Ladies and gentlemen, thank you for standing by and welcome to Halliburton Third Quarter 2019 Earnings Call. At this time, all participants lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Abu Zeya, Head of Investor Relations. Thank you. Please go ahead, sir.

Good morning. And welcome to the Halliburton third quarter 2019 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 today are Jeff Miller, Chairman, President, and CEO, and Lance Loeffler, 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 31st, 2018; Form 10-Q for the quarter ended June 30th, 2019; 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 that exclude the impact of impairments and other charges taking during the second quarter. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our third quarter press release and can also be found in the Quarterly Results & Presentation section of our website. 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 time for others who may be in the queue. Now, I will turn the call over to Jeff.

Thank you. Abu, and good morning, everyone. As the second half of 2019 unfolds, US and international markets continue to diverge. International activity growth is gaining momentum across multiple regions. Meanwhile, operators' capital discipline weighs on North American activity levels. That said, our outstanding employees executed effectively in the third quarter. We managed the market dynamics and delivered on our financial results as per expectations. Let me cover some headlines. Total company revenue was $5.6 billion and operating income was $536 million, representing decreases of 6% and 3% respectively compared to the second quarter of 2019. Our Drilling and Evaluation division revenue was down 4% sequentially, but operating income grew 3% quarter-over-quarter. Our international D&E operating margin increased 180 basis points. Overall, D&E margin performance was negatively impacted by weaker demand for our services in North America. Our Completion and Production division revenue declined 8% sequentially, driven by lower completions activity in North America land. C&P operating margin was essentially flat compared to the second quarter, supported by strong international activity and the execution of our new playbook in North America. International revenue was flat sequentially, but is up 10% year-to-date. Lower project management and stimulation activity in the Middle East and Asia offset healthy growth in Latin America and Europe/Eurasia in the third quarter. North America revenue decreased 11% sequentially, primarily driven by customer activity declines. And finally, we generated approximately $530 million of free cash flow in the third quarter, a significant improvement over the first half of the year. In the third quarter, supply and demand uncertainties continued to impact commodity prices. On the one hand, Iran sanctions, Venezuela production declines, and political instability in Latin America and North Africa are constraining supply. On the other hand, there is near-term uncertainty in demand due to ongoing US-China…

Thank you, Jeff. And good morning. Let's begin with an overview of our third quarter results compared to the second quarter of 2019. Total company revenue for the quarter was $5.6 billion and operating income was $536 million, representing decreases of 6% and 3% respectively. North America led the decline as a result of activity and pricing headwinds. Let me go over the details of our divisional results. In our Completion and Production division, revenue was $3.5 billion, a decrease of $299 million or 8%, while operating income was $446 million, a decrease of $24 million or 5%. These results were primarily driven by lower pressure pumping activity and pricing in North America land, coupled with decreased completion tool sales in Latin America and reduced simulation activity in the Middle East/Asia. Partially offsetting these declines were increased cementing activity in the eastern hemisphere, improved completion tool sales in Europe/Africa/CIS, and higher simulation activity in Latin America. In our Drilling and Evaluation division, revenue was $2 billion, a decrease of $81 million or 4%, while operating income was $150 million, an increase of $5 million or 3%. These results were driven by reduced drilling and wireline activity in North America and lower project management activity in Middle East/Asia. These declines were partially offset by higher drilling activity in the eastern hemisphere, fluids activity in Latin America and higher testing and software sales globally, resulting in better overall margins. Moving on to our geographical results. In North America, revenue in the third quarter of 2019 was $2.9 billion, an 11% decrease, primarily associated with lower activity and pricing in pressure pumping and well construction services in North America land. In Latin America, revenue was $608 million, a 6% increase, resulting primarily from higher activity in multiple product service lines in Argentina, increased…

