Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Halliburton third quarter 2019 earnings call.
At this time all participant lines are in listen only mode. After the speakers presentation. There will be a question answer session to ask the question then session you need to press star one on your telephone.
Please be advised that today's conference is being recorded if you acquire any further systems. Please press star zero.
I would now like to him the conference over to your Speaker today I was at <unk> head of Investor Relations. Thank you. Please go ahead Sir.
Good morning, and welcome to the Halliburton third quarter 2019 conference call.
As a reminder, today's call is being webcast and a replay will be available on halliburton's website for seven days.
Joining me today, our Jeff Miller, Chairman, President and CEO and Lance Leffler CFO .
Some of our comments today may include forward looking statements, reflecting halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward looking statements.
These risks are discussed in halliburton's Form 10-K for the year ended December 31st 2018 Form 10-Q , four the quarter ended June Thirtyth 2019, recent current reports on form 8-K, and other Securities and Exchange Commission filings.
We undertake no obligation to revise or update publicly any forward looking statements for any reason.
Our comments today also include non-GAAP financial measures that exclude the impact of impairments and other charges taken during the second quarter.
Additional details on reconciliation to the most directly comparable GAAP financial measures are included in our third quarter press release.
Can also be found in the quarterly results and presentations section of our web site.
After our prepared remarks, we ask that you. Please limit yourself to one question and one related follow up during the Q and they period in order to allow time for others, who may be into Q now I will turn the call over to Jeff. Thank you a boom and good morning, everyone.
It was the second half of 2019 on folds U.S. in international markets continued to diverge.
International activity growth is gaining momentum across multiple regions. Meanwhile, operators capital discipline weighs on north American activity levels.
That said, our outstanding employees executed effectively in the third quarter.
We manage the market dynamics and delivered on our financial results as per expectations.
Let me cover some headlines.
Total company revenue was $5.6 billion and operating income was $536 million, representing decreases of 6% and 3% respectively compared to the second quarter of 2019.
Our drilling in evaluation Division revenue was down 4% sequentially, but operating income grew 3% quarter over quarter.
Our international would be any operating margin increased 180 basis points.
Overall, the any margin performance was negatively impacted by weaker demand for our services in North America.
Our completion and production division revenue declined 8% sequentially driven by lower completions activity in North America land CNP operating margin was essentially flat compared to the second quarter supported by strong international activity and the execution of our new playbook in North America.
International revenue was flat sequentially, but is up 10% year to date.
Lower project management and stimulation activity in the Middle East and Asia, offset healthy growth in Latin America, and Europe Eurasia in the third quarter.
North America revenue decreased 11% sequentially, primarily driven by customer activity declines.
And finally, we generated approximately $530 million, our free cash flow in the third quarter, a significant improvement over the first half of the year.
In the third quarter supply and demand uncertainties continued to impact commodity prices on the one hand, Iran sanctions, Venezuela production declines and political instability in Latin America, and North Africa, our constraining supply.
On the other hand, there's near term uncertainty in demand due to ongoing U.S., China trade tensions and negative economic data out of Asia and Europe .
As the U.S. production growth continues to weigh on supply OPEC plus extended this agreement until March 2020 to manage production and support oil prices.
Even with these crosscurrents international growth continues at a steady pace.
This summer I spent a month visiting our operations and our customers in the eastern Hemisphere, and I'm excited by what I saw.
Consistently improving markets across Europe , Asia and Australia.
This confirms my confidence in Halliburton, delivering high single digit international revenue growth this year.
It is important to note that both of our divisions are meaningfully contributing to our international growth.
Our drilling in evaluation Division traditionally had the most exposure to international markets with about 70% of division revenues coming from outside North America.
The revenue split has generally been the opposite for our completion and production Division.
We're pleased to see the CNP division increasing his participation in the international markets in this cycle.
Year to date International CMP revenue has grown 13% double the international revenue growth rate of DNA.
In today's environment customers aimed to squeeze every available barrel from their existing assets.
So mature fields development as prominent.
We also see increased unconventional activity in several international regions.
The technology makes required for development focus to production oriented and unconventional project plays to our CNP portfolio strengths.
With a focus on the international mature fields market.
We're growing our production group.
Part of the CMP division that comprises artificial lift specialty chemicals and well intervention solutions.
Historically, Halliburton, primarily participated in the drilling and completion stages of wells lifecycle.
With our expansion into production services, we're tapping into a long term later cycle market with significant growth potential.
Our well intervention business helps operators diagnose field productivity issues and design and deliver immediate impact solutions, leveraging our custom chemistries and tools.
This capability is critical for mature fields.
With rigorous intervention and well surveillance activity, increasing especially in the middle East Europe and Asia.
