Halliburton Company

Ladies and gentlemen, thank you for standing by, and welcome to Halliburton's first quarter 2020 earnings call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Abu Zeya, head of investor relations. Please go ahead, sir.

Thank you, Gigi. Good morning, and welcome to the Halliburton first quarter 2020 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 31, 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 as well as expenses related to the early extinguishment of debt. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter press release and can also be found in the quarterly results and presentation section of our website. After our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A period. in order to allow time for others who may be in the queue. Now, I'll turn the call over to Jeff.

Well, thank you, Abu, and good morning, everyone. We're speaking with you today as billions of people are under some form of quarantine in their homes. Businesses and schools are disrupted, and worldwide travel has generally come to a halt. The human and economic impact from the COVID-19 pandemic is being felt globally. At the same time, our industry is facing the dual shock of a massive drop in global oil demand coupled with a resulting oversupply. As the world is battling the pandemic, I thank our employees for their continued focus during these difficult times. We are a critical part of the global energy infrastructure and an essential service to satisfy both immediate and long-term energy needs. On our customers' work sites and within our facilities, Halliburton people are getting the job done while taking the appropriate steps to protect themselves and others. Our tiered crisis response model has been road tested in the past through hurricanes and other catastrophic events, and it is working well in the current circumstances. Globally, our corporate crisis team monitors the evolving situation across all of our core functions, from health and safety to IT infrastructure to supply chain, and provides guidance to support our local response plans. Locally, every country has reviewed their emergency response plans, assessed them for business continuity, and activated them in alignment with local authorities. To ensure the safety for all who must go to a work location, we've provided specific direction about how to work in the COVID-19 world, and elevated cleaning protocols for our facilities and equipment. We've adjusted shifts and rotations to maximize social distancing, as well as implemented varying levels of medical screens as appropriate. We're maximizing remote work where possible and are encouraging our employees and customers to collaborate virtually using information sharing tools. Now let me cover some headlines for what was a solid first quarter of 2020. We finished the quarter with total company revenue of $5.0 billion, a 12% decrease year-over-year, and adjusted operating income of $502 million, an increase of 18% from the first quarter of 2019. Our completion and production division revenue declined 19% compared to the first quarter of 2019, and operating margin expanded 170 basis points. Our drilling and evaluation division delivered a strong quarter. Revenue was flat year-over-year and operating margin grew 450 basis points. While our North America revenue declined 25% due to lower activity and pricing in U.S. land, internationally we delivered 5% growth this quarter. This marked the 11th consecutive quarter of year-over-year revenue increases for our international business. Finally, free cash flow was effectively neutral for the quarter, which is a significant improvement compared to the first quarter of 2019 and reflects our focus on driving more working capital efficiencies. The first quarter seems like a long time ago, but it is an important demonstration of some key facts. Here's what it tells me. We make commitments and execute on them quickly. we completed the previously announced $300 million in cost savings. We demonstrated the ability to improve our margins and lower our cost of service delivery. And the Halliburton team was well prepared to adjust and deliver under any market conditions. Although we came into 2020 with improving expectations for our financial performance in the North American and international markets, the dislocations resulting from the pandemic and the precipitous decline in oil prices have significantly altered those expectations. Let me describe to you what I see ahead of us, recognizing that the market is still in motion. Activity is in free fall in North America and is slowing down internationally. We cannot predict the duration of the COVID-19 pandemic impact on demand or the pace of any subsequent recovery. At a minimum, we expect the decline in activity to continue through year end. Though we have not experienced anything like the impact of COVID-19 pandemic before, under adverse market conditions, we know what buttons to push and what levers to pull. And we are doing so with swiftness and resolve. Today's market calls for deeper, immediate actions. We are significantly reducing costs, cutting capex, and managing working capital. I will give more detail on each of these actions in a few minutes. We are unwavering on our commitment to safety and service quality for our customers and our focus on cash flow generation and industry-leading returns for our shareholders. And we believe our near-term actions will not only temper the impact of activity declines on our financial performance, but also ensure that we are in a strong position financially and structurally to take advantage of the market's eventual recovery. Before we get into the operational discussion, let me address a few topics I deem critically important in the near term. First, I believe Alliburton has sufficient liquidity, approximately $5 billion, including cash on hand and our undrawn credit facility. Second, in the first quarter, we successfully executed both a tender offer for some of our bonds and a debt offering. As a result, we retired $500 million in total debt and extended the maturity for our $1 billion of senior notes out to 2030. We have focused on debt reduction over the last few years, and we entered this downturn with $2.6 billion less debt than in 2016. We also have a very manageable debt maturity profile, with only $1.3 billion coming due through 2024. Deleveraging remains a key priority. We believe our free cash flow generation will be sufficient to pay down upcoming debt maturities in the normal course of business. Finally, our dividend is a lever we can pull. Based on our market outlook, and valuations. Our board and management review the dividend quarterly and will act prudently to make adjustments for the long-term success of our business. Let me be clear. We have no intentions to increase leverage to maintain the dividend. We also do not intend to allow the dividend to prevent us from being structurally and financially positioned to take advantage of the eventual market recovery. Now let me describe in more detail what I see unfolding in the markets globally, how we are prepared today compared to the most recent downturn, and the actions we are taking to adjust our business to today's market. The market in North America is experiencing the most dramatic and rapid activity decline in recent history. Our customers continue to revise their capital budgets downwards, as they swiftly adjust spending levels in response to the lower commodity price. Right now, North American E&P CapEx is trending towards a 50% reduction year-on-year in 2020. Since mid-March, U.S. land rate count has fallen 34% and is expected to continue declining from here. With prices at the wellhead near cash break-even levels, we expect activity in