Halliburton 2Q16 Earnings Call Notes

Halliburton’s (HAL) CEO David Lesar on Q2 2016 Results

Revenue down only 9%

“Our total company revenue declined only 9% sequentially compared to the 19% decline in the global rig count. Our North America revenue was down 15% from the prior quarter, significantly outperforming a 23% decline in the average US rig count.”

Second quarter should mark the trough for our earnings

“despite these continuing headwinds, based on the recent improvements to North American activity, I believe that this second quarter will mark the trough for our earnings.”

Customers are thinking about growing their business again rather than focused on survival

“Now, conventional wisdom coming out of the first quarter was that the rig count would continue to drop. We said we saw North America differently and were the first to call a bottom for the rig count. This is precisely what happened. So let’s talk about the reality of today’s North America market. I can summarize this market in one sentence. Today our customers are thinking about growing their business again rather than being focused on survival.”

There is a growing survivor mentality out there

“I spent a large amount of time with customers late in the quarter taking their pulse and I can tell you there was a growing survivor mentality out there, and you can’t underestimate the positive change in attitude that we’re seeing in our North American customers. There is a spring in their step that I didn’t see earlier in the year and in almost every case, they are talking about adding rigs, buying assets or doing something value accretive. In short they are getting back to business.”

The animal spirits are back

“The psychological factors are getting better. Oil reaching $50 per barrel, even for a brief time, was a critical emotional milestone for our customers as was being able to buy a strip above $50 per barrel. So maybe it can be summed up best by one customer who told me, Dave, it’s actually a light at the end of the tunnel and not an incoming train. To borrow a Keynesian economic term, the animal spirits are back in North America”

Balance sheet repair is still critical for many customers

” understanding the economic reality in North America is equally important. Pricing has helped cash flow but not enough. Hedges rolling off have created cash flow uncertainty. Balance sheet repair is still critical and many customers are looking at severe declines in production as many of them have drilled few wells in the last 18 months. And while there are many customers that have adequate liquidity, there is also a large segment evaluating how to access capital. This evaluation is around whether to do dilutive equity deals, accessing the high yield markets, looking at Reserve Base lending or partnering with private equity”

North American producers know that they will be the first beneficiaries of supply shortages

“But the important point is, they are back in business. Now our North America customer management teams are great to work with. They are creative, adaptive and increasingly confident and I believe they will find the solutions best tailored for their companies. This is also a smart group and they see today’s looming supply shortfall and know that US unconventionals will likely be the first and deepest beneficiary of growing supply shortages. And you can be sure they want to reap some of that benefit.”

We need to find 2 Saudi Arabias worth of production in the next 5 years

” the last 2 years has been a period of significant under investment, where global CapEx has been reduced by nearly $400 billion. As a result, the industry will have to find a lot of new barrels in the next 5 years. Now, you can choose your own energy supply expert and there are many of them out there, but most agree we will need between 18 and 22 million barrels per day of new production by 2021. Meaning we have to find nearly 2 Saudi Arabias worth of production in the next 5 years. ”

To achieve that we need a supportive commodity price and we’re not there yet today

“To achieve this production goal, we believe there will need to be structural changes that have to happen. It clearly starts with a supportive commodity price and we’re not there yet today. The prices will have to get there soon or the supply challenges will be even greater.”

Current service pricing in North America is unsustainable

“Current service pricing in North America is unsustainable. We are in an environment where service providers are unable to meet their cost of capital and many are struggling to recover even their cash costs. Historically, as we reached the bottom, the downward momentum on pricing creates a headwind and margin repair tends to lag activity recovery by a quarter or so.”

We are prepared for the North American upcycle

“We are prepared for the North American upcycle. Our approach to the market remains unchanged. The North American market is turning. It will recovery the fastest and Halliburton will be the biggest beneficiary”

Mark McCollum

$3.5B termination fee associated with BHI

” as we’ve previously disclosed, we recognize the $3.5 billion termination fee associated with the Baker Hughes transaction. We also recognize pretax restructuring and other charges of $423 million”

Deepwater doesn’t work at these prices

“where pricing is today, it just doesn’t work generally in the deep water, especially the new deep water. So we’ve been focused on making sure that we get market share gains, even as the market has shrunk because in the long term, contracting nature of that market, when it does turn back up, you’ve got those contracts in hand and now market share becomes very sticky at that point in time.”

Jeffrey Miller

900 rigs will consume all the available horsepower in the market

“900 is the new 2,000 for US rig activity. Now what I mean by that? I believe it’ll the only take 900 rigs to consume all of the horsepower available in the market. Why? We know the North American market best and we’re in every single part of that market. What’s clear to us is that the increases in rig efficiency, lateral length and sand per well create a compounding effect that consumes increasingly more horsepower per rig.”

4m horsepower has been permanently removed from the market

“We believe up to four million horsepower and maybe even more has been permanently removed from the market, representing about 20% of the horsepower capacity reported at the peak and more is permanently impaired each day.”

It’s sentiment that trumps the oil price right now

” it’s a sentiment that trumps the oil price right now. Based on conversations, they are clearly more positive and constructive than they have been in the past, but realize we were starting at the worst part of the market”