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Executives

David Lesar - Executive Chairman, CEO and President

Mark McCollum - EVP and CFO

Timothy Probert - President of Strategy and Corporate Development

Jeff Miller - EVP and COO

Kelly Youngblood - Senior Director of IR

Analysts

James West - Barclays Capital

Waqar Syed - Goldman Sachs

Jeff Tillery - Tudor, Pickering, Holt & Co.

Angie Sedita - UBS

Bill Herbert - Simmons & Co.

Kurt Hallead - RBC

Jim Wicklund - Credit Suisse

Scott Gruber - Sanford Bernstein

David Anderson - JPMorgan

Brad Handler - Jefferies

Jim Crandell - Cowen Securities

Doug Becker - Bank of America Merrill Lynch

Halliburton (HAL) Q1 2013 Results Earnings Call April 22, 2013 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Halliburton first quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions.] As a reminder, this conference may be recorded.

I’d now like to introduce your host for today's conference, Kelly Youngblood. Sir, you may begin.

Kelly Youngblood

Thanks, operator. Good morning, and welcome to the Halliburton first quarter 2013 conference call. Today's call is being webcast and a replay will be available on Halliburton's website for seven days. The press release announcing the first quarter results is available on Halliburton website.

Joining me today are Dave Lesar, CEO; Jeff Miller, COO; and Mark McCollum, CFO. Tim Probert, president of strategy and corporate development will also be available today for follow-up calls.

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 materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2012 and recent current reports on Form 8-K.

Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures are included in the press release announcing the fourth quarter results, which, as I have mentioned, can be found on our website. In our discussion today, we will be excluding the impact of these items on our financial results unless otherwise noted.

We welcome questions after we complete our prepared remarks. We ask that you please limit yourself to one question and one related follow-up to allow more time for others who have questions.

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

David Lesar

Thank you, Kelly, and good morning to everyone. Let me begin by saying that our results for the first quarter played out pretty much as we said it would on our last call. Our international operations were impacted by the normal seasonal drop off in the first quarter, but revenues and operating income expanded significantly compared to the prior year as we outgrew our primary competitors.

Sequentially, our North America margins improved substantially as we worked through the guar issue and got our equipment back to work as customers refreshed their budgets. Total company revenue of $7 billion was a record for a Halliburton first quarter, and operating income was $902 million. Our Sperry Drilling, Mult-Chem, and Baroid product lines achieved record revenues this quarter and from an operating income perspective, Baroid and drill bits also set new records.

I’m very pleased with our results in North America, where we saw nearly a 400 basis point sequential improvement to our margins as we work through our remaining high-priced guar inventory, saw activity levels rebound from the dramatic drop off seen at the end of the fourth quarter, and began to see cost savings materialize from our Battle Red and Frac of the Future initiatives.

The U.S. land rig count averaged 3% lower in the first quarter versus the prior quarter. However, despite reduced overall rig activity, horizontal rigs were up sequentially, and we expect this trend to continue, especially in areas like the Permian Basin. Coupled with the increased adoption of pad drilling and 24-hour operations, we expect to see even higher service intensity.

We believe that the oil directed rig count will grow moderately from current levels as our customers continue to evaluate the pace which they can more efficiently drill in complete wells. We believe this continued shift towards efficiency will bode well for us in the coming years, as no other company has the ability to execute factory type operations as efficiently as Halliburton.

Recently, we have seen an uptick in natural gas prices. However, our outlook for gas activity this year has not materially changed. We believe we will need to see sustained pricing improvements before gas activity will meaningfully increase. With the exception of the Marcellus, where we are already very active, our view is that natural gas drilling will not be a major activity driver in 2013 in the U.S.

The availability of associated gas and shut in gas to meet market demand will likely delay a meaningful uptick in new well drilling. If we see improvement in the gas basins, it will be late in the year, although we are becoming increasingly optimistic about gas activity in 2014.

That all being said, let me remind you that we called the fourth quarter as the bottom for North America margins, and our first quarter results bear that out. Even with the spring breakup in Canada, we continue to expect North America margins will expand over the balance of 2013, subject to the usual year-end seasonality.

Turning now to the international markets, we continue to successfully execute our growth strategy. Relative to the first quarter of 2012, we grew revenues by 21%, which is the highest among our primary peers, and is clear evidence of our expanding global market share.

In fact, compared to our two primary competitors, we have delivered leading year over year international growth now for the last four quarters. In addition, eastern hemisphere grew operating income by an outstanding 39% relative to the first quarter of 2012, which is also the highest in our peer group.

We did experience the typical sequential decline in revenue and margins during the first quarter due to the absence of seasonally higher year-end software and product sales as well as the normal first quarter seasonal weakness in the North Sea, Eurasia, and Australia.

Our thinking for the full year internationally remains consistent. We are forecasting year over year international revenue growth in the low teens, and continue to expect our average full year international margins will be in the upper teens.

