哈里伯頓 (HAL) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Halliburton third quarter 2007 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. Ma'am, you may begin.

Thanks, Matt. Good morning and welcome to the Halliburton third quarter 2007 earnings conference call. Today's call is being webcast and a replay will be available on Halliburton's website for seven days. A podcast download will also be available. The press release announcing the third quarter results is available on the Halliburton website. You will note the press release reflects a change to our segment reporting. We have recently undergone a corporate restructuring as part of the separation of KBR. We have reorganized the energy services operations into two divisions, Completion and Production and Drilling and Evaluation. Completion and Production includes our production enhancement, completion tools and cementing lines. Drilling and Evaluation includes all other product and service lines including Sperry, Wireline, and perforating, security DBS Drill Bits, Baroid, Landmark, and Project Management. Beginning in the third quarter, our segment reporting has been adjusted to reflect the organizational change. All prior periods have been restated. Our geographic structuring reporting remains unchanged and includes four regions--North America, Latin America, Europe , Africa, CIS, and Middle East Asia.

Joining me today are Dave Lesar, our CEO; Chris Gaut, our CFO; and Andy Lane, our COO. In today's call, Dave will provide opening remarks, and Chris will discuss overall operating performance and financial position, followed by Andy who will highlight some of our recent contract wins and technology successes. 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 Halliburton's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations on 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 year-ended December 31, 2006, our Form 10-Q for the quarter ended June 30, 2007, and recent current reports on Form 8-K. Now I'll turn the call over to Dave

Thank you, Evelyn, and good morning, everyone. We continue to look for operational efficiencies and cost management opportunities in how we run our business. Also, subsequent to the KBR separation, we evaluated our management structure to ensure our organization was properly aligned with our new singular focus on oil field services and to get our costs aligned with the pricing pressures we were beginning to see in North America. We have recently undergone an exercise to eliminate redundancies and streamline our operations by reorganizing our energy services operations in two divisions that Evelyn referenced. This structure will allow us to have greater cost efficiency and also allow our product lines to work together more effectively to market services and develop new technologies. Now let me talk a bit about the quarter.

At Halliburton, our total revenue increased 5% as compared to the second quarter and operating income increased 2%, but that includes the 32 million in environmental charges. Our Eastern Hemisphere business continues to do very well as our recent capital investments in the Eastern Hemisphere are paying off. Sequentially, Eastern Hemisphere revenue grew 5% and our operating income improved 16%, resulting in 24% operating margins, a 220 basis point improvement from the second quarter.

We expect the product lines driving future growth in the Eastern Hemisphere to be Sperry, our Wireline and Perforating and Completion Tools business. For example, both Sperry and Completion Tools showed revenue growth of around 30% during the first nine months of this year compared to the same period last year, and the recent PSL Energy Services acquisition is providing further Eastern Hemisphere expansion. We are also increasing our manufacturing investment around the world to bring new tools online to serve the high demand we are seeing for our services, opening new plants in Malaysia and Singapore. Our outlook for the Eastern Hemisphere continues to remain very positive.

Now, let me provide you an update on the North American market. Overall, in North America, operations revenue was up 6% and operating income was up 5% sequentially, as we experienced a rebound in Canadian activity and higher market share in pressure pumping which more than offset the impact of losing two weeks of activity due to Gulf of Mexico storms and some pricing declines in the U.S. land market. More importantly for many of you, our U.S. land operations in the third quarter posted increases in both revenue and operating income as compared to the second quarter, while we maintained our strong operating margins of approximately 30%. Increased volume is driving these results most significantly. In the higher frac and cementing activity.

During the third quarter, this increased demand for our services was enough to offset pricing declines. We noted last quarter that we were beginning to see pricing declines in our U.S. land frac operations. This has continued through the third quarter but we still believe that U.S. land frac prices will decline less than 5% , between July 1, and the end of the year. We are seeing certain competitors bid for pressure pumping work aggressively in order to limit their market share degradation. This may result in some spillover to our cementing prices but not to the level we have experienced in frac operations. To offset this we have been very aggressive in managing our cost and headcount.

A key metric driving our profitability is how we utilize our pressure pumping equipment. We continue to develop the most effective and efficient frac and cementing solutions and to deploy equipment in the most efficient manner. Although these businesses are less significant for us now, we are also beginning to see U.S. land pricing pressures in other products like Baroid, Bits, and Wireline, and Perforating. U.S. land pricing declines will probably continue into the fourth quarter. We're currently bidding a significant amount of work with customers and are seeing the potential for some pricing declines, for more pricing declines than we experienced in 2007, again as competitors seek to avoid market share degradation. Most of this impact would be in pressure pumping, and if so, could start impacting us in the first quarter. We'll be able to provide a more quantitative view on the impact of pricing on 2008 operations during our fourth quarter conference call after all of these contracts are awarded, but I don't think it would be prudent to discuss our bidding strategy on this call.

