Jeff Miller – CEO

Greater rig productivity means fewer rigs for same production

“Yes. I think I certainly feel like I was a little high on my number. 800 feels very busy. And it’s happening like we thought in terms of the rig efficiency is there, which is driving substantially more completion activity. Fewer rigs drive more completion activity. We’re seeing that today not only in terms of number of stages, but sizes of stages has also compounded the level of activity. We’re up about three times what we were in 2014 in terms of sand volume, just pure volume. And so the demand is there and it’s driven off again, as I said, that lower rig count. And I don’t know that that it makes – it’s going to continue to move up, but it’s simply going to drive more and more activity.”

Momentum around pricing continues to move up

“I mean the momentum around pricing continues to move up. And so very positive. It really started in Q4 of last year where we really tried to probe the market to see if there was room to move. We saw some green shoots, but I’d describe it as a bar room brawl. It absolutely was brawling in Q4 last year to see if prices would move. As they started to move, that’s what precipitated our move in Q1 to accelerate reactivation simply as our team on the ground started to get a better sense of customer urgency, which ultimately drives pricing momentum. We were able to react very quickly then.”

*International going to tread water for a bit

“Look, I think international is going to unfortunately tread water for a bit. I don’t know that it needs to come back. We’ll continue to trim cost internationally. That team is working very hard. That team knows how to execute kind of in any market and I think will be effective. The infrastructure that we’ve built out doesn’t go away, but we will certainly scale that back as we look at markets that either have a – look at the timing form coming back. Some may never come back just given the producing power of the Middle East, North America and probably Russia will likely be more dominant. So there are some marginal markets that may not come back, but by and large, we manage in that every day in terms of where to be.”

Anyone that thinks they’re a commodity probably is

“anyone that thinks they’re a commodity probably is”

Dave Lesar – CEO

North America has turned the corner, but international downswing is still playing out

“Now, let me take a few minutes to discuss what we’re seeing in the market today, and our prospects and challenges for the coming year. Despite the positive sentiment surrounding North American land, it is important to remember that our world is still a tale of two cycles. While the North America market appears to have rounded the corner and is on the upswing, the international downswing is still playing out.”

Animal spirits are running but maybe in different directions

“Let’s talk about North America. On the second quarter call, I told you that customer animal spirits were back in North America. Last quarter, I said that these animal spirits were alive, but somewhat caged up. Now, these animal spirits have broken free and they are running. However, not all customers are running in the same direction or as a pack, but they are running. These animal spirits can be seen by the dramatic increase in customer M&A activity, energy industry initial and secondary company offerings, the significant private equity capital moving into resource plays and of course the increase in the rig count. Customers are excited again, and our conversations have changed from being only about cost control to how we can meet their incremental demand.”

Trading market share for better profitability

“In Q3, we told you that we were willing to strategically trade some of that historically high market share for better profitability. Clearly, the time had come to improve returns and that is what we told our customers. In Q4, as demand for our equipment increased and availability tightened, our customer discussions revolved around the unsustainable pricing that was in place and the need for us to make a return before we were willing to continue to work for them or add new equipment. If a customer agreed to better pricing, we continued to work for them, if not, we took that equipment and use it to fill the incremental demand with a customer that shared our view on how to work together and make better wells.”

US shale is swing producer, tough for deepwater to compete

“Most people agree that the U.S. is now the world’s swing producer and it has demonstrated its ability to ramp up production quickly at a price that may make it difficult for deepwater projects to compete. We believe that the race to get deepwater project cost down versus the impact on commodity prices on increasing U.S. shale production will have to play out over the course of 2017. Therefore, we do not expect to see an inflection in the international markets until the latter part of 2017.”

OUS portfolio doesn’t compete

“Yes. Jim, let me give you an anecdote. I was talking to the CEO of one of our IOC customers Friday, obviously not going to say who it was. And he said that there was not a single asset in their portfolio outside the U.S. that competes with their U.S. opportunities right now. And to me that’s a pretty amazing statement to me in terms of really how much further commodity prices have to go up to bring some of these more either highly complicated or longer duration projects to the front of the queue get an FID decision made around them.”

Jeff Miller

Talking about price increases

“First, I like talking about price increases more than decreases, it’s a nice change. Second, the service price recovery is starting from an extremely low base, in many cases below variable cash costs. Third, the level of pricing that satisfies a particular service company depends on where they are on the profitability continuum. Finally, even though the industry is starting in different profitability levels, every company will have to march back up the same path to profitability.”

Halliburton’s (HAL) CEO Dave Lesar on Q3 2016 Results

NA revs grew for the first time in 7 quarters. Animal spirits are alive if muted

” Our North America revenue grew 9% for the period, representing the first revenue increase in seven quarters. Our results improved as we took advantage of the rig count growth by focusing on increasing utilization and working our surface efficiency model. Our customers’ animal spirits remain alive and well in North America even though for some they may feel caged in a bit by cash flow constraints in the short-term. The average U.S. rig count increased 14% over the quarter, driven primarily by rig additions to smaller operators where we saw a trend of less service intensive wells, which is not activity typically worth chasing at today’s pricing.”

