Q2 2021 Halliburton Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Halliburton second quarter 2021 earnings call.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to Abu Zeya head of Investor Relations. Please go ahead Sir.
Good morning, and welcome to the Halliburton second quarter 2021 conference call.
As a reminder, today's call is being webcast and a replay will be available on halliburton's website for 7 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 in halliburton's form 10-K for the year ended December 31.2020.
Form 10-Q for the quarter ended March 31, 2021 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.
Details on reconciliation to the most directly comparable GAAP financial measures are included in our second quarter earnings release and can also be found in the quarterly results and presentation section of our website.
After our prepared remarks, we ask that you. Please limit yourself to 1 question and 1 related follow up during the Q&A period in order to allow time for others, who may be in the queue now I'll turn the call over to Jeff.
Thank you Abu and good morning, everyone.
Our performance in the second quarter demonstrates that our clear strategy is working well and Halliburton strategic priorities are driving value, let's get right to the highlights.
Total company revenue increased 7% sequentially as both North America and International Top line continued to improve operating income grew 17% with solid margin performance in both divisions.
Our completion and production division revenue increased 10% driven by the strength in U S land completions.
C N P delivered operating margin of 16% in the second quarter, reaching 3 year highs.
Our drilling and evaluation division revenue grew 5%.
Operating margin of 11% was about flat sequentially with rig count increases across multiple regions offsetting a seasonal decline in software sales.
North America revenue grew 12% as both drilling and completions activity marched higher throughout the quarter.
Increased utilization and our significant operating leverage supported sequential margin expansion.
International revenue grew 4% sequentially with activity increasing in a key producing regions of the world. Despite COVID-19 disruptions in various countries.
Finally, we generated strong free cash flow this quarter, bringing the year to date free cash flow to almost $425 million.
I'm pleased with the solid performance, we delivered in the first half of this transition year.
While recent market volatility only demonstrates the fact that we remain in a transition year.
Today I want to spend more time discussing what I believe will unfold over the next couple of years.
First let me reaffirm the outlook for the rest of this year.
In the second half of 'twenty 'twenty, 1 we expect activity momentum to continue.
Internationally, we still anticipate a double digit increase in activity compared to the second half of 'twenty 'twenty, even as certain countries continue to face Covid disruptions.
With commodity prices remaining supportive.
We believe activity in North America inches higher with drilling outpacing completions as operators buildup well inventory for 2022.
Looking beyond this year, let me describe the longer term outlook.
We believe that we are in the early innings of a multiyear up cycle.
For the first time in 7 years, we anticipate simultaneous growth in international and North America markets and this view guides, our business objectives and expected outcomes.
So here's how we see the macro industry environment, playing out over the next couple of years.
First we believe commodity prices will remain structurally supported with both demand resurgence in many economies and increased vaccines availability, we anticipate that global demand will continue to exceed supply.
Particularly to the extent OPEC plus manages supply additions over the near term.
As OPEC pluses spare capacity returns to normalized levels over the next year, we believe sufficient pent up global oil demand will support a call on both international and U S production.
Second multiple years of Underinvestment in the international markets, coupled with the anticipated oil and gas demand growth give us confidence in our healthy international recovery.
I believe the growth will be led by the national oil companies and focused on shorter cycle barrels.
This activity should come with higher service intensity and higher relative capital spin around the wellbore as opposed to long cycle infrastructure investments.
We expect mature fields, both onshore and offshore to attract the most investment while large scale Greenfield exploration will be limited to a few markets in Africa and Latin America.
As a result, we anticipate double digit annual international spending growth at least over the next couple of years.
Third we believe that a supportive commodity price environment normalized levels of spare OPEC plus capacity and high decline rates in U S. Shale are constructive for North American spending we.
We expect drilling and completion spending in North America will also grow double digits annually over the next 2 years, although activity will not return to pre pandemic levels. We.
We expect private operators to Opportunistically lead the activity come back while public e&ps balanced growth and returns.
Fourth I believe equipment availability will tightened much faster than most people think.
In multiple product lines, we believe that equipment supply will fall behind anticipated demand.
Today, both drilling and completions equipment or nearing tightness in North America.
And we expect to see international markets tighten over the next few quarters.
Given the scarcity of external capital sources, many north American service companies do not currently generate sufficient cash to organically fund investment in new equipment innovation and maintenance, let alone generate sufficient returns.
Internationally multiple years of service company Capex reductions should limit equipment availability.
We expect increasing demand and tightening equipment capacity will lead to higher prices.
Pricing is beginning to return in North American now and is expected to lag internationally, where contract durations are longer.
I know the positive macro outlook I. Just described is a case for the rising tide lifting all boats. However.
However, what matters is how halliburton is positioned to outperform in this market the.
The improving macro environment marks the first time in a long time that we see an increasing level of customer urgency and a pivot back to what creates value in our industry and this reinforces the power of halliburton's unique value proposition.
