Halliburton Company (HAL) Earnings Call Transcript & Summary

Hello, my name is David Anderson. I'm Head of U.S. Oilfield Services Research at Barclays. And with me this morning is Jeff Miller, he is the CEO of Halliburton. He has been with the company since 1997 in several leadership roles, including COO, until 2014 when he was named President, later becoming CEO in 2017. Halliburton, of course, is most associated with being the biggest oilfield service company in North America and the largest pressure pumping fleet in the industry, but it's truly a diversified global company, providing products and services to the upstream oil and natural gas industry throughout the life cycle of the reservoir. Jeff, thank you very much for joining us today.

Fantastic to be here.

So Jeff, let's just start off with a bigger picture question. You took the market by surprise on your last earnings call when you guided to double-digit top line growth for the next several years, 400 basis point margin expansion by 2023. Can you talk about what gave you the confidence to put those targets out there? And perhaps could you just kind of share with us the path to get there of kind of what you think is going to have to take place over the next 2 years?

Certainly, Dave, I will. Maybe one thing before we get to that though. Had a big storm -- obviously, the storm in the Gulf of Mexico is affecting our people in the Gulf of Mexico and really up through the Eastern Seaboard. And so I want to at least express my appreciation for the team in the Gulf of Mexico that looks after that business, taking care of each other and their communities. Along that path, that will have an impact of about $25 million to our pretax operating income, but we're still on track to deliver revenue and EBITDA growth over the prior quarter, so sequential growth. But I wanted to express that to our team. Now on to your bigger question, the entire outlook, very much intact and a bullish outlook. But what gives me that confidence really is the structural demand that we see coming. For services, the stronger macro. And then obviously, Halliburton, I think, I believe, is uniquely positioned for what we see unfolding. If you let me kind of take those in order maybe, the structural support for commodity prices feels strong. Demand continues to outstrip supply and a $60 to $80 oil price is constructive for everyone. Inside of that, see a healthy international recovery, clearly revolving around shorter-cycle barrels. But it's still going to take time to produce those barrels, it's not immediate. And so demand growth, in my view, pent-up demand growth, which we saw some of earlier this year, will ultimately actually outstrip that supply, and we will see a cull on U.S. production. Though I expect U.S. production is slower, more methodical, it doesn't look like the '17 to '19 runup, but it's going to be a steady march, which is very good for us. I have one other -- a couple of other comments. The industry structure, in my view, is improving for services. I think CapEx is being managed for returns, broadly speaking. In North America, competitors really are not earning enough free cash flow to fund the growth. Pricing around urgency, I expect we see -- we're negotiating up, not down. We see that certainly in the U.S. Expect that internationally. And then obviously, Halliburton, I think, is quite differentiated, both internationally and in the U.S. with opportunity to grow lift and chemicals internationally, along with our premium drilling services. And then North America, being the only integrated provider in North America, I think gives us a lot of opportunity around technology.

So maybe just to start there and kind of what you just mentioned on kind of better industry structure, kind of healthier industry structure around the capital discipline. So I think one thing, I believe it was Lance, your CFO, had mentioned to me, he called it a closed-loop system on capital these days. So maybe just talk about how your playbook has evolved. I think if we go back a couple of years ago, I think you would have unveiled then a different point for a different time. Obviously, a few things have happened in the last 18 months. So maybe just start talking about from there about kind of how that playbook has evolved one step further in this sort of closed-loop system on capital.

I think that's an excellent description of that, Dave, and you certainly do have a grasp of the history. I think the -- but that closed-loop system is very different, in my view. It is for our customers and for us, and that means that we generate the cash that is used in the business, both to grow and maintain and all of those other things. And the CapEx has to fit inside of that and that there's not capital racing into the market from anywhere else. And so those dynamics do change what we're doing. As you say, we've been at this a couple of years. So what are the evolution? We viewed North America as maximizing value in North America, which changes the way we invest. It drives more focus on returns. And also in that closed loop system, equipment has to pay for itself inside of that time. And so I think that, that is what we see unfolding as sustainable for Halliburton, but it also requires better capital velocity, which a lot of our technology that we've developed has gone into better capital velocity. We've actually improved asset turns. We've actually improved asset turns 50% just in the last 5 years. And some of that is -- a lot of that is the evidence of the work around North America, how we invest. And capitalize is an overused term, I would actually describe it more as a capital velocity investment strategy that is geared to what we actually see, which is not up into the right infinitely, but it is a measured -- running a business to make the most returns.

