Halliburton Company (HAL) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Halliburton’s Fourth Quarter 2014 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 call is being recorded. I would now like to introduce your host for today’s conference, Kelly Youngblood, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to the Halliburton fourth quarter 2014 conference call. Today’s call is being webcast and a replay would be available on Halliburton's website for seven days. Joining me today are Dave Lesar, CEO; Christian Garcia, Acting CFO; and Jeff Miller, President. Some of our comments today may include forward-looking statements reflecting Halliburton's views about future events. These matters involve risk and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton’s Form 10-K for the year ended December 31, 2013, Form 10-Q for the quarter ended September 30, 2014, recent current reports on Form 8-K and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today include non-GAAP financial measures, reconciliations to the most directly comparable GAAP financial measures are included in our fourth quarter press release which can be found on our website. Unless otherwise noted, in our discussion today, we will be excluding the impact of restructuring charges and Baker Hughes’ acquisition related cost taken in the fourth quarter of 2014. In our prepared remarks today Dave will provide a brief update on our progress related to the pending Baker Hughes acquisition. However, the purpose of the call today is to review our quarterly financial and operational results and our outlook for 2015. We ask that you please keep your questions focused on those matters. Now I’ll turn the call over to Dave. Dave.

Thank you, Kelly and good morning everyone. While the market is certainly tougher out there today, and I will discuss that in a minute, I do want to begin with a few of our key accomplishments in 2014. First, I'm very proud to say that we delivered industry leading total company revenue growth and returns in 2014. We finished the year with revenues of nearly $33 billion and operating income of $5 billion. Both of which are new records for the company. Leading the improvement was North America with revenue growth of 16% and profit growth of 23%, followed by the Eastern Hemisphere with revenue and profit growth of 10% and 12% respectively. This was also a record year for both of our divisions, where 12 of our 13 product lines set new all-time highs. From an operating income perspective, we achieved new full year records in our Completion Tools, Multi-Chem, Drill Bits and Baroid product lines. I highlight this performance because you want to head into any industry downturn starting from an extremely strong financial and operating platform and that’s certainly is where we are performing today. And finally during the fourth quarter we announced the definitive agreement to acquire Baker Hughes. We believe this combination will create a bellwether oilfield services company, a stronger more diverse organization with an unsurpassed depth and breadth of services. We are excited about this transaction and the benefits it will provide the shareholders, customers and other stakeholders of both companies. Similarly, employees at all levels in both organizations are excited about creating a new industry leader and the opportunities they have is part of a larger company. We've also heard from many of our customers who have expressed enthusiasm about the combination, those who see the broader, cost effective offerings that we will be able to provide. And especially those who are looking for a compelling alternative to their current incumbent in parts of the world or individually ourselves and Baker have only a small footprint. We are continuing to highlight for our customers the benefits that this combination will deliver to them. We have formed an integration team lead by Mark McCollum which includes representatives both companies. Mark and his team have already hit the ground running to develop a day one strategy and an ongoing integration plan which we believe will deliver the nearly $2 billion in annual cost synergies we discussed in our previous announcement. Now, I'm not naïve how hard it is to put two companies together. It’s damn hard. But you know Mark and you know his excellent track record on delivering on the commitments that he makes to you. And I'm confident that we will achieve our integration goals with him in the lead. On the regulatory front we filed the initial Form S-4 with the Securities and Exchange Commission and are proceeding expediently with all the antitrust filings. We continue to expect that we will complete the transaction in the second half of 2015. We look forward to realizing these strategic and financial benefits inherent in this combination to create greater value for our combined shareholders. I want to clear that we remain committed to seeing this deal through despite the current macro headwinds facing the industry. In fact, as we continue to analyze the potential value creation opportunities of the combination, we believe the transaction is even more compelling today than we when we announced it. I would also like to congratulate the Baker Hughes employees for delivering on an outstanding quarter with record financial results. This is clear evidence to me of the capabilities of this organization and their continued focus on supporting their customers during this period of transition. So all in all 2014 was a historic year for Halliburton as we stayed focused on our returns, executing on our key strategies around unconventionals, deepwater and mature fields. Our strategies have worked, are working and we intend to stay the course. Now, let me discuss what we are seeing in the market today and our prospects and challenges for the coming year. Later Christian will cover our fourth quarter results. Obviously, commodity pricing has dropped dramatically over the last several months with oil prices now at levels not seen since early 2009. The North America rig count and activity levels held up with most of the fourth quarter as customers executed against the reminder of their 2014 budgets. However, over the last 60 days the U.S. land rig count has fallen by 250 rigs or close to 15%. Capital expenditure budgets from our customers remain fluid, but so far an average have been reduced 25% to 30% as they adjust their spending to operate within their cash flows in response to a continued drop in commodity prices. As a result, we expect activity declines for North America land to accelerate further in the first quarter, impacting all of the key liquids basins. What is creating even more uncertainty with the service industry is that many customers have continue to revise down their capital budgets to further capital reduction announcements. This makes is difficult to size your business in today's U.S. market, in particular, because it is such a fast moving target. So while we did not