Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to Halliburton's first quarter 2020 earnings call. Please be advised that todays conference is being recorded I would now like to hand, the conference over to our Booth de Ya head of Investor Relations. Please go ahead Sir.
Thank you Judy.
Good morning, and welcome to the Halliburton first quarter 2020 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 Lafleur 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 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 as well as expenses related to the early extinguishment of debt.
Additional details on reconciliation to the most directly comparable GAAP financial measures are included in our first quarter press release and 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 in a period in order to allow time for others, who may be into Q.
Now I'll turn the call over to Jeff.
Oh, Thank you Andrew and good morning, everyone.
We're speaking with you today is billions of people are under some form of quarantine in their homes.
Businesses in schools are disrupted and worldwide travel is generally come to a halt.
The human an economic impact from the covert 19 pandemic is being felt globally.
At the same time, our industry is facing the dual shock of a massive drop in global oil demand coupled with the resulting oversupply.
As the world is battling the pandemic.
Hi, Thank our employees for their continued focus during these difficult times.
We are a critical part of the global energy infrastructure and an essential services the satisfied both immediate and long term energy needs.
On our customers work sites and within our facilities Halliburton people are getting the job done well, taking the appropriate steps to protect themselves than others.
Our tiered crisis response model has been rug tested in the past two hurricanes another catastrophic events.
And it is working well and the current circumstances.
Globally, our corporate crisis team monitors the evolving situation across all of our core functions.
Health and safety to IP infrastructure to supply chain and.
And provides guidance to support our local response plans.
Locally every country has reviewed their emergency response plans.
Yes them for business continuity inactivated them in alignment with local authorities.
To ensure the safety for all he must go to a work location. We've provided specific direction about how to work and the cobot 19 world and elevated cleaning protocols for our facilities and equipment.
We've adjusted shifts in rotation to maximize social distancing as well as implemented varying levels of medical screenings as appropriate.
We're maximizing remote work, where possible and are encouraging our employees and customers to collaborate virtually using information sharing tools.
Now let me cover some headlines for what was a solid first quarter of 2020.
We finished the quarter with total company revenue of 5.0 billion, a 12% decrease year over year and adjusted operating income of 502 million an increase of 18% from the first quarter of 29 team.
Our completion and production division revenues declined 19% compared to the first quarter of 29 team and operating margin expanded 170 basis points.
Our drilling and evaluation division delivered a strong quarter.
Revenue was flat year over year, and operating margin grew 450 basis points.
Our north American revenue declined 25% due to lower activity and pricing in U.S. land.
Internationally, we delivered 5% growth this quarter.
This marks the 11th consecutive quarter of year over year revenue increases for our international business.
Finally.
Free cash flow was effectively neutral for the quarter, which is a significant improvement compared to the first quarter of 2019.
And reflects our focus on driving more working capital efficiencies.
The first quarter seems like a long time ago.
But it isn't important demonstration of some key facts.
Here's what it tells me.
We make commitments and execute on them quickly.
We completed the previously announced 300 million and cost savings.
We demonstrated the ability to improve our margins and lower our cost of service delivery.
And the Halliburton team as well prepared to adjust and deliver under any market conditions.
Although we came into 2020 with improving expectations for our financial performance in the North America and international markets.
Dislocations, resulting from the pandemic and the precipitous decline in oil prices have significantly altered those expectations.
Let me describe to you what I see ahead of us.
Recognizing that the market is still in motion.
Activity is in free fall in North America, and is slowing down internationally.
We cannot predict the duration of the covert 19 pandemic impact on demand.
For the pace of any subsequent recovery.
At a minimum we expect the decline in activity to continue through year end.
The way of not experienced anything like the impact of Cove at night Ping pandemic before.
Under adverse market conditions, we know what buttons to push and what levers to pull.
We're doing so well swiftness and resolve.
Today's market calls for deeper immediate actions.
We're significantly reducing cost cutting capex and managing working capital.
I will give more detail on each of these actions in a few minutes.
We are unwavering on our commitment to safety and service quality for our customers and our focus on cash flow generation and industry, leading returns for our shareholders.
And we believe our near term actions will not only temper the impact of activity declines on our financial performance.
But also ensure that we're in a strong position financially and structurally to take advantage of the markets eventual recovery.
Before we get into the operational discussion.
Let me address a few topics I'd be critically important in the near term.
First I believe Halliburton has sufficient liquidity approximately $5 billion, including cash on hand, and our Undrawn credit facility.
Second.
In the first quarter, we successfully executed both a tender offer for some of our bonds and a debt offering.
As a result, we retired $500 million in total debt and extended the maturity for our $1 billion of senior notes out to 2030.
We have focused on debt reduction over the last few years and we enter this downturn with $2.6 billion less debt than in 2016.
