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Halliburton Co (HAL) Q2 2019 Earnings Call Transcript

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Halliburton Co (NYSE: HAL)
Q2 2019 Earnings Call
Jul 22, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks

  • Questions and Answers

  • Call Participants

Prepared Remarks:

Abu Zeya -- Investor Relations

Good day, ladies and gentlemen, and welcome to the Halliburton's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Abu Zeya, Head of Investor Relations. Sir, you may begin.

Good morning, and welcome to the Halliburton's Second Quarter 2019 Conference Call. As a reminder, today's call is being webcast and a replay will be available on Halliburton's website for seven days. Joining me today are; Jeff Miller, Chairman, President and CEO; and Lance Loeffler, CFO.

Some of our comments today may include forward-looking statements reflecting Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31st, 2018, Form 10-Q for the quarter ended March 31st, 2019. 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 second quarter press release and can be found in the Quarterly Results section of our website. [Operator Instructions]

Now I'll turn the call over to Jeff.

Jeff Miller -- Chairman, President and Chief Executive Officer

Thank you, Abu. Good morning, everyone. Commodity markets navigated some choppy waters during the second quarter. On the one hand, there are global oil demand concerns largely attributed to the uncertainty surrounding the outcome of the US-China trade talks. On the other hand oil prices have recently been buoyed by supply side reaction to the extension of OPEC plus production cuts, ongoing output declines in Venezuela, US sanctions on Iranian oil exports and political instability in Libya and sedan.

Against this backdrop, Halliburton's execution in the second quarter was outstanding, and I am very pleased with our results. We continue to build on the growth momentum internationally and successfully manage the market dynamics in North America.

Before we dive into the details, here are few highlights for the second quarter. Total company revenue was $5.9 billion and adjusted operating income was $550 million, representing increases of 3% and 29% respectively, compared to the first quarter of 2019.

Our Completion & Production division grew revenue 4% and operating income 28% sequentially. Improved completion activity in North America land and our solid execution globally resulted in delivering better-than-expected margins.

Our Drilling and Evaluation division grew operating income 18% quarter-over-quarter with strong improvements coming from our Sperry Drilling and Wireline and perforating product service lines. Overall D&E division incremental margin was 44%. North America demonstrated solid performance this quarter, delivering 2% revenue growth despite the dropping rig count. International revenue grew 6% sequentially led by activity increases in the Eastern Hemisphere.

And finally, we generated approximately $450 million in operating cash flow, as well as positive free cash flow in the second quarter.

Now I'd like to provide some regional commentary, beginning with the international markets. I'm excited by what I see internationally a continued broad-based recovery across multiple geographies, primarily driven by land and shallow water operations. Our business in the North Sea is extremely busy, both in the Norwegian and UK sectors. We have significantly increased our market share there by winning large tenders. Currently, we are sold out of Drilling and Wireline tools in the North Sea. Is activity keep ramping up especially with independent operators taking over IOC assets in the UK, supply and demand balance is significantly tightened for tools and I expect that incremental work will come with better pricing.

We see similar dynamics in the Asia-Pacific markets. Malaysia, Australia and India are all showing strong activity growth. Increased activity leads to better pricing dynamics and we are already seeing the leading edge of pricing improvement in those markets. For instance, tightness in the supply of open-hole Wireline tools is allowed us to raise prices in certain markets.

As to the broader offshore market, we've seen enough size to anticipate future growth. In June, the year-over-year change in offshore rig count was up for the 12th consecutive month and appears to be gaining momentum. However, the majority of large offshore projects being sanctioned or awarded today have a 2020 or 2021 start date.

For example, this month we announced an integrated offshore drilling services contract win with Kuwait Oil Company. This is the first offshore project in Kuwait since the 1980's and it includes six high-pressure, high-temperature exploration wells on two jack-up rigs in the Arabian Gulf. Starting next summer Halliburton will provide well construction services, well testing, coring, coiled tubing and the majority of offshore logistical services under this three-year contract.

Halliburton entered this international recovery a much stronger competitor. Over the last decade, we've taken strategic actions that have increased the market opportunities in which we can compete. To be specific; first, we made substantial investments to grow our international footprint in the years prior to the downturn. We increased our product service line presence in various geographies. Expanded our manufacturing capacity in Singapore and opened technology centers and Saudi Arabia, India and Brazil. I cannot emphasize enough how important physical footprint is in the international markets. You simply must be present to win.

Second, we made strategic investments in closed technology gaps and product lines that we believe are critical to our success in the international markets. These product lines are Sperry Drilling.

I've talked to you a lot about iCruise, our new rotary steerable platform. Rotary steerable's are used globally for drilling, both onshore and offshore wells. The competitive drilling technology is critical, because it's not only a higher margin business. It's also the cornerstone of integrated well construction services. Because of superior technical specs and the modular design of this tool, we're confident that replacing our legacy platform with iCruise will enhance our competitiveness, save on maintenance costs and improve asset velocity. We are already running it in the US, as well as in Latin America, the North Sea and the Middle East. In fact it delivered the longest lateral and longest well in Argentina's Vaca Muerta Shale in its first deployment.

Another Sperry innovation introduced last year is the EarthStar our ultra-deep resistivity sensor that turns on the high beams in the reservoir. So we can now see over 200 feet around the well bore, while drilling, more than double the depth of detection of other industry offerings. This technology is critically important for offshore exploration and has been instrumental to Halliburton securing deepwater drilling contracts in Norway, Brazil and Guyana.

During the second quarter a customer in Norway deployed EarthStar on a deepwater exploration well with a very tight drilling window. One of the most complex wells this operator ever planned. Using the data acquired by the tool we were able to precisely land the well and to identify secondary pay zones directly impacting the wells production potential. Other product lines, we've strengthened our open-hole Wireline and production testing. These are highly technical and differentiated businesses. Today, Halliburton successfully competes for the most advanced open-hole Wireline and testing projects around the globe, going head to head with our key competitors.

All of these efforts, give us a strong base to capitalize on the international recovery, and we expect to deliver high single-digit international revenue growth this year. As I highlighted, our Drilling and Evaluation division driven in large part by our international footprint performed as expected in the second quarter. The catalyst for the second half D&E margin improvement, are all intact and I have confidence in our team's ability to execute. We expect to see meaningful revenue ramps in Norway and India as mobilization cost vain and execution starts in earnest.

I've talked about the iCruise increased drilling system in the cost savings, it provides to Halliburton. This and other D&E technologies that we're deploying will continue their market penetration and further improve our margin performance.

Finally end of your product and software sales should provide additional boost to D&E margins. As I look ahead, I am encouraged by the leading edge pricing discussions in various international markets, although we've cut overall capex we have not done so at the expense of growing our international business. Our capex, reduction is driving the right capital allocation decisions and the right pricing and return discussions. Once the activity momentum builds internationally, it's hard to slow it down, given the timing of contract starts in the current awards pipeline, I expect the activity growth to continue into 2020.

Now turning to North America. I'm pleased with how Halliburton performed in North America during the quarter. Congratulations to our North America team for solid execution. In the second quarter, we saw a modest improvement in hydraulic fracturing activity, which manifested in mid single-digit increases in both completed stages and pumping hours during the quarter.

While our pricing remained stable we were able to improve margins by reducing costs and maximizing our equipment utilization. This is what I mean when I tell you that we will control what we can control and manage our business to perform well in any market conditions. It's important to note, the second quarter results were not solely based on performance of our hydraulic fracturing business. In fact, other C&P and D&E product service lines made meaningful contributions to both revenue and margins in North America in the second quarter. The increasing contribution from non-hydraulic fracturing product lines is important, it demonstrates our strategy to profitably grow our share of services per well, both in North America and internationally, and the results are showing.

Despite the average quarterly rig count in North America, dropping 13% since the first quarter, our cementing product line activity remained stable and margins grew quarter-over-quarter. We're able to achieve this with no additional capital by effectively utilizing assets and increasing the number of jobs person net unit. As well complexity and lateral lengths increase in US unconventionals, creating dependable well barriers and curing mud losses has become more critical, built on a century of technical innovation, our loss circulation solutions and light cement slurries deliver results in the most challenging conditions. Differentiating Halliburton from the competition.

With tailored cement designs Halliburton executed the longest laterals to-date in the DJ, Permian and Marcellus basins with each lateral over three miles long. Our Wireline and Perforating product line continue to generate profitable growth driven by its diverse and competitive technology portfolio and exceptional service quality.

In our North America Perforating business, we are quickly gaining share with a proprietary integrated gun system. Halliburton velocity modular guns come to location preassembled and not require any field wiring, which makes them a lot easier, faster and safer to deploy than conventional perforating guns. With velocity guidance we're delivering more than 400 runs between mis-runs, a fourfold improvement in service quality and efficiency, compared to conventional guns. Modular guns have seen a very fast uptick with our customers growing to 40% of the gun shot by Halliburton and just a year from launch.

Our artificial lift business, which consists primarily electric submersible pumps continue to outpace the market, it delivered a record second quarter growing both revenue and profitability. ESPs have proven to be a very valuable asset in our production portfolio serving both the conventional and unconventional markets.

Looking forward, I believe that our customers activity cadence for the rest of the year will be dictated by their focus on remaining within their announced capex budgets and generating free cash flow, some will slow down as they've been very efficient and we'll scale back completion programs for the rest of the year to stay within their capex guidance. Others may drop rigs, but will continue working down their DUCs. Majors will most likely continue executing their growth plans in the US shale to meet their longer-term objectives.

As a result of these different customer behaviors, we expect that activity in North America will be slightly down in the third quarter. We anticipate the slow down to be more pronounced in gassier basins, due to persisting lower gas prices. Despite the near-term softness in activity, we expect our margins to remain stable next quarter, we're taking the actions that allow us to protect margins and as evidenced by our second quarter C&P performance these actions are working. As we navigate 2019 and beyond, our company is executing a different playbook than in the past. Here's what we are doing to keep delivering returns and cash flows to our investors.

First, we recognize the changing behavior of our customers and have changed our own approach to capital spending. In 2019 we've decreased capex 20% year-on-year, and the majority of the reduction came from North America. We have sufficient size and scale in this market and see no reason to invest in growth when it comes at the expensive returns. The capital that we do spend this year in the US is mostly directed toward increasing efficiency and refurbishing equipment both with line of sight to improving returns and cash flow.

Second, we're reducing our operating costs; for example, we recently restructured our North America organization, removing several layers of management. The restructuring has changed our cost profile certainly, but it's also increased our market responsiveness. We are also partnering with our premier supply chain and logistics organization to reduce our input costs. We continue to evaluate cost reduction opportunities across the company, and we will manage and right size our North America operations for the market environment.

Finally, we have stacked additional equipment throughout the quarter and we'll continue to do so, where we do not see acceptable returns. The pressure pumping market remains oversupplied and we're not afraid to reduce our fleet size as it contributes to writing the supply and demand in balance. This may impact our top line in the near-term, but saves labor and maintenance costs, and I believe will lead to better margins. We are taking these actions, while continuing to drive growth in the product service lines that we expect to most positively contribute to profit and cash flow generation in North America.

In my view as unconventionals in our maturation phase represented by the pivot from scarcity to abundance, technology will differentiate Halliburton, and I'm excited about our prospects. Customers are required to maximize production for every capex, dollar they spend and technology that can improve well productivity will be key to their success. These are the challenges that Halliburton solves every day.

For example, our automated fracturing service optimize the sand placement for lateral foot and ensures every cluster makes a meaningful contribution to well production. Our open-hole Wireline business is growing in unconventionals as customer spend time and money evaluating their reservoirs prior to fracturing them. We see increased use of fiber optics across various basins as operators and evaluate stimulation performance and make changes in real time. And I am convinced that no one is better at collaborating with customers to engineered solutions that deliver the lowest cost per barrel than Halliburton.

With that, I'll turn the call over to Lance for a financial update. Lance?

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Thank you, Jeff. Let's begin with an overview of our second quarter results, compared to the first quarter of 2019. Total company revenue for the quarter was $5.9 billion and adjusted operating income was $550 million, representing increases of 3% and 29% respectively.

Now let me turn to our divisional results. In our Completion & Production division, revenue was $3.8 billion, representing an increase of $143 million or 4%. Operating income was $470 million, an increase of $102 million or 28%. These improvements were primarily driven by increased cementing activity and completion tool sales internationally, higher artificial lift activity in North America, increased stimulation activity in North America and the Middle East Asia and increased pipeline services in Europe/Africa/CIS. These results were offset by reduced stimulation activity in Latin America.

In our Drilling and Evaluation division, revenue was $2.1 billion, an increase of $50 million or 2%. Operating income was $145 million, an increase of $22 million or 18%. These improvements were primarily driven by increased Wireline activity globally, improved drilling activity in North America, Latin America and Europe/Africa/CIS and higher project management activity in Middle East Asia. Partially offsetting these increases were reduced fluids activity in Latin America and North America and lower software revenue globally.

Moving on to our geographical results. In North America, revenue in the second quarter of 2019 was $3.3 billion, a 2% increase. Improvements were primarily driven by higher stimulation, artificial lift and Wireline activity in North America land and higher drilling activity in the Gulf of Mexico. These results were partially offset by lower software revenue across the region and reduced fluids activity in the Gulf of Mexico.

Latin America revenue was $571 million, a 3% decrease sequentially resulting primarily from lower software revenue and reduced fluids activity throughout the region, as well as reduced stimulation activity in Argentina. These reductions were partially offset by increased Drilling and Wireline activity in Mexico and higher cementing activity and completion tool sales in Argentina. Even though activity was slightly lower in Latin America this quarter, we expect it to step up in the second half of the year with the ramp up in Argentina, Guyana and Colombia.

Turning to Europe/Africa/CIS, revenue was $823 million, a 10% increase sequentially, primarily driven by higher activity across multiple product service lines in the North Sea and increased well construction services in Russia, partially offset by reduced software revenue throughout the region. In Middle East Asia, revenue was $1.2 billion, a 7% increase sequentially, largely resulting from higher completion tool sales and increased pressure pumping, wireline and project management activity throughout the region, coupled with improved drilling activity in Asia. These results were partially offset by lower drilling activity in the Middle East.

In the second quarter, our corporate and other expense totaled $65 million, and we expect it to remain at these levels for the third quarter. During the second quarter, we recognized a pre-tax charge of $247 million consisting primarily of asset impairments, and severance costs. As Jeff discussed earlier, we continue to adjust our cost structure and footprint to the current operating environment in North America.

Net interest expense for the quarter was $144 million and we expect it to remain approximately the same for the next reporting period. Our effective tax rate for the second quarter was approximately 23%. Going forward, we anticipate our third quarter and 2019 full-year effective tax rate to be 22% based on our expected earnings mix.

We generated approximately $450 million of cash from operations during this quarter. We made progress in collecting our receivables, while our inventory slightly increased related to our strategic technology deployments. We expect inventory to be consumed through the rest of the year. And I see second quarter as a step in the right direction as we generated positive free cash flow. We will continue to target working capital is a key focus for the organization.

On a full-year basis, we believe working capital levels will be essentially flat with 2018 and for the full-year, we still expect to generate free cash flow at or above 2018 levels.

Capital expenditures during the quarter were $408 million and our 2019 full-year capex guidance remains unchanged. While our capex of $1.6 billion this year is similar to our DD&A level, we anticipate capital spend in 2020 to be significantly less than that. This level of spend will still allow us to capitalize on the international growth, while being responsive to the market conditions in North America.

At Halliburton, capex is at the core of our strategy execution. Our capital allocation behavior drives the right returns discussions, both internally and with our customers, and this is consistent with our focus on generating strong cash flow for our investors regardless of the market environment.

Finally, we continue our focus on delivering shareholder returns. During the second quarter, we returned approximately $260 million to shareholders via share repurchases and dividends.

Now turning to our near-term operational outlook. Let me provide you with some comments on how we believe the third quarter is shaping up. For our Drilling and Evaluation division, we expect activity increases in the North Sea and Asia to be offset by lower activity in Africa and North America. All in, we expect sequential revenue to be up low single-digits with margins increasing 125 basis points to 175 basis points. As we see the impact of the catalyst for D&E margin improvement that Jeff described earlier.

In our Completion & Production division, lower activity in North America will be offset by higher activity internationally and the impact of our cost reduction efforts. As a result, we believe that sequential revenue will be down low single-digits with margins expected to remain essentially flat.

Now I'll turn the call back over to Jeff for the closing comments. Jeff?

Jeff Miller -- Chairman, President and Chief Executive Officer

Thanks, Lance. To summarize our discussion today, momentum is building internationally and activity improvement should continue into 2020. Leading edge pricing is trending upward, as equipment supply and demand balance tightens in various geographies. Halliburton has the footprint and the expanded technology portfolio to capitalize on this international growth. We recognize the changing behavior of our North American customers and are executing a new playbook to keep generating returns and free cash flow.

Halliburton is taking the right actions to be successful in this market. We have cut overall capex in 2019, and plan to do so in 2020 as well. This is driving the right capital allocation decisions and pricing and returns discussions. We are reducing our operating costs, we have restructured our North American organization and are also partnering with our premier supply chain and logistics organization to reduce our input costs. We have stacked additional equipment throughout the quarter, and we'll continue to do so with a focus on returns. We are strategically growing our share of services per well by increasing the competitiveness of our non-hydraulic fracturing product service lines.

And finally, we are developing technologies that will improve well productivity, a requirement of a mature unconventional market. We remain focused on delivering consistent execution, generating superior financial performance and providing industry-leading shareholder returns.

And now let's open it up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from James West with Evercore ISI. Your line is open. James, your line is open, please check your mute button.

Jeff Miller -- Chairman, President and Chief Executive Officer

James you there?

James West -- Evercore ISI -- Analyst

Yes.

Operator

Our next question comes from Angie Sedita with Goldman Sachs. Your line is open.

Angie Sedita -- Goldman Sachs -- Analyst

Thanks, good morning guys.

Jeff Miller -- Chairman, President and Chief Executive Officer

Good morning, Angie.

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Good morning, Angie.

Angie Sedita -- Goldman Sachs -- Analyst

So I thought it was interesting your comments. Let's start on the international side for a change in the momentum you're seeing going into even 2020, maybe you can give us a little incremental color on the degree of momentum, we could see next year. Could we see similar growth levels for revenue in the international markets as you did in 2018? And then on the pricing side, do you expect it to continue to be region specific or could it become more widespread?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes. Thanks Angie, the international, but move as fast as, for example, North America. So when we see a trajectory, it tends to stay on that trajectory. And I'm encouraged by 2020, because of the number of FIDs and types of things that we're seeing today that really don't get started until 2020. So the Kuwait for example, it doesn't really begin until the middle of next year, though it was one [Phonetic] now. And so, the FID's that we're seeing now that give me confidence about the trajectory for 2020. Yes, early to call growth rates for next year, but yes, I think you met 2019, what I see a similar kind of growth trajectory, the '19 that carried over into '20 and yes, that seems reasonable to me.

Angie Sedita -- Goldman Sachs -- Analyst

Okay, helpful. And then on the North America land market some first kudos for being proactive on the stacking equipment in this market versus fighting for share. You commented that you're seeing pricing is stable, and one of your peers that they're seeing some pricing softness. So maybe you could talk a little bit about pricing? And then the degree of drop-off that we could see in Q3 and even into Q4 as far as activity?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes, Angie. Let me start with pricing. The -- I mean, from our perspective is -- there was stable for us through Q2, that doesn't mean there is an occasionally, something that we see in terms of pricing behavior by competitor. But on balance, very stable. As we look at the balance of the year, certainly from an activity standpoint, I've said it would be down slightly in Q3, obviously Q4 always comes with weather seasonality all of that I suspect given budgets that we would see more step down, as well around that. But I think what's really important here is as you described it, kind of, the way we're approaching the market, I mean our playbook is different, we're very sharp around taking cost out. Where we see it needs to come out, we've demonstrated that we do stack equipment, we'll stack equipment and are just that focused on returns in margins.

And so that's kind of the way we see the second half of the year obviously, customer spend through Q2. We don't know that yet, but when we do know that I think that will also be instructive on the second half of the year. We talk to our customers, so we know what they're thinking, but the fact is we need to look at where those budgets come out in Q2.

And I guess, just one follow-up on international pricing, you had asked that question, Angie. We're seeing international pricing, it is getting traction, it is getting traction around tool shortages and demand and certainly the North Sea. We've seen it in a few other markets as well, I mean, that's part of what we see from our standpoint, anyway the capital discipline that we're driving is driving the right conversations. With customers and quite frankly the right choices by us.

Angie Sedita -- Goldman Sachs -- Analyst

Great, thanks. I'll turn it over.

Operator

Thank you. Our next question comes from Sean Meakim with JP Morgan. Your line is open.

Sean Meakim -- JP Morgan -- Analyst

Thanks. Hey, good morning.

Jeff Miller -- Chairman, President and Chief Executive Officer

Good morning, Sean.

Sean Meakim -- JP Morgan -- Analyst

So, Jeff, you mentioned that you're working from a different playbook given this is a different cycle, and I certainly agree with that approach. And it seems like you're thinking is evolving in terms of how you're looking at capex next year? Could you maybe just walk us through a little bit of the flex points, I know it's still a bit early in the year, but how you're thinking about some of the flex around putting that budget together? And then one of the most common questions investors are wrestling with now is for Halliburton was the largest legacy frac fleet, how electric frac may or may not factor into those thoughts into next year? If could you help -- maybe frame that out for us a little bit?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes, thanks, Sean. I mean, we're in the early planning around capex for 2020 clearly we're in the early planning stages, but I wouldn't highlighted if it wasn't going to be meaningful. So just to, kind of, discuss capex 2020, we believe firmly that we don't sacrifice growth in opportunities internationally and we still have room to grow in North America, if customer budgets support that. Important -- that kind of behavior and decisions that capital scarcity is driving and we won't continue that into 2020.

With respect to electric fleets, this is something we also we know a lot about, and we've been testing those and had a fleet in the field for some time now. So this isn't new to us, but it's also, we're going to be thoughtful about where and how we deploy capital. So as we look at that particular space, that's the markets over-supplied. And so when we get to the end of every year and we think about capex some part of the fleet rolls off every year, and we look at that, and at that point were presented with choices and this is around replacement do we replace that asset with acquired fleet? Or dual fuel fleet? Or in this case could be an electric fleets? So, I mean, I see that at least from our standpoint as an evolution. But we don't see customers willing to pay more for that today, so that's, kind of, how we frame electric right now.

Sean Meakim -- JP Morgan -- Analyst

I appreciate that. Thank you for that feedback. And then Lance, I mean, could we talk a little bit more about working capital, you mentioned that the inventory build in the first half of the year and your expectation of that will convert to a source of cash in the back half? How would you characterize collections across the different operator types of this stage? Are we in a fairly normalized environment? Or there still some challenges, you know, how would you frame out that impact as we look to the back half of '19?

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Yes, Sean. Thanks. Thanks for the question. So look over the last two years we've generated over $1 billion of free cash flow, and I expect that, that trend continues in 2019. Now, we've got work to do in the second half of the year, but the past of that free cash flow generation first starts with sort of margin improvement into age, particularly with our D&E business, right? But it also includes making progress on collections, we saw DSO improvement from Q1 to Q2, and I suspect that, that will continue throughout the course of the second half of the year.

In terms of inventory that you mentioned, it is true. We've invested a considerable amount in inventory in the first half of the year as we continue to deploy iCruise in our Sperry technology deployment, as well as I expect us to burn that down in the second half of the year. In addition to the normal traditional completion tool deliveries that we expect in the back half of the year. So, I think both of those will be momentum adding to our free cash flow.

Now I'd also point out too, our rate of spend in capex was heavier in the first half of the year, which is not unusual. We reiterated our guidance around the $1.6 billion of spend in this year, so it will have a slower rate of spend in the second half as well.

Sean Meakim -- JP Morgan -- Analyst

Got it. Thank you for all the detail.

Lance Loeffler -- Executive Vice President and Chief Financial Officer

No problem.

Operator

Thank you. Our next question comes from James West with Evercore ISI. Your line is open.

James West -- Evercore ISI -- Analyst

Hey, good morning guys.

Jeff Miller -- Chairman, President and Chief Executive Officer

Hi, James.

James West -- Evercore ISI -- Analyst

Good morning, guys. So you can hear me now, right?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes. I hope so. Yes, we hear you.

James West -- Evercore ISI -- Analyst

Okay, good. All right, good, sorry about that, that was a issues today. So my first question Jeff international here, we're starting to see some acceleration as you look out in the 2020 likely to see volumes at or maybe even above kind of current growth levels plus you're going to get some offshore, plus you got some pricing, could we be in a scenario where we start to dip into the kind of double-digit type of growth internationally in 2020?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes, I mean, James, I'm not ready to call 2020 at this point. But I think there is no reason not to believe that's possible. I think the thing we're going to stay dead focused on going into 2020 you're going to be margins and here we want profitable growth. And I think we demonstrated with where we are, we can grow and we've grown quite a bit internationally, but we're going to again keep a sharp eye on margins as that market unfolds.

James West -- Evercore ISI -- Analyst

Okay, that's fair enough. And pricing obviously is a big part of that margin profile, what's the level when you're having these conversations, I know you're on the road a lot in the international markets. What's the level of push back on pricing or is the market now understanding, hey, we're tight, equipment is tight and you need to generate adequate return?

Jeff Miller -- Chairman, President and Chief Executive Officer

Well, it's a mixed bag. I mean, I would say that still customers look at that scenario and realize, hey, that service pricing is inadequate, and returns are inadequate and need the work done well. And we have a lot more success with those customers and that's a bigger group of customer gets to be a bigger group of customer, all of the time. It also helps when we say demonstrate that tools are sold out, and we can do that by making choices, and so that also helps. Our service quality that Halliburton is at a level quite frankly, I've never seen it before, and so what we have to offer is a fantastic product and so we're very comfortable talking about pricing today.

James West -- Evercore ISI -- Analyst

Got it. Thanks, Jeff.

Operator

Thank you. Our next question comes from Scott Gruber with Citi. Your line is open.

Scott Gruber -- Citigroup -- Analyst

Yes, good morning.

Jeff Miller -- Chairman, President and Chief Executive Officer

Good morning, Scott.

Scott Gruber -- Citigroup -- Analyst

So I want to come back to E-Frac, and I realize it's early days for the technology, but assuming that as to the strong demand pull, does materialize for the technology? Would you look to add E-Frac capacity at a rate that approximates your share in the marketing or relative to the industry build out? Would you look to invest more slowly to enhance free cash flow, you know, the risk of seeing your share within E-Frac, be a bit smaller than your current share, and how do you think about balancing E-Frac share with free cash flow, and it is that an important factor for you?

Jeff Miller -- Chairman, President and Chief Executive Officer

So, Scott, returns are first and foremost, for us, and so we looked at all of this in terms of returns. From a share perspective the pace that I'm describing actually is perfectly adequate, if we're happy with the returns and the technology deployment to keep up with where we are in the market and that's just sort of a normal replacement schedule that we're already on, it's just how we make those choices around what we replace. From our perspective, it's going to have to be a more efficient lower capital endeavor or somehow make better returns and what's out there today or it doesn't proliferate and that's not saying we don't participate, what I'm saying is, I want to make certain that the Halliburton approach around really power and pumps, we love the pumps that we have, together are making a return and at least where we see it today, it's not a, it's more capital for the same or less returns, so that's not really where we want to be.

Scott Gruber -- Citigroup -- Analyst

Got you. And then just turning to D&E, Lance based on the guidance that you provided, It does look like a more material ramp in revenue and margins is required in 4Q to achieve the flattish year-on-year, something like almost or maybe over 100% incrementals, I'm not sure if that's possible. I'll just, kind of, playing around with some numbers and using mid single-digit growth, but at that rate, it looks like the incrementals would have to be quite large. How are you thinking about 4Q shaping up from a revenue and incremental perspective, if the elements are still there for flattish margins on a year-over-year basis?

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Look, I think we'll see -- we'll continue to see continued momentum in terms of the activity that we're doing in places like the North Sea and India. We're also going to have in the fourth quarter, we've got visibility this year just given the strength of the international recovery more than we've had in prior -- in the last several years around software sales that will also be a tailwind to that. But I think, you know, to come back to it look, D&E produced 44%, I believe incrementals just 1Q to 2Q. I think that clearly the international recovery helps that business, and what we've been talking about. But what we're trying to describe right in terms of the tale of two halves is a business that, while it was weighed down by certain things or from certain timing perspectives as we continue to deploy our new Sperry Technology, is that you're going to see a market difference in the two halves of the year, and I think that's the message that we're trying to communicate to the street.

Scott Gruber -- Citigroup -- Analyst

Got it. Appreciate the color.

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes, thanks.

Operator

Thank you. Our next question comes from Bill Herbert with Simmons. Your line is open.

Bill Herbert -- Simmons -- Analyst

Thanks, good morning. Lance just sticking with D&E for a second here. So, get the fact, I mean, you've been consistently persuasive with regard to the difference between first half and second half in terms of what drives D&E margins, but just trying to get -- is the -- to reiterate the question is the conviction relatively high that we're going to be in the neighborhood or flat margins year-over-year for D&E, second half, which implies, kind of, 13% to 14% margins in Q4. Sorry to be the dead horse here.

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Yes, look, I think Bill, I said on the prior call that we'd be sort of flattish or in the ballpark. I think, look, there is a lot of stuff that we've got to go out and execute. But the tailwinds behind what we have looking forward for D&E, for the second half of the year, paying a very different picture in terms of margin profile than I did in the first half.

Bill Herbert -- Simmons -- Analyst

Okay, got it.

Jeff Miller -- Chairman, President and Chief Executive Officer

I mean, Bill, the mobilizations we clearly see those and those are finishing, finishing now. Sperry Technology implementation certainly helps, there are other D&E Technologies that we're rolling out, they are equally helpful, I talked about some of them on the call. Velocity, guns other things ramping and then the visibility around not just software, but year-end product sales is better than it's been in the past. And so I think we're confident around the catalysts are intact, we can't prescribe the cadence necessarily, but certainly second half ramps up.

Bill Herbert -- Simmons -- Analyst

No way [Phonetic]. Thank you. And again, I get the conceptual building blocks, I'm just trying to get to a specific number within reason, but I hear you. Second question from me, kind of, multifaceted, first; if you could rank the C&P margin improvement contribution current quarter? And what I'm trying to get at is to what extent did the product sales drive the margin improvement, and then also what percentage of your frac fleet is stacked now? Thank you.

Jeff Miller -- Chairman, President and Chief Executive Officer

I'll, sort of -- I'll start with, sort of, your question around the allocation on C&P margins, but I think, look at completion tools have a great, great quarter. But I think the majority of what we're doing in terms of making sure that we're managing costs in North America is reflected in some of the C&P performance as well. I mean, we're being decisive, we're moving quickly and we're seeing the results and I think that's what's important.

Bill Herbert -- Simmons -- Analyst

Okay. And with regard to the percentage of your fleet that stacked?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes, Bill, I mean, we're not going to get into competitive specifics, I think you are in the market, so you have a sense of what that is. I think the point is that we are continuing to stack equipment when it doesn't make sense. And I think that will come with slightly lower revenues, but certainly higher margins.

Bill Herbert -- Simmons -- Analyst

Okay. Thank you, sir.

Jeff Miller -- Chairman, President and Chief Executive Officer

Thanks, Bill.

Operator

Thank you. Our next question comes from Chase Mulvehill with Bank of America Merrill Lynch. Your line is open.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Hey, good morning. So I guess, I wanted to talk a little bit about the pre-assembled perf gun solution that you mentioned earlier on the call. Could you talk about the solution that you have and maybe compare to some of the market leaders out there? And then maybe just kind of talk about how this impacts the integrated frac solution that you're trying to push out in the market?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes, so this is very competitive tool, in fact we're fortunate, because we've got a solid manufacturing business in Alvarado, Texas, where we've been building and making charges for years. So, as velocity guns go into the market, highly effective. We have the ability to tailor those as required for different configurations, which is benefit certainly to us.

And it's also part of bringing down in my view the overall, I won't just say cost. This is the effectiveness around integrated Wireline in North America. Because we can change actually the way that we were to get to a lower cost and better performance, which is different than just haven't two things sitting out there together. Changes the -- not just the number of people, but the who is doing what, allows us that velocity guns, allow us to change the -- certainly the technical content on location, reduces the number of mis-runs, mis-fires. And I'm really excited about the volume, I mean, we described it is 40% of the [Indecipherable] gunshot by Halliburton, which is a lot of guns. But we see actually the potential to continue to drive unit cost of those guns down as the volume continues to grow. So that is one of those things, it just gets more competitive over time.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Okay that makes sense. Appreciate the color. And then coming back to Sperry a little bit. I mean obviously you guys have been investing a lot in Sperry. Could you talk about when we think about Sperry and potentially leveraging, we're working closer with land rig companies and the opportunity to kind of have better penetration of some of your kind of leading-edge Sperry technology?

Jeff Miller -- Chairman, President and Chief Executive Officer

Look those are all things we look at, I think the -- really the rotary steerable and motors are very different animals in the marketplace. What we're doing with rotary steerables is really exciting for me, I mean, this is a fantastic piece of kit, and it's very integrated into sort of data and real-time and not just real-time, but automation, so really excited about that. I've always been clear that we didn't want to be aligned with just one for example contractor, I believe that -- if you look at North America, it's an open architecture market, and there is a lot of choice that can be exercised by customers. So we've always been really careful to make sure what we put in the market is functional with lots of providers, and so that's sort of a one thing certainly around the rotary steerable.

In the motor, I talked last quarter about our Motors Center of Excellence, and I'm really excited about that, because it allows us now to -- the customized solutions for our clients around motor performance, and there is a lot of variability in terms of the rock and performance of motors, and having that in-house allows us not only to do the customization, but also retain the learning and bake that into a very efficient, sort of, turnaround in 24-hour type business. So, that's something that how we align it with operators interesting, but the way I think more about it is, how does it from a value proposition standpoint work best for us, and I think we've got it there now.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

All right. I appreciate the color, very helpful. Thanks, Jeff.

Jeff Miller -- Chairman, President and Chief Executive Officer

Thank you.

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Thanks, Chase.

Operator

Thank you. Our next question comes from Kurt Hallead with RBC. Your line is open.

Kurt Hallead -- RBC -- Analyst

Hey, good morning.

Jeff Miller -- Chairman, President and Chief Executive Officer

Good morning, Kurt.

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Good morning, Kurt.

Kurt Hallead -- RBC -- Analyst

Hey, so I first question I have for, you know, appreciate the color and the context of you guys stacking equipment and being capital discipline as it relates to the US frac-related businesses. Wondering if you guys give us some sense on what the attrition dynamics might be? Whether that's industry or as you look at your own frac fleet? How are you thinking about stacking equipment versus, let's just say retiring equipment?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes, I think the -- we're always managing the fleet, I guess is the way I would say that, and there is clearly always when we have a big fleet, it gives us the ability to retire, replenish, repair and in my view replace, and so we take all of that together. Some equipment that stacks ready to go back, some equipment they comes out of the system is actually the equipment, I was describing that is being retired where we have choice around how we replace that equipment and at what pace. So I think the -- we're really careful with the fleet that way. There is no question that equipment is working harder and attrition is occurring in the marketplace.

We don't see capital spend going up for, we just don't see new equipment coming into the market and we know how hard it's working. So whole of the conspires to drive attrition, as I've always said, it's hard to see the pace of attrition until there's a call on the equipment, and I suspect there will be at some point, but I do know that you have the physics of pumping fluid and sand through steel is having its effect on broadly the fleet in North America. All fleets in North America.

Kurt Hallead -- RBC -- Analyst

That's great color. I appreciate that, Jeff. And then maybe for Lance, you gave some really good additional color on the D&E margin dynamics for the rest of the year. I was wondering, if you could maybe give us some insights as well on Completion & Production and typically when you see a revenue decline in a certain business segment, the margins were declined along with it. You guys have given specific data points here and suggest that even a revenues that's going to decline for C&P in the third quarter margin that's going to kind of hold flat. Do you think that kind of the internal, kind of, business momentum, where your cost structure is down, their efficiencies as such a level that even if C&P were to decline again in the fourth quarter. You can -- your margins could be stable?

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Yes. Good -- that's a good question, Kurt. Look, I think obviously we guide one quarter out, so I'll say any of the specificity for our next quarter's call in the fourth quarter. But I mean, that's the intent, that's what we're working toward, right? I mean that's what we talk about in terms of continuing to manage costs in North America and controlling what we can control, but we'll give a better view when we get to the third quarter call what fourth quarter looks like for C&P.

Kurt Hallead -- RBC -- Analyst

Okay, that's great. Nice really appreciate the color. Thank you.

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from David Anderson with Barclays. Your line is open.

David Anderson -- Barclays -- Analyst

Hey, Jeff, I just wonder if you could maybe just dig into a little bit on the evolution of this new playbook in North America. I know, you have a new head of Western Hemisphere, Mark Richard in there who is, I think been putting his, kind of, view in there as well. But as far as long as I can remember how that we've sought market share during the downturn? Now you're stack equipment, it sounds like EBITDA per fleet may be improving as well, I guess is that almost, kind of, early confirmation on the new playbook? But perhaps you just, kind of, give us a little background as to, kind of, how you arrived at this new playbook?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes. Just to cut to the chase, yes, the answer is yes, what you are saying is that new playbook in action. But the -- what we've recognized is there is a change in the customer spending patterns. And when that changes, it has to -- we want to address the best returns, and so what was the right playbook several years ago, when there was a different cadence and pace of customers spend today needs to change. And so that's what you're seeing in action. And so we're going to be super sharp around capital into the downturn. I'd say the downturn, but what we see is slowing activity as I described for Q3. What we want to make sure is that we are, it is slightly down. We want to be slightly there with our capex.

But most importantly -- not our capex, our capital equipment, but what's most important to us is that we're not waiting on the spring back, we've demonstrated, we know how to add people back to the system and equipment back when is required. So I'm quite comfortable that reflects down when the prices go below something that is making a return for us, and we'll let somebody else do that below, sort of, return cost. So hope that's clear, but that's the way we're thinking about -- it's not how we're thinking about it, that's how we're executing on the new playbook.

David Anderson -- Barclays -- Analyst

So in this new playbook, do you view each of your product lines and service lines separately? In other words, each one of them have to basically hit certain return hurdles. How are you viewing, because in the past, we've talked about bundled models in the integrated model and whatnot? But this sounds like we're a little bit more, kind of, defining the -- each one of our product lines has to stand on its own, is that fair to say?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes, that's fair. Though I would say we like integrated work and we do a lot of that in the North Sea, we do a lot of that around the world and we're happy doing that when it's available in North America. But at the same time, yes, everything has to make a return. And part of the reorganization in North America was around cost, but equally so was around speed of decision making and executing each of those service lines. And I'm really pleased to report with the North America spend down in the first half of the year. Our non-frac revenue per rig was, up 13% year-on-year. So that's evidence of that sharp focus around all of those service lines.

David Anderson -- Barclays -- Analyst

So one of the service side, you called out was artificial lift, and you talked about that being a driver of the higher NAM revenue. I was just wondering, if you could just talk that [Indecipherable] the market in general and lift, and how that compares, how other lines, product lines are trending? How is the spend in the pace of lift installations? How has that trended this year? We all know about the GP capital discipline, what is during the drilling completions? But what's going on with lift? Is that still kind of holding up pretty well. Do you expect it to hold up well. Could you just provide little color on how that market is trending?

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes. Dave, I mean I feel like that's opex spend by clients and it's really important that they produce in support production and that means every well needs to work. And that's part of the reason we've talked about growing our production business as they're growing and building out production, because opex and production matters a lot to our customers, and I think that's what you're seeing in the ESP business, because it's an effective way for clients to improve production. But chemicals in some ways falls along the same lines, so excited about those businesses.

David Anderson -- Barclays -- Analyst

Okay. Thanks, Jeff.

Lance Loeffler -- Executive Vice President and Chief Financial Officer

Thanks, Dave.

Operator

Thank you. This concludes the question-and-answer session. I would now like to turn the conference back over to Jeff Miller for closing remarks.

Jeff Miller -- Chairman, President and Chief Executive Officer

Yes. Thank you, Shannon. Before we close, I'd just like to reemphasize a couple of points; first, I'm excited about the international recovery; the growth for the balance of 2019; and the momentum that's building into 2020. In North America, we plan to execute our new playbook reducing cost, stacking fleets and reducing capex that drives better margins and free cash flows for 2019 and 2020. Our focus on non-frac service lines is a terrific opportunity for Halliburton, and our organization is well positioned to deliver profitable growth. Look forward to talking to you again next quarter and Shannon please close out the call.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Abu Zeya -- Investor Relations

Jeff Miller -- Chairman, President and Chief Executive Officer

Lance Loeffler -- Executive Vice President and Chief Financial Officer

James West -- Evercore ISI -- Analyst

Angie Sedita -- Goldman Sachs -- Analyst

Sean Meakim -- JP Morgan -- Analyst

Scott Gruber -- Citigroup -- Analyst

Bill Herbert -- Simmons -- Analyst

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Kurt Hallead -- RBC -- Analyst

David Anderson -- Barclays -- Analyst

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