哈里伯頓 (HAL) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Halliburton third quarter 2006 earnings conference call.

At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Evelyn Angelle, Vice President of Investor Relations You may begin.

Thanks, Matt. Good morning and welcome to Halliburton's third quarter 2006 earnings release conference call.

Today's call is being webcast and a replay will be available on our Web site for seven days. A podcast download will also be available on our Web site.

Joining me today are Dave Lesar our CEO, Chris Gaut, our CFO, Andy Lane, our COO and Bill Utt, the President and CEO of KBR. The press release announcing our third quarter results is available on our Web site.

In today's call, Dave will provide opening remarks, Chris will discuss our overall operating performance and financial position followed by Andy who will review the ESG regions and our business outlook. Bill will address KBR operations. 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 our Form 10-K for the year ended December 31, 2005, our Form 10-Q for the quarter ended June 30, 2006, and recent current reports on Form 8-K.

Today we will be giving you an update on the IPO of KBR. And sale of KBR, Inc. stock under a Form S-1 would be registered under the Securities Act of 1933 and such shares of common stock would only be offered and sold by means of a prospectus. This earnings conference call does not constitute an offer to sell or the solicitation of any offer to buy any securities of KBR.

Now we'll turn the call over to Dave Lesar. Dave?

Thank you, Evelyn, and good morning, everyone.

We had another record quarter in our Energy Services business and we believe that the momentum should continue into the fourth quarter and beyond. We'll discuss these results in detail with you in a minute.

But first I'd like to address the issues that I believe are on top of everybody's mind: KBR and our outlook on the North American market. We are continuing to work through the KBR IPO process.

Since we spoke with you in July, the market for IPOs has improved. Therefore, if we're able to finalize the SEC review process with respect to the Form S-1 within the next few weeks, we expect to complete an IPO of just under 20% of KBR's outstanding shares.

This would be followed by a spinoff of the remaining shares to Halliburton shareholders no later than April of 2007. If we are unable to proceed with the IPO before the end of the year, we would expect to spinoff 100% of KBR to Halliburton shareholders in the early part of 2007. Again, this would be no later than April.

Let me shift to the Energy Services Group. As you know, the coalbed methane market in Western Canada began to be impacted by softness in the price of natural gas, however we've seen no other widespread impact on demand or pricing in our pressure pumping services in North America.

We have the base and knowledge, the customer base, the technology, and the experience to successfully work our way through any near-term concerns. Demand for our services in North America continues to be strong. The reality today is Halliburton currently does not have enough capacity to serve all of the customers seeking our pressure pumping services in North America.

If some of our current customers were to decrease their activities, it would allow us to go to work for others. If this were to occur, we might experience some down time or mobilization costs during this transition period though we believe we will be able to keep our equipment and people highly utilized.

Also, if natural gas drilling were to decrease, we expect to see our customers shift their focus to drilling oil wells in the near-term rather than letting the rigs go unutilized.

Now, let me give you some examples of how we effectively reallocate our equipment and workforce in order to react to changes in the market. We recently, for example, addressed a pricing and utilization issue with a major customer in the Rockies by redeploying our frac fleet to other major customers. This allowed us to realize the improved pricing while displacing a competitor.

We are also redeploying frac fleets to the mid-con area to address additional demand from our existing customers. We're also considering sending another fleet to Canada where our business is focused not in the shallow gas markets, but in the deeper areas such as the foothills.

We believe we will be at least able to continue posting our historical high margins because we have enough demand for our services to keep our fleets fully utilized even if it means moving equipment to other areas. And most of our customer contracts contain cost escalation clauses that allow us to pass cost increases along to our customers. For those customers that do not have escalation clauses, that work is priced on a call-out basis and inflationary costs are already priced in.

We spent a lot of time discussing our near-term outlook for North America with our customers. Other than the shallow and coalbed methane wells in Western Canada, we've seen and heard only limited instances of customers actually shutting in production temporarily until the natural gas price comes back up.

So far, this is not impacted our volume. However, in the event that drilling activity does decline or more production is shut in, our view is that this would rather quickly reduce gas production and allow gas storage to come down sufficiently to bring natural gas markets back into balance, perhaps within one or two quarters.

But this is only a hypothetical. So I would encourage you, do not discount our excellent North American gas position and reservoir knowledge. We believe our equipment will be working when others are not.

With the softness in natural gas prices and lower oil prices, we know there is an increase on Wall Street that this cycle is slowing. We certainly don't believe that that is the case.

