Q4 2019 Earnings Call
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The conference over to your Speaker today Mr. Robert <unk>. Please go ahead Sir.
Good morning.
Welcome to the Halliburton fourth quarter 2019 conference call. As a reminder, today's call is being webcast and 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 30, Onest 2008.
18 Form 10-Q for the quarter ended September 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.
Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our fourth quarter press release and can also be found in the quarterly results on presentations 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 in a period in order to allow time for others, who may be in the Q.
Now I'll turn the call over to Jeff.
Thank you both and good morning, everyone.
2019 solidified the pivot from growth the capital discipline, and North America and marked another step on the road to recovery in the international markets.
I'm pleased with the way the Halliburton team executed our value proposition delivered exceptional safety and service quality and stayed focused on generating healthy returns and strong free cash flow.
I think our outstanding Halliburton employees for their hard work and execution the entire year.
2020 opens a new decade, and a new century for Halliburton.
It brings new opportunities that I will address in a few minutes, but first some headlines for the full year and fourth quarter of 29 team.
We finished 2019, but total company revenue of $22 billion and adjusted operating income of $2.1 billion.
Hi, I'm pleased with the continued recovery in our international business.
We increased revenue, 10% outgrowing the international rig count for the second year in a row.
North America revenue declined 18% as a result of customer activity and pricing reductions and our decision to focus on those customers to provide the best returns.
Systematically improving or service delivery immediate cost reductions and the growth in non frac product lines allowed us to stem the margin erosion.
We delivered over $900 million, a free cash flow for the full year, demonstrating our ability to generate consistent free cash flow throughout different business environments.
Finally, 2019 was an exceptional year for our safety and service quality performance. Our total recordable incident rate and nonproductive time, both improved by over 20% historical best across our business.
This is a result of our employees continued commitment to safety in process execution.
And now a few points about the fourth quarter.
We finished the quarter with total company revenue of $5.2 billion, a 6% sequential decrease and adjusted operating income of $546 million, an increase of 2% quarter over quarter.
Our completion and production division revenue declined 13% sequentially and operating margin remained essentially flat.
Our drilling in evaluation division delivered a strong quarter.
We grew revenue, 4% and improved operating margin 300 basis points sequentially.
The any international margins grew significantly offset by margin decline in North America.
Well, our North America business declined due to the significantly lower activity in U.S. land internationally, we delivered 10% revenue growth. This quarter. This underscores the versatility and global reach of our business.
In the fourth quarter, we took a 2.2 billion dollar largely non cash impairment charge.
And made strategic decisions to market for sale, our pipeline services and well control product wise.
As I mentioned 2020 brings plenty of opportunities.
The oil prices more constructive as we enter the year.
The eminent global recession fears of abated with the help of economic easing from the leading central banks.
You asked production growth is slowing because of constricted capital flows.
The increase in non U.S. non OPEC supply coming into the market is limited.
The geopolitical instability in the key oil producing region of the world should add an incremental risk premium to the commodity prices in the near term.
That said oil prices are still supported by the OPUC plus cuts and will fluctuate based on the group's resolve to continue limiting production.
Gas prices in the U.S. or below breakeven levels.
You asked drilling and completions activity may be biased lower due the consolidation and restricted access to capital.
Halliburton is no stranger to navigating choppy waters.
We entered 2020 and our next century with a clear sense of purpose.
You will continue to do what we do best.
Collaborate and engineer solutions to maximize our customers asset value.
Generating industry, leading returns and sustainable cash flow for our shareholders.
We will do this with attention to the sustainability of our business minimizing environmental impacts and acting as a responsible corporate citizen.
The international markets presented plenty of growth opportunities in 2019.
We grew revenue, 10% year over year closing stronger than anticipated.
All regions increased revenue led by Asia Pacific Latin America and Europe .
They're divisions meaningfully contributed to the international growth.
Completion and production led the charge with 13% expansion due to higher activity in mature fields in Europe and Unconventionals in Argentina, The you EIY in Australia.
Drilling in evaluation grew international revenues, 8% as we increased activity levels in all markets, specifically in Norway, Mexico, China and Nigeria.
In 2020, we expect the international spend by our customers to increase by mid single digits, making it the third consecutive year of spending growth.
We have the right footprint and an enhanced technology portfolio to compete and win across the international markets.
We expect to grow at or above the market rate this year consistently focusing on profitable growth and improving our international margins.
Continued gas activity expansion in the middle East resolution of political issues in Latin America, and several pending project awards may enable us to outgrow the market again in 2020.
Our drilling in the valuation division is poised to grow faster as we get the benefit of the full year enter Norway integrated contracts. The I crews directional drilling platform rollout continues and new offshore drilling activity starts up around the world.
The international revenue growth should follow the historical cyclicality.
In the first quarter, we expect international revenue to decline due to normal seasonality and the elimination of year end sales thereafter, we should see steady growth that will peak in the fourth quarter.
This year, we expect to increase our international margins.
We anticipate higher utilization for our existing equipment and busy markets like the North Sea and Asia Pacific.
