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Executives

Christian Garcia - Vice President, Investor Relations

Dave Lesar - Chief Executive Officer

Mark McCollum - Chief Financial Officer

Tim Probert - Executive Vice President, Strategy and Corporate Development

Analysts

Brad Handler – Credit Suisse

Robin Shoemaker - Citigroup

Kurt Hallead – RBC Capital Markets

Ole Storer - Morgan Stanley

Jim Crandell - Barclays Capital

Bill Sanchez – Howard Weil, Inc.

Michael LaMotte – J.P. Morgan

Dan Pickering – Tudor Pickering & Co.

Mike Irvin – Deutsche Bank

Halliburton Company (HAL) Q1 2009 Earnings Call April 20, 2009 9:00 AM ET

Operator

Welcome to Halliburton’s first quarter 2009 earnings call. (Operator Instructions) I would now like to turn the conference over to your host today, Christian Garcia, Vice President of Investor Relations. Please begin.

Christian Garcia

Good morning and welcome to the Halliburton first quarter 2009 conference call. Today's call is being web cast and a replay will be available on Halliburton's website for seven days. The press release announcing the first quarter results is available on the Halliburton website.

Joining me today are Dave Lesar, CEO; Mark McCollum, CFO and Tim Probert, President, Drilling and Evaluation Division and Corporate Development. In today's call Dave will provide opening remarks. Mark will discuss our overall financial performance and liquidity position and Tim will provide comments on our operations and business outlook. We will welcome questions after we complete our prepared remarks.

Before turning the call over to Dave, I would like to remind our audience that some of today's comments may include forward-looking statements reflecting Halliburton's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10K for the year ended December 31, 2008, and recent current reports on Form 8K.

During the first quarter of 2009 we restated our historical financial statements with the adoption of certain new accounting pronouncements and transferred selected operations from Completion and Production to the Drilling and Evaluation segment. For more details on the effect of this restatement and prior periods please refer to our earnings release. Note that we will be using the term international to refer to our operations outside the U.S. and Canada and we will refer to the combination of U.S. and Canada as North America.

Now I'll turn the call over to Dave Lesar. Dave?

Dave Lesar

Thank you Christian and good morning everyone. The industry experienced an unprecedented decline in activity in the first quarter which obviously had an impact on our financial results. The U.S. rig count has dropped over 50% from its August 2008 peak and there can be no certainty on when the decline in activity will bottom out. This downturn so far is worse than previous cycles in terms of the speed of the decline. The steep drop off in activity has led to reduced volumes and intense pricing pressure for the remaining available work and therefore has caused severe compression in margin for all of the services industry.

Outside of North America the international markets were more resilient than the domestic market. However, our business started to see the deferral of several projects in line with the behavior of past cycles. We are also seeing EMP operators focusing their efforts on removing service cost inflation on our domestic and international projects by seeking to secure cost concessions from their supply chain.

Here is a summary of our first quarter results. Total revenue was $3.9 billion and represented a decline of 3% from the first quarter of 2008. This is against a backdrop of a 19% decline in worldwide rig count year-over-year. On a macro basis, I believe that this shows our strategy of balancing our geographic and product line portfolios continues to be successful. Despite a 30% year-over-year decline in North American rig activity and the impact of price degradation, our North American revenues declined on 10% year-over-year due to share increases in select locations and favorable service mix from shale plays.

North America margins declined to 14% resulting from lower volumes and intense pricing pressures. International revenues grew 3% from the first quarter of 2008 with Latin America contributing growth of 9%. Our international growth was significantly affected by unfavorable year-over-year currency movements in select locations but notably the North Sea, Mexico and Brazil. However, overall international margins remained a healthy 20%.

These results indicate that we have executed well in a very challenging environment. Our strategy of protecting or increasing our market share, lowering our input costs and growing our business in select locations has helped mitigate the impact of this downturn on our financial performance.

Let me now turn to the results of North America and look at our prospects for the coming year. North America revenue dropped 25% on a sequential basis on a 30% sequential decline in rig count. The largest declines came in the Permian Basin, the Rockies and the mid-Continent. Although our revenue drop was substantial I believe this was a good performance given the 30% rig count drop and significantly lower revenue opportunities which were then compounded by pricing pressures on all remaining work as everyone tried to keep their equipment utilized.

We had less severe activity fall off in the complex shale plays like the Haynesville and horizontal drilling in the Northeast. Activities in these areas, along with the Gulf of Mexico, and their associated service intensity assisted in moderating the effect of this weak drilling environment in the first quarter. In addition, as we have stated before there was a group of customers who wanted to work with us because of our proven track record and superior technology that we could not serve in the past because of equipment shortages. With the decline in activity we have now been able to begin to serve these customers. However, all markets remain susceptible to additional adjustments by our customers.