Throughout the downturn Halliburton doubled down on our value proposition to collaborate and engineer solutions to maximize asset value for our customers. We continue to invest in technology, both digital and hardware that maximizes value per barrel of production.
We're expanding in new market segments, we are uniquely positioned in North America as the only integrated service company.
Our collaborative culture, and engineered solutions create sustainable competitive advantage setting halliburton up to move from value creation the value capture.
Here are a few examples of how halliburton creates and captures value through our digital technologies.
We are accelerating the deployment and integration of digital both with our customers and internally.
It creates technical differentiation contributes to higher margins and drive internal efficiencies.
Over the first 6 months of this year, we grew the total user count on our I energy public cloud by 70%.
And cloud revenue now constitutes almost 20% of our overall software revenues.
We believe that this shift from on Prem to cloud software solutions drive faster growth.
It also allows us to expand our revenue base with the same customers as we add new cloud native applications and increase the number of users within the same operator.
Digital technology enables high value remote and autonomous operations, we see steady growth of our remote monitoring of open hole wireline operations. For example, this past quarter, we deployed virtual remote logging capabilities on a remote location in continental Europe utilizing.
Utilizing a well site specialist in Norway to remotely operate downhole tools.
Virtual remote logging allows us to place highly specialized personnel at regional hubs rather than in the field, which leads to better resource utilization fewer personnel at the well site less.
Less H S. He exposure and higher margins.
We also deployed digital and automation in our drilling operations across the globe, both on discrete and integrated contracts.
Over 75% of our I cruise drilling system runs our fully automated today and we expect all runs to have some automation by the end of this year.
Across Europe, and Eurasia, we increased the number of automated jobs fivefold since the beginning of this year.
Drilling automation directly translates to top tier customer performance.
For example over the last 2 years it allowed us to improve the rates of penetration by approximately 25% on a middle east lump sum turnkey project.
And on another integrated contract in the North Sea.
Moreover.
Digitalization and automation improve the resource efficiency of our own operations in the second quarter on an N O C project in Russia, we reduced rig site personnel by 40%.
Separately for an IOC in the Caspian, we captured cost efficiencies through using our remote operations center to monitor and control drilling jobs.
Halliburton's differentiated drilling technologies penetrate the market and deliver results for our customers.
Our multi year investment in drilling technologies is paying off and we believe we are on the right path to outgrow the market as international drilling activity ramps up.
Our drilling technologies deliver top quartile performance on discrete contracts and form the core of our integrated project management offering.
This past quarter on a challenging gas project on Russia's Yamal peninsula the.
Halliburton project management team drilled 8 horizontal wells 36 days ahead of plan with zero HSE incidents.
In close collaboration with our customer, we maximize drilling performance and accelerated the operator's production.
And lastly, we deployed digital solutions to optimize production.
In the second quarter, we won a contract that highlights the enormous opportunity for digital adoption in the middle East.
After many years of collaboration with Halliburton on its digital transformation journey co.
White oil company expanded our automated production management contract in North Kuwait to all other assets in the country.
K O C will use decisions based 365 halliburton's cloud based subscription service for E&P applications to automate work processes and accurately plan forecast and optimized production throughout K O 6 portfolio.
We're also expanding in new market segments.
We expect to benefit from the significant growth potential of our specialty chemicals and artificial lift businesses, both in North America and internationally.
As Halliburton increases participation in these new segments.
We believe we will enjoy unique growth opportunities that are margin accretive and longer cycle.
I'm pleased to announce that in the second quarter Halliburton was awarded a 7 year production chemicals contract with a large IOC in Oman.
Products for this new contract will be manufactured at Halliburton's, New Saudi chemical reaction plant scheduled to open later this year.
The strategic location of this plant will allow us to manufacture and sell specialty chemicals to other new customers throughout the region.
In North America, we recently expanded our footprint in the downstream process and water treatment chemicals business through awards of 2 separate 5 year specialty chemicals contracts from large refiners on the Gulf Coast.
And our growing international artificial lift business earlier. This month, we completed the first installation of our E. S. P contract in Kuwait.
We believe this contract gives us scale in the region that will allow us to profitably grow our artificial lift business and other key markets.
Finally, Halliburton has the broadest market exposure because we remain the only integrated service provider active in both North America and international markets. I believe this unique position allows us to capitalize on the double digit growth equipment, tightness, and resulting better service pricing in <unk>.
Markets.
In the international markets, we expect that halliburton's differentiated drilling equipment capacity tightens first.
Over the next few quarters as large tenders soak up capacity I expect a return to the pre pandemic environment when pricing improved in certain markets.
In North America spin.
Specific equipment categories are already tight today.
There is a high demand for low emissions frac equipment and the supply is limited.
Halliburton leads the market in low emission solutions today and that gives us a structural pricing advantage to further maximize value in North America.
Halliburton showcased our market, leading low emission solutions at a recent event and Duncan Oklahoma over.
