Halliburton Co

NYSE:HAL

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Halliburton's Third Quarter 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to David Coleman, Head of Investor Relations. Please go ahead, sir.

[David Coleman, Head of Investor Relations]

Good morning. And welcome to the Halliburton 's third quarter 2021 conference call. As a reminder, today's call is being webcast, and a replay will be available on Halliburton's website for 7 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, 2020, Form 10-Q for the quarter ended June 30 2021, recent current reports on Form 8-K, and other Securities and Exchange Commission filings.

We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures that exclude the impact of special items. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our third quarter earnings release and can be found in the quarterly results and presentation section of our website.

After our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q$A period in order to allow time for others who may be in the queue. Now, I'll turn the call over to Jeff.

[Jeff Miller, Chairman, President and CEO]

Thank you David and good morning everyone. Last quarter, we discussed a longer view of a recovering market and our confidence in a multiyear up-cycle. I am pleased with the steady march of activity and Halliburton 's performance in the third quarter internationally and in North America, all reinforce our enthusiasm today, and for what we expect in 2022 and beyond.

Our results demonstrate the effectiveness of both our strategy and our execution as the market recovery accelerates. Here are some highlights. Total Company revenue increased 4% sequentially with top-line improvements across all regions. While adjusted operating income grew 6% with solid margin performance in both divisions.

Our Completion and Production division revenue grew 4%, driven by increased global activity. Operating margin was essentially flat in the third quarter, as we made operational choices to prepare for higher demand for our services in 2022. Our Drilling and Evaluation division revenue grew 4% with increased activity across multiple regions.

Operating margin of 11% was about flat sequentially. North America revenue increased 3% as growth in U.S. land was partially offset by a decline in our Gulf of Mexico business due to Hurricane Ida. International revenue grew 5% sequentially in line with the international rig count growth. Our year-to-date free cash flow generation of almost $900 million puts us solidly on track to deliver our full-year free cash flow objective.

Finally, we retired $500 million of our long-term debt and ended the quarter with 2.6 billion of cash on hand. As this upcycle unfolds in both the International and North America markets, Halliburton is executing on our strategy to deliver profitable growth and generate industry-leading returns.

In the international markets, third quarter activity momentum continued, and I believe it will accelerate into year end and support mid-teen second half revenue growth compared to the second half of last year. This expected outcome is better than we anticipated a quarter ago. In the third quarter, we started long-term projects across all regions in spite of the COVID-19 interruptions.

While mobility restrictions and daily precautions remain in place, business activity around the world has adjusted and continues to improve. In the Middle East, countries relaxed border restrictions and Opec (ph) members prepared for activity increases. We started to work on several rigs offshore UAE, mobilized a work-over project in Bahrain, and completed multiple ESP installations on our Artificial Lift contract in Kuwait. We expect the Middle East to exit the year with solid activity momentum.

In Asia-Pacific, we launched operations on an integrated project offshore Malaysia with full implementation of Halliburton's Digital Well construction capabilities. We also ramped up for an increase in our Indonesia drilling operations where the local NOC plans to boost production from its assets. In Europe, Africa, CIS region.

The start of operations on a 23 well offshore integrated development campaign for Woodside in Senegal marked a new country entry for Halliburton. In Russia, we're mobilizing for a multiyear IOC operated project on Sakhalin Island. In the UK sector of the North Sea, work continues on several new development drilling, and workover projects for local independent operators. Finally, Latin America delivered its best quarterly performance since 2015.

We spotted the first well on a three-year integrated project in Brazil, deployed our new drilling technologies on multiple wells in Argentina and prepared to mobilize for new work in Ecuador and Columbia. In addition to contract startups, our pipeline of new tenders continues to grow.

While large Middle East tenders and Latin America projects received most of the headlines, customers in Africa, Russia and Southeast Asia, among others, are also issuing tenders for new work. All of this points to increasing international customer urgency and demand for our services. Let me describe what I'm seeing that gives me this conviction. Global supply and demand balance continues to tighten, resulting in a strong commodity price environment. In response, asset owners are eager to reverse baseline production declines caused by multiple years of under investment.

We expect that NOCs and other operators with short cycle production opportunities will commit additional capital and gain share to meet future oil demand. Additionally, new fields are smaller and more complex. More customers work harder to produce more barrels. Finally, as mature assets change hands, new owners move quickly to revitalize the assets they acquire and unlock remaining reserves.

They require service partners who can deliver proven technology and decades of experience. All of these things have one thing in common. They require higher service intensity, more dollars spent on the wellbore rather than on infrastructure. As the international recovery accelerates, we remain committed to a clear strategic priority. deliver profitable growth, and we have unique competitive advantages to deliver on this priority.

We have the established footprint, geographic presence, and customer and supplier relationships to capitalize on growth. We have a strong presence in all major international markets. The substantial majority of our workforce is local and within the regions where we operate, our supply chain spend is primarily with local suppliers. We have proven capabilities to ramp up our services as customers enter new markets. We demonstrated this in Guyana, Suriname, and most recently, in Senegal.

The Halliburton team mobilized personnel and built a multi-functional operational base to support Woodside as we embark together on a development campaign offshore Senegal. We also engineer innovative solutions, both digital and hardware to meet the complex reservoir challenges faced by our international customers.