However, looking ahead, our customers are telling us that based on current natural gas strip price that 2008 activity will actually increase, both in the pressure pumping part of our business and on the Drilling side, with more horizontal wells being drilled, so we expect continued growth in revenue and operating income for U.S. land in 2008, but we do think there may be some downside risk to our operating margins if pricing continues to erode or if natural gas prices decline significantly.

In Canada, we experienced a seasonal recovery from the traditional slow second quarter, Spring breakup season. Our operating income increased but we have not changed our outlook on Canada, and we're not planning on a significant recovery there.

We are staying on top of the changes in the North America market. We're monitoring our customers activity levels and pricing behavior and are making the appropriate adjustments to our business, including keeping a close eye on cost, equipment deployment, and headcount. This proactive management is reflected in the good margins we posted this quarter. With this in mind, however, we are not underinvesting in this long term market as we see continued need for oil field services and serving the poor quality reservoirs in North America.

We also mentioned last quarter that Pemex is becoming a more significant customer for us. In Mexico alone, we have recently been awarded projects totaling approximately $1 billion. This work will be performed over the next three years beginning in the first quarter of 2008. You should look for expected growth in excess of 20% in our Latin America operations in 2008 led by Mexico, Brazil, Argentina, and Columbia. Now, let me turn the call over to Chris and he will give us some

Thanks, Dave. Good morning. I will discuss our third quarter results compared sequentially to the second quarter. Halliburton's revenue in the third quarter was $3.9 billion, that's up $193 million or 5% from last quarter, all regions and both divisions posted revenue increases led by strengthen Asia, improved activity in U.S. land, and a seasonal recovery in Canada. Operating performance improved significantly in the third quarter despite the second quarter, $49 million gain on sale of our investment in Dresser Limited, and the $32 million third quarter charges for old environmental matters. Our reported operating income still improved by $17 million in the third quarter.

Three of four regions in both divisions contributed to the overall increase in operating income. We had very strong growth in performance from the Eastern Hemisphere, where operating income increased by 16% from the second quarter. Operating margin in the third quarter was 24% as incremental margins over the second quarter in the Eastern Hemisphere were very high.

Our diluted earnings per share for the third quarter were $0.79. These results include a $133 million or $0.15 per diluted share favorable income tax impact from our ability to recognize U.S. foreign tax credits we previously assumed would not be fully benefited. We now believe we can fully utilize these credits because of a taxable income growth from our international operations. The fourth quarter tax rate will also be favorably impacted by our growing international operations. We expect the fourth quarter and 2008 effective tax rate to be in the range of 31 to 33% due to the favorable mix shift of more international earnings.

Now, I will highlight the segment results, and as we now have two segments, I'll try to bring you more regional color on the individual segment operations. Completion and Production revenue increased $121 million or 6% from last quarter and operating income grew $41 million or 7% over the second quarter. Completion and Productions growth was led by our production enhancement product line where revenue increased 10% due to higher activity in the U.S. and internationally.

Looking at Completion and Production on a geographic basis, the Europe, Africa, CIS region posted flat revenue but a 19% increase in operating income. Completion Tools contributed to the increased profitability through more favorable product mix in West Africa. Production enhancement benefited from improved stimulation vessel utilization in West Africa as well as increased activity in Russia and Egypt. cementing benefited from a stronger mix of high end services in the UK.

In the Middle East/Asia region, Completion and Production revenue improved 21% and operating income improved 22% over the second quarter. Our success in penetrating markets like India is attributable to our strength in deepwater completions technology including sand control. In fact, we expect to more than double our revenue in India this year as compared to 2006. Our Completion Tools revenue tends to vary from quarter to quarter and the third quarter had a high level of shipments to Asia. Production enhancement had improved activity in Australia and Southeast Asia, particularly for our premier pinpoint stimulation services.

In North America, Completion and Production revenue improved 6% and operating income improved 8%. U.S. results were driven by higher frac activity and to a lesser degree cementing activity offset by the pricing pressures Dave Spoke of. This division's revenue was negatively impacted by third quarter storms in the Gulf of Mexico. All three product lines in this division benefited from the seasonal improvement in Canada as the second quarter was impacted by restricted activity due to the Spring breakup season. In Canada, Completion and Production revenue improved in excess of 70% since the second quarter. In Latin America, Completion and Production revenue was flat and operating income decreased by 32% due to a number of discrete items this quarter. Storms in Mexico negatively impacted third quarter results as they did in the Gulf of Mexico. Completion Tools had a drop in Latin American activity as some customers experienced project delays. Production enhancement incurred costs related to bringing a new stimulation vessel online in Mexico, and was negatively impacted by a labor strike in Argentina. We do expect Latin America results to improve during the fourth quarter.

In our Drilling and Evaluation division, revenue increased $72 million or 4% and operating income increased $24 million or 7% over the second quarter. Both Sperry and Wireline contributed meaningful it to the third quarter growth while environmental charges negatively impacted Baroid's third quarter results. Of the $32 million in environmental charges recorded in the third quarter, $24 million impacted Baroid, while the balance was reflected in corporate and other.