experienced price weakness during the fourth quarter, price discount discussions with customers did begin in the fourth quarter and have accelerated over the last past several weeks and price reductions are now occurring across all product lines. Now, we expect pricing concessions to be less severe when compared to previous cycles and therefore I believe our decremental margins should be lower. That is because our margin improvement this cycle was largely driven by our focus on gaining efficiencies and getting increased labor input cost recovered more quickly, not through net pricing increases. This up cycle did not last long enough for us to see the kinds of net pricing that would have enabled margins to recover to historically strong levels. Therefore, less pricing erosion will be needed to eventually reduce service capacity if market weakness persists. Based on our experience in previous downturns, we expect that it will take a couple of quarters to see how the interplay of pricing declines, volume reductions and equipment efficiency deterioration plays out relative to our ability to lower labor and input cost and to right size the organization, and therefore reach an equilibrium in the market. The first quarter of any severe downturn is almost always the most challenging quarter to predict, because pricing concessions usually impact our results in real time. Volume declines can be erratic as customer’s rig plans are uncertain and can change daily. Then there is typically a delay in realizing input cost savings from our suppliers. There is two reasons for this. One, discussions with vendors are dependent on them truly believing we have a reduction in ongoing activity levels, before we can have the kinds of tough renegotiations that results in significant input cost reductions. Second, there is a timing issue as to the expenses that flow through inventory like sand, propane, chemicals and cement. It takes a while to see lower input pricing fully reflected in your average inventory cost, because you have to work off your higher priced inventory. Next, headcount adjustments don't follow directly from pricing concession as you still need the crews to do the work. Headcount adjustments do, however, follow volume reductions. Therefore there is a lag in getting labor costs out as activity declines. And finally, the impact of a large rig count reduction on 24-hour operations and its inherent efficiency is hard to predict as customers slow down activity in many different ways. But eventually these moving parts all settle out and we reach some sort of equilibrium. In this environment, we would expect to see most of our margin degradation occurring over the first couple of quarters and more margin stability in the back half of the year. Now, in this very uncertain averment, we believe Halliburton's more efficient crews and differentiated technologies are best suited to outperform. Additionally, being aligned with the right customers, those with assets in the sweet spot of the reservoir, becomes more important as we expect to see those customers continue to work through the cycle. But we have to be real about it. The North America market is going to see volatility and pain for a few quarters. However, in this scenario I like our chances. Now, moving to international, we started to see the impact of lower commodity prices during the fourth quarter. Declining oil prices have caused our customers to reduce their budgets and defer several of their new projects, particularly around offshore exploration. In 2015, we anticipate headwinds across all of our international regions. Middle East/Asia will likely be the most resilient followed by Latin America. And finally, Europe, Africa, CIS is expected to see the sharpest decline. Let me talk about each individually. Middle East/Asia is expected to be the best performing region for the company in 2015 as recent project awards in Saudi Arabia, Iraq, the UAE, and Kuwait are all anticipated to move forward. However, we expect Malaysia and Australia and other markets across the region to be impacted by reduced customer spending and delayed projects. In Latin America, we currently expect to see unconventional activity levels in Argentina continue to grow, along with the startup of our new integrated asset management project in Ecuador. However, we believe lower activity levels in Mexico and Colombia will more than offset the higher growth in these markets. Europe, Africa/CIS is expected to experience significant activity declines across the entire region with the most vulnerable areas being the North Sea, Russia, and Angola. In addition, Russia and Norway also are experiencing significant currency weakness. So when you net out the international regions, we expect to see year-on-year decline. But we believe we will outperform spending predictions indicated in the third-party surveys that are out there today. Later Jeff will discuss some of the specific actions we're taking to adjust our cost structure to the market conditions. I can tell you that we will do what we have to do, we know what buttons to push and levers to pull and we will do so. I will say that, similar to previous cycles, we will protect our market share and expect to see customers focused on our highly efficient service model. As our customers struggle with cash flows, they will be very focused on optimization and gaining higher levels of efficiency and I expect that this will bode very well for Halliburton. Our management team has been through previous downturns and we intend to emerge from this cycle a much stronger company on a relative basis. During the fourth quarter we took a $129 million restructuring charge as a first step in preparing for these market changes. And as Jeff will cover in a few minutes, there is likely to be more in the first quarter. Now for competitive purposes, we're not going to lay out our detailed strategy for addressing this business environment. However, in the short-term, we're putting initiatives in place not only to temper the impact of the activity decline on our financial performance, but also to ensure that we're in an optimal position to take advantage of the market's eventual recovery. The length of any downturn is very difficult to predict, but as you know, we are in a great financial position right now with strong free cash flow. We will make adjustments as activity declines and our intention is to look beyond the cycle and continue to execute our strategic initiatives. I believe that this is the right thing to do for the health of our business over a complete business cycle. As I stated, we've been through these cycles before and we know what to do and we will execute on that experience. The bottom line, we have historically outperformed the market in North America during downturns and we have no reason to believe that this downturn will be any different. Now, let me turn it over to Christian to provide more details on our financial performance. Christian?

