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?

Thank you, Jeff. Let's begin this morning with an overview of our third quarter results compared to the second quarter of 2020. Total company revenue for the quarter was about $3 billion, representing a 7% decrease, and adjusted operating income was $275 million, or an increase of 17%. These results were primarily driven by continuing rig count declines across multiple regions, partially offset by increased activity in Latin America and higher completions activity in North America land as well as the continued impact of our global cost savings. In the third quarter, we recognized $133 million of pre-tax severance and other charges to further adjust our cost structure to current market conditions. The cash component of this charge was approximately $80 million. Let me cover some of the details related to our divisional results. In our completion and production division, Revenue decreased $98 million, or 6%, while operating income increased $53 million, or 33%. The revenue decline was driven by reduced completion tool sales across Europe, Africa, CIS, the Gulf of Mexico, and Latin America, coupled with lower cementing activity in the Middle East, Asia, and North America lands. It was partially offset by higher stimulation activity and artificial lift sales in North America land, higher activity across multiple product service lines in Argentina, as well as increased pipeline services in Europe, Africa, CIS. Improvements related to stimulation activity in North America land and the impact of our cost reductions drove the overall margin increase. In our drilling and evaluation division, revenue decreased $123 million, or 8%, while operating income decreased $22 million, or 17%. These declines were primarily due to reduced drilling-related and wireline services activity in North America and the Eastern Hemisphere, coupled with lower project management activity in the Middle East Asia. They were partially offset by improved drilling activity in Latin America. Moving on to our geographical results, in North America, revenue decreased $65 million, or 6%. This decline was primarily driven by decreased well construction activity in U.S. land, coupled with reduced activity across multiple product service lines in the Gulf of Mexico, partially offset by higher stimulation activity and artificial lift sales in U.S. land. In Latin America, revenue increased $34 million, or 10%, resulting primarily from increased activity across multiple product service lines in Argentina, Colombia, and Mexico, partially offset by reduced activity in Ecuador and lower completion tool sales in Guyana. Turning to Europe-Africa CIS, revenue decreased $42 million, or 6%, This decline was primarily driven by lower completion tool sales across the region, reduced drilling-related services in Norway, and a decline in fluids and cementing activity in Russia. These reductions were partially offset by increased activity across multiple product service lines in Azerbaijan and a seasonal increase in pipeline services in Europe. In Middle East Asia, revenue decreased $148 million, or 13%, largely resulting from reduced well construction activity across the region, lower project management and wireline activity in the Middle East, and decreased project management activity in India. These declines were partially offset by higher completion tool sales in the United Arab Emirates and Saudi Arabia. In the third quarter, our corporate and other expense totaled $42 million, which was positively impacted by an insurance reimbursement. For the fourth quarter, we estimate that our corporate expense will return to previously announced run rate of $50 million. Net interest expense for the quarter was $122 million, which included higher interest income from our international subsidiaries. We expect net interest expense closer to $128 million in the fourth quarter. Our adjusted effective tax rate for the third quarter was approximately 24%. We expect our fourth quarter tax rate to be approximately 15% based on the market environment and our expected geographic earnings mix. Our full-year adjusted effective tax rate should be approximately 21%. Capital expenditures for the quarter were $155 million, and we now expect full-year 2020 CapEx to be less than $800 million. Turning to cash flow, we generated $265 million in free cash flow during the third quarter, primarily driven by our increased operating income and continued working capital improvements. As a result, we improved our cash position during the third quarter, ending the period with $2.1 billion in cash. We expect to continue generating positive cash flow from operations in the fourth quarter and expect to deliver full-year free cash flow of over a billion dollars. Now, turning to our short-term operational outlook, let me provide you with our thoughts on the fourth quarter. For our completion and production division, we expect higher North America completions activity and traditional year-end completion tool sales, which are more muted than in prior years. With that said, we expect revenue to be up approximately 10 percent and margins to remain flat sequentially. In our drilling and evaluation division, we anticipate a slight sequential increase in our drilling-related activity and expect to see typical year-end software sales. As such, Revenue for the division should be up mid single digits with operating margins moving modestly higher by 25 to 50 basis points. I'll now turn the call back over to Jeff. Jeff.