Our outlook over the next several years remains very robust. Worldwide demand for hydrocarbons continues to grow and the reservoirs are becoming more and more complex. This is translating to increased demand for oil field services, particularly those services that reduce drilling time and increase production rates.

So with that outlook, let me focus on operations. ESG has posted a year-to-date 30% revenue growth compared to the first nine months of 2005.

Our operating margins continue to climb. We posted 25.7% operating income margin for the first nine months compared to 22.1% in the same period a year ago.

Another of our goals we've visited with you on is to achieve industry-leading returns on equity. Halliburton's consolidated return on equity for the first nine months of 2006 on an annualized basis was 32%. Excluding KBR, this figure increases by approximately 7 percentage points.

Now some highlights from the third quarter. ESG posted record revenue in the third quarter with sequential growth of $276 million, or 9%.

Production Optimization, Fluid Systems, Drilling Information, Evaluation, all contributed with record revenue. Within these divisions, all major product service lines posted record revenues.

ESG also achieved record operating income and grew operating income at 14.5% on a sequential basis, better than the 9% revenue growth we saw sequentially. Operating income margins were 26.7%, 130 basis point sequential improvement. Our incremental margins for the quarter were 42%.

Our commitment to Eastern Hemisphere growth and profitability continues to pay dividend as both regions in the Eastern Hemisphere posted record revenue despite a $9 million impact from the strikes in Norway. The Middle East-Asia region had record operating income while Europe-Africa was just shy of its record.

From a product serviceline standpoint, Sperry operating income grew 39% sequentially, which was heavily impacted by improvements in the Middle East. Once again the Eastern Hemisphere showed improved margins with just over a 21% operating income margin, even with the mobilization costs we are currently incurring to ramp-up our Eastern Hemisphere activity.

We continue to win large projects in the Eastern Hemisphere. We've recently been awarded two contracts in Indonesia for a total of $110 and a $70 million project in the UAE for cementing and stimulation services.

I'm also proud of our Latin America region, which posted record revenue and operating income with a strong sequential 40% incremental margin. All four divisions contribute positively to the results in Latin America.

From a company perspective, let me highlight a couple other points. KBR backlog continues to strengthen. It increased $4 billion this quarter to a record $15 billion with the addition of the Qatar gas-to-liquids project, and Task Order 139 under our LogCAP III contract.

Halliburton's cash position remains extremely strong. We are still pursuing our strategy of 1 to $2 billion in acquisitions annually and are currently looking at a number of options. However, we still feel the best investment is in ourselves, having spent about $1 billion on share repurchases with an additional $2 billion recently added to that authority.

So with that, let me turn the call over to Chris and he'll go over more operational details.

Thanks, Dave, and good morning. I will discuss our third quarter results compared sequentially to the second quarter.

Halliburton Company revenue in the third quarter was $5.8 billion. That's up 5% from last quarter. ESG revenue was up $276 million, or 9% sequentially with all divisions and regions contributing to the positive results.

KBR revenue increased $10 million. International revenue was 54% of the total for ESG and 68% for Halliburton as a whole.

ESG operating income increased to $906 million reflecting a 26.7% operating margin, the highest in our history. KBR reported operating income of $98 million with an operating margin of 4% and that is after the $32 million, or $0.03 per share impairment charge.

Now I'll highlight the ESG segment results. Particularly noteworthy was the broad-based strength of our incremental margins across all four divisions and across each geographic region.

Production Optimization operating income increased $49 million, or 14% with a 100 basis point improvement in margins. Production enhancement had a favorable job mix and increased activity in U.S. land and recovery following the second quarter spring break up in Canada. Utilization of our stimulation vessels was strong worldwide.

Completion tools posted strong operating income results, particularly in the Middle East and Asia region with strong sales for our recently acquired Easy Well product line. Operating income for completion tools also benefited from strong sequential improvements in Latin America, the North Sea, and Russia.

Fluid Systems operating income was up $18 million, or 9% due to strong U.S. land activity, recovery from second quarter spring break up in Canada, and improved results in Africa and the Middle East.

Cementing services operating income increased sequentially led by strength in drilling activity in North America. Cementings increased operating income was partially offset by higher mobilization and startup costs for projects in Africa, Asia, and the Middle East.

Baroid continued to increase its operating income margin led by improved sales and pricing in Africa. Higher demand in the U.S. and the Canadian recovery also contributed to Baroid's improvement.