In Latin America, I’m happy to announce that we’ve received a final award approval from Petrobras for both the high tech directional drilling and testing contracts. These four-year contracts with extensions for up to another four years include drilling, logging while drilling, and integrated test and services in both the pre-salt and post-salt formations in the Brazilian offshore market.

In both these cases, we won the leading market position in Brazil, and more importantly, in the drilling award, we won the largest package, even though we were not the lowest bidder. Together, the potential estimated value of these hard-fought contracts is more than $2 billion, which is expected to significantly increase our position in the largest deep water market in the world.

These wins are a testament to the ongoing success of our strategy to provide long term advanced technology solutions to our customers will increase in a leadership position in the global deep water market.

There’s no doubt Latin America was a disappointment from a margin standpoint in the first quarter. But the issues were one-off in nature as we saw activity delays, incurred increased severance costs in Argentina, cost to mobilize in our new deep water contracts in Brazil, and a significant rate count reduction in our Mexico IPM projects as we wait on our large contracts to retender. I fully expect Latin America margins to improve moderately in the second quarter and to average in the upper teens for the second half of the year.

Our growth strategy going forward remains the same. It is clearly working well, and does not need to be changed. We will continue to focus on strengthening our global position in deep water, unconventionals, and mature fields, and we continue to be relentlessly focused on industry leading returns.

I am optimistic about the remainder of the year, our ability to continue rebuilding North American margins, and realizing continued revenue and margin growth in our international business. Now I’ll turn the call over to Jeff to provide operational highlights.

Jeff Miller

Thanks, Dave, and good morning everyone. Let me begin with an overview of our first quarter results. Latin America revenues grew 21% compared to the same quarter last year, driven by an expanding revenue base in Mexico, Brazil, and Venezuela, and from a product line perspective, the growth was driven by Sperry Drilling, Baroid Fluids, and consulting and project management. Year over year, operating income was down 11%, primarily due to activity delays and higher costs in Argentina and mobilization costs for the recent contract wins in Brazil.

In addition to the deep water Brazil wins David discussed already, we had several highlights with unconventional activity in Latin America this quarter. In Argentina, we provided integrated completion services for an independent operator on the largest volume shale well ever pumped in the country. This quarter also marked the first international application of PermStim, our premium guar alternative, where we designed a customer fluid treatment on a shale well in north Mexico.

The eastern hemisphere headline is that compared to the first quarter of 2012, revenue grew by 21% and operating income increased 39%. And though we experienced the typical sequential decline in revenue and margin during the first quarter, we did not see the severity of weather disruption typically experienced during the first quarter.

In the Middle East Asia region, compared to prior year, revenue and operating income increased 25% and 51% respectively. We saw the largest growth in the Australia, China, and Saudi Arabia markets. This improved performance reflects the successful startup and execution of contract awards throughout 2012. Specific to Saudi Arabia, we saw over 30% revenue growth relative to the first quarter of 2012, and it’s expected to be one of our top growth areas in 2013.

Notably during the quarter, we received a direct award for two additional rigs on our south guar project, and we deployed the first complete rapid suite sliding sleeve system in the country. To support further unconventional development in the region, we are look forward to opening our [unintelligible] gas technology center in Saudi Arabia later this year

In addition, operations in Iraq posted a profitable quarter, and as we refine our portfolio of projects, we expect operations to remain profitable for the year. Also of note, our Multi-Chem product line took a significant step forward on its eastern hemisphere footprint, expanding operations with the win in India.

This quarter also marked the opening of our completion technology and manufacturing center in Singapore. The center is already delivering high quality completion tools through our eastern hemisphere operations and helping to drive additional revenue growth and cost improvements.

Turning to Europe, Africa, and CIS, relative to the first quarter of 2012, we saw revenue and operating income increase 17% and 25% respectively. The improvement was driven by higher activity levels in the North Sea, Eurasia, Nigeria, and Central Africa markets. In Angola, we recently secured a wireline formation evaluation logging contract on a deep water pre-salt block for a large independent operator and in Norway, we were awarded a multiyear contract with Statoil to improve production through multilateral solutions on a mature offshore field.

Across the Europe, Africa, and CIS region, we’re seeing an uptick in the adoption of unconventional technology. For example, we’re seeing increased use of multistage fracturing across the region, and expanded application of rotary steerables and sliding sleeve technology in developing the tight oil fields of Russia. These are markets with terrific potential for unconventional development, and we are excited about further adoption of our technologies to help clients develop their resources.

Moving to North America, revenue was down 1% compared to the previous quarter. That’s relative to a 3% sequential drop in the U.S. land rig count. Operating income was up 30% sequentially, driven by lower water cost, increasing service intensity, and early cost savings resulting from our Frac of the Future and Battle Red initiatives.

Starting with guar, the quarter shaped up as expected, with large low-cost guar deliveries early in the quarter, significantly reducing our full quarter average cost. Given the first quarter exit rate for completion activity, our average guar cost should be at market rate by the end of the second quarter. At the end of the first quarter, approximately 85% of our crews were under long term contracts, and about three-quarters were working 24-hour operations.

