哈里伯頓 (HAL) 2005 Q2 法說會逐字稿

Good day and welcome to today's Halliburton Company second quarter 2005 results conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Miss Evelyn Angelle. Please go ahead, ma'am.

Thanks, Jamie. Good morning and welcome to Halliburton's second quarter 2005 earnings release and conference call.

Today's call is being Webcast and a replay will be available on our Web site for seven days.

Joining me today are Dave Lesar, Chairman, President, and Chief Executive Officer, Chris Gaut, Executive Vice President and Chief Financial Officer, Andy Lane, Executive Vice President and Chief Operating Officer, and Burt Cornelison, Executive Vice President and General Counsel.

The press release announcing our second quarter results is available on our Web site at www.halliburton.com. If you get a moment, please take a look at the newly improved Investor Relations section of our Web site which reflects some new features such as straightforward navigation, downloadable files with historical financial information, GAAP to non-GAAP reconciliation, and a calendar of upcoming events and conferences.

I'd like to point out that this quarter, we've adjusted our ESG geographical reporting somewhat. We now reflect the former Soviet Republics and our Europe, Africa, CIS region.

Previously, these areas were recorded in our Middle East/Asia region. Our Web site now has a table reflecting which countries we report in each of our four ESG regions.

We have tentatively scheduled our 2005 third quarter earnings conference call on Tuesday, October 25, 2005 at 9 a.m. Central Standard time.

In today's call, Dave will provide opening remarks. Chris will discuss our overall operating performance and financial results, followed by Andy, covering strategy and our business outlook. We will welcome questions after we complete our prepared remarks.

Before turning the call over to Dave, I'd 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 our performance. These matters involve risks and uncertainties that could impact the Company's operations and financial results and cause our actual results to differ from our forward-looking statements.

These risks are discussed in Halliburton's Form 10-K for 2004, Form 10-Q for the period ended March 31, 2005, and recent current reports on Form 8-K.

In addition, we will be providing some non-GAAP financial measures. A reconciliation of as-reported results to adjusted results is set forth in our earnings release and footnote table 3.

Now I'll turn the call over to our CEO, Dave Lesar. Dave?

Thank you, Evelyn, and good morning, everyone.

Chris and Andy will give you an in-depth story of our remarkable quarter, and I don't want to steal their thunder, however, I do want to set the stage by mentioning a few of the challenges Halliburton has faced and overcome so we can appreciate our progress in the strength as we look forward into the future.

Obviously, our asbestos liability is now behind us. The Barracuda project is 97% complete.

KBR has been thoroughly restructured and both segments of that business are performing well. KBR's work in the Middle East is winning award fees and future business from the Defense Department.

With regard to the eventual separation of KBR, we have stated that we first needed to establish a track record of value demonstrated by strong earnings and a backlog for a number of quarters and make progress in resolving outstanding issues regarding government contracts and investigations. We are making progress.

The Energy Services Group is showing strength in every division. One could argue that ESG's contribution alone was higher than the results expected for all of Halliburton. Market conditions have been favorable, but the leaders of ESG's divisions have made numerous changes that have put us in a superb position to take advantage of our opportunities.

We'll now listen as Chris and Andy describe the quarter as we report highlights that include record Halliburton Company operating income, record ESG revenue, record operating income at ESG, and operating margins that exceeded 21% for ESG.

And I think more importantly, 66% of our revenue growth came from the Eastern Hemisphere. KBR continued to build a strong backlog and had a very strong performance.

We also have strong liquidity and now believe we will get to our stated debt-to-capital goal by next year.

I'm very proud of what we did and let me turn the call over to Chris now. Chris?

Thanks, Dave. And good morning.

I will comment on the overall Company and individual segment results. I'll summarize the change in revenue, then operating income for each of our six segments, and then discuss our liquidity and other financial items. In my remarks, I will be comparing second quarter of 2005 results sequentially to the first quarter of 2005.

We have good news to report both at ESG and KBR. It was a fundamentally solid quarter.

Halliburton Company revenue was $5.2 billion, that's up 5% sequentially, mainly due to stronger E&P spending and improved pricing. ESG revenue was up 287 million, or 13% sequentially with increases in every region.

KBR revenue was down 2% sequentially, primarily due to reduced activity on the LogCAP contract in Iraq on a consolidated basis. International revenue was 74% of the total in the second quarter of 2005.

Halliburton achieved record operating income of 607 million in the second quarter, up from 586 in the first quarter, but recall that Q1 results included a $110 million gain on the sale of our interest in the Subsea 7 joint venture. Excluding this gain on Subsea 7, ESG's pro forma operating income increased 35% and operating margin increased by 260 basis points to 21% in the second quarter.

KBR operating income in the second quarter of 2005 improved by $17 million for a 4.5% operating margin. This reflected strong project performance and the recent award fees received on our work in Iraq.

