Halliburton Company (HAL) Q2 2013 Results Earnings Call July 22, 2013 9:00 AM ET
Kelly Youngblood - Senior Director, IR
Dave Lesar - Chairman, President and CEO
Mark McCollum - Executive Vice President and CFO
Tim Probert - President, Strategy and Corporate Development
Jeff Miller - Executive Vice President and COO
Bill Herbert - Simmons & Company
Jim Wicklund - Credit Suisse
Angie Sedita - UBS
Waqar Syed - Goldman Sachs
James West - Barclays Capital
Kurt Hallead - RBC Capital Markets
Brad Handler - Jefferies
Doug Becker - Bank of America
Dave Anderson - JP Morgan
Jeff Tillery - Tudor Pickering
Scott Gruber - Bernstein
Robin Shoemaker - Citi
Good day ladies and gentlemen. And welcome to the Halliburton Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions)
As a reminder, this conference call is being recorded. I’d now like to introduce your host for today's conference, Kelly Youngblood. Sir, you may begin.
Good morning and welcome to the Halliburton second quarter 2013 conference call. Today's call is being webcast and a replay will be available on Halliburton's website for seven days. The press release announcing the first quarter results is also available on the Halliburton website.
Joining me today are Dave Lesar, CEO; Jeff Miller, COO; and Mark McCollum, CFO. Tim Probert, president of strategy and corporate development will also be available today for follow-up calls.
I would like to remind our audience that some of today's comments may include forward-looking statements, reflecting Halliburton's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and 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, 2012, Form 10-Q for the quarter ended March 31, 2013 and recent current reports on Form 8-K.
We will welcome questions after we complete our prepared remarks. We ask that you please limit yourself to one question and one related follow-up to allow more time for others who have questions.
Now, I'll turn the call over to Dave.
Thank you, Kelly, and good morning to everyone. Overall I am pleased with our second quarter results. Total company revenue of $7.3 billion was a record quarter for Halliburton and operating income was over $1 billion. We achieved record revenues this quarter in our Baroid, Cementing, Completion Tools, Multi-Chem, and Testing product lines. From an operating income perspective, Baroid, Testing and Artificial also set new records.
Turning to the geographies, our international operations grew 8% sequentially which is at the top of our peer group. This growth came from record revenues in both of our eastern hemisphere regions. Compared to our two primary competitors, we have delivered leading year over year international revenue growth over the last five quarters. Also notable for the quarter, our international revenue comprised almost half of our total company revenue, which clearly demonstrates the success on our ongoing strategy to grow our international business and balance our geographic mix. So clearly, we are not just North America pressure pumping company.
Our Eastern Hemisphere played out as we expected. Revenue was up 11% sequentially and operating income was up 23%. I want to specifically highlight our Middle East/Asia region, which had an outstanding revenue growth of 20% and operating income growth of 43% relative to the second quarter of last year.
This is a very exciting market for Halliburton today and we expect our Middle Asia region to be the highest growth want that we have led by Saudi Arabia, Iraq and all of Asia.
For the year, we still fully expect Eastern Hemisphere margins to average in the upper teens, with year-over-year revenue growth in the mid-teens. With pricing improvement opportunities in the Eastern Hemisphere continuing to be somewhat illusive, our current operating bias is toward improving our utilization and efficiency as we address the increase spend from our customers.
Jeff will discuss the weaker than expected Latin America performance and the Mexico integrated project market in greater detail. But I want to be clear on one thing, we feel confident that revenue and margins of Latin America will improve in the second half of the year. We expect margins to improve in the third quarter and approach the mid-teens level and expect full year margins to be approximately the same.
In summary, our international outlook has not changed. We expect consistently solid year-over-year growth in several key markets. Although, there is still uncertainty around Egypt, Libya and North Mexico activity in the near-term, our deepwater share gains coupled with increase rig count in Saudi Arabia and an anticipated rebound in Latin America during the second half provide us confidence that we will continue to outperform on the relative basis to our peers.