We also have a very manageable debt maturity profile.
With only 1.3 billion coming due through 2024.
De leveraging remains a key priority.
We believe our free cash flow generation will be sufficient to pay down upcoming debt maturities in the normal course of business.
Finally.
Our dividend is a lever weekend whole.
Based on our market outlook and valuations.
Our board and management review the dividend quarterly will act prudently and make adjustments for the long term success of our business.
Let me be clear.
We have no intentions to increase leverage to maintain the dividend.
We also do not intend to allow the dividend to prevent us from being structurally and financially positioned to take advantage of the eventual market recovery.
Now, let me describe in more detail, what I see unfolding in the markets globally.
How we're prepared today compared to the most recent downturn.
And the actions, we're taking to adjust our business to today's market.
The market in North America is experiencing the most dramatic and rapid activity decline in recent history.
Our customers continue to revise their capital budgets downwards.
As they swiftly adjust spending levels in response to the lower commodity price.
Right now.
North American NP Capex is trending towards a 50% reduction year on year end 2020.
Since mid March.
You asked land rig count has fallen 34% and as expected to continue declining from here.
With prices at the wellhead near cash breakeven levels.
We expect activity in North America land to further deterioration during the second quarter and remain depressed through year end impacting all basins.
Our outlook for the international markets has also changed.
In addition to the collapse of oil prices.
The industry is dealing with activity interruptions due to the Corona virus pandemic.
Cobot 19 had minimal impact on our international operations in the first quarter.
But the second quarter will be different.
We are seeing restricted movements within countries.
Quarantine requirements for rotational staff.
Logistics delay due to third party personnel reductions.
And in some cases.
Entire country closures.
Different markets are impacted differently and this will lead to significant operational disruptions at least through the second quarter.
Beyond these near term headwinds.
Certain international customers are also fundamentally reducing capital spending.
Referring exploration and appraisal activity.
And looking to cut costs on their major ongoing projects.
We expect international spending to be down in the range of 10% on a full year basis.
Opex plus production decisions and the duration of the pandemic related demand and activity disruptions will ultimately determine how much the international spending declines this year.
International projects and contract structures tend to be longer term oriented.
However in the face of these unprecedented circumstances.
Our customers I, Lcs and overseas and independents alike.
Our all reassessing their priorities with some reacting more swiftly than others.
We believe the activity changes internationally will not be uniform across all markets.
We anticipate that the least affected markets will be the OPEC countries in the middle East.
Well offshore Africa, and Latin America may see double digit declines this year.
As operators in North America, and international markets look for ways to cut spending.
Pricing as a lever they're seeking to pull.
We continue to make pricing decisions based on our overall returns expectations for the business.
Given the oversupply of fracturing equipment in North America.
Pricing levels in this market, we're already at historical lows coming into 2020.
Internationally the pricing increases we were starting to see we'll take a pause.
We will work to improve efficiencies as a means to optimize costs for both our customers and halliburton.
It is important to remember they were coming into this downturn from a very different place than in 2014.
And we believe these differences prepare us better for what lies ahead.
Spending in the North America market was down in 2019.
In response, we introduced a new playbook that prioritized returns over market share.
We restructured our North America organization.
Rationalized, our real estate footprint.
Fleet at a cost out program and started addressing our fixed costs through the service delivery improvement strategy.
We clearly had momentum from these efforts coming into 2020.
Our more efficient Q 10 pumps now represent 100% of our fracturing fleets.
We also have the largest number of dual fuel and tier four diesel fuel engines in the market.
This fleet composition delivers differentiated service quality and efficiency.
And will ultimately drive the flight to quality when the market stabilizes in North America.
We closed key technology gaps and drilling and open hole wireline.
Added new artificial lift and special Kim specialty chemicals capabilities to our portfolio.
And continued to lower our costs across various product offerings.
This is taken significant technology spend.
Which is now largely behind us.
Our capex in 2019 was down year over year.
And we further reduced capex coming into 2020 to drive capital discipline across all of our business segments.
As a result.
We do not have the significant oversupply of tools and equipment in the international markets.
We have built an operating machine to be effective and successful across cycles.
Unfortunately, as we enter this downturn.
We will need to make some painful decisions.
And I am aware that this will cause great difficulty for our impacted employees.
We are implementing the following set of measures that will further reduce our costs and improve our cash generation ability as our customers continue to reduce their spending levels.
We're reducing our capital expenditures for 2022 about $800 million.
Roughly 50% from 2019 levels.
We believe this level of spin will allow us to invest in our key strategic areas.
Continuing to support our business in the active markets.
We will take out about 1 billion of annualized overhead and other costs across our entire business with most of it happening in the next two quarters.
To accomplish this.
We're streamlining our global and regional head count consolidating multiple facilities.
And removing another layer of operations management and North America.