Thanks Dave, and good morning everyone. It has been a while but I'm glad to be back on the call and looking forward to be working with all of you again. Let me begin with an overview of our fourth quarter results and later on let me discuss our financial outlook. Total company revenue of $8.8 billion was a record quarter for Halliburton with operating income of $1.4 billion. We achieved record quarterly revenues in both of our divisions and our Middle East/Asia region set a new record for both revenue and operating income. From a product line perspective we had record revenues in the fourth quarter in Production Enhancement, Completion Tools, Drill Bits, Artificial Lift and Consulting and Project Management while new operating income records were set by Multi-Chem, Drill Bits and Landmark. North America revenue was flat sequentially in-line with the average quarterly rig count. Operating income was modestly higher over the same period despite the impact of seasonal fourth quarter, weather and holiday downtime. Fourth quarter margins benefited from the continued roll out of our Battle Red and Frac of the Future initiatives, as well as efficiencies we're seeing from recent enhancements to our logistics network. Service pricing was stable during the fourth quarter as activity levels remained robust, but are expected to deteriorate in the coming quarters. In the Eastern Hemisphere we experienced a modest level of sequential revenue growth which resulted in a new quarterly record despite the headwinds experienced in our Europe, Africa/CIS region. Operating income came in flat compared to the third quarter. In the Middle East/Asia region revenue increased by 10% compared to the third quarter and operating income was up 29% over the same period. Our fourth quarter margins came in just under 21% as a result of seasonal year-end software and equipment sales as well as higher integrated project-related activity in Saudi Arabia, Iraq, India and Indonesia. Switching to Europe, Africa/CIS, fourth-quarter revenue and operating income declined 8% and 35% respectively compared to the prior quarter as we experienced significant reduction in activity levels in the North Sea, Russia and Angola. Declining oil prices and project economics caused our customers to reduce activity levels in the first several of their new projects. Russia and Norway results were also significantly affected by currency weakness. In Latin America revenue increased 3% sequentially while operating income declined 4% compared to the previous quarter. The revenue increase was a result of year-end software sales, increased Artificial Lift activity in Venezuela and higher activity levels across the majority of our product lines in Colombia. Operating income was negatively impacted during the quarter from mobilization costs in Brazil and budget constraints in Mexico. Now I will address some additional financial items. As a result of the market decline that has primarily impacted our international business. We incurred $129 million of restructuring charges in the fourth quarter consisting of severance-related costs as well as asset write-offs. The majority of these adjustments related to our Eastern Hemisphere business. Our corporate and other expense totaled $83 million for the quarter excluding $17 million in costs related to the Baker Hughes acquisition. We anticipate that our corporate expenses for the first quarter will be approximately $90 million excluding acquisition-related costs and this will be the new run rate for 2015. Our effective tax rate for the quarter was approximately 27% which was lower than expected as a result of Congress approving the Federal Research and Experimentation tax credit in late December. As we go forward in 2015 we are expecting the first quarter effective tax rate to be approximately 28% to 29%. Currently, we anticipate that our capital expenditures for 2015 will be essentially in-line with 2014 and expect depreciation and amortization to be approximately $2.4 billion for the year. I know this may surprise some of you, but let me lay out our approach. As Dave mentioned, our objective is to look beyond the cycle and continue to invest in certain strategic technology such as the Frac of the Future, while retiring older, more costly equipment. As we have previously discussed, our Q-10 pumps support our surface efficiency strategy that will enable us to lower operators' costs while at the same time protect our margins against deteriorating industry conditions. As you know, we manufacture our own equipment which gives us the utmost flexibility in this market and can adjust our spend accordingly based on our visibility. Turning to our operational outlook, the severity of the activity decline in the coming quarters continues to be unclear, preventing us from providing specific guidance. But let me give you some thoughts around the first quarter of 2015. For the first quarter of 2015, our results will be subject to the same type of seasonality that you've seen in previous years. Landmark, completions and direct sales activities typically fall-off in the first quarter as those businesses benefit historically from customers' year-end budgets. Our business will also be impacted by weather-related seasonality that occurs in the Rockies, North Sea and Russia. In the first quarter of 2014 this seasonality impacted our results by approximately 22%. However, this year we believe the decline will be exacerbated by the macro headwinds currently faced by the industry. In North America, the U.S. rig count is already down 9% from the fourth quarter average and the rate of decline has accelerated in the last two weeks. We expect to see activity levels continue to drop throughout the first quarter accompanied by price reductions. As Dave mentioned, the beginning of a down cycle is typically the most challenging, but we believe that our sequential decrementals in the first quarter will be less severe than what we have previously experienced in the prior downturn. We finished 2014 in a solid financial position. We continue to have the best returns in our peer group. We reduced working capital by seven days since our Analyst Day and gave back 33% of our cash flow from operations for our shareholders in 2014. In 2015 we will continue to focus on working capital and returns and we will live within our cash flows. We will also continue to adjust our cost structure and currently anticipate that we will be incurring restructuring charges for severance and other actions that we are contemplating in the first quarter. Now I will turn the call over to Jeff for an update on our strategy. Jeff?