Thanks, Lance. In summary, international growth continues at a steady pace across multiple regions, benefiting both our D&E and C&P divisions. Increased activity, pricing improvements, our ability to compete for a larger share of high-margin services and reallocation of our assets should lead to higher international margins as we look past this year. In North America, we expect activity reductions to continue into the fourth quarter. Halliburton is successfully executing our new North America playbook to maximize returns and free cash flow. We stacked additional equipment throughout the quarter and will continue managing utilization with a focus on returns. We're aligning with the right customers. We're introducing new technologies to improve margins. And we will continue to take actions that lower the overall service delivery cost. I want to close by thanking our employees for their outstanding focus and dedication to our company and our customers. Your resiliency and hard work are the foundation of our company's strength and why together we can continue delivering on our promise to our shareholders. And now, let's open it up for questions.

[Operator Instructions]. Our first question comes from James West with Evercore ISI. Your line is open.

Good morning, Jeff. Good morning, Lance.

Good morning, James.

Good morning, James.

So, Jeff, obviously, [technical difficulty] third quarter. Fourth quarter, as Lance described is just going to be fairly tough. What does this mean for the exit rate and how are we going to 2020 and how the outlook there starts to shape up?

Yeah. Thanks, James. You're a little crackly there at the beginning, but as we look at the Q4 activity, obviously, we think budget exhaustion, et cetera, starts to bring that down. I expect we'll see an uptick as we go into Q1 of 2020, and I think that's a little bit getting to that cadence of spend. So, I think that we'll be increasing activity certainly in the first half – first quarter and then really first half of 2020, and our playbook will have us ready to take advantage of that.

Okay, great. That's very helpful. And then, as we talk about the playbook or think about the playbook, what are you seeing from your competition? Clearly, some of these guys can't actually perform at the same levels or will not perform at the same levels, but also some may follow you on your returns-focused strategy. What have you seen so far from you showing leadership here with your willingness to walk away from the underperforming contracts or low return [ph] contracts versus your peers?

James, we're early in that process now. And, I guess, my view is we know we are extremely competitive. We have very good margins and returns in that business relative to anyone in that marketplace. And so, when we see an opportunity where it transacts well below cost, we're pretty comfortable stepping back from that just because we don't want to burn up our equipment without making the kind of returns and cash flow that we want to make. So, to be seen, I fully expect we'll see the – we see it actually some today, the flight to quality. Our service delivery is very, very good; our safety performance is very, very good. And so, I think this unfolds as equipment just gets tighter. And I think we're well-positioned in this market.

Got it. Thanks, guys.

Thank you.

Thanks, James.

Our next question comes from Angie Sedita with Goldman Sachs. Your line is open.

Good morning, guys.

Good morning, Angie.

Good morning, Angie.

Good morning. So, Jeff, maybe a little bit more color on the international markets and the visibility there, I think there's some debate about the pace of growth for 2020. So, I'd love to hear what you're seeing out there and the prospects for having similar growth rates in 2020 as you did in 2019, and maybe you could also touch on the growth you saw in C&P versus D&E?

Yeah. Thanks, Angie. Less clear on – we just don't have the visibility on 2020 at this point because it's still early. That said, I believe Halliburton outgrows the increase in drilling and completion spend, whatever that is internationally. And as I described, I think we've got a good set of contracts set up for 2020. And, technically, we're very well-positioned for 2020. And so, without trying to put a number on that today, I feel Halliburton will be very competitive in that space, anyway. Yeah.

Okay. Okay. So, maybe on your remarks on the attrition, it'd be great to hear any additional color on attrition and retirements for Halliburton and what you're hearing for the industry as a whole for even this year and next year, and how much supply you think could be pulled out of the market?

Yeah. As I've always said, it's hard to see attrition until there's a call on the equipment, but it's pretty clear there's less equipment in the market today than there was at the beginning of the year, and that amount varies in terms of how people call it. We think it's 15% to 20% easily in the marketplace. But then, we watch equipment adds, of which there really aren't any, and we know how hard equipment is working. And so, I really believe we will continue to see that as we go into even 2020 in terms of the attrition happening. And our view of the market is we want to be super careful with our equipment. We want to work it for returns and when we don't see those returns, we want to set it to the side.

