Halliburton's CEO Hosts Annual Day Conference (Transcript)

Nov.11.13 | About: Halliburton Company (HAL)

Halliburton Company (NYSE:HAL)

Annual Day Call

November 6, 2013 09:00 ET

Executives

Kelly Youngblood - Vice President, Investor Relations

Dave Lesar - Chairman, President and Chief Executive Officer

Jeff Miller - Chief Operating Officer

Eric Carre - Senior Vice President, Drilling and Evaluation

Harold Mesa - Vice President, Operations, Brazil

Jon Lewis - Senior Vice President, Europe and Sub-Saharan Africa

Paul Koeller - Vice President, Consulting and Project Management

Jim Brown - President, Western Hemisphere

Stephen Ingram - Technology and Marketing Manager, North America

Laura Schilling - Shell Global Account Manager, Western Hemisphere

Mark McCollum - Executive Vice President and Chief Financial Officer

Operator

Welcome to Halliburton’s Analyst Day 2013. Please welcome, Vice President, Investor Relations, Kelly Youngblood.

Kelly Youngblood - Vice President, Investor Relations

Good morning everyone. I’d like to welcome everyone attending today in person as well as those listening in live via webcast. We have a full program store for you today and are very eager to get started. But let me begin with a few housekeeping items before we get going.

First, safety is a top priority at Halliburton and so please take a moment to locate the nearest exit to you. And in case of an emergency, we will use the exit doors, proceed down the stairs or escalators and exit the front of the building.

Second, I’d like to direct your attention to our Safe Harbor language on the screen. Today’s presentations will include forward-looking statements and those statements are subject to risks and uncertainties that could impact operations and financial results and cause our actual results to materially differ from those forward-looking statements. These risk factors can be found in Halliburton’s Form 10-K for the year ended December 31, 2012, Form 10-Q for the quarter ended September 30, 2013, and recent current reports on Form 8-K and other SEC filings. Our comments include non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures can be found on our Investor Relations website.

And finally last to the housekeeping items, we do ask that you I think earlier said turn the phones off if possible and any other electronic devices you have, please turn the sound off, put it on silent mode if you would. And we have received some questions about wireless connectivity if you look on the back of your badge, you will have the instructions on how to get connected to wireless.

So let’s go ahead and get started. Let me welcome to the stage. Halliburton’s Chairman, President and CEO, Dave Lesar. Dave?

Dave Lesar - Chairman, President and Chief Executive Officer

Good morning everyone and welcome to our 2013 Analyst Day. I got to tell you we couldn’t wait for this day to come, because today we get to tell you our story. And I believe that at the end of the morning, you will think that it really is a very powerful story indeed. We are very excited about where we are in today’s marketplace and I will hope those of you that were here yesterday got a sense of that excitement as it permeates through the management team that we have in place.

Now, I am not going to speak for very long today, you know me, you know what I stand for. Today, I want you to get to know some of our other management team a little bit better, because it’s this group and a lot of great other employees that are going to make our story happen. Now, at our last Analyst Day, I spent a lot of time talking about our philosophy as a management team and as a company. And I focused on two things providing execution certainty and living up to our commitments. So I hope as you reflect on the last three years, you keep those thoughts in mind, we execute the plan and we live up to our commitments. More importantly, keep them in your head as we go throughout the day, because as I said, we have a powerful and exciting story to tell you. I also believe it’s important to continue to make commitments to our shareholders to continue to live up to those commitments and I want you to hold this accountable for meeting them.

So let’s start by looking back at our 2010 Analyst day and review the commitments that we made to you then. The first commitment we made is that we were going to outgrow the deepwater market by 25%. And I tell you I don’t care how you count the deepwater market, we did that and way more as we grew at a rate well beyond market. And we are going to dive into this topic a little deeper in a few minutes, but clearly we check that box. The second commitment we made was to maintain our unconventional market leadership position, which we obviously have done. We said we would take what was then a vision of what could be that we called the Frac of the Future. Today, the completion of the future is a reality and when coupled together with our Battle Red initiative, we will start to pace significant benefits to all of us over the next several years. So again, we lived up to that commitment. So let’s check that box.

Next, we said we would triple the size of our mature fields business from $900 million a year in revenue to $2.7 billion through organic growth and targeted acquisitions. This strategy has also paid off very well for us. We are currently on a run rate not of $2.7 billion a year, but $3 billion a year in revenue and very much like how that market is evolving into higher end integrated projects, where there is less competition. So we met this commitment as well and I will give us a check in this box. And finally, we made a commitment to close the international margin gap and maintain North American margin leadership. Now, the international goal was set when we thought that we were at a market inflection point in the international areas and we would be able to introduce technology and leverage our growing contract base. As you know, the international market is essentially just ground along at a slower pace since then, although it’s now starting to pick up.

So while our growth has been excellent. In fact we have had the fastest growth in the international markets among our peer group. Our margins and those of our peers are essentially back to where they were in 2010. So in my view this part of the story is not yet completed. So I will have to give us an incomplete grade here. So you know what we are going to do, we are going to reload and try it again. We are as excited about the international markets today as we were then. In North America, we made a commitment to maintain our margin leadership against our peer group. In fact, we met this goal to get a check in that box, but I am not going to do that, because that would be like winning on a technicality. Why is that? After the last Analyst Day, there were two big transactions in our space. One of our peers bought a large pumping company as you all know and the other bought a large integrated oil services company.

If you look on the revenue side since then, our North American organic growth has been over 70% while our peers purchased plus organic growth has averaged 55%. So clearly, it’s still better to grow the old-fashioned way organically. So while our North American margins are technically still in the lead versus the peer group average, I have got to be honest with you, it’s because one has drastically seen its margins fall while the other now has North American margins better than us. We hope to change that fact with what you here today. So I am very proud of our track record. I believe that we have called the market better than anyone else in our sector. We take pride in this and will continue to be as open and transparent with you as possible to maintain your confidence.

Now, as you saw yesterday, our management team is stronger than ever. And we don’t and we will never set conservative goals for ourselves. I demand that our management team have goals, that exceeds their reach and I would rather stretch and set a goal and mess it than set a low bar and easily jump over it. And I know that you feel the same way because you have told me that. So, one of the programs that we are going to unveil to you today is going to be our drive towards being the most efficient service company in North America. We are going to call the program the Halliburton Advantage or HALvantage for short. Now, initially the HALvantage program will encompass and capture the integrated internal benefits of Frac of the Future, Battle Red and the other initiatives that we spent so much money on in the last three years. This is an ongoing process. So after we captured those benefits, we will look at implementing others that we are already evaluating, but in the long for us, the HALvantage will be that we will be the most efficient services provider in North America.

So remember we live up to our commitments as we go through this morning, because we are going to make some new commitments to you today. That when these commitments are executed, we’ll translate into leading performance in the sector and more specifically will continue to result in superior growth, margins and returns. So let’s turn to today’s agenda. One thing that shouldn’t surprise you is that we are sticking with our strategy, our consistent focus on deepwater mature fields and unconventionals has served us very, very well these are high growth sustainable market segments because of the advantages that Halliburton has in them. Our market leadership in unconventionals advances in deepwater technology and our expanded capability in mature fields, so over the course of the morning, we are going to go into a greater level of detail on these markets to help you better understand our strategy in each of these key growth areas where we put in place the building blocks to continue to grow our business and outperform the market. So what are you going hear today?

First that we are going to continue to outgrow in the expanding deepwater market, we made great strides in the past three years and we are looking forward to seeing a continued pay off there. Two, you will see significant continued growth in our mature fields business as this market evolves more and more towards higher-end integrated projects. And thirdly, we are going to continue to lead in the unconventional space as we fully rollout frac in the future Battle Red and a game changing new product that we are introducing to you today. This is a cool product not only is it smart, it learns, uses artificial intelligence so that more you use it, the smarter it gets and our execution of these strategies will result in superior margins, growth and returns. We have also been listening to you our shareholders and understand the importance today that the marketplaces on shareholder returns. Already we have done more this year than any of our peers.

So at the end of the day Mark McCollum will come up and model out for you the numbers that you will hear today. And when you do that, you will come up with some truly extraordinary results both in terms of earnings per share potential as well as cash available to return to you our shareholders. So with that, I am going to turn the program over to our Chief Operating Officer, Jeff Miller, and he will MC the next couple of sessions. So, Jeff welcome.

Jeff Miller - Chief Operating Officer

Thanks Dave and good morning everyone. It’s great to be here today and it’s also great to see all of you here today. And I think I have met most of you at some point during the year, but if I haven’t met you please to grab me during one of the break, so that we can meet. And I have been in this job as Chief Operating Officer for about a year, let me be clear that I am just as committed to the future targets that we will lay out for you today as is Dave.

We are very excited about the Halliburton story and the opportunity to tell you about our strategy for the coming years. And then finally, to give you some insight into how we differentiate ourselves. Today you will hear us set bold targets for our company around both revenue growth and efficient operations and then we will describe how we make these happen. As Dave just mentioned, a big part about how we work really in our DNA will be HALvantage. We clearly demonstrated that we can grow, so let me repeat what Dave said HALvantage is focused on efficiencies. And a big part of my job is delivering those HALvantage efficiencies. Let me further clarify what we mean when we say HALvantage. We have been implementing efficiency measures for the last few years. We have talked separately about a number of these but from here forward when we talk about our efficiency efforts we will talk about those collectively as HALvantage. But more importantly I'm responsible for execution and by that I mean execution certainty. I have done that for the last year and I can assure you that execution stays front in center going forward. I am your MC for today’s event, so let me quickly cover the agenda.

We have organized our day around our growth strategies deepwater, mature fields and unconventionals. First Eric Carre will demonstrate our success in the deepwater market, he will then walk you through how we positioned our business geographically, those areas where we have a leading technology position and then finally how we continued outgrowing the market. Next Jon Lewis will walk you through the mechanics of our mature fields business and how we combine consulting proficiency, our global footprint and our integration capabilities to create a terrific business and a business that will even flatten or reverse the mature fields decline curves for our clients. Jim Brown will then take you through the dynamic unconventionals market where we are the undisputed leader. We are winning the unconventional battle in North America and we are in that position by creating value at the well site every single day. You should get a clear understanding about how we always reinvent ourselves staying at least two to three years ahead of our competitors and today we are introducing a brand new product that transforms our clients view their reservoirs and how we work.

Next, Mark McCollum will show you how our strategy around deepwater unconventionals in mature fields translate into real and more importantly meaningful numbers, at this point let me just say that we absolutely believe in this market. And you have seen strong signals from us that demonstrate this. We have raised our dividend, recapitalized the business for future growth and repurchased 10% of our outstanding shares. After Mark quantifies our outlook you should clearly see that our growth story is still in the early innings. And then finally Dave, Mark and I will answer your questions. So let’s get started. Our first speaker today is Eric Carre, Senior Vice President of Drilling and Evaluation Division. I am proud to be on the management team with Eric and what I like and what you will like too about Eric is that he is totally focused on making sure that we have the best products, service quality, people and technology in the drilling and evaluation space. Eric along with Harold Mesa, Vice President of our operations in Brazil will demonstrate what we have done to narrow the gap on our primary competitor and then separate ourselves from the rest of the pack. Three years ago we were seeing as a compelling alternative in deepwater and as you will see now, we have become more of a compelling choice. Eric?

Eric Carre - Senior Vice President, Drilling and Evaluation

Thank you, Jeff. Good morning everyone in our Analyst Day we highlighted deepwater as a major growth opportunity for Halliburton. We also shared our strategy to develop a substantial market position in this segment. Over the course of the next 30 minutes Harold and I would like to demonstrate to you three things. First, we have delivered on our commitment, but more importantly we have developed significant infrastructure and organizational capabilities while doing so. Second, the deepwater market remains a very tremendous growth opportunity for company. The segment will remain attractive over the next five years and the opportunity to gain additional market share is still very significant. And third, our deepwater strategy is working. Our competitiveness in deepwater has significantly increased and we will continue to capitalize on it. Back in 2010, we committed to outgrowing the deepwater market by 25%. Let’s briefly review how we did it.

Based on the Wood Mackenzie data, the deepwater market grew an average of 13% per year since 2011. Halliburton’s deepwater revenue grew by 31% per year over that same period of time so we have clearly delivered on our commitment. All the benchmarks over the same period of time could be the deepwater rig count with a CAGR of 11% or more broadly the international service sector with a CAGR of 14%. So no matter how you look at it we have delivered about twice the market growth rate. We also won major contracts and strengthened our market position with a lot of our key customers.

Back in 2010, our major deepwater operations were centered around the Golden Triangle and a few other operations. Since then we have expanded our operation to over 30 different countries. Now some in our industry have commented that we actually bought work to drive growth in deepwater. As we would say in Europe, this is being very economical with the truth. We earned our position. So let me show you how we did that. When we started defining our strategy years back, the message from our customers was centered around three key elements. They wanted a choice of suppliers in deepwater, but their concerns with Halliburton, was the lack of footprint in some key deepwater market as well as some technology gaps. This was the baseline of our presentation three years ago. We outlined our strategy to become that compelling alternative in deepwater.

The key building blocks of our success have been an unwavering investment in infrastructure in our global footprints as well as the commitment to improving our technology portfolio. Let’s first have a look at people and infrastructure. Over the last three years, we invested over $1 billion to improve our infrastructure in operations, manufacturing and technology. In operations alone, we have added over 50 new facilities globally totaling over 2 million square feet, which is equivalent to adding about 10 technology centers such as the one you saw yesterday. We have also increased our deepwater related headcount significantly, for example, in the Golden Triangle alone, headcount levels increased by over 35%. Now, if you consider the challenge associated with staffing deepwater operations in general or staffing challenges in countries such as Angola or Brazil, you will understand that this is quite an achievement. As a result of this major footprint expansion, we are now present in all deepwater markets around the world. The majority of the infrastructure investment is also behind us. Therefore, we expect future deepwater contract to generate enhanced margins as a result of improved cost absorption.

Let’s now move to technology. As you know, deepwater is a very technology driven segment and we could not have achieved this level of success without a competitive offering. What you see on the screen is the sample of about 30 new products and services we have commercialized in the last three years. Now, it is not a comprehensive list by any means, but it gives you a sense of the focus we put on developing a competitive technology portfolio for deepwater. While we continue to lead in refining and completion segment driven by our landmark business and our number one market position in completions. I really want to draw your attention to the numerous technologies launched across the drilling and evaluation segment, which are really starting to make an impact.

Developing a whole new suite of technologies is just one part of the story. We have also focused heavily on their market adoption and the results are evident in the numbers. You can see a couple of examples on the screen. In the last three years, the numbers of wireline sampling jobs has grown by over 260%. Our new DynaLink wireless testing system has grown by 185%. The number of imaging jobs has grown by 170%. On the completion side, the new ESTMZ completion, which we introduced at the last Analyst Day in 2010 has not captured over 70% of the lower tertiary completion market in the Gulf of Mexico. These are just a few examples of high-end, high-margin technologies that have fueled our growth. In summary, as you just saw, the primary drivers behind our exceptional growth in deepwater these last three years have clearly been our ability to ramp up infrastructure and to deliver key technologies to the market.

