Halliburton Company (HAL) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Halliburton Third Quarter 2017 Earnings Conference Call. At this time, all participants are a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call may be recorded. I would now like to introduce your host for today’s conference, Lance Loeffler, Halliburton’s Vice President of Investor Relations. Sir, you may begin.

Good morning. And welcome to the Halliburton third quarter 2017 conference call. As a reminder, today’s call is being webcast, and a replay will be available on Halliburton’s website for seven days. Joining me this morning are Jeff Miller, President and CEO; and Chris Weber, CFO. Some of our comments today may include forward-looking statements reflecting Halliburton’s views about future events. These matters involve risks 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, 2016, Form 10-Q for the quarter ended June 30, 2017, 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 also include non-GAAP financial measures. And unless otherwise noted, in our discussion today, we will be excluding the impact of the second quarter fair market value adjustment related to Venezuela. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our third quarter press release, which can be found on our website. Finally, after our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A period in order to allow more time for others who may be in the queue. Now, I’ll turn the call over to Jeff.

Thank you, Lance, and good morning everyone. Overall, we had a fantastic quarter and I’m very pleased with our results. We are hitting on all cylinders just like we said we would and this quarter’s performance is another example of why Halliburton is the execution company. Here are few highlights from the third quarter. Total company revenue was $5.4 billion, representing a 10% increase compared to our second quarter results, and we generated $1.1 billion of operating cash flow. Once again, we outgrew our peers on a global basis showing that we are taking global market share. Our North American revenue increased by 14%, significantly outpacing the average sequential U.S. land rig count growth of 6%. Total operating income increased 55% to over $630 million, primarily driven by continued strengthening of market conditions in North America and improved profitability in our drilling and evaluation product lines. Our completion and production division revenue increased 13% with 215 basis points of margin expansion, despite the approximately 50 basis-point negative impact of Hurricane Harvey. The drilling and evaluation division revenue increased 4% while operating margins expanded by 260 basis points to approximately 9%, demonstrating solid execution in our international franchise. Finally, during the quarter, we completed the acquisition of Summit ESP, which is an important strategic step in building out our production oriented business lines and makes us the number two ESP provider in North America. In August, the Texas Gulf Coast was severely impacted by Hurricane Harvey and our fantastic employees worked closely together to support those in our organization and the entire community affected by the storm. As a result of the weather, we had a few customers temporarily suspend activity in both the Gulf of Mexico and the Eagle Ford. We also experienced increased costs because diesel fuel was temporarily unavailable and reduced deficiency due to sand supply chain disruptions, both of which negatively affected our margins for the quarter. In spite of these disruptions, the sophistication and hard work of our supply chain organization allowed us to quickly adapt to these challenges and continue to execute and deliver superior service quality. Let me take a moment and talk about a few things we said about North America in the second quarter call. We told you the rig count growth would plateau, and that’s exactly what it did. We said our North America sequential revenue would significantly outperform average U.S. land rig count growth, and it did. We told you that our completion and production margins would continue to expand, and they did. We said operators were beginning to optimize as opposed to maximize the use of sand and turn to technology to increase production; this trend held true as we saw average sand per well remain flat sequentially. And finally, we said we would have the highest returns in the industry, and we do as we continue to outgrow our peers and take market share. Now, let me spend some more time on each of these topics. During the quarter, the U.S. land rig count effectively flattened as customers reacted to shareholder input and their own view of market conditions for the balance of the year. However, our revenue increased and we saw improved activity in our completions related product lines due to the natural lag between drilling and completing wells. Today, the industry is drilling approximately the same footage as in 2014 with half the rigs while completions intensity has significantly increased. As the rig count stabilizes, our customers are focused on efficiencies, optimization and making more barrels. These are all things Halliburton does really well, differentiating us from our peers. And I’m pleased with the progress we’ve made this quarter towards normalized margins in North America. Our strategy is working. And as I said in the past, the path to normalized margins begins with customer urgency, and I still see that urgency today. We have three levers to achieve our margin goals. And they’re, one, increasing pricing; two, improving equipment utilization; and three, structurally reducing our costs. Increasing pricing is important, but it’s just one component we can leverage to reach our goal. Ultimately, we will utilize a combination of all three levers to return to normalized margins. All three levers are important, and the great thing about Halliburton’s scope and scale is that we have the ability to pull on them all in a meaningful way. And you know Halliburton is the execution company. We’re going to pull these levers as necessary to get to our normalized margins. The North America completions market remains tight and we continue to push pricing across our portfolio every day. Demand for our completions equipment and service quality remains strong. The improving oil price outlook provides runway for us to increase our portfolio pricing as we go forward. So, let me be clear; we still have the ability to push price. Equipment utilization comes in a couple of forms. First, it has to be working; and second, it has to be working for the right customers. Our fleet is sold out for the remainder of the year and into 2018. We continue to place our equipment with those customers who know how to effectively and efficiently use us to increase their productivity, which improves our utilization. As for reducing costs, we continue to remove unnecessary costs from our company. It’s also critical that we save costs and increase utilization through the use of technology. Our wellhead ExpressKinect unit is a perfect example. This equipment allows us to increase our utilization by switching wellheads faster and more safely when doing zipper-frac operations. As a result, we’re able to reduce the number of people on location and improve our equipment efficiency. Let’s now take a minute and talk about a few topics that I hear frequently debated in the market. The first is sand. During the third quarter, total sand volume for Halliburton continued to increase, but our average sand per well remained sequentially flat. Data points from the last two quarters and my discussions with customers indicate customers are focused on cost-effective production. They hear a lot of conflicting anecdotes about sand used today, because they are based on individual operators and individual basis. But the facts are, for Halliburton, sand per well was down in the Bakken, Rockies and Northeast, and it was up in the Permian Basin. This happened because customers that know the production characteristics of the reservoirs have streamlined their operations to focus on cost per barrel of oil equivalent and are optimizing sand utilization. Conversely, those customers that are still drilling the whole acreage or exploring production boundaries at their reservoirs are continuing the pump jobs with higher sand loads. At the end of the day, Halliburton benefits from both scenarios. The second topic is supply and demand for pressure pumping equipment. Now, first, let me be clear. I believe the market is undersupplied today. At the same time, equipment is being used harder and maintenance costs are