Halliburton Company (NYSE:HAL)
Barclays CEO Energy Conference
September 11, 2013 07:45 AM ET
Jeff Miller - EVP and COO
Mark McCollum - EVP and CFO
James West - Barclays Capital
James West - Barclays Capital
Okay. Good morning everyone and welcome to day one of the 27th Annual Barclays CEO Energy Conference. I’m James West; I run the U.S. oil service equipment and joint team. I’m pleased that you all who have joined us this week, we’ve a jam pack three days of keynotes presentations breakout and one-on-one meetings. Roughly 220 energy companies participate in this year’s conference making it the largest ever and we’re expecting a record attendance. I trust everyone will be very busy and hopefully have a very productive conference.
Before we get started, as all of you know today is the 12th anniversary of the September 11th attacks on New York City and other areas, an event that affected all of us in this room in many different ways. To show our respect for those who lost their lives in the attacks, I would like to invite all of you to join me in a moment of silence. Thank you.
Kicking off the conference, and once again this year is Halliburton. I’m pretty sure those of you that know my work and that we believe still Halliburton is by far in a way one of our favorite stocks, one that we think has considerable upside potential from current levels, given that the company just bough back 3.3 billion worth of shares, it seems that the Management Team and the Board agree at least with that assessment, the stock is undervalued.
Leading off the presentation this morning for Halliburton is the new named -- clearly new named COO, Jeff Miller. I believe this is Jeff’s first time speaking at our conference. Jeff was named Executive Vice President and Chief Operating Officer in September of last year. Previously Jeff was Senior Vice President of Business Development and Marketing. Before that post, Jeff previously ran the Gulf of Mexico, was President -- Vice President of Baroid and Country Vice President for Indonesia and also for Angola.
During Jeff on stage and speaking in today as well is Chief Financial Officer, Mark McCollum. Mark joined Halliburton in 2003 from Tenneco as Chief Accounting Officer. He was named CFO in 2007. Please welcome the COO into the conference, Jeff Miller.
Okay. And thank you James and good morning everyone. We are all familiar with the Safe Harbor statement, but before we began, I would like to remind the audience that some of my comments may include forward-looking statements reflecting Halliburton’s views around future events that could differ materially from our actual results.
And so with that let me dig right in and talk about service intensity and maybe a couple of ways to look at that. What you see on the slide is the rig count projected from 2005 through 2015. And as you would expect really that’s been – the exception of a little bit of a flattening in 2013 we expect to see continued increases in the out years on now through 2015. But I think what’s important here is to look a little bit at what’s going on behind the rig count and behind this effective secular trends and so when we overlay the global drilling and completions of [sand] against the rig count beginning in 2005, what we see is a consistent trend of rising service intensity.
Now please recall that Halliburton strategy is around deepwater, unconventionals and mature fields. We see those three themes as the fastest growing themes in the marketplace. But when we look at a rig count like I’m showing you now, it’s hard to pick those themes out of kind of the big overall trend. So what I would like to do now is look a little bit behind that, what’s going on in those counts. So let me start first with horizontal drilling.
Globally over a third of all land rigs in the world today are drilling horizontally. This is up from less than 8% in 2005. And so when we look at revenue multiplier or basically the service intensity associated with horizontal rigs versus vertical rigs, we see about a three to four times multiplier compared to conventional rig. And so this is going on kind of in the background on this slide driving service intensity.
North America leads the way in adoption horizontal drilling techniques, but there are dozens of other countries experimenting with these techniques, I will call out a couple of them, first Russia and then Mexico where horizontal drilling has become an important part of infield drilling and also enhanced recovery in mature fields.
The second key theme or story is on the offshore part of this business and that’s going on again in these numbers. There what we seen is a rig count growth of less than 1% since the inflexed point in 2005, that’s the blue bars down at the bottom. But underneath that relatively static number, what we’re seeing as a continuing bias towards deepwater capable rigs. In fact over a 100 semi-submersibles and drill ships were built into the fleet over the last four years, most of which were designed to operate on water depths greater than 5,000 feet.
Now when we think about that, a deepwater rig compared to the shallow water rig or shelf rig, the revenue intensity or multiplier is two to three times. So again, what we’re seeing is service intensity sort of built into this rig count. Now both of these trends, horizontal and deepwater, drive complexity and service intensity. That happens actually in the well design.