Drilling and Formation Evaluation operating income increased to $227 million compared to $189 million in the second quarter of 2006 while posting an operating income margin of 26.9%, a 250 basis point sequential improvement. Sperry contributed significantly to the division's performance posting sequential improvements in all regions. Sperry had particularly strong performance in the Middle East with some contribution from the startup of the Al Khurais project.

Security DBS' operating income increased sequentially benefiting from improved fixed cutter and roller cone bit sales in North America and Asia Pacific. Wirelines' operating income was down slightly with improvements in several markets offset by lower direct sales, direct export sales during the quarter.

In the Digital and Consulting Solution segment operating income improved over 19% from the second quarter of 2006. Current indications are Landmark will continue with its traditionally strong fourth quarter results.

Let's turn to the results for our two KBR segments. In the Government and Infrastructure division we posted operating income of $53 million compared to $68 million in the second quarter.

Iraq-related revenue decreased by $70 million from the second quarter due to decreased volumes. Our work for the U.S. Navy increased in the third quarter. Our majority owned U.K. maritime operations posted a strong quarter, as well.

In the third quarter we recorded a $32 million non-cash impairment charge related to an Australian railroad joint venture, and that's due to slower than anticipated growth in freight revenue. The second quarter included a $17 million impairment charge related to our investment in a joint venture road project in the U.K.

The Energy and Chemical segment posted operating income of $45 million compared to the second quarter operating loss of $109 million. Third quarter operating income margin was a strong 7.5%.

Scheduled delays and cost increases encountered on the Escravos gas-to-liquids project in Nigeria resulted in a second quarter operating income charge of $148 million. And Bill will provide an update on the Escravos project in a moment.

Let's review some other financial items. In the third quarter, we had an effective tax rate of 33%. Our tax rate this quarter was favorably impacted by tax settlements. Our effective tax rate for 2007 should be approximately 35 to 36% we think.

Capital expenditures totaled $238 million during the third quarter, or $619 for the first nine months of the year. We expect capital expenditures for the full-year 2006 to be approximately $875 million and for 2007, we see our capital spending increasing to about $1.2 billion.

We were very aggressive in our stock repurchase program in the third quarter buying back 26.6 million shares at a cost of $865 million. The repurchases during the third quarter added $0.01 to EPS due to the change in average shares outstanding.

Now let me turn it over to Andy Lane.

Thanks, Chris, and good morning, everyone. Before I discuss the ESG operational highlights from a regional perspective, let me make a quick comment about technology and capital.

Historically, about a third of our revenue had been driven by new product revenue. With our leadership in technology, coupled with our continued view of a strong market over the next several years, we are increasing our research and development budget by 20 to 30% in 2007. Also, as Chris stated, we are also increasing our capital budget by 40% in 2007.

We remain very positive of the outlook for the next several years, therefore we feel very confident about making these long-term investment commitments in technology and capital. I'm certainly proud of the overall ESG operating result this quarter, the highest quarterly revenue and operating income in our history.

The third quarter also continues the trend with 11 straight ESG quarters of increasing revenue and seven quarters in a row of improving operating income. I'll begin with the Eastern Hemisphere which showed revenue and operating income growth in both regions, including record results in revenue and operating income in the Middle East-Asia regions and record revenue in the Europe-Africa CIS regions.

Our Europe-Africa CIS regions showed a $34 million, or 5% increase in revenue from last quarter. Results in Africa were driven by Baroid's strong performance in West Africa and Algeria where we experienced both price increases and higher product sales.

Our stimulation vessels in Angola showed increased utilization this quarter and frac and acid work in West Africa was in high demand. We booked our first wireline revenue in Libya in the third quarter. We recently deployed additional assets to support our continued growth plans for Libya.

Africa should have a strong fourth quarter driven by increased sales in completion tools, increased demand for directional drilling services and higher activity in Algeria.

Our Middle East-Asia region revenue grew $10 million compared to last quarter. This is despite a $15 million sequential decrease in wireline direct sales into Asia. Offsetting the lower direct sales, we saw increased demand for our directional drilling and wireline services in Asia-Pacific.

Our results in Saudi Arabia continue to strengthen. In our Sperry business we saw a significant increase from the second quarter related to higher demand for our Geo-Pilot and GeoTap systems and the startup on work on the Khurais project for Saudi Aramco.

We currently are servicing two drilling rigs for the Khurais project with an expectation for an additional nine rigs running by the end of this year and more rigs to be added in the early part of 2007. The project will have an excess of 20 rigs at peak activity levels.