higher. As a result, there will be a greater call for new equipment, just to replace the active equipment that’s being worn out more quickly, meaning the day when supply and demand come into balance is further out than people think. Now, I believe companies that are not making money will struggle to build new equipment beyond their current fleet, take or pay commitments, as they work with constraint budgets and struggle to find capital to fund further purchases. You see many announcements of new fleet deployments, but no announcement of fleet retirements. But, I can tell you, they are happening. Next, completions intensity is not slowing down. We are pumping more sand with less equipment, and as a result, the maintenance costs associated with today’s completion designs are increasing. The design of our equipment gives us an advantage over the market that even we have seen an increase in maintenance costs. I believe deferred maintenance is happening throughout the industry. A proxy for deferred maintenance and the simplest place to see it is in the industry and horsepower creeping crew size. Now, while Halliburton continues to operate with an average fleet size 36,000 horsepower per crew and have for the last several years, the rest of the industry is now averaging closer to 45,000 horsepower per crew. Deferred maintenance is creating this equipment redundancy on location. The bottom line is that Halliburton has the advantage to respond to customer demand by bringing less equipment to the well side and designing our equipment to require less maintenance cost. Building our equipment internally gives us the ability to respond quickly to market changes and to design our equipment to reduce the total cost of ownership. As a follow-up to that point, I said last quarter, I’d be crazy to talk about new build equipment in detail terms, and this remains the case. But, what I said has not changed. We are first and foremost a returns focused organization. And we will only bring out new build equipment under certain conditions. And those conditions are, one, backed by customer commitment; two, captures leading-edge pricing, which is accretive to our margins; and finally, three, it generates acceptable return on investment. Turning to the international markets. Outside North America, our more conservative outlook for the last several quarters is proving accurate. Our customers around the world have different breakeven thresholds and production requirements that all face the headwinds of the current commodity price environment. Due to lower cash flow and project economics, they are more focused than ever on lowering costs. The result of this combination is less activity and more pricing pressure. In contrast to North America, where we believe that a $50 oil price drives significant activity, customers tell me, the longer duration international markets will react less to absolute oil price but more to a positive view of where price will be for several years. This isn’t surprising, given the longer investment cycle that many of our customers face. I believe that we found a floor in the international rig count earlier this year. However, due to the longer term contractual nature of international markets and the level of continuing price pressure, I expect discounts will offset activity gains over the near-term. In this environment, we have to execute and maintain margin by controlling costs. Our international organization is committed to making the toughest of markets sustainable and has continued to rightsize the business during the quarter, demonstrating impressive control over their costs. In addition, customers embrace the way we go to market. We collaborate in engineered solutions to maximize asset value for our customers and it is paying off. In the eastern hemisphere, we achieved a modest improvement in activity in the third quarter but the landscape remains challenged. Pricing pressure and cost cutting remained major themes, and the use of technology to lower the cost per BOE is ever more important. Our products service lines continue to deliver technology that drives our value proposition, maximizing asset value. The Middle East remains our most active international market with the largest part of the work focused on mature fields. Among many important technologies deployed in the region, I’d like to highlight our CoreVault system. This system effectively stores sidewall cores with up to 2.5 times more oil and gas than previously. This additional reservoir characterization and effective means for doing so allow our customers to make more barrels and reduce cost. In the Middle East, we continue to build on our leading position in project management because of our ability to work closely with our customers and deliver superior service quality. Our most recent contract win is a project to deliver over 300 wells in Oman, and we’ve seen increased project management activity in this region, allowing us to showcase our services and technologies that reduce time and cost on a project. We have seen significant market share growth as we have a proven execution track record and deliver better wells for our customers. In the North Sea, this year has been about reducing production costs through standardization and technology optimization. We have the technology portfolio to solve our customers’ problems from single density, variable slurry cement that can be used for all sections of well to our data sphere array monitoring system that due to its modular design provides customized reservoir monitoring. We help structurally reduce cost by decreasing the time to drill and complete a well or by producing more barrels. What’s most important to point out is how we collaborate with customers and together we create terrific results. Another example is in the North Sea where our ruthless focus on service quality, collaboration with the operator and rig contractor, driving efficiency on critical path items and responding to customer insight has laid to record-breaking performance on a multi-well integrated services contract. This project is truly a collaborative effort and through the collective thought and execution of the team, they’ve been able to reduce the time to finish a full year scope of work by over 165 days, saving over $170 million. The improved efficiency came from two areas, technique solutions for record growing performance and collaboration where our commercially aligned team coordinated collaborative planning and execution. Latin America saw a slight rig count growth in the third quarter, driven by increased activity in Argentina, Mexico and Brazil. While activity is improving, the pricing pressures across the region make it increasingly important to be efficient as we execute. This quarter in Mexico, we designed and ran especially drill bit to help tackle a particularly difficult reservoir. This design reduced the necessary runs in hole, resulting in a three-day reduction in rig time. This example shows that even in a tough pricing environment, there is an appetite for new technology, especially if there were reduced costs. Finally, in recent days, commodity prices have experienced the modest rebound, as we have seen some signs of tightening in the macro supply demand picture. However, I still believe that the oil and gas industry will largely remain in a range-bound commodity price environment in the near to medium term. I am confident that Halliburton has the right strategy. In this environment, we’re focused on returns and capital discipline. In this type of sustaining market, I expect that our capital spending should be approximately aligned with our depreciation expense. Our working capital should continue to improve over time as our day sales outstanding declines to traditional levels and our free cash flow conversion should be in line with or exceed our peers, and to deliver these metrics, we’re focused on maximizing asset utilization, improving working capital velocity, and capital discipline. When I take all of those together, I am confident that we will generate solid free cash flow in today’s market environment. Pure and simple, Halliburton is proud to be a service company, and we believe our investors and customers appreciate that. I am confident that we’re working on the right things that create the most value and generate the highest returns. Our strong competitive position is not only a function of geographic footprint, it’s also the depths of the products and services that we provide to our customers and use it to generate industry-leading returns for our shareholders. Now, I’ll turn the call over to Chris for a financial update.