Thank you, Christian, and good morning, everyone. Today I would like to begin my comments by discussing the current market environment and what we plan to do. Although oil demand growth expectations for 2015 have weakened it is still growth. Demand is forecast to increase by an estimated 900,000 barrels per day. Keep in mind the steep decline curves are still at work. We estimate the average annual production decline rates for unconventionals in North America are in excess of 30% and much higher in some areas. Depending on the ultimate trajectory of the rig count declines and the backlog of well completions, we believe that North America crude production could begin to respond during the back half of the year. Internationally, decline rates have become more pronounced in several key markets over the last couple of years. In areas like Angola, Norway and Russia historical growth has given way to net production declines in the last year. While decline rates in markets like Mexico and India have actually accelerated. Consequently, we believe that any sustained period of under investment due to reduced operator spending could lead to an increase in commodity prices. And this largely ignores the possibility of short-term disruptions due to geopolitical issues. So, the long-term fundamentals of our business are still strong. But it is clear we are heading into an activity downturn. We can look at previous cycles for insight and while history doesn't always repeat, sometimes it rhymes. In North America, we're looking at the rig count decline relative to past downturns. After a plateau through much of the fourth quarter, the rig count has dropped sharply over the last two months and is already down 15% from early December. This trajectory is similar to both the 2001-2002 cycle and the 2008-2009 cycle. And in those cases, we experienced a rapid correction to the rig count going from peak to trough over a three quarter period. Over the past several years, we've taken key steps to reduce our underlying cost profile. Steps such as deploying Frac of the Future equipment, streamlining our field operations through Battle Red, and vertically integrating portions of our logistics network. For these reasons, we're confident that we are better prepared than our competitors to execute through this coming cycle. In the international markets, our projects and contracts tend to be longer term in nature than in North America. Historically, this has resulted in reduced year-on-year volatility. However, nearly all of our customers are currently reassessing their priorities and looking for efficiency and even more so in the offshore space. It's important to note that this group has been quick to react to decline in commodity prices with the first moves being made in mid-2014 at sub $100 oil. Although projects already underway are continuing to move forward, generally speaking we're seeing significant reductions in new work being tendered and projects that can be delayed are moving to the right. As we evaluate service intensity for our international markets, we keep a close eye on revenue per rig, which helps us understand the overall health of the business. Although this metric took a step backwards during the 2009 economic downturn, we've seen consistent improvement over the last four years. In fact, we're in a better position now than going into the last cycle. Our 2014 revenue per rig is more than 20% higher than in 2008. For Halliburton, this expansion represents not only the value of technical content in complex wells, but also our ability to expand our footprint in underserved geographies, as well as in underutilized product lines. We believe this demonstrates the success of our growth strategies, deepwater, mature fields and unconventionals, and positions us to outperform through the next cycle. As Christian said, the midterm outlook is unclear. But whether this cycle ends in a sharp V or takes time to recover, our strategy will be consistent. First things first, we'll control the things we control. We've already taken initial steps to address headcount internationally. And as activity in North America begins to fall more sharply, we will make similar adjustments here as well. Between actions already taken in the fourth quarter and actions we anticipate taking by the end of the first quarter, we expect our headcount adjustments to be in line with our primary competitors. We intend to minimize discretionary spending in our operations. As operators have requested price discussions with us, we've opened dialogues with our suppliers around both volume pricing and anticipate reducing our input cost profile. We'll continue to manufacture our Frac of the Future equipment and plan to take advantage of the opportunity to accelerate the retirement of older fleets which operate at a higher cost, especially in 24-hour operations. The value we have seen from the rollout of our Q-10 pumps has truly exceeded our original expectations. And despite the current market conditions, we feel it's the right decision for our shareholders to move forward with this initiative. Frac of the Future not only gets the job done with 25% less capital and offers maintenance savings of up to 50%, an optimized Frac of the Future spread running under the right efficiency model can complete a well more than 50% faster than legacy equipment. And it does all of this with 35% fewer people on location. Frac of the Future represents about 30% of our North American fleet today, and we expect that number to be closer to 50% by year end. Second, service quality really matters, and even more so in this environment. And our ability to execute more efficiently lowers non-productive times for our customers and reduces their effective cost per barrel. Due to the nature of the work that we do today, large complex shale wells in North America, increasingly technical offshore work and a growing base of integrated projects on the international stage, we believe that our superior execution and best-in-class technical solutions will allow us to maintain utilization and outperform our peers. As the management team, this isn't our first downturn. We're talking to our customers every day, and it's safe to say that budget expectations are a moving target. Accordingly, we've given ourselves flexibility inside of our capital budget to right size quickly to whatever the market gives us. I'm very pleased with our management team and the strategies we have in place, and believe that we're well positioned to outperform in the downturn and to ensure that we take advantage of the recovery up cycle and come out a much stronger company. Now, let me turn the call back over to Dave for his closing comments. Dave?

