Halliburton Company

Ladies and gentlemen, thank you for standing by, and welcome to Halliburton's second 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, Liz. Good morning, and welcome to the Halliburton second 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 Leffler, 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, 2019, Form 10-Q for the quarter ended March 31, 2020, 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 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. The second quarter of 2020 is now behind us. It was a tough one for many industries, including the oil and gas sector. A global pandemic and the resulting collapse in demand have upended many businesses, and as economies around the world emerge from lockdowns, the path forward remains uneven and uncertain. I'm grateful for our employees' focus, dedication, and perseverance during these difficult times. Employee safety is our top priority, and we continue our efforts to take the appropriate measures to provide a safe working environment for everyone. COVID-19 is altering our everyday lives and business operations, and it is important that we do not let our guard down. Despite this distraction, our safety performance is the best it has ever been, with our total recordable incident rate improving more than 20% since the end of last year. There are three key areas I will address on the call today. First, our solid second quarter performance, demonstrating a significant reset that improves the earnings power of our business, despite the severity of the activity collapse. Second, the market and business outlook for the second half and full year of 2020. And finally, what we are doing today to make sure that Halliburton powers into and wins the eventual recovery. The global activity collapse in the second quarter was swift and severe, much worse than anticipated. U.S. average rig count for the quarter declined 50% sequentially, while international rigs dropped 22%, with absolute global rig count sinking to the lowest level in recent history. Halliburton's response to the market disruption was equally swift and aggressive. As I'll discuss in a few minutes, our organization responded with a tremendous sense of urgency. Let me cover a few headlines related to our financial performance. Total company revenue was $3.2 billion, and adjusted operating income was $236 million. Our completion and production division revenue of $1.7 billion was impacted by a drop in market activity in the low teens in international markets and about 70% in U.S. land completions. Despite these headwinds, CNP delivered a solid operating margin of 9.5% in the second quarter. Our drilling and evaluation division revenue of $1.5 billion was down largely in line with lower rig count activity globally, delivering operating margin of 8.3% in the second quarter. The speed and effectiveness of the cost actions that we have executed help minimize the sequential decremental margins to 14% in CNP and 16% in D&E. Revenue for North America declined 57% sequentially, with our CNP and D&E divisions outperforming the completions and drilling activity declines, respectively. International revenue was down 17% sequentially, outperforming the rig count decline. And finally, we generated over $450 million in positive free cash flow in the second quarter. As reflected in these results, our aggressive cost actions are an important part of our earnings power reset. As you recall, we removed $300 million in costs over the prior two quarters. In April, we announced an additional $1 billion in annualized cost reductions. I'm pleased to report today that these actions, which are largely permanent changes to our business, are 75% done. I expect the remaining cost reductions, which are mostly aimed at our international business and real estate rationalization, to be completed by the end of the third quarter. Let's now discuss our expectations for the second half of 2020. Internationally, we anticipate drilling activity to continue to decline modestly, while completions stay resilient into year end. The activity changes have not been and will not be uniform across all international markets. On a full year basis, we expect activity in the OPEC countries in the Middle East and the Norwegian sector of the North Sea to be more resilient while Latin America and Africa declined sharply. Some customers are deferring new projects, most notably in the offshore exploration markets. Due to the deeper and longer pullback in Latin America, we now anticipate a mid-teens decline in international customer activity and spend for the full year. In North America land, some green shoots of completion activity are emerging, but I would not characterize this as the start of a meaningful recovery. After customers bring back shut-in production, and as WTI remains range-bound around $40, we expect to see a modest uptick in completions activity during the third quarter, followed by the usual seasonal deceleration at the end of the year. Drilling activity declines have slowed, and we believe the rig count should find a bottom sometime in the third quarter but a meaningful inflection point in drilling seems further out. Our full year customer spend outlook for North America remains unchanged at approximately 50% down compared to 2019, with gassier basins outperforming the oilier ones. Further demand weakness from a slower economic recovery or multiple waves of COVID-19 related activity shutdowns present