In the Europe, Africa, CIS region, Drilling and Evaluation revenue improved by 2% and operating income improved by 11% driven by increased Sperry services in Russia and the North Sea and higher Wireline and Perforating services in the Caspian. Drilling and Evaluation revenues in the Middle East/Asia region improved by 6% while operating income improved by 15%. Wireline and Perforating had improved equipment deliveries, into Asia during the third quarter. Baroid and Security DBS Drill Bits experienced higher sales volumes in the Middle East.

In North America, Drilling and Evaluation revenue increased 6% but operating income decreased by 3% as compared to the second quarter. Here we recorded a $24 million environmental related charge related to a Dresser Legacy matter. Also the Gulf of Mexico storm season contributed to the decrease in activity. The revenue impact of third quarter storm activity in the Gulf of Mexico was approximately $12 million. Baroid was impacted most severely. Looking ahead, Sperry continues to be positively impacted by the increased amount of horizontal drilling that is occurring on U.S. land. And in Canada, our Drilling and Evaluation segment experienced an improvement in revenue in excess of 60%. Product lines that contributed most to this recovery included Sperry, Baroid, Wireline and Perforating and Security DBS.

Drilling and evaluations Latin America revenue improved 3 % and operating income improved 7% from the second quarter. This improvement was primarily driven by Wireline and Perforating service activity and Baroid sales and services throughout Latin America, Partially offset by the two hurricanes that hit Mexico during the third quarter.

Now, I will address some other financial items. Our minority interest expense was up in the third quarter to $18 million, that's due to higher earnings for our partners interest in JV's in the Middle East and North Africa. During the third quarter, we purchased approximately 11 million shares of our stock at an average price of $33.71 per share for a total amount of $374 million. We currently have $2.4 billion remaining under our share re purchase authorization. I would also like to provide some guidance related to 2008. We have not finalized our capital expenditure budget for 2008 but it will likely be in the range of 1.5 billion to $1.7 billion for the full year with a continuing shift towards international and to the Drilling and Evaluation division. We expect depreciation and amortization to be approximately 170 to 175 per quarter or about $700 million during 2008. Andy?

Thanks, Chris. Good morning, everyone. As Dave said we remain optimistic about the outlook for the Eastern Hemisphere, led by improved project execution and new technology introduction. Our work in the large Khurais project in Saudi Arabia continues to progress well and exceeds our customers expectations. We are currently significantly ahead of the original drilling schedule. A large contributor to our success is the use of our new realtime center in Saudi Arabia to continuously monitor the drilling of the wells and insure optimal drilling efficiency with our geopilot tools. We believe we are now operating at the peak of the contract.

As Dave mentioned consistent with the Pemex strategy of awarding larger integrated projects, we've recently been awarded two large contracts totaling approximately $1 billion in Mexico. All product lines will be positively impacted by these awards but we are not taking on big time risk. In addition to the large contract awards for Completion Tools we discussed in our last call, primarily sand controlled tools for offshore China, Completion Tools for Malaysia, and deepwater sand control completion for India, we've just been awarded another significant contract, this one in Indonesia. These recent contract wins will continue to drive growth for Completion Tools in 2008 and beyond.

As we discussed in previous quarters, growth in Russia is expanding across multiple product lines. Revenue is up over 20% in the third quarter of 2007 as compared to the third quarter of 2006, with a 35% increase in operating margins when comparing these periods. Growth is coming primarily from cementing, Sperry Drilling Services, Baroid, and stimulation. Our Russia revenue will be in excess of $350 million in 2007. This represents a compound annual growth rate of more than 25% since 2004. We expect our growth rate in Russia to remain above 20% over the next several years.

Libya is another market where we are experiencing substantial growth. Year-to-date we have seen our revenues almost double as compared to 2006 and an even better improvement in operating income. Both of our divisions are fueling these results and we anticipate continued growth here as we move forward. Last quarter, we talked about the successful launch of our new pilot fleet of drilling systems at Sperry including the enhanced geopilot, the V-pilot and easy pilot tools and this quarter I'm pleased to announce the very successful launch of our new insight generation of LWD Tools. This new generation of LWD provides unprecedented insight to our customers reservoir, to maximize reservoir contact and ultimately recoverable reserves by providing deeper reading measurements, higher resolution imaging, faster telemetry, and greater reliability. To date we have commercially launched two new services that can be run in combination with our new insight, IXO Interface, to Lagrande Priceco and Telepipe, high speed watertight communication.

The first service is InSite ADR Azimuthal Deep Resistivity. This service reads up to 18 feet into the surrounding formation allowing for realtime geosteering to locate and stay in the most productive part of the reservoir. It combines these features with compensated true resistivity measurement into a single tool. We are seeing significant demand for this service. The second new service is InSite AFR Azumuthally Focused Resistivity. This service provides high resolution imaging while drilling, illuminating structural and stratographic detail. Recently a major operation in the Middle East has qualified this sensor as a replacement for Wireline imaging tools allowing them to make realtime decisions and save valuable rig time. We have an aggressive manufacturing build schedule for these new LWD Tools.

I'd like to mention one additional product that has been experiencing strong, worldwide customer demand due to increasing requirement for hole enlargement operations, our XR reamer. This tool is capable of simultaneously drilling and enlarging the pilot hole by more than 44%. It features activation and deactivation capabilities, ultra stabilization technology for smooth drilling, and a high density cutting structure for added durability. We've had more than 40 runs in the harsh North Sea environment enlarging more than 133,000 feet since January of this year.

In August, we opened the Edgar Ortiz realtime center in Houston. The center is a 13,000 square foot state-of-the-art facility that brings experts from Halliburton and our customers together in a realtime collaborative environment to model, measure, and optimize our customers assets. It allows geoscientists and engineers to, among other things optimize drilling programs through our drill to the earth model workflow which is designed to integrate data such as generated from the ADR and AFR tools into a powerful visualization environment that enables more precise understanding and adjustments to well pass and the underlying earth model. This is all part of what we referred to as the digital assets.

These are just a few examples of new products we've introduced this year as a result of our committment to research and development. We have increased our R&D budget by 30% in 2007 as compared to 2006. To that end we have recently opened our new technology center in Punai, India. By year-end we expect the center to be staffed by approximately 100 employees, most of which have advanced degrees and about 25% are PhD's. The focus of the center is to develop technology for production enhancement, cementing, drilling fluids, and completion tools. Additionally this center will provide technology support for the development of the new Asia Pacific supplier base and contain a world class fluids lab to support our Eastern Hemisphere operations. Opening this center is a significant step in our globalization strategy for technology, enabling us to support Product Development and field operations for Halliburton customers around the world. Our next global technology expansion will be a center in Singapore and that location is expected to open by year-end.

Our plans to globally source new manufacturing needs and are progressing well. In addition to the plant we opened in Mexico during the second quarter, we opened two new facilities during the third quarter in Brazil and Malaysia. These two plants provide us with over 200,000 square feet of manufacturing capacity and will produce cementing equipment as well as a broad range of completion tools for our rapidly expanding business. These two facilities will allow us to better serve our Latin American and Eastern Hemisphere customers. Now I'll turn the call back to Dave for some closing comments. Dave?

Thank you, Andy. If you look back during the third quarter, each of our product lines except for Completion Tools and Landmark posted record revenue. Completion Tools and Landmark posted their second highest revenue quarters and traditionally the fourth quarter is Landmark's strongest. We also saw a record operating income performance from Sperry, Wireline, Perforating, and cementing product lines in the third quarter. My thanks to all our employees around the world for these significant achievements. Now let's go to take your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question is from Ken Sill of Credit Suisse. Your question, please?

Yes, good morning. And congratulations on what seems to me to be a pretty solid quarter.

Thanks, Ken.

And I've got a couple questions. One thing just kind of watching the stock as you were talking and you started talking about pricing pressure in North America expanding to other segments. I guess I'd like to get a little bit more detail on your outlook for North America. A couple of your competitors have talked about the growth in demand for pressure pumping and directional drilling services being kind of a secular ex-rig count growth as we go after tighter reservoirs and more directional drilling. How do you think that impacts your ability to grow or maintain revenues and profits in North America assuming the rig count flattens out here?

Well, clearly, there is some offset, right? To the pricing from the volume activity, and we've demonstrated the ability to do that, and away from pressure pumping, some of the product lines we mentioned we just Drill Bits and Drilling Fluids but I don't think that's really news there, Ken.

Okay, so, but you would expect to be able even in a flat rig count to show some upward revenue in North America in the other product lines outside of bits and fluids?

Yes, Ken, because we continue to see an increase in horizontal Drilling which will fuel our growth in Sperry and also it is the high end fracturing market is differentiated from the rig count, and we are seeing a lot of our pinpoint stimulation fracturing revenues and as we said previously, August was our highest fracturing month in the history of the Company so we're seeing strong demand for our fractioning services.

Our completions business is also doing well in North America, as we get reemphasis on that.

Okay, and just an unrelated question, I noticed on the share buyback, it was down significantly from what you'd done last quarter. Is that something we should expect just a little bit more modest share repurchases or is there something that drives that one way or the other?

Well, we're not looking to make this on auto pilot, in other words, that we're buying a certain number of shares or spending a certain amount of money per quarter. That's rather we're trying to take advantage of the under valuation for the benefit of shareholders so when the stock price is low, we buy more stock and as you see our average purchase price during the third quarter was under $34 and so we buy more when the stock is low, as the stock began to move up, beginning in late August and continued to move up strongly, our bid was not hit. So it will depend upon the opportunity, Ken, but I think you will also see that our repurchases were among the largest in the space here in the third quarter.

Yes, I know, they're very good. I'll let some other people ask questions. Thank you.

Our next question is from [Mike Irvine] of Deutsche Bank. Your question, please?