North America land to further deteriorate during the second quarter and remain depressed through year-end, impacting all basins. Our outlook for the international markets has also changed. In addition to the collapse of oil prices, The industry is dealing with activity interruptions due to the coronavirus pandemic. COVID-19 had minimal impact on our international operations in the first quarter, but the second quarter will be different. We're seeing restricted movements within countries, quarantine requirements for rotational staff, logistics delay due to third-party personnel reductions, and in some cases, entire country closures. Different markets are impacted differently, and this will lead to significant operational disruptions at least through the second quarter. Beyond these near-term headwinds, certain international customers are also fundamentally reducing capital spending, deferring exploration and appraisal activity, and looking to cut costs on their major ongoing projects. we expect international spending to be down in the range of 10% on a full year basis. OPEX Plus production decisions and the duration of the pandemic-related demand and activity disruptions will ultimately determine how much the international spending declines this year. International projects and contract structures tend to be longer-term oriented. However, in the face of these unprecedented circumstances, Our customers, IOCs, NOCs, and independents alike, are all reassessing their priorities, with some reacting more swiftly than others. We believe the activity changes internationally will not be uniform across all markets. We anticipate that the least affected markets will be the OPEC countries in the Middle East, while offshore Africa and Latin America may see double-digit declines this year. As operators in North America and international markets look for ways to cut spending, pricing is a lever they're seeking to pull. We continue to make pricing decisions based on our overall returns expectations for the business. Given the oversupply of fracturing equipment in North America, pricing levels in this market were already at historical lows coming into 2020. Internationally, the pricing increases we were starting to see will take a pause. We will work to improve efficiencies as a means to optimize costs for both our customers and Halliburton. It is important to remember that we are coming into this downturn from a very different place than in 2014, and we believe these differences prepare us better for what lies ahead. Spending in the North America market was down in 2019. In response, we introduced a new playbook that prioritized returns over market share. We restructured our North America organization, rationalized our real estate footprint, completed a cost-out program, and started addressing our fixed costs through the service delivery improvement strategy. We clearly had momentum from these efforts coming into 2020. Our more efficient Q10 pumps now represent 100% of our fracturing fleet. We also have the largest number of dual-fuel and Tier 4 diesel fuel engines in the market. This fleet composition delivers differentiated service quality and efficiency and will ultimately drive the flight to quality when the market stabilizes in North America. We closed key technology gaps in drilling and open-hole wireline added new artificial lift and specialty chemicals capabilities to our portfolio, and continued to lower our costs across various product offerings. This has taken significant technology spend, which is now largely behind us. Our CapEx in 2019 was down year over year, and we further reduced CapEx coming into 2020 to drive capital discipline across all of our business segments. As a result, we do not have the significant oversupply of tools and equipment in the international markets. We have built an operating machine to be effective and successful across cycles. Unfortunately, as we enter this downturn, we will need to make some painful decisions. and I am aware that this will cause great difficulty for our impacted employees. We are implementing the following set of measures that will further reduce our costs and improve our cash generation ability as our customers continue to reduce their spending levels. We are reducing our capital expenditures for 2020 to about $800 million, roughly 50% from 2019 levels. We believe this level of spend will allow us to invest in our key strategic areas while continuing to support our business in the active markets. We will take out about $1 billion of annualized overhead and other costs across our entire business, with most of it happening in the next two quarters. To accomplish this, we are streamlining our global and regional headcount, consolidating multiple facilities, and removing another layer of operations management in North America. We're accelerating our service delivery improvement strategy in North America, redesigning the way we deliver our fracturing services to lower our unit cost and improve margins and returns in the long run. We're cutting our technology budget by 25%. We have stopped discretionary spend across the business and we have eliminated salary increases for all personnel this year, and I and other members of the Executive Committee have taken pay cuts. Additionally, we will make variable headcount adjustments and rationalize our assets to be in line with the activity reductions we anticipate. As we look to reduce our own input costs, we are also renegotiating prices and terms with our suppliers. Finally, we will continue our efforts on working capital improvements across all three of its components. We believe these actions are necessary given the current environment and will help protect our balance sheet and drive cash flow and returns for our shareholders. As we steer the company through this downturn, we remain focused on the underlying drivers of success and our long-term strategic objectives. we will continue to execute our value proposition, deliver value and efficiency across our product offerings, and remain focused on safety and service quality. We remain committed to being leaders in North America by delivering on our low-cost service improvement strategy. We continue to closely collaborate with our customers and partners on leveraging digital solutions to reduce non-productive time and improve labor and asset efficiency. As I've stated on prior calls, we are in the early innings of our artificial lift and specialty chemicals growth internationally, and we plan to continue down this path. We believe these businesses give us exposure to a later cycle market with long-term growth potential. We will continue to spend on technology that reduces our operating costs, We believe this is necessary for the future success of our business. We've been through downturns before. As the market unfolds from here, we believe we have the people, the technology, and the depth of experience to outperform our competitors. If required, we will take further actions to adjust to the evolving market. If I've learned something from all of the downturns I've been through in my career, It is that the industry always bounces back. This downturn, although the most severe we have seen in a generation, will be no different. I believe it will reshape our industry and position it better for the next cycle. At some point, returning global economic and oil demand growth, market balancing supply actions by key producing countries and declining non-OPEC production will likely lead to a new reinvestment cycle. And I believe Halliburton will emerge stronger on the other side, like we always have. Now I will turn the call over to Lance to provide more details on our first quarter financial results. Lance? Thank you, Jeff, and good morning.