Halliburton Company Q2 2010 Earnings Call Transcript

Halliburton, Co. (HAL)

Q2 2010 Earnings Call

July 19, 2010 9:00 a.m. ET

Executives

David Lesar – Chairman of the Board, President and Chief Executive Officer

Mark McCollum – Executive Vice President and Chief Financial Officer

Tim Probert, President Global Business Lines and Corporate Development

Christian Garcia – Vice President, Investor Relations

Analysts

Dan Boyd – Goldman Sachs

Bill Herbert – Simmons & Company

David Anderson – J P Morgan

Scott Gruber – Sanford Bernstein

Kurt Hallead – RBC Capital

Ole Slorer – Morgan Stanley

Angie Sedita - UBS

James Crandell – Barclays

Stephen Gengaro - Jefferies

Presentation

Operator

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

I would now like to turn the conference over to your host today, Christian Garcia, Vice President Investor Relations. Please begin.

Christian Garcia

Good morning, and welcome to the Halliburton Q2 2010 conference call. Today’s call is being webcast and the replay will be available on Halliburton’s website for 7 days. The press release announcing the Q2 results is available on the Halliburton website.

Joining me today are Dave Lesar, CEO; Mark McCollum, CFO; and Tim Probert, President Global Business Lines and Corporate Development. In today’s call, Dave will provide opening remarks, Mark will discuss our overall financial performance and liquidity position, and Tim will provide comments on our operations and business outlook. We will welcome questions after we complete our prepared remarks.

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 results, and cause our actual results to differ from our forward looking statements. These risks are discussed in Halliburton’s Form 10K for the year ended December 31, 2009; Form 10Q for the Quarter ended March 31, 2010; and recent current reports on Form 8K. Note that we will be using the term “international” to refer to our operations outside the US and Canada, and we will refer to the combination of US and Canada as “North America.”

Dave?

David Lesar

Thank you, Christian, and good day to everyone. Overall I’m very pleased with our Q2 results. Our total revenue of $4.4 billion was 26% higher than the prior year, and our first year-on-year increase we’ve experienced since the Q4 of 2008. We were able to leverage our expanded market position to benefit from the significant increase in US land activity and the seasonal recovery in the international markets. Our operating income grew 60% from the prior year, led by more than a 400% increase in North American profitability.

Let me talk first a little bit more about North America. North America was our stellar performer in the Q2, with sequential revenue increasing 24% versus US land rig count growth of 13%. This is the first quarter that our sequential revenue increase outpaced rig count growth since the recovery began last year. Operating income improved over 90% sequentially, despite the negative earnings impact of the Canadian seasonal slowdown and the deepwater drilling suspension in the Gulf of Mexico.

The gas-directed rig count rose 8% during the Q2. Gas operators are benefiting from productivity gains driven by improved drilling and completion times that lower their breakeven thresholds and enhance their returns. Also, drill to hold activity continues to also influence gas-directed activity. The US oil-directed rig count grew 19% over Q1 levels, buoyed by stabilized commodity prices for liquids. Oil rigs now number close to 600 in the US, a level which we have not seen since the early ‘90s.

The continued rebound in oil- and gas-directed activity in the Q2 led to increased utilization levels for our equipment and provided us opportunities to increase prices for several of our product lines, led of course by our stimulation business. We have also experienced smaller increases for directional drilling, cementing, and drill bits, as our ability to integrate services together creates a proposition that adds value to our customers.

In this upturn, however, price increases have not been uniform across all the various land basins in the US, because we’re taking a different approach in today’s market environment. We are working with customers to understand their production economics, developing equipment efficiency models and setting prices at rates that allow them to earn the returns that they require while enabling us to also generate an appropriate return for our capital investment in that particular basin.

I see this as a win-win situation, as it allows our customers to keep their rigs running but does not force us to leave a particular basin to seek higher returns for our equipment. Across this spectrum, pricing power is highest in the oil and liquid rich basins, and lowest in the conventional dry gas basins, with dry gas shale plays somewhere in between. Utilization levels for our equipment have now surpassed those at the rig count peak in the Q3 of 2008, and are fast approaching levels not seen since the fall of 2006. Utilization levels are highest in the plays with the strongest growth, such as the Bakken and the Eagle Ford, where we have significantly expanded to 24 hour operations.

Discussions are underway with some operators regarding longer-term contracts, and we are experimenting with a few of these. These contracts may contain take-or-pay, or standby rate provisions, which can provide a certain level of revenue stability for US land operations. We are currently evaluating these types of contracts, but I am not yet convinced that they generate the highest returns for our equipment over a full business cycle, and we are not pursuing these arrangements aggressively at this point in time.

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