Our project pipeline is strong and the incremental activity will help tighten tool availability and absorb the existing cost structure.
We intend to be prudent with capital allocation driving our organization they have the right pricing discussions with customers.
Given the tool tightness in some product lines and geographies, we're strategically reallocating assets to the best returning opportunities.
Pricing in certain international regions is improving we expect this momentum to continue throughout 2020.
About one third of our book of business is awarded every year, the remaining two thirds or existing contracts and contract extensions.
We are gaining pricing traction on new work and contract renewals were making strategic choices about the work we pursued.
I believe the capital and pricing discipline across all geographies will allow halliburton to deliver rational returns driven growth in the international markets.
Turning to North America.
The U.S. shale industry is facing its biggest test since the 2015 downturn with both capital discipline and slowing leading edge efficiency gains weighing down activity in production.
As expected in the fourth quarter.
Customer activity decline across all basins in North America land affecting both our drilling and completions businesses.
The rig count in U.S. land contracted 11% sequentially and completed stages had the largest drop we've seen in recent history.
Well holidays, and whether were the usual factors other reasons for this air pocket and activity included our customers free cash flow generation commitments and an oversupplied gas market.
With this backdrop Halliburton, followed our playbook and continued to proactively manage our fleet count.
As announced last quarter, we also proactively cut costs and started the implementation of the strategy to sustainably improve our service delivery.
Those actions allowed us to curb margin declines in North America, and deliver lower decrementals year on year, even though the industry sequential activity drop was much more severe than in the fourth quarter of 2018.
In the fourth quarter the markets are clear public evidence of the long awaited equipment attrition.
This is just the beginning.
We believe a lot more equipment will exit the market is lower demand increasing service intensity and insufficient returns take their toe.
As service companies cannibalize idle equipment for parts and you sideline pumps to beef up working fleets the available horsepower supplying the market maybe smaller than some thing.
Halliburton's continued doing what we said we were doing stacking equipment to improve our returns we exited 2019 with 22% less available fracturing horsepower, we've rationalized our equipment supply to the anticipated level of demand in 2020.
The size and scale of our business in North America gives us the ability to rightsize without sacrificing our market leadership position and the value that comes with it.
In the fourth quarter, we started the implementation of our 300 million dollar annualized cost savings and service delivery improvement strategy.
We moved quickly to execute the initial personnel reductions and real estate rationalization, all with an eye to improving on our near term financial performance.
We've achieved about 200 million and savings on a run rate basis in the fourth quarter.
While this impacts our business globally. The majority of the savings are geared towards North America.
We're looking at 2020 with pragmatism.
Early indications are that are U.S. land customers will reduce capital spending approximately 10% from 2019 levels.
I believe that the current level of Ducs in the market will allow operators to spend less money on new well construction and Greg more of it the completions.
The press gas pricing has negatively affecting the activity outlook in the gassy basins, which will likely bear the brunt of the activity reductions in 2020.
In the first quarter operators will reload their budgets and we expect modest improvement in completions activity as a result.
That said the calendar cadence, where some operators are biased to spend more earlier in the year will likely remain.
Halliburton will continue to be proactive and taking actions to generate industry, leading returns and strong free cash flow in this environment.
Here's a more significant actions.
After systematically rationalizing equipment in 2019 to adjust to changing activity levels. In 2020, we plan to provide the capacity that maximizes the returns on our overall fleet.
They should also allow us to be efficient about our workforce and maintenance planning and to achieve higher utilization of existing fleets throughout the year.
Pricing pressure was considerable during the year end tendering season.
Consistent with our capital disciplined approach we've taken on contracts that are expected to allow our portfolio to earn acceptable returns and declined those that are not.
I like to slice of the market that we're choosing to participate in this year.
Hi, great customer portfolio gives us confidence in a more sustainable demand level and the mix of pricing and volume that generates returns for halliburton.
Make no mistake, we will continue developing technologies is value the crews to halliburton and not just to our customers are integrated completions offering and I crews rotary steerable system or prime examples of such technologies.
They should allow us to reduce our capital outlay and deliver better margins all with the purpose of generating strong returns.
We plan to continue strategically growing our share of services per well by increasing the competitiveness of our non hydraulic fracturing businesses in North America.
Our wireline and perforating artificial lift and specialty chemical product lines, all posted strong double digit revenue growth in 2019, despite the overall market softness in U.S. land.
We intend to keep this momentum and spread it the other services.
Finally.
We will continue the implementation of our service delivery improvement strategy.
Halliburton is redesigning the way, we deliver our fracturing services in order to lower unit cost and improve margins and returns in the long run.
2019 closed a decade of the shale revolution, the transformed the United States into the world's top hydrocarbon producer.
Hello burden wasn't early participant in this development and has been investing in it and innovating ever since hand in hand with our customers.
As unconventionals enter maturation phase Halliburton is committed to the north American market and taking appropriate actions to thrive in the new environment.
