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spk10: Good day and thank you for standing by. Welcome to the Halliburton Company second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Coleman, Senior Director of Investor Relations.
spk17: Hello, and thank you for joining the Halliburton Second Quarter 2023 Conference Call. We will make a recording of today's webcast available for seven days on Halliburton's website after this call. Joining me today are Jeff Miller, Chairman, President, and CEO, and Eric Correa, Executive Vice President and CFO. Some of today's comments 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, 2022, Form 10-Q for the quarter ended March 31, 2023, 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. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our second quarter earnings release and in the quarterly results and presentation section of our website. Now, I'll turn the call over to Jeff.
spk15: Thank you, David, and good morning, everyone. In the second quarter, Halliburton once again delivered strong results, driven by service quality, outstanding execution, and strong global demand for high-quality and high-performance oilfield services. Let's get right to the highlights. Total company revenue increased 14% year-over-year. Operating income grew 41% compared to second quarter of 2022 adjusted operating income. International revenue grew 17% year-over-year with strong activity in all markets. North America revenue grew 11% year-over-year. Our completion and production division revenue grew 19% year-over-year, while margins expanded by 320 basis points. Our drilling and evaluation division revenue grew 7% year-over-year, while margins expanded nearly 300 basis points. Finally, we generated $1.1 billion of cash from operations, $798 million of free cash flow, and repurchased approximately $250 million worth of shares during the quarter. Halliburton delivered an impressive first half of 2023. I'd like to thank our employees for these outstanding results. Thank you for executing on our mainstays and strategy deliveries. Now let's turn to what I see in the markets and what I believe is driving this multi-year upcycle's duration. Demand for oil and gas is strong, as demonstrated by demand growth of 2 million barrels per day in the first half of the year, compared to the same period last year. Oil and gas continues to demonstrate its critical role in the global economy, and meeting long-term demand requires sustained capital investment. Commodity prices remain attractive, When I talk to customers, they expect to work more, not less, and many of their activity plans extend into the next decade. Customers are settling in for a long duration upcycle. Overall, I expect upstream spending to grow in 2023 and beyond. For this year, I expect international and North America customer spending growth in the high teens and around 10% respectively compared to last year. despite reduced rig count and completion activity in the U.S. Now, let's start with our performance in the international markets. Revenue in the second quarter grew 17 percent compared to the same period of last year with strong activity across both divisions. Today, more than 20 percent of our tender pipeline represents incremental activity, which is as high as I can recall. Equally important, In addition to strong growth in the Middle East and Latin America, we see steady growth in activity across the globe. In this environment, I expect quality services and equipment to remain tight and pricing to continue to improve. Halliburton's strategy is to deliver profitable international growth. We are clear in how we do this, through differentiated technology offerings, selective contract wins, and a unique collaborative approach to working with our customers. Our differentiated technology and digital portfolio deliver high quality and high performance to our customers in all markets. Here are some examples. Our drilling and LWD technology platforms deliver better reliability, data capture, and efficiency for our customers while structurally expanding our margins. We build and deploy leading-edge drilling equipment that requires less capital to build and operate compared to the prior generation of equipment. One example, for a customer in the Middle East, Halliburton achieved a world record for the longest well ever drilled with a measured depth of over 51,000 feet using Halliburton's iCruise, iStar, and Logix technologies. Our leading position in completions technology is unlocking production for customers. We recently set another world record with the successful installation of the first 12-zone intelligent completion for a Middle East offshore customer using Halliburton SmartWell technology on our eCompletions platform. In our digital business, Equinor joined several other customers in selecting Landmark's Decision Space 365 as their standard subsurface data interpretation tool. During the second quarter, our Landmark software business closed on the acquisition of ResOptima, a leader in advanced ensemble modeling at the reservoir level. I'm excited about ResOptima's technology, both standalone and how it accelerates Landmark's roadmap for next-generation reservoir modeling technology. Now, turning to collaboration. Our value proposition to collaborate and engineer solutions to maximize asset value for our customers and our mainstay processes define how we consistently differentiate our services. This is the source of our competitive advantage. Our value proposition creates an environment where our customers and Halliburton collectively perform better. A recent example of this is Halliburton and VAR Energy's announcement of a long-term strategic relationship for drilling services. I expect we will demonstrate with VAR, as we have with other customers, that our collaborative approach creates significantly better operational and financial performance for both the customer and Halliburton. Our international strategy works. Our differentiated, cost-effective technologies and collaborative approach with customers empower us to strategically target work where we see a competitive advantage and a clear path to outperform financially. Turning to North America, we delivered a solid quarter. North America revenue grew 11% versus the same period last year, and margins were sequentially flat versus the last quarter. Looking ahead into the second half, I expect overall market activity in North America will be slightly lower than in the first half. More importantly, I expect Halliburton's North America margins to remain strong for the balance of the year. Our results in North America clearly demonstrate the success of our strategy to maximize value. We do this through capital efficiency, differentiated technology, and alignment with high-quality customers. During our last call, I outlined the steps we took in North America land to maintain pricing and deploy service capacity to attractive return opportunities or retire old equipment to further accelerate Halliburton's transition to our electric fleets. Executing on our strategy during the second quarter, we deployed additional Zeus fleets on multi-year contracts while retiring additional diesel equipment. Demand for our Zeus E-Fleets is strong. In fact, during the second quarter, we signed more multi-year Zeus contracts than in any prior quarter. The multi-year duration of these contracts provides both stability and secure economic returns, which furthers my confidence in the strength of our margins. I continue to be impressed by the performance of our Zeus E-Fleets and the optimization and efficiencies that come with scale. Our current system is the result of multiple iterations over several years and our continuous improvement processes. Every element of the value chain, from design and manufacturing to operations and maintenance, is continuously improved. Our advances in pump technology and system design result in higher horsepower density and pump efficiency. With Octave, we are automating equipment operation for consistency and reliability. We work to be the best at getting better. Today, Zeus is a fully integrated system. We deliver new equipment on time that works right out of the box. And on average this year, our E-Fleets pumped over 10% more hours than our high performance diesel fleets. For our customers, these improvements mean better performance and even lower total cost of ownership. For Halliburton, these improvements mean we further widen the moat around our growing E-Fleet business. In all markets, international and North America, I believe our strategies yield improved financial results. Let's look at the steady growth and margin expansion in D&E. This is the result of a structural change and technology overhaul that began several years ago. Our leading drilling platforms are lower cost and higher performance than the prior generation, which drives higher asset velocity and higher returns. In our testing business, our FlowConnect surface well testing service provides a safe, efficient, and automated platform to our customers while lowering our overall operating costs. In our wireline business, our examiner platform provides high-quality reservoir data, reduces subsurface uncertainty, and allows us to win high-value exploration work. Finally, across all product lines, Automation and remote operations are beginning to transform service delivery, driving higher quality and reliability while lowering total cost of service delivery. Looking through any quarterly fluctuations and seasonality, I fully expect D&E margins will continue to expand over time. Our strategy also generates strong free cash flow, and our capital return framework returns cash to our shareholders. I expect over 50% of free cash flow will be returned to shareholders this year. I am pleased with where we are today. In the last 18 months, we retired $1.2 billion of debt, strengthening our balance sheet. Twice increased our quarterly dividend, which forms the stable foundation of our capital return framework. and finally repurchased approximately $600 million worth of shares, including approximately $250 million this quarter. I fully expect that the execution of our strategy in this long-duration upcycle will deliver better returns, more free cash flow, and more cash back to shareholders. Now I'll turn the call over to Eric to provide more details on our financial results.