For example, in well construction, this quarter we introduced the iStar comprehensive measurement platform. This next-generation intelligent platform provides multiple logging and drilling measurements that enabled reservoir evaluation, faster drilling, and consistent well delivery.

For multiple customers in the Middle East and North Sea, the iStar platform provides insight into the impact of drilling parameters on well work conditions, and optimizes the drilling process in real-time. In completions, we're the global leader in downhole completion solutions. As our customers increase their activity, our e-completions ecosystem integrates manufacturing digital twins and technology development processes to increase our speed to market for these long lead complex systems.

In many regions, as customers drive for better performance in the face of increasing operational challenges, I expect adoption of integrated and bundled contracts will continue to grow. Halliburton has strong project management capabilities, and they've proven track record that deliver efficiencies and reduce total customer cost of ownership. Our digital innovations reframe customer project economics through greater efficiencies and improved decision-making.

For example, in the third quarter, we deployed our well construction 4.0 digital solution to deliver further operational efficiencies for our customer in the Middle East. Finally, our customers call on us for collaboration from an IOC, looking to reduce emissions on its operations in Mexico, to a European independent working to remotely monitor and control all of its global drilling operations.

Halliburton 's value proposition to collaborate and engineer solutions to maximize asset value for our customers is working for both our customers and Halliburton. Now, turning to North America, the bifurcation between public and private Company activity continued in the third quarter.

Public E&Ps remain committed to their spending plans for 2021 while private operators continue to take advantage of a strong commodity price environment. As expected, completions growth moderated in the third quarter as operator's shifted their focus from completions to drilling activity. Just like in the international markets, customer urgency and demand for our services keep growing in North America.

Drilled but uncompleted well counts reached the lowest levels since 2013 as operators depleted the surplus of ducks accumulated in 2020, we expect customers to drill and complete more new wells to offset steep base decline rates and deliver production into an anticipated attractive market next year, Completions equipment availability is tightening.

Customers have responded by starting the 2022 tender process earlier in an attempt to lock in access to quality services for next year's programs. Private companies now operate about 60% of the U.S. land rig count. And current commodity prices provide a strong incentive for their activity to expand. Our market-leading position in North America is rooted in the groundbreaking technologies we put to work in this market.

We are the only fully integrated service provider in North America, and this gives us a unique competitive advantage. We combine the full breadth of our technology disciplines, geo -sciences, physics, chemistry, material science, and mechanical, electrical and software engineering to deliver innovative solutions at scale around the world, and uniquely in North America, to maximize production and minimize costs, Our smart fleet intelligent fracturing services transitioned from pilot to campaign mode. Several large operators today have smart fleet working on multi-pad completion programs.

Smart fleet for the first time allows operators to measure treatment placement in real time, which among other things, has demonstrated up to 30% improvement in cluster uniformity. In the third quarter, we introduced the IsoBond Cement System and pumped it for multiple customers in the DJ Basin and in the Marcellus shale. By removing liquid additives, this dry-blended cement provides significant operational efficiencies and lower capital requirements for land operations.

Taking advantage of the increasing demand for our services require strategic execution on many fronts, particularly in the current environment of stressed supply chains, tight labor, and inflationary pressures. Against that reality, I believe that Halliburton is best prepared to provide reliable execution for our customers. Our sophisticated supply chain organization translates Halliburton size and scale into real savings for us and our customers.

We are seeing that in action as our supply chain delivers what our customers require for their projects. The labor market is tight today. We've seen the situation before, and our human resources team knows how to navigate it. Over the last few years, we compressed our onboarding time, strengthened our national recruiting network, and used digital solutions to significantly reduce our field personnel requirements.

Despite real challenges, we have the scale, speed, and systems to recruit talent nationally and quickly deploy it for our customers. In logistics, we have ready access to a fleet of drivers to make deliveries to the job site. We expanded our collaboration with Vorto, an artificial intelligence supply chain platform. Our early adoption of Vorto's platform that connects drivers, asset owners, and maintenance yards allows us to effectively manage trucking inflation, and availability constraints.

Now let me spend a few minutes on our activity and pricing outlook for 2022, first in the international markets and then in North America. Next year, we expect international activity momentum to accelerate, and international leading edge pricing to move upward in pockets as a result of higher activity. This is what we're seeing today.

Large tenders remain competitive, but we're already seeing modest price increases on discrete work in underserved markets. We see increasing customer demand for Halliburton's high-end technology and the recognition of its value. Finally, as a result of lower spending by service companies for more than half a decade, international market face tightening equipment supply.

To meet these demands, we are strategically reallocating assets to drive, improve utilization and returns. Let me be clear. Halliburton prioritizes profitable growth internationally and this will drive our capital allocation decisions to the best returning product lines, geographies, and contracts.

In North America, we expect customer spending to increase in and around 20% next year, including solid net pricing gains. Many factors drive that spending and pricing, including customer urgency, equipment tightness, handed desire to align with a reliable and differentiated service provider like Halliburton. Last quarter, we highlighted the pricing traction that exists for low emission equipment.

Today, as we tender for 2022 work, we're seeing price increases for the rest of our fracturing fleet as well. Net pricing has also increased across different non - frac product service lines, drilling, cementing, drill bits, and artificial lift. To generate the highest returns as this market grows, we are taking steps to maximize the value of our North America business.

