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Edited Transcript of HAL earnings conference call or presentation 22-Apr-19 1:00pm GMT

Q1 2019 Halliburton Co Earnings Call

HOUSTON Apr 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Halliburton Co earnings conference call or presentation Monday, April 22, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Abu Zeya

Halliburton Company - IR Officer

* Jeffrey Allen Miller

Halliburton Company - President, CEO & Chairman

* Lance Loeffler

Halliburton Company - Executive VP & CFO

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Conference Call Participants

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* Angeline Marie Sedita

Goldman Sachs Group Inc., Research Division - Research Analyst

* Daniel Jon Boyd

BMO Capital Markets Equity Research - Oilfield Services Analyst

* James Carlyle West

Evercore ISI Institutional Equities, Research Division - Senior MD

* Judson Edwin Bailey

Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Research Analyst

* Kurt Kevin Hallead

RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst

* Marc Gregory Bianchi

Cowen and Company, LLC, Research Division - MD

* Scott Andrew Gruber

Citigroup Inc, Research Division - Director and Senior Analyst

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* William Andrew Herbert

Simmons & Company International, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Halliburton First Quarter 2019 Earnings Call. (Operator Instructions)

And as a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Abu Zeya. Please go ahead.

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Abu Zeya, Halliburton Company - IR Officer [2]

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Good morning, and welcome to the Halliburton First Quarter 2019 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, 2018, recent current reports on Form 8-K and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Our comments today also include non-GAAP financial measures that exclude the impact of impairments and other charges. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter release and can be found in the Investor Downloads section of our website. (Operator Instructions)

Now I'll turn the call over to Jeff.

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [3]

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Thank you, Abu, and good morning, everyone. What a difference 90 days make in this market. Commodity prices have rebounded, customer budgets have refreshed and we're back to work. Our results for the first quarter played out as we expected, and I'm pleased with how our organization executed, both in North America and internationally.

Here are the first quarter highlights. Total company revenue of $5.7 billion was essentially flat compared to the first quarter of 2018, and adjusted operating income was $426 million. International revenue increased 11% year-over-year, which was a great first step towards our expectation of high single-digit international growth for all of 2019.

Our Drilling and Evaluation division had a strong year-over-year revenue growth of 7%, with activity improvements across all geographic regions.

Finally, as expected, hydraulic fracturing activity ramped up in U.S. land as customers refreshed their budgets. And despite pricing headwinds, our execution resulted in delivering better-than-expected margins in our Completion and Production division.

From a macro perspective, 2019 is off to a strong start. Commodity prices have been rising since the beginning of the year due to tightening oil supplies and stable demand. OPEC Plus production cuts and supply disruptions from Venezuela, Iran and Libya have supported market rebalancing. Oil demand trends, particularly in China and India, have also been constructive. Overall, the macro environment remains favorable for our industry.

Against this backdrop and with winter behind us, customer activity in both hemispheres has picked up off December lows and continues to trend higher. Although, we often discuss the hydraulic fracturing business in North America, it's important to remember that Halliburton has a portfolio of 14 product service lines operating in North America. For example, our Artificial Lift and Cementing businesses showed excellent results in the first quarter, growing both revenue and margin year-over-year. Our Artificial Lift product line grew top line revenues 55% year-over-year in the first quarter, driven by strong demand for ESPs that are now installed much sooner in the life of the well and sometimes right after the well is put on production. Halliburton is the #1 Cementing provider in U.S. land. Demand for our Cementing services continued to be strong in the first quarter. Congratulations to our Artificial Lift and Cementing teams for an outstanding performance.

Now let's turn to our North America land hydraulic fracturing business. We experienced an increase in the stages pumped every month this quarter, with March finishing on a high note. Overall, the first quarter activity level was modestly higher compared to the first quarter of 2018. As expected, we had pricing headwinds throughout the quarter. However, we believe the worst in the pricing deterioration is now behind us. And as we've discussed in the past, the success of our hydraulic fracturing business is not dependent on pricing alone. Given our presence in all basins and exposure to all customer groups, we have the ability to pull other levers such as utilization, cost savings and operational efficiency to drive a better outcome for our business.

Let me describe what I believe will happen with hydraulic fracturing supply and demand throughout 2019. On the demand side, it's evolving as we had anticipated. Our customers have announced their 2019 budgets, and we expect that overall spend will be down 6% to 10% in North America. Here's how I see the impact of our customers' 2019 budgets on the North America land stimulation services business. I expect that customers will operate within their budgets largely by achieving savings through sand cost deflation and by reducing drilling activity. On the other hand, I believe that net completions activity will remain essentially flat year-on-year, as our customers seek to achieve their publicized production targets. In the near term, our view on North American customer activity heading into the second quarter is shaped by the momentum that we saw building at the end of March.

As for the next couple of quarters, I see demand for our services progressing modestly. The cadence of spend across basins for various companies will look different throughout the year, but Halliburton has the scale, range of services and customer relationships to capture more than anyone else out of every dollar spent in North America land this year.

Now let's talk about the supply side. Given the demand landscape, the service industry has adjusted accordingly and cut capital spend. Currently, new horsepower is not being added to the market. At the same time, the existing equipment is working a lot harder today, leading to equipment attrition. A key driver of this is service intensity, which quickly translates into shorter equipment lives and higher maintenance costs.

