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Halliburton Company. (NYSE:HAL)

Q2 2008 Earnings Call

July 22, 2008 9:00 am ET

Executives

Christian Garcia - VP, IR

Dave Lesar - CEO

Mark McCollum - CFO

Tim Probert - EVP, Strategy and Corporate Development

Analysts

David Anderson - UBS

Chuck Minervino - Goldman Sachs

Ole Storer - Morgan Stanley

Jim Crandell - Lehman Brothers

Mike Urban - Deutsche Bank

Kurt Hallead - RBC

Michael LaMotte - JPMorgan

Dan Pickering - Tudor, Pickering, Holt & Company

Robin Shoemaker - Citigroup

Alan Laws - Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the Halliburton second quarter 2008 Earnings Call. (Operator Instructions)

As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Christian Garcia, Vice President Investor Relations. Please go ahead.

Christian Garcia

Good morning, and welcome to the Halliburton second quarter 2008 conference call. Today's call is being webcast and a replay will be available on Halliburton's website for 7 days, a podcast download will also be available. The press release announcing the second quarter results is available at the Halliburton website.

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

Before turning the call over to Dave, I would like to remind our audience that some of today's comments may include forward-looking statements reflecting Halliburton's views, about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial result and cause our actual results to differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2007 or Form 10-Q for the quarter ended March 31, 2008 and recent current reports on Form 8-K.

Please note that, we will be using the term 'International' to refer to our operations outside the U.S. and Canada, and we will refer to the combination of U.S. and Canada, as North America.

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

Dave Lesar

Thanks, Christian, and good morning to everyone.

The company posted another excellent quarter with year-over-year revenue growth of 20%. Our International revenue grew 26%, which was in excess of our 20% goal. With Latin America continuing it's growth momentum with a 33% year-over-year growth. We expect robust activity in this region to continue for the remainder of the year, as we execute our strategy in this market.

Overall, our revenues grew 11% sequentially, despite the pricing pressures in frac in the U.S. We had record revenue this quarter in every product line except Landmark, which typically records its highest revenue in the fourth quarter.

Let me now turn to the results of North America and discuss our prospects for the second half of 2008 and onwards. Despite a very negative impact of the spring breakup in our spring Canadian operations and of course, pricing pressure in the frac market, North America revenue for the quarter grew a strong 7% sequentially, due to higher activity in both U.S. land and the Gulf of Mexico. In the U.S., our revenues increased 12% sequentially, as Halliburton continues to benefit from the increase in horizontal drilling activities toward which we have focused our U.S. service portfolio.

Our well construction businesses in general and Sperry in particular, have continued to show strong growth in U.S. land market this quarter. Furthermore Canada, has now recovered from a seasonal drop, and we expect strong activity in this market in the second half of 2008. More service-intensive plays such as the Montney in Northeastern British Columbia also are giving us additional opportunities to apply cross product line solutions. Our focus on efficiency and high utilization helped us deliver strong second quarter margins in North America.

The pressure pumping pricing environment continued to be competitive. Overall, we experienced the 1% to 2% average pricing decline for fracturing, consistent with our guidance. However, we saw clear signs of prices stabilizing towards the end of the quarter. In fact, the pricing decline was at the lower end of the range we expected. We however, did see continuation of inflationary pressures and increases in fuel and materials that we discussed in the first quarter call. And Mark, will provide an update on this and how we're trying to mitigate them. For our product lines outside of fracturing, pricing has stabilized, with the exception of some minor weakness in our cementing business this quarter.

We do not expect continued pricing declines going forward. In fact, currently wireline logging, directional drilling/LWD, and drill bits have the most pricing leverage upside in this market. Our customers have announced revisions to their capital programs for the remainder of 2008 and 2009 for the development of their conventional and unconventional resources. We expect unconventional drilling activity to increase over the second half of the year and be geared more towards service-intensive emerging shale plays like the Haynesville and Marcellus, which will drive demand across all of our service offerings.

The formations of these plays are not yet well understood, and require a much more reservoir-focused approach. Tim will provide more color on the technologies that our customers are beginning to employ, to unlock the value of these reservoirs. This increased activity along with the tightening and balancing out of capacity provides us with an improved outlook for all of our businesses. It enhances our ability to increase prices modestly and cover cost inflation. Our fracturing equipment utilization remains high and we've worked to optimize fleet placement. We'll continue to realign our equipment with our customer's assets, where we received better long-term margins and returns.

Now, let me turn to our International business. Revenue continued its strong upward momentum with a 26% year-over-year growth. All of our international regions showed growth over 20% with Latin America alone growing above 30%. Sequentially, international revenues increased 15% as operations in Norway, Saudi Arabia, Angola, Mexico, and Brazil continued to expand. International margins for the quarter were 21% even with our continued heavy investments in people, facilities, and equipment to support the next phase of our growth in the Eastern Hemisphere. Margins were additionally impacted this quarter by the ramp-up costs for our Manifa offshore award where drilling is expected to start in Q4 or early next year and reach a total of ten rigs.