Canada has also shown a lower drop off in revenue than the U.S. land and has now entered spring break up season. We expect Canadian activity will not recover to pre-break up levels in the latter half of the year. We also saw price erosion in all product lines and expect that pricing for our services will remain under pressure until activity stabilizes. The timing of when national gas supply and demand fundamentals improve is uncertain. We expect that customers will continue to look at and adjust their spending plans until this happens.

We indicated in our fourth quarter call that we expect that the activity decline will lead to a supply response sometime before the end of the second quarter. Recent data points that we are seeing, although still inconclusive, provide us with positive indications that this may occur. We expected that 70-75% of our North America margin compression would come in the first quarter. Given the unprecedented decline in the rig count and the added impact of the financial crisis on our customers’ ability to access the capital markets I believe we will continue to see additional margin compression in our North America business.

Let’s look at our international business for a second. We believe that Latin America will continue to be a bright spot in 2009 with increased activity in Brazil and Mexico. We expect to expand our already strong position in those markets by continuing penetration of our differentiated well construction technologies. We expect that worldwide deep water activities for development work will be resilient in this weak commodity market. Deep water provides our company with significant opportunities as customers value our unique technologies to increase their productivity in these challenging reservoirs. We enjoy leading deep water positions on a global basis and cementing completions, stimulation and a number two position in directional drilling, LWD and drilling fluids.

The current downturn is different from past cycles due to the overlay of the global credit crisis in combination with broad demand weakness. Certain international markets such as Russia and the North Sea are already exhibiting particular weakness in activity due to the lack of access to external financing to fund development projects. Resolution of capital access issues will be key to restoring activities in these markets for the remainder of the year.

We have also seen our international customers seek to improve their project economics by reducing execution inefficiencies and lowering costs in their supply chain. It is our intention to leverage the full breadth of our solutions portfolio to assist our customers in meeting their objectives. We think our broad based integrated offering is a key competitive advantage in this market place.

In the first quarter activity drop offs have been sharp and have accelerated throughout the quarter and we took actions to offset some of the impact of the downturn on our financial results. We have eliminated discretionary spending and consolidated operations in areas of reduced activities. Our large international infrastructure has provided us an opportunity to lower our vendor costs from the supply chains we have built up over the past year and Tim will provide you with progress in this area when we talks in a few minutes.

While it has been our desire to minimize headcount reductions during this down cycle we found it necessary to reduce personnel in the first quarter. We said last quarter our objective was to live within our cash flows and despite the FCPA settlements we generally accomplished this in the first quarter. We invested $518 million in capital expenditures in line with our build program for the year. We continue to believe in the long-term prospects of this business and our goal is to continue with our capital program in a range of $1.8 billion which is about the same as last year.

It is a well known fact that the industry’s equipment was used extensively in the last up turn and the entire industry needed to refresh its capital fleet. Our capital program allows us to one, refresh our equipment that has been heavily utilized during peak periods; two, build new and more robust technologies for deep water and higher horse power units for the new shale plays and for higher pressure, higher temperature environments; three, our current environment allows us the benefit to lower supply chain costs so we can build more for the same amount of money.

This capital expenditure program is consistent with our strategy of balancing growth and returns. We have historically generated one of the highest returns in the industry and we believe this strategy will continue to deliver superior, long-term value for our shareholders. As I stated in our fourth quarter call, we will draw upon our management’s deep experience in navigating through previous downturns. Our first quarter results indicate that so far I believe we have executed well in addressing the industry’s current challenges. We have successfully increased our market position in several areas in North America while growing in key markets internationally.

We continued our investments in technology which will expand our competitive advantage and position us for longer term leadership in key markets. I would like Mark McCollum now to go over in more detail the financial results for the quarter. Mark?

Mark McCollum

Thanks Dave. Good morning. I will be comparing our first quarter results sequentially to the fourth quarter of 2008. Our revenue in the first quarter was $3.9 billion, down $1 billion or 20% from the fourth quarter as all of our product service lines showed marked declines from the previous quarter. As Dave mentioned, a steep curtailment in activity and corresponding pricing pressure affected our overall financial performance. In addition, we experienced seasonal declines resulting from the normal fourth quarter spike in revenue for landmark software, completions and direct sales.

On a geographic basis, all regions registered declining revenues with North America experiencing a 25% sequential decline resulting from price erosion and the 30% drop in the average rig count. As a result, North America operating income dropped by 57% sequentially and margins have now declined by approximately 1,100 basis points since activity peaked in the third quarter of 2008.

In our fourth quarter call we discussed that in the 2001/2002 cycle our overall North America margins declined by 1,200 basis points from peak to trough. Given that the current U.S. downturn is more pronounced than the previous cycle, we are currently anticipating we will experience additional North American margin compression which could exceed that level by another 300-500 basis points in the short-term. Ultimately, the overall contraction of our North America margins will be dependent on the eventual depth and length of the industry’s downturn.

