Halliburton's (HAL) CEO Dave Lesar on Q2 2014 Results - Earnings Call Transcript

| About: Halliburton Company (HAL)

Halliburton Company (NYSE:HAL)

Q2 2014 Earnings Conference Call

July 21, 2014 9:00 AM ET

Executives

Kelly Youngblood - VP, IR

Dave Lesar - Chairman and CEO

Mark McCollum - EVP and CFO

Jeff Miller - COO

Analysts

Kurt Hallead - RBC Capital Markets

Angie Sedita - UBS

Jim Crandell - Cowen and Company

David Anderson - JPMorgan

Brad Handler - Jefferies & Company

Bill Herbert - Simmons & Company

Jeff Tillery - Tudor, Pickering Holt

Jim Wicklund - Credit Suisse

Doug Becker - Bank of America Merrill Lynch

Waqar Syed - Goldman Sachs

Chuck Minervino - Susquehanna Financial Group

Operator

Good day, ladies and gentlemen. And welcome to the Halliburton Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Kelly Youngblood

Good morning. And welcome to the Halliburton's second quarter 2014 conference call. Today’s call is being webcast and a replay would be available on Halliburton's Web site for seven days. Joining me today are Dave Lesar, CEO; Mark McCollum, CFO; and Jeff Miller, COO. Some of our comments today may include forward-looking statements reflecting Halliburton's views about future events. These matters involve risk and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton’s Forms 10K for the year ended December 31, 2013, Form 10Q for the quarter ended March 31, 2014, recent current reports on Form 8K and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Now I’ll turn the call over to Dave, Dave?

Dave Lesar

Thank you Kelly and good morning everyone. I am obviously very pleased with our second quarter results and here are the headlines, record company revenue this quarter of $8.1 billion, double-digit sequential revenue growth and new quarterly records in both North America and Middle East/Asia. We once again delivered industry-leading revenue growth both sequentially and year-over-year compared to our primary peers. We had strong cash flow from operations of $1.1 billion and our Board has approved an increase in our buyback authorization to $6 billion.

I am also pleased to announce the promotion of Jeff Miller to President and his appointment to Halliburton’s Board, effective August 1st. I’ve known and worked with Jeff for 25 years and I am absolutely confident he will do an excellent job leading our very strong management team. Now for some details around our performance this quarter, company operating income increased 23% sequentially, led by a 31% increase in North America operating income, with an impressive 280 basis point improvement in margins to 18.2%.

The Eastern hemisphere had an equally impressive 220 basis point margin improvement to 16% resulting from a 26% growth in operating income. Now on our last call some of you may have been skeptical when I said I was beginning to feel the turn in North America, but based on our performance during the quarter I believe this feeling was dead on target. Today we are not feeling the turn, we are in the turn and I feel even more excited than I was last quarter about the outlook for the North American market.

Why is that? During the quarter we saw our completion volumes continue to rise and I don’t see that changing. Our logistics infrastructure is more of a differentiator than ever before. We were successful in getting cost recovery from our customers. And we estimate the percentage of excess horsepower has dropped below the 10% mark and capacity has tightened to the point that the market will require new horsepower to meet customer demand.

As you know, based on the competitive advantage of our Frac of the Future, our plan has always been to upgrade our fleet to Q10s over time. These current trends provide us confidence that now is the appropriate time to accelerate our Q10 build schedule. We anticipate incremental fleets arriving in the fourth quarter and throughout 2015. We’ve also been investing to increase our logistics capability as well. I am confident that these are the right moves. So even in the unlikely event the market softens, we always have the option of accelerating the retirement schedule of older equipment and replacing them with Q10s.

Now moving to our international operations, Eastern Hemisphere activity continues to expand at the steady rate that we expected. But you know what, steady is exciting for us because it demonstrates that our view of the market was the correct one and that we are sized and scoped correctly to turn industry-leading revenue growth into steadily increasing margins. Our outlook for the full year remains intact. We are still targeting our Eastern Hemisphere revenue growth to be in the low double-digits with average full year margins in the upper-teens and approaching 20% by the end of the year. Second quarter margins of 16% show we are on-track to deliver that.

Turning to Latin America, we faced issues around revenue timing during the quarter. Now it’s easy for me to give my head around the issues, and I can see a path forward to normalized profitability. But I am certainly not thrilled with how some of the things played out this quarter; first, there was an issue with the late receipt of our software consulting blanket order from PEMEX, which impacted our ability to book revenue to offset our costs, which of course significantly hurt second quarter results. This should reverse itself in the second half of the year. Second, we were mobilizing for two large integrated projects which resulted in cost, but minimal revenue, for the quarter. This also should reverse itself in the second half of the year. Lastly, the rig count approached a 10 year low and social disruptions impacted operations resulting in reduced discrete service activity in Mexico.

However, we remain encouraged by the prospect of energy reform in Mexico and believe that as the market gains more certainty around the direction of reform future service activity will increase. And in Brazil we are pleased with our customers’ decision to re-tender the deepwater drilling contract, which should allow us to right-size our footprint there. So looking at the full year, we continue to target 2014 Latin America margins to be in line with the prior year at approximately 13%.

