Halliburton Company (HAL) Q3 2013 Earnings Call October 21, 2013 9:00 AM ET
Kelly Youngblood - Investor Relations
Dave Lesar - Chairman, President, Chief Executive Officer
Mark McCollum - Chief Financial Officer, Executive Vice President
Jeff Miller - Chief Operating Officer, Executive Vice President
James West - Barclays Capital
Jud Bailey - ISI Group
Bill Herbert - Simmons & Company
Waqar Syed - Goldman Sachs
Angie Sedita - UBS
David Anderson - JPMorgan
Jim Wicklund - Credit Suisse
Brad Handler - Jefferies
Doug Becker - Bank of America Merrill Lynch
Kurt Hallead - RBC Capital Markets
Jim Crandell - Cowen
Jeff Tillery - Tudor, Pickering, Holt
Scott Gruber - Sanford Bernstein
Good day, ladies and gentlemen, and welcome to the Halliburton third 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 call is being recorded.
I would now like to introduce your host for today's conference, Mr. Kelly Youngblood. Sir, you may begin.
Thanks, Sam. Good morning, and welcome to the Halliburton's third 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 third 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 risk 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 June 31, 2013, recent current reports on Form 8-K and other Securities and Exchange Commission laws.
Our comments include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our third quarter press release which, as I have mentioned, can be found on our website. In our discussion today, we will be excluding the financial impact of the third quarter charges related to employee severance and asset write-offs, $38 million after-tax or $0.04 per diluted share unless otherwise noted.
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 will turn the call over to Dave.
Thank you, Kelly, and good morning to everyone. Before I talk about another strong quarterly performance I would like to review the actions we have taken this year around our commitment to delivering shareholder returns to you. This year, we have repurchased approximately 4.4 billion or 10% of our outstanding shares. Earlier this year, we announced a 39% increase in our dividend. These actions reflect our continued confidence and the strength of our business outlook.
Going forward, we remain fully committed to increased shareholder returns. We are targeting a dividend payout of at least 15% to 20% of net income, supplemented by additional systematic share buybacks while leaving room for any capital spending or acquisitions we may want to do. We have been and will continue to be relentlessly focused on delivering best-in-class returns.
Now, moving to the third quarter. Overall, I am pleased with our operational results. Total company revenue of $7.5 billion was a record quarter for Halliburton, while operating income was over $1.1 billion. We achieved record revenues this quarter in our Boots & Coots, Cementing, Completion Tools, Drill Bits, Multi-Chem and Testing Product lines. From an operating income perspective, our Baroid, Completion Tools, Drill Bits and Testing Product lines also set new records.
Turning to the geographies. On a year-to-date basis, our Eastern Hemisphere growth continues to lead our peer group. Compared to last year, third quarter year-over-year revenue and operating income grew 17% and 30%, respectively. Sequentially, the revenue improvement, a 9% growth in operating income was driven by our Europe/Africa/CIS region.
In addition to record revenue in that region, we saw a strong sequential improvement in margins of 300 basis points, due to improved performance in our Russia, North Sea and Angola operations. Consistent with previous years, we expect the fourth quarter in the Eastern Hemisphere to be our strongest quarter of the year, due to seasonal year end software and equipment sales.
Moving to Latin America. This has been a tough year as customer activity did not meet our expectations and Jeff will talk more about our fourth quarter outlook, but as we look ahead to Latin America over the next few years, there are several positive factors coming into play.
First, Mexico activities are expected to pick up significantly as the mega tender projects ramp up in the first part of 2014. Although we do not expect a material impact next year, the recent reform discussions signal a strong opportunity in Mexico shale and deepwater markets.
In Brazil, we have a leading market share today in a number of long-term deepwater contracts, including some that could extend past 2020. Although activity levels are just treading water today, as deepwater activity level accelerates, we see significant upside in Brazil. However there could be some short-term bumps in the road, but in the long-term Latin America is expected to be an outstanding growth market for Halliburton.
In North America, we are expecting the typical seasonal decline in the fourth quarter that we have experienced in previous years. However there are some additional transitory issues we are currently facing. Due to the recent floods in Colorado, logistical disruptions in the Niobrara, where we have a very high market share are lingering into the fourth quarter which is continuing to impact our efficiency in cost structure in that basin. These cost inefficiencies should be fixed by the end of the year.
