Halliburton Company Earnings Call NUGGETS: North America Pricing Pressures, Contract Terms and Renewals

On Monday, Halliburton Company (NYSE:HAL) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

North America Pricing Pressures

Waqar Syed – Goldman Sachs: Thanks for all the inputs on the different moving thoughts, but is there a way to quantify some of the margin impacts in North America for pressure pumping? How we could be in maybe by the end of the year where could margins be? Do you see fourth quarter could benefit from guar price declines, maybe start to offset some of the seasonal declines and pricing pressures?

A Closer Look: Halliburton Earnings Cheat Sheet>>

Mark A. McCollum – EVP and CFO: Waqar this is Mark. In the comments, we tried to give you a little bit of color. There is going to be a fairly significant impact for guar inventory costs as we move through the year. As Dave said, about two-thirds of our margin delta in the second quarter related to guar costs, as we look and that inflated about 75% over first quarter levels. We expect guar to inflate another 25% in the third quarter and so probably sort of in relative terms that’s going to end up being about two-thirds of the impact as we look forward. That should abate as we go into Q4. There will be some pricing impact. We are expecting, as long as there’s risk to the gas rig count which we expect will continue to be pressured through the end of the injection season there will be pressure on hydraulic fracturing margins. But there will be some benefit for Canada getting back to work as well to offset that. So it’s difficult to say exactly were that will be. We’re not going to give specific margin guidance sort of beyond that, but I think that ought to be sufficient to kind of help you find where would – but all of those things should be relatively transitory. As we go into 2013, we’re expecting the rig count to begin to grow again. The guar cost issues to be behind us and normalized based on sort of what ought to be market industry averages and from there, we also should start seeing the benefits of our Frac of the Future initiative, all of the things that we’ve been doing to try to transform the business to reduce our cost, we’ll continue to provide some uplift to our margins as we go into 2013.

Waqar Syed – Goldman Sachs: In the past, you’ve said that your normalized margin is around 25%, 26% for North America. Has anything changed in your view that at some point in 2013 you could not get back to that kind of level?

Mark A. McCollum – EVP and CFO: No, nothing has changed from that front. We still believe that mid-20s range is our normalized area of margins.

Contract Terms and Renewals

James West – Barclays Capital: Just to follow-up a little bit on the North America stimulation topic, curious as to when you roll over contracts now, are you still able to achieve pretty significant pricing, I guess premiums versus your competitors? So if the market’s down 20, you are only down, you call it 10, this is our number out there? And then second, are your customers still asking for the same level of term contracts as they were say three or six months ago?

Tim Probert – President-Strategy and Corporate Development: So two parts to that question, James. I think first of all, obviously contracts we are renewing throughout the year, that’s a bit in contrast to the way it was three years ago when we kind of had the big renegotiations at the end of the year, and the answer is, yes, we believe that we are continuing to get a premium as we renew those contracts, that’s quite clear. And secondly, in terms of the term, I would say they’re getting shorter. Obviously you are in an environment when there is more uncertainty than was when the original contracts were undertaken. So, it’s reasonable to assume that those terms (we are sure) were never held previously. That’s not necessarily a bad thing either because if we see some recovery, we have an opportunity to move things.

James West – Barclays Capital: Absolutely, that makes sense. Then Mark, I had a question on North America margins, again the gap down was soft from 1Q to 2Q was pretty significant. There are a lot of moving parts in there but is it safe to say as we think about the rest of this year, that that – we’ve already seen kind of the biggest gap down margins, of course it will go down as you’ve said, but have we seen the biggest kind of at least sequential drop?

Mark A. McCollum – EVP and CFO: Yes, definitely.