We continue to expect expansion of international margins, which will be driven by value created from the introduction of new technology, the liability of execution, and the fixed cost leverage offsetting the price competition we're seeing on larger tenders. Project visibility continues to be very good giving us confidence that we will continue to see healthy growth rates throughout the second half of 2008 into 2009 barring a significant global recession due to high commodity prices. We are making good progress and growing profitability in several undeserved markets and are improving our exposure to the highest growth segments of the market.

Let me turn the call over to, Mark to give you more financial details.

Mark McCollum

Thanks, Dave and good morning. I'll be comparing our second quarter results sequentially to the first quarter. Halliburton's revenue in the second quarter was $4.5 billion up $458 million or 11% from the first quarter. Landmark, Baroid, Wireline, and production enhancement product lines, registered growth of over 10% sequentially. On a geographic basis all regions showed double-digit increases, except for North America, which grew 7% but was impacted by spring breakup in Canada. And as Dave pointed out, we are expecting a resurgence of activity in Canada in the second half of 2008, at a much higher level than what we had originally anticipated.

Operating income increased $102 million or 12% from the first quarter of 2008, representing incremental margins of 22%. Our second quarter results included a $25 million gain on the sale of two investments, which was recognized in North America, in the drilling and evaluation segment, and a charge of $30 million for the settlement of the ReedHycalog patent dispute, which is included in corporate and other. Our first quarter results included $23 million for impairment charges on an oil and gas property in Bangladesh, which was included in the Middle East/Asia drilling and evaluation results and a $35 million gain related to the sale of an investment, which was included in the North American, completion and production results.

Now, I'll highlight the results of our two operating segments. Completion and Production revenue increased $246 million or 11% from the first quarter, while operating income increased $32 million or 6%. The higher sequential revenue was led by production enhancement with a growth rate of 15%, driven by increased activity in U.S. land in Oman and our strong vessel utilization in Mexico and the North Sea.

Looking at completion and production on a geographic basis, North American C&P revenue increased 9% sequentially. Operating income was flat, as the first quarter results included the $35 million gain previously discussed. The revenue increase was driven by higher activity across all product lines in both U.S. land and the Gulf of Mexico. This was partially offset by a decline in stimulation pricing of 1% to 2%, as well as the seasonal spring breakup in Canada. C&P margins for North America continue to be impacted by higher costs related to materials and fuel prices. However, these increases are largely offset by increased equipment utilization.

We've been successful in negotiating fuel surcharges and we should see the impact of these negotiations starting in the third quarter. We have also been talking with our customers about recovering our cost for other consumable materials and will provide an update on these discussions during the third quarter call. In Latin America, completion and production revenue increased 6% in the second quarter, due to strong activity in Mexico, Brazil, and Venezuela. However, the improved top line results were not enough to offset the negative impact of the union strikes in Argentina. So our operating income declined 8%. We are not expecting resolution of the strikes in the coming months, and we are selectively transferring equipment to other countries in the region. Production enhancement experienced sequential revenue growth of 16%, primarily driven by higher vessel utilization in Mexico.

In the Europe/Africa/CIS region, completion and production revenue increased 26% and operating income increased 49%. The growth in revenue and operating income was driven by increased completion tool sales and favorable pricing adjustments in West Africa. Strong activity across all product lines in continental Europe and higher vessel utilization in the North Sea, in Middle East/Asia, completion and production posted sequential increases of 5% and 9%, in revenue and operating income respectively. We experienced strong activity in Oman and Saudi Arabia. Our Khurais project in Saudi Arabia is ahead of schedule, and we have started mobilizing for our Manifa project.

In addition, strong sales of our completion tools in Indonesia and China contributed to the favorable performance. Now on our Drilling and Evaluation division, revenue increased $212 million or 12% and operating income increased $96 million or 25% from the first quarter. We experienced strong sequential revenue growth in all product lines with Landmark, Baroid, and Wireline posting double-digit increases. The sequential increase in operating income was driven by the flow through of higher revenue in the non-recurring items previously mentioned. Baroid margins increased more than 200 basis points from the first quarter, and posted strong performance across all regions, notably in the U.S., the North Sea, and West Africa.

In North America, drilling and evaluation revenue increased 4% and operating income increased by 11% sequentially, as strong performance in our U.S. land operations from Baroid and Sperry offset the seasonally lower Canadian activity. Drilling and evaluation's Latin America revenue increased 27% and operating income improved by 63% from the first quarter.

The improvement was driven by higher activity associated with the alliance to integrated project in Southern Mexico. We are currently operating on four PEMEX supplied rigs and anticipate having six rigs by the end of the third quarter. Although, this was a slower ramp-up than we planned, the project is going exceptionally well. We are also seeing strong growth rates across all other countries in the region, except for Argentina and that's again, due to the union strikes.

In the Europe/Africa region, drilling and evaluation revenue and operating income increased 9% and 7% respectively. The increase was driven by higher drilling and multilateral activity in the North Sea, increased Wireline activity in North Africa and favorable pricing adjustments in West Africa. Drilling and evaluation revenue in the Middle East/Asia region increased 19%, while operating income improved 65%. Remember that the first quarter results were negatively impacted by the $23 million oil and gas impairment in Bangladesh. Additionally, the increase in operating income was driven by higher activity in Australia, Malaysia, and China across most product lines. In addition, increased Baroid revenues in the Middle East contributed to the strong performance.

