哈里伯頓 (HAL) 2003 Q1 法說會逐字稿

Good day. Welcome to today's Halliburton Company first quarter 2003 results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to introduce Vice President of Investor Relations, Mr. Cedric Burger. Please go ahead, sir.

Thank you. Good morning and welcome to Halliburton's first quarter 2003 earnings release conference call.

Today's call is being webcast and a replay is available on our website.

Joining me today are Dave Lesar, our Chairman, President and Chief Executive Officer, and Doug Foshee, Executive Vice President and Chief Operating Officer, and Chris Gaut, our new Executive Vice President and Chief Financial Officer.

Following our prepared remarks, we'll take questions from the investment community. We'll limit each caller to one question in order to maximize participation in the time we've allowed.

Before turning the call over today for opening comments, I would like to remind our audience that some of today's comments may include forward-looking statements reflecting the company's view about future events and their potential impact on financial performance. These matters involve risks and uncertainties that could impact the company's operations and financial results as discussed in Halliburton's form 10K for the year ended December 31, 2002.

With that, I'll turn the call over to Dave Lesar. Dave.

Thank you, Cedric.

Good morning to everyone.

We're going to change up the format that we've used a bit this morning. With the addition of Chris Gaut, as our new CFO and Doug, assuming the responsibilities for Chief Operating Officer, I'm going to simply make a few opening comments and then Chris is going to go over the numbers in greater detail and then we'll follow that up with some more detailed commentary and operations from Doug, before we turn it over to questions. So as I said, it's a little different than we've done in the past. Let me just give you a few highlights for the quarter. As we expected, the first quarter saw a continued unwillingness by our customers to commit to any major spending increases, due to their uncertainty over the sustainability of oil and gas prices. This had some impact on our overall results in terms of both revenues and margins. However, we are clearly beginning to see some positive signs in terms of future activity levels.

Our first quarter income from continuing operations was $59 million or 14 cents diluted share. This included a 34 million dollar or 8 cents charge, related to the Barracuda project. And I want to talk about Barracuda a bit more and Doug will elaborate further. We are at this time currently an ongoing high-level negotiations with Petrabrass about resolution of the issues on the Barracuda project. While these discussions have not yet concluded, they are moving forward in a positive manner. And these negotiations may be completed as early as the end of the second quarter of 2003. If successful, could result in a number of positive developments, including schedule relief and improved project liquidity.

I'd like to point out here that taking the 55 million dollar charge does not mean that we don't intend to collect this money or recover this PNL charge. However, SOP 81-1 sets a high standard for the probability on collection of claims and we did not believe there was additional probable claims at this time that we could accrue related to these costs. The successful resolution, however, of these negotiations would cause us to reevaluate our probable claims. So as not to compromise the company's negotiating position, that we have ongoing, we're not going on to say anything more on the negotiations at this point in time, nor will we take questions on them.

On the new business front, we did, however, announce a number of new awards within the past several weeks. Within the ESG, we're very excited about the three-year contract that we received from BP American Production to provide products and services for their drilling and completion activity in the Gulf of Mexico and lower 48 states. This was a tightly contested series of bids that BP had. Our share of the award will increase our market share with BP, and in this area by more than 50%.

Some of the Halliburton technologies that will be available available under the contract are bay Lloyds accolade drilling fluid, Sperry Sun's geopilot, rotary steerable system, Halliburton's L and P, emerald lab service, and Halliburton's micropalmar fracture and serves. We were awarded work in essentially all the service lines that we bid. In addition, we're very excited about a three-year contract and we got from Shell to provide our Poraflex line of expandable screens, which had a total estimated value of $166 million. This will very much compliment our growing expandable tubular business that we have. Recently, on the KBR side, a joint venture in which KBR is a 50% owner was notified that we have been selected as the winning bidder on the $1.4 billion project with BP for the Tangguh LNG project. This project will include the design, procurement, construction, and commissioning of a L&G plant in Tangguh. We expect this project to be added to the backlog later in the year or early next year, once the project moves forward.

I think it's important to point out this makes the eighth L&G award for us over the last two years and demonstrates or continued strong performance in this area. Now as I said, led me turn the call over to Chris, he'll go over the numbers in more detail and then doig will add an operating flavor at the end. Chris.

Thank you, Dave.

My comments today will include updates on the company and segment results, liquidity and other balance sheet items, and guidance for the second quarter, and for the full year 2003. Now, I'll be comparing first-quarter results sequentially to 4th quarter 2002 results and talking about our results of continuing operations and that's excluding the net gain from the sales of Mono pumps and Wellstream and expenses related to the global asbestos settlement. But including the Barracuda charge, which was $55 million pre-tax, $34 million after tax. These proforma results are reconciled to our GAAP financial and the schedules attached to the press release, which is accessionible on our website, www.Halliburton.com.

