Halliburton (HAL)

Q3 2011 Earnings Call

October 17, 2011 9:00 am ET

Executives

Mark A. McCollum - Chief Financial Officer and Executive Vice President

Timothy J. Probert - President of Strategy & Corporate Development

David J. Lesar - Executive Chairman, Chief Executive Officer and President

Kelly Youngblood -

Analysts

Douglas L. Becker - BofA Merrill Lynch, Research Division

William A. Herbert - Simmons & Company International, Research Division

John David Anderson - JP Morgan Chase & Co, Research Division

James Crandell - Dahlman Rose & Company, LLC, Research Division

Ole H. Slorer - Morgan Stanley, Research Division

James C. West - Barclays Capital, Research Division

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Brad Handler - Crédit Suisse AG, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Halliburton Third Quarter 2011 Earnings Call [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Kelly Youngblood, Senior Director, Investor Relations. Please begin.

Kelly Youngblood

Good morning, and welcome to the Halliburton Third Quarter 2011 Conference Call. Today's call is being webcast and a replay will be available on Halliburton's website for 7 days. The press release announcing the third quarter results is available on the Halliburton website. Joining me today are Dave Lesar, CEO; Mark McCollum, CFO; and Tim Probert, President, Strategy and Corporate Development.

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 risk 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 10-K for the year ended December 31, 2010, Form 10-Q for the quarter ended June 30, 2011 and in recent current reports on Form 8-K.

Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing the third quarter results, which as I have mentioned, can be found on our website. We will welcome questions after we complete our prepared remarks. Dave?

David J. Lesar

Thank you, Kelly, and good morning, to everyone. I'm very pleased with the overall performance of our business in the third quarter. Total revenues of $6.5 billion and operating income of $1.3 billion are both company records, representing sequential growth of 10% and 15%, respectively. We achieved record revenue levels in our North America, Latin America and Middle East/Asia regions. In North America, revenue and operating income grew sequentially by 13% and 14%, respectively, compared to a U.S. rig count growth of only 6%, and we exceeded $1 billion in operating income for the first time ever. Our international revenue and operating income grew 7% and 23%, respectively, compared to a rig count growth of 2%, driven by a 17% revenue growth in Latin America and more modest growth in the Eastern Hemisphere.

Let me talk about North America in a little more detail. Strong activity in the Bakken, Eagle Ford and Permian Basin drove the sequential growth for the quarter, along with the seasonal recovery from the Canadian spring breakup. Sequential incremental operating margin for the third quarter was 32%, which was lower than the elevated level we saw in the second quarter. The second quarter was favorably impacted by the typical spring seasonal rebound, as well as very high level of Gulf of Mexico incrementals. Incremental operating margins in the third quarter were negatively influenced by cost increases for materials, logistics and labor. Incremental margins were also negatively impacted by weather stoppages in the Marcellus due to flooding in Pennsylvania and by water shortages in the Mid-Continent, due to drought restrictions. We anticipate continued inflation on various cost items like labor, freight, chemicals and profits, which we plan to offset through targeted pricing improvements. Historically, the pricing offset of these costs may not be realized in every case and can sometimes have a 1- to 2-month lag before cost increases can be fully recovered. Leveraging our market position, serving the customers we cannot get to at this time and the provision of integrated services offerings to customers will be the primary drivers of revenue growth going forward. We also continue to work on efficiency gains and cost structure improvements as outlined in our Analyst Day in November 2010. We are making good progress on the implementation of our frac-of-the-future, for example, and since January we've seen a 10% reduction in our average crew size. So while gas drilling remained basically flat from the second quarter, we continue to believe that there is a risk of decreased gas directed activity. Gas demand for power generation increased this year due to the substitution of natural gas for coal and the harsh summer temperatures we experienced in various regions in the U.S. However, if this demand were to moderate next year, we would expect that the gas rig count could as well. We anticipate that if there is a decline, at least a portion of the rigs would be redeployed to the liquids-rich place. We've already seen this to a degree, as rigs have left the Haynesville for other liquids basins. Such shifts can impact our efficiency and financial performance. In the Gulf of Mexico, we are pleased to see a higher level of permit approval in recent months and we believe more deepwater rigs will be arriving in the Gulf over the next few quarters. While this is a positive trend, we remain cautiously optimistic as we need to see a sustained, higher level of permit applications and approvals to get us back to pre-Macondo activity levels. We believe that our customers now have a better understanding of how the permitting requirements work and this should help expedite the process moving forward. As activity increases, we believe we will continue to benefit, as our share of new deepwater work awards under rigs that are deploying to the Gulf is approaching 40%. This is higher than our typical historical market share.

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