We're accelerating our service delivery improvement strategy in North America redesigning the way, we deliver our fracturing services to lower our unit cost and improve margins and returns in the long run.
We're cutting our technology budget by 25%.
We have stopped discretionary spend across the business.
And we have eliminated salary increases for all personnel this year.
And I and other members of the Executive Committee have taken pay cuts.
Additionally, we will make variable headcount adjustments and rationalize our assets to be in line with the activity reductions we anticipate.
As we look to reduce our own input costs.
We're also renegotiating prices and terms with our suppliers.
Finally.
We will continue our efforts on working capital improvements across all three of its components.
We believe these actions are necessary given the current environment.
And we'll help protect our balance sheet and drive cash flow and returns for our shareholders.
As we steer the company through this downturn.
We remain focused on the underlying drivers of success and our long term strategic objectives.
We will continue to execute our value proposition.
Deliver value and efficiency across our product offerings and remain focused on safety and service quality.
We remain committed to being leaders in North America by delivering on our low cost service improvement strategy.
We continue to closely collaborate with our customers and partners on leveraging digital solutions to reduce nonproductive time, and improved labor and asset efficiency.
As I've stated on prior calls we're in the early innings of our artificial lift and specialty chemicals growth internationally.
And we plan to continue down this path.
We believe these businesses give us exposure to a later cycle market with long term growth potential.
We will continue to spend on technology that reduces our operating costs.
We believe this is necessary for the future success of our business.
We've been through downturns before.
As the market unfolds from here.
We believe we have the people the technology and the depth of experience to outperform our competitors.
If required we will take further actions to adjust to the evolving market.
If I have learn something from all of the downturns I've been through in my career.
It is that the industry always bounces back.
This town downturn.
Although the most severe we've seen in a generation.
We will be no different.
I believe it will reshape our industry and position at better for the next cycle.
At some point.
Returning global economic in oil demand growth.
Market balancing supply actions by key producing countries and declining non OPEC production.
Well it will likely lead to a new reinvestment cycle.
And I believe Halliburton will emerge stronger on the other side.
Now I will turn the call over Deland to provide more details on our first quarter financial results Lance.
Thank you, Jeff and good morning.
Let's begin with an overview of our first quarter results compared to the first quarter of 2019.
Today.
Total company revenue for the quarter was $5 billion, a decrease of 12% year over year, while adjusted operating income was $502 million, an 18% increase.
As Jeff mentioned.
During the quarter, we accomplished the remaining $100 million of the announced 300 million an annualized cost reductions.
In the first quarter, we recognized approximately $1.1 billion of pre tax impairments and other charges to further adjust our cost structure to current market conditions.
These charges consisted primarily of noncash asset impairments.
Mostly associated with pressure pumping equipment.
As well as severance and other costs.
In addition.
Based on the current market environment, and its expected impact our business outlook.
We recognized a 310 million dollar noncash tax adjustment to our deferred tax assets.
Now, let me take a moment to discuss our divisional results in more detail.
And our completion and production division.
Revenue was $3 billion.
A decrease of $700 million or 19% when compared to the first quarter of 2019.
Operating income was $345 million, a decrease of $23 million or 6%.
These results were primarily due to lower pressure pumping activity and pricing and reduced completion tool sales in North America.
Partially offset by increased cementing activity and completion tool sales in the eastern hemisphere.
And our drilling in evaluation Division revenue was $2.1 billion, which was flat from the first quarter of 2019.
While operating income was $217 million, an increase of $94 million or 76%.
Higher activity for drilling related services in the North Sea and Asia more than offset reduced activity and pricing for multiple product service lines in North America land and lower fluids activity in Latin America.
Moving on to our geographical results.
In North America revenue was $2.5 billion.
At 25% decrease when compared to the first quarter of 2019.
This decline was mainly due to reduced activity and pricing in North America land.
Primarily associated with pressure pumping well construction and completion tool sales.
This decline was partially offset by increased artificial lift activity and specialty chemical sales in North America land and stimulation activity in the Gulf of Mexico.
In Latin America revenue was $516 million at 12% decrease year over year.
Resulting primarily from reduced fluids activity and stimulation services across the region, particularly in Argentina.
This was coupled with decreased activity in multiple product service lines in Brazil, Ecuador and Colombia.
These declines were partially offset by increased activity across multiple product service lines in Mexico and Guiana.
Turning to Europe Africa see is revenue was $831 million at 11% increase year over year.
Resulting primarily from increased drilling related activity in the North sea.
Improved well construction activity in Russia and.
An increase completions activity activity in Algeria, partially offset by reduced activity in multiple product service lines in Ghana.
And Middle East Asia revenue was $1.2 billion, a 9% increase year over year, largely resulting from increased activity in the majority of product service lines in the United Arab Emirates, Indonesia, and Malaysia, which was partially offset by lower.