Total company revenues of approximately $3.1 billion for the first quarter were down 9% sequentially from the 4th quarter, primarily during to reduced activity in KBR. International revenues were 66% of the total in the first quarter of 2003, that compares to 68% in the prior quarter. Operating income was $123 million, a decrease of 89 million or 42% sequentially, primarily due to the $55 million loss in the Barracuda project, lower prices in U.S. pressure pumping, the national strike in Venezuela, lower activity in the Middle East associated with the war in Iraq, and seasonal declines in Landmark and subsea operations.

Income from continuing operations was $51 million or 12 cents per diluted share, including the 8 cent per share charge related to the Barracuda project. Now I will give you more detail by segment on our operating results and I'll review revenues, followed by operating income. In the Energy Services Group, revenues were $1.6 billion, a decrease of $103 million or 6% from the 4th quarter of 2002. Three items accounted for 83 million of this $103 million decline: First, Sperry Sun revenues declined by $31 million, primary due to the sale of Mono pumps early in the quarter and lower activity in the Gulf of Mexico. In the 4th quarter of 2002, Mono pumps had approximately $20 million in revenues, obviously we didn't have those in the first quarter.

Second, Landmark revenues declined $36 million due to lower software sales in the first quarter, and third, SubSea revenues declined 16 million, due to seasonality operations in the north sea and delays of work in Brazil. Breaking down the other product service lines sequentially, Baroid revenue increased 8% overall, with nice increases in all regional markets, except the Middle East, which was impacted by the war in Iraq. For drill bits, security DBS's revenues increased by 10%, compared to Q4, due to increased rig activity in Canada. Our pressure pumping revenues decreased by 1%. U.S. pressure pumping revenues improved over 4%, but were offset by 5% decline outside the U.S. due to lower export sales.

Drilling activity in areas with we have our strongest presence, such as the Rockies, south Texas, and the Gulf of Mexico, did not experience the same level of increased drilling activity as some of their areas in the U.S. and particularly Canada. Completion products revenues where down 4%, primarily in Europe and Africa. Logging sequential revenues declined 9% due to lower revenues in Venezuela and the absence of some product equipment sales, which occurred in the 4th quarter. Overall, Halliburton Energy Services revenues decreased 1.8% to $1.5 billion, and that is excluding Mono pumps from both revel periods.

Turning to operating income for ESG. ESG operating income in the first quarter of 2003 was $159 million, comparing to $199 million in the fourth quarter of 2002. Operating margins this quarter were 9.9% compared to 11.6% in the 4th quarter. Most of the changes due to port performance and surface SubSea.

SubSea operating income declined $28 million due to lower activity levels and significant increases in dry docking costs in our SubSea operations and lower operating income at Wellstream. This impacted Energy Services Group margins by approximately 1.7%, and that is the difference between our Q4 and Q1 margins.

Landmark's margins fell 14 percentage points due to season of decline in the software decline sales which does traditionally have high incremental margins. Overall, AGS margins increased to 11.2% versus 10.4% in the prior quarter, excluding the gain on the sale of Mono pumps. Baroid margins increased significantly, due to increased revenue in Nigeria and the Gulf of Mexico. Completion products margins improved about 3 percentage points primarily due to increased activity in Angola, Brazil, and the Gulf of Mexico. Security DBS operating margin increased slightly due to seasonal activity in Canada. Logging margins dropped almost 2 percentage points due to pricing pressures in the U.S.. Our pressure pumping margins dropped over 3 percentage points due to a weaker pricing environment in the United States.

Sperry Sun margins decreased almost 5 percentage points, primarily due to lower activity offshore in the Gulf of Mexico. Now some geographic information for the Energy Services Group.

On a geographic basis, sequential revenues where down in all regions except for North America, up approximately 2%, primarily in Canada due to increased rate counts there. The Europe and Africa region was down 9% with decreases in the U.K. partially due to a $12 million decrease in Landmark revenue in the region as well as the impact of the sale of Mono pumps.

Asia-Pacific revenues declined 18% primarily due to reduced pressure pumping equipment sales in China. And decreased revenue due to the sale of Mono pumps. Revenue was down 17% in Latin America, with decreases in Venezuela due to the oil workers strike across most of our product service lines. Middle East revenues fell about 6% sequentially, as a result of the war in Iraq. Geographically margins improved by 1 percentage point in North America due to Canadian activity, with a decline in Landmark was more than offset by other product service lines. Latin American margins improved by over 2 percentage points as deterioration in margins in Venezuela was more than offset by increases in Mexico and Brazil. The absence of equipment sales impacted margins negatively in Asia-Pacific, declines in margins in the Middle East and Europe Africa were primarily related to poor SubSea performance results, and the impact of the war in Iraq.

Now, talk about the engineering and construction group KBR. Again, I will review revenue followed by operating income. Revenues for KBR decreased 11% sequentially to approximately $1.5 billion. The decrease was primarily in two product lines, onshore and offshore, due to reduced activity on several major projects, which was partially off offset by 39% increase in government services. The increase in government services revenue was due to initial activity related to Iraq and activity on the Los Alamos contract.