And as we look out over the next few years, it’s clearly our belief that these three themes, deepwater, unconventional and mature assets will continue to outgrow the market and we fully intend to leverage our technology capability and footprint, to leverage this secular growth on a global basis and maintain the momentum that we’ve built going into this year And so as we look out in the next year, what I see is it could be the first time since 2005, where we see growth in both markets, both internationally and domestic.
So at this point let me take a look at some of the geographies. And I will start with the Eastern Hemisphere. If I think about the offshore markets in the North Sea and West Africa, activity levels have been improving. And we’ve recently grown our open-hole wireline position in business in West Africa, which is we expect to continue to see expanding into the coming years. In fact we see another 15 to 16 deepwater rigs waited to arrive in that market by 2016.
East Africa is another key market that holds great promise in our view, but I expect a softening in the activity level until infrastructure is able to actually catch up with the discovery rates that they’ve had in East Africa, nevertheless an important market.
If I think about the Middle East, what we’ve seen is improving activity across that region. And I may take a minute here on just a bit of the side bar with respect to Middle East unconventional and this is something that we’ve seen gaining ground not only in Saudi Arabia, but also in Oman and a lot of discussion in other parts of the Middle East and this is really on the back of the demand for domestic energy. And this is a bit of a change certainly over the timeframe that we’re talking about this morning, a one that I expect will continue to grow into the future.
More specifically in the Middle East, I talked about a rack in the past, and what I would like to talk about now is that we continue to forecast profitable operations in a rack for the current year. And we are also entering what I would see is a new face of managed projects in the southern part of a rack. And then also I see substantially increased activity in the northern region of Kurdistan.
Also in the Middle East, talk about Saudi Arabia and what we are seeing there in terms of rig activity and rig increases. And this will clearly drive activity growth into next year. We have recently increased our position into managed projects in the Kingdom and look forward to expansion of the unconventional and tight-gas programs in Saudi Arabia.
The unconventional exploration is already underway, both in the North and in the South and we’re on track to open Halliburton’s tight-gas technology center in Saudi Arabia later this year. And also I can touch on Asia-Pacific and this is a place where we’ve seen terrific growth this year and really we’ve seen it across the entirety of the market. We’ve seen tremendous growth in Malaysia both in – both in sort of deepwater and also in mature field activity as sort of the national oil company takes a relook at mature fields that are on their books.
And then also I will touch on Australia, which is a place where unconventionals are becoming a larger and larger piece of the pie. We’ve seen that overall business grow probably in the 10% to 15% range with unconventionals leading the way with about a 20% year-on-year growth. Now this is still a smaller market, but we believe we’re well positioned to support the further growth and activity in 2014 and expect that growth to be of a similar size.
China is also an exciting market. Over the past year we’ve seen the first commercially viable unconventional gas well in the country and it’s clearly a national effort to replace coal and oil with natural gas and expect the gas plays a substantially larger role in their next five-year outlook. Nevertheless facing constraints around infrastructure and a few other things, but certainly positive.
Look briefly at Latin America and couple of markets to call out here. First is Mexico. Clearly a tough year in 2013 as activity was halted in the second quarter in northern part of Mexico. However, as move into 2014, we’re optimistic about the prospects here. Currently we’re looking at 10 -- roughly 10 integrated project management tenders to come to market. Right now it’s roughly estimated to be $8 billion to $9 billion worth of work. We see that work getting on the -- tendered in Q4, likely starting in Q1 of next year and should be a large piece of work.
We have also talked earlier this year about our third quarter win for the Humapa project incentivized contract, one of the reasons I’m particularly excited about the Humapa incentivized contract it is very near to work that we’ve done in Remolino where we were able to apply unconventional technology and mature field technology to deliver tremendous results. In Remolino we fully expect to have the same experience in Humapa and a great opportunity to apply that technology in its Chicontepec region.
Finally, I talk about Brazil and this quarter what we’re as we’re ramping up activity into a deep water directional drilling contract and looking ahead, clearly our focus is on the incremental deepwater rigs that should move into that market and though it looks a bit sideways for the very near future, certainly in support of that country’s economy and the size of the reserves that we see there should be a -- we fully expect growth into the future and see 5 to 10 incremental rigs over just the next couple of years.
