Q1 2021 Halliburton Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Halliburton and first quarter 2021 earnings call.
Please be advised for today's conference is being recorded.
I would now like to hand, the conference over to all PJM head of Investor Relations. Please go ahead Sir.
Good morning, and welcome to the Halliburton and first quarter 2021 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 Lance Loeffler 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 and halliburton's form 10-K for the year ended December 31, 'twenty 'twenty 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 asset dispositions and other charges.
Beginning this quarter, we have modified our free cash flow metric and non-GAAP financial measure to include the impact of total proceeds from sales of property plant and equipment.
We believe this item is recurring in nature and including it improves comparability of this metric relative to our large cap peers.
Additional details, including recalculation of this measure for prior periods and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter earnings release and can also be found and the quarterly results and presentation section of our website.
After our prepared remarks, we ask you to please limit yourself to one question and one related follow up during the Q&A period to allow time for others, who may be in the queue now I'll turn the call over to Jeff.
Thank you Ben and good morning, everyone.
We're off to a good start this year.
The world is reopening and even though some regions still experienced lockdowns overall economic and demand recovery continues to build.
Oil demand is increasing globally oil inventories are down near their five year averages.
And OPEC plus actions continue to support commodity prices for.
First quarter strengthened our confidence about how this transition year will play out.
Our first quarter performance demonstrates the strength of our strategy and operating leverage and this global market recovery here are some highlights.
International revenue grew 2% compared to the fourth quarter of 2020.
Marking and activity inflection and the international markets.
Strong recovery in Latin America, more than offset declines in other regions, while margins remained resilient.
North America revenue grew 13% as both drilling and completions activity ramped up throughout the quarter.
How our utilization and our significant operating leverage supported sequential margin expansion despite weather disruptions.
Our completion and production Division revenue grew 3% with increased North America, and Latin America activity offsetting seasonal declines and other regions.
Our drilling and evaluation division delivered solid revenue and margin performance revenue grew 11% while margins increased 2.6 percentage points driven by stronger drilling activity in North America and software sales across multiple regions.
Finally, we delivered approximately $160 million of free cash flow and the first quarter, which is a great first step to delivering strong free cash flow for the full year.
This was another quarter of solid execution on our five strategic priorities that define halliburton's path and will drive our success.
We're committed to drive profitable growth internationally maximize value and North America.
And accelerate and integrate digital technologies and.
And improved capital efficiency.
And actively participate and advancing cleaner affordable energy.
Our first quarter performance demonstrated that aligning our actions with these strategic priorities boosts, our returns and free cash flow generation.
We expect to continue delivering strong free cash flow and industry, leading returns as we move through the year.
We are encouraged by the inflection and international activity, we saw during the first quarter and anticipate that recovery will gain momentum across all regions and the second quarter and beyond.
Today, we see early indicators of future activity growth internationally.
Our completion tool orders, a leading indicator of upcoming work grew throughout the first quarter.
The volume of tendered work has significantly increased wear.
We're on pace to nearly double the value of submitted bids compared to last year with the most work coming from the N O sees and the Middle East followed by Latin America.
The signs give us greater conviction that the second half of this year, we will see a low double digit increase and international activity year on year.
We believe the international markets will experience multiple years of growth. However, this up cycle is expected to be structurally different from prior cycles.
And Halliburton's International business is better prepared to benefit from it.
Here's why.
We expect the N O sees and other short cycle barrel producers will increase investments and gain share to meet future oil demand growth.
Halliburton has the established footprint and the customer relationships to capitalize on this growth.
It feels becomes smaller and more complex operators work harder to produce more barrels.
Their pursuit of incremental production to meet future oil demand growth should require higher service intensity.
And certain markets maturing assets are changing hands.
New owners require a proven technology and experience to revitalize their assets and unlocked remaining reserves.
Halliburton's broad technology portfolio local expertise and commercial flexibility are helping these customers achieve their efficiencies and production objectives.
Multiple years of service company, Capex reductions limit equipment availability and the international markets.
And early 2020 free Covid International pricing was beginning to increase on the back of equipment tightness, but paused with the oil demand collapse.
As the world Reopens and activity rebounds, we expect large tenders to remain competitive, but leading edge pricing should increase.
Our strategic priority is clear and deliver profitable growth as the expected international recovery unfolds.
We believe the following factors will help us accomplish this.
First we expect our ongoing investment and technology innovations to benefit us as the market recovers.
For example, as the global leader and completions technology, we introduced the Ovidiu is expanding isolation packer.
Video uses material science innovation to transform a metal alloy into a rock like material when it reacts with downhole fluids decree.
It creates a long lasting seal for improved well integrity and is especially suited for high pressure and high temperature environments as well as permanent plug and abandonment operations.
Our completion tools R&D pipeline and incorporates the latest advancements and materials science sensors telemetry and digitalization of videos is one. Good example of this pipeline.