Project management activity in India.
In the first quarter, our corporate and other expense totaled $60 million and net interest expense was $134 million.
Our normalized effective tax rate for the quarter was 21%.
We generated $225 million of cash from operations during the quarter.
As anticipated working capital was seasonally a use of cash but significantly lower than the draw we experienced in the first quarter of 2019.
As activity declines globally working capital has historically been a strong source of cash and I expect a similar pattern this year.
We have a heightened focus on improving working capital metrics and are working hard to prudently manage customer credit risk in light of the current market conditions.
Capital expenditures during the quarter were $213 million.
As Jeff mentioned, we've reduced our full year capex budget to approximately $800 million.
These cuts are geared towards both our North America business and uncommitted projects internationally.
We believe our capital allocation decisions are consistent with our focus on generating cash flow regardless of the market environment.
Our free cash flow generation for the quarter was $12 million, a significant improvement compared to the first quarter of 2019.
During the quarter, we took actions to manage our debt maturity profile.
We executed two transactions a debt issuance and a subsequent tender which lowered our total debt by $500 million.
But more importantly, it also reduced our 2023 and 2025 maturities by $1.5 billion.
As a result of these transactions, we incurred a net cost of $168 million related to early debt extinguishment.
Our total outstanding debt was $9.8 billion as of March 30 Onest.
We have no current borrowings under our revolver and no financial covenants in our borrowing facilities for our debt agreements.
Now looking forward.
Our second quarter results will be impacted by the severity of the continuing activity declines in North America.
Customer projects suspensions and delays internationally.
And the uncertain duration of the pandemic related disruptions.
As well as actions related to the OPEC plus production cuts.
These uncertainties and the exact timing of our cost reductions impacting our division results preclude us from providing specific guidance for the second quarter.
We will continue to execute the measures that Jeff outlined.
In addition to the activity related variable cost adjustments, we plan to reduce annualize overhead and other costs by about $1 billion.
To achieve that we will have an associated cash costs of approximately $200 million.
These reductions will talk target all of our business lines and support functions globally.
And we expect to complete most of these actions within the next two quarters.
I will now turn the call back over to Jeff for closing comments Jeff.
Thanks Lance.
Before we close there are two important themes that I see accelerating in the depth of this downturn.
Both will be helpful. Today, but more importantly, they will create strong competitive advantages for us in the future.
First we are fast tracking the implementation of our service delivery improvement strategy in North America.
As we restructure our overall North America business.
We launched the strategy the lower the cost to the overall cost of service delivery in the U.S last year, and we will accelerate these efforts and the current market.
Next this downturn accelerates the adoption of digital technologies by our customers and by Halliburton internally.
We are far along the road to delivering the next frontier of digital solutions that will help drive efficiencies in our workforce and reduced capital investments through automation and self learning processes.
In this environment.
Digitalization will unlock the potential to structurally lower costs and enhance performance across the entire value chain.
I have never been more convinced that digital is the future and Halliburton is leading the way.
With that.
Let me summarize our discussion today.
To the Halliburton team.
Path ahead will be challenging.
But I have the utmost confidence in our ability to maintain focus and execute on our value proposition and this extremely difficult environment.
Our balance sheet and liquidity position is our solid.
And we plan to continue taking actions to strengthen them.
We know what buttons to push and what levers to pull and we will do so quickly around.
Around cost Capex and working capital.
And we will continue to proactively adjust our business to current market conditions.
We know that the industry will recover.
It may look different when it does but we believe the actions. We are taking will ensure that we are in a strong position.
Financially and structurally to take advantage of the markets eventual recovery.
And now let's open it up for questions.
As a reminder to ask a question you wanted to press star one on your telephone to withdraw your question press. The pound team. Please standby will we compile the Q and a roster.
Our first question comes from the line of selling Mckean from JP Morgan. Your line is now open.
Thank you Hey, good morning.
Yeah.
So Jeff I was hoping we can start with capital allocation in the dividend.
Given the forward outlook, the uncertainties $600 million years name on the balance sheet seems pretty useful.
I appreciate you have no intention to take on leverage to fund the dividend you, probably a pretty decent free cash this year to cover the dividend, especially with working capital benefit on a run rate basis, maybe that looks a lot harder exiting 2020 does I. Appreciate any additional comments you have about the board's decision, making on the dividend with respect to timing how to think about that.
Well look thank you Sean Yes, I've described how we think about the dividend in the prepared remarks.
And so we will review the dividend with our board would do that quarterly we have a board meeting coming up in May and we'll update you on any decisions when we get to that point.
Okay fair enough.
And then on the billion dollar cost out plan, maybe could you just compare contrast.
This initiative relative to the prior 300 million dollar program I'm just thinking about.