Now I will address some additional financial items. Nothing unusual on taxes this quarter, we continue to expect our full year 2008 effective tax rate to be in the 30% to 32% range. During the second quarter of 2008, we updated our fair value calculation, related to the indemnities provided to KBR during the separation process, relating to the FCPA investigations and the Barracuda-Caratinga bolt arbitration matter. We recorded an after-tax charge to discontinued operations of $117 million to reflect our most recent assumptions on the potential resolution of these issues.

We currently have $1.2 billion of 3.8% convertible bonds outstanding. The conversion option has moved deeply in the money, as our stock price has risen and the current market value of these bonds is ranging around $3 billion to $3.2 billion. Since the market value of the bonds, greatly exceeds the par value and because we now have the ability to call the bonds, although we've not yet elected to do so, a number of bondholders are electing to go ahead and exercise their right to convert. We require to settle the $1.2 billion par amount in cash, though, we have the option to settle the approximately $1.8 billion to $2 billion premium in excess of par in either cash or stock.

Now, if we settle the premium in stock, we will do so with the issuance of Halliburton shares from treasury stock. Since the shares required to fully satisfy the premium on the converts, are already included in our fully diluted EPS calculation. Settling the premium in stock, increases our basic share count, but doesn't negatively impact diluted EPS. Now to the extent we settled the premium in cash, our share count will go down, but we will have an immediate earnings charge for the value paid. However, from an EPS standpoint, the higher ongoing interest expense for the increased borrowings should be offset by the lower shares outstanding.

We expect our depreciation, depletion and amortization to average approximately $190 million per quarter for the rest of the year. And finally, we're increasing our capital expenditures guidance by $200 million to $1.9 billion to $2 billion for the full year. The incremental capital is to provide for equipment placements on the coming offshore rigs and to meet the growing demand of our customers in the emerging shale plays in North America.

Tim?

Tim Probert

Thanks, Mark and good morning, everyone.

The continuing increase in shale activity and our role in developing these plays is a very important part of our North American story. As most of you know, as activity shifts toward these plays, Halliburton is well positioned to serve shale operators, because of a combination of our reservoir expertise, proven technologies, and broad infrastructure, necessary to maximum the value of these assets. In the Woodford, for example, stratigraphy and organic content are well understood. But due to their complexity compared to the Barnett, the formations are more difficult to drill and fracture. Horizontal wells in the Woodford are deeper with longer laterals, bigger frac jobs, and more stages.

Cementing these long, horizontal section has proved to be a challenge here. So well cemented with conventional slurries have exhibited inadequate isolation of frac targets, which has led to reduced fracturing effectiveness and decreased production. Our zone field cementing systems, have significantly improved the segregation of the targeted frac zones, prevent in communication, and improved productivity.

We have more stabilities in issuing the lower Huron Shale in the northeast where reducing exposure to the sensitive shales is critical. A combination of optimized Sperry bottomhole assemblies along with our electromagnetic telemetry technology has trimmed as many as five days from the typical drilling cycle there.

Water production and water use are becoming significant challenges for our customers exploiting unconventional and tight reservoirs. In the San Juan and Green River Basin, for example, our water management solutions eliminate the need to use portable water without compromising fluid qualities. Here our OmegaFrac fluid is the first linear fracturing fluid specifically designed to use a wide variety of field-produced brine water, providing cost and environmental benefits to our customers and communities, and we're applying a similar approach in emerging shale plays.

Now the Haynesville's in the early development stage and the environment is especially challenging, with average depths over 12,500 feet, bottomhole temperatures approaching 350 degrees Fahrenheit, and wellhead treating pressures exceeding 10,000 psi. This requires the use of specialized drilling, pressure pumping, and fluids technology. Average drilling times are double those of the Barnett and fracturing requires almost twice the amount of hydraulic horsepower at higher treating pressures. We estimate that Haynesville wells are currently about 1.5 to 1.7 times more drilling and fracturing intensive than those in the Barnett.

Understanding fracture orientation and geometry is a key element of improving well performance. However, in this microseismic monitoring technology, ExactFrac allows us to monitor frac propagation in real time to maximize well performance. In the Barnett, we recently undertook a client study to evaluate a large number of wells using landmark reservoir modeling tools with the ExactFrac service, to both optimize horizontal well and fracture placements. So, we are pleased with these and other growing capabilities, an important component of the differentiated shale technology portfolio.

Some of you may have seen the recent results from the Patent Board, published this month in the Wall Street journal, which provides a scorecard for industries-based on indicators that track global patent activity related to innovation, technology, and science strengths. The energy and environmental industry, the latest survey showed Halliburton to be the leader for the third consecutive time. While, we are pleased with our top ranking, most importantly, the survey confirms the progress we have made in the last few years, in enhancing the depth of our intellectual property and gives us the confidence that we are on track in delivering technology solutions for reservoirs that are becoming increasingly more challenging. We also continue to enhance our technology portfolio through acquisition.

During the quarter, we purchased the remaining 49% of WellDynamics, the world's leading provider of intelligent well completion technology. The acquisition provides a significant competitive advantage in delivering increased reservoir productivity and maximized ultimate recovery for our customers. We acquired the Protech Centerform, the only provider of casing centralization that uses a carbon fiber and ceramic composite applied directly to the casing. This complements our range of casing solutions particularly for our customer's deepwater and high-pressure/high-temperature drilling and completion challenges.