Now I'll discuss the ESG segment results beginning with the Production Optimization segment where revenue increased $146 million, or 16% over the first quarter of 2005.

Revenue growth in Production Optimization was led by production enhancement, which had a 17% increase due to higher activity in the U.S., Russia, Australia, Angola and the North Sea. In Canada, however, the seasonal spring break up and unusually high rainfall resulted in a significant decline compared to Q1.

Completion tools revenue increased 10% due to stronger sales in the North Sea, China and Angola.

Well Dynamics, our intelligent well subsidiary, posted record revenue more than double the Q1 level. The improvement in Well Dynamics was driven by growing customer acceptance of the SmartWell technology, primarily in the Middle East and the North Sea.

Production Optimization operating income declined by 46 million, or 16% in Q2 versus Q1, however, excluding the $110 million gain on the Subsea 7 sale in the first quarter, operating income increased 64 million, or 35%.

In production enhancement, our well stimulation product line, operating income grew 39% with an incremental margin of 51%. Operations outside of North America contributed about 40% of the increase led by Russia, the North Sea and Angola. Canada posted a season of decline in operating income for the quarter.

Completion tools operating income increased 9% on higher revenues from more profitable offshore markets such as the North Sea.

In the Fluid segment revenue increased $68 million, or 11% over the first quarter. Cementing services revenue increased 9% due to higher activity and improved pricing on U.S. land operations as well as improved activity in Mexico, Asia Pacific and the North Sea.

Baroid also benefited from increased activity and pricing in the U.S., as well as volume growth in the North Sea and Venezuela on a revenue increase of 13% over the first quarter. Fluid Systems operating income was up 22 million, or 19% compared to the first quarter, reflecting a 140 basis point increase in operating margin.

Cementing services operating income increased 18% with a 47% incremental margin. This was primarily due to strong activity in pricing in the U.S., improved margins in Asia Pacific, and higher activity in the North Sea, offset by the seasonal decline in Canada.

Baroid operating income increased 24% due to strong results in the U.S. and the North Sea, partially offset by reduced contributions from Mexico and Nigeria.

Our Drilling and Formation Evaluation segment had outstanding results. Revenue increased $77 million sequentially or 16%, of which 58 million came from international operations.

Sperry Drilling Services revenue increased 14% due to stronger activity in the North Sea, the United States, and Eurasia, partially offset by the seasonal decline in Canada. GeoPilot rotary steering services continued to develop momentum growing revenue 42% over the prior quarter.

Logging services revenue increased by 27%. The logging improvement was led by direct sales in China and increased activity in the United States and West Africa.

In our Security DBS Drill Bits product line, demand for our Z3 Fixed Cutter technology continues to be very robust, partially offsetting the seasonal decline in Canadian activity.

Drilling and Formation Evaluation operating income increased $46 million or 58%, of which $40 million came from international operations.

This segment had our highest incremental margins resulting in an operating margin improvement of 590 basis points. Improved pricing, equipment utilization, and a focus on selected markets contributed to this success.

Sperry Drilling Services experienced a 68% increase in operating income with improvement in all international regions most notably the North Sea and Africa. North America declined due to seasonality in Canada. Logging showed strong improvement in the United States, Africa and Asia.

In our Digital and Consulting Solutions segment, we had a slight decline in revenue of 3% compared to the first quarter, however, revenue for Landmark Graphics was up 8% from Q1. Digital and Consulting Solutions operating income decreased $13 million, or 45% compared to Q1.

Landmark's improved operating results of $14 million in the second quarter were offset by a $15 million additional charge for two integrated solutions projects in Southern Mexico, compared to an $8 million charge in the first quarter. The charges reflect the increased cost to complete the projects and longer drilling times than originally anticipated, primarily due to unfavorable geologic conditions.

If you recall, the Digital and Consulting Solutions results in the first quarter of 2005 included the favorable resolution of a contract issue in the amount of $17 million.

Now let's turn to our two KBR segments.

Government and Infrastructure revenue for the second quarter of 2005 was $2 billion, compared to 2.1 billion for the first quarter. The 2% decrease resulted from lower activities on the LogCAP contract.

Government and Infrastructure's operating income for the second quarter was $73 million. That's up 20 million, or 38% over the first quarter.

This was partly because we recorded an additional $29 million in income from award fees that were granted on the definitized LogCAP task orders during the most recent quarter. The accrual for estimated award fees on LogCAP was also increased from 50% to 72% of the maximum 2% award fee based on our favorable track record on Iraq awards.

The impact of this increased accrual to second quarter revenue and operating income was $10 million.

You may also remember that first quarter results reflected $22 million of operating income related to the Iraq dining facilities or DFAC settlement and granted award fees on definitized task orders. On the RIO contract we are waiting final definitization of costs but we expect our award fee to be close to our 50% accrual rate as our customer has evaluated our performance as good to very good.