Let’s now look forward. What will the market look like in the next three to five years and what are the key strategies that allow us to continue outperforming it. Fundamentally, the key drivers behind the deepwater market growth have not changed significantly over the last three years. First is access to reserves. Deepwater remains a critical component for many of our customers to access world class reserves and deliver on the production growth targets. According to Wood Mackenzie in the last five years, about 60% of all discoveries in terms of volume were made in deepwater.

Second is advances in technology and that is primarily happening on two fronts. First, these technologies that make it possible to identify new resources, as you saw in the landmark demo of GeoShell yesterday, for example. Second, drilling and completion technologies, which makes it possible to access resources unreachable before. We can now economically drill in 10,000 feet of water and very challenging environment such as (indiscernible) HPHT. Finally, licensing activity is in our view also very indicative of future growth. In 2012, leading top 20 exploration companies license 40% more acreage than in 2011 and 28% of all licensing activity that ever took place in deepwater took place last year. Now think about that for a minute, is there any better indicator of the growth to come or the criticality of gaining market share at this particular point in time.

So let’s now take a look at some of the key trends in deepwater and what the implications are for us. First, it is worth mentioning as you can see on the map that deepwater is now clearly a global phenomenon with activity in all regions around the world. If we look at the next five years, there are three key elements, which I believe are worth noting. One is the deepwater market is projected to grow at a rate of over 10%. Now, this rate could be higher driven by increasing service intensity and new technology adoption. The development segment of deepwater is expected to grow at a faster rate than exploration in terms of well count 13% versus 4%. Now, this plays to our strength, in terms of execution, integration capabilities and number one position in the completion arena. Activity will also continue to increase globally, but the core deepwater business will remain centered around the Golden Triangle. About 60% of all wells drilled in the next five years will be drilled in the Golden Triangle. This fits very well with our contract portfolio and recent infrastructure investment.

In summary, we are looking at a healthy market growth going forward and market trends which are favorable to Halliburton. So how are we going to take advantage of this favorable market condition? While our strategy going forward is primarily one of continuity, first, we will fully leverage the infrastructure investment I described earlier on. Our increased footprint, market share and technological capability now make us competitive in most deepwater market around the world. This will have a positive impact on our top and bottom line. Going forward, our deepwater margins will also strengthen, thanks to the winding down of our numerous startup operations and our operation teams getting up the learning curve in all new markets we entered. Second, we will continue to improve our leading market position in the development market segment by focusing on Halliburton’s key strength, execution and integration. Our customers are increasingly sensitive to the service sector performance as it relates to service quality and well construction and completion costs. Third, we will continue to selectively introduce in existing and new contracts, market-leading technologies to help our customers reduce uncertainty and maximize the value of their assets.

Let me give you a few examples of these leading and differentiated technologies. Drilling expert, drilling expert provides a unique and fully integrated environment, where our engineers can collaborate with our customers during planning and actual drilling operations to deliver the best wells in the shortest possible period of time. ICE Core, for the first time in our industry ICE brings the lab downhole. This technology directly measures hydrocarbon composition under downhole conditions. This information is critical to our customers to evaluate reserves, design completions and surface facilities. GeoTap ideas, our customers have always wanted the ability to take fluid samples while drilling. This technology does exactly this, offering improved sampling quality, review sampling time costs and risks.

Some of these products have been under development for couple of years. Comparably, we have been focusing on improving our technology development capabilities. We can now develop products faster, quickly address market requirements and get closer to our customers. I want to highlight a few of these new capabilities today. First is our new acoustic center, it is designed to support technology developments for both our wireline and LWD businesses. This state-of-the-art facility gives us the in-house capability to design and test technologies related to sonic, ultrasonic and seismic technologies. These are critical for our customers to determine among others geomechanical reservoir properties. The center was opened six months ago, and is already allowing our scientists to significantly accelerate the development of our next-generation sonic tools. Second is our Brazil technology center, it was established in partnership with Cenpes, which is the R&D arm of Petrobras at the University of Rio de Janeiro. The center is primarily focused on deepwater technology developments, and all new projects are co-funded by our customers.

Several projects have been completed already, such as new cement slurries for pre-salt applications or advanced seismic processing algorithms. Third is our new advance perforating flow lab. This lab was opened in 2012, and is the only lab of its kind in the world. It enables us to simulate under downhole condition the effect of a perforation on reservoir production. Our customers only get one chance to perforate a given one. So it is critical that we get it right the first time and our lab allows us to do just that. Going forward, we would continue to invest both in new technologies as well as technology development capabilities.

Now we can apply these key strategies and technologies I just described to just about any market in the world, but what better example though than Brazil to illustrate what our strategy in action looks like. It is the largest, and one of the most technically driven markets in the world. It is also one where all of our key strategic components are in place including a tremendous contract portfolio. To discuss this we brought in Harold Mesa, who has been leading our operations down there for the last several years. Harold?

Harold Mesa - Vice President, Operations, Brazil

Thank you, Eric. Good morning everyone. Are you guys ready for some Samba today. Okay, so let’s go. Over the next few minutes, I will discuss how we are executing our deep-water strategy in this single largest deep-water market in the world Brazil. While Brazil is not only a big market, it is one of most complex and highly technology driven. And when you have all of these factors together, what you get is one of the most challenging deepwater environments in the world, being so successful in a market like this requires several important building blocks, the state-of-the-art facilities, talented and highly motivated people. We need the right level of service quality and key multiyear contracts. In Brazil, our customers believe that we have fulfilled all of these requirements and as a result we have gained significant share during the last couple of years.

We recognized that 2013 and 2014 is a challenging transitional period. However, according to Petrobras from 2015 and beyond, the market will start growing again. Now considering the length of our contracts in most cases up to eight years, we feel very confident that we will have proper returns on our investments. So now lets’ go to the strategy. The first component of our strategy is capitalizing on our infrastructure, and on our people. We currently have 11 locations in Brazil, recently inaugurated our technology center in Rio de Janeiro. We are expanding our base in Macae. And we started the construction of a second major facility in Macae as well. We have expanded our operational capacity by over 45% during the last few years. So when we consider all of our facilities, we already have all the infrastructure that we require to service the market in the years to come.

Now, let me tell you about my team, my great team. We have 2,500 employees, 94% of them Brazilian, 65% of them under 35-years-old, not only that, 93% of them hold either a university or a technical degree. So in few words, I am leading one of the best teams in the industry with young, talented, well educated, and highly motivated people. Honestly I could put my team against anyone in the world and guess what, we always work around, we always win. The second component for our strategy is excellence in execution and to accomplish that we have to deliver from the service quality perspective, and that is exactly what we are doing. The charts on your screen describes operating efficiency, relative to our largest competitor. Couple of years back within the ramp-up period, in the middle of a massive equipment mobilization, with intensive hiring and training, there was a gap when compared to that competitor. Today that gap disappeared and we’re competing head to head in Directional Drilling and already surpassed them in Wireline Logging.

The third component of our strategies is selective technology leadership, and we’re introducing technology to the market, technology that is adding significant value to our customers with results adding tremendous value to our business. Brazil is a highly technology driven market and due to the complex nature of the market, and the discovery of the pre-salt our customers face unique challenges around reservoir characterization and operations. So we're helping our customers providing solutions to those challenges basically using two main approaches. First, leveraging our technology center, so in a collaborative environment with our customers, we’re developing technology to be introduced to the market. And second introducing technology from our global organization, technology that is addressing issues that our customers in Brazil are facing, again we can only introduce technology into that market if we have some key components in place, the right infrastructure, the right people, the right level of service quality, and key multi-year contracts.

We have all of those components, and as a result we’re executing very well this strategy. Eric mentioned this, a couple of his slides back, some of the technologies that we are introducing, but I will just mention couple of those that we are introducing to our market in Brazil. And the first one is drilling expert. But before getting into the details of the technology, let me make a comment. I worked in Directional Drilling and Wireline Logging for over 18 years. And the first time when I reviewed this technology and understood its potential, I was really excited about it. Let me tell you why? Drilling expert is the most powerful drilling optimization platform in the industry. It integrates the drilling optimization workflows with engineering packages from our drilling related service lines, landmark, drilling, fluids and drilling bits.

The benefits that we are introducing to the market with these technologies are first, superior planning capabilities, much better than the ones currently available in the market. Second, increase drilling efficiency and reduction of non-productive time. And third, interactive optimization and enhance decision-making process in real-time. So as you can see, drilling expert has the potential to transform the entire drilling operation for our customers and that is what makes this technology so exciting. We are expecting significant gains on the market, on our market with introduction of this technology in Brazil.

Another game changing technology that we are introducing to our market is ICE Core and ICE it stands for Integrated Computational Element. What this technology does is on down-hole conditions in real-time allows us to obtain lab quality fluid ID measurements. This information is critical to our customers in order to reduce uncertainty around hydrocarbon composition. We have over 110 patents and filings related to this technology. And this large number is very indicative of the degree of sophistication that we are introducing to the market. Some of their benefits that we are introducing to our market with this ICE technology are, first, lab quality, hydrocarbon composition analysis at downhole conditions. So that means with this technology now, we are able to run multiple analysis. We are even pulling the tool out of the horn. And we will send in samples to the lab. And second, now our customers can size reserves and strategize production in real time. We initially commercialized this technology outside of Brazil within our Wireline reservoir description tool. We ran over 20 jobs, more than 600 sampling hours with 100% reliability.

So in summary, we are executing very well on our strategy. During the last few years, we managed to capture a significant contract portfolio and we are delivering it through our infrastructure, our people, our service quality and the technology that we are introducing to the market. Certainly, we are expecting very good returns on our investments. Just to finalize, where is Mr. Lesar, where is Dave? Here he is. Dave, I am going to invite myself to the next Analyst Day, because I want to tell everyone how we became the largest service company in Brazil. I will be here. Thank you.

And let me turn it over to Eric.

Eric Carre - Senior Vice President, Drilling and Evaluation

Thanks Harold. Great example of strategy execution in a very competitive market, now as the Head of our Drilling and Evaluation Division, I can assure you that we have implemented similar strategies in all key markets around the world to ensure we keep growing our deepwater business globally.

So let me wrap things up. We made a commitment three years ago to significantly outgrow the deepwater market. As we highlighted in our presentation, one we have delivered on our commitment and we have built significant infrastructure and organizational capabilities while doing so. Two, our competitiveness in deepwater has increased significantly and we are now present in all key deepwater markets around the world. Three, our strategy is working. So let me share saying I learned when I came to the U.S., if it ain’t broke, don’t fix it. So we are sticking to our commitment to outpace the deepwater market growth in the next three years whatever the market turns out to be. Thank you. Jeff, back to you.

Jeff Miller - Chief Operating Officer

Thanks Eric. So a couple of things, this is a market that we all know was continuing to grow and we are committing to continue outgrowing this bigger market by 25% and I have heard competitors what this really means then is this is a bigger piece of a bigger price. And I have heard competitors say that we bought this market share, but from what you just saw, it should be clear, very clear that we earned our share and we earned our share on the back of our global footprint, technology and service quality. Okay, at this point, I’d like to shift gears.

Jon Lewis, our Senior Vice President of Europe and Sub-Saharan Africa is going to completely transform your perception of the mature fields market. I am telling you this is no longer the rusty old wellheads that you may have in your minds. John has been doing a tremendous job for us in his region and that’s one of the toughest markets in the world. Paul Koeller, our Vice President of Consulting and Project Management will join Jon to walk you through the evolution of this business and how we are executing our strategy. Now, this is a complex market to say the least. We have added discrete services to our portfolio, which may not sound that sexy, but let me tell you the way this market is moving from discrete services to integrated asset management is really good. And by that, I mean, great for us, but before mature fields can be important to us, they have to be important to our customers. So let’s hear straight from a few of those customers right now.

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Jon Lewis - Senior Vice President, Europe and Sub-Saharan Africa

Thanks Jeff and good morning. You just heard from a cross-section of our customer base, the importance of mature fields to their ongoing production targets and their financial goals. As operators continue to be challenged with the ever increasing capital requirements and Greenfield developments, mature fields will remain their primary source of free cash flow and they will be the primary source of their highest returns. Now, for the majority of our customers, meeting the expectations of the capital markets is therefore keenly dependent upon squeezing more hydrocarbon from this class of assets.

But as we all know growing percentage of these mature fields are going into decline and they’re going into decline at ever increasing decline rates. So the maintenance of these free cash flow generated becomes increasingly service intensive, which as you will see the course of this presentation plays to the strengths of Halliburton. As we heard in the video, mature fields have not always been the preferred carrier path of operated talent. This also is creating an increased reliance on the service sector for the technical and executional skills necessary to achieve these production goals.

It is the secular trend therefore, created by these dynamics that would ensure mature fields remain one of the fastest growing spend areas and also services in coming years. Now before we talk about what this means for our future performance, an update on our prior analyst day commitment, we committed to a tripling of our mature field revenues over a three-year period to $2.7 billion of commitment as Dave mentioned earlier on in the presentation that we have exceeded and we’ve done that through a combination of organic and inorganic growth.

And we remain uniquely positioned to continue to take advantage of the expanding market and so doing creating a stable earnings growth engine for us with limited capital investment. Let me now provide a little bit more color on what we believe the market for mature field services will continue to be so significant over the next several years. Firstly a definition, we define mature fields as any hydrocarbon asset that has passed peak production. Such fields represents an increasingly significant part of our customers asset portfolios and is the date on the slide illustrates the production and reserves contribution for mature fields is forecasted to grow materially over the course of the next five years.

Again given their importance to free cash flow and returns, their assets from which all customer base increasingly wish to maintain or increase recovery rates, book additional reserves, extend economic field life and/or improved production efficiency. But of course operators are also challenged by the rates at which these fields are declining, the results of an historical focus on production target versus ultimate recovery. On average, 60% of IOC’s portfolio fields are in decline with the average decline rates being more than 8% per annum.

And of course again both percentages will grow over the next several years. Significantly, development CapEx were publicly listed oil and gas companies while up 19% year-on-year has not been sufficient to stem the decline in reserve life again highlighting that operators have to squeeze more hydrocarbon from these fields to meet the expectations of the capital market. And this of course is a realistic objective given that on average, we leave around 65% of the oil in place. Not surprisingly, the challenge of mature fields is not unique to the IOCs, an increasing proportion of mature field production and reserves comes from assets owned by the national oil companies, the NOCs who don’t always have the organizational capacity to sustain production, the independence too and an increasingly important segment made up of companies who’ve evolved the management of mature fields is a core competency together with the growing number of smaller independents who see commercial opportunity in mature fields, but need to draw on the expertise of a company like Halliburton to execute on that project.