Revenue for the quarter under our law company 3 contract with the United States Army was $108 million, and includes work of $86 million related to Iraq. Under a separate contract, we're performing additional work in Iraq related to the oil fires, but that revenue was not material in the first quarter. As a matter of interest, the first quarter impact of our Iraq-related work on net income was less than 1 cent per share to the total company. We're not able to provide any more information regarding these contracts due to the classified nature of the projects.

The operating loss at KBR was $17 million in the first quarter, a decrease of $62 million sequentially, primarily due to a $55 million loss on the Barracuda project and lower overall revenues. The additional losses on the Barracuda project are due to recently identified higher cost trends and some actual and committed costs exceeding estimated costs. In addition, schedule delays have added to the cost of the project during the quarter.

The only other offshore fix price at the contract that is not substantially complete at this time is the bell neck project in Indonesia, which is now 50% complete and remains in a profitable position.

Now, some other financial items. General corporate expense was $19 million in the first quarter of 2003, that compares to $32 million in the 4th quarter of 2002. This decrease relates to severance and other reorganization costs that were taken in the 4th quarter. The $19 million in corporate expenses is in line with our previous guidance of 17 to 20 million per quarter. We expect a small increase during the remainder of 2003, primarily due to professional fees for Sarbangs off sea compliance. Interest expense was $27 million in the first quarter of 2003, we expect interest expense to decrease in the second quarter by two to three million due to the debt reductions I'll discuss in may minute. We had foreign currency losses of $6 million in the first quarter, and that was primarily related to Brazil and Mexico. Our effective tax rate for the first quarter was 43% as reported. But excluding the impact of the net gain on the sale of Mono pumps and Wellstream, which carried a higher tax rate with them, our effective tax rate was 39% for the quarter from continuing operations and proforma basis, and that is a better indication of our rate for future periods.

Capital expenditures totaled $100 million for the quarter, and that's down $100 million sequentially. A significant portion of the decrease was in KBR, which had about $50 million in expenditures for infrastructure improvement at our Devenport shipyard JV facility during the 4th quarter of 2002. We're focused on capital discipline and expect our spending to be down year over year, to approximately $700 million. Most of our capital spending will be in the Energy Services Group, primarily for directional and LWD tools.

Depreciation, depletion and amortization expense was $127 million for the quarter, and that's about the run rate we expect for DD and A for 2003. Now just a minute to update you on several key issues affecting our debt and liquidity. Total debt at March 31st, total debt was $1.5 billion, which is essentially unchanged from the end of the year. Our debt to capital at the end of the quarter remained low at 29% and our net debt to capital ratio taking into account our $900 million of cash is 13%. We maintain our investment credit ratings.

We ended the quarter request $900 million in cash, down from $1.1 billion at the end of 2002. This decrease relates to increased working capital requirements about half related to the startup of our work in Iraq. Our networking capital position was $2.4 billion at the end of the first quarter. Subsequent to quarter end we did pay off the $139 million of 8% senior notes upon their maturity this month.

During the quarter, we sold our Mono pumping products business to National Oilwell for $23 million in cash, at 3.2 million shares of National Oilwell stock and subsequent to the sale we -- we sold the 2.5 million shares of National Oilwell stock for $52 million. In addition, we sold our Wall Street business for $136 million to Canover Partners Limited. We continue to have our $350 million in availability under our unused, committed line of credit that expires in mid-2006.

Head count, our head counted was around 92,000 employees at the end of the quarter, up sequentially due to increases in our government operations group. Now, guidance for the second quarter and for the full year 2003: as we look ahead to the second quarter, we expect a modest improvement in oil service activity, as Dave mentioned. Accordingly we expect earnings per share from continuing operations for the second quarter to be at least 23 cents per share, excluding any impact of the proposed global asbestos settlement.

The major factors contributing to the sequential improvements are normalcies, no declines in Landmark in the North Sea operations in the first quarter that should begin to rebound in the second quarter, possitively impacting earnings, and we believe the negative impact on our operations in Venezuela should be reduced in the second quarter, however we continue to be exposed to reasonable uncertainties in Nigeria and the Middle East. So 23 -- at least 23 cents in the second quarter, and adjusting our full-year 2003 earnings guidance, due to first-quarter actuals, updated guidance for the second quarter, and including additional losses of Barracuda that we took in the first quarter, we expect our earnings per share for 2003 to be at least $1 per share. With respect to the SEC investigation, we believe the production of documents is now complete. Process of providing witnesses to testify is ongoing. To our knowledge, the scope of the investigation is not changed and relates only to the accrual of revenue associated with cost overruns and unapproved claims for long-term engineering and construction projects.

Now I'll turn the call over to Doug, who will provide an update on operations and the status of our global settlement.