We've already executed multiple contract startups in 13 different countries this year.
In Latin America, we recently deployed our spectrum fusion hybrid coil tubing service for a customer in Colombia.
In a single trip with the well still producing we provided real time visualization of the shape and location of old perforations and perform production logging, while maintaining the ability to circulate fluid to clean the well as needed.
The customer gathered valuable downhole insights without having to take the well off production.
In the last couple of years, we've had a significant uptake and unconventional activity in several middle eastern countries as well as in Argentina and Australia.
Our production enhancement business demonstrated strong international growth year to date benefiting from these developments.
Halliburton leveraged our experience in U.S. shales to providing customized application of technology logistics management and operational excellence to maximize asset value for our international customers.
In Argentina, Halliburton delivered the highest number of frac stages to date in the third quarter as a result of consistent execution and applying service sufficiency best practices in the Vaca Muerta shale play.
Our completion tools and cementing businesses also increased international revenue and margins on the back of strong activity recovery in the UK and Norway sectors of the North Sea I will see activity expansion in Brazil, and Mexico and increased demand from Asia in the Middle East.
We grew cementing services as well as installations of casing equipment, and intelligent multilateral and core completion solutions for customers in all these markets.
For example, this summer we installed a multilateral completion to increase reservoir exposure and inflow control and and operators mature field in Norway.
This intelligent completion system allowed the operator to manage production from each of the four laterals without impacting production from the others in the event of a gas influx or water breakthrough.
To be clear our drilling in evaluation businesses are also meaningfully contributing to our international growth.
As you know Halliburton entered this international recovery a much stronger competitor due in large part to technology investments. We've made in key services like drilling LW D open hole wireline and testing.
Recently, and operator recognized Halliburton wireline as a benchmark for service quality and execution in an ultra deepwater exploration campaign in West Africa.
Open hole wireline data collected at water depth over 10000 feet help the customer to confirm significant additional reserves and successfully determine fracture and closure pressure in sand and shale formations.
In the Norwegian North Sea and operators adopted our latest logging while drilling innovation the earthstar ultra deep resins devotee service as a standard and their exploration wells.
The customers target formation has exceedingly complex geometry, making it hard to interpret using conventional methods.
The unique Threed and version capability of the Earthstar sensor is the only LW the technology capable of reliably mapping such complex structures.
Looking to 2020.
I see more international topline and margin growth opportunities for Halliburton coming from mature fields and shallow water markets.
During a global economic slowdown a broader offshore recovery should add momentum to the international growth going forward.
Offshore rig count increased 19% year on year and sanction debt by de volumes are up 20% compared to last year led by Guiana, Brazil, and Azerbaijan project sanctions.
Recently.
Outside energy awarded Halliburton drilling and completion services for its deepwater field development campaign in offshore Senegal.
It's due for the final investment decision in December and work is planned to start in late 2020 or early 2021.
The campaign is expected to include 18 wells with up to eight optional wells over an estimated three to four year term.
Halliburton was awarded the well construction lower completions, Eli and slick line coal tubing and well testing services.
We've also announced several new offshore project wins this year in Latin America, and the Middle East.
Our pipeline of projects is strong and I expect Halliburton outperformed the growth in international drilling and completion spending next year.
Increasing activity and improving pricing across markets, our ability to compete for a larger share of high margin services.
And reallocating assets to the markets, where we can earn the highest returns.
I believe will improve our international margins going forward.
In North America.
The market is very different.
Customer spending has decreased and is largely concentrated in the first half of the year.
The U.S. land rig count declined 11% from the second to the third quarter for the first time and 10 years and while historically the third quarter used to be the busiest in terms of hydraulic fracturing activity in the U.S. stage counts declined every month this quarter.
As a result.
The market for both drilling and completion services in North America softened during the third quarter impacting service company activity and Halliburton was no exception.
Throughout the third quarter pricing pressures continued as operators tried to lower overall costs in order to meet their cash flow objectives.
We are the execution companies. So let's talk about how we are proactively executing our North America playbook with a clear purpose to generate returns and free cash flow.
This is what it looks like.
We are stacking equipment.
In the third quarter, we stack more equipment than we did in the first six months of the year.
While this impacts our revenues, we would rather err on the side of stacking and worked for insufficient margins and wear out our equipment.
We are reducing costs.
You've seen us do this before.
We took out a billion dollars in 2016.
We reorganized and reduced our fixed costs in North America earlier this year.
We continue to evaluate the way, we work and we will keep reducing costs in our North American operations.
We're aligning with the right customers.
We are in continued to be aligned with the customer groups that are spending and that value our services.
We're deploying technology that lowers our cost and accrues value to Halliburton.
Take intergraded well completions for example.
It is a combination of wireline and fracturing services.