Let me give you some data points to put this in perspective. Halliburton is currently pushing 30% more sand volume through equipment than in 2016. The shift to local sand that is finer and more abrasive also leads to more equipment wear. Customers are drilling longer laterals and fracking more stages per well. Last year, we fracked 20% more stages per horsepower than we did in 2016. And with increased efficiency, we've improved utilization, achieving more pumping hours per day. Again, more wear and tear.

Industry sources estimate that about 7.5 million hydraulic horsepower will need to be rebuilt in 2019 to maintain a flat horsepower supply. This equates to $1.7 billion in equipment spend that I do not see forthcoming as the service companies have cut capital spending plans. As a result of these factors, I believe that capacity attrition will occur naturally throughout the year and that there will be less horsepower available in the market at the end of the year than there is today.

And Halliburton will significantly reduce North America hydraulic fracturing CapEx this year. We have sufficient size and scale in the market today and see no reason to invest in growth when it comes at the expense of returns. The capital that we do spend will be mostly directed towards improving efficiency, reducing emissions and refurbishing equipment. I am frequently asked, when will we add hydraulic fracturing capacity again? Let me tell you, I don't see that happening until the market has better supply and demand balance and substantially better pricing. And despite the ongoing market rebalancing I just described, the market conditions are not conducive to adding capacity. In this market, we're focused on maintaining the right level of capital spending to support our business, but most importantly, on continuing to deliver strong cash flow and leading returns. As the North America land market rebalances over the next few quarters, we will continue to control what we can control. We are positioning ourselves to outperform the market, even if demand is substantially different from what we currently expect.

I already mentioned our CapEx reduction. That was the first step. Second, we are reorganizing our structure in North America land to be more nimble and operate more efficiently. This will make us more effective in any market.

Third, I often talk about continuous improvement. I want to make it clear that this is not a temporary initiative at Halliburton, it's part of who we are as a company. We are constantly looking for ways to eliminate waste and improve productivity in all parts of our organization, from technology to training, from supply chain to field operations. And we will continue to drive cost and capital efficiency throughout our company. Finally and most importantly, we are a returns-driven organization, and where pricing concessions would have pushed returns below an acceptable threshold, we have instead elected to stack equipment, including frac fleets. Emerging from the industry's focus on cash flow and returns, we see stable growth over a longer period of time. This sustained growth will be good for Halliburton. It will allow us to leverage our supply chain and logistics infrastructure, drive asset velocity, capture efficiencies around our repair and maintenance programs and implement technologies at scale to reduce cost and increase production. Therefore, we can be more efficient with our investments.

Halliburton is well positioned to navigate the near term and thrive in the long run. Our company is 100 years old, and we got here by evolving with our markets and our customers. We will continue to do so in the future.

Turning to international markets. I'm excited by what I see. The international recovery continues to build momentum. Halliburton has gained share in key international markets over the last several years. This gives us a strong base to capitalize on the recovery, and we expect high single-digit international revenue growth this year. The international recovery was initially led by the national oil companies and focused on mature fields. Now the offshore markets are also entering recovery mode as project economics become more attractive.

International offshore spending is projected to be up 14% in 2019, and the average offshore international rig count increased 29% year-on-year in the first quarter. A great example of an emerging offshore rebound is our recent win with Shell in Brazil. In the first quarter, we started work on Shell's 3-year integrated well construction campaign in the Santos and Campos basins offshore Brazil. These are some of the most complex but also the most prolific basins in the world. Halliburton is excited to collaborate with Shell on the first green shoots of long-term activity recovery in this critical deepwater market.

Middle East activity is increasing, driven by rig additions in Iraq and Saudi Arabia. However, we expect pricing pressures in the Middle East to continue in the near term. A steady volume of activity and excess equipment capacity in the region continue to drive competitiveness. Going forward, a call on production and tightening spare capacity should lead to positive pricing movements.

The North Sea is showing pricing improvement, with available drilling equipment capacity essentially absorbed. However, we expect margin pressure to remain for the first half of the year, as we optimize performance on our competitively priced long-term contracts and continue to incur mobilization costs.

Activity ramp-up continues across the Asia Pacific and Africa, with the rig counts in both regions now at the highest levels since the first quarter of 2015. We're starting to see pockets of pricing improvement in these areas as they come back from the downturn low.

Latin America activity will improve this year, driven by Mexico and Argentina. I'm excited about the near-term growth and long-term potential in that region. As we see more capacity tightness internationally and the pipeline of projects progressively expands, we expect to continue demonstrating rational returns-driven growth in the international markets. The pricing discussions with our customers in some markets have become more constructive, and we expect this momentum to build going into 2020. As the rationalization of the U.S. shale industry unfolds and the international markets ramp up, Halliburton is best positioned to capitalize on the future opportunities.

We make thousands of decisions every day and our global presence, our diversified product and service portfolio, our culture, our processes and our depth of leadership will allow us to win. We will win through responsible capital stewardship, prioritizing capital efficiency, investing in the technologies that deliver differentiation and generating strong cash flow and returns.