We also completed the purchase of Knowledge Systems Inc, a respected provider of software and services that improves well planning and drilling by helping clients predict, wellbore, geomechanics, and pore pressure, so wells can be drilled safely and economically. So these three acquisitions strengthen our technology portfolio and give us greater resources to put into our broad distribution channels to support our next phase of growth.

Dave?

Dave Lesar

Thanks, Tim. To summarize, we completed another excellent quarter with overall year-over-year growth rates of 20% and continued strong margins. We have seen prices stabilize across all of our product lines in North America. Our customers increased drilling plants, are providing us with a more robust outlook for our services in the second half of the year. And all indications are that the shift of activity towards more service-intensive plays will drive demand for our technologies that are specifically designed for more complex reservoirs.

Internationally, we continue to make progress in balancing our geographic portfolio with year-over-year revenue growth of 26%. Margins were above our stated target. We have seen competition intensify, but we believe we are well positioned, given the breadth of our technology and the execution capabilities of our people. And I like to publicly thank our employees worldwide for delivering another excellent quarter.

Let's go ahead and open it up for questions, now?

Question-and-Answer Session

Operator

(Operator Instructions)

And our first question comes from David Anderson from UBS. Your question, please?

David Anderson - UBS

Thank you very much. Can you guys just talk a little bit about where you are with your utilization on the frac side and you base them generally on a five-day work week?

Tim Probert

Thanks, Dave. Utilization is very high at the moment. And we certainly have the preponderance of activity on a five-day week. We also have some Saturday work, as well. So really a combination of the both at the moment.

David Anderson - UBS

And I assume you expect that to continue to increase throughout the year?

Tim Probert

Yes, we do. I think particularly as you've sort of heard the commentary during the course of the call. As we get into the third and fourth quarter, we certainly expect the pressure on utilization to increase.

David Anderson - UBS

And with regards to Canada right now, can you just not chat a little about in terms of the capacity situation up there and how does that compare to the U.S.? And do you think you will see any kind of equipment start to migrating north or is there too much activity down here to see that?

Tim Probert

I think as you heard us say, we really are expecting a much stronger second half in Canada, certainly much stronger than we had anticipated in the early part of the year. And as you know, a fair amount of equipment did head south and elsewhere, during the sort of the fall in Canadian activity. I think it's reasonable to assume that some of that will return to Canada to meet the expectations there at the market. Certainly it's an area, that we're undertaking careful consideration in terms of the disposition of our fleets.

David Anderson - UBS

So do you think pricing should move up, as well, in Canada? I guess judging from your comments, I'm shooting for you?

Tim Probert

Yeah. I think most certainly.

David Anderson - UBS

Okay, one last question. You had mentioned in the Haynesville comparing to the Barnett, you said 1.5 to 1.7 times more fracture intensity. Could you just expand upon that a little bit, are you talking about say two comparable five-stage fracs or is just kind of like all in well?

Tim Probert

This is really sort of more on a monthly basis really. I mean, obviously drilling times in the Haynesville are longer, and by the way that 1.5 to 1.7 was both sort of drilling and fracture intensity.

David Anderson - UBS

Okay.

Tim Probert

But really try to sort of pair that down to a monthly evaluation. So, you can try to get an assessment of what it means in terms of a monthly or quarterly revenue stream.

David Anderson - UBS

Okay So the Haynesville it seems that's, sounds like the area where you're most focused on right now over the next call six months, fair to say?

Tim Probert

It's clearly early days yet. There's a lot of work to be done. But I think we just wanted to kind of frame it as a point of reference for you in terms of what it might mean for the service industry.

David Anderson - UBS

Great. Tim, thank you.

Operator

Our next question is from Chuck Minervino of Goldman Sachs. Your question, please.

Chuck Minervino - Goldman Sachs

Good morning. Just a question on pressure pumping as well, given the increased demand outlook here and activity levels, have your supply expectations changed at all for the pressure pumping market for the rest of the year?

Dave Lesar

We had basically told you on our last call that we expected a sort of 12% to 15% increase in capacity for 2008. And we still believe that to be a fairly good number in terms of capacity increases. Again, lead times of equipment are still fairly long, probably in the range of nine months. So any decisions that were made in the last month or so really won't have any impact in terms of North America, until clearly well into 2009.

Chuck Minervino - Goldman Sachs

Okay. And then when you stack that up with your demand outlook. Are you looking for really flattish pricing for the remainder of the year or do you actually see pricing increasing in the second half of '08?

Dave Lesar

I think that clearly, it's going to be a matter of timing here. We had earlier expected to see stabilization in the second half of the year and clearly that came quite a lot earlier than we expected. That stabilization occurred in really towards the end of Q2 rather than in Q3 that we had originally expected. So, I think it's reasonable to assume that, we will see modest increases during the course of Q3, but ramping-up perhaps, slightly more as we move in to the back end of the year. And clearly as you know, we're going to be in a renegotiation phase at the end of the year for 2009. And the climate for negotiation is clearly quite a bit different at the end of 2008, than it was at the end of 2007.

Operator

Our next question is from Ole Storer of Morgan Stanley. Your question, please.