Customers may delay some drilling until 2017 but getting better

“Now, looking ahead to the fourth quarter on North America land, activity levels are difficult to call at this point. Based on current customer feedback, we remain cautious around customer activity due to holiday and seasonal weather related downturns. Our customers may take extended breaks, starting as early as Thanksgiving and push additional work to the first quarter of 2017. As one customer told me, Dave, it doesn’t make any sense for me to rent an efficient high-spec rig, if I have to start and stop all the time for the holidays or the last five weeks of the year. I just can’t get the efficiencies I’m paying for in the rig. I would rather just wait till next year to start drilling. And I believe we will see a lot of that mentality in the fourth quarter. But that being said, it does not change our view that things are getting better for us and our customers.”

International rig count should bottom in 1H17

“We expect to see a bottoming of the international rig count in the first half of 2017. Land-based mature field activity should lead the international recovery, while we expect the deepwater complex to remain so severely challenged for the foreseeable future. Even though the light at the end of the tunnel is getting brighter, there is no question we remain in a very challenging market.”

North America is the swing producer

“As we have said for some time, North America has assumed there role of swing producer in global oil production. Because of this shift away from production discipline, which was historically created by OPEC, our industry will likely experience shorter commodity price cycles going forward. So, we see the future market as a combination of shorter cycles and range-bound commodity prices. ”

The last cycle of $100 oil covered up terrible inefficiencies across the industry

“keep in mind, the last cycle of $100 oil covered up terrible inefficiencies across the industry. In today’s environment, asset utilization will be just as critical to improving margins. And I have full confidence we’re taking the necessary steps to achieve that. Positioning us for success while navigating through this deep cyclical downturn was one of the most intellectually stimulating management challenges we have ever had. ”

Still need oil above $50 to see meaningful increases in activity

“the North America unconventional market has responded the quickest demonstrated by the increase in recent rig count activity. However, we continue to believe meaningful activity increases from our customers will not start until we see sustainable commodity prices above $50 per barrel. “‘

Our customers are smart

“listen, our customers are smart, they see 2017 shaping up to be better and they’re going to try to lock in as much time and price as they can at this point in time.”

Jeff Miller

Still in oversupplied equipment market

“So, let’s start with North America. While the supply and demand balance for U.S. onshore services is heading in the right direction, we are still in an oversupplied equipment market. Our customers remain focused on cost and producing more barrels. ”

Pricing is still a brawl

“Pricing is still, yes, I’ll describe it overall as a brawl. As I said, we’re always pushing on pricing. We’re seeing small increases in different basins, but where we’re most focused around those customers with whom to collaborate the best. And I’ve always said that the tightening of utilization was a critical first step and we are beginning to see that”

The rock is different in every basin

“It’s always important to remember that Halliburton operates in every basin across the whole of North America. And what’s happening just in the Midland or Delaware, in the Permian isn’t — every basin, every rock is different. And so, we go to market where the customer needs to get the best well in those markets. ”

International usually lags North America by 6-9 months

“The international business traditionally lags North America by six to nine months. So, that’s just sort of broadly across all of the markets in terms of activity. And we’re continuing to see and if you look at sort of geographically outside of the resilience in the Middle East business, there’s been a substantial decline in activity commensurate with the commodities”

rigs going back to work may be driven by PE money

“There has been a lot made about the rigs that have gone to work so far have been low calorie rigs, private companies by private equity sponsor drilling wells, primarily in the Permian and trying to drill as cheap as they can. It would seem that in your market share progression that you’ve gone after bigger companies that work 24/7 that the drill complex wells. Has the move so for off the bottom been a rig count that is not clearly beneficial to you guys and is that one of the issues that will be solved as we get into 2017 and more established companies pick up drilling?”

Jeff Miller – President

We’re on the road to recovery but this is the worst downturn we’ve ever seen

” I think the headline reads on the road to recovery. You have to look hard, but if you look at the red line, you’ll see on the road to recovery. But at the same time, I would describe this as sorting through the wreckage of the worst downturn that we’ve ever seen. We see the after-effects just about everywhere that we look. There have been more than 350,000 layoffs in the industry, mostly weighted towards oilfield services, some companies laying off as much as 80% of their workforce. At Halliburton we’ve laid off about 40% of our workforce. Bankruptcies and restructuring are quite commonplace today and CapEx has been radically reduced and asset sales are now strategy.”

We’ve found bottom

“So fundamentally, we’ve found bottom. I would describe it now is that we are in the early innings of a recovery. But what’s important to remember is we study the script every day and we look at oil price and all the other things that we do on a day-to-day basis. It’s important to remember that the starting point is from a 100 year low in activity”

Decline rates with capex spending lead to a 14m barrel per day gap

” The current decline rates, if we conservatively estimate those at 3%, are working on the slide behind me right now. What you’d see is that just a 3% decline rate. Again conservative means about a 14 million barrel per day gap grows over the next 5 years. What this model does not consider is what I like to describe as almost CapEx starvation, which would only serve to exacerbate that gap, meaning more that 14 million barrels per day.”