Improved performance at our DML shipyard in the U.K. contributed increased revenue and income over the prior quarter.

In our Energy and Chemicals segment of KBR, revenue for the second quarter of 2005 was 653 million, compared to 663 million, I'm sorry 663 for the first quarter. The 2% decrease primarily resulted from winding down the fixed price offshore EPIC projects, offset by revenue from the recently awarded Tangu LNG project in Indonesia, the Escravos gas-to-liquids project in Nigeria, and increased activities from a synthetic crude project in Canada.

Operating income for the second quarter of 2005 was $49 million, that's a 7.5% operating margin, decreasing 3 million from the first quarter. The new Tangu and Escravos projects contributed to the second quarter operating income, although an offsetting 9 million loss was recorded in the second quarter in a joint venture gas project in Algeria due to higher project cost estimates.

We expect KBR will generate operating margins in the 2 to 4% range for the reminder of 2005, but that's excluding any changes to our reserve positions.

Now let's turn to other financial items.

Our general and corporate expenses were $37 million in the second quarter, compared to 32 million in the first quarter. The increase was due to a $7 million legal settlement.

We expect corporate expenses for the remainder of 2005 to be in the range of 30 to 35 million per quarter. This is a bit higher than our prior guidance because certain legal and professional fees that we previously reported at the segment level are now being reflected in the general corporate expenses.

Our effective tax rate on continuing operations for this quarter was 28% due to a further reduction in our evaluation allowance, similar to the one that we discussed in the first quarter. We expect our continuing operations effective tax rate to be around this quarter's rate for the remainder of 2005, however, it should be pointed out that this rate is highly sensitive to our estimated level of U.S. taxable income in future periods.

We continue to expect that our capital spending for the full-year 2005 will be about $675 million.

Turning now to liquidity.

Our cash and marketable securities were 1.6 billion at June 30, which is a decrease of approximately 200 million from March 31. We used cash to redeem $500 million of senior notes at par during the second quarter.

This was part of our plan to reduce the debt-to-capitalization ratio to the mid-30s, a goal we now expect to achieve inside of the next 12 months. Our debt-to-total capitalization ratio was 43% as of June 30, and we will repay another $300 million of debt as it matures in October of this year.

Our working capital position on our government services work in the Middle East was approximately 675 million at June 30. That's up from approximately 600 million at March 31.

We continue to utilize our two accounts receivable facilities. In addition, we have our 1.2 billion revolving credit facility as an additional source of liquidity.

Now I'll turn the call over to Andy Lane. Andy?

Thanks, Chris, and good morning, everyone.

As Chris just reviewed the financial performance in the second quarter was excellent. Activity at the ESG is strong, and we continue to benefit from improved pricing.

In the quarter, the ESG set revenue and operating income records and increased year-to-date operating income by $550 million over last year's operating results.

On the KBR side, we've clearly put our business back on a solid platform. The new KBR posted strong earnings in the second quarter, and increased mid-year operating income by $519 million over last year's operating results. I'm very pleased with the successful turnaround at KBR.

I want to thank all of the men and women of Halliburton for their hard work and dedication. Halliburton is performing very well, and is stronger than ever, and it's because of our great employees.

For the ESG, robust rig activity coupled with improved pricing drove revenue improvements in the U.S., particularly within our pressure pumping businesses. The high rate of growth in our well stimulation business has significantly outpaced the change in the rig count.

We also benefited from other factors such as the growing momentum we are now experiencing in the Gulf of Mexico, where changes made to our operational structure as a result of the prior downturn have not impaired our ability to respond to increasing customer demand.

In terms of U.S. pricing, we expect to see continued implementation of our April price increase during the second half of this year. Despite our price book increases, we have maintained market share, reflecting the value that our customers place on our technology, our service quality, and excellent safety record.

Given high activity levels, particularly in the U.S., we are proactively seeking ways to ensure the availability of resources as well as manage the rising cost of labor and materials. We have increased our recruiting efforts and have implemented retention programs as needed.

From a global staffing perspective, we continue to develop and deploy our nationalization strategy in order to achieve the optimum mix of local and expatriate staffing in key countries. Our procurement organization is actively leveraging our size and our buying power through several programs designed to ensure that we have access to key materials at the best possible prices.

Moving on.

International activity is also very strong. In fact, about 66% of the ESG's revenue increase came from the Eastern Hemisphere.

For perspective, U.S. revenues increased 14% sequentially versus a 4% increase in the rig count, while international revenues, excluding Canada, increased 19%, compared to a 5% rig count increase. We have generated sequential revenue increases in all regions and excluding gains on sale we've set operating income records in the Middle East, Asia Pacific, and Europe, Africa CIS.