And pricing, the North America market continues to have excess supply of pressure pumping equipment, and although this is improving, we anticipate pricing pressure will continue as contracts review during the next quarter or so. Accordingly, we are already working on adjusting our cost structure. Despite these transitory issues, we believe that we will see margin improvement as we go through 2014 for a number of reasons.
First, the efficiency trend on land plays write to our strengths. We are not only leading the industry and execution and surface efficiency, but we are now introducing new technologies, which are changing the ways that customers approach their subsurface. You will hear more about these at our Analyst Day in a couple of weeks. The Gulf of Mexico activity levels are improving. Currently they are shifting from drilling to completions where we have a leading market position. There are dozen or so deepwater rigs scheduled on the calendar to arise on the Gulf next year and on those we have secured a strong drilling and evaluation position.
Thirdly, our Battle Red and Frac of the Future initiatives are being rolled out now. I have seen them start to operate in the field. The benefits are real and we expect that they will be substantial. We have invested a significant amount of money in our Battle Red and Frac of the Future initiatives. As we told you on our last call, when we roll out these two broad corporate initiatives, we are continuously looking for ways to use them to better manage our cost structure in the organization. During the third quarter, based on the progress of these initiatives, we have made adjustments to headcount and assets that resulted in a charge. As we continue with the deployment of our Battle Red initiative over the next few quarters, we expect for there to be additional headcount reductions and related severance charges. However, again, as you will see at our upcoming Analyst Day we are expecting a large future payoff for these initiatives.
So overall, I am very optimistic about Halliburton's relative performance as we move into 2014 and based on early conversations with our customers, we are anticipating overall spend levels to increase. Our strategy is working well and we intend to stay the course. At our analyst day we intend to provide you more detail about our outlook for the coming years, our ability to outperform our peer group, how we will continue to balance our geographical portfolio and describe our path toward normalized margins for both the Eastern and Western hemisphere operations. We will continue to drive toward expanding our global portfolio in the deepwater, mature fields and unconventionals.
Now let me turn the call over to Jeff for some operational details.
Thanks, Dave, and good morning, everyone. Met me begin with an overview of our third quarter results. The Eastern hemisphere had record revenue in the third quarter with sequential operating income growth of 9% driven by record quarterly revenue and improved profitability in the Europe, Africa and CIS region. Relative to the second quarter, Europe/Africa/CIS were both revenue and operating income by 3% and 29% respectively.
The sequential improvement was led by improved cementing, Boots & Coots activity in Russia, increased drilling and cementing activity in the North Sea and higher drilling and completion tool sales in Angola. In Norway, Statoil has awarded contracts to Halliburton that provide us with a leading market share in multiple services including drilling and completion fluids, cementing, stimulation, special tools and waste management for both onshore and offshore. The initial scope of this contract is for three years with up to six years in extensions. This award represents a significant statement of confidence from our customers for the value-added technologies that we are bringing to the Norwegian market.
In addition we are expanding our testing portfolio in the pre-salt deepwater market in Angola. In addition to discrete testing awards for drill stem testing and our DynaLink service, Halliburton has recently been awarded contracts by multiple customers to provide a full suite of testing in subsea services in their pre-salt operations. Activity on these wins is expect to start throughout 2014 and will give Halliburton a significant position for testing in subsea services in the Angola pre-salt market. In conjunction with our successes in testing offshore discovery wells elsewhere in Africa and in Brazil, these one demonstrate the strength of our deepwater testing and subsea business.
In the Middle East/Asia region, compared to the prior quarter, revenue and operating income were lower by 2% and 5% respectively. Higher activity in Saudi Arabia was partially offset by activity delays for stimulation activity in Australia. Also contributing to the sequential decline was the prior quarter benefit from the conclusion of the Majnoon project in Iraq and increased completions activity in Malaysia that did not repeat.
Let me speak specifically to the Kurdistan market for a moment. This is an area that until now has been primarily focused on exploration, but we are expecting development work will ramp up over the next few years following a series of successful appraisal programs. However, it is completed construction of large multiproduct line facility in Kurdistan and we are mobilizing for recent awards in cementing, Sperry, Baroid among other product lines.