The unconventional barrel is the fastest barrel to market

“the unconventional barrel is simply put, the fastest incremental barrel of oil to market. That means it will be the first to fill demand, to fill the imaginary supply bucket that I described on the prior slide. In addition though, the unconventional barrel is the shortest cycle return barrel, which makes it an attractive barrel, not only for filling demand, but from a return stand point.”

Deepwater will be slowest to recovery

“The slowest recovery will be Deepwater. That’s really a duration question. It’s 7 to 10 years from discovery to barrels in the tank. It has 2 implications. The first being financial and it’s just as simple as more money upfront and a longer wait for a return, but then also from a demand standpoint in terms of filling that barrel.”

Brazil has stopped declining

” there are a few glimmer spots, I won’t call them bright spots. I’ll call them glimmering spots, but Brazil for example has stopped declining in activity and is doing what it can to make their reserves work in the current economy.”

Differentiation in service companies

“Service Company differentiation has never been clearer. On the one hand we have a competitor moving towards a distribution model, moving away from full service execution in the last mile, while on the other hand a competitor pursuing single source sector integration, basically saying we already know what you need, we’ll define it.”

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”

Mark A. McCollum

Never been more differentiation between the service companies

“it strikes me at this point in time there is probably more differentiation between the major service companies than there ever has been. And so, if I am an investor in terms of thinking about who I would invest with, I don’t think at any point in time there has been a clear line of sight as to how everybody is attacking the market.”

Coming off the bottom, but lower slope recovery

“We think at this point in time in the cycle the market itself will be – we’re coming off of the bottom and we feel like we have kind of at the bottom at least in North American and approaching a bottom internationally. But that the recovery itself is going to be a lower slope recovery than maybe some others have been.”

This was a supply based downturn

” it’s probably not to going to be a straight line for the fact that this was a supply based downturn that you have a relatively low demand growth overall and the fact that North America is also now the swing producer in the world with relatively little energy policy and a free market at a lot of access to capital that the recovery itself may be somewhat choppy, because you have shorter cycles here, that as your best foot comes in prices modulate around the supply/demand equation.”

Unconventionals in NA are the swing supply

” let me also say that in this recovery we think that unconventionals in North America clearly are the first mover. They are the cheapest, fastest barrel to market and so they become the swing barrel, the incremental barrel out there.”

It is ugly out there from a pricing standpoint

” I mean clearly guys it is ugly right? I mean everybody is underwater at this point in time and there is – that’s you know, that is definition of an unsustainable market. Right? So, they cannot hold here for any of this and so we are going to do need some pricing relief here at some point of time. It’s really going to depend on who you are, where you are right? For us when we are negative, but yet, I mean essentially says you’re not covering your depreciation and may be some of the fixed cost allocation that’s you are making to your business, utilization actually becomes a more important factor than just price. “

Dave Lesar

Obtaining anti-trust approval has become increasingly difficult

“From a regulatory perspective, we completely understood that the transaction would draw regulatory scrutiny and that substantial divestitures would be required to obtain regulatory approval. However, obtaining the U.S. anti-trust approval of large complex business combinations, regardless of the industry, has become increasingly time intensive and difficult, as evidenced by the termination and litigation of several other large proposed transactions over the last 16 months.”

Deterioration of oil prices also decimated the economics of the deal

“In addition to regulatory matters, the unprecedented deterioration of the oil and gas industry decimated the economics of the deal. During the pendency of the deal, the WTI price of oil has gone from over $76 in November of 2014 to a low of just over $26 in February of this year, while the global rig count has gone to a 17 year low and you all know what’s happened in North America, where each week we seem to hit new historical lows.”

People are more optimistic with oil prices higher, Q2 could be bottom for rig count

“I think that clearly they’re marginally more optimistic about things. I don’t think we’ve seen that optimism translated into any set plans to actively increase the rigs in the back half of the year, certainly those discussions are taking place. I think if you look at our release we put out last week, we thought the rig count would bottom in Q2, I think we still believe that’s the fact. But certainly, with the oil prices a little higher, people are more optimistic and we do think that potentially we’ll see an upswing in the rig count in the back half of the year.”

Independents are confident that they’ll get the money they need

“And I think given the nature of these companies and they are independents, they’re very confident in their own skill set, they’re confident in the acreage they have and I think that when they believe that the time is right to start drilling, they will do it. And generally, I think what we’ve seen is they’ll be able to get the money to do that either through commodity prices, or through going back into the equity markets or the debt markets. So, yeah, they are feeling better and I think they’re trying to survive to 2017 and then get on with things.”

Christian A. Garcia – Senior Vice President of Finance & Acting Chief Financial Officer

Jeffrey Allen Miller – President & Director

Lowest cost wins

“Commodity prices in markets will move up and down, but the one thing about which I am certain, one thing that won’t change over time is that the lowest cost per BOE wins.”

International cycles are usually longer than North America

“The international cycles are just longer, and so they are longer on the way down because structurally the contracts are longer, they’re also slower on the uptick as well. So, I don’t expect to see improvement internationally until we see some improvement in North America. That timeframe has usually been six months to a year in terms of the lag between North America and the rest of the world”