The successful rollout of our eye crew's intelligent drilling system continues to deliver excellent results and the first quarter I crews improved drilling speeds 55 per cent for our customer and the middle East saved and operator, three days of rig time, and the North Sea and increased drilling rates 25 per cent compared to offset wells and offshore Chi.
Anna.
Second.
Our production business continues to expand internationally with unique growth opportunities.
We plan to start executing on our first multi year electric submersible pump contract and the middle East and the second half of this year.
We see significant volume and future growth potential for artificial lift solutions and the middle East as many mature fields across the region come off natural flow and require E. S B's to sustain production.
With proven summit ESP technology, a strong local presence and a focus on profitable growth, we expect to thrive in this market.
As we progress towards completing our specialty chemicals plant in Saudi Arabia.
We are actively participating and regional tendering activity.
In addition to providing new business opportunities. This plant will also manufacture chemicals for our internal consumption.
We expect a new plant to deliver cost savings and profitable growth for Halliburton, and 2020 two and beyond.
Finally, we are accelerating the deployment and integration of digital technologies with our customers.
We believe digital creates technological differentiation contributes to higher international margins and drives internal efficiencies.
And the first quarter, we introduced a new real time data transmission system for a major customer and the North sea.
And as high Fidelity low latency data highway is an essential building block for virtual remote operations that are performed without human intervention and use real time data and tailored algorithms.
We also launched a new digital workflow on a private cloud for and integrated services contract and the Middle East.
This workflow helps our employees make better decisions.
And it uses a proprietary natural language processing service to extract specific information from a variety of documents and locate associated data and our data Lake.
This is digital technology and action.
Facilitating collaboration and knowledge management, while improving operational efficiencies.
These digital technologies are important milestones and our journey from digital planning day virtual execution.
We're using our open architecture platform to integrate real time information from the customer Halliburton's, many digitally enabled technologies and third party providers across the entire assets.
I believe that halliburton's current strength and new capabilities will deliver profitable growth and our multi year international recovery.
Today, North America, and staging a healthy recovery.
And the current oil price environment shale operators have a larger portfolio of economically viable projects.
As a result, the average U S land rig count grew 27% sequentially and the first quarter outpacing the growth and completed stages.
We still expect the majority of our customers to remain committed to a disciplined capital program. This year.
But what we are seeing today solidifies, our confidence and a steady activity cadence for the rest of the year as operators work to maintain their productive capacity.
The market dynamics continue to improve.
Supportive commodity prices should allow our customers to spin their announced budgets and meet their cash flow objectives.
Customer mix should transition as the year unfolds privates led the recovery and the first half and we expect some public companies to increase activity and the second half of the year.
Halliburton and serves both of these customer groups aligning with operators that have longer term and more efficient programs.
As a result demand for our equipment is increasing and our calendar is filling up for the rest of the year.
Last year, we use digital technology to redesign our service delivery approach and create significant differentiation and our cost structure.
Adding to our cost reset in 2020, we continued to drive cost out of our North America operations.
As an example, we've engaged with water.
Software company that designed and artificial intelligence supply chain platform to transform how we buy move and sell sand and trucking within our U S land operations.
Without human intervention.
Or does platform optimizes thousands of logistics loads per day, while also identifying and addressing issues before they occur.
This fits with our strategic priorities to use digital technology to drive down costs, and our business and to maximize value and North America.
Together with our size and scale are sustainable operating leverage should widen our margin differential relative to our competitors and North America.
We are steadily improving margins and our first quarter performance was another step and the right direction.
As we look ahead, we see upside to our margin performance based on utilization technology innovation and pricing utilization.
Utilization is the first step to better margins for the smaller equipment base and the right customer alignment, we intend to continue optimizing utilization as market demand grows.
Given our scale the operating leverage impact from utilization increases alone should improve our cash flow generation and North America.
Technological differentiation and digital innovation is the next step.
Halliburton has the leading low emission solutions and the market today, both electric and dual fuel and we expect they will command a premium as market demand expands.
And as the leader and hydraulic fracturing Halliburton has the scale and R&D depth to deliver a proven power agnostic capital efficient solution for E Frac dipped.
Deployed and the Permian Basin are fully integrated all electric Frac site includes our 5000 horsepower Zeus electric pumping unit, our new express blend blending system. He went to electric wireline unit and the electric Tech Command Center.
Built using our flagship Q10 pumps, Zeus delivers performance levels up to 40% higher than conventional pumps and substantially reduces emissions limited only by the grid power source.
And as certain components of our input costs rise, we are working with our suppliers and our customers to adjust our gross pricing in line with cost inflation, we're seeing and the market.
While improving U S economic activity and winter weather disruptions led to increases and sand chemicals cement additives and raw materials costs halliburton's purchasing power and technology have allowed us to procure and deliver these materials and a cost efficient manner, such that both halliburton and our customers are.
More competitive.
Service pricing improvement is the final step.
We're not there yet, but we see positive signs of market rebalancing that should drive future pricing improvements.
Total fracturing equipment capacity has limited room to grow and the current pricing environment continued.
Continued attrition from a rising service intensity and insufficient returns for many service companies is altering the industry dynamics because.
Because we are an integrated provider Halliburton participates in all key businesses in North America today, and will benefit more than others when pricing moves up.
We believe that halliburton's leadership and strength in North America will allow us to take advantage of positive market dynamics and deliver on our strategic priority to maximize value and this market.
Consistent with our strategy, we continue to turn every knob to manage greater capital efficiency and drive solid free cash flow generation.
This takes many forms and includes important technology advancements and multiple product service lines, whether digital or equipment related.
Process changes that improve the speed with which we move equipment and respond to market opportunities and finally actions to reduce the pace of working capital consumption required to grow our business.
The first quarter was a good demonstration of this and we will continue to build on these actions.
We're also executing on our strategic priority to advance cleaner affordable energy and to support sustainable energy advancements using innovation and technology to reduce the environmental impact of producing oil and gas.
Halliburton has a three pronged approach to achieving this objective.
First we recently released our target to achieve 40 per cent reduction and scope, one and two emissions by 2035 from the 2018 baseline.
This is consistent with our goal to reduce the carbon footprint and environmental impact of our operations and follows our commitment to set science based targets announced last year.
Second we are innovating, we continue to develop and deploy low carbon solutions to help oil and gas operators lower their current emissions profiles.
We also use our existing technologies and renewable energy applications for.
For example.
Today, the geothermal market and Europe is growing rapidly and represents an attractive expansion opportunity for our artificial lift business.
We're currently supplying electric submersible pumps, specifically designed for the high temperature large wellbore applications on a geothermal project in Germany.
We're also providing drilling and cementing services for geothermal wells and Indonesia.
We develop new high temperature, cementing formulations and directional drilling techniques that increased geothermal sites generating capacity and improve project economics.
And finally, we're excited about the progress of Halliburton labs are clean energy accelerator and the first quarter, we announced Halliburton labs as inaugural group of participating companies. They are working on solutions for transforming organic and plastic waste to renewable power and recycling of lithium.
And I on batteries and converting carbon dioxide water and renewable electricity into a hydrogen rich platform chemical.
We are collaborating with these companies and providing world class industrial capabilities and expertise to help them achieve further scale and increase their valuations.
This engagement and the clean energy space will inform halliburton's future strategic decisions as the energy transition evolves.
We are taking applications for the next cohort of participants as we continue bringing early stage clean energy companies and to Halliburton labs.
To sum up we entered 2021 and optimistic and focused on innovation.
We believe that the early positive momentum in North America will continue and the international market recovery will accelerate in the second half of the year.
Halliburton will continue to execute on our key strategic priorities to deliver industry, leading returns and solid free cash flow as they anticipated multiyear recovery unfolds.
I will now turn the call over to Lance to provide more details on our financial results.
Lance.
Thank you Jeff.
Let's begin this morning with an overview of our first quarter results compared to the fourth quarter of 2020.
Total company revenue for the quarter was $3.5 billion and increase of 7% and our operating income was $370 million and increase of 6% compared to the adjusted operating income of $350 million in the fourth quarter of 2020.
Now, let me take a moment to discuss our divisional results and a little bit more detail.
And our completion and production division revenue was $1.9 billion or an increase of 3% while operating income was $252 million, representing a decrease of 11%.
The increase in revenue was primarily driven by higher stimulation and artificial lift activity and North America.
Higher cementing activity and the north sea as well as improved stimulation activity in Argentina, and Mexico, and higher completion tool sales and Latin America.
These increases were partially offset by lower cementing services and Russia.
Lower pressure pumping activity in the Middle East Ridge.
Reduced seasonal completion tool sales and lower well intervention services and the eastern hemisphere.
Operating income was negatively impacted primarily by decreased completion tool sales and reduced pressure pumping activity and the eastern hemisphere.
Our drilling and evaluation revenue was $1.6 billion or an increase of 11%.
While operating income was $171 million and increase of 46%.
These increases were primarily due to higher software sales globally and.
Improved drilling related services and wireline activity in the Western Hemisphere, and Norway and increased project management activity internationally.
Partially offsetting these increases were lower drilling related services across Asia.
Moving onto our geographical results.
And North America revenue was $1.4 billion, representing an increase of 13%.
These results were primarily driven by higher drilling related services stimulation and artificial lift activity in North America land as well as higher wireline activity and software sales and North America land and the Gulf of Mexico.
Partially offsetting these increases were reduced completion tool sales and lower cementing and fluids activity in the Gulf of Mexico.
Moving to Latin America revenue was $535 million, representing an increase of 26%, resulting primarily from increased activity and multiple product service lines, and Argentina, and Mexico, as well as higher fluid services and the Caribbean.
Partially offsetting these improvements was reduced activity across multiple product service lines and Columbia.
Turning to Europe Africa C. I S revenue was $634 million, a 1% decrease sequentially, resulting.
Resulting mainly from reduced completion tool sales and well intervention services across the region cut.
Coupled with lower activity in Russia, and lower fluid services and Kazakhstan.
These decreases were partially offset by higher well construction activity and the north Sea and increased software sales across the region.
And Middle East Asia revenue was $878 million or 6% decrease.
These results were primarily driven by lower stimulation and well intervention services and the middle East.
Reduced drilling related activity, and Indonesia, and China, and lower completion tool sales across the region.
Partially offsetting these declines were improved project management activity in Iraq, and Saudi Arabia, and higher wireline activity across Asia.
In the first quarter, our corporate expense totaled $53 million looks.
Looking ahead to the second quarter, we anticipate corporate expense to be slightly higher net interest.
<unk> expense for the quarter was $125 million and we expect this level of interest expense to drift slightly lower and the second quarter as a result of our reduced debt balance.
Our effective tax rate for the first quarter was approximately 23%.
As we go forward into 2021 based on the anticipated market environment and our expected geographic earnings mix, we expect our full year effective tax rate to be approximately 25 per cent.
Turning to cash flow, we generated $203 million of cash from operations during the first quarter and $157 million of free cash flow.
We also repaid $188 million and maturing debt with cash on hand, and the first quarter and will continue to prioritize reducing leverage and the near term.
Capital expenditures during the quarter came in at $104 million.
We expect capital equipment deliveries for international projects to ramp up and the second half of the year and as a result, our full year 2021, Capex guidance remains unchanged.
Finally.
Turning to our near term operational outlook, let me provide you with some comments on how we see the second quarter unfolding.
And North America, we expect both completions and drilling activity momentum to continue but.
But sequential activity growth should moderate.
And the international markets, we expect a seasonal rebound and a broad based activity increase the pace of which will vary across different regions.
As a result for our completion and production division, we anticipate low double digit revenue growth sequentially with margins expected to expand by 125 to 150 basis points as a result of our strong operating leverage across all markets.
And our drilling and evaluation division, we anticipate and mid single digit revenue increase with margins declining 100 to 125 basis points sequentially.
The moderate growth and anticipated reduction and margins are primarily attributed to the seasonal decline and our software sales globally.
I'll now turn the call back over to Jeff.
Jeff.
Thanks Lance.
To sum up I'm optimistic about how this transition years shaping up that.
And the demand outlook continues to improve both internationally and domestically even as some regions still experienced lockdowns.
This year's headed in the right direction and Halliburton is focused on the right things to deliver on our shareholders' objectives.
We expect our strong international business to continue its profitable growth as activity increases throughout the year.
And North America, our business has recovered and is demonstrating margin improvement on the back of our strong operating leverage.
Digital is growing our revenue and helping us and our customers increase operational efficiency and reduce costs.
Our commitment to capital efficiency is expected to support growth and solid free cash flow generation and.
And finally, we believe that our strategy to advance cleaner affordable energy positions us well for the future.
And now let's open it up for questions.
If you'd like to ask a question at this time. Please press the star and the number one key on your Touchtone telephone to withdraw your question price per pound key.
Our first question comes from James West with Evercore ISI.
Hi, guys.
Good morning, James.
And the Jeff clearly.
International looks looks good and the back half.
Randy days and are left the conference call and obviously, you and I have silicon photonics and between but.
And your visibility on the second half and even more so in 'twenty, two which I think is more important.
Should have increased at this point and so I'd love to hear your thoughts on kind of how the international recovery.
Take shape I understand you know double digit year over year second half for this year, but really is it kind of.
And into 'twenty two.
And how we should be thinking about regions markets, where the growth is going to be and and should that double digit momentum continue.
Yes, Thanks James.
Yes.
Confidence improving.
And visibility improving.
And our outlook both for 'twenty.
One and for 2002 and in fact when.
And when we see the tender pipeline strong strengthening these are all sort of the things that.
Start sometime later this year, but really start to get traction and 'twenty, two and even 'twenty three.
Some of the.
The programs that we're seeing are.
Shorter cycle barrels, but the fact is those are actually service intense barrels defined switch things and it's going to drive great for upstream spending faster and.
Even if I look at just 21.
Outlook confidence.
And more so today.
And I think earlier and we see it.
And you know at a minimum and proving to flat year on year, which is an improvement from what we thought earlier.
Right.
Okay. Okay makes sense and then as we think about North America, obviously, the big E&ps are going to remain capital disciplined and probably show some really good cash flow this year, given where the oil price is but they'll step up next year.
Is it committed spend and a certain percentage of cash flow. So are you starting to have conversations or sort of think about the 22.
And it reflects to North America, and kind of what the increase could be and spending if oil prices are for.
And higher than they were going into this year.
Yes, James I think we're going to see sort of the steady cadence of increase.
And as we move through this year and even into next year.
I think that you know just the fee.
And back and since I get that there.
There is a lot of discipline around.
Production, and and where and what they can do profitably.
Yeah and also thank as we see improvement into 2022.
They will face.
Service cost inflation, just because of where everything is great and what needs to be replaced so I don't think they.
And it won't be.
It certainly won't be the same and I think that.
Tightening of capacity is very good for Halliburton, and I think that if anything that will be a bit of a governor.
Okay. Thanks, Jeff.
Yes.
Our next question comes from Scott Gruber with Citigroup.
Hey, good morning, good morning, Scott.
So as you guys, probably heard and some of your investor conversations.
And then some concern around Halliburton in terms of the CMP margins.
As we start the year just given the mixed doors.
First the completion market.
And we heard the <unk> guide obviously.
How should we be thinking about the second half.
And assuming no net pricing and the U S with the international.
<unk> side starting to accelerate.
Continuing to expand on a more efficient and streamlined platform.
How should we think about second half Incrementals will co.
From a high level, if you could put some color around that.
Okay, and can we do better than the tiki pace, which looks like speed and around 25 per cent.
Well look thanks Scott.
We're confident about the progression and in North America, certainly for CMP, and and globally and I think that day.
And.
Our goal is to maximize the value of this business.
And.
Said I think can expect mid.
Mid teens full year, and I think thats, a solid number and and that's it.
Reflecting and activity increase that is driving the incremental margins as opposed to pricing no pricing in that and I think we have visibility towards what will drive pricing.
Which will substantially improve and.
In fact supercharged those incrementals, but I think right now we are building and our outlook around what is the steady cadence of improvement.
And.
Maintaining and actually continuing to drive further efficiencies and North America with respect to it.
Keeping our cost.
The reset that we did last year is still alive and well and place.
Gotcha and then.
Other question on the D and E side.
And obviously, some some noise on the margin front around the software sales.
But maybe some color and the second half for for D and E.
The question is and the past as we've seen the international side of the business accelerate off the bottom we've often seen startup cost.
And limit the margin improvement potential at least for a couple of quarters at the start of the cycle is there risk that this cycle or is that really diminished given the digital applications and streamlining the platform and how should we think about do you need margin expansion and the second half.
And as things start to pick up internationally.
Yes, Thanks look I think the.
And the DNA starting at a higher point than it did finished last year.
It is important and I think it says two important things one our software business is strong and and accretive.
And it also says though that the rest of the business margins the breast and <unk> margins. The baseline is improving and so we're knocking on double digits as well.
We look out through the rest of the year.
And as I look at the back half for the international expansion.
And we're positioned today for that and so the kind of investment we're making.
We view it as of March we want to continue to improve the baseline.
Margins in that business. So it's continuing to improve and so I think we will see improvement and 2021 I think that continues.
And that and so our outlook is.
For continuing to grow those margins I don't see the kind of headwinds that we might have seen a year ago. When we were ramping for one of the largest contracts and the north sea.
See that repeat.
And some of what we're getting also.
And is the benefit of the capital efficiency, that's baked into a lot of our DNA.
Ability to move things around in fact, that's at the core of our strategy is capital efficiency and I think that manifests itself around how we move tools and other things.
Great I appreciate the color Jeff Thank you.
Our next question comes from David Anderson with Barclays.
Hi, Good morning, Jeff I was just wondering if you could just talk briefly about the pressure pumping market share you want to.
<unk> talked about you know DGB engines and <unk>.
And the E&ps are increasingly looking to move away from diesel some even suggesting higher pricing on this type of equipment. I was just wondering if you could kind of towards where you stand on this and are your customers pushing for this type of equipment and.
Are you starting to see any bifurcation of the market on pricing because of this.
Yeah. Thanks, Dave look I think as we look into the future.
Those types of solutions will get pricing earlier.
And more so.
We are saying.
And more demand for those types of solutions, and we have a leading position around.
Whether it's tier tariff.
Tier four dual fuel or also.
<unk> electric.
And so yes, we're seeing and van I think that the.
Case, and will happen gradually simply because of the ability to do two things one put equipment into the market and so the way, we look at that and Thats replacement equipment generally.
And so we've got 10% to 12% of our equipment that goes on.
Off every year and so what we're able to do is replace that with what we view moving higher margin better returning equipment over time.
But thats more of the pacing that we see.
And then the other sort of key components around pricing I mean, when we look at and I won't.
And into all of this but when we think about returns for.
New equipment, any kind of new equipment, but particularly technology, we expect some premium around the technology and also derisking and the time horizon.
Impact of making those returns also and I think that's equally key.
That makes sense and then if I could just switch over to the international side.
You talked about improved project management activity in Iraq, and Saudi Arabia I was just wondering first was there anything noteworthy behind this improvement or is it just more of a course of business but.
More importantly, as you talk look at the tendering activity out there.
Is this going to be a preferred contracting model for N O sees I guess, assuming we're at the beginning of a multiyear growth phase and if so are you comfortable increasing your exposure to project management activity.
To answer the first question, David and just sort of normal course of other unless we see improvements and we see more.
Activity at different times, so that's really all day read through on that.
Yes, I think the.
With respect to project management broadly and how we see those contracts and the future obviously a lot of activity around that and you will be certainly very thoughtful around how we increase that exposure and we manage that risk.
And the most important component of looking at those types of things and understanding and managing the risk of course, and it's one of the reasons up so.
Alright, Thanks, and you hear me say it a lot, but I am talking about profitable growth internationally, and so that profitable component is going to be the lead parts around how we grow internationally. So we will take up.
Certainly we're in that business, we're good at that business.
But we're also.
Pretty circumspect around how we make money doing that.
Thanks, John.
Thank you.
Our next question comes from Sean <unk> with Jpmorgan.
Thank you Hey, good morning.
Morning, Sean.
Since E&P and a pretty good quarter all things considered.
And you expected some mix shifts for the back half of the year.
Private E&ps led the early recovery, you said, you're expecting some publics to add rigs and the back half.
And does this also suggest that you think private e&ps and mostly added what they can under the current oil price environment and they've been they've ever have the rig count today and there are two thirds of the rigs added off the trough, but there and market, there and economics and not that different maybe from the publics and I'm just curious your visibility on private E&P activity for the balance of the year.
Yes look I think that they are the <unk>.
Most nimble group Theyre going to move the quickest to engage they also have the least impact on the overall headline production number also so I think that I really am encouraged by the activity that we've seen.
The ability to continue that.
They're all making their own economic decisions and they make that really without a lot of.
Stakeholder beyond the owners.
Vito.
Direction, and so I think what we're seeing is a natural reaction to that but I don't think its indicative of how the whole market behaves and so they have the ability to get real busy and then slowdown and back and down as they see production start to ramp up a little bit for them and it changes their economics.
And so.
A hard March up into the right and not necessarily and I think they'll all make their own decisions and could easily.
I'm not going to say back off but what they will do is make those decisions.
And has.
Other.
Operators start to ramp up and Thats, obviously, a much more disciplined group for their plans in place.
Thank the key.
Point to make here, though we're at the end of the first quarter were into Q2, and we haven't talked about any of the kind of budget blowouts that we talked about and prior years, where Oh Wow, we've overspent, so there's something coming that's.
And then a slow things down and that's not at all what we see in fact, what I'm describing in terms of.
Our confidence and the cadence.
Is the confidence and the cadence that we are going to stay busy and marching through the second half of the year likely ups and fact I think our outlook today is.
Up North America.
Up North America, maybe close to 10% on the full year. So that's some moderation, but that's still growing.
And it's a good point I appreciate that feedback.
On DNA and the results were obviously impressive sort of unpack the impact of seasonal software sales spilling into the first quarter, but you've also been press releasing a lot of the new contracts.
And agreements tied to digital initiatives. So I'm just curious how much of the confidence underlying your margin commentary is driven by the improved mix from digital and could eventually be justified and maybe enhance and disclosure around the materiality of digital to your results.
Well, it certainly digital and enhance it enhancing our margins.
But thats and Thats, certainly where we want to see that go and we expect it to continue it's also baked into all aspects of our business. So from a digital perspective.
It is sort of equal parts customer oriented just consulting and software sales and it's also equal parts.
Making our tools better so they'd be coming answer products and we sell them through the normal course of business, but they meaningfully impact the value of those tools and then finally.
What it does internally to drive our own cost out and so helping yes, but I think more importantly, when I look and DNA is again back to that baseline of improving margins, which is built on the back of sort of the high credit performance and technology their wireline performance and technology, there and so those kind of things that.
Our operational and we can see them, we see them getting traction.
More broad traction those are the kind of things that as we look into a multiyear up cycle internationally.
And that's what's going to drive margin up.
And one in 'twenty two 'twenty three.
Really helpful. Thanks, Jeff.
Our next question comes from Ian Macpherson with Simmons.
Thanks, Good morning, guys.
And Jeff I wanted to ask you for an update on your.
And your innovative.
Frac operations you spoke.
Interestingly last quarter about the smart fleet.
And as well as.
We've seen what you've accomplished with the grid Frac I know theres been some IP contest there I hope when we talk about that but just kind of and update on how those operations on leading edge technology and.
Domestic cracker going and how you see that blossoming over the course of the year with with incremental fleets of those varieties.
Yes look.
Bob.
Really like the technology I like what we've done.
The.
And as a smart fleet.
And as advertised and we've got more trials to do.
But we continue to find more effective ways to deliver that solution, which should allow us to scale, even more quickly I think it's going to.
Continue to gain a lot of traction.
Very capital efficient approach to and planning technology, because it implements with the equipment that we have.
And equally standpoint.
And again.
Certainly pleased with the performance.
And that we've seen yes, it continues to drive or deliver on the kinds of efficiencies and we thought we would see both from us for us in terms of utilization and.
<unk> per horsepower.
A lot of interest from customers around that technology also.
But let's remember, we're maximizing value and North America. So we only put this equipment out when it may.
It meets our return expectations and we can derisk the time horizon.
And so.
It's not.
And it's going to look more like replacement upgrading and replacement as opposed to sort of new investment.
Understood. Thanks, Jeff and then separately Lance I wanted to ask you about the for.
Free cash flow progression going into Q2 and for the rest of the year, obviously, the Capex was light loaded and Q1 and.
And so just thoughts on how all the capex sequences through the year and just general.
Maybe a refresh on on total absolute dollar working capital framework for this year, not sorry, not working capital, but bottom line free cash.
No good.
Good question and look I think.
Overall as everyone knows maximizing free cash flow remains a key priority for us and what we're focused on.
But more so free cash flow, that's driven by margin progression and then all aspects of the capital efficiency I know, Jeff covered a little bit and his.
Prepared remarks.
Around efficiency and working capital and remaining disciplined around capex.
Look more operating profit we see ahead.
And based on our activity outlook improving.
And and obviously the progression around margins that we've discussed already this morning, we're pretty optimistic about what all of that means for 2021 free cash flow target, which today gives us.
And you know more confidence that we will be sort of ahead of where consensus sits today.
Even excluding the change and the metric that we've outlined this quarter.
Perfect. Thanks Lance.
You bet.
Our next question comes from Chase Mulvehill with Bank of America.
Hey, good morning, everybody Hey, good morning, Jeff.
And I would say.
So I guess in your prepared remarks, you talked about a doubling of the value of submitted bids.
Across the international market, if we compare that to what you saw last year. So I guess I was hoping that maybe you could provide a little color relative to the mix between <unk> Ioc's independent E&ps and and maybe the regions that you see the most pickup and.
And bidding activity and then.
And I don't know if you'd be willing to kind of step out over your skis, a little bit and say you know what it might would mean for activity as we kind of get into 2020 two and if you start signing a lot of a lot of these contracts.
So and I know you talked about some some continued growth and some strong growth on the international side over the medium term, but I don't know if you'd like to quantify that at this point just given the bid activity you're seeing.
Yes look I think that.
<unk> of activity. We're seeing is is probably more weighted towards middle East Latin America broadly and <unk>.
A tender activity.
And I think that I'm not.
And I'm going to try to quantify things that are.
To derivatives to enter.
And deviations in the future, but what our view is.
That's certainly indicative of a growing market and the kind of market that.
And it will grow over time.
We're going to engage and that and participate in it but at the end and and and.
And be successful, but our view is.
A focus on profitable growth and drive international revenue growth that way.
But I think we're also going to see.
And that sort of lead to the broader based kind of recovery, which is equally important to price and so I bring that up just to say that.
These.
Big tenders are always very competitive from a price standpoint, but where we start to see price improvement typically is as the market sort of starts to fill up and we see more opportunities and.
And that is how we see and the international market shaping up so.
I think thats and equally important concept and what we're saying in terms and growth.
Okay.
Thanks for the color there and maybe if I can kind of come back to the conversation around and U S onshore and total and tried to tease out a little bit more and the publics versus privates.
I don't know if you'd kind of be willing to share your mix.
<unk> for versus profits and the U S onshore and no kind of overall rig activity is roughly half between the publics and privates today.
And it continues to kind of see a shift towards province.
And as activity continues to rebound because they are obviously responding to a higher oil price, while the publics or not.
And so maybe just talk to your mix and kind of what advantages you think you have.
When you look to kind of pursue more opportunities on the product side.
Versus your competitors.
Look we have a great footprint and North America, we've got a leading position in North America, which means we really work for all of the customers in North America.
So from a mix perspective, what we look for is efficiency and we'd look for opportunity and we look for growth opportunity and we look for.
Take on technology and performance and so.
I think the.
And that's the way we view the market less around a versus b, but it's more do they have the characteristics that.
Allow us to drive our value proposition and market and maximize.
The kind of returns like we're talking about and and so I think that that moves at different times, depending on where the market is.
But it doesn't usually changed a whole lot.
Okay, Alright, I'll turn it back over thanks, Jeff. Thank you.
Our next question comes from Marc Bianchi with Cowen.
Thank you I.
I guess thinking about the cost structure going forward, there's a few variables that I think with.
Covid and normal normalization hopefully.
Coming out of Covid, where maybe there could be some increased travel and entertainment expense.
I'm curious how that sort of factors into the margin outlook that you have and.
If there's if there's any risk to maybe a headwind to margin as we get into the back half of the year.
Yeah. Thanks Luke.
Those types of costs are in our in our outlook. So I don't.
We manage cost all the time I don't.
C a bow wave of that coming back.
And we've reset the earnings we reset it and terms of how we work and how we move people around and how we go to market. So.
And.
You know.