It is one thing to have both product lines and another thing to integrate them technically and culturally and achieve lower cost on location.
It takes R&D effort to develop a host of new proprietary technologies that enable this integration.
Halliburton's integrated well completions offering minimizes nonproductive time improves efficiency reduces personnel on location and capital costs for Halliburton.
This technology integration, which is hard to duplicate improves customer efficiency, but more importantly, it improves our margins.
These actions allows to maximize our active fleet utilization and protect our margins our third quarter results demonstrate that our new North America playbook is working and is the right approach for this market.
Looking ahead to the fourth quarter, we see more of the saying.
We expect customer activity to decline across all basins in North America land impacting both our drilling and completion businesses.
Feedback from our customers leads us to believe that the rig count and completions activity may be lower than in the fourth quarter of last year.
Well holidays in potential weather impacts are the usual culprits.
Other drivers of this continued activity decline our customers free cash flow generation commitments and oversupplied gas market and concerns about oil demand softness in 2020.
Given the reduction and cadence and customer spending that we see we plan to further change the way we deliver our services in order to improve our margins and maximize returns.
In the fourth quarter consistent with our playbook, we plan to undertake further cost reductions by streamlining our operations and corporate functions. We're still finalizing our estimates, but expect to capture approximately 300 million an annualized cost savings over the next few quarters.
Importantly, regardless of the cuts in idling of equipment the size and scale of our business in North America gives us the ability to drive sustainable model without sacrificing our leadership position.
I believe the actions, we're taking will enable halliburton to evolve and emerge stronger in the future.
So what changes the narrative for North America going forward.
While the cadence of activity will likely remain the same over the near term. There are a few other key trends were watching closely today that should play out over time and alter the market dynamics in us land.
First attrition.
Given demand deceleration the service industry has adjusted accordingly, and cut capital spend this year.
There were hardly any new equipment additions and maintenance spending has been severely curtailed.
All the while service intensity showed no signs of slowing down.
Multi well pad penetration continued lateral lengths kept growing and proppant loading increased further.
The direct result of higher service intensity, especially in terms of hours pump per day is the increase in maintenance frequency.
This should accelerate the long awaited equipment attrition from the market.
Both voluntary through stacking and involuntary.
As I said at the beginning of the year, there would be less horsepower available in the market at the end of the year than there was in January .
We can now see this happening as service companies are cannibalizing stacked equipment for parts rather than paying for replacement components due to budget constraints.
We expect attrition to continue into 2020.
At Halliburton, our size and scale allow us to flex down with the market and generate sufficient free cash flow to keep our active fleet healthy.
We benefit from in house manufacturing digital preventative maintenance protocols ongoing materials R&D.
And automation efforts to increase equipment lifespan.
These are unique competitive advantages that are hard and expensive to replicate in this market.
Second some of our customers are changing their buying behavior. They have started contracting for services, an integrated packages rather than discreetly. This helps tire multiple services compresses, the learning curve and drives cost savings and efficiencies for both us and our customers.
This is similar to how the north sea has evolved over the last few years.
We're currently working on integrated projects with customers in the Bakken and the Permian.
The collaboration has resulted in better performance and helps secure longer term customer commitment.
Some companies are increasingly centralizing the management of their procurement activities.
This should lead to supplier rationalization and concentration of a larger share of the work with a select number of high quality safe and efficient service companies.
We believe that these new customer buying behaviors uniquely position halliburton to get an outsize share of their spend.
Finally.
One more trend we are watching is the deceleration of incremental use production growth brought about by capital discipline.
The record breaking 2018 growth will not be replicated in 2019.
In fact.
Current projections for 2020 indicate a further decline in production from the current your estimates.
The maximized production per every capex dollar they spend.
Operators will require technologies that can improve both deficiencies and well productivity.
Instead of counting stages, they'll want to make every stage count for this I believe they will turn to Halliburton.
We bring to the table technologies like automated fracturing and distributed fiber optic sensing that are tailor made for addressing production challenges.
Our customers are mostly focused on price today early studies confirm our technologies work they are hard to replicate and will be more valuable halliburton overtime.
Also with declining us incremental contribution to world production non U.S. production will be required to fill the gap.
This means more growth in international and offshore markets and more opportunities for Halliburton.
As the international recovery continues and the North American market matures, our strategy will allow us to thrive in this dynamic environment.
Believes that the actions I have described to you today will ensure that Halliburton continues to improve its earnings power and generate strong free cash flow and industry, leading returns in the future.
With that I'll turn the call over to Lance for financial update Lance.
Thank you, Jeff and good morning.
Let's begin with an overview of our third quarter results compared to the second quarter of 2019.