Specifically, we are repositioning our fracturing fleets to customers in areas where we can maximize returns in 2022, securing longer-term, premium pricing contracts for our existing and planned electric fleets, and accelerating fleet maintenance and deployment of the next-generation fluid in technology, which extends the life of our equipment.

Halliburton has committed to North America and I expect we will benefit more than others as activity and pricing momentum accelerates across the board. Next, let me turn to how we are executing on our strategic priority to advance a sustainable energy future. As we are witnessing now and saw in the third quarter, the worlds requires a greater supply of oil and gas. As an oilfield services Company, we have the core competency to help our customers to deliver this supply in the most efficient and technologically advanced ways possible.

With our customers, we are bringing our technical expertise and over a century of industry experience to actively participate in the transition to a cleaner economy. One of the most meaningful contributions we can make today to this transition is to help our customers reduce emissions from their existing production base.

Emissions reduction is a critical part of our technology development process, and our innovative low-carbon solutions are helping oil and gas operators reduce their carbon footprint. Halliburton 's electric fracturing solution delivers results now for our customers. In the third quarter, Halliburton completed an all electric pad operation on a multiyear contract with Chesapeake Energy in the Marcellus shale.

We deployed our electric fracturing spread with electric blending, wireline, and ancillary equipment, and an advanced power-generation system from VoltaGrid. This high-performing solution reduced Chesapeake's emission using over 25 megawatts of lower-carbon power generation from Chesapeake's local field gas. We are collaborating with an IOC in Mexico on their total carbon footprint reduction.

Because we provide both well construction services and logistic services on this contract, we changed supply boat fueling mechanisms and optimized usage to achieve emissions reductions in the first year of operations. We are now using a similar contract structure to collaborate with this IOC on its other projects in Latin America.

We're also advancing renewable energy solutions through Halliburton Labs, our clean energy accelerator. In the third quarter, we doubled our size by increasing the number of Halliburton Labs companies from 4 to 8. Welcoming Alumina Energy from California, Ionada from Ontario, and Parasanti and SurgePower Materials from Texas. We help these companies scale their exciting technologies, from innovative energy storage solutions to modular carbon capture systems.

In September, Halliburton Labs hosted its third finalist pitch day, featuring 9 early-stage companies, and an audience of several hundred entrepreneurs, investors, academics, and other professionals, looking to engage with companies that advance cleaner, affordable energy.

The Halliburton Labs participants are achieving results, and Roxol Bioenergy completed a $10 million series 8 round of financing, and Roxol 's patented modular system uses locally sourced organic or plastic waste to generate clean on-site energy, even in the most remote and inaccessible location.

Other accelerator participants achieved important scaling milestones in the third quarter. With both current and expected demand increases, Halliburton remains committed to the priorities we set in 2020. We prioritize profitable growth and returns, remain focused on capital efficiency at are keeping our overall capital investment in the range of 5% to 6% of revenue.

I'm excited about the multiyear up-cycle we see in front of us. I believe our value proposition, technology differentiation, digital adoption, and capital efficiency will allow us to deliver profitable growth internationally and maximize value in North America. Halliburton will continue to execute our key strategic priorities to deliver industry-leading returns and strong free cash flow for our shareholders. Now, I'll turn the call over to Lance (ph) to provide more details on our third quarter financial results (ph). Lance.

[Lance Loeffler, CFO]

Thank you, Jeff. And good morning, everyone. Let me begin with a summary of our third quarter results compared to the second quarter of 2021. Total Company revenue for the quarter was $3.9 billion and adjusted operating income was $458 million, an increase of 4% and 6% respectively.

During the third quarter, Halliburton closed the structured transaction for our North America real estate assets that I described earlier this year, which resulted in a $74 million gain. We also discontinued the proposed sale of our pipeline and process services business, leading to a depreciation catch-up related to these assets previously classified as assets held for sale. As a result, among these and other items, we recognize a $12 million pretax charge. Now, let me take a moment to discuss our division results in more detail. Starting with our completion in production division, revenue was $2.1 billion, an increase of 4% while operating income was $322 million or an increase of 2%. These results were driven by increased activity across multiple product service lines in the western hemisphere, higher cementing activity in the Middle East Asia region, as well as increased well intervention services in the Europe, Africa, CIS region.

These improvements were partially offset by reduced completion tool sales in the eastern hemisphere, lower stimulation activity in the Middle East / Asia region, and accelerated maintenance expenses for our stimulation business in North America, which related to upgrading our fluid and technology in preparation for the anticipated market acceleration that Jeff described earlier.

In our Drilling and Evaluation division, revenue was $1.7 billion, or an increase of 4%, while operating income was $186 million, or an increase of 6%. These results were due to improved drilling-related services internationally and in North America land, additional testing services and wireline activity across Latin America, along with increased project management activity in Mexico and Ecuador. Partially off-setting these increases were reduced drilling-related services in Norway and the Gulf of Mexico.

Moving on to our geographic results. In North America, revenue increased 3%. This increase was driven primarily by higher well construction, artificial lift, and wireline activity in North America land, increased completion tool sales in the Gulf of Mexico, and additional stimulation and drilling activity in Canada.

Partially offsetting these increases were reduced drilling-related, wireline, and stimulation activity in the Gulf of Mexico as a result of the impact from Hurricane Ida. Turning to Latin America, revenue increased 17% sequentially. This improvement was driven by increased activity in multiple product service lines in Argentina, Mexico, and Brazil, as well as higher well construction services in Columbia, and improved project management activity in Ecuador. These increases were partially offset by reduced fluid services in the Caribbean.