Very well versus fixed cost that you referenced that I think largely this is an overhead cost reduction so perhaps thats more fixed.
Maybe the split between North America, and International we agreed to get anymore detail you can offer us on that program. Please.
Yes.
Look at.
Quite a bit it's fixed costs that are coming out I guess, the comparing contrast.
You know, we took out $300 million in the fourth quarter of last year that was largely.
That was fixed costs as we approach the business I described this cost reduction similarly, because it is.
Not the variable items I guess, it's overhead is things that are fixed as things that take big steps down when you take them out you don't necessarily add them back.
In contrast to.
Crews in the equipment on location and the supplies and all of the things that go with that so.
A lot of that a lot of our strategy around North America. It really had been to accelerate our ability to make those decisions and take costs out quickly.
These types of fixed costs again.
You know its is a layer of management is.
A lot of the discretionary things that we take out that we don't that are required to add back at any point.
And I would add Sean that.
These costs as you as you asked about the split between sort of North America and international I think that these are predominantly aimed at North America.
But they also include.
International cost cutting as well.
Got it thank you.
Thank you. Our next question comes from the line of James West from Evercore ISI. Your line is now open.
Hey, good morning, guys.
James.
Jeff I wanted to touch on.
More of a bigger picture question.
Relates to something you said right at the end of your prepared comments and I certainly agree with you that the industry is going to look a whole lot difference as it gets this downturn in the next couple of quarters, while there will be interesting to watch.
All going to cause a major say gelled, which will be winter road.
The two things.
Maybe we're talking a little bit prepared comments.
Explore a little more is the acceleration of your deliveries strategy in North America, the digital transformation of the industry because those things I think are the most important for halliburton and for the industry, but frankly going forward on what the industry looks like whether it's a couple of quarters or more.
For todays that today's levels and then.
Thanks, James a fantastic question.
And the current environment really accelerates or allows us to really test the art of the possible with respect to how we work.
And digital is front and center and I can see.
When we embrace that whole heartedly as opposed to.
Incrementally.
We're able to do things quite differently in terms of less people less footprint.
Actually working more effectively in my view.
But it really does require divorcing the mind of what a lot of this grew up doing.
To make that step to Wow. This is all possible without you fill in the blank all of the things we thought were required to.
Actually execute this work and so.
Look that this this whole period is awful on a lot of different fronts, but I'm, an optimist and I think we take advantage of an opportune time like this to say, okay forget everything you thought you knew.
First and foremost service quality and safety everything else, let's go relook at given the robust set of tools that we have and a lot of these are tools that we've invented at halliburton or theyre built off of our own native cloud platforms and so from that respect that makes it very very sticky as it we come out of this.
Okay.
And Jeff are you seeing.
Breweries from because the reason, though it's early days in the down.
Or inbounds from customers around the digital offerings, we have had they already started to show it increases they look to lower their cost for new embraced as new to this new paradigm isn't happening yet.
Actually it is we've seen.
A meaningful uptick just in the last 30 days and demand for native cloud services and apps and things that would allow.
Not just working remotely, but take the same kind of cost removal that I'm, describing our customers do that when they adopt cloud technology, a lot of what landmark and our digital organization.
Has been building and has on the shelf and so it's really it's accelerated the demand.
For that and obviously necessity is the mother of demand creation in that regard.
The quite encouraging to me and it actually as I said in my remarks, I'm actually more commenced convince today than ever.
That.
Digitalization and the landmark and then the.
Broader digital platform, we have we'll just service better in future.
So thanks.
Thanks James.
Thank you. Our next question comes from the line a bill Herbert from Simon Your line is now open.
Thanks, Good morning.
Hey, Lance with regard to working capital.
If I looked at the last couple of downturns or actually the last downturn 2015.
A huge source the cash with regard to working capital harvest about $1 billion. It was front end loaded.
2016 was another 1.2 billion backend loaded.
Question is.
Is that that order of magnitude expected to be this time around the 2020 in when does the in windows.
And walk us through in terms of the so the evolution of the working capital harvest.
This year is it second half weighted or does it start to inflect in the second quarter.
Yes, Bill thanks, Thanks for the question.
Youre right historically, we have generated cash from working capital during the last three downturns.
I would say on the on the absolute amounts.
Probably a little bit different profile than particularly the 2015 comparison that you are referencing just given the fact that on an absolute basis.
Our receivables and inventory are at levels that they were.
Coming off of 2014 record level of revenue.
So thats, a little bit differ but I still expect the relative behavior to be the same.
We should continue to see as the business shrinks.
Over the next three.
Three quarters that we continue to generate cash from working capital in the unwind.
Okay, and then Jeff with regard to pulling forward the art of the possible in terms of digital automation remote operations, what's what percentage reduction do you think that would.
Result in with regard to your average crew size.