Thanks, Jeff. Good morning. I’ll start with the summary of our third quarter results compared sequentially to our second quarter results. Total company revenue for the quarter was $5.4 billion, representing an increase of 10% while operating income was $634 million, an increase of 55%. These results were primarily driven by increased activity and pricing in North America. Turning to our division results. In our completion and production division, third quarter revenue increased by 13% while operating income increased 32%, primarily resulting from improved activity in pricing throughout North America land in our pressure pumping, completion tools and cementing product service lines. On the international side, increased completions activity in the Middle East and the start of new contracts in Brazil improved results. In our drilling and evaluation division, revenue and operating income increased by 4% and 44%, respectively. These increases were primarily due to increased drilling activity in the Middle East, North America and Latin America. Globally, we saw sequential improvement in all of our drilling and evaluation product lines. Let’s take a minute to review our geographic results. In North America, revenue increased 14% sequentially, driven by increased utilization and pricing throughout the United States land sector in the majority of our products service lines, primarily pressure pumping as well as higher well completion and pressure pumping activity in Canada. In Latin America, we saw revenue increase by 4%, primarily driven by increased activity in Argentina, production group activity in Brazil, and increased drilling activity in Mexico. These results were partially offset by reduced well completion activity in Venezuela. Turning to Europe, Africa and CIS, revenue increased 6%, primarily due to improved utilization in the majority of our product service lines in the North Sea and improved drilling and well completion services in Russia and Nigeria. The results were partially offset by reduced activity in Angola. For Middle East/Asia, revenue increased 3%, primarily as a result of increased activity in the Middle East and project management activity in Indonesia, partially offset by reduced activity in pricing across Southeast Asia and lower project management activity in Iraq. Our corporate and other expense totaled $71 million in the third quarter and we expect our fourth quarter will be comparable to this quarter. As a function of our reduced debt balance, we reported $115 million in net interest expense for the quarter. Looking ahead, we expect net interest expense for the fourth quarter to remain at a similar level. Our effective tax rate for the third quarter came in at approximately 27%, slightly lower than expected due to variability in our earnings mix. For the fourth quarter, we expect the effective tax rate to range between 27% and 29%. Cash flow from operations during the third quarter was approximately $1.1 billion. Providing some color on our near-term operational outlook. As is typical for the fourth quarter, a combination of weather, holidays, budget constraints and year-end sales make forecasting a challenge, but this is how we see it playing out right now. Similar to prior years, we expect our U.S. land results to moderate in the fourth quarter due to the holidays and lower efficiency levels experienced in the winter months, particularly across the Rockies and Northern U.S. In our international business, we believe the typical seasonal uptick in year-end product and software sales will be lower this year versus traditional levels as customer budgets are largely exhausted. Given these factors, in our drilling and evaluation division, we expect North America revenue will change in line with the average U.S. land rig count while international revenue will increase by low-single digits. For our completion and production division, we expect that our North America revenue will outperform the average change in U.S. land rig count by several hundred basis points while international revenue will increase by low single digits. We expect the operating profitability for both of our divisions to increase marginally in the fourth quarter. Let me turn it back to Jeff for a few closing comments.