Now let me be clear about one thing, and I’ve been around long enough to know, headwinds become tailwinds therefore I am optimistic about our future growth potential in Latin America as we go into 2015. So our overall strategy is working well and we intend to stay the course. Our leadership position in North America positions us well to capture the upside of this exciting and quickly evolving market, and we are continuing to realize significant revenue and margin expansion in our international business. We remain dead focused on consistent execution, generating superior financial performance and providing industry-leading shareholder returns to you.

Now I am going to turn the call over to Mark to provide financial details. Mark?

Mark McCollum

Thanks Dave and good morning. Let me begin with an overview of our second quarter results. Starting with North America, revenues were up 11% sequentially relative to a 4% increase in U.S. land rig count. And operating income was up 31% over the same period. Margins increased to 18.2%. Stronger activity levels in U.S. land primarily drove the improvement for the quarter. Margins also benefited from modest pricing improvements on pressure pumping contract renewals, which were designed to cover inflation on specific cost categories such as transportation, fuel and labor. These improvements were partially offset by the Canadian spring breakup and lower sequential profitability in the Gulf of Mexico due to the timing of completions activity.

In the Eastern Hemisphere, revenue and operating income increased sequentially by 9% and 26% respectively, as a result of growth in both the Middle East/Asia and Europe/Africa/ CIS regions. We experienced a seasonal rebound in revenue and margins after encountering typical first quarter weather-related weakness in the North Sea, Russia and Australia.

In our Middle East/Asia region, revenue and operating income increased by 11% and 25% respectively compared to the first quarter. Saudi Arabia showed strong sequential improvement driven by our consulting, directional drilling and drilling fluids product lines. We are very excited about this market and continue to see revenue and profitability improving at a very aggressive rate. Additionally, we continue to see solid growth across the majority of our Asia Pacific countries with Australia, Malaysia and China leading the pack for the quarter.

The current situation in Iraq has resulted in some logistics bottlenecks and increased security measures but our operations which are in Southern Iraq and in Kurdistan are away from the fighting and are continuing. We continue to expect the Middle East region to have the highest growth rate for the full year 2014 despite the potential for activity disruptions in Iraq later this year. However, contract renewals and tenders for new work in Iraq are currently being pushed back which may mute our growth expectations as we exit the year.

Turning to Europe/Africa/CIS, revenue and operating income increased 6% and 27% respectively compared to the prior quarter. The seasonal activity rebound in the North Sea and Russia led to sequential improvement. Additionally, sub-Saharan Africa showed sequential improvement, led by drilling activity gains in Angola and higher completions, intervention in pipeline processing services in Nigeria, Ghana and Congo.

The Russia sanctions have not had a material impact on our activity levels up to this point, but there is some risk related to certain projects that are being tendered later this year. Latin America revenue increased 4% sequentially while operating income declined by 39%. Despite double-digit revenue improvement this quarter in Venezuela, Argentina and Colombia, we were negatively impacted by project mobilization and the blanket order delays in Mexico which Dave previously discussed.

Our corporate and other expense totaled $107 million for the quarter, a little higher than anticipated, driven by retirement cost and higher professional fees. We invested approximately $15 million in our HALvantage strategic initiative during the second quarter. These activities should wrap-up this next quarter. We anticipate that corporate expenses for the third quarter will run approximately $90 million to $100 million.

Our effective tax rate for the second quarter came in at approximately 28%. For the remainder of 2014, we are expecting the effective tax rate to be approximately 28% to 29%.

Cash flow from operations during the second quarter was $1.1 billion, an increase of approximately 18% compared to the first quarter. Excluding the $215 million in acquisitions made this quarter, we have generated approximately $356 million in cash and marketable securities during the quarter. As we progress through 2014, we believe we are well-positioned to generate significantly more cash and that our cash flow will continue to grow in the coming years. As a reminder, we are working to grow the percentage of cash available for distribution to shareholders to roughly 35% of our operating cash flows over the next few years, which is nearly double our historic average.

As discussed, we intend to accelerate our Q10 build schedule and expand our logistics infrastructure. As a result we now expect that our 2014 capital expenditures will be approximately $3.3 billion, an increase of $300 million compared to our previous guidance. We also expect depreciation and amortization to be approximately $2.1 billion during 2014.

Now moving to the Eastern Hemisphere outlook, in the third quarter we are anticipating a mid single-digit percentage improvement in revenue and we expect margins to migrate modestly higher into the upper-teens. Revenue is expected to continue to step higher in the fourth quarter, which is seasonally our strongest quarter of the year with margins approaching 20%. We continue to expect full year revenue growth to be in the low double-digits and margins averaging in the upper-teens.

In Latin America, we expect mid-teen sequential revenue expansion in the third quarter and believe margins should approach the mid-teens. With continued improvement in revenue and margins in the fourth quarter, as a result we expect full year revenue and margins to be in line with 2013. However, our second half outlook assumes the timely approval of our billings under the blanket order in Mexico, as well as a swift resolution of the retender of our Brazil drilling contract.

And concluding with North America, we are expecting revenue growth in the third quarter to outpace the rig count with North America margins approaching 20%. While we expect the rig count to continue to increase, utilization levels are very high and growth in the third quarter could be constrained by the availability of equipment until incremental fleets begin to arrive later in the year.