Finally, I would like to close with North America and a little bit beginning with the deepwater activity in the Gulf of Mexico, which continues to slowly expand. We're still tracking five to six rigs coming into that market here in the fourth quarter or as we go into the fourth quarter but we see project timelines slipping somewhat to the right as clients are faced with certification requirements and permitting issues, but clearly a positive growth story here.
We anticipate seeing continued rig arrivals as we move into 2014 and I have clear vision of an expanding lower treachery activity in the deepwater Gulf of Mexico and if you clearly recall that as our particularly service intense activity in the lower treachery demanding large parts of our technology particularly our enhanced Single-Trip Multizone completion technology.
Moving on to the Battle Red initiative that many of you're aware of, we’re now entering the final phase of testing of Battle Red. We’re on track to see results in the first quarter. Frac of the Future as well is continuing with that rollout and it's expected that by yearend we’ll be roughly at a 20% implementation of our Frac of the Future initiative. But really when I think about the current year the big story has been around drilling efficiency. And basically what that means is, drilling more wells with the same rigs.
And what I’d like to do is spend just a minute now talking about service intensity in horizontal rigs and basically how we see drilling more wells with the same rigs rolling out. And so what you see behind me now is a look at the average drilling base for a new horizontal well in the U.S. Now this data set excludes mobilization on pad, so this is effectively only the drilling activity associated with horizontal wells.
We think there is about a day of efficiency from an operator standpoint associated with a pad in terms of moving from well to well. But as we look here at horizontal just the drilling activity, this is the place where service companies probably have the greatest impact on efficiency. So when we look at this type of activity and include the vertical wells of which there are still quite a number of vertical wells being drilled, that will dilute the overall efficiency number somewhat. But last year we tracked a 14% to 16% improvement in drilling efficiency, and this is really what we’re seeing in the activity levels.
For the first half of this year, horizontal efficiencies improved by 16% year-on-year or about 8% to 10% improvement when you include the vertical and the directional well population together. So, I’m not necessarily projecting the same pace to continue but we still see substantial efficiency opportunity as we move now from fewer verticals to more horizontals and its key basins around North America and also leave it to pads which provide more opportunities for efficiency.
As we look at efficiency this is right in Halliburton’s wheelhouse and this is where we are able to truly use our surface efficiency technology along with our basin insight to drive customer’s efficiency and that is the reason why our customers continue to prefer Halliburton and why Halliburton is -- continues to lead the market in North America. So at this point I’ll say thank you, and turn it over to our Chief Financial Officer, Mark McCollum to provide some additional details. Mark?
Thanks, Jeff and good morning everyone. Good to see you. We’ve talked for some time about our key strategies as we targeted our growth and our business looking at building our offshore revenue base about 25% faster than market, focusing on our expertise and unconventionals and developing a strategy around mature fields that combines it or integrates our product service lines to provide unique offerings for our customers. We think that those strategies have enabled us to grow on an outsize basis relative to our competition, by targeting specific markets and specific customers which are growing faster than the average. This approaches resulted in us being able to maintain our market leadership in North America, the largest energy services market in the world. But a natural outcome of this strategy has also been a step change in our market position internationally. Today international markets represent about 48% of our business. It's a much more balanced position than we were several years ago.
But balance is not the goal for Halliburton. Balance happens because we’re applying to where we believe the ball is going to be over the next several years strategically. Within Halliburton returns of the goal, and so in that regard we’re very pleased at our growth strategies of continuing to deliver above average and above cost of capital returns. And while margins and returns have compressed over the last few year’s following a period of fairly heavy global investment. We’re making tactical decisions every single day within Halliburton to make sure that we have this goal of returns in mind and believe that we’re poised to continue our out-performance over the next several years.
Now as we look at this past year, we’re very pleased with what we’ve been able to accomplish in terms of returning value to our shareholders. Back in the first quarter we announced a 39% increase in our dividend which we’ve been executing this year. Following that we also went in the second quarter bought back $1 billion of common stock in the open market by using cash on our balance sheet.
