哈里伯頓 (HAL) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Halliburton fourth quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow 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, Mr. Christian Garcia. You may begin.

Good morning and welcome to the Halliburton fourth quarter 2007 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 fourth quarter results is available on the Halliburton website. Joining me today are Dave Lesar, CEO, Mark McCollum, CFO, and Tim Probert, Executive Vice President, Strategy and Corporate Development. In today's call, Dave will provide opening remarks, Mark will discuss our overall financial performance, followed by Tim, who will provide comments on our operations and business outlook. We will welcome questions after we complete our prepared remarks.

Before I turn the call over to Dave, I'd 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 and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2006, our Form 10-Q for the quarter ended September 30, 2007, and recent current reports on Form 8-K. In addition, please refer to the table in the Halliburton press release that reconciles as reported results to adjusted results for the non-GAAP disclosure.

Now I will turn the call over to Dave. Dave?

Thank you, Christian, and good morning, everyone.

As usual, we have a lot of moving pieces to discuss this morning. Let me begin with a few highlights from our results for the year before discussing our fourth quarter performance. For 2007, our total revenues grew 18% to a record level of $15.3 billion, with all product lines registering double-digit growth. The western hemisphere grew 12% to almost $9 billion, and was hampered by year over year declines in Canada. Overall, we had a good performance, given a challenging environment in North America. Consistent with our strategy, the eastern hemisphere grew 27% in 2007 to over $6 billion in revenue. In the year, we focused our investments and resources into growing targeted geographies. Our results reflect the successful execution of this strategy. More importantly, in the fourth quarter, the eastern hemisphere is now over 43% of our revenue, and 55% of our revenue is now from outside North America.

We, of course, still value our North America franchise, but these results exhibit an improving global balance in our portfolio. For the fourth quarter total revenue reached a record $4.2 billion, which represents a sequential increase of 6% compared to the third quarter. Operating income was essentially flat from the third quarter due to the impact of two special items: the $34 million impairment charge associated with a legacy oil and gas property in Bangladesh and $12 million of executive separation costs. Mark will provide more details regarding these items.

The strong sequential revenue growth in the quarter was led by our eastern hemisphere business. Eastern hemisphere revenues for the quarter grew an impressive 12% sequentially, which is evidence of the success of our continuing investments in infrastructure, people, and capital. Operating income did not grow as fast as revenue, as the revenue increase in the eastern hemisphere. This is due to the fact and the impact of the impairment charge from the oil and gas property and other costs that we incurred, associated with our continued ramp-up of our eastern hemisphere infrastructure, such as facilities, training, technology deployment, and, of course, adding and hiring people. Excluding the impairment charge for the oil and gas property, eastern hemisphere margins were nearly 23% in Q4.

Now turning to North America, where I know there's a lot of interest, revenue grew 1% sequentially as we saw recovery in the Gulf Coast and modest seasonal increase in Canadian activity. However, our Canadian business is down year-over-year, and we are not planning on a recovering Canada in 2008. Our U.S. land revenue was impacted by normal seasonal drilling restrictions on our customers, and also our customers extending the holiday season in the Rockies, both of which had an impact on our fracturing business. Also in the late fourth quarter, and even into the early first quarter, due to weather delays and pipeline access issues, a number of our customers delayed the completing and fracturing of a number of wells that they had already drilled. For example