faced some headwinds with a 3% revenue decline sequentially, primarily due to decreased pressure pumping services and lower completion tool sales. Halliburton expects North American revenues to decline by 6% to 8% for the full year of 2024. The company’s strategy focuses on maximizing value rather than market share, which involves investing in differentiated technologies tailored for the North American market【4:7†source】【4:9†source】.

Technological Advancements

Halliburton continues to innovate, with notable advancements like the Octiv automation platform and the iCruise rotary steerable system. The latest addition, AutoFrac, allows for the fully automated execution of fracturing jobs. The iCruise system has seen rapid adoption, particularly in the Permian Basin, where its usage increased by nearly 45% since the start of the year. These technologies enhance operational efficiency and are expected to contribute significantly to the company’s performance【4:1†source】【4:7†source】【4:11†source】.

Forward-Looking Statements

Looking ahead, Halliburton expects steady growth for the remainder of 2024, particularly in international markets. For Q3 2024, the company anticipates a slight decrease of 1% to 3% in revenue for its Completion and Production division and a 2% to 4% increase in revenue for its Drilling and Evaluation division. Margins are also expected to reflect these changes. The company's focus remains on executing its strategy to maximize shareholder value【4:12†source】【4:15†source】.

Strong Cash Flow and Capital Management

The company generated $1.1 billion in cash flow from operations and nearly $800 million in free cash flow during the quarter. Halliburton also repurchased $250 million worth of its common stock. For the full year, the company expects free cash flow to increase by at least 10% compared to the previous year, demonstrating its solid financial management and commitment to returning capital to shareholders【4:4†source】【4:5†source】.

Guidance and Market Outlook

For the third quarter of 2024, Halliburton plans for corporate expenses to increase slightly and anticipates SAP deployment to remain on budget, concluding by 2025. The company expects its effective tax rate to rise by approximately 1% next quarter. Overall, the firm remains confident in its strategic approach, balancing investments in technology and maintaining a focus on high-margin operations to drive future growth【4:11†source】【4:12†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Second Quarter 2024 Halliburton Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to David Coleman, Senior Director, Investor Relations. Please go ahead.

[David Coleman, executive]

Hello, and thank you for joining the Halliburton Second Quarter 2024 Conference Call. We will make the recording of today's webcast available for 7 days on Halliburton's website after this call. Joining me today are Jeff Miller, Chairman, President and CEO; and Eric Carre, Executive Vice President and CFO.

Some of today's comments 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, 2023, Form 10-Q for the quarter ended March 31, 2024, 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 in the quarterly results and presentation section of our website.

Now I'll turn the call over to Jeff.

[Jeffrey Miller, executive]

Well, thank you, David, and good morning, everyone. Halliburton delivered solid second quarter results that demonstrated the strength of our international business and the differentiation of our North America service offerings.

Here are the quarter highlights. We delivered total company revenue of $5.8 billion and operating margin of 18%. International revenue was $3.4 billion and grew 8% year-over-year, led by Latin America, which delivered a 10% increase. North America revenue was $2.5 billion, an 8% decrease year-over-year compared to a 12% decline in rig count over the same period. Our Drilling and Evaluation division and our Completion and Production division both demonstrated margin improvement year-over-year. Finally, during the second quarter, we generated $1.1 billion of cash flow from operations and about $800 million of free cash flow and repurchased $250 million of our common stock.

I'll begin our discussion with the international markets, where Halliburton's strategy of profitable growth delivered another solid quarter. International revenue grew 8% year-over-year, with growth demonstrated by each region. This marks the 12th consecutive quarter of year-over-year growth in our international business.

As I look ahead for the remainder of this year, my outlook today is consistent with our expectations at the start of the year. I expect steady growth for Halliburton throughout the remainder of 2024. In our international markets, we see strong demand for Halliburton services, high activity levels and equipment tightness across all major basins. We expect our international business to deliver about 10% revenue growth for the full year.

I am pleased with the profitable growth we are seeing across our product lines, and today, I would like to highlight three specific ones in more detail. The first is our Landmark software business. I recently attended our Landmark forum, LIFE2024, in Athens, Greece. It is an annual event where we share our latest software innovations and our customers share their successes and future opportunities.