Thanks Lance. To sum up, we're charting a fundamentally different course. I believe our execution of the five key strategic priorities will deliver success for Halliburton now and into the future. Our strong international business is already delivering returns and margin expansion, and I expect that will continue in the next up cycle. Our leaner North America business will enable us to successfully navigate through the market contraction and will be more profitable as the market recovers. Halliburton 4.0 is part of everything we do and enables the success of the other strategic priorities. It will grow our current business, create new revenue opportunities, and drive better returns. Our lower capital intensity is expected to contribute to strong free cash flow in the future. Our commitment to a sustainable energy future in which reliable and affordable oil and gas continues to play a critical role will help us and our customers lower emissions. Our creation of Halliburton Labs will accelerate the sustainable affordable energy future. Halliburton's strategic actions boost our earnings power reset and free cash flow generation today, and as we power into and win the eventual recovery. And now, let's open it up for questions.

Ladies and gentlemen, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Angie Sedito with Goldman Sachs. Your line is open. Thanks. Good morning, guys.

Good morning, Angie.

So, Jeff, on the pace of activity, maybe some thoughts around 21 in the past for the U.S. markets. You talked about a strong start early 21. And so thoughts if that's really driven by the gut cleanup, or do you think we could see a pickup of drilling activity and additional wells? And then along with that, on the international side, you noted that the pace of decline is slowing. Um, do you think that we've seen the bottom in some, most of these countries? Is there some reason to believe that we have not even ignoring the seasonality and thoughts around the pace of the international activity in 21? Yeah.

Thanks, Angie. Uh, let me, you know, just broadly, both your questions, you know, 2021 feels better from here. Uh, yeah, I think the second half of 20, um, you know, thinking about that as a bottom. We see progressive improvement in 2021. Separating that a little bit, North America, we're seeing duct activity now. We'll see duct activity, I suspect, into next year. And then the drilling activity would follow that. But again, if we step back and think about North America, to maintain steady production, whatever the exit rate ends up being, implies the number of wells that need to be drilled. And so if drilling is below that, then we start to see production drift lower, which then would have a positive impact on commodity price and an impact more so on international activity. From an international perspective, you know, Again, we see improvement in 2021 from where we are certainly now, and we see that strengthening more so in the back half of 2021 or the second half of 2021 because we do work through seasonality and some other things. But in either case, you know, we see improving activity.

Okay. Okay. Fair enough. Thanks, Jeff. And then if you could talk about operating margins in 21, given you'll have a full year benefit of the billion dollars in structural cost cutting and the activity outlook you just outlined, thoughts around the pace of C&P and D&E margins and even the potential exit rate for 21.

Yeah, look, obviously the earnings reset or the earnings power reset is a critical part of our strategy. So those cost cuts are permanent. I expect when activity moves up, we'll see margin improvement follow. We'd see D&E margins start moving upwards when we see broader international drilling activity recover. As I described how we might see that next year, C&P is going to benefit from stronger completions activity recovery in North America and also internationally. I think C&P probably sees recovery more so first, and margins D&E improves, gets into the double-digit range as we see more sustained recovery internationally. Again, I really like where we are strategically. I think our strategy addresses that and would expect to see the margin progression follow along with the activity.

Right. Fair enough. Thanks, Jeff. I'll turn it over.

Thank you. Our next question comes from James West with Evercore ISI. Your line is open.

Hey, good morning, Jeff and Lance.

Morning, James. Morning, James.

So international, Jeff, and I know that's, I mean, you spent most of your career working international. The business has contracted, of course, but Sounds like you're seeing a bottom in here. What type of or what level of recovery would you expect in 21, and are there geographies that stand out as more robust than others?

Well, James, look, I think we went into the first part of this year very active. In fact, we were seeing a lot of good things happening in Q1. It tailed off in Q2. so I don't think the full year of 21 eclipses 2020, but trajectory, I think, is really important because that leads to, you know, the eventual recovery that I believe happens, and so I think we get on that pace starting in 21. Does it overcome 20 immediately? Not necessarily, but it's going to just be slightly below. You know, I think we're on a pace because of the sort of underinvestment that we're seeing, and we're seeing it in the U.S. today, and we'll see it. We've seen it really internationally, and this is just too important to too many governments, to too many people in the world to see it underinvested for that long.

Right, right. And as we think about the U.S. market, which is kind of an impaired market, but the structure is getting better with some of the M&A that's happening. I mean, are you guys comfortable that you see a more profitable future as we kind of pull out of this downturn in North America than we've seen for the last, you know, almost a decade?

Yes, I do. You know, I think what we're seeing in service company consolidation is great for Halliburton. You know, it's happening as we expected it would happen. and our approach to this market, which is a different playbook, and we wouldn't be doing it if we weren't convinced that it drives better free cash flow and a more profitable market. And so there are a lot of things that we're doing that are different that will allow us to make more free cash flow in this type of market. And so I think all of these things are positive, and I would say the you know, whether it's consolidation and attrition and rationalization, all of those things are conspiring to, you know, create tightness. But even, you know, in spite of not having the tightness today, we're seeing the improving margins and returns.

Right. Okay, great. Thanks, Jeff.

Thank you. Our next question comes from Bill Herbert with Simmons. Your line is open.

Good morning. Lance, hey, Jeff. Lance, free cash flow, and I'm just looking at the relationship between street expectations for next year, EBITDA down 5%, 7%, but free cash flow down close to 40%. Does that make sense? I mean, given the fact that you're not going to have the restructuring and severance cash expense that you had, This year, maybe working capital is not the tailwind in 2021 that it was in 2020. But if revenues are flat to down, it's hardly a huge consumer of cash in your margins. And so I'm just curious, I mean, how should we think about free cash flow for 2021 at this stage? I mean, your capital intensity, 5% to 6%. It would seem that your free cash flow would be actually up year over year.

I agree with a lot of the commentary in the questions, meaning that, yes, working capital will be less of a tailwind for our free cash flow next year, but that's replaced by healthier operating profit led by increased activity in the markets that you heard Jeff describe. Also, a full-year benefit of the cost-cutting activity that we've been through this year rippling through our operating margins. And so it'll be much more of an operating-led free cash flow draw in relationship to the capital intensity that we've talked about as opposed to working capital unwind next year.

Okay, so in the event that EBITDA is relatively flat, Do you think flat, flat to down, flat to up, do you think that free cash flow is in the vicinity of this year or higher next year?

Look, I think it's a little early to call, Bill, but I think we've been pretty clear on what the levers are that drive it, and we'll be more prescriptive about it when we get into the course of next year.

Okay. And, Jeff – I'm just curious as to your perspective here with regard to the consolidation that we're seeing. First, Noble goes to Chevron. WPX goes to Devon. Now, Concho goes to Conoco. And these are basically at stock prices that are 20% to 30% of recent peak. And I'm just curious, in your discussions with, your clients and your customers is the sense that this is a fundamentally disrupted industry and that basically with regard to the lower 48 market opportunity, it's been fundamentally redefined. And at this juncture, the best alternative is to find a relatively safe piece of paper in the form of a consolidator. I mean, what are you hearing from your customers?

Yeah, look, Bill, no, I don't. I think it's what you see when, you know, market efficiencies start to, you know, come into play in the sense that, you know, these larger operations allow for better application of GNA for all. There's just a lot of cost associated with operating all these different companies. And so I suspect there's at some level, there's the opportunity to better leverage and make more cash flow by bigger operators. I think the value you're seeing, obviously the stock price is depressed, but nevertheless, the outlook, the long-term outlook and the importance of that production is still very relevant. And so, you know, in the discussions, I think that's, you know, that's more of what I hear is around how to be more efficient. Obviously, this is one way to be more efficient.

Got it. Thank you.

Thank you. Our next question comes from Chase Mulville with Bank of America. Your line is open.

Hey, good morning. I guess the first question I wanted to ask is about C&P Guide. You know, Lance, I think you got it up, you know, revenues 10% on a sequential basis. I guess, one, can you tell us how much benefit is coming from kind of year-end completion tool sales? And then number two, I would expect that margins would have been up given the strong sequential improvement in revenues. So kind of help us connect the dots on why margins will be flat.

Well, I think one, Chase, on your question about completion tools, I think we were clear in some of the, even in the guidance language, that completion tools will be more muted than they have been in recent fourth quarters, just given the size of the market and level of activity. In terms of the guide, I think you have lots of puts and takes. We have an improving North America structure. but we also have, again, the sort of the muted impact of completion tools that have traditionally led to accretive margins impact in the fourth quarter.

Okay. All right. That's helpful. And if I can just talk, you know, more specifically about North America, you know, I think Angie kind of asked about E&P CapEx, and, you know, obviously it will be up from here. I don't think it was quite clear if you thought it would be up on a year-over-year basis. But maybe if we can just talk to kind of frack fleets and kind of where you think the active frack fleet count is today and when we get to that kind of 200 level that you guys talked about being kind of required to hold production flat. And then any thoughts on when you think that rig activity will begin to meaningful recover?

Yeah, thanks. I think with the activity in Q1 offset by Q2, it's almost – I think overall, 21 will be slightly down from 20 in terms of overall, but again, that's sort of factoring out Q1 and Q2 offsetting, so let's take the second half of this year and project that forward. I think it feels better from here, and we see sequential recovery. I think it really comes down to You know, where does production exit in 21 will drive then how much activity in 2021? Excuse me. So I think the, you know, we can see a path to that in 2021 in terms of the 200 fleet sort of level. Again, it's going to depend on what is the appetite for producing barrels in North America inside of that time frame. You know, I think from an overall, when I think about the frac fleet, I also think about the health of the frac fleet, I mean for all of the market. And, you know, I think the pace of attrition is going to weigh on that, which means it could create more tightness sooner, even if we were somewhat below that.

Okay. And then what about when rig activity, when do you think that starts to pick up meaningfully?

Look, I think that follows the frac activity. So I would expect we would see, you know, rig activity picking up middle of next year, early part, probably middle of 2021, just to, you know, just because that sort of will follow probably the most frac intensity.

Okay, perfect. I'll turn it back over. Thanks, Jeff. Thanks, Lance.

Thanks. Thank you. Our next question comes from Sean Mecham with JP Morgan. Your line is open.

Thank you. Good morning.

Good morning. Good morning, Sean.

So, Jeff, thinking about normalized margins, you reset the cost base this year. You've indicated that you think both segments can generate normalized margins in the mid-teens in the next cycle. So in 15 through 19, normalized margins were maybe 10%, 11%. But you were able to get to that mid-teens level in 09 to 14. So it would be great if you could walk through the building blocks. to those normalized expectations, and particularly in D&E, which I think seems to be a little bit more of a heavier lift from here.

Well, thanks. You know, we've talked about a lot of what we're doing in D&E in terms of our iCruise technology, what we've done around other service lines in that business, whether it be wireline and even testing. And so, you know, I think that the building blocks are around testing A, getting that technology footprint implemented, which we're doing. And I've described sort of the uptick that we've seen in that even in the current market. So then, you know, sort of the next step from that is getting any amount of improved activity, which I believe we will see. And then in the international markets, you know, the capital oversupplies much less. I mean, in fact, you know, capital was getting tight in Q1 of this year. and it remains tight. And so I don't think it's quite realistic to expect to see some pricing improvement, which is another key component of how we step those margins up.

Yeah, thanks for that. That's helpful. And that dovetails into maybe talking a little bit more about the international cycle. So some of your IOC customers are committing to divert capital away from upstream oil and gas. Your independent customers are being forced by financial markets to commit more cash flow to their balance sheets. Seems like the next international cycle is going to be shorter cycle and more NOC focused. Is that fair, that long cycle maybe falls more out of favor in terms of mix of spend and just how you think Halliburton is positioned for that type of environment?

Well, look, I think we're very well positioned for that kind of environment. A, we're in all of the right locations. We've got relationships with all of the customers you're describing and I think that what we're doing with project management and our investment in lift and chemicals and those sort of things all play to that type of market even more so. And so I think that's a place where we've been very successful in the past, and I think that that will ultimately be even a more stable market. And And, again, I think oil and gas is so important on so many dimensions that I believe that we'll see more investment, even by OCs as we move forward into certain of these geographies anyway. But from a positioning perspective in the international markets, really like where we are and really like our technology footprint, and particularly for the kind of – you know, outlook you described. That informs our strategy, actually, key elements of our five strategic pillars.

Understood. Thanks, Jeff.

Thank you.

Thank you. Our next question comes from Scott Grubber with Citigroup. Your line is open.

Yes, good morning.

Morning. Morning, Scott.

Jeff, a couple times on the call you highlighted your improving position abroad. Obviously, a number of interesting initiatives there and some good momentum. As we look out into 2021, if we think about things on an exit-to-exit basis, you know, when the market is hopefully starting to grow again, I'm not asking for your market growth outlook, but how much of a delta do you think you'll be able to deliver versus, you know, whatever the underlying market delivers next year just given your initiatives?

Well, look, I think if that's a top-line question, I think we've had a history of outgrowing the market over the last several years, so we know how to grow. We're very much focused on driving profitable growth out of that market, and again, that's precisely what our strategy is intended to do. So I'm certainly comfortable with our ability to outperform the market from a growth perspective. equally comfortable with our ability to drive profitable growth. But I think what you'll see us doing is driving those things that drive a capital efficiency, so whether it's iCruise or it's digital or it's elements of our business that allow us to make more free cash flow out of that growth going forward. And, again, like I said, very excited about how that all shapes up and what the team's working on.

Got it. And then a question on how labs, a very interesting initiative, and you highlighted several areas of additional expertise. We have exposure to the energy transition theme and where you have some ability to generate revenues. But as we step back and kind of look at, you know, the overall revenue opportunity for both you and peers, it seems, you know, somewhat small, you know, over the next five or ten years without a material investment and potentially opening some new revenue channels. How do you think about that potential balance? How do you think about allocating R&D dollars and CapEx dollars and potentially some M&A dollars to the transition theme while also trying to deliver better returns next cycle? And how do you think about when it's potentially time to ramp those investments up a little more aggressively?