At this point, I’d like to say a few words on stimulation pricing. As we finish the quarter, virtually all of our long term hydraulic fracturing contracts have been renewed. Due to the timing of contract startups, we will see some additional pricing impact on our margins in the second quarter as some recently renegotiated contracts went into effect at the beginning of April. However, we believe the worst of the pricing pressure is behind us.

To support our focus on improving pricing trends, we will continue to execute our stated strategy around surface efficiencies, custom chemistry, and subsurface technology, delivering differentiated services, which generate superior returns over the long term. Our fleets are sold out today, and are aligned with customers where we can create the most value for them and deliver the best returns for Halliburton.

I believe our first quarter performance indicates we’re on the right track, and as a result, I’m not going to comment on any tit for tat reports on pricing because I feel they are normally self-serving and anecdotal, and I expect that you see them the same way.

With respect to our other product lines, we’ve experienced some pricing pressure in specific basins, but there has not been a meaningful impact on our margins. The pressure’s been focused on cementing, [unintelligible] wireline, and directional drilling, primarily in areas with lower technology requirements and therefore smaller competitors in the market.

However, we believe that as activity levels continue to improve throughout the year, this pricing pressure will subside and our cost optimization initiatives will help offset any further pricing pressures on those service lines.

We’re also beginning to have more meaningful discussions with our clients around the technology to make better wells, which we believe may signal the leading edge of pricing improvement.

We’re increasingly optimistic that even in a market with flat or moderately improved rig count, we will continue to see a shift to pad well activity and more 24-hour operations. It is our view that the resulting increased well count and stage count could absorb a meaningful percentage of the excess horsepower and help drive service intensity across the product lines.

In the Gulf of Mexico, first quarter activity was impacted by [bolt] maintenance issues on [BOP stacks]. We expect strong revenue and profit growth for the year, but weighted more to the second half. We believe we will continue to grow our market share as rigs move to a completion cycle on new wells, and we are well-positioned to lead the market and lower tertiary completions.

A good example of how we differentiate ourselves is our enhanced single trip multizone system, which can quickly isolate and stimulate multiple zones in a lower tertiary formation, saving operators weeks of rig time and substantially improving the economics of these ultra-deep wells. For a major operator in the Gulf, we’ve already documented an average savings of 18 rig days per well by applying this single-trip technology.

I like our position in North America, and believe it’s only going to get better going forward. The guar issue is largely behind us, and we anticipate better cost optimization will result from our strategic initiatives. We anticipate activity levels will improve through a combination of modest rig count growth and continued drilling efficiencies over the course of the year.

I want to conclude with our key areas of focus. First, we are committed to improving our North America margins. We’ve seen a dramatic improvement this quarter, but we’re not finished. Second, we’re committed to growing our international revenues and margins and achieving a better geographic balance in our business going forward. And finally, we remain focused on capital discipline and ensuring that we generate the highest returns in our peer group.

And now Mark will provide some additional financial commentary. Mark?

Mark McCollum

Thanks, Jeff, and good morning everyone. Our results for the first quarter reflect a $637 million net of tax accrual to increase our contingency reserve related to the Macondo multidistrict litigation. The accrual this quarter is in addition to the $191 million net of tax accrual made in the first quarter of 2012.

Over the past month or so, we’ve participated in court-facilitated settlement discussions with some of the parties included in the multidistrict litigation, with the goal of resolving a substantial portion of the private claims against us in this matter.

These discussions are at an advanced stage, although they’ve not yet resulted in a settlement, and the accrual is based on where we are in the negotiations at the present time. Our most recent offering includes both stock and cash, with the cash components payable over an extended period of time.

We’re pursuing these settlement discussions in earnest, because we believe that an early and reasonably valued resolution is in the best interest of our shareholders. However, a settlement of this magnitude is complex, and requires the other settling parties to be reasonable on their part too.

From a litigation standpoint, we continue to believe that we have substantial legal arguments and defenses against any liability, and that BP is contractually required to indemnify us as described more fully in our public filings. Therefore, if our settlement discussions are not successful, we’re fully prepared to see this matter to conclusion in the courts.

As the [MBL] trial and other investigations progress, we’re constantly monitoring and evaluating developments and it’s possible that we may need to adjust our reserve estimate up or down in the future. Our reserve estimate also does not include any potential recoveries from our insurers. Because we’re engaged in ongoing settlement discussions and active trial proceedings, we will not be taking any Macondo related questions today.

Excluding the charge related to the Macondo litigation, our corporate and other expense totaled $120 million this quarter and included approximately $37 million for continued investment in our Battle Red, completion tools, manufacturing, and other strategic initiatives. Some of these initiatives will continue throughout 2013, but the related costs should begin to decline in the second half of the year.