Thanks, Chris. In closing, there are few things I want to highlight. First, I am very pleased with our third quarter results. I want to thank each of our employees for their hardworking commitment to execute at every turn and deliver Halliburton’s value preposition. These results clearly demonstrate the strength of our franchise and our ability to adapt to any environment. Second, Halliburton’s relative performance in the 2018 will remain strong, as a result of our ability to grow our North America revenue and margins, and improve our position in our international businesses. Finally, our strategy is working and we intend to stay the course. We are focused on delivering superior execution for our customers and achieving industry-leading returns and cash flow conversion for our shareholders. Now, let’s open it up for questions.

Thank you. [Operator Instructions] Our first question comes from James West with Evercore ISI. You may begin.

Hey, good morning, guys.

Good morning, James.

Jeff, for the first time, I think I can remember that your earnings met or if you exclude some of the Harvey impact, they Schlumberger’s, which is pretty impressive I think. What part of your strategy would you attribute that to?

Thanks, James. Look, our strategy is pretty simple and very executable, and it’s to be the best service company. And that means we focused on leading returns, margins and revenue growth, and along with that technology, directly focused on returns, collaborating with our customers, the strong BD group, and then delivering service quality. I think that returns focused, I mean that is our strategy and is working.

Got it. And then a follow-up from me to a comment that you made towards the end of your prepared statements. It sounds like spending within or spending the levels, CapEx hitting level that depreciation would be really just sustaining CapEx, so little kind of growth in PP -- or no growth in PP&E. Can you perhaps discuss the discipline here on your side with respect to adding equipment to the market?

Look, I -- when we look at the market as it’s playing out, I think we have what we need to execute. And as I described, what we see in front of us in terms of activity as I described international, described North America, I think at that sort of pace, then we ought to have a business that returns solid cash flow from that kind of market. And so, when I’ve described those types of parameters it’s to describe what we see. And you know again, focused on returns means that we are very efficient and we drive a lot of velocity with the equipment that we have, utilization, things of that nature, spend a lot of time talking about that. But that is in fact how we see generating a lot of cash flow.

Our next question comes from David Anderson with Barclays. You may begin.

Yes, thanks. Good morning, Jeff. Staying on the pressure pumping side just for a second here, your strategy in downturn is to gain share and stimulation. You talked about all your equipment deployed. So, I guess, I’m wondering right now, does pricing out there currently support new build economics? It seems like we’re in another one of those crossroads between maximizing returns or continuing to protect share. Can you discuss your thinking, please?