Ole Storer - Morgan Stanley

Thank you. I got a question first on the CapEx. You seem to get more bullish on your business in raising the CapEx. I think, you said from $1.7 billion to $2 billion mentioning that this was partly because of offshore rigs and partly because of shale. Particularly on the offshore, what is it that's changed since the beginning of the year, given that most of these offshore rigs under construction have been visible for quite a while. So, what is it that triggered the greater enthusiasm for that space?

Mark McCollum

Ole of course, we monitor all of our projects on an ongoing basis. This is really I would say as much as anything an adjustment to our view of the future with respect to the projects which we see, the projects which we think we should receive. Clearly, North America plays a part in that picture, as well. So I think you should take this generally speaking as a good sign of our confidence in the market ahead.

Dave Lesar

Ole, this is Dave. Let me add to that. Also with the delay of the arrival of lot of the offshore rigs, we diverted that equipment that we had built in anticipation of that marketplace developing into other parts of the business. And to some extent, we're now having to backfill that equipment to meet those rigs as they're coming on.

Ole Storer - Morgan Stanley

Okay. That makes sense. Secondly, Mexico on the counter-bid, you bid at quite a different level to the company that was awarded the contract. Could you comment a little bit on that, as well as your, strategy on future IPM work or project management work in Mexico, you've been awarded a small contract there. But are you targeting some of the bigger tenders coming up or what's your strategy?

Mark McCollum

Let sort of talk about IPM in general for us. That's obviously, a very important part of our portfolio, and as we may have mentioned before, sort of on any given day we're sort of operating typically around about 30 IPM projects of one kind to another in about ten countries around the globe. So we have a pretty important portfolio. And certainly Latin America represents the most important part of that portfolio, also the U.S., North Africa and so forth are other important elements of the portfolio. But yes, we certainly intend to participate and support primarily of our NOC customers, as they tend to turn a little bit more towards this approach to help them develop and exploit that fields.

Ole Storer - Morgan Stanley

So just to finish. How do you see that opportunity compared to what's going on in the new offshore market? Is there any difference in margin if you allocate your tools to an onshore project versus allocating them to the offshore?

Mark McCollum

Well I think as we may have commented to you on the prior call actually, if we take a look at our international business in general, about half our business internationally is driven by offshore activity. And both our share and margin are slightly better in offshore activities. So that sort of gives you a sort of a general guide. Of course, IPM type activities are not always exclusive to onshore, they also take place in offshore activities as well such as we've completed in the North Sea. So, it's really a blend I think of both.

Ole Storer - Morgan Stanley

Okay, well done. Congratulations for the very good performance.

Mark McCollum

Thanks, Ole.

Operator

Our next question is from Jim Crandell of Lehman Brothers. Your question, please.

Jim Crandell - Lehman Brothers

Just as the follow-up to Ole's question, that you have said earlier or Dave said earlier, that one of the negative things about margin was pricing competition on large tenders. Do you consider your IPM business in general to be a lower margin business than your ongoing international business, since you cited it in your opening comments? And it seems that everybody likes to snipe at each others IPM contracts. There's certainly been a lot of talk about how far down you bid on Manifa to win that contract. Would that fall into that category about a lower margin business than your total?

Mark McCollum

Yeah. I think there's a lot of discussion around IPM activities. And just sort of for the record we really don't consider Manifa to be an IPM project. It's something which we project manage ourselves. But for us the definition of IPM really requires us to have some involvement in the management of rigs and the total operation, just to sort of put a little clarity to that. But I think within the scope of our definition in terms of IPM, as I said we think it's a really important part of the portfolio.

It's clearly a model, which is in favor for a member of our large national oil company customers and it's something that we intend to respond to as a company. We also intend to manage the risk and ensure that clearly our execution is up to snuff to ensure that we deliver the margins, which are consistent with the rest of our business.

Jim Crandell - Lehman Brothers

You said though, Tim, that our price competition on larger tenders would be sort of a negative offsetting factor to other factors giving profit margins. So if they ask question again, is your IPM business lower margin business overall, than your rest of your international oil service business? And can you give some percentage or rough guidance on how many of these 30 IPM projects, you considered to be competitively bid and where there is the price competition that you said right off the bat in your opening comments?

Tim Probert

Jim, with regard to the comment regarding larger contracts I think in the international space, we can clearly say that the overall sort of size of the tranches of work, which are being led by our customers IPM or not, becoming significantly larger. And this is for a number of reasons, some of which are related to the ability to get access to services and some obviously are related to bargaining power of our customer base. But the point is as the projects are tending to get larger and it requires us to ensure that, we obviously execute well. But it also requires that we provide new technologies into those contracts to ensure that during the life of those contracts, we manage them from start to finish to ensure that we drive margin improvement during the life of the contract.

Mark McCollum

Jim, this is Mark. I also want to add on to your specific question about the margin differentials between IPM work and the rest of our international business. They are not that much different, they're very much inline. And that's how we risk manage these things to make sure that we deliver for our shareholders.

Jim Crandell - Lehman Brothers

Okay. Mark, thank you. That's very helpful. One final question. You talked about the one year tenders being renegotiated in a much different environment, as we get towards the end of the year. Would you expect given the cost increases for labor materials, etcetera. Would you expect to have real price improvement on your one year tenders' roll over as they take place later this year or in early 2009?

