Q3 2020 Halliburton Co Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to Halliburton third quarter 2020 earnings call. Please be advised that todays conference is being recorded.

I would now like turn the conference over to other <unk> head of Investor Relations. Please go ahead Sir.

Good morning.

Welcome to the Halliburton third quarter 2020 conference call as it.

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 Lance Leffler CFO.

Some of our comments today may include forward looking statements, reflecting halliburton's views about future events.

These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward looking statements. These risks are discussed in halliburton's form 10-K for the year ended December 31st 2019 form 10-Q for the quarter ended June Thirtyth 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 severance and other charges additions.

Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our third quarter earnings release and can also be found in the quarterly results and presentation section of our web site <unk>.

After our prepared remarks, we ask that you. Please limit yourself to one question and one related follow up given the Q and a period in order to allow time for others, who may be in the queue now I will turn the call over to Jeff.

Thank you Bill and good morning, everyone.

The third quarter saw world economy slowly emerged from like now.

Oil prices move off their lows and the return of shut in production.

Man recovery is starting to unfold, while under investment in global oil production capacity.

Oh pack plus actions and expectations for effective COVID-19 treatments are providing support to commodity prices.

However.

The pace and magnitude of recovery going forward will vary greatly by geography and customer type.

With resurgence of COVID-19 in certain economies presenting near term risk.

Despite these challenges we continue to execute on our value proposition both for our customers and our company.

Every day, our employees collaborate and engineered solutions to maximize asset value for our customers and.

They are doing it with the best service quality and safety in our history.

Our third quarter financial performance reflects the results of this execution.

Let me share some highlights.

Total company revenue was about $3 billion down 7% and adjusted operating income was $275 million, an improvement of 17% compared to the second quarter of 2020.

Our completion and production division revenue declined 6% sequentially, well operating income improved 33%.

Delivering an operating margin improvement of 4% compared to the second quarter.

These results demonstrate the impact of our structural cost reductions and improved utilization in North America land.

Our drilling and evaluation division revenue and operating income were down, 8% and 17% respectively compared to the second quarter of 2020 DNA.

Denise topline outperformed rig count declines both internationally and in the U.S.

International revenue was down 7% sequentially, the international rig count trended lower by 12% highlighting the diversity and strength of our international franchise.

North America revenue decreased 6% sequentially.

Completions activity increases in North America land were more than offset by lower activity in the Gulf of Mexico, and lower overall drilling activity as you as rig counts declined 35% sequentially.

I'm pleased to report that our $1 billion in structural cost reductions are complete.

And lastly, we generated approximately $730 million a free cash flow through the first three quarters of this year and are on track to generate over $1 billion in free cash flow for the full year.

Before we discuss the details of our third quarter performance I'd like to say something to our outstanding employees.

I appreciate that the last several months have been far from easy.

He is experienced disruption and uncertainty both in your personal and work lives.

More than ever you've had to balance taking care of yourselves and your families with your work duties.

Through it all you have performed admirably.

He has continued to deliver outstanding products and services to our customers breaking service quality and safety records along the way.

In April no one would have predicted the operational and financial success that Halliburton has achieved over the last six months.

You should realize these results are your results.

Their duty your hard work and perseverance and very challenging times.

Im very proud of you all.

Halliburton's charting a fundamentally different course.

Continued to take strategic actions designed to boost our earnings power and free cash flow generation, both today and as we power into and when the eventual recovery.

As markets around the world begin to stabilize.

Our five strategic priorities will drive halliburton's future success.

First we continue to focus on our strong international business, we're outperforming in the international markets and plan to balance future growth with the objective of improving margins and returns.

Second our strategic priority for a leaner more profitable North American business is well underway as demonstrated by the last two quarters.

We will continue to focus on profit not share in this more consolidated market, which.

Which will remain a key component of the global supply stack.

Third digital drives everything we do our digital framework Halliburton 4.0, permeates all aspects of our business and enables the success of our other strategic priorities.

As digital deployment and integration across the value chain accelerates. We believe it will continue to grow our current business create new revenue opportunities and drive better returns for Halliburton.

Fourth our capital intensity is structurally lower with future capex expected to be 5% to 6% of revenue.

This provides a tailwind to our strong free cash flow generation.

Lastly, Halliburton is committed to a sustainable energy future in which oil and gas continues to play a critical role.

On today's call I will discuss our third quarter financial performance reflects the impact of these strategic priorities and how our future actions aligned with them.

Our third quarter demonstrated again that we have a strong international business.

Is delivering margin expansion now and we expect it to drive higher returns and the eventual recovery.

For the second quarter in a row nearly two thirds of our revenue came from international operations.

In both our drilling and evaluation and completion and production divisions now earned the majority of their revenue in the international markets.