I will now turn the call over to Lance to provide more details on our financial results. Then I will return to discuss how we are strategically positioned to differentiate ourselves in the current market and deliver returns for our shareholders. Lance?

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Lance Loeffler, Halliburton Company - Executive VP & CFO [4]

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Thanks, Jeff. Let's begin with an overview of our first quarter results compared to the first quarter of 2018. Total company revenue for the quarter was $5.7 billion, essentially flat year-over-year, while adjusted operating income was $426 million, a 31% decrease.

Now let me take a moment to discuss our divisional results. In our Completion and Production division, revenue was $3.7 billion, a decrease of 4%, and operating income was $368 million, a decrease of 26%. These results were primarily driven by increased stimulation activity in North America, which was offset by lower pricing.

The Completion and Production division also benefited from higher Artificial Lift and Cementing activity in U.S. land, increased stimulation activity in Latin America and higher completion tool sales in the Middle East/Asia and Latin America region.

In our Drilling and Evaluation division, revenue increased 7% to $2.1 billion driven by activity improvements across all regions. Operating income was $123 million, a decrease of 35%. These results were primarily driven by mobilization costs that we incurred on multiple international drilling projects coupled with reduced project management activity and lower pricing in the Middle East.

Moving to our geographical results. In North America, revenue decreased 7% primarily driven by lower pricing in stimulation services, partially offset by higher Artificial Lift, Cementing and stimulation services activity. Latin America revenue increased 28%. This increase was driven by higher activity for the majority of our product service lines in Mexico, increased stimulation work in Argentina and improved fluids activity throughout the region, partially offset by reduced drilling and testing activity in Brazil.

Turning to Europe/Africa/CIS, revenue grew 4% driven by higher activity across multiple product service lines in Ghana and the United Kingdom. These results were partially offset by lower drilling activity in Azerbaijan.

In Middle East/Asia, revenue increased 7% year-over-year, largely resulting from higher completion tool sales across the region, coupled with increased project management activity in India and improved drilling activity in the Middle East. These improvements were offset by reduced fluids activity and lower pricing in the Middle East.

In the first quarter, our corporate and other expense totaled $65 million, which is in line with our previous guidance. We expect corporate expense in the second quarter to remain approximately the same. During the quarter, we recognized a pretax charge of $61 million primarily related to a noncash impairment of legacy sand delivery equipment, as we have adopted a more efficient sand logistics solution.

Net interest expense for the quarter was $143 million, and we expect it to remain approximately the same for the next reporting period. Our effective tax rate for the first quarter was approximately 21%. Going forward, we expect our second quarter and 2019 full year effective tax rate to be approximately 23%. Our first quarter cash flow from operations was a use of cash of $44 million primarily driven by short-term working capital movements. We experienced some customer payment delays that should get resolved as the second quarter progresses. We have also built up inventory primarily for the international rollout of our strategic investments, and we plan to work this inventory down throughout the year.

Historically, it's not unusual for our cash flow to be back end loaded, and we expect to generate strong operating cash flow for the remainder of 2019. Capital expenditures during the quarter were $437 million, with our 2019 full year CapEx firm at $1.6 billion. On a full year basis, we expect to generate higher free cash flow than last year by engaging the appropriate levers in different markets, optimizing capacity and structure in North America, driving pricing improvements and contract optimization internationally and managing working capital and CapEx.

Now turning to our near-term operational outlook, let me provide you with some comments on how we believe the second quarter is shaping up. For our Drilling and Evaluation division, we are anticipating a second quarter rebound from typical seasonal disruptions in drilling activity, offset by ongoing mobilizations. Therefore, we expect sequential revenue to be up low single digits with margins increasing 50 to 150 basis points.

In our Completion and Production division with North America land activity improving and the worst in pricing deterioration behind us, we believe that revenues will increase mid-single digits, while margin should be up 50 to 150 basis points.

Now I'll turn the call back over to Jeff to highlight some of our ongoing strategic initiatives and make a few closing comments. Jeff?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [5]

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Thanks, Lance. More than ever, we are focused on exercising prudent capital allocation to the right priorities. We have solid long-term strategies aligned with value generation for our shareholders. We will continue to expand in the product service lines and penetrate the markets where we see opportunities to generate growth and returns. As we implement these strategies, we expect to generate economic and technical differentiation that will lead to higher returns and free cash flow.

There are 3 main areas where we are investing this year, and I'll walk you through each one of them.

First, we will continue to enhance the competitiveness of our Sperry Drilling product line. I've talked to you a lot about iCruise, the new rotary steerable platform we introduced last year. The global rollout of this advanced drilling technology is on track with the tool already working in Argentina, the Middle East and across the U.S. shale basins. We're currently building out the tool inventory, and by the end of 2019, iCruise will constitute over 1/3 of our rotary steerable fleet. Growth in the higher margin rotary steerable market is extremely encouraging, but conventional motors remain the workhorse of directional drilling, especially on land. Another initiative we undertook at Sperry to increase our competitiveness and differentiation was to launch our Motors Center of Excellence. It is a new approach to drilling motor development that combines specialized engineering and manufacturing capabilities to customize motor designs for specific basin challenges. The Center deploys the latest mechanical engineering expertise to build more durable motors that drill faster and allow for longer runs with a higher rate of penetration. We have assembled a dedicated team of scientists in bearing and power section design, polymer chemistry and materials that is focused on accelerating research and development activities to deliver differentiated drilling motors to the industry.

As part of our Motors Center of Excellence, last quarter, we opened 2 new reline facilities equipped with state-of-the-art technology and strategically located in Houston and Saudi Arabia to serve our customers in the Western and Eastern hemispheres.

Next, we will continue investing in our production businesses, Artificial Lift and specialty chemicals. They are critical to both unconventional and mature fields. They fit well within our existing product portfolio, and they have a lot of growth potential for Halliburton going forward. This year will be all about international expansion for these businesses. It is already well underway for our Artificial Lift offering. We opened a testing and disassembly facility in the Middle East and are making ESP deliveries in several countries in Latin America and in the Middle East. Plans for international manufacturing of ESPs are in the works as well.

I recently went to Saudi Arabia to attend the groundbreaking ceremony for Halliburton's first chemical manufacturing plant in the Eastern Hemisphere. Leveraging the expertise added through the Athlon acquisition last year, we're building a plant that will provide an advantaged location for Halliburton to deliver superior service and chemical applications expertise to our Eastern Hemisphere customers. Upon completion in 2020, the plant will have capabilities to manufacture a broad slate of chemicals for stimulation, production, midstream and downstream-engineered treatment programs. We will not only supply our customers with next-generation specialty chemical solutions, but we'll also be able to manufacture chemicals for our own drilling fluids, cementing and stimulation businesses.

Finally, the third focus area for this year. We will continue to differentiate in a very important, but highly competitive space in hydraulic fracturing. The intense exploration of top-tier acreage, fueled by rapid trial-and-error technology cycles led to the explosive increase in production from U.S. unconventionals that we have seen in the past decade. As shale matures and operators have to step out to second-tier acreage, it will become increasingly hard to add enough production capacity to replace the significant legacy decline volumes as well as drive new production higher.

Going forward, higher activity and more advanced technology will be needed to maintain flat production levels in unconventionals. In light of this, I firmly believe that the future of unconventional technology will be more heavily weighted towards enabling higher well productivity.

As I've told you before, Halliburton's first step in this direction is investing in the Prodigi fracturing automation platform. We're using the latest machine learning technology to make our hydraulic fracturing treatment smarter and help our customers achieve optimal production from tougher and deeper rock. Today, Prodigi applies automated rate control to more effectively breakdown all prefloration clusters. This eliminates human error and yields more consistent fracturing treatments. On a recent application in North Dakota's Williston basin, Prodigi enabled more even distribution of proppant and fluid to each cluster, resulting in a 30% increase in cluster efficiency. This is just the beginning of what Prodigi will provide as we continue to work smarter going forward. And Halliburton is best positioned to develop and deploy the advanced technologies that will ultimately improve well performance.

With shale maturation, capital discipline on both the operator and the services side and an escalating focus on technology and efficiency, we expect customers to demand both surface execution and subsurface effectiveness. It won't just be about getting the most number of stages fracked today. Improving the quality of those stages and their production output will be just as important. In this environment, a strong integrated franchise will matter, size and scale will matter, technology depth will matter, superior service quality will matter, customer collaboration will matter, and Halliburton has all of these.

In summary, as supply and demand rebalance in North America land over the next few quarters, Halliburton is well positioned to navigate the near term and thrive in the long run. Second, a broad-based recovery is ongoing internationally and will continue into 2020. Halliburton will keep achieving rational, returns-driven growth in the international markets. And finally, against this backdrop, Halliburton is focused on the right things. We're investing in the products and services that generate growth and returns, managing our cost and other operating levers and committed to generating strong free cash flow and industry-leading returns.

And now let's open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Angie Sedita of Goldman Sachs.

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Angeline Marie Sedita, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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So Jeff, maybe we could touch on the -- your commentary on the worst in pricing is behind us. Is that -- give us a little color there. Does that imply that the pricing pressure is not completely gone? And then also, you touched on your levers to drive margins and of course, utilization and operational efficiency does drive margins in a big way. So can you talk about those levers and how much more do you have to pull there?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [3]

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Angie, the -- I'd say the worst is behind us. That doesn't mean there's nothing, but it also means that when we look at the market and how it's shaping up, that does -- will there be some trickling effect potentially? I'm not going to give precision around our strategy there. But what I will tell you is that, we are saying no where the thresholds aren't met, which gives me confidence, and then align that with what we see around activity and tightening capacity, which -- all of that should progress as the year goes on, and I view that as lending of support to pricing being behind us.

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Angeline Marie Sedita, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Okay. And so does that -- with the tightening capacity and you talked about the attrition that's ongoing, do you -- what's your thoughts on pricing for the back half of the year? Or is that more of a 2020 event?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [5]

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Yes, again, I'm not going to try to pick the date on where things are. I think broadly though, our view is that we will see tightening capacity on the balance throughout the year. I described how hard equipment's working. Also, the capital discipline that our customers see, we see the same, and so I think the reduction in CapEx or the actual -- the discipline around CapEx goes a long way to support balancing of the market. Now when does it balance? I think it's more balanced later in the year, certainly, than it is today. So I think that's all supported.

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Angeline Marie Sedita, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

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Okay. And then as an unrelated comment, but a follow-up. Your reorganization in the U.S. land, can you give us more color there? Is there a cost savings opportunity for the reorganization? Or is this more operational changes?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [7]

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Well, look, there's always cost associated with reorganization, but let me focus on making us more efficient and more nimble. So a couple of years ago, we took a fair amount of cost out, but most of that cost came in the form of an organization that would operate more efficiently and more quickly, and it's really what we're doing here. This is not targeted at the frontline by any means. What this is more around how do we brighten the lines and more quickly operate, make decisions and go to market. Now efficiency or lower cost is useful in any market in terms of driving performance, but that's not the intent.

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Operator [8]

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And your next question comes from James West of Evercore ISI.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [9]

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So Jeff and Lance, on North America real quick, I think this is pretty easy to respond to. But one, are you stacking fleets now if you can't get the appropriate return? And two, are you starting to see a push towards maybe a rebundling, meaning that as the operators have de-bundled previously when they were spending as much as they could, now that their budgets are -- have shrunk in size, perhaps the rebundling, the reorganization, the better collaboration part of the business should start to unfold? And I'm curious about both those topics.

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [10]

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Yes, James. On the first topic, we did stack equipment in the first quarter, and I'm not going to go any further than that. But as we look at the market and look at returns on equipment, that caused us to make those decisions, and we'll continue to manage our business around returns. The second question though is around rebundling. And look, I've always had a view that over time, those things that make sense to come back together do. I think we are early days of that, but there's just such an elegance and efficiency around how things fit together. That doesn't mean we are not very competitive with each slice, and I think we've demonstrated that. But at some point, once the pieces and parts have been examined, you start to see, wow, it's a lot simpler to put those pieces and parts back together, but to come, James. But I feel good about where we are in that process.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [11]

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Okay. Okay. Got it. And then on the international side, Jeff, it sounds like you're a bit more bullish now than you were maybe a quarter ago. I guess, one, is that fair to say? And then the second is, kind of, top line looks like it's going to be pretty strong this year, has been strong, you've been outperforming. When do you think the bottom line or the incrementals start to outpace normalized incrementals?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [12]

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Yes. The -- look, I think what gives me more confidence is how broad-based this recovery looks today. And so we started to see not just a green shoot here and there, but I think as I described in my commentary, nearly every region I talked about in terms of some form of growth. We also see a broadening base of offshore, sort of, activity, not maybe activity, and also the tendering activity that leads to more activity as we go into 2020. From a margin standpoint, I'll focus those comments on D&E, obviously. We expect stronger decrementals as we -- incrementals, excuse me, stronger incremental -- clarified that. What we saw in the first quarter, James, was -- I mean, it really was a mix of different things, both mobilizations that generally get done at midyear or as we move through the year, the mix of services. There is a real pricing impact from the Middle East that we saw. I mean, a lot of tender activity that happened in '18, it all started in earnest on January 1 of this year. So we saw some of that. But what's important, I think, is we expect strong incrementals into Q2 for that business, and clearly Q1, in my view, is a bottom for D&E margins.

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Operator [13]

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And our next question comes from Jud Bailey of Wells Fargo.

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Judson Edwin Bailey, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Research Analyst [14]

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Jeff, you started off your comments by saying what a difference 90 days makes and that's probably appropriate. Could you maybe talk about how you're seeing the year progress from a -- I'm sticking to North America and how maybe customer tone or conversations have changed, and to the extent visibility over the next couple of quarters, even the back half of the year has or has not improved as the macro environment has kind of stabilized here?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [15]

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Well, I think the macro environment stabilizing is the key point. I mean, in -- 90 days ago, we were coming off what wasn't a clear path for commodity prices. Obviously, Q4 was pretty hard on everyone. So in the range of 90 days, commodity price set up. What we had thought would happen has happened in terms of customers going back to work. And as I said in my commentary, sort of, each month was progressively building and that shapes our view. As we talk with customers, we look at the calendar, those things are all constructive as we look out to the next couple of quarters. More specifically around the second half of the year, a couple of ways we think about that, but I think importantly, is the production targets that are out there today, all of that requires some level of completion activity to meet that. I also think that some part of the CapEx reduction gets captured in, sort of, other things so that whether it's sand or service price deflation and maybe lowering rig count a bit. And I think the last question really be around, what do the smaller operators do going into the back half of the year. And I think they may be the most opportunistic. It's most important to them also just with a smaller asset base. Investing in completions really matters a lot to the value, not just to the asset, but likely the company.

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Judson Edwin Bailey, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Research Analyst [16]

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Okay. And my follow-up is maybe for Lance. Your guidance on C&P revenues up mid-single digits. My impression is that pricing is still, on average, a bit of a headwind as we head into the second quarter. Can you maybe give us your thoughts on how much the lag effect from the pricing weakness throughout 1Q impacts how C&P revenue growth looks in the second quarter? Just trying to balance what's the volume, and what's -- what the headwind on pricing is.

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Lance Loeffler, Halliburton Company - Executive VP & CFO [17]

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Yes, I think the -- it kind of goes back to what Jeff was saying, maybe an earlier comment. I think you may see some of a trickling effect to continue from the pricing side, but it's more than offset by the level of activity that we see, which is what informs our guidance. So it's really volume-related with modest impact from pricing.

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Operator [18]

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And our next question comes from Bill Herbert of Simmons.

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William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [19]

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Jeff, when you think about the second half, is this -- and your frac calendar specifically, is this based upon specific visibility which is populating the frac calendar, or kind of a plausible expectation that completions needs to move higher, even -- I mean, for any number of reasons, including meeting customer budgets, selling Permian pipes, et cetera? So distinguish between optionality and actually tangible visibility that's unfolding.

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [20]

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Yes. Bill, the -- we've got visibility in the calendar out a couple of quarters, and so we've got a view of that and that's more specific. As we look further in the year, particularly the back half, I think there's some signposts that we look for in terms of production targets met, not met, also around rig count with smaller operators, what that may look like. So -- and I think that cadence also could be different in different basins. But I think the -- we obviously have discussions with customers, and I think there's -- it's quite a mixed bag in terms of outlook and how they plan to manage activity throughout the year. So we are asking those kind of questions, certainly, earlier than we have in the past. And I feel like with our business development organization and ability to be very sharp around the edges in terms of where we are and how we perform, I feel confident in at least Halliburton's outlook for the balance of the year.

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William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [21]

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Okay. And then with regard to international margins, it seems like, at least in the ordering of the elements conspiring to a weaker D&E margins in Q1 that the major issue was the mobilization expense associated with several different drilling projects. That's a transient issue. So I'm curious as to when the mobilization -- well, first of all, how broad was the mobilization headwind in Q1 apart from the North Sea? Secondly, when does that abate? And thirdly, doesn't that represent a nice margin opportunity in the second half of the year?

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Lance Loeffler, Halliburton Company - Executive VP & CFO [22]

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Yes, Bill, this is Lance. Look, I think there is opportunity, and we do expect D&E margins to improve throughout the course of the year. I think we've been pretty vocal around that. While the mobilization sure will provide that uplift, it's not to discount the pricing pressure that we continue to see in the Middle East. By that I mean, so as we get through the first half of this year, we expect D&E margins to be markedly improved in the second half to sort of land at flat year-over-year margins in D&E.

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William Andrew Herbert, Simmons & Company International, Research Division - MD & Senior Research Analyst [23]

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Okay. So flat year-over-year margins for FY '19 or second half versus second half?

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Lance Loeffler, Halliburton Company - Executive VP & CFO [24]

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No, flat year, FY '19.

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Operator [25]

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And our next question comes from Scott Gruber of Citigroup.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [26]

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Jeff, you mentioned in your prepared remarks that the U.S. market is likely settling into one that's less volatile, which would be good for you. It sounds like mainly a demand comment. And obviously, there's only so much you can control. Have you thought about ways of further reducing the volatility from your side? And how do you think about customer exposure? Does the growth of the majors present an opportunity to enter into some contracts that may be are stickier and longer term? Is there an ability to look at the E&Ps, given that they're settling into a spending cadence that may be steadier? Is their ability to go after some longer-term deals with them? How do you think about overall reducing the volatility in the business?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [27]

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Yes. Without going into like specific things that we do, I mean, what you're saying, obviously, we think about that. We've historically -- and look, we do a lot of business with IOCs, we do a lot of business with all of the customers in the marketplace, so along -- different of those 14 service lines that we have. But we've -- historically, we've optimized our frac fleet around what we view as the most efficient customers, we could drive the most margin. But I also think with the industrialization of shale, sort of, at scale, larger scale today, those types of things become more attractive. And so we have good relationships. We have the ability to scale to those growth plans and look, -- and we plan to do so. But we're going to do it always with an eye to what are the best returns for our shareholders.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [28]

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Got it. And then you mentioned 20% efficiency gains in frac over the last 2 years. How should we think about those gains in '19 and '20? Are you seeing efficiency improvement on par? Is it starting to slow? Just some color on that trend as well would be great.

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [29]

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Yes, I think we are seeing that. To a degree, we're reaching some sort of maximum velocity here just in terms of hours a day. If I were to think back, there've been some big sort of milestones in efficiency, and Halliburton has been at the front edge of each of those. So the first was going from 12 to 24 hour a day operations. That was a big step. Next was more around zipper fracs as opposed to single-well fracs and then multi-well pads as opposed to single-well pads. All of those are sort of structural step changes. We've done a lot at the margin around being more efficient. And our focus is taking capital off location not putting more capital on location. And so we do some things to drive our capital efficiency. But the big steps, I don't necessarily see those today. What I really see over the next cycle or the next few years is more emphasis around what's happening around the wellbore as opposed to on surface. Now you hear a lot of discussion around that, but I say that to include everything from parent-child, to spacing, to velocity, to all of these other things that we believe and I believe will have more impact on productivity and efficiency over the next 3, 5 years.