Thanks, good morning. You've given us some sense of your expectations on growth in a couple regions, namely Latin America and Russia. I was wondering based on what you see today and the visibility you have if you could give us a sense of kind of where the relative growth rates might be or where you're going to be growing faster or slower in other parts of the world? So this is outside of North America just to be clear.

Mike, this is Andy. I'll take that one. We do see a lot of areas of good growth for us. If you look at our Middle East, Asia Pac segment, it's really China and Saudi Arabia that we're very optimistic about future growth. In Europe and Africa segment, it's really Egypt, Libya, Russia that we mentioned and the Caspian, and then Latin America, they've -- Mexico, Brazil, Columbia, and Argentina also strove strong growth all in excess of 20%, so that's our highlight areas.

As well as Saudi, right?

Yes.

And then from a product line standpoint, obviously our fastest growing divisions there as we've been saying are Sperry, Completions, and Wireline.

And specific to Latin America, wanted to dig in there a little bit. You did say that the new project awards are going to be essentially on an integrated project basis; is that right?

Yes, that's right.

In Mexico?

Yes.

The track rate of the industry and certainly not just you guys but the industry as a whole has been having a lot of difficulty with some of those projects in the past. Can you talk a little bit about some of the things that either you're doing operationally or the way the contracts are structured to hopefully mitigate some of the risks that the industry has seen in the past on those projects?

Mike, let me, a couple comments. We've had our own experiences there on those projects, and we've learned a lot. The problems we had in the past were turnkey drilling projects bid. We are not bidding turnkey drilling anymore. These are alliance-type projects and we largely influence the customer that this is the only projects we would take on in Mexico in the future and they relate to bundling of our services, providing project management, drilling engineering, and they go with Pemex supplied rigs, Pemex supplied tubulars. So it's really a good combination of their rigs and personnel with our discrete services and technologies and then we manage the projects so we're very pleased with that model of going forward with Mexico.

And the pricing there and the incentives, are those kind of performance incentives or time or cost plus or could you give us a sense on that?

Well, they're fixed prices for our services, for Halliburton provided services.

Okay.

But we are not taking on rig time risk. We are not fixing the price on the rig time.

Okay, perfect. That's all for me. Thank you.

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

Good morning. I want to go back to U.S. pricing. Are prices weak in a number of these other product lines, both because they're weakening on their own and because you're packaging them with stimulation or other services?

Jim, it is largely an aspect of our bundling and the ability for us to package the co-offering of Halliburton together in North America. The most competition is in the fracturing segment of the business and we certainly don't want to just compete in the space of the capacity there, so yes, as we said on the last call, it is bundling and in some cases, we'll do trade -offs on different product lines for the total award and we've had some very large awards in the U.S. that we think will serve us well.

Okay, Andy I think on your last call you said there was a lot of contractual activity coming in the third quarter. Can you specifically comment on what's already happened and then given how you see rollovers in the fourth quarter, is it a foregone conclusion that U.S. fracturing prices will slip in the first half of the year from current levels?

Jim, I think the best way to characterize it is still the mix and we have a large customer base that is on contract and I think previously, we have characterized that across the U.S. land as 70% on contract and 30% on short-term pricing or call out. So a large number of contracts have been rebid, but we also have a large number out for bids right now, and as we said from the baseline in the first half of 2007 that we see less than 5% impact on pricing alone in the second half of 2007 but we see that largely offset by increased volume. At this market pricing, Halliburton is very attractive business to get locked up and so we see a very strong demand for our fracturing services and that offsets the pricing decline. So we don't see a significant impact in the fourth quarter.

Okay, Andy, I agree with all of that. My only question was about the first and second quarters of '08.

Yes, Jim, I don't think we're, for competitive reasons wanting to signal to our competitors what our pricing strategy is so we're being a little cautious there.

Okay. Just one follow-up question on well stimulation, if you look at the Speer study which has recently been done it shows that the big three companies are now 52% of horsepower in the U.S. land, well stimulation, yet the returns of the business are still quite good. There's been a lot of buzz recently about one of your competitors making a significant offer for one of the large independents out there. Is this something that, is this a strategy that you would consider going forward if the market stabilized to be a buyer of certain of these independents that have expanded capacity recently?

Well, Jim, we wouldn't rule out anything, but I would like to say we see our growth from our internal organic growth in fracturing. We're the market leaders. We're going to stay the market leaders and so we continue to do that with our own growth in the business, and then also with the growth in our business taking the technology in the U.S. that is relatively immature outside the U.S., I'm talking about the pinpoint stimulation, the stage fracturing that's largely over 80% of the jobs today are running North America and we still see a lot of growth for our stimulation business outside the United States as those technologies get transferred. So that's another area that we're focused on growth but that will be organic growth also.

Okay, thank you.

Our next question is from Dan Pickering of Tudor Pickering. Your question, please?

Good morning, guys.

Good morning, Dan.