Total company revenue for the quarter was $5.6 billion and operating income was $536 million, representing decreases of 6% and 3% respectively.
North America led the decline as a result of activity and pricing headwinds.
Let me go over the details of our divisional results.
And our completion and production Division revenue was $3.5 billion, a decrease of $299 million or 8%, while operating income was $446 million, a decrease of 24 million or 5%.
These results were primarily driven by lower pressure pumping activity and pricing in North America land, coupled with decrease completion tool sales in Latin America, and reduced stimulation activity in the Middle East Asia.
Partially offsetting these declines were increased cementing activity in the eastern Hemisphere improved completion tool sales in Europe Africa, CIO, CS and higher stimulation activity in Latin America.
In our drilling in evaluation Division revenue was $2 billion, a decrease of $81 million or 4%, while operating income was $150 million, an increase of $5 million or 3%.
These results were driven by reduced drilling in wireline activity in North America.
And lower project management activity in Middle East Asia.
These declines were partially offset by higher drilling activity in the eastern hemisphere fluids activity in Latin America, and higher testing and software sales globally, resulting in better overall margins.
Moving onto our geographical results.
In North America revenue in the third quarter, 2019 was $2.9 billion and 11% decrease primarily associated with lower activity and pricing in pressure pumping and well construction services in North America land.
In Latin America revenue was $608 million, a 6% increase resulting primarily from higher activity in multiple product service lines in Argentina.
Increased testing activity in artificial lift sales across the region and improved fluids activity in Mexico.
These improvements were partially offset by lower completion tool sales in Brazil.
Turning to Europe Africa see is revenue was $831 million, which was essentially flat with the second quarter.
Higher activity across multiple product service lines in Russia, Caspian and North Sea offset lower activity in West Africa.
In the Middle East Asia revenue was $1.2 billion, a 4% decrease largely resulting from reduced project management and stimulation activity across the region.
These declines were partially offset by increased activity in multiple product service lines in Indonesia.
In the third quarter, our corporate and other expense totaled $60 million, we estimate that our corporate expenses for the fourth quarter will revert to our average run rate of approximately $65 million.
Our net interest expense for the quarter was $141 million and we expect it to remain approximately the same in the fourth quarter.
Our effective tax rate for the third quarter was approximately 20% coming in slightly lower than anticipated due to certain discrete tax benefits.
We expect our fourth quarter tax rate to be 23% based on the market environment and our expected geographic earnings mix.
Our full year effective tax rate should be approximately 22%.
We generated $871 million of cash from operations in the third quarter.
Our free cash flow generation for the quarter was approximately $530 million and we reached positive free cash flow on a year to date basis.
We believe further improvement in receivables and a draw down inventory in the fourth quarter will allow us to generate approximately $1 billion of free cash flow for the full year.
Capital expenditures during the quarter were $345 million and our 2019 full year Capex guidance remains unchanged.
We told you last quarter that our capital spend in 2020 would be significantly less than $1.6 billion.
We are carefully monitoring the market dynamics in North America, and we'll exercise prudent judgment to make further adjustments. According to the anticipated activity levels in 2020.
Finally, let me provide you with some comments at our operations outlook for the fourth quarter.
For our drilling in evaluation Division, we expect sequential revenue to be flat to up low single digits with margin improvement in the range of 425 to 475 basis points.
This is driven by year end software in product sales combined with activity increases across our international markets offset by lower demand in North America land.
And our completion and production Division, we believe our sequential revenue will be down low double digits with margins expected to decline 125 to 175 basis points.
As Jeff stated in North America, we have continued to stack equipment that does not meet our returns threshold and we will be proactive and reducing costs.
We anticipate that higher activity in Asia in the Middle East will be offset by activity declines in North America Land, Latin America and Europe in Eurasia.
Now I'll turn the call back over to Jeff for closing comments, Jeff. Thanks, Lance in summary.
International growth continues at a steady pace across multiple regions benefiting both our de any and CNP divisions.
Increased activity pricing improvements our ability to compete for a larger share of high margin services and reallocation of our assets should lead to higher international margins as we look past this year.
In North America, we expect activity reductions to continue into the fourth quarter.
Halliburton to successfully executing or new North America playbook to maximize returns and free cash flow.
We stacked additional equipment throughout the quarter and we'll continue managing utilization with a focus on returns.
We're aligning with the right customers.
We're introducing new technologies to improve margins.
And we will continue to take actions at lower the overall service delivery cost.
I want to close by thanking our employees for their outstanding focus and dedication to our company and our customers.
Your resiliency and hard work are the foundation of our company's strength and why together, we can continue delivering on our promise to our shareholders.
Now, let's open it up for questions.
As a reminder, SASSA question, you will need to press star one on your telephone.
To withdraw your question press the pound key.