Thank you, Chris.

I'd like to start this morning by reviewing in a bit more detail the Barracuda chart this quarter. As is obvious by the amount of the charge, this continues to be our most challenging project in KBR. As has already been mentioned, we'll take a $55 million pre-tax charge amounting to 8 cents a share after tax on Barracuda this quarter. The charge comes as a result of our quarterly review, which showed both schedule slippage and an increase in claims by subcontractors as for progress on the project, it's now almost 70% complete, with over 80% of the estimated total costs spent or committed. So the project continues to make significant progress toward completion. As we move through this summer, several project mile stones will be completed, including the sale way of the Barracuda vessel from the shipyard in Singapore.

In addition to the physical progress being made on the project, we're very encouraged that significant progress is being made with our client on the commercial side. We have had extensive discussions and negotiations around the resolution of our differences, and believe that significant headway has been made in this area. While it's not a certainty, as Dave said, we believe we'll show significant reportable progress toward resolving our commercial dispute with our client during this next quarter. I know that the charge related to Barracuda overshadows the rest of KBR's performance. However, I would like to point out several very positive outcomes in the quarter for KBR.

First, and also in our offshore segment, the SPSO handover certificate was issued by Shell on the EA field development, offshore Nigeria, signifying commencement of the commissions and operations phase. This follows the successful connection of the SPSO to the platform last quarter, capping a very successful world scale SPSO development. Also, during the quarter, the pen ex board approved change orders in excess of $100 million related to the Cantorrel field in the Gulf of Mexico, increasing the scope of the project significantly and resolving a important commercial dispute amicably. In the onshore product line, we continue to secure new business in the gas modernization arena. As Dave mention, just last week BP notified KBR and our long-time partners of our selection of the engineering procurement and construction of the Tangguh L&G project valued at $1.4 billion. This project is significant for several reasons.

First, it's the first grassroots LNG facility to be constructed in Indonesia. Second, it represents our first opportunity to work in the LNG arena for BP, a major player in the global arena for LNG. And last, it shows our continued leadership in what is our most differentiated product line.

Also, in the LNG arena, the TSKJ joint venture led by KBR achieved ready for startup milestones on the LPG units on Nigeria LNG train 3 ahead of schedule and earned the maximum possible incentive bonus. This follows the successful completion at the end of last quarter, of the LNG ready for startup milestones ahead of schedule, which are in the maximum interceptism bonuses there. KBR continues its leadership in LNG. We've participated in one or both phases of all but one grassroots LNG projects built since 1976. We've performed the engineering construction on approximately 62% of the total installed LNG tonnage in the world. And we've been instrumental in approximately 70% of all LNG receiving terminals outside Japan in that time period.

On the ammonia front, nitrogen 2000, a large ammonia expansion project in Trinidad, received its regulatory permits enabling KBR to license its technology and engineering to the owners.

Switching gears, KBR's operations and maintenance product line performance continues to be below expectations, and we'll be watching this closely as we go through the balance of the year. Other recent awards include a $400 million contract in our infrastructure product line to a consortium in which KBR is a 25% shareholder with the U.K. highway agency for development of a 33-mile stretch of road in the U.K., and subsequent to quarter-end KBR added $100 million to backlog related to a contract with the U.K. department of health to provide for restructuring and modernization of its national health services information technology. Much has been written about our involvement in Iraq. Much of what has been written has been inaccurate at best. We've tried our best to stick to the facts while at the same time complying with our clients' requirement for confidentiality.

We're very proud of the work work we did in advance of the hostilities in Iraq to help the military devise a plan for minimizing damage to the oil fields of Iraq, which everyone acknowledges will be the lifeblood of the Iraqi people's economic recovery. We are perhaps the only company in the world that had the three crucial elements to complete this task: Namely, we're among the world's experts on oil field services and on controlling oil well fires caused by explosives.

Secondly, we're an existing contractor with several branches of the U.S. government, and so we understand very well their processes, procedures, and logistical requirements. And finally, and very importantly, our people possess the necessary clearances to review classified information in advance of a conflict. We don't feel the need to apologize for this. We did a professional workman-like job.

Our people have worked tirelessly under very tight deadlines, and in extreme conditions, to meet the significant demands of our client. As for the future, we continue to provide logistic support under the law company 3 contract, which with won in open competition and will do so as long as our client requests our services. We also continue to provide help and bringing the Iraqi oil fields back on production. We look forward to competing for further business in this regard, if as and when that business is put out for competition. We've begun work to help the government deal with the disposal of weapons of mass destruction, an area where we also have existing contracts with the government, which were secure again in open competition previously.

And finally, we look forward to competing for other business in Iraq, if given the opportunity, and we feel no need to apologize for that, it's what we do for a living. Now I'd like to switch gears and talk about the Energy Services Group.