Chris, CapEx looks up fairly substantially year-over-year. I think historically you've talked about '08 as a year of lower spending. Is the incremental spending associated with specific contracts or is this sort of on the come type spend something

It's associated with big new contract opportunities that we see internationally, Dan. Now if we were to win everything, that capital spending wouldn't cover it, but so we're assuming we win a certain portion of that and that would put us, give us the good utilization of that new capital in the range of 1.5 to 1.7, but it is planned to be associated with new contracts that we take on.

Okay, and so those are contracts that are out there for bid but have not yet been awarded, so anticipatory at this time but it sounds like the number or amount of contracts out there has gone up in the last six months?

Some of them are ones we have already been awarded. Others will be ones that are to be bid.

And just to give you a little more color on that. We have between 11 billion and $12 billion of contracts out there that we have visibility of now so what Chris is talking about is a factoring of that $11 billion value to what we feel real confident we're going to win and some very large projects in the Eastern Hemisphere.

And Dan this is Dave. Let me just add one other thing. We're also looking at entering a number of new countries in Wireline and Perforating, as you know, we have taken which, I think has been a really great strategy over the last number of years in really picking our spots and growing our Wireline and Perforating business but we see a number of markets in the Eastern Hemisphere that are begging for a Wireline and Perforating business to go in and provide some competition, and we are going to enter one, if not more countries next year and we have to build up our equipment to do that.

Okay, and Andy, the 11 billion to 12 billion of projects, that number would have been lower six months ago?

Yes. We were tracking in the $7 billion range, Dan.

Okay. Great, and then I guess my follow-up, I want to make sure I understood the discussion around the U.S. market and pumping. Dave, I think you said price pressure less than 5% kind of July 1, through December 31. I wanted to understand, is that Halliburton specific or the spot market and then can you help us with kind of what percent of your revenue in the pumping business are, this high end pinpoint multistage versus sort of the standard generic fracturing.

I think, Dan, the 5% basically is specific to Halliburton since we don't have insight into anyone else's results but I think that given the fact that we sort of have captured the high end of the fracing market, I don't think we are quite susceptible, if you will, to some of the real huge discounting I think people are hearing about in pressure pumping and fracing in particular in North America, and as I said in the discussion, there is a fair amount of work being bid out there right now. It is in many cases some very good high end stuff and I think that we don't want to give away our bidding strategy on it but I think we'll come out fine on it.

Thank you.

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

Thanks, good morning. A couple things on North America. You seem to tie the restructuring of the business to kind of cost pressures and all of the pricing pressures in North America. Can you tell us a little bit about where you are in terms of realizing the benefits you expect from that?

Yes, Geoff, this is Dave again. I think that it is really a combination of things. I think we owed it to ourselves and to our shareholders as we completed the separation of KBR to make sure that we had sort of the appropriate management structure and management team in place to handle a very focused oil field services Company, but we also weren't immune to what we saw going on over the summer in the North American market. It was clearly something was going wrong in Canada at the time and so I just thought it was prudent for us to take a look at our structure, at the management team we had, and make sure that it was the right one to get focused on the operations that we had and so we made the changes. We did have some costs in there related to the severance and restructuring but it really isn't -- I would consider it more sort of a continuing ongoing tweaking of our organization and an aggressive management of our U.S. cost structure and I think that we're trying to make it scalable for the business we see out there and I don't think we are prepared nor would we want to say what sort of cost reductions or benefits we might see out of it because I think at this point in time, that's a competitive advantage we have and we want to keep that in house and use it where we see fit.

Would you say you're kind of ahead of the current market or kind of in synch with the current market in terms of your cost management efforts?

I would say, Geoff, I think we always try to stay in synch with our, sort of where we see the current market, because I think that we did a pretty good job sort of calling last up turn in North America and I think had added capacity and people ahead of time and were able to capture that market when it came around, and I also think we were maybe a little bit on the front end of some of the scaling back when this last sort of bumps in the road happened over the Summer. So we have a really good management team running our North American business, and I would say that they've got a good feel for things and they're really in synch with where the market is today.

With that in mind and with the comment you've made already about the overall market environment, how confident are you you're going to deliver an increase in North American profit contribution next year over this year?

I think that right now, Geoff, we believe -- you're talking about absolute operating income dollars?

Yes.

Yes, I think we're very confident we're going to produce more next year, but as I indicated, I think with some of the pricing pressures we see out there, it could have some down ward pressure on our operating margins.

Sure.

But overall operating margin dollars, we believe, will be up.

And last question on the -- I think Andy mentioned in talking about the Eastern Hemisphere, that the Al Khurais project was reaching its peak. I wondered if you could elaborate a little bit on that on a couple dimensions? One, does that mean it is about to start rolling over and decline? And two, how do you see the timing of the other opportunities you've spoken about related to whatever the trajectory is on Al Khurais?

Yes, Geoff, and the good news is that the original drilling targets that Saudi Aramco had on the project, we far exceeded that to the scale of being over 30% ahead, and so we're very efficient. Our Sperry operation is doing an excellent job, and we talked about a realtime capability that also really enhanced the operation of those remote rigs. And so the project scope from the customers perspective has not changed. We're just delivering it more efficiently, and so we have another year, a good year of that project because it was a mega project but we see it tailing off in the later part of 2008. Just because we're completing the project early.