In the third quarter as you guys know we just finalized the execution of a Dutch tender for about $3.3 billion of common stock which we debt financed, essentially it was a recapitalization of our business, something that we had seen the need to do for the last year or so to make sure that we continued to drive our cost of capital down, take advantage of the -- not only our credit rating in the market but also the fairly advantageous debt markets, and we feel very good about what we accomplished in that transaction, I think that the market received it very well.
As we look forward we stated in the first quarter and we’ll continue to hold that our dividend strategy will be returning about 15% to 20% of our net income on an annual basis that continues to be our policy. We also had bumped our share buyback capacity prior to the Dutch tender. We still have little over $1.5 billion of stock buyback capacity this authorized by the board we’ll be using that over the next several years. What you’ll see us do more than likely is, is a more ratable approach to stock buybacks with sort of a baseline dealing with dilution that happens from employee stock plans, but also as we have cash flow we’ll be looking at making sure that we’re doing the right things for our shareholders on a return standpoint.
You heard Jeff talk about some of the markets, key markets around the world, and I think the way I would summarize that our message around the trajectory of our business in the short-term has not changed. This quarter we’ve seen Canada come back, and so we’ve experienced a fairly normal seasonal recovery. U.S. activity has been flat and slightly up as well efficiency has continued to improve rather than the rig count. As we look towards the end of the year we do see a repeat of 2012.
It looks like customer spending plans in some cases are up. There are other customers who have eased their spending a little bit as they’ve improved their capital discipline and they’re also seeing the effects of some of the efficiencies that they’re achieving in drilling. That change as we go into the year and it will lead to some activity choppiness in some key basins. We still had too much service capacity in the North American market, that’s something that’s persisted because the rig count has been relatively flat.
As long as there is over capacity we’re going to continue to fight service companies on the pricing front, and we’re still seeing some pricing weakness in some key basins.
For us as we look ahead this over capacity situation, in fact that efficiencies continue to drive our customer behavior and what they’re trying to achieve we firmly believe within Halliburton that the guy who’s going to win in this space is the lowest cost service provider. Not just into the way that the customers look at that, but also as we look at it internally. So we are laser focused right now within Halliburton and trying to continue to drive out cost in our business through our Frac of the Future program, through Battle Red and through other things that we can look at.
We mentioned on our second quarter call, that we might find the need to take some restructuring charges. As we look at those efficiencies indeed we do expect in the third quarter this year that we’ll take a restructuring charge somewhere in the neighborhood of about $0.03 to $0.05 a share in primarily North America, but it's largely around severance in dealing with some assets that we feel like are not as official as they need to be in this market place.
Turning to international, our statement for a long period of time has been that we continue to see slow and steady improvements in our business. The rig count is growing slowly. We have been gaining share in that overall marketplace taking advantage of those that revenue opportunity, building on a lot of the investments that we made. We’ve been able to improve margins slowly, but essentially by having a higher revenue base allowing to pull more incremental margins to the bottom line. See that continuing to take place while the Eastern Hemisphere has had a really good 2013, Latin America as Jeff mentioned earlier has stumbled a bit.
We’ll see some pick up in Mexico in the second half as we get some of our, some contracts signed and start up some of the work that we have been tendering in recent times, but there is still some choppiness in Brazil, in Colombia, in Venezuela that continues to pull on that business a little bit and we’ve talked about before. But as we look ahead into 2014 we see Latin America turning and we’ll be building to be a strong growth market for us next year along with continued very favorable prospects in the Eastern Hemisphere. We do think that the international markets will be a very bright spot for Halliburton as we move into 2014.
So in summary, as we talked about we’re going to continue to leverage these strategic growth themes that we’ve talked about to drive service intensity and outsize growth in our business. Based on the outlooks that we see in the market, we’re very, very excited about what's developing over the next several years. I think that our strategies will, as they have will continue to pay in terms of demonstrating outsize growth and outsize returns for us in the business as well as our shareholders and that’s our focus. We’re going to continue to drive that and with that we’ll open it up for questions.
James West - Barclays Capital
We’ve got time for questions for Jeff and for Mark, let me just kick it off real quick. Mark or Jeff do you want to take this one. The early look at 2014 in North America we talked a little bit during the last night, but how are you guys thinking about rig count of both efficiency gains in ’14 in North America and what that means for well count?