North America also delivered results as we expected and I’m pleased with the quarter. Revenue was up 3% despite a sluggish U.S. land rig count and 71% lower Canadian rig count. We also saw 120 basis points sequential improvement in our margins to 17.5%.
We are now expecting the rig count to remain relatively flat for the remainder of the year as we absorb a meaningful switch to multi-well pad activity among our customer base. We believe this incremental drilling efficiency gains will provide for higher service intensity.
We currently estimate that pad drilling represents as much as 50% of the activity across key U.S. basins and we’ll continue to pick higher. As an example, we’ve seen the Eagle Ford growth of less than 40% pad activity last year to over 60% today.
Ultimately, we believe this efficiency trend bodes very well for us in the long run as our scale and expertise allows us to lead the industry in executing factory-type operations. And despite issues around capacity, utilization and pricing for the balance of the year, we do expect North American margins to continue to improve.
We believe we have reasonable visibility around North America activities for the third quarter. At this time it’s too early to tell the full extent of customer plan revisions and their impact on activity in the fourth quarter. However, we believe that current commodity prices make budget reloading of more compelling option for our customers, which could help mitigate the risk to our fourth quarter slowdown.
I’m optimistic about Halliburton’s relative performance for the remainder of the year and our ability to grow our North America margins and continue to realize revenue and margin expansion in our international business.
Our strategy is intact and working well, and we intend to stay the course. We will continue to drive toward expanding our global portfolio in deepwater, mature fields and unconventionals.
We have been and will continue to be focused on delivering best-in-class returns. We bought back billion dollars of shares in the second quarter and today announced an additional repurchase of our authorization to total of $5 billion. These actions reflect our growing confidence in the strength of our business outlook and our ability to not only increase our buybacks but our dividends while leaving room for any capital spending or additional acquisitions we may want to do.
Now let met turn the call over to Jeff and he’ll provide some additional operating detail.
Thanks, Dave, and good morning everyone. Let me begin with an overview of our second quarter results. The Eastern Hemisphere had solid sequential improvement compared to the first quarter of 2013 with revenue growth of 11% and operating income growth of 23%. The improvement was led by seasonal recoveries in Norway and Russia along with the improved activity levels in Angola and across all of Asia.
In the Middle East Asia region, compared to the first quarter, revenue and operating income increased 12% and 17% respectively. The growth was driven by higher stimulation, wireline and fluids activity in Malaysia, increased drilling and stimulation activity in China and improved profitability in Iraq.
The Middle East Asia is a high growth region for us and Malaysia is a great example where revenue grew 40% year-over-year and profit more than doubled driven by our strategic offshore wins. We continued to build on this success in the second quarter displacing a major competitor to provide offshore cementing services and in addition winning a series of fluids contracts in Malaysia with an aggregate estimated value in excess of $500 million over the next four years.
Additionally, continuing our growth in Saudi Arabia, in the second quarter, we were rewarded a three year lump sum turnkey project to provide reentry services in an existing field. This strategic win comes in addition to the recently expanded reward for our multi-rig turnkey project in the kingdom.
Turning to Europe, Africa and CIS, relative to the first quarter, revenue and operating income increased 9% and 33% respectively. The improvement was driven by higher fluids and cementing activity in Russia, increased stimulation, fluids and completion tools activity in Norway and higher drilling and completions activity in Angola. A highlight of note in the region, during the second quarter, our Baroid product line partnered with Cobalt International Energy to transfer our supersaturated (inaudible) viscosity fluid technology from the Gulf of Mexico to Deep Water Angola. This as well as the D&E were (inaudible) deepwater drilling and we believe this technology will be instrumental to the future success of Angola’s new subsalt drilling project.
Within Europe, Africa and CIS region, we also have been successful in executing several strategically integrated projects. Let me give you a few examples now. In Russia we saw early success with our Em-Yoga integrated tight oil project. The project began earlier this year and by applying unconventional, multistage completion techniques to [this mature field], production has already materially exceeded targets leading to substantially increased activities in those fields.
