Halliburton Company

Ladies and gentlemen, thank you for standing by, and welcome to Halliburton's second quarter 2021 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 second quarter 2021 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, 2020, Form 10Q for the quarter ended March 31, 2021, 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. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our second 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. Our performance in the second quarter demonstrates that our clear strategy is working well, and Halliburton's strategic priorities are driving value. Let's get right to the highlights. Total company revenue increased 7% sequentially as both North America and international top line continued to improve. Operating income grew 17% with solid margin performance in both divisions. Our completion and production division revenue increased 10% driven by the strength in US land completions. C&P delivered operating margin of 16% in the second quarter reaching three-year highs. Our drilling and evaluation division revenue grew 5%. Operating margin of 11% was about flat sequentially with rig count increases across multiple regions, offsetting a seasonal decline in software sales. North America revenue grew 12% as both drilling and completions activity marched higher throughout the quarter. Increased utilization and our significant operating leverage supported sequential margin expansion. International revenue grew 4% sequentially, with activity increasing in the key producing regions of the world despite COVID-19 disruptions in various countries. Finally, we generated strong free cash flow this quarter, bringing the year-to-date free cash flow to almost 425 million dollars. I'm pleased with the solid performance we delivered in the first half of this transition year. While recent market volatility only demonstrates the fact that we remain in a transition year, today I want to spend more time discussing what I believe will unfold over the next couple of years. First, let me reaffirm the outlook for the rest of this year. In the second half of 2021, we expect activity momentum to continue. Internationally, we still anticipate a double-digit increase in activity compared to the second half of 2020, even as certain countries continue to face COVID disruptions. With commodity prices remaining supportive, we believe activity in North America inches higher with drilling outpacing completions as operators build up well inventory for 2022. Looking beyond this year, let me describe the longer-term outlook. we believe that we are in the early innings of a multi-year upcycle. For the first time in seven years, we anticipate simultaneous growth in international and North America markets, and this view guides our business objectives and expected outcomes. So here's how we see the macro industry environment playing out over the next couple of years. First, we believe commodity prices will remain structurally supportive. With both demand resurgence in many economies and increased vaccine availability, we anticipate that global demand will continue to exceed supply, particularly to the extent OPEC Plus manages supply additions over the near term. As OPEC Plus's spare capacity returns to normalized levels over the next year, we believe sufficient pent-up global oil demand will support a call on both international and U.S. production. Second, Multiple years of underinvestment in the international markets coupled with the anticipated oil and gas demand growth give us confidence in a healthy international recovery. I believe the growth will be led by the national oil companies and focused on shorter cycle barrels. This activity should come with higher service intensity and higher relative capital spend around the wellbore as opposed to long cycle infrastructure investments. We expect mature fields, both onshore and offshore, to attract the most investment, while large-scale greenfield exploration will be limited to a few markets in Africa and Latin America. As a result, we anticipate double-digit annual international spending growth at least over the next couple of years. Third, we believe that a supportive commodity price environment, normalized levels of spare OPEC Plus capacity, and high decline rates in U.S. shale are constructive for North American spending. We expect drilling and completion spending in North America will also grow double digits annually over the next two years, although activity will not return to pre-pandemic levels. We expect private operators to opportunistically lead the activity comeback, while public E&Ps balance growth and returns. Fourth, I believe equipment availability will tighten much faster than most people think. In multiple product lines, we believe that equipment supply will fall behind anticipated demand. Today, both drilling and completions equipment are nearing tightness in North America, and we expect to see international markets tighten over the next few quarters. Given the scarcity of external capital sources, Many North American service companies do not currently generate sufficient cash to organically fund investment in new equipment, innovation, and maintenance, let alone generate sufficient returns. Internationally, multiple years of service company capex reductions should limit equipment availability. We expect increasing demand and tightening equipment capacity will lead to higher prices. Pricing is beginning to return in North America now, and is expected to lag internationally where contract durations are longer. I know the positive macro outlook I just described is a case for the rising tide lifting all boats. However, what matters is how Halliburton is positioned to outperform in this market. The improving macro environment marks the first time in a long time that we see an increasing level of customer urgency and a pivot back to what creates value in our industry. and this reinforces the power of Halliburton's unique value proposition. Throughout the downturn, Halliburton doubled down on our value proposition to collaborate and engineer solutions to maximize asset value for our customers. We continue to invest in technology, both digital and hardware, that maximizes value per barrel of production. We are expanding in new market segments, We are uniquely positioned in North America as the only integrated service company. Our collaborative culture and engineered solutions create sustainable, competitive advantage, setting Halliburton up to move from value creation to value capture. Here are a few examples of how Halliburton creates and captures value through our digital technologies. We are accelerating the deployment and integration of digital. both with our customers and internally. It creates technical differentiation, contributes to higher margins, and drives internal efficiencies. Over the first six months of this year, we grew the total user count on our iEnergy public cloud by 70%, and cloud revenue now constitutes almost 20% of our overall software revenues. We believe that this shift from on-prem to cloud software solutions drives faster growth. It also allows us to expand our revenue base with the same customers as we add new cloud native applications and increase the number of users within the same operator. Digital technology enables high-value remote and autonomous operations. We see steady growth of our remote monitoring of open-hole wireline operations. For example, this past quarter, we deployed virtual remote logging capabilities on a remote location in continental Europe, utilizing a well site specialist in Norway to remotely operate downhole tools. Virtual remote logging allows us to place highly specialized personnel at regional hubs rather than in the field, which leads to better resource utilization, fewer personnel at the well site, less HSE exposure, and higher margins. We also deploy digital and automation in our drilling operations across the globe, both on discrete and integrated contracts. Over 75% of our iCruise drilling system runs are fully automated today, and we expect all runs to have some automation by the end of this year. Across Europe and Eurasia, we increased the number of automated jobs five-fold since the beginning of this year. drilling automation directly translates to top-tier customer performance. For example, over the last two years, it allowed us to improve the rates of penetration by approximately 25% on a Middle East lump sum turnkey project and on another integrated contract in the North Sea. Moreover, digitalization and automation improve the resource efficiency of our own operations. In the second quarter, On an NOC project in Russia, we reduced rig site personnel by 40%. Separately, for an IOC in the Caspian, we captured cost efficiencies through using a remote operations center to monitor and control drilling jobs. Halliburton's differentiated drilling technologies penetrate the market and deliver results for our customers. Our multi-year investment in drilling technologies is paying off. and we believe we are on the right path to outgrow the market as international drilling activity ramps up. Our drilling technologies deliver top quartile performance on discrete contracts and form the core of our integrated project management offering. This past quarter, on a challenging gas project on Russia's Yamal Peninsula, the Halliburton project management team drilled eight horizontal wells 36 days ahead of plan with zero HSE incidents. In close collaboration with our customer, we maximized drilling performance and accelerated the operator's production. And lastly, we deployed digital solutions to optimize production. In the second quarter, we won a contract that highlights the enormous opportunity for digital adoption in the Middle East. After many years of collaboration with Halliburton on its digital transformation journey, Kuwait Oil Company expanded our automated production management contract in North Kuwait to all other assets in the country. KOC will use Decision Space 365, Halliburton's cloud-based subscription service for E&P applications, to automate work processes and accurately plan, forecast, and optimize production throughout KOC's portfolio. We are also expanding in new market segments. We expect to benefit from the significant growth potential of our specialty chemicals and artificial lift businesses, both in North America and internationally. As Halliburton increases participation in these new segments, we believe we will enjoy unique growth opportunities that are margin accretive and longer cycle. I'm pleased to announce that in the second quarter, Halliburton was awarded a seven-year production chemicals contract with a large IOC in Oman. Products for this new contract will be manufactured at Halliburton's new Saudi chemical reaction plant scheduled to open later this year. The strategic location of this plant will allow us to manufacture and sell specialty chemicals to other new customers throughout the region. In North America, we recently expanded our footprint in the downstream process and water treatment chemicals business through awards of two separate five-year specialty chemicals contracts from large refiners on the Gulf Coast. In our growing international artificial lift business, earlier this month we completed the first installation of our ESP contract in Kuwait. We believe this contract gives us scale in the region that will allow us to profitably grow our artificial lift business in other key markets. Finally, Halliburton has the broadest market exposure because we remain the only integrated service provider active in both North America and international markets. I believe this unique position allows us to capitalize on the double digit growth, equipment tightness, and resulting better service pricing in both markets. In the international markets, we expect that Halliburton's differentiated drilling equipment capacity tightens first. Over the next few quarters, As large tenders soak up capacity, I expect a return to the pre-pandemic environment when pricing improved in certain markets. In North America, specific equipment categories are already tight today. There is a high demand for low-emissions frac equipment and the supply is limited. Halliburton leads the market in low-emission solutions today and that gives us a structural pricing advantage to further maximize value in North America. Halliburton showcased our market-leading low-emission solutions at a recent event in Duncan, Oklahoma. Over the course of five days, several hundred people from more than 40 operators came to see our electric and dual-fuel equipment displays and operational demonstrations, including our 5,000-horsepower Zeus electric pumping unit, our new Express Blend blending system, E-Wench electric wireline unit, the Electric Tech Command Center, and an effective power generation solution. They didn't just see R&D plans and prototypes. Instead, they witnessed functional, job-ready equipment that works for our customers today and delivers unprecedented fracturing performance and reduced emissions. The Duncan event also showcased 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 fracturing performance in real time. It sets us apart from the rest of the hydraulic fracturing market and solidifies our industry leadership in intelligent fracturing. In the second quarter, we deployed it with two IOC customers in two different U.S. basins with excellent results. Operators achieved more consistent fracturing placement on every stage with improved cluster uniformity and management of offset frack hits. Smart Fleet, paired with our premium low-emissions equipment, creates a powerful combination of Halliburton's leading technologies to deliver superior production results, reduce environmental impact, and drive a strong margin differential for Halliburton. We believe that our unique value proposition, combined with customer urgency and equipment tightness in the U.S. and international markets, will improve pricing for our differentiated equipment and services. As our equipment reaches sustained levels of higher utilization in North America, we are now moving from passing on inflationary cost increases to setting net pricing higher, and we expect this trend to accelerate into 2022. Internationally, pricing will take longer to catch up to North America and will first manifest itself on discrete contracts and underserved markets. We expect large tenders to remain competitive but our strategic priority is clear, deliver profitable growth as the recovery unfolds. We expect improved pricing, higher utilization, and our significant operating leverage will deliver strong incrementals for Halliburton in this upcycle. In the face of both current and expected demand increases, we remain focused on improved returns and capital efficiency and expect our overall capital investment to stay in the range of 5% to 6% of revenue. Now, let's step back for a minute and think about what this means for Halliburton. My remarks often focus on the practical view of the near term, but I also have conviction about Halliburton's performance in the early innings of this upcycle. Based on the market assumptions outlined earlier, we expect revenue to grow at a mid-teens compound annual growth rate over the next two years. We also expect operating margins to expand by about 400 basis points by 2023 and thus return to 2014 margin levels. We are committed to driving significant free cash flow and returns for our shareholders as this multi-year upcycle unfolds. This earnings power results from the execution of Halliburton's strategic priorities. I am confident that our focus on technology differentiation, digital adoption, and capital efficiency positions us for profitable growth internationally and maximizing value in North America. Now, I will turn the call over to Lance to provide more details on our second quarter financial results. Lance?