We are still in the early days, but we expect this to be a growth market for Halliburton. In Saudi Arabia, Halliburton was awarded an important three-year contract to drill and complete new wells on an existing field. Saudi Arabia is a core market for Halliburton, and we believe this one demonstrates our customers' confidence in Halliburton's ability to help, plan and mobilized to execute the significant program.
Turning to Latin America, we saw a significant improvement compared to the second quarter as revenues increased 6%, sequentially and operating income improved by 57%. Mexico was the primary driver for recent contract approvals resulted in an increase in the consulting and software revenue for the quarter.
In the offshore market, stimulation vessel utilization was improved relative to the first half of the year. Additionally, improved profitability in Wireline and cementing in Argentina, contributed to the sequential growth. The improved results in Mexico and Argentina more than offset the activity related weakness in Brazil and Venezuela.
With respect to Brazil and Mexico, we believe that the fourth quarter activity levels maybe significantly lower than originally anticipated. There are two primary reasons for this decrease. First, in Mexico, activity levels on our southern alliance the project are expected to decline meaningfully over the remaining months of the year as PEMEX ramps down the ongoing IPM work in preparation for the mega tenders.
We averaged seven rigs in the southern alliance project during the third quarter and expect to exit the year at two rigs. This lower level of activity has been expected to continue through early 2014 and company until the new mega tender projects are expected to ramp up.
Second, in Brazil, we have seen a significant reduction in drilling activity over the course of the year with a shift in focus to completions. In addition, we are currently operating under a cost structure in line with the original scope of work which has not materialized. We are working with our customer to right size our operational footprint, but we expect reduced activity levels to extend through the fourth quarter and continue into the next year.
Ultimately, this does not change our long-term positive outlook for Latin America. The transition to the mega tenders in Mexico, in conjunction with the startup of our incentivized Humapa contract and improved deepwater rig count give us confidence that the activity levels in Mexico will recover as each of these areas gets underway.
In Brazil, our recent deepwater contract have a potential term of about eight years, so although drilling activity metrics sideways for several quarters, Brazil remains the largest and most active deepwater market in the world and we believe higher drilling activity levels will resume. As a result, we expect both these countries to continue to be strong contributors to our growth and profitability over time.
Now, switching North America, despite the significant revenue and operating income disruption from the Colorado floods, we delivered sequential revenue growth and higher operating income. Activity levels improving and cost the rest of the U.S. land market with seasonal recovery in Canada and increased activity in the Gulf of Mexico deepwater market.
U.S. land rig count remained sluggish and the focus from our customers continues to be on pad operations and on drilling efficiency. As we discussed in our previous call, multi-well pads account for over half of our customers drilling activities in key North America basins, including the Marcellus, Eagle Ford, Bakken and Niobrara, and we see this percentage increasing, but more importantly we see increased service efficiency on horizontal drilling which is providing a mid-teens percentage reduction in drilling days on a year-over-year basis. Together, these two efficiency factors are contributing to a well count that has modestly improved even in a flat rig environment.
We are also seeing a trend towards increasing stage counts per well, and in certain basins increased volumes pumped per stage. Already, we are seeing average stage count per well increase by 15% to 20% year-over-year in the Eagle Ford and in the Marcellus. We are still in an oversupplied market today, with as much as 20% excess pressure pumping capacity. Nevertheless we believe that an increase in wells drilled per rig combined with greater service intensity driven by increased fluids and profit volumes per well will ultimately help balance the market. We believe that these trends play to Halliburton's strength as the leading service provider in North America.
In the Gulf of Mexico, we saw sequential improvement tampered by some activity delays and extended drydock maintenance on one of our large stimulation vessels. In the fourth quarter we expect revenue improvement in the Gulf as that vessel returns to service as well as higher completions activity and end of year sales. Looking ahead we are excited about expanding our share position in this growing market. In addition to our leading completions position, we recently deployed two new vessels focused on the shelf, an intervention vessel and a fit for purpose stimulation vessel. Additionally, we believe we are well-positioned with drilling and evaluation services on the next round of incoming deepwater rigs.
