Q2 2020 Halliburton Co Earnings Call
I'd now like to end the conference, which I do say a head of Investor Relations. Please go ahead Sir.
Thank you Liz.
Good morning, and welcome to the Halliburton second 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 are Jeff Miller, Chairman, President and CEO and last Leffler CFO.
So for 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 2019 form 10-Q for the quarter ended March 30, Onest 2020.
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 second quarter press release and can also be found in the quarterly results impressions presentation section of our website.
After our prepared remarks, we ask that you. Please limit yourself to one question and one related follow up your into Q and a period in order to allow time for others, who maybe into Q.
Now I'll turn the call over to Jeff.
Well, thank you have moves and good morning, everyone.
The second quarter of 2020 is now behind US It was a tough one for many industries.
Including the oil and gas sector.
Global pandemic, and the resulting collapse in demand that up and as many businesses.
And as economies around the world emerge from like balanced the path forward remains uneven and uncertain.
I'm grateful for our employees focus dedication and perseverance during these difficult times.
Employee safety is our top priority.
We continue our efforts to take the appropriate measures to provide a safe working environment for everyone.
Hope at 19, as altering our everyday lives and business operations and it is important that would you not let our guard down.
Despite this distraction.
Our safety performance is the best it has ever men.
With our total recordable incident rate improving more than 20% since the end of last year.
There are three key areas I will address on the call today.
First our solid second quarter performance, demonstrating a significant reset that improves the earnings power of our business. Despite the severity of the activity collapse.
Second.
The market and business outlook for the second half and full year of 2020.
And finally, what we're doing today to make sure that halliburton powers into and wins the eventual recovery.
The global activity collapse in the second quarter was swift and severe.
Much worse than anticipated.
The U.S. average rig count for the quarter declined 50% sequentially, while international rigs dropped 22%.
With absolute global rig count thinking to the lowest level in recent history.
Halliburton's response to the market disruption was equally swift and aggressive.
As I will discuss in a few minutes our organization responded with a tremendous sense of urgency.
Let me cover a few headlines related to our financial performance.
Total company revenue was $3.2 billion and adjusted operating income was $236 million.
Our completion and production division revenue of $1.7 billion was impacted by a drop in market activity in the low teens in international markets and about 70% and U.S. land completions.
Despite these headwinds.
CMP delivered a solid operating margin of 9.5% and the second quarter.
Our drilling in evaluation division revenue of $1.5 billion was down largely in line with lower rig count activity globally, delivering operating margin of 8.3% and the second quarter.
The speed and effectiveness of the cost actions that we have executed helped minimize the sequential decremental margins to 14% and CMP and 16% and DNA.
Revenue for North America declined 57% sequentially.
With our CMP and DNA divisions, outperforming the completions and drilling activity declines respectively.
International revenue was down 17% sequentially.
Outperforming the rig count decline.
And finally, we generated over $450 million and positive free cash flow in the second quarter.
As reflected in these results.
Aggressive cost actions are important part of our earnings power reset.
As you recall were removed 300 million and cost over the prior two quarters.
In April we announced an additional $1 billion an annualized cost reductions.
I'm pleased to report today that these actions, which are largely permanent changes to our business are 75% Doug.
I expect the remaining cost reductions, which are mostly aimed at our international business and real estate rationalization to be completed by the end of the third quarter.
Let's now discuss our expectations for the second half of 2020.
Internationally, we anticipate drilling activity to continue to decline modestly.
Completion stay resilient into year end.
The activity changes have not been and will not be uniform across all international markets.
On a full year basis, we expect activity in the OPEC countries in the middle East and the Norwegian sector of the North sea to be more resilient, while Latin America Africa declined sharply.
Some customers are deferring new projects, most notably in the offshore exploration markets.
Due to the deeper and longer pullback in Latin America.
We now anticipate a mid teens decline in international customer activity and spend for the full year.
In North America land.
Some green shoots of completion activity our emerging.
But I would characterize this as the start of a meaningful recovery.
After customers bring back shut in production and as Debbie a T.I. remains range bound around $40, we expect to see modest uptick in completions activity during the third quarter.
Followed by the usual seasonal deceleration at the end of the year.
Drilling activity declines have slowed and we believe the rig count should find the bottom sometime in the third quarter.
But a meaningful inflection point in drilling seems further out.
Our full year customer spend outlook for North America remains unchanged at approximately 50% down compared to 2019.
With Gassier basins outperforming the oilier ones.
Further demand weakness from a slower economic recovery or multiple ways of cobot 19 related activity shutdowns present downside risks to our outlook for the remainder of the year.
Though we believe positioning our company to ride out those event should they occur.
It is not possible to predict the impact that they may have.
Regardless as demonstrated this quarter.
Expect halliburton to outperforming the market.
Under any conditions.
As we look into the future.
I believe the international and North America markets will present opportunities for Halliburton.
Although the timing of commodity price recovery remains uncertain.
We are taking the necessary actions to thrive in the current market and to prepare halliburton to win the eventual recovery.
International producers have the opportunity to regain market share as a result of declining us production.
This should translate into healthy activity levels internationally.
As oil demand recovers.
International shorter cycle barrels will likely fill a higher proportion of future incremental demand requirements.
As economic growth returns.
Expect the key producing regions to maintain productive spare capacity. So they can quickly meet demand.
Offshore longer cycle barrels and new exploration activity will likely be the farthest out in terms of incremental contribution to the supply stat.
Today, we have an excellent international business.
Both in terms of geographic footprint.
Technology portfolio.
Great Corona virus, our international business grew revenue every quarter for almost three years outperforming our largest competitor and was on the road to meaningful margin improvement.
International regions contributed nearly half of our revenue in 2019.
They are also historically more resilient on margins demonstrating the strength of our diverse business.
Here's how we are preparing to when the recovery internationally.
We are driving adoption and expansion of our latest technologies in the international markets.
Our star logging, while drilling tool has seen a two and a half times increase and its adoption over the last year, even though it is one of our premium offerings.
Our cerebral in bit sensor package provides a high speed look at data captured directly from the bit.
Its international adoption has doubled this year compared to the first half of 2019.
We successfully completed customer qualifications and are currently deploying the latest wireline tractors and DSP pumps in the middle East.
We are growing in monetizing our digital offerings.
The improved performance and efficiency and allow us to introduce new commercial models for all parties share in the benefits of our digital technologies.
The Aker BP project in Norway is a demonstration of a customer successfully adopting digital technology to achieve best in class performance.
We have collaborated with our alliance partners to deploy digitally enabled new technologies and innovative ways of working.
Our contract structure for all Alliance partners benefit from these successes fosters a collaborative culture and drives further performance improvement.
We increased rate of penetration by 88% over the course of the well campaign and a third of the wells we drilled on a specific prospect we're in the top decile of the industry benchmark for drilling speed.
We made great strides in the digital transformation of the well planning cycle rapidly working towards the goal of planning a well on a day.
We applied digital three D. inversion.
Helping the customer improve their reservoir understanding.
This led to re planning of a whole reservoir section.
And potential incremental reserves for the customer.
We're also advancing alliances with key industry players.
Both within and outside of the oil and gas sector.
We recently announced Halliburton and technique FMC collaborated to create Odyssey.
The world's first distributed acoustic sensing solution for subsea wells.
This collaboration strengthens our digital capabilities and sub sea reservoir monitoring and production optimization.
We recently signed a five year strategic agreement with Microsoft and Accenture to advance Halliburton's digital capabilities in Microsoft as your.
This is an important step in our adoption of new technology and applications.
Enhance our digital capabilities and customer offerings drive additional business agility.
And reduce capital expenditures.
We're also taking actions not only to thrive in the current market, but to best position our business in the future.
Streamlining our cost structure as part of a continuing efforts.
Reduce our fixed costs.
And improving components of our working capital through a strong focus on managing collections deploying digital inventory planning solutions and extending vendor payment terms.
As oil demand recovers.
I expect the international business will continue to be a more meaningful contributor to our revenue going forward.
I believe that the actions we are taking provides the basis for margin expansion and higher free cash flow conversion internationally in the next upcycle.
Turning to North America.
We believe that North America production is likely to remain structurally lower in the foreseeable future.
And have slower growth going forward.
The shrinking demand for shale oil and limited access to capital markets. The inevitable rationalization will continue.
We expect to see a more disciplined market was stronger operators and service companies.
The activity declines and intra year cyclicality over the last two years.
Let us to change our approach to this market.
But what has not changed is our commitment to the single largest oil field services market.
Into our leadership position in it.
While the North America market will be structurally smaller.
We believe that it will be more profitable for us.
Our service delivery improvement strategy lowers our fixed and services costs.
And we'll drive higher contribution margin with the goal to make Halliburton.
Most competitive from a cost structure perspective.
This strategy has resulted in sustainable changes to how we organize and execute everyday in the business.
And positions us to deliver higher profitability and free cash flow in North America.
Our playbook is clear.
Returns and cash generation matter more than ever.
And growth for the sake of market share is the thing of the past.
We believe that our size and scale combined with our ability to quickly respond to changing market conditions are strong advantages for us.
Helping to drive the unit cost down and enabling us to capture work across multiple basins and resource types.
The 1.3 billion and cost cuts a combination of the 300 million and prior cuts and the $1 billion and further reductions are largely aimed at North America.
Let me, let me remind you what we've done to reset the earnings power in this key market.
We are changing the fundamentals of how we deliver our services.
And I expect this will drive a higher contribution margin and lower our fixed costs.
We reduced our maintenance cost per horsepower hour by over a third compared to the 2019 run rate by redesigning, our maintenance and value engineering processes.
This has been scale test it is a permanent change in how we execute our operations and is independent of the market activity levels.
We've also made permanent reductions to our workforce.
We have flattened our North America organization.
Removing layers of management.
We are using digital and remote operations to reduce the number of Frac engineers required to monitor jobs by establishing real time operation centers and using cloud based solutions to modernize data flow between the rig site and the back office.
We are reducing our real estate footprint by over 100 facilities.
Which not only removes costs that fits with our digital and remote operations strategy.
In addition to the strategic changes.
We will continue to take advantage of our unique competitive strengths.
We offer a full suite of oilfield services through 13 product service lines in North America.
We will continue to emphasize our non frac revenue streams, resulting in a more balanced business portfolio.
We continue to deliver differentiated technologies across our product lines.
Many of them using advances and automation and digitalization.
These technologies, either lower our cost or improve production results for our customers.
Finally and critically.
None of the improvements internationally and in North America.
Happened without are fantastic competitive and committed team focused on achieving all of these objectives and protecting the gains we make over time.
Turning to capital spending.
2020 will be the second year in a row that we have significantly reduced our capex.
Which will largely be directed towards our international business.
Because we size our capital budget based on a committed project pipeline in anticipated returns.
We believe that this year just like in 2019.
This capex reduction will not hamper our ability to outperform the market.
We will continue to exercise thoughtful capital allocation to the best returning opportunities.
The capital intensity of our business has come down.
And as we think about the future.
We projected capex spend as a percentage of revenue will be closer to 5% to 6% versus the historical norms of 10% to 11%.
There are several reasons why we were able to drive this change and positively impact our free cash flow going forward.
We now build our equipment cheaper and at last longer.
Advances and sensing technologies and material sciences are lowering the total cost of ownership for our tools.
Design improvements such as component modularity make asset velocity better than ever.
This means we need to build fewer tools to support the same level of business.
For example.
The I crews drilling system has modular components and standardize electronic inserts for all tool sizes.
Allowing for 20% better asset velocity.
Digitalization reduces our capital footprint.
We're removing equipment from location and replacing costly hardware with software solutions.
We do not anticipate large technology recapitalization programs similar to the Buildout of our leading Q 10 pumps and the increased drilling systems.
And finally.
The North America business now has structurally lower capital requirements. It is a mature market and frac job intensity is platte telling.
The Halliburton I've just described to you is charting a fundamentally different course.
The growth in digital technologies, the position of strength and the international markets.
The sharper approach to North America.
And a lower capex profile.
All of that comps for the hard work that we've been doing over the last few years.
We're not waiting for an up cycle to drive significant free cash flow and returns for our shareholders.
We believe that the strategic actions, we're taking today will further boost our earnings power and free cash flow generation ability as we power into and when the eventual recovery.
Now I'll turn the call over the last to provide more details on our second quarter financial results Lance.
Thank you, Jeff and good morning.
Let's start with a summary of our second quarter results compared to the first quarter of 2020.
Total company revenue for the quarter was $3.2 billion and adjusted operating income was $236 million, representing decreases of 37% and 53% respectively.
In the second quarter, we recognize $2.1 billion, a pre tax impairments and other charges to further adjust our cost structure to current market conditions.
These charges consisted primarily of noncash asset impairments, mainly associated with pressure pumping equipment and real estate as well as inventory write offs severance and other costs.
As a result of this charge, we realized a 49 million dollar reduction in depreciation and amortization expense in the second quarter.
This impact is reflected in our division results with approximately two thirds associated with our CMP Division.
And the remainder related to our DNA Division.
We expect our third quarter, depreciation and amortization expense to be approximately $225 million, reflecting one month of additional impact.
As Jeff mentioned by the end of the second quarter. We also accomplished approximately 75% of the annualize $1 billion and cost reductions.
And when we intend to complete most of the remaining actions by the end of the third quarter.
The cash costs associated with the various cost actions in the second quarter was approximately $180 million.
We anticipate that we will incur an additional cash cost of approximately $60 million in the third quarter as we continue to make further structural adjustments.
Moving to our division results.
Our completion and production revenue was $1.7 billion a decrease of 44%.
While operating income was $159 million a decrease of 54%.
These declines were largely a result of a decrease in pressure pumping activity globally.
Primarily driven by Us land and Latin America.
Coupled with lower artificial lift activity in us land.
These were partially offset by improved completion tool sales internationally.
Our drilling and evaluation revenue was $1.5 billion a decrease of 27%.
While operating income was $127 million a decrease of 41%.
These declines were primarily due to a global reduction in drilling related services and lower software sales internationally.
In North America revenue was $1 billion, a 57% decrease.
This decline was driven by reduced activity in us land, primarily associated with pressure pumping well construction artificial lift and wireline activity, coupled with reduced activity across multiple product service lines in the Gulf of Mexico.
Latin America revenue was $346 million, a 33% decrease resulting primarily from decreased activity across multiple product service lines in Argentina, Colombia, Brazil, and lower software sales in Mexico.
Turning to Europe Africa, CNS revenue was $691 million, a 17% decrease resulting primarily from reduced well construction and pressure pumping activity and lower software sales across the region.
This was partially offset by increased fluids activity and completion tool sales in Norway, and improve cementing activity and completion tool sales in Russia.
In the Middle East Asia Asia region revenue was $1.1 billion, a 10% decrease largely resulting from reduced activity across the majority of product service lines in the middle East.
In Malaysia and India.
Partially offset by improved drilling activity and completion tool sales in China and Kuwait.
In the second quarter, our corporate and other expense totaled $50 million and this amount should serve as the new quarterly run rate for the rest of the year.
Our interest expense for the quarter was $124 million.
For the third quarter, we expect it will be closer to $130 million.
Other expense for the quarter was $48 million, primarily driven by our foreign exchange exposure and currency weakness in Argentina.
Looking ahead, we expect it will be approximately $30 million for the third quarter.
Our normalized effective tax rate for the second quarter was approximately 25% driven by certain discrete tax items and a lower earnings base.
For the third quarter and full year, we expect our effective tax rate to be approximately 24% and 20% respectively.
Capital expenditures for the quarter were $142 million and our full year 2020, Capex estimate of $800 million remains unchanged.
Turning to cash flow, we generated $598 million of cash from operations during the second quarter.
As anticipated working capital was a source of cash.
As activity declines globally working capital has historically been a strong source of cash and we expect to see continued benefits from working capital for the rest of this year.
Free cash flow generation for the quarter was $456 million.
Our year to date and expected earnings performance for the remainder of the year combined with working capital benefits and lower Capex should result in full year free cash flow of over $1 billion.
Finally, while we remain cautious about the forecasted pace of economic recovery and the potential for additional cobot related shutdowns.
Let me provide you with some comments on how we see the third quarter playing out based on our outlook.
Sequentially, we expect overall company revenue to decline low single digits in the third quarter.
Lower average rig activity across most regions will impact our DNA division, while modest completions activity improvement should drive CMP division revenue to be flat to slightly up.
The full quarter benefit and continued execution of our cost reductions should offset the impact of lower activity on our profitability.
As a result, we expect to deliver higher sequential operating income and modestly higher margin.
Let me now I'll turn the call back over to Jeff.
Thanks Lance.
To sum up our discussion today.
Our second quarter performance in a tough market demonstrates our organizations ability to execute swiftly and aggressively and we expect to complete our remaining cost actions in the third quarter.
We have an excellent international business and is ready to deliver margin expansion and higher free cash flow conversion in the next up cycle.
The actions we have taken in North America.
Including our service delivery improvement strategy, we believe will enable us to have higher profitability and free cash flow even in a structurally lower environment.
We are moving full steam ahead with the deployment of digital technologies for our customers and internally.
And finally.
Halliburton is charting a fundamentally different course I believe the strategic actions. We're taking today will further boost our earnings power and free cash flow generation ability as we power into and when the eventual recovery.
And now let's open it up for questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
Our first question comes from James West with Evercore ISI. Your line is now open.
Hey, good morning, guys foreign James one James.
Congrats on the excuse me.
Quarter here.
Yes, you talk about this shorting fundamentally different course, and I think it's definitely appropriate we have a visitor.
Fulfilled the think along with your vision for the future dual field and course digital lower capital intensity higher return droll.
Part of that strategy could you maybe talk about kind of where you or in the various ports. So of that journey. Both the the digital side. The I was at the cost structure was North America before long you talked with that maybe the international and the technology delivered.
That will thanks, James and again, when I look through the noise of the covert disruption and industry consolidation and rationalization.
But clearly we do focus on.
What is that due course and.
We are working on those things right now I talked about a number of mid my commentary but.
We are focused on.
Rolling down on the technology, that's important drilling I crews earthstar cerebral.
Digital growing our lifting chemicals businesses, which I described in the commentary and then feeding that technology into our fantastic International business.
Finally, delivering on North America service delivery improvement strategy, while at the same time, demonstrating structurally lower capex on.
Built on capital efficiency.
In an organization that executes under any conditions. So yes, we are charting a different course.
Progress along digital art, we've talked about each quarter different things that we're doing we're making terrific project progress around Halliburton 4.0.
Very good about the kinds of contracts were signing today and the work that's being done behind the scenes to continue to advance set and obviously you saw some of our announcements with partners this quarter.
Okay. So you feel good about the have.
Your charter didn't hear what about on the customer side I mean, it seems to me that it is fundamentally different mindset from the customers as well.
What's their approach with their adoption of these new technologies to deliver digital side. How is that progress soon is there or the impediments to change now or are they really aligning with kind of your view host shoes.
Look at that I've always said that take that digital has to evolve right. Its something thats built out over time and.
And it's not often with partners and so we've talked about our partners, but yes, there so appetite for absolutely and I think that okay. What I would let me.
Want to think about it in terms of reservoir drilling and production those are the bikes that can be digested today, and so thats why when we talk about.
Progress and the things that we're doing we're doing them and those sort of silos not because we view them long term a silos, but because that's the way they can be digested right now.
Yes.
Okay. Thanks.
Our next question comes from Angie Sedita with Goldman Sachs. Your line is now open.
Thanks, Good morning.
Really impressed since coronary unbelievable the numbers, it's good for kudos to you guys.
International markets, if you touched on job really important for growth and do you highlighted some of the initiatives there, but can you talk a little bit about cost cutting opportunities in the opportunity to further improve margins, obviously TV margin kind of nice move in Q1, but can you talk about additional efforts there on the cost cutting side and then.
No. There is a focus on generating more free cash flow out of the international markets. So maybe it is over 50% of your revenues maybe talk about further Bob International.
Yes, Thanks, Angie look I think we're positioned in the right markets.
The strong markets.
Got the technology uptake, that's so important in those markets.
And then what we're doing around.
Lowering capital efficiency are improving capital efficiency.
Play straight into that and so.
We expect that we will continue to see.
Progress in those markets and.
And they will be stronger over time.
Okay. So maybe talk a little bit about the evolution here in your Capex profile and I think that's really shown through your 19, and 21 and become a lower capital intensive company and really rethinking the us land market. So maybe can you talk a little further about that.
Capex profile on how you're looking at the market differently, particularly in the us and the long term ability to generate more cash flow.
Free cash flow, yes. Thank you the.
When I think about.
The type of equipment, we're building and.
Actually using equipment more efficiently lowering the cost of that equipment.
Those are all the kinds of things that we look at obviously, we're focused on improving returns using our digital capabilities to eliminate cost I mean, we've removed.
Roughly a 100 facilities.
We only remove 100 facilities by changing the way we work dramatically. So that it just takes less capital and that plays into everything from maintenance to where people work et cetera. So thats sort of a north America view as those same skills and capabilities are applicable everywhere in the world.
And so I expect us to continue to.
Drive cost out of our business and that's really our.
I will talk about charting a different course.
Yes, physical international strength.
And then a leaner organization that drive technology and efficiency and I think those leaner and efficiency and the technology applications will be driving cost out all of the time, including internationally.
Great. Thanks, Jeff I'll turn it over.
Thank you.
Our next question comes from Bill Herbert with Simmons. Your line is now open.
Okay on local couple of questions for you on cash flow for stable.
Do you expect.
The working capital harvests in the second half the.
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Well.
Yes, let me address the first part of your question.
Which is I think the working capital unwind in the momentum in the second half of the year.
Clearly we had a strong.
Cash flow associated with the unwind and working capital in Q2.
I suspect that that momentum continues into Q3 in Q4 may not be a strongest because we had such.
With the revenue declines just in the course of Twoq, you and the unwind around receivables and that offset by payables.
It was good to see the organization continues to be really efficient on how we continue to wring out.
The cash flow generated for working capital.
But may not may not be as strong as the third quarter, but I still expect momentum to skews me the second quarter, but I still expect momentum from the unwind to continue to incur to occur in Q3 and Q4.
And can you repeat the second question I think you are talking about administrative expenses, but again bills kind of hard to pick you up.
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In early November.
I guess, what Biden is talking about is the 28% corporate tax rate I'm, just curious as to whether were with where are your your your tax shield net operating losses.
Losses at such right do you expect to be equal.
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No no we don't Bill I mean, we've got we've got certainly we do have the Vienna wells.
Associated I mean look theres always other ways it Albert and continues to pay tax cash taxes.
But at the federal tax level, we expect that will have.
The tax shields from renewals.
Okay.
Thanks Bill.
Our next question comes from Sean Meakim with Jpmorgan. Your line is now open.
Thank you good morning.
Good morning, Sean.
The Decrementals were very impressive huge difference compared what we saw in 2015 26, Steve and I was hoping we could just get a better sense of the run rate for CMP going forward. So impairments helpless lower DNA I appreciate your quantifying that for Threeq you it looks like a 400 basis points.
Distance from once you to Threeq you.
Were there margin benefits from the inventory write downs I'm, just curious of completions activity gets a little better in Threeq you does the margin follow at the EBITDA line, So looking past EBIT to the EBITDA line.
Yes, I look I think.
I think the changes that we've described and based on the guidance we've given.
I think this has been the margins that we've reset today clearly have been helped by some of the accounting changes in the impairments that we've taken over the first part.
Part of the year.
But look it's not to say that we haven't done significant amount of work around.
The cost cuts, which we believe are permanent.
It goes across everything that we're doing whether its drilling digital production Frac in North America as Jeff as described in so look I think.
In terms of our margin progression, we're going to continue to work that as hard as we can we still got.
Some room to continue to improve on that on that cost cutting journey as we described in our remarks.
And.
Look I think it sets us up ultimately that when activity moves up.
All of this is done with the expectation that we ultimately have stronger incrementals with these permanent cost cuts and changes.
Let me just follow that up with I mean, the the way to look at things and is in my view is.
What's that they course look like in that and of course looks like substantially lower cost like a reset around cost.
Are we directing our energies.
Towards digital being much sharper in North America.
Around how we invest what we do and how we manage that cost structure.
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Internationally, continuing to protect and poor technology into that market.
And then the structurally lower Capex and that all comes from changing things that we're doing and so.
We are.
Changing many business processes and this the way, we view things, which ultimately drives substantially lower cost in resets margins and cash flow higher.
Right got it I appreciate that and so then just as a follow up.
If we think that.
EBIT will be higher quarter over quarter modestly higher margins as a percentage does that policy for EBITDA do you think EBITDA can grow quarter over quarter.
Bobby I think the implications.
With everything that we've described Sean our prepared remarks would tell you that.
Yes.
EBITDA was relatively flat.
Even though the top lines coming down.
Got it very helpful. Thank you.
Our next question comes from David Anderson with Barclays. Your line is now open.
Hey, good morning, Jeff. So obviously international is a bigger part of your business now going forward just wondering in your outlook as you think about international markets. How they are trending how you've thought about pricing.
And that I'll look at a particular second that you're hearing some reports about pricing.
Sessions being asked for the I know sees particularly the middle East I was just wanted to be just talk about bad weather, whether you think that's a concern or risk for the industry. I know you have a lot of other contract sales teekay contracts and whatnot. So maybe just kind of talked about both such if you want monthly.
Look I think.
The fact is pricing never recovered internationally.
At this fall, we havent seen many tenders. So we don't have much of a.
A view of that.
But bottom line is there much less capital internationally I mean, they excess capital just isn't there.
Maybe the way that it is in the U.S., so thats, probably get sorted out in the U.S. as well.
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And so most of the dialogue has been more around.
Working on efficiencies how to drive more efficient operations, both for our customers and for us and less so around pricing.
Does it mean that they don't get asked about but at the same time.
The only effective path forward is to drive better efficiency utilization and technology or that sort of thing internationally and I see that applies to seasoned Io sees so you're not being asked to cut your Ivan I didn't mean on new caught new tenders I've been on kind of existing work, you're not getting asked to cut pricing on existing work I understand and I would say.
Hey that certainly the first responses, let's look for ways to drive better efficiency.
Not address pricing because most of these tenders and most of these contracts that are in place today were lit.
Arguably at the bottom of the international cycle, which was in 2016.
Airplane Fairpoint.
You mentioned digital quite a bit to then on today's call just curious about something as you're looking forward.
In terms of where you want to be let's just think like two three years down the road here.
Do you think you can pull you can pull all the technology out internally and others can you create always organically, where do you need to look outside I guess, if I look back in the past look in the back and making the mid Ninetys. Those technology acquisitions were critical obviously to you in some of its competitors think about landmark of course, how are you thinking about that going forward.
Thats something you're going have to look outside of Halliburton is that a combination because you're just kind of broader views on that please.
I mean broadly.
That the same as we do.
Most of our M&A in the sense that we see when we see opportunities to.
Accelerate R&D or we see things that are.
Important ads.
We make them and we've continued to do.
Smaller transactions around.
Our digital offerings, though.
We're very thoughtful around the build versus buy strap approach and Thats a lot of the valuation we feel like weekend.
Through partners and others get into all of the things, we need to do and deliver platform solutions.
But and so there is not like gate.
Big transformational thing that's in our minds more importantly in my view is continuing to advance.
The R&D around digital.
Thanks.
Thanks.
Our next question comes from Chase Mulvehill with Bank of America. Your line is now open.
Hey, good morning, everybody.
I guess.
I guess, what does it kind of stick on this kind of the digital and remote operations did you guys have been talking about through the quarter.
For the past couple of quarters, I guess first how should we think about the structural margin improvement from these cost savings initiatives on the remote operations and automation side, how much benefit did you see kind of into Q and then the second part of the question is really how easily can competitors replicate this strategy overtime.
Yes, Thanks Chase the.
Q2, I mean the digital.
Technology and the digital approach that we're taking as what enables that cost reductions that were a large part of the cost reductions that were seeing in Q2, I wouldnt describe it as enough activity to actually drive as a kind of incremental I mean, we did it will drive terrific incrementals as we see.
Any activity growth.
But the ability I'm going to.
Stick with real estate rationalization, just as a proxy for the kind of things that can be removed when we use a digital solutions that we have internally.
For our customers I think I've described in my remarks at least one example around how digital solutions are driving much better.
Performance.
Both for our customers and for ourselves and so I think that we will continue to see that play a role.
Replicating digital at scale, it's very difficult I mean, I think that will prove to be.
I know I know what's involved in it for us and I know that we're working with some of the very best partners in the industry.
Add it's not it takes a lot of work on our part and a lot of discipline around platform outcomes that are scalable and reliable sort of all the time and so I think that.
I'm quite confident about where we're going.
Okay. Appreciate the color one quick follow up on the on the Capex side, you mentioned, Bob the 6% of revenues.
Being spent on Capex can you confirm that thats a loan term.
Capex number and maybe how much of that is maintenance versus growth and then if this implies that maybe.
International side that the market share strategy market share gain strategy is less of a focus over the medium to longer term.
Yes, I think that the 5% to 6% versus the 10 to 11 as our longer term outlook. This based on.
Capital efficiency.
Just the how we build things and how we take them to market how fast we move them around all of the things that drive.
Lower capital requirements and so I believe those changes are largely permanent also.
But I think about.
How that plays out internationally.
Thank that same.
Efficiency, a lot of the technology and tools that I described.
Particularly around capital efficiency, whether it's I cruiser cerebral or some of those technologies.
Our inherently lower capital requirements, when they're being used obviously, we went through a period of building that out over the last year.
But operationally they operate at probably 20% less.
More more more efficient better velocity.
I think we have that too.
Reap internationally over time.
Perfect Alright.
Thanks.
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Our next question comes from Scott Gruber with Citigroup. Your line is now open.
Yes, good morning.
Morning.
So the big question for you it appears as Dan how to make a profit in the smaller US market you guys. Obviously took a great stride hearing.
Too cute approving yes, thats, it's very possible Lance you mentioned strong incrementals during the recovery here, yes, I realize we're just starting to poker head out of the bankers have more one of the worst downstairs, we've ever seen but if you do get back to five or 600 rigs operating us which is more or less consensus I think what's a reasonable.
Range to think about where CMP margins could rise to.
Yes, Scott I'll talk to that.
Look I think as you look to into the future into what the recovery may look like in North America.
In the in this picture that you painted around activity.
I think this is going to continue to be a good business that delivers.
Mid teens margins and and produce a heck of a lot of free cash flow given the things that we've talked about on this call today operationally and the way that were becoming sharper in North America with our service delivery improvement initiatives on top of just structurally lower capex required.
Just to achieve that.
Business.
Drives a really nice free cash flow profile, we believe.
I think.
Go ahead, sorry, we're going to generally add one thing to that because as we look at North America, if we just sort of assume.
Flat level of production and 21.
And then we move that forward into 22, we see all of the attrition and sort of tightening that is happening.
We ended this year and we saw.
Solid performance in Q1.
We expect we get back to a market this probably size and shape at least from a supply and demand of equipment standpoint, something that looks like Q1.
2020, some time further out and the approach that we're taking I think will.
Worked very well for us.
Got it and then just given your technology investments on the Denise side and given the costs, we said on that side of the business as well it kind of just where you stand in terms of the market share gains.
Internationally.
Do you think will were mid cycle in the next cycle.
As the gap between CMP margin in DM DMV margins much smaller than what we've seen the last few cycles.
Yes, I would expect so a main again.
We have expectations that.
That business continues to improve also we're well on the way to doing that really up until we got into.
The pandemic situation and where we are today, but none of the fundamentals of changed around what we're doing other than.
I think a sharper cost structure around these things.
I appreciate it. Thank you. Thank you.
Our next question comes from Marc Bianchi with Cowen. Your line is now open.
Hey, Thank you.
I wanted to ask first on kind of the third quarter outlook for completions I think you mentioned up.
For your for your North America CMP business.
Do you see that outperforming the market in other words do you do you think that the market could be flat to down, but halliburton's up or do you also see the market up in third quarter.
For completions look I think I think we're off the bottom in May I think you'll see a little bit of an uptick in Q3 as ducs get completed drilling we think will be down a little bit.
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I think that will be.
Many of our customers managing decline rates into the end of the year.
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But our view as the market as stays with.
Making returns and taking on the work that we believe we can execute well so.
Yeah.
I think thats, what the overall market will do and I think we'll be in and around that.
Great great. Thanks for that Jeff and then you guys have mentioned in the press release and then a few times on this call about winning the recovery.
Maybe if you could offer for us a little bit more color on what that means what are the what are the metrics we should be.
Looking forward from you guys in terms of claiming victory on that front, well I think thats.
Returns and cash flows and we spent a lot of time talking about free cash flow and returns and that's what we're setting up for today and I think we get well through whatever this.
Period of time is until we see commodity prices Titan I think we do we do well.
Through this near term, but then when we start to see tightening we're going to have.
The right cost structure that scales.
Very efficiently I was strong incrementals and it delivers a lot of free cash flow and very very good returns, that's what winning the recovery looks like to me.
Is there a threshold is there a target that we we should be looking for.
And secondly, ondeck revenue closer to that before we start set and targets around that but what my expectations are is that it's a very strong performance by halliburton.
It's it's out there are ways.
Great. Thank you.
Thank you.
Our next question comes from Kurt Hallead with RBC capital markets. Your line is now.
Hey, good morning Markert.
Hey, Jeff just kind of curious when you provided the outlook here for the second half.
2020 indicated you know an uptick in completion activity in the third quarter and then.
Seasonal decline in the fourth quarter and.
Im just curious on that just given how rapid decline to now overall activity was and how sharp decline in overall spending has been for 2020.
So I guess, you're picking up that dynamic from your discussions with customers. So they're going to get a little more active in the third quarter in this pull back again in the fourth it seems a little bit counterintuitive, just given how sharply spend and activities ready think.
Yes look I think the.
I think it's going to rest more around kind of duck activity as we go into the second half of the year. So on a relative basis more pronounced gbpthree less pronounced Q4 would be my impression.
Though thank every customers working their own strategy around what do they need to do as they go into 2021.
Which will be obviously, a time, where some stability needs to return to predictive Tibet productive capacity and those sorts of things.
Yes, so is it more modest sort of in Q4, it may be but at my overall outlook is there will be relatively biased. Even if you just take into account holidays and all sorts of things that happened in Q4, along with weather.
And this isn't Mart kind of market, where your power through terrible weather in an effort to try to get to some point I don't think Inc. Q4.
Okay. Thanks, Thats good color and just maybe one quick follow up here it looks like the run rate on Capex will be little bit higher in the second half than it was first have you indicated that your Capex is project pipeline driven.
So our.
Is it safe to assume gear that you're starting to see and increase in potential project activity going out into 2021.
Look no I mean, I think what we see or some long lead time.
Items that we do have made we talked about projects being deferred but not necessarily cancelled. So we have to manage all of that together.
And so precisely where those things fall in the calendar.
<unk> is where they fall.
Yes, I think what's most important to think about around capital really is the overall efficiency that we've driven into both the tool process the asset velocity.
Which will structurally help us keep that.
At a much lower point than it has been in the past.
Okay, Great appreciate that follow up thanks. Thank you.
Thank you that concludes our question and answer session for today I'd like to turn the conference back over to Jeff Miller for closing remarks. Thank.
Thank you Liz before we wrap up today is call I'd like to leave you with a few closing comments.
Second quarter performance demonstrates halliburton's ability to execute swiftly and aggressively the actions we've taken in North America, we believe will enable higher profitability and free cash flow even in a structurally lower environment.
They have an excellent international business on our moving full steam ahead with the deployment of digital technologies, both for our customers and internally.
Most importantly, halliburton is charting a fundamentally different course I believe the strategic actions, we're taking today will meaningfully reset our earnings power and free cash flow ability as we power into a when the eventual recovery.
Look forward to speaking with you again next quarter list. 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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