Our business mix and footprint in specific geographies, along with exposure to long term integrated projects support our comparative revenue outperformance and more constructive international outlook for 2020.

We outperformed the 12% sequential international rig count declines in the third quarter and are trending significantly better than the 20% reported rig count reductions year to date.

Despite the well known activity slowdowns, our international margins improved sequentially.

With several key end markets demonstrating margin improvement year on year.

As we look ahead to the fourth quarter, we see the pace of activity declines in the international markets slowing and believe we are getting closer to an activity bottom.

In the meantime service companies are being prudent with their capital which results in limited excess equipment. This year.

This should lead to a tighter market, even without an increase in new activity.

Well, we believe a broader recovery across all regions will still take time.

Halliburton is well positioned to outperform the market.

Here are a few examples.

Over the last few years, we've made significant investments in our directional drilling and open hole wireline technologies that are critical to our success in the international markets.

These investments are paying off for example.

For example, this year in the eastern Hemisphere, we've drilled five and a half times more footage with our eye crews tools compared to last year. Despite the decline in rig activity.

Adding to our existing business lines. Another important component of Halliburton strength in the international markets is the ongoing expansion of our production businesses.

Today, we have a small international market share in the service segment, which gives us plenty of room to grow and we are growing.

Im pleased to announce that earlier this month Halliburton was awarded a seven year contract for electric submersible pumps by a middle Eastern INO C.

We also completed our first SP installations in a growing geothermal market in Europe.

Halliburton four point no superchargers, our already strong international business.

He is open architecture, and digital technologies that drive connectivity and deliver performance to collaborate with our customers and partners pioneering new approaches to subsurface understanding well construction and reservoir in production.

Our digital innovation and its adoption by our customers are refraining, operator project economics through greater efficiencies and improved decision making.

We believe this creates technological differentiation for us and we expect it will drive higher returns.

Today is more customers contract for integrated services packages, we continue to benefit from our strong project management capabilities, the delivery efficiencies and reduce total cost of ownership for our customers.

Going forward Halliburton, well construction 4.0 will enable our project management business to deliver more efficient wells by reducing planning time, improving drilling performance and lowering well construction costs and risks.

Well construction 4.0 provides a singular interface for well site performance management is.

It's open architecture environment enables seamless integration and collaboration of our premium technologies like cerebral intelligent bits logics automated drilling software and barrel logics real time density in Realogys with any third party service or application.

As part of Halliburton production 4.0.

We have formed a new alliance with Honeywell. These are digital technologies to optimize our customers assets like a manufacturing plant.

Fundamentally changing the way surface and subsurface are simultaneously managed.

This helps our customers optimize their production.

Halliburton delivers reservoir modeling.

Well in field surveillance.

Spi optimization and well intervention.

Honeywell brings his expertise and topside automation surface equipment performance monitoring and productivity solutions.

This is not simply an expectation for tomorrow. This is digital and action today for customers like PTT E P in Thailand.

Our current strengths and new capabilities in the international markets are critical to our future success.

The international short cycle producers have an opportunity to regain market share as a result of declining U.S. all production.

The demand starts to improve and outgrow supply.

It should encourage international investments in both oil and gas and our.

And our strong international business that now delivers the majority of our revenues is ready to power into the eventual recovery.

The next strategic priority I want to discuss today is driving a leaner more profitable North America.

Last quarter I described to you in detail the actions, we took to reset our earnings power in this key market.

To recap, we now have 50% less structural head count and the 50% smaller real estate footprint in North America compared to last year.

These and other changes to how we're organized and how we execute everyday are sustainable and independent of market activity levels.

I believe our efficient disciplined execution in the North American market together with the structural changes will drive margin improvement and free cash flow.

Halliburton executed exceptionally well in North America this quarter.

Our DNA division outperformed the sequential rig count declines and our CMP Division grew and drove overall margin improvement for North America. Despite the hurricane season negatively impacting Gulf of Mexico activity.

This proves that our cost actions and service delivery process improvements are delivering the intended results.

As the leading completions provider in North America, Halliburton has exposure to every basin and every customer group.

The month on month land completions activity improvement in the third quarter was a welcome sign.

But September stage counts were still below April activity levels and oak.

And overall stages completed in U.S. land showed a modest sequential increase for the full quarter.

We intend to stay disciplined in how we deploy our fracturing fleets into the recovering market.

Looking ahead to the fourth quarter, we expect North America land completions activity to increase by double digit percentage is operators deplete their DUC inventory.

Spec rig counts to lag completions and not step up materially before year end.

As we predicted the North America market structure is improving with both consolidation and rationalization.

We've seen a steady flow of consolidation announcements from operators as well as service companies.

I see it the U.S. shale industry will continue to slim down and as a result emerge healthier in a relatively more sustainable growth environment in the future and this plays to Halliburton strengths and our disciplined strategy.

The supply demand balance for us fracturing capacity is also improving.

We estimate the close to 30% of hydraulic fracturing equipment has been permanently retired this year.

We expect more will follow as demand remained structurally lower.

Insufficient returns and a lack of reinvestment by service companies should accelerate the cannibalization of idle equipment for parts and the use of sideline pumps to beef up working fleets.

We anticipate a tighter balance between horsepower supply and demand as the U.S. achieves more stable production levels.

As we look ahead, we expect pricing to work its way through a couple of predictable steps the fee.

The first step, which we are starting to see now is a recovering demand for active capacity.

The first warm stacked fleet reactivations are unlikely to see meaningful pricing improvement, but they will increase utilization and revenue on a lower cost base and make a positive contribution to earnings.

The second step will happen when activity recovers enough to call on cold stacked equipment to return to the market.

I expect that higher pricing will be necessary to justify incremental investments.

As with our international business Halliburton 4.0 is driving innovation in North America.

Last week for example, we announced an industry first the launch of our Smart fleet intelligent fracturing system smart.

Smart fleet marries our digital capabilities and fracturing expertise to do it was not possible until now give customers control over frac performance in real time.

The decisions our customers make about well spacing and multiple pad development have a big impact on their unconventional asset economics.

The surface efficiencies plat, telling and capital remaining constrained.

Operator strive to make every stage as productive as possible.

Before smart fleet, however, they face the high level of uncertainty related to fracture placement and performance smart.

Smart fleet changes this it's.

Its intelligent automation integrates real time fracture measurements live threed visualization, and real time fracture commands to give operator's control over fracture outcomes while pumping.

Sets us apart from the rest of the hydraulic fracturing market and solidifies our industry leadership and intelligent fracturing.

Smart fleet. Another Halliburton 4.0 digital offerings will continue to address our customers' toughest reservoir challenges and improve the efficiency of our service delivery.

In the near term I expect the divergence of rig in completions activity will create choppiness is balance sheets are repaired and reinvestment rates continue to adjust.

However, we believe that our strategic priority for a leaner and more profitable North America will enable us to successfully navigate through this market contraction and power into the eventual recovery.

Let me now discuss capital efficiency.

A key enabler of all our strategic priorities.

We believe we can maintain our reduced capex at 5% to 6% of revenue and that it will contribute to sustainable free cash flow generation for our business.

We will keep investing in the development of new technologies and strategically fund international growth.

As the market recovery unfolds. This is.

This includes digitalization of our tools and processes that together with material science and design advancements.

Down cost and extend the life of our equipment.

At the same time, we will continue to exercise thoughtful capital allocation to the best returns opportunities.

The last strategic priority I will discuss today is halliburton's commitment to a sustainable energy future we.

We recognize that the energy landscape is evolving.

Alternative energy sources are growing.

We were executing our strategies to meet these changes.

First oil and gas will play a key role in providing the world with affordable and reliable energy long into the future and we will continue to deploy innovative solutions, including our full digital portfolio to meet that demand.

We will also invest in the future directly through innovation and our recently launched Halliburton labs.

Today, our digital and other technologies help our customers decarbonise their legacy production base and reach their emissions reduction goals.

For example, our digitally enabled I crews rotary Steerable system allows customers to drill wells faster and reduce the number of days a diesel powered rigs is on their location, which helps cut down on emissions.

We also help our customers achieve their carbon neutral goals through carbon capture and storage.

We provide a variety of services in this space from.

From subsurface assessment and characterization to well construction and fiber optics monitoring and verification solutions.

Our current technology portfolio support Ccs projects, all around the World and Australia, Europe and North America.

We also have decades of experience in providing geothermal drilling services how.

Halliburton delivers a full range of innovative technologies to address the ultra high temperature environments from.

From directional drilling cementing.

Louis pumping services logging and casing inspection and.

And project management led developments geothermal fields today.

To date, we have participated in operations in all the key geothermal producing areas of the world.

For our own portfolio of services and equipment, we continue to do what we do best innovate collaborate and invest in lowering the emissions profile of our technologies.

We have shown steady improvement over the years, reducing our scope, one and two emissions and.

In the coming months we're.

We're committed to establishing and sharing our greenhouse gas emissions reduction targets and reporting on our progress.

Finally, I'm excited about the formation of Halliburton labs.

Which we announced in the third quarter.

It is a collaborative environment or entrepreneurs academics investors and industrial labs come together to advance cleaner affordable energy.

Halliburton receives a minor equity stake in early stage clean energy companies in exchange for their access to our world class facilities technical expertise and business network.

But more importantly, Halliburton labs provides us with a wealth of knowledge and an opportunity to play an important role in developing sustainable affordable energy solutions.

We're excited about Halliburton Labs advisory board, consisting of leading academics and thought leaders whose.

Who's first members include Rice university's Reggie to Roche cash.

Caltech, John brought singer and two lanes Walter Isaacson.

I will now turn the call over to Lance to provide more details on our financial results Lance.

Lance.

Thank you Jeff let's.

Let's begin this morning, with an overview of our third quarter results compared to the second quarter of 2020.

Total company revenue for the quarter was about $3 billion, representing a 7% decrease and adjusted operating income was $275 million or an increase of 17%.

These results were primarily driven by continuing rig count declines across multiple regions.

Partially offset by increased activity in Latin America, and higher completions activity in North America land as well as the continued impact of our global cost savings.

In the third quarter, we recognized $133 million of pre tax severance and other charges to further adjust our cost structure to current market conditions.

The cash component of this charge was approximately $80 million.

Let me cover some of the details related to our divisional results.

In our completion and production division revenue decreased $98 million or 6%.

While operating income increased $53 million or 33%.

The revenue decline was driven by reduced completion tool sales across Europe Africa see is.

The Gulf of Mexico.

In Latin America coupled.

Coupled with lower cementing activity in the Middle East Asia, and North America land.

It was partially offset by higher stimulation activity and artificial lift sales in North America land higher activity across multiple product service lines in Argentina, as well as increased pipeline services in Europe Africa CIA ass.

Improvements related to stimulation activity in North America land and the impact of our cost reductions drove the overall margin increase.

In our drilling and evaluation division revenue decreased $123 million or 8%.

While operating income decreased $22 million or 17%.

These declines were primarily due to reduced drilling related and wireline services activity in North America and Eastern Hemisphere couple.

Coupled with lower project management activity in the Middle East Asia. They.

They were partially offset by improved drilling activity in Latin America.

Moving on to our geographical results in North America revenue decreased $65 million or 6%. This.

This decline was primarily driven by decreased well construction activity in U.S. land, coupled with reduced activity across multiple product service lines in the Gulf of Mexico.

Partially offset by higher stimulation activity and artificial lift sales in the U.S. land.

In Latin America revenue increased $34 million or 10%, resulting primarily from increased activity across multiple product service lines in Argentina, Colombia and Mexico.

Partially offset by reduced activity in Ecuador, and lower completion tool sales in Guiana.

Turning to Europe Africa, CIO, CS revenue decreased $42 million or 6%.

This decline was primarily driven by lower completion tool sales across the region reduce.

Reduced drilling related services, and Norway, and a decline in fluids and cementing activity in Russia.

These reductions were partially offset by increased activity across multiple product service lines in either by John and a seasonal increase in pipeline services in Europe.

In Middle East Asia revenue decreased $148 million or 13%.

Largely resulting from reduced well construction activity across the region.

Lower project management at wireline activity in the Middle East and decreased project management activity in India.

These declines were partially offset by higher completion tool sales in the United Arab Emirates, and Saudi Arabia.

In the third quarter, our corporate and other expense totaled $42 million, which was positively impacted by the insurance reimbursement.

For the fourth quarter, we estimate that our corporate expense will return to previously announced run rate of $50 million.

Net interest expense for the quarter was $122 million, which included higher interest income from our international subsidiaries we.

We expect net interest expense closer to $128 million in the fourth quarter.

Our adjusted effective tax rate for the third quarter was approximately 24%.

We expect our fourth quarter tax rate to be approximately 15% based on the market environment and our expected geographic earnings mix.

Our full year adjusted effective tax rate should be approximately 21%.

Capital expenditures for the quarter were $155 million and we now expect full year 2020, capex to be less than $800 million.

Turning to cash flow we.

We generated $265 million in free cash flow during the third quarter, primarily driven by our increased operating income and continued working capital improvements.

As a result, we improved our cash position during the third quarter ending the period with $2.1 billion in cash.

We expect to continue generating positive cash flow from operations in the fourth quarter and expect to deliver full year free cash flow of over $1 billion.

Now turning to our short term operational outlook, let me provide you with our thoughts on the fourth quarter.

For our completion <unk> production Division, we expect higher North America completions activity and traditional year end completion tool sales, which are more muted than in prior years.

With that said, we expect revenue to be up approximately 10% margins to remain flat sequentially.

In our drilling and evaluation division, we anticipate a slight sequential increase in our drilling related activity and expect to see typical year end software sales.

As such revenue for the division should be up mid single digits with operating margins moving modestly higher by 25 to 50 basis points.

I'll now turn the call back over to Jeff Jeff.