To recap North America. Activity levels continue to improve across the U.S. land market this quarter, despite the disruption from the Colorado floods. Increased rig efficiency, combined with greater service intensity, continues to benefit us even with a rig count that is flat. We are increasingly optimistic about 2014 based on early data points and will continue to be very focused on our cost structure to enable margin growth in the coming year.
Internationally, we are very pleased with our year-over-year growth. In spite of short-term activity disruptions in Latin America this year, we have led our peer group in year-to-date growth and plan to continue balancing our geographic portfolio and growing our global business going forward.
Now Mark will provide some additional financial commentary. Mark?
Thanks, Jeff, and good morning, everyone. As Dave discussed, we are continuously evaluating our cost structure within the organization as we deploy our corporate initiatives. The ongoing Frac of the Future build as well as the final deployment of our Battle Red program is having a significant impact on the support and operational headcount needs of North America as well as equipment and inventory requirements. During the third quarter, as we begin to roll out these initiatives, we completed an initial evaluation of these areas and took our first action, which resulted in severance and other charges during the quarter of approximately $38 million after tax. As Dave said, based on the early impact of these strategic initiatives, we believe that further rollout may result in some additional adjustments going forward.
Our corporate and other expense came in at a $102 million this quarter, slightly lower than expected due to lower cost for our strategic initiatives and some lower legal expenses. Approximately $27 million of our corporate costs were for continued investment in Battle Red and other strategic initiatives. We anticipate the impact of these investments will be approximately $0.03 per share after tax in the fourth quarter, as we begin the field deployment of the last phases of the North America Battle Red initiative. In total, we anticipate the corporate expenses will be between $110 million and $120 million for the fourth quarter.
Our effective tax rate this quarter came in at 29.5%, in line with our previous guidance. For the fourth quarter, we anticipate that our tax rate will be approximately 29%. Our capital expenditure guidance of approximately $3 billion for the full year remains unchanged. Also during the quarter, we purchased 68 million shares of common stock at a price of $48.50 per share for an aggregate cost of $3.3 billion excluding fees and expenses related to our tender offer. These shares represented approximately 7.4% of our total number of outstanding shares.
Year-to-date, we have repurchased approximately 10% of our outstanding common stock. We have approximately $1.7 billion remaining in Board authorization for future share repurchases. For the fourth quarter, our average share count is expected to be approximately 855 million shares outstanding, which reflects the full benefit of our share buyback to-date. Additionally, due to our recent $3 billion debt offering, we expect interest expense to average approximately $100 million per quarter going forward.
Now moving on to our near-term outlook. For our Eastern Hemisphere business, we currently expect fourth quarter year-over-year revenue to increase by low double digits with a meaningful sequential improvement in margins into the high teens.
As mentioned earlier, Latin America's sequential growth in margins are expected to be significantly impacted by activity levels in Mexico. For the fourth quarter, we now anticipate Latin America revenue to be flat sequentially and do not expect the material change in margins relative to the third quarter.
Finally, for North America, we anticipate the typical weather and holiday-related seasonal declined in revenue and margins in the fourth quarter. With the transitory issues Dave outlined earlier weighing on the number a little more than usual. As a result, we believe North America will be down sequentially although we are not expecting as sharp of a decline as we had in 2012.
As we move into 2014, we anticipate North America margins to recover as customer activity resumes and we see the pay off of our strategic efficiency programs in recent cost optimization efforts.
Now, I will turn the call back over to Dave for some closing comments. Dave?
Thanks, Mark. Just a quick summary, Eastern Hemisphere continues to deliver top-tier growth, leading the industry year-to-date and we expect a strong fourth quarter with margins in the high teens. Latin America will be flattish, but expect strong growth in 2014. For North America, we anticipate typical seasonality in the fourth quarter with some pricing pressure and lingering effects of the Colorado floods, but margin improvement as we go into 2014. Finally, as demonstrated by our dividend increase earlier this year, and the repurchase of 10% of our shares, we are very confident in the strength of our business outlook and are focused on delivering leading shareholders returns.
With that, let's open it up for questions.
Earnings Call Part 2: