Halliburton Company (HAL) Earnings Call Transcript & Summary

Good morning. Welcome, everyone, to the Fifth Annual JPMorgan Energy Conference. I'm Sean Meakim, JPMorgan's oil services and equipment analyst. And we're very excited kicking off day 1 with Halliburton, the U.S. services leader and newly pure-play services provider today. It's great to have CEO, Jeff Miller here. So Jeff, welcome.

Thank you. It's great to be here, Sean.

Yes, Jeff, the last time we saw each other, we're on the road, meeting with investors on the East Coast in February. And it feels like we've gone through an entire cycle in just the last few months.

So maybe to kick things off, I just think given the unprecedented challenges that the industry is facing, can you maybe give us an update on how Halliburton's been able to manage in the field, particularly outside North America where COVID's been more disruptive, and I'm thinking about Latin America and Middle East most notably. But let me turn over to you and just to get your latest thoughts on what you're seeing out there.

Yes. Thanks, Sean. Look, different end markets have behaved quite differently, depending on where they are. The -- our response has been to keep the safety of our employees and our industry and focus while we work closely with customers to meet their objectives. Some markets have shut down, while others -- and have continued to extend closures. Some of those are notable. Others are starting to resume activity levels and are easing some restrictions. And then there are some others where oil and gas is so critical to their economy that in spite of closures, they worked wide open throughout the whole time, and it continues. But look, we're so fortunate at Halliburton. We've got great people working through logistics. And in most cases, we have adapted to those requirements without a lot of disruptions. I think that's the feedback I've had from customers.

That's good to hear. So maybe starting with North America, in Lower 48 rig count, it's been cut in half in the past quarter. Frac crews are down maybe 70%. This is kind of what we can see. How has 2Q progressed relative to your expectations, and I'm thinking not just about activity but also some of the cost-out initiatives that you have to try to manage the [indiscernible] activity environment.

Look, the Lower 48 pace of activity decline has certainly been larger and sharper than anticipated. Completions are down more than rigs, as you know, in Q2. But -- and all basins haven't come down exactly the same way. But the pace and the urgency with respect to where we've directed those cost cuts have been equally accelerated is how I would say that. And so we've reduced cost at a rapid pace also. Still got more to go, but we're very much on track to deliver the $1 billion in cost reductions over the next couple of quarters, this quarter or next quarter. And despite the near-term rapid declines, the balance of the year looks about 50% year-on-year down in North America. So our overall full year outlook is consistent with what we thought.

Right. So now as we think about the back half of the year, production is starting to come back online. WTI is close to $40. Do you see E&Ps coming back to maybe complete some wells, if not adding rigs? So on the one hand, they're going to try to stabilize production for '21, so activity in the back half of the year will be important. At the same time, we've seen significant seasonality in the fourth quarter of the last couple of years. That's also probably a risk that we should be thinking about as well.

Yes. I think the calendar cyclicality that we've come to know, things are so disrupted, I'm not sure how relevant all of that will necessarily be. But I also think it will be, again, a mixed bag between customers and specifically where each customer is, what that basin is doing, what they produce in that basin. There's some indication that there'll be a subset of customers that reactivate some activity later in the year, but that price has to be in the $35 to $40 range. Fortunately, that's where it is. But those things haven't happened yet. I think a lot would wait for stronger commodity prices before they did much new anyway. The gas basins have held up better and have firmer activity plans as they go into what they expect to be a heating season. But having said all of that, and we'll look, I'm sure, closely at the type of activity that we think we see, there may be some rebound in activity of some sort. There will be some rebound in activity, but it's still going to be low in terms of comparison to Q1. And sometimes I call it as it will be meaningful, but it won't be material.

Yes. Yes, a lot of small numbers. Yes.

Yes.

Sometimes it looks so big because the absolute numbers are so small.

I mean it will be better, but it isn't going to be back to Q1 by any means.

Exactly. So that's been -- one of the things we've talked about -- a lot about has been this idea of a flight to quality within the Lower 48. So have you seen evidence of that? On the one hand, you would think that with a lot of excess crews, a lot of excess capacity, there'll be desire, if I can get a Halliburton crew, I'll take that. On the other hand, they're trying to squeeze every dollar they can from a CapEx perspective, and so that makes it difficult from your point of view. Just how do you think about -- how have you seen that unfold in terms of those 2 competing dynamics?

Look, I think there's -- the flight to quality always occurs, and we're confident in that, though, at the same time, it's been a shocky 90 days about here in the sense that there hadn't been a lot of thought put into like plans and where we might go. So it isn't like there's been any activity that, hey, we're trying to decide around most of the spend. We just want to slow down. We want to stop. And so there isn't a lot of debate around that. That's not a, "Gee, he could do this better." This is, "How do I just get stopped?" And that's been more of what we've seen over this journey from where we were in Q1 to where we are today. It hasn't had a lot of -- and had any new work in it to speak of in North America. But look, the point is -- your point is well taken because the investment in our equipment, the process around our investment in equipment, the quality, that we actually have performed and are performing the best we ever have, which is tall order at Halliburton, and our customers know that.

So as we think about 2021, pretty wide open, a lot of uncertainty, but just maybe -- let's talk about what's a little bit more within your control for next year. So just given that wide spectrum of potential outcomes, how are you planning the business? Or how do we think about the ability to respond, kind of the flexible up and down next year depending on what the market gives you?

Yes. Look, and it's -- if we step back around strategy, strategy overall, particularly in this North America discussion, hasn't changed at all in that sense of emphasizing returns over share. We are market leaders, but what's more important is that we want to be market leaders in returns. And from my standpoint, it hasn't changed at all. Our service improvement strategy in North America, it was one we were talking about and starting actually when we were on the road together not long ago, that's just been accelerated. Matter of fact, expects both frac and nonfrac service lines with respect to how we take cost out. As we get into '21, if we need to do more things from a cost standpoint, we will. But we feel like part of our strategy is -- had been predicated on the cyclicality that we saw in North America. So the speed with which we can dial up and dial down activities and not wait for, "Oh, we're going to carry costs until times get better." I mean we take out cost immediately because we have the confidence in our systems to put the people and equipment back to work equally fast.

Right. So now I'm just wondering [Technical Difficulty], you talked about the acceleration of this service delivery strategy. Cost structure will be lower. In terms of next cycle, North America, how do you think about competitive dynamics? There's going to be some kind of call on lower-emission equipment. That's going to be part of the mix. Integrated solutions perhaps get more traction. Just curious how you would characterize what the next cycle in North America would look like.

Yes. And that's -- I think it all plays into Halliburton's strengths, the next cycle, because, one, we have the most low-emissions equipment today in the marketplace. Whether that's Tier 4F or dual-fuel pumping spreads, very much in that space. We have some electric equipment that's also working today. So from that standpoint, lowest emissions, our integrated eWinch is really a fantastic solution to remove emissions from location, but more importantly or as important, it's just a much faster, more seamless way to complete wells now that the wireline winch is integrated with the actual act of the completion. That's different than having a wireline company and a frac company. I mean these are actually -- we've removed steps, people and costs and improved efficiency. By the way, these things work together. I think there'll be fewer players with more basin concentration. I think that will work well for us. I think scale will matter. So better capital allocation through the cycle and the ability to balance growth and returns, I think, is what we'll -- one of the things we'll also see in the next cycle. Size and scale is always an advantage to driving down unit costs. And I really believe that the next turn on North America, there will be a lot more focus and value ascribed to improving recovery factors more so than simple service efficiency gains. We make widgets on surface that take out a minute here or a minute there. I think we've reached, in many ways, the level of diminishing returns around that. There's 24 hours to work with. We pump 20-plus. There's just not a lot more hours to work within there. But what makes money for customers is the earnings power and the barrels and how do we produce more of those. That's where we're spending our R&D dollars today.

Right. Right. That makes a lot of sense. So then also you talked about the cost side. So we have a $1 billion program. Looking past that, just thinking about kind of pull what you just said back into margin recovery next cycle, particularly for the C&P business. So can you get back to a 10% normalized EBIT, which is maybe what you accomplished last cycle may not be what the target was. But in a world in which there's going to probably be continued pressure in terms of taking cost out, how do you kind of stay ahead of the competition to extract more margin out of the business compared to your competition?

Yes. Well, C&P, Sean, that would be a disappointment. We certainly expect to do a lot better than that, than 10%. Improvements in our North America service delivery platform, combined with better relative international mix, should logically drive better margins. You'll see both of those in the next cycle, the benefits of what we've done to take out costs in the U.S. and some improvement internationally. But we do need to get back to some normalized level of activity.

Yes. Right. No, of course. So let's maybe shift over to international and some offshore topics. So you've been relatively more sanguine on the decline in international relative to your peers and, again, within a small band, right? So in the last earnings call, you talked about spending down 10% year-on-year. Most of that impact you'd feel in the second quarter, and some of that reflects more severe cutbacks that we've seen in the rig counts in places like Latin America. Middle East should be relatively more stable aside from COVID issues. Just curious if you could provide any more clarity on the back half of the year. And is that maybe small disparity between you and your peers that reflect opportunity set for Halliburton? Or is it just that it's difficult for E&P with those bigger and longer-cycle projects to dial back as quickly?

Yes. I think it's more the latter because we've got great visibility into the international market. I think that it's a combination of COVID interruption, disruption, while the longer-term impact is -- that's the near term. The longer-term impact is going to be customers that are dialing back capital programs. They just don't dial back that quickly. They have to be agreed with partners. They have to be negotiated with providers, and then they shut down. They also come back on more slowly. So I think the outsized impact around COVID activity, our industry is fantastic at solving problems, logistical problems. And because of our people, we've solved a lot of those. So I do think we'll see IOCs pulling back more so as the year wears on, and then they sort of retrench into fewer areas where they can conserve capital. Land-driven completions and workover activity and national oil company activity in certain countries, those are declining at a slower rate on a relative basis. They typically do. And I think the hardest hit will be the exploration plays. We really don't see anything where brand-new steel is being cut or new things are being searched out. So we don't -- and so that's where I kind of see international offshore will be struggled the most in terms of sort of growth. Short-cycle barrels onshore probably come back first. And I think as we -- that's longer term. But as we look out the balance of this year, the retrenchment or reduction in capital activity by IOCs, I think, is yet to really be seen.

Got it. Can we talk about technology for a little bit? So…

Certainly.

That's certainly been a big priority of yours since you've taken over as CEO. Can we just talk about how your perception of your ability to narrow technology gaps relative to your peers and how you think that has influenced and will influence top line and margin performance for Halliburton?

Look, man, I'm really pleased with our technology progress. In fact, we've closed gaps in drilling, wireline and testing, and I think we've leapfrogged in certain aspects of each of those with respect to technology. And look, man, we're not done by any means. I think the production service lines, lift and chemicals are yet to really come, and there'll be more margin improvement on the way. We continue to drive capital efficiency and technology. I think we're the leader in the number of patents per dollar spent and deliver faster development times. So really pleased with technology and where we are. And I think that will have a meaningful impact on our earnings capacity, earnings power.

And then specifically on the production businesses, you've talked a lot about the debate between build versus buy, and you basically go into a build strategy with just some bolt-on pieces to kind of get you started. Can you talk a little about where you are with that and where you see -- where Halliburton could be? Can that be a meaningful business for you in the next cycle, say, 3 to 5 years out?

Yes. I mean 3 to 5 years, absolutely. I mean the fact is we bought Summit, important business for us, good business in North America but had 0 international operations. And so the whole world is still open for growth around that business. Similarly with chemicals, it was more a frac-oriented business that we had with Multi-Chem and Athlon acquisitions. We now have the ability to address a wider number of customers and applications as well as our internal consumption. So all of that has a long way to go. And yes, and I am a build-versus-buy guy just because I know how to make -- I mean you make the returns building. You don't make -- you don't buy a return. You've got to build returns.

Yes. So let's speak and let's also touch on digital. The downturn can be an opportunity in terms of accelerating customer adoption of digital solutions. That seems like something that we've identified as a potential opportunity. So how are customer discussions evolving as your customers are experiencing work from home? We were talking, before we got live here, about just the proliferation of teams and other different types of means, customers are likely going to be experiencing this. And so to some degree, remote operations, automation, just different digital platforms getting a lot more traction here, how do you see that evolving and to an extent, is this -- have these last 4 months become a catalyst?

Yes. Yes. I mean I'd say digital is integral to our whole business. I mean I saw it that way before the downturn. And that's both internally and go-to-market, so with customers. We call it Halliburton 4.0 to capture the fact that it is really a Fourth Industrial Revolution. I mean think horses to horsepower. And over the next 10 years, I think it reduces costs and capital dramatically for us and for our customers. What I believe is more important, and this is the most important part from my standpoint, is how we monetize this, how we make the value and keep the value. And we monetize digital today by selling software. We do projects that we get paid for, do cloud hosting. For example, our uptake on iEnergy, which is our cloud, that uptake's accelerated 15%. We've seen 15% increase in users just through the first several weeks of Q2. And then at the same time -- that's all the external part. And then we also -- we save money by demanning and operating more efficiently. And so much of the North America cost reduction -- not most but a big part of our strategy around North America cost reduction is driven out of what we know we can do with digital tools.

Right. And so I think one of the other key debates beyond some of the near-term ability to capture some revenue opportunities and maybe to capture some shares, what does digital mean long term for the industry? So I always talk about how the industry wakes up every day and goes to work trying to destroy itself, right? So meaning that to some extent, the industry has become very successful at lowering cost per BOE. And so as long as that's the case, it is a bit of a headwind in some ways. Until the rock kind of reclaims the hand -- the upper hand, there are challenges to it kind of from a deflationary perspective. So as you think about long term, maybe beyond just the cloud and beyond some of the digital solutions, can we talk about maybe machine learning, AI and just how you see long term? To what extent is that a deflationary force that you have to consider in terms of your core oil services business? How do we think about that interplay over the coming cycle?

Well, I think the 2 will -- it will be more efficient, so it lowers costs. That was, in and of itself, deflationary, though, at the same time, there'll probably be a wider application. And some of our solutions, near term and longer term, were driven off of AI or really artificial intelligence and decision-making, which those algorithms and things are baked into the equipment itself. So I think it will narrow the field of participants. It's not -- while it's much of an open architecture, the application and the consumption of it and tools is not that straightforward. And I think there's a lot of effort around that. And so if I take -- I hate to start with -- we're talking about AI, which is a big, broad net of things, but we have to boil it down to an example that we can digest. So a digestible example might be EarthStar, which is a tool. We describe it as a tool. But what it really is, is a software platform that evaluates the rock and evaluates it in real time, and that will continue to get smarter. And so because that's harder to do, it does save the cost, the client. It improves performance, and I got plenty of examples where clients have found oil that they didn't think they had because they were using that tool. That will accrue to us in that form.

Yes, that makes sense. So maybe let's talk about cash. So cut CapEx down to $800 million this year, so that's basically half year-on-year. Working capital is a seasonal use to start the year, but that should inflect in the back half as we typically see, and maybe some unwind in the balance sheet should help. You've cut the dividend 75%, $1 billion of costs coming out. That will have some cash impact for the year, but on that, it's going to be helpful. Just can you talk about your confidence in free cash in 2020 as you implement all these changes? And then looking beyond, I know a wide opportunity set in '21, but how do you see in terms of Halliburton's ability to flex to generate cash no matter what the market gives you?

Yes. Look, I'm confident in our ability to generate strong positive free cash flow this year. Look -- and generating it again next year. We have a 15-year track record of doing just that to back up that confidence. So look, working capital will be a help this year in 2020, but so will full year cost reductions be a benefit to '21. So we don't really see those this year. So if activity remains challenged, based on kind of the outlook that you've described, and you'll see us flex CapEx down more so. I mean CapEx is partly demand driven and then partly capital efficiency, which we can affect, meaning we build things cheaper and move them around faster. But I want to be really clear that $800 million is not a floor. I mean that is what we see today. But the ability to flex that, we have that ability.

So then maybe a natural follow-on question to that, as we think about capital intensity of the business, clearly, some initiatives to try to improve that, and the activity is also looking a lot different here. As you look to the next cycle, how do you see capital intensity maybe as a percentage of sales? It's often a common question from investors. The numbers have come down. We're less than half of where we were, say, 5, 10 years ago. Where do you see -- in a recovery scenario, next cycle, where do you see capital intensity for the business on a normalized basis?

Yes. I'm not going to -- it's lower. I mean it's -- I hate to use percentages of revenues because that's really not the way we run the business. That's such a -- it's a backward looking -- you only know that after the market's grown and you met the market. But if it used to run 10%, 11%, it's closer to 5% than 10% today. If I [Audio Gap] is all up. The -- we get there by -- a lot of the decisions that we've made have been driven around better capital efficiency in the manufacturing, whether it's iCruise tools that take less capital, I mean we built a lot of iCruise equipment for much less money than we would have built, an equivalent capacity, productive capacity of anything else. I think we've done the same around completion equipment. A lot of our e-completion sort of design work and completion tools is around how we just manufacture things at a lower cost, so the capital cost is lower. And so that effort, in my view, pays off in future cycles. I think we're beginning to see it now. Just for example, I mean, we met the growth in '19 internationally on substantially less capital. So that's evidence that we can meet that growth with less capital.

Right. So then let's touch on the balance sheet, so the kind of effect on cash. The debt profile was quite elevated just on trough EBITDA, but the maturity profile is well spaced out, right? So you've got plenty of flexibility there. There's not much to do between now and '24. So just what else can be done in terms of balance sheet management just given those parameters?

Yes. I mean, look, we're well positioned today, in my view, as you rightly point out, just because we've removed the near-term uncertainty around leverage and liquidity. From here, we're committed to deleveraging. We may accelerate those actions based on the outlook, but it would depend on the economics and the future cash flow-generation ability of the business, what we see there. Mostly, we want to be prepared for the eventual market recovery and have plenty of dry powder to go after that recovery. And that's a lot of what we have done over this short period of time has been geared towards having -- being the best prepared to power into what that recovery is.

Right. So thinking about the balance sheet and thinking about the recovery, the last couple of cycles, the large-cap service companies have generally been acquirers in downturns, but it looks a bit different. If anything, your peers tend to be shedding assets, not looking to acquire new ones. So just curious how you think about what the competitive landscape can look like next cycle in terms of potential for consolidation in the industry, both in North America or international. Just curious how you see that changing. Again, we're going to -- it's a different cycle in terms of how you and your peer group are looking at the world compared to what you did with prior couple of cycles.

Yes. This may -- I'll just -- I got to -- I thought -- I think there'll be less -- there'll be consolidation, I think there will also be liquidation that happens over the next cycle. The idea that we acquire just to grow, that idea is -- I'll just speak for Halliburton. I don't view that as a good strategy at all. That's a bad strategy. We're going to spend our dollars where we can turn them into the most returns, and that's rarely rolling up small things. That's not a long term -- that's not sustainable, in my view, and so much of the value gets handed over. So you'll see us continue to look at those kinds of things that we think advance our R&D that can then be scaled through our existing footprint. But rolling up geographies and things of that geographic-type things, I think we are better off -- we just know we make better returns when we go at it differently.

Right. So we're coming up on about time here, Jeff. Just want to give you maybe a minute here if there's anything else you want to say in terms of closing comments to wrap it up. Well, I'd love to turn it over to you.

Yes. Thank you, Sean. And look, I appreciate the opportunity to be with you this morning. Three really things to keep in mind, please. What we're doing today, in our view, is all geared to power into the recovery. Strategically, what we will be doing will be delivering on our digital drilling, production growth and differentiating our frac business around recovery, recovery factors and ultimately generating free cash flow, which is we know that's what we can do, we will do. We think we'll do it better in the future. And it will be predicated on digital drilling, production and frac and then generating free cash flow off of those strategies. Thank you.

Thank you, Jeff. Yes, on behalf of JPMorgan, thanks for being here today, and I look forward to seeing you again soon. Thanks, everyone. Have a great day.

Yes, my pleasure. Thank you, Sean.