Overall, AGS had a good quarter. Breaking things down by PSL, Baroid turned in an outstanding quarter as new management has really started to show the fruits of their efforts to make the fluids area perform. Baroid had an 8% increase in revenue coming from virtually every geographic segment except the Middle East. In addition, margins improved as previous cost cuts were combined with great activity in Mexico, the U.S. and Africa. Also, turning in a stellar quarter was completion products and services. While revenues were off here slightly, sequentially, operating income and operating margins improved substantially. As Chris mentioned, pressure pushing was off sequentially, but this was affected by export equipment sales in Q4 that weren't repeated this quarter. And the major markets for pressure pumping in the U.S., namely the Rockies, south Texas, and Gulf of Mexico, we continue to retain our leading market position.

Pricing weakness continued, but we think we hit bottom during the quarter on pricing and expect a lag between increases in activity and pricing to begin to work in our favor the balance of the year. This should hold true for other PSLs as well. Other PSLs performed in-line with our expectations, given current market conditions. The most disappointing aspect of the quarter for ESG was without the doubt the performance of surface SubSea area, where we saw a $28 million swing from quarter to quarter due to lower activity levels combined with increased cost at SubSea 7 and disappointing results at Wellstream. Both of these should be corrected in Q2, with an anticipated rebound at SubSea and no effects from Wellstream, as that company was sold during the quarter. As Chris mentioned earlier, surface SubSea alone affected ESG margins by over a point and a half, and we don't expect a repeat of this in Q2.

Landmark's performance as was mentioned was off sequentially as we expected, but was right on pace with the first quarter of last year, which was our record year for them in every respect. Geographically, we continue to be challenged by the dramatic event in Venezuela, where our loss there widened during the quarter by about $5 million, but we have a plan in place to mitigate this for the balance of the year. In addition, operating income in the U.K. was off sequentially, and it remains to be seen whether or when the move of assets down the food chain from IOCs to independents will result in increased activity. As for Nigeria, the other talked-about problem spot, both our revenue and our operating income were up sequentially. Canada was also seasonably up, although this represents less than 10% of ESG revenue and operating income.

I don't want to rehash what Dave reported in the beginning with regard to new business, but it's worth highlighting that each of those pieces of business is not just a tactical win, but a strategic win. In the case of the BP work, which will begin if the third quarter of this year in the U.S. onshore and Gulf of Mexico, not only will we be bringing some of our best technologists, this win materially increases Halliburton's market share in the U.S. with this very important client worldwide.

The contract awards from Shell for expandable screens and solid expandable tubulars, in addition to providing in excess of $160 million in revenue, will continue our efforts to gain acceptance of expandable applications and increase the rate of adoption by the industries as a hole as we demonstrate the value associated with this important technology. Other recently awarded new contracts within the Energy Services Group, which will benefit us in the second half of year, include contracts at Landmark, with Shell, the ministry of energy in Kazakhstan, and Angelo swifts, as well as a renewal of our technology agreement with BP.

To wrap up on ESG, I believe the franchise is in great shape and there's a real sense of excitement about the remainder of 2003.

The last thing on my agenda this morning is an update on asbestos. First, let me give you the statistics. During the quarter, an estimated 45,000 new claims were filed. This number is high by historic standards, but we believe it's driven by the last of the plaintiffs attorneys attempting to get new claims on file ahead of any pre-pack filing and and any potential litigation.

In addition, we believe that in most cases, single claimants are filing against multi-Halliburton entities and we believe that the actual number of additional claimants is about half that number. Finally, only 3700 cases were settled during the quarter, as this activity has for the most part been on hold awaiting the outcome of the global settlement.

About the global settlement, in January of this year at our investmentor meeting in New York, I outlined for you a set of milestones that would have to be achieved in order for the global settlement to become final. I'd like to begin reporting to you on these calls our progress against each of those milestones.

Let me reiterate here that our commitment to pay existing claims is capped at $2.75 billion. Should aggregate claims exceed this amount, we'll ask for a reduction in payment per claim in order to stay within that cap. First, the definitive settlement agreements. We have settlement agreements with plaintiffs attorneys representing more than 75% of the outstanding claimants, the amount required to approve a trust. So this hurdle has been cleared. Next, the plan of reorganization and disclosure statements. Good working drafts of these documents now exist and have been circulated to plaintiffs attorneys and to the futures representative.

Initial comments have been received for both documents and are being worked into new drafts for recirculation and we're on course to have the disclosure statements and ballot ready to mail in early June. The next critical path item is financing. We continue to work with our lenders to secure the various forms of financing necessary to complete this transaction. This includes a new revolver, a master letter of credit facility, and finally funding for the payments into the trust for the benefit of the claim.