Well, I think we’re always going to be about returns. Clearly, we need share to drive the volume and the scale, and that’s where the efficiency and some of the things that I talk about are more meaningful at scale. But, specific to the building question, I’m just going to go back to what I said on this, answered this a couple of quarters now, but the three conditions being to meet client, leading edge pricing and generating adequate returns. But I don’t think that -- there is a lot of juice in utilization, there is a lot of juice and in effect market share comes from better utilization. So, I think you kind of under estimate the number of levers that we have in the market when it comes down to something that binary.

Thanks, Jeff. Kind of a different question, more strategic question, back in September, you talked about how HAL is not interested in financing E&P projects. It’s been a subject, something up quite a bit lately. Can you update us on your thoughts around performance based contracts and is there any desire on Halliburton’s part to invest in these types of projects along side your customers?

Yes, thanks. This is -- for us, we call that integrated asset management, and it is really a capital allocation question; it’s where do we put our capital and what will make the best returns. And so, -- and along with those better returns, my view, a key part of that is asset velocity and to produce returns for shareholders. So, we’re not going to tie up our cash and things that we think had longer duration and likely lower returns. We have done some smaller deals, we’ve done a few things, we understand this space. And when we do it, we’ll do it with other people’s money to maintain those kinds of returns.

Our next question comes from Bill Herbert with Simmons & Company. You may begin.

Thank you. Good morning. Hey, Jeff and Chris. I guess, a comment with regard to -- I mean, you’ve made some I think some realistic and some encouraging comments with regard to your visibility and the continued pricing strength and tightness in the frac value chain accordingly. What should we expect for incrementals going forward? If you look at Q3 C&P, they were in the low 30s, which is typically reflective of volumetric incremental ramps in pricing, and I recognize that there was some Harvey nose. But, kind of in the market that we expect, not necessarily red hot from an activity standpoint but still tight and pricing still accommodating your utilization, you said that there is runway for improvement. Shouldn’t we expect incrementals to be higher than what we have at the end of the third quarter?

Yes, this is Chris. We’re not giving guidance on incrementals. We’re focused on margin expansion. We talked about margin improvement and our profitability. When we look at the pace that we’re at, I mean, we got almost a 1,000 basis points of margin expansion in few quarters of C&P. And Jeff spent a lot of time talking about the path towards those normalized margins, the levers that we have to pull. So, we’re confident of that path. Now, remember C&P is more than just frac and P&E in North America. We’ve also got our production business lines; we’re investing in those business lines, looking to grow in line with that Summit acquisition. So, there are other elements of that, but we feel strongly about that path with the levers that we have to pull that Jeff laid out.

Okay. And if we could drill down on pricing just a little bit more. I guess the narrative, industry-wide coming into this quarter was that leading edge pricing was still supportive of new build economics. But slope of the event that we witnessed year-to-date was flattening, not flattened, but flattening, and there was still continued convergence between leading edge and legacy pricing. Is that a fair summation as to where pricing stands today?

Yes. Bill, I think that’s reasonable. Our guys push price all of the time. And so, maybe not accelerating the way it did in the spring, but still opportunity and momentum in North America. I think if we look at Q3, bit of a cause just as commodity prices bounced into the 40s, but we talked about, first and foremost finding the right customer to drive efficiency, and it doesn’t change the demand for our services today, and along with that comes ability to move on price.

Thank you. Our next question comes from Angie Sedita with UBS. You may begin.

So, I appreciate the color on returning to normalize margins for North America. And maybe you could a little bit more about two of the levers, right, utilization and cost cutting, a little bit more color there on how much more you think you have to be done on utilization side as well as on the cost cutting, and maybe even a little bit the timeline on how much we could see that clearing into 2018?

Well, I think if the question’s around the path to normalized margins, I’ve always said, it starts with customer urgency. We see that, calendar power being also important in terms of driving utilization and working with the efficient client. In terms of how far there is to move, each of those levers has fair amount of ways to move. I won’t give you the specifics, but it’s one of those things that we work every day. But it’s the precision around, for example what happens on location being able to measure all of those steps. And again, the measurement scale is a bit of a different matter. But, what’s special about that is that now when we make changes and drive efficiency, again driving better utilization, we can drive across just a fleet at a time. And so that gives me a lot of confidence around the ability to improve the number of turns on equipment in a day. From a cost perspective, we’re constantly working that. I’ve talked about our continuous improvement being one of the pillars of our strategy but really, Angie that’s what we do to systematically drive cost out of all of the components of our business. And often times that includes technology, I referred to some of that in my script. But, it’ll also be technology that takes all kinds of forms, some is customer-facing, a lot of it internally facing, so that all of that value accrues to us in terms of reducing costs. I hope that helps.