I'll now turn the call over to Lance to provide more details on our financial results than our return to discuss digitalization a topic that will define the next decade for our industry.
Lance.
Thank you, Jeff and good morning.
Let's begin with an overview of our fourth quarter results compared to the third quarter of 2019.
Total company revenue for the quarter was $5.2 billion, a decrease of 6% and adjusted operating income was $546 million an increase of 2%.
During the fourth quarter, we recognize $2.2 billion of pre tax impairments and other charges to further adjust our cost structure to current market conditions.
These charges consisted largely of noncash asset impairments, mostly associated with pressure pumping and legacy drilling equipment.
They also included approximately $100 million of cash costs, primarily related to severance.
As a result of the charge in the fourth quarter, we recognized the benefit of approximately $35 million from a reduction in depreciation and amortization expense.
Which reflects two months of DNA impact.
The after tax impact of this reduction in the fourth quarter is approximately three cents of vps.
Of which two is included in our completion and production results and the remainder in drilling in evaluation numbers.
As Jeff mentioned, we have also accomplished a significant portion of our intended annualized cost reductions with the remainder to come in the first quarter.
Let me take a moment to discuss our divisional results in more detail.
And our completion and production Division revenue was $3.1 billion, while operating income was $387 million both decreased 13%.
Reduced activity and pricing in multiple product service lines, primarily associated with stimulation services in North America land, coupled with lower activity for stimulation services in Latin America, and well intervention services in the Middle East drove our results.
These declines were partially offset by higher pressure pumping activity in the eastern hemisphere, coupled with year end completion tool sales globally.
In our drilling in evaluation Division revenue was $2.1 billion, an increase of 4% while operating income was $224 million an increase of 49%.
These results were primarily driven by increased activity in all product service lines in the Middle East Asia.
Coupled with higher drilling activity in Europe Africa, C.I.S. and year end software sales globally.
These improvements were partially offset by lower drilling activity in North America, and reduce testing activity in Latin America.
Moving onto our geographical results.
In North America revenue was $2.3 billion, a 21% decrease this decline was mainly due to lower activity in pricing in North America land, primarily associated with pressure pumping and well construction.
This decline was partially offset by higher year end completion tool sales in the Gulf of Mexico.
In Latin America revenue was $598 million, a 2% decrease resulting primarily from lower activity in multiple product service lines in Argentina.
Coupled with decrease testing activity across the region.
These results were partially offset by higher activity for all products service lines in Colombia increased project management activity and cloud infrastructure installations in Mexico, and higher year end completion tool sales across the region.
Turning to Europe Africa see is revenue was $883 million, a 6% increase resulting primarily from increased well construction activity in the north sea, coupled with increased activity in multiple product service lines in Algeria.
These improvements were partially offset by lower pipeline services across the region.
In Middle East Asia revenue was $1.4 billion, a 19% increase sequentially largely resulting from increased activity in multiple product service lines across the middle East, India, and China higher pressure pumping activity and Australasia and higher year end completion tool sales across the region.
These results were partially offset by lower well intervention services in the middle East.
In the fourth quarter, our corporate and other expense totaled $65 million and we expect it to be the same in the first quarter of 2020.
Net interest expense for the quarter was $141 million and should remain approximately the same for the first quarter.
Our effective tax rate for the fourth quarter was approximately 22%.
Based on the market environment, and our expected geographic earnings mix, we expect our 2021st quarter effective tax rate to be approximately 21% with a projected full year tax rate of approximately 23%.
We earned approximately $1.2 billion of cash from operations during the fourth quarter.
As expected, we improved our working capital and generated strong free cash flow of approximately $827 million for the quarter.
Delivering approximately a $1 billion a free cash flow for the full year, excluding the cash impact of the restructuring charges I discussed earlier.
As a result, we ended the year with $2.3 billion in cash.
Capital expenditures during the quarter were $340 million with our 2019 full year capex ending just above $1.5 billion.
As we look ahead to this year, we intend to reduce our capital expenditures by approximately 20% to $1.2 billion.
We believe this level of spend will still allow us to invest in our anticipated international growth, while continuing to rationalize our business to the current market conditions in North America.
Within this reduced Capex budget, we will continue investing in and growing our production group businesses.
Namely constructing a chemical manufacturing plant in Saudi Arabia, and expanding our artificial lift footprint.
We will also move forward with the I crews system global rollout, but at a more normalized pace than what we accomplished over the last couple of years.
Our digital efforts and new technologies aimed at improving our efficiency and reducing our operating costs will also get an appropriate share of spend.
We believe our capital allocation decisions are consistent with our focus on generating strong cash flow for our investors regardless of the market environment.
Finally, let me provide you with some comments on how we see the first quarter playing out.
As is typical our results will be subject to weather related seasonality and the roll off of year end sales, which will mostly impact our international business.
North America will see a modest increase in completions activity as Jeff described earlier.
We will continue to pull the levers that allow us to mitigate margin declines across the business this quarter.
As such and our completion and production Division, we expect sequential revenue to increase 2% to 4% with margins declining 125 to 150 basis points.