Look forward to the market opening I think that's going to drive a lot more demand and that will continue to drive demand for oil, but I think for them.
For our standpoint.
We're going to we just manage those costs.
Yes, thanks for that Jeff.
Lance back on the free cash flow.
And the working cap was a positive number this quarter, but then there was another sort of $2 50.
Drag or outflow from other operating outflows could you could you talk about that and then just as I think about those two lines over the course of the year.
Would you would you expect them to be net neutral positive negative.
Yeah, so other operating.
And the cash flow line item tends to be pretty heavy and the first quarter.
We've got compensation that tends to hit in the first quarter as well as taxes are heavy with property taxes et cetera, and so.
It's not atypical from us from a.
Intra year cyclicality perspective, we expect that to lighten up.
Obviously into Q.
And that's sort of the color I would give you on that.
Okay. Thanks for that turn it back.
Alright, Thanks, Mark Thank you.
Our next question comes from Connor Lynagh with Morgan Stanley.
Yes. Thank you I was hoping we could put a finer point on some of the discussion on pricing and international you've made the comment that obviously large tenders will be competitive, but leading edge pricing should increase can you maybe frame for us the extent to which leading edge pricing is meaningfully different.
From what Youre more sort of contracted book looks like in other words, its leading edge pricing is moving higher and would that imply that contract pricing will follow or is there a mark to market effect, we should think about.
No I think contract pricing will follow the way that works generally starts there.
The contracts themselves improve over time, and I think that having alternatives that are higher priced also help to create pressure upward pressure on.
Pricing, even in larger contracts and.
I would add I mean, that's that's what Jeff is describing is exactly what we were seeing.
And the early part of late part of 2019 2020 was that dynamic in terms of large tenders still bid competitively, but rising level of activity was tightening.
The rest of the broader market, obviously, we took a pause with COVID-19, but we expect as we see activity levels creep back to where we were and those for that period of time I think we're optimistic that we start to see the same behavior from a pricing perspective.
Got it makes sense and I guess, just further to that and so on the on the large tender side of things there's been some discussion about.
Some of the software elements, maybe improving before pricing how do you guys feel about the potential for terms and conditions or.
Different types of ancillary charges, improving and the near term and I guess the other question is you've made a lot of changes to your cost structure. Do you think you can maybe drive improved margins.
Without without the increase in pricing.
Yes, we expect to do that and that's as we continue to see activity come on and we will see improving margins.
Always working T's and C's, there are always leading edge sort of things that we're working on that become easier to do become very important over time to do and we're doing those all the time and we're doing those now.
Also digital sort of implicit through all of this and when we see our digital and.
Improving driving margins better all the time and so.
Thank you.
Should see improving margins before we see even the pricing, but I think the pricing is for it allows us to really.
That's where we see the real traction and Incrementals.
I appreciate the color. Thanks.
Our next question comes from Christopher <unk> with Wells Fargo.
Thanks. Good morning, just wanted to ask first on some of the cost inflation that was mentioned in the prepared remarks.
Is that mostly getting offset in the pretty near term maybe this quarter and extra is there any impacts that could be flowing through as you get price recovery and the second and third quarter. Just curious if there's going be any tailwind from that.
Yes, Chris.
This is lance.
Yes, I mean, a lot of that is largely the cost inflation that we described is driven by.
You know, what's happening and in North America.
And the growth that we're seeing there some of it was driven by the impact of the storms right and some of the shortages that we saw across the value chain.
But I would say look our size and scale gives us an inherent advantage.
To negotiate the best deals.
Lot of those consumables.
And to the extent.
Lot of our commercial arrangements allow us to pass that through to.
And to the customer.
Our guidance overall sort of incorporates that.
And I think look we're always going to be continuing to focus on maximizing our value and North America, regardless of the challenges and the environment, but that's sort of baked into how we see.
At least the near term playing out and obviously the outlook, we gave them given for the for the year.
Okay. Thanks, that's helpful and then.
And maybe on Capex. So I think in the past you said, 5% to 6% range.
And the data it looks like service intensity is very high pricing is not really caught up with the amount of work is getting done and so just curious.
To check in on the 5% to 6% range. If you expect that would still be in place for 'twenty, one and probably 2020 two as well.
Yes.
Yes, I mean, that's what we've talked about capital efficiency and driving capital efficiency through all parts of our business. That's what it allows us to get to that 5% to 6% of revenues in terms of.
Capex spend so yes for.
'twenty, one and perfect. Thank you.
Thanks.
That concludes today's question and answer session I would like to turn the call back to Jeff Miller for closing remarks, Okay. Thank you Liz before we end the call I'd like to make a few closing comments I am encouraged by this year's positive momentum and demand recovery.
And we were well positioned globally for growing international demand and the expected steady activity cadence and North America.
And our with our leading digital technologies, which allow us to maximize value for Halliburton and its shareholders and look forward to speaking with you again next quarter, let's please close out the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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