Our recent focus has been [on] to improve the operating income performance outside the U.S., and we are seeing very good results from these efforts. As a result, Africa and Europe have improved significantly to complement our historically strong results in the Middle East.

In our Middle East-Asia region, Saudi Arabia is working hard to ramp up production and has significantly increased its demand for oil services. Our own revenues from Saudi increased 17% sequentially.

Early in the year, Saudi Aramco recognized Halliburton for its overall performance on the Qatif integrated services drilling program which include providing project management and various discreet services.

In addition, Well Dynamics received a multi-well order from Saudi Aramco to supply more than 40 SmartWell completions. This helped Well Dynamics achieve their highest quarterly results ever, and has positioned Well Dynamics for record performance in 2005.

We also experienced double-digit revenue growth in Oman. We announced earlier that we were awarded three major contracts by Petroleum Development Oman valued in total between 400 million and $500 million over the next five years.

These contracts include cementing, stimulation, directional drilling, logging while drilling, and mud logging services, and reflect our leading market position in the country. The ESG has been in Oman since the early 1960s and has almost 50% of the market.

Our revenues from China more than doubled, and we won more than $200 million in new multi-year contracts in Malaysia and Thailand.

In Latin America, Mexico was a problem for us as we continue to deal with issues in our fixed price turnkey drilling project in the South. It bears repeating that our clearly stated strategy is that we will not undertake any turnkey drilling contracts in the future.

Overall, our performance in Latin America was good with the revenues up 6%.

In the Europe, Africa CIS region, activity in the important North Sea market continues to improve. Revenues from Norway increased 30%, and the U.K. increased 20%.

With the increase in activity, we have greatly improved our asset utilization in all product lines, positively impacting profitability. Strengthening demand in the North Sea, along with the improvement in the Gulf of Mexico will serve us well as we are positioned to capitalize on these opportunities.

In Russia, Azerbaijan and Kazakhstan revenues were up 44% from the first quarter. In Russia we are working for various domestic as well international customers and we believe that the business environment from a risk perspective has improved from six months ago.

Because of this, we are doubling our stimulation capacity in Russia. Recent awards in Azerbaijan for Sperry Drilling Services and in Northern Kazakhstan for Sperry, Baroid and completion tools, combined with continued growth in our core product lines in Russia will improve our position as these areas expand.

In Africa, we are very focused on improved results and have recently renegotiated several underperforming contracts. In Angola where demand is driven by deep water development, we signed more than $200 million in new contracts in the second quarter and are actively pursuing another $100 million currently in the tender process.

Our operations in Egypt, where we have significant market share, also performed very well. In Nigeria, we are working through some difficult business and political issues and we expect to resolve these in the third quarter.

Finally, we see additional growth opportunities in the region through expanding our position in Libya. Our overall investment in Africa in the last five years is beginning to generate the financial returns we expected.

Now let me move on to KBR where we continue to track well against our planned and proved results.

The total KBR backlog as of June 30 was $14.6 billion, up $5.1 billion from March 31. This includes the unfunded portion of the recently awarded Task Order 89 for $4.97 billion for the next phase of work under LogCAP in Iraq.

This replaces several task orders that are nearing completion. This new task order was definitized up-front with our customer Army Material Command AMC. This significant award will take us into 2006 and reflects the excellent job we have done in 2005.

Within Government and Infrastructure or G&I, we continue to work closely with our customer to resolve previous disputes in Iraq.

The LogCAP contract with the U.S. Army represents more than two-thirds of G&I's revenue. So our strategy is to seek contracts with the Navy, Air Force, and the U.K. Ministry of Defense in order to diversify our portfolio and achieve long-term sustainable results.

In the second quarter, we received scores from the award fee board for our Iraq work under LogCAP. I am happy to announce they are very good.

We received four ratings of excellent and two ratings of very good. We received a total award fee of $72 million.

I'm also pleased that we were selected to provide logistic services to the U.S. forces deployed in Europe, expanding our work in the Balkans. The U.S. Army Europe support contract has a maximum capacity of $1.25 billion for up to five years and includes the provision of support services to the Balkans and the U.S. Army Europe's 94-country-area responsibility.

This is another significant award that shows KBR is the best company at providing these valuable services at a competitive price. Our backlog in the G&I segment is very strong.

Within KBR's Energy and Chemicals segment, we continue to build our gas monetization backlog which has increased from $180 million to $3 billion in just one year. The total E&C backlog now stands at $6.2 billion.

In the second quarter, the E&C segment and our joint venture partners were awarded the Front End Engineering and Design for fee contract for a liquefied natural gas, or LNG project in Angola. This project will enable Angola to monetize offshore gas reserves and will also have a positive environmental impact by reducing flaring.