While in Athens, I had the opportunity to meet with dozens of customers, and they told me how excited they were about our latest offerings, like unified ensemble modeling, scalable earth model and our latest developments in AI and machine learning. These tools change the way customers work by driving efficiencies from asset-level planning through production.

The conference included customer presentations that showcase their business transformation and their use of Halliburton Landmark's tools. Our customers tell us we create unique value with our iEnergy Cloud platform, which seamlessly integrates into their workflows. I am confident that Landmark's DecisionSpace 365 will expand and add to our customers' productivity and innovation journey.

Next, Halliburton's artificial lift product line is growing in the international markets at double the rate of our overall international business. It embodies our successful M&A strategy of bolt-on acquisitions that bring leading technology into our portfolio.

We organically grow new technologies through our global footprint and through collaboration with our customers to engineer solutions that maximize their assets' value. As one example, this quarter, we launched our GeoESP line, which is engineered for the harsh geothermal environment. The GeoESP line solves for extreme thermal cycling, scale development, abrasion and corrosion. While geothermal ESP technology has applications across the globe, Halliburton sees substantial growth opportunities in Europe, where customers require advanced technology to bring geothermal to scale.

Finally, Halliburton's drilling services are key to our success in the international markets. We had another strong quarter in unconventional drilling with our iCruise X rotary steerable system and our LOGIX autonomous drilling platform. We deployed advancements that improved drilling speed and reliability and set several interval records during the quarter.

We invest in differentiated drilling technology, and we expect our strong performance and reliable execution to drive above-market growth. For example, in the Middle East, our drilling services revenue grew about 30% year-over-year. I am pleased with our international business and look forward to deepening our strategy and delivering additional profitable growth.

Turning to North America. Our second quarter revenue declined 3% compared to the first quarter. Halliburton's first half 2024 results were largely as we expected. However, as we have seen, rig counts and overall service activity declined through the quarter.

As I look to the second half of 2024, I now expect full year North America revenues to decline 6% to 8% versus last year, driven by lower activity. I expect that the second half of 2024 will be near the low point of activity levels this cycle. And while it's too early to give specific guidance for 2025 in North America, I expect activity to be directionally higher than the second half of 2024.

Here's how I think about this. First, I expect an increase in activity after E&P companies complete their acquisitions and establish new development plans. Second, some of the merged assets will be divested to smaller operators who will put them to work. Finally, I expect some recovery in natural gas activity.

Six years ago, when we set our strategy to maximize value in North America, I understood it may take a market like we see today, where North America activity declined by over 200 rigs in the last 18 months, to demonstrate the margin resilience and earnings power of our strategy. I am pleased that Halliburton delivered strong C&P margins through this period, and I am confident that our strategy will deliver strong results in the future. We're committed to our strategy to maximize value in North America because it delivers shareholder value and it is the right strategy for this market.

For Halliburton, we focus on returns. We allocate capital to the markets and products that drive superior returns and margins. We prioritize returns over market share. And to that end, we retired a few fleets this quarter. We developed differentiated technologies that solve for the unique requirements of the North America market. And lastly, we improve efficiencies for our customers through those technologies, service quality and execution. I expect this strategy will deliver leading performance for our customers and a structurally more resilient North America business for Halliburton.

A key part of how we do this is our strategic investment in technology. One technology I'm excited about is the latest addition to Octiv, a key component of the ZEUS platform. Today, Octiv is a cornerstone of how we deliver large multi-well pads with unmatched precision and consistency. As our customers execute completions with ever-increasing side and intensity, automation, as delivered by Octiv, provides better control and more effective delivery for simul-frac and [ trimul-frac ] operations.

During the second quarter, we completed field trials of the latest level of Octiv automation called AutoFrac. With the single click of a button, AutoFrac executes the entire frac job from ramp-up at the start to ramp down at the end, making autonomous fracturing a reality. This new level of automation gives customers control to execute the frac design, exactly how they want it without human intervention. Following our commercial trials, AutoFrac is ready to scale, and I'm excited about what this technology means for our customers and for Halliburton.

Lastly, we see rapid adoption in North America of our iCruise rotary steerable system. We consistently reduce drilling times for our customers and create significant value. In the Permian Basin, the number of rigs running the system has increased by almost 45% since the start of this year. We are on pace to triple our footage drilled in North America this year, and I'm excited about the market adoption of iCruise.