Now the increased importance of mature fields not surprisingly is reflected in spend patterns. The intervention market alone a market we lead will be a $12 billion spent in 2013 while the mature field drilling CapEx budget this year primarily associated with field redevelopment and infill drilling is nearly $60 billion. Now these absolute numbers are interesting, but the underlying drivers of them on their impact on future spend is perhaps much more so. While the increasing reliance on production from mature fields crates of itself a very healthy growth market, it is the service intensity required to extract each incremental barrel of hydrocarbon that is the real game changer.

And as we see from the slide, the CapEx required for each incremental barrel has increased threefold over the last three years, a CAGR in excess of 12%. Now very important, it is these two multiplying factors, the increasing dependence on production from mature fields and the required service intensity to deliver the production that defines the velocity on the inclination of what we refer to as the mature field treadmill. It also highlights the service intensity is not unique to unconventional or deep-water in fact, it is an accelerator of growth across all three of Halliburton’s strategic teams. And even with this increase in service intensity, returns on mature fields for our customers remain very competitive, in fact Mackenzie have determined that capital efficiency on mature field while intervention barrels to be more than three times that of Greenfield development so, how we’re taking advantage of the secular trend. Firstly, we continue to execute on our multiyear mature fields strategy, first outlined in the analyst day in 2010 clearly as you seen this is delivering results.

But as the market matures, no pun intended we have seen the development of three distinct commercial models; discrete services, integrated solutions, and integrated asset management. Discrete technologies key to addressing the challenges of mature fields will continue to deliver growth as we invest organically and inorganically a new technical capabilities, but much more importantly a comprehensive suite of discrete technical capabilities is a prerequisite to operating in the premium integrated solutions and integrated asset management segments, positioning ourselves for these types of contracts in other words moving our contract portfolio to the right of the slide is a core element of our strategy.

With integrated asset management, operators are contracting us to manage all aspects of their mature fields, subsurface analysis, drilling and completions, infrastructure and facilities, and production operations with payment for services and often of a barrel fee coming out of cost recovery on actual production. Now, these projects are not easy to execute and we have learned some hard lessons over the last few years. Perhaps in the last three years, we have developed successful and proprietor execution models often based as you will see later on in the presentation on some of the industry’s most sophisticated technologies. Very few companies have the technical, operational, and financial capabilities to execute on these types of engagements. The competition is reduced, margins are much more attractive, and contract terms are longer.

Let me now turn the floor over to Paul Koeller, Vice President of our Consulting and Project Management business who will update you on the execution of the strategy. Paul?

Paul Koeller - Vice President, Consulting and Project Management

Thank you, John and good morning everyone. In addition to these three business models that John has described. From our customer’s perspective, the solutions they seek following the three types. First, immediate impact for increasing production and cash flow, second, optimize reservoir management, maximizing the recovery factor, and third, new page to further expand and leverage the existing infrastructure.

Let’s take a closer look at the each of these. Immediate impact solution is achieved to improve flow or production from an existing wellbore. It might come in the form of chlorine blockage that has formed in the wellbore as a result of scaling, standing up for a non-operating downhole valve, or it could be that reservoir is losing energy and we need to put in place our change out the downhole submersible pump. As many of the wells in mature fields have aged, another major challenge often face is wellbore integrity. We have not addressed and lead the significant downtime and loss production.

In all cases, the asset owner is looking for a quick and cost effective approach for how to rectify the situation. The second solution type, optimize reservoir management is focused on increasing the ultimate recovery from an existing reservoir. We want to squeeze out every drop we can that meets the economic threshold. The activities in this area tend to be longer duration and execution and can have an impact that spans multiple years, often extending life of the field. The examples including water flood, CO2 injection, miscible floods or maximizing reservoir contact to the use of multilaterals, well extensions or infill drilling as well as refract program. These types of solutions required an extensive amount of reservoir characterization and modeling work.

The third solution type is for new pay zones for reservoirs. In the previous two solution sets we were focused on increasing production and/or increasing reserves from an existing producing reservoir, the reservoir that provided the economic justification for all the surface facilities and wellbore infrastructure. Leveraging existing infrastructure for new pay horizons can deliver quite attractive economics. New pay horizons are usually the outcome of new technology being applied that was not available at the time the field was initially discovered. And therefore, these zones were deemed uneconomic. In addition delivering across these three solution sets and also across three commercial models that John described, we must also engage with our customers to provide insight, diagnostics and execution. I hope you are getting a sense that this is a complex business that we have to manage and one that is not easily entered.

At our last Analyst Day, I talked about the knowledge and expertise we have within the organization for adjusting our customers’ challenges in their mature fields. While we work with them to define the optimum solution for what is possible which can range from a specific technology for a discrete problem to an open-ended challenge such as the unlocking of incremental production and reserves through new technology or perhaps new thinking. We accomplished this by leveraging over 11,000 technical professionals worldwide that cumulatively represent over 140,000 years of experience. As you can imagine with this level of experience, our knowledge of every mature field basin enables us to provide insight into what has worked and tried and what results can be expected.

In the area of diagnostics, we are number one. We have made great advances organically in our integrated cased-hole logging capabilities, which is particularly important in identifying new pay zones. We are in many instances at the time the well was drilled the open hole logs that were run in the up hole section were across the nonproductive formations were minimal, largely for correlation purposes. One of these tools is our new TMD 3-D tool, which you saw yesterday, is the clear leader for measuring gas saturation and tight gas sands behind pipe. Another diagnostic component were great advances have been made with organically and through acquisitions is in software interpretation by Landmark on the decisions based platforms. Some of the new capabilities directly impacted mature fields include 40 seismic interpretation tools for monitoring reservoir floods. And new software for production monitoring to identify and rank well intervention candidates.

With respect to execution over the last three years we’ve been very aggressive in our organic growth and targeted acquisitions, as a result today we are number one in wellbore intervention. As the only service provider with the capacity, capability for hydraulic work over, snubbing, coil tubing and through tubing tools. This capability is a must for delivering immediate impact solutions. We are also the number one provider of advanced multilateral systems, which is a key technology for maximizing reservoir contact. And our autonomous ICD valve, which I talked about three years ago when it was still in the planning phase is now being used extensively by our customers for minimizing water production. We acquired Multi-Chem in 2011, which currently holds a number three market position for production chemicals.

A key component for addressing scale issues, EOR applications and minimizing water production, our most recent acquisition for mature fields strategy came in late 2011 and we acquired global oilfield services and artificial lift company. At a compound annual growth rate of 20% over the last four years, the ESP market is the second fastest growing market globally in the oilfield services area. We are very excited and committed to this rapidly growing market and will continue to invest in it as evidenced by our recent acquisition of BTEO group out of China, which gives us a world-class capability for the design and manufacturing of ESP downhole components. So, I’ve talked about our customers three solution needs in our customer engagement process.

Let me now talk about how we’re applying these ii the different commercial models that John described, starting with discrete services. This particular example is indicative of how we deliver value to discrete services in mature fields, and as a good example of how we’re penetrating the ESP market. We had a customer with a significant down time challenge using conventional ESPs in a CO2 drive mature field. The conventional ESPs that were being used in the producing wells were unable to handle the increased CO2 that was being injected in offsetting wells for pressure maintenance causing scale problems. Further these particular ESPs used to operate in a very narrow back pressure range to prevent lockup. The current production was running at about 12 barrels a day and was reaching the uneconomic limit. Our solution of this challenge was to install our own ESPs with our proprietary gas bypass system, eliminating the back pressure and scaling issues. By applying this technology we were able to reduce the water production and increased oil production to greater than 700 barrels of oil per day, a 583% increase. At a $100 per barrel oil this results in a very quick payback that is measured in days not months or years.

Let’s now move to innovative solutions. Let me first start with consulting, which is where the opportunity generation occurs and has experienced very significant growth in mature fields area with revenue doubling over the last three years. Without this capability, the service company will be very limited in their ability to participate across the full value chain of our E&P customers. As was mentioned earlier by John, the vast majority of mature field reserves are owned by the NOCs close to 75%. And though we do a lot of work the IOCs and independents on the mature fields, the NOCs afford us a tremendous opportunity because they do not have the resources to work on these assets when the IOCs leave, and in many instances they also do not have the expertise.

Our consultants are as talented as anyone else, but what differentiates us is our collaborative approach in working with our customers and our proprietary workflows and software that we’ve developed to gain insight in what the opportunities are in their mature fields. This added insight enables us to identify new technology needs and drive the adoption of technology that can provide value to the field that previously was not considered. Through this close working relationship, we gained a unique partnership and intimate understanding of their assets, which gives us a preferred position for a seamless continuum into the execution phase with our product service lines and to further engagements on other fields.

Let’s move to the execution phase and talk about integration. Integrated Project Management or IPM is where wells are drilled and completed on a project for turnkey basis, which I should add, is not always on the fixed fee, and the vast majority of this work is on mature fields. This commercial model is gaining a lot of traction in the marketplace as evidenced by compound annual growth rate of 12% over the last three years for the industry. Halliburton’s CAGR for IPM activity over the same three-year period is 23%, almost double to that of the industry. The capabilities required to successfully participate on an IPM project encompasses not only the technical abilities that would be comparable to an operator’s drilling department, but also the operational and commercial skills required to identify, assess and mitigate risk. Further, the table stakes to have a profitable seat at this table is that you must be able to execute at the discrete services level. Over the last three years, we have worked extensively in building up our IPM capabilities through significant efforts in recruiting, training, process development and risk assessment. Additionally this June, we announced our rig joint venture with Trinidad Drilling for the provision of top tier rigs, our first for the IPM market segment.

Let me share with you an example of an integrated solution that included both subsurface analysis and execution excellence. About two years ago, Halliburton was approached by an IOC with mature field challenge on one of their legacy offshore West African assets. The production license was near exploration and the original reservoir was near depletion, but there was a shallower tight silt stone with considerable oil in place. The customer needs to determine if the potential reservoir merited an extension of the license. As an example of the consultative lead approach, Halliburton put a team of experts in the IOCs West Africa office and work jointly with them to model the reservoir and then identified multiple approaches to drilling, completing, stimulating and producing it. And innovative technology approach was delivered and successfully tested and resulted in sufficient production to merit launching initial full field development planning effort based on this design. When this new pay zone is sanctioned for development Halliburton retains the right of first refusal on all services, strong margins. Needless to say only a very limited number of service providers can compete in this market segment and deliver this type of holistic solution.

Let’s now move to integrated asset management. This is the price, as Jon mentioned, the most recent trend that is evolving mature fields. Particularly with the NOCs is towards incentivize contracts. And this is a core element of our mature field strategy and one we really like. This commercial model has attracted Halliburton for a number of reasons. First we are able to leverage our subsurface expertise to better understand the most attractive reservoirs and decide those we wish to pursue. Second, the integrated long duration of these arrangements allows us to better leverage our service delivery infrastructure through which we can drive a higher efficiency level. Third, these types of projects provide a steady stream of revenue and margin over an extended time. And fourthly, there are only a handful of companies able to compete in this second.

Two recent projects that we have been awarded over the last 12 months of this nature are the Bayan Field in Malaysia and the Humapa Field in the Chicontepec area of Mexico. Looking forward, we are targeting two the three of these types of contracts per year, but we will be very selective in choosing those that we wish to participate in. We have the skills and expertise to operate successfully in these new commercial structures within our integrated asset management group. And have organized ourselves internally to support this with consulting, IPM and integrated asset management all being within the same organizational entity.

Now it may appear as though we are trying to become an oil company, we are not. We are not seeking equity positions. We do not strive to put barrels on our balance sheet. We are supplying knowhow, capacity and alignment of interest with upside through risk sharing on reservoir performance. So as we talked about the migration from discrete to integrated solutions and how the majority of service companies cannot participate. Now we are seeing that a service company without the subsurface insight, the breath of discrete services, the capabilities of profitably executing on integrated services and the financial capability to operate a producing asset will not be able to achieve the highest position in the hierarchy of service providers.

Before I turn the stage back over to Jon, I want to share with you an example of the type of solutions and impact we can have on a mature field and that we would incorporate on our own integrated asset milligram projects. This particular example is from a project we did with Kuwait Oil Company. And as you will notice, it represents some of the highest technology in the industry. When thinking about work that is done on a mature field, it should not be thought of as a big one-time study that is done every three to five years with an execution phase following. A mature field requires an evergreen approach with the flexibility to adjust as new data and information are obtained. About 18 months ago we were given a very unique opportunity and challenge to provide a higher level integrated solution, a customized solution that would require integrating our well dynamic Smartwell technology with our Nexus reservoir simulator in real time on the Sabriya field in North Kuwait. This was more than just connecting hardware, we had to define from scratch new workflows and processes to support this linkage as well as need to address the aspect of change management to ensure the organization would embrace and adopt the new approach.

The results are still coming in with the date they have increased production and ultimate recovery by 7% which is quite significant when you consider the productivity of these wells. We are still working with KOC on this project and are in discussions with them for taking this technology and approach to other mature fields in their portfolio. As a side comment, when I visit the operations center I am always impressed by the fact that you cannot tell who works for Halliburton and who works for KOC. This represents a true partnership between our two companies, a level of integration and reliance that few companies can achieve.

Let’s hear what KOC and member of the Halliburton team have to say about this exciting project.

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I want to emphasize what you just heard by integrating our industry leading Smartwell technologies with a series of automated production optimization work flows. We have created a unique real-time ecosystem that is already delivering 7% production growth for this field for KOC on already prolific Wells with further scope for improvement.

Historically, Halliburton has been very strong in the well construction and completion space but with KwIDF we have integrated these production optimization solutions to provide unique insight to the next 20 years of the field’s life, it’s production maintenance requirements and all of the associated services that go with this projects like KwIDF represent a new and strategic segments of the mature field market for Halliburton. One that is defined by a deep understanding of the science and engineering of production optimization and enabled by a sophisticated series of proprietary IT solutions, again this is a capability that is not easy for others to replicate and clearly such solutions represent a key basis by which we are differentiating our capabilities in the marketplace.

Let me wrap up the presentation with a few summary statements. Firstly I hope Paul and I have impressed upon you the opportunity mature fields represent. The treadmill nature of the asset type, the potential of the 65% unrecovered hydrocarbon, our customers need to maintain free cash flow and competitive returns will ensure this secular trend remains robust and growing segment of spend for many years to come. Secondly through the multi-year execution of our mature field strategy that Halliburton is uniquely positioned to lead this market. Through our consultative led engagements we are able to better prescribe the reservoir solutions and through our broad portfolio of products and services deliver against these. Thirdly, that migrating – that by migrating our contract portfolio to the integrated asset management type of engagement that Paul described we are creating an incremental and stable earnings growth engine that requires lower levels of capital investment delivering improved returns which brings me to our commitment.