For our drilling in evaluation Division, we anticipate sequential revenue will decline, 4% to 6% with margins decreasing 200 to 250 basis points.
Ill now turn the call back over to Jeff Jeff.
Thanks Lance.
One of the key trends that will define the new decade in our industry is digitalization.
The next 10 years, we'll see digital technologies and artificial intelligence going mainstream.
Just like the smartphones did in the last decade.
In the oil and gas industry digitalization unlocks the potential to structurally lower costs shorten the time to first oil increase optionality and exploration and production and enhanced performance across the entire value chain.
Digital is not a separate strategy at Halliburton.
Rather it is an integral part of our value proposition.
Our ability to collaborate engineer solutions and maximize customers asset value is evolving through the seamless integration of digital technologies into our operations.
Digital permeates everything we do and has the same goals our business strategy deliver value for our customers and returns for our shareholders.
At Halliburton, we're hard at work on the next frontier solutions that will shift the balance in the people process technology Tri Ed.
Replacing labor and reducing capital investments through automation and self learning processes.
We believe this will allow us to harness the transformative power of digitalization and make a quantum leap in productivity similar to going from horses to horsepower.
It takes time to build the scalable software and hardware infrastructure required to fully capitalize on digital solutions.
We're well along that path and the been building up our digital capabilities for a number of years with a long term view of how digitalization will evolve.
I'm pleased with the internal and customer adoption, we're seeing.
Halliburton is in a unique position to reap the benefits of the industry's move towards digitalization.
Our landmark product line has an established leader in Petra technical software with a powerful cloud enabled decisions based 365 software platform.
In 2019, the cloud native software was our fastest growing business within landmark increasing revenues, 50% year over year.
Landmark provides us a solid foundation established three decades of investment in software development people domain expertise and processes to create and scale digital solutions.
This benefits all of our product lines. In addition, we are strategic partnerships with Accenture, Microsoft AAMC, and Schneider electric all of which validate and expand both our vision and our capabilities.
We now have over 100 customers with thousands of users across the globe, leveraging our I energy digital ecosystem to integrate software and workflows across their organizations, regardless, if they're halliburton's third party or internally developed.
This open architecture platform is unique in the industry and in our view is unnecessary condition for the successful adoption and scaling of digital solutions.
True to our DNA.
We're also bringing to market practical smart and interconnected products and services that help unlock value for us and our customers.
Our pioneering new approaches to subsurface understanding well construction and reservoir recovery.
Let me spend a few minutes on each.
First we transform subsurface understanding using big data digital frameworks and evergreen models.
We've created a unique geological model of the entire Earth to provide insights into the origin and productivity of reservoirs. Once drilling starts we deliver improved field measurements with next generation wireline and logging while drilling tools fiber in sensors.
We then translate these measurements into faster more informed decision, making using a new class of models made possible by digital technologies.
For example.
Our first star Ultra deep resistivity sensor automatically feeds into our industry first scalable Earth model that updates in real time.
Customers can now make faster decisions about their development programs and reduce cycle times by a factor of 10.
Second we improve well construction through collaborative will engineering and drilling automation.
Landmarks digital well program enables seamless collaboration between operators and service companies across a multitude of software platforms.
The I crews drilling system increases the number of built and sensors by a factor of five and offer self guiding capabilities.
Working with our rig partners, our digital twin technology delivers better collaboration and faster decision, making.
All of these solutions boost efficiencies and lower costs, while de Manning the process of well construction.
Last but not least we improve recovery and production by using our digitally enabled tools to connect customers assets and leveraging this to monitor and enhance performance outcomes.
In completions, we use our intelligent completions for monitoring production trends and connecting them to broader reservoir management studies.
In artificial lift we leveraged digital to monitor SB health and extend run life.
And stimulation, we use our industry, leading fracture modeling software and full scale asset simulator, the model fracture propagation and Frac hits.
These are examples of how we deliver digital innovation today with a focus on specific domains and aligned with the customers buying behavior.
They provide immediate value to customers increased customer loyalty and generate returns for halliburton.
Over time.
We believe digitalization will seamlessly connect sub surface drilling and production, enabling customers to make asset level decisions at the speed of execution.
We have a solid foundation the tools the open architecture and the domain expertise to successfully deliver this vision.
Let me summarize what we've talked about today.
In 2020, Halliburton is focused on delivering margin expansion industry, leading returns and strong free cash flow.
And our view international growth will continue.
Increased activity disciplined capital allocation pricing improvements and our ability to compete for a larger share of high margin services. We believe will lead the international margin expansion in 2020.
As North America customer spending declines again this year Halliburton will continue to execute our playbook to maximize returns and free cash flow.
We plan to provide the service capacity that we believe will maximize the returns on our overall fleet.
Continued to invest in technologies that improve margins.
Keep strategically growing or non hydraulic fracturing product service lines.
And continue the implementation of our service delivery improvement strategy.
We believe digitalization will define this decade in our industry.