International revenue decreased by 17% sequentially due to lower activity and the typical seasonal declines for landmark, completion tools and direct sales of manufactured equipment. Overall, operating income decreased $547 million or 47% from the fourth quarter of 2008 resulting from lower activity, pricing erosion and employee separation costs partially offset by cost savings previously mentioned by Dave.

Our fourth quarter 2008 results included a $35 million gain from the settlement of a patent dispute which was recognized at corporate and other. Our first quarter 2009 results included $28 million in employee separation costs. These costs are incorporated in each of our segments and regions as well as in corporate and other depending upon the location of the affected personnel.

Unlike other companies, we have not excluded these costs in the comparisons that follow. Now I will highlight the segment results. Completion and Production revenue decreased $524 million or 21% from the fourth quarter while operating income was down 42%. The decline in revenue was driven primarily by lower production enhancement results in the U.S. land and seasonal declines in completions revenue.

Looking at Completion and Production on a geographic basis, North America revenue decreased 26% and operating income declined by 57%. We experienced significant declines resulting from both decreased activity and price reductions. As Dave mentioned, declines were most significant in the Permian Basin, Rockies and mid-Continent areas and these areas had the most margin compression as well.

In Latin America, Completion and Production revenue decreased 10% but operating income increased 6% from the fourth quarter as lower activity in Venezuela was offset by higher margin sales in Mexico and Brazil. In Europe, Africa, CIS Completion and Production revenue decreased 14% and operating income declined 30% due to lower vessel utilization and declines in the North Sea, Kazakhstan and Russia. Partially offsetting the declines in these locations were revenue increases in North Africa from higher submitting activity.

In Middle East/Asia, Completion and Production posted a sequential decrease in revenue and operating income of 16% and 22% respectively due to higher completion tool sales in the fourth quarter.

In our Drilling and Evaluation division revenue decreased $479 million or 20% and operating income declined 46% with unfavorable sequential results in nearly all product service lines. Typical fourth quarter increases in software sales and direct sales contributed to the decline. In addition, the division experienced significant activity weakness in North America, Russia, Venezuela and the North Sea. In North America, Drilling and Evaluation revenue declined 24% and operating income decreased 59% with all product service lines registering sequential decreases.

On a percentage basis, Sperry’s revenue declined the least among the product service lines in this division as it benefited from a favorable mix towards horizontal drilling which now accounts for over 40% of total rig count. In addition, Sperry had sequential revenue increase in the Gulf of Mexico as activity shifted towards drilling rather than completions in the quarter.

Drilling and Evaluation’s Latin America revenue declined 22% and operating income decreased 47% driven by lower activity across the region but most notably in Mexico and Venezuela. The division benefited from strong Sperry activity and seasonal revenue increases for landmark in the fourth quarter of 2008.

In the Europe, Africa, CIS region Drilling and Evaluation revenue decreased 16% and operating income declined 39% due to lower Sperry and wire line direct sales activity in Russia and North Africa. We continue to expect growth in North Africa for the remainder of the year.

Drilling and Evaluation revenue and operating income in the Middle East/Asia were down 20% and 38% respectively. Lower direct sales in Asia and weak activity in Saudi Arabia were the primary drivers for the decline. We are currently ramping down the Khurais project and expect that demobilization will be complete by the middle of the second quarter. We are anticipating that our work on the Manifa project would partially offset the revenue impact of the finalization of Khurais. However, the start up of the off shore portion of this project has been deferred.

Now I will address some additional financial items. In the first quarter we issued $1 billion of 10-year senior notes at a fixed rate of 6.15% and $1 billion of 30-year senior notes with a fixed rate of 7.45% for a total of $2 billion. While these notes provide incremental carrying cost of approximately $34 million per quarter, we believed it was prudent to issue them when we saw a window in the market rather than be dependent upon the proper functioning of the credit markets at whatever future point in time we might need to access them. These notes provide us with additional flexibility to weather this financial storm and to take advantage of potential strategic opportunities on our terms and within our timing.

As of March 31, we had $3 billion of cash and equivalents, an increase of $1.8 billion from December 31 primarily resulting from the $2 billion note issuance. For the first quarter we used $84 million of cash before financing activities primarily due to the settlement payments related to the FCPA investigation of $274 million. Without these payments we would have generated positive cash flow consistent with our focus on working capital management and cash generation.

We anticipate that corporate expenses will be approximately $50-55 million per quarter for the rest of the year. We expect our 2009 effective income tax rate will remain in the range of 32-33%. Finally, we expect depreciation and amortization to be approximately $225-230 million per quarter or about $900 million in total during 2009.

Tim?

Tim Probert

Thanks Mark. Good morning everyone. Drilling activity declines within the current North America cycle have been discussed in some detail but let me add a few comments on pricing. The current pricing environment is extremely challenging but the actions we have taken have been consistent with our focus on protecting our share and improving our market position.

While the eventual depth of the North American cycle is uncertain it is worth noting that the sub-cycle of oil directed activity is exhibiting signs of a bottom. The international down cycle is underway with rig count falling by 9% from the September peak in 2008. Using past cycles as a guide there is a clear risk of a further decline in the international drilling market under current demand and commodity price scenarios. Generally, past international cycles demonstrate differences in amplitude and time frame compared to the U.S. International cycles tend to be shallower and longer in duration and follow U.S. cycles by one or two quarters, much like we are experiencing now.

International work is primarily driven by larger IOC’s and NOC’s involving more complex projects and involve service contracts with longer terms. These attributes have historically made international activity lag during periods of rising commodity prices but likewise slower to adjust when oil prices fall. What is so unique about this international cycle is the pace at which our customers have focused their efforts on lowering the cost of their projects. According to CERA, upstream capital costs have increased by 130% since 2000 with much of the cost rising since 2005.

While it is important to point out this data includes execution inefficiencies as well as inflation, operators have approached their key service providers to facilitate the reduction of their project costs nonetheless. We are working closely with them to trade an expansion of scope and the lengthening of duration with contract renegotiation milestones and price concessions.

Improving international project economics is a key driver for our customers and it is incumbent on us to participate in this effort which in some respects could lead to what could be characterized as a cost inefficiency led recovery in the current price environment. To address the impact on margins, we are focusing our efforts to lower our input costs across our global network. Of our total costs about 1/3 of personnel base and 2/3 are dependent on our supply chain management structure in one form or another.

We have targeted 17 categories that represent 60% of this spend comprising several hundred suppliers from whom we are seeking reduced pricing to match current market realities. In the first quarter we finalized negotiations with suppliers that represent over half of the targeted spend. Additionally, we are benefiting from new manufacturing centers in emerging markets opened in 2008. As activity weakens in 2009 we are carefully preserving work in our lower cost manufacturing centers located in Malaysia, Singapore, Mexico and Brazil.

The timing of lower supply costs being reflected in our financial results is a function of several factors including our inventory turn over rate. We do not expect to see meaningful impact of these cost savings until the second half of the year. As Dave pointed out it was also necessary to take more significant actions relating to our labor related costs in the quarter than we had expected earlier.

For example, we have reduced our headcount in North America by 12% in the quarter. Overall, international margin pressure was modest in the first quarter and while we are working hard to mitigate its impact we expect the pressure will intensify in the coming quarters. The less acute trajectory of the international cycle does however afford us the opportunity to address many aspects of our cost structure on a more timely basis. As a result, ultimate pressure on margins will be less severe than North America.

Dave?

Dave Lesar

Thanks Tim. Let me just wrap up with a few closing comments and then we will open it up for questions. I think as the first quarter results show I believe we responded well to the unprecedented decline the industry has experienced in the first quarter. We have protected our overall market share and included and enhanced it in other areas. We have made significant progress in lowering our supplier costs and continue to make strategic investments that will expand our competitive advantage.

Industry prospects will continue to be weak in the coming quarter and visibility so the ultimate depth and length of this cycle remains a bit uncertain. However, we are confident that our management team is prepared to meet the challenges that are forthcoming.

Let’s go ahead and open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brad Handler – Credit Suisse.

Brad Handler – Credit Suisse

Can you please amplify a little on your U.S., North American margin comments? I think I heard you say down another 300-500 basis points from the first quarter level but perhaps I just want to clarify if I heard that right or was it 300-500 basis points from a different reference point first of all? Then as a related side question can you comment on the March exit margin at all, or perhaps we are already close to that down 300-500 basis points in March? Are you looking for something that is potentially already kind of flattish if that is the guidance?

Mark McCollum

I don’t know that I can comment on our March exit margins but I can clarify the comment on the 300-500 basis points. That was in reference to the 1,200 basis point decline we had seen back in 2001 and 2002. As Dave mentioned, we were expecting to see about 70-75% of the overall margin decline in the first quarter. Based on what we saw happen during the first quarter we are sort of extrapolating on what we think will happen again over the next short-term period. Obviously it is a very fluid environment. I think the ultimate extent to what the margin compression will be in this cycle is going to be very dependent upon the length and the depth of the downturn, how far rigs fall and the resulting excess capacity that we see in the market as customers continue to adjust their capital plans and there is going to be excess capacity in certain product service lines. It could be different over the longer term, but this is sort of what we can see at this point in time.

Brad Handler – Credit Suisse

Is that time frame near enough that you are basically saying you are not getting any of the benefits from cost savings in that? So this is purely the revenue and the volume and pricing pressures could take you down another 500 basis points for a total of 1,700 basis points I think you said from a year ago?