I'm sorry, Chris?

It's ramped up to its sustainable full speed for another year, and then it begins to tail off from there.

And how do you see the timing of those other opportunities you talked about? Do you expect to be able to capture enough in those other opportunities and in a timely fashion that you just, the increase from the other projects offsets the rolling over on Al Khurais, or is there going to be maybe timing issues there?

Yes, Geoff, we have bid Manifa as our main competitors and we have not heard any response back yet on that big project, but we still see great opportunity in Saudi Arabia overall from the other projects they have going and so we still expect more than 20% growth from Saudi Arabia irregardless of the outcome on Manifa for next year.

Okay, thank you.

Thanks.

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

Yes, good morning, gentlemen. A question I had, as you looked at the international region you've run through various countries that show, the audits show pretty good growth 2008 versus 2007 and even in 2009. I was wondering -- you gave some specifics on Latin America. Could you give us some indication of maybe top line growth you would expect out of the Europe, Africa or the Middle East, Asia segments?

Overall, our Eastern Hemisphere growth we continue to expect very good growth there, but no, we don't have a specific number we're going to give you here on that, Roger, but continue to look for the 20% growth level for our international operation.

And maybe just a quick follow-up unrelated there, but the two items, maybe the Gulf of Mexico impact, how you actually would quantify that and given that we've seen the rig count tail off there, do you actually expect to get a recovery in the fourth quarter and then the other thing, the Dresser issue, is that pretty much do you think now a closed item or is there some potential or residual risk that you may have to be dealt with at a later date?

The Dresser/Baroid matter was a specific case that is now settled, and it has to do with NL and Baroid before leaving part of Dresser, but of course, with a Company this size does have ongoing environmental matters in litigation to deal with but that matter is settled.

Okay.

Roger, we did lose two weeks of activity especially in the deepwater area and we had 17 deepwater rigs and 13 shelf rigs shut down during hurricane Dean and it also impacted us for almost one week of offshore work in Mexico when the storms hit Mexico, so it had a significant impact on us in the third quarter.

Both in the Gulf and in Mexico.

Right.

Probably $25 million or so in total.

Okay, thank you.

Our next question comes from Scott Gill of Simmons & Company. Your question, please?

Chris, Dave, I was wondering, on the Eastern Hemisphere, revenue growth numbers around 28, 29%. When you kind of back out the acquisitions, for example, PSL , what was kind of the organic revenue growth numbers for

PSL was very small this quarter. They are just ramping up at this point. We have some good bids outstanding for them, but it's not major.

Okay.

Or significant at this point, Scott.

Fair enough, and last year in North America, we saw the Rockies have a pretty substantial impact to your business, particularly in the first quarter but we see regional gas price weakness in the Rockies again this year and of course we have the environmental restrictions that get applied here in the winter months. Should we be expecting a similar type of seasonal impact to your numbers, late part Q4 or early part of Q1, or not?

Scott, we do see the same seasonal impacts and the holiday impacts that we saw last year could impact us again this year, like they had last year, but we have a very strong Rockies Position with the Express Pipeline coming online, we see some stabilizing of rocky prices, gas prices and local prices in the first quarter and that may help us, but we predict about the same as last year.

Okay, all right, thank you.

Your next question is from Ole Slorer of Morgan Stanley. Your question, please?

Thank you very much. You did a lot better than most of us thought in North America sequential margins from 27.1 to 28.2%, even allowing for the rebound in Canada and you mentioned something about bundling, pumping services with other segments of your business and therefore, being able to drive a higher net margin. How much of what seemed to be very good performance was due to this item and how much was due to maybe you have a very strong position in, for example, the Rockies and to what extent were you able to go in and maybe early on negotiate pricing at better levels in some other segments?

Ole, I think you're right on both counts and both had a positive impact. The bundling certainly is part of our strategy, as we take advantage of the breadth of Halliburton in our offerings but we, being the market leaders and having a very strong position and having the personnel, I mean, trained personnel is a huge issue right now in the industry and we have a very strong group in North America and especially in the Rocky Mountains that you mentioned, so that does help us negotiate ahead of competitive bidding where people want to stick with Halliburton and not have the interruptions in their operation, and so that definitely, both of those helped us. And we also had very strong demand for our services, both fracturing and cementing. So the activity driver and the efficiency model that Dave talked about really drove a lot of our results in the third quarter.

Okay, those are helpful clarifications. So when we look into the second half and your highlighted 5% pricing deterioration is achievable because of your quality, if you look towards some of the segments of the market that you might be abandoning, so such as the more commoditized part of the stimulation market, what are you seeing other peoples pricing doing in those segments of the market on successful bids?

We are seeing some aggressive discounting in the market. Again, I don't think it's helpful for us to engage in speculating about what we would do or what others are doing specifically, but Ole, suffice it to say that we are seeing some aggressive discounting in the commodity end of the market from those who don't have the utilization that we do.