Now I will turn the call over to Jeff for an update on our strategy. Jeff?

Jeff Miller

Thanks, Mark and good morning everyone. Our strategy is in the deepwater, mature fields and unconventionals are clearly delivering results. These led not only to record company revenues, but also quarterly revenue records for our production enhancement, baroid, cementing, wireline, production chemicals and artificial lift product lines. So for today’s comments, I’ll focus on our execution against these three strategies. Recall that our unconventional strategy is to deliver the lowest cost per barrel of oil equivalent through surface efficiency, custom chemistry and subsurface insight.

Let’s start with surface efficiency. We’re seeing record activity levels with year-over-year stage counts up more than 20% and profit volumes per well up about 35%. We also saw record sales of our drill well plugs for plug-and-perf operations, as well as record installations of our RapidSuite sliding sleeve technology. All of these indicators point to larger volume jobs which is precisely for the Q10 pump excels consistently delivering 20% higher flow rates with about 50% lower maintenance cost than a legacy pump.

And one last comment on North America surface efficiency regarding profit and infrastructure, while we see sufficient quantities of sand at the mines, the transportation infrastructure has and will continue to experience unprecedented levels of congestion. And we see profit competing for delivery not only with other profit types, but also with oil and agricultural products. And while we’re not immune to this impact, we’re confident that we have the best developed logistics infrastructure and we plan to continue adding to this capability throughout the year.

Moving on to subsurface insight, we continue to gain traction with our CYPHER platform that optimizes where to drill, how to drill, where to frac and how to frac to make better wells. CYPHER applications continue to grow with over 50 projects underway across more than a dozen basins globally, which makes me even more excited about our recent release of CYPHER 2.0. That refines our earth modeling capability, increases our simulation accuracy and allows real-time adjustments during frac treatments.

And finally our Custom Chemistry solutions are helping deliver better wells. Our AccessFrac diversion technology, clean breaking PermStim and our RockPerm formation analysis have all demonstrated better production for our clients. For example AccessFrac has delivered on average 20% better performance than offset wells with market uptake tripling since last year. RockPerm was first introduced only one year ago, as a means to enhance production through better hydrocarbon mobility and it’s now used in more than one-third of our North American completions.

And as we work across every basin we get to see the different methods used in all of those basins. And even as volume trends emerge our new techniques gain popularity we’re more convinced than ever. The customized frac design and customized fluid chemistry delivered better, sustainable production for our clients.

Now turning to the mature field space, we’re pleased with the progress of our large IPM and asset management projects. During the quarter, we were either rewarded or began mobilizing on large integrated projects in India, Kuwait, UAE and Indonesia. For example our 93 well integrated project with Cairn India, is the first IPM project in India to employ tier 1 land rigs. These projects and other provide us with a strong platform for growth in addition to a pursuit pipeline of over 30 billion in project management opportunities that we’re currently evaluating.

And during the quarter, we started on the multi-decade Humapa incentivized asset management project in Mexico. Early work over operations have been successful and the production levels are already well ahead of schedule in the project. We expect to spud new wells in this asset during the second half of 2014, bringing up to two rigs by the end of the year. Also in Mexico, we spud at our first well in the Mesozoic project in late June and expect our second well to spud in late July. Our Mesozoic project represents a $1 billion opportunity over the next few years.

We plan to mobilize additional rigs over the next several quarters moving towards four rigs by early 2015. And during the second quarter, we expanded our artificial lift capabilities through the acquisition of Europump, an industry leader in progressive cavity pump systems. This acquisition is an important step forward in our artificial lift strategy which complements our existing electric submersible pump technology and positions us to benefit from this growing market. Overall we’re very pleased with the progress of our mature field strategy. The Europump acquisition expands our discrete service offerings and we’re confident in our ability to execute on these large integrated projects.

Looking at deepwater, we continue to increase reliability and reduce uncertainty for our customers. As we introduced new technology, we’re dramatically simplifying equipment design to increase the operability of the equipment. Examples include our full suite of high pressure open hole logging tools designed for the deepwater Gulf of Mexico and our new ultra deepwater subsea control system Dash EH which is integrated with Veto, Halliburton’s premiere 3-inch 15k Subsea Safety System that performs emergency well shut-in and critical landing stream disconnect in less than 15 seconds. Specific to the Gulf of Mexico, we continue to see incremental deepwater activity for the balance of the year and an increase in lower tertiary rate completions in early 2015. In the third quarter, we expect to begin operations on an integrated deepwater project for a major customer providing drilling and completion services across multiple wells.

During the second quarter, we also acquired Neftex Petroleum Consultants, a market leader in reducing uncertainly in basins the world over. Neftex has created a unique 4-D model of the subsurface already used by E&P companies worldwide to evaluate and identify resources more quickly and more accurately. We expect this acquisition will touch all three of our key strategies by integrating data and interpretations from the Neftex Earth Model with Landmark’s DecisionSpace platform. We expect to be able to accelerate our customer’s ability to explore prospects and increase our ability to predict drilling success.