In Europe, Africa, CIS, revenue was essentially flat sequentially. These results were driven by higher well intervention services across the region, increased well construction services and completion tool sales in Nigeria, additional pipeline and fluid services in Russia, and increased activity across multiple product service lines in Senegal.

These improvements were offset by decreased activity across multiple product service lines in the North Sea and Algeria and lower completion tool sales in Angola. In the Middle East Asia region, revenue increased 2% resulting from improved well construction activity in the Middle East and Australia.

These improvements were partially offset by lower completion tool sales across the region, along with reduced wireline and stimulation activity in Saudi Arabia, lower projects. Management activity in India, and lower stimulation activity in Malaysia. In the Third Quarter, our corporate and other expense totaled $50 million For the fourth quarter, we expect our corporate expense to moderately increase.

Net interest expense for the quarter was a $116 million. In the third quarter, we retired $500 million of 2021 senior notes using cash on hand, as a result, our net interest expense in the fourth quarter should decline modestly. Our effective tax rate for the third quarter came in at approximately 24%. Based on our anticipated geographic earnings mix, we expect our fourth quarter effective tax rate to be approximately 22%.

Capital expenditures for the quarter were approximately a $190 million. In response to higher demand for our services in both international and North America markets, we are pulling forward spending on long lead time items for our premium equipment, and now expect our full-year capital expenditures to be closer to $800 million for the full year.

Turning to cash flow, we generated approximately $620 million of cash from operations and almost $470 million of free cash flow during the third quarter. I am very pleased with our working capital performance this quarter as we delivered net cash proceeds from working capital despite our revenue growth.

Now let me describe our near-term outlook. In North America, we expect moderate pricing and activity improvements in drilling and completions to drive sequential growth. In the international markets, we expect continued improvement in rig counts, the pace of which will vary across regions. As a result, for our Completion and Production division, we anticipate mid single-digit revenue growth sequentially, with operating margins expected to expand by approximately 50 basis points.

The higher year-end completion tool sales will be partially offset by seasonal North America land activity impacted by the holidays and lower efficiency levels typically experienced in the winter months.

In our Drilling and Evaluation division, we anticipate sequential revenue growth of 5% to 7%, and a margin increase of a 150 to 200 basis points, due to seasonal software sales and higher overall global activity. I'll now turn the call back over to Jeff. Jeff.

[Jeff Miller, Chairman, President and CEO]

Thanks, Lance. To summarize our discussion today. Halliburton is on track to deliver strong results and our financial commitments for this year. We see customer urgency and demand for our services increasing internationally and in North America. We expect to benefit from the accelerating recovery and deliver profitable growth in the international markets and maximize value in North America.

We prioritize our investments to the highest returns opportunities and are committed to capital efficiency. As our forward outlook unfolds, we expect to deliver strong free cash flow and industry leading returns for our shareholders. 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 West, Evercore ISI]

Hey. Good morning, guys.

[Jeff Miller, Chairman, President and CEO]

Morning, James

[Lance Loeffler, CFO]

Morning, James.

[James West, Evercore ISI]

Just -- clearly, a very bullish global outlook of North America and International. It seems though that International really stepped up even further than you thought, maybe initially in the last 3 months since the last conference call. Could you perhaps describe where the -- these pleasant surprises are coming from?

[Jeff Miller, Chairman, President and CEO]

Well, thanks, James. Look, I think broadly if I look out at the improvements, it's really a function of the tightening macro, and what we see and so. I think supply is clearly short. I mean, this underspending that's been happening for really 7 years is starting to have an effect on the supply side, and that drives clearly urgency, but it's harder to do.

And then along with that, we've got short supply service assets, and that is also driving great environment for us and Halliburton's in the right places. And so when I think about profitable growth internationally and also maximizing value in North America, that's right in the fairway of where we want to be.

And so this beginning of an up-cycle, I think what we'll see are our operators work very hard to improve production, but it's short-cycle style barrels are just going to take a lot more work around the wellbore. And all very good. And it's really, as I said, beginning of what I see as a very strong up-cycle for our services.

[James West, Evercore ISI]

Sure. No doubt about that and we certainly agree. One follow-up from me, North America, the 20% number that you put out there, which is actually the same number that we're using, but how much of that increase is activity versus pricing in the inflationary environment that we're now seeing in North America? Meaning, is activity in that scenario up 10%, 12%, is up 15%. How are you thinking about activity levels versus the overall spend level?

[Jeff Miller, Chairman, President and CEO]

Look, I think -- clearly it's a combination of both. I think that we will see certainly inflation, I'm not going to give you a number today, but I think that we're seeing strengthening pricing -- strengthening pricing into 2022 so I think that'll be a part of it. In fact to our strategy of maximizing value in North America, I think that we're going to be really sharp around where we work and how we generate those returns.

So I -- is it -- I would -- I think that pricing will move up more. And I think there will be a lot of effort put into the activity but the combination of equipment shortages that drive prices are going to probably be a headwind to a degree on activity as we get into the year, biased more to price than activity probably.

[James West, Evercore ISI]

Okay. Got it. Thanks, Jeff.

[Operator]

Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.