Great. Thanks. I'll turn it over.

Thanks, Angie.

Our next question comes from Sean Meakim with JP Morgan. Your line is open.

Thank you. Good morning.

Good morning, Sean.

So, on free cash flow, I was hoping we could get a little bit more granular on the quarter and the guide. So, collections improved, I think, as we expected, but payables also fell a good amount. Inventory is still growing. CapEx is unchanged for the year. Sounds like earnings power is going to be challenged in the fourth quarter. So the $900 million of free cash that you're effectively guiding for this quarter is dependent upon working capital to a large degree. Could you maybe just walk us through those pieces?

Yeah, Sean. Let me take a stab at that. So, look, we did make considerable improvements in 3Q. I think that that momentum clearly has to continue into 4Q, and it's really done – as you talk about the working capital movements, we continue to believe that we're going to progress on the way that we're collecting our receivables expect inventory will draw down as we deliver on our completion tools orders for the fourth quarter. And my belief is that working capital on a year-on-year basis is still relatively flat in 2019.

Okay.

I'd also say, in addition to the working capital goals that we have in the fourth quarter, we're also going to be down on CapEx as well. The rate of spend of CapEx that will contribute to that free cash flow number.

Got it. Thank you for that.

And then, maybe just on the D&E margin ramp, some moving pieces there too. In the third quarter, top line fell, but margins expanded. So, you had got North America. It's challenging on the top line, but you're getting some progress where you're trying to go on the international side. For the fourth quarter, it seems like similar dynamics, but a little bit different. The international is helping you more given the year-end product sales, et cetera. Are we getting those moving parts correctly and then, can we just get a little bit more of an update on how iCruise is fitting into that relatively? What your expectations would have been, say, 9, 12 months ago?

Yeah. thanks, Sean. I'll start with the second part of that question. The iCruise is really delivering what we had expected though it is obviously – some of the contracts we were targeting or have been won, but are moving a bit to the right. That said, the performance of the tool, very good, very excited about what it can do, and coupled with EarthStar, for example, really is delivering on the technical promise that we had hoped. So, I expect, as I look through Q4 and into 2020 and beyond that the value of this suite of technology is going to be very impactful. In fact, I'll just comment here, at the World Oil Awards this week, actually the best drilling technology was the EarthStar 3D Inversion which is fantastic technology. So, to get back to progression, we kind of see a longer ramp on the recovery of that business, but all of the building blocks are in place and the technical approach is working, and I see us winning the kind of contracts that I think are required to earn higher margins.

Great. Thank you very much.

Our next question comes from Scott Gruber with Citigroup. Your line is open.

Yes. Good morning.

Good morning.

Good morning. Staying on D&E margins, I know you guys typically forecast just one quarter ahead, but I was curious about a bit of color on 1Q. How should we think about margins going into next year? You have a bit more North Sea exposure at this point. Has that changed the seasonality? Are we going to see a little more seasonal impact on D&E margins or is there still sufficient underlying profit improvement that you can offset and have more normal seasonal margin performance in 1Q?

Scott, this is Lance. Appreciate the question. I think looking ahead, I think there's still going to be some seasonality in 1Q. We're still dealing with weather in the Northern Hemisphere as we traditionally see it. But I think, overall, as you think about where international margins can go, based on some of the comments Jeff made prior, I think not only are you seeing the investment in technology come to fruition and what we expect, but also just generally more activity in the international markets help improve – also seeing better pricing in certain regions around the world. That comes because of the tightness of tools, et cetera, that will drive that. So, I think that there is, obviously, continued progression on where we see international margins going, not just in the fourth quarter, but into next year.