Over the course of 5 days several hundred people from more than 40 operators came to see our electric and dual fuel equipment displays and operational demonstrations, including our 5000 horsepower Zeus electric pumping unit, our new express blend blending system. He went to electric wireline unit the electric Tech Command Center.
And an effective power generation solution.
They didn't just see R&D plans and prototypes.
Instead, they witnessed functional job ready equipment that works for our customers today and delivers unprecedented fracturing performance and reduced emissions.
The Dunkin' event also showcased our smart fleet intelligent fracturing system.
Smart fleet marries our digital capabilities in fracturing expertise to do what was not possible until now give customers control over fracturing performance in real time.
It sets us apart from the rest of the hydraulic fracturing market and solidifies our industry leadership and intelligent fracturing.
In the second quarter, we deployed it with 2 IOC customers and 2 different U S basins with excellent results.
Operators have achieved more consistent fracturing placement on every stage with improved cluster uniformity and management of offset Frac hits.
Smart fleet.
Third with our premium low emissions equipment creates a powerful combination of halliburton's, leading technologies to deliver superior production results reduce environmental impact and drive a strong margin differential for Halliburton.
We believe that our unique value proposition combined with customer urgency and equipment tightness in the U S and international markets will improve pricing for our differentiated equipment and services.
Our equipment reaches sustained levels of higher utilization in North America. We are now moving from passing on inflationary cost increases to setting net pricing higher and we expect this trend to accelerate into 'twenty 'twenty 2.
Internationally pricing will take longer to catch up to North America, and we will first manifest itself on discrete contracts and underserved markets.
We expect large tenders to remain competitive, but our strategic priority is clear deliver profitable growth as the recovery unfolds.
We expect improved pricing higher utilization and our significant operating leverage will deliver strong incrementals for halliburton in this up cycle.
In the face of both current and expected demand increases we remain focused on improved returns and capital efficiency and expect our overall capital investment to stay in the range of 5% to 6% of revenue.
Now, let's step back for a minute and think about what this means for Halliburton Myra.
On my remarks, often focus on the practical view of the near term but.
But I also have conviction about halliburton's performance in the early innings of this up cycle.
Based on the market assumptions outlined earlier, we expect revenue to grow at a mid teens compound annual growth rate over the next 2 years.
We also expect operating margins to expand by about 400 basis points by 2023, and thus return to 2014 margin levels.
We are committed to driving significant free cash flow and returns for our shareholders as this multiyear upcycle unfolds.
This earnings power results from the execution of Halliburton strategic priorities I.
I am confident that our focus on technology differentiation digital adoption.
On capital efficiency positions us for profitable growth internationally and maximizing value in North America.
Now I will turn the call over to Lance to provide more details on our second quarter financial results Lance. Thank.
Thank you, Jeff and good morning.
Let me begin with a summary of our second quarter results compared to the first quarter of 2021.
Total company revenue for the quarter was $3.7 billion and operating income was $434 million, an increase of 7% and 17% respectively.
Higher equipment utilization and our significant operating leverage supported these strong results as rig counts moved up globally in the second quarter.
Now, let me take a moment to discuss our division results in a little more detail.
Starting with our completion and production Division revenue was $2 billion, an increase of 10%.
While operating income was $317 million or an increase of 26%.
These improvements were driven by higher activity across multiple product service lines in North America land.
Improved cementing activity in the eastern Hemisphere, and Latin America.
Increased completion tool sales in the middle East, the North Sea, and Latin America, as well as higher well intervention services in Saudi Arabia and Algeria.
These improvements were partially offset by lower stimulation activity in Latin America.
In our drilling and evaluation Division revenue was $1.7 billion, an increase of 5%.
While operating income was $175 million or an increase of 2%.
These results were driven by improved drilling related services and wireline activity across all regions, along with increased testing services in the eastern hemisphere.
Partially offsetting these improvements were reduced software sales globally.
Moving on to our geographic results.
In North America revenue increased 12%, primarily driven by higher pressure pumping services drilling related services and wireline activity in North America land as well as higher well construction activity in the Gulf of Mexico.
Partially offsetting these increases were reduced software sales across the region.
Turning to Latin America.
Revenue was flat sequentially, primarily driven by increased activity in multiple product service lines in Mexico higher fluid services in Brazil, as well as additional completion tool sales in Guyana.
These results were offset by lower stimulation activity in Argentina, Mexico, and Brazil decreased software sales across the region and lower project management activity in Mexico and Ecuador.
In Europe Africa C. I S revenue increased 7%.
Resulting from increased activity across multiple product service lines in Russia.
Nor way, Algeria and Ghana.
These increases were partially offset by lower software sales across the region and lower activity in Nigeria.
In the Middle East Asia region revenue increased 5% rich.
Resulting from improved activity in multiple product service lines in Saudi Arabia improve.
Improved well intervention services across the region in.
Increased drilling related services in Oman.
Completion tool sales in Kuwait.
Improved well construction activity in Australia and increased pipeline services in China.
These improvements were offset by lower software sales across the region.
Reduced project management activity in India.