Earlier this week, we announced that KBR and our joint venture partners have been awarded a cost reimbursable FEED contract and option for a cost reimbursable engineering, procurement and construction management, or EPCM, contract for the Greater Gorgan Downstream LNG Project in Western Australia. This FEED contract is expected to be followed by the EPCM contract when the project receives final investment decision approval, which is expected next year.

During the quarter, we also began work on our newly awarded Indonesia Tangu LNG and Nigeria's Escravos gas-to-liquids, or GTL projects. As indicated in the past, our current focus within our E&C segment is the pursuit and successful execution of gas monetization projects, where we have the leading position.

Currently, we are actively pursuing nine new LNG Projects and one new GTL project.

In April, KBR was awarded a contract to provide engineering services to Chevron's Agbami FPSO vessel offshore Nigeria. As part of our strategy to minimize risk, KBR will work as a subcontractor and will manage EPC services for the top sides on a reimbursable basis.

In Brazil, our customer has realized maximum combined production of 305,000 barrels of oil per day from Barracuda and Caratinga. And a major technical milestone was achieved with gas compression and sales from both floating production, storage, and offloading vessels.

In order to complete the project we must complete remaining work on the lenders reliability test and achieve final acceptance. We have a target date of December 2005 for this objective.

The Barracuda-Caratinga project has had no impact on our earnings in the first half of 2005.

In closing, let me make a few remarks regarding our outlook on the industry.

Having direct experience with previous downturns, we continually compare the current upcycle with those in the past. We see many structural differences in the fundamentals that support current activity.

Oil and gas prices continue to be very robust. Excellent E&P, recent E&P spending survey suggests additional growth in the back half of 2005 and 2006.

There is far less excess oil supply than in prior periods of high prices. We see significant growth in LNG infrastructure projects designed to commercialize gas reserves around the world.

On the demand side, China and India are consuming far more energy than in the past and U.S. consumption keeps increasing. In addition, world economies appear to be absorbing higher oil and gas prices with minimal impact to GDP growth rates.

While we will continue to monitor the situation and maintain a disciplined approach to cost and capital, we are very optimistic about our prospects in this robust market.

Now I'll turn the call back to Dave for closing comments.

Thanks, Andy.

I think the information laid out by Chris and Andy provide the good reasons for all of us to feel proud and good about what we've accomplished. But I also want to second Andy's closing remarks about our reasons for forecasting good market conditions as we look forward.

It's also important to emphasize that all of our business segments are performing very well against their competition. But are also operating with a discipline that we believe will keep us strong and competitive in all market conditions.

We are steadily reducing our corporate debt and improving our return on capital, both of which will be important for maintaining our competitive edge in the future.

Now we'll be happy to answer your questions. Please limit it to one question and one follow-up.

Thank you. [Operator instructions] Our first question will come from Geoff Kieburtz of Smith Barney.

You've achieved quite a lot at KBR. You achieved quite a lot in the quarter period, but KBR is, I think, first time really clean quarter, very solid profitability. You've talked about achieving this for several quarters. I was wondering whether you could begin to maybe quantify what "several" means.

Well, Geoff, as we mentioned it's the three things we're looking for and several quarters in which to establish a financial track record and help valuation was one of those. The other is building backlog. Good progress there. Andy also referenced some of the other things we see as potential out there that we're chasing.

And then third was progress on resolving issues, and we've made some progress there certainly in Iraq, but we, you know, also are working hard on that. So it's all three of those things that we're looking to achieve, but still we're not looking to set a timeline for the separation. Our objective, Geoff is to get the best value for our shareholders.

Is there any possibility that you would relax your intensity in pursuing a separation of KBR given that it's performing so well?

The overall result we're seeking to achieve is the best value for the shareholders. We continue to believe that a separation is the path that will lead us there, but as we get further into it, and actually see what the market or potential buyers, how they would value the business, we have to compare that to how it's valued as part of Halliburton. And come up with the best answer.

If I could just one last question. Do you feel as if you have a good sense of how potential buyers are – (technical difficulty)?

No, we have not been solicitating interest. Certainly we've had indications from interested parties lobbed in, but we've said that, you know, we feel that there's not enough information out there from which people can really value KBR or its parts at this point so we are not soliciting interest.

Our next question comes from Michael LaMotte of JP Morgan.

Thanks and congratulations on a really terrific quarter. Andy, I was hoping you could quantify exactly what the export sales were to China in the quarter, and, you know, whether or not if we start to model the margin in DFE for the back half of the year, what impact that might have, you know, whether we should take our expectation in the second half or not.

Yes, Michael. It's not significant. It was less than 5 million, and that's about the historic rate we expect, and we shouldn't see it differ at all in the second half.

Okay. Great. And then, Chris, quickly, can you update us as to where you are on your thoughts on a buy back?

If I could address the overall use of cash and then work towards the buy back. Our primary first priority with use of cash remains addressing the balance sheet, getting our debt-to-capital ratio back in where we think it should be, which is that mid-30s debt-to-capital ratio. We're well on our way there.