North America is the largest oilfield services market in the world. We are crystal clear on how we maximize value in North America. We have demonstrated that this strategy works, and that's why I am confident that we will continue to deliver strong returns through this cycle.

To step back, Halliburton's returns and cash flows are strong, and I am pleased with our performance this quarter. I'm just back from a few weeks in Europe/Africa. What I saw is a microcosm of Halliburton around the world. The quality of our people, the clarity of our strategy, our leading technologies, the depth of our pipeline of opportunities and the competitiveness of our business segments all give me incredible confidence in Halliburton's future.

Now I'll turn the call over to Eric to provide a few more details on our financial results. Eric?

[Eric Carre, executive]

Thank you, Jeff, and good morning. Our Q2 reported net income per diluted share was $0.80. Total company revenue for the second quarter of 2024 was $5.8 billion, flat sequentially. Operating income was $1 billion, a sequential increase of 5%. And operating margin was 18%, a sequential increase of 69 basis points.

Beginning with our Completion and Production division. Revenue in Q2 was $3.4 billion, sequentially flat. Operating income was $723 million, up 5% when compared to Q1 2024, and operating income margin was 21%. These results were primarily driven by strong international completion and production performance offsetting softer results in North America.

In our Drilling and Evaluation division, revenue in Q2 was $2.4 billion while operating income was $403 million, both sequentially flat from Q1 2024. Operating margin was 17%, a sequential increase of 20 basis points. These results reflect the strength of our global D&E business despite the roll-off of seasonal software sales in Q2 which affected every region.

Now let's move on to geographic results. Our Q2 international revenue increased 3% sequentially. Europe/Africa revenue in the second quarter of 2024 was $757 million, an increase of 4% sequentially. This increase was primarily driven by higher well construction activity and improved wireline activity in Norway, along with increased completion tool sales and higher stimulation activity in West Africa.

Middle East/Asia revenue in the second quarter of 2024 was $1.5 billion, an increase of 5% sequentially. This increase was primarily related to higher activity in the Middle East across multiple product lines and higher fluid services in Asia. Latin America revenue in the second quarter of 2024 was $1.1 billion, sequentially flat.

In North America, revenue was $2.5 billion, representing a 3% decrease sequentially. This decline was primarily driven by decreased pressure pumping services in U.S. land and decreased completion tool sales and testing services in the Gulf of Mexico.

Moving on to other items. In Q2, our corporate and other expense were $65 million. For the third quarter of 2024, we expect our corporate expenses to increase slightly. Our SAP deployment remains on budget and is on schedule to conclude in 2025. In Q2, we spent $29 million or about $0.03 per diluted share on SAP S/4 migration, which is included in our results. For the third quarter, we expect SAP expenses to increase slightly.

Net interest expense for the quarter was $92 million. For the third quarter 2024, we expect net interest expense to be roughly flat. Other net expense for Q2 was $20 million, which was lower than anticipated, driven by favorable FX movements. For the third quarter of 2024, we expect this expense to be approximately $35 million.

Our effective tax rate for Q2 was 22.5%, lower than expected due to discrete items. Based on our anticipated geographic earnings mix, we expect our third quarter of 2024 effective tax rate to increase approximately 1%.

Capital expenditures for Q2 were $347 million. For the full year of 2024, we expect capital expenditures to be approximately 6% of revenue.

Our Q2 cash flow from operations was $1.1 billion, and free cash flow was $793 million. During the quarter, we repurchased $250 million of our common stock. For the full year 2024, we expect free cash flow to be at least 10% higher than in 2023.

Now let me provide you with some comments on our expectations for the third quarter. In our Completion and Production division, we anticipate sequential revenue to be down 1% to 3% and margins to decrease by 75 to 125 basis points. In our Drilling and Evaluation division, we expect sequential revenue to increase 2% to 4% and margins to increase by 25 to 75 basis points.

I will now turn the call back to Jeff.

[Jeffrey Miller, executive]

Thanks, Eric. Here are a few key points I would like you to take away from our discussion today. I am pleased with our 18% margins and about $800 million of free cash flow in the second quarter. We are well on track to deliver over 10% free cash flow growth this year.