And lower overall activity in Bangladesh.
In the second quarter, our corporate and other expenses totaled $58 million.
For the third quarter, we expect our corporate expense to remain largely unchanged.
Net interest expense for the quarter was $120 million and should remain flat for the third quarter.
We remain focused on reducing our leverage in the near term and recently announced the redemption of our remaining 2021 senior notes at par or ahead of schedule in August using cash on hand.
Which should reduce interest expense beyond the third quarter.
Our effective tax rate for the second quarter came in better than expected at approximately 22% benefiting from several 1 time discrete items.
Based on our anticipated geographic earnings mix, we expect our third quarter effective tax rate to be approximately 25 per cent.
Capital expenditures for the quarter were approximately $190 million and we will continue to ramp up for the remainder of the year.
However, we will stay within our full year target of 5% to 6% of revenue.
Turning to cash flow, we generated $409 million of cash from operations and $265 million of free cash flow during the second quarter.
We believe that our year to date and expected earnings performance for the remainder of the year combined with efficient working capital management should result in our full year free cash flow of approximately $1.2 billion.
The growth in earnings outlook that Jeff laid out positions us well to grow our free cash flow over the next couple of years.
Now, let me turn to our near term outlook.
In the international markets, we expect a steady increase in activity as the rig counts continued to recover.
In North America, we anticipate modest pricing improvement and continued activity momentum in both completions and drilling but sequential activity growth will be slower than in prior quarters.
As a result for our completion and production Division, we anticipate high single digit revenue growth sequentially with margins expected to modestly increase by 25 to 50 basis points.
In our drilling and evaluation division, we anticipate sequential revenue growth of 3% to 5% due to continued rig count increases globally in a margin increase similar to that of our CMP Division.
I will now turn the call back over to Jeff Jeff.
Thanks Lance.
Before I wrap up our discussion today I want to thank our employees for their terrific execution on our value proposition dedication to Halliburton and excellent service delivery for our customers.
Now, let me summarize what we believe and expect will unfold.
We're in the early innings of a multiyear upcycle as oil demand exceeds supply the macro environment will be constructive for both international and U S markets.
Halliburton's unique value proposition integrated services portfolio and differentiated technologies position us to outperform in this market.
We have significant growth potential in new markets with our specialty chemicals and artificial lift businesses.
Our technical differentiation allows us to disproportionately benefit from equipment capacity tightening across markets.
Improved pricing higher utilization and our significant operating leverage will deliver strong incrementals for halliburton in this up cycle.
We will continue to execute on our strategic priorities and remain committed to driving strong double digit growth margin expansion.
Significant free cash flow and returns for our shareholders as this multiyear upcycle unfolds.
And now let's open it up for questions.
Thank you to ask a question you will need to press star 1 on your telephone.
Withdraw you question you May press the pound key please Tim alloy compile the Q&A roster.
Our first question comes from James West with Evercore ISI. Your line is open.
Thanks, Good morning, gentlemen, good morning, James and James.
Jeff you gave a great outline of what would you see as the multiyear expansion for the business and then we certainly agree with what you're you're suggesting how do your customers that when when you're looking at the mosaic of all your different customers on all the different regions are they aligned with kind of debt.
View that it's time to.
Trying to get after it may need to put some supply onto the market and get going.
Look I think we're looking at the day is the macro on when we talk to our customers.
Particularly publix, they're going to do exactly what they've said, they're going to do and I think we start at playing out.
But we also have a good view of the macro on terms of supply and demand.
And.
I think from that perspective, the planet will demand oil.
Where does it come from.
Clearly, we've got line of sight to improving activity internationally I describe that primarily with N O season, Yes, I think that it's it's not zeal.
Steady march to produce more barrels.
And then I think that.
The call back on the U S is simply going to be that that underinvestment that we've seen for a number of years internationally.
It doesn't just spring back into action and I think that's very positive for North America.
From a customer perspective, obviously the privates the price.
They're much more opportunistic around the support of oil price. So we see quite a bit of activity in outlook from them.
Right right and then it is as we think about the returns on the assets that you are putting into the field right.
Right now, we're probably is suboptimal type of return levels they need price if they go up and so what.
What are the levers or how quickly do you think pricing.
Can move in this market to get get back to what you would want to achieve to drive returns higher.
Well James this is a process and it's probably multiple iterations, but I think gross and net pricing to a certain degree today in the U S.
But moving.
And you know as we work through into 2022, I expect that continues to accelerate.
Internationally I think it takes on the same type of dynamics that we saw on 2019 were.
Markets individual markets see tightness see pricing large tenders remain very competitive.
And from our perspective that was that worked well for Halliburton and 19 and enter the first quarter of 'twenty.
And.
We've been very clear I think about profitable growth and so I think that's key when I think about growth internationally.
Keyword, there being profitable growth and so that means that yes, and we see multiple years of growth in front of us and for that reason, we want to be deliberate about how we put equipment to work and make money.