spk12: Eric? Thank you, Jeff, and good morning. Before I begin the financial review, I'd like to discuss one item. In the second quarter, we kicked off our SAP S4 upgrade and recorded a $13 million expense, or about one penny per diluted share, in our Q2 operating results. Future expenses will be both included in our operating results and in our quarterly guidance. Here are a few more details on the upgrade. This upgrade will take place over the next two and a half years, concluding around Q4 2025. We expect it to provide efficiencies, cost savings and advanced analytics that will benefit Halliburton and our customers. The total project investment should be approximately $250 million, $50 million this year and $100 million in each of the next two years. Upon completion, we expect significant ongoing savings, which will pay back the investment in about three years. Now, let me move on to our quarterly results. Our second quarter reported net income per diluted share was 68 cents, excluding the effect of the transaction in Argentina, Our adjusted net income per diluted share was 77 cents. Total company revenue for the quarter was $5.8 billion, a 2% sequential increase, while operating income was $1 billion, a sequential increase of 4%. Operating margin for the company was 17.4% in the second quarter, a 329 basis points increase over second quarter of 2022 adjusted operating margin. These results were primarily driven by strong international activity across both divisions, along with improved pricing. Beginning with our completion and production division, revenue in the second quarter was $3.5 billion, a 2% sequential increase while operating income was $707 million, an increase of 6% sequentially. CNP delivered an operating income margin of 20%. These results were due to increased activity from multiple product lines in international markets and higher artificial lift activity in North America. In our drilling and evaluation division, revenue in the second quarter was $2.3 billion, a sequential increase of 2%, while operating income was $376 million, a sequential increase of 2%. D&E delivered an operating income margin of 16%. These results were driven by higher drilling activity and increased fluid services in key regions, including Middle East and Latin America, partially offset by seasonal roll-off of software sales across multiple regions. Now let's move on to geographic results. Our second quarter international revenue increased 7% sequentially due to solid product sales, activity increases, and pricing gains across multiple product lines. These results were impacted by lower software sales in the eastern hemisphere. In North America, Revenue in the second quarter was $2.7 billion, a 2% decrease sequentially. This decline was primarily driven by decreased stimulation activity in U.S. land, partially offset by increased artificial lift activity in U.S. land and higher activity across multiple product service lines in the Gulf of Mexico. Latin America revenue in the second quarter was $994 million, a 9% increase sequentially, resulting from higher completion tool sales in Brazil and improved activity across multiple product service lines in Mexico and Argentina. Partially offsetting this increase is reduced activity in the Caribbean across multiple product service lines. Europe-Africa revenue in the second quarter was $698 million, a 5% increase sequentially. This improvement was primarily driven by increased fluid services across the region and higher completion tool sales in Angola and Norway. Middle East-Asia revenue in the second quarter was $1.4 billion, a 6% increase sequentially largely resulting from higher completion tool sales in Saudi Arabia and higher Y-line activity, drilling services, and stimulation activity in the region. This improvement was partially offset by decreased project management activity in Saudi Arabia. Moving on to other items. In the second quarter, our corporate and other expenses was $59 million. For the third quarter, we expect our corporate expenses to increase by about $5 to $10 million. As noted earlier, in the second quarter, we spent $13 million, or about one penny per diluted share, on SAP S4 migration, which is included in our operating results. For the third quarter, we expect these expenses to be approximately $20 million, or about two pennies per diluted share. Net interest expense for the quarter was $92 million. The increase this quarter was primarily related to the reduction of interest income as a result of the Argentina transaction. For the third quarter, we expect this expense to remain approximately flat. Other, net expense for the quarter was $32 million. For the third quarter, we expect this expense to remain approximately flat. Our effective tax rate for the second quarter came in at approximately 21.3%. Based on our anticipated geographic earnings mix, we expect our third quarter effective tax rate to increase by approximately 50 basis points. Capital expenditures for the second quarter were $303 million. We anticipate that for the full year, capital expenditure will be approximately 6% of our revenue. Our second quarter cash flow from operations was $1.1 billion, and free cash flow was $798 million. We expect to generate free cash flow for the full year 2023 that is 30% to 40% higher than last year. Finally, we repurchased $248 million of our common stock during the second quarter. Turning to our near-term operational outlook, let me provide you with some comments on how we see the third quarter unfolding. In our completion and production division, we anticipate sequential revenue to be essentially flat with the second quarter and margins to remain approximately flat. In our drilling and evaluation division, we anticipate sequential revenue to increase in the low single digits and margins to increase 25 to 75 basis points. I will now turn the call back to Jeff. Thanks, Eric.
spk15: Let me summarize our discussion today. Our international business is growing at a strong pace across all regions. I expect our differentiated technology offerings, selective contract wins, and our unique collaborative approach to working with our customers to deliver higher international margins and growth for Halliburton. Our strategy to maximize value in North America is driven by capital efficiency, differentiated technology, and alignment with high quality customers. I expect this will allow us to generate solid financial performance. I expect that the execution of our strategy in this long duration upcycle will deliver better returns, more free cash flow, and more cash back to shareholders. And now let's open it up for questions.
spk10: As a reminder to ask a question, please press star 11 and wait for your name to be announced. To withdraw your question, please press star 11 again. In the interest of time, we ask that you limit yourself to one question and one follow up. Our first question will come from the line of David Anderson with Barclays.
spk04: Hi, good morning, Jeff. So North America is slowing down a bit. International started accelerating to be expected. But I was wondering if you could perhaps take a little bit of a step back and talk about how you see the primary markets trending on the next kind of 12 to 24 months in terms of NAM, Middle East, and offshore. Maybe set LATAM aside, which is an extended growth market. I guess my question is, in terms of the cadence, how do you see the trajectory of each of these markets playing out? You lowered NAM spend, I think you were saying, 10% up from down from 15%. So is that kind of flattish in the second half of the year? And then how do you see the ramp up in the Middle East and then the timing of offshore? I know it's a lot, but maybe kind of this bigger picture, how you see those markets trending?
spk15: Certainly. And look, I'm as confident as I have ever been in the duration, the long duration of this cycle. And that's rooted in attractive commodity price and really the growth in demand for oil. So I'll start there. I think the offshore piece of this, we're super excited about it. If we include Gulf of Mexico, we're eclipsing 50% of our revenues internationally are offshore. All of our service lines are represented there. I think the cadence as I look over the next year, let's say year or so, it just takes time to get this work underway. I'm just back from a trip and we were looking at projects that You know, they have to get rigs, get plans, get agreement from governments. But it's starting, and, you know, I expect it continues to build into 24 and beyond. I mean, these are the kind of projects that, you know, take a decade to do. And so, you know, Middle East, I see the same thing. You know, the number of rigs being mobilized in the Middle East, that takes some time to do. But we are beginning to see it. We are seeing it. But my view is that will continue to build over the next, 12 or 24 months. Coming back to North America, you know, I gave you the, you know, an outlook on the second half of the year, but I think what's most important is when I look into 24, you know, I mean, commodity markets are getting more constructive, oil prices firming up, gas seems to have found its footing, you know, and expect that ramps. We're seeing some consolidation with customers, and that means that bigger customers do more planning through the cycle. They're committed to executing plans over a longer term. And service intensity in North America never lets up. In fact, it only gets harder. You've got to work harder just to stand still. So all of this is constructive for Halliburton's business as I look out into 2024 and beyond. And, you know, in some of that, in North America, it's just it's backed up by the pace of E-Fleet contracts that we're seeing. You know, we've had more contracts last quarter. We've even signed another one this quarter. And that's really for work that starts in 24 and goes 24, 25, 26. So, you know, there are a lot of reasons that I see 24, you know, looking super strong for us.
spk04: And then, Jeff, maybe we can just kind of get into the heart of kind of where a lot of the chatter has been during the quarter. Obviously, rig counts have been falling. We've been hearing about pricing and pumping getting softer. Of course, a lot of this comes from your competitors who would love to pay less for these services. Can you give us some insight into kind of what you're seeing in the pricing trend? Is the softness kind of really stuck on the Tier 2 side? In your comments, you talked about your Zeus leads holding up. Is the Tier 4 holding up? What do you see on the competitive pricing side? If you can kind of give us some more context to hear, because we just kind of hear these kind of generalized comments, and I have a feeling there's more to it. I was wondering if you could provide some more context, please.