We anticipate the impact of these investments will again be approximately $0.03 per share after tax in the second quarter. Our legal costs have also increased during the Macondo trial, so in total, we anticipate that corporate expenses will average between $120 million and $130 million per quarter for the remainder of the year.

I’m pleased to say that we’re already beginning to see the payoff of the investments we’ve made over the last few years, such as the recent opening of the Singapore manufacturing center, a material reduction in our effective tax rate, and finally cost optimization related to our Battle Red initiative. Next quarter, we intend to give you a further quantification of the expected savings we can realize from our Battle Red and Frac of the Future programs.

During the quarter, we were positively impacted by retroactive federal tax benefits of $50 million, resulting in an adjusted first quarter effective tax rate of approximately 23%, excluding the charge related to the Macondo litigation.

Due to the benefits from the strategic realignment of our international operations we completed last year, and the continued expansion of our international business, for the remaining quarters of the year, we expect the effective tax rate will be approximately 29%, a 300-basis point improvement over our 2012 rate.

Also during the quarter, we announced a 39% increase to our dividend and the commencement of stock repurchases under our existing buyback authorization of $1.7 billion. Going forward, our intention is for the dividend to represent at least 15% to 20% of our net income.

As a result of the Macondo settlement discussions in the first quarter, we were unable to repurchase a significant amount of shares. We plan, however, to be much more aggressive in our second quarter repurchase activity, following the anticipated completion of our SEC filings later this week.

Our capital expenditure guidance of approximately $3 billion for the full year 2013 remains unchanged. For our international bus, as we move into the second quarter, we’re anticipating a moderate improvement in revenue as we recover from the first quarter seasonal drop off. And we expect margins to approach the mid teens.

For North America, we anticipate a modest improvement in the U.S. rig count in the second quarter. However, given the stronger U.S. activity levels in the first quarter, coupled with the typical second quarter drop off in Canadian activity due to spring break up, we only expect a slight improvement in sequential revenues for the second quarter.

North America margins should be positively impacted by another 100 basis points or so, as our average guar cost continues to decline to market levels. We anticipate also that marginal improvement from U.S. activity levels will be largely offset by pricing from late first quarter contract renewals and by Canadian activity disruptions due to spring breakup.

Now I’ll turn the call back over to Dave for some closing comments.

David Lesar

Okay, thanks, Mark. So in summary, we’re very proud of our strong year over year international growth, which was the highest in our peer group and a solid proof point that we are executing well against our strategy. Our overall international outlook for the year has not changed. We expect revenues will grow in the area of the low teens, and expect full year margins will average in the upper teens.

Specifically, for Latin America, we had some temporary activity declines and one-off charges across the region, but it doesn’t change our outlook for the full year. The North America headwinds from last year are largely behind us, and we are optimistic about activity levels and continued margin improvement for the remainder of the year.

And lastly, with respect to ongoing Macondo settlement discussions, we are working hard to come to a reasonable settlement that will be in the best interest of our shareholders. So at that point, let’s open it up for questions.

Question-and-Answer Session

Operator

[Operator instructions.] Our first question comes from James West of Barclays. Your line is now open.

James West - Barclays Capital

Dave, when I saw you back in January and February, there were two things that really stuck out in my mind from our conversations. One was that on the international side you talked about the opportunity set being really the largest you’d ever seen.

And then number two, that this was really the time to test pricing in the international markets. I’m wondering if we could kind of revisit that, if you could talk about that opportunity set. Is it still as large as you thought a couple of months ago? And then really the second is on the pricing side, are you starting to see some more pricing discipline from your competition? Or are you starting to see pricing rise?

David Lesar

Yeah, I think with respect to the first comment, the opportunity set in the international markets remains as large as it has been, and I think the largest set that we’ve certainly seen within recent history. So those opportunities haven’t gone away.

I think the other point that I should make is that with the Brazil tendering process behind us, the opportunity set is a whole lot of sort of medium-sized types of opportunities. It’s not any big mega types of tenders out there. Which gives us and our competitors, I think, an opportunity to sort of test where we are in terms of pricing.

If you look at where we are bidding today, and where we’re winning work, I think we certainly have hit the bottom in terms of international pricing. Believe me, it’s still competitive. But I believe that we’re seeing that it is starting to turn up.

James West - Barclays Capital

Okay, and then maybe just one follow up on Mexico. We’ve got some contract retendering that has to go through. How long is that process expected to take before you can get back to work there?

Jeff Miller

There are a couple of big things that happen sort of mid year. So I would expect that through the process we’ll see some sorting out of budgets early, at the end of Q1, and then tenders mid year. It’s probably later in the year, before budgets are refreshed and back to work. But I would expect during the balance of this year we’d see that.

David Lesar

I think one other thing I might add is that on these contracts we’ve gotten extensions on a number of them, but it’s been at a rig count that’s less than what we had been working at while we wait on these tenders to come forward. And that’s really part of the reason that the margins have got squeezed. But as I said, we look at that as sort of a one-off issue.

Operator

Our next question comes from Waqar Syed of Goldman Sachs. Your line is now open.