Today, we are putting the stake in the ground and we are committing to a further tripling of our mature fields revenues over the next three years to $9 billion, a growth rate that will likely give us a leadership position in this segment. Our success over the last three years in mature fields and discrete services and integrated solutions with wins such as Humapa and Bayan and with differentiated offerings such as KwIDF give us and I hope you confidence in our ability to deliver against this commitment. And as we have emphasized throughout this presentation an increasing percentage of this growth will come from integrated asset management contracts where the competition is less and the margins are superior.

Thank you for your attention.

Jim Brown - President, Western Hemisphere

Thanks Jon. Tripling our mature fields to $9 billion is a terrific growth story and what’s more important as this market evolves from discrete services to integrated asset management it’s a market where only a select few can participate. What’s equally impressive is that our growth so far except for a few small acquisitions has been largely organic, so if it’s not clear to you by this point let me make it abundantly clear right now. Our mature fields approach is laser-focused on returns. And we will execute our growth to $9 billion. At this point, let’s take a short break, a short 20-minute break and then we will resume our webcast. Thank you.

(Break)

Jeff Miller - Chief Operating Officer

Welcome back everyone. Our next presenter probably doesn’t need any introduction, I mean, who other than Jim Brown, I can tell you about how we continue to lead the unconventional market. And I don’t mean by a little, I mean lead by a lot. Now, Jim told you three years ago what we saw happening in this market and showed you the blueprint for our Frac of the Future concept. Jim along with Stephen Ingram, our North America Technology and Marketing Manager and Laura Schilling, our Shell Global Account Manager for the Western Hemisphere. We will show you how this concept is a reality today. And it’s a game changer in all aspects of surface efficiency. It’s a competitive differentiator and it’s a competitive differentiator that we expect to approve straight to our margins. So what’s next in unconventionals? We are targeting the subsurface, combining our leading unconventional knowledge and using predictive models like no one else in the industry. This allows our customers to better understand their reservoirs and lower their cost per BOE. Please welcome, Jim Brown.

Jim Brown - President, Western Hemisphere

Well, thank you, Jeff and good morning everyone. And again welcome to our Analyst Day today. Three years ago, as Jeff said, I stood in front of you and described how the world of unconventionals was changing and what we as a company would do to continue to achieve the number one position in the unconventional market. Again as Jeff said, we are the undisputed leader in this space.

So let’s take a moment to see how we did. We described a changing market, oil replacing gas, horizontals replacing verticals and a customer set that was more focused on integration and execution. I would say we called it. At that time, we committed that we would continue to be the undisputed leader in the unconventional marketplace. So to do this, we approached the market with four key strategies. One, we focused holistically on the reservoir; two, we always have and we will continue to take an integrated approach to solutions; third, that we would execute the most effective and the most efficient delivery platform in the industry; and finally, that we had the lead providing environmentally friendly solutions. I am here to tell you that we are the clear leader in this space today.

Now, let’s look at our strategies. First, you remember our basin-centered tech teams that I talked about three years ago. This is how we delivered on our reservoir strategy. As the leaders in unconventionals, we have a very broad perspective and we see our customers’ assets through a unique lens. So by knowing that reservoir better than any of our competitors, our customers rely on our multi-disciplined teams to provide solutions to their challenges. We had seven back then. If you remember, we had seven tech teams. Today, we painted North America with a tech team network that includes every one of our operating districts. And we have strategically positioned ourselves to serve the emerging basins around the world and we keep adding more. These teams drive the collaboration process across all disciplines and across all operations.

Now, looking towards the international unconventionals, we are going to utilize these tech teams to continue our leadership position in each one of these plays. When we outlined our expectations three years ago, the international basins were still in their infancy, but they were making good strides. However, the ramp up process has been slower than we originally anticipated. We have said it before to hit full scale development, these markets require four factors. One, you have to have the rock; two, a government that’s willing to allow you to make a profit; three, you have to have the infrastructure; and finally, you got to have the will to get it done. Ultimately these plays require scale, inefficiency to make them work, but it will come as these countries strive to gain their energy independence.

As you know, we drilled and completed the first unconventional wells in most of the international plays. We are already operating in Australia, Argentina, China, Saudi Arabia and many others. The point is the list is long and we are positioned to lead. Our second commitment was having an integrated approach. We have pioneered multi-PSL solutions. It’s not about the discrete product lines anymore it’s about integrating the processes that go in to creating a solution. Multiple product lines working in concert to harvest the asset and increase the BOEs for our customers. For example, in drilling, we have packaged drilling fluids, motors and bits to efficiently deliver the perfectly placed wellbore. We have put our money where our mouth is, commercializing performance-based models based on cost and production.

In completions, we have pioneered combining frac case hole wireline completion tools and coiled tubing to virtually remove all of the nonproductive time out of the process. And you will hear more about this shortly when Laura Schilling talks about monetizing that white space. And with our newer product lines, we are linking artificial lift to multi-chem production chemicals with a couple of our legacy lines to increase production and extend the life of our customers’ assets as they mature. So, all-in-all, today in North America, over 85% of our revenue, over 85% of our revenue comes from integrated services providing multiple lines on a single well. This can only be accomplished by a large integrated service company such as Halliburton.

Third, we tore up the blueprint on wells’ site design and delivery. And we started building the leanest, most efficient platform in the industry. For example, three years ago, in our production enhancement line, we introduced a game-changing concept, you’ve all heard of it, Frac of the Future. And this is what it looks like today? We have brought animation to reality. We have rolled it out in over 20% of our fleet by the end of this year and have delivered 30% savings on maintenance and crew costs. We continue to optimize more capacity on the best operational platform in the industry. Let me tell you what Battle Red is? It’s not a concept it’s digitizing our back office from dispatch to timekeeping. We are taking our operational flows to the digital workspace. The Battle Red just isn’t about frac, it transcends all of our operations from drilling to completions. The future truly is here today.

And finally, we are leading by delivering a suite of environmental solutions that help our customers as well as the general public understand that this is a sustainable business. We have delivered a smaller footprint on location and we have delivered our clean suite line of products and services. We introduced natural gas-fired fleets and built solar power into our delivery platforms. We are setting the pace. Now having executed on these four strategies, this is a common theme you’re going to hear today. We make commitments and we delivered on them.

I’m proud to say today, we’re number one in the largest market in the world. We didn’t buy that position, we built it. The numbers prove it, we’re number one in frac, we’re number one is cement, number one is drilling fluids, number one in drill bits and case hold with the strong number two position across the rest of our product lines and were focused on staying ahead of the pack, but you know today is a brand new world. I said this before my 35 years in the industry in North America, I’ve always worried about the natural gas market and the weather that drove it.

Now those traditional pronounced boom and bust cycles are a different story altogether. Gas will still come and go, but it won’t necessarily be the market driver. In fact when it does come back, it just gives us the opportunity to add to our number one position. It will be gravy, but the reality is this today is all about liquids and that’s why we are focused. A more stable price, steady rig count, mega pads, more service intensity, tailored chemistry, drilling and completion efficiencies.

What all this means is we’ve gone from volatility, to stability, to velocity. Today, it’s all about velocity in this marketplace. What this means for our customers is turning the wells on quicker, getting product to market. For us, it’s using capital more efficiency. This is the new normal. The liquids market is evolve rapidly and we’ve risen to that challenge. For the most part with the exception of the few growth areas, exploration and delineation is over. We’re now in full scale development. Every dollar matters, it’s about maximizing production, utilizing technology to extract every barrel, less risk, less cost, more barrels. It comes down to a simple formula, two things you have to have, you have to be the most efficient lowest cost service provider and you have to make better wells.

This obviously lowers the unit cost of production for our customers, but more importantly in the end, it delivers Halliburton value and ultimately value for our shareholders. This is how we think in Halliburton. We focus on both sides of this formula. So here is how we’re going to do it. From Frac of the Future to Battle Red, as Dave said this is part of HALvantage, this is why we’re the most efficient service provider. Frac of the Future is a perfect example of how we’ve completely redesigned one of our delivery systems, a leap ahead to minimize our footprint reduced our capital investment.

This system is unique to Halliburton and you can’t buy it on the street. And now we’re taking that proven approach the cementing, logging, and drilling and beyond. And again let me tell you what Battle Red is centralizing and digitizing our internal processes across all our product lines, across all operations, eliminating hundreds of touch points in bottlenecks from our system and things like invoicing, inventory, maintenance and personnel management. I’m very excited about what Battle Red means for our organization and who are showing will be up here in a few minutes to tell you more.

Now let’s look at the second half of the formula. It’s making better wells. Today, we’re proud to showcase a brand new product it’s called CYPHER, it truly is seismic to stimulation. This is a game changing product. So, I want you to please pay close attention. You’ve heard me talk about velocity. There’s a product that can make it happen. CYPHER converges all of our tools, all of the data that goes into making a well decision. This product will precisely tell you where to drill, where to land, and steer the well, where to complete, how to complete, and ultimately predict with that well will make in terms of production. There is some out there that can put one or two of these processes together with limited capability, but CYPHER is the first and the only product capable of integrating all of this in one place.

As Dave said it’s not only smart, but to artificial intelligence it learns, the more to use, the more it learns. In early results, our customers utilizing this product are seeing gains of 20%, 30% and more in production. Now at this point what I’d like to do is introduce Stephen Ingram. Stephen is our North American technology manager. He is going to detail for you this transformational product what it means to our customers and what it means to us. Stephen.

Stephen Ingram - Technology and Marketing Manager, North America

Thank you, Jim. As you heard Jim said, today, Halliburton is announcing CYPHER. It is a fully integrated decision making product. In essence, it tells you where to drill, where to land the well, how to complete the well and where to complete the well, and what is the value to our customer. Our two enormous value drivers increased production and reduced uncertainty. So, let’s take a little closer look at CYPHER. The image on the screen is the midland basin pictured it in your mind, West Texas specifically, it’s decline shale. This is a pad location with the surface view. The next image brings in a 3D wall from seismic. Now seismic provides us a general overview of the subsurface of a large section. It allows you to get an understanding of the structure and gives us resolution towards false and formations where they reside.

Now when we begin reading data from appraisal wells, we can include our logging data. Our full portfolio of logging suites including our industry-leading magnetic imaging resonance technology is sonic tools and core data. See log data helps us to increase the resolution of CYPHER and the model by correlating it back to seismic. This very basic work here delivers a low resolution map in three dimensions. CYPHER can now take the integrated data and begin advancing the interpretations. We apply our world-class shale formation of evaluation techniques to discover the sweet spots.

This is the place in the reservoir where we will maximize production early in the life of the asset. The red bullet now represents the sweetest spots and the blue well let’s just say at the moment that you would like to drill and complete knowing where the red is. The combination of hydrophysical, geological and geophysical data in the model tells us where to drill and how to drill it. This information extracted detailed properties such as Rock Mechanics, which help us understand brittleness. This is where we will focus on cracking the rock to optimizing production along the length of the lateral.

With this integrated data, we design and model the optimal completion and fracture treatment. We model key factors in the sweet spot to drain it, including the complex fractures growth, the lateral length, the number and spacing of perforation clusters and stages. We model porosity, permeability and pressure. As Jim stated, CYPHER tells you where to drill the well, where to land the well, where and how to complete the well. The goal is to complete the very best wells first in an acreage position. CYPHER is more than creating effective well designs. With the breadth of the data that is incorporated into the integrated model, we increase the predictability of production. We’ll talk about that in a moment.

So, I described some of designs that goes into these models. Let’s take a look at what our customer sees. CYPHER delivers an integrated model containing the important reservoir properties necessary for them to characterize their shale or their type formation. From here, CYPHER will deliver and recommend the optimal well placement including where to land and steer the well, the lateral length where to complete the well including which zones will be most productive and by modeling the wells complex fracture growth. And finally, CYPHER tells us how to complete the well by formulating the optimal stage spacing for each section of the lateral.

It defines the fracture treatment, the fluid, the chemistry, and the profit design. The ability to integrate from so many disparate data sources is unique to Halliburton and it’s due to the open platform design of our asset models. The beauty of this open platform is that the asset model is no longer static to the operator. As you drill and complete more wells, the data is gathered and can be modeled at anytime. It is a dynamic product that in effect learns with each new well drilled and it drives recommendations from artificial neural networks. The more data that goes in, the smarter the model becomes. There is no other tool in the marketplace today that pulls off all of these domains into a single platform with such immediate implications on how to increase productivities of large assets. CYPHER truly is the first integrated smart product for our industry, embedded is 27 IP and patent protections protecting ourselves in addition to being trademark for delivering in the field today. Now, we have been beta testing CYPHER for well over a year to validate the benefits to our customers, which is reducing uncertainty and increasing production.

So to show CYPHER’s impacts, I’d like to provide you with the results of two ongoing projects with large independent oil and gas operators here in the United States, one in a liquids reservoir and the other in a gas. In North Texas in the liquid producing area of the Barnett Shale, our client was faced with inconsistent well performance, which was becoming uneconomical for their team. In this image, you see a wellbore in black it’s drilled by our competition. The target zone, shown in red, is a 50-foot target interval. This type of wellbore placement with significant variability in the sections outside of the target zone is unfortunately common in the United States, especially with a factory focus on reducing drilling days.

But let me draw your eyes to the columns on the bottom of the image. As you move through the fracturing stages, you see varied production contribution. When this wellbore is out of zone that section of the well produces less which has been documented by CYPHER. This data shown before you has been originated from fiber optic production monitoring technology, which you saw demonstrated to you yesterday. The key takeaway here is that as much as 50% of the production is left behind pipe. So we deployed one of our CYPHER teams. We integrated seismic logs and core and other relevant data to create the integrated asset model and identify data gaps. The engineering tech team identified the natural fracture network and recommended sweet spots. There are so many factors that go into successfully drilling and completing wells. Before having CYPHER, the client would have only been able to isolate some of the root causes creating the variability in production and they would have delivered inconsistent well results to trial and error wasting time and capital on future wells.

With CYPHER product, we were able to determine the most pivotal factors that drove consistent performance and increased production. So the results, CYPHER delivered the sweet spot and consistent production contribution along the lateral length. This project, which began earlier this year and on 45 wells today, the tech team using CYPHER has delivered an increase of over 60% estimated recovery. CYPHER has enabled to do many things with this client. It allowed us to make better wells, but it also secured our market position with them and introduced new technologies that positively impacted them and our margins.

Our next example is from a factory operation in the Marcellus Shale. Now, this client is far past exploration and appraisal. They have been in the play for many years and we have been right there focused on their reservoir with them. But what does factory mean to them? They are in a high velocity mode. They need to make decisions quickly, drilling faster and here is where reducing uncertainty has an exceedingly high value. Halliburton has differentiated itself by eliminating the uncertainty of producing viable wells by utilizing CYPHER. CYPHER results in a better understanding of economic trade-offs. For example, when CYPHER models various drilling and completion designs, it produces an estimate of future production and includes estimates of low costs. Operators can now make investment decisions with a clear view of the expected payoff. In other words, customers can now see exactly how much predicted production that they can achieve on a per well basis.