Let's don't think well I think it it could be in the range of half I mean is meaning okay that is not the cruise.
Currently criticized but it's really all of the things that are in between accrue.
And sort of the overhead as a company the.
There are a lot of steps that involve designing work and how work gets actually prepared for delivery the delivery of products and materials.
The ability to embrace.
The automation of all of that.
It is pretty meaningful I'd say crew size can't come down as well because there are few things around the crew that are required to deliver.
All of that input, but I think that more impactful part will be all of the sort of transaction friction between.
Sort of the top the organization in there.
Okay. Thank you.
Yes.
Thank you. Our next question comes from the line of Angie the data from Goldman Sachs. Your line is now open.
Thanks, Good morning, guys 400 Angie.
Good morning, Philanthropy I'll start with I know, it's impressive to see the debt reduction then I know, it's a focus of both you and job. So maybe you could talk a little bit further about that stops the Kentucky around shoring up your balance sheet.
Steve reduced to 509 pushed out maturities I think you have another 685 do and 21, there maybe you could talk about trending maturities and just thoughts around free cash flow.
Yes, Asia as weak as we said sort of on the prepared remarks, our expectation is that we retire the 685 that comes due next year through the free cash flow generation that we would expect to achieve this year.
That's roughly $200 million coming due in February of next year and the remainder in November.
And so we think that we've got ample capacity to pay that down I mean, the focus philosophically for jeopardize that continue to reduce debt.
At this company and that's what we're going to continue to chase.
Okay. Thanks, and then maybe Jeff I mean, you made remark in your prepared comments around flight to quality and clearly we've seen this bifurcation in the markets, maybe you could talk a little bit about the flight to quality in North America, and what you're seeing so far our you've seen that actually playing out in Q2.
Or is that bigger factor when you see a recovery I guess incremental color around CMP and do you need when we go into Q2 in Q3 in the taste the downturn as we go through the rest of the year.
Yes look I fully expect we see a flight to quality, but.
Area at this very moment.
There's just not a lot of thought going into anything other than reducing.
Capital spend right now and so in that kind of environment.
There isn't much flight because there's not a lot of new things being added.
Fully confident and our operating.
Capability and the quality of the service, we deliver and we maintain that front and center and fully expect the sort of after the industry is able to take a collective breadth.
We will be.
Generally well positioned and see the same flight to quality that we've always see.
Thanks, I'll turn it over.
Thank you. Our next question comes from the line of Scott Gruber from Citi. Your line is now open.
Yes, good morning.
Good morning.
How should we think about your strategic initiatives.
And expanding your Nash international share and list chemicals, Directionally formation evaluation in light of the Capex cuts and market conditions.
Well, we look we think thats an important.
Avenue of growth, we bought those businesses to do that.
The.
The early work around trials in a number of countries continues on.
Doesn't take much capital to get that going and continue that strategic.
Push into those markets, albeit I don't think we'll see the same growth that we had anticipated.
It's more a matter of.
Pushing those services are delivering those services through the existing infrastructure that we have so.
To continue that strategic initiative is one that we bought those businesses in order to do that.
Obviously, we'd like to see better market for those services as we do this but it doesn't change.
The fundamental interest and.
Actually opportunity to continue to do the thing is required to grow those businesses takes many steps to grow those businesses internationally and we don't have to stop those.
Got it.
And just circling back to its Andy's question I know the outlook.
Internationally is very opaque.
But could you see the the vast majority of that annual activity.
Into Q and then the second half's, maybe a more flattish just given the.
Fading impacts uncoated offset by.
Growing impact from the customer Capex reductions, where we likely to see activity continued to to step down in the second half of the year.
Yes, I mean, I think we will see.
Most of the U.S. impact in Q2 I mean.
Thats just this moving so quickly that.
No our view on.
The U.S. says that we see dramatic reduction in Q2, though not able to call the precise number or timing.
And then likely.
Kind of works off the rest of the year the.
Flattish the international market reaction little differently, and I, just say that because taking a frac holiday is a lot different than taking a deepwater rig holiday. They just happened at different paces.
And so.
We've got a view of slowing activity internationally it doesn't necessarily slow at the same pace that we see it.
Just because they pick a date is like we're going to stop on X state, but it's not today, it's at a point in time and so I think that on wind is over more than just Q2, albeit the cove at 19 disruption part should get behind as quickly.
The same operators that are conserving capital in the us in many cases or the operators that we'll look to conserve capital internationally.
End of season, if we if we had the grade level of how affected or impactful in overseas would be less impacted.
Probably iOS these marceau internationally over the balance of the year, but all of that.
We'll have better visibility to that as we go through Q2.
Appreciate the color John Thank you.
Thank you.
Thank you. Our next question comes from the line of Chase Mulvehill from Bank of America. Your line is now open.