While these agreements have not yet been executed, we're highly confident that barring dramatic or unforseen change in the capital markets, the financing will be concluded on attractive terms. Simultaneous with the items mentioned above, is the due diligence process on claims. We've now received an estimated 33% of the necessary files and have reviewed an estimated 83% of what has been received. Of the files received and reviewed to date, we believe there's good medical evidence in a substantial majority. Unfortunately, this is not the case with regard to evidence of exposure to our products and services the other key variable. In this area, our review finds the files generally lacking. We are in the process of meeting with plaintiff counsel concerning this lack of documentation we expect the attorneys with whom we have met will provide additional information on product I.D.. Whether that will be sufficient for us to proceed on the terms I've outlined remains to be seen, but we're generally getting cooperation from the plaintiffs' part. We're currently on course to file the pre-pack in mid-July. This will put anticipated plan confirmation with a final non-appealable plan late in the third quarter or early in the 4th quarter.

Finally, there's the topic of legislation related to asbestos. First, let me say we continue to work diligently toward concluding the global settlement announced in December. Having said that, we're very keen it see the outcome of any legislative efforts, which would address this issue on a broader basis. As recently as last week, the New York Times reported that an accord was near, that was supported by business, insurers, unions, and senators from both parties. This legislation would create a national, privately financed trust that would pay claimants injured by exposure to asbestos and effectively cap the liabilities of companies and insurance carriers. Of course, we said for a long time the federal legislation was needed to ultimately cure the problem. It's been estimated that the economic damage from this fornd of litigation has already exceeded that of the S&L crisis in the 80s. We of course are watching very closely how this is developing, and are anxious to see the legislation in written form, which we expect will be submitted in the U.S. senate for markup this next month.

Elsewhere on the legislative front, the Texas house recently passed a comprehensive medical malpractice tort reform bill and an asbestos medical criteria bill, which also establishes an inactive docket for unimpaired asbestos claimants these bills are now pending before the Texas senate. While we continue to head down a path toward global settlement, we are monitoring the progress of legislate you've developments, and now I'll turn the call back over to Dave for closing comments.

Thank you, Doug.

As you've heard from Doug and Chris, we've had a lot of moving parts this quarter. But as I look at it, with the exception of the loss and the Barracuda project, and poor performance in seasonal and dry docking driven by surface SubSea in the first quarter, I believe that the rest of the operations in Halliburton performed well in the first quarter and should provide us a very strong basis to build upon for the balance of the year. As we expected, continuing economic and political un -- uncertainties adversely affected customer spending. However, the world wide and U.S. rig counts are beginning to improve through the first quarter, and oil and gas prices remain in favorable ranges. I anticipate, as Chris and Doug have indicated, a modest recovery in the second quarter and increasingly faster paced recovery during the second part of the year.

I'm also am very proud of the many employees we have who are currently working in the Middle East. These men and women are working hard in the midst of a very difficult and dangerous situation, and I think are doing a fantastic and great job for Halliburton. I find it unfortunate that their efforts are being overshadowed by the media's attempts to damage the reputation of both Halliburton and KBR, but I would again like to express my appreciation for the outstanding work of all of our employees in the Middle East and throughout the world. With that, let's go to questions, and as Cedric said, the ground rules are one person, one question. So we can get to as many of you as we possibly can.

Thank you.

Today's question and answer session will be conducted electronically. If you want to ask a question, please press the star key then 1. We do ask you limit yours to one question initially. We'll take as many questions as time permits today. Once again, press star 1 if a have a question. Our first question from James Wigland with Bank of America Securities.

Good morning, gentlemen.

It's derivative I guess but pressure pumping you had pricing pressure pumping in the US down 3% due to pricing. That is historically one of your highest margin businesses, one of your competitors reported a decent quarter. Can you talk about what you're going to do about pricing -- price hikes going forward and what was the primary reason for the pricing weakness in the quarter?

Yes, Jim.

We have already begun to see improvements in pricing and pressure pumping. We expect that trend to continue during the quarter. Of course, we are not as affected by seasonal activity in Canada as some of our competitors in the pressure pumping arena, and therefore we also won't see the falloff in that activity level in the second quarter as that seasonally declines, Canada represents about less than 10% of revenue and operating income. And we would expect for not only for the second quarter but for the balance of the year a lowering of discounts to book in the pressure pumping side.

Excellent.

My follow-up again on the U.S., the Gulf of Mexico was -- seemed normally abnormally weak in the first quarter and question whether that will recover. Do your people see potential of a pickup in Canada -- excuse me, in the Gulf of Mexico? And I want to say that the detail on this conference call and the breakdown is exceptional and appreciated.

Thank you.

Thank you, Jim.

I guess that was part to the only question you gement but let me try to answer that. We do expect activity increases in the Gulf of Mexico, although not unlike everybody else we're sort of waiting for that to really hit in earnest. But if you listen to the comments by our customers, particularly our customers who are involved in the deeper exploratory efforts on the shelf, and of course those deeper wells on the shelf require more of our products and services, we are looking forward to an increase sequential increase in activity level, and in pricing levels in the Gulf of Mexico for the balance of the year.