In Norway, we recently completed first phase of an integrated multi-well project. Based on our success in delivering services and accelerating the production cycle, our contract has been renewed to 2015 and was expanded to include two additional fields.
And finally, in the Danish sector of the North Sea, we were recently awarded a five year multi product line contract with an estimated value of over $100 million to provide services on a high pressure, high temperature development. This reward was based on our proven track record of delivering integrated services in the Scandinavian market and a recognized expertise with HPHT services. All three of these projects are good examples of how we collaborate internally and with our customers to drive value into a project both with the operator and for Halliburton.
Overall, our Eastern Hemisphere performance has been impressive. If we look back to this year last -- this time last year; we’ve grown revenue by 16% and operating income by 22%. In Latin America, we had a disappointing start to the year. Revenues were flat compared to the first quarter and operating income was down 7% as a result of reduced drilling activity in North Mexico, increased mobilization costs in both Brazil and Mexico and lower vessel activity offshore Mexico.
Moving into the second half of the year, we’re confident that we will see an uptick in Latin American financial results. Let me touch on the few of the key drivers now. In Columbia, we see second half levels improving as our customers resolve some of the recent permitting delays. In Brazil, during the third quarter, we will complete mobilization of our directional drilling contract and expect the transition to our new market share in the fourth quarter.
And finally, in Mexico, we expect to see the largest improvement. In the third quarter, we’re confident we will secure contract approvals related to our consulting and software services and see increased utilization of our stimulation vessels. We also expect to have finished mobilization of equipment for our recent offshore intervention services contract.
We anticipate the North Mexico activity will continue to be an issue for the region in 2013. However, I'm pleased to announce that we were recently awarded the Humapa block by Pemex in the [lease round] and incentivized projects.
Scheduled to begin in early 2014, this estimated $1.2 million project is for multiyear asset management contract in Chicontepec Basin. This most recent round of incentivized contract differs from the previous round and then it provides 100% cost recovery for our services during the first phase of the project. We expect returns for this project to be generated from our own service revenues and to be accretive to our overall business.
We were very selective in targeting the Humapa block. In fact, it was the only one we’re dealing with. Because we believe that this project would generate robust returns at a lowest level of risk and better experience in the nearby Remolino Laboratory gives us a technical advantage in delivering timely productive wells.
We’re also currently evaluating a pipeline of large integrated projects in Mexico valued at an estimated $8 billion. We expect this work will be awarded towards the end of the year. With the combination of these integrated projects and the Humapa project, we’re excited about 2014 and beyond for Mexico.
Let me give you a few other Latin American highlights for the quarter. In Brazil, we inaugurated our Technology Center in Rio de Janeiro for Halliburton personnel to collaborate with operators and the country's leading university and a global center of expertise for both deepwater and mature fields.
Further, in the ultra-deepwater pre-salt market at Brazil, Halliburton successfully performed the deepest wireline fluid sampling and Rotary Sidewall Coring job ever undertaken. Samples were retrieved from depths of over 22,000 feet helping our customer identify the most productive zones of this exploration well.
We also see opportunity in the offshore Mexico market. We recently displaced the major competitor to provide open-hole logging services on a deepwater well. Based on a reservoir characterization portfolio including our geo mineralogical tool and our RDT formation tester with fluid indemnification.
Now, moving to North America, revenue was sequentially up 3% and operating income was up 10% driven by increased U.S land activity partially offset by reduced seasonal activity in Canada. Consistent with the first quarter, approximately 85% of our crews on the long-term contracts and about three quarters of working 24 hour operations.
In spite of relatively flat sequentially U.S. rig count, drilling efficiencies in the trend towards multiwell pads are driving more robust well count. Additionally, in some cases, we’re seeing operators increasing the number of stages on horizontal wells performing as many as 40 stages per lateral in the Marcellus in certain [zones].
It’s our view that the result in increased well count and stage count could absorb the remaining 4 percentage of the excess horsepower and help drive service intensity across all product line. Although we believe excess pressure pumping capacity has diminished since the first quarter due to rising demand, there is still an over supply in the market. As a result, we anticipate the pricing pressure will persist to some degree across many North American basins in 2013.