I'm excited about our international business, where our technology portfolio has never been stronger. I am confident that our strategy to maximize value in North America is working, and I expect it continues to deliver strong returns.

Finally, I am convinced that our collaborative approach and value proposition differentiate us from our competitors and are directly aligned with how our customers expect to drive improved performance.

And now let's open it up for questions.

[Operator]

[Operator Instructions] Our first question will come from the line of Dave Anderson with Barclays.

[John Anderson, analyst]

So North America's softening a little bit. Not a surprise. A lot of your fleet though is under contract with e-fleet. I think it's around 40% or so, and you're continuing to roll out equipment. So I'm just wondering about the recontracting of those. I think you typically have like 2 to 3-year contracts. I would assume like maybe 1/3 of that gets repriced each year or something like that.

So what does that look like right now in terms of contracting? I think -- I'm assuming demand still outstrips supply here. So is pricing able to still move higher there? Are you doing kind of blend and extend deals with some customers who want more? Just a little color around the repricing of that on the e-fleets.

[Jeffrey Miller, executive]

Yes. Well, let's -- we still see a lot of demand for e-fleets. I mean clearly, it's a leading technology, and we rolled a couple out this quarter and signed some more contracts. And so that's a runway through the end of this year and into '25 that we see today.

We don't have any contracts that expire really until next year. And so that's a process that we're working through. I'm not going to go through all that on this call. But we're signing up with repeat customers, which is a pretty good indicator of the value that they're creating. So we feel confident about that process, but really don't want to go through it on the call.

[John Anderson, analyst]

Totally understand. But would you expect that most of those fleets stay with the existing customers?

[Jeffrey Miller, executive]

Yes, I feel -- yes. Yes. Still -- I mean, these are the same customers, in some cases, that are signing up the second and even beyond that fleet. And so no reason to believe that they would not. And we're clearly on the path to 40% in 2024 and '25 as well. I mean, I think that trajectory gets clearer every day.

[John Anderson, analyst]

Yes, that makes a lot of sense. And if I shift over to your international story here. And within the 10% revenue growth, you highlighted Middle East up 5% this quarter sequentially. Can you just talk that part of the international story for you and kind of how you see that growth? Should growth start to accelerate here?

There's big unconventional play over there that I know you're involved in. I don't know if you can talk about any other contracting opportunities with that. But am I wrong to think that, that growth should start to accelerate in the Middle East, even -- I mean, within the 10%, I know you meant. But really into next year as well?

[Jeffrey Miller, executive]

No, you're not wrong. Look, I'm very confident around our business in the Middle East. And as you say, I'm not going to talk about contracts, but Aramco, obviously, is a fantastic operator. And we've got a lot of exposure to both the unconventional and the gas work in Saudi Arabia. We've got our typical services, a lot of exposure, and even some creative sort of new things. So I'm very optimistic, actually bullish, around Middle East.

[Operator]

Our next question will come from the line of Arun Jayaram with JPMorgan.

[Arun Jayaram, analyst]

Jeff, my first question's on North America. You now expect revenues down 6% to 8% year-over-year. How would you characterize the declines in terms of impact from lower activity levels versus, call it, pricing impacts?

[Jeffrey Miller, executive]

Look, it's primarily, this is activity based. The fact that we -- and then we retired a few fleets during the quarter as well. But this is activity, and that's, as we look at activity for the year, gas market actually took a leg down. I didn't think it would come up, but I didn't really expect it to take a leg down either. So it's not flat. And I think M&A takes some time to digest and so that has an impact on activity broadly.

And clearly, efficiencies. I mean, we've got terrific technology. We talk about efficiencies all the time, but we also catch up the rigs. Glad we're at the leading edge of that technology, and that performance makes Halliburton more value, but it really doesn't change the activity outlook.

[Arun Jayaram, analyst]

Understood. Understood. Jeff, you've obviously been on the road quite a bit internationally. You expect 10% year-over-year growth this year. I was wondering if you could give us any qualitative or even quantitative thoughts on how you think international spending trends in 2025 for industry, and how is growth prospects internationally next year?