Thank you please limit yourself to one question and one follow up please stand by what we compile the kewaunee roster.
Our first question comes from James West with Evercore ISI. Your line is open.
So Jeff.
Good morning, James James.
So Jeff.
Okay.
Third quarter.
Correct.
It's going to be fairly.
At this meeting for.
Exit rate, we're going to enter 2020 in outlet stores.
There are certain shape up.
Yes, Thanks, James here, a little correctly, there at the beginning but.
Yes.
As we look at the Q4 activity, obviously, we think budget exhaustion et cetera starts to bring that down.
I expect we'll see an uptick as we go into Q1 of 2020, and I think that's a little bit getting to that cadence of spend so I think there will be increasing activity certainly and the first half first quarter and then really first half of 2020, and our playbook will have us ready to.
Manage of that.
Okay. Great. That's very helpful. Then as we talk about the playbook for thinking about the playbook. What are you seeing from your competition clearly no. Some of these guys can't actually.
Performed at the same levels or will same levels.
So some may file with you when your returns focused strategy what have you seen so far from you show in leadership, Peter with your willingness to walk away from you all underperforming contracts were low return contracts versus your peers.
Well James we're early in that process now and I guess my view is.
We know we are extremely competitive we have very good.
Yes margins and returns in that business relative to anyone in that marketplace and so when we see.
Opportunity, where it transact well below cost.
We're pretty comfortable stepping back from that just because we don't want to burn up our equipment.
Without making the kind of returns and cash flow that we want to make so.
To be seen I fully expect we'll see the.
We see it actually some today the flight to quality our service delivery is very very good or safety performance very very good and and so yes. I think this on full says equipment, just gets tired or and I think we're well positioned in this market.
Got it thanks guys.
Thank you thanks James.
Our next question comes from Angie Sedita with Goldman Sachs. Your line is open.
Good morning, guys.
On Angie Angie.
So maybe a little bit more color on the international markets and the visibility there I think there's some debate about the pace of growth for 20, Twond is I would love to hear what you're seeing out there and and the prospect for having similar growth rates in 2020 as you did a 19 and maybe you could also touch on the growth you saw in CMP versus.
DNA.
Yes, Thanks, Angie less clear on told me, we just don't have the visibility on 2020.
At this point because it's still early that said.
I believe Halliburton outgrows, the increase and.
Drilling and completion spend whatever that is internationally and as I described I mean, I think we've got a good set of contract set up for 2020, and technically were very well positioned for 2020 and so.
Without trying to put a number on that today.
I feel halliburton will be very competitive in this space and anyway, yes.
Okay. Okay. So maybe on your remarks on the attrition it'd be great to hear.
Any additional color on attrition and retirement for Halliburton, and what you're hearing for the industry as a whole.
This year next year, and how much supply pulled out of the markets.
Yeah, I mean, it's as I've always said, it's hard to see attrition until there's a call on the equipment, but it's pretty clear there's less equipment in the market today.
Then there was at the beginning of the year and that amount.
Varies in terms of how people call it.
We think its 15% to 20% easily in the marketplace.
But then we watched equipment adds of which there really aren't any and we know how hard equipment is working and so.
Yes, I really believe we will continue to see that as we go into even 2020.
In terms of the attrition happening.
And on our and our view of the market is we want to be Super careful with our equipment. We want to work at for returns at home, we don't see those returns we want to.
Set up to the side.
Great. Thanks, I'll turn it over.
Thanks, Andy.
Our next question comes from Sean Meakim with Jpmorgan. Your line is open.
Thank you good morning.
Okay, Great and Sean.
So on free cash flow I was hoping we could get a little more granular on the quarter and the guide so collections improved I think as we expected, but payables also fell a good amount inventory is still growing.
Capex is unchanged for the year sounds like earnings power is going to be challenged in the fourth quarter, just sort of $900 million or free cash that you're effectively guiding for next for this quarter is dependent upon working capital to large degree could you maybe just walk us through those those yes, yes, Sean let me, let me take a stab at that so look up.
We do we do we didnt make considerable improvements in Threeq you I think that that momentum clearly has to continue into fourth Q4, Q and has really done.
As you talk about the working capital.
Movements, we continue to believe that we're going to progress on the way that we're collecting our receivables.
Expect inventory will draw down as we deliver on our completion tools orders for the fourth quarter.
And my belief is that working capital on a year on year basis is still relatively flat in 2019.
Okay and also I'd also say.
In addition to the working capital.
We added goals that we have in the fourth quarter also going to be down.
On Capex as well.
The rate been Capex.
That will contribute to that free cash flow number.
Got it. Thank you for that and then each on on the de any margin ramp.