Halliburton continues to move full steam ahead on the digital journey and is uniquely positioned to repurpose benefits.
And now let's open it up for questions.
Ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone keypad to withdraw your question press the pound Keith.
Please standby will be compiled acuity Rob.
Our first question comes from the line of James West with Evercore ISI. Your line is now open.
Hey, good morning, Jeff when events.
James.
So Jeff talked into your prepared comments, we talked a lot about.
International and international margin progression I Wonder, if we could dig into a little more detail there was.
Mid single digit it sounds like growth.
Do you maybe over the LP set a touch here as well plus you're seeing some pockets of pricing strength, how should we think about the margin expansion as we go through the year what type of incremental should we be expecting.
Thanks, James look I think.
Spent a fair amount of time on the catalyst themselves.
Activity, improving rational project choices.
And technologies, Yes, I think the key is it's going to be shape, we're starting at a higher point going into Q1, and we certainly did last year, then I would expect.
The shape of that the look similar where we start fit it moves up a little just that shape of the international margins should stay consistent but obviously starting from our point.
Okay Fair enough and then maybe for for Lance you're on the the free cash flow.
The next year looks like it's going to be pretty significant based on some growth, but also lower.
Capex here, how should we think about when when were to see the free cash flow start to show up will be similar to this year, we're very back end loaded or would it be more even throughout the year yes.
Thank you are right in terms of the expectations to grow free cash flow this year.
You're right around the.
I don't think that the.
Our ability to drive sort of the working capital consumption is going to remain in the first half of the year like it has historically for us I expect some of the extreme volatility that we saw last year to not repeat this year, but there still is a consumption of cash from a working capital perspective, but overall with the reduction.
In Capex the improvement around margins and some stability around our working capital, we expect free cash flow to grow in 2020.
Okay got it thanks, guys. Thank you.
Our next question comes from Sean Meakim with Jpmorgan. Your line is now open.
Hi, good morning.
Right.
So you touched on the margin progression internationally can you maybe just talk about how we think that translates into.
Any in 2020.
So we had the margin ramp in Fourq you.
Maybe 70 basis points are so comes from from the DNA benefit.
That'll help year on year in 20, but can we see 2020 margins on a full year basis get back to 2017 2018 levels do we think we can get back to a double digit type of outcome for the year. Just I'm. Just curious how you think investors will get comfortable with a trajectory.
Like that just given it's been difficult business. The forecast last couple of years, Sean It has been difficult to forecast what we've done a lot of things during that time, so the platform around.
Hi, Chris Technology, and our Star has been rolling out at same time.
We've seen international a lot of international Choppiness that we see some recovery sort of happening, which obviously.
Lends itself towards DNA and so.
I think these are multi year efforts that we view them, we view them that way I'd say digital as well will contribute to probably early days to DNA. So.
For all of those reasons I don't think its unreasonable to expect we get back.
Two.
18, looking down the number or beyond.
Got it okay. Thank you for that.
And then so on the digital strategy you a competitor that's made a lot more noise about their strategy maybe than you have so far.
But the pizza and repsol contracts.
Sounds.
Pretty similar in terms of the offering.
Can you, maybe just to expand a little bit in terms of.
The scalability that you see for those types of avenues.
Going across a broader set of customers, where you see the most opportunity.
Yeah, I think I tried to describe today, our vision around digital and then.
Mechanics for realizing that vision, which then quickly becomes in today's market what are the things we actually do.
The Apple.
Yes, some of the tools that are in the market as we integrate those obviously the mode expands around those.
I think it'll take many forms over time again, it will be big projects, which we've talked about a few of those where is either cloud infrastructure and the cloud environment that we either install or operate and we've got examples of each of those.
But equally important will be.
Good day and March around how this work really gets done which is around drilling production and reservoir filling in those spaces.
With tools that all contribute to that vision and so I think that.
Theres a lot of scalability here and I think what's most important is really the production.
Capital that Halliburton has invested in and and landmark that really makes a scalable and back to do these things is scale, there's a lot of.
Discipline and practice.
Joel Dev ops that are required at scale to reliably.
Developed software and operate maintain and then ultimately continue to advance.
We have that so I'm really confident in.
That rolled out over the longer term and I think the thing to focus on is what are those tools that were doing now that deliver returns obviously they contribute to the vision.
Got it very helpful. Thank you.
Thank you.
Our next question comes from the line of Angie Sedita with Goldman Sachs. Your line is open.
Thanks, Good morning, guys.
Yeah.
So Jeff on seen Tees Pacific North America can you talk a little bit about the cost cutting that's unwinding here. You said you have a 100 million lots is there more that can be done beyond that 109 months Jafar land.
Maybe you could talk also about the pricing have you seen them market starting to stabilize on the front side for pricing are you still seeing pressure in frac going across other product line.
Yes, Thanks Angie.
Look.
300 million Dollarss in savings. So we've moved quickly on that and I think you know the 200 million that we've taken out on an annualized basis already.
Expect to get the rest of that Don in Q1, and I think.