Thanks, Jeff. Industry prospects will continue to be weak and the coming quarters and the ultimate depth and length of this cycle remains uncertain. However, we are confident that our management team is prepared to meet the challenges that are forthcoming and we will take the opportunity to strengthen the long-term health of our franchise. We will selectively cut costs and at the same time, continue to invest where we can improve our competitive position. Whatever scenario you think may happen we have the people, technology and experience to outperform the market. We have demonstrated this to you for the past several years. Whatever the level of industry activity, we expect to get more than our share of it. Now, before I open it up to questions I want to let you know that due to other business commitments I will not be participating in our first quarter conference call. Jeff will be providing market comments on my behalf and I will return for our second quarter call. Now let's open it up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of David Anderson with Barclays. Your line is open.

Thanks. Good morning Dave.

Good morning. Good morning Dave.

So, Dave, first off, you must be very happy to see the strong numbers posted by Baker this morning. Hopefully, they can keep it up as you close this deal by the end of the year. But as we all kind of stare out at the unknowns of the next couple quarters, I would love to hear your perspective what you've seen so far from your customers in North America. We're getting a sense this is happening a lot faster than we have seen in past downturns. Perhaps it is because E&P's are struggling with where the oil prices will settle out. I just want to know if you agree with that assessment, and perhaps you could give us some insight into their thinking and how that is shaping your view on how this market responds over the next couple quarters.

Yeah, let me let Jeff take a shot at it and then I'll comment as necessary.

Yeah, thanks, Dave. I mean the -- we're talking to our customers every day. And of course initially the discussions have been around reductions in the 25% to 30% range. However, as commodities continue to move, they are all revisiting their budgets. I mean, arguably for the next couple of quarters this will be -- North America will look a bit like a chocolate mess in terms of where it winds up. But the -- most customers are living within their cash flows and similarly, that's what we are going to do. But we're confident that we're positioned in the right places and in the fairways of the right plays to where we will be very effective as we work through this with them.

Yeah, Dave, let me just add a little bit to that. I think the -- your question about the speed of the pullback by our customers is a bit unusual and I think, first of all, they're worried about their cash flow because of lower commodity prices. And I also think they are worried about where their next dollar might come from if they start living outside of their cash flows. So, in my view, it sort of exacerbates the speed by which this is happening. But I also think it accelerate the time where they sort of know what they can spend this year, they know how they are going to spend it, they know who they are going to spend it with. And we can get to that equilibrium point that I referenced in my remarks.

So, now, Dave a key part of your strategy over the last several years has been aligning with the strongest customers. You clearly did that in the natural gas downturn and this is -- the same strategy here with oil. These are the customers that have the best economics in their acreage. I was wondering if you could talk about some of the steps that you think these stronger guys are taking. Are you seeing kind of high grading of drilling yet? Is it CapEx shifting amongst certain product lines? Are you starting to see them use their scale to get more pricing concessions through the supply chain? Can you just help me understand how maybe -- your customer base is clearly differentiated, how are they responding differently or are they yet?

Yeah, I think -- good question. In terms of what they are doing and we are -- let me just confirm, we are aligned with what we call the fairway players, particularly in North America. And our view of a fairway player is one who is in a strong financial position and has a low leasehold cost or are in the sweet spots of these various reservoirs. So, the discussions with them today are, okay, let's high grade back to the places where we can produce the lowest cost per BOE even in this pricing environment. Let's have to remain service company and operator, very flexible in how we're approaching this market in terms of where we're going to put rigs up, how many rigs we're going to have there. We went to partner with you in terms of the service capabilities you have. But be essentially aware that we're still in a commodity driven world and we may have to be flexible and change. We can do that. We've got a good management team, we've got a good footprint, we've got good technology and it's not a fun environment to be in, but it's one we can easily handle.

Our next question comes from the line of Jud Bailey with Wells Fargo. Your line is open.

Thanks. Good morning. I wanted to -- you talked about how quickly your customers are moving much more quickly than in prior cycles. Could you maybe talk a little about how that's impacting your discussions -- and you talked about it a little bit -- but how it's impacting your discussions with your vendors? And maybe how quickly you think you could get price concessions? And do you think you can get price reductions on the supply chain side in-line with what you are giving to your customers?

Yeah, thank you, Jud. Those discussions have already begun, but I think as Dave referenced in his early remarks, there is a bit of a disconnect in the timing of seeing price concessions with customers and working that both through the vendor community and also through our inventory. I think that is one of the reasons I say we look out a quarter or two. That said, we've got a terrific procurement organization and we have -- we're already in discussion with a number of vendors and we continue to see this progress. Again, these are steps that we have taken before and it's really a matter of connecting sort of what's happening in the marketplace to the vendor community, but I think that happens initially quite quickly.

Okay. And then just to kind of switch gears and look internationally. And Christian commented a little bit on this, but it want to make sure I am thinking about it correctly when I think about Europe, Africa/CIS and the types of revenue declines you experienced in the fourth quarter. You take away some of the seasonality and your typical year-end product sales. Can you help us think about that market in terms of revenue progression in the first quarter or second quarter? And what are the moving parts on what's going to be the biggest weakness in that market?

Jud let me approach it internationally in total. As I mentioned, we're not going to provide specific guidance, but kind of give you some help here. If you look at seasonal decline that we see in our international markets, it usually declines -- typically declines about 10% -- 9% to 10% for Q1. Clearly, there's going to be macro headwinds that would push that at a higher decline rate. If that is the case, then we will basically see a steeper decline in the operating income. As an example, last year we saw a 300 basis points decline from Q4 to Q1 for our international markets and we expect to see a little bit higher than that this time around. Now, I'm not going to provide guidance in any of the sort of regions, but you're absolutely right, Europe, Africa/CIS will probably have a higher decline than Middle East or Latin America.

Our next question comes from the line of Bill Herbert with Simmons & Company. Your line is open.

Thanks. Good morning. Dave and Jeff and Christian, so I think it's plausible that given the rationale that you laid out that your decremental margins are going to be less severe than they were in 2009. I'm just curious if we can bracket sort of a plausible targeted range. I mean you did close to 60% decrementals in 2009, I'm just curious as to what you guys envision as a reasonable target as we come into 2015 with regard to decrementals in North America. I mean should they start with a four just to throw that out there?

Right. So, Bill, to answer you, we don’t know, because the – the reason is we don’t know the depth the length of the cycle. Okay. So what we can tell you is in Q1 if you look at 2008, 2009, the rig count drop in Q1 of 2009 was about 30%, our revenue decline was 25% of that line.

Right.

We had the 1,000 basis points decline in Q1. We just don’t think it’s going to happen in Q1 at least given the visibility that we have currently. So that’s the only visibility we have. We are going to do it quarter by quarter and we will update our guidance as we go along throughout the year.

Okay, and then secondly more of a conceptual question for Dave. Dave, if you could put your oilfield history and cap on and compare and contrast if you will what you expect to be this downturn in terms of duration versus what we've seen kind of in 2088, 2009, the late 90s and the mid-80s. It sounds like from a duration aspect, although you guys have taken pains to say you don’t know whether this is U-shaped or V-shaped. Our capital spending budget would seem to indicate that you don’t necessarily view this as a protracted multiyear adjustment.

No. I think, Bill, that’s right. I mean, if you look at the 2008-2009 that was really a gas driven rig count decline. What we are seeing today is more of an oil based decline. If you go back into the late 80s and 90s, those actually were probably more oil driven declines at that point in time. And so I don’t have a crystal ball that will allow me to absolutely predict it. I know on my experience that you have to invent through these things. You want to keep your business franchise strong. And as Christian indicated, we are looking at basically a flat capital budget for next year. But the reality is that a lot of that is going into building out our Q-10 pump system, because, frankly, you guys can shoot me if I didn’t continue to invest in that technology. It’s a great technology. It’s a differentiated technology. It saves not only customer’s money but it saves us operating cost. So we would be crazy not to push through with the deployment of that and retire the older assets. The reality is that if we did -- we had pulled back there our capital expenses for next year likely would be going down. But generally, my experience has been stay flexible, stay nimble, stay strong financially and I think that when we come out of this thing, especially when we execute the transaction with Baker, we’re going to be a heck of a company and I'm really looking forward to that.