So how reliable can these models be? Well, in this case, after CYPHER was deployed, the wells were drilled and the recommendations from the integrated asset model were made. There was a 93% correlation between predicted and actual production. So let me state that again. There is a 93% correlation before a bit was ever spudded in the ground. Take out the value that CYPHER adds to the customer. CYPHER identified the wellbore placement, the well spacing, perforation cluster spacing, frac fluid chemistry and many other factors. It eliminated oversize surface equipment. It right-sized gas compression and it ensured the accuracy of pipeline contracts. This work has affected how operators go to market and the confidence by which they work. Now, that is quite a value proposition.

CYPHER has shown the customer where to drill the well, how to drill the well, where to complete the well and how to complete the well. Eliminating uncertainty, it drives value in the operators’ work and well beyond the well site. And this method drives confidence in Halliburton. Today, we have all product lines working in multi-rig operations for this operator illustrating the power that CYPHER has to pull-through services in large scale projects. By understanding that their challenges is both increasing production and reducing uncertainty, we have strengthened our business relationship with them. This is our sustainable model continuing to be the first mover in understanding challenges and providing solutions to them.

So let’s transition now to alpha results from other projects in the major U.S. basins. In evaluating our early projects, we see great opportunities in the major basins of the U.S. We seeing results today and the ability to increase and affect production in the amounts of a 27% increase in the Utica, a 24% increase in the Bakken, 29% increase in the Niobrara, and on down the line of the major basins in the United States. These statements speak to the strength and the breadth of the CYPHER product coupled with our tech team basin knowledge. So I’d like to recap the major points of differentiation that Halliburton brings through CYPHER. By focusing on the reservoir and knowing where to drill the well, where to land the well, where to complete the well and how to complete the well, CYPHER reduces uncertainty and it makes better wells. You see with CYPHER, I just don’t understand how any operator would drill or operate without this knowledge, it is self evident, it is the total optimization product. Thank you. Jim?

Jim Brown - President, Western Hemisphere

Well, self-evident is right. I mean, look at these numbers, 20%, 40%, 60% better wells. Our wells are right next to our competitors’ wells. In some cases, we are only a 1,000 feet apart. There is probably people in this room with the help of CYPHER could drill, steer and complete a well. And to demonstrate how effective it is, everyone here today will receive a copy of a digital game we created called Seeking Cypher to test your knowledge and your skill set. So thank you Stephen. Now, Stephen has talked about the bottom side of the formula, that’s making better wells.

Now, I’d like to introduce Laura Schilling who will walk you through the efficiency side of the formula. Prior to her current role, Laura was a District Manager and she led one of our largest district operations in North America. She is going to share with you our efficiency gains and what it means to our bottom line. Laura?

Laura Schilling - Shell Global Account Manager, Western Hemisphere

Thank you, Jim. So it’s really good to see everyone. And for the last three years, I have been in the field leading our operation in the Niobrara play in the DJ Basin. In fact, the Brighton field camp was one of the first to upgrade our frac fleet to the Frac of the Future technologies. And we were also one of the first to deploy the Battle Red initiatives. And these innovations led to a reinvention of how we delivered in the fields and our customers notice.

We led incredible change and I saw how this differentiated our services to our customers resulting in the incredible market leadership we enjoy there today. So for the next 10 minutes, let’s get out of this room, let’s go out to location. We could go to Williston, North Dakota, Odessa, Texas, Montgomery, PA and even my former districts in Brighton, Colorado. Now you know in the Rockies some of you know that winters get cold and dark and I would tell you being a district manager is a pretty tough job. But just to clarify, I am the one on the left. So as Jim mentioned we are focused on both sides of the formula and driving superior operational efficiency is all about influencing metrics that we can control. And let’s begin with the vision of the Frac of the Future improving completion efficiency in the field through improved equipment design.

Now at the time we committed to you that this would result in 20% less capital on location, 45% less personnel and that we would decrease completion times by 25%. And at that particular time in 2010, we did not quantify a commitment to you for savings related to maintenance. But when we look at the real impact of this new way of working, we are actually outpacing those numbers. On sites for the Frac of the Future is deployed this is what we are seeing. We deployed 20% less capital on location and we have reduced completion times closer to 40%. By the end of the year 20% of our fleet will be converted to the Frac of the Future equipment such as the Q10 pump.

The Q10 is customized for 24-hour operations reducing downtime and what we have seen as reducing maintenance costs by 50%. This kind of performance has reduced our footprint and the amount of equipment needed on location. The solar powered SandCastles have automated proppant conveyance systems that reduced waste and the need for personnel to monitor these tasks. And with remote operation centers in every major unconventional play, we provide real-time engineering support off the location and we are monitoring thousands of drilling and completion jobs a month.

Our next generation technologies and equipment continued to be added to the Frac of the Future portfolio. We are introducing a new SandCastle the PS 4000 that doubles propane capacity on-location. And the pump down visualization capability you saw yesterday allows us to optimize the speed of setting plugs, allowing us to reduce completion time by over 10%. We have also introduced innovations in fluid chemistry that are driving new levels of efficiency. Our Access Frac service uses the proprietary degradable, diverting material to establish zones that can withstand the rigors of fracturing. And using this technology customers can set fewer plugs and treat more perforation clusters, the number of trips in drill out time is reduced resulting in improved completions efficiency. And to-date we have done 3000 jobs globally with this technology.

So as you can see Frac of the Future platform led to a reinvention of how we deliver services in the field. And the lessons we have learned extend far beyond completion services. We have taken operational efficiency to the next level. So what is the result, delivering superior operational efficiency means we turn well inventories into producing assets in a shorter amount of time, we increased the asset’s velocity resulting in better economies of scale for the customer. And through higher utilization we lower our cost to deliver and our customers cost per BOE. And our unique approach to how we deliver in the field is a major component of why we went and it’s a differentiator to our customers. But really this is just the beginning.

Now Stephen just described the powerful tool that we have in CYPHER. For Halliburton as Stephen showcased efficiency starts with understanding the reservoir and by identifying the sweet spot and understanding reservoir drainage patterns we identify where to drill, how to land the wellbore and then we can customize the optimal drilling system. And this is where our integrated approach creates step changes in efficiency.

Now in 2011 horizontal wells in the Niobrara took about 18 days to drill. Horizontal wells now average around eight days with one customer Halliburton customized solutions from drill bits, fluids and drilling to design an integrated system especially formulated for the conditions in the DJ Basin. And during drilling the well is monitored in real-time allowing the engineering team to optimize rotary speed, weight on bit and torque to maximize drilling efficiency.

By optimizing drill bits, fluids and drilling, Halliburton now drills these wells in less than five days. That’s 43% faster than the current average. And this kind of performance through integration delivers efficiencies that can be repeated across multiple wells on a pad. Our approach not only enables the customer to create inventory faster but our understanding in the reservoir helps us recommend optimal lateral length, the best number of wells on pads, custom perforation and completion designs. All in turn contributing to lowering our customers cost per BOE.

So reinventing our delivery platform required us to look at efficiently in an entirely different way. So let’s look at a completions example. We had to ask for ourselves several new questions, how much time is attributable to operating hours on a job, can we reduce the amount of downtime between stages but are yet can we reduce the amount of downtime between wells. How can we monetize the white space otherwise known as non-operating time? So currently while we could be on a location completing a well over three to four days, operating hours represent about 40% of the time.

What activities are taking place the other percentage of time? Well, a good portion of it, we are waiting on third parties. But for us when delivering our services, lot of times we are moving equipment, we are rigging up and down, measuring materials such as sand and chemicals, performing maintenance, paperwork, sometimes waiting on assets to arrive. So why is understanding this so important. Because if we are not pumping fluids or estimate or running wire line or drilling we are not making are any revenue. So customized equipment help decrease some of this non-operating time but there is a lot more white space to capture.

So let’s look at what it takes to support 24-hour operations today. This is an example from one 24-hour crew working for 30 days. Now these numbers will depend – will vary depending on the design and who the customer is but in this particular case this crew completed 332 frac stages. They pumped 40 million pounds of proppant which required delivery of over 200 railcars and 888 truckloads to location. In total this crew pumped 52 million gallons of fluid. Now delivering this kind of volume 24 hours a day across unconventional basins it is the complex task. And often as complexity increases so does inefficiency. We believe we are the most efficient than any one than else in the industry, but there is still a lot of room for improvement. And it was out of these challenges that Battle Red became the next enabler for surface efficiency. We have leaned out basic processes and used automation. And as Jim mentioned we eliminated hundreds of touch points and bottlenecks in our system. It automates invoicing, inventory, allows remote maintenance monitoring and even personnel management. We also created more transparent logistics networks to support our businesses in major basins.

For example as part of our logistics network Halliburton owns proppant storage plants and that gives us control of the value chain, and helps to drive right efficiency. And this actually keeps our transportation and delivery costs lower than our competitors from rail, to wellhead. And today we have regional dispatch hubs with visibility to every job in an area and every piece of equipment. So for our customers this means we can source equipment faster and decrease non-productive time. And for Halliburton this means we no longer have stranded assets. This transparency promotes increased utilization enabling us to catch more work and generate more revenue.

So you have heard a lot about Battle Red and it can be a hard concept to understand, so let me give you a few real life examples of how digitizing our processors has changed how we work. Now many of these tasks used to often result in huge amounts of paper being shuffled across my desk or from department to department days after the job. But now with a smartphone like the one I have in my hand as a district manager I had access to key pieces of information. For example, I can see when a crew arrived on location and even see what roads they took to get there. I can see which crew is on site and how many hours that they have logged and manage overtime. I could monitor jobs, I can see what frac stage that they are on, even see if the crew is performing maintenance on a certain piece of equipment. And I could review individual customer details and invoices. In total, I could see the daily utilization, revenue and costs to make better decisions about my business everyday.

But now let me put on my other red hard hat. Let’s say I am a service leader on a crew, I can order materials such as sand and chemicals and I can have them shed directly to location. I can see how much material inventory is currently on location and crews can also check key job procedures, take training and safety modules while they are out. And most importantly, I can review the invoice for the job. I can check accuracy and materials and I can give it to the customer before I leave location. Now, this process used to require putting two big binders together, job data and materials and I would have to drive it over to the customers’ office sometimes many days after the job and try to get the ticket signed. But now as a service leader, the customer can actually sign the screen. So I have the visibility to the right information, so I can manage my cost, inventory and equipment and utilization everyday.

Now, this is not just about using technology, I want to be clear. This puts the right information into the right people’s hands so we can make better decisions about cost and we can increase productivity. And Brighton was one of the first to pilot the software applications and train our crews on the processes, but other districts are currently implementing these applications now. So what happens when we bring all of these pieces together? Halliburton delivers across the most efficient platform and we monetize the white space having reinvented our service delivery platform and that’s the HAL Advantage. As we bring these pieces of efficiency and automation together by implementing across our entire fleet, operating time can represent closer to 75% of our time on location. Remember what I said, if we are not drilling, fracing, cementing, running wireline, we are not generating revenue, but through increased efficiency we have shrunk and we have monetized this white space. And it worked in Brighton, but we have a lot of runway left as we implement this across our operation.

So just in closing, for Halliburton through more efficient service delivery, the decrease in maintenance cost, higher utilization and more robust logistics networks, we lower our operating cost. For the customer, this translates to getting more wells completed in a 24-hour period of time than our competitors can. We turn well inventory into producing assets. We increased that velocity and that lowers their cost per BOE. Jim?

Jim Brown - President, Western Hemisphere

Thank you, Laura. I mean, this is really cool stuff and this is taking our business really into the 21st century. These kind of efficiencies that Laura just demonstrated, they don’t happen overnight. It’s transforming how we work today and how we have widened the gap between us and our competitors create the most efficient delivery platform on the planet. Thanks again Laura. So again, the formula is simple, the most efficient service company that delivers the best wells. Now you are not going to see this stuff at Bob’s completion service and bakeshop and you are not going to see it from our primary competitors either as we are the only ones that are attacking both sides of this simple formula.

Again, we are being repetitive here, but it’s important. For the customer that yields a lower cost per BOE. For Halliburton, the equation yields better margins. So at this point, I am going to draw a line in the sand, as we like to say a line in the proppant. So here we go. My commitment for Halliburton is over the next three years 500 basis points of margin in our North America operations. And that’s without a price increase. Again, if you are the most efficient service provider and you deliver the best wells and you go to market with the most professional, knowledgeable, well-connected sales force 500 basis points is a slam dunk.

So with that, I’ll close. Thank you very much for your attention. And I will turn it back to Jeff.

Jeff Miller - Chief Operating Officer

Jim, 500 basis points, I never thought I’d see that happen. You can be focused on something more than revenue growth. I’m excited and you should be excited too. Excited because we have the unique combination of service efficiencies and subsurface solutions to continue to lead in this space and outperform the market. CYPHER is the only product of its kind that shows you where to drill, where to steer well, where to complete and how to complete. Even more CYPHER is an interactive and iterative product, not a series of static consulting models. CYPHER will be how we design work in the office and then execute work in the field. In fact, we know how to make better wells.

And what we know is that it takes both, customized horsepower and science. At this point, you heard our outlook and our commitments for our three strategic themes. So you have to be asking yourself what’s this mean in terms of revenues, margins and shareholder returns. Now, I have been in finance, I have run countries in service lines and I have been in sales. And I can tell you that this next guy is the toughest guy to sell in the room. But Mark McCollum, our Chief Financial Officer has terrific insight into this industry and how it works. So at this point, let’s get dialed into what these commitments mean, really mean financially. Mark?

Mark McCollum - Executive Vice President and Chief Financial Officer

Thanks, Jeff and good morning everyone. I was telling somebody earlier that it’s a rare situation in this world where everybody is on the edge of their chair to hear from a numbers guy. So I am excited about the opportunity to address you here. Dave opened up the presentation today saying that we are staying the course on our strategy. And that we will remain focused on the three key areas of growth that have benefited us so well over the last few years.

And as you have already heard this morning, if we haven’t already figured it out, we tend to set stretch goals for ourselves here in this organization. And if you sort of replay what you’ve heard our guys this morning thus far have laid out some pretty aggressive new goals almost as fast as my Baylor Bears score touchdowns, almost, not quite, but almost. So let me take a minute or let’s take your time out and do a quick play-by-play recap.

In deepwater, we intend to continue outgrowing the market by 25%. We have used the last several years to put the building blocks in place to make this happen. We told you we spent over $1 billion in infrastructure to get us there. Now we are starting to reap the benefits with those investments, but it’s going to be technology that takes us forward from here. We are transitioning from being a compelling alternative to a compelling choice, which will help us to continue to grow our market share, particularly as we leverage the market trend toward more development projects. In mature fields, we are committing to tripling the size of this business to $9 billion in the next three years. This market is often underappreciated, but as you heard this morning we believe it’s going to be one of the fastest growing segments in the coming years.