That really speaks to how that team in North America executes, we execute very quickly and with a lot of purpose and so obviously that contributes.
Beyond that we've talked about our playbook in how we expect to execute our strategy in North America.
Thank overtime that continues to drive improvement and and and margins.
Less concentrated in a moment, but obviously a set of activities that yield value overtime.
From a pricing standpoint, it's still very competitive information, obviously Q4 was quite competitive.
Yeah. So I think the market in spite of attrition is still oversupplied.
What's important though is that we make our own choices around how to maximize fleet profitability and by virtue of doing that.
I view it as.
No more stable in that respect.
I might add comet two on the on the $300 million and cost savings just just to be clear to to add to Jeff.
That's sort of cash structural savings.
Yes.
Okay. Okay. Thank you that's helpful and then maybe staying along the themes on pricing.
Obviously, the reverse internationally, maybe you could talk a little bit or give more color on the pricing power or momentum you're seeing in the international markets.
Is it fairly widespread is it by specific regions or product lines and do you think there could be a little bit momentum going into 2020 or is it slow and steady.
So it got more describe it as slow and steady Angie I think what the key is that they set up is constructed and so.
Yes.
Energy and capital in a more prudent way focusing on profitable growth as opposed to growth all of those things conspire to create an environment where.
We're able to get better pricing is a widespread.
Yes, generally widespread, but theres, probably pockets where more concentrated than others.
Sometimes driven by availability and.
Like city of work and things that would normally and rationally drive higher pricing and so I think thats what were seeing in the market.
And yes, it is getting traction.
Great. Thanks, I'll turn it over.
Our next question comes from Bill Herbert with Simmons. Your line is now open.
Thank you good morning.
Lance you talked about a conceptually, but I'd like to kind of refined it if you will with regard to the discussion.
The evolution of working capital for this year less pronounced.
Seasonal trends you were huge consumer cash working capital was in the first half of 2019 at a nice contributor to cash in the second half Im trying to.
Kind of peg.
The order of magnitude of the reduction in cash consumption. During the first half of this year versus the first half of last year.
I think what you see bill is.
Sort of a year over year comparison is we don't have made last year, we are carrying.
A lot of inventory associated with the boost in the I crews rollout.
And in some of our CMP product lines that I don't think that you see that consumption taking place again this year as we consume more of that inventory as opposed to build it.
The collection cycle is still going to be very similar albeit.
As the international business becomes a bigger part of our business that typically has longer dsos and we may see some impact there, but still a a view where we billed receivables early in the year and then unwind those.
As we get into the later part of the year.
Okay, and so just to take a stab at it would you expect that your cash.
That your cash consumption from working capital in the first half of this year when it run it like half of what it did in 2019 to me it's at a reasonable starting point.
I think thats, probably a reasonable starting point.
Okay, and then secondly.
Again, a lot of moving parts, but it kind of a 20% production in capex.
You should have better working capital improvement for this year net income should be up as well. So at least on my numbers I'm getting to kind of a free cash flow yield assuming a $24 stock price.
On the 7% to 8%, which is getting pretty sporty and I'm just curious with regard to the priorities are the deployment of that surplus cash flow is still a.
Reduction of net debt first and foremost.
Yes, I think it is I think.
The excess cash I think we do have a near term priority on reducing debt.
The reality is bill is while we're focused on that debt reduction in the near term what it does and what it offers us as we continue to.
Chip away at it does give us more flexibility to return cash to shareholders.
In the future and I think.
Today.
Our business, we need to it we need to address the $3.8 billion of debt that we have coming due over the next six years.
So I think we'll do that do some of that in the near term, but also with an eye on ultimately returning cash to shareholders.
Okay. Thank you.
Thanks, Bill Thanks, though.
Our next question comes from Scott Gruber with Citigroup. Your line is now open.
Yes, good morning.
Morning, Scott.
Kind of staying on a similar line of questioning.
Let you mentioned the 1.2 billion of Capex in 2020, which is good to see give us provide some color on how you think about the sustainability of capex around that level is a few moving pieces here in your and 20 and they'll be a few more and 21 and particularly with the Saudi comes point in.
But not recurring.
But just how should we think about kind of broad strokes for.
On the level of Capex.
Feel free to frame as a percent of sales of for TV.
Yes, Scott this is Jeff on the.
I think the key is around prioritization and yes, we are focused on the best returning opportunities.
But we were able to fund international growth in 2019, and expect with that level of Capex can continue to fund the growth that we see in 2020. So it isn't that we are.
Starving anything the reality is we're feeding things appropriately and around.
Return expectations, we think about spending this year, it's probably two thirds international third you asked.
But in our view very sustainable and so we're comfortable with that level of Capex and also.
What it means to making better returns.
I would add I would add.
In an environment and increasing pricing environment. The generates the appropriate returns we may spend more but it will be commensurate with a focus on.
Turns and overall driving better free cash flow.
Got it and then just a question circling back on the domestic Frac market.
With pricing hopefully stabilizing here in early 2020.