Dave Lesar

Yeah, Jim, this is Dave. Let me answer that one. I think that we're somewhat in the environment we were a couple of years ago, where I think we were clearly press for our price increases. But I think, what you are going to see is that you will get specifically allocated price increases for such things as shortages in certain commodity chemicals, fuel prices, that sort of thing, as sort of a pass-through increase. And then, we will negotiate for a price increase on the base services work. I think, we probably are a little bit further down the road before we'll be able to push for sort of a peer price increase like we were getting a couple of years ago.

Tim Probert

Well, I think it's also fair to say, we are not waiting for the contract rollovers to go after the cost recovery portion.

Operator

Our next question is from Mike Urban of Deutsche Bank. Your question, please.

Mike Urban - Deutsche Bank

Thanks, good morning. I wanted to dig a little bit more on today's favourite topic, IPM. Is some of that competitive pressure that you're seeing out there based on competitors who own rigs, bidding those more aggressively or is it difficult to tell or is it just kind of across the board competitive pressure on those large projects?

Mark McCollum

I think that really the main issue is having access to rigs. And our position to this point has been that we do not wish to own rigs. We partner with suppliers of rigs to execute. We have a number of, I think very good examples in a number of markets, where we've developed strong relationships and execute collectively very well against our targets for our customers. So at this point, no I don't think it's a particular disadvantage to us at all.

Mike Urban - Deutsche Bank

I mean I would agree in terms of the efficiency that you guy's offer and the quality of the service. But, is there a sense out there that those competitors are bidding perhaps, below market rates on the rigs in order to come in low on the project as a whole?

Mark McCollum

I am not sure why anyone would want to do that. In today's current market I guess it's possible. But I think they would be leaving some money on the table, if they did.

Mike Urban - Deutsche Bank

And the follow-up to that, it pertains to the international margins as a whole. I think you've spoken to this a little bit given that you're getting some aggressive pricing on the large projects. Would you say that pricing on kind of the non-IPM work is improving on average or is it more of the infrastructure leverage and the up selling that's driving the margin improvement you expect?

Dave Lesar

I think, this is Dave, I think it's a little bit of both. Certainly, you have the leverage of the expanding footprint and your ability to take on more volume and provide you absolute operating income dollars. But also the theory around these bigger projects is to get in and then up sell your new technologies because typically these are multiple-year contracts, in many cases with options to extend that our customers hold. So, it's paramount basically to get in, get the project, and then up sell. And I think that we've done a pretty good job of doing that over the past several years. And that's no secret formula out there I mean everybody tries to do it. But I think it's something that we've gotten pretty good at.

Mike Urban - Deutsche Bank

All right. Thank you.

Operator

Our next question is from Kurt Hallead of RBC. Your question, please.

Kurt Hallead - RBC

Hey, good morning. Just wanted to try to calibrate a couple of things. On one of its call yesterday, they reference price increases about 10% to 15% in North America. And then, they mentioned something like 15% plus price increases internationally. They did reference the fact that it was varied by product line and so on. But I just want to try to gauge how that jives with how you're seeing the market right now?

Mark McCollum

I'm sure it's not unreasonable to expect on certain items or products to see pricing increase in those ranges. And certainly, when you take a look at the overall inflation for hydrocarbon-based goods, so let's say specialty chemicals, for example, or for that matter machined items, etcetera. The inflation has really been quite substantial. So, it's not unreasonable to assume that those maybe quite reasonable rates. I think however, for a broad basket of services such as within Halliburton's portfolio, I think the guidance that we gave you a little earlier is probably closer to being more appropriate.

Kurt Hallead - RBC

Okay. And just wanted to follow-up also when the Slumberjay talked on last Friday, they gave a pretty positive outlook with respect to an acceleration in international programs. And I wanted to see if that's kind of caused you guys to get more optimistic with your growth rate for international business for 2009?

Mark McCollum

Well, as we sort of commented a little bit earlier. We did adjust our capital outlook slightly, as we sort of readjusted that portfolio with respect to, portfolio of projects if you like. So we continue to see a very robust outlook and certainly have no reason to sort of diminish our enthusiasm for the coming year.

Kurt Hallead - RBC

Again that CapEx increase was for offshore and for shale, most of that seems like it's going to be geared for North America. But I was just trying to get a reference point on how incrementally optimistic you are about international growth rates?

Mark McCollum

I think what I said was that a lot of the stuff that we had planned for the offshore rigs has actually been diverted already into the U.S. market. So, the increase in capital we're looking at actually is to serve the non-North America and offshore markets. So, I think that sort of bodes well and gives an indication of our enthusiasm for what we see to be continued growth rates in Eastern Hemisphere.

Kurt Hallead - RBC

Okay, great. Thank you.

Operator

Our next question is from Michael LaMotte of JPMorgan. Your question, please.

Michael LaMotte - JPMorgan

Thanks. Good morning, guys. I don't know if Dave or Tim, if you're better to answer this question. But I'm trying to think about the North American market and really how it's changing versus maybe the 05/06 timeframe, where it was all about, build the equipment and provide as much slick frac capacity, as you can. And as the new shale plays emerge, it's very clear that the technology penetration and uptake is a lot greater?