Waqar Syed - Goldman Sachs

My question relates to North America. It seems the margin improvement was much higher than we expected. It feels better than what you expected as well. Could you provide, Mark, what was the source of the upward surprise in margins in the first quarter?

Mark McCollum

As we look at it, we thought probably just given a lower level of activity expected in Q1 that we would only get a couple hundred basis points from guar savings. I think the Street knows that we had said that we thought we could get 400 to 450 basis points of improvement in our North America margins from the turn in our guar inventories. We, I think in the first quarter, just given the higher activity levels, got about 300 basis points of that savings on guar, which leaves the remaining 100 or so for the second quarter, which I talked about in my prepared comments.

The rest of it, really when you look at it, is activity-related. Very strong activity for us. We got our crews back to work much faster than we thought we would on the pressure pumping side. When you look across our drilling and evaluation divisions, they did extremely well. We saw almost 200 basis points of marginal improvement across D&E as well.

So all the activity increase for us just well exceeded the pressure that we saw from continued pricing that we had from rolling some of our pressure pumping contracts in the first quarter.

Waqar Syed - Goldman Sachs

And this is the first time that I’ve heard you guys be positive on the pricing front as well. What gives you that confidence that pricing could pick up later in the year?

David Lesar

The conversations that we’re having with clients these days are becoming more geared towards making better wells, which leads very quickly into a discussion around chemistry and chemistry application. And those are applications of our technology, and so maybe not today, but that’s the leading edge of the right discussion to have with a company like Halliburton, because we do make better wells when we use that technology.

Operator

Our next question comes from Jeff Tillery of Tudor Pickering. Your line is now open.

Jeff Tillery - Tudor, Pickering, Holt & Co.

The reported rig counts, we can see activity has trended pretty flattish over the last month in the U.S. Just wanted to hear kind of your discussion, your viewpoint, on activity second and third quarter, and what gives you confidence there will be uptick from here?

David Lesar

A combination of things. We see increases in pad drilling. That obviously drives service intensity for us. You heard my discussion around leading edge of technology application. And those things combined start to take us to more efficient operations where we’re using our equipment.

The second thing is really alignment with the clients that appreciate our efficiency level. And so as we position our equipment in the basins and with the clients that want that sort of efficiency, we expect to see improvement. So in spite of, say, rig count modestly increasing, both our share of it and the speed with which that activity happens can increase.

Jeff Miller

When you look at the well count, yeah, overall it didn’t look that great, but the horizontal rig count was up. If you look inside of that, the rig count went up with the customers whom we work for. A lot of the majors.

And then thirdly, we focus more dramatically on well count. And when we look at activity across the quarter, well count was up and so was our service intensity around stage counts. And so that drives improved performance, as Jeff said, when you’re aligned with the right customers doing the right type of work with good technology.

Jeff Tillery - Tudor, Pickering, Holt & Co.

And my second question is just as you look out, if you think about exiting this year, North American margins were quite a bit better than I had thought. We’re going to see international margin improve during the course of the year. I would still expect international margins to exceed North America to exit the year. Do you agree with that?

Jeff Miller

No, I wouldn’t necessarily agree with that. I think it will be a horse race as the year progresses. Certainly North America is getting better, but we’ve still got excess capacity in the North America market that we’ll be dealing with, so there is some pricing pressure that they’re facing. Right now, as the international operations expand and on their base and the improvement that we see, I think that they could actually eclipse the North America margin in the year. But it will be very, very close.

Operator

Our next question comes from Angie Sedita of UBS. Your line is now open.

Angeline Sedita - UBS

Just to be clear, when you’re talking about North America and modest price increases as customers adopt new technology. Is this specifically in frac? Or in other product lines?

David Lesar

This is all product lines. So this is about making better wells, which is a function of well construction and completions. But I will say these are the leading edge of discussions around how to do it. So very encouraged by the discussions, which means there’s an appreciation for the technology of how better producing wells are made.

Angeline Sedita - UBS

And then on North American frac capacity, assuming that we do see another 6-7% growth in the rig count in 2013, and as we’ve discussed here, growth in the well count and, i.e., rig efficiencies, do you believe that the frac market could actually be balanced by early 2014 or even late 2013?

David Lesar

Really Q1 played out very close to what we thought it would, maybe a little bit better activity. We always thought, as we looked ahead, that there still would be some excess capacity in the frac market, maybe in the 10-15% level, too much frac capacity. That could get absorbed very, very quickly in the early part of 2014 based on what we’re seeing.

Operator

And our next question comes from Bill Herbert of Simmons & Co. Your line is now open.

Bill Herbert - Simmons & Co.

Back to North America here real quickly. You guys have addressed this in some facets, but not necessarily in others. I guess my question is you came into the year with a decent inventory [of drill bit], uncompleted wells. That helped propel better completions activity versus drilling activity in Q1. Drilling activity hasn’t been all that brisk year to date. And yet you guys are waxing confident about the runway remaining for the next quarter or so. At least that’s my interpretation. Can you give us some more granularity as to which markets look better? Which markets look worse? And specific discussions you’re having with customers? Because it sounds like the visibility you see is more nebulous to the market.