So Jeff, you guys have now committed to your CapEx of being only 5% to 6% of revenue, which is, gosh, probably about half of what it used to be 3 or 4 years ago, maybe 5 years ago. So clearly, it's a different viewpoint going forward. You had said before kind of as you were sort of expecting kind of global demand or kind of activity start picking up, but really, the whole industry seems to have kind of really kept that discipline really tight. Is there a point where that's going to have to increase? It feels like at some point the market is going to be short on kind of tools and equipment, maybe not so [indiscernible], but I was sort of thinking kind of in general in terms of capacity of kind of what you do, think about kind of international. Are you going to have to increase that number at some point if the market gets really tight? Maybe just kind of help us on what kind of, broadly speaking, kind of where do you think kind of capacity of tools and equipment for your work is today?

Look, we are -- I think that, clearly, the 5% to 6% is, I believe, sustainable and critical in terms of our strategy, which is to maximize value in North America, grow profitably in the international markets and generate free cash flow, which dictates that capital velocity, that 5% to 6% range is important in that math. But to get to that math, we've done a lot around 2 things. One is design for better returns, better velocity. And then also, we believe that pricing needs to move up. And so we don't overbuild for a market like that. I believe we've got the tools that we need to be competitive. We know where we see the market growing and plan to deploy that capital not into things that don't make a return, but just make headline revenues. But that focus is going to be on making returns with the equipment that we have. And I think one of the things that -- it may be more of a North America dynamic, but this idea of the prisoner's dilemma, I think that what prevents that is, a, it's been done and it didn't work. In fact, the reality is a lot of companies wrote that into bankruptcy over the last few years. Clearly making returns is what's required. I think the closed-loop system forces that discipline. And we're not alone in making -- needing -- requiring returns. And so I expect that we see capital managed that way broadly in the industry. Certainly, our customers are viewing the world that way.

So if we think about -- just in terms of let's just focus in on the pressure pumping market, nobody should have been building any equipment for years, seen very, very little just in terms of replacement. We've been talking about attrition for some time now. So if you look out there today, it looks like kind of the remaining equipment out there is primarily just kind of Tier 2 kind of lower quality equipment out there. So you know where I'm going with this. Talk to me a little bit about the pricing side. It feels like we're getting kind of tight. You've talked about that you're all sold out in terms of your available equipment. So I think investors are all kind of wondering, when are we going to start seeing this net pricing? All the E&Ps are, of course, saying, "No, no, no. There's none of that happening." So what's the real story, Jeff?

Well, where you sold out, the decisions that you make are clearly around price. And so we are [Audio Gap] broadly and clearly around the ESG friendly equipment, I'll describe it that way, whether it's dual fuel, Tier 2, Tier 4 or electric fleets, seeing a lot of interest in that. I think that gives us strong [Audio Gap] different form. And so that's all more indicators of the difficulty in building new equipment for the market at large.

Sorry. You froze up there for a second, Jeff. So just kind of -- just summarize on the pricing side. Are you feeling constructive about that?

Yes, I am.

Do you think [ you'll get ] to net pricing by year-end? Is year-end kind of a goal for you to start getting some net pricing here?

Yes. No, it certainly is. We are seeing net pricing on ESG equipment, ESG-friendly equipment. We are seeing that now. I would say it's not at the pace I would like, but when we're sold out, clearly, the lever we work on is price, not get more. And so -- and I think that broadly that is -- since there isn't new capital going into the marketplace, our approach to capital has been always to replace the equipment that wears out sort of at the end of its life. So that's about a 15% replacement schedule that we have. And we continue on that. But as we do that, we actually will -- we're the net leader today in terms of ESG-friendly equipment and expect that we will continue to outstrip that as equipment wears out and we replace it.

So let's go down that ESG road a little bit, and let's talk about e-frac. So it's something we're talking a lot about these days. You were very vocal 2 years ago and started coming out and saying, "I'm not paying for the power." Smart move because now other people are paying for the power, it looks like you've kind of found a solution for that. So let's talk -- can you talk a little bit about how many e-frac fleets you have out there? How are you paying for that in this closed-loop system? Because that sounds like new capital, but perhaps there's something on the other side of that. But just talk about where you see this e-frac market going and how big these could be in kind of, say, 2 years?

Well, I think it will continue to grow. Best estimate that we have -- the market today, at least, for all available equipment is probably 35% or so, some form of Tier 2 dual fuel, Tier 4 dual fuel or electric. So ESG-friendly is gaining ground; electric, in particular, much smaller. But as we go into our replacement cycle, as we replace equipment, obviously, we have a choice to make. Is it Tier 4 dual fuel or is it electric? And obviously, we're making decisions around that in real time. It's really driven by contracting. If the contract is there, and quite frankly, the duration is such that we don't have recontracting risk, but then all of a sudden that's a good business for us, but again, has to live within that replacement cycle, which is sort of the governor on this, I don't see -- well, there's a lot of talk about equipment. I don't expect there's going to be a flood of it because of the closed-loop system we described. I think we've got a terrific solution. It's here today. It's not something we're speculating on. It works. It's very good. It's working today. We actually had sort of an open house up in Duncan, we had 40 different companies probably represented by over 100 people through Duncan to look at the e-fleet working with the power, as you described, the reciprocating power, though it's power-agnostic, and also the smart fleet, which is sort of a different topic but, in my view, an equally important one over time. So I think from a structural -- that gives us structural pricing support, net pricing support, and we're certainly approaching it differently than we are equipment that may be Tier 2 or getting retired.

And the e-frac fleets that you're putting out there, are all those under contract that you're putting out there?

Yes, they're under contract. Nothing is getting built that doesn't have a contract.

Doesn't have a contract.

We're not building anything spec -- again, as things come up for replacement, there's room to build a fleet. If it's an electric fleet, it needs to have a place to go. Otherwise, it would be dual fuel with the ability -- Tier 4, which is really nearly all our fleet -- I say nearly all, a huge part of our fleet. We've been probably the biggest buyer of Tier 4 equipment. We've been doing that for a long time. So it's either a conversion or a dual fuel Tier 4. I think there's more optionality with Tier 4 dual fuel because it doesn't depend on gas delivery, it doesn't depend on grid. So I feel like there's more optionality. But clearly, where there is demand and an opportunity for electric and a client prepared to do the planning work to deliver on that. I think that's a great opportunity also.

So on that 35% that you call ESG-friendly pressure pumping, is that giving a premium price? In other words, are customers asking for that equipment over others and are willing to pay a premium for that equipment?

Yes, that was a broad -- that was the market, yes, market. We lead that market. The -- yes, I mean, there's always a request for typically what are 3 options or at least 2 options, dual fuel or electric and then sort of other. Yes, there's more better pricing around -- as I say, there's sort of a structurally better pricing around the electric or the Tier 4 dual fuel. Or maybe you could say there's a discount to pure Tier 2. Maybe another way to think about it, although in my view the pricing is moving positively and we see net pricing, and I think the improvement in terms around electric as well is a very important factor. Because historically, there was a lot of recontracting risk in this equipment that was built. And we've really just taken a view that it's not worth it to us certainly at this point in the market to take any risk around recontracting that equipment before it's paid out.

Yes, that makes a lot of sense. Jeff, maybe we can switch over to the international side. Since the beginning of the year, we've been hearing rumblings about kind of international inflection picking up, Middle East in particular. I know you had talked about increased tendering activity earlier in the year. I guess, we're all kind of holding our breath waiting for it. What's the story today? Has things gotten pushed out a little bit? I think we were talking earlier a little bit about it's still tough to kind of move around in different countries today. So has that timing got pushed out a little bit? Are you still thinking this is kind of by before year-end, we'll start to see kind of Middle East rig counts and Middle East activity starting to pick up?

Well, we still expect to see international activity up double digits second half of this year to second half of last year, overall flattish for the year. So we've seen improvement. But we are, as you say, seeing, near term, more disruptions from COVID than we had seen. I don't think it changes plans for companies, but it is making it more difficult to accelerate those plans. And particularly in Asia, there are certain pockets in the Middle East where it's more difficult to get work done. But the business does continue to grow profitably. I expect as vaccination rates increase, customers are now requiring it, countries are requiring it, I think that, that all will serve to reduce the COVID disruption that's going on and ultimately grow demand. I think the risk to anything would always be demand growth over the next few years. But we are seeing what's required for the growth. And I'd say in the Middle East, yes. Russia as well seeing growth. And so is it pushed out? I wouldn't call it pushed out necessarily. We are seeing the growth, but I think we'll see an acceleration of that more so when either vaccinations, we see more of those, or we see fewer cases.

So when we talk about capacity in pressure pumping, it's pretty easy to define in a self-contained market in North America. Harder to understand that internationally because a lot of this equipment moves, and I know if you have too much of capacity in one area, you can move it to another. But maybe from a general standpoint, how are you looking in terms of kind of your international business on kind of tools and equipment? Are things getting tight? Is there still enough -- I'm sort of asking from a bigger picture question, also kind of as you're kind of looking around there. Obviously, we're kind of getting at the pricing story, which I know there's contracts. So how is that kind of looking in terms of kind of that tightness of that equipment out there today?

Yes. Look, we're seeing tightness today as an indication of that, particularly around drilling equipment. And we're making decisions, rationalizing where equipment goes. And that's a good thing. And I think that we're seeing that tightness more broadly. There are big contracts that aren't determined yet in a number of places. Those are going to consume capital as they get sort of awarded. But our primary focus has been around seeking those opportunities. We believe the growth will come. There'll be plenty of work. The question is, is there plenty of work at the right return? And so we are sold out. Can we move equipment? Yes, we can. But even the equipment that's being moved has to be upgraded to a better opportunity. And I'd say that broadly for drilling equipment. We're also seeing the order book improve for completion equipment, which are very much internationally-driven. We see more of that internationally. And that's a good indicator of long lead time sort of outlook by clients to have that moving up, again, driving margins.

So let me ask you, on the production side, so not the drilling, the completion, with the production side, you have 2 businesses you've been growing pretty steadily internationally, one on the artificial lift side, the other on the chemicals. I just kind of love to kind of hear how you're thinking about both of those developing. But some of the ESP acquisition, gosh, what was that, 3 or 4 years ago, just seems to be one of the best acquisitions you've done since you've been there. Just talk about how that business has grown, the opportunities in artificial lift. Because Jeff, I've been traveling in the Middle East for a long time. I don't ever remember artificial being part of the story. And now all of a sudden, we're seeing multiple -- all these multiyear contracts being announced. So love just to kind of get the sense of what you see in artificial lift. And sort of similar, the production chemicals, you have a new facility you're building in Saudi, love to kind of know where that's going to go from there and how you're going to utilize that.

Yes. Let's start with our artificial lift, which fantastic acquisition, Summit, and it's been a great integration. I mean that Summit team is terrific and have quickly become a part of Halliburton and they are so competitive. Great group, great team. And yes, artificial lift, it will become progressively more important globally, in my view, as short-cycle barrels are produced. And I think this is sort of a hallmark of what short-cycle barrels look like. And if they draw on them, they draw it faster with ESP pumps. And I think that's part of why you're hearing more about it. And that certainly was part of the investment thesis that we had when we acquired Summit was, we've been talking about shorter-cycle barrels for some time. Even though back in '14, there was this roll off of big projects, going to say big projects coming online, we never saw the growing backlog of the multibillion 20- to 40-year-return-type projects coming on. And they don't need artificial lift. Those things have enough natural drive that they aren't planning lift on those. But you are planning lift on unconventionals. You're planning lift on, again, infield drilling where we want to juice up production. So great investment, super excited about that. And first contract in Kuwait, but more to come. I mean we're making that investment a solid market target. Chemical is the same thing. Obviously, chemicals moves to the smaller in a different pace than lift, but also driven by short-cycle barrels production. And having the plant in Saudi end of this year or first quarter of next year is certainly going to make us more competitive in those markets. And we feel like that's probably the best place in the world. If your feedstocks is in Saudi Arabia, it serves the Kingdom, but also that whole region, which is clearly a push by the Saudi government is to export from Saudi Arabia, where this is an opportunity to do that. And we won some contracts that are important, but also to serve as our own internal demand is also part of that business case. So feel good about where that's going.