Once we achieve that, then we can put more priority on directly benefiting shareholders and look at both our dividend policy as well as stock buy backs. As we've said, we expect to get to our target debt-to-capital ratio well within a 12-month period

Our next question comes from James Wicklund of Banc of America Securities.

Good morning, guys. Way to blow the doors off. Um, a question. The way the analysts and investors typically build models, we look at incrementals from when you last reported. And I think everybody expects activity to continue to move up. So just in building that, are there any areas in this quarter's report that had margins or mix that we should be watchful for in our forward projections ?

From a seasonality standpoint, of course. On one hand, we will have the benefit in the third quarter of Canada coming back, which will, from Canada we'll have very strong incremental margins coming in. On the other side, Gulf of Mexico and the hurricane season will be more significant.

If we think about it, you know, more functionally, the U.S. Landmark, it remains quite strong. North Sea is strong, although we had a good recovery in the second quarter over the first quarter part of that's seasonal in the North Sea.

And, you know, Asia Pacific, Russia, good road to recovery. Russia had a down first quarter seasonally, so that helped second quarter results. So, you know, fundamentally, if you're looking, if you're asking, Jim, if we had a lot of special matters that are not really repeatable, no, it was fundamentally a solid quarter. Andy.

Okay. A follow-up. There was an article the other day talking about the possibility of in Barracuda-Caratinga of the well stream umbilicals having problems. I realize that's, you know, not imminent probably, but just in terms of veracity and magnitude, can you address that article? That point.

Yes, Jamie, this is Andy. I'll address it. If you look at Barracuda-Caratinga as the overall project including all the well work, we're 99% complete. If you look at just the EPC contract on the FPSOs we're 97.7% complete. We've reached these production milestones that have set new record production levels for the country of Brazil.

So I will, the issue on the bolts. We provided exactly what was required at spec for the contract, the original EPC contract, and the reported bolt failings are riddled fractures that occurred on approximately 1% of the total bolts. So we're working closely with our customer on that issue.

Yes. And we have repaired those where we found a problem and also made a provision for, or included in the provision we already had, Jim, an allocation for future problems and we believe that to be adequate. But I think the main point, as Andy said, is we had constructed this vessel to the customers' specification.

Our next question comes from John Dowd of Bernstein.

Good morning. I'm impressed with the margin improvement outside of the pressure-pumping business specifically at Sperry-Sun and in the logging business. Is this pricing-related or mix? Basically is this a function of stronger demand for your high-end products or is it pricing across the board?

John, I'll take that one. It's a multi-quarter improvement. This is, I believe, the sixth quarter in a row improvement for Sperry.

I will talk Sperry first, And Tim Provert and the group there at Sperry are doing a great job. They've worked to exit countries where we had small non-critical mass operations and have worked on centralizing our resources. They've worked on reducing the overall repair and maintenance cost on our tools.

So it's a fundamental improvement in the Sperry business and then you add on top of that pricing improvements and especially with the offshore markets coming back in the U.K. and the Gulf of Mexico, Sperry continues to strengthen for us, so we're very proud of that, and it's a combination of better operational performance and pricing improvement.

On logging, logging also is a multi-quarter story of improvement. They've taken the same approach and fundamentally improved logging's operations.

We're not going after market share. We're going after consistent growth where we can be successful and deliver the returns we want, and we're very pleased with the performance in logging, and it's driven by pricing improvement and operational improvements across the board.

Okay. Second, I was wondering if you could break out your, if you said it before, I missed it. I was wondering if you could break out your plan to capital expenditures for the year and how much of that will be in the North American markets, and how much will be overseas?

Yes, John. The capital spending for the year remains at our guidance as we went into the year at $675 million. We haven't changed that, and that is more back-end loaded. So of that, so, you know, the guidance remains pretty much the same.

We have not provided a geographic breakdown of that, and I would say that the best way to think about the spending is roughly proportionate with our revenue base across the segments. As you know, about 100 million of that 675 is on the KBR side and the remainder is on ESG, fairly proportionately with breakdown in revenue.

Our next question comes from Dan Pickering of Pickering Energy Partners.

Good morning, guys. On the Production Optimization side, I was hoping you could walk us through the year-over-year pricing improvement that you guys think you're seeing, and roughly how much of the April 11 to 15% price increase you think you saw in the second quarter.

Okay, Dan. Good morning.

You know, as you know, we had an 8% increase in April of 2004 and then 15% in October of 2004, and then followed by our recent 11% in April 2005. We feel we've done really well on the first two price increases that I've mentioned, getting those into the marketplace.

Roughly two-thirds of our business in the U.S. is on contracts, so at various extension dates and over periods. So it takes us a while.