Production from existing fields is continuing to decline and our customers need help to either extend or enhance production. These fields are also significant cash flow generators. And many operators, especially the NOCs lacked the technical expertise to unlock the additional opportunity. Halliburton is uniquely positioned to benefit from this market since there really are only a couple of companies that have the scale, the integrated solutions portfolio and the track record to handle the pipeline of large integrated asset management projects that are coming in the next few years.

And finally in unconventionals, we are committing to a 500 basis point improvement in North America margins without help from pricing based on the efficiencies and cost improvements that we expect to achieve from HALvantage as well as our ability to apply our CYPHER seismic to stimulation subsurface technologies to reduce uncertainty and improve results for our customers. We are the undisputed leader in the unconventional market and we are not going to relinquish this position to our peers. You’ve heard me say this before the winner at the end of the day will be the company that can offer the highest production for the lowest cost per BOE and we showed you today how Halliburton can make better unconventional wells than anyone else in the world. So these are our three primary commitments, but ultimately they are just empty words unless they positively impact our ability to deliver on our financial strategies of generating superior growth, superior margins and superior returns.

So let’s take a look at how we expect these commitments to translate into our financial results. In North America, we see margin contribution coming from several different drivers. Some of those we expect to see in the next few years and there are other items that will eventually come to fruition, but are going to take a little bit longer and are difficult to forecast at this time. The shorter term bucket includes continued growth in the unconventional market in North America as it further evolves to a more efficient development model. We continue to see an improvement in horizontal service intensity and well count regardless of what the rig count environment is.

Next is the expansion of the Gulf of Mexico. We have got a very strong position in the completions market in this area and we have an increased share in the drilling and evaluation business with new rigs that will be entering the market in 2014. Now as Jim Brown mentioned, we are making a bold commitment today to improve margins by 500 basis points in the next three years driven by the execution of our various HALvantage initiatives and the growth that we expect our CYPHER platform technology to deliver. But what does that mean for 2014? Next year, we are expecting to gradually improve North America margins over the course of the year by approximately 200 basis points then the remaining 300 basis points of improvement will be achieved over the next few years.

Now, let me be clear. This is a quarter-by-quarter improvement in margins accumulating to 200 basis points just from these initiatives and it assumes no help from rigs or from pricing. Now, if some of the early indicators are correct, customers may be increasing their CapEx and rig count next year. And if this happens depending on the timing of those activity increases, we should be able to get our margins in North America into the low 20s by the end of the year. Now, over the full cycle, when the market sees a meaningful increase in gas activity, we continue to anticipate pricing improvement that will move our North America margins into the mid-20s. Now, this is a very robust business. North America is still the largest energy services market in the world and we are very proud of our position here.

Now, moving internationally, Jon Lewis and Eric Carre outlined the major near-term growth opportunities that we see in both deepwater and mature fields. We have the building blocks in place and are well-positioned to continue to grow revenues and margins even in a flat pricing environment. As you have seen over the last couple of years, our revenues and margins continue to stair-step higher each quarter on a year-over-year basis. As activity levels continue to improve, we gain additional share. We have better fixed cost absorption and we take advantage of technology up-sell or pricing improvements as those opportunities present themselves. Next year, we are committing to move margins a step higher into the upper teens for the full year. Now, like North America, this assumes no help from pricing. Now, pricing, we still believe will come, but we continue to believe that there is not a major inflection and activity or pricing in the near-term in the international markets, but when we do get that inflection, we believe our normalized international margins can move consistently into the low 20s.

Now, another important point to note is that this year we will be very close to having an equal balance between our North America and our international businesses. In the next couple of years, we expect our international business to actually take the lead and it will likely move closer to 60% of our total company revenues. So as you can see the growth and cost strategies, we have outlined for you this morning are intended to have a pretty significant marginal impact, but there is more. As you know, for the past several years, we have been investing in a series of strategic corporate initiatives that were designed to better position us for significant future growth at both North America and around the world. Today, two of those initiatives are already in place. The global business realignment project and our global sourcing initiatives complemented each other and they were focused on realigning our international operations to improve our product and service delivery for our international customers, for creating better access for us to lower cost international suppliers allowing us to obtain a more efficient use of our field technology and ultimately achieving a substantial reduction in our cost.

Now, our global growth expectations required to build out of Eastern Hemisphere manufacturing capability. And so earlier this year, we opened a completion tools manufacturing and technology center in Singapore and we have moved our product line management team there to oversee the operations. This center has already provided significant savings in labor, freight and repair and maintenance and believe it or not, we are already expanding the footprint to accommodate future business. Now, just a minute ago, Laura Schilling touched on our Battle Red initiative. This is the third initiative that we have been going forward on, which is entering the final phase of its field deployment in North America.

Now, quickly by employing proprietary mobile device applications and by digitizing our back office, we will be streamlining our job execution, our warehouse and our billing processes first in North America, but eventually and ultimately around the world. And although there is some headcount reduction associated with this project, some of which you saw on our third quarter results. The major focus of this initiative is actually unlocking working capital for both the invoicing and the inventory processes. And in just a minute, I am going to talk to you a little bit more detail about what we see and what we are targeting for improvement in working capital. The cost of these three initiatives will have averaged over $100 million a year or about $0.08 to $0.10 of annual corporate cost over the last three years.

In the first quarter of 2014, these initiatives and their cost will begin to wind down. We will incur about $0.02 to $0.03 cents in the first quarter and maybe a $0.01 or $0.02 in the second quarter. But by the back half of 2014, they should be a $0.01 or less of our quarterly corporate cost. And by the beginning of 2015, the cost will be gone. In addition to the cost savings, one of the indirect outcomes of these transformational initiatives has been an increase in our international earnings and a related reduction in our effective tax rate. We achieved a 300 basis point reduction in our tax rate in 2013 and we expect to continue to improve our ETR by an additional 100 to 150 basis points over the next few years as more of our business now shifts to Latin America and the Eastern Hemisphere.

Now, I’d like walk you through a roadmap as to what our EPS could possibly look like over the next two years based on the commitments that we have talked about thus far today. First, let’s start with our 2013 estimated EPS. Then if you add in a conservative growth number for North America and the 500 basis point margin improvement related to our HALvantage initiatives as well as the commitments we made today for international growth and margin improvement and finally the elimination of our corporate initiative expense and the projected lower tax rate. Well, you can see that these items alone are adding up to a fairly impressive EPS number that we think that can be achievable over the next few years. And this really just represents a base case scenario assuming no meaningful help from pricing or gas activity. But now if you assume that at some point over the next few years, we get that help and we can get up to a normalized margin for both North America and international. Well, it’s a pretty impressive story.

Now, I will admit the numbers will obviously fluctuated depending on what level of growth you model, but this gives you a feel for the potential upside opportunity that we see based on our commitments today around growth, margins and tax rate improvement. What ultimately is most important to us is the impact that this improvement in earnings profile will have on our returns and our cash flows going forward. As you guys know, we are returns driven organization and we are proud of the fact that we have had the leading returns over our peers for the past several years. This slide shows the DuPont return on assets formula. It’s pretty simple formula and believe or not it’s actually very well-known within the Halliburton organization, margins times capital velocity equals returns. I have just shown you how we intend to impact the margin side of this equation, but it’s important to also note that we are relentlessly focused on the velocity side of the equation as well, since this is the multiplier effect on our growth that will ultimately drive more distributable cash. And in this regard, we also expect to see an improvement in velocity over the next several years.

And we sometimes get criticized around the amount of capital that we have invested over the last few years, but when you double the size of the company over a three-year period it requires significant investment, and remember we achieved our growth primarily organically while our competitors growth happened primarily through M&A. So I’m proud of the fact that during the same time period, we continue to drive significantly higher levels of sales for asset dollar invested than any of our peers. But as I mentioned earlier, we have to put the building blocks in place especially in the international market. So now that's happened now we can enjoy the return on these investments as the pace of our international infrastructure spend declines.

Also in North America, our HALvantage initiatives and deployment will require significantly less capital on location. And so over time we fully expect this to also be a tremendous driver of additional capital velocity. So we fully anticipate our asset turnover metric to improve over the next few years. This reflects the result of the efficiency initiatives that we put in place that will continue to allow us to generate more revenue for each dollar of capex invested going forward. And I’ll also look at specifically working capital. And relative to our primary competitors, we currently have an 18-day advantage. Now a day of working capital for us is worth approximately $80 million.

So if we think about that, that’s a $1.4 billion advantage that we have in capital efficiency over our peers. Said another way is another $1.4 billion of additional liquidity that we can either invest directly into revenue generating assets or return to our shareholders. Now even though we performed well on a relative basis, we still believe we have significant room to improve. For example, our DSOs run close to 80 days, now our terms certainly aren’t 80 days. In fact in North America, they are closer to 30 days. The low hanging fruit or opportunity lies in the front end of our order to cash process. It takes us on average 8 to 10 days to issue an invoice, that’s 8 to 10 days before our customer even sees a bill.

And given the number of manual handoffs involved oftentimes that invoice comes back for correction after the customer has had it in his hand for 30 days. Additionally our inventory management processes have been very manual, paper intensive with a lot of inefficiencies. So this is what Battle Red targets – driving out that error and automating these manual processes to help us become a leaner more efficient organization. So from Battle Red, we expect to reduce DSOs by as much as 5 to 7 days. Additionally we’re expecting our global manufacturing logistics footprint along with other internal initiatives that we're currently working on to give us some additional 3 to 5 days of help on the inventory and payable sign. In total, we are targeting a 10 day reduction in working capital over the next three years. Now depending on your growth assumptions for us, this represents roughly a $1 billion immediate liquidity opportunity, but for us it also represents a significant ongoing improvement in our returns.

So I’m talking about margins and earnings power based on the operational commitments that we made you this morning and now using that we have a structural advantage of working capital and asset utilization that we intend to expand over the next couple years, but when you combine the expected impact from both margins and from velocity what emerges is a clear path for our returns to increase to 20% over the next few years. So this is another aggressive goal that we're committing to you guys today, 20% return on capital employed by 2016. Now what’s often underappreciated by the market returns are an important metric to us because the actions necessary to drive returns ultimately influence the amount of sustainable cash that we generate in the amount that we can return to you our shareholders in the form of dividends and buybacks.

In that regard, I hope you believe that we've demonstrated a clear commitment to you in 2013 by repurchasing $4.4 billion of our common stock and raising our dividend by 39%, but even if you exclude our recent $3.3 billion Dutch, over the past three years, inside the parameter of living within our cash flow we have actually allocated about 19% of our operating cash flow to shareholders. Now if you take a minute to think about the operational commitments that we made to you today, North American margin expansion, international growth, a decrease in our effective tax rate, a reduction in our working capital metrics and a lower capital reinvestment rate, you realized that we are now poised to convert a much higher percentage of our earnings into cash flow, which will in turn allow us to distribute a greater amount of cash to our shareholders. So going forward, our goal is to return roughly 35% of our operating cash flow to stakeholders, 35%. That’s nearly double our historic trend. And based on the confidence that we have as a management team and our outlook in our commitments, I am happy to announce that our Board of Directors has approved an additional 20% increase in our dividend to our shareholders. Now, as we previously announced, we expect our dividend payout going forward to be at least 15% to 20% of net income. And we anticipate doing more systematic buybacks going forward. We also expect the announcements like this dividend increase to happen more often going forward.

So to wrap it up, here are the key commitments that we have made to you today. Clearly, we have got significant upside. Over the next three years, we will grow faster than the market itself. We will deliver superior margins and we will deliver superior returns. We are going to maintain our North American leadership position and we are going to compress the gap with our competition internationally. And finally, we believe that we are going to generate significantly higher cash flow, which will result in higher returns to our stakeholders. On behalf of the entire management team, we have really enjoyed the opportunity to share our story with you today. We think it’s a great story and it’s one that we are very proud of. And I hope you get a sense of the enthusiasm that we all have, not only for having delivered the track record that we have historically, but also for the focus that we have on continuing to outperform in this upcoming cycle.

And I am going to leave you with one final thought, it’s something that Dave mentioned at the first part of the session this morning, but it’s particularly important to all of us here. At Halliburton, we stand by our commitments to deliver. Thank you very much. Now, everyone, we are going to take a short 10 minute break and then we are going to come back and we will have our question-and-answer session right after that 10-minute break. So very quickly come back and join us for questions and answers.

(Break)

Question-and-Answer Session

Operator

(Operator Instructions) Thank you.

Jim Brown

So I guess the format will be raise your hand and someone will run a mic around to you, so who has got, Jason, you have got one and who has got the other one over here. Okay, well let’s just, let’s go to James to start.

Unidentified Analyst

Thanks. So quick question on the 500 basis points in North American margins, I know you said that assumes no price or no help with the rig count, but if you look at the CapEx announcements, they have obviously been in the positive side. So kind of how do you mirror that target with what may actually unfold here over the next couple of years?

Jim Brown

I think obviously we are not – don’t take the info that Mark put out there as a prediction and we don’t expect growth in rig count. We don’t expect a growth in well count, stage count or the ability at some point that moved prices up. We are really trying to freeze for you the benefit of the Battle Red initiatives and some of the other initiatives to get in your head just the impact of those on an individual basis. I mean, if you look at as Mark said the early indications of capital spend for next year, even with you think about the leverage now, with modest rig count growth, stage count going up, service intensity going up. I would expect our business in North America to grow next year plus have the benefit of starting to rollout some of these efforts.

And I think that one of the things and I had a couple of folks asked me at the break sort of the pace of this. You got to remember how big we are in North America and how much change in terms of behavior in the organization we are trying to drive here. We have 30,000 some employees in North America. So this is not a trivial exercise to roll this out and to change the behavior if the headcount reduced, get customers on board with this approach. So, this is a multiple, multiple year payoff in terms of how it’s going to come. So, but as I said I don’t want you to take the view that we are not predicting price increases, we’re not predicting rig count increases, that’s all I believe going to come, but we really wanted to bifurcate the impact. You know you’ll make your own choice in terms of where the growth may go, the pricing power may come from, but what we wanted to do basically isolate for you is the five points is just going to come from the efforts that we outlined today.

Unidentified Analyst

When you are going through the kind of as you isolate everything felt some of the growth etcetera. The earnings impact on the company just want to make sure I got this clear around sixes that’s hard and then if you get the pricing growth etcetera that for the number one up to seven and half to somewhere in there, right?

Jim Brown

That’s what that slide should have demonstrated, yes.

Unidentified Analyst

Demonstrated, okay.

Mark McCollum

All of our commitments were three year commitments, so that’s what we’re looking at.

Dave Lesar

So I guess our view, James as we sort of provided the stuff we can control and on the rig count and pricing side is going to be market driven. And I think we wanted to give you a sense of the earnings power and everybody will have to sort of put in their own projection of where that goes. When it does, we’re going to take advantage of it and we’re going to read the benefits of it, but yeah, there is such a wide variety in this room I suspect of the outlook aspect of rig count and pricing power that’s sort of up for you to model at this point, but we wanted just to show you the sort of the leverage to earnings power when it does happen and if it doesn’t happen, it’s still a pretty powerful story.