Alright, Alright got it thanks, Jeff Thank.
Thank you Josh.
Our next question comes from David Anderson with Barclays. Your line is open.
Hey, good morning, Jeff.
Clearly very bullish comments on <unk>.
Looking out over the next couple of years I was wondering if you could talk about maybe some of the signs that you're seeing on the international side are particularly with the middle East N O sees.
You've talked about increased completion tool sales from artificial lift contract from other tenders from you.
Yesterday Aramco suggests maybe shifting 6 billion more on upstream I was just wondering when you start to see this to inflect and when does it come through we haven't seen the rig count pick up the 3.2 guide indicates sort of a similar pace of activity from second quarter, but at the same time middle East feels like it should be leaving that double digit growth.
Does your guidance next year I'm wondering if you just help me kind of understand that trajectory, maybe obviously not a very opaque or it's more of an opaque market to help us.
I kind of see what you're seeing in that part of the world.
I mean, what we see is you know, let's say broadly middle east, adding you know adding activity.
Adding it sort of as we speak but more so focused towards next year. So I think that we see.
Well you know what.
Second half to second half, we're going to be up.
Probably mid double digits.
For 'twenty 'twenty, 1 versus 'twenty, 'twenty, so where does that come from I think that that debt alone is ink.
Increasing and we see that sort of across the middle East.
But we also see it in Argentina.
Argentina as an example, we say it in other parts of the market.
And so I think debt.
If that gets traction and continues to get traction as we go further into 'twenty, 2 but debt.
<unk> activity the demand signs are there now that we're seeing in adequacy grow.
That continues to accelerate as we get into 'twenty, 2 'twenty 3 but it doesn't necessarily overcome all of the under investment. So I think that there's work to be done to.
And to grow that business led by 4 for operators to grow production I think uzi sides of gross now.
It'll be more pronounced and 'twenty 2 I know we've described 21 is a transition year. So we still see COVID-19 slowdowns in market share Theres, a number of rigs that arent working because theyre not staffed today not by us, but just in general on so that type of disruption is weighing down on things a bit but I.
Fully expect this to work through that through the balance of 'twenty 1.
That's good to hear.
Kind of a different topic I was wanted to ask about kind of some of the inflation that maybe youre seeing on the North American side, particularly maybe if it impacted your CMP margin at all this quarter and I know youre not really seeming net real net pricing right now, but I'm just kind of curious what the.
On the E&ps are seeing in terms of inflation are we talking like 5%. These days and sort of around the same question I'm wondering about labor.
We do see this increase next year and in E&P budgets on assuming completion crews are added over next 12 months the industry doesn't really seem ready for that labor wise I'm, just kind of curious how you know.
That inflation could kind of start working its way through and obviously that could lead to net pricing at some point, but do you maybe just talk about some of those components that you're seeing on the North American side. Please.
Yes, I mean, I can speak to what we see in terms of inflation and it's Ah yeah on we saw inflation in many parts of our business, whether it's maintenance in particular cost parts and people to do it.
But we've also been able to pass that along.
And in certain cases get.
As we get through the second half of this year and we're seeing some net pricing now.
And I think we'll see more of that more so as we go into 2022.
But the ability to recover inflation.
It is an important an important step also.
And the range is it 5% to 10% 5 per cent.
It moves all around depending on the category.
From a people perspective, we've been able to staff our equipment, we've got a very large footprint and have access to lots of people and so yes.
Yeah, we haven't.
<unk> seen some attrition or turnover, but we've also been able to replace folks.
Early efficiently.
Alright, Thanks John.
Next question comes from Chase Mulvehill with Bank of America. Your line is open.
Hey, good morning, everyone.
I guess first thing.
Really appreciate you guys kind of given some visibility over over your outlook for the next couple of years on kind of top line and margins.
And kind of looking back.
If we were to go back to kind of.
Pre kind of 2014 levels and basically look at the prior decade.
You sustained 20% plus EBITDA margins for basically a decade and that even includes the 20 the 2000 non downturn.
So you've given us guidance.
Debt EBITDA margins will get comfortably above 20% over the next couple of years. So I guess 2 questions number 1.
When do you think we will get back to that 20% EBITDA Mark.
Are you comfortable debt, it's first half of next year second half of next year.
And then once we get there how sustainable is 20% EBITDA margins.
Haven't been above 20% since before 2014, but how sustainable do you think that 20% EBITDA margins will be over the next.
Our cycle.
Yeah. Thanks.
Look I think I've given you my outlook over the next couple of years and so over that period of time, we approach and then exceed.
Yeah, those numbers that we got to in 2016 I think the most important part of this is the science debt the sustainability of that.
And I felt like we see the strengthening macro.
And our unique competitive position in the marketplace.
All very sustainable I mean, I think we're back on to footings that yeah.
We have to produce more of the things that we do to create value become more important and that's an example.
<unk> being.
The technology in our equipment in North America, our drilling technology different elements of technology, whether it's digital or lift.
But all of those things are what are so important in a market that requires more barrels and that's what we see unfolding.
And so I think very sustainable.
I've described it is the early innings I think these are the early innings of a at least a 9 inning game to be played.
And so I am really convicted and excited about the outlook.
Okay, Alright, a quick follow up.
You've given us this a couple of your outlook.
Obviously, that's going to lead to some pretty strong free cash flow.
You're paying down debt, the 2020.1 notes here.
So what's the plan for excess free cash flow.
As we kind of get into 2022 and leverage ratios get to more comfortable levels is it a dividend bump special dividends buybacks M&A or just maybe just build cash on the balance sheet.
Yeah Chase. This is lance I'll take that look I think you're right I mean in the near term we're focused on.
Trimming our debt levels I think that that focus a good example of that focus was what what we plan to do this month or early next actually with the $500 million maturity that we have coming day of paying it down with cash.
Look I think we're getting to a point where.
We're continuing to strive to cut our debt levels to get back to that 2 times debt to EBITDA leverage ratio that we've talked about.
Before but I mean, I think we are getting to a point, where we intend to.
Returned more cash to shareholders, whether in the form of a dividend or share repurchase not willing to commit to that at this point, but it's certainly something that we think is in hand type scenario. So we continue to trim our level of debt and <unk>.
Improved the level of cash that we send back to shareholders.
Okay perfect. Thanks, Lance Thanks, Jeff I'll turn it back over.
Thank you.
Our next question comes from Scott Gruber with Citigroup. Your line is open.
Yes, good morning, Dave.
Morning.
Scott.
Good morning morning, Tim I wanted to get some more color on the encouraging pricing trends here in North America.
The net pricing.
That you're garnering is that going to impact margin as much in the second half I ask because when you look at the <unk> Guide.
The embedded incrementals look to be kind of on the order of 20%.
I would just think it would.
Would be something greater than that.
We will have a big impact is there just a time lag here or are there other offsets maybe on equipment sales margin.
Do we just really need to see low, but little bit more activity growth.
Price and take a bigger leg higher into 'twenty 2.
Yes. It is.
As I said, it's a it's not across the board. It is a process, but we are seeing net pricing in certain pockets and certain things today and I expect that that accelerates as I said into 2022.
But clearly it looks like ESG friendly equipment that is in very short supply.
We have a leading position and.
Dual fuel electric.
Tier 4.
Also and so on all of those categories, that's what the market demands and that's an up structurally.
Structurally because of our large footprint there we have a structurally differentiated position, but that equipment isn't everywhere and that equipment as you know some under contract some slot on is moving.
And so the way I.
I think what's important at this point is that we're negotiating on negotiating up and not down and that's sort of a different dialogue than what we've had and that's what we're seeing today so does that ex.
Do you see all of that in Q3, absolutely not on what you do is you see us on a journey now that's different than the 1 that we've been on and.
And that's where we are.
That's great to hear.
And then turning to the digital contract wins, which was great to see a couple of questions more on.
The impact on margins.
First.
So we can dimension it.
Digital revenues.
Margin flow through D and E are when you have completion of production apps some of it hit CMT.
Then more importantly, how do we think about the real timing and magnitude of the benefit to margins.
Is there much of a benefit during the second half you know through the initial.
<unk> and scaling up.
Simply Kuwait or is it more to come in 'twenty, 2 and 'twenty 3 and then particularly for D&A. It's been a segment where you guys are.
Pushing to structurally lift margins.
Over the last couple of years, how does the.
How does the digital wins.
Deviation of the industry in Alberta participation really.
Bush.
Damian bars, you can go on a more normalized basis as we get deep into recovery.
Well thank you.
Think about digital.
Digital margin impact is across the business, obviously, the software sales and the.
The cloud native apps.
R and D N E, but more broadly digital capability effects, the whole business and so that's behind our answer products of tools like earthstar on our smart fleet. All of those are a byproduct of having digital capability in the company in fact.
Capacity to develop software at scale is pretty unique and that is what allows that to happen. The third way, we consume software and this has an impact also on the entire business is the ability to.
Concern the solutions ourselves and reduce our own cost. So I would argue are a large part of our ability to for example last year reduced the roof line by 50% was rooted in our ability to do things digitally.
Digitally that.
Moving many steps and changed the processes and took people out and so that's why.
Careful how we describe that I think that.
<unk>.
Clearly, it's a contribution to DNA, but I would say that.
The contracts. We've described are all good contracts, but they you ramp up my ramp up they get started it's a consultative process and so you know.
Would expect later this year or really more so into 'twenty, 2 and beyond and I think these build 1 on top of another day.
Calm very sustainable over time less of a sort of pop all at once but sort of building into larger projects over time.
Yeah.
Great I appreciate the color Jeff. Thank you yep. Thank you.
Our next question comes from Ian Macpherson with Piper Sandler Your line is open.
Hey, good morning, Jeff and Lance Thanks for.
Taking my question so.