Yeah, look, let me be really clear. We are an oil field services company, and we believe the world. needs a lot of oil and gas for a very long time. And, you know, really, to the extent capital is shifted away by certain customers, more capital will be invested by others. But with that as a backdrop, I mean, clearly Halliburton Labs is exciting for us, but let's be really clear how we're doing that. We are, in effect, exchanging our expertise and access to our labs and business network for equity investment in early-stage companies. So our intent is not to invest capital dollars into that process today beyond what little support. In fact, not capital dollars. I mean, they're engaging in our, in effect, taking advantage of invested capital that we already have that we know we can take better advantage of doing this you know so we'll have a front row seat in this space uh we'll watch it closely we have a lot of skills that are applicable uh to helping companies be successful um in this space and we'll learn a whole lot about this over time but i want to be clear oil field services is where we're spending our capital today got it appreciate the call jeff thank you thank you

Thank you. Our next question comes from Kurt Hallett with RBC. Your line is open.

Hey, good morning, everyone. Morning, Kurt. Morning, Kurt. Hey, thanks so much for the summary so far today. I do want to actually extend the conversation a little bit more on that last topic, Jeff. You know, I think as is painfully aware for everybody on this call, investors are definitely shifting their focus, at least in the very near term. toward more of the renewable dynamic and clean energy dynamics, and it's good to see that you're going to have that front row seat through Hal Burton Innovation Labs. I think we've also seen a number of the major oil companies that are customers, viewers, you know, start to pivot their budgets, some more so than others, like BP, for example, you know, into more of the renewable space. And then I heard you quite clearly that you're an oil services company, and that's kind of where your capital is going to go. But I'm kind of interested on kind of delving beyond those dynamics and getting into how you may be looking longer term through this process. Do you think this shift on renewable energy is just going to fizzle out like it has in prior cycles, or do you actually see Halliburton playing a meaningful role in that dynamic and having it be a meaningful piece of the business and maybe having a third business line with completion and production and drilling and evaluation as part of the Halliburton portfolio in the future?

Yeah, look, I think that there will be the different forms of energy, renewable energy, alternative energy, they will all compete for space. And I believe oil and gas is very affordable and very effective, and it will be for a very long time. But that's not to say there won't be competitors in the space. Nuclear has been in the space a long time. And so, you know, what I think from a Halliburton Labs perspective, you know, it's looking at the disruption that happens of which there will be much. But oil and gas remains very competitive in that kind of environment. So I won't try to call does it fizzle, does it make it. What we'll have to do over the long term is compete and feel very good about oil and gas as a competitor.

Okay, that's fair. And my follow-up then is just along the lines of more of the traditional business dynamics. So you guys referenced, you know, a tighter market for both North America and international going forward. The prospect to get margin improvement on the heels of higher activity even without competition. So I was just wondering if you could help us frame that dynamic. You know, in the context of prior cycles, you know, you typically would get maybe incremental margins anywhere around, you know, 35% to maybe 50% with pricing power. You know, without the pricing power with the cost savings and the higher activity, you know, how are you guys thinking about the prospect for incremental margins as we move off the second half of 20 and go into 21? Yeah.

Yeah, Kurt, this is Lance. Look, I think everything that we've done around sort of the structural cost-cutting exercise that we've been through this year in major form will also continue on the edges as we move forward. But it was all built to reset our cost structure in order to drive better incrementals going forward. Now, look, I mean, Clearly, activity helps on a lower fixed cost base. You'll see improvement. So I expect that just activity alone will help bolster our incrementals. But clearly, if you add pricing on top of that, they are supercharged. And I think a lot of what this management team on is looking to deliver outsized incrementals, even in this market, in a recovery versus the historical sense.

Thank you. That concludes our question and answer session for today. I'd like to turn the conference back over to Jeff Miller for closing remarks.

Thank you, Shannon. Before we wrap up today's call, I would like to leave you with a few closing comments. Our third quarter performance demonstrates tangible results of Halliburton's execution from our five strategic priorities and the early impact of our earnings power resets. Our strong international business is already delivering returns and margin expansion, and I expect it will continue in the next up cycle. Our leaner North America strategy will enable us to both navigate through the current market conditions and be more profitable as the market recovers. Finally, our strategic actions boost our earnings power reset and free cash flow generation today and as we power into and win the eventual recovery. I look forward to speaking with you again next quarter. Shannon, please close out the call.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for joining and have a wonderful day.