Halliburton Company (NYSE:HAL) Q4 2023 Earnings Call Transcript
Halliburton Company (NYSE:HAL) Q4 2023 Earnings Call Transcript January 23, 2024
Halliburton Company beats earnings expectations. Reported EPS is $0.86, expectations were $0.8. Halliburton Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Halliburton Company Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, David Coleman, Senior Director of Investor Relations.
David Coleman: Hello and thank you for joining the Halliburton Fourth Quarter 2023 Conference Call. We will make the recording of today's webcast available for 7 days on Halliburton's website after this call. Joining me today are Jeff Miller, Chairman, President and CEO; and Eric Carre, Executive Vice President and CFO. Some of today's comments 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, 2022, Form 10-Q for the quarter ended September 30, 2023, 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. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our fourth quarter earnings release and in the Quarterly Results & Presentation section of our website. Now I'll turn the call over to Jeff.
Jeffrey Miller: Thank you, David, and good morning, everyone. 2023 was a great year for Halliburton. Both of our divisions achieved their highest operating margins in over a decade, and we returned $1.4 billion to shareholders. Here are the highlights. We delivered full year total company revenue of $23 billion, an increase of 13% year-over-year; and operating income of $4.1 billion, an increase of 33% compared to 2022 adjusted operating income. Our international business demonstrated strong growth with our revenue up 17% year-over-year despite our exit from Russia in August of 2022, completing 2 consecutive years of high teens growth. Our North America business showed strength with revenue up 9% year-over-year despite rig count declines.
Completion and Production revenue grew 18% year-over-year and margins expanded 312 basis points. Drilling and Evaluation grew 7% year-over-year and margins expanded 171 basis points. Turning now to Q4, where Halliburton delivered exceptional margin performance supported by better-than-anticipated completion tool sales globally, strong performance across multiple high-margin product lines and favorable weather in North America. Completion and Production margins finished the year almost 100 basis points higher than Q4 of 2022. International revenue grew 12% year-over-year, led by the Europe-Africa region, which grew revenue 17%. Finally, during the fourth quarter, we generated $1.4 billion of cash from operations, $1.1 billion of free cash flow and repurchased approximately $250 million of common stock and $150 million of debt.
Before we continue, I want to take a moment and thank the Halliburton employees around the world who made these results possible. Our success last quarter and throughout 2023 was a direct result of your hard work and dedication. Thank you for your relentless focus on safety, operational execution, customer collaboration and service quality performance. Let me begin with my views on the strength of the oilfield services market. As we look past the new cycle and near-term commodity price volatility, the fundamentals for oilfield services remain strong. Here are 2 reasons why. First, we see an increase in service intensity everywhere we operate. Whether it's longer laterals in North America, smaller and more complex reservoirs in mature fields or offshore deepwater, customers require more services to develop their resources, not fewer.
Second, long-term expansion of the global economy will continue to create enormous demands on all forms of energy. I expect oil and gas remains a critical component of the global energy mix with demand growth well into the future. With this positive macro outlook, I believe Halliburton's strong execution, leading technology and collaborative approach will drive demand for Halliburton's products and services around the world. Now let's turn to international markets, where Halliburton's performance delivered another year of profitable growth. Halliburton's full year international revenue grew 17% year-on-year, and our quarterly revenue grew 12% compared to the same quarter of last year. Each region delivered year-on-year revenue growth throughout 2023, and both divisions delivered improved international margins year-on-year.
Our results in 2023 demonstrate the effectiveness of Halliburton's profitable international growth strategy, the strength of our global competitiveness across product lines and the power of our value proposition with customers. In 2024, we expect international E&P spending to grow at a low double-digit pace and foresee multiple years of sustained activity growth. Although we anticipate regional differences in growth rates for 2024, we believe the Middle East/Asia region will likely experience the greatest increases in activity with other regions closely behind. As we look out to 2025, we expect Africa and Europe, among others, to demonstrate above-average growth. Beyond 2025, we see an active tender pipeline with work scopes extending through the end of the decade, which gives me confidence in the duration of this multiyear upcycle.
While we expect overall activity growth, we also see above-market growth within our well construction product lines, where customers choose Halliburton to improve the reliability, consistency and efficiency of their drilling operations. One such technology is LOGIX' autonomous drilling platform, which is now used on 90% of our iCruise runs worldwide. Customers also rely on Halliburton's subsurface expertise to develop today's most complex reservoirs. This requires technologies to reduce uncertainties, such as our DecisionSpace 365, unified ensemble modeling and advanced formation evaluation systems like our iStar logging well drilling platform, and reservoir Xaminer formation testing service. These technologies enable customers to target small reservoirs, identify bypassed reserves and gather reservoir properties in real time.
We see reservoir complexity increasing worldwide, and I expect the capabilities of these systems will continue to deliver customer value and lead in overall growth within our formation evaluation portfolio. For Completion and Production, we also expect increased adoption of our technologies like intelligent completions, multilateral solutions and artificial lift. Our intelligent and multilateral completions enable customers to produce, inject and control multiple zones in a wellbore, which is critical for offshore developments, a segment we expect to outpace the overall market. In artificial lift, our strategy targets markets like the Middle East and Latin America, where our differentiated performance and existing footprint create a solid foundation for profitable growth.
We also expect strong demand for our services in carbon capture and storage, where Halliburton's leading capabilities to design, deliver and validate reliable barriers play a crucial role. As our customers invest in carbon storage, our tailored cement designs and casing equipment technology enable them to address the unique challenges of long-term carbon sequestration. With this activity growth, the availability of equipment and experienced personnel remains tight. We expect asset-intensive offshore activity to increase, which will further tighten the market. As offshore represents over half of our business outside North America land, we expect this activity to drive improved pricing and higher margins for our business. I am confident in Halliburton's strategy for profitable international growth, and I am excited about our performance in 2024 and well into the future.
Turning to North America. Halliburton's strategy yielded strong results in 2023. Our full year North America revenue of $10.5 billion was a 9% increase when compared to 2022 despite sequentially lower rig count. Fourth quarter margins in North America land were relatively flat quarter-over-quarter despite lower revenue. Our full year and fourth quarter results demonstrated the strength of our differentiated business and the successful execution of our strategy to maximize value. The dynamic North America market continues to evolve with larger customers and stable programs, elevated quality expectations and greater demand for technology to improve recovery and well productivity. This evolution fits perfectly with Halliburton's value proposition.
Our Zeus electric fracturing solution is highly sought after in this market, where its seamless combination of electric frac, automation and real-time subsurface measurements uniquely address customer requirements. We believe customers demand Zeus because it provides the lowest total cost of ownership and it's shown to be the most proven and reliable solution in the market. The market pull for this technology has been strong. The combination of Zeus fleets working in the field today and Zeus fleets contracted for 2024 delivery represent over 40% of our fracturing fleet. I expect well over half of our fleets will be electric in 2025 with all of these e-fleets on multiyear contracts generating full return of and return on capital during their initial contract terms.
Consistent with our strategy from the beginning, we plan for our Zeus deliveries in 2024 to replace existing fleets rather than add incremental fleet capacity. This is how we maximize value in North America. The growth of Zeus and our commercial approach has transformed the North America completion services market. Technology is only transformative when adopted and is only adopted at the rate of Zeus when it works and creates meaningful value for our customers. Zeus' rapid adoption, both by new and repeat customers, tells us our solution is the right one for North America. Turning to our 2024 North America outlook. We expect a continued strong business with the combination of stable levels of activity in the market and the contracted nature of Halliburton's portfolio.
We expect this results in a flattish revenue and margin environment for Halliburton. To close out, I am confident in our strategies to maximize value in North America and for profitable growth internationally. In 2023, Halliburton demonstrated the power of these strategies, the consistency of our execution and the value of our differentiated technology. We generated about $2.3 billion of free cash flow during the year, retired approximately $300 million of debt and returned $1.4 billion of cash to shareholders through stock repurchases and dividends, which represents over 60% of our free cash flow. Today, I am pleased to announce that our Board of Directors approved an increase of our quarterly dividend to $0.17 per share. Our outlook for oilfield services remains strong, and I expect we will deepen and strengthen our value proposition and generate significant free cash flow.
Now I'll turn the call over to Eric to provide more details on our financial results. Eric?
Eric Carre: Thank you, Jeff, and good morning. 2023 was a strong year for Halliburton. Multiple financial and operational metrics showed the best business performance in recent memory, any one of which are worthy of highlighting. More important than any single metric, however, the overall business performance demonstrated the effectiveness of our strategy. Here are a few highlights. In our C&P division, our 2023 margins of 20.7% were the highest since 2011. In our D&E division, 2023 margins of 16.5% were the highest since 2008. In North America, our strategy to maximize value is about structurally changing the risk and return profile of our business. We delivered steady margins through the year despite lower activity driven by the rollout of our Zeus fleet and their associated contract terms and the strength of our well construction business.
Internationally, our profitable growth strategy drove revenue and margin improvement across all of our geographies. Revenue was the highest in the last 8 years, and profit margins were the highest in over a decade. Beyond pricing and activity, this is the result of the multiyear investment in our drilling business and technology differentiation across multiple product lines. Our focus on capital efficiency allowed this revenue growth and structural margin improvement, while capital spending remained within our target range of 5% to 6% of revenue. Collectively, these results generated about $2.3 billion of free cash flow, the highest cash generation in the last 15 years. Let's turn now to our fourth quarter results. Our Q4 reported net income per diluted share was $0.74.
Net income per diluted share, adjusted for losses in Argentina primarily due to the currency devaluation, was $0.86. Total company revenue for the fourth quarter of 2023 was $5.7 billion. Operating income was $1.1 billion and the operating margin was 18.4%, a 95 basis point increase over Q4 2022. Beginning with our Completion and Production division. Revenue in Q4 was $3.3 billion, operating income was $716 million, and the operating income margin was 22%. Our better-than-anticipated results were driven by the best fourth quarter of completion tool sales in 9 years, strong performance across multiple product lines and favorable weather in North America. In our Drilling and Evaluation division, revenue in Q4 was $2.4 billion, operating income was $420 million, and the operating income margin was 17%, an increase of 122 basis point over Q4 last year.
These results were in line with our expectation and driven by international software sales, higher project management activity in the Eastern Hemisphere and increased fluid services in the Western Hemisphere. Now let's move on to geographic results. Our Q4 international revenue increased 4% sequentially, which was our highest international revenue quarter since 2015 and tenth consecutive quarter of year-on-year revenue growth. Q4 sequential growth was led by the Middle East region driven by improved activity across multiple product lines and strong year-end completion tool sales. Europe/Africa demonstrated sequential growth consistent with the overall international market with higher activity in Africa offsetting lower product sales in Europe.
Latin America revenue declined slightly in the fourth quarter, where reduced completion-related activity following a very strong third quarter activity improvements in the Caribbean. In North America, revenue in Q4 decreased 7% sequentially driven primarily by a decline in U.S. land activity as a result of typical holiday-related slowdowns. However, we experienced fewer weather-related events than expected. As weather-related downtime is more expensive than planned downtime, this means our Q4 North America land margins were higher than anticipated. Additionally, completion tool sales in the Gulf of Mexico delivered the strongest quarter in 3 years. Moving on to other items. In Q4, our corporate and other expense was $63 million. For the first quarter of 2024, we expect corporate expenses to be flat.
Our SAP deployment remains on budget and on schedule to conclude in 2025. In Q4, we spent $15 million or about $0.02 per diluted share on SAP S/4 migration, which is included in our results. For the first quarter 2024, we expect these expenses to be approximately $30 million or $0.03 per share due to the timing associated with accelerated phases of the rollout. In 2024, we expect to spend $120 million and $80 million in 2025. Net interest expense for the quarter was $98 million, slightly higher than expected primarily due to premiums associated with debt buybacks. For the first quarter 2024, we expect net interest expense to be roughly $85 million. Other net expense for Q4 was $16 million lower than our prior guidance due to the non-GAAP treatment of the Argentinian peso devaluation.
For the first quarter 2024, we expect this expense to be about $35 million. Our adjusted effective tax rate for Q4 was 17.9%, lower than expected due to discrete items. Based on our anticipated geographic earnings mix, we expect our first quarter 2024 effective tax rate to be approximately 21%, slightly lower than our anticipated full year effective tax rate. Capital expenditure for Q4 were $399 million, which brought our full year CapEx total to $1.4 billion. Approximately 60% of our CapEx was deployed to international and offshore markets in 2023, and we expect this ratio to remain similar in 2024. For the full year of 2024, we expect capital expenditures to remain approximately 6% of revenue. Our Q4 cash flow from operations was $1.4 billion and free cash flow was $1.1 billion, bringing our full year free cash flow to about $2.3 billion.
For 2024, we expect free cash flow to be directionally higher. Now let me provide you with some comments on our expectations for the first quarter. As is typical, our results will be subject to weather-related seasonality and the roll-off of significant year-end product sales. As a result, in our Completion and Production division, we anticipate sequential revenue to be flat to down 2% and margins lower by 125 to 175 basis points. In our Drilling and Evaluation division, we expect sequential revenue to decline between 1% to 3% and margins to be lower by 25 to 75 basis points. I will now turn the call back to Jeff.
Jeffrey Miller: Thanks, Eric. Let me summarize our discussion today. 2023 was a great year for Halliburton. We generated about $2.3 billion of free cash flow and returned over 60% of free cash flow to shareholders through dividends and stock repurchases. We're committed to return over 50% of our free cash flow to shareholders in 2024. For our international business, we expect low double-digit growth driven by the power of our value proposition, global competitiveness across all product lines and our profitable growth strategy. In North America, we expect a continued strong business driven by stable activity, our differentiated technical position with our Zeus electric frac solution and the increasingly contracted nature of our business. And now let's open it up for questions.
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