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Halliburton Unsure of Recovery's Timing, But Sees North America Healing Quickly

The energy markets may not begin to recover for months, but North America should heal faster than anywhere else in the world, a top Halliburton Co. executive said Monday.

President Jeff Miller sat in for CEO Dave Lesar during the company’s first quarter conference call. As Schlumberger Ltd. executives indicated on Friday, the outlook is murky because rigs continue to fall and business continues to contract (see Shale DailyApril 17). Halliburton, the No. 1 U.S. onshore operator, is confident that North America will be primed and ready once business accelerates.

"It's our view that North America will continue to be the most adaptable market, in terms of addressing well economics through both efficiency models and technology uptake," Miller said. "The U.S. unconventional business is now the lowest cost, fastest-to-market incremental barrel of oil available in the world today.

"One thing we've helped our unconventional customers prove over the years is that they are smart, technically savvy and very adaptable companies. I'm confident that this type of market will show that again. As a result, we believe that when the recovery does come, North America will respond the quickest and offer the greatest upside. And that Halliburton will be best positioned to lead the way...We've been through these cycles before. We know what to do and we'll execute on that experience."

Management isn't ready to set the date for the market to return to positive territory.

"Looking back over the last several major cycles, the speed of this downturn has been historically high," Miller told investors. "Because of the lack of available work driven by the rig count decline, and the resulting overcapacity in the available equipment chasing the work that remains, this is an extremely competitive market.  We're seeing substantial pricing pressure in all of our product lines, and a significant amount of service capacity is looking for work."

Oilfield service companies are behaving one of three ways, according to Miller. One group of service providers are "still running their businesses to make a profit and returns for their investors." The second group are "those who've decided that covering fixed costs is no longer important, and therefore will take work to keep equipment busy and crews intact while operating at a loss. And the third are those that are basically working at a price that covers only their cash costs."

Ultimately, "neither model two or three is sustainable," he said. "We believe capacity adjustments are likely in a market like this. We're not going to call the bottom. But historically, it's taken the rig count three quarters to move from peak to trough. Once we see activity stabilize, the healing process can begin. But it takes time.

“Our input costs can then start to catch up with service pricing declines, and our efficiency programs and well solutions can start driving margins upwards."

Miller made it clear that vendors either play ball with Halliburton or risk being dropped.

"As we discussed last quarter, there's a delay in realizing cost savings in our suppliers. Input cost reductions around items like sand and logistics began during the first quarter and we expect to realize more of these cost savings as we move to the remainder of the year." Many of Halliburton's key vendors "now realize the type of market that we're in, and they're working with us to allow us to get our input costs more competitive." But the company may consolidate its  vendor lists to commit more volumes to fewer companies going forward.

"We are playing offense," said Miller. "We are focused on the utilization of our deployed assets and we are defending our market share with key customers..." Most important, "we are still a returns-driven organization. When pricing concessions push returns below an acceptable threshold, we have instead elected to stack equipment, including fracture fleets. Given the unsustainable prices we've seen some of our competition willing to work for, we would rather save our equipment for better times."

What's not unique about the downturn is that customer, service company and supplier behavior "is pretty much as you would expect," as each jockeys for the best price and to maintain market share. "What is unique is the speed in which this is happening," Miller said.

Given the headwinds globally, "our focus is on controlling what is within our control." Since late last year, Halliburton has cut 10% of its workforce, or about 9,000 people worldwide. It's also reduced its capital spending for this year to $2.8 billion, down about $500,000.

All of the internal changes led to a $1.2 billion restructuring charge in 1Q2015. Charges included a complete writeoff of operations in Libya and Yemen, as well as severance charges. There also were costs related to the pending merger with Baker Hughes Inc., which continues to be on track to close in the second half of the year. The merger is requiring Halliburton to spend more money than it would otherwise, Miller noted. It's also keeping its investments ongoing in technology to "maintain the health of the franchise," he said. Baker reports its earnings on Tuesday.

"In a typical downturn, we would have reduced our operating cost structure more than we have done. But in anticipation of closing the Baker Hughes acquisition later this year, we want to preserve our underlying service delivery and platform. We know we have best-in-class service delivery. And keeping this platform in peak condition will allow us to realize our transaction synergies post close. This means we are not cutting as deep as we might have done so otherwise. Consequently, we are carrying an elevated cost structure. While this decision burdens current margins, it is clearly the right thing to do in the long run."

Income from continuing operations was $418 million (49 cents/share) in 1Q2015, compared with year-ago profits of $623 million (73 cents). Year/year, adjusted operating income was $699 million versus $970 million. Total revenue was $7.1 billion, compared with $7.3 billion in 1Q2014.

Total company revenue of $7.1 billion was down 4% year/year, outpacing a 19% global rig count decline. North American revenues fell 9%, while operating income fell 54% from a year ago, versus a 21% decline in the U.S. land rig count.

Completion and production (C&P) revenue was down 4% to $4.2 billion on the steep rig count declines and price discounts. C&P operating income fell 30%, with North America C&P declining 48%. Drilling and evaluation (D&E) revenue was off 4% from a year ago, with operating income down 23%. North America D&E operating income plunged 71%, primarily because of decreased fluid and drilling services in the United States land market.

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