The 1 question I had Jeff is when you look at double digit trajectory for synchronized expansion for North America and international just given the.
A strong command that OPEC plus has over.
The oil market over the intermediate term, what what type of call on U S. Production growth are you contemplating which underpins your north American outlook for the next couple of years.
Well, yes, we think that.
Some of the what we've seen over the last couple of days I think lays out a path for.
OPEC.
And so that's.
To a certain degree to find if we look at pent up demand for oil at least today the.
The.
If we look at the pent up demand that we see per oil to the hey, if we're at 98 million barrels a day now the economy feels more than 2 million barrels shut in to me in fact, probably 4 million barrels consumed in aviation alone and so I think there is a normalized level of.
Spare capacity that's expected. So then when we think okay North America, what happens there, but were up 10% year on year and I think the expectations that production is largely flat for this year.
I would expect that there would be a call or is it 500000 barrel from number like that some level of growth that would be called on in 2022 debt.
Debt the price clearly supports which would then drive.
For activity for Us certainly and we have to a O N that mixes stemming the decline curve that is always working on North America production. So you know.
Those are the things that underpin our outlook.
And.
Got it thanks, Jeff.
And then staying on the on the domestic pressure pumping cyber obviously, beginning to see some of the smaller competitors.
Announce firm plans and sort of abstract plans for renewing their fleets with with clean fleet.
Well different iterations of it.
In your view is that coming earlier than you would like to see it or do you think that the market is ready to support.
The pricing and the returns for that equipment.
At the scale that we've already seen in the last few months.
And do you should we expect Halliburton within your 5% to 6% Capex envelope.
To March along at that same industry cadence with with nuclear fleet investment.
Well look we always look at our what we're fortunate today that we have 1 of the youngest fleets in the market and you know but.
As we replace equipment. We also have a large fleet and so as we systematic or leave replace equipment. We have a choice to make so what type of equipment do we replace it with and it's a combination generally of electric or dual fuel but.
But I think that the.
Our steady drumbeat of replacements and within our 5% to 6% of capital spend we were able to.
Vito meat meat meat meat demand and and and also at terms that are adequate and and but I think those 2 things have to be in place. So Fortunately, we're in a position where we are able to deliver those things today.
I'd say today, but the day and over the.
The near term.
With.
From operations.
You know remains to be seen the pace at which all of that can happen in the market, given where sort of broadly.
That market stands today in terms of returns so without the returns it's not we wouldn't be investing in these types of equipment at all Unfortunately, we're in a position to do so and do it.
Ratably, along with our sort of plan replacement cycle.
Yeah.
Super Thank you Jeff I appreciate it.
Thank you.
Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.
Thank you. Thank you very much and congrats on a good quarter here I have a really high level question. It's been a top 10 years for the energy sector, but it's been an even tougher period of time for oil services relative to the rest of energy.
As a leader of this industry. What do you think the key is to track the generalist investor back into this vertical within the space do you think it's about earnings execution is about returns on capital or is it about returning excess capital to shareholders. So return on capital.
Well they all it has to be all 3 of those but I think it starts with some clarity around what is the trajectory over time, that's sustainable as opposed to all of the ups and downs that we seem to have had sort of intra period.
Gyrations and I think what's shaping up today as I described it.
<unk> is a more.
Sort of predictable sustainable trajectory and that's what we see out over the next couple of years and really beyond that just because I think we've been through a lot of the over capitalization theres been underinvestment for a long enough period of time, particularly in the resource.
Debt as demand recovers, which.
It will recover.
I think there's a solid opportunity set for our services are now within within that obviously I have a view that and believe firmly that our.
Competitive positioning is different also and because of that.
Halliburton's in any.
Has tools, whether its our value proposition, our technology or sort of our portfolio and how it's placed to maximize value in North America, which we've always been clear on we want to maximize value in North America and grow profitably internationally and I think both those macros are set up perfectly for free.
Doing that and so as a generalist you know there is some clarity around where we're going on.
We've got some track record of where we've been where we're going.
And I think that sets up well for a generous generalist investor.
Yeah, and so then the follow up on that on return of capital. If you look at the energy sector S&P energy sector trades at a 4.5 per cent dividend yield.
Do you think about halliburton value proposition on a multiyear basis around return on.
Of capital whether through dividends or through buybacks do you ultimately need to be offering a total return of capital yield that's far in excess to the market given the questions about the terminal value of the business.
Well I think look I think Neal I think it's a it's a great question and I think that we're going to continue to to reevaluate what it means for us in the near term as we continue to grow.
Into this recovery.
We certainly believe that we need to improve those yields today are on.
On a dividend basis.
But we're going to continue to look at and get comfortable with a forward free cash flow profile. What we think that this business we believe can generate.
In these out years that Jeff discussed, but clearly we believe it requires improvement from where we are today.
Maybe 1 follow on to that Neal.
<unk>.
Strategically we have changed the cash flow profile of our business and that was the shift from 10% 10 or 11% of revenue is going into capital down to the 5% to 6%, but what that does.