Okay, I understand. Thank you very much.

Our next question comes from Michael LaMotte of JPMorgan. Your question, please?

Thanks, good morning. Chris, a couple of quick clarifications if I could. First, the positive change in working capital this quarter? What was behind that? Pretty big positive jump in--?

Yes, we did have some increase in receivables. That's in part linked to the shift to more international business where receivables do tend to be a bit longer, and I think we'll see that stabilize and with the increased attention it's getting I don't think that rate of growth will continue. But also as we are bringing on these new manufacturing facilities that were mentioned in Southeast Asia and Mexico and so fourth, we are bringing more inventory, raw material, and work in process up, so that's going to be part of the kind of goes with the territory, there.

Okay, and then was there any revenue pick-up from the acquisition in the quarter?

Minor from the PS LES this quarter, less than $30 million, but that will be greater in future periods and as we integrate that with our operations and as we learn about the bids that we're now making for that equipment.

Okay, and then Andy, quickly, on Saudi, the growth comment that you're talking about '08, is that simply just operating at a higher sort of plateau level on Al Khurais so that you get year on year pick-up or do you actually see sort of that 20% number being up from current levels at Al Khurais? I'm trying to get a gross versus net sense as to what your activities in that market look like.

What we're saying is we have a full -- we ramped up through 2007. We're now at the peak level at Khurais and we see a sustained year of maintaining this level of drilling activity so that drives a lot of the growth but also we still see good opportunities. We have new screen offerings that were introduced into Saudi Arabia. We have growth in our smart well business through Well Dynamics, we see growth there. So a lot of our high end offering we still see penetration because Saudi Aramco continues to be a good technology buyer and so there will be growth in both the Sandscreens and smart wells along with our drilling on Khurais.

So we should really think about it not so much in terms of counting rigs but product penetration and just sort of the cyclical evolution of that market?

Exactly.

And then just lastly on the efficiency question, I'm sort of trying to get back to this point of how much of it is sort of process and ongoing and something that we can expect to be there in volatile quarters and potentially volatile quarters in the future or how much of it is sort of you guys moved aggressively on Canada in particular and parts of the lower 48 in March/April time frame of this year and so you saw some real benefit from that in the third quarter. Can you give us a sense as to some lumpiness versus smooth impact from the efficiency side?

Yes, Mike, I think it's largely, we did exactly what we said we were going to do. We moved equipment out of Canada and people early. We took advantage of them through the third quarter. Some of that equipment and personnel because of the softness in Canada is going to stay in the U.S. We took some to Latin America also, and we did see very good opportunities to capitalize on that. If the Canadian market strengthens in the end of the fourth quarter and first quarter, we'll opportunistically move some resources back there, but we see that as a very fluid movement across-the-border and we had some additional equipment, fracturing and cementing equipment come out in the second half of the year. We're taking full advantage of that extra capacity we have.

Some of the restructuring costs or the restructuring that we've done here in the third quarter, those costs were incurred in the third quarter and we'll have the benefits going forward.

Oh, okay.

There are more efficiencies to be gained.

I think we've got time for one more question.

Thank you. Our final question is from Kurt Hallead of RBC Capital Markets. Your question, please.

Yes, good morning. The question I had was you talk a lot about the gains that you're making in the number of different markets internationally and I think a lot of people may look at that and maybe question whether or not that is coming at some element of a discounting from a pricing standpoint, obviously that's not always the answer, but I just wonder if you could provide some color as to some of these gains you're coming. Is it coming on pricing? Is it coming on reliability, technology, anything along those lines would be helpful.

I think, Curt, this is Dave. I think if you look at the fact that our margins are consistently going up in the Eastern Hemisphere, I think that would indicate that we are not chasing that work by essentially buying it. I think that we have indicated on the calls over the last year or so that we have heavily invested in our Eastern Hemisphere infrastructure, both in terms of hiring and training new, young engineers, expanding our facilities and investing in capital equipment, and we continue to do that and our margins continue to expand and our revenues continue to grow. So to me, I think it's a very good combination and it seems to be working and it's certainly something that we are going to continue to do and so I would say, no. I don't think we are pursuing a growth strategy via discounting. I think we're doing it the old fashioned way and it's paying off for us.

Great and then just as a follow-up to that, a lot of focus obviously is here on North American pricing trends. Can you give us some color, some sense on the international front? Is there still elements of pricing power or would you consider it maybe more kind of flat?

It's very hard, Kurt, to generalize about the international market. Each market, each bid is its own microcosm. We, I think in general, there is modest price improvement but price is not going to be the biggest driver of international growth. It's going to be volume, and just as we were saying, if we can get the additional equipment out there as we now are able to with our greater manufacturing capacity, we'll be less constrained in our resources and there is demand, there are contracts we're taking on and we see that good growth and the margins building.

Great. Excellent. Thank you.

Thanks, Kurt. Well, thank you all for joining us. We appreciate your attention and we'll talk to you next quarter.

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