Halliburton Company

Ladies and gentlemen, thank you for standing by, and welcome to Halliburton's third 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 Zea, head of investor relations. Please go ahead, sir.

Good morning, and welcome to the Halliburton third 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 31, 2019 and Form 10Q for the quarter ended June 30, 2020, recent current reports on Form 8K, 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 severance and other charges. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our third quarter earnings 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.

Thank you, Abu, and good morning, everyone. The third quarter saw world economy slowly emerge from lockdowns, oil prices move off their lows, and a return of shut-in production. Demand recovery is starting to unfold, while under investment in global oil production capacity, OPEC Plus actions and expectations for effective COVID-19 treatments are providing support to commodity prices. However, the pace and magnitude of recovery going forward will vary greatly by geography and customer type, with resurgence of COVID-19 in certain economies presenting near-term risk. Despite these challenges, we continue to execute on our value proposition both for our customers and our company. Every day, our employees collaborate and engineer solutions to maximize asset value for our customers, and they are doing it with the best service quality and safety in our history. Our third quarter financial performance reflects the results of this execution. Let me share some highlights. Total company revenue was about $3 billion, down 7%, and adjusted operating income was $275 million, an improvement of 17% compared to the second quarter of 2020. Our completion and production division revenue declined 6% sequentially, while operating income improved 33%, delivering an operating margin improvement of 4% compared to the second quarter. These results demonstrate the impact of our structural cost reductions and improved utilization in North America land. Our drilling and evaluation division revenue and operating income were down 8 percent and 17 percent respectively compared to the second quarter of 2020. D&E's top line outperformed rig count declines both internationally and in the U.S. International revenue was down 7 percent sequentially as international rig count trended lower by 12%, highlighting the diversity and strength of our international franchise. North America revenue decreased 6% sequentially. Completions activity increases in North America land were more than offset by lower activity in the Gulf of Mexico and lower overall drilling activity, as U.S. rig counts declined 35% sequentially. I'm pleased to report that our $1 billion in structural cost reductions are complete. And lastly, we generated approximately $730 million of free cash flow through the first three quarters of this year and are on track to generate over $1 billion in free cash flow for the full year. Before we discuss the details of our third quarter performance, I'd like to say something to our outstanding employees. I appreciate that the last several months have been far from easy. You've experienced disruption and uncertainty both in your personal and work lives. More than ever, you've had to balance taking care of yourselves and your families with your work duties. Through it all, you have performed admirably. You have continued to deliver outstanding products and services to our customers, breaking service quality and safety records along the way. In April, No one would have predicted the operational and financial success that Halliburton has achieved over the last six months. You should realize these results are your results. They are due to your hard work and perseverance in very challenging times. I am very proud of you all. Halliburton is charting a fundamentally different course. We will continue to take strategic actions designed to boost our earnings power and free cash flow generation both today and as we power into and win the eventual recovery. As markets around the world begin to stabilize, our five strategic priorities will drive Halliburton's future success. First, we continue to focus on our strong international business. We're outperforming in the international markets and plan to balance future growth with the objective of improving margins and returns. Our strategic priority for a leaner, more profitable North American business is well underway, as demonstrated by the last two quarters. We will continue to focus on profit, not share, in this more consolidated market, which will remain a key component of the global supply stack. Third, digital drives everything we do. Our digital framework, Halliburton 4.0, permeates all aspects of our business and enables the success of our other strategic priorities. As digital deployment and integration across the value chain accelerates, we believe it will continue to grow our current business, create new revenue opportunities, and drive better returns for Halliburton. Fourth, our capital intensity is structurally lower, with future CapEx expected to be 5% to 6% of revenue. This provides a tailwind to our strong free cash flow generation. Lastly, Halliburton is committed to a sustainable energy future in which oil and gas continues to play a critical role. On today's call, I will discuss how our third quarter financial performance reflects the impact of these strategic priorities and how our future actions align with them. Our third quarter demonstrated again that we have a strong international business. It is delivering margin expansion now, and we expect it to drive higher returns in the eventual recovery. For the second quarter in a row, nearly two-thirds of our revenue came from international operations, and both our drilling and evaluation and completion and production divisions now earn the majority of their revenue in the international markets. Our business mix and footprint in specific geographies, along with exposure to long-term integrated projects, support our comparative revenue outperformance and more constructive international outlook for 2020. We outperformed the 12 percent sequential international rig count declines in the third quarter and are trending significantly better than the 20 percent reported rig count reductions year to date. Despite the well-known activity slowdowns, our international margins improved