Got it. And then, on the $300 million of cost savings, obviously, you'll get a bit in 4Q. Can you just provide a bit more color on how that phases in over the next few quarters and whether there's any offset in terms of severance or facility closure cost and how large those could be?

Yeah. Scott, I'm not going get into the details today on that. I think the point is is that we're focused on lowering our service delivery costs. And I think probably the most important point is is that we're being decisive, right? We're looking to move quickly around cost reductions in North America. We've seen some of those actions – seen some of the benefit of those actions that we took in 2Q. I'd just say stay tuned over the course of the next couple of quarters.

I think just to add to that, when we think about our North America playbook which is driving specifically towards utilization and efficiency and cost, I think this playbook is right squarely in the middle of the types of decisive actions we're taking around taking out costs.

Got it. Appreciate it. Thank you.

Thanks.

Our next question comes from Chase Mulvehill with Bank of America Merrill Lynch. Your line is open.

Hey. Good morning, fellas. I guess I just want to follow-up on Scott's question here. So, maybe on 4Q for D&E, I don't know if you can maybe help us kind of understand how much of the improvement in margin on the revenue side is attributed to kind of the software sales that you typically get in the fourth quarter? And then, along those lines, how much of the $300 million of cost savings are included in your 4Q guide?

Yeah. Appreciate the question, Chase. Look, I think in terms of the impact on software and product sales for the fourth quarter, it's relatively the same as we saw last year. So, not above or below what we experienced last year. On the cost-cutting side, look, again, I'm not going to get into the details today on the call on how that transforms over the next couple of quarters, but we will keep you posted as that continues to develop.

Okay, all right. Follow-up. Listening to the prepared remarks, Jeff, you talked about your more integrated packages that you're seeing in US onshore. Maybe could you expand a little bit, what kind of customers you're seeing kind of push more towards integrated packages? And is this more on the drilling side, the completion side or both?

I'd really say it's both. And it's customers of all sizes quite frankly, but probably more to the – larger into that. And I think some of that's just reflect – look, this is the early days, but it's encouraging because I know the type of safety and service quality performance that we have in the market and the ability to put more things together, I think, drives better performance over time. It's really a collective investment and a learning curve that drives that kind of efficiency. And we've seen that actually evolve in the North Sea. So, while early days North America, very early days, I think there's an analog which was the North Sea, which was obviously a very disintermediated market probably just five or six years ago and we've seen roughly 90% of our work today in the North Sea is in some form or fashion of integrated or bundled or in some form or fashion a more stable set of work that is more outcome-based that then allows us to, over time, demonstrate really some of the things that make Halliburton so reliable and so efficient over the long term.

Okay, all right. That's helpful. Thanks, Jeff. I'll turn it back over.

Thanks.

Our next question comes from Kurt Hallead with RBC. Your line is open.

Hey, good morning.

Good morning.

Good morning, Kurt.

Appreciate all that color so far. Good stuff. The question I had for you initially here is on the US/North American frac, Completion and Production side of the business, right? You guys talked about a cost reduction effort that's underway, focus on the right players, et cetera. However, it looks like the market is still going to be kind of devoid of pricing, right? So, when we think about the – or when you guys think about your business in US, and US frac, in particular, beyond your cost reductions and pricing, do you think there is other ways you can drive margin improvement, Jeff?

Yes, I do. I think, strategically – technology is always an important part of this business and we continue to invest in technology. And some of that technology allows us to lower our cost. And we don't necessarily spend a lot of time talking about that simply because it's not for sale. I want to keep it and have that benefit accrue to Halliburton. I talked about one just this quarter on the call with integrated completions, but that's more complicated to do than meets the eye and it actually drives a lot of cost savings for Halliburton. When we direct our efforts that way, that is part of the sustainable competitive advantage we have around not just cost cutting – actually, I don't see it as cost cutting. I see the playbook actually is strategically driving better efficiency and better margins sort of in the face of where the market is today. And I say all of that – and I want to pivot to what I really think the future looks like, which, over the next few years, the dialogue I believe will be more around recovery factors in unconventionals and less about just pure speed. And I think, in that market, some of the things we're doing with Prodigi and a host of things that I think will be quite impactful in that future scenario, which the future – what, a couple years out, but I'm really excited about that also. And nothing we're doing today gets in the way of delivering on that future set of technologies.