Yeah, I mean I guess what I would say is, we see modest increase in rig count probably for 2014. Really it's early to make these calls because our customers really haven't gone and completed their planning process and then at the same time from an efficiency standpoint I still see room to run particularly in some key basins around pad drilling and actually it continually moved to more horizontal drilling as well. So there’s still some room to do that broadly across the market. I would actually say that a lot of work had been done. In the past there’s been exploration in a number of markets and I think the energy around pad drilling is really going to gain legs in 2014.
James West - Barclays Capital
Okay, so if I put that together then in a somewhat rising rig count environment with better efficiencies we’re looking at well count growth maybe high single-digits, is that there or maybe low double-digits?
Yeah, I mean that seems [very small], yeah.
Hi, I had two questions. One; could you give us a sense for industry capacity utilization right now in pressure pumping, so how much excess capacity you think is out there? And then secondly assuming the Mexican reforms continuing go through in the start to develop their shale resource; how soon could that start to absorb some of that excess capacity. Is that within the next couple of years or really further out? Thank you.
When we think about excess capacity in North America it's probably in the order of 20% -- high teens to 20% in excess capacity today and that really doesn’t abate absent the attrition that we should see on equipment in the market, obviously borrowing any additions to the market in terms of capacity. And then any increase in rig count which could come I think would take that out pretty quickly. With respect to Mexican reform I mean obviously this is as excited as I’ve been about it in my career. I think we’re as close as we’ve ever been to seeing real reform in Mexico and opening up that market. But I think it's going to depend upon how that reform unfolds as to how interesting the shale activity will be. Obviously shale takes a lot of capital, but it could be -- if it were to take off kind of at a rate that we’ve seen in the Eagle Ford, and clearly this is the same Eagle Ford south of the border that it is north of the border. Geology has no respect for State lines, and so that sort of activity is clearly possible. It's the same type of play there and so I would be very positive if we saw a group go in and decide to develop that kind of full scale. Clearly there’s the demand for the energy in Mexico.
James West - Barclays Capital
And so, just on the international, just in general we’ve been waiting for more than inflection in terms of pricing. It seems that perhaps the industry is under investing a little bit international given the, it's top line growth that you guys and others have seen. I know you’re leading the pack there what you just showed on your graph. What's it going to take here to really start to see pricing move up at a faster flip?
I think one of the thing’s that’s changed is that we’ve got better visibility of rigs into the international market than we probably ever had before. And a number of these countries telegraph growth well in advance. They execute on that path, a deep water rig count of roughly 65 coming into the market. We know which rigs those are and generally where they’ll go. So I think to a degree that visibility has softened or muted to a degree those supply pinches that have occurred in the past. So we’re building into the growth at a rate that we believe addresses that growth.
It's partly for that reason that when we talk about Eastern Hemisphere or international growth we do see stronger or longer, but the reality is we do see sort of a slow and steady stronger or longer more so than we see a fast inflection. To the degree the improved margins come on the back of better absorption of our fixed cost base and the ability to sell technology into existing contracts and that’s still a very important part of the margin expansion strategy.
James West - Barclays Capital
Other questions for Jeff and Mark; I got one back here. Even after the Dutch tender your leverage is still fairly low, your constructs up in the business outlook, I wonder why not try to accelerate the $1.5 billion remaining under your authorization and perhaps do it a bit sooner maybe with some additional debt?
Well whether we have too low a debt or not, sort of in the eye of the beholder, right? Our target debt to cap ratio typically is around 25% to 30% in the middle of the cycle. While we’re arguably sort of at the bottom of the cycle, once we completed this Dutch tender we’re above 35% on our leverage ratio. So we are outside of what we would normally call for is (indiscernible) is maintain our A rating. We believe our A rating is a strategic asset for us. It certainly has been in the last five years, and so that’s critical to maintain. So, right now we think that the right course of action is to continue to move forward and to do further buybacks just out of cash flow that we generate from the business. I’m still confident that we will generate those cash flows. So, I don’t see that as being a significant disconnect.
James West - Barclays Capital
Okay guys, thank you. They will be available in the breakout session in Liberty I & II. Thanks Mark. Thanks Jeff.
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