sequentially with several key end markets demonstrating margin improvement year on year. As we look ahead to the fourth quarter, we see the pace of activity declines in the international markets slowing and believe we are getting closer to an activity bottom. In the meantime, service companies are being prudent with their capital, which results in limited excess equipment. This should lead to a tighter market even without an increase in new activity. While we believe a broader recovery across all regions will still take time, Halliburton is well positioned to outperform the markets. Here are a few examples. Over the last few years, we've made significant investments in our directional drilling and open-hole wireline technologies that are critical to our success in the international markets. These investments are paying off. For example, this year in the eastern hemisphere, we've drilled five and a half times more footage with our iCruise tools compared to last year, despite the decline in rig activity. Adding to our existing business lines, Another important component of Halliburton's strength in the international markets is the ongoing expansion of our production businesses. Today, we have a small international market share in this service segment, which gives us plenty of room to grow. And we are growing. I'm pleased to announce that earlier this month, Halliburton was awarded a seven-year contract for electric submersible pumps by a Middle Eastern NOC. We also completed our first ESB installations in a growing geothermal market in Europe. Halliburton 4.0 supercharges are already strong international business. We use open architecture and digital technologies that drive connectivity and deliver performance to collaborate with our customers and partners, pioneering new approaches to subsurface understanding, well construction, and reservoir and production. Our digital innovation and its adoption by our customers are reframing operator project economics through greater efficiencies and improved decision making. We believe this creates technological differentiation for us and we expect it will drive higher returns. Today, as more customers contract for integrated services packages, We continue to benefit from our strong project management capabilities that deliver efficiencies and reduce total cost of ownership for our customers. Going forward, Halliburton Well Construction 4.0 will enable our project management business to deliver more efficient wells by reducing planning time, improving drilling performance, and lowering well construction costs and risks. Well Construction 4.0 provides a singular interface for well site performance management Its open architecture environment enables seamless integration and collaboration of our premium technologies like Cerebro Intelligent Bits, Logix automated drilling software, and Barilogix real-time density and rheology with any third-party service or application. As part of Halliburton Production 4.0, we have formed a new alliance with Honeywell to use our digital technologies to optimize our customers' assets like a manufacturing plant. fundamentally changing the way surface and subsurface are simultaneously managed. This helps our customers optimize their production. Halliburton delivers reservoir modeling, well and field surveillance, ESP optimization, and well intervention. Honeywell brings its expertise in topside automation, surface equipment performance monitoring, and productivity solutions. This is not simply an expectation for tomorrow. This is digital in action today for customers like PTT-EP in Thailand. Our current strengths and new capabilities in the international markets are critical to our future success. The international short cycle producers have an opportunity to regain market share as a result of declining U.S. oil production. As demand starts to improve and outgrow supply, it should encourage international investments in both oil and gas. and our strong international business that now delivers the majority of our revenues is ready to power into the eventual recovery. The next strategic priority I want to discuss today is driving a leaner, more profitable North America. Last quarter, I described to you in detail the actions we took to reset our earnings power in this key market. To recap, we now have 50% less structural headcount and a 50% smaller real estate footprint in North America compared to last year. These and other changes to how we are organized and how we execute every day are sustainable and independent of market activity levels. I believe our efficient, disciplined execution in the North American market, together with these structural changes, will drive margin improvements and free cash flow. Halliburton executed exceptionally well in North America this quarter. Our D&E division outperformed the sequential rig count declines and our C&P division grew and drove overall margin improvement for North America, despite the hurricane season negatively impacting Gulf of Mexico activity. This proves that our cost actions and service delivery process improvements are delivering the intended results. As the leading completions provider in North America, Halliburton has exposure to every basin and every customer group. The month-on-month land completions activity improvement in the third quarter was a welcome sign, but September stage counts were still below April activity levels, and overall stages completed in U.S. land showed a modest sequential increase for the full quarter. We intend to stay disciplined in how we deploy our fracturing fleets into the recovering market. Looking ahead to the fourth quarter, We expect North America land completions activity to increase by a double-digit percentage as operators deplete their duck inventory. We expect rig counts to lag completions and not step up materially before year-end. As we predicted, the North America market structure is improving with both consolidation and rationalization. We have seen a steady flow of consolidation announcements from operators as well as service companies. As I see it, the U.S. shale industry will continue to slim down and, as a result, emerge healthier in a relatively more sustainable growth environment in the future. And this plays to Halliburton's strengths and our discipline strategy. The supply-demand balance for U.S. fracturing capacity is also improving. We estimate that close to 30% of hydraulic fracturing