So Jeff, in the remaining time, I want to talk about kind of 2 kind of emerging areas of Halliburton. The first is on the digital side. There have been a lot of announcements to your DecisionSpace 365, your iEnergy. You've had a number of wins there, a number of announcements. When we talk kind of talking to customers, they're certainly using it, but it doesn't seem like we're kind of at that kind of major adoption level. Talk a little bit about that digital adoption curve and kind of where customers are on this. And how can this business grow? Do you think your kind of pure softwares component can kind of double over the next few years? Obviously, that should be very helpful to margins I would think as well. Just talk about that a little bit, please.

Yes. It was pretty interesting, the adoption rate. I think there was an initial sort of blast of announcements as the world was going digital, and we're going to hire big providers to do it all. And almost all of those projects, really all of those projects, have been scuttled. And I think where we are now is in the real adoption, the meaningful adoption where digital has to make a return. And it comes in smaller bits and bobs, it's not can we get Zoom running on all of our computers and go paperless? The big step is intelligence and adoption of workflows and the kind of things that take more time to do, but clearly add more value. And so I think the kind of adoption that you're seeing today, while it sounds like it's dribs and drabs, probably, if you're looking from the outside, you say, "Oh, well, they want a drilling contract or they want a production operations contract to go implement." But I think what you're seeing is the meaningful, sticky adoption, because we're doing a lot of consulting around workflows. And we've always done that at Landmark. And we've really always taken the view that the substantive adoption was not going to be all of the puffery around we're going digital. It's going to be around -- we want to automate the drilling process. We need to shorten the planning horizon. How do we do that? And once we start to accomplish those things, it actually pulls along adoption of even more technology. But until it's demonstrating savings, no different in our own business, we don't adopt things until we know there's a business case around it. And I think that we're getting into that place. And that's where Landmark really excels. And I think you're seeing that acceleration. And should I expect a doubling? Yes, I mean we're on a pace to grow that business quite quickly. Certainly, the software sales, the cloud environments and then leading out of that, the value to Halliburton, which is even broader, answer products like smart fleet, answer products like -- all that has to do with EarthStar and all of the things that come behind that. So those are answer products that come from having a Landmark in-house. Even a smart fleet, I mean we would not develop a smart fleet if we didn't have production capacity around software at scale. And that's part of what Landmark brings.

I think you hit the nail on the head is that customers need to see these cost savings before they really commit to this. So I think we're kind of getting close to that.

But we're in that stage now, Dave, where I think we're getting that, and we're demonstrating that, and that's why I'm so confident about the growth.

Because then that will feed on each other. So Jeff, one last quick question here. I just want to ask about kind of Hal Labs, some of your new energies So talk a little maybe a little bit about the goal of Hal Labs. We noted that a couple of our companies we see some additional funding. So just in the last few minutes here, just maybe just kind of just a little bit of a pitch on Hal Labs, what you're doing there, maybe a couple of interesting technologies that you're really keeping an eye on.

Yes. Hal Labs, super excited about that. It is Halliburton's opportunity. We're using it that way to own an environment that is highly creative and commercial and modeled around Bell Labs, that idea of capturing those important elements. We've got, I think, 8 to 10 companies in there today. We're seeing valuations of these companies grow. They are using -- we are able to provide help to them that has been important. I think it's very different from any of the other sort of incubator things you read about. And this is the feedback from our own participants, is that online access with an organization like ours has been a dramatic game changer for them and driving a lot of funding and having sort of the guardrails of Halliburton there derisks these investments for investors. Cool things like nanotech, insulation, making power from waste, which is another company in our group, and even potentially a unique way to create graphene tubes. Fascinating stuff. Our benefit is we're learning a lot about the technology, but also about the taxonomy of this space. I think one of the issues with green or climate tech investing is the lack of capitalized infrastructure. So technology into OFS, it finds a home quickly because it's capitalized. Not the case with all of these new value chains. So anyway, we're super excited about it, Dave. I know we need to wrap up. So anyway, thank you.

Absolutely. Well, thank you very much, Jeff Miller, CEO of Halliburton. Thank you very much for kicking off our conference today. And we look forward to talking to you very soon, Jeff. Thank you.

Thanks, Dave.