In closing, I want to be clear that our strategies are working. We continue to see strong long-term growth opportunities across unconventionals, deepwater and mature fields. In fact I would like to highlight the performance of our Eastern Hemisphere where we’ve see revenue expand by more than 50% over the last three years with margins stair-stepping higher year-after-year. This has been a consistent focus on our three key themes that is driven this success.

In mature fields, we are now the leading surface provider of primary customer against Norway driven by our focus on both discrete and integrated solutions. In unconventionals, we are the leading provider of unconventional services in Australia and recently into joint venture to expand our footprint in China. In deepwater, we have seen tremendous growth with all product lines drawing baroid fluids in Asia Pacific, creating a testing business almost from scratch, and a completions business that is now number one globally. Looking ahead, with the projects we have in place and the technology we’re putting to work, we are very optimistic about our growth prospects for the Eastern Hemisphere in the coming years.

Before I hand the call back to Dave one final note, it is truly a privilege to serve as President of Halliburton. I have been part of the management team for several years and I have been part of developing our current strategies, so you should expect us to stay the course and remain dead focused on superior growth, margins, and returns. I would also like to take this opportunity to thank the Board and the over 80,000 Halliburton employees for their steadfast support.

Now, I will turn the call back over to Dave for his closing comments. Dave?

Dave Lesar

Thanks, Jeff. In North America, we are past feeling the turn, we are in the turn and we will be accelerating our Q10 build in the order to meet customer demand. In Latin America, we feel optimistic about improved second half, but are still monitoring a few potential headwinds regardless of that 2015 is shaping up to be a strong year.

In the Eastern Hemisphere, we are still on-track for low-double digit full year revenue growth with margins averaging in the upper-teens. And finally, our strong outlook for the business provides us with confidence in improving increase shareholder returns going forward as is evidenced by our increase in stock buyback authorization to a new total of $6 billion, which represents approximately 10% of our market cap today.

With that, let’s open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Kurt Hallead of RBC Capital Markets. Your line is now opened.

Kurt Hallead - RBC Capital Markets

Great, thank you. Good morning.

Dave Lesar

Hi Kurt good morning.

Kurt Hallead - RBC Capital Markets

Maybe a question for either Dave or Jeff with respect to the re-tendering on Brazil, when do you think you might get the bids opened and how do you expect to see that playing out going forward I guess in the context of you still expect to be awarded in the same package that you were awarded before?

Jeff Miller

Yes thanks, Kurt. That rebid is in process right now, so the documents haven’t been resubmitted. We still expect to see that conclude this year, expect early Q4. With respect to competitive positioning I am not going to share that with you here, I expect it will be competitive but in any case expect to see a healthy reset as we look ahead into the ’15 and beyond.

Kurt Hallead - RBC Capital Markets

Okay, great. My follow-up relates to the U.S. frac business and the accelerated deployment of the Q10 pumps and I’m sure you are aware of increased equipment orders by other players in the market. Can you help us calibrate what this may mean as it relates to the potential for pricing? You think it’s going to be more of a volume driven market or you think there’s an opportunity to get some price as time goes on?

Jeff Miller

Yes, Kurt let me just kind of go through what we’re seeing in the marketplace with respect to activity. We’re seeing all the right signs as capacity starts to tighten which we’ve seen fall below sort of 10% spare capacity. We see activity increasing at breakneck rate, we’re seeing some pass through of cost increases at this point and probably most importantly we have clarity of our frac calendar through the end of the year. So all of those things give it a lot of confidence in adding our equipment because we see where that’s going to go work. I think from a -- if you think more broadly about the market, again we believe in our equipment, it’s doing exactly what we thought it would do, what we described at our Analyst Day so from Halliburton’s perspective very confident that the Q10 equipment is delivering.

Kurt Hallead - RBC Capital Markets

Alright, thanks, I appreciate it.

Operator

Thank you. Our next question comes from Angie Sedita of UBS. Your line is now opened. Angie please check your mute button.

Angie Sedita - UBS

Thanks, good morning guys.

Dave Lesar

Hey Angie.

Angie Sedita - UBS

So on the Q10 roll out is there is any constraints in adding this incremental equipment if you want to accelerate it even further and can you talk about how much you’re adding incrementally as far as percentage wise from you what you were adding at the beginning of the year?

Jeff Miller

Yes, thanks Angie. From a competitive standpoint we’re not going to share with you quantities of equipment and that sort of thing. But suffice to say that we have the ability, that’s one of the reasons we stay in the manufacturing business, it gives us the ability to flex more quickly and then put the equipment when and where we need it.

Angie Sedita - UBS

So there’s no constraints in adding equipment at a more accelerated rate if you want to even up it from here or do you have any constraints in the system? And then to add to that on the legacy equipment, is it fair to say that all retirements will stop at this time or are you still seeing some retirements at the older equipment?

Mark McCollum

Hey Angie, this is Mark. Just so I oversee the capital side let me weigh in, we did during the second quarter stop the retirement of some of our equipment just because of the activity levels were so great; we were rolling Q10s out, the ability to leave some of the older equipment out there allowed us to basically gain a spread or so to sort of address some of that activity. From a capital standpoint we’re building to contract. We’re building to what we can see. There is the ability to dial that further if the market accelerates further, but we think that this build schedule is aggressive enough to make sure that we’re addressing the market as we see it that will be available for Halliburton over the next 18 months or so.