David Lesar

Let me take this one. I think it’s not a matter of geography. It really is a matter of your customer base. And we’ve said for years we only deal with what we call the fair way players in the U.S., North America market. These are the folks that are going to keep rigs up and their budgets up, through thick and thin, but also are those that are dealing with some of the lowest lease cost opportunities there.

So we pride ourselves on our ability to sort of pick and choose who we work for, and we do that. And so it really doesn’t matter where they’re working. And I really wouldn’t get too concentrated and focused on geography. It’s really what our customer base is. And I think has Mark has said, our customers that we’re working for are increasing their rig counts. They’re increasing their budgets, and we sort of know what their plans are for the remainder of this year.

And that’s what gives us the increasing confidence of our position in North America from a margin accretion standpoint, notwithstanding the fact that there are a lot of other companies and customers out there that may not feel so confident. We just happen to feel really strong and really confident about the customer base that we have.

Bill Herbert - Simmons & Co.

And then the follow up is on international. Your guidance sort of low teens for the year. You’ve got a 21% year over year increase for the first quarter in terms of revenue growth, which implies a pretty good slowdown with year over year growth relative to Q1 for the balance of the year. Is that conservatism? Or is that based upon conviction that the year over year rate of growth is actually going to slow that much? It’s still commendable, but slower than Q1.

David Lesar

It is truly slower than Q1, but I think that as we look year over year, Q1 in 2012 was a bit more dramatically down. And so we knew that Q1 probably would be a little bit higher percentage. As we look ahead also we think that particularly in Latin America things are going to move a little bit slower, possibly, than some would forecast. So maybe it has a little bit of conservatism in it, but we think it’s a pretty fair forecast, just based on, historically, what you see customers do from this point forward. And remember, last year we saw some pretty significant growth sequentially in our international markets coming off of Q1. So it really is in comparison to last year.

Operator

Our next question comes from Kurt Hallead of RBC. Your line is now open.

Kurt Hallead - RBC

Dave, a question for you. There was a lot of chatter the last couple of days, at least from one of your competitors, getting very optimistic about the acceleration in the international marketplace as you get through the second half of the year. And I think a lot of that is being driven by the prospects of the Saudis to pick up rigs. I know you’re pretty close to the situation out there, very close. I wonder if you can put it into context for us compared to what transpired in Saudi in ‘06/’07 into ’08, how you would compare that to what you see happening now, and then what kind of impact you would expect that to have on capacity and pricing and opportunities going out late ’13 and into ’14?

David Lesar

Well, I think, sort of on a broad scale, as I indicated before, we are very excited about the potential in the eastern hemisphere markets at this point in time. And we are very optimistic, specifically, about opportunities in Saudi Arabia. If you look at the myriad of areas that Aramco was looking at increasing: gas drilling, work over areas, the whole area of lump sum turnkey projects. And we’re embedded with Aramco in all of those.

So I think if you look at the opportunities in the Red Sea, where we recently won some work with Saudi Aramco. So we’re very excited about that market in particular, and obviously we’ll get more than our share of that market as it comes around. We’re in active negotiations with them right now about several projects. Obviously, we can’t talk about them until they’re awarded, but we’re very optimistic about where we stand on them.

So I believe that Saudi is a bit of a microcosm of what we see the whole international market playing out as, which is very positive over the next several years.

Kurt Hallead - RBC

And maybe in that context, is there a parallel we can draw to what transpired in ’06, ’07 and the acceleration in bus and margins and activity and pricing and everything else that drove the sector for a good two, two and a half year period?

David Lesar

I certainly hope so.

Operator

Our next question comes from Jim Wicklund of Credit Suisse. Your line is now open.

Jim Wicklund - Credit Suisse

Jeff, you talk about service intensity. And we all know that rig count is becoming increasingly passé as a metric. And I understand the improvements in technology in your customer base that drive your business. But have you all come up with a number? Is service intensity growing by 5%? 10%? Is there a number that you all are kind of looking to put on that?

David Lesar

We look at different metrics, so numbers of stages and different things that we see out there. And so when we look at it, we see it improving. I’m not going to give you, necessarily, a particular metric, but we’re forecasting a 9-10% improvement in efficiency of rigs, which gets to what drives the underlying numbers of stages, numbers of activity.

Jim Wicklund - Credit Suisse

And I know we talked a little bit about rig count and all, but spending. Do you think that North America spending will go up this year, through the rest of the year? There’s been a great deal of question as to whether the rig count is going to move. And like I said, rig count doesn’t matter. And the number of sources we have for footage and wells are kind of sparse. What do you think spending is going to do for the industry overall for North America for the rest of the year?

