HAL Q2 Results

Halliburton Company Q2 2008 Earnings Call Transcript

Dave Lesar

Thanks, Christian, and good morning to everyone. The company posted another excellent quarter with year-over-year revenue growth of 20%. Our international revenue grew 26%, which was in excess of our 20% goal with Latin America continuing its growth momentum with a 33% year-over-year growth. We expect robust activity in this region to continue for the remainder of the year, as we execute our strategy in this market. Overall, our revenues grew 11% sequentially despite the pricing pressures in frac in the US. We had record revenue this quarter in every product line except landmark, which typically records its highest revenue in the fourth quarter.

Let me now turn to the results of North America and discuss our prospects for the second half of 2008 and onward. Despite a very negative impact of the spring break-up in our spring Canadian operations and of course pricing pressure in the frac market, North America revenue for the market grew a strong 7% sequentially due to higher activity in both US land and the Gulf of Mexico.

In the US, our revenues increased 12% sequentially as Halliburton continues to benefit from the increase in horizontal drilling activities toward, which we have focused our US service portfolio. Our well construction businesses in general and Sperry in particular have continued to show strong growth in US land market this quarter. Furthermore, Canada has now recovered from a seasonal drop and we expect strong activity in this market in the second half of 2008.

More service-intensive plays such as the Montney in northeastern British Columbia also are giving us additional opportunities to apply our cross product line and solutions. Our focus on efficiency and high utilization helped us deliver strong second quarter margins in North America. The pressure-pumping pricing environment continued to be competitive. Overall, we experienced the 1% to 2% average pricing decline for fracturing consistent with our guidance.

However, we saw clear signs of prices stabilizing towards the end of the quarter. In fact, the pricing decline was at the lower end of the range as we expected. We, however, did see continuation of inflationary pressures and increases in fuel and materials that we discussed in the first quarter call. Mark will provide an update on this and how we are trying to mitigate that.

For our product lines outside of fracturing, pricing has stabilized with the exception of some minor weakness in our cementing business this quarter. We do not expect continued pricing declines going forward. In fact, currently Wireline logging, directional drilling/LWD, and drill bits have the most pricing leverage upside in this market.

Our customers have announced revisions to their capital programs for the remainder of 2008 and 2009 for the development of their conventional and unconventional resources. We expect unconventional drilling activity to increase over the second half of the year and be geared more towards service-intensive emerging shale plays like the Haynesville and Marcellus, which will drive demand across all of our service offerings.

The formations of these plays are not yet well understood and require a much more reservoir-focused approach. Tim will provide more color on the technologies that our customers are beginning to employ, to unlock the value of these reservoirs. This increased activity along with the tightening and balancing out of capacity provides us with an improved outlook for all of our businesses. It enhances our ability to increase prices modestly and cover cost inflation. Our fracturing equipment utilization remains high and we have worked to optimize fleet placement. We'll continue to realign our equipment with our customers' assets, where we received better long-term margins and returns.

Now, let me turn to our international business. Revenue continued its strong upward momentum with a 26% year-over-year growth. All of our international regions showed growth over 20% with Latin America alone growing above 30%. Sequentially, international revenues increased 15% as operations in Norway, Saudi Arabia, Angola, Mexico, and Brazil continued to expand.

International margins for the quarter were 21% even with our continued heavy investments in people, facilities, and equipment to support the next phase of our growth in the Eastern Hemisphere. Margins were additionally impacted this quarter by the ramp-up costs for our Manifa offshore award where drilling is expected to start in Q4 or early next year and reach a total of ten rigs.

We continue to expect expansion of international margins, which will be driven by value created from the introduction of new technology, the liability of execution, and the fixed cost leverage offsetting the price competition we are seeing on larger tenders. Project visibility continues to be very good giving us confidence that we'll continue to see healthy growth rates throughout the second half of 2008 into 2009 barring a significant global recession due to high commodity prices. We are making good progress in growing profitability in several undeserved markets and are improving our exposure to the highest growth segments of the market.

Let me turn the call over to Mark to give you more financial details.

Mark McCollum

Thanks Dave, and good morning. I'll be comparing our second quarter results sequentially to the first quarter. Halliburton's revenue in the second quarter was $4.5 billion, up $458 million or 11% from the first quarter. Landmark, Baroid, Wireline, and production enhancement product lines registered growth of over 10% sequentially. On a geographic basis all regions showed double-digit increases except for North America, which grew 7% but was impacted by spring break-up in Canada. As Dave pointed out, we are expecting a resurgence of activity in Canada in the second half of 2008, at a much higher level than what we had originally anticipated.

Operating income increased $102 million or 12% from the first quarter of 2008, representing incremental margins of 22%. Our second quarter results included a $25 million gain on the sale of two investments, which was recognized in North America in the drilling and evaluation segment and a charge of $30 million for the settlement of the ReedHycalog patent dispute, which is included in corporate and other.