Angie Sedita - UBS

Okay, helpful and then as a follow-up, you mentioned it briefly in your remarks, on the cost recoveries are you now seeing that in every instance, are there still some regions of pushback and I believe you signed a new agreement earlier this year that would actually reduce your sand cost and that you’re also doubling your rail fleet as far as your ownership of the rail fleet, could both of these start to help margins in Q3 or is it more Q4 2015?

Jeff Miller

Yes, Angie, to address the first part of the question which is really what are we seeing across the entirety of North America. It’s not all the same in terms of tightness, nor is it the same in terms of cost. So the ability to get the cost pass throughs, we’re able to do that where we see that kind of inflation. The second part of your question around logistics, truly a place where we have a lot of confidence in our ability and our supply chain organization has a great window into the market in terms of how to acquire the inputs and as you suggested, or as we’ve said in our comments, we’ll continue to build the logistics capability that we have, and so that’ll -- across a number of different parts of that supply chain.

Angie Sedita - UBS

Great, thanks, I’ll turn it over.

Operator

Thank you. Our next question comes from Jim Crandell of Cowen. Your line is now opened.

Jim Crandell - Cowen and Company


Thank you. Just to follow-up on the pricing question, cost pass-throughs are usually the first step and you went out of your way to say that there’s less than 10% excess capacity in the industry which seemingly sets a stage for real pricing increases and as we know your prices are well below where they were at the peak of the last cycle, when do you see it -- do you see it, and if so when do you see it coming, going from more of a cost recovery to real price increase environment in domestic pressure pumping?

Jeff Miller

Yes, Jim, I can’t, I’m not going to give you a date or a time in that case, what best I can do is describe the conditions precedent which is what we’re seeing; recall oil cycles are a little different than gas cycles in terms of spikiness, so -- but we -- our build schedule and sort of our view into the market gives us a lot of confidence around kind of that what we see for the balance of this year and in ’15.

Jim Crandell - Cowen and Company

Okay. And do you see - last cycle as I recall when you were building equipment, you would not add equipment unless you sold the least four other services along with the stimulation equipment, do you have a similar strategy now this year and will you be requiring your customers to order at least three or four product lines?

Jeff Miller

Jim we see pull through on services consistently I mean that’s part of our value proposition in terms of how we go to work most efficiently from a competitive standpoint I am not going to get into the requirement or where we are in that cycle but we are confident that the package of services that we put to work really work well together particularly as the market gets tighter and busier.

Jim Crandell - Cowen and Company

Okay, thank you.

Operator

Thank you. Our next question comes from David Anderson of JPMorgan. Your line is now opened.

David Anderson - JPMorgan

No. Thank you. And apologize if I ask a question that might have been answered already as that line dropped off. But there is a question in terms of the capacity of how it’s going to tighter in the market. How much of this do you think is due to seasonally smaller because you guys haven’t had a lot of extra backup on wells and also we have a co-refurbishment cycle which I think is probably starting to kick in. Is that playing a factor in terms of the market tightening up to kind of less than 10% of excess capacity now?

Dave Lesar

Well volume matters a lot, and so our strategy has been to build equipment into the market that handles a lot of volume, and handles the volume more efficiently than competing equipment in the market. So, what we’re seeing it shape up in terms of tightness which is a function of volume, size of jobs that we have described plays right to us. I think that’s -- so anyway it gives us a lots of confidence in the direction both the markets going and where we are.

David Anderson - JPMorgan

So do you need less backup capacity on a given well than your competitors? Can you give us some sort of sense as to how much less that would be?

Dave Lesar

Clearly, less, how much less that kind of depends on the size of the job and where it is and some of those things. But again our whole strategy was around putting equipment that is basically the lowest total cost of ownership and the ability to handle bigger jobs with less back up. And we’re seeing that happen that’s why we’re -- and we described the 20% better efficiency out of our equipment and we’re consistently seeing that work that way.

David Anderson - JPMorgan

Okay, a question for Mark on the guidance, so on the third quarter guidance you guided to kind of close to 20% margins in North America in the third quarter. Now if I recall correctly a lot of that’s all coming from the cost side. Is there more to go on the cost side, you see margins picking up and should we start thinking and could we kind of start layering in I know you’re kind of holding off and kind of say in the timing of pricing. But is that kind of next phase as you think about margin progression in North America?

Mark McCollum

Yes, I think in terms of cost it is. If we look back at sort of the margin progression in Q1 to Q2, there is a little bit of cost, some of that’s cost of goods sold and then commodities as Angie highlighted earlier that we certainly were able to add some share. But when you look back I mean in our analysis it is very much activity driven. Our units out there are working harder and they are sort of a breakpoint that really adds to the margin. We just finished the roll out of the core components of our Battle Red program. It’s now in the field fully deployed. We’re working through the change management of that process now as that stabilizes for the next couple of months. There is going to be additional cost savings that will be added to it. We’re going to continue to work on supply chain and logistics.