[Neil Mehta, Goldman Sachs]

Good morning team. I want to go back to the comments last quarter, the 400 basis points of margin improvement by 2023. Given we're in a firmer oil macro environment and the activity pick-up that you anticipate. Do you see potential for that actually get pulled forward. And how are we tracking relative to the 400 basis points of their upside or downside, as you tested out real-time.

[Jeff Miller, Chairman, President and CEO]

So thanks, Neil. But look, I'm really excited about the outlook and the possibility to pull that forward. Certainly, that's a possibility. I think that we're on track. I mean, everything that I see indicates that's well on our viewfinder in terms of getting to the '23 outlook that I had.

The pace at which oil -- oil demand comes back, which I would say is surprising a little bit to the upside in spite of what's out there with respect to COVID, certainly encouraging, certainly highlights what we've been seeing for some time, which is how important oil is, and more importantly, the impact that not spending normal rates for quite a long time has on the supply of oil. Of course, operators are going to work really hard to accelerate that, which is fantastic for Halliburton. So I'm very encouraged about the outlook and the Pacing.

[Neil Mehta, Goldman Sachs]

Alright Jeff. And then the follow-up is just return of capital, that $500 million of debt this quarter next year is set up to be a good free cash flow year, how do you think about getting the dividend or capital returns profile to be more competitive relative to the rest of energy

[Lance Loeffler, CFO]

Yes, Neil, this is Lance. Look, we certainly -- no doubt, we see an environment that provides us with a lot more flexibility as we look towards 2022. And I would just say this year, 2021, we've had a strategy and we're continuing to execute that. It starts with EBITDA growth, Capex control, and a focus on deleveraging throughout the course of the year. The dividend raise is certainly in the viewfinder as our outlook plays out.

We're still going to continue to be focusing on deleveraging our business and to a certain extent accelerating it when it makes economic sense. So there's still work to do there, but I think the message is that we've got a great opportunity to address all of these things as we move into next year.

[Neil Mehta, Goldman Sachs]

Thanks, Lance.

[Operator]

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

[David Anderson, Barclays]

Hi. Good morning, Jeff. So the question on everyone's mind right now is net pricing in the U.S. and whether or not you're getting that now. I was wondering if you could just confirm you have in fact recently put through a pricing increase in U.S. pumping business.

And addition, if you could address the topic of labor inflation and how much is that offsetting pricing and what could that mean if the industry looks to add, say, 20 or so fleets on the coming quarters. Our E&P seem to think pricing is going to stay flat outside of inflation, so I'm just kind of curious where you think that disconnect could be.

[Jeff Miller, Chairman, President and CEO]

I think the disconnect will be around supply of equipment and also the type of equipment, there's a lot of demand out there. I'll talk about pricing may be first. We're seeing it now, it looks a little different than maybe in prior cycles in the sense that it's more of a process than it is a point in time, but yes, making a lot of progress around that.

We've talked about premium equipment and clearly that's -- a lot of demand for that and it's in short supply and likely stays that way. And so that's certainly positive. Our outlook is that we're going to, certainly, getting that pricing -- getting some net pricing now, and we expect to continue that, particularly as equipment tightens. It starts with the premium equipment, but my view is that we will see that across the entire fleet as we go into 2022.

And so with respect to inflation, yes, seeing that, I think that's been passed along fairly straightforward manner, but that's not the pricing that actually we're looking forward to and seeing some of now. From a labor perspective and, if you described 20 more fleets into 2022, your 40 to 85% utilization today, that takes us what, like close to 100. That drives a lot of pricing activity around equipment, and the labor, I think, it will exacerbate that.

We were very fortunate at Halliburton that we're able to manage the labor, other elements of transportation, I think, more effectively than the market. I described some of that in my comments. But I think that will continue to get tight and I like the way we're differentially positioned around those things also.

[David Anderson, Barclays]

Clearly, labor is an issue everywhere and I'd have to think of the oil field especially acutely. A separate question. You touched on this a little bit, but I'm really wondering what the inventory of kind of both directional drilling and completion tools globally. Now, you're spending only about 5% of revenue on Capex.

It's less than half the rate of just a few years ago. Your competitors have also been very capital disciplined. Obviously, not just the E&Ps were capital disciplined, but you guys have been as well. But now on this cost of this global recovery in activity, as you said, multi your up-cycle unfolding.

And we're also seeing the supply chain issues across the industry. I guess my question is, if there's going to be the shortage of type of specialized equipment next year and where do you see it most acute? You talked about reallocating equipment, but I feel like we've done this already a couple of times, and I know you've been moving it around, but it feels like we're kind of coming into this inflection on a lot of this equipment out there, and I'm just kind of curious of your views on that.

[Jeff Miller, Chairman, President and CEO]

Well, we likely are and we are -- it's getting tight, it's tighter, and we're going to reallocate equipment to the highest return opportunities. And I think we're just going to see some tightness, which is a healthy thing, which is going to drive better asset allocation to projects. We're -- we see capital velocity as a strategic plank for us that we're very focused on and we think that's the key to driving profitable growth.

And I say it that way because there will be many opportunities, our focus is on the profitable slice of that. And things that we're seeing set up as it gets more active internationally. Short-cycle barrels clearly will use equipment, but as we see, some element of offshore activity creep into that, that soaks up more capacity.

And so I expect we'll see quite a bit of tightness which is very, very positive for Halliburton and our outlook. I mean, I don't -- I think that the returns haven't been there, and we expect to see solid returns, and growth in returns, and free cash flow, and a tight market is what makes that happen.

[David Anderson, Barclays]

Looking forward to them. Thanks, Jeff.

[Operator]

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

[Chase Mulvehill, Bank of America]

Good morning, everyone. So I just wanted to --

[Jeff Miller, Chairman, President and CEO]

Good morning Chase.

[Chase Mulvehill, Bank of America]

Good morning. I just want to follow up on the commentary around the North America Capex being up 20%, obviously U.S. onshore will be up a little bit more. But I just want to connect the dots there and just try to understand how you're getting to the 20%. Because if you just look at operating cash flow of E and Ps, those could be up 30 to 40% year-over-year. So that would imply that they would spend less of operating cash flow [Indiscernible] today, they're spending about 50% of operating cash flow.

And if you just look at consensus for public E&Ps, we're talking high teens already for growth. So that implies a more modest pace of growth for the private E&P s. So I just I want to kind of understand the 20% [Indiscernible] that you put out there for North America.

[Jeff Miller, Chairman, President and CEO]

Thanks, Chase. Look, 20% is a good starting point. Obviously, could it be more? It could be certainly and I think the more activity there is, the more price there will be and so kind of take those in tandem. When we look at 2022, clearly there's a call on U.S. production at the kind of commodity prices that we see today, and particularly given the supply shortage.

So we have always expected that we would see North America move first and strongest as we got into the real heavy lift around short supply. That said though, I do believe that it is moderated to a degree because there are formulas in place around how reinvestment -- around reinvestment rates, around dividend requirements, around compensation schemes.

So all of that's in place which serves to certainly moderate activity for the public. And I suspect we'll -- those budgets aren't out, but I certainly expect that we'll see those. The privates clearly are very active. An evidence to me that we see sort of that strengthening, is we're finding more work.

The reality is -- was we readjust pricing and look at the market that requires moving around to different operators at different times. And we're doing some of that now. But the old adage, you don't quit a job till you have a job. And we're finding jobs.

All of that is positive, but I think that there will be tightness around equipment in that environment. I don't -- we're in and around 20 is just sort of a current outlook on 22. I don't mean that to be prescriptive. Could it be more clearly, it could be more. But I also think it will be very tight.

[Chase Mulvehill, Bank of America]

Thanks. Great. Can I follow-up on the frac maintenance expense. I mean, you noted -- in the press release you talked about it during the earnings call. I don't know if you would offer up how material it was, is it -- does it recur again in 4Q and so maybe that's impacting margins on the CMP side a little bit.

And also maybe, is -- should we think about this is as an indication that you think you're going to be able to get the pricing you need in 2022 to really kind of drive more activity on the frac side.

[Jeff Miller, Chairman, President and CEO]

Yeah. Look at the -- the maintenance was maybe a penny. But clarity around where that equipment will go. I mean, that's an indicator that we have certainty around where that equipment will go to work and the kind of things we're doing are like the, the [Indiscernible] end are things that drive better margins for us and a longer life over the life of that so it's just wise to do, I think more important is that we've got real clarity around where that equipment goes and 22 and we want to make certain that we're ready and it goes to work at prices that clearly eclipse any cost of maintenance on the equipment.

It's just the thing that we want to do. Q4, we've given you our guidance and all that's in that guidance. So look, I take it as a real positive that we've got the clarity that we have, and just the concrete evidence of where this equipment will go. And we just want to make certain that we're taking care of everything in real-time.

[Chase Mulvehill, Bank of America]

Right. Perfect. I'll turn it back over. Thanks, Jeff.

[Jeff Miller, Chairman, President and CEO]

Thank you.

[Operator]

Thank you. Our next question comes from Scott Gruber with Citigroup. Your line is open.

[Scott Gruber, Citigroup]

Guys, good morning.

[Jeff Miller, Chairman, President and CEO]

Hey, Scott.

[Lance Loeffler, CFO]

Morning, Scott.

[Scott Gruber, Citigroup]

I just want to come back to the domestic inflation question again. Are there any numbers you could put on the delta in your inflation versus the market inflation just given your advantages. And now that you're securing, what I assume is market-based price increases, kind of what that combination could be.

The framework is -- if the market pricing is up 15%, but peers are seeing like 10% inflation only getting net 5. But -- there is a meaningful gap for Halliburton, maybe you're net inflation or your net pricing gains are 10% because you aren't experiencing half of the inflation.

So if you could tell us what that inflation gap could be and obviously I just made those figures up, so [Indiscernible] any color on the potential net pricing gains for Halliburton vis -a - vis the competition would be great.

[Jeff Miller, Chairman, President and CEO]

Yeah. Look, guys, it's very competitive information. I'd say we out perform ed the numbers you laid out. But maybe I'll just walk through the components of how we manage these things. It's very -- we have very sophisticated supply chain organization and they are working overtime, but absolutely getting it done.

Price fairly passed on to customers. The labor [Indiscernible] the ability to recruit nationally in the US, and the ability to have a strong local workforce internationally, both are key elements of managing inflation for Halliburton. From our raw materials perspective. Again, supply chain buys from the entire world, we manage logistics, and we actually see that improving in terms of tightness as we go into 2022.

Particularly we're seeing sort of space on airplanes. As the world opens up and we see more carriers sort of get back to work, we actually believe the international logistics around raw material gets better. And then in North America, our relationship with Vorto is having quite an impact. I mean, we are able to add drivers. We were able to retain drivers, it's been quite disruptive but very effective.

And so look, I'm confident that we outperform in terms of managing inflation for Halliburton, but that's a separate topic from where we see pricing going in 2022 and many cases now.

[Scott Gruber, Citigroup]

Just a quick one on international Jeff, you mentioned an acceleration in international activity next year. Any early read on where that figure could go. Are you thinking potentially mid [Indiscernible], high - [Indiscernible]. We've seen 20% growth in past years during strong up cycles. Just any early read on where international activity growth could ascend to next year?

[Jeff Miller, Chairman, President and CEO]

Yeah. Look, the entire international market is a huge market, and so to move all of that at a high rate is probably more difficult to do, particularly given where the supply chain actually in project backlog is for clients. But nevertheless, could it be low-teens to mid-teens? Yeah, certainly could be. Super excited about Latin America and the pace of growth and the outlook there. Middle East should be very strong.

And I think we're going to see the kind of broad-based improvement that allows pricing and pockets of places to continue to get better. So it's going to be good. It should be really, really good market internationally. I think we build into it throughout 22 as well.

[Scott Gruber, Citigroup]

Got it. Thank you.

[Jeff Miller, Chairman, President and CEO]

Thank you.

[Operator]

Thank you. Our next question comes from Arun Jayaram with JPMorgan. Your line is open.

[Arun Jayaram, JPMorgan]

Good morning. I wanted to get a bit more color on some of the implications of house decision to reposition some of your frac fleets to get the better pricing you mentioned and exposure to long-term contracts. So I wanted to maybe get a sense of are you mobilizing that equipment today. So, is that going to be a little bit of a drag on 4Q, and as you get that equipment into those newer markets, does that give you some tailwinds as we think about 2022.

[Jeff Miller, Chairman, President and CEO]

Yeah. I think it does give us tailwinds as we go into 2022. Drag our headwinds near-term. Not much -- any of that would be in our guidance. But look, this is making -- maximizing the value in North America, which is clearly what strategically we want to do and plan to do. And our doing involves making decisions around what we do with the assets that we have. And I think you're seeing that and will continue to see that from Halliburton.

And so I'm super encouraged, and a lot of the discussions we're having today with customers are around 2022, in fact, most of that dialogue is 2022 and beyond, actually, even into some sort of 23 type discussion. So I'm super encouraged, so what we want to make sure is that our assets are deployed where they're the most valuable for us and our clients. And yes, that does include moving them around.

When we're moving them around, we tend to do more maintenance on them and what not. That's the opportunity that we take typically to do high-grades of fluid ends and that kind of thing. And so it should be interpreted in a very positive way what we're doing, and particularly a demonstration of really two strategic planks. One is maximizing value in North America and the second is capital velocity. Capital efficiency.

[Arun Jayaram, JPMorgan]

Got it. Got it. Any color, Jeff, on which basins that you sense is a better opportunity to get better pricing in these long-term commitments?

[Jeff Miller, Chairman, President and CEO]

Well, fortunately, we're in all the basins. And so I don't really take a view of basin by basin as much as we do customer opportunity by customer opportunity, and that can be wherever it might fall. I'm not going to necessarily carve out a particular location. Clearly, there's more activity nearly in all of the basins today, and so that's very encouraging.

[Arun Jayaram, JPMorgan]

Okay. My follow-up is just on international -- there's 3.5 to 4 million barrels offline by OpEx Plus. I wanted to get your views on -- are you seeing any shifts internationally from customers, perhaps shifting from a focus on maintenance Capex, sustaining Capex projects, to growing productive capacity. and if so, which markets are you seeing perhaps some shift towards that -- into a bit more growth?

[Jeff Miller, Chairman, President and CEO]

Look, I think [Indiscernible] we're going to find internationally, there's been a lot of under spend for quite a long time and a lot of countries are declining today. Declining is hard to overcome. They'll work hard to do that, but that doesn't necessarily move the needle in terms of production. It might get it back to flat instead of even with extra work, it takes extra work to just stem the decline.

All of that's positive for us. I mean, clearly we see more activity as we go into 2022 in the Middle East and Latin America. But again, I think that those that can spend and are in a position to do so will, but there's the capital austerity by a number of clients is still well in place, and so I think that -- and I say that in the sense that I think that production is going to all be near wellbore, which is very good for us, and I think that a lot of work will get done. But I still see supply as tight for really quite some time.

I mean, it doesn't turn back on. Maybe a point worth remembering, in 2014, the number of big multi-billion-dollar projects with 30-year payouts that were being completed or in the process of finishing, we don't see those today. And the reality is that means there's less spin on infrastructure and a lot more spin on what we do. And I think that's all very, very positive.

[Arun Jayaram, JPMorgan]

Thanks a lot.

[Jeff Miller, Chairman, President and CEO]

Thank you.

[Operator]

Our next question comes from Ian Macpherson with Piper Sandler. Your line is open.

[Ian Macpherson, Piper Sandler]

Good morning.

[Jeff Miller, Chairman, President and CEO]

Good morning, Ian.