Thanks, Lance to sum up we're charging a fundamentally different course, I believe our execution of the five key strategic priorities will deliver success for Halliburton now and into the future.

Our strong international business is already delivering returns and margin expansion and I expect that will continue in the next up cycle.

Our leaner North America business will enable us to successfully navigate through the market contraction it will be more profitable as the market recovers.

Halliburton 4.0 is part of everything we do and enables the success of the other strategic priorities it will.

It will grow our current business create new revenue opportunities and drive better returns.

Our lower capital intensity is expected to contribute to strong free cash flow in the future.

Our commitment to a sustainable energy future in which reliable and affordable oil and gas continues to play a critical role will help us and our customers lower emissions.

Her creation of Halliburton labs will accelerate the sustainable affordable energy future.

Halliburton strategic actions booster earnings power reset and free cash flow generation today, and as we power into and when the eventual recovery.

And now let's open it up for questions.

Ladies and gentlemen to ask a question you will need to press star one on your telephone.

A question press the pound key.

We ask that you please limit yourself to one question and one follow up please stand by what we compiled the county roster.

Our first question comes from Angie Sedita with Goldman Sachs. Your line is open.

Thanks, Good morning, guys.

Angie.

So just on the pace of activity, maybe some thoughts around 21 on the Pos for the U.S. markets you talked about a strong start early 20 watt.

Thought that that's really driven by that got cleaned out or do you think we could see a pick up in drilling activity and additional well.

Along with Dod on the international side.

You noted that the pace of decline is slowing.

Do you think that we've seen the bottom and most of these countries. Those are some reason to believe that we are not going to seasonality and thoughts around the pace of the international activity and 21.

Yes, Thanks, Angie let me just.

Just broadly both your questions 2021 feels better from here.

I think the second half of 20.

Thinking about that as a bottom.

Yeah, we see progressive improvement and.

In 2021 separate.

Separating that a little bit North America.

We're seeing that activity now, we'll see duck activity.

Back then to next year.

And then the drilling activity would follow that but again, if we step back and think about North America.

The maintain steady production or whatever the exit rate ends up being implies a number of wells that need to be drilled and so is drilling is below that.

Then we start to see production drip lower which then would have a positive impact on commodity price and an impact on.

More so on international activity.

From an international perspective.

Yes.

Again, we see improvement in 2021 from where we are certainly now and we see that strengthening more so in the back half of 2021 or the second half of 2021, because we do work through seasonality and some other things.

[music].

But in either case.

Yeah, we see improving activity.

Okay. Okay fair enough. Thanks, and then if you could talk about operating margins of 21, given you'll have a full year benefit billion.

Billion dollars.

Structural cost cutting and the activity outlook, you just outline thoughts around the pace that CMP deeni margins and even the potential exit rate for 21.

Yes look obviously the the earnings reset.

The earnings power reset as a critical part of our strategy.

So those cost cuts are permanent.

I expect when activity moves up we'll see margin improvement follow.

Yeah, we did see the margins start moving up.

Upwards, when we see broader international drilling activity recover.

Then as I've described how we might see that next year.

CMP is going to benefit from stronger completions activity recovery and North America.

And also internationally.

So I think CMP, probably sees recovery more so first.

Margins DNA.

Improved its into the double digit range as we see more sustained recovery international.

So again.

Really like where we are strategically I think our strategy addresses that and would expect to see.

The margin the margin progression follow along with the activity.

Right fair enough, Thanks, Jeff I'll turn it over.

Thank you. Our next question comes from James West with Evercore ISI. Your line is open.

Hey, Good morning, Jeff and then Lance Gordon.

Morning, James James.

So international.

Up and I know that the media spend most of your career working international.

The the businesses.

Contract it of course, but sounds like you're seeing a bottoming here what type of or what level of recovery would you expect in 21 or other geographies that standout is more robust than others.

Well James look I think the.

Yeah, we went into the first part of this year very active in fact, we were saying a lot of good things happening in Q1, it tailed off in Q2.

So I don't think the full year of 21 eclipses 2020, but trajectory I think is really important because that leads to.

The eventual recovery that I believe happens.

And so I think we get on that pace starting in 21 does it overcome 20 immediately not necessarily but it's going to be slightly below I think we're on a pace because of the sort of.

Sort of under investment we're seeing we're seeing it in the U.S. today, and we'll see it right we've seen it really internationally and.

This is just too important to too many governments that too many people in the world to see it under invested for yes for that long.

Right right.

And as we think about the U.S. market, which as you know.

Covenant appeared.

Market, but the structure is getting better with some of the M&A that that's happening I mean are you guys comfortable that you see a more profitable future as we kind of pull out of this downturn in North America than we've seen in the last.

Almost a decade.

Yes, I do.