Tim Probert

With respect to the reduction of our input costs as I have explained, absolutely the adjustments that have been made to personnel which we unfortunately had to make in Q1, the 60% of that cost structure which is represented by our supply chain we don’t expect to hit until the second half of the year. We obviously have to move it completely through our inventory and with the slowing of activity that has a tendency to reduce the number of turns which you see in the system. So I think it is appropriate to reflect any those savings during the course of the second half of the year.

Dave Lesar

Let me sort of summarize I think what you have heard. The issue is that price compression is today and is now. So as Mark has indicated, I think we are looking at potentially a 300-500 basis points additional pressure off the margins we saw in Q1. Of course that is going to be dependent on where the rig count ends up bottoming. Then I believe we will start to get some help in the back part of the year as we start to push through some of the cost savings we are now starting to get from our customers through our financial statements and hopefully that will mitigate and maybe reverse some of the margin hit we are taking at this point in the year.

Operator

The next question comes from Robin Shoemaker – Citigroup.

Robin Shoemaker - Citigroup

In staying with the North America theme, in terms of the activity decline you are seeing and your response to it, what part of your current strategy in response to this downturn is more of a permanent or structural nature? You mentioned that Permian, Rockies and mid-Continent are down worse than other markets. I assume you kind of have a view of where activity will recover and where it will not. I would just ask you to address that question of how much permanent cost reduction are you taking out now based on your view of the market going forward?

Tim Probert

There are two elements really I think. Number one is, ultimately does activity come back? I should say at what level will it come back assuming it will not come back to the same level as we went into the downturn. That is point number one. Then point number two relates to the geography of where will the focus be. Clearly I think we will definitely see some differences with respect to the picture of North America as we come out of the down cycle and clearly we are making adjustments to our infrastructure to reflect that. Truly I think to sort of telegraph what changes we might be making to those structural elements of our business probably is a little bit premature at present.

Robin Shoemaker - Citigroup

You mentioned your strategy on the international side of trying to get some value in return for lowering your prices or granting some price concessions in already negotiated contracts in terms of either lengthening the contracts or something that would give you value for what you are giving up, are you having success at that? Is that something that is going over well?

Tim Probert

There are a couple of key levers we can pull with respect to the situation. Number one obviously is duration. That gives us an opportunity to extend the duration beyond the current down cycle of the industry. The second relates to scope. That is to add additional services or products into a contract which may not necessarily be currently in place. The third lever is semi-tied to that and it is the opportunity to renegotiate a certain element. It could be commodity price. It could be some other element of time duration, for example. So I say yes, we are having some success in negotiating along those lines.

Operator

The next question comes from Kurt Hallead – RBC Capital Markets.

Kurt Hallead – RBC Capital Markets

The international market you sound a bit more constructive relative to prior cycle terms. Is it fair to say you don’t expect to see the same sort of margin compression that let’s say you experienced during the 1997 to 1999 downturn in the international markets? You think it will look more like 2001/2002 or maybe somewhere in between?

Dave Lesar

I think we really only have sort of one quarter of data points in front of us in terms of the international market but I would say it is behaving more like the latter than it is the former at this point in time and that is where we would expect it to turn out given what we see right now.

Kurt Hallead – RBC Capital Markets

It seems like coming into the year, January and February; all your customers pretty much had put everything on hold, giving you actually zero visibility. The conversations I have had the last couple of weeks it seems there have been some settled change in intonation where customers are now giving you some general sense of what they are planning on doing for the rest of the year. Are you seeing the same thing? Is that adding to your confidence? What do you think the trigger point was for the customers to all of a sudden start to give you more visibility?

Dave Lesar

I think there are a number of questions there. A lot of it had to do with the fact that we have had significant discussions with our customers about their plans because they went through many, many iterations of their own capital budgets before they announced anything and then are constantly updating them. So part of the discussion is just give us some indication of what you are going to do here so we can make sure we have the people and the equipment available and that the industry doesn’t look at either closing down locations or furloughing employees or stacking equipment and then you, Customer XYZ, turn around and want some services. So part of it was just a more intensive dialogue with our customers about their plans.

I think you are seeing a variety of behavior in the market place today. You have some customers that are just flat shutting gas production until the pricing gets better. We have a subset of customers that are drilling but not completing wells. We have some customers that are drilling and completing and then shutting their production in. So the discussions we are having with them are on a day-to-day basis, on a rig-to-rig basis about what their plans are for that rig, where it is going to go, what it is going to be doing and what services we are going to get on that. So, I am not sure that we are getting any clearer of a picture as to where ultimately it might go but the communication is a lot more intensive than it has been.

Operator

The next question comes from Ole Storer - Morgan Stanley.

Ole Storer - Morgan Stanley

If I understand you correctly you seem to indicate that margins will trough in the second half of the year, sorry in the second quarter in North America you will get some benefit of the cost reductions in the second half but that it is too early to talk about what sort of shape the recovery will be. If you look at internationally, again, I think the bait right now is does this market trough in 2010, in other words benefiting in a big way from contracts signed at historic prices this year that will gradually roll over and result in lower margins in 2010? It just strikes me that thought is a little too simplistic in that the volume you will execute under a contract might vary radically compared to whether we have a first quarter environment and everybody is trying to figure out the global economy and everything else under the sun. Could you just again bring us up to speed on how you are seeing this dynamic play out in the various regions around the world? [inaudible] see certain margins internationally that might already have troughed?

Dave Lesar

Let me take a first shot at that. I think unlike the U.S. business which has traditionally been more of a short-term or a call out sort of business, pricing has collapsed ahead of our ability and the industry’s ability to sort of push cost through our supply chain to try and preserve the margin base. I think the one positive aspect of the discussions we are having with our customers on the international front right now, because we know what contracts we hold, we know what option periods those contracts involve and we know the discussions we are having about either expanding scope or expanding the duration and the fact these are contracts we know we will have 12-24 months from now, we are better able to get our supply chain costs in line with the sort of cost reductions that our customers are asking for. Therefore, I don’t think you will see the mismatch of our prices going down but our costs not being able to closely follow. I think we will be able to more closely match the revenue reduction opportunities with the cost and supply chain reduction side of it. I don’t believe that you are going to see as far as we can see at this point in time the sort of margin compression you are having in the U.S. in the international market place.

Ole Storer - Morgan Stanley

One follow-up. You mentioned a 9% down rig count but a lot of the business is also rigless. What are you seeing in terms of volume in general under your [frame] agreements? Is any of that internationally starting to pick up? You are talking about there are several types of activity that could be curtailed if a company wanted to be cash conservation mode. Are you seeing any of this turn around yet?

Tim Probert

I think it sort of varies from place to place. If we take a look at the North Sea, for example, or the U.K. sector of the North Sea there were only 18 exploration and appraisal wells drilled during the course of the first quarter. In that case there is a fair amount of rigless activity, intervention activity which is planned. In other areas where there are major projects planned, the rigless activity sometimes takes a second seat or a back seat to the major capital programs. So it is a little bit difficult to generalize.

However, I think in a reasonable price commodity environment there certainly are plenty of opportunities for rigless activities to essentially bolster the overall revenue stream.

Ole Storer - Morgan Stanley

To sum it up, should margins drop in 2009 or 2010 internationally?

Tim Probert

I think it is a little too early to say at the moment. We are sort of one quarter into this and as you know; let me just sort of add one thing to emphasize that many of our customers are very concerned about their overall project costs. Those concerns are clearly being manifested in terms of the discussions we are having with them as there are others. It is the timing of them getting back to their primary programs which will determine the exact trough whether it is in 2009 or in 2010.

Operator

The next question comes from Jim Crandell - Barclays Capital.

Jim Crandell - Barclays Capital

My first question is about the horrific price discounting in simulation in the U.S. Given where we are on a capacity utilization basis with less than 50% and given there is some 13-14 publicly traded or significant private companies in the business is it possible or maybe even likely that even in a recovery we may not see pieces recover or recover much at all in that business?

Tim Probert

I think that clearly we are seeing some extreme pricing pressure right now. I think we are seeing some of the smaller suppliers clearly pricing on a cash basis which is placing quite a bit of stress in the system. I think that is quite clear. In terms of a recovery I think we just have to look back at past cycles to be our best guide in terms of the way in which pricing recovers and I think that clearly as we discussed a little earlier during Robin’s question the industry is going to look quite a lot different, I think, when it recovers this time. I think that we are going to certainly ensure that we place ourselves in a position where we take best advantage of the newer plays and structure ourselves to take advantage of a rising pricing environment.

Dave Lesar

Let me just add a little bit to that. We have talked on a number of calls that there is a lot of pressure pumping and there are a lot of pressure pumping companies out there but we really don’t compete head to head against very many of them. We have focused on the high pressure, high temperature, high horse power type gas, CBM shale plays end of the business and I really work with a select group of customers. That group of customers is going to be there, is going to survive through this and is going to continue to want our technology and our capability when we get out the other end of this. I think that for the part of business that we compete in and the customer base we have, I don’t think I would be as concerned about our ability to get price increases at the time when this thing turns.

Jim Crandell - Barclays Capital

I would just say there is a lot of anecdotal evidence on big, multi-stage jobs fact pricing by Haliburton and others being 40% down or more in the market place and I would say that the weakness in pricing is certainly not just a shallow area that you don’t compete in. It seems to be squaring in your markets as well.

Dave Lesar

Well it is easy to point to an individual job with an individual customer where a pricing decision got made but I think we are pretty confident when the supply demand tightens up we should be able to look at price increases at that point.

Jim Crandell - Barclays Capital

Just a follow-up question back to the international markets, certainly your competitors are saying that the Russian market in the U.K. North Sea market, as well as maybe Latin America and Mexico have now bottomed. Would you agree with that particularly in Russia?

Tim Probert

I think there is a lot of anecdotal evidence around but we are just going to be cautious in our reflection of that. I think it is just too early to say at the present time. We still are continuing to see some slippage in terms of overall rig count. Again, looking back at history towards a traditional international cycle we still have a ways to go yet. So I really think one quarter into this thing is just too early to say.

Dave Lesar

Let me just add, I think of the two markets you referenced I think we feel that the Russia market on the long-term and even in the short-term probably is closer to turning around than the North Sea is.

Operator

The next question comes from Bill Sanchez – Howard Weil, Inc.

Bill Sanchez – Howard Weil, Inc.

I was curious if you could provide a little bit of color as we are hearing about IOC’s gearing up for upstream beginning in Iraq. I thought perhaps you could share your thoughts as far as Halliburton’s position there and your outlook?

Tim Probert

Halliburton has a long history in Iraq through the years. Whilst we have a presence there and we are generating revenue in Iraq, we don’t have operations on the ground currently. We are obviously monitoring very closely the activities both in terms of the potential for service contracts with the majors in Iraq and also conventional activity we certainly feel notwithstanding security issues which could still derail current plans that there will be some significant opportunity there over the next 3-4 years.

Bill Sanchez – Howard Weil, Inc.

Is that something you are gearing up for now to take advantage of a 2011 or 2012 type situation? What is the time frame for you getting on the ground there?

Dave Lesar

Let me add to that. I think there are really two sort of troughs that will go on in Iraq. We are having discussions with any large number of IOC’s about their ongoing discussions with the Iraqi government about starting up operations there and for us that will be done on a more traditional services type strategy and philosophy. There are also discussions going on at this point in time with some of the Iraqi oil and gas companies about integrated project management, IPM, turnkey, whatever you want to call it type opportunities and we do see that there may be a number of those opportunities start to come up maybe even faster than the opportunities come up with the IOC’s. As Tim has said, we recently won a wire line bid in Iraq so we will start operations in there shortly but I don’t think it will be any meaningfully large addition to our revenue stream certainly for a number of years.

Bill Sanchez – Howard Weil, Inc.

Tim or Mark, I think last quarter you mentioned the seasonality in fourth quarter 2007 to first quarter 2008 cost Halliburton $0.07. Do you have that number for this quarter?

Mark McCollum

Sorry, I don’t have that exact number but I think it was just sort of it was fairly close in line with what we thought it was going to be in terms of the seasonality. For the particular pieces Direct Sales, landmark seasonal declined as well as the completions and how they fell.

Operator

The next question comes from Michael LaMotte – J.P. Morgan.

Michael LaMotte – J.P. Morgan

On the de-mobe around Khurais and the opportunity for replacement work, is there anything in Saudi on the gas side that what country are you looking to reallocate those resources elsewhere in the region or the world?

Dave Lesar

As you know, the Saudi’s are very good at sort of reallocating market share within the country once they decide which contractors they want to work for. As we indicated, with Khurais ramping down we thought Manifa would essentially replace it. Manifa has been deferred at this point in time. I still think it will come at some point in time in the future. What they are doing is reallocating some of the rigs that we were on to other rigs they are operating within Saudi. They are also talking about potentially looking at some gas plays and more importantly some tight gas plays that they are very interested in the country. I suspect we will get a shot at doing some of that.

Michael LaMotte – J.P. Morgan

So when you say de-mobe it is just sort of pulling back Khurais, it is not actually leaving the country?

Dave Lesar

At this point in time I think we see that we can reallocate the equipment that we had on Khurais to other opportunities inside of Saudi.

Michael LaMotte – J.P. Morgan

Was there a performance bonus in the first quarter on early completion surrounding that project? I’m just trying to think about impact potentially on margin Q1 to Q2 in the EMEA region.

Dave Lesar

No, that was just a straight up time and materials contract we happened to get very good results on. There was no bonus payment.

Michael LaMotte – J.P. Morgan

Lastly, if I could ask you to elaborate perhaps on the final statement in your prepared comments on the press release that we will make the strategic investments to emerge even stronger. Are you referring there to the capital program? The strength of it this year and the recapitalization of the fleet? Or were you sort of alluding at a potentially more interesting M&A environment?

Dave Lesar

I think what we are trying to do is indicate that we are getting and keeping our powder dry. I think we have not backed off on our technology spend and we have some very interesting technology that is coming down the pipeline. When we are ready to commercialize that we need and want to have the capital budgets available to be able to manufacture and bring that technology to the market place. The refresh of the fleet I think is something that really needed to be done not only by us but by the industry. I think we would look at whatever interesting and strategic M&A opportunities might be out there at that point in time. But as Mark indicated, we want to have the financial firepower to be able to do some combination of all of those and be able to take advantage of whatever the market ends up giving us.