equipment has been permanently retired this year. We expect more will follow as demand remains structurally lower. Insufficient returns and a lack of reinvestment by service companies should accelerate the cannibalization of idle equipment for parts and the use of sideline pumps to beef up working fleets. We anticipate a tighter balance between horsepower supply and demand as the U.S. achieves more stable production levels. As we look ahead, we expect pricing to work its way through a couple of predictable steps. The first step, which we are starting to see now, is a recovering demand for active capacity. The first warmstack fleet reactivations are unlikely to see meaningful pricing improvement, but they will increase utilization and revenue on a lower cost base and make a positive contribution to earnings. The second step will happen when activity recovers enough to call on cold-stacked equipment to return to the market. I expect that higher pricing will be necessary to justify incremental investments. As with our international business, Halliburton 4.0 is driving innovation in North America. Last week, for example, we announced an industry-first, the launch of our smart fleet intelligent fracturing system. Smart Fleet marries our digital capabilities and fracturing expertise to do what was not possible until now, give customers control over frac performance in real time. The decisions our customers make about well spacing and multiple pad development have a big impact on their unconventional asset economics. With service efficiencies plateauing and capital remaining constrained, operators strive to make every stage as productive as possible. Before Smart Fleet, however, they faced a high level of uncertainty related to fracture placement and performance. Smart Fleet changes this. Its intelligent automation integrates real-time fracture measurements, live 3D visualization, and real-time fracture commands to give operators control over fracture outcomes while pumping. It sets us apart from the rest of the hydraulic fracturing market and solidifies our industry leadership in intelligent fracturing. Smart Fleet and other Halliburton 4.0 digital offerings will continue to address our customers' toughest reservoir challenges and improve the efficiency of our service delivery. In the near term, I expect the divergence of rig and completions activity will create choppiness as balance sheets are repaired and reinvestment rates continue to adjust. However, We believe that our strategic priority for a leaner and more profitable North America will enable us to successfully navigate through this market contraction and power into the eventual recovery. Let me now discuss capital efficiency, a key enabler of all our strategic priorities. We believe we can maintain our reduced capex at 5% to 6% of revenue and that it will contribute to sustainable free cash flow generation for our business. We will keep investing in the development of new technologies and strategically fund international growth as the market recovery unfolds. This includes digitalization of our tools and processes that together with material science and design advancements drive down costs and extend the life of our equipment. At the same time, we will continue to exercise thoughtful capital allocation to the best returns opportunities. The last strategic priority I will discuss today is Halliburton's commitment to a sustainable energy future. We recognize that the energy landscape is evolving and alternative energy sources are growing. We are executing our strategies to meet these changes. First, oil and gas will play a key role in providing the world with affordable and reliable energy long into the future, and we will continue to deploy innovative solutions including our full digital portfolio, to meet that demand. We will also invest in the future directly through innovation and our recently launched Halliburton Labs. Today, our digital and other technologies help our customers decarbonize their legacy production base and reach their emissions reduction goals. For example, our digitally enabled iCruise rotary steerable system allows customers to drill wells faster, and reduce the number of days a diesel-powered rig is on their location, which helps cut down on emissions. We also help our customers achieve their carbon neutral goals through carbon capture and storage. We provide a variety of services in this space, from subsurface assessment and characterization to well construction and fiber optics monitoring and verification solutions. Our current technology portfolio support CCS projects all around the world in Australia, Europe, and North America. We also have decades of experience in providing geothermal drilling services. Halliburton delivers a full range of innovative technologies to address the ultra high temperature environments from directional drilling, cementing, fluids, pumping services, logging and casing inspection, and project management-led developments of geothermal fields. To date, we have participated in operations in all the key geothermal producing areas of the world. For our own portfolio of services and equipment, we continue to do what we do best, innovate, collaborate, and invest in lowering the emissions profile of our technologies. We have shown steady improvement over the years, reducing our Scope 1 and 2 emissions In the coming months, we are committed to establishing and sharing our greenhouse gas emissions reduction targets and reporting on our progress. Finally, I'm excited about the formation of Halliburton Labs, which we announced in the third quarter. It is a collaborative environment where entrepreneurs, academics, investors, and industrial labs come together to advance cleaner, affordable energy. Halliburton receives a minor equity stake in early-stage clean energy companies in exchange for their access to our world-class facilities, technical expertise, and business network. But more importantly, Halliburton Labs provides us with a wealth of knowledge and an opportunity to play an important role in developing sustainable, affordable energy solutions. We're excited about Halliburton Labs' advisory board consisting of leading academics and thought leaders whose first members include Rice University's Reggie DeRoche, Caltech's John Grotzinger, and Tulane's Walter Isaacson. I will now turn the call over to Lance to provide more details on our financial results. Lance?