So moving pieces, there too and the third quarter topline fell the margins expanded so you have got North America is challenging on the topline, but you're getting some progress where you're trying to go on international side.
For the fourth quarter seems like similar dynamics, but little bit different more international is helping you more given the year end products et cetera.
We are we getting those moving parts correctly and then we just get with more of an update on how I cruises fitting into that.
Relative to me what your expectations would have been say 912 months ago.
Yes, Thanks, Sean.
Yes, I'll start with the second part of that question. The I crews is really delivering what we.
We had expected to though it is obviously some of the contracts, we were targeting or one butter moving a bit to the right that said.
The performance of the tool very good very excited about what it can do and coupled with star for example.
Really is delivering on the technical promise that we had hoped.
So I expect as I look through Q4 and into 2020 and beyond that the value. This.
Suite of technology is going to be very impactful in fact, I'll just comment here at the World Oil Awards. This week actually the best drilling technology was the Earth Star three D. and version, which is fantastic technology.
So to get back to.
Progression.
Yes, we kind of see a longer ramp on.
The recovery of that business, but all of the building blocks are in place and the technical approach is working and I see us winning the kind of contracts that I think are required to earn higher margins.
Great. Thank you very much.
Our next question comes from Scott Barber with Citigroup. Your line is open.
Yes, good morning.
Good morning, good morning.
Staying on do you need margins.
You guys should we forecast so just one quarter head, but just curious about a bit of color on one Q, how should we think about margins going into next year.
You have a bit more north sea exposure at this point has that changed the seasonality.
Are we going to see a little more season seasonal impact on dealing margins or is there still sufficient underlying profit improvement. There you can offset and have more normal seasonal margin performance in one Q.
Yes.
Scott This is Lance I appreciate the question I think.
I think looking ahead, I think there's still going to be some seasonality.
In one Q, we're still dealing with weather in the northern hemisphere.
As we traditionally see it.
But I think overall as you think about where international margins can go based on some of the comments Jeff made prior I think not only are you seeing.
The investment in technology come to fruition and what we expect but also just generally more activity in the international markets.
Help improve.
Also seeing better pricing in certain regions around the world.
That comes because of a tightness of tools et cetera that will drive that so I think that.
But there is obviously continued progression, where we see international margins going not just in the fourth quarter, but into next year.
Got it.
Then on the $300 million of cost savings, obviously, you'll get a bit and for Q.
Can you just provide a bit more color on how that phases, then over the next few quarters and whether there's any offset in terms of severance or facility closure costs than colors those could be.
Yes, Scott I'm not going to get into the details today on that I think the point is is that we're focused on lowering our service delivery costs.
And I think probably the most important point is that were being decisive right. We're looking to move quickly around cost reductions in North America, we've seen some of those actions.
Seen some of the benefit of those actions that we took into Q.
I'd, just say stay tuned over the course, the next couple of quarters.
I think there just to add just to add to that yeah. When we think about our North America playbook, which is driving specifically towards utilization.
And efficiency and cost I think this playbook is right.
Right squarely in the middle of the types of decisive actions, we're taking around taking out cost.
Got it appreciate it thank you.
Thanks.
Our next question comes from Chase Mulvehill with Bank of America Merrill Lynch line is open.
Hey, good morning flows.
Yes, so what do.
I just want to follow up on Scott's question here.
So maybe on for Q for DMD I don't know if you could maybe help us kind of understand how much of the improvement in margin in this.
On the revenue side is attributed to kind of the software sales. If you typically get in the fourth quarter and then along those lines how much of the 300 million in cost savings.
Are included in your and your Threeq Guide.
Yes, sorry, Thank you got so yes.
Appreciate the question Chase look I think in terms of the impact on software product sales for the fourth quarter. It's relatively the same as we saw last year. So.
Not above or below what we experienced last year.
On the on the cost cutting side look I don't again, I'm not going to get into the details today on the call on how that on how that transforms over the next couple of quarters, but we will.
We will keep you posted as that continues to develop.
Okay all right.
Hello.
You know listening to the prepared remarks, Jeff you talked about more integrated.
Packages that you're seeing in U.S.. So in short well, maybe could you expand a little bit what kind of customers youre seeing kind of push more towards integrated packages and is this more on the drilling side the completion side or both.
I'd really say, it's both and its customers of all sizes quite frankly, but probably more to the.
Larger into that and I think some of that's just reflect it look this is the early days.
But it's.
Encouraging because I know the type of safety and service quality performance that we have in the market and the ability to put more things together I think drives.
Better performance over time, it's really a collective investment in in a learning curve that drives said kind of efficiency and.
Yeah, we've seen that actually evolve in the north sea. So while early days North America very early days I think theres, an analog which was a north sea, which was obviously a very.