Yes. That does help. I appreciate that. And then, as an unrelated follow-up. Maybe you could talk a little bit about your fleet today and just as a reminder, how much of your frac fleet that’s in the field today is Q10 versus legacy assets and just thoughts on the life of those assets and replacement or upgrades over time?

Yes. Thanks, Angie. That’s probably about 60% of the fleet Q10 today. But again, big push several years ago with our retrofit, the fleet with Q10, don’t have that same requirement today, and that’s when we talk about capital, that’s why I’m comfortable with the kind of capital progression we laid out in this kind of market, because there is a very natural sort of replacement that happens over time. I will do that with Q10s, but I don’t think it’s going to be -- it won’t be anything like maybe what you’ve seen in the past. And the Q10s really have delivered and we continue to go to market with solidly less horsepower than competitors. And I think that also gets to -- if we think about the industry’s pace of replacement, I think we’re going to well outperform that and that’s going to show up in the form of returns.

Thank you. Our next question comes from Jud Bailey with Wells Fargo. You may begin.

Thanks. Good morning. Just of follow up on Angie’s question. You highlighted kind of the three levers you still have to pull you think you can pull to get to normalized margins. I’d be curious is -- of the three, is one a bigger driver than the other at this point, or are they all kind of equal or is one going to be a bigger driver? And, is there a way to think about the timing in which to kind of get to that level, is that a still a realistic possibility in 2018?

Yes. Short answer, yes, Jud, on to get there in 2018. The pulling on the different levers, you know us; we’re going to pull every lever we got. But those are the big levers that when we pull them, have the more meaningful impact. So, I’m not going to break one above the other necessarily, actually all three of them are very powerful. And we’re working this.

Okay. That’s fair. And my follow-up question is you alluded to it in your prepared comments that your strategy on artificial lift and kind of the production side of the business. Could you -- you have Summit, is the strategy to kind of grow that platform across the Halliburton global platform or do you still see other opportunities out there that could supplement Summit on both production chemicals and artificial lift side?

Yes, thanks. Well that’s the all of production is an opportunity for us to grow, in our wheelhouse, it’s -- as I talk about our strategy to collaborate an engineered solution, that fits well with what we do. Summit was such a nice add, I give a shout out to the new employees we have from Summit, fantastic business and yes, very scalable. And clearly, the plan is to scale that beyond the U.S. and to our international operations. And those activities are underway. The other components of that, I’ve talked about chemicals. I think that will likely be a more organic move than it is M&A, maybe a little bit a bolt-on around that. But, the guys are working hard at that every day, and I really think that that is something that we will just systematically build out and we’ll talk about it from time-to-time along that path, probably not every quarter but as it continues to grow, we’ll give you a better insight into that.

Our next question comes from Jim Wicklund with Credit Suisse. You may begin.

The biggest issue, of course now we’re talking about what 2019 earnings are going to be, but for the last several weeks, you had an all price high enough that E&Ps have been hedging, the head of Total mentioned at a London concert -- conference that U.S. E&Ps have been hedging like crazy, you guys have a little bit of visibility into 2018. I realize your customers really haven’t set their budgets yet. But, the discussions that you are having, are they more constructive now than they were before? Can you give us what little outlook you may be able to have for 2018, as we sit here today?

Yes. I mean, Jim, our board is full through the first part of 2018 and the reality is the only people that probably talk to more customers than me is my BD group and I talk to the BD group every day. And so, we’re having constructive conversations about 2018 and encouraging discussions. I think the $50 oil through the planning cycle is a great thing, yes, and I mean this is the right time. And so, they are absolutely planning to work next year, hedges are getting in place. And I think it’s -- interesting thing, when we talk to our customers, we don’t lecture our customers, I mean, we listen to them. Because we listen to them, we hear the message that they are getting from their stakeholders, and I think this is important point. Because all of our -- with all of our conversations, my personal conversations, some are very focused on returns and there are others that are going to shoot them in because they like the acreage that they have. But that’s because that’s what their shareholders want. And at the end of the day, we work for both sets of customers. And so, I am very encouraged going into 2018, Jim.

That’s positive; I’ll take that, good. Second question if I could. Jud mentioned artificial lift; we all know Dover is in the market. Your balance sheet is a little over levered. Can you talk about what the plan is Chris, maybe through 2017 and through 2018 in terms of balance sheet ratios and freedom to do deals?

Yes. So, I mean, just in terms of the balance sheet and we’ve talked about desire to further delever. I mean, we retired the $1.4 billion earlier this year. We’ve got a maturity in August of next year, $400 million that we plan to retire. We like to see our credit metrics normalize, debt to EBITDA under 2.5 times, debt to cap moving back into 30s and so focused on working towards those metrics.