Hey, Thank you good morning, everybody.
Morning.
Okay.
So I guess, if you can kind of come back to the us a little bit obviously twoq use.
Going to take a significant step down, but if we think about your overall strategy for us on sure during this downturn.
Do you think that you maybe focus a little bit more a little bit less on market share. This downturn relative to kind of how you were thinking a couple of months ago.
Look I, our playbook doesn't change going into this.
Current environment by that I mean.
Returns.
Our front and center, albeit challenged.
But we're not chasing market share don't intend to I don't think that I don't think that the dynamics have changed to the things that formed our view on our strategy for North America haven't changed the bigger full cycle type things and.
And so therefore.
We're going to manage our cost.
We're going to look at the returns on equipment, the best utilization of equipment, whether that's the stack it or work it.
But we don't believe that.
Anyone marking below EBIT or EBITDA is not going to be successful in a long term and we plan to be very successful on long term and so we haven't changed our view there.
Like the quality May result in more market share at some point, but trust me that is not that we don't go to market thinking about that.
Right, Okay that makes sense I can kind of the switch over to international a little bit and this is kind of been touched on throughout the today's session but.
You talked about international Capex, CMP, capex being down about 10% year over year.
Okay, plus members, you're talking about actually holding 6 million barrels a day production.
Offline basically April 2022.
So if they end up doing this can can you talk about you know the medium term activity outlook for international.
Last cycle, we were down kind of 40% you know it seemed like going on international drilling and completion spending do you think that we'd be better or worse, all said and done if OPEC plus does hold this amount of production offline through 2022.
Yes, Chase look I think thats, the kind of clarity, we will likely get as we work through Q2.
But it's it but just don't with respect to OPEC plus I think overall, they will be more resilient than the rest of the market almost independent of.
What impact.
The recent agreements have or don't have on activity.
Yes, the market never really recovered from 16.
Other than nominally so that.
The hard to follow the same distance though.
Like I said I think we'll get that clarity as we work through Q1, I said in the range of 10% simply because.
It could be at zero, plus or minus something around that band.
I think we've got.
We'll see we'll have a better sense in North America as we get through Q2, I think we'll have visibility but without.
All of the certainty as we get through Q2 again, just because those are slower developing the decisions are slower developing internationally to degree just because they have to there's too many.
Partners Nations governments things involved too.
Move at the same pace that North America nimble independent operator can move.
Alright, Thats all have thanks, Jeff I'll turn it over.
Yes.
Thank you. Our next question comes from the line of David Anderson from Barclays. Your line is now open.
Hey, good morning, gentlemen.
No.
Question on sort of I certainly appreciate the lack of visibility in North America, only the surprised anybody but your customers are all in various states of health as well if I think what the majors versus the MPS versus the privates that are out there.
Can you just talk about how those discussions are going and maybe the differences that you see in how those customers are behaving now I know it just seems to just seems like to us on the other side, it's all sort of coming out as fast and furious, but if you could just maybe segregate how those different customers are behaving and what they're talking to you about it'll be very helpful.
Look I think that.
They're all behaving in the very near term quite similarly.
Yes, I think they all have a view.
And I'm not going to differentiate between the.
Financial position of the market or the different parts of the market, though I would say that's an incredibly aggressive group of competitors.
My clients I'm talking about in North America and.
They are going to each aggressively act independently of the dialogue with them at least with May has been.
Yes disappointment over the near term, but all.
The bit firmly in their teeth looking ahead to what it looks like on the other side.
And the dialogue is always that we're going to need to be super competitive and worked with Albert and when we get to the other side we've had many discussions about.
What does Erie recovery or how do we.
What do how do we.
Implement the things we're talking about on the other side so.
That's generally been a consistent conversation.
With all customers.
In a separate question on the International side, you had said in your remarks, you. It sounds like the direct impact from the pandemic as MOCVD, mostly international operations supply chain kind of quarantines, having trouble moving people around.
Are you seeing the same thing on the U.S. I haven't really heard that much about that or is it just the fact that to equip activities phones. So fast that youre not really see is somewhat irrelevant can you just talked about kind of the more direct impact. So this pandemic to your operations on the U.S. So yeah, we see less of the direct impact just because the workforces.
All us.
Most of the travel can be done and a car not on a plane.
So most of the supply chain is North America based it's a very little that we actually source outside the U.S.
And so I think thats the reason more than any other that we don't see the disruption in the U.S., obviously, we see the commodity price impact in the us.
But internationally.
Even if it's not a U.S. based workforce, we have a very globally based workforce.
The 140 nations that work for Halliburton as most of those international so thats, where we get into some of that.
Supply chain well people interruption.
So let me compliment our international folks and operations I mean, they ramped up very quickly.
The interruptions to this point have been.
Ill.
Very limited.