If you had mentioned a focus on maximizing returns on the Frac fleets.
But broad strokes that does that strategy likely mean that your frac business trends with the market in 2020 or lagged the market to a degree in 2020 as we focus on returns how should we think about it.
Yes, I think that it will.
Yeah, I would expect we stay consistent with the market, but we don't feel like we have to just because we mostly focus on.
The returns and free cash flow out of that business, but I wouldn't think we would be out of the market at any point in time.
That said, we're focused on the slice of customers that.
Make the best returns for us, which gets to a number of factors efficiency, but also calendar cadence.
So spend and this year going into Q1 for example were 95% committed on the fleet, which is the best we've been since the downturn.
Got it appreciate the color. Thank you.
Our next question comes from David Anderson with Barclays. Your line is now open.
Hi, good morning, Jeff.
To your comments on the digital side as we move beyond the proof of concept and becomes more broadly accepted you'd kind of talked about sort of two different types of customers out. There I guess is sort of maybe on the S&P side is those who have kind of realize they can do some selves and your provide sort of certain discrete operations different applications. Like you just mentioned on some of your tools on the other side.
Other bigger broader customers are which you can implement ecosystem across the organization. How do you now since you made today, how do you see those two sets of customers evolving over the next let's say next several years is it fair to assume is kind of the former and then the former is a majority of that business and then hopefully it kind of evolve more into more of the broader in.
Lamentation can you just talk about how you see that customers acceptance.
Yes look I think customers do this at the pace at which they can digest it realistically and that is the reason why I think you'll see that.
Bifurcation today, it's more apparent just because customers that can.
Actually operate and execute at a at that level of integration or fewer in far between today.
And I kind of view it that way it gets implemented at the pace. It can be absorb that's why I tend to talk about division and then bring it down to hear the more digestible roofing.
Being.
Drilling production.
And reservoir, and then even down into the tools because.
The number these tools.
But have to be integrated but they can be in their more effective when integrated and so yes I use.
Fairly simple example, like in our star tool.
Yes, it's a tool its metal that runs in the well it's fantastic tool, but what's most important about it is the answer product, which is the three D inversion.
Thats really inversion becomes even more valuable when integrated in an earth model and likely yet again more valuable when integrated into the entire ecosphere, but that difficult for everyone to do that at one time and it's very hard to do that given sort of the proliferation of different system. So the key in my view is we didnt.
I need to advance the platform the ecosystem as you describe it.
While at the same time driving immediate returns around these tools and then they're available to be integrated into that because system of that so yes that makes that much less im sure. Thanks.
Other started digital here is that it appears to be deflationary to traditional oilfield services going forward.
Customer can do your customers can do more with less would you agree with that and do you think that future digital revenue to Halliburton, presumably it comes at higher margins more sustainable cannot more than offset this deflation over the next several years.
Thank you can because I think what's missing in this deflation discussion is.
The most comes in or around our equipment that allows so much cost savings on the client side that part of the business that.
We'll be able to re better margins and better returns on those assets to deliver those solutions and obviously same time will likely be reducing our own cost as we work through this so I think it'll be deflationary in some ways I.
I think the value and the returns on the.
Not just the componentry, but how that component tree is part of that ecosphere.
Really widens the moat that maybe isn't there is prevalent today, but I think we'll see that widening that ultimately drives.
Better returns for us in spite of what might be deflationary in a number of other areas of the business.
Great. Thank you.
Thank you.
Our next question comes from Chase Mulvehill with Bank of America Merrill Lynch. Your line is now open.
Hey, good morning.
I guess I wanted to come back to the Capex question and ask it maybe a different way.
We think about that 1.2 billion of Capex, what's the split between DNA in CMP.
Yes Chase. This is lance I would I would say that it's very similar to the 60 40 split that we talked about between Nam and internationalism is a good proxy.
Okay. So 60% CMP is that what you're saying I don't know, 60% Danny got it okay. All right. So if you are 40% I think that puts you know sub 4% of CMP revenues, if we think about capex as a percentage of revenues.
Obviously lower than kind of what you did in 2016 on a percentage of revenues. If we look over the next couple of years in kind of call. It a sluggish modest growth North America environment, how should we think about CMP capex over the next couple of years, maybe frame it on a percentage of revenues.
Yeah look I think structurally lower is as we've described it based more on the market and the opportunity set that we see.
But we're really careful not to look we don't peg. This two per sensor revenues and other things. Because then we get sort of odd answers when we see markets growing and I don't think growth is geared that way to our capex.
Necessarily in so we will continue to focus on the best returning opportunities.
And where we see those.
But the idea that.
Going to have to move the Capex is going to move as a percentage with revenues is really not that that's not how we approach that.
Yes, okay that makes sense.
And then come in coming back to Frac, you talked about 22% less frac horsepower.
Is that the amount that you've actually retired or is that the amount that you've actually taken out of the market from an active fleet reduction and then quick one follow up to that you talked about improvement in Frac utilization in 2020 for your active fleets.