And Jim, I’ll just add the discussion around. Production and some of these things is part of what makes that C&P group a big group, and there is a lot of moving parts in there.

Thank you. Our next question comes from Timna Tanners with Bank of America/Merrill Lynch. You may begin.

I wonder if you could talk a little bit more about any future improvement, international in particular, your comments on taking market share, if you can elaborate a little bit on how and where you have been doing that and if you have further rightsizing internationally?

Yes. Thanks, Tim. I think that team absolutely executing in the marketplace. I think we are taking share by virtue of the performance that we saw this quarter and we’ve seen for several quarters. But, I think probably what’s more important when we think about international is I think we have a more realistic view what that market is. For example, we’re seeing more activity or at least signs of activity in the form of FIDs and things. But those are not tenders; those don’t convert the service revenue quickly. We did find the bottom, but I think that those are very competitive markets with a lot of visibility around the activity in those international markets. And so, I do believe that the pricing pressure will persist and likely offset a lot of the gains that you might expect from that kind of activity, particularly as we go into 2018.

Okay. So, rightsizing may continue there, it sounds like?

Yes. And I think that’s just part of a process. It’s a combination of our continuous improvement activities where we’re consistently looking at technology to drive cost out. But, it’s hard; it is taking those things and turning it into how do we operate at lower cost point. And I would say that that team has done that consistently. That’s not a projection. They will just manage all the levers that they have to manage.

Okay. And I just want to follow up on Harvey, if there is lingering impact into the fourth quarter and if that -- or if that’s been what’s behind in the third quarter?

I think that’s behind as at the end of Q3.

Thank you. Our next question comes from Scott Gruber with Citigroup. You may begin.

Jeff, I wanted to start with your digital transformation strategy. I think Halliburton is doing more than many investors realize. Can you discuss your broader strategy around this effort, such as the OpenEarth initiative, the Microsoft alliance? And importantly, are E&Ps more willing to share data in the credit environment or how do you work around the reluctance to share data if not and still deliver value enhancing tools?

Yes. No, very excited about our strategy and I think we’ve laid that out but it is -- at its heart, and this is an important distinction and open architecture strategy which makes it a lot easier for customers to use. I think there will always be competition around data between customers. And I think customers are taking a closer and closer look at their own data and who owns and controls that data, and I suspect they will control it more so. It is just very competitive for our customers. And so, when we think about that, we want to make certain that we have the right set of tools that can be used effectively by them. And they’re open in the sense that our customers uptake of those tools and they can make them do what they need them to do. And I think tools is probably an oversimplification, I’m describing more of a platform and the philosophy. But, as we work with Microsoft for example, that’s again an ability to leverage I think a lot of investment and R&D and cloud that will help our customers. But again, I will tell you, we are very returns oriented. And so, when I think about what we do, we’re very specific about where we create value and what it proves to us versus necessarily scatter shooting across the space.

Got it, appreciate the color. And unrelated follow-up on the domestic frac market and the sand per well trend. What are you hearing from your customers regarding their potential response to falling sand prices as the new local Permian mines come on? Do you anticipate them using more sand per well? Does that uptrend begin to anew? Do they simply go out and drill more wells, which you may hear about through in discussions around on fleet expansion? How do you think they respond to falling sand prices, particularly in the Permian?

I think all of our -- that will create -- lower costs, will create more headroom for our clients to work, no question. But I think the more important dynamic in the Permian than the price necessarily today is, is they better understand those reservoirs and how to make the best production at the lower cost per BOE. That’s why I held out the Permian as one where we see sands per well increasing. And I think that’s more evidentiary of our market that’s being learned as opposed to one being optimized and that makes perfect sense and that’s what our customers do. They make the best investment and they manage their business very carefully. And so, when they make decisions to do more of something, there will be a reason for that. I think that’s more the reason in West Texas today as reservoirs are better understood in other parts of the country that’s where you start to see more of that optimization. But, I would expect that it does free up more cash for doing more work, which is certainly positive. But, I would not assume that they don’t optimize in West Texas at some point either.

Thank you. Our next question comes from Chase Mulvehill with Wolfe Research. You may begin.

Good morning, Jeff. So, quick question on the C&P margin side. It came a little bit light of market expectations. Can you talk about what you are seeing as potential bottlenecks on the U.S. completion side and if they had an impact in 3Q?