We're really balancing the capital, our capability and capacity, along when we move these older contracts onto the new contracts. So we've done well on the previous two, and we're early on on our April increase in the U.S. market. So we continue to work very hard on pushing that price increase in the second half of the year.

So that one's coming through. But also a significant impact and driver for our business is the efficiency that we're able to get more revenue out of a crew, out of a job deployment.

As we are seeing that we're able to work with our customers so that they can do multiple fracs when they're on a well site, and that higher utilization and less time traveling between jobs has really been beneficial. And we're also looking at other ways to bring more efficiency and better utilization to our equipment, and that has really helped improve our results as well as price.

Okay. That's helpful. And then, I missed the answer to the earlier question on the sustainability of the margin levels at DFE. Do you think that you can kind of continue at this 22% level as we move through the back half of the year?

With the improvement in the offshore market, particularly in the North Sea, and their improvement in growth in the international side, yes, Sperry's performing at a new level here, and we think that that reflects their market position.

Our next question comes from Scott Gill of Simmons & Company.

Yes, good morning, and, again, terrific quarter, gentlemen. My question is, I've been trying to get a better understanding of your superb performance in the Eastern Hemisphere. Sequentially, those geo markets in ESG were up over 20%, much better than your competitor reported today. I guess my question is, can you give us a little more color as to what drove that performance? And also my follow-up is, what kind of guidance can you give us for growth rate as we look at the back half of 2005 and into '06?

Yes, Scott, I'll take the first part of that question. You know really what's driving our performance is a focus on that segment of our business. We've the right management in place in the regions. We really have an excellent focus on improving both two areas that have underperformed for us historically have been central Africa and continental Europe and we've worked hard on those and we're seeing the results of that now.

And then you add the improvement in the U.K. and Norway on top of that and our investment there, you add a strengthening West Africa market and our position there. All that together is on top of a very strong Middle East and Asia is solid for us and it has been.

So we, and Russia was underperforming the first quarter and it's come back now in the second quarter, and we expect it to continue its improved performance. So all those factors together, and our attention to the Eastern Hemisphere has led to these improvements.

It seems in some quarters people have underestimated the strength of international network and that strength I think is now becoming more apparent. We have a very strong position in a number of areas of course with the recovery in the North Sea and our great position there. That's really getting a benefit.

We have a good position in Russia. That's coming through now, and the Middle East and North Africa. Good performance for us.

Offshore West Africa, seeing an increase in all those areas. And we've also talked about parts of Australia, Southeast Asia, even into China. We're very pleased with the performance and with the prospects there.

Our next question comes from James Crandell of Lehman Brothers.

Chris, notwithstanding your previous answer, what's the magnitude you think of the infrastructure in capital investment you think that you'll need to make in the Eastern Hemisphere for '06 and '07? And given the growth prospects, given your position, is it reasonable to expect a big ramp-up in oil field Cap Ex from the 575 in '05?

Jim, let me start this one. If you look at, overall, we see very little infrastructure investment needed because we're already very well-placed.

In CIS, we're really taking a focus on the Siberian gas positioning and Caspian as two separate markets and a unique focus on both of those outside of the Moscow selling focus.

One area where we do see some investment over the next three years is our strengthening of the Libya market, and we do see a good investment in capital there over the next couple of years to get to our historical market share that we enjoy in Northern Africa that we expect to have in Libya. So that will be a place where we will invest in infrastructure, and then more investment on just the product and service capability in Russia is where we're investing.

Right. You mentioned the doubling of our capacity there in the pressure pumping area. Libya is certainly a growth area for us as we think about 2006. Saudi Arabia, North Africa.

So, yes, our spending will go up in 2006 and probably in 2007 on the Eastern Hemisphere. We are planning for that. Of course, since we manufacture a lot of our equipment internally, we have probably a little bit better control over our pipeline than maybe some other folks do. And we're going to manage that appropriately.

Okay. And a related follow-up question, more of a strategic question. It would seem to me that precision drilling's oil service and the international land rig businesses would fit hand-in-glove with Halliburton and would bolster your under balance business, it would give a shot in the arm to your wireline business, couldn't hurt in LWD although you're strong there and the rigs would give you project management capability. Do you agree with this? And if you do agree, how come you didn't act?

Well, we're not going to get into specific transactions in this forum. Jim, you know, obviously that if we had thought that was something that was a good fit, then, you know, we would have looked at it, but I think there are other arguments that you're not, that were not included in your question and we took a different view of that.

We see organic growth opportunities as we've been talking about in Russia and Libya and the Middle East area through our own system. It's just more beneficial at this point in time

Our next question comes from Robin Shoemaker of Bear Stearns.