Our next question comes from the line of James West with Evercore ISI. Your line is open.

Hey, good morning guys.

Good morning, James.

Hey, Dave or Jeff, on international side, obviously, you’re going to have conversations. You are having conversations about pricing. But my sense is this cycle we never saw that big inflection point for international pricing, it was more of a market share game. So do you actually have that much pricing not to give up or am I misreading this because lot of the CapEx costs are coming offshore where pricing is better?

Thanks James. This is Jeff. No, you are reading that correctly. I mean, we really never saw net pricing throughout the last cycle internationally. In fact, as you describe most of the margin gains were volume driven and really cost absorption over that period of time. That said, we are working with our customers around efficiency approaches, how can we lower total cost of operations for them and this really gets back to our basic strategy which is around reducing uncertainty and increasing reliability in operations. And we've made terrific gains in non-productive time over the last couple of years and that’s a differentiator for us.

Is there an urgency on the part of our customer base? Are they expressing urgency for you to go ahead and get the Baker deal closed so you could provide even better efficiencies?

Yeah, I think James as Kelly said at the beginning, we really don’t want to and can't answer any questions related to Baker other than what we had in our prepared remarks.

Our next question comes from the line of Angie Sedita with UBS. Your line is open.

Great. Thanks. Good morning guys. Christian, could you -- I mean you gave us the color on Q1 on international markets, as you looked at it seasonally Q4 over Q1 on a normal year. Can you do the same for us on North America?

Yeah, so North America, as I mentioned, rig count is already down 9% so far. I don’t know may reach the decline in the mid-teens for the whole quarter. Well, assuming that projection as correct, we would expect a revenue decline to probably slightly less than this -- than that percentage based on our past experience. And as I mentioned, the decrementals in 2008-2009, we don’t think we are going to do better than that.

Okay. Okay, fair enough. And Dave or Mark, can you talk about the steps you are taking both internationally and in North America to protect your market share given that your largest fear has been quite vocal on your proposed merger and the opportunities that they see.

Yeah, let me answer that one Angie. I have heard the word distraction, I have heard other comments about what's going to happen. You got to remember we've been asbestos, we've been through asbestos, we've been through Macondo, we've been through the Iraq war and none of those distracted us from making sure our business franchise remains strong. We've been through ups and downs, that didn’t distract us. So, I guess, my view is, you know us. We are the execution company. We are not going to get distracted through this. This is a tough market, but we've been through these kinds of things before. I've got a really strong management team. We are going to focus on maintaining our market share. We’re going to focus on improving our business franchise and clearly we’re not going to get distracted. I'm not going to permit it to happen. So I guess that would be my sort of editorial comment on it.

Our next question comes from the line of Kurt Hallead with RBC Capital Market. Your line is open.

Hey, good morning. Thanks for all that color. I just wanted to dive in a little bit deeper into Brazil, for example, given lot of challenges that are going down there with corruption scandal. I know you guys have a contract shift taking place down in Brazil. I want to get a sense as to -- you mentioned Mexico, what's your outlook for Brazil as you go into 2015?

Yes. Thanks Kurt. The outlook is, we will do those things that we've described. We expect to drilling contracts signed in first quarter. We should have our wireline contract sort of reupped in Q1 and our testing contract mobilized into Q1. The broadly outlook, however, is we still that market declining to a certain degree in terms of activity and beyond that really don’t want to give any guidance expect to say that we've described some of those markets as looking a little bit stronger and certainly Brazil and Mexico are likely to be headwinds.

Right. And then beyond the next follow-up, say, beyond the Rouble depreciation dynamic in Russia, what kind of activity changes have you seen there?

Yeah, in Russia, I mean, obviously we still got a couple of things going on. First, the sanctions are in place and so that’s having an impact on our business, you mentioned currency. And then around mature field activity there may be some improvement there. But overall, the issues around sanctions and what not, I think, are a bit of a drag on the business overall.

Our next question comes from the line of Jeff Tillery with Tudor Pickering. Your line is open.

Hey, good morning. Could you give us some color as you see on the domestic completion activity there has been increasing anecdotes around wells being drilled but not completed. Could you just talk about is that having – is that noticeable yet and how do you see that playing out over the coming quarters.