Now turning to the Western Hemisphere. We had a very strong quarter in the U.S., in fact, our best quarter ever.

Demand for our services was strong throughout the quarter and we continue to realize pricing gains. Our margins in the Western Hemisphere were the highest in our history.

Looking ahead, we have seen limited examples of softening in the U.S. markets due to the weakness in the price of natural gas. So far this hasn't impacted our activity, our scheduling boards are full and we're as busy as we've ever been.

We are also preparing for the typical fourth quarter seasonal reduction in activity we see in places like Utah and Wyoming due to winter stipulations imposed by the Bureau of Land Management, in other areas in which we worked that are impacted by weather and the holiday season.

We do believe that the softness in natural gas prices could in the next three to six months impact our ability to push through pricing increases as aggressively as we have in the past. If this turns out to be the case, we expect the impact to be short-lived.

Our Canadian operations rebounded from the impact on the second quarter spring breakup with the average rig count for the third quarter increasing to 494 rigs from 282 in the second quarter. Our revenue in Canada increased by 69% from the second quarter.

However, late in the third quarter we began to see a slowdown in shallow well and coalbed methane drilling activities as the natural gas spot price declined. We expect to see Canada's typical busiest season, which lasts from November through March, to kick off shortly.

Revenue in Latin America increased 10% from the second quarter. All divisions contributed to the strong results in Latin America. In Mexico, we experienced increased demand for our well stimulation and drilling fluid services. Venezuela results were also strong with revenue gains posted by production enhancement, completion tools, Baroid wireline and drilling services.

Now I'll turn the call to Bill Utt to address KBR. Bill?

Thank you, Andy, and good morning, everyone. I'm certainly pleased about KBR's overall results for the third quarter, particularly in light of the very difficult second quarter we experienced.

We have recently received our six-month Iraq award fee scores. Again, we were awarded an excellent rating of 96, reflecting our customers' continuing satisfaction with the work we perform serving the troops in a very difficult environment.

We also received an excellent rating for our work for the U.S. Army in Afghanistan. My congratulations to all of the KBR employees working on the LogCAP III project for a job well done.

As you know, we've been forecasting a drop in revenue related to our Iraq work, but so far it hasn't materialized. We have not seen changes in our workload that would be related to reduction in troop count so the demand for our services has remained strong.

In fact, in August of this year, we were awarded a large task order under our LogCAP III contract for additional work through 2007, but as we've mentioned before, the U.S. Army has announced its plans to transition from the LogCAP III contract to a new LogCAP IV contract. The LogCAP IV contract will be divided among three contractors so our work will likely decrease from current levels.

We have recently submitted our bid on the LogCAP IV proposal to the customer and we understand the work will be awarded sometime during the fourth quarter.

The $53 million in operating income posted in the third quarter by KBR's Government and Infrastructure Division is particularly noteworthy in light of the $32 million impairment charge we recorded related to our investment in the Australian railroad. Remember, this is not a construction project, but rather an ownership interest we have in the railroad, similar to the interest we sold last year in the Dulles toll road.

We continue to be disappointed with this venture as it has struggled to meet freight volume growth forecast. We do, however, remain committed to the investment.

We've been working with the project's bankers to restructure the joint venture's debt to delay principal payments. Currently, $10 million remains on our books related to this investment.

Our Energy and Chemical segment posted a very good quarter. Operating income margins of 7.5% resulted from strong project execution worldwide.

Our efforts related to project selection and execution is reflected in these results and I'd like to acknowledge the hard work of our Energy and Chemicals employees in this regard. We continue to be very focused on risk management and selecting and pricing the projects we pursue. At current energy price levels, we continue to see a strong demand for our services, particularly in the gas monetization arena.

Now a quick update on the Escravos project. Our discussions with our customers to reduce our risk in the project have been successful.

We have recently executed change orders for amounts in excess of $200 million. With these change orders, portions of the remaining work now have a lower risk profile, particularly with respect to security and logistics.

We feel the contingency recorded on the contract remains adequate. We are back to work on the project and are currently approximately 38% complete.

Also, as KBR proceeds to life outside of Halliburton, I am continuing to refine of the management structure of the KBR organization in preparation for becoming a publicly traded company. I began this process in the third quarter and expect to be complete by the end of the year. I expect these changes will continue KBR's progress towards best-in-class risk awareness and risk management.