[Jeffrey Miller, executive]

Look, they look strong for next year internationally. I mean, we see a lot of projects that are either just now being tendered or activity going into next year. And in some cases -- it takes a while to get the international up and going. And so probably the activity that picks up the soonest will be where it's sort of NOC-driven, which would look in some cases like obviously the Middle East. Others, where IOCs are engaged, that takes a lot of negotiation and contract extensions for them.

And so I'm seeing meaningful work. I just talked about my trip to Europe/Africa, and I see meaningful step up there. Still excited about Latin America and what's possible there. And so no, I feel really confident both in Halliburton's outlook for '25 and the industry's.

[Operator]

Our next question comes from the line of Neil Mehta with Goldman Sachs.

[Neil Mehta, analyst]

Jeff, I guess the first question, just building on North America. What do you think is going to be the driver that forms the bottom in activity? I think you alluded to some of those points around M&A and natural gas, but maybe you can unpack that more. And are you seeing any green shoots in customer conversations that would suggest that 2H really is the bottom?

[Jeffrey Miller, executive]

Yes. Look, I think that customers, in a lot of cases, are working through plans for 2025 now. And let me maybe just step back and give you kind of where I see capacity and industry structure because I think that's really important from a services standpoint.

We've got -- new equipment is not being built. The old equipment is attriting. And I think that -- I talked about retiring fleets this quarter. I mean, this is sort of shrinking of capacity availability, and that's happening pretty much in real time, I think, across the board.

And clearly, as we look at next year, I say all that to say, I do expect an increase in activity around companies that get sort of new plans in place. I expect assets end up in the hands of new teams, which is I never bet against North America entrepreneurs. That will happen. I do expect some pickup in gas next year, at least not a leg down from here. So clearly, I would expect the leg up. And I don't think it takes a lot of activity to firm things up, I think, is the point I'm making here.

[Neil Mehta, analyst]

And then just a follow-up. It was a very good quarter for free cash flow. And the company has been very consistent around $250 million of return of capital. So there's probably two parts to that question. One is how do we think about working capital in the balance of the year? And how should we think about your commitment to returning capital to shareholders?

[Eric Carre, executive]

Yes, Neil, it's Eric. So as we said in terms of the working capital, I mean, the working capital will evolve in a way that is consistent with our overall guidance of free cash flow being up over 10% compared to last year. We had more of the working capital headwinds in 2023, so that's a significant delta between the two years. And as an organization, we continue to focus on the overall efficiency of working capital as a whole.

In terms of cash return. We bought back $250 million in Q1, $250 million in Q2. And I think, generally speaking, it's a good kind of guiding point in terms of what we intend at this stage to do for the remaining of 2024.

[Operator]

Our next question comes from the line of James West with Evercore ISI.

[James West, analyst]

So Jeff, as you think about -- and I don't want to beat a dead horse too much. But if you think about North America next year, we're -- I'm increasingly bullish on the outlook for '25 and certainly for '26 both with oil prices where they are, and gas prices which should rebound nicely. And we have this huge power demand pull coming from the tech industry. And I think the tech industry is more fully aligned with the oil and gas industry than it's probably ever been.

So I'm curious about your customer conversations, how they're thinking about how do we get this gas to market? How do we size up crews or size up equipment and get ready for what's going to be a surge in demand? And kind of pair that with constructing more natural gas-fired power generation and things of that nature to meet data centers and AI demand. How are your conversations kind of evolving there?

[Jeffrey Miller, executive]

Look, there's a lot of discussion around what to do with gas. I think our -- I think your point around data centers and alignment is just, in my view, that will be takeaway for gas at some point. It seems easier to lay data lines than gas pipelines. And the -- gas is such a fantastic fuel and resource for this country that I think it's directionally absolutely correct.

In terms of timing, I think that will come on. I think it's early to work through the mechanics of what that means to plans but I expect all that's coming together. And the degree to which gas gets taken away, that only creates more runway for oil in the Permian Basin.

So I'm -- share your excitement around what data centers and AI mean for our industry in terms of natural gas takeaway. And we've got a pretty good seat at that and get to watch it really closely, and am excited.

[James West, analyst]

Got it. Okay. That makes a lot of sense. And then iCruise, you mentioned adoption now. I mean, we had great adoption internationally, but it sounds like you're getting better adoption in the U.S. as well. Could you maybe highlight kind of what you're seeing with the iCruise's technology and how that's unfolding?