Disintermediated market, probably just five or six years ago, and we've seen roughly 90% of our work today in the North Sea is in some form or fashion.
Of.
Yes, integrated or bundled or in some form or fashion, a more stable set of work that is more outcome based that then allows us to overtime.
Demonstrate really some of the things that make halliburton.
So reliable and so efficient over the long term.
Okay, all right Thats helpful. Thanks, Jeff I'll turn it over.
Thanks.
Next question comes from Kurt Hallead RBC Your line is open.
Hey, good morning.
Morning, more encouraged I appreciate all that color so far.
Good stuff.
My question I had for you initially here is on the.
Yeah on the on the U.S., North American Frac completion, and production side of the business right you guys talked about.
The cost reduction effort, that's underway focused on the right players et cetera.
However, it looks like the markets still going to be kind of devoid of pricing right. So when we think about the or when you guys think about your business and in us and U.S. Frac in particular.
Hi, beyond your cost reductions and pricing do you think there's at other ways you can drive margin improvement Jeff.
Yes, I do I mean, I think strategically I mean technology is always an important part of this business and we continue to invest in technology.
And some of that technology allows us to lower our cost.
And we don't necessarily spend a lot of time talking about this simply because it's not for sale I want to keep it and have that benefit accrued Halliburton I talked about one just this quarter on the call with integrated completions.
But thats more complicated to do that meets the eye and it actually drives a lot of cost savings for Halliburton.
When we direct our efforts that way that is part of the sustainable.
Competitive advantage, we have around not just cost cutting actually I don't see it as cost cutting I see the playbook actually is strategically.
Driving.
Better efficiency and better margins sort of in the face of where the market is today.
Say all of that and I want to pivot to what I really think the future looks like which over the next few years. The dialogue I believe will be more around recovery factors and unconventionals and less about just pure speed and I think in that market. Some of the things, we're doing with prodigy and a host of things.
I think will be quite impactful.
In that future scenario, which you know the future what a couple of years out, but I'm really excited about that also and nothing we're doing today, it's in a way of delivering on that.
Feature set of technologies.
Okay Thats great color. Then you got you indicated you gave us some some sense on attrition say on a general basis. It runs maybe 15% to 20% per year and then given the dynamics at play in the marketplace with companies not generate enough free cash.
To put into the maintenance what would be your your assessment above and beyond that 15 to 20 I know you didn't really.
Maybe not caught want to comment on it but maybe press a little bit here and kind of give us your best guess as to what you think it could be.
Given the under investment the business.
Look I think this is something that accelerates, particularly as we get into 2020, we'll see an up tick in the first half of the year first quarter and I think they'll be stress in the system at that point.
And I really you know the extent the which.
Yes.
There isn't new investment in this business.
Just continues to wear on equipment. So there has to accelerate over time.
All right, Jeff I'll leave it there thanks guys. Thank you.
Our next question comes from Dan Boyd with BMO capital markets. Your line is open.
Thanks, Good morning, guys are now and.
So the thinking about the 300 million in cost savings over the next three quarters can you give us an idea on how much that is fixed versus variable.
I think most of that would be more in the fixed category not the variable I mean, the variable costs were managing all of the time and in fact.
Our ability to flex up and down on variable cost is.
Allows us to be I think hyper responsive to moves in the marketplace.
But when we attack that the type of fixed costs things are the part that that's the removal of the waste that as permanent when we think about continuous improvement and driving there and that's what you saw in the second quarter as well.
It was a move around.
Taking out waste and so that tends to common steps as we sort of evaluate how best to get that efficiency and then we're able to move on the cost.
Okay, great and.
And then Lance just going back to the Deeni margins I think what we're all trying to figure out.
Just what the go forward run rate is exit any kind of for Q seasonality. So your earlier this year, we talked about flat margins year on year looks like there may begin to come in a little bit blow closer to 8%, but what should we be thinking about the new run rate being into double digit range on a on an annual base.
Yes, this or is it just too early to say I.
I think.
To try to call 2020, it's probably a little early.
But you know we firmly believe that margins in DNA in international markets are higher than where they are today, obviously, we got room to run I think as the markets continue to improve and for the things that sort of talked about.
Maybe on an earlier question around activity leads the tool tightness.
More constructive pricing discussions and implementation further implementation of our technology, particularly on the drilling side.
We're encouraged by what we see so yes. The goal is to be to be higher than where we are today clearly.
Little too early to call what would be our expectations for 2020 market.
Maybe just to add to that if I could.
Yeah the other.
Important part of this is as we manage capital.
We start we're reallocating assets, where we believe we need to in order to drive those margins up so we see tool tightness in the marketplace broadly.
And clearly we're going to move those assets to where they make the best returns and so.