spk15: Well, I think that, you know, I've told you what we're doing, which is retiring older equipment and transitioning to electric. And so I think that's an important factor. You know, we really, you know, don't see – We'll participate in the bottom part of that market, particularly at all, really, with that spot-type market. You know, most of our work, I'd say over 70% of our work's with large privates and publics. And so, you know, and these are customers that execute their plans. They do execute their plans. And from our perspective, you know, the performance, we continue to see our performance improving, okay, even as we, you know, add electric, but also even on our diesel fleets. And, you know, differentiated service performance, technology is getting better. I mean, those are things that drive not only margins, but they're also part of the dialogue around, you know, what's it take to actually run a high-performing business, and that requires engines, transmissions, and people. And we really haven't seen any deflation in those things.
spk10: Our next question comes from a line of Arun Jayaram with JP Morgan.
spk16: Hey, Jeff, maybe just a follow-up to David's question. One question we get is, you know, how do softer conditions called in the spot market influence pricing on your dedicated fleets or, you know, as you start some of your price negotiations on 2024 in North America?
spk15: Well, look, I think that, you know, again, we've got little exposure to the spot as I described. I would say broadly speaking, As we look ahead, high-performance, high-quality services really matter, and we see a lot of bifurcation there. And we're going to continue with our E-Fleet rollout, which is sort of a whole different category of service. It's actually lower cost or better performance for our clients, but also lowers their total cost of ownership. And so, you know, I would say we're – planning to deliver high-quality service, and we really don't see any point in burning up equipment with no margins. That's not a good direction. It actually has longer-lasting impacts if surface equipment isn't taken care of.
spk16: Okay. Fair enough. Jeff, I want to get your thoughts on offshore. Obviously, one of the trends the market has been observing is just strength in offshore markets. Could you talk about how is positioned from a product line perspective offshore, and what you're seeing perhaps in the Gulf of Mexico to mitigate maybe some of the risk of lower activity in North America?
spk15: Well, look, we're heavily levered towards the offshore business. In fact, all of our service lines participate in our offshore business. And, you know, we've got leading positions and in in in cementing and hct um you know our drilling business we've talked a lot about where we're going with drilling and wireline um and so you know that's an important business for us um it is higher service intensity which means that it takes more equipment to do um and and and so we really like that i expect gulf of mexico continues to to strengthen And, again, we talked about last quarter sort of the percentage of our offshore international business, anyway, as a percentage, you know, continues to grow. And so I think that, you know, the offshore business is going to be very important for Albertan in the Gulf of Mexico and all around the world.
spk10: Our next question comes from the line of James West with Evercore ISI.
spk08: Hey, good morning, Jeff. Morning, Eric.
spk11: Morning. Morning, James.
spk08: So, Jeff, with your Zeus rollout, your E-Fleet rollout here, you talked about some visibility or good visibility into 24 and even 25 at this point. As these E-Spreads come to the market, are you kind of one-for-one retiring the Tier 4 assets that you have, or do those continue to work and so it's a net increase in horsepower?
spk15: Look, it's not a perfect science, in terms of one in one out, but it is generally one in one out and over over time. And so you know, the type of equipment, for example, that we would retire is typically higher cost to maintain. And so when we retire a fleet, we sort of blow the parts back into the current fleet, and that lowers the cost or improves the margins of the existing fleet. But you know, we're replacing say replacing, we're adding equipment only as it's demanded by clients. So that's the difference. We're not building it to replace it. We're building it for contracts where there is commitment to return the capital and also the return on capital inside of the contract. And so that's what's driving the pace of replacement.
spk08: Okay. Okay. That makes sense. And then on the international and particularly offshore contracts, side, as these rigs are mobilizing, getting set up, you know, government signing contracts, et cetera, and the companies, your customers are sourcing, you know, the service equipment and service products, what's the conversation like with them around pricing and kind of, or is there even really much of a concern about pricing because they just need to get the equipment?
spk15: Well, I think that we're seeing pricing moving up, whether it comes in the form of a tender or a dialogue, and a lot of that is around tightness. It's also around efficiency and performance of our equipment. We've just done a lot to structurally overhaul and technically overhaul a lot of our drilling business, and I talked a bit about some of the wireline things that we're doing. So the dialogue certainly prices up And it comes in a few forms, whether it's a negotiation or a discussion, or in some cases we call and say we just don't have it, which is, you know, again, driving prices up.
spk10: Our next question comes from the line of Neil Mehta with Goldman Sachs.
spk01: Yeah, thanks so much. Jeff, maybe I start with you to talk a little bit about return of capital to shareholders, and I'll let you go anywhere you want with this. You did buy back $250 million worth of stock in the quarter, and you've been pretty steady in terms of that dividend coming back to shareholders as well. As you think about the repurchase program, how aggressive do you Do you view this as more of a ratable program or an opportunistic one?
spk15: I think that we've committed to return at least 50% free cash flow back to shareholders. The reality is it's going to be more than that. I think what we do is we build the base case around what we return to shareholders and then we're able to flex up from that. I think that's some of what you're seeing. Barak, do you want to add to that?
spk12: I think you covered it well. The main focus in the organization right now is to continue to generate free cash flow. That's really the first priority and ensure that we have enough. Actually, we're generating enough free cash flow right now. to continue to buy back share, but also to continue to work and further strengthen our balance sheet. So if we look forward, we intend to do both, even though the bias right now is clearly on continuing to buy back more shares.
spk01: Thanks, Eric. Another follow-up is for you. You made some comments around this in the script, but Any Q3 considerations you want us as a market to keep in mind as we think about building the sequential model into next quarter?
spk12: No, I think we covered it in the prepared remark, and Jeff mentioned it as well as you look throughout the remainder of the year. I know there are a lot of questions on North America, so maybe I'll repeat what we indicated, which is H2 is going to be a little lower than H1 for North America. Q3 is a bit down compared to Q2, and we're expecting Q4 to be flat relative to Q3, considering there are some holidays and seasonality as well. So you combine that with the guidance by division, and I think it gives you a really good perspective on how we see the second half of the year unfolding.
spk10: Our next question comes from the line of Scott Gruber with Citigroup.
spk05: Yeah, I wanted to say on the second half outlook, you know, typically, you know, frack activity does slow down into the holiday season, but the gas forward curve is actually quite encouraging today, Jeff, as you mentioned in your conversation earlier. You know, the conversations with clients today? Are they suggesting that they're going to bring back some gas completion activity later this year? Or is that more likely to wait until next year after the budget reset process?
spk15: Look, I think that I'm not going to try to call tops and bottoms. I'll let others do that. But I think that the outlook I described for 2024 is consistent with what you just described. And so when we see that, you know, I don't have precision around the date, but there's no question that gas is firming up and that there'll be LNG takeaway and that the gas market will be busy. It's a question of the date, but I expect that, you know, build in 24. Could it come sooner? Obviously it could. And I would say oil price is quite constructive today as well, which may bring some smaller players back into the market. But all of these things structurally from a cycle standpoint are very, very positive. And as I look at 24, you know, sometime between now and there, we see, you know, improving activity.
spk05: Got it. That makes sense. Yeah, and I did want to touch on the oil side as well. You know, obviously, last year, oil productivity was down. And, you know, that was starting the conversation around, you know, the need just to drill more wells to kind of offset that productivity loss. You know, this year we do seem to be at maybe a localized plateau on well productivity on the oil side in the U.S., but, you know, is that part of the conversation here with customers that, you know, over time that they're going to have to be, you know, drilling more wells in the U.S., given that productivity decline, is that kind of top of mind as they kind of start to think about 24 needs, or is that a kind of off the horizon still?
spk15: No, I mean, let me frame that differently. I think that this is my point around service intensity, meaning it takes more work to produce the same over time unless there are step changes in terms of either efficiency or insight. And so, you know, we talk about our smart fleet offering quite often, but the reality is that's part of our technology. portfolio to help customers better understand productivity of ROC and where the frac is going and how to design fracs that can be more productive over time. So I think that's an important step. But there is no question when we think about North America, and we even saw that during the COVID, you know, the pace at which North America declined following sort of the near slowdown or near stoppage in North America. And so you know, I think those are well understood by the market and our clients. And so when I think about the way forward in North America, that features in it and is clearly part of our view as to why, A, there'll be more activity over time, even to stand still, and further, why E-fleets in our case are so valuable because they really do help clients achieve better productivity and lower costs. So I think that That's one of the reasons I'm so focused on that, and I think that's how it plays out.
spk10: Our next question comes from the line of Luke Lemoine with Piper Sandler.
spk02: Hey, good morning, Jeff Herrick. Jeff, morning. Jeff, nice job on that North American margins and QQ. I mean, those flat, and you talked about those remaining strong for the balance of the year. It kind of sounded like you're not expecting these to be materially different from the first half. Is that correct?
spk14: That's correct.
spk02: Okay. And then, Eric, 2Q D&E margins were better than your guide. Can you maybe walk us through what changed relative to your expectations?
spk12: Yeah, I think, I mean, there's a lot of moving parts in the D&E margins. I think we just delivered better across the board in most product lines and in all of the regions. There's really not a lot more to say about that solid execution from all product lines across the globe.
spk02: Okay, got it. Thanks a bunch.
spk10: Our next question comes from a line of Stephen Gingaro with Stiefel.
spk03: Hi, can you hear me?
spk09: Yep. Yes.
spk03: Oh, sorry. That got cut off. Thanks. Good morning, everybody. Two things for me. The first is, you know, we've written and we've heard from others that You know, the consolidation in the U.S. frack business and just the better behavior by you and many others has led to a different dynamic in the business. I'm just curious, as you've seen a little bit of, obviously, rig count softness and frack spreads have come off a bit. Are you seeing, can you visibly see any different approach to pricing across the industry yet? Is it too early to tell? Just curious if there's any proof of concept here yet.
spk15: Look, I think it's quite different, and I think it's different along a couple of dimensions. Number one, quite different in the sense of the type of equipment that we are putting into the market with eFlix. So that's a very different dynamic than we've seen in the past, and I think that the pull for those from customers is meaningful. And so that's one key difference. And I think from the other perspective, the bifurcation of performance is an important point. And I think that we've seen quite a difference in our performance, and that still matters. In fact, that matters a lot. And I think that sort of the overall, we've always replaced our equipment, invested in our equipment and technology. But I think that the idea that equipment runs in perpetuity or that it can be run to the ground and then somehow rebuilt is not realistic. And so I think there's some understanding around that today that there probably wasn't before.
spk03: Thank you. And you touched on this a little bit earlier, but when we hear from EMPs and just industry data in general that well quality is deteriorating a bit, is that a net positive do you think for the, for the completion side of your business or how do you think about the, the impact that has, or is it kind of too gradual to really jump out?
spk15: Yeah, look, I mean, what that drives is more technology and more service intensity, both. I mean, that, that's the upshot of what you just described for our customers. And, you know, We see that. And so we are, like I said, I'm quite confident about, I'm confident in North America's contribution to the overall oil and gas supply for the world. It's important. And sustaining that is going to require investment and a lot of technology and a lot of just repetitions. So I think it's setting up very well for Halliburton.
spk10: Our next question comes from the line of Mark Bianchi with Cowan.
spk07: Hi, I just I want to ask one more on sort of the North America outlook for the back half. I know it's been asked several times, but just because so many people seem to be focused on that. I think people are surprised by fourth quarter being flat quarter over quarter and margins seemingly holding in. Would you anticipate that overall the profit for Halliburton or the EPS should be flat to up in the fourth quarter versus the third quarter?
spk15: Yes. I mean, we're not going to guide Q4, but directionally everything is intact.
spk07: Yep. OK, great. Thanks for that, Jeff. The other one I had is just a bit of a modeling question on the corporate line for you, Eric, because we've got this new software element that we need to include. So if I take those two together, the corporate plus the software, it looks like we should be something in the mid 80s of a negative number. And then that should be sort of on a 20 to 25 million dollars run rate beyond that. beyond third quarter. Is that the right way to think about that software impact?
spk12: Yeah, I mean, we guide the two separately so as to give you clarity as to what they are. So we guided corporate going into Q3 to be 5 to 10 million up from Q2. That's essentially a timing issue. We were a bit under guidance in Q2, so that gives you the corporate number. And then in terms of SAP, which we guide as a separate line. We guide it to $20 million, or about two pennies. And what we'll do on that one, we gave you the yearly numbers, so 50 this year, 100 next year, 100 the following year, so you can kind of run your models on a yearly basis, and then we'll give you more color, quota to quota, because some of it depends on how the rollout is happening, right?
spk13: So we want to do that on a quota to quota basis.
spk10: Our next question comes from the line of Kurt Khalid with Benchmark.
spk06: Hey, good morning, Jeff and everybody. Hey, Jeff, I'm kind of curious on the international front, right? Are you seeing the prospect of maybe an acceleration in activity, whether that be in the Middle East or Latin America? maybe relative to the beginning part of the year. I know there have been some questions about, you know, the OPEC production cuts, and that may be having a negative impact on activity, but I'm kind of curious as to whether or not, you know, there's a situation, you know, in the Middle East where there's a greater sense of urgency and maybe a push to move some projects a little more quickly.
spk15: OPEC cuts absolutely do not have an impact on activity. Be crystal clear around that. These are customers with plans that are meeting global demand, and it is unrelated to cuts in OPEC. I would say that the growth, I wouldn't describe it as an acceleration. I would describe it as continued growth. And that's very positive. That's a good thing because that's consistent with the long duration nature of this cycle. So it's not a spike to come at some point in time in the future to then level out. I think what we're going to continue to see is steady growth in activity, kind of like we've seen, although, you know, does the pace pick up? It might some as, you know, in fits and starts as big projects get started. But I think overall, This is a great setup for Halliburton in terms of timing and pacing and absolutely consistent with how we see the length of this cycle, meaning it's going to take quite a period of time as barrels are invested in and reinvestment is made.
spk06: Okay, that's great. I appreciate that, Keller. Now, maybe then, you know, focusing again on the North American market, you've given some clear deep expectations on what you see there. With the fact that you guys are, you know, getting rid of older equipment, focusing on E-Fleet, you mentioned a couple long-term contracts. How do you see the prospects for Halliburton to continue to outpace the market if the market's just going to be flat?
spk15: Well, I think I've described what we're going to do. And I think that, you know, sort of the, I mean, we're focused on what we're doing in terms of, you know, you mentioned E-Fleets, but that's an important thing. And that's an important opportunity for Halliburton and somewhat unique for Halliburton. I also believe that it's, you know, as I look out into the future, You know, as I said, I see we talked extensively about service intensity and technology, and I think both of those are going to be very high demand as we get, you know, into 24. And I would say for what we do, it's in high demand now. And so, you know, I think the long term for North America clearly points towards what we do uniquely at Halliburton. And so I feel pretty confident about that.
spk10: That concludes today's question and answer session. I'd like to turn the call back to Jeff Miller for closing remarks.
spk15: Yes, thank you, and thank you all for participating in today's call. Let me close out the call with this. Halliburton delivered an impressive first half of 2023, and I fully expect that the execution of our strategy in this long-duration upcycle will deliver better returns, more free cash flow, and more cash to shareholders. Look forward to speaking with you next quarter. Please close out the call.
spk10: This concludes today's conference call. Thank you for participating. You may now disconnect. you Thank you. Thank you. Good day and thank you for standing by. Welcome to the Halliburton Company second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Coleman, Senior Director of Investor Relations.
spk17: Hello, and thank you for joining the Halliburton Second Quarter 2023 Conference Call. We will make a recording of today's webcast available for seven days on Halliburton's website after this call. Joining me today are Jeff Miller, Chairman, President, and CEO, and Eric Correa, Executive Vice President and CFO. Some of today's comments 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, 2022, Form 10-Q for the quarter ended March 31, 2023, 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. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our second quarter earnings release and in the quarterly results and presentation section of our website. Now, I'll turn the call over to Jeff.
spk15: Thank you, David, and good morning, everyone. In the second quarter, Halliburton once again delivered strong results, driven by service quality, outstanding execution, and strong global demand for high-quality and high-performance oilfield services. Let's get right to the highlights. Total company revenue increased 14% year-over-year. Operating income grew 41% compared to second quarter of 2022 adjusted operating income. International revenue grew 17% year-over-year with strong activity in all markets. North America revenue grew 11% year-over-year. Our completion and production division revenue grew 19% year-over-year, while margins expanded by 320 basis points. Our drilling and evaluation division revenue grew 7% year-over-year, while margins expanded nearly 300 basis points. Finally, we generated $1.1 billion of cash from operations, $798 million of free cash flow, and repurchased approximately $250 million worth of shares during the quarter. Halliburton delivered an impressive first half of 2023. I'd like to thank our employees for these outstanding results. Thank you for executing on our mainstays and strategy delivery. Now let's turn to what I see in the markets and what I believe is driving this multi-year up-cycles duration. Demand for oil and gas is strong, as demonstrated by demand growth of 2 million barrels per day in the first half of the year, compared to the same period last year. Oil and gas continues to demonstrate its critical role in the global economy, and meeting long-term demand requires sustained capital investment. Commodity prices remain attractive, When I talk to customers, they expect to work more, not less, and many of their activity plans extend into the next decade. Customers are settling in for a long duration upcycle. Overall, I expect upstream spending to grow in 2023 and beyond. For this year, I expect international and North America customer spending growth in the high teens and around 10% respectively compared to last year. despite reduced rig count and completion activity in the U.S. Now, let's start with our performance in the international markets. Revenue in the second quarter grew 17 percent compared to the same period of last year, with strong activity across both divisions. Today, more than 20 percent of our tender pipeline represents incremental activity, which is as high as I can recall. Equally important, In addition to strong growth in the Middle East and Latin America, we see steady growth in activity across the globe. In this environment, I expect quality services and equipment to remain tight and pricing to continue to improve. Halliburton's strategy is to deliver profitable international growth. We are clear in how we do this. Through differentiated technology offerings, selective contract wins, and a unique collaborative approach to working with our customers. Our differentiated technology and digital portfolio deliver high quality and high performance to our customers in all markets. Here are some examples. Our drilling and LWD technology platforms deliver better reliability, data capture, and efficiency for our customers while structurally expanding our margins. We build and deploy leading-edge drilling equipment that requires less capital to build and operate compared to the prior generation of equipment. One example, for a customer in the Middle East, Halliburton achieved a world record for the longest well ever drilled with a measured depth of over 51,000 feet using Halliburton's iCruise, iStar, and Logix technologies. Our leading position in completions technology is unlocking production for customers. We recently set another world record with the successful installation of the first 12-zone intelligent completion for a Middle East offshore customer using Halliburton SmartWell technology on our eCompletions platform. In our digital business, Equinor joined several other customers in selecting Landmark's Decision Space 365 as their standard subsurface data interpretation tool. During the second quarter, our Landmark software business closed on the acquisition of ResOptima, a leader in advanced ensemble modeling at the reservoir level. I'm excited about ResOptima's technology, both stand-alone and how it accelerates Landmark's roadmap for next-generation reservoir modeling technology. Now, turning to collaboration. Our value proposition to collaborate and engineer solutions to maximize asset value for our customers and our mainstay processes define how we consistently differentiate our services. This is the source of our competitive advantage. Our value proposition creates an environment where our customers and Halliburton collectively perform better. A recent example of this is Halliburton and VAR Energy's announcement of a long-term strategic relationship for drilling services. I expect we will demonstrate with VAR, as we have with other customers, that our collaborative approach creates significantly better operational and financial performance for both the customer and Halliburton. Our international strategy works. Our differentiated, cost-effective technologies and collaborative approach with customers empower us to strategically target work where we see a competitive advantage and a clear path to outperform financially. Turning to North America, we delivered a solid quarter. North America revenue grew 11% versus the same period last year, and margins were sequentially flat versus the last quarter. Looking ahead into the second half, I expect overall market activity in North America will be slightly lower than in the first half. More importantly, I expect Halliburton's North America margins to remain strong for the balance of the year. Our results in North America clearly demonstrate the success of our strategy to maximize value. We do this through capital efficiency, differentiated technology, and alignment with high-quality customers. During our last call, I outlined the steps we took in North America land to maintain pricing and deploy service capacity to attractive return opportunities or retire old equipment to further accelerate Halliburton's transition to our electric fleets. Executing on our strategy during the second quarter, we deployed additional Zeus fleets on multi-year contracts while retiring additional diesel equipment. Demand for our Zeus E-Fleets is strong. In fact, during the second quarter, we signed more multi-year Zeus contracts than in any prior quarter. The multi-year duration of these contracts provides both stability and secure economic returns, which furthers my confidence in the strength of our margins. I continue to be impressed by the performance of our Zeus E-Fleets and the optimization and efficiencies that come with scale. Our current system is the result of multiple iterations over several years and our continuous improvement processes. Every element of the value chain, from design and manufacturing to operations and maintenance, is continuously improved. Our advances in pump technology and system design result in higher horsepower density and pump efficiency. With Octave, we are automating equipment operation for consistency and reliability. We work to be the best at getting better. Today, Zeus is a fully integrated system. We deliver new equipment on time that works right out of the box. And on average this year, our E-Fleets pumped over 10% more hours than our high performance diesel fleets. For our customers, these improvements mean better performance and even lower total cost of ownership. For Halliburton, these improvements mean we further widen the moat around our growing E-Fleet business. In all markets, international and North America, I believe our strategies yield improved financial results. Let's look at the steady growth and margin expansion in D&E. This is the result of a structural change and technology overhaul that began several years ago. Our leading drilling platforms are lower cost and higher performance than the prior generation, which drives higher asset velocity and higher returns. In our testing business, our FlowConnect surface well testing service provides a safe, efficient, and automated platform to our customers while lowering our overall operating costs. In our wireline business, our examiner platform provides high-quality reservoir data, reduces subsurface uncertainty, and allows us to win high-value exploration work. Finally, across all product lines, Automation and remote operations are beginning to transform service delivery, driving higher quality and reliability while lowering total cost of service delivery. Looking through any quarterly fluctuations and seasonality, I fully expect D&E margins will continue to expand over time. Our strategy also generates strong free cash flow, and our capital return framework returns cash to our shareholders. I expect over 50% of free cash flow will be returned to shareholders this year. I am pleased with where we are today. In the last 18 months, we retired $1.2 billion of debt, strengthening our balance sheet. Twice increased our quarterly dividend, which forms the stable foundation of our capital return framework. and finally repurchased approximately $600 million worth of shares, including approximately $250 million this quarter. I fully expect that the execution of our strategy in this long-duration upcycle will deliver better returns, more free cash flow, and more cash back to shareholders. Now I'll turn the call over to Eric to provide more details on our financial results. Eric?
spk12: Thank you, Jeff, and good morning. Before I begin the financial review, I'd like to discuss one item. In the second quarter, we kicked off our SAP S4 upgrade and recorded a $13 million expense, or about one penny per diluted share, in our Q2 operating results. Future expenses will be both included in our operating results and in our quarterly guidance. Here are a few more details on the upgrade. This upgrade will take place over the next two and a half years, concluding around Q4 2025. We expect it to provide efficiencies, cost savings, and advanced analytics that will benefit Halliburton and our customers. The total project investment should be approximately $250 million, $50 million this year and $100 million in each of the next two years. Upon completion, we expect significant ongoing savings, which will pay back the investment in about three years. Now, let me move on to our quarterly results. Our second quarter reported net income per diluted share was 68 cents, excluding the effect of the transaction in Argentina, Our adjusted net income per diluted share was 77 cents. Total company revenue for the quarter was $5.8 billion, a 2% sequential increase, while operating income was $1 billion, a sequential increase of 4%. Operating margin for the company was 17.4% in the second quarter, a 329 basis points increase over second quarter of 2022 adjusted operating margin. These results were primarily driven by strong international activity across both divisions along with improved pricing. Beginning with our completion and production division, revenue in the second quarter was $3.5 billion, a 2% sequential increase while operating income was $707 million, an increase of 6% sequentially. CNP delivered an operating income margin of 20%. These results were due to increased activity from multiple product lines in international markets and higher artificial lift activity in North America. In our drilling and evaluation division, revenue in the second quarter was $2.3 billion, a sequential increase of 2%, while operating income was $376 million, a sequential increase of 2%. D&E delivered an operating income margin of 16%. These results were driven by higher drilling activity and increased fluid services in key regions, including Middle East and Latin America, partially offset by seasonal roll-off of software sales across multiple regions. Now let's move on to geographic results. Our second quarter international revenue increased 7% sequentially due to solid product sales, activity increases, and pricing gains across multiple product lines. These results were impacted by lower software sales in the eastern hemisphere. In North America, Revenue in the second quarter was $2.7 billion, a 2% decrease sequentially. This decline was primarily driven by decreased stimulation activity in US land, partially offset by increased artificial lift activity in US land and higher activity across multiple product service lines in the Gulf of Mexico. Latin America revenue in the second quarter was $994 million, a 9% increase sequentially, resulting from higher completion tool sales in Brazil and improved activity across multiple product service lines in Mexico and Argentina. Partially offsetting this increase is reduced activity in the Caribbean across multiple product service lines. Europe-Africa revenue in the second quarter was $698 million, a 5% increase sequentially. This improvement was primarily driven by increased fluid services across the region and higher completion tool sales in Angola and Norway. Middle East-Asia revenue in the second quarter was $1.4 billion, a 6% increase sequentially largely resulting from higher completion tool sales in Saudi Arabia and higher Y-line activity, drilling services, and stimulation activity in the region. This improvement was partially offset by decreased project management activity in Saudi Arabia. Moving on to other items. In the second quarter, our corporate and other expenses was $59 million. For the third quarter, we expect our corporate expenses to increase by about $5 to $10 million. As noted earlier, in the second quarter, we spent $13 million, or about one penny per diluted share, on SAP S4 migration, which is included in our operating results. For the third quarter, we expect these expenses to be approximately $20 million, or about two pennies per diluted share. Net interest expense for the quarter was $92 million. The increase this quarter was primarily related to the reduction of interest income as a result of the Argentina transaction. For the third quarter, we expect this expense to remain approximately flat. Other net expense for the quarter was $32 million. For the third quarter, we expect this expense to remain approximately flat. Our effective tax rate for the second quarter came in at approximately 21.3 percent. Based on our anticipated geographic earnings mix, we expect our third-quarter effective tax rate to increase by approximately 50 basis points. Capital expenditures for the second quarter were $303 million. We anticipate that for the full year, capital expenditure will be approximately 6 percent of our revenue. Our second quarter cash flow from operations was $1.1 billion, and free cash flow was $798 million. We expect to generate free cash flow for the full year 2023 that is 30% to 40% higher than last year. Finally, we repurchased $248 million of our common stock during the second quarter. Turning to our near-term operational outlook, let me provide you with some comments on how we see the third quarter unfolding. In our completion and production division, we anticipate sequential revenue to be essentially flat with the second quarter and margins to remain approximately flat. In our drilling and evaluation division, we anticipate sequential revenue to increase in the low single digits and margins to increase 25 to 75 basis points. I will now turn the call back to Jeff. Thanks, Eric.
spk15: Let me summarize our discussion today. Our international business is growing at a strong pace across all regions. I expect our differentiated technology offerings, selective contract wins, and our unique collaborative approach to working with our customers to deliver higher international margins and growth for Halliburton. Our strategy to maximize value in North America is driven by capital efficiency, differentiated technology, and alignment with high-quality customers. I expect this will allow us to generate solid financial performance. I expect that the execution of our strategy in this long-duration upcycle will deliver better returns, more free cash flow, and more cash back to shareholders. And now, let's open it up for questions.
spk10: As a reminder to ask a question, please press star 11 and wait for your name to be announced. To withdraw your question, please press star 11 again. In the interest of time, we ask that you limit yourself to one question and one follow up. Our first question will come from the line of David Anderson with Barclays.
spk04: Hi, good morning, Jeff. So North America is slowing down a bit. International started accelerating to be expected. But I was wondering if you could perhaps take a little bit of a step back and talk about how you see the primary markets trending in the next kind of 12 to 24 months in terms of NAM, Middle East, and offshore. Maybe set LATAM aside, which is an extended growth market. I guess my question is, in terms of the cadence, how do you see the trajectory of each of these markets playing out? You lowered NAM spend, I think you were saying, 10% up from down from 15%. So is that kind of flattish in the second half of the year? And then how do you see the ramp up in the Middle East and then the timing of offshore? I know it's a lot, but maybe kind of this bigger picture, how you see those markets trending?
spk15: Certainly. And look, I'm as confident as I have ever been in the duration, the long duration of this cycle. And that's rooted in attractive commodity price and really the growth in demand for oil. So I'll start there. I think the offshore piece of this, we're super excited about it. If we include Gulf of Mexico, we're eclipsing 50% of our revenues internationally are offshore. All of our service lines are represented there. I think the cadence as I look over the next year or so, it just takes time to get this work underway. I'm just back from a trip and we were looking at projects that You know, they have to get rigs, get plans, get agreement from governments. But it's starting, and, you know, I expect it continues to build into 24 and beyond. I mean, these are the kind of projects that, you know, take a decade to do. And so, you know, Middle East, I see the same thing. You know, the number of rigs being mobilized in the Middle East, that takes some time to do. But we are beginning to see it. We are seeing it. But my view is that will continue to build over the next, 12 or 24 months. Coming back to North America, you know, I gave you the, you know, an outlook on the second half of the year, but I think what's most important is when I look into 24, you know, I mean, commodity markets are getting more constructive, oil prices firming up, gas seems to have found its footing, you know, and expect that ramps. We're seeing some consolidation with customers, and that means that bigger customers do more planning through the cycle. They're committed to executing plans over a longer term. And service intensity in North America never lets up. In fact, it only gets harder. You've got to work harder just to stand still. So all of this is constructive for Halliburton's business as I look out into 2024 and beyond. And, you know, in some of that, in North America, it's just it's backed up by the pace of EFLE contracts that we're seeing. You know, we've had more contracts last quarter. We've even signed another one this quarter. And that's really for work that starts in 24 and goes 24, 25, 26. So, you know, there are a lot of reasons that I see 24, you know, looking super strong for us.
spk04: And then, Jeff, maybe we can just kind of get into the heart of kind of where a lot of the chatter's been during the quarter. Obviously, rig count's been falling. We've been hearing about pricing and pumping getting softer. Of course, a lot of it's coming from your competitors who would love to pay less for these services. Can you give us some insight into kind of what you're seeing in the pricing trend? Is the softness kind of really stuck on the Tier 2 side? In your comments, you talked about your Zeus leads holding up. Is the Tier 4 holding up? What do you see on the competitive pricing side? If you can kind of give us some more context to hear, because we just kind of hear these kind of generalized comments, and I have a feeling there's more to it. I was wondering if you could provide some more context, please.
spk15: Well, I think that, you know, I've told you what we're doing, which is retiring older equipment and transitioning to electric. And so I think that's an important factor. You know, we really, you know, don't see... will participate in the bottom part of that market, particularly at all, really with that spot type market. You know, most of our work, I'd say over 70% of our works with large privates and publics. And so, you know, and these are customers that execute their plans. They do execute their plans. And from our perspective, you know, The performance, we continue to see our performance improving, okay, even as we, you know, add electric, but also even on our diesel fleets. And, you know, differentiated service performance, technology is getting better. I mean, those are things that drive not only margins, but they're also part of the dialogue around, you know, what's it take to actually run a high-performing business, and that requires engines, transmissions, and people. And we really haven't seen any deflation in those things.
spk10: Our next question comes from a line of Arun Jayaram with JP Morgan.
spk16: Hey, Jeff, maybe just a follow-up to David's question. One question we get is, you know, how do softer conditions called in the spot market influence pricing on your dedicated fleets or, you know, as you start some of your price negotiations on 2024 in North America?
spk15: Well, look, I think that, you know, again, we've got little exposure to the spot as I described. I would say broadly speaking, you know, as we look ahead, you know, high performance, high quality services really matter. And we see a lot of bifurcation there. And we're going to continue with our E-Fleet rollout, which is sort of a whole different category of service. It's actually lower cost or better performance for our clients, but also lowers their total cost of ownership. And so, you know, I would say we're planning to deliver high quality service. And we really don't see any point in burning up equipment with no margins. That's not a good direction. It actually has longer lasting impacts if surface equipment isn't taken care of.
spk16: Okay. Fair enough. And Jeff, I want to get your thoughts on offshore. Obviously, one of the trends the market has been observing is just strength in offshore markets. Could you talk about how is positioned from a product line perspective offshore, and what you're seeing perhaps in the Gulf of Mexico to mitigate maybe some of the risk of lower activity in North America?
spk15: Well, look, we're heavily levered towards the offshore business. In fact, all of our service lines participate in our offshore business. And, you know, we've got leading positions and in cementing and HCT. Our drilling business, we've talked a lot about where we're going with drilling and wireline. And so that's an important business for us. It is higher service intensity, which means that it takes more equipment to do. And so we really like that. I expect Gulf of Mexico continues to strengthen. And, again, we talked about last quarter sort of the percentage of our offshore international business, anyway, as a percentage, you know, continues to grow. And so I think that, you know, the offshore business is going to be very important for Albertan in the Gulf of Mexico and all around the world.
spk10: Our next question comes from the line of James West with Evercore ISI.
spk08: Hey, good morning, Jeff. Morning, Eric.
spk11: Morning. Morning, James.
spk08: So, Jeff, with your Zeus rollout, your E-Fleet rollout here, you talked about some visibility or good visibility into 24 and even 25 at this point. As these E-spreads come to the market, are you kind of one-for-one retiring the Tier 4 assets that you have, or do those continue to work and so it's a net increase in horsepower?
spk15: Look, it's not a perfect science, in terms of one in one out, but it is generally one in one out and over over time. And so you know, the type of equipment, for example, that we would retire is typically higher cost to maintain. And so when we retire a fleet, we sort of blow the parts back into the current fleet, and that lowers the cost or improves the margins of the existing fleet. But you know, we're replacing say replacing, we're adding equipment only as it's demanded by clients. So that's the difference. We're not building it to replace it. We're building it for contracts where there is commitment to return the capital and also the return on capital inside of the contract. And so that's what's driving the pace of replacement.
spk08: Okay. Okay. That makes sense. And then on the international and particularly offshore contracts, side as these rigs are mobilizing, getting set up, you know, government signing contracts, et cetera, and the companies, your customers are sourcing, you know, the service equipment and service products. What's the conversation like with them around pricing and kind of, or is there even really much of a concern about pricing because they just need to get the equipment?
spk15: Well, I think that we're seeing pricing moving up, whether it comes in the form of a tender or a dialogue, and a lot of that is around tightness. It's also around efficiency and performance of our equipment. We've just done a lot to structurally overhaul and technically overhaul a lot of our drilling business, and I talked a bit about some of the wireline things that we're doing. So the dialogue certainly prices up and it comes in a few forms, whether it's a negotiation or a discussion, or in some cases we call and say we just don't have it, which is, you know, again, driving prices up.
spk10: Our next question comes from the line of Neil Mehta with Goldman Sachs.
spk01: Yeah, thanks so much. Jeff, maybe I start with you to talk a little bit about return of capital to shareholders, and I'll let you go anywhere you want with this. You did buy back $250 million worth of stock in the quarter, and you've been pretty steady in terms of that dividend coming back to shareholders as well. As you think about the repurchase program, how aggressive do you intend to be? Do you view this as more of a ratable program or an opportunistic one?
spk15: I think that we've committed to return at least 50% free cash flow back to shareholders. The reality is it's going to be more than that. I think what we do is we build the base case around what we return to shareholders and then we're able to flex up from that. I think that's some of what you're seeing. Beric, you want to add to that?
spk12: I think you covered it well. I think the main focus in the organization right now is to continue to generate free cash flow. That's really the first priority and ensure that we have enough. Actually, we're generating enough free cash flow right now. to continue to buy back share, but also to continue to work and further strengthen our balance sheet. So if we look forward, we intend to do both, even though the bias right now is clearly on continuing to buy back more shares.
spk01: Thanks, Eric. Another follow-up is for you. You made some comments around this in the script, but Any Q3 considerations you want us as a market to keep in mind as we think about building the sequential model into next quarter?
spk12: No, I think we covered it in the prepared remark, and Jeff mentioned it as well as you look throughout the remainder of the year. I know there are a lot of questions on North America, so maybe I'll repeat what we indicated, which is H2 is going to be a little lower than H1 for North America. Q3 is a bit down compared to Q2, and we're expecting Q4 to be flat relative to Q3, considering there are some holidays and seasonality as well. So you combine that with the guidance by division, and I think it gives you a really good perspective on how we see the second half of the year unfolding.
spk10: Our next question comes from the line of Scott Gruber with Citigroup.
spk05: Yeah, I wanted to say on the second half outlook, you know, typically, you know, frack activity does slow down into the holiday season, but the gas forward curve is actually quite encouraging today, Jeff, as you mentioned in your conversation earlier. You know, the conversations with clients today? Are they suggesting that they're going to bring back some gas completion activity later this year? Or is that more likely to wait until next year after the budget reset process?
spk15: Look, I think that I'm not going to try to call tops and bottoms. I'll let others do that. But I think that the outlook I described for 2024 is consistent with what you just described. And so when we see that, you know, I don't have precision around the date, but there's no question that gas is firming up and that there'll be LNG takeaway and that the gas market will be busy. It's a question of the date, but I expect that, you know, build in 24. Could it come sooner? Obviously it could. And I would say oil price is quite constructive today as well, which may bring some smaller players back into the market. But all of these things structurally from a cycle standpoint are very, very positive. And as I look at 24, you know, sometime between now and there, we see, you know, improving activity.
spk05: Got it. That makes sense. Yeah, and I did want to touch on the oil side as well. You know, obviously, last year, oil productivity was down. And, you know, that was starting the conversation around, you know, the need just to drill more wells to kind of offset that productivity loss. You know, this year we do seem to be at maybe a localized plateau on well productivity on the oil side in the U.S. But, you know, is that part of the conversation here with customers that, you know, over time that they're going to have to be, you know, drilling more wells in the U.S. given that productivity decline? Is that kind of top of mind as they kind of start to think about 24 needs or is that a, kind of off the horizon still?