If you care to kind of quantify that how much improvement and utilization across your active fleet. You think you can get and 2020.
Well look I'll start with the first question the 22% that we described is out of the market.
Out of the market sold by the pound.
Retired.
The.
And that's done some good things for us I mean, the reality is that.
Yeah were 90% Q tends at this point.
Costs are lower our service quality is the best it's ever been.
That's how we.
View that the.
Activity I guess is the.
As we look out at the.
Balance of the year or in terms of utilization.
Part of.
Maximizing profitability of that fleet and the returns on that fleet is keeping it busy and as I described earlier and we start the year, 95% committed which is.
The best we've been in some time, so I'm encouraged by that outlook based on the fleet that we have.
Okay, Alright, Thats all have I'll turn it back over thanks, Jeff.
Thanks.
Our next question comes from Kurt Hallead with RBC capital markets. Your line is now open.
Thank you Hey, good morning foreign currency.
Thanks for that Gray run down.
I was kind of curious first foremost on the international front when you look at 2020.
Where do you think the best relative growth prospects are for for Halliburton, you mentioned that you know Asia Pac was.
A major contributor here 19, so just kind of curious on how you see the regional dynamics play out for 2020.
Yes, Thanks, Curt look I think it's again led by Asiapac.
In 2020, Europe see is continues to be strong as we get into a full year of activity on a number of the contracts we've talked about in the past.
Africa grows, but it will be a bit more choppy as it works through exploration and regulatory sort of resetting in that market.
Middle East remains robust.
But obviously starts at a fairly high point as a market itself and let them likely brings up the rear.
Okay. Appreciate that dynamic and then just want to get better understanding here on the guidance you provided for first quarter on on the margin progression foreseen pain, DNA and I want to try to get in this context for CMP.
When you look at the margin degradation on a quarter on quarter basis can you give us some general sense of how much is that related to.
The absence of the tool sales versus.
Market dynamics.
Yes, correct. This is lance.
Yes. It was it's definitely impacted by just the nonrecurring nature year end product sales in the CMP Division, which were probably up.
10% to 15% versus what we saw in 2018. So we had a good fourth quarter and our CMP division in terms of year end equipment sales.
Okay, and then can the same be said for gaming.
Now I'll, let you continue and sorry, no and that is that is obviously those margins are accretive.
So what we see replacing that in the first quarter in terms of activity largely in the resumption of our pressure pumping business in North America is coming at lower margins and so that you see the off does offset of that.
And then in the same be saved for Deeni.
Yes, same can be said for DNA, probably more comparative flattish year over year in terms of year end product sales and R&D any division.
That's great appreciate that incremental color. Thanks, guys.
Thanks Kurt.
Our next question comes from the line of Marc Bianchi with Cowen. Your line is now open.
Thank you.
Jeff you were talking about oversupply is still in the in the Frac market and with your retirements and what we've heard from the others. There has been a pretty significant reduction so far what do you think is needed from here so kind of balance the market and what do you think the timeline is for that.
Yes look I think whats.
Most important is that that attrition is really I get this question a lot and I think a quarter ago et cetera, I thought it was 20% which was viewed as high turns out.
That's right in the right into fairway.
And so that attrition is in fact occurring and the market forces are the forces that drove that attrition haven't changed at all in terms of.
Amount of sand Pops number of stages per day, all of those things that drive that attrition havent changed and so I suspect we continue on a pace since at least consistent with that.
As far as a timeline of when we see it I'm really.
You know it happens at some point.
It doesn't change the way we go to the market today and so yeah. We're so focused on delivering our strategy.
Around cost reduction in our service delivery improvement that.
So when that happens it will be terrific and we'll see a great boost from that I think in the meantime, we've got a plan to deliver solid free cash flows and.
Returns sort of in any market.
Okay. Thanks for that.
Maybe somewhat related.
We've got the guidance here for first quarter for CMP margins.
Which includes the full benefit of all the cost cutting are doing well.
Where do you think those margins can get absent any kind of pricing recovery.
For the for the Frac side of the business is there just through the self help that you're talking about a bogey that you would point to.
Over the next number of quarters.
But no I mean, I think we we've provided guidance on Q1.
Ooh strategy is something that we executed and we continue to see the value and benefit from and so we're taking a very long view of this business in the actions that we're taking.
Beyond Q1 to contenders continue to contribute and improve the business.
I think that we will continue to outperform bank, we have the highest margins today.
In North America will continue to add to that.
Great. Thanks, so much.
And that will conclude today's question and answer session I'd like to turn the call back to Mr. Miller for closing remarks.
Thank you Liz before before we wrap up I'd like to close with a few points.
First I expect that Halliburton's international growth will continue in 2020 and that the combination of capital discipline pricing improvements and technology will lead to margin expansion.
Second Halliburton will continue executing our North America playbook to maximize returns and free cash flow.
And finally, I believe digitalization will define the next decade, and Halliburton is uniquely positioned to reap the benefits look forward to talking to you again next quarter list. Please close out the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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