Thanks, good morning. I wanted, Andy, I wanted to ask you about perhaps the one area that didn't have really spectacular performance, and that was Latin America. And the reason I ask is, that Big Blue showed some pretty nice sequential year-on-year improvement in profitability and I have a feeling that that same trend is imminent for Halliburton's Latin America business. But can you just give us just a rundown of how that area is performing relative to others and what needs to happen for it to show the same kind of growth rates we're seeing elsewhere?

Yes, Robin. Let me start down in Argentina. Very strong for us. Brazil, very strong for us. Venezuela is coming back and improving over previous last two years so we feel very good about that. Columbia is a solid performer for us.

So it really comes down to Mexico, when you look at Latin America for us. Add to little color on the drilling project. As you know, this was a significant direction for PEMEX to go to some of these lump sum turnkey drilling prospects despite the historical model they've had for discreet services there.

So these two projects we have in the south are to drill 33 wells. We've completed 13 of those 33 or approximately 40% of the project. We have seven rigs drilling.

We've had disappointing results on the first two batches of wells that we worked on in Mexico. We have three more batches of wells to come, and we expect improved performance on these future drilling wells.

There's been a lot of geological uncertainty in the information provided to us on this drilling project, and we're pursuing resolution of that with our customer. So the main driver for the lack of operating income from Latin America and improvement was the $15 million charge we took in Mexico, that forecast based on the results from our first two batches of wells the overall results for the rest of the project.

So we expect improvement, and we're working very hard on that, and it has our top attention to turn that project around.

Without that $50 million charge we would have had a nice increase in Latin America.

Okay. Okay. And just remind me, I think you did say that you would no longer pursue this kind of lump sum project in Mexico.

That's correct. We, in the late '90s, we tried, had a similar project in the Vergos area and it just does not have the right risk and reward balance for us. We were not successful on that.

We felt like these wells had more technology components and that we could have delivered on this project, but, again, it shows the inherent risks in these projects are not acceptable us to us so we will not do any more turnkey drilling projects anywhere.

Our next question comes from Ken Sill of Credit Suisse First Boston.

Good morning, gentlemen. I wanted to keep digging into the good results that came out of the Middle East, you know, 120% incremental margins. In the comments, you mentioned specifically a 40 well intelligent completion project. I'm wondering how much of an impact that had on the Q2 results, and how much is going to be in the numbers going forward?

Okay. I'll start.

The overall improvement in Middle East is Saudi in general. The activity increased there and our service expansion. Also in Oman that we mentioned, very strong improvement in activity there that we're benefiting from. Those are the two hubs of the Middle East.

It was very little impact on the second quarter for the awards that are in the first couple of wells in Saudi. We're very proud of Well Dynamics and we're very proud of seeing that expansion of the adoption of the SmartWell technology. It's historically been with the Shell, BP, Stadel-type technology customers been very Europe focused and now to see Saudi Aramco adopt that technology in a big way is very encouraging for us so we see that as having a future impact on results on Well Dynamics' results more than it had an impact in the second quarter.

Jim, we'll take one more question after this, but I would just add, Ken, that most of the increase, or the biggest chunk of it, of the improvement in the Middle East really was, and the star performer there was the drilling information evaluations group, Sperry and logging. And really performed well.

Yes, Well Dynamics was a contributor but far less than some of the other product lines.

And then as a follow-up on that with intelligent completions going to Saudi Arabia, deep water starting to pick up. Is that intelligent completion business a higher margin business than some of other things we've seen in the past?

Well, it's still early on, Ken, in the adoption of it, but we expect it to be the same kind of margins, high end margins that you would see in deep water and you see in high-end completion equipment. That's our expectation, and we have three levels of technology there, a high end, a medium, and a low end technology, and each have different margin expectations, but as a basket of technologies, we expect it to be a high-margin business.

Our next question, our final question comes from Robert Mackenzie.

Thank you, my questions have been answered.

Do we have one more?

And our final question will come from Kurt Hallead of RBC Capital Markets.

Hi. Just real quick. A lot of focus and attention on the pricing in Production Optimization. I was just wondering if you can give us some indication as to whether or not you're seeing the ability to push or accelerate pricing in your other business segments as well?

And the follow-up to that is, it appears like you're just now starting to get the pricing and it should really continue to accelerate in the back half of the year. So I'm just trying to get a sense of broader beyond Production Optimization what you're seeing pricing-wise and whether or not it should continue to accelerate.

Yes, Kurt, we are seeing continued acceptance of pricing outside of pressure pumping. We have a keen focus on pressure pumping for the second half of the year both in the U.S. and outside the U.S. So that will be the center of our attention, but it's across the board.

We see it in Sperry Drilling where supply and demand is very tight. We see it in completions as markets pick up on offshore markets. So we are continuing to make progress and pushing pricing across the whole portfolio of Halliburton and definitely outside the U.S. market.

Thank you all very much. And we will talk to you in October. We appreciate your time

Ladies and gentlemen, this does conclude your teleconference. You may now disconnect and have a great day.