spk15: No, I mean, let me frame that differently. I think that this is my point around service intensity, meaning it takes more work to produce the same over time unless there are step changes in terms of either efficiency or insight. And so, you know, we talk about our smart fleet offering quite often, but the reality is that's part of our technology. portfolio to help customers better understand productivity of ROC and where the frac is going and how to design fracs that can be more productive over time. So I think that's an important step. But there is no question when we think about North America, and we even saw that during the COVID, you know, the pace at which North America declined following sort of the near slowdown or near stoppage in North America. And so I think those are well understood by the market and our clients. And so when I think about the way forward in North America, that features in it and is clearly part of our view as to why, A, there'll be more activity over time, even to stand still, and further, why E-Fleets, in our case, are so valuable because they really do help clients achieve better productivity and lower costs. So I think that That's one of the reasons I'm so focused on that, and I think that's how it plays out.
spk10: Our next question comes from the line of Luke Lemoine with Piper Sandler.
spk02: Hey, good morning, Jeff, Eric. Jeff, morning. Jeff, nice job on that North American margins and QQ. I mean, those flat, and you talked about those remaining strong for the balance of the year. It kind of sounded like you're not expecting these to be materially different from the first half.
spk14: Is that correct? That's correct. Okay.
spk02: And then, Eric, 2Q D&E margins were better than your guide. Can you maybe walk us through what changed relative to your expectations?
spk12: Yeah, I think, I mean, there's a lot of moving parts in the D&E margins. I think we just delivered better across the board in most product lines and in all of the regions. There's really not a lot more to say about that solid execution from all product lines across the globe.
spk02: Okay, got it. Thanks a bunch.
spk10: Our next question comes from a line of Stephen Gingaro with Stiefel.
spk09: Hi, can you hear me?
spk13: Yep. Yes.
spk03: Oh, sorry. I cut off. Thanks. Good morning, everybody. Two things for me. The first is, you know, we've written and we've heard from others that You know, the consolidation in the U.S. frack business and just the better behavior by you and many others has led to a different dynamic in the business. I'm just curious, as you've seen a little bit of, obviously, rig count softness and frack spreads have come off a bit. Are you seeing, can you visibly see any different approach to pricing across the industry yet? Is it too early to tell? Just curious if there's any proof of concept here yet.
spk15: Look, I think it's quite different, and I think it's different along a couple of dimensions. Number one, quite different in the sense of the type of equipment that we are putting into the market with eFlix. So that's a very different dynamic than we've seen in the past, and I think that the pull for those from customers is meaningful. And so that's one key difference. And I think from the other perspective, the bifurcation of performance is an important point. And I think that we've seen quite a difference in our performance, and that still matters. In fact, that matters a lot. And I think that sort of the overall, we've always replaced our equipment, invested in our equipment and technology. Um, but I think that, you know, the, the idea that equipment runs in perpetuity or that it can be run to the ground and then somehow rebuilt is not realistic. And so I think there's some understanding around that today that there probably wasn't before.
spk03: Uh, thank you. And when you, you took, you touched on this a little bit earlier, but when we hear from EMPs and just industry data in general, that well quality curating a bit. is that a net positive do you think for the, for the completion side of your business or how do you think about the, the impact that has, or is it kind of too gradual to really jump out?
spk15: Yeah, look, I mean, what that drives is more technology and more service intensity, both. I mean, that, that's the upshot of what you just described for our customers. And, you know, We see that. And so we are, you know, like I said, I'm quite confident about, I'm confident in North America's contribution to the overall oil and gas supply for the world. It's important. And sustaining that is going to require investment and a lot of technology and a lot of just repetitions. So I think it's setting up very well for Halliburton.
spk10: Our next question comes from the line of Mark Bianchi with Cowan.
spk07: Hi, I just want to ask one more on sort of the North America outlook for the back half. I know it's been asked several times, but just because so many people seem to be focused on that, I think people are surprised by fourth quarter being flat quarter over quarter and margins seemingly holding in. Would you anticipate that overall the profit for Halliburton or the EPS should be flat to up in the fourth quarter versus the third quarter?
spk15: Yes. I mean, we're not going to guide Q4, but directionally everything is intact.
spk07: Yeah. Okay, great. Thanks for that, Jeff. The other one I had is just a bit of a modeling question on the corporate line for you, Eric, because we've got this new software element that we need to include. So if I take those two together, the corporate plus the software, it looks like we should be something in the mid 80s of a negative number. And then that should be sort of on a 20 to $25 million run rate beyond. beyond third quarter? Is that the right way to think about that software impact?
spk12: Yeah, I mean, we guide the two separately so as to give you clarity as to what they are. So we guided corporate going into Q3 to be 5 to 10 million up from Q2. That's essentially a timing issue. We were a bit under guidance in Q2, so that gives you the corporate number. And then in terms of SAP, which we guide as a separate line. We guide it to $20 million, or about two pennies. And what we'll do on that one, we gave you the yearly numbers, so 50 this year, 100 next year, 100 the following year, so you can kind of run your models on a yearly basis, and then we'll give you more color, quota to quota, because some of it depends on how the rollout is happening, right?
spk13: So we want to do that on a quota to quota basis.
spk10: Our next question comes from the line of Kurt Haleed with Benchmark.
spk06: Hey, good morning, Jeff and everybody. Hey, Jeff, I'm kind of curious on the international front, right? Are you seeing the prospect of maybe an acceleration in activity, whether that be in the Middle East or Latin America? maybe relative to the beginning part of the year. I know there have been some questions about, you know, the OPEC production cuts, and that may be having a negative impact on activity, but I'm kind of curious as to whether or not, you know, there's a situation, you know, in the Middle East where there's a greater sense of urgency and maybe a push to move some projects a little more quickly.
spk15: OPEC cuts absolutely do not have an impact on activity. Be crystal clear around that. These are customers with plans that are meeting global demand, and it is unrelated to cuts in OPEC. I would say that the growth, I wouldn't describe it as an acceleration. I would describe it as continued growth. And that's very positive. That's a good thing because that's consistent with the long duration nature of this cycle. So it's not a spike to come at some point in time in the future to then level out. I think what we're going to continue to see is steady growth in activity, kind of like we've seen, although, you know, does the pace pick up? It might some as, you know, in fits and starts as big projects get started. But I think overall, This is a great setup for Halliburton in terms of timing and pacing and absolutely consistent with how we see the length of this cycle, meaning it's going to take quite a period of time, you know, as barrels are invested in and reinvestment is made.
spk06: Okay. That's great. Appreciate that, Keller. Now, maybe then, you know, focusing again on the North American market, you've given some clear deep expectations on what you see there. With the fact that you guys are, you know, getting rid of older equipment, focusing on E-Fleet, you mentioned a couple long-term contracts. How do you see the prospects for Halliburton to continue to outpace the market if the market's just going to be flat?
spk15: Well, I think I've described what we're going to do, and I think that sort of the – I mean, we're focused on what we're doing in terms of – you mentioned E-Fleets, but that's an important thing, and that's an important opportunity for Halliburton and somewhat unique for Halliburton. I also believe that it's – as I look out into the future – You know, as I said, I see we talked extensively about service intensity and technology, and I think both of those are going to be very high demand as we get, you know, into 24. And I would say for what we do, it's in high demand now. And so, you know, I think the long term for North America clearly points towards what we do uniquely at Halliburton. And so I feel pretty confident about that.
spk10: That concludes today's question and answer session. I'd like to turn the call back to Jeff Miller for closing remarks.
spk15: Yes, thank you, and thank you all for participating in today's call. Let me close out the call with this. Halliburton delivered an impressive first half of 2023, and I fully expect that the execution of our strategy in this long-duration upcycle will deliver better returns, more free cash flow, and more cash to shareholders. Look forward to speaking with you next quarter. Please close out the call.
spk10: This concludes today's conference call. Thank you for participating. You may now disconnect.
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