I think as I described earlier specific to margins in C&P, we are making investments in other things, like production group is in that group. And so, there is more going on in that than purely North America frac. But, as it is a different question in terms of what kind of bottlenecks do we see, obviously, the Hurricane drove some bottlenecks here and across the country. I think that as mines come on, a lot of the bottlenecks you hear about around sand get alleviated. Again, when you have a bit of a differentiated view to those things given where we are and the fact our ability to buy at scale particularly with respect to sand, but then equally around people, again, we talk about people lot and our ability to hire the national level for people I think gives us a differentiated position as we view those bottlenecks.

Okay. And the guidance for 4Q on the margin side, you said profitability will be marginally better in 4Q. Was that percentage margins or an absolute margin dollar when you said marginally better?

Percentage margins.

Okay. So, the last one, on the three levers that you mentioned with pricing utilization and cost reduction, how close are we to optimizing each of these levers?

A plenty of room to move on all three.

Okay.

I mean that’s what we do every day; we’re always working on those.

Our next question comes from Sean Meakim with JP Morgan. You may begin.

So, Chris noted in the marginally better margins, but on the D&E specifically, trying to get a better sense of sustainability of that 3Q run rate, given pricing remains pretty challenging internationally, activities up but not dramatically. Could you give a little more context with that move in the margin to give a sense of the look forward?

I mean, if the question is, are the one-offs in there, the reality there aren’t any one-offs in there; that group is absolutely executing very well, and I would say systematically driving cost out of the business, they winning the contracts they need to win and they are -0 we continue to drive technology into the D&E group that I think is paying off. And I’ve talked about the investment we’ve made in Sperry for some time. And I think that’s beginning to pay off. I think there is a lot of runway actually left to go there. But, it will come probably in fits and starts as we go into next year.

Okay. Thank you for that Jeff. That’s helpful. And then just on -- following up on the expansion plans for production and Summit. How do you think about strategically owning assets versus aligning Halliburton in partnerships with others where you’re trying to expand your reach globally?

With respect to production specifically, it will be -- we’ll invest in those things that we think we can uniquely use to drive value for us; in those places where we can’t, we’ll look to partner. I -- very much the strategy being executed now. So, I won’t get into all -- anymore details than that. But I would say, generally speaking, we’re not afraid to and in fact we will seek to, in some cases partner with companies that we believe are in businesses that we don’t want to be in, but maybe form part of the value chain. And I think we’ve demonstrated the ability to do that very effectively. In fact with rigs, we work very closely with rig contractors and had a lot of success in our project management business, driving lower cost and better returns, probably for us and the rig contractor than we would, if we were somehow jointly investing.

Thank you. Our next question comes from Kurt Hallead with RBC Capital Markets. You may begin.

I was wondering if you can give us an update, generate significant amount of cash and maybe kind of run through the priorities on that cash again for us between growth, dividend, buying back stock. And when you think about the growth dynamics, where would you be directing that? It sounds like North America, but just looking for some color on that.

Yes. This is Chris. I’ll take that. As I mentioned earlier, in terms of use of free cash flow, we are still focused on debt retirement and we have the $400 million maturity next year that we intend to pay off. We’ll consider growth opportunities, both acquisitions and organic and want to be value accretive, generate industry-leading service company returns, and that’s in terms of absolute level and the speed with which we realize those returns or short duration or rapid payback. And after that, we’ll look at returning cash to shareholders and considering both dividends and share buybacks.

Okay, great. And maybe follow-up to one of the prior questions when you kind of talk about your three levers, trying to get back to normalized earnings. In your mind, Jeff, which one of those three would probably carry the most weight in 2018, as you see it right now?

We’ll have to see when 2018 gets here, Kurt. I mean, we use all of them that are available. And I am not -- and I will tell you, I put sort of equal time in all three of them. I’ll just go back to sort of Chris’s view -- incredible, as he mentioned earlier, we’ve come a long way, two quarters and we will continue to use all of those levers as we move into next year.

Yes, and this is Chris. Like we said, we’re on the path, fourth quarter with the seasonality and weather, holidays, customer budgets, I mean, obviously not representative of what that normal path looks like, but with the margin guidance, the revenue guidance that we provided, we think that’s generally aligned with consensus estimate.

Thank you. At this time, I’d like to turn the call back over to Jeff Miller for closing remarks.

Okay. Thank you, Shannon. Look, I’d like to wrap the call up with a couple of key takeaways today. First, the third quarter results demonstrate the strength of our franchise and the effectiveness of our strategy. I thank all of our employees for their commitment to execution. Finally, I expect Halliburton’s relative performance in 2018 will remain strong as a result of our ability to grow North America revenue and margins and improve our position in our international businesses. So, I look forward to talking with you next quarter. Shannon, you may close out the call.

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a great day.