Finally, I'm looking forward to leading KBR through the separation process and I'm confident that standalone KBR will be a leader in the markets we compete in. All of the KBR employees are excited about the prospect of being part of a standalone company.

Let me now turn the call back to Dave for some closing comments. Dave?

Thanks, Bill.

As you can see we've got a lot ahead of us. KBR's separation is just around the corner. In the Energy Services Group, our Eastern Hemisphere business continues to grow as we invest in key resources in important markets.

We're focused on offering the most advanced technology solutions to our customers as well applications continue to become more and more complex. And as Andy said, we're committed to increasing our technology spend significantly as we go forward to make all of this happen.

We're also confident that any softness in the North America market will be temporary as natural gas supply and demand equilibrium will correct itself.

Now, let's open it up for questions. Please limit your comments to one question and one follow-up.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Daniel Henriques of Goldman Sachs. Your question please?

Morning.

My question is on KBR, just one clarification. Let's assume a scenario without the IPO, is there any reason why the spinoff couldn't have happened even earlier in '07 than compared to your April '07 deadline? I mean when were you expecting the IRS approval?

Yes, Daniel, it could happen well before April in the event of there not being an initial public offering first.

Okay. And in terms of the IPO, I'm not sure if you mentioned the timing, is that December, November?

We are working through the registration process with the SEC and that is hard to predict. We had said here today that we would like to do an IPO, but it would have to be this year. If we can't get it done this year, then we're going to move off to a straight [stead].

Our next question is from Jim Wicklund of Banc of America. Your question please?

Clarification on Cap Ex, Chris, didn't you all say it was going to be $2 billion next year up from eight and change this year? Did I hear that right?

No, $1.2 billion.

$1.2 billion.

About a 40% increase.

Boy, I hate to waste my question on that. And my related follow-up is in terms of Cap Ex, the margins and returns that you're getting on domestic pressure pumping business and everybody else is getting has attracted a great deal of capacity additions, where do you think returns on pressure pumping or margins on pressure pumping, where do you -- how high do you think they can ultimately go?

Well, Jim, they're very attractive now as you point out and we don't see deterioration there, but as we look forward to where we'll be spending more of our money in 2007, most of the increase is going into our Drilling and Formation Evaluation segment for additional tools for Sperry and for wireline. Our Fluids business is going to have a nice increase in 2007, as well.

So we see many good opportunities out there. We are not constrained by good investment opportunities whether it's in well stimulation, directional drilling, logging while drilling, wireline, or drilling fluids and cementing.

And Jim, we're also putting more of our pressure pumping investment into the Eastern Hemisphere in 2007 where we do see more uplift in margins from pressure pumping in that hemisphere.

Our next question is from Jamie Stone of UBS. Your question please?

Yes, I just want to, Andy, talk a little bit about, if we could revisit the comments that you made in July on pricing and what you thought it would be like to implement pricing in the second half of the year and see if you can update us on what you experienced in the third quarter and then how you see going forward both on the domestic side as well as on the international side?

Yes, Jamie, and we did talk about it in the second quarter and what we're referring to is the slowing in the increase of price increases. We did see, however, and we're very encouraged in August and September on pricing in the improvement we did receive in the quarter. So prices did improve both in the Eastern Hemisphere and the Western Hemisphere.

So as you know, the majority of our work in the U.S. is on contract, on some form of annual type contract, and so roughly 70, 80% of that work we will negotiate prices for 2007 here in November-December and we're encouraged by the outlook that we'll have at that point and we're still optimistic we're going to push prices through in the November-December timeframe for the majority of our U.S. North America work.

Okay.

And then just related follow-up on the DFE side, that market, that business was very strong in the quarter, you're obviously committing more capital to it. Is the growth going forward there? Can you give us a sense of how much you think is volume versus price?

Yes, Jamie, as you know we've been constrained in Sperry and we're catching up with our manufacturing deliveries and we also see a lot of opportunity for growth so we're putting, as Chris said, even more of our capital investment into Sperry. So it's mostly volume driven and it is a very competitive segment of the market but we seek still good growth in top line and good margin improvement as we deploy in Eastern Hemisphere.

You know, one prime example is Al Khurais that we talked about. We're only on two rigs there, as you know that's 100% Halliburton project and so we're going to be ramping up to over 20 rigs. So we're optimistic there that Sperry will do very well in Saudi.

And we're still seeing a lot of rollout of our technology, a wide acceptance of the Geo-Pilot and GeoTap and we're working on several more technology rollouts that will happen in 2007.

Our next question is from Geoff Kieburtz of Citigroup. Your question please?

Morning.

I guess maybe I was a little bit surprised at a 40% increase in the Cap Ex. Could you go into a little bit more detail as to, maybe, and I understand more going into DFE, but could you give us some maybe calibration here? How much is going into each major segment maybe compared to what your '06 Cap Ex allocation was?

Sure, Geoff.

The biggest increase is in Drilling and Formation Evaluation, as I mentioned, and that will be a substantial increase. A lot of it having to do with some of the contract wins that we have as well as just the general expansion that we see in our Eastern Hemisphere business.

The next largest increase will be in the Fluid segments, building out cementing skids for the new rigs, new offshore rigs going into service and the expansion of our business there, but also in drilling fluids as we build out bulk plants in additional areas to serve the increased markets we see in West Africa, North Africa, Asia, for instance and Latin America.

And then the third would be Production Optimization in terms of increase. And that is completion facilities, manufacturing capacity as well as the continuing build out of our fleet and replacement of our fleet and, importantly, the build out of our fleet for Eastern Hemisphere applications in places like Russia, Middle East. And so hopefully that will give you a picture there, Geoff. Is that sufficient?

Would you offer maybe a split on your pressure pumping investment sort of what amount is outside of North America?

Well, North America is, of course, a very large production enhancement market but our deliveries in North America next year were actually going to be down from 2006 a bit and up outside of North America.

Our next question is from Jim Mandel of Lehman Brothers. Your question please?

Thank you. Very good quarter. My question, Andy or Dave, relates to the Sperry-Sun and the technology development.

You know, your main competitor has introduced the family of tools in the last couple of years, would seem to go beyond what anything else has done. Where are you in sort of coming up with a family of tools which can really look out from the formation and can compete on an equal footing with say with what this scope family offers?

Yes, Jim, we're continuing to expand in a couple areas. First in the breadth of our Geo-Pilot and GeoTap line of equipment. We are the only ones with the slim hole full offering on rotary steerable plus the Geo Tap so we see a large demand for that and we're continuing to invest in that technology and deployment of that.

We also see several developments coming out in early 2007. Our mid-end rotary steerable technology that we've been working on for 6 to 12 months, we'll see that being commercialized in mid 2007 and we're very optimistic about that market share.

And we're also working [inaudible] we've got several new developments coming out on the Sperry side for additional technology and rollout in 2007 in 2008 so we feel we'll be in a very strong position next year in technology comparisons.

Okay.

And my related follow-up is where are we in terms of the new offshore rigs that have been ordered in ordering cements skids? How well do you think you're doing overall in terms of market share thus far in placing skids on the new offshore rigs that are being constructed?

Yes, we track that very closely, Jim, and we're doing excellent this year. I think we're outpacing 3-1 our competitors in placement of cement skids and we track that as a net number across both refurbs and new builds so very pleased with the progress there and that's part of our capital spend, as Chris said, in cementing [inaudible] and cement skids is a big part of that.

Our next question is from Dan Pickering of Pickering Energy Partners. Your question please?

Good morning.

On KBR there seems to be, there are a lot of moving pieces, obviously. If we added back the Australian charge you did about $130 million in operating income in the third quarter. Is that the right general area for us to think about fourth quarter and sort of a 2007 run rate?

That was an exceptional quarter for KBR and we wouldn't guide KBR and that as a -- on a consistent basis. That's I think something that they can, you know, aim for. But in terms of guidance on an ongoing basis, Dan, I think that's when everything goes exactly right.

Okay.

And then my other question would be can you talk to us a little bit and refresh us on your acquisition strategy where you guys are looking and give us an update on whether or not the kind of changing commodity price environment for both gas and oil has that helped, hurt, or no change to your opportunity base?

We are pursuing a number of potential deals, as Dave mentioned, and we're not going to talk about the specifics there. Clearly the valuations of public companies have come down, but it's also true that a seller's price expectations don't necessarily come down as fast as the public market pricing.

So that, you know, is taking a bit, a little bit harder to work through that, but we think we'll get there on some deals that we're working on now that we think will be important and additive to our results. In the meantime, we feel that our opportunistic approach to our stock repurchase is the right approach.

You saw that we were aggressive in the third quarter. Of course, we're out of the market for buying back stock by the Company as in the same basis we are for insiders, and so we were out of the market since the end of September until we announced earnings here. But we see that as a good opportunistic value and we'll be continuing to pursue that.

Your next question is from Ken Sill from Credit Suisse. Your question please?

Yes, good morning, guys. I don't think the horse is dead yet, so I'm going to beat it one more time on pressure pumping Cap Ex.

Could you give us a feel of how much, obviously, you guys have inflation. So in the 40% increase in Cap Ex, what do you think that's going to translate into in terms of an increase in actual capacity? Will it be as much or half that? Do you have any idea on that?

Well, yes, we will be adding equipment and adding capacity next year, but not as much in 2006. For competitive reasons we're not going to quantify that, Ken.

As we mentioned before, the economics of reinvesting in that business are outstanding. But we got a good jump on that, maybe ahead of some others and now with the improvement in some of the other markets around the world, we're seeing very good investment opportunities in these other areas and that's why we're putting so much capital there, as well.

We like the North America well stimulation business, we're continuing to invest in it, but we are also looking to become bigger in so many other areas and so it's a broader based program in 2007 than we've ever had before.

Okay.

And then as a follow-up, you know one of the big debates is, is there any real differentiation in a lot of new [capacity] that's coming on or is the market in North America differentiatible and I'm, as a corollary there, do you guys have kind of an estimate of what the average life of some of this pressure pumping equipment would be given how hard you're running it these days?

And I definitely think the U.S. market is differentiated on technology and we feel very strongly that we lead in the high-tech, deep high pressure frac applications. The only area that's really a commodity type market would be the water type fracs in some of the shales.

But even within the shales, that of being produced the unconventional gas there, we see a lot of technology being applied recently in horizontal wells with pinpoint stimulation. That's clearly a differentiator in technology that Halliburton's applying with some record results on those wells. So there's definitely a different scale on pressure pumping and the technology being applied in the U.S.

Our next question is from Scott Gill from Simmons & Company. Your question please?

Yes, good morning, gentlemen.

Bill, I was wondering if you could answer for me. If you look at the Escravos project and kind of what has occurred there, if you couldn't just contrast the Escravos GTL project with the Pearl GTL project in terms of contract terms or maybe what those risk are on the Pearl project as we look forward?

Certainly, Scott.

The Pearl project was fundamentally a reimbursable project for us. As such, we are performing services at the direction of the client group and, you know, they instruct us what to do, we place packages. So fundamentally the risk return aspect of that is, you know, a much lower risk profile than we see on a fixed price EPC project such as Escravos.

We spent a lot of time in the last six months since my arrival focusing on risk awareness and I think we're doing a much better job of really identifying the risks and asking very thoughtfully, how do you best allocate those risks within the contracts and also how do you price the risks that we retain within KBR? But fundamentally the difference between Escravos is a lump sum turnkey project where we're putting our balance sheet behind the contract for a fixed price in contrast to Peal which is a reimbursable project.

And my follow-up then, Bill, is as you look forward on the ENC side of KBR, what does that opportunity set look like as you go into 2007 in terms of major projects?

Well, the market remains strong for the products and services that KBR provides, particularly around the gas monetization arena. I think we continue to be able to look at a lot of projects and we see a great, a good market to be a participant in for 2007 and into the, through the end of the year.

We are seeing, you know, from our standpoint the chance to shape projects very thoughtfully with our customers and have, you know, much more intimate dialogues with them regarding what risks that the contractor should bear, and certainly the pricing for those risks and what risks are most appropriately borne by the customer.

So I think we're excited about the market as we it continue to unfold for us through 2007 and we think we'll be able through our dialogue with our clients to be able to have a richer series of discussions that I think will result in a higher value added by KBR in the client capital expenditure programs that we participate in.

Our next question is from Roger Read of Natexis Bleichroeder. Your question please?

Yes, good morning.

I guess my main question is, you look at possibility of a slowdown in the U.S. regarding the pressure pumping, you mentioned mobilization would go up and utilization, I guess, would go down. Can you give us an idea of what utilization's been running at this point and kind of what you've seen in maybe a prior, let's call it plateau or slowdown in terms of the impact on utilization?

Yes, Roger, I mean we're basically 100% utilized right now. Third quarter, as we said, was a peak in activity for us and we're fully utilized across the board.

And so we don't see any -- and we have a very good outlook for the next 60 days, of course, and we see a very strong workload through the full fourth quarter. So we have very little concern at all in the slowdown there and work in the short-term. And longer term, we still see our position in the market very strong.

And we know from living through many down cycles and slowdowns that we usually maximize our market share in the slower periods as the smaller players fall out. And we certainly think that would happen again if there was any slowdown this time. But we are still seeing full utilization and we plan to continue that.

And the mobilizations are within North America from one base unto another and that's what this equipment is made to do. We're not talking about huge disruptions.

It's very common for us to move people and equipment between the Rockies, mid-con and South Texas and then we're just going to optimize the location where the most work is.

Okay.

So fair so say that mobilizations aren't anything new and like you say, we won't, it's not something we would necessarily as long as within fairly contiguous regions within the United States?

Yes, you won't see it. The mobilizations that take longer and the higher costs are the mobilizations to Algeria, the ramp-up on Khurais, some work in Oman, those are the type of mobilizations, some mobilizations to Libya and Russia, they take a little longer and a little more expensive but you're not going to see it in the U.S. and we don't plan to see much of a downturn as we --

[Inaudible] we're not planning -- we're not talking. When we talk about mobilizations within our well stimulation business in North America, we're not talking about moving equipment out of North America.

Your next question is from Mike Urban of Deutsche Bank. Your question please?

Thanks. Good morning.

Seems like the focus in the market has been on gross capacity addition and the pumping business. Was wondering if you had a sense or you could offer a sense for what the attrition rate is either in the industry or specific to Halliburton? And then if that might change if indeed you did see a slowdown would you just start taking older equipment out of the market?

Yes, Mike, I mean you hit it there at the end. That's exactly what we do. Of course 2005, 2006 have been so robust that we haven't taken a lot of older equipment out of the market and if there was any slowdown in activity that would certainly be one of the things we'd look at doing.

And but we've done a lot of investment over the last couple of years, so the age of our fleet is in good shape, in very good shape but there always is a few pieces of equipment that is much older that we would take out.

And any sense of that attrition rate either, again, industrywide or specific to you guys? Just not a lot right now?

No, there's not a lot right now. We have time for what, one more question?

Yes.

Our next question is from Rob MacKenzie from FBR. Your question please?

Morning.

I wanted to dig a little deeper into your viewpoint that Halliburton would hold up better in market share if there is a downturn. I wanted to get how you would respond to pricing moves, for example, if one of your smaller competitors decided to cut price to maintain share and also if one of your larger competitors tried the same?

Yes Rob, I mean we don't compete in a lot of markets heads up with the smaller competitors so their pricing tactics are not primary importance to us. And of the three large competitors, we're very competitively priced and we don't see any -- as we said in the third quarter, we did not see any impact on pricing, we actually had positive movement in pricing during the quarter. So we still feel very strong about our position there.

My follow-up is in prior downturns, you've often seen one or more of the big names lead the way in taking prices down to maintain share. What's your viewpoint on either Halliburton doing that or one of your competitors doing that this time?

Halliburton won't do that. And we still see this as a very much demand driven market and we don't see that happening. So we're not foreseeing that cycle happening any time in the near future.

One last question.

Our final question is from Robin Shoemaker of Bear Stearns. Your question please?

Yes. Thank you.

Wanted to just go back to the Cap Ex budget for a minute. I think you told us in Houston that a dollar of Cap Ex you expect to generate $4 of revenue.

I wonder if that would still be the case as you shift Cap Ex a little bit away from pressure pumping equipment? And the time frame, the kind of time frame for kind of cash on cash return on capital spending, what is your basic guideline or principal there?

Yes. In the past couple of years, we have had that kind of revenue increment associated with the capital spending that we've had. We're not counting on that kind of increment necessarily continuing right away from this additional Cap Ex. As we build up Cap Ex, the growth would be attractive, but maybe not at that remarkable rate.

Robin, the economics that we look for are a 15% after-tax unleveraged internal rate of return and in this market with these opportunities, we feel that we're clearly exceeding that with the discretionary spending that we're doing here. So as I said earlier, we have more opportunities, good opportunities than we're going to take advantage of here in this market, we're rationing them out and this is where we've come out as I described earlier.

Right. And in terms of the split of Cap Ex next year this $1.2 billion, I believe you've indicated that 60% of this year's Cap Ex is North America. Is it shifting more to international in '07?

Very much so. Very much so.

And you don't have a percentage break down for us on that?

Certainly a significantly more than majority is going to be outside of North America next year. So most of the growth is outside. Most of the growth is outside North America and that's a lot of growth as you see.

This concludes our question-and-answer session for today. I'd like to turn it back over to management for any closing remarks.

Thank you, everyone. That concludes our call. If anyone has further questions, please feel free to call us sometime today. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.