[Ian Macpherson, Piper Sandler]

Jeff, it seems like an unsung hero of your year so far has been Latin America. It's whe -- That's where you've had really outsized growth and the market there, the total activity has grown, but it looks like you punched above your weight in Latin America.

Can you speak to those strengths? And you said, I think it's -- not towards in your mouth, but synchronized global, international growth going into next year. For Latin America, in particular, do you expect to see continued momentum on par with the rest of Eastern Hemisphere growth into next year as well?

[Jeff Miller, Chairman, President and CEO]

Yes, I do. Look, I'm very encouraged about Latin America. And that team has punched above its weight in Latin America. We've got an excellent team, great position. We're in every country. The technology introduction has been effective there which I've talked about sort of our Drilling Tools and what we've been able to accomplish.

Our project management capabilities are very strong in Latin America and it's allowed us to outperform in my view. I think that continues into 2022 as more work comes on. And again, that's a part of the world where oil production, and it's very important to economies and operators. and I think that we'll continue to see a strong Latin American business.

[Ian Macpherson, Piper Sandler]

Great. Thanks, Jeff. And then I was going to ask a follow-up to Lance after. You had a really good quarter here with free cash, with the disposals, and some working capital as well. Any indicators for Q4 [Indiscernible] with regards to extras outside of the basics of free cash with respect to net disposals and working capital movements to close the year.

[Lance Loeffler, CFO]

Yeah, I think we certainly expect continued strength in the operational profit piece of the equation. That's pretty obvious based on our guidance for the quarter. Some of that will be offset by some of that acceleration in Capex spend that we talked about in my prepared remarks.

[Jeff Miller, Chairman, President and CEO]

We'll be looking to round out the year around Capex. And look, I think we'll have to see how working capital continues to play out. We have clearly been very focused on working capital and the required investment it would take to put back that investment as we continue to grow, a great outcome this quarter where we actually still generated cash from working capital, despite the fact that our revenue was growing globally.

So all good facts historically, whether we can keep -- whether it's realistic that we can keep that momentum from a working capital perspective going forward might be a little bit harder. So those are all the things that we think about. I mean, look, overall, I'm excited about the way that free cash flow has behaved so far this year and I continue to be encouraged about what that means for next year as well.

[Ian Macpherson, Piper Sandler]

Great. Thank you, Jeff.

[Jeff Miller, Chairman, President and CEO]

You bet. Thank you.

[Operator]

Our next question comes from Marci Bianci with Cowen (ph). Your line is open.

[Marci Bianci, Cowen (ph)]

Thank you. I guess, with regard to CMP in North America here, you've got these little bit of maintenance overhang, I guess it's about 50 basis points based on your comment, Jeff, and then there's these pricing initiatives. Is there any way you could give us a sense of the margin leverage that you could see in 2022 from all of this?

I don't know if it'd be perhaps unreasonable to get to 19& or 20% margins towards the end of the year in CMP, if you're willing to comment on that or any other color about how you would see the margin average shaping up.

[Jeff Miller, Chairman, President and CEO]

Look, I feel good about our business in 2022, most certainly for the reasons I've described. I'm not going to try to give an outlook today on 2022, but what I can say from an operating -- from an earnings power standpoint. We've been very effective at maintaining the earnings power reset that really happened a year ago, but that's well in place.

And all of the things, there were a lot of things that we did when we were reducing costs a year ago that really they were going to be savings as we saw activity pick up, but they were sort of the things that improved margins with activity. We didn't have much activity, so we didn't see the benefit of that, but a lot of the digital work that we've done in North America and reduction of roofline and changing of maintenance and all of those things become more valuable as we get into an environment where we see more activity.

And so we're really encouraged about the outlook. And not only activity but our technology offering, particularly around frac in North America, is very unique and I think we will see the power of that also.

[Marci Bianci, Cowen (ph)]

Yeah. Okay, great. And then, Lance, going back to free cash flow, it looks like you're going to be approaching maybe 50% conversion of EBITDA here in '21. Maybe walk us through the puts and takes as you look at '22 Capex, probably in that 5% to 6% range, but just any other color you could talk to around the conversion, that would be great.

[Lance Loeffler, CFO]

Yes. So, I think as we look to '22, it's certainly healthier, right? Generally speaking, I describe it that way because it means that our operational profit contribution is clearly moving higher as -- into the year -- into next year. But like I said earlier, even as I was relating to the fourth quarter, our revenue increase is going to require incremental working capital. Look, 21 is proof that we're focused on it, and managing it as tight as we can and as efficiently as we can.

And then you're right, Mark, from a Capex perspective. I think we've been pretty clear what the guardrails are on our business even into next year, 5% to 6% of revenue. But look, at the end of the day, maximizing value in North America, growing international profitably, and that keeping real tremendous amount of focus on capital efficiency. I think all leads to free cash flow growth next year.

[Marci Bianci, Cowen (ph)]

Great. Thanks so much.

[Operator]

Thank you. That's all the time we have for questions today. I'd like to turn the call back to A - Jeff Miller for closing comments.

[Jeff Miller, Chairman, President and CEO]

Thank you, Katherine. Look, I'm pleased with the quarter and look forward to speaking with you again at the end of the next quarter as we see this multiyear up-cycle continue to unfold. Katherine, you can close out the call.

[Operator]

This concludes today's Conference Call. Thank you for participating. You may now disconnect.