Michael LaMotte – J.P. Morgan

If we think about strategic initiatives for M&A if there are a handful of reasons to do it, one is consolidating market and rationalizing market, I think the deals that you and others have looked at in the last few years have been more about geographic expansion or broadening product line. Any change in priority from the last few years? Is consolidation more of an interest now?

Dave Lesar

I think the prices of the various assets have certainly been sort of marked down to more reasonable values. I think it wouldn’t be in our best interest for me to try and telegraph what direction we would want to go but I think the strategy we have had of niche acquisitions and geographic expansion certainly would still be the top priority but we clearly would and are looking at broader things than that.

Operator

The next question comes from Dan Pickering – Tudor Pickering & Co.

Dan Pickering – Tudor Pickering & Co.

I just want to clarify something that came up earlier in the Q&A. I think one of the questions indicated that you said Q2 was the margin trough for North America. Did you say that and do you think, can we just revisit that?

Dave Lesar

If you can give me a rig count bottom then I can probably do a better job articulating when we see a margin compression bottom. I think what I was trying to indicate is that the pricing compression I think we will see sooner rather than the mitigating effects of the cost savings. So if you ask me when I believe we will see a pricing compression, margin compression bottom related to pricing I am hoping that it is Q2. If the rig count continues to fall all the way through Q2 and into Q3 then no, Q2 won’t be the bottom because we are going to keep chasing it down at that point in time. I would hope that we would start getting some help from the cost savings in Q3 and even if we were continuing to see price compression that would be mitigating at that point in time.

Dan Pickering – Tudor Pickering & Co.

My other question or follow-up question would be something that hasn’t been talked about I guess for probably six months now. Are the capital markets and the outlook now such that the company would consider share repurchase as one of the options that kind of came off the table when the capital markets closed? Are we open enough now to think about buying back stock or is that back burner at this point?

Mark McCollum

I think that we are more open to it than we were maybe six months ago. That is a good question. I think the capital markets have proven more resilient for the higher investment grade companies such as us. We did access the capital market and it seemed that we can continue to do so. It is certainly not our interest to borrow but we would like to use the cash on our balance sheet to grow with capital as well as with prudent M&A opportunities but if they are not out there and we deem it to be the best use of cash to start buying some shares back then you might find us doing so.

Dan Pickering – Tudor Pickering & Co.

So it sounds like CapEx first, M&A secondly and opportunistically share purchase third but no longer off the table?

Mark McCollum

Right. Obviously as Dave alluded to in the call it is very important to us this year given the lack of certainty we have about the direction of the financial markets to operate within our cash flow. So that is an important directive and obviously we intend to try to generate cash through this through the unwind of working capital and through some of the cost savings initiatives we have done. We are going to watch it very closely and have a discussion with our Board.

Operator

The next question comes from Mike Irvin – Deutsche Bank.

Mike Irvin – Deutsche Bank

Did I hear you correctly in saying you saw some anecdotal evidence you would expect the supplier response in North American gas during the second quarter or starting during the second quarter? Was that right?

Tim Probert

We had said I think during our last call that it was our expectation there would be some sort of supplier response during the second quarter. Dave commented in his prepared remarks that there clearly was, though far from perfect, the data is beginning to emerge that would suggest that might actually take place before the end of Q2.

Mike Irvin – Deutsche Bank

Could you reconcile that with your additional comments that you have seen a lot of shut ins? That you have seen customers but not complete, complete but then shut in? So is it the current production starts to roll out and if that happens then we get gas price response and you just go back and see the completions come in and the additional production or even [L&G] for that matter. I’m just trying to roll all those together visa vie is it enough that you see rig activity come back or is it just a case where existing production drops and then we bring on completion and you don’t necessarily need to put a drill in every back door.

Tim Probert

Clearly our service operations will benefit from completing those completions. Taking a look at the API data the API data sort of tells us that there has been actually a slip in the correlation between drilling and completions over the last quarter or so which sort of adds to the kind of support of the view that there is an inventory of wells in place which are drilled but not completed. Certainly the anecdotal evidence from our field operations provides some support for that too. So, yes but I think the idea is those will get completed into a rising price environment and clearly we will benefit from a service standpoint from that when it takes place.

Mike Irvin – Deutsche Bank

So it will be more the completion side of the business to which you obviously have a great bit of exposure rather than expecting a rig count rise? Is that fair?

Tim Probert

The rig count will come back, clearly those completions will benefit us right away.

Christian Garcia

That will do it. Thank you for your participation in today’s call.

Operator

Ladies and gentlemen thank you for your participation. Everyone may now disconnect. Good day.

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Source: Halliburton Company Q1 2009 Earnings Call Transcript
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