Is that sets halliburton up to do those things and so I think it's our view and the change in our.
Our cash flow profile, certainly aid that process.
Got it.
Thank you. Our next question comes from Erin <unk> with Jpmorgan. Your line is open.
Yeah. Good morning, My first my first question relates to just the activity mix on the U S.
Privates have added more than 70% of the incremental rigs since the activity bottomed mid last year.
Yes. My first question is what is your expectation around co op the mix of public company activity.
Next year once some of the OPEC barrels are returned and do you think that a higher mix of public company activity is are you different about that or do you think it is helpful.
To your revenue growth and margin opportunities relative to industry next year.
So look I think we can we will always look for the best return opportunity for US I'd say operators have not said anything about next year and I'm not going to project, what they might say I think.
No.
You know I have a.
We can we can see what the demand sort of looks like to us.
As we look out into next year, but I also think that the.
Every operator will make their own decisions around how they deploy their capital on overall a supportive.
Commodity price, which we see create headroom for our clients.
You know to do work and return cash to their shareholders, which is important for them to do so I think the.
Improving commodity price.
A structural sort of support that we will see in the commodity price makes all of that work as we go into 2022.
Stay tuned.
Got it got it and just as my follow up.
A dynamic, particularly in the U S where budget exhaustion has led to some frac holidays, which has obviously been a headwind.
How are you how is halliburton looking to mitigate that risk as we approach the <unk>.
Back half in the fourth quarter.
Kind of given that dynamic.
Well look I think operators are going to do exactly what they said they would do and so we really haven't seen budget exhaustion to this point haven't talked about it.
And I think that is because operators are ratably doing exactly what they said they were going to do so I don't anticipate that we see.
Any of that or much of that this year and I'd say the other thing that we've done is we believe.
On a lot of work to very belies, our business such that when we see slowdowns or holes or anything else, we're able to respond to it very very quickly as opposed to how we might have done it in the past that al is process change and really philosophy change, but it's working quite well on it.
So I think we'll have a.
A solid sort of working through the balance of the year.
Just because of the clarity that our clients have on providing to us.
Great. Thanks.
Thank you.
Our next question comes from Connor Lynagh with Morgan Stanley. Your line is open.
Yes. Thank you.
Wanted to return to the multi year outlook you guys gave.
Basically what I'm wondering is certainly I know you want to stick to the range that you've put out there for capital expenditures.
Assume theres a certain degree of gross investment required to realize that so I was wondering if you could discuss just where you plan on allocating capital with some of the big areas that you think are sort of priorities within the business over the next couple of years here.
Yeah, well look I think that.
As we look out I believe that we've got the opportunity to meet those expectations within the guidance that we've provided with respect to Capex I think there is growth capex in that.
Sort of 5% to 6% range that we provided.
For.
For example, if I look back over the last 5 years asset turns have improved.
By 50% I mean, that's strong improvement, but this is back to my commentary around strategically approaching capital efficiency.
We are very sharp around our R&D dollars drive capital efficiency, our process drives capital efficiency and those are the kind of results. We see in terms of capital efficiency. So we will continue to drive that as the market is.
Expanse.
Over the next you know.
A couple of years and really that strategically that becomes our operating.
Process and I expect we will continue to do that.
Got it thank you.
Sort of similar question here, but just in terms of thinking about particularly your your.
Labor pool in I guess your overhead.
In international markets, So certainly rightsize in select areas, but youre anticipating a pretty big recovery here I guess I'm just curious.
It seems like in the outlook there is an acceleration.
In incremental margins as you get out into some of the later years is that because you have.
Sort of excess labor that's going to be.
On a more highly utilized is that because of the pricing that youre anticipating just curious what the what the big drivers are of that of that improvement on incremental margins.
Yeah look color on I think it's less about cost savings structurally I think it's more about volume of activity combined with price.
Right, So it's volume utilization.
And pricing improvement throughout the course of that journey that Jeff sort of outlined.
I mean, we're always.
We're always working on costs on a cost as you know we've got a continuous improvement program, where we're constantly driving managing costs down.
And I believe that that program and our approach to that is.
As adequate as we grow we will manage the cost.
But clearly we expect to see tightness on pricing and more activity over time that all drives incrementals.
Got it thank you very much.
Yes.
Thank you Tim just a question and answer session I would now like to turn the call back over to Jeff Miller for closing remarks, yes. Thanks, Shannon before we end the call on the close with this.
In the early innings of an unfolding multiyear upcycle that presents growth opportunities for Halliburton internationally and in North America.
Those opportunities match Halliburton is unique customer focused value proposition and our position as the only fully integrated energy services company and both international and North American markets.
This unfolds, we remain committed to driving returns and free cash flow for Halliburton shareholders I'm.
I'm optimistic about what lies ahead and look forward to speaking with you next quarter Shannon Please close out the call.
This concludes today's conference call. Thank you for participating you may now disconnect.
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