David Lesar

I think the actual spending is probably going to be flat, and I think that’s a function of spending the money faster, which our clients will be able to do. So I don’t see a big increase in actual spend, necessarily, across the board.

Operator

Our next question comes from Scott Gruber of Sanford Bernstein. Your line is now open.

Scott Gruber - Sanford Bernstein

We’ve seen Halliburton definitely take the lead here in pushing for more 24-hour work and pumping in the states. It’s obviously great for asset turns and margins. But you can also complete more stages when you work around the clock. Have you guys gone out and looked at the efficiency gain which is being realized by your pumping fleet, or maybe the pumping fleet as a whole here in the U.S., and how that will impact tightening of the market?

David Lesar

You know, our strategy has been to implement our Q10 pump capability. We’ve [feathered] that end of the market, sort of ratably, as we’ve retired equipment. But we believe we will see probably a 20% improvement in our efficiency on the back of our technology. So when I think about capital efficiency and capital required to address our piece of the market, I believe it will be more competitive than others, certainly in that space.

Jeff Miller

Let me just add one more comment. Obviously the impact of 24-hour operations adds to the efficiency of the industry, but it also eats up your equipment two or three times faster than your traditional way of doing pressure pumping does. So that in itself also will lend to the consumption of any excess capacity that’s in the market, just because the useful life of your equipment tends to require you to have more maintenance and more ongoing cost. But it does grind the equipment up faster and that tends to take some of the equipment out of the market a lot faster than it might historically have.

Scott Gruber - Sanford Bernstein

And that 20% figure, that’s primarily related to less backup capacity? Or is that a combination of less backup capacity and more stages executed per week, per month?

Jeff Miller

That’s, actually, in our view, the same thing, stages less horsepower.

David Lesar

The Q10 runs at higher rate of horsepower than traditional pumps and so if you just look through it, you just need 20% less, based on what we’re seeing it run in the marketplace. It means fewer trucks.

Scott Gruber - Sanford Bernstein

If I could ask a quick question on Mexico. You mentioned a little bit slower going here in terms of growth rate in Latin America. What’s your outlook for gas-related activity in Mexico, particularly in the Burgos. You know, Mexico is importing more low-cost gas here from the U.S.

David Lesar

I think it’s still a bit of a science experiment in northern Mexico right now. As we’ve talked about over the last couple of calls, we’ve done some fracs. I think we did the first frac in northern Mexico. And the results have not been made public on that. So we won’t do that today. But I think you can consider it as sort of a prospective science experiment at this point in time. But we are optimistic about what might develop as we go forward.

Operator

Our next question comes from David Anderson of JPMorgan. Your line is now open.

David Anderson - JPMorgan

Everyone seems to be downplaying the potential improvement in natural gas activity. You did on this call as well. [unintelligible] price has been down about $4 for over a month, and I’m just kind of wondering, some of your [competitors] are starting to lock in hedges. Why won’t we start to see activity increasing soon. You talk about your customer base. You stuck with those guys. I’m just kind of curious what they’re saying. What do they need to see to start getting out there again.

David Lesar

I think you’re right. For $4 plus gas, where they can lock hedges in, is getting to the point where a lot of these fair way players actually can be quite profitable from a return standpoint on these. I think what we want to convey today is that we’re not counting on that in the projection we’re doing of where we see the market going the balance of the year. Obviously if gas prices do stay in the above-$4 level, I think that only adds to the potential optimism that we have about 2013 and 2014.

David Anderson - JPMorgan

That number could really change in the second half of the year if it stays here and if your customers start coming back. We should see even more [upset] to your margins.

David Lesar

Yes, that would be our feeling, for sure.

David Anderson - JPMorgan

We often hear your competitors complain about your pricing. It also seems a bit like sour grapes considering you guys have a lower cost structure out there. I was wondering if you could just give us a sense as to how much lower you think your costs are compared to your competitors? And also, how far along are you in the Battle Red initiative and some of these other cost initiatives?

David Lesar

We’re not going to comment from a competitive standpoint on where we think we are relative to cost. I think we’re making progress on the two initiatives you describe, Frac of the Future and Battle Red. We’ll plan to give you a better update on that next quarter. But they do drive efficiency for us in the ability to obviously manage our bus. As I said in my prepared comments, I don’t plan to comment on the tit for tat, back and forth around pricing, just because it’s anecdotal. Our commitment is to make a return on the equipment we put in the market and that’s my commitment. And so that’s what we’re doing.

Operator

Our next question comes from Brad Handler of Jefferies. Your line is now open.

Brad Handler - Jefferies

I guess I’ll stay with North America too to start. And this is a bit of a leading question. If you are as committed as you are, and you have a process where the Q10 pump is rolling out, in principal you cannot retire the older pumps as aggressively and build into an opportunity to work with these good customers of yours that might be growing their bus. Is there any change in philosophy, I suppose, about the retirement strategy of your existing equipment?

David Lesar

No. I mean, the new technology is more efficient. It also has better maintenance cycles. So it’s the right thing to do. And so what we plan to do is continue with what we had said in terms of capital discipline throughout the year. And at this point in the year, we’re well into the year.