[Jeffrey Miller, executive]

Yes. Thanks. Look, I am really pleased with the technology in North America. And I really like the way we're going to market with it because we're going to market with full services, our own services. We're also selling direct sales and some rentals. And that tells me three things about the technology.

It tells me, a, it's in high demand. B, it tells me that it's very reliable because we could sell it that way. And c, it's delivering performance. And I'm really pleased with the customers that are adopting it because, in my view, this kind of adoption is -- really, these are the gold standard of, in my view, drillers. That good drilling organizations, they pick this tool up and say, wow, we really like it. We want more of it.

And so like I said, I think we've got a really good runway around drilling in North America, and it's all rooted in sort of investments we've made over quite a few years. But I believe we're there today.

[James West, analyst]

Got it. North America's a nice cash flow machine for you guys.

[Operator]

Our next question will come from the line of Luke Lemoine with Piper Sandler.

[Luke Lemoine, analyst]

You kind of revised the international outlook a little bit for this year. Could you walk us through some of the puts and takes that have unfolded? Or is some of this just a push into '25 on the spend?

[Jeffrey Miller, executive]

Look, we're sort of halfway through the year and we've got really good visibility on the balance of the year. And so I didn't think we'd hit the high end of the range, so wanted to tighten that up for you guys as we look out.

Q4 will be the highest international quarter we have, typically with software sales and tool sales. But day in and day out, we're continuing to grow, and we're very focused on profitable growth. And as I think I alluded to earlier, my expectation is that we see a continuing march internationally of growth. And the oil price says that, our clients are saying that. My own project inventory is saying that.

So if you describe it as a push, that's one way to think about it. But just from where we sit today, I know what we can get done, and I thought it would be worthwhile to narrow that a bit.

[Luke Lemoine, analyst]

Okay. And then you touched on it a little bit earlier, but could you walk through some of the various unconventional international opportunities you're seeing develop over the next 2 or 3 years?

[Jeffrey Miller, executive]

Certainly. Look, Saudi Arabia and Argentina today are meaningful markets that really have heft and are executing. The -- and I think what has changed -- and so the rest of the Middle East, I'm excited about. And Middle East is a pretty big place if you think about it in terms of sort of from the Mediterranean all the way to back into Saudi, that's a long way. But there's a lot of activity being talked about, and I think we're right in the middle of those -- don't think, I know we're in the middle of those discussions. We've got a lot of experience in this.

And I think what's different today is the sort of ability to accept sort of what the testing is, the early days activity of this. I think there's a lot of sort of we've seen starts and stops internationally, but now we have a proven model in two international markets where you get through the initial phase and then it becomes a meaningful contributor to production.

And I think that's been sort of seen by other places where they have good reservoirs, good rock, and working through, I think, very thoughtfully and pragmatically what's it take to get from A to B. And so from my perspective, that's a much better discussion than sort of a scramble, wildcat sort of move all over the world. These are very serious operators that are taking a long view.

[Operator]

Our next question comes from the line of Saurabh Pant with Bank of America.

[Saurabh Pant, analyst]

Maybe, Jeff, I'll start with a question on D&E margin. Obviously, Eric, you guided to the third quarter. But as you think beyond that, not just fourth quarter but '25, how should we think about margin expansion opportunity? Because this is a primarily international-driven business, right? How should we think about the impact from net pricing improvement, technology uptake? I know you talked about Landmark, right, but just help us a little bit with the margin expansion opportunity in D&E.

[Eric Carre, executive]

Yes. I think the way to look at D&E margins is really the progression on a year-on-year basis. There tends to be quite a bit of difference between different quarters as we recognize revenue around software impacts, mostly Q1, Q4, et cetera. So it's really the year-on-year progression by quarter that you need to pay attention to it.

From that perspective, we continue to improve the margins in D&E. We firmly believe that it continues as we get into next year. Jeff talked about the progression of the directional drilling business. In North America, we continue to see progression and adoption of the new drilling technologies in the international markets as well. So directionally, we continue to be very confident in the growth of our D&E margins as we go into 2025.

[Jeffrey Miller, executive]

Maybe a little more color on that because when I think about our drilling business, we've rolled out iCruise, which is the drilling tool, the BHA. And then we're -- that penetration has grown to where we're drilling a lot more feet with our iCruise than we are our legacy tools, probably 60%, 70% of our fleet is that today.