You know I think what we're seeing in service company consolidations great for Halliburton.

Happening as we expected that would happen.

At our approach to this market, which is a different playbook and I am I am.

We wouldn't be doing it if we were convinced that it drives better free cash flow at a more profit right market.

Yes. So there are a lot of things that were doing that are different that will allow us to.

Make more free cash flow.

In this in this type of market and so I think all of these things are positive that I would say, though.

Whether its consolidation and attrition and rationalization all of those things are conspiring to.

Create tightness.

Even so.

In spite of not having the tightness today, we're seeing the improving margins and returns.

Okay, great. Thanks.

Thank you. Our next question comes from Bill Herbert with Simmons Your line is open.

Good morning.

Lance Hey, Jeff.

Lance free cash flow and I'm, just looking at the relationship between street expectations for next year.

EBITDA down five 7%, but free cash flow down close to 40% does that make sense I mean, given the fact that you are.

You're not going to have the restructuring and severance cash expense that you had the issue.

This year, maybe working capital is not the tailwind in 2021 that it was in 2020, but if revenues are flat to down its currently huge consumer of cash.

In your margins and so I'm. So I'm just curious I mean, how do we think how should we think about free cash flow for 2021 at this stage I mean, your capital and can see 5% to 6%.

It would seem that your free cash flow would be actually up year over year.

In any event.

Yes, sorry go ahead I agree with a lot of the commentary in the questions, meaning that yes, working capital the working capital will be less of a tailwind for our free cash flow next year, but that's replaced by health.

Healthier operating profit led by.

Increased activity in the markets that you heard Jeff described also full year benefit of the cost cutting activity that we've been through this year.

Rippling through our operating margins and so it will be much more of an operating led.

Free cash flow drawl and in relationship to the the capital intensity that we've talked about.

As opposed to working capital unwind next year.

Okay. So so in the event that.

EBITDA is relatively flat do you think flat flat to down flat to up do you think that free cash flow is in the vicinity of this year or higher net.

Next year.

Look I think it's I think it's a little early to call Bill, but I think we've been pretty clear what the levers are that drive it and we'll be we'll be more prescriptive about it when we get into the course of next year.

Okay and Jeff.

I'm just curious as to your perspective here with regard to the consolidation that we're seeing.

First noble goes the Chevron.

W.P. Exco sedan now concho.

Goes to Conoco and these are basically at stock prices that are 20% to 30%.

Of recent peak and I'm just curious in your discussions with your clients and your customers.

Is the sense that this is a fundamentally disrupted industry and.

And that basically with regard to the lower 48 market opportunity, it's been fundamentally Erie.

Defined and at this juncture the best alternative is to find a relatively safe piece.

Piece of paper in the form of they consolidate or I mean, what what are you hearing from your customers yes.

Bill I know I don't.

I think it's what you see when.

Yes, Mark.

Market efficiencies start to.

Ill come into play in the sense that.

These larger operations allow for better application of DNA for all there's just a lot of cost associated with.

Operating all of these different companies and so I suspect there is at some level there is the opportunity to better.

Better leverage and make more cash flow.

As bigger operate about bigger operators.

Yes, I think the.

Yes, the value you're seeing obviously the stock price is depressed, but nevertheless, the outlook the long term outlook.

And the importance of that production is still very relevant and so you know in the discussions I think that's that's more of what I hear is around out to be more efficient. Obviously this is one way to be more efficient.

Got it thank you.

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

Hey, good morning.

Yes, the first question I wanted to.

Ask is about CMP God.

I think you've got it up revenues, 10% on a sequential basis.

I guess, one can you can you tell us how much benefit.

It's coming from kind of a year in completion tool sales.

And then number two I would expect that margins would have been up given the strong sequential improvement revenues, so kind of help us connect the dots so while margins will be flat.

Well I think.

One chase.

On on your question about completion tools I think we were clear in some of the even in the guidance language that.

At least until it will be more muted than they have been in recent fourth quarters, just given the size of the market level of activity.

In terms of the guide I think you have lots of puts and takes we have it.

Improving North America structure.

But we also have again, the sort of the muted impact of completion tools that have traditionally lead to accretive margins impact in the fourth quarter.

Okay, Great that's helpful.

And if I can just talk more specifically about North America.

I think and you kind of asked about M.P. Capex and obviously it will be up from here I don't think it was quite clear if you thought it would be up on a year over year basis, but.

But maybe if we can just talk to kind of the frac fleets and kind of where you think the active Frac fleet count is today when we when we get to that kind of 200 level that you guys.

You guys talked about being kind of the required to hold production flat and then any thoughts on when you think that rig activity will begin meaningful recovery.

Yes, thanks the.

I think with the activity in Q line offset by Q2, it's almost.