Brad Handler - Jefferies

I appreciate your spending wouldn’t change. I just don’t know if the retirement intentions might have softened perhaps? I guess just to clarify the question.

Jeff Miller

I think the way that I would characterize it, from the earlier question, if gas activity were to take off dramatically on us, and we recognized that we weren’t putting enough, it would be easier to dial up our manufacturing just a little bit to get more Q10s out. We’ve been trying to be very disciplined in how the Q10s are coming out. We’ve talked about reducing capex, staying with it, and generating some additional cash flow this year. That’s an adjustment that we can make if we felt like the forecast could lend itself to basically turn out more units rather than keeping the old stuff out of the field and deferring those efficiency gains that we’re trying to capture.

Brad Handler - Jefferies

If I could ask an unrelated one on Brazil, so the contracts have been signed. Help us a little bit with the ramp, the incremental revenue ramp. Does that take several quarters? Should we see full run rates only in 2014? Or does that happen relatively more quickly?

David Lesar

I would say to look more to 2014 for the full ramp on that. We will feather equipment in as we sort of go through the year. But don’t expect full on, really, until the equipment’s in place and ready to go.

Operator

Our next question comes from Jim Crandell from Cowen Securities. Your line is now open.

Jim Crandell - Cowen Securities

Given your somewhat optimistic view on gas drilling for 2014, and given the lead times involved, are you close to the point, or are you almost at the point, where you might consider new equipment building in domestic pressure pumping?

David Lesar

I think that’s one of the huge advantages we have by manufacturing our own pumping equipment, is we don’t have the real extended lead times that our competitors might have with respect to when they order up and can dial up their spend there. So I think we really have the luxury of waiting until probably the second and third quarter of this year to take a look at the market before we have to make a decision as to whether or not we want to ramp up production that could come on stream in 2014. And I think that’s part of the reason that we have the higher returns, is that we have more granularity around our ability to control manufacturing.

Jim Crandell - Cowen Securities

For follow up, my question is on the formation evaluation, both LWD and wireline bus worldwide. If you just exclude Brazil for a second, I know that increasing penetration in this market has been key to your overall goal of improving margins internationally. Can you comment, and maybe even include the deep water Gulf of Mexico? Do you feel in both LWD and wireline you’ve gained share of the market in the past year?

David Lesar

Yeah, I think in the last year we have gained some share. And I think it’s demonstrated by some of the markets where we’re working today. So with our sort of full [FE] suite of services, we’re working in east Africa today and some of the more challenging environments there. We’re seeing, as I mentioned, progress in Angola. We’ve won some important contracts [unintelligible] to work in Asia. So yes, we’re making the progress that I would expect and partly just demonstrating our capability to deliver in these deep water markets.

Kelly Youngblood

I think we have time for one more question.

Operator

Our final question comes from Doug Becker of Bank of America Merrill Lynch. Your line is now open.

Doug Becker - Bank of America Merrill Lynch

Dave, I was hoping to get your last thoughts on Halliburton’s exposure to the artificial lift market. You have a clear focus on mature fields. And particularly just in light of GE’s announced acquisition of Lufkin.

David Lesar

If you look at our portfolio, artificial lift is one that clearly was a hole in the portfolio that we have. We made the acquisition a year ago of Global, and now have an offering in artificial lift. It actually, I think, as we said in either the Q3 or Q4 call last year, has exceeded beyond our wildest imagination in terms of financial performance. And it sort of gives us a window into what the opportunities in that market will be.

So we’re glad to be in the business, albeit in a small way right now, but I think that what we’ve demonstrated over the years is that when we get focused on a market and put the capital to it, that we basically are going to be a player.

Now, [unintelligible] is going to be basically in [ESP]. At this point in time, rod lift and things like that we don’t view as critical to our ability to compete long run in the mature field area. But I think that having the ESP offering is something that rounds out what we have and was an important acquisition for us to build on.

Doug Becker - Bank of America Merrill Lynch

And Mark, what’s the potential for significantly accelerating the share repurchase program, particularly if a significant portion of the Macondo settlement is paid in stock? Does that alter the thinking?

Mark McCollum

Certainly a settlement on Macondo gives us more certainty as to what we could do with our cash going forward. I think everyone recognizes we’ve had a cash placeholder on the balance sheet as it were to hold in anticipation of what the ultimately exposure on Macondo might be.

I think having an earlier resolution of it, if we are successful in settlement discussions, would give us some certainty, then, as to what we could do. We typically need $750 to $800 million of cash to run the business. And beyond that, everything else creates an opportunity. And so I think you hit it right. If something were to happen, that would create a lot of opportunity for us to do some interesting things.

Operator

Thank you. And at this time, I’d like to turn the call back to management for any closing remarks.

Kelly Youngblood

No, operator, you can go ahead and close out the call.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You can now disconnect. Everyone have a great day.

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