Jeff Miller

We have a question up here. Yes, back here, I am sorry, go ahead.

Unidentified Analyst

Thanks. One of the focus on the international side and I appreciate the guidance to give at – given us really helpful. On the normalized margins getting into the low 20s that’s essentially getting back to your prior peak without pricing, which is just great that a different sign of improvement. Your largest competitors essentially also said that returning to their prior peak again similar kind of assumptions, which implies that you no longer expect to be able to close the margins gap. If now feel that there is something structural there, is that conservatives and kind of give us some color around how that might be – different how you might be able to do that or if you don’t think you can that’s fine too?

Dave Lesar

No, I mean, I would say absolutely we don’t think that’s an impossible goal. I think that were competitive organization and we see a variety of pass, the one is the fact that we do have the infrastructure footprint down now and it really is a matter of giving the contract base to absorb the – that aspect. The second is that was touched on a couple of times and I think the Eric it on in particular is the fact that the international market is rolling more toward the completion side and that’s where more of a deepwater growth is going to come from. That rolls more into our strengths as a company especially with our completion position that we have. So, I would not at all take away from this that we don’t expect to close the – some of the margin gap, I’ll be very disappointed if we don’t, but I was disappointed on the last go around so, as I said we’re very competitive as an organization, we’ve got the technology, we’ve got the infrastructure now, we’ve got the contract base, which we didn’t have last time to start to do that. So, I’m confident that you that will be able to start to do that. So, now we’re not – that’s not something we’ve up on.

Unidentified Analyst

The key element of closing the margin gap is closing size gap so as we continue to outgrow the marketplace that’s going to make a meaningful in that differential.

Unidentified Company Speaker

So the baseline would be getting to that the low 20s as you grow into the infrastructure that you built – you wouldn’t be expect to continue or to narrow that gap.

Jim Brown

And I think just one more add-on that obviously if even – when we get back to the sort of low 20s where were last time – it’s on a lot bigger base of business then we had probably doubled the size of what we had last time and again you just give leverage to our earnings per share power at that point in time.

Unidentified Analyst

Thank you. Mark, could you give us an idea of what the Frac of the Future rollout looks like beyond the 20% really I’m looking at three ways, one in terms of just from a CapEx standpoint, secondly from balancing of market share standpoint with the kinds of things that you’ve shown us obviously you’re growing and then sort of third from of a manufacturing standpoint is all that’s coming from your own manufacturing. Are you going to scale up on that to accelerate?

Mark McCollum

So we have – there are number of different things that we have to keep in balance so, one is obviously making sure that we’re keeping our manufacturing full, continue to utilize that, that is most efficient point. Another factor is also looking at how much can, the markets absorb, but any one time relative to what growth expectations we have in the market and the great thing about having their own manufacturing is that where we can be fairly nimble and adjust that at any point in time. The third factor also looking at as we we’re replacing equipment in the field, some of that equipment at a point will be – will continue to have some level of useful life. And so we’re also trying to pace ourselves to make sure that when we do pull an equipment if it’s destined for retirement that it indeed is fully depreciated and really needs to go and you – in our planning, we challenge ourselves this year, we’ll continue to challenge ourselves as to whether we add incremental horsepower, if we can put that horsepower out there to work and get a good solid return on that equipment, we’ll make that decision along the way. So, I will tell you it’s variable right now, but I think we’ll be about 20% deployed at the end of this year. We should expect to be about 50% deployed by the end of 2015 and then it will continue to deploy over the preceding years. Now that is sort of assuming, sort of the current level of rig count or not a major inflection in North American activity. If it changed rapidly, you would probably see us dial-up quite a bit to get that horsepower out there as fast as we could?

Dave Lesar

Yes. And I think as you can appreciate, we’re not going to layout a specific roadmap because it’s a competitive advantage to us to so to keep close to the vast, what our rollout strategy as how fast, where they are going to show up and things like that, we’re not going to sort of broadcast that to the world, year or two had a time and allow our competition to prepare for it. So, I think as Mark said sort of a variable rollout plan is what we have. We manufacture own equipment so we have that advantage. We have the capital to spend if we want. We’ve got the market share that out there if we want it and we have the ability basically to roll it out of whatever speed we want and we’ll just access the market as it goes along and you just think of our manufacturing capability is sort of a volumes which and will adjust as we go, but I don’t think we will lay out any more of a clear roadmap that because I want to keep the competitive advantage in side.

Unidentified Analyst

Just two quick follow-ups if I may, first it sounds like now accelerated attrition of the existing equipment is in the plan. And then secondly is it still a customer driven rollout as opposed to a pace driven rollout.

Jeff Miller

I would say is it, as you look at attrition and that’s a question about attrition broadly we continue to see attrition, we think in the marketplace of other equipment and largely due to cannibalization as much as anything else and I think that’s probably been discussed at some point in the market that frac fleets they have a way of diminishing if they’re not being used because that equipment winds up being used to keep equipment in the field working. So, yes that’s out there as I pass. The other that we didn’t talk much about was internationally in terms of the ability to move equipment around the world. So, as we sort of look at the dynamics there that ability are certainly there for us.

Dave Lesar

Right now, we are sending equipment to Saudi, we’re sending equipment to Australia and all of that is basically refurbished equipment is the number we’re replacing the Q10 is replacing a set of pumping assets that’s still the best that there is out there and so by refurbishing the assets that we’re taking out of the field basically we’re able to sort of replicate some of our horsepower coverage in other parts of the world for a very low capital cost. Because it’s basically got refurbished versus a complete new build to basically send into some of these markets. Here in the front.

Unidentified Analyst

Guys, you did a very impressive job talking about margins for 2014, 2015, 2016 and this Analyst Day has been very well put together. But if you want to talk about a little bit of your visibility on revenues for 2014 versus 2013 as far as the growth of revenues internationally and in North America and you expect internationally that you can continue to outpace your peers both the top line and at the bottom line?

Mark McCollum

I think some of the comments made yesterday in the breakout sessions, we are expecting in 2014 a more modest growth level then maybe you’ve seen in the last couple years, but continued. If you look at the market overall internationally, we are still expecting a low double-digit growth in the market itself, and in the North America looking ahead to continue to see an increased in well count and service intensity that will drive probably a high-single digits growth in relative activity. At this point our expectations around well count at least internally in our planning were fairly modest for 2014 in North America.

Unidentified Analyst

And then as a follow-up on deepwater, you said it’s going to be driven by new technologies, is there any area of the world that you still yet to enter in with a full footprint or new customers that you still need to tap into that could also drive that growth?

Jeff Miller

We have got a lot – there is a lot of a runway left for us in the Eastern hemisphere. If you just look at the gap we have today between ourselves and our primary competitor. But what I would say today is that we are competing effectively in every international market in the world. So are there bits and bobs of footprint that we might need in a particular location. In some cases maybe yes, we by and large we are in all of those basins today. And more importantly we are competing across the breadth of our service lines today in all of those markets as well. By that I mean the full range of drilling in evaluation technology.

Dave Lesar

Yes, I guess (Andy) I would add to that by saying I think it’s really more waiting for the contract rollover opportunities to come available now as opposed to needing to put infrastructure down. So we got the infrastructure, we built the infrastructure size wise so that we can take on more product lines or larger pieces of existing product lines. So now as I said it’s just a matter waiting for through the contract cycle process to come back around.

Unidentified Analyst

Mark, a question, how much of the acceleration in returns that you are looking for over the next couple of years, are they result of the now absorption of the $1 billion plus you spent in infrastructure over the last couple of years?

Mark McCollum

I don’t know they have calculated specifically. But maybe the weighted – kind of thinking our capital spend on infrastructure typically runs about 15% of our total CapEx, that’s historically. Over the last several years it has been much higher than that in fact it’s probably been upwards towards 25% to 30% in some of the 2010 and 2011 timeframe. So we are just – we are expecting it to drop off would be somewhat more modest, which will help on some of that.

Unidentified Analyst

And how long will it take for Battle Red to be rolled out throughout the international markets. I know that’s much more complex I know it’s collection of individual markets, but how long will it take before we really start to see the impact of that?

Jim Brown

The hard part and Jeff addressed this. So the hard part of the Battle Red initiative was actually having to build the infrastructure. I mean it all looks great on your iPhone, but somebody had to build that. It’s not something you go, buy. It’s maybe the way to say it So and having constructed it we have made that major investment. As you saw the numbers are staggering what we have invested over the last couple of years, but thanks that creates a sustainable competitive advantage. We are going to be finishing rolling it out in the early part of next year. And then immediately thereafter start the process of beginning to rolling it out region-by-region and product- by-product line across the rest of the world. So it may take a couple of years, but pacing it – we will just want to make sure that we are doing it in a way that – what you don’t want as a flaw of execution rollout and as you deal with international customers as you deal with international customers, there are going to be vagaries of the processes as that will need to capture in the process that may be different from what North America looks like.

Jeff Miller

Yes, and I would just add to it Jim is the – it’s a bandwidth intensive process because you are essentially instead of paper you are hogging bandwidth with Battle Red. And so we really want to make sure it gets set up and mature a little bit more in the U.S. before we look at taking it overseas because a lot of places we operate as you well know. You don’t have Verizon and AT&T and always there is great cell phone capability. A lot of it is bandwidth driven. So we also want some of those international markets to mature a little bit from that standpoint.

Unidentified Analyst

What was the thought process behind the 20% increase in the dividend with the 15% to 20% target of net income as a backdrop, I mean how do we arrive at the 20% increase and that’s an expectation of what with regard to net income when?

Mark McCollum

So remember our formula for looking at dividends is at least 15% to 20% of net income, right. So that’s as a threshold, this doesn’t mean that we are establishing a variable dividend policy, what it means is not only as we look at what we have done today, but what we look at, how the business will look going forward as well as our cash flow generating capability and what we have done currently. All those things go into consideration when the Board looks at the dividend at any point in time. So it’s – I can’t say it’s either a look back when there is an aspect of that or look forward. Although there is an aspect of that, I think it all comes together with the recommendation of what the Board and as they work with us just to make sure that number one, we can do that within our commitment not only to them, but to you deliver it in our cash flows and continue to be capital at this point.

Dave Lesar

Yes, look Bill, Mark is a conservative guy. I mean let me just talk about this a little bit. Mark is a conservative guy. He said something really important, it’s not a variable dividend plan, its not coming back down. So I think by nature we are going to be more conservative as we ramp it up, because this is still a cyclical business and we have no intention of cutting the dividend when the business cycles back down. And if we have up here a variable plan, I think you could sort of write the crest, the ups and downs a little more closely. But as I said, our intention is to continue to have it march up, but if it get down cycle it’s not coming down. And so I think that – by that nature as I said one of the reasons I love Mark is he is very conservative. And I sleep, very well at night is with him as our CFO. But I think that has more to do with that anything else.

Unidentified Analyst

Okay, I will take that carefully. And then the second question, you may have mentioned it and if you did I missed it. But have you thought about – I am sure you have thought about it, but with regard to your capital spending budget for 2014, what are your thoughts on that particular front today?

Mark McCollum

Right now it will go up slightly, but not dramatically. I have had several people ask us as you know a metric that we do not use is capital to depreciation. That’s a ratio that is not meaningful to us for a couple of reasons. One is as we are in hyper growth mode, as you have seen over the last three years doubling the size of the company. And so trying to lock yourself into that doesn’t make sense. The other thing is that because of the wide variety of assets and service lines that we have the depreciation levels, they’re all different. And as we look at the business what we’re trying to do is invest in targeted projects that we see where we go. So, having said that and with the growth expectations that we laid out our expectations of that capital go up modestly next year, but not much. As a percentage of sales though, remember I showed you the asset turnover metric, that is an important metric to us. And then we intend to try to continue to improve that asset turnover metric over the next several years. And so you should see capital is a percentage of revenue and revenue growth go down okay?

Unidentified Analyst

Yes, Mark, on the 500 basis point improvement in North American margins, roughly how much of that is associated with Frac of the Future, which is very much under your control? How much of it associated with these other factors you mentioned, I think it was Gulf growth, service intensity and CYPHER adoption?

Mark McCollum

One of the things that we wanted to do today in sort of rebranding all these initiatives under HALvantage is speaking to the fact that it’s becoming very, very difficult for us inside the organization to know exactly what's contributing to what. So going forward, what we want to be able to do is say look here is the commitment. We’re going to do 200 basis points next year and it’s going to be captured by a lot of these different things. The focus of the organization is becoming leaner and more efficient and everything that we do is designed to drive out costs and increase revenues at least to capture more value for the work that we do for our customers by using CYPHER and other things. And so I can't tell you specifically in and probably it would be a disservice because ultimately we won’t be measuring it that way.

Dave Lesar

But I think one important thing in my view CYPHER is a revenue growth generation product. It is not something that should be lumped in with Battle Red and Frac of the Future, CYPHER is, it will drive revenues for us. Battle Red and Frac of the Future will drive efficiencies for us. So I guess I would say mentally put those things into separate buckets, because as CYPHER gets picked up as a product, it is used more and more it clearly will drive market share gains and it clearly will drive growth for us.

Mark McCollum

Allows us to differentially price.

Dave Lesar

Yes, exactly.

Unidentified Analyst

Thanks. As we think about some of the large moving parts here, mature assets, the deepwater, can you talk little about the margins associated with those businesses presuming that the deepwater is higher margin and the average company margin, not obvious in what we have seen I’d say over the last three years. We hear about it being very competitive, and then just on the mature assets as well is that above average company margins?

Jeff Miller

Okay, if we think about deepwater again a couple of things happen at deepwater, first is the service intensity is much higher in deepwater. Typically is a very competitive space when those awards are given but because of the service intensity being higher in the end and then the uptake of new technology is higher in bigger volumes. So that moves it from a margin standpoint up the scale on a relative basis. Mature fields actually from a customer standpoint has some of the fastest paybacks for them and so we're able to then as we apply technology or design a commercial model that’s more valuable for us it's not hard to make that equally valuable are more valuable for our clients. So I would say when we think about margin opportunity, we have the ability in both of those phases to create quite a bit of margin expansion opportunities.

Dave Lesar

Yes, I think let me just elaborate a little bit on the thing between the two markets. Here’s maybe a different way for you to think about them, let’s break it at the gross margin level and the operating margin level. In the deepwater, our gross margins are very high, but your costs to have to deliver that gross margin, the infrastructure you need, the logistics you need, the inventory you have to carry, all those are sort of below the gross margin line. And so you end up with the margin you end up with the deepwater, go to mature fields the gross margins are lower but the costs you have to have to deliver that is significantly less than in the deepwater so you end up at the margin level you do.