But what follows on that is an equal sort of step-up in efficiency, performance and actually margin for us around our iStar technology, which is basically the LWD technology that goes with it. And that adoption -- or actually implementation is much less. I want to say, in the 20% range. So we've got a very good glide path of things that structurally improve margins for both -- D&E.

And so I see that as part of my confidence around, look, we just need to continue to retire the old as a time and replace it with the new, and that is structurally improving our capital efficiency.

[Saurabh Pant, analyst]

Okay. Fantastic. No, that's helpful. And just one on the production side of things. I know you talked about artificial lift in your prepared remarks. Good to see international growing at a much faster pace than the overall international market for lift.

But if we focus on the production chemical side of things, I know you acquired Athlon. You have been investing time and money to expand that business, right? Maybe just update us on that, Jeff, where does the production chemicals sit and what's the opportunity just on that side for Halliburton?

[Jeffrey Miller, executive]

Look, we're in that business, it's clearly part of our portfolio, but it's also -- it's an inherently sort of lower-returning business than the balance of our business. So we run it like all of our business, with a focus on profitability and returns. I'm pleased at the pace we're filling our plant in Saudi Arabia. And that business has a long sales cycle. But we know a lot about chemicals and continue to execute that.

[Operator]

Our next question comes from Scott Gruber with Citi.

[Scott Gruber, analyst]

I'm curious, diesel prices have come up a little bit and there's hopes for natural gas price recovery next year. So Jeff, I'm curious, what gas price would close the cost of fuel delta between e-frac when using CNG and traditional diesel? I don't think it's $4 or $5 gas. I want to check that with you. And just overall, how would you describe e-frac economics, even in an environment of healthier gas...

[Jeffrey Miller, executive]

A couple of things. It's a lot higher than that, to start with. I mean, if we just use sort of BTU 6 times 4, at 4 you're still a long way from diesel prices.

The other thing is the efficiency of the mousetrap. I mean, it's just our e-fleets are creating value well beyond the economic trade-off with gas. That's not to say there isn't a lot of runway around economic trade-off with gas, but that platform in and of itself is just a better-operating machine, and it provides technology for clients that really they can't get -- that's not available in another form. And whether that's AutoFrac, Octiv, what we're doing with Sensori in terms of understanding recovery, a lot of this.

And so we're able to help solve for delivering what was planned with precision and in measuring performance of what was placed in the reservoir. That's a whole different kettle of fish, but it's all attached to a ZEUS platform. And so all of that runs together.

So when I think about e-fleets broadly, yes, there is the gas arbitrage, which is happening all the time. And like I said, a long way to go on gas arbitrage before that ever comes up. But I think more importantly is what we're able to achieve with that technology for our customers.

[Scott Gruber, analyst]

Makes a lot of sense. And ultimately, I mean, it sounds like Octiv and AutoFrac are going to help kind of further the ultimate penetration for e-frac with your customers and kind of extend any type of saturation that ultimately could be hit. Just as you think a few years out, as you develop these softwares and build up a platform for a more efficient operation, where do you think e-frac goes as a percent of Halliburton's fleet? And kind of when do you get there?

[Jeffrey Miller, executive]

Well, look, I think we talked about this. We'll eclipse 40% this year. I expect we're 50% next year. And we continue to invest both in the -- once -- we're at scale today, and that allows us then to both improve or continue to extend the technology around the pump itself and the power systems, and then also the software that we're talking about that really addresses, in my view, what operators are focused on, which is recovery and placement and a whole lot of things that affect productivity over time.

And so we're extending that moat around that technology every day. And so I'm confident that as we continue into the future, we've got quite a glide path of ideas and things that will make that yet again even more effective for customers over time. So pleased with where we are there.

[Operator]

Our next question comes from Doug Becker with Capital One.

[Doug Becker, analyst]

Can you hear me?

[Jeffrey Miller, executive]

I can.

[Doug Becker, analyst]

So Halliburton's North America revenue has regularly outperformed the North American rig count. Just wondering if you could just highlight some of the key drivers of that outperformance that you expect going forward? And really asking to try and calibrate how Halliburton's North America revenue might outperform the rig count next year.