Our next question from Ken Sill with Credit Suisse.

Good morning.

I guess the rumors of your impenalty in demise in the oil field are premature. One of the follow-up on what is going on in the directional drilling business. You said revenues were down 5% sequentially on weakness in the Gulf of Mexico. What do you see for pricing there and based on what some of the competitors have talked about, seems that business in general is still growing.

Are you guys seeing any loss of share or is this just a temporary setback based on who is working in the Gulf and what do you see for pricing more worldwide?

Probably more related there, Ken, to the well-known impacts of the downturn in deep drill and deepwater drilling in the Gulf of Mexico. And the higher value side of the business for Sperry Sun there. We think that as activity settles out there and sees a more gradual improvement but more importantly recovery in other areas that we expect to be more rapid, whether that's on the shelf is Doug was saying or in other areas, that will benefit our directional side in our drilling and formations -- valuations group as a hole.

And I guess I would add, Ken, that we do not see a loss in market share in Sperry Sun. Sperry Sun continues to see great response in the marketplace from their new rotary steerable products. We're just now rolling out our big -- rotary tools, and so we -- there's no cause for concern. There's no concern on our part with regard to Sperry.

Remember, they're coming off a record year last year, the first year to ever hit a billion dollars in revenue, in an otherwise down market, and we don't see anything to hold that back this year.

Scott Gale with Simmons and Company.

Yes, good morning.

Without trying to get into the negotiations of the Barracuda project, I was wondering if you could update us on a few of the numbers that were presented in the 10K. Number one, the probable recovery from unapproved claims was $182 million at the end of the year. There was 29 million of claims at Petrobrass agreed in principal to, and 78 million in taxes. Have those numbers changed at the end of Q1?

Scott, no change in those numbers. At this point. The change that we're taking the charge for is looking at the schedule for completion and the trending in cost, particularly with subcontractors. And we've essentially expensed those incrimental costs and we're now forecasting and have at this point in time not changed our estimate of what the recoverable amounts are. The -- In dollar terms.

The one changes that we made subsequently amend our claim, as a result of the negotiations that are ongoing.

But we haven't done that yet.

Right, we have not done that yet.

Paul McCrae is our next question.

Yes, good morning. And my congratulations to Chris Gaut. You've got a good man there, Dave.

My question has to do with the July 14th deadline for the bankruptcy filings at Harbison-Walker. Is it likely that due to difficulties in getting some of the due diligence done and the incentive perhaps to defer further because of possible legislation, that it would not be unreasonable to go to the judge in Pittsburgh and request another continuance there?

Yeah, Paul, this is Doug.

I guess first of all, we need to point out that the other side of this equation, that is the claimants and the plaintiffs' attorneys representing the claimants, have the ability to walk away from this deal if they feel like we don't have our foot firmly on the gas pedal toward a global settlement, which of course we do. The process of going through the claims is a laborious one. We're now a third -- basically a third complete, and as we complete sections we're going back to those plaintiffs' attorneys where we don't have documentation we believe we need, primarily in order to ensure we can recover the maximum amount on our insurance policies. And by and large, we're getting good cooperation from them. What happens as we move forward and move closer to July, I just -- it's just impossible for us to predict. Of course, there will be a big event here this next month with the -- what we believe will be the introduction of legislation in the U.S. senate and we'll watch that very closely. But we're not taking our eye off the ball with regard to getting a global settlement down that we agreed to because there's certainty with that.

Curt with RBC Capital Mortgage.

Good morning.

The general question I had once again, just wanted to follow up in the Gulf of Mexico, is that can you provide additional color as to what you're seeing specifically with respect to incremental bid activity that gives you the confidence as we move out into the second quarter and third quarter?

I guess, Curt, we talked on the call about one of the most significant of those activities, which was the BP tender that we just went through, and we're very pleased with the outcome of that.

Overall, in the U.S., including the Lower 48 and the Gulf of Mexico, we're anticipating that our market share with BP, who of course, is a huge client of ours worldwide, but our market share with BP in those two areas will go up by 50% or more. And so I think from our perspective, that is the biggest tangible piece of evidence on an individual bid that we can give you that gives us optimism with regard to our second half of the year.

And also it's consistent with the emphasis we have on service quality and focus on the key important customers for us.

Move on to Terry Darling with Goldman Sachs.

Thank you.

I guess you're looking at your guidance for the second quarter, looks to me to be overly conservative so I guess my question is, why am I wrong? If we look at this, you're talking about a 3 cent sequential increase. If we back out Barracuda Caratinga charge will not be recurring. It's 13 million after tax, 21 million pre-tax and a 16 million loss in the SubSea business, which you are indicating will not recur. You'll have the U.S. rig count up 10, 12% sequentially. Ballpark. You've got the seasonality, NC business coming back. Talking about pricing getting better. Nigeria is not hurting you. Venezuela is improving. Help me understand why I'm wrong on this assessment, what are some of the negatives perhaps we haven't talked about here?