So I do think one way to think about it is sort of bifurcate your thinking into sort of what is the gross margin in a particular set of business lines, and what is the delivery cost against that gross margin that eats into your margin capability. So in the example of deepwater, the gross margins are very good, but since we've had to build infrastructure, build logistical systems put people on the ground that has eaten to those margins. A lot of that cost now is being absorbed, so we can capture the higher deepwater margins. The reality is deepwater margins in a stable environment are clearly the highest, the three business segments we have the deepwater, unconventionals and mature, but they’re also the set of most intensive from a service quality, and everything else to deliver. I would put mature fields on the other hand, although the margins are quite acceptable, and I think you'd be surprised how good they are. At the gross margin level, it's not anything like deepwater, but your underlying cost to deliver is also substantially less.

Unidentified Analyst

Then speaking with the mature fields what part will our artificial lift play and I mean make clear steps towards the ESP business, what about other parts of artificial lift?

Jeff Miller

Well the ESP, I mean, clearly the ESPs are front and center in that mature field space. And we think we have got a great opportunity here to organically effectively grow the rest of the way with that business. And my favorite analogy to that is our testing business, which again was really on the back of very limited acquisition of anything really and the ability with our footprint grow that. So as we look at mature fields, clearly that opportunity exists with artificial lift or with ESPs. As we look it around at the breadth of that space, again, we try to look for things, where we can create value with technology and the ability to integrate those things and what we do. And we clearly see that with ESPs today in terms of the ability to tie that into some of the technology, in fact that you saw put in, all of those things would be things where we could create more value with the ESP business.

Unidentified Analyst

Question on CYPHER, you gave an example on there about the Barnett and clearly you are leaning on your expertise in these different basins. Just curious how you see that rollout happening over the next, call it, couple of years. Is that where we should be thinking about it? I am just kind of curious, there are certain basins where this is more applicable, is it more kind of the more mature areas, can you talk about that a little bit?

Dave Lesar

No, I think the – I mean, I will take it sort of at the high level and Jeff can kick in. It’s that’s all the same. You go where the money is. And so I think with CYPHER, you will go to the big liquids basins, so Eagle Ford, Bakken, probably Niobrara would be where we sort of rolled out. As Steve said, the two examples we gave you were sort of beta tests. We have done some alpha tests in the various basins, which we showed to you. And we really like what we see. So obviously, you are going to go to market in two places. Those basins where you are seeing the most production increase, because you create the value for the customer. And those basins where we see the most production and most customers would be where we would focus.

Jeff Miller

And I will follow that up what you saw with Jim’s slide, where we started with roughly seven tech teams three years ago. And today, we have painted North America red with respect to that technical capability. So we have that inside and capability really in all basins, which makes it and because that structure is in place, the ability to roll something like CYPHER out is really pretty straightforward for us. So it’s just a question about what pace and the machine is geared up and ready to run with that. So we are pretty excited about it and even really following on this, the ability to do the same thing with CYPHER internationally.

Unidentified Analyst

Considering we are talking about targets here in three years, what do you think Cypher is going to do in terms of North America, any idea in terms of percentage of your jobs?

Jeff Miller

Let me describe CYPHER, I described it as how we design wells in the office and how we work. So it’s going to create stickier customers, it’s going to create margin on its own in some cases, but every bit is effective. We will be the way we use it everyday through our system to drive the types of improvements on location. And I think that’s one of the things I said at the end, but we believe its customized horsepower and science. And the way we use CYPHER at Halliburton will give us the ability to hardwire those two things together. So it has a lot more leverage for us in terms of revenues and margins when it’s baked in to the way that we work.

Dave Lesar

Yes. I think just one last point on that, because I think it’s an important takeaway on CYPHER. And it’s something I said because of the way it’s constructed with its artificial intelligence network in it, the more customer uses it the smarter it gets. So you got to think about embedding a software inside of you know a computer or something, it’s going to be very, very difficult for a customer to go away from us. Once they see and are benefiting from CYPHER, because it means that they lose essentially all that capability, if they want to go in a different direction, which right now there isn’t a different direction.

Unidentified Analyst

Just on the mature fields commentary so $9 billion of revenue that’s not that far from what you do in the Eastern Hemisphere today. So just help us understand little bit about the path there that the degree of importance kind of the fee per barrel jobs and just a little bit about the mix and is this all organic, just some color on how you get there?

Dave Lesar

Yes. Let me get started on that and then Mark and Jeff can add. I mean, keep in mind, yes, it’s a pretty – it’s a large goal. And I think it surprised people when we talked about it internally. I asked actually the same kinds of questions, because I don’t want to get up here in front of you and make a commitment that three years from now where – which I have the intention of standing up here three years from now and seeing you not having met. And so I think as Paul described it, there is really nine businesses in mature fields. You have said that the three delivery models of sort of discreet services, integrated services and integrated asset management in sort of the three ways you go to market. And all of those are very much growing at a very good rate today. So we continue to expect to see our discreet businesses continue to grow very fast. We need some bolt-on either organic growth or bolt-on probably an artificial lift, but other than that, we got number one market positions in a business that’s growing faster than the general market is, more and more integrated project management opportunities. The whole business in Iraq basically is on IPM today. Mexico was going IPM. And so outsized growth in the integrated project area and then as Paul said, you add two or three integrated asset management jobs in per year over the next three years. And I can actually pretty easily see my way toward that $9 billion.

Mark McCollum

Yes. And so as we described what the opportunity looks like, it continues to evolve more towards sort of that select few description that I gave you around these large projects. And they are very large and it gives us the ability to control effectively how all the work is done. And so we see more and more of that as the mature fields sort of annuity that’s been in the market for all these years. It starts to return to NOCs, that’s right in our wheelhouse, so clearly can see our way there.

Jeff Miller

Jeff, you have (indiscernible).

Unidentified Analyst

I guess two questions please. First, you have clearly described the goals, the stretch goals, I am not sure I completely followed Mark’s comments along with the rising red bar there, but I think you said that 2016 was sort of no price, no growth $6 with price, with growth $7.50. So the question is what’s the biggest risk to coming in below $6 and what are the things that could happen that could bring in above $7.50?

Jeff Miller

Mark, you want to start?

Mark McCollum

Well, your interpretation on slide was pretty close. So good review, but I think that as we look ahead obviously, the biggest growth – biggest risk that we see, the profile is always the sort of global macroeconomic outlook across the board right. So I mean, that’s as Dave described in his opening comments right, that was one of those things that I think caught us in terms of meeting our commitments around closing margin gap internationally is that the pace of international spin has just been glacial. And it’s been sort of a slow and steady increase over time that we have had to really slog it out. And so we are all feeling like that’s beginning to term, not maybe I called an inflection, but that pace is beginning to quicken. But if something were to happen to sort of send the world back into another financial concern. That’s one of those big, those large risks that we could see or the other side of it, we also always see that there could be more regulation, right, regulation across the board around our services as a risk that we try to manage through.

But what we try to do constructing the outlook, but do not try to make heroic assumptions as Dave said about the markets themselves, right. What we are seeing is look in this kind of environment with a relatively stable growth trajectory from this point, maybe even slightly below what we have done before on the things that we could control this is the outcomes that we believe we can achieve. And I think internally as a management team, we have all said look we have got to make our own success here. In this kind of market, it’s about efficiency, it’s about continue to be lean and mean and really go after the market focusing on the growth areas that we can go and get our – more than our fair share maybe in this point of time in the market to try to capture the opportunities now. So when the market does turn we can be there. And if the market doesn’t we are going to continue to make great success well beyond what our peers can do.

Unidentified Analyst

Just correct me if I am wrong, but if I had listen your answer I would have thought that you would point to North Americas being the more risky part of it that I understand if financial collapse, whatever, we wired our Armageddon and so on but baring that the North America market is still the one that will be the more impacted by some sort of macroeconomic slowdown presumably?

Jeff Miller

Yes I mean I think obviously if you saw oil prices drop to $60 to $70, you would see stress in the North American market. We don’t expect that to happen, but if you want to envision a downside case, it would be liquids prices in the U.S. Now if you want to leverage on the upside. If you get gas drilling to relieve some of the pressure on some of the areas that have an oversupply in terms of equipment today, you actually – you have way more leverage that way. So as I look at the U.S. market today, yes you have some downside risk, but you actually have way more upside case or upside potential and I believe you have downside risk.

Unidentified Analyst

(Question Inaudible)

Dave Lesar

Jeff, you want to...

Jeff Miller

I am going to say not right now. I mean is there opportunity to use this technology to pull things together, absolutely. But where we believe it has the most impact today and where we are spending our time is in the unconventionals mostly because we see the most opportunity there. And remember I had said it’s iterative and interactive. And I think one of the big differences between onshore unconventionals in deepwater is really the velocity. There is time to drill, they have spend a year drilling a well there is a lot of time to stop and think through that process, the reality onshore is how quickly can we make a decision how effectively can we make it and then can we monitor it on the fly. And so for those reasons we will spend our time with CYPHER onshore.

Dave Lesar

Yes and I also think Jeff as you know that the deepwater market is primarily an IOC market and they have a lot of that capability not integrated together, but they really view that that’s what they do with CYPHER adjusted. So you move deepwater you drill maybe one well a quarter or one well a half year, two unconventionals where you drill in a well every five days. That’s where we really see the juice of CYPHER at this point in time. But as Jeff said the accumulation of data, the sort of the scientific components of it would be of use in the deepwater, but as I said is a said the customer usually has the luxury of time, the ability to study it and solve the velocity benefit that you get out of CYPHER when that will have no value in that part of the market.

Unidentified Analyst

(Question Inaudible)

Unidentified Analyst

Now look Jason this industry is glacial as compared to other industries, the way you mapped it out here in terms of the benefit for the customer on site for I would imagine you should have about 50 people banging on your door right now to get inside, can you give us some general sense on how long you think it might take for the uptake of CYPHER in the context of the glacial uptake in the past.

Jeff Miller

This will not be glacial. The fact is this is we are getting a lot of banging on our door for this capability today. And we control largely how we roll that out through our own organization. So the ability to roll it out and uptake it I think additionally it will be faster North America because of really the client mix that we have. And I would say that CYPHER appeals very much so to the nimble high speed client that wants to use this quickly there are a lot of those in the market. And so I think once they see what it’s able to do, maybe it takes a little time for them to see what others are getting accomplished, but very quickly the uptake will be there.

Dave Lesar

Let me just put one other plug-in for CYPHER. And it’s interesting in that, it’s actually the first product that I’ve ever been associated with Halliburton, we’ve been invited into the board room to make presentations about what it can do or been invited in to sit down with the CEO, he says tell me about the CYPHER or board that says come in and show us with CYPHER can do for our company. That is a powerful selling tool when somebody says the board – we’re discussing with the Board of Directors or we’re sitting down with your CEO because they see the power in the benefit of the thing. So, as Jeff said I think it’s – you’ll see a rollout relatively quickly.

Unidentified Analyst

Thanks. So, I want to ask also on the CYPHER business model when you determine where to drill, how to drill, how to Frac and complete. You are encroaching on the decision-making and is made by the customers and sales especially drilling management teams. So have you encountered in the resistance in the beta testing you’ve in terms of that decision matrix and how it’s done today versus how you’re opposing to do it?

Jeff Miller

Well, I’ll say that because we are interacting at all levels in the company, I’ve had situations where a CEO have said look this is what we want to do and that message get sort of delivered that way and so there is a lot less rep points when it’s done that way, but what I think our clients find is that this is information that they can’t get otherwise or the ability to make decisions as this new for them. We have a great business development organization in North America. We work closely with our clients and so for that reason, I think they generally don’t feel like we’re competing with and what they see is really the value that we can create, it makes the whole team look smarter than else clients make more money.

Dave Lesar

Yes, I mean, the marketing approaches get out of the way here comes CYPHER, it’s here’s CYPHER is a collaborative tool to sit down with you. At the end of the day, the folks are customs. They’re the ones that are going to buy cementing services and buy the Frac and buy the Wireline. So, it’d be crazy for us to sort of go ahead our way into this and create a bunch of animosity. So, as Jeff said this is a collaborative product, it’s available to those customers and lot of you filed the – especially the independent E&Ps in the U.S. They are under tremendous stress today to increase the production, be more efficient, forget about returning cash to shareholders just stop taking more cash out of the marketplace and so that’s the value proposition to down and it’s a very, very attractive one.

Unidentified Analyst

Okay. If I may just follow-up with different question on the international margin which you talk about earlier, in the last meeting three years ago, you mentioned the three reasons really for the margin gap with your largest competitors which were sanctioned countries, service mix and high volumes in underserved markets. And I’m just curious if you look at that today asked the same question what accounts for the margin gap. What would you most side, I heard Mark mentioned just your size is one aspect of what would be perhaps others.

Mark McCollum

Well, I mean, I would say obviously the size, but the product mix still is an issue, we made some critical acquisitions and in the chemicals and in life. But there is still primarily domestic in the North America, we have plans to roll those out around the world. We think that still an area that there is some differential margin opportunity and growth that we need to capture. So, that is a partly underlying strategy for particularly around mature fields is continuing to capture that sanctioned country issue as we look at it obviously as for the most part going away. I mean I can’t speak specifically the water competitors have done and they’re completely out, but certainly things have changed over the last three years in that regard.

Dave Lesar

I would just add that, underserved markets was clearly one of the areas, they were underserved by us as we didn’t have infrastructure there. Now we have infrastructure there and as I said earlier it’s a matter of getting a contract base that grows to absorb the fixed cost of those areas. So to get everybody out here on time as promised we’ll go for one more question.

Jeff Miller

Yes, just one last question to Jim.

Unidentified Analyst

Dave you talked about preferring organic growth, but at the same time you talked a lot about deepwater consistently over the years as well. With your major competitor making fairly sizable investment increase its deepwater capability, what’s a lot of you given to being proactive in terms of trying to increase your deepwater capability of the year acquisition and then may be just talk a little bit beyond that about you have a team or an effort underway to sort of proactively address acquisitions?

Dave Lesar

Yes, we have an M&A group that’s really good. We look at a lot of deals big and small. Obviously, I’m not going to tip my hat and you talk about what areas and where they might be in, but we go through a pretty rigid analytical process because as we kept talking about today, returns are important to us and we don’t want to chase growth and we would not want to chase acquisitions just to get bigger, just to get product lines if we can’t see away toward getting the kind of returns that we want. So, we’re pretty judicious in looking at, but now our M&A and even large M&A is not off the table, but I have to be convinced, Mark and Jeff have to be convinced that we can see a path because remember one of our three tenants is superior returns and they do and keep superior returns, you also got to do smart M&A and that’s what we’ll do, I mean, Mark, you want to add?

Mark McCollum

That’s absolutely right answer. It’s always the returns or the bottom-line.

Unidentified Analyst

Thank you.

Dave Lesar - Chairman, President and Chief Executive Officer

Okay. We appreciate everybody joining us for the last day and a half and look forward to get in front of you and I guess about three years and showing how we met those commitments. So, thank you.

Mark McCollum - Executive Vice President and Chief Financial Officer

Thanks very much.

Operator

Ladies and gentlemen, that concludes Halliburton’s Analyst Day 2013. Thank you for your participation.

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