哈里伯頓 (HAL) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Halliburton Company fourth 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.

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

Today's call is being webcast and a replay will be available on our Web site for seven days. We are also pleased to announce we are the first among our peers to offer a Podcast download which will also be available on our Web site within 24 hours after the call.

Joining me today are Dave Lesar, our CEO, Chris Gaut, our CFO, and Andy Lane, our COO.

The press release announcing our fourth quarter results is available on our Web site at www.halliburton.com. We have tentatively scheduled our 2006 first quarter earnings conference call for Friday, April 21st at 10 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 into 2006. We will welcome questions after we complete our prepared remarks.

Before turning the call over to Dave, 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 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 the year ended December 31, 2004, Form 10-Q for the period September 30, 2005 and recent current reports on Form 10-K.

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

Thank you, Evelyn, and good morning, everyone.

Chris and Andy will discuss our fourth quarter results in some detail, however, I wanted to begin by sharing with you some of the highlights.

First, we posted fourth quarter diluted earnings per share of 2.08. We'll talk in a minute about a $540 million deferred tax asset valuation allowance reversal. Excluding that benefit, our earnings per share were $1.06.

Our Energy Services Group growth continued with a 10% growth in the third to the fourth quarter of which two-thirds came from outside North America. Outside of North America, revenue was up 13% and operating income increased 33%, and for the first time ever, all four ESG divisions had operating margins in excess of 20%.

Also clearly, our pressure pumping businesses remained exceptionally strong for us. Our ESG operating margins increased from 21.8% in the third quarter to 23.8% in the fourth quarter.

At KBR, we had another profitable quarter and put to rest all remaining issues under the RIO contract in Iraq. From a consolidated standpoint, we generated $874 million in crash from operations during the fourth quarter.

Our strong outlook on 2006 and beyond allowed us to reverse a substantial portion of the deferred tax valuation allowance we originally set up as part of the asbestos and silica settlement. This means we will be able to utilize those tax losses to offset U.S. tax payments in the future.

Our strong cash flow and positive market outlook on future growth is also caused us to increase our planned capital spending substantially for 2006.

I'd like to spend a few minutes reflecting on the performance for the full year 2005. ESG posted a 26% growth in revenue from 2004 to 2005.

This reflected strength in each of our four divisions, driven by our industry-leading position in pressure pumping. The more compelling story, though, is the dramatic increase in our profitability.

While ESG revenues increased by 26%, operating income grew by 80%, reflecting a 48% incremental margin for the year. Our operating margins were nearly 23% for year compared to just 16% in 2004.

We benefited from the strong demand for natural gas drilling and production-related services in North America and leveraged our substantial market positions throughout the world. Our customers very much recognize our unique ability to deliver quality products and services and are willing to pay a premium for those technologies that allow them to drill wells more efficiently and to dramatically accelerate and increase their production on those wells.

KBR's performance was also a highlight for 2005. After years of working through difficult projects that generated significant losses, our efforts to restructure KBR in 2004 showed up in 2005.

On the Energy and Chemicals side, our backlog moved away from the final stages of executing difficult legacy projects to newly awarded LNG and gas-to-liquids projects. KBR's management focus on projects execution allowed the E&C division to offer operating margins in excess of 6% for 2005, a margin that is unprecedented for KBR.

The Government and Infrastructure division also had a great year posting margins in excess of 4%. KBR's management focused on working with our customers to resolve disputes related to our work in Iraq, including those disputes that has received a great deal of media attention such as dining facilities and fuel.

Both of these matters were fully resolved during 2005 resulting in our Government and Infrastructure division recognizing additional income for award fees.

What hasn't had much media coverage, because I suspect it was positive news for us, was the recent resolution of all outstanding issues in the RIO contract including the Iraq fuel importation matter, as well as additional issues under the LogCAP contract. As you know, Halliburton has and continues to receive a lot of media attention regarding our purchasing of fuel.

We have now been paid a total of $1.1 billion related to our Iraq fuel purchasing work. This represents 100% of the cost we incurred related to this task.

So after all the government audit processes were completed, we received compensation for every penny we spent to buy fuel for Iraq. This final resolution shows that our procedures were in compliance with the direction we receive from our customer.

Now, with respect to our commitment to separate KBR from Halliburton, we will, of course, be guided by the objective of maximizing shareholder value. In our current plan is to file for an initial public offering for KBR soon after we file our 10-K.