Terry, and we're not saying you're wrong.

What we're saying is that we're giving a essentially a bottom number and the earnings as we said will be at least 23 cents, and you're right, there are a number of positive things happening out there. But we're trying to be conservative in setting a floor for expectations. Now, if we want to look at what the still uncertainties are out there, how quickly or service work recovers in Venezuela and Nigeria, yes, those are question marks. And Middle East seems to be coming back. But we would not argue with you that the positives outnumber the negatives at this point in time.

Rob Mckinzee with Friedman Billings Ramsey has our next question.

Good morning. Question for you on asbestos topic again.

Given your experience with the rate of receiving on the files, 33% and the time it takes to process those, you can give us an update on how long it might take to complete the due diligence process, I'm trying to get a feel for when and or when pre-pack filing may be likely for two subsidiaries? Thanks.

Yeah, Rob.

Our goal still is to be complete with this process by the end of May. And I would say that the rate of receipt of files is increasing at an accelerating pace since we began this process and got all -- got them the final documents signed up. Remember, that it was only very recently that we went from letter agreements, which were not sufficient for the plaintiffs' lawyers to give us their files, to actual binding contractual agreements with those same counsel. So we're still expecting to be through the due diligence process by the end of May, which keeps us on track for a mid-July pre-pack.

Our next question from Miller Tabic -- Kevin Simpson.

Good morning. My questions on pumping services pricing. The just to be specific, BJ is putting a price list book increase up of 7%, I guess starting next month. And I guess, Doug, you're talking about reducing discounting -- strategically, are you not going to go alone with the price book increase and try to do it another way? Or are you just going to see what the lay of the land is in terms of how tight the market gets?

Yeah, I guess a couple of things. First, I would take people back to the second or third quarter of 2001. We actually instituted the last price increase on the pressure pushing side at the top of the cycle. We intend to be leaders, in pricing for pressure pumping. We should be, given our market share globally. But by and large, at least -- at the current time that's going to result from a reduction in discounts. And remember, the discounting part of this business is actually has a greater impact than increases in the book.

Michael Urban from Deutsch Bank.

Thank you. Good morning. Question on the cost side.

Was wondering if that -- at this point you realized the full benefits from the restructuring, and then if given what is going on in the world, in particular Venezuela, what if anything you're doing to take out additional costs, what kind of number might that look like.

Yes, Michael. We have implemented the restructuring, and are realizing the full impact in the first quarter of the cost savings, and working hard to make sure that that remains in place throughout the year. We think that will be the case.

Try to give you an indication of that with some of the comments we made about corporate expense, and that's also going to be flowing through Energy Services Group and keeping that well contained. We'll be looking to take advantage of increased activity as certain areas may improve in Asia. And when the North Sea turns up, but those will be the activity based and we have realized what was promised, we think. And I guess, Michael, you had a question about Venezuela? And in Venezuela, we have a plan in place to mitigate the effects of the downturn in Venezuela. We are expecting that to show up soon. Reduced -- reduced negative impact from Venezuela in the second quarter. But as of yet, we're not seeing that increased activity. Particularly in the western part of the country.

Move on to Jeff Kinders with Smith Barney.

Thank you. Going back to Chris's guidance on the full year, just wanted to be clear here. There's several numbers given in the press release how to interpret the first quarter. So the first part of my question is, in your dollar or better for the full year, what number are you using for the first quarter? The bigger question, though, is are you signaling that your view on the second, third and fourth quarters of this year has changed in any material way from when you issued the $1.10 or better guidance, not you Chris, specifically, but the company, after the 4th quarter, and maybe you could just describe what those significant changes are. I think that's one question.

Got you. Thank you for giving me a chance to clarify that. For a full year, guidance there, that is based on 12 cents, normalized earnings, in the first quarter. With the guidance that we've just given now in the second quarter, and so the implication is really no change from the prior guidance for the second half of the year.

We have time for one more question.

We'll take our final question from James Stone with UBS Warburg.

Hi, guys. Good morning. Can you just tell us if -- if you were to come to pass that congress were to pass legislation and let's say that legislation didn't actually get passed until later this year, and you have already achieved a non-appealable settlement, would the settlement still hold up, or would it revert to being included underneath the federal trust? Hello?

Yeah, I'm sorry, Jamie. This is Doug. It's virtually impossible for us to play that kind of hypothetical because we haven't seen in final written form what the legislation is going to look like, and the answer to your question I think would be totally dependent on how the legislation was written. That won't be a subject of speculation much longer because, as I said in my comments earlier, we expect that legislation to be submitted for markup in the senate here this next month.

Okay. That end today's call. I want to thank you for joining us today. Replay is available on our website.

Thank you. That concludes our conference call. We thank you for your participation and have a nice day.