We all I think across the face of logistics bottlenecks and issues in the early part of Q2 with moving sand where it needed to be. We’ll think as we continue to iron out logistics and add to our infrastructure there. We’re going to be able to continue to drive additional savings. So at least -- we said all along we believe that we could get to close to 20% without the benefit of pricing and that is still the internal goal and we’re driving hard to that and we think that the results of Q2 were a strong step toward that goal.

Operator

Thank you. Our next question comes from Brad Handler of Jefferies. Your line is now opened.

Brad Handler - Jefferies & Company

Thanks and I guess I’ll stay in the Western Hemisphere too. But first in Latin America, have you received the blanket order from Mexico for consulting and project management? I wasn’t quite clear from the comment thus far.

Dave Lesar

So Brad the answer is yes. We did get the blanket order but we didn’t get it in time to be able to book any revenues in Q2. And so now that we have the blanket order in hand the process now is submitting billings that ultimately need to be approved by PEMEX management that ultimately can translate into revenue. So I mean that really was the impact of Q2 that we had to book cost and no ability to book revenues offsetting that even on an unbilled basis. So that we’ve got it now in hand and that’s why we feel fairly confident in our second half guidance around Latin America with regard to that.

Brad Handler - Jefferies & Company

Right assuming -- I guess assuming any kind of normal processing of those -- of your bills?

Dave Lesar

That’s right, I mean it’s clearly -- it's still customer dependent. We’re subject to their timing and if they approve those bills on an expeditious manner then we get to book the revenues and have the margin uplift associated with it.

Brad Handler - Jefferies & Company

Okay, make sense. And then if I can come back to the U.S. too I guess we’re also bouncing around some different questions here, but have you experienced in your view do you think you’ve experienced some taking away of work from somebody else because of your distribution capabilities has have others already struggled but getting in the sand in place or some other facet of logistics that do you think you’ve already taken share because of constraints of others?

Dave Lesar

But we did it at all the time Brad this is -- we rely on our infrastructure we’re very proud of the logistics capability that we have and we really put to work in the second quarter.

Brad Handler - Jefferies & Company

Fair enough. Alright, that’s fine. Thank you very much. That makes sense, thanks.

Operator

Thank you. Our next question comes from Bill Herbert of Simmons & Company. Your line is now open.

Bill Herbert - Simmons & Company

Thank you. Good morning. Back to Latin America Mark, high confidence level with regard to your Latin America second half guidance and you’re rationale with regard to the endorsing of the software order makes sense. You also had a stake in however in the press release that “we believe our full year Latin American margin should improve sufficiently to be around the ’13 assuming approval on the billings under the blanket order in Mexico as well as a swift resolution of a retender in the Brazil drilling contract” it doesn’t sound like given you commentary that in fact your Latin American targets for the second half of the year are all that contingent on a resolution or the retender, correct?

Dave Lesar

No, they are contingent on that as well the -- I mean both issues are there, the Mexico lack inability to build on the blanket order and of course the mobilization cost that we incurred where the larger issues of why the margins were off of Q1. So I think that relative to guidance that we gave at the end of Q1 the blanket order was the culprit that really hurt us in terms of being below what we thought the Latin American business was going to look like in Q2. So as we go to Q3 getting that back certainly helps us.

The Brazil retender obviously we’re subject to our customers’ calendar as well on that front, they have a fairly aggressive schedule and so for they’ve been executing against that schedule, we’re hopeful that we can get some relief under that contract expeditiously if for some reason they begin to delay that process that push retender out to the end of the year and again right now I can’t see that but assuming that happened it could have a marginal impact on us later in the year, in the fourth quarter.

Bill Herbert - Simmons & Company

But the vast majority of the margin bridge for the second half of the year is the combination of the blanket order in Mexico coupled with object inception in Mexico as well?

Dave Lesar

That’s exactly right.

Bill Herbert - Simmons & Company

Okay, great. And then secondly, this is probably a Dave question but maybe not, with regard to -- or Russia, you’ve made some comments here there are some project tenders in the latter part of the year which now -- which could be delayed based upon the possibility of sanctions or just the turmoil that’s underway in the region, could you elaborate on that and what that means? And then moreover if you could remind us kind of what percentage of your revenues are actually derived from Russia these days? Thank you.

Dave Lesar

Yes, thanks Bill. The Russia business for us is the growing business and I think the commentary that you’re describing is more around our outlook if sanctions were to be increased or become more so, currently at least till now the sanctions themselves have had a minimal impact on the business but as we -- as sanctions potentially escalate and the risk of more sanctions sort of looms that's what we believe puts some risk into the business in the back half of the year.

Mark McCollum

I think on your sizing question Bill, this is Mark, I don’t want to give any kind of specifics but I think the Russian business is the low single-digits percentage of our total revenues, company revenues, low single-digits.

Operator

Thank you. Our next question comes from Jeff Tillery of Tudor Pickering Holt. Your line is now opened.

Jeff Tillery - Tudor, Pickering Holt

Hi, good morning. You mentioned several numbers just around completion size and intensity in the both leading edge I believe ahead of what you’re seeing year-to-date, what are the answers for the industry to just in terms of preparedness is that just greater local storage, and do you see infrastructure as a limit or in terms of the industry actually being able to transition completions to where they want to go over the next 12 months?