We believe the IPO market in general, and the public market for engineering and construction companies in particular, is very attractive and [a] public valuation of KBR will benefit Halliburton's stock price.

Valuation multiples of publicly traded engineering and construction firms are currently very favorable. Chris will give you more details in his section of this presentation.

Before I turn the call over to Chris, let me say a few words about the future.

You've heard others talk about their expectations of revenue growth in the energy services business for 2006 and beyond. As you know, our practice is not to provide revenue guidance, however, I will say that we operate in the same markets as our competitors and we are also very optimistic that the market will continue to grow at an accelerated pace, and we believe additional price increases will be warranted as equipment and labor remain tight.

We will also have volume growth due to increased capital spending. We believe the North American market will continue to grow strongly in 2006 and beyond, and therefore, we will deploy additional capital and labor resources into this important market.

Similarly, we expect the regions outside of North America will continue to strengthen as we execute our aggressive growth and investment strategy. We believe our fastest growing international markets in 2006 will be the Middle East, North Africa, Russia and the deep water offshore markets.

We are very pleased with KBR's recent success in being awarded government contracts outside of Iraq and in the gas monetization area that capitalize on our strength in LNG and gas-to-liquids. As we said last quarter, we expect a slowdown in Iraq-related work going forward so we are focusing on diversifying our portfolio in the G&I division.

All of this success has resulted in significant cash balances and expected free cash flows. We plan to use cash to make additional investments in growing our business worldwide, both organically through capital investments, and through complementary technology focused in geographic acquisitions.

For example, we expect our capital spending in ESG to be up almost 40% in 2006. We will also be looking at how we can directly enhance shareholder value by increasing our dividend and resuming our stock buy back program.

We will discuss these matters with our Board of Directors at our February meeting.

Now I'll turn the call over to Chris, and he'll give you more details on the quarter.

Thanks, Dave.

I'll briefly review the drivers of our fourth quarter results compared sequentially to the third quarter.

Halliburton Company revenue in the fourth quarter was $5 .8 billion and that's up 14%. ESG revenue was up 251 million, or 10% sequentially.

KBR revenue, which benefited from our work on recently awarded LNG and GTL projects, was up $452 million, or 18% sequentially. International revenue was 58% of the total for ESG and 71% for Halliburton as a whole.

Halliburton achieved record operating income of $779 million in the fourth quarter. Overall, ESG operating income increased by $112 million reflecting a 200 basis point operating margin increase.

While approximately one-third of improvement came from the strong demand for natural gas drilling in North America, all four regions and all four business segments showed double-digit percentage growth in operating income. Operating income outside of North America was up 33% compared to the prior quarter.

ESG as a whole had a 23.8% operating margin in the fourth quarter of 2005.

KBR operating income decreased 29 million in the fourth quarter to $129 million. Recall that the third quarter results included the $85 million of income from the sale of our interest in a toll road, and $70 million in losses due to our Algerian operations.

Now I'll highlight the ESG segment results.

Production Optimization revenue increased 124 million, or 11% compared to the third quarter of 2005. Our industry-leading technology in the area pinpoint well stimulation continued to deliver excellent performance especially in North America.

Production Optimization operating income increased 17%, or $44 million with a 110 basis point improvement in margins. In addition to strong U.S. land results, production enhancement had increased utilization of resources in Canada and West Africa and increased activity in Algeria.

Completion tools had excellent performance in the fourth quarter. Revenue in completions grew 20% and operating income grew 51% reflecting increased activity in the Eastern hemisphere, which we define as all of our regions outside of North and Latin America, as well as recovery in the Gulf of Mexico.

In the Fluid Systems segment, revenue increased $46 million, or 6% over the third quarter of 2005 and operating income was up $18 million, or 13%. Cementing services operating income increased 17% on strength in North America and Latin America, partially offset by decreased activity in Africa.

Baroid operating income increased 5% with improved margins in Latin America, partially offset by the continued impact of the hurricanes.

Our Drilling and Formation Evaluation segment had a revenue increase of $27 million, or 5% sequentially, of which more than half came from operations in the Eastern hemisphere. While Sperry Drilling Services reported double-digit percentage growth over the third quarter 2005 in the Middle East, Asia region and the U.S, Sperry's Africa revenue declined and Sperry also experienced weakness in the North Sea as customers shifted their activity on some rigs from drilling to production-related activities during the quarter.

Security DBS Drill Bits continued its positive growth trend posting an 8% sequential revenue increase driven primarily by activity in Asia and North America. We are experiencing growing demand for our fixed cutter bits so we are currently expanding our fixed cutter manufacturing capacity.