[Jeffrey Miller, executive]

Well, I think a lot of it is -- the e-fleets are contracted. That's a large part of our business. The performance is leading in terms of efficiency and technology, and we continue to invest in technology that differentiates Halliburton. And that's one of the key things.

I mean, it's consistent with our strategy. I'll pivot back to our strategy just for a minute. But we want to -- maximizing value in North America means that we're very targeted about what we do, what we invest in, where we spend money and on those things that we know will create differentiation. And clearly, technology is one of those key areas. And not technology for the sake of technology, but targeted technology that can solve for automation, that can solve for subsurface understanding and measurements, direct measurements.

And so that focus allows us to outperform on the revenue side of that. And the maximize value, again, that strategy hasn't changed at all. And gives me a lot of confidence into '25 and beyond in terms of where Halliburton is in the market.

[Doug Becker, analyst]

I mean, is it too aggressive to think about, in a flat North America rig count environment, Halliburton's revenue is still growing 5% next year in that type of environment?

[Jeffrey Miller, executive]

Yes. I mean, it could be. I mean, we need to watch it unfold next year. But look, again, I'll go back to our performance in the market is going to outperform. It's early on '25, but I've got confidence in the technology and the solutions that we provide for our customers that are unique. And that puts us in the position to outperform.

[Doug Becker, analyst]

Completely makes sense. And then just a quick one on the e-fleets. We've been hearing more talk about white space even on dedicated or contracted fleets. Just wanted to get a little bit better sense for your e-fleets. Is there any risk of white space? And fully appreciate that their long-term contracts and you justify the returns. But just thinking about any potential white space risk on those contracts.

[Jeffrey Miller, executive]

No, not the case. Our clients that contract -- again, these are contracted with customers with long programs. They're going to use these e-fleets. It will be always the -- if there were white space, this is the fleet that they will keep working no matter what. It is -- when you're delivering lower cost of ownership, you are -- and delivering the technology and the client is committed to the fleet, that's the fleet that's always working. And so no, I'm not worried about that.

[Operator]

Our last question today will come from Marc Bianchi with TD Cowen.

[Marc Bianchi, analyst]

The first one I had was on the activity outlook. Jeff, you mentioned that it could improve here from the second half of '24. But it sounds like you're stopping short of talking about revenue. And I guess maybe following on this to some of Doug's question. Like when you look at how hard it is to call revenue, is price -- uncertainty about price the main thing? Or maybe talk about the top 1, 2 or 3 things that are uncertain around revenue versus activity.

[Jeffrey Miller, executive]

No. I think the uncertainty around activity is really the driver here. And when we look at the second half of the year, we've had some customers that did -- we caught up with them. And they're still customers and they plan to go to work again next year and maybe even later this year. So no, that's not my concern.

It is -- again, I'll pivot back to our strategy in terms of maximizing value. We've got a lot of tools that allow us to do that technically. And I think it's just a question of pacing, of things happening in -- whether it's setting plans or other things. But '25 will be, in my view, clearly higher than the second half of 2024.

[Marc Bianchi, analyst]

Okay. Okay. Great. And then the other one I had, maybe this one is for Eric. But just looking at the third quarter guide for C&P. The margin reduction sequentially seems pretty steep for the revenue reduction we're getting. Could you talk about maybe some of the moving pieces there? What might be driving that margin weakness?

[Eric Carre, executive]

Yes. I mean, the margin guidance is actually a combination of what we talked about for North America. But really, Q3 margins in the international business are going to be lower than Q2 as well. So there's just not too much to read into this, except there's a lot of moving parts in the business. It's not just North America, it's multiple product line as well. So it is not all related to North America.

[Operator]

That concludes today's...

[Jeffrey Miller, executive]

Thank you. Let's wrap up the call here. I know all of you have a very busy day ahead of you, and maybe I'll give you a few minutes back before your next call.

But as we close out today's call, it's important to step back and remember this. Halliburton delivered 18% margins and about $800 million of free cash flow in the second quarter. We're well on track to deliver 10% free cash flow growth this year. Our international business and its technology portfolio have never been stronger and our strategy to maximize value in North America is working. We are committed to maximizing value, not market share, and I expect that strategy continues to deliver strong returns.

Look forward to speaking with you next quarter.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.