Dave Lesar

Yes, thanks. And we were seeing as you described record levels of congestion rather to speak for the industry itself I will speak for Halliburton and so where we spend our time is focused on building out that logistics capability to have access to adequate supplies of both propones and chemicals and there are many elements along that supply chain and we focus on each of them and we also maintain a broad base of suppliers on the sort of the source end of that business so I think the -- from our standpoint the volumes continue to increase, we really think it plays to what we would like to do which is prop into location and then just as importantly have the equipment on location that can handle it and deliver jobs very effectively.

Jeff Tillery - Tudor, Pickering Holt

And the follow-up question has -- it is just around any sort of inflationary pressure as you are seeing here in the U.S. anything at this point where you are not able to recover your cost inflation from the customers even if it’s not matched perfectly in timing and you think that you are stuck with?

Dave Lesar

Not at this point, we are able to -- so we have got great visibility into the inflationary pressures, we are -- and because of that I think we have the ability to respond to those quickly and get those in front of our customers.

Jeff Tillery - Tudor, Pickering Holt

Okay, thank you guys.

Operator

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

Jim Wicklund - Credit Suisse

Good morning guys.

Dave Lesar

Hi, Jim.

Jim Wicklund - Credit Suisse

I want to ask a pricing question because the anti-trust but I do want to drill down on something, investors don’t want anybody in the industry adding capacity. If anybody adds capacity it slows down the pricing improvement so some people are going to see your acceleration of capacity adds as a negative. And I just want to ask I would assume that these capacity additions won’t reduce margins it won’t reduce your returns, is that a fair statement?

Dave Lesar

That’s a fair statement Jim, I mean we are building to contract and we are building to fair away customers I say fair away players. So, we have got a lot of confidence that our equipment it goes to work in the market.

Jim Wicklund - Credit Suisse

Okay, okay I appreciate that that’s going to probably be one of the hottest topics following the conference call is what that’s going to be and I would assume that the 300 billion increase in CapEx would be to a large extent that acceleration of hydraulic horsepower?

Dave Lesar

Yes, it is.

Jim Wicklund - Credit Suisse

Okay, my follow-up if I could, Bill asked it and I will kind of chime in, in the end. The two areas that we are worried about going forward are Iraq and Russia but only if sanctions or violence continues it then reveres -- you guys only have about a $100 million in assets in Iraq how material could that be in the year or two if things get worst than better does that -- would that be enough to drive your earnings down in two years?

Dave Lesar

Jim, as we look at that market I mean it’s a bit of a unknown over two years time what that could mean what we are seeing happen today are delays and getting contract approvals through the government and the extensions of contract I have to believe that, that rights itself over a period as long as two years because of the importance of hydrocarbons in that markets and to the government et cetera. So, as we look further down the road I mean I can see where this comes right as things settle out if it were to continue to escalate, clearly we have got other places we could move equipment and put it to work even in that very region. So, I think we have got lots of options we just prefer not to exercise them.

Jim Wicklund - Credit Suisse

Thanks for the clarification guys.

Operator

Thank you. Our next question comes from Doug Becker of Bank of America Merrill Lynch. Your line is now opened.

Doug Becker - Bank of America Merrill Lynch

Thanks. So, back at the November Analyst Day kind of weighed out the North American target that at some point second half of the year margins would be approaching 20%, activity levels are better than expected at that point in time, the frac market is tighter, you are getting cost recovery, just what’s the market dynamic that keeps from seeing margins above that 20% at that time the target that was weighed out at that time?

Dave Lesar

As I hear a tough customer I think it’s ultimately the dynamic largely the fact that there is inflation offsetting a lot of what we are doing to right here, you talked about activity, you talked about the increased -- the ability to pass through but we are constantly as Jeff has alluded to managing logistics challenges we are managing inflation across a number of cost categories and so that really is ultimately is pushing against us. We are continue to navigate through that very effectively and as I have indicated earlier, what we are seeing our largest margin improvement thus far has been on just the share efficiency of running our crudes really stretching out what we can do with these Q10 fleets and what our guys could do in the field every single day it’s a differentiator for Halliburton that we see other people not being able to drag, we are going to continue to push on that until such time as I would say the pricing lock jam breaks.

Doug Becker - Bank of America Merrill Lynch

And so, may be if I just summarized it, it’s -- yes you are getting cost recovery which is not instantaneous relative to the cost inflation that you are seeing?

Dave Lesar

Yes it never is.

Mark McCollum

It never is.

Doug Becker - Bank of America Merrill Lynch

Okay. And then just a quick clarification the less than 10% excess capacity in horsepower is that before or after what I would call just normal industry friction?

Dave Lesar

Not sure, what you define is friction Doug…

Doug Becker - Bank of America Merrill Lynch

It’s just crudes moving in the yard just something that -- there is always some amount of capacity that’s not available even if it truly is in the market?