downside risks to our outlook for the remainder of the year. Though we believe positioning our company to ride out those events should they occur, it is not possible to predict the impact that they may have. Regardless, as demonstrated this quarter, I expect Halliburton to outperform the market under any conditions. As we look into the future, I believe the international and North America markets will present opportunities for Halliburton. Although the timing of commodity price recovery remains uncertain, we are taking the necessary actions to thrive in the current market and to prepare Halliburton to win the eventual recovery. International producers have the opportunity to regain market share as a result of declining U.S. production. This should translate into healthy activity levels internationally as oil demand recovers. International shorter cycle barrels will likely fill a higher proportion of future incremental demand requirements. As economic growth returns, we expect the key producing regions to maintain productive spare capacity so they can quickly meet demand. Offshore, longer cycle barrels and new exploration activity will likely be the farthest out in terms of incremental contribution to the supply stack. Today, we have an excellent international business, both in terms of geographic footprint and technology portfolio. Pre-coronavirus, our international business grew revenue every quarter for almost three years, outperforming our largest competitor and was on the road to meaningful margin improvement. International regions contributed nearly half of our revenue in 2019. They are also historically more resilient on margins, demonstrating the strength of our diverse business. Here's how we are preparing to win the recovery internationally. We're driving adoption and expansion of our latest technologies in the international markets. Our Earth Star logging while drilling tool has seen a two and a half times increase in its adoption over the last year, even though it is one of our premium offerings. Our Cerebro in-bit sensor package provides a high-speed look at data captured directly from the bit. Its international adoption has doubled this year compared to the first half of 2019. We've successfully completed customer qualifications and are currently deploying the latest wireline tractors and ESP pumps in the Middle East. We are growing and monetizing our digital offerings. They improve performance and efficiency and allow us to introduce new commercial models where all parties share in the benefits of our digital technologies. The Ocker BP project in Norway is a demonstration of a customer successfully adopting digital technology to achieve best-in-class performance. We have collaborated with our alliance partners to deploy digitally enabled new technologies and innovative ways of working. Our contract structure where all Alliance partners benefit from these successes, fosters a collaborative culture and drives further performance improvement. We increased rate of penetration by 88% over the course of the well campaign, and a third of the wells we drilled on a specific prospect were in the top decile of the industry benchmark for drilling speed. We made great strides in the digital transformation of the well planning cycle, rapidly working towards the goal of planning a well in a day. We applied digital 3D inversion, helping the customer improve their reservoir understanding. This led to replanting of a whole reservoir section and potential incremental reserves for the customer. We are also advancing alliances with key industry players, both within and outside of the oil and gas sector. We recently announced Halliburton and Technip FMC collaborated to create Odyssey, the world's first distributed acoustic sensing solution for subsea wells. This collaboration strengthens our digital capabilities in subsea reservoir monitoring and production optimization. We recently signed a five-year strategic agreement with Microsoft and Accenture to advance Halliburton's digital capabilities in Microsoft Azure. This is an important step in our adoption of new technology and applications to enhance our digital capabilities and customer offerings, drive additional business agility, and reduce capital expenditures. We are also taking actions not only to thrive in the current market, but to best position our business in the future. Streamlining our cost structure is part of a continuing effort to reduce our fixed costs and improving components of our working capital through a strong focus on managing collections, deploying digital inventory planning solutions, and extending vendor payment terms. As oil demand recovers, I expect the international business will continue to be a more meaningful contributor to our revenue going forward. I believe that the actions we are taking provide the basis for margin expansion and higher free cash flow conversion internationally in the next up cycle. Turning to North America, we believe that North America production is likely to remain structurally lower in the foreseeable future and has slower growth going forward. With shrinking demand for shale oil and limited access to capital markets, the inevitable rationalization will continue and we expect to see a more disciplined market with stronger operators and service companies. The activity declines and entry year cyclicality over the last two years led us to change our approach to this market. But what has not changed is our commitment to the single largest oil field services market and to our leadership position in it. While the North America market will be structurally smaller, we believe that it will be more profitable for us. Our service delivery improvement strategy lowers our fixed and services costs and will drive higher contribution margin with the goal to make Halliburton the most competitive from a cost structure perspective. This strategy has resulted in sustainable changes to how we organize and execute every day in the business and positions us to deliver higher profitability and free cash flow in North America. Our playbook is clear. Returns and cash generation matter more than ever, and growth for the sake of market share is a thing of the past. We believe that our size and scale, combined with our ability to quickly respond to changing market conditions, are strong advantages for us, helping to drive the unit cost down and enabling us to capture work across multiple basins and resource types. The $1.3 billion in cost cuts, a combination of the $300 million in prior cuts, and the $1 billion in further reductions are largely aimed at North America. Let me remind you what we have done to reset the earnings power in this key market. We are changing the fundamentals of how we deliver our services, and I expect this will drive a higher contribution margin and lower our fixed costs. We reduced our maintenance cost per horsepower hour by over a third compared to the 2019 run rate by redesigning our maintenance and value engineering processes. This has been scale tested as a permanent change in how we execute our operations and is independent of the market activity levels. We've also made permanent reductions to our workforce. We have flattened our North America organization, removing layers of management. We are using digital and remote operations to reduce the number of frac engineers required to monitor jobs by establishing real-time operations centers and using cloud-based solutions to modernize data flow between the rig site and the back office. We are reducing our real estate footprint by over 100 facilities, which not only removes costs, but fits with our digital and remote operations strategies. In addition to these strategic changes, we will continue to take advantage of our unique competitive strengths. We offer a full suite of oilfield services through 13 product service lines in North America, and we will continue to emphasize our non-FRAC revenue streams, resulting in a more balanced business portfolio. We continue to deliver differentiated technologies across our product lines, many of them using advances in automation and digitalization. These technologies either lower our costs or improve production results for our customers. Finally and critically, none of the improvements internationally and in North America happen without our fantastic, competitive, and committed team focused on achieving all of these objectives and protecting the gains we make over time. Turning to capital spending. 2020 will be the second year in a row that we have significantly reduced our CapEx, which will largely be directed towards our international business. Because we size our capital budget based on a committed project pipeline and anticipated returns, we believe that this year, just like in 2019, this CapEx reduction will not hamper our ability to outperform the market. we will continue to exercise thoughtful capital allocation to the best returning opportunities. The capital intensity of our business has come down. And as we think about the future, we project that CapEx spend as a percentage of revenue will be closer to 5% to 6% versus the historical norms of 10% to 11%. There are several reasons why we were able to drive this change and positively impact our free cash flow going forward. We now build our equipment cheaper and it lasts longer. Advances in sensing technologies and material sciences are lowering the total cost of ownership for our tools. Design improvements, such as component modularity, make asset velocity better than ever. This means we need to build fewer tools to support the same level of business. For example, the iCruise drilling system has modular components and standardized electronic inserts for all tool sizes, allowing for 20% better asset velocity. Digitalization reduces our capital footprint. We're removing equipment from location and replacing costly hardware with software solutions. We do not anticipate large technology recapitalization programs similar to the build-out of our leading Q10 pumps and the iCruise drilling systems. And finally, the North America business now has structurally lower capital requirements. It is a mature market, and frack job intensity is plateauing. The Halliburton I have just described to you is charting a fundamentally different course. The growth in digital technologies, the position of strength in the international markets, the sharper approach to North America, and a lower CapEx profile. All of that comes from the hard work that we've been doing over the last few years. We are not waiting for an upcycle to drive significant free cash flow and returns for our shareholders. We believe that the strategic actions we are taking today will further boost our earnings, power, and free cash flow generation ability as we power into and win the eventual recovery. Now I'll turn the call over to Lance to provide more details on our second quarter financial results. Lance?