Additionally, as we gauge the utilization of our equipment on a 24x7 basis, we see a significant opportunity to improve and drive the light space, by that I mean the downtime out of the schedule. In this environment, we believe it’s more important than ever to be aligned with most efficient customers where we can create the most value for our customers and deliver the best returns for Halliburton.
We’re continuing to execute our strategy around surface efficiencies, subsurface technology and testing chemistry, delivering differentiated services that generate superior returns over the long term. As part of this larger strategy, Frac of the Future and Battle Red are really the platforms that enable surface sufficiency. We expect to see increased performance at the well head, as we incorporate these tools into our processes.
Battle Red effectively applies new processes and technologies to standardize and automate integrated workflows across our product line driving improved efficiency across our North American Service Delivery Organization. Although there are some associated cost savings, this initiative is primarily directed in improving working capital and cash flow.
We’re targeting a 50% reduction in days to bill our customers and we expect these tools to also be able to help manage inventory level, reduce overtime and optimize low freight deliveries. As an example, we’ve already seen a 15% to 20% reduction in costs around trade and standby charges. We anticipate Battle Red roll out will be completed in the first quarter of 2014.
Next is our Frac of the Future program, which is designed to reduce capital and operational costs at the well side. All these data indicates Q10 are running two to three times longer than existing power burden cost and five to six times longer than the industry standard before requiring maintenance, which we anticipate will reduce our fleet maintenance experience 5% to 30% . This efficiency also allows us to reduce the equipments needed on location by an average of 25% decreasing the capital required to deliver Frac fleet and reducing labor and fuel costs. Specific labor to process automation and reduce vehicle counts on the job site. Over the last few years, we’ve indeed reduced our crew charges by close to 30% and believe our crews on location are currently streamlined. When we look at what we’re able to deliver on a stage per head count basis, we’ve seen a 40% rise in executional efficiency over the same time period.
By the end of this year, we anticipate that close to 20% of our fleet will be converted to Frac of the Future. The rate at which we deploy going forward will be dependent on three factors; North American natural gas activity, the growth of international oil conventional and our requirements would replace older equipment. We believe our manufacturing capability has a strategic advantage allowing us to manage deployment and quickly take advantage of changing market conditions. Assuming a consistent build schedule of new equipment, we expect to reach the 50% mark on Frac of the Future deployment around 2015. We believe these strategic initiatives will deliver material differentiation and provide a sustainable competitive advantage to Halliburton for the years to come.
Turning to the Gulf of Mexico, revenue was impacted by BOP certification related issues that has delayed several of our large completions to the back part of the year. For the remainder of the year, we expect revenue and profit will average higher than the first half, as deepwater arrive and more rigs move to development and completions. We’re optimistic about the Gulf of Mexico deepwater market and are excited about our competitive position in the lower treasury market that we expect maybe double in 2014. We continuously work for ways to better manage our cost structure in the organization. As we migrate towards more efficient, differentiated service platforms, such as Battle Red and Frac of the Future, it will have an impact on support and operational headcount as well as equipment and inventory requirements.
We expect to complete an evaluation of these areas and you take action on them in the third quarter, which will result in severance and other charges during the quarter. We’ll be identifying these separately in our third quarter results. So to summarize North America, we’re forecasting rig count to remain stable for the year, but believe that activity levels can improve as a result of drilling efficiencies and further adopting of flat well drilling.
In a flat pricing and rig count environment, cost management is going to be more can and be extremely important, so we anticipate better cost optimization will result from our strategic initiatives. We’re maintaining close contact with our customers to better understand their budget plans for the reminder of the year. We want to be clear that we expect North American margins to increase the balance of the year.
And finally, we’re committed to growing our international revenues and margins and achieving a better geographic balance in our business going forward. I think our performance this quarter speaks for the progress we’re making on that front. And now, Mark will provide some additional financial commentary. Mark?