Okay. That's great color. Then you indicated – you gave us some sense on attrition. Say, on a general basis, it runs maybe 15% to 20% per year. And then, given the dynamics at play in the marketplace with companies not generating enough free cash to put into the maintenance, what would be your assessment above and beyond that 15% to 20%? I know you didn't really – maybe not want to comment on it, but maybe pressing a little bit here, kind of give us your best guess as to what you think it could be given the underinvestment in the business?

Look, I think this is something that accelerates, particularly as we get into 2020. We'll see an uptick in the first half of the year, first quarter, and I think there will be stress in the system at that point. The extent to which there isn't new investment in this business, that just continues to wear on equipment. So, it has to accelerate over time.

All right. Jeff, I'll leave it there. Thanks, guys.

Thank you.

Our next question comes from Dan Boyd with BMO Capital Markets. Your line is open.

Hi, thanks. Good morning, guys.

Good morning, Dan.

Good morning, Dan.

So, thinking about the 300 million in cost savings over the next three quarters, can you give us an idea on how much that is fixed versus variable?

I think most of that would be more in the fixed category, not the variable. The variable costs, we're managing all of the time. And, in fact, our ability to flex up and down on variable cost allows us to be, I think, hyper responsive to moves in the marketplace. But when we attack – the type of fixed cost things are the parts that – that's the removal of the waste that is permanent when we think about continuous improvement and driving there. And that's what you saw in the second quarter as well. It was a move around taking out waste. And so, that tends to come in steps as we sort of evaluate how best to get that efficiency and then we're able to move on the cost.

Okay, great. And then, Lance, just going back to the D&E margins, I think what we're all trying to figure out is just what the go-forward run rate is, exit any kind of 4Q seasonality. So, earlier this year, we talked about flat margins year-on-year. Looks like they're maybe going to come in a little bit below, closer to 8%. But should we be thinking about the new run rate being in the double-digit range on an annual basis or is it just too early to say?

I think to try to call 2020, it's probably a little early, but we firmly believe that margins in D&E and the international markets are higher than where they are today. Obviously, we've got room to run. I think as the markets continue to improve and for the things that I sort of talked about maybe on an earlier question around activity, leads to tool tightness, more constructive pricing discussions and further implementation of our technology, particularly on the drilling side, we're encouraged by what we see. So, yes, the goal is to be higher than where we are today, clearly, but little too early to call on what would be our expectations for a 2020 market.

Maybe just to add to that if I could. The other important part of this is, as we manage capital, we are reallocating assets where we believe we need to in order to drive those margins up. So, we see tool tightness in the marketplace broadly. And, clearly, we're going to move those assets to where they make the best returns. And so, I think that, in and of itself, drives better margins over time. And at the same time, we do have the ability to meet and exceed growth rates, I believe, internationally.

Maybe just kind of sneak one more in on that. When you look at the margin improvement then in D&E, Lance, how much of it would you just – if you had to put it in two buckets of – one self-help and then the other one just being external market growth and pricing. How should we think about that?

I would weight that to the latter…

Okay.

…in terms of activity and pricing.

Okay. Thanks, guys.

Thanks, Dan.

Our next question comes from David Anderson with Barclays. Your line is open.

Hey. Good morning, gentlemen. So, aside from the pressure pumping aspect, I was wondering about what other parts of your North American business have been impacted by the new playbook? I know part of this is you're looking at every business in terms of its returns. I was just kind of curious, how many of those product lines are kind of underwater in terms of returns? I just wonder if you can just kind of help us understand how this new playbook is impacting the other parts of your business.