Dave Lesar

Our view is that it probably has some view of that, right. The reason we believe that’s fallen that low is impart sort of twofold. One is, crude sizes have to grow, seems like 20% to 50% in some cases as the equipments working harder, so you have got more equipment in the field per fleet. And the second issue is because it’s working so much harder, there is more in the shop and in the base, being worked on at any one point of time. And so the net, what we are trying to do is get a percentage calculation of what’s available to work and it appears to us that what’s available to work now is less than 10%.

Doug Becker - Bank of America Merrill Lynch

Perfect, thank you.

Operator

Thank you. Our next question comes from Waqar Syed of Goldman Sachs. Your line is now opened.

Waqar Syed - Goldman Sachs

Thank you. My question relates to the share buyback program or the expansion that you announced. Mark, are you going to, I mean just to kind of sort of regular share buybacks on a monthly basis or this Dutch auction that you are considering as well as you have done in the past?

Mark McCollum

Waqar, there is no limitation as to how we can spend the money that the Board has authorized us to spend, so I wouldn’t necessarily preclude a Dutch auction. I think though that right now it doesn’t feel like that’s the appropriate way to approach the market. We just did one last year. It was debt finance, and so our debt ratio was high. What I am primarily focused on is thinking about how do we deploy access cash, either -- obviously we have an opportunity here for reinvestment in the business that we have been discussing in North America. We have an opportunity all the way for additional M&A transactions similar to what we accomplished in Q2. But to the extent that we are generating more cash flow than we thought we would and that certainly has been the case over the last couple of quarters. And we believe will continue to be the case over the next few quarters. You will see us be in the market doing ratable share purchases until such time as it makes sense, collective sense, financial sense to do something on a larger scale.

Waqar Syed - Goldman Sachs

Okay. And then on Brazil, so retendering certainly positive but when should we expect kind of activity to actually pick up. Is that something that could happen early in ’15 or later in ’15, what’s your view on that?

Mark McCollum

Waqar, we don’t see a lot of change in ’15, I mean this could be a ’16 event when we see things, take back up there. There is opportunities for things to be done but I think there is also a lot of sorting out to be done.

Waqar Syed - Goldman Sachs

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from Chuck Minervino of Susquehanna. Your line is now opened.

Chuck Minervino - Susquehanna Financial Group

Hi, good morning. Just wanted to go back also to the Analyst Day comments as well and I was hoping you can may be update us on the context of the guidance I believe you gave at that Analyst Day around $6 number for 2016. I also believe they are really heavily dependent on the self help you could do and getting really contemplate this improvement in this North America cycle. So may be clarify for us if you can and then also kind of may be give us some update on how you are thinking, is it possible that that kind of $6 number, I know it could have gone higher, I remember that slide at your Analyst Day. Can we see that $6 kind of run rate sooner than that or that $6 number going higher in ’16 as well may be an update there?

Dave Lesar

Chuck, 2016 seems like a long, long time away but I think it’s fair to say six months or so off of our Analyst Day. We are very pleased with the progress that we are making on all fronts and each of our strategy is unconventional, deepwater mature fields. From a financial standpoint, the things that we are being able to accomplish in terms of improving cash flow, we are tracking right along the line, may be a little ahead of where we thought we will be in terms of reducing working capital. And so as I look at it, I think that everything is going exactly the way that we have planned may be a little bit better but don’t necessarily want to get out there right now with the 2016 forecast. But certainly we firmly believe in our strategy both operational as well as financial strategy and we are going to execute against that strategy. We are not going to lever-off of that right now and feel like that certainly it’s being successful in driving us forward.

Chuck Minervino - Susquehanna Financial Group

Okay and then just a couple of quick ones. When you did lay that out, at that particular time did you anticipate having to add pressure pumping capacity or was that kind of planned with, when you laid that out, was that more of using what you had in the field?

Jeff Miller

We had always planned to implement the Q10 in fact of the future strategy, so the timing and the pace of that was not as clear certainly a bad time but given the value and the efficiency of the equipment, part of our strategy has always been to put that newer technology to work.

Chuck Minervino - Susquehanna Financial Group

Alright, thank you very much.

Operator

Thank you. At this time I would like to turn the call back to management for any closing comment.

Kelly Youngblood

Thank you, Sam. On behalf of the Halliburton management team, I am sorry Dave…

Dave Lesar

Yes Kelly let me just add one last comment to what Jeff said because I think it’s been important one and that, and it goes back to the issue that the question Jim Wicklund had around our market expectations in adding pumping capacity. Of course we’re not going to be crazy enough to add equipment into the market if we see that it’s going to have an impact on our margin expectations from the direction that they’re had it right now. We build to market expectations. We build to the customer base we have. We build to the market share we believe that is efficient to support our business in North America. And we’re also building in a Q10 fleet that we believe is second to none in the marketplace.

So as Jeff said all we really are doing is accelerating a bill that we have previously laid out to everybody to get it done faster to take advantage of the efficiencies and the competitive advantage we have from it sooner rather than later. So, I wouldn’t get too exercised about it in my view I think it’s the smart business decision and clearly we wouldn’t do it if we didn’t think it was in the best interest of our shareholders.

Kelly Youngblood

And with that, I’d like to thank everyone for your participation. And Sam I’ll turn it back over to you to close the call.

Operator

Thank you, sir. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a wonderful day.

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