Yes, I think that.
And in of itself drives better margins.
Over time and.
At the same time, we do have the ability to meet and exceed growth rates I believe international.
Hi, just kind of sneak one more in on that when you look at the margin improvement than in dealings and how much of it would you just if you had put it in two buckets of one self-help and then the other one just being external market growth in pricing how should we think about that.
I would wait that to the ladder.
Our.
Activity and pricing.
Okay. Thanks, guys.
Thanks, Dan.
Our next question comes from David Anderson Barclays. Your line is open.
Hey, good morning, gentlemen.
Aside from the pressure pumping aspect I was wondering about what other parts of your North American business have been impacted by the new playbook I know part of this as you look at every business is in terms of its returns I was just kind of curious how many of those product lines are kind of underwater in terms of returns I. Just wanted to just kind of help us understand how this new playbook is impacting the other.
Thanks for your business.
Well I think it.
It has an impact on all parts of our business I mean I, Thank our view too.
Obviously improving returns.
We'll get to other parts of the business I think that anything we do in some cases, a takeout fixed costs also have an impact on other parts of the business. So I can't do one was really without the other.
We like our all of our businesses in North America.
And I think they all benefit a degree from.
The approach were taken with Frac, though it's probably more pronounced footprint.
Okay.
I was just curious if there's been a lot of talk about the digital space over the past quarter, you announced 10, new applications on your decision space 365.
Digital platform, but as we kind of look out there we feel lot of promise out there was just curious how you're thinking about the investment required.
A bit of an arms race going on it seems like out there, but can you give us a sense as to how much your R&D spending or today.
Dedicated towards digital how are you thinking about spending kind of going forward over the next few years in that space. Yeah. I think the you know the capital and R&D spend around that is.
Included in sort of our run rate. So I don't think it's going to be outsized.
What you've seen us due in the past.
Yes, I think the.
We really like our landmark business May we are leading software provider in the industry.
We hosted a an important event in Houston, we had 1300 customers that are event in Houston to look at sort of the future of digital and had thought leaders who are also our clients present at that event.
But I think the key focus and where we will spend more time talking to you it will be around.
Oh, it's monetized because I think thats really important component.
All things digital which is in my view its internal efficiency.
Enhance tools that we charge more for and then software sales in consulting that we sell directly the clients and you hear me talk about those at different times I try to frame them better, but if I think.
Pants tools, three D. and version as a good example of that with Earthstar that has a lot of digital involved in making it work.
Internal efficiencies look like things like our maintenance, it's automated and.
Digital pointing at manufacturing, so and then 365 being one of the products that we actually sell both in the cloud and the subscription model. So I'm comfortable with where we are effect I really like where we are digitally and I think the digital principles that we laid out early around being open architecture evolving with partners and then.
Clearly making returns.
For Halliburton are there right.
That is absolutely the right strategy.
Great. Thanks, Jeff.
Thank you.
Our next question comes from Marc Bianchi with Cowen Your line is open.
Thank you.
I wanted to ask first on Capex.
Yeah.
Suspect you guys aren't looking to get into what you expect to spend in 20, but just looking where the run rate is here.
And third quarter, and then saying it's going to be again lower enforce it is that the right way to think about.
The Capex that you think the business needs on a go forward basis.
Yes, I mean I think the.
Timing of the spend is more weighted obviously towards the first part of the year, just because thats when tools are actually going to work and lot of the planning goes on.
The next year.
We have a view of where we want things to be and when we want them to be there.
Okay.
Thanks for that Jeff and.
Back on the $300 million of cost save.
Okay.
Is that the right amount of cost save for this level of revenue.
How are you thinking about what level of revenue that business will be size for.
Once you complete that program.
Look I think that.
We continuously take waste out of the business and look for ways to operated at a lower cost point. So that's kind of the step that we see right now that is effective.
But at the same time.
Yes, we're always looking for ways to make the business more and more efficient and will continue to do that almost irrespective of what we think the revenues are or will be.
Okay. Thanks that I'll turn it back.
Thank you. This concludes the question answer session I would now like turn the call back over to Jeff Miller for closing remarks. Thank.
Thank you Shannon.
In closing I am excited about the international outlook and now Halliburton is positioned to benefit from these improving conditions. The combination of increased activity pricing improvements ability to compete for a larger share of high margin services and reallocation of our asset should lead to higher international margins as I look toward the future.
Our North America Playbook is working are driving lower costs, better asset utilization and market leading returns in the near term while concurrently developing technology that lowers our cost or is essential to our customers over the longer term.
Principally unconventional resource recovery drilling and digital and all technologies were Halliburton is uniquely positioned to win.
So thank you it look forward to talking to you again next quarter.
Hey, close out the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.