Because those that group is literally sprung to action to manage I just can't tell you how many people moves and.
Supply chain moves that theyve overcome so does that give you a little bit of comfort in the second part of the year for international that if you are more impacted today from the pandemic as that easily maybe that gives you a little bit of help in the back part of your.
Well I think the coded interruption party gives me a lot of confidence around our ability to find an operating rhythm.
Which our team typically does.
And does quite well.
But I would say that that does the commodity price impact is.
What we will see as as I described earlier, Dave working through.
Q2.
And what it might main again I think in the in the range of 10% between our initial thoughts had been up and now we're talking about down 10% or so in that range.
But I think that clarity, we really don't get that clarity until it.
Settles then.
I appreciate thank you.
Yes.
Thank you know our next question comes from the line of Kurt Hallead <unk> from RBC. Your line is now open.
Hey, good morning, everybody hope everybody as well. Thank you Kurt Yes, we are thank you.
Awesome Awesome, So Oh, Jeff you spent quite a bit of time on the last conference call talking about the digital dynamic obviously, a reference again and that besides it today.
I think last time, we had a discussion you indicated maybe digital dynamic might not have very.
Near term big near term impact on revenue generation. So just wanted to kind of touch base again and given all the disruption that's happened in the industry. Given the commentary you made about number of different discussions now being had and rethinking of reshaping the industry going forward.
Any any updates for any thoughts on on how much revenue digital could potentially push you know.
Whether it's this year or whether you think it's going to get accelerated as we go into into next year as well.
Well look I think it accelerates as I've described I don't think any revenues accelerating at this very moment, albeit we are saying.
A meaningful uptick in new users just over the last 30 days as I said in our I energy cloud, which is in meaningful.
But overall hard to describe revenues up.
In a meaningful way at least right now.
That said, though the ability to rule reduce cost by implementing these things isn't the here in the now I mean that is like here in the now this week, having an impact and so I think the.
Yes, the ability for example on our integrated projects as we.
This accelerates the acceptance by customers in a demand even by our own people to implement those tools that demand rigs work remotely all of those are tools that we've been building over the last several years, we've implemented a more we've talked about them.
In the North sea with.
After BP and some others, we've been quite vocal low data with many others, though it's hard to look at this set of tools today and not ask yourself why am I not using those tools today and so I'm really encouraged about.
The pace, we will see.
I think we'll actually be though.
See his impact will be still over the next few years as that continues to grow but the existing tools get adopted quite quickly I think in this market.
That's great. Thanks, Thanks for that color, just and maybe a follow up here for Lance.
You know in prior cycle downturns typically the decremental margin associated with.
With this down cycle could be anywhere in let's just call it 40% or so.
I know you guys burned given a specific guidance and I appreciate that dynamic, but just trying to think through this that's element if we're coming through this down cycle that kind of lower price points.
For Us Frac.
Didn't really kind of get the same pricing on the international dynamic through this last upturn.
Should we still be thinking about maybe baseline of 40% Decrementals.
Or should it be lower and then in that same context, once we come up with that decremental dynamic I'm, assuming we add back a billion dollars that cost savings to whatever we calculate is that when does that a fair way to think about it.
Yes, I think it is a fair way to think about I will try to pick an exact number in terms of decrementals in this cycle, but what I will tell you is that we're taking out costs now.
To do a those decrementals them to soften those decrementals throughout the full cycle of this downturn I mean, that's the that's the purpose that's what we're aiming towards.
That comes with a form of lowering our unit costs and ultimately doing everything that we can to improve our operating leverage.
So yeah, I mean, I think that the way that you're thinking about it.
If you if you had an assumption around decrementals.
The the fit the overhead and other costs that we announced.
The $1 billion, which is in addition to the 300 million that we've already taken out in the fourth quarter and first quarter of this year.
Fourth quarter of last year first quarter of this year.
We expect those to be impactful and to soften the the decrementals in this downturn.
That's great Alright appreciate that thank you.
Thanks Kurt.
Thank you that concludes our question and answer session for today I would like to turn the conference back over to Jeff Miller for closing remarks.
Yes, Thank you Gigi, but before we wrap up the call I'd like to leave you with a few closing comments.
First I think the halliburton employees for their dedication to safe reliable service through these difficult times.
I have the utmost confidence in their ability to deliver our value proposition under any conditions.
Second our balance sheet and liquidity position are solid and we plan to continue taking actions to strengthen them.
We are taking swift actions to address cost Capex working capital and we'll continue to proactively adjust our business to current market conditions.
Finally, we would we know the industry will recover and believe the actions. We're taking will ensure that we are in a strong position financially in structurally to take advantage of the market's eventual recovery.
Look forward to speaking with you next quarter Gigi Please close out the call.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining and have a wonderful day.
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Mhm.
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