Logging services revenue grew 14% primarily as a result of improvements in the Middle East, Latin America and Asia.

Drilling and Formation Evaluation operation income increased $19 million over the third quarter. Included in this increase is a $24 million gain on an intellectual property settlement regarding our drill bit business.

This division also recorded a $4 million inventory charge during the fourth quarter. Andy will discuss direct sales in a moment.

In the Digital and Consulting Solutions segment, revenue increased in the fourth quarter compared to the third quarter by $54 million, or 32%. Operating income increase from 35 million to today 66 million, it's an 89% increase.

The improved results were related almost entirely to the Landmark Graphics business. The fourth quarter is always Landmark's strongest, but this year was exceptionally impressive.

Landmark's consulting, software and data management businesses all did very well, and in looking ahead, Landmark should clearly benefit from the expected increase in exploration activity in 2006.

Now I will discuss our two KBR segments.

Government and Infrastructure revenue for the fourth quarter of 2005 was 2.1 billion compared to 1.9 billion for the third quarter. The increase resulted from higher Iraq revenue related to the timing of procurement of long lead time equipment and greater government services activity for U.S. Naval facilities repair work along the Gulf Coast.

Government and Infrastructure's operating income for the fourth quarter was 55 million, that's down 94 million, or 63% from the third quarter. The decrease is primarily the result of the $85 million in third quarter income on the sale of interest in a toll road and the difference in third and fourth quarter settlements related to the Iraq work.

In the fourth quarter the Gulf Coast Naval facilities work and higher activity at the DML shipyard in the U.K. were larger contributors to operating income.

In the Energy and Chemicals segment, revenue for the fourth quarter of 2005 was $816 million, that's a 33% increase from the third quarter. The increase is due to operations in maintenance projects in North America and the U.K., as well as work on the recently awarded LNG and GTL projects.

Operating income for the fourth quarter of 2005 was $66 million versus only $1 million in the third quarter. We recognized $70 million in losses related to Algerian projects during the third quarter.

Operating income also increased in the fourth quarter as a result of the GTL project and performance bonuses on an upstream engineering contract in the Caspian.

As David mentioned, we are moving forward with our plans to separate KBR. We have previously set out three preconditions for the separation and we believe KBR has sufficiently progressed each of these.

KBR has shown good profitability in 2005 and has significantly increased its backlog. We have also seen good progress in resolving the major Iraq issues and disputes.

The FCPA investigation has expanded to look at Halliburton's use of other agents in Nigeria and in other countries. We are cooperating with the government.

Our board has appointed a committee of the board to oversee the investigation and we are supplying additional information, but the investigation is likely to be ongoing for some time. We will continue to update our disclosure in our 10-K and in our planned S-1 for KBR which we expect to file as soon as our 10-Q and the 2005 audited financial statements of KBR are complete.

Our plan at this point is a 20% IPO of KBR, however, in response to interest we have received, we may consider selling some pieces of KBR, but we would not expect such sales to change our IPO plans. In preparation for the KBR separation, in December 2005, KBR entered into $850 million unsecured five-year revolving credit facility.

Now looking at some other financial items.

Our general corporate expenses were $20 million in the fourth quarter, that's compared to 26 million in the third quarter of 2005. The decrease was largely due to lower professional fees and a gain on an insurance item.

We expect a run rate in 2006 of 28 to $30 million per quarter for our corporate expenses.

Let me explain our tax accounting.

During the fourth quarter we completed our three-year plan which caused us to revise upward our estimate of domestic taxable income in the year 2006 and beyond. As a result, we recorded a $540 million favorable adjustment to our valuation allowance during the fourth quarter 2005.

Excluding this $540 million adjustment for future utilization of our NOL, the fourth quarter effective tax rate would have been about 22%.

In 2006 and thereafter, we believe our effective tax rate will be back in the range of 35 to 37%. However, keep in mind that about half of that accounting tax expense will be non-cash due to the utilization of our NOL for the next several years and should be added back to cash flow contributing roughly a dollar per share to cash flow.

Beginning in 2006, we will expense the cost of our employee stock option awards and our employee stock purchase plan. We expect the incremental impact of this change in accounting principle to be approximately $0.01 to $0.02 per diluted share per quarter.

Now let's discuss our liquidity.