I think it has an impact on all parts of our business. I think our view to, obviously, improving returns will get to other parts of the business. And I think that anything we do, in some cases, to take out fixed costs also have an impact on other parts of the business. So, can't do one really without the other. We like all of our businesses in North America. And I think they all benefit a degree from the approach we're taking with frac. So, it's probably more pronounced with frac.

Okay. I was just curious, there's been a lot of talk about the digital space over the past quarter. You announced 10 new applications on your DecisionSpace 365 digital platform. But as we kind of look out there and we see a lot of promise out there. I was just curious how you're thinking about the investment required. A bit of an arms race going on it seems like out there. But can you give us a sense as to how much your R&D spending is today dedicated towards digital and how are you thinking about spending kind of going forward over the next few years in that space?

Yeah. I think the capital and R&D spend around that is included in sort of our run rate. So, I don't think it's going to be outsized to what you've seen us do in the past. I think the – we really like our landmark business. We are a leading software provider in the industry. We hosted an important event in Houston. We had 1,300 customers at our event in Houston to look at sort of the future of digital and had thought leaders who are also our clients present at that event. But I think the key focus and where we will spend more time talking to you, it will be around how it's monetized because I think that's really the important component of all things digital, which is – in my view, it's internal efficiency, enhanced tools that we charge more for and then software sales and consulting that we sell directly to clients. And you hear me talk about those at different times. I'll try to frame them better, but if I think our enhanced tools, 3D inversion is a good example of that with EarthStar, that has a lot of digital involved in making it work. Internal efficiencies look like things like our maintenance, it's automated, and digital planning and manufacturing. And then, 365 being one of the products that we actually sell, both in the cloud and the subscription model. So, I'm comfortable with where we are. In fact, I really like where we are digitally and I think the digital principles that we laid out early around being open architecture, evolving with partners, and then clearly making returns for Halliburton are the right – that is absolutely the right strategy.

Great. Thanks, Jeff.

Thank you.

Our next question comes from Marc Bianchi with Cowen. Your line is open.

Thank you. I wanted to ask – first on CapEx, I suspect you guys aren't looking to get into what you expect to spend in 2020. But just looking where the run rate is here in third quarter and then saying it's going to be again lower in fourth, is that the right way to think about the CapEx that you think the business needs on a go-forward basis?

Yeah. I think the timing of the spend is more weighted, obviously, towards the first part of the year just because that's when tools are actually going to work and a lot of the planning goes on as we look to next year. We have a view of where we want things to be and when we want them to be there.

Okay. Thanks for that, Jeff. And back on the $300 million of cost save, is that the right amount of cost save for this level of revenue or how are you thinking about what level of revenue the business will be sized for once you complete that program?

Look, I think that we continuously take waste out of the business and look for ways to operate it at a lower cost point. So, that's kind of the step that we see right now that is effective. But at the same time, we're always looking for ways to make the business more and more efficient and we'll continue to do that almost irrespective of what we think the revenues are or will be.

Okay. Thanks for that. I'll turn it back.

Thank you. This concludes the question-and-answer session. I would now like to turn the call back over to Jeff Miller for closing remarks.

Yeah. Thank you, Shannon. Look in closing, I'm excited about the international outlook and how Halliburton is positioned to benefit from these improving conditions. The combination of increased activity, pricing improvements, ability to compete for a larger share of high-margin services and reallocation of our assets should lead to higher international margins as I look towards the future. Our North America playbook is working. We're driving lower costs, better asset utilization and market-leading returns in the near term, while concurrently developing technology that lowers our cost or is essential to our customers over the longer-term, principally unconventional resource recovery, drilling and digital and all technologies where Halliburton is uniquely positioned to win. So, thank you. I look forward to talking to you again next quarter. Shannon, you can close out the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.