And I am just wondering sort of how and I guess two part question here, one is how is marketing to the client different today versus a few years ago with respect to North America? And two if we consider the margin opportunity in this kind of technology oriented environment. Could we actually see profitability get better than what we saw in 05/06?

Tim Probert

I think on a broad basis, let's just sort of take a look at sort of I think the roots of this question really revolves around sort of is there a bifurcation of the market or not between the sort of the major players and perhaps the new entrants. And it might be helpful just to reference some data that Spears & Associates provided in terms of trending of both horsepower and revenues overtime. So they indicated that from 2003 to 2007 that the horsepower of the big three in proportion to the total industry dropped from around about 75% to about 50%.

And interesting that if you look at the amount of revenues for the same time period, proportion of revenue that the big three had in relation to the entire industry dropped from about 80% to roughly 75%. So, I think you can really see there's really a significant difference in the revenue for horsepower between the big three players and the smaller fracturing players. And I'm convinced that this is clearly a representation of the technology, which is applied in the value, which is received. So, I think that's point number one.

And point number two for us, you've heard us say a couple of times that we're really very focused on trying to balance the portfolio in North America between all our various product lines. So, no longer for us is it solely about fracturing by itself. We're really trying to put together a group of products and services in an efficiency model for our customers that really can drive value and productivity for them. And if I was to sort of call out one most significant change for us over the sort of 2005 timeframe, I think it's the maturity which we have in that kind of approach to our markets and our customers.

Michael LaMotte - JPMorgan

That's helpful color, Tim. And maybe, if I think about that trend of '03 to '07 with the technology penetration rate seeming to increase would it be fair to say that, that should trend to a faster rate over the next few years?

Tim Probert

Yeah.

Michael LaMotte - JPMorgan

It terms of revenue per horsepower?

Tim Probert

Yeah. I believe that our customers today are really becoming very focused on the productivity of their wells. And some of the color commentary that I was trying to provide a little earlier was I think our commentary on some of the thoughtfulness, which our customers are entering into with respect to the longevity and the investment that they're making in these plays and the need to ensure that it's not about simply punching wells down. It's really about maximizing the productivity. And I think that really, is really something which will be very beneficial to us and others that can offer something similar to the market.

Dave Lesar

I think, this is Dave. Let me just add one last comment. I think not only do you have sort of a bifurcation going on around the ability and the technology of the frac. But you also have much more of a linking together of all their other product lines on some of these shale plays. Tim mentioned earlier, the need to get a very specific and different sort of cement job down, before you can do the number of stages of fracing you want to do. The placement in a well using directional drilling is much more important.

So, we're seeing more of our customers in these types of play's come to us for sort of a multiple product line solution. And I think that will also help differentiate the bigger service companies from those that perhaps don't have as strong as cementing or drilling or completion position, than some of the newer entrants might have.

Michael LaMotte - JPMorgan

That's great. Thanks. Mark, a couple of quick cleanup questions for you. Looking at cash balances I'm trying to reconcile the dip in interest income from run rate in the last few quarters?

Mark McCollum

It's really driven by a couple of different things. One is obviously, interest rates have fallen this year and so that's having an influence. The other side of it last year, we did have some option rate securities. We got out of those in early January, no losses on our part. But effectively that lowered our overall yields. And so, that's really the two drivers of our interest income.

Michael LaMotte - JPMorgan

Okay. And then lastly, on the KBR arbitrations any timetable when that investigation or arbitration process will be wrapping up?

Mark McCollum

No, no, there's really no timetable. Obviously, we've had ongoing discussions all along with the Department of Justice, with the SEC, and then the arbitration matter is continuing on and we've been fully cooperating with those investigations. The update that we did from an accounting standpoint is a normal process using an outside third-party to help us do that. And we're obviously working to resolve them as quickly as we can. But we're not really the sole drivers of that timetable.

Operator

The next question is from Dan Pickering of Tudor, Pickering, Holt & Company. Your question, please.

Dan Pickering - Tudor, Pickering, Holt & Company

Good morning, guys. I wanted to circle back to this international growth opportunity. Dave in your comments earlier, you kind of called out that the second quarter grew 26% year-over-year and kind of above your 20% expectation, and just coming back to I mean, is this growth rate sustainable?

Mark McCollum

Well I think Dan we had set a long-term goal of growing in excess of 20% a year in our non North American operations. And we don't see anything out there right now that would say that it's not sustainable.

Dan Pickering - Tudor, Pickering, Holt & Company

Okay, thank you. And then I guess a philosophical question, as it relates to the North American market particularly in pressure pumping. Last cycle pricing went up very quickly, margins expanded very quickly, and a lot of new competitors came in, capacity additions, Tim, you addressed that in your discussion around capacity growth. As you think about this market developing going forward, do we just let prices go where they will run them up as much as we can or is it a more measured approach to sort of manage the capacity additions that might come as well?

