Halliburton Company Earnings Call Nuggets: Pricing and North American Margins

On Wednesday, Halliburton Company (NYSE:HAL) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

Pricing

David Anderson – JPMorgan: Well, I’m sure you get a lot of questions about pressure pumping pricing. So I guess my angle on this is I’m curious about where spot prices are now relative to the pricing on your existing term contracts. Just wondering are spot prices now in line with terms and how would you expect those contracts to get repriced? I mean, would it be a material change, like down 10%, and I guess, as a follow-up to that, are you starting to see E&Ps sign up any term contracts now, or is it just still too early?

Tim Probert – President-Strategy and Corporate Development: Well, Dave. This is Tim. We are still 80% to 85% long-term contracts, and so our exposure to the spot market is really quite limited and clearly there is, as Dave pointed out, a more aggressive stance in those spot markets, but it’s one which frankly we’re just not exposed to that much.

Mark A. McCollum – EVP and CFO: Let me also – Dave, this is Mark. I’d also add, there it definitely varies by basin and terms. So, we’re still signing up term contracts. We have customers in certain of the liquids basins that are only resigning up for term contracts, that are extending the contracts that they have, and they still continue to be at fairly good prices.

David Anderson – JPMorgan: But are they lower than they were before, I guess is my question, and how much lower? Is it – like a 10%, is it material?

Mark A. McCollum – EVP and CFO: In some of the oil basins, the answer is no, they’re not lower.

David Anderson – JPMorgan: And I would assume the Eagle Ford is probably the most vulnerable out of all those?

David J. Lesar – Chairman, President and CEO: Yes.

Mark A. McCollum – EVP and CFO: Yes.

David J. Lesar – Chairman, President and CEO: I mean, but clearly its proximity to the Haynesville makes it a much more vulnerable basin.

David Anderson – JPMorgan: As a related question, you’re talking about your CapEx, and it looks like you’re on track to spend less, but Mark it sound like you just kind of reiterated your $3.5 billion to $4 billion number. Just wondering if the North America market doesn’t show any signs of tightening you’re seeing, you think your second half looks a little bit better, but if that doesn’t happen would you expect spending – to cut spending and maybe be below that range, and now you’ve got Macondo just on the rearview mirror, just wondering what the thoughts, I mean, is there a potential for a buyback here when you consider where your stock is trading now, if you cut CapEx maybe buy back here at $32 here?

Mark A. McCollum – EVP and CFO: Well, let me take the questions in order. I think with regard to CapEx, I still feel very confident that we’re going to spend in that range of $3.5 billion to $4 billion, but I was trying to reiterate that even though we may be slowing down some of the equipment deliveries in North America, there’s still quite a bit of infrastructure that we’re building out related to our facilities, the transloading facilities for sand and other activities here in the U.S. as well as we are winning quite a bit of international tenders that are requiring incremental capital to what we had built into our original plan. So there is a shift of CapEx fairly immediately for mobilization into some additional international work that we’re pretty excited about. So, in total I don’t see a big shift and it’s difficult for me to see, based on the outlook right now, that we would step down meaningfully from the CapEx number. Now towards your second question, we accrued something on Macondo. It’s one of those that you know based on our valuation of events that had transpired through the course of the quarter we felt the need to do that under U.S. GAAP. However, I would say that we’re long way from having Macondo behind us. I mean, right now we are still in litigation mode. There are still fairly uncertain calendar as to when events around Macondo will take place. So until such time as Macondo is dealt with in its entirety I think it’s going to be difficult for us to strategize on what are the common corporate initiatives we might do with regard to any excess cash that we might have.

North American Margins

James West – Barclays Capital: Mark, quick question for you on North American margins. So we got another decline in the second quarter, 200 basis points to 250 basis points and then you alluded to margin perhaps dropping into the low 20% range, I think in the second half. So, correct me if I’m wrong on that?

David J. Lesar – Chairman, President and CEO: Yeah. I guess, what are the trend toward the end of the year is what I’m alluding to.

James West – Barclays Capital: Okay. So, is that, would that represent the bottom given what you see currently in North America, I mean some of that’s just a mismatch between vendors and some of the pricing declines in pressure pumping, and then is this – are you backing-off earlier statements that you guys have made that normalized margins would be more like in the mid-20s or is that still achievable after we kind of shakeout 2012?

David J. Lesar – Chairman, President and CEO: Well, to the first question as you ask, I think based on what we can see today, yes that low 20s feels like that that’s the bottom. But again I mentioned there is a still a lot of movement out there, it’s a very dynamic market, and so we’ll continue to try to adjust as we see. I think towards your second question, our comments last quarter about normalizing in the mid-20s related really to our outlook for the year of 2012, it’s difficult at this juncture, given the dramatic decrease in the gas rig count and the current outlook for gas to say that we would (indiscernible) to that point there, I mean, that’s – so I’m – we’re kind of coming off of that earlier guidance at least with regard to 2012, I’m not going to try to crystal ball, where we see things going in 2013. But I do think structurally in our business, when you look long-term through the cycles themselves that mid-20s range is essentially where our business tends to operate, and we are driving initiatives inside the company to reduce our cost structure in a way that can give us a fighting chance even if the market begins to flatten out toward the end of the year that we can find our way back to those mid-20s range, if we execute well against our cost initiatives.

James West – Barclays Capital: Okay. That’s very helpful. And then just one question on the international side of the business, is there real spare capacity internationally right now? And if not, what point do you think we do start to see real pricing traction or are we just going to let the offshore drillers have a little fun here?

Tim Probert – President-Strategy and Corporate Development: I think just really following on from one of the remarks that Mark just made now about the shift of capital to the international markets. I think that’s, if you like, a proof point really if there was significant excess capacity then we wouldn’t be needing to move assets to the international market. So no, I would say that our general view is that obviously market-to-market it’s going to be slightly different, but in general terms, no, there’s not a significant overhang of assets in the international markets today.

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