Our working capital position on our government services work in the Middle East improved to about $500 million at December 31st as we collected large payments in connection with the full settlement of the RIO contract.

In response to our customers' planned increases in E&P spending, we estimate that ESG's capital spending will increase by almost 40% from $575 million in ESG capital spending in 2005 to about $800 million in 2006.

KBR's 2006 capital spend will be approximately the same as 2005. We expect DD&A for 2006 to be about $550 million.

I'm pleased to announce that we have achieved our debt to total capitalization goal of a ratio less than 35%, and that's well ahead of our original time line.

Cash and marketable securities increased almost $300 million at December 31st compared to the prior quarter. This cash increase is after we repaid $300 million in senior notes in October and we retired the $256 million ESG accounts receivable securitization facility.

Andy?

Thanks, Chris. Good morning, everyone.

As you can see, we finished the year with very strong results. I want to start by briefly recapping some of our major achievements in executing against our improvement plan.

At ESG, we have take a leadership role in pricing, controlled our costs in a growth market and optimized our manufacturing base to achieve better throughput. Manufacturing delivered a record $1.25 billion in shipments during 2005.

We posted over 1 billion in improved ESG operating income results in 2005 over 2004 on $2 billion in top line growth.

On a relative basis are the improvements we made at KBR were even more dramatic. We completely change the cost structure of the business and instituted a highly disciplined approach to project selection and execution.

We improved KBR's operating income by $840 million in 2005. As a result, KBR is now in great position to capitalize on robust gas monetization trends.

Now let me discuss ESG's fourth quarter performance.

We significantly improved the margins from the Eastern hemisphere. Margins increased from 17.8% to 20%, driven by improved results in Saudi Arabia, Angola, the U.K. and China.

Western hemisphere operating margins also improved increasing from 24.3% to 26.3%, largely from improved pricing, higher equipment utilization and increased activity in the U.S. and improved performance in both Mexico and Venezuela.

In North America, incremental margins were 48%, again illustrating the operational leverage of our core pressure pumping businesses. In North America in 2005 we increased revenue by 34%.

Our rate of pricing improvement increased over the second half of 2005. Currently we estimate we have 70% of our customer base on a 2005 price book, and we have 40% of our October 2005 price book already in place.

We anticipate additional price increases as demand for all of our services remains very strong.

We estimate the hurricane impact was approximately $17 million in operating income in the fourth quarter. The most affected operations were Baroid, production enhancement and cementing.

Our Cameron and Venice facilities require additional repairs before being fully operational. However, we are now able to fully serve all of our customer needs from our Gulf Coast facilities.

We are taking this opportunity to rebuild, modernize and consolidate some of our facilities in this area which will yield longer term operational benefits. While the situation has improved, we estimate approximately a $12 million impact in operating income in the first half of 2006.

We expect insurance proceeds to offset some of these losses.

In Mexico, we will complete our turnkey drilling project this spring and have already release one of the seven rigs. We expect our margins in Mexico to improve further upon completion of this project.

Activity in the Middle East, in particular Saudi Arabia, continue to improve driven by enhancement and demand for our rotary steerable systems. In the fourth quarter we saw an increase in direct sales in Chinese and India which contributed approximately $11 million in additional operating income.

We prioritize our manufacturing capacity to build service equipment for our own use first with direct sales as a secondary priority. The service equipment that we sell is typically subject to 9 to 12-month lead times for manufacturing.

Now let me turn to KBR.

As we've mentioned for several quarters, we expect our Iraq work on the LogCAP III to see an even more rapid decline during 2006 than we saw in 2005 as compared to 2004. We have been focused on diversifying our G&I portfolio in preparation for this decline.

For example, we continued to expand our work for the U.S. Navy under our CONCAP construction contingency contract and we are positioned for future contingency work for the U.S. Air Force under AFCAP. And we further strengthened our position with the U.K. Ministry of Defence.

For E&C we are pleased with the growth in LNG and gas-to-liquids projects. If you look back at the year, we won some significant new LNG contracts.

We now starting to see some of these large contracts in our results, and there is continued momentum in 2006, with several new projects planned. Worldwide, for the industry, we expect contracts of 14 new liquification trains representing 68 million tons of additional capacity to be awarded in 2006 and 2007.

KBR is the industry leader in this business, having participated in over 50% of the recent capacity construction, and we are confident we can win our share of this new work.

Last quarter I mentioned that renewed attention was being made to the need for increased petroleum refining capacity. In the fourth quarter KBR was selected to provide conceptualization, planning and early design services for a major refinery expansion in the U.S.

We believe refineries and refinery upgrades will be a growth area for us.

It is clear that our strength in the fourth quarter included every division and every region. It was a strong finish to a great year. There are many reasons to look at 2006 and beyond with confidence.

Let me turn it back to Dave for closing comments.

Thanks, Andy.

I began this call by describing our stellar 2005 results. What we have achieved in 2005 I believe shows the value off the strategy we have followed for several years. Halliburton's fundamentals are in place, and we are clearly and eagerly looking forward to excellent growth in 2006 and beyond.

For the Energy Services Group, this means continuing to be the leader in pricing. It means more improvements in the productive use of our equipment and adding capacity in growth areas.

For KBR, this means capitalizing on our strengths in LNG and GTL and diversifying the applications of our Government and Infrastructure skill sets.

Before closing, I would like to preempt one possible question.

We too, have heard some merger rumors recently involving our company. We just don't comment on rumors. Having said that, I just want to say that today we are totally focused on the separation of KBR from Halliburton.

I want to thank our customers who saw the value of our work and stuck with us through the difficult years. I want to thank our employees who continue that work with us and innovate through all of our businesses. We are looking forward to what we believe will be a great several years.

Now we'll take your questions. We ask for a limit of one question and one follow-up per caller. So let's go to the first question.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll go first to James Stone with UBS.

Good morning, Dave, and thanks for giving a lot of very good information and I think puts to rest a lot of stories.

I just want to touch on some of the operational things in the quarter, and, Chris, you talked a little bit about the decline that you saw in operating income at DFE in the quarter. I'm wondering if there was a little bit more to that than just sort of mix shifts in the North Sea of Africa or, you know, what is the prognosis or the outlook for that business as we head into 2006 particularly on the directional drilling side?

We think the outlook for Sperry's directional drilling at DFE as a whole is positive. As I said, were impact by several rigs moving to more production and completion activity in the North Sea and some lower sales in Africa.

And actually you saw the other side of that in our completions business, where they had higher activity in the fourth quarter. But we've had very good growth in the directional drilling business in the Middle East and Asia, and we expect that to continue, and we expect the mix shift in the rig activity in these other areas to balance out and shift that going forward.

Okay. And then just as you look at the IPO of KBR have you settled on a management structure for that business at this point? What's left to be done there?

Jamie, this is Dave. Let me answer that one.

As you know, we brought Cedric Burgher back into the Company and announced that last quarter to be the Chief Financial Officer for KBR and Cedric will obviously be in the CFO position that leads KBR through that.

We have had an ongoing search for a new CEO for KBR, and it will be someone who comes in from the outside. And we've got that search going on. We're down to a short list and we would hope to have a finalist for that shortly.

And I think the rest of the KBR management team that's inside the business today is a great management team. They certainly have showed that. And we believe that collectively, they'll be a fantastic team going forward in the IPO.

That's great. Thank you.

We'll go next to Geoff Kieburtz at Citigroup.

Thanks very much.

Andy, I'd like to come back to your comments on equipment sales to Asia in particular. I think you gave us an 11 million EBIT contribution in the quarter. Could you give us a little bit more information on that like what was the contribution for the full year? And can you give us some sense of how that fluctuates?

Yeah, Geoff, let me just hit a few points on direct sales in general. Primarily this is in our DFE division although some of the other divisions have occasional direct sales.

The way we classify direct sales is we're selling service equipment to local service providers and markets that we don't directly compete in for their own services. It's generally older generation technology and so for DFE, for all of 2005, it totaled $95 million, 34 million in the first half, it was 24 million in the third quarter, 37 million in the fourth quarter.

Now we usually ramp up at the end of year with our direct sales shipments so seasonally it falls off in the first quarter and we expect to see that again in the first quarter. Other direct sales were 10 million in fluids and 14 million in POs. So that's the scale of our direct sales business.

Okay. And just so I'm clear there, the total revenue from direct sales in the fourth quarter was around 50 million?

Yes. Total revenue from direct sales in the third quarter was 31 million and in the fourth quarter it was 58 million.

58 million. And that's, that 58 million of revenue is what drove the 11 million EBIT contribution?

Exactly.

Okay. Separate question on KBR, if I could.

Can you give us some idea of what the bonus accruals were on the Iraq work and maybe elaborate a little bit on what looks like unexpectedly strong margins in Energy and Chemicals?

Yes. First on the bonus accruals, we did not have an award fee in the fourth quarter or board review. So they were just our standard accruals which I think we previously mentioned we accrue at 72% of our total award.

We expect an Iraq award and a Kuwait award here in February for the second half of 2005's business. So we'll have new award scores here in the next month, but we expect them to be very strong.

In the E&C, what you're seeing is the consistent base business. You're seeing the ramp down of the previous legacy projects, many in the upstream business and a ramping up of the LNG and GTL projects that we've brought in in the last 12 to 18 months.

So it was a very solid quarter for E&C and we have a good outlook for that segment.

Do you think that these, I think previously you sort of suggested that those margins were sustainable more in the 5% range and they seem to be staying well above that.

Geoff, we've been saying that we want them to be at least 5. And I would say the fourth quarter is at the high end of the range and we're not saying that it's going to be there every quarter. But we'd be very disappointed, you know, if it's not 5% on an annual basis there.

Great. Thanks very much.

We'll take our next question from James Wicklund, Banc of America Securities.

Good morning, everybody. Great quarter and thank you.

Guys, and I hate to ask this question and please forgive me, but I'm up in New York and there has been a rumor rampant in every meeting that I've gone to that you were scheduled to announce a major acquisition as early as today. Realizing the limitations on conversations, guys, can you talk about the potentials of Halliburton making major acquisitions in the oil field service business going forward?

Jim, I think, as I said in the remarks, you know, one, we don't comment on rumors, but today we are totally focused on the separation of KBR from Halliburton. And I think that answers your question.

It does, and, again, sorry guys, but I needed to do that. Thanks. That's all I've got. Go ahead.

We'll go next to Jim Crandell at Lehman Brothers.

I want to ask not a question on rumors per se but acquisition strategy. And as you look at your company now that KBR is being put into an IPO here and you've got all the problems of the Company in the past behind you, do you feel the need or desire for more scale in your oil service business and would you describe your acquisition strategy in oil field service as niche focused or willing to consider something large?

Jim, we're very pleased with the prospects that we have for our portfolio of businesses. We have been more active in the acquisitions arena during 2005 and we've announced a handful of deals here in the past several months.

We will continue to look for acquisitions that add technology, that complement our existing product line or possibly that provide greater geographic balance in certain areas. Those are the kinds of things that we have been most focused on.

Okay.

And as the follow-up question, Andy, could I ask you to comment on the rate of price improvement in the U.S. stimulation market in the recent quarter? Not the percentage gained but rate of improvement relative to the past two to three quarters in pricing. And then get your reaction to all the capacity coming on the market and what that portends for the business here going forward.

Yes, Jim, we saw throughout 2005, we had some success in early 2005 in getting the late 2004 price booked increases through. We saw increasingly better success in the second half of 2005 with the most in the fourth quarter.

The market still is very tight and we see a lot of room for still upward pricing. There are lots of shortages of people, shortages of cementing, shortages of frac [propin], sand and overall shortages of personnel have created and is still a very tight market. So we still see a very good fundamental market on supply, capacity of shortages to increase pricing in 2006.

My sense, Andy, is you've been reasonably aggressive in increasing your domestic stimulation capacity perhaps as much as 25% last year in sort of going forward. Is that a reasonable estimate?

We haven't given, Jim, the details on how much, for competitive reasons, how much we have put into North America specifically, but it is, you know, a very strong performer for us and it will be a large part of our capital investment in 2006.

Okay. Thank you.

We'll take our next question from Scott Gill at Simmons & Company.

Yes, good morning, gentlemen. And kind of along those lines for Andy, Chris or Dave.

You're looking to increasing your capital spend for 2006 fairly significantly. Can you give us some color and detail on the increase in which product service lines are going to get the majority or the components of that capital spend?

Scott, we're not breaking that down, again, for competitive reasons, but some of the divisions that we feel can really benefit from an increased allocation of resources would include our directional drilling business. We talked about expanding capacity in drill bits.

Certainly in our pressure pumping businesses, Andy spoke to the North America side and then outside North America, we're looking at growth in such areas that Dave mentioned not only in the Middle East but North Africa. Russia, we previously talked about a significant increase in our role there, and, you know, I think those are some of the focused areas for us. Andy, anything you want to add?

No. The big one's pumping services and Sperry downhole tools are our main emphasis.

As my follow-up, as you look at your capital spending budget for 2006 and you start assessing your various suppliers, are you seeing any tightness in the markets that put that budget at risk? In other words, you might not be able to spend your $800 million?

This is Dave. Let me answer that one.

I think that in, especially in our critical pressure pumping markets, we're the only big pressure pumping company that is vertically integrated in that we still manufacture our own pressure pumping equipment. And I think that actually gives us a real advantage today in being able to react to the marketplace because most of our competitors are really going to a single vendor and have to sort of figure out how and when to get into the queue for equipment going forward where we can ramp up and down our manufacturing facilities very quickly to meet the demands that we see out there.

So from that standpoint, I think that we actually have a big competitive advantage in this marketplace.

I think if you look at sort of the components for drilling tools at some of the others, certainly there are issues and backlogging of certain items there, but generally I think we feel we can bring them into the market at the pace that we want them.

Thank you.

We'll go next to Dan Pickering at Pickering Energy Partners.

Good morning, guys.

I was wondering if you could address the North American side? Revenues up roughly 2%, I'm just curious how that fits with your expectations I guess thinking about pricing improvements, rig count improvements. I thought that number might be a bit higher.

Were there any lumps in either the third quarter or the fourth quarter?

Dan, it was a very strong quarter for us in October and November. We has some tail-off in December primarily in the Rockies related to the just logistics of moving equipment around and the weather and where we were working in the Rockies on the certain projects. So that impacted us a little bit and there was a slight slowdown at the end of December in Canada just a slowdown in overall activity.

But again, we were very strong in October and November and we feel very good about going in the first quarter. You have your normal seasonal weather impact that you have to live with in Canada and the Rockies but overall we feel very good about the quarter.

Keep in mind, Dan, when you think about the comps, sequential comps of third quarter, we also had a very strong third quarter in North America. Topped that in fourth quarter, some seasonality there and weather factors in December.

Okay. Great.

And then, I guess, as we look into 2006 and particularly in the first quarter, as you look at your -- whether you want to talk about it geographically or by business segment, we all understand the seasonal fourth to first quarter issues in the Landmark business, but is there any reason to think that any of your other segments as we move into Q1 should show any revenue or margin slowdown relative to Q4?

Well, Dan, I think the only other things I would say, Landmark, of course, is a big impact as it always is in the first quarter of the drop-off from its great fourth quarter. It will be more significant this year because of the very strong performance Landmark delivered.

You will see a drop-off in direct sales in BFE that we talked about in the 30 million range. You have weather impact in the Rockies that we talked about, North Sea, Russia has experienced an extremely cold winter so we expect to see all that hit us in the first quarter.

Does that aggregate in your mind to improvement in overall revenue or decline?

Well, we're not providing guidance, Dan, but there are some puts and takes there and obviously this is January. So, you know, the overall trends remain in place as we've been saying throughout this call. There are some places where there is some seasonality.

Thanks very much.

We'll take our next question from Robin Shoemaker with Bear Stearns.

Yes, thank you.

I wanted to ask your views on the cost structure and cost of operations in oil field inflation, et cetera, particularly just with respect to your 48% incremental margins in oil services in 2005.

With the cost to pressures you're experiencing, is that an achievable kind of incremental margin in '06? Or should we think of something perhaps lower than that as an achievable target?

Robin, I'll just in general terms about what we see in pricing. We, as you know, the labor market's very tight. We see our historical annual increase in labor costs in the second quarter. We normally do that adjustment.

We still see tightness in cement, we see tightness in some specialty chemicals that we use in our operations. Definitely in materials and steel and so those are the main drivers for pressure on cost increases.

But we will push pricing. We'll push pricing very hard through 2006, and that's our plan.

48%. That's a big number.

Right. Understood.

So in -- just as related. In the things that may have held back your margins a bit in '05 from what even the very good margins you achieved would have been as I think of the Mexico turnkey project and the hurricane impact primarily which presumably wouldn't impact you in 2006.

Good points. Good points.

Okay. Thank you.

Yeah, on Mexico, it's been depressing our results the whole year, not only taking some losses but then in other quarters like this quarter having zero margin contribution from that work.

Right. Thank you.

We'll go next to Mike Urban at Deutsche Bank.

Thanks, good morning.

I wanted to go a little more into the pricing trend. I was wondering if you could quantify or at least differentiate where you're seeing better or worse price increases, and then also, I think I have an idea what the answer's going to be 'cause we're getting to where, if any, have there been any laggards disappointments that are now showing better pricing increases?

Certainly North America, as we've been saying, quite strong. And then, of course, the Middle East, the Gulf and Asia. I think the offshore markets are coming along quite as well.

If we were to think about where we might have some laggards in terms of price, they're probably parts of Latin America outside of Brazil and working with national oil companies, too, those tend to be longer contracts and so there's some lag there as well.

And that and probably in parts of Southeast Asia we also have longer-term contracts there and depending on the competitive dynamics in a particular country and where the rigs are going or coming, you know, they're probably particular markets there, particular countries where we have some flatter areas there.

How about on a product line basis? Anything that's continuing to not get as much pricing as you might like or where you've suddenly see a pick-up of late?

Probably the only PSL now that it does not have pricing that's higher than the 2001 peak is logging. It's just been a laggard from a pricing standpoint. I think for the industry as a whole.

Any particular driver that you think's causing that or anything that might change?

Well, Mike, I think logging as a whole we have done a very good job in the last year in improving the profitability. We remain in a less than advantageous market share position so we are not the pricing leader in logging by far, but they have done very well in logging.

We also would like to see Baroid accelerate at an even faster pace so that'd be area I'd mention.

Great. Thank you.

We're going next to Ken Sill at Credit Suisse.

Good morning, guys.

I know you don't want to provide guidance but if you're going to IPO KBR maybe you could help us here a little bit here. Obviously, a great source of positive surprise, but just looking at the numbers you're saying the revenue for Iraq decline in '06 is going to be more dramatic than '05, and yet the revenues were up in the fourth quarter. So should we see that tail-off kind of ratably as we move through '06 from Iraq?

Yes, Ken, I think we will. We've the uptick in revenue in Q4 because we were charged with purchasing some long lead-time items that the military wanted.

We expect it will be a consistent decline over 2006 and, you know, you have read as we have increasing talk from Washington about reducing troop counts ahead of the Congressional elections, the mid-term elections later this year. That may have an impact on the timing of the true production.

But that's probably the biggest driver overall is the troop count as well as the move more toward, you know, sustainment rather than building new facilities.

And the margin should remain pretty strong in government in Iraq in the first quarter. You said there's going to be more award fees get booked so continuing in the 3%-plus --

Well, don't know about that, Ken. We've had some settlements here in 2005, and as we said this morning, we've made very good progress of settling the big issues here. And the LogCAP contract is probably in a more of a 2 to 3% margin contract overall.

And then in Energy and Chemicals, I noticed the backlog was down just slightly, the revenues were up nicely. You're talking about 5%-plus margins there. Is the LNG and petrochem stuff that's coming on going to kind ramp up and result in better revenue in '06 or is '06 kind of a transition year where it's kind of flatish relative to '05 because you had a really good fourth quarter in that business.

Yeah, we see that business continuing to grow. And we're rolling off some revenue of these older oil and gas facility contracts at very low margin and rolling on these gas monetization contracts that carry and contribute a higher margin.

So that's going to be a benefit in '06 and based on our plans and the increase in backlog, I think that's a pretty good indicator of where we see that business going.

Okay.

And is there going to be any seasonality Q4 to Q1 in that business like we've seen in some prior years or has that just been the normal trend down and you kind of bottomed and are going the other way now?

I don't expect to see any seasonality on the E&C business.

Justin, we're running short on time so let's take one more question.

We'll take our last question from Kurt Hallead with RBC Capital Markets.

Hi, good morning.

My question relates to whether or not you guys are seeing any differential push back from your customers with respect to the price increases and whether or not your North American customer base, whether or not you see any nervousness or skittishness as it relates to the seasonal downtick in the natural gas price?

Yeah. This is Dave.

Let me answer that because I spend a lot of time with our customers, and it's really, the pushback we get is not on pricing, it's getting the equipment and get it for me now that I've got drilling commitments, I've got rigs leased and I need you guys there, especially in the stimulation market where they will pay a premium for the type of work we do.

So the push-back really is, we need more investment. We're asking for a longer-term commitments but with more flexibility on pricing. And in a number of cases, we're getting that.

So I think that we see that the supply-demand balance is still in the favor of the service companies, and that's why we believe we can continue to bring equipment into the marketplace and at the same time increase our prices.

And you're not getting any sense of any nervousness at all about this seasonal shift in natural gas prices?

No, not at this point.

Okay. That's enough. I'll hop off line, thanks.

I'd like to thank everyone for joining us today. If others have additional questions, please feel free to call me today. That concludes our call this afternoon. Thank you.

Again, that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.