We've worked through year we saw tightening in capacity, things that I described. So there is some amount of that out there. But I would really take a broadly view to say that our customers are managing within cash flow, and so I think that behavior may be different for different customers. But broadly there will be a drawback to the best parts of the plays focused on efficiency and really those strategies that we talk about that we've built our franchise around, which is lowest cost per BOE, custom chemistry and delivering sub service insight. So I think those things are at play. But I don’t necessarily see a large inventory building of uncompleted wells.

Yeah, I think -- this is Dave. I mean, you've just got to think through -- put yourself in the operator’s mind, especially one who is concerned about cash flow. It would be crazy to drill a well and then put it in inventory because you've got cash flow out, but not cash flow coming in. So I think the decision is very quickly going to go to, do your drill well? If you drill a well you’re going to complete it. If you’re not going to complete that there is no sense in drilling it, and that’s the dialog that’s going on now.

My second question is unrelated. You talked a lot about -- there is lot of questions around North American supply chain, Europe, Africa, CIS, you've talked about that being likely the worst region in 2015. Could you just talk about cost structure and flexibility in that region and things you’re doing to address that?

Yeah, thanks. So we've taken some steps early in Q4 around headcount, so we are reacting quickly to what we see there. As we described the timing around supplier cost reductions and getting those in place don’t sync up perfectly. But for the visibility that we have we are taking actions to address that.

Our next question comes from line of James Wicklund with Credit Suisse. Your line is open.

Good morning, guys. You guys always gain market share in the down market and you've done a fabulous job this morning explaining why. But I just kind of have an industry question. I remember when I was running an operation in Africa, granted it was long time ago. And I have to cut everybody by 15% and I didn’t really care what their margins were, they just had to cut their prices to me by 15%. Their margins or costs where their problem. Has that changed? Jeff, you alluded to the fact that since we -- some of these companies don’t have the margin to give up that pricing won't go down this much?

Jim, I'm glad you are not my customer anymore. I think the reality is that you -- a customer may take that approach, say, we want to cut our cost by 15%. But in today's world and really today's shale world in the U.S. and let’s say the offshore market in Africa, differentiated technologies still make a difference. And having that technology, having the efficiency, having the people on the ground ends being sort of what you sell to that customer. Customers also know that in reality -- in reality they know who they want to use for particular products and services in various parts of the world and generally they move to make sure that when they go through a cost reduction after like this that they keep the strong players strong.

Our next question comes from line of Waqar Syed with Goldman Sachs. Your line is open.

Thank you very much. Dave, my question relates to service intensity in the U.S. shale. You were seeing strong service intensity increase throughout last year, do you expect that trend to continue? Do you expect people to have more frac stages and then use more sand per frac stage? Or do you see that abetting with where the sand price -- sand costs are right now?

Yeah. Thanks Waqar. The behavior around the wells, we expect to continue. I mean, what we've seen is consistently improving productivity based on the things we talk about all the time, so custom chemistry, the application of your technology like AccessFrac and rock firm and then also sand volume. So, while overall activity likely falls off, the activity that’s executed is going to be executed with absolutely the best technology and well bore design and frac design to deliver the lowest cost per BOE. So I expect that continues.

And so previous you were seeing about 15% per quarter kind of change in sand volumes used per well, if I may say. How do you see that trending going forward?

Well, we actually in Q4 a year-on-year increase of about 46% sand on a per well basis, so that was up sequentially another 5% or 6%, again, on a per well basis. So, I expect that at some point better design, better frac design will moderate the volume of sand, it’s not internment. But nevertheless, I would expect the demand -- not the demand, but on a per stage basis volumes to remain high.

Yeah, and let me just make sort of one last comment on sort of increasing volumes is that, more and more of our customers are now looking at what is the impact of these large volumes jobs on offset wells. And this concept of well bashing is what's it’s called where basically pumping enormous volumes into one well bore is it bashing adjacent well bores and actually declining or decreasing the volumes you are getting out of it in total. So, I think as the volumes continue to increase, customers and the service industry, Halliburton, in particular, are starting to look at sort of the signs of what's happening down hole two to make sure that what you are running up with is an optimal outcome and not just accelerating greatly production from one well, but impacting that in adjacent wells.

That does conclude today's question-and-answer session. I would like to turn the call back over to management for closing remarks.

Yeah. Thank you, Kay [ph]. So I would like to wrap the call up with just a couple of comments. And as we've said there is a tremendous amount of uncertainty in the market, but we've seen this before. And we always take basically a two-pronged approach, which is first, we control what we control and defend our margins within our cash flows. And the second is that we look through the cycle and as in the past emerge a stronger company in the recovery. Thank you and we look forward to speaking with you next quarter. Kay [ph], you can take from there.