Mark McCollum

A couple of differences perhaps, I'll maybe comment and then Dave will obviously, add any comments, if he sees fit. I think we're in a very different environment. We're clearly in a more inflationary environment today than we were in the sort of 2005 timeframe. So I think there clearly is an element of sort of recovery here, which has to take place, which clearly will mute pricing realization relative to the 2005 timeframe. I think that having been through a cycle of unbridled optimism in North America, I think it's our general belief, that we'll see perhaps a sort of more ordered process this time. And whilst we'll certainly see some pricing leverage, I am not sure that we are certainly planning on anything like the sort of 2005/2006 timeframe.

Dave Lesar

And I think, Dan, just to add a little bit to that. I think the larger pressure pumping companies on sort of the last cycle, really tried to balance revenue growth with margin growth. Whereas I think, some of the newer entrants were very much interested in market share and revenue growth, with not as much attention being paid to sort of the return on capital and the return on investment they've made on that equipment. And I think that as the market has moved more back into balance, I would hope that is that everybody is sort of has learned our lesson and that you really do need to balance the revenue growth with the margin growth.

But I think for the reasons we articulated earlier, there really has been a bifurcation in the market too, in terms of sort of what part of the streets or what part of the neighbourhood, you can play in as a pressure pumping company. And I think that will be a bit of a limiting factor on the number of newer entrants that perhaps can come in to some of these more specialized plays.

Dan Pickering - Tudor, Pickering, Holt & Company

Thank you.

Operator

Your next question is from Robin Shoemaker of Citigroup. Your question, please.

Robin Shoemaker - Citigroup

Thanks. Just to change the topic for a minute. I wanted to ask a question about your M&A strategy post the Expro situation. It seemed that, that would have been clearly a much different kind of merger than the ones you've transacted here in the last year and I think, you described it as transformational. But in light of that experience, what do you think are the prospects for Halliburton making a merger or an acquisition that would grow your international footprint entering new market such as Expro would have done, in the current kind of competitive environment for M&A?

Mark McCollum

Well, thanks, Robin for that question. I think, clearly we continue to be very active in terms of our M&A pursuits. You saw that we closed three acquisitions during the course of the quarter, all of which have some element of support for international market. And so really, we're focused in two main areas. Number one is the sort of shall I say technology additions for which we can utilize our distribution network around the globe to enhance their growth and secondly in a certain number of areas, some geographic acquisitions, where we feel we're not as well served as you would like to be and in which case, we can take our technologies and put them through that distribution network.

So we continue to have an active program. We kind of committed to you that we would continue to focus on that and that's something that we certainly expect to do. I think it's fair to say that it is a fairly aggressive market and we have to make our choices. And we have to have a bright line beyond which we will not cross in terms of pricing and value. But nonetheless, we still feel there are a number of opportunities out there.

Robin Shoemaker - Citigroup

Right. Yeah, understood it. You mentioned earlier, I think you described them as underserved markets. I assume that's both organic and potentially M&A. What I mean just upon a geographic kind of basis, what are the in your mind the primary underserved markets?

Mark McCollum

We've sort of publicly stated several of those underserved markets, and clearly Russia is one of those markets, where we do feel we've got significant headroom opportunity. I think India is another market to which we were somewhat late to play. So those would be two examples of two significantly underserved markets for us. I should add that though, it would only be fair to add that, our growth rate in those markets is very good. However, it is clearly from the smaller base than we would ideally like.

Robin Shoemaker - Citigroup

Yes, right. Okay, thank you.

Christian Garcia

We'll take one more question.

Operator

Our final question is from Alan Laws of Merrill Lynch. Your question, please.

Alan Laws - Merrill Lynch

Good morning. I know, we always ask you about fracturing capacity additions. I wonder if, you could talk a little bit about the supply/demand balance and what that looks like for the cementing equipment. You talked about in your comments some weakness in the quarter, was that a regional phenomenon or is that kind of a broadly based statement?

Mark McCollum

No, actually the cementing overall sort of really held up much more so than the fracturing business, during the course of the last couple of quarters. And our feeling is that the slight softness that we saw during the course of the second quarter was somewhat temporary. So we really don't see this being a long-term phenomenon. We are fairly sure that the capacity adds in this sector, don't materially change the overall balance here.

Alan Laws - Merrill Lynch

Okay, great. And you also talked about kind of multiple product lines. And wondered if you could comment a little bit on if there are any chokepoints in providing those packaged services? And maybe talk a little bit about in particular directional drilling business, and how tight that presently is in North America?

Tim Probert

Directional drilling clearly is an area of tightness on a global basis actually. So if I was to sort of point to one area in the sort of provision of services overall, I will probably say that in North America that is one where there is some degree of tightness. Though I believe that, within Halliburton, the work which we've undertaken to expand our manufacturing and supply chain capacity is something which allows us to meet the demand from our key customers.

Alan Laws - Merrill Lynch

Okay. Thanks. The one last thing, I just wanted to ask is about the Rockies market, a big market for you. Could you talk about maybe the outlook for growth there, given developing capacity issues on the REX pipeline, if you thought about those things at all internally?

Tim Probert

Yeah. I mean, clearly this sort of continues to, the Rockies clearly is a very important location for us in North America, clearly one of the stars for us. And we continue to be very enthusiastic about the outlook particularly driven by REXs.

Alan Laws - Merrill Lynch

All right. Thanks a lot.

Christian Garcia

Okay. That concludes our call this morning. Please call us, if you have any further questions. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.

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