Thanks, Jeff, and good morning everyone. Our corporate and other expense came in at $108 this quarter, slightly lower than expected due to some insurance reimbursements for legal costs, associated with Macondo litigation as well as decrease in costs related to our corporate initiatives. Approximately $34 million of our corporate costs were for continued investments in Battle Red and other strategic initiatives.
The cost of these initiatives will be declining over the next few quarters. We anticipate the impact of these investments will be approximately $0.02 to $0.03 per share after tax in the third quarter. In total, we anticipate that corporate expenses will average between a $110 million and $120 million per quarter for the remainder of the year.
We continue to benefit from the strategic realignment of our international operations completed last year and the continued expansion of our international business. Our effective tax rate this quarter came in at 29% in line with the low end of previous expectations.
We anticipate though that we might see a slight increase to about 29.5% for the third quarter. Our capital expenditure guidance of approximately $3 billion for the full year remains unchanged.
Throughout this quarter, we have continued to pursue in our (inaudible) settlement to resolve a substantial portion of the private claims pending in the Macondo multi-district litigation. However, discussions among the parties to the proposed settlement have recently slowed while BP challenges certain provisions of their previous settlement with the plaintiffs' Steering Committee including a current appeal in the Fifth Circuit Court.
We continue to believe that a reasonably valued settlement is in the best interest of our shareholders. But given the complexity of the current situation among other parties, it is difficult to estimate when or if a resolution through settlement can be reached. In the meantime, we’ll continue to argue our defense against any liability in the course.
No adjustments to the Macondo Reserve was recorded during the second quarter as the MDL trial and other investigations progressed, we’re constantly monitoring and evaluating developments. And it’s possible that we may need to adjust our reserve estimate up or down in the future.
At this time, our reserve estimate does not include potential recoveries from our insurers. However, we did a reach favorable agreement with a portion of our insurers during the quarter which among other things, allows us to continue to be reimbursed for our legal cost.
As we communicated in our first quarter call, we intended to be more aggressive in our second quarter common stock repurchase activity. During the second quarter, we upsized our revolving credit facility from $2 billion to $3 billion and used the excess liquidity that transaction created to repurchase $23 million shares of common stock.
Last week, our Board of Directors approved increase in the authorization for future share repurchases to $5 billion. We are currently evaluating the best available repurchase methods.
This increased authorization together with the 39% increase in dividends announced in the first quarter is a reflection of our growing confidence in the Street from our business outlook and our continuing commitment to shareholder distributions. Going forward, we believe that company will generate sufficient cash flows to enable us to grow our business, increase shareholder returns and maintain flexibility to take advantage of any strategic opportunities we see.
Now, moving on to our near-term outlook. For our international business, we expect stronger revenues and margins during the second half of the year, but weighted more heavily to the fourth quarter. For the eastern hemisphere, we’re currently expecting third quarter year-over-year revenue growth to be similar to the second quarter with a modest sequential improvement in margins.
Latin American growth is expected to be muted by the activity curtailment in Mexico but we should see a moderate sequential improvement of revenue with margins approaching the mid teens. And for North America, we anticipate a flat U.S. rig count for the third quarter. However, we expect to see the seasonal rebound from breakup in Canada along with stronger activity levels in the Gulf of Mexico. And we anticipate the net result will be modestly higher sequential revenues and margins.
Now, I’ll turn the call back over to Dave for some closing comments. Dave?
Okay. I know a lot of people were dialing in late, so let me give you a quick summary of what we said today. The North America based on improving activity levels in Canada and the Gulf and continued efficiency gains for U.S. land, we expect margins to continue to improve for the balance of the year.
As Mark said, in Latin America, we feel confident that revenue and margins can improve in the second half with margins approaching the mid-teens in the third quarter. For the Eastern Hemisphere, our outlook remains unchanged. For the full year we expect revenue growth in the mid-teens with margins in the upper teens. And our aggressive buybacks in the second quarter and the increase to our repurchase authorization clearly demonstrate our growing confidence we have in the strength of our entire business outlook.
And finally, we have been and will continue to be relentlessly focused on delivering best-in-class returns. So with that let’s open it up for questions.
Earnings Call Part 2: