HOUSTON Oct 19, 2015 (Thomson StreetEvents) -- Edited Transcript of Halliburton Co earnings conference call or presentation Monday, October 19, 2015 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kelly Youngblood Halliburton Company - VP of IR * Dave Lesar Halliburton Company - Chairman & CEO * Christian Garcia Halliburton Company - SVP, Finance & Acting CFO * Jeff Miller Halliburton Company - President ================================================================================ Conference Call Participants ================================================================================ * Jud Bailey Wells Fargo Securities, LLC - Analyst * Sean Meakim JPMorgan - Analyst * David Anderson Barclays - Analyst * Angie Sedita UBS - Analyst * James West Evercore ISI - Analyst * Bill Herbert Simmons & Company International - Analyst * Scott Gruber Citi - Analyst * Jeff Tillery Tudor, Pickering, Holt & Co. Securities - Analyst * Dan Boyd BMO Capital Markets - Analyst * James Wicklund Credit Suisse - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day ladies and gentlemen and welcome to the Halliburton third-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kelly Youngblood, Halliburton's Vice President of Investor Relations. Sir, you may begin. -------------------------------------------------------------------------------- Kelly Youngblood, Halliburton Company - VP of IR [2] -------------------------------------------------------------------------------- Good morning and welcome to the Halliburton third-quarter 2015 conference call. Today's call is being webcast and a replay it will be available on Halliburton's website for seven days. Joining me today are Dave Lesar, CEO; Christian Garcia, acting CFO; and Jeff Miller, President. Mark McCollum, Chief Integration Officer, will also join us during the question-and-answer portion of the call. During our prepared remarks Dave will provide an update on the pending Baker Hughes transaction; however, due to the ongoing regulatory review today we will not be taking any questions related to regulatory matters. Some of our comments today may include forward-looking statements reflecting Halliburton's views about future events. These matters involve risk 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, 2014, Form 10-Q for the quarter ended June 30, 2015, recent current reports on Form 8-K and other Securities and Exchange Commission filings. We undertake the obligation to revise or update publicly any forward-looking statements for any reason. Our comments today include non-GAAP financial measures and unless otherwise noted in our discussion today we will be excluding the impact of these items. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our third-quarter press release which can be found on our website. Now I will turn the call over to Dave. Dave? -------------------------------------------------------------------------------- Dave Lesar, Halliburton Company - Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you, Kelly, and good morning to everyone. As expected it was another very challenging quarter for the services industry. Activity levels and pricing took another hit across the globe as our customers respond to the impact of reduced commodity prices and the pressure that their own shareholders are putting on them. Considering the difficult headwinds that were working against us I'm actually very pleased with our overall financial results for the third quarter, especially for our Eastern Hemisphere operations. Now let me cover some of the key headlines. Total Company revenue of $5.6 billion declined 6% sequentially, outperforming our largest peer. I'm very pleased with the resilience of our international business where we again outperformed our largest peer on both a sequential and year-over-year basis for both revenue and margins. This demonstrates once again that we are not getting distracted as we go through the merger process. And I am confident that from what we are seeing in the marketplace this is the same for Baker Hughes. And despite lower revenues as a result of pricing concessions and activity reductions, we were able to maintain operating margins due to a relentless focus on cost management. As expected, North America revenue and operating income declined further as a result of lower activity levels and pricing pressure. However relative to the overall market, I am pleased with our performance. From the peak that we saw last November, our completions related activity has declined approximately 18% relative to a 58% reduction in the US land rig count. This clearly demonstrates the customer flight to quality that has emerged during this downturn and it positions us well for when the market recovers. Finally, we took an additional restructuring charge to reflect current market conditions but let me remind you as we approach the finish line on the Baker Hughes acquisition we continue to maintain North American infrastructure well beyond current market needs, incurring a cost which we would have otherwise eliminated. This cost impacted North America margins by approximately 400 basis points in the third quarter. Now turning to operations, in North America prices continued to erode during the third quarter, impacting the total services industry profitability, obviously including ourselves. We believe these prices are clearly unsustainable but as we have been saying all along pricing cannot stabilize until activity stabilizes. Looking ahead to the fourth quarter visibility is murky at best. Based on current feedback, we believe most operators have exhausted their 2015 budgets and will take extended breaks starting as early as Thanksgiving. Therefore our activity levels could drop substantially in the last five weeks of the year. In my 22 years in this business I've never seen a market where we've had less near-term visibility. In reality we are managing this business on a near real-time basis customer by customer, district by district, product line by product line and yes even crew by crew. But you know me and you know our management team. Nobody knows the North America land market better than us. We are the execution Company and we know what levers to pull to make this market work. Our view is that the first quarter could end up being a mirror image of the fourth quarter. So just as the fourth quarter is facing a steep drop-off post-Thanksgiving we expect to see a slow ramp-up beginning in January and improving from there, suggesting that the first quarter could be the bottom of this cycle. If you pull back and look at the full-year 2016 and compare it to 2015, you could envision a similar mirror image: directionally a slow start and then perhaps picking up speed in the second half of the year. Now there obviously are a number of moving parts in North America and I'm not confident enough yet to call the exact shape of this recovery but we do expect that the longer it takes the sharper it will be. Until then we will continue to execute on our strategy and we will be watching the same external data points that you do: what is happening to oil production, what is the rig count doing, what is happening with operators' cash flows and how are redetermination's impacting our customers' credit lines. In addition we have our own proprietary intro metrics that we will follow. We will continue to adjust our cost structure to market conditions but to me it does not make sense to reduce costs or infrastructure to reflect expected fourth quarter's reduced activity levels. Instead we are positioning our North America land business for future success and to ultimately outperform the industry as the market recovers. Internationally I remain very happy with where our business is today. The international markets have held up better than North America but they are not immune to the impacts of lower commodity prices. We did experience lower prices during the quarter but in anticipation of these reductions, we aggressively went after further cost adjustments. Although we had to concede some on pricing we have worked closely with our customers during the past year to improve their project economics through technology and operating efficiency. Internationally for 2016 we expect to see a continuation of trends from 2015. Land-based activity including mature fields should be the most resilient while we expect offshore to see additional project delays. Now I'd like to provide you with an update on the Baker Hughes acquisition. During the quarter we announced the second tranche of businesses to be marketed for sale in connection with the acquisition of Baker Hughes and we expect that marketing process to begin shortly. On the first tranche of divestitures we have now moved into the negotiation process. On the regulatory front, during the quarter, the timing agreement with the DOJ was extended by three weeks and accordingly Halliburton and Baker Hughes agreed to extend the closing date to December 16. Outside of the US we continue to make progress with completing the required filings and obtaining the necessary approvals. Specific to the European Commission, we are working cooperatively to respond to their information requests and expect to resubmit our filing in the near future which will start the formal review process. Let me be very clear, we remain confident this deal will be approved. We continue to target a 2015 close but the transaction could move into 2016 which is allowed under the merger agreement. We are enthusiastic about and fully committed to closing this compelling transaction and achieving our annual cost synergy target of nearly $2 billion. I want to be clear this $2 billion will be on top of any cost reductions that we've made to date. We are very excited about the benefits of this combination and what it will provide to the shareholders, customers and other stakeholders of both companies. This combination with Baker Hughes will create a bellwether global oilfield services Company combining our highly complementary suites of services and products into a comprehensive offering that will deliver an unsurpassed depth and breadth of cost-effective solutions to our customers. Now let me turn the call over to Christian to provide more details on our financial results. Christian? -------------------------------------------------------------------------------- Christian Garcia, Halliburton Company - SVP, Finance & Acting CFO [4] -------------------------------------------------------------------------------- Thanks, Dave, and good morning everyone. Let me begin with a comparison of our third-quarter results to the second quarter of 2015. Total Company revenue of $5.6 billion represented a 6% decline while operating income declined 21% to $506 million. North America led the decline as a result of continued activity and pricing headwinds. For our international business third-quarter revenue declined by 5% while operating income margins remained unchanged to second-quarter levels. The impact of price negotiations with our customers in the first half has been offset primarily by a proactive reduction in operational costs. In the Middle East/Asia region revenue declined by 4% with a similar decline in operating income of 3%. Lower activity levels across the Asia Pacific markets were partially offset by increased activity in the UAE and Iraq. Turning to Europe Africa CIS we saw third-quarter revenue declined by 7% with a decrease in operating income of 9%. The decline for the quarter was primarily driven by lower activity in Angola and East Africa. Latin America revenue and operating income both declined 4% during the quarter, driven primarily by reduced activity in Mexico. Partially offsetting this decline was improved unconventional activity levels in Argentina. Moving to North America revenue declined 7% with operating income at near breakeven levels. Reduced activity levels throughout US land were accompanied by further price reductions across the business especially in the pumping related product lines. Globally the continued activity declines and pricing pressures led us to take additional actions to adjust our cost structure. As a result, we incurred an additional restructuring charge of $257 million after-tax in the third quarter consisting primarily of asset write-offs and severance related costs. As this market plays out we will evaluate our operations and make further adjustment as required. Our Corporate and Other expense totaled $58 million for the quarter and we estimate that our corporate expenses for the fourth quarter will be approximately $65 million. Our effective tax rate for the third quarter came in a bit higher at 29% due to the impact of gains from our foreign currency hedging program. We expect our effective tax rate to be approximately 26% to 27% for the fourth quarter. Given the ongoing decline in activity levels we are reducing our capital expenditure guidance by an additional $200 million to $2.4 billion for the year. This represents a 27% year-over-year decline. However, our Q10 program remains intact as we derive significant cost savings from its deployment and the Q10 provides us the ability to address the higher completions intensity experienced by the industry. Finally, let me give you some comments on our operations outlook starting with our international business. We believe that typical seasonal uptick in year-end sales will be minimal this year as customer budgets are exhausted and may not fully offset continued pricing pressures. As such we expect fourth-quarter revenue and margins to come in flat to modestly lower compared to the third quarter. In North America the prospects of reduced borrowing capacity for operators in a prolonged holiday season make the fourth quarter challenging and difficult to predict. So far the average horizontal rig count is down a little less than 10% from the third-quarter average. If these headwinds play out we estimate that the fourth quarter average horizontal rig count could drop about 15% to 20% sequentially. We expect our North America revenues and margins to decline but we anticipate sequential decrementals to be only in the mid-teens due to our cost reduction efforts. Now I will turn the call over to Jeff for the operational update. Jeff? -------------------------------------------------------------------------------- Jeff Miller, Halliburton Company - President [5] -------------------------------------------------------------------------------- Thanks, Christian, and good morning everyone. To begin I'd like to take this opportunity to commend our operational teams for once again executing to our playbook. I'm telling you we are not distracted. I'd particularly like to recognize the performance of our international employees for staying dead focused on our business in a very difficult market. Now what's on everyone's mind is North America. so let me give you a little more granularity on North America by division. Our drilling related businesses have been much more resilient than our completions related businesses. In fact drilling division margins increased this quarter to 10% and this is including the 400 basis point impact of the added costs that we're carrying in anticipation of the Baker Hughes acquisition. Obviously the most stressed part of our business is pumping. Now this is the business that we know the best. It's the business that recovers the fastest, it's the business that recovers the most sharply and we know what that path looks like. It looks like this. It looks like staying with the fairway players in the basins that we know. It does not mean chasing every stage. It looks like staying with the customers that are loyal, even if that means working at a price that we don't like, collaborating on a path forward that lowers their cost per BOE to a place where we can both be successful. And it looks like staying with the overall strategy to focus on long-term returns, meaning we see a path to profitability. This is a very simple solution but simple does not mean easy. So if you're looking for a silver lining here the most competitive piece of the business, pumping, is the one that we know the best. It's a business that recovers the fastest and the most sharply and you can be confident that we have to team that gets it done. Last time we reported earnings oil was in the upper $50s and the outlook was cautiously optimistic. Since then we saw oil drop into the $30s which I can tell you elicited an immediate and visceral reaction from our customer base. As I described at a conference during the quarter the rig count followed the oil price down soon thereafter. Now this has caused us to continue to look carefully and strategically at the business and how we're structured to execute. In the short term, we further adjusted our operations. Recent actions we've taken include partnering with our suppliers to find better ways to work together in these tougher times, leveraging our logistics infrastructure including higher rate usage of unit trains and stacking additional equipment during the quarter where we either were unable to make an acceptable return or cannot see a path to acceptable returns. Finally, rightsizing the business to reflect current activity levels. Unfortunately since the beginning of the year market conditions have forced us to reduce our global headcount by over 21%. Now these are always tough decisions affecting great people. But they are simply decisions that we have to make. Consistent with maintaining our service delivery model to obtain the cost synergy savings in the Baker acquisition we've taken a bottoms-up look at our service processes, including comparing our current structure to previous similarly sized markets. This is an examination of how we work, those things absolutely required to deliver our value proposition which also means stripping away everything that is not required. For example in the third quarter we eliminated an entire level of management in North America. In my view this is not a one-time initiative. By clarifying and controlling how we execute we can retain this efficiency, these cost savings as the market recovers. We have a two-pronged strategy, the first part being to control what we control in the short term and the second is looking beyond the cycle and preparing for the recovery. Q10s are a great example. The cost savings we derive from these new generation fleets is substantial compared to legacy equipment: 25% less capital on location, 30% less labor on-site and up to 50% less maintenance cost. Q10 spreads now represent close to 50% of our fleet and we should be near 60% by the end of the year. At the same time, those legacy assets that are still deployed are being strategically placed to maximize their potential in locations or function that maximize their cost effectiveness. While the industry has seen average fleet sizes increase by 15% to 20% over the last two years due to rising completions intensity our average fleet size has been essentially flat as a result of the more efficient Q10s. So when coupled with our logistics platform we believe Halliburton offers the lowest total cost of service to our customers at any point in the cycle. We're pleased with our customer portfolio. Both in North America and on an international basis we've aligned with customers who have strong balance sheets and assets in the fairway positions in the basin. These are the customers that have better well economics and are continuing to work through the downturn and are engaged in the important cost per barrel discussion. Improving a customer's cost per barrel of oil equivalent is core to our value proposition. This is why we continue to invest in technology and our emphasis is on two basic tenets. One is increasing reliability, eliminating moving parts, simplifying designs and helping eliminate nonproductive time at the well site. The second is making better wells. Products like AccessFrac, CoreVault and DecisionSpace help customers identify and access the sweet spots of their reservoirs and more importantly these products have seen increased uptake during this downturn. Adoption of DecisionSpace is up double digits from 2014 for example and the usage of AccessFrac has grown more than 60% over last year. There is no question that this is a challenging market today but our playbook remains the same. We are looking through this cycle to ensure that we will accelerate our growth when the industry recovers. We are managing through the downturn by drawing on our management's deep experience in navigating through past cycles. In the long term we anticipate that unconventionals, mature fields and deepwater will offer the most significant growth opportunities. That hasn't changed, although each of these markets faces economic challenges right now. Ultimately when this market recovers we believe North America will respond the quickest and offer the greatest upside and Halliburton is best positioned to outperform. Now I'd like to turn it back over to Dave for closing remarks. -------------------------------------------------------------------------------- Dave Lesar, Halliburton Company - Chairman & CEO [6] -------------------------------------------------------------------------------- Okay, to sum up we continue to make progress with the Baker Hughes acquisition and we are diligently focused on finalizing all regulatory matters, completing the divestiture process and preparing for integration activities after closing the deal. We are managing the downturn by executing our two-pronged strategy, getting down to our purest form of cost while retaining the flexibility to grow in our usual disciplined way as activity levels recover. For the fourth quarter there is a lot of uncertainty as we approach the holiday season but we believe that customer budgets will reload in the first quarter and anticipate activity to ramp up in the second half of 2016. Looking ahead, we're not going to try to call the exact shape of recovery but we do believe that the longer it takes the sharper it will be and when that recovery comes we expect North America will offer the greatest upside and that Halliburton will be best positioned to lead the way. Finally there is no doubt that this is going to be a bumpy road but history would tell you that we have outperformed in these kinds of markets, turning them into a new catalyst for growth. We are the execution Company. So you can be sure that whatever the market gives us we will take it and then take some more. Now let's open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Jud Bailey, Wells Fargo Securities. -------------------------------------------------------------------------------- Jud Bailey, Wells Fargo Securities, LLC - Analyst [2] -------------------------------------------------------------------------------- Thank you, good morning. I wanted to start off by asking about your international margins, where you continue to put up good results in spite of the downturn. |