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Scott Andrew Gruber, Citigroup Inc, Research Division - Director and Senior Analyst [30]

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If you had to put a number on the efficiency improvement this year, what would you peg it at?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [31]

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I don't know. Less than it's been. I'd just call it 5%, 10%, maybe, in that range.

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Operator [32]

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And our next question comes from Sean Meakim of JP Morgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [33]

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So you mentioned you've got a lot of different levers to drive cash flow depending on what the market gives you. I think a lot of your 2019 CapEx budget was committed prior to the reduction that you took into the year. So conceptually, if 2020 looks a lot like 2019, in other words, activity in North America is comparable, international is improving modestly. Could your CapEx budget take another cut lower if some of the recent growth initiatives in drilling and production start to roll off?

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Lance Loeffler, Halliburton Company - Executive VP & CFO [34]

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Yes. Sean, look, I think in terms of the, sort of, CapEx and revenue relationship that we sit at today, I believe it was like high 6%, is lower than it's been on average over the last 10 years where we've averaged closer to 10%. I think clearly this year, we've been pretty vocal about what buckets we're outspending as a part of that of $1.6 billion of CapEx. I don't know that, that -- to me, it feels like -- in and around 7% today feels like a good number even for next year. Now the slices of that pie, right, as we go -- as we think about how we invest may change. But I think the rate of CapEx spend as we reinvest in the business feels pretty good.

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [35]

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Let me maybe just step in there too. I mean when we think about the outlook, I mean we're focused on, what I'd call, a returns-focused growth. And so if we think about where we're spending this year, we are continuing to invest in strategic initiatives, and we're building out sort of our Sperry iCruise Fleet and investing in international growth. So we're doing all of that today in the realm where we're in, in sort of the 7% -- 6% to 7% of revenues today. So it feels sustainable to me, and I don't see this as a shift in our approach. I mean in this market, that level of spend is appropriate to generate returns.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [36]

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Got it. And just one point of clarification. When you highlighted pricing pressure in the Middle East, is that -- were you considering this to be incremental pressure from customers? Or is this really just a rolling through of contracts that were won last year?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [37]

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Well, I -- it's -- principally, what we see in this quarter is the rolling over or the establishment, beginning of contracts at lower prices. It doesn't necessarily mean that it's abated. But it is certainly -- that's what we are seeing now. That we're in the -- as we look ahead, we'll work on how to optimize things and perform more profitably over time.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [38]

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And so would you say that the -- would you characterize the magnitude of the decline due to mobilization and that pricing basically in line with what you would have expected for the quarter?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [39]

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Yes. No, that's what we generally thought we would see, and we also saw a number of things that I described in my comments. But mobilization, bad pricing, also weather in the North Sea was pretty tough this quarter, more so than probably we would have expected. So those sorts of things.

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Operator [40]

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And our next question comes from the line of Chase Mulvehill from Bank of America Merrill Lynch.

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Lance Loeffler, Halliburton Company - Executive VP & CFO [41]

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Chase, you there?

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Operator [42]

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(Operator Instructions) And our next question comes from Kurt Hallead of RBC.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [43]

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Just had a follow-up question here. When you guys were talking about the overall spending activity -- spending levels for the U.S. being down 6% to 10% and for international kind of the be up high single digits. When we look at, say, Completion and Production and we look at Drilling and Evaluation, would it be safe to assume that, in aggregate, Completion and Production would be -- like you said, completion activity be up, so I'd imagine that overall C&P revenues would be up on a year-on-year basis, maybe in that high single-digit range? And think adversely on Drilling and Evaluation, with the drilling activity being down in the U.S., that kind of offsetting growth internationally. So just want to try to get a general sense, so C&P up kind of on a year-on-year revenue and D&E maybe kind of flattish, is that kind of a safe way to think it about right now?

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Lance Loeffler, Halliburton Company - Executive VP & CFO [44]

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The way that I would think about it, Kurt is that, and we mentioned this, I think, in some of our prepared remarks, was that we expect our completions activity to be sort of flat year-over-year, right? Even though spend is down in North America, that takes the form of lower sand pricing or lower drilling expenditures versus the actual completions activity. And then as we think about D&E, particularly driven by the international markets, we see a broad recovery, pockets of pricing improvement but also weighed down by pretty competitive Middle East today. So it's a balance of all of that.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [45]

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Got it. Appreciate that, Lance. And then Jeff, maybe a follow-up for you. I know that you've had a very continuous focus on returns and that being the key mantra or one of the key mantras for the company. I was just wondering if you could give some perspectives on how you think about returns thresholds. And when you think about it in the context, is it -- when you think about it through cycle, is that a 3-year period, 5-year period, 10-year period? Just, kind of, some general insights on that dynamic will be helpful.

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [46]

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Look, when I think about returns broadly, I think the -- I think about sustained growth over a period of time, and I also believe that the value for growth at any cost is over. And so when we will talk about returns-focused growth that it's the right kind of growth. And look, I feel great about Halliburton in this kind of paradigm. I mean we've always been returns-focused. Clearly, it starts with margin, so improving pricing and managing cost. We're always managing costs in that environment. And then I think disciplined investing, I think that may be informs more of what you're asking. But we make capital scarce when we need to make capital scarce. And we're also, in my view, investing in the right businesses. So if we think about lift in chemicals and where we've put our CapEx, we'll do that very thoughtfully and certainly focused on returns.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [47]

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Okay. That's helpful. And maybe one follow-up, just on the attrition comment. Jeff, you referenced earlier that 7.5 million horsepower would need to be rebuilt in '19, and you wouldn't think the spending level required to rebuild that equipment would happen. So in the context of the attrition then, how much horsepower do you think could shake out of the market this year?

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Lance Loeffler, Halliburton Company - Executive VP & CFO [48]

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Kurt, this is Lance. I think it's tough to call. Hard to really put a number on it, right? I mean I think attrition's always been a tough one to try to define in the pressure pumping industry, but one that we know it's happening because we see what it's -- how it's working on our fleet, right? And we talked about some of the stats that we had in our prepared remarks. You can't ignore it. And today, we know that there's underinvestment. We know that there's more pressure than ever on all of the fleet in North America around the wear and tear, and therefore, the repair and maintenance costs associated with it and the burden that a lot of our space has had to shoulder. And I think, look, at the end of the day, there's going to be some that are just going to flat out be retired.

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Operator [49]

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And our next question comes from Dan Boyd of BMO Capital Markets.

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Daniel Jon Boyd, BMO Capital Markets Equity Research - Oilfield Services Analyst [50]

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Wanted to follow up on the international outlook. You put up 11% growth in the first quarter. The guide for the second quarter sounds like about 10% first half growth year-on-year. And presumably, the mobilization costs you're calling out suggests continued growth in the back half. So just wondering, what keeps you with a little bit more on conservative high single-digit revenue number for the year?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [51]

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Look, we want to be very realistic about what we see unfolding in the market. I think the -- a lot of the tender activity that we see today is probably not going to begin until 2020. And so we see activity building, but we're also going to be -- I've talked about returns-focused growth. And part of that discussion is making sure that we're investing and pursuing the right things. And look, we're really encouraged. In fact, I think what we'll see is growth, as I described, in '19 and then certainly building into 2020 as sort of that broad-based, sort of offshore activity starts as opposed to being tendered and talked about. So encouraged, but again we're going to manage our business.

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Daniel Jon Boyd, BMO Capital Markets Equity Research - Oilfield Services Analyst [52]

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Yes, just being conservative. Lance, I wanted to follow-up on Bill's question on the D&E margin. So in order to keep them flat year-on-year, it sounds like we need to exit the year in the fourth quarter low double digits. And so just wondering, as you look past the mobilization costs that you're incurring, is that a number that you sort of see without pricing and without big contract wins from here on out? Basically, is -- how de-risked is that low double-digit margin?

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Lance Loeffler, Halliburton Company - Executive VP & CFO [53]

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Look, I mean, we're going to have to work towards it, no doubt. But I think the tailwind that you get as you begin to put revenues across the cost that we've been running and around the actions that we're taking in the North Sea in those mobilizations. I also think that we expect to start to see some benefit as we get more Sperry tools in the market. I think we told you that 1/3 of the Sperry fleet will be iCruise by the end of the year. We're working hard to get the tools out. That's part of the working capital build that you saw on the inventory side that I mentioned in my commentary around the international strategic investments. And so those are the things that give me confidence that we can continue to build on what we need to get to those commitments.

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Operator [54]

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And our final question comes from the line of Marc Bianchi of Cowen.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [55]

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First question, just back to the pricing discussion for North America. Jeff, you noted the 14 product service lines that Halliburton offers. Is there any distinction among those lines in terms of where pricing is bottoming? Specifically, everybody is focused on frac, but as you mentioned, you're a big player in cementing. There's been some concerns about cementing competition. Just curious if there's any distinction you could offer on those product lines?

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [56]

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Yes, I'm going to -- very competitive space in North America, so I'm not going to get any more detailed around pricing and where the other service lines are. Clearly, hydraulic fracturing is probably the biggest pieces of sort of the North America landscape today, and it probably is the most oversupplied. So I'll leave it at that.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [57]

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Okay. And then Lance, in terms of the outlook for free cash flow growth for the year, big working capital consumption here in the first quarter, which is seasonal. Would you anticipate working capital for the year to be a neutral, a positive or a negative?

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Lance Loeffler, Halliburton Company - Executive VP & CFO [58]

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Well, I think we're going to see a lot of benefit as we, sort of, work through the DSOs that we've built up in the first quarter of the year. I think we'll continue to work down a lot of the inventory that we built up. I would suspect that we -- the working capital does release cash, some point throughout the year.

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Operator [59]

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Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to management for closing remarks.

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Jeffrey Allen Miller, Halliburton Company - President, CEO & Chairman [60]

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Yes, thank you, Candice. Before we wrap up the call, I'd just like to highlight a few points.

First, I'm excited about the broad-based international recovery that we see unfolding, and Halliburton is well positioned to take advantage of this growth. Second, I believe that demand for North America completions will be up modestly over the next few quarters and that capacity will tighten over the balance of the year. Finally, our focus on capital discipline, capacity tightening and cost management will deliver leading returns and free cash flow in excess of last year. Look -- I look forward to speaking with you again next quarter. Candice, please, close out the call.

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Operator [61]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.