I think overall.

21 will be slightly down from 20 in terms of overall, but again, that's sort of factoring out Q1, and Q2 offsetting so let's take the second half of this year and project that forward I think it feels better from here and we see sequential recovery.

Yeah, I think the.

It really comes down to.

Where does production exit in 21 will drive then how much activity in 2021. She is me so.

So I think the.

Yeah.

We can see a path to that in 2021 in terms of the 200 for the sort of level, but again, it's going to depend on what is the appetite for produce.

Producing barrels in North America inside of that timeframe.

I think from an overall I think about the Frac fleet also thinking about the health of the Frac fleet I mean for them all of the market.

And I think the pace of.

Attrition is going away on that which means it could create more tightness sooner.

Even if we were somewhat below that.

Okay, and then what about when rig activity when do you think that starts to pick up.

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Look I think that follows the frac activity. So I would expect we would see it.

Rig activity picking up.

Middle of next year early part probably middle.

Probably middle of 2021 just to.

This because it sort of will follow probably the most frac intensity.

Okay, perfect ill turn it back over thanks.

Thanks.

Thank you. Our next question comes from Sean Meakim with Jpmorgan. Your line is open.

Thank you good morning.

Morning, John.

So Jeff thinking about normalized margins.

You reset the cost base. This year, you've indicated you think both segments can generate normalized margins in the mid teens in the next cycle. So it 15 through 19 normalized margins or maybe 10, 11%, but you're able to get to that mid teens level and Oneida 14, So it'd be great. If you could walk through the building blocks to those normalized expectations in particular.

Hi, Andy any which I think has a bill that seem to be a little more of a heavier lift from here.

Well, thanks, I always talks about a lot of what we're doing in DNA in terms of.

Hi, Chris Technology, what we've done around.

Other service lines in that business, whether it be wireline.

And even testing as so.

I think that the building blocks are around.

Hey, getting that technology footprint implemented, which we're doing I've described sort of the uptick that we've seen in that even in the current market.

So then sort of the next.

Sort of the next step from that is getting any amount of.

Improved activity, which I believe we will see and then in the international markets. The you know the capital oversupply is much less I mean as in fact that cap.

Capital was getting tight in Q1 of this year and it remains tight and so I don't think it back thank as quite realistic to expect to see some pricing improvement, which is another key component of how we step those margins up.

Yeah. Thanks for that that's helpful and then.

Dovetailed into let me talk a little bit more about the international cycle. So some of.

Some of your privacy customers are committing to divert capital away from upstream oil and gas your independent customers are being forced by financial markets to commit more cash flow to their balance sheets seems like the next international cycle is going to be shorter cycle and more NRC focus is.

Is that fair that long cycle, maybe falls more out of favor in terms of mix of spend and just how you think halliburton's position for that type of environment, well look I think we're very well positioned for that kind of environment.

A wear and all of the right locations, we've got relationships with all of the customers you're describing.

I think that.

What we're doing with project management, and our investment and.

Lifting chemicals and those sort of things all.

Play to that type of market even more so.

And so.

Yes, I think thats.

A place where we've been very successful in.

In the past and I think that that will ultimately be even a more stable market as.

And.

Hey, Joe M&A, and again, I think oil and gas is so important on so many dimensions that.

I believe that we'll see more investment even biopsies as we move forward into certain of these geographies anyway, but from a positioning perspective in the international markets really like where we are and really like our technology footprint and particularly for the kind of.

Yes outlook you described that informs our strategy actually key elements of our five strategic pillars.

Understood. Thanks, Jeff.

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

Yes, good morning, good morning, Scott.

Just a couple of times on the call you highlighted your improving position abroad.

Obviously, a number of.

Interesting initiatives there is good momentum.

As we look out into 2021, if we think about things on an exit to exit basis. When the market does hopefully starting to grow again not asking for your your market growth outlook, but how much of the Delta do you think you'll be able to deliver versus whatever the underlying market delivers next year just given your initiatives.

Well look I think if it.

The topline question.

I think we've had a history of outgrowing the market.

Over the last several years, so we know how to grow.

We're very much focused on driving profitable growth.

Out of that market and again Thats precisely what our strategy is intended to do.

So I'm certainly comfortable with our ability to outperform the market and from a growth perspective.

Equally comfortable with our ability to drive profitable growth, but I think what you'll see us doing is driving those things that drive a capital efficiency, so whether it's I crews or its digital or elements of our business.

That allow us to make more free cash flow out of that growth going forward.

And again I said very excited about how that all shapes up and what the team is working on.

Got it and then a question on how labs very interesting initiatives you highlighted several areas of the day.

Additional expertise, we have exposure to the energy transition team.

Yes, the ability to generate revenues, but as we step back and kind of look at near the overall revenue opportunity for both you and peers. It seems somewhat small he over the next five or 10 years with without a material investment in big potentially opening some new revenue channels. How do you think about that.

Actual balance you how do you think about allocating R&D dollars and Capex dollars.

Potentially some M&A dollars to the transition team.

While also trying to deliver better returns next cycle and how do you think about what its what its potential to make those investments up little more aggressively.

Yeah look only the really clear we're in oilfield services company and so and we believe the world needs a lot of oil and gas for a very long time.

And.

Yes, really to the extent capital shifted away.

By certain customers more capital will be invested by others.

But with that as a backdrop I mean.

Clearly Halliburton labs is exciting for us.

But let's be really clear how were doing that we are in effect exchanging our expertise and.

Access to our labs and business network for an equity investment in.

Early stage companies so.

Our intent is not to invest cash.

Capital dollars into that process today beyond what little support in fact, not capital dollars I mean, they're engaging in our.

In effect, taking advantage of invested capital that we already have.

That we know we can take better advantage of doing this so we'll have a front row seat in this space. We'll watch it closely we have a lot of skills that are applicable to help.

Helping companies to be successful.

In this space and we'll learn a whole lot about this over time, but I want to be clear oilfield services.

Where we're spending our capital today.

Got it appreciate the color Jeff. Thank you. Thank you.

Thank you. Our next question comes from Kurt Hallead with RBC. Your line is open.

Thanks.

Hey, good morning, everyone Morningstar morning, Curt.

Hey, thanks, so much for a summary, so far today.

Actually extended conversation a little bit more on that last topic Jeff.

I think as painfully aware for everybody on this call investors are definitely shifting our focus at least in the very near term toward more of the renewable dynamic in clean energy by normal. So it's good to see that you're going to have that front row seat through through how Burton innovation labs. We also seen a number of the major oil companies that are customers.

The orders start to pick that their budget some more so than others like BP for example.

I am too into more of the renewable space.

And then I heard you quite clearly that you're in oil services company.

Thats kind of where the capital is going to go.

I'm interested on.

Got a doping beyond those dynamics and getting into how you may be looking longer term.

Through this process you think they shipped on renewable energy is going to fizzle out like it has in prior cycles or do you actually see halliburton.

Playing a meaningful role in that dynamic it having it be a meaningful piece of the business and maybe having a third business line with completion and production and drilling and evaluation as part of the helper portfolio in the future.

In the future.

Yeah look I think that there will be.

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The.

Different forms of energy renewable energy alternative energy.

No that will all compete for the board.

For space and I believe oil and gas is very affordable and very effective and it will be for a very long time, but that's not to say there wont be competitors in the space nuclear has been in the space a long time.

So.

What I think from a Halliburton labs perspective.

Looking at the disruption that happens of which there will be much better.

But oil and gas remains very competitive and that.

That kind of environment, So I won't try to call does it fizzled does it make it.

Little health they have to do over the long term is compete.

And feel very good about oil and gas as a competitor.

Okay. That's fair and my follow up then is still alive at more of the traditional business dynamics that you guys referenced tighter market for both North America and international going forward the prospect to get margin improvement on the heels of higher activity, even without pricing. So I was just wondering.

If you could help us frame that dynamic you know in the context of prior cycles. You know you typically would get may be incremental margins anywhere around 35 to maybe 50% with pricing power.

Without the pricing power with the cost savings and higher activity.

How are you guys thinking about the prospect for incremental margins as we as we move off the second half of 2000 and go into 21, Yeah. Kurt. This is Lance look I think everything that we've done around sort of the structural cost cutting.

Exercise that we've been through this year and major form.

We'll also continue on the edges as we move forward, but it was all built to reset our cost structure in order to drive better Incrementals going forward.

Now look I mean, clearly activity helps or lower fixed cost base.

You will see improvement so I expect that just activity alone will help bolster our incrementals, but clearly if you add pricing on top of that they.

They are supercharged I think a lot of what this management team on is looking to deliver outsize incrementals, even in this market and in a recovery.

Versus the historical.

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.

Thank you Shannon before.

Before I wrap up todays call I would like to leave you with a few closing comments are.

Our our third quarter performance demonstrates tangible results of halliburton's execution from our five strategic priorities and the early impact of our earnings power reset.

Our strong international business is already delivering returns and margin expansion and I expect it will continue in the next up cycle.

Our leaner North America strategy will enable us to both navigate through the current market conditions and be more profitable as the market recovers.

Finally, our.

Our strategic actions boost our earnings power reset and free cash flow generation today, and as we power into and when the eventual recovery look.

I look forward to speaking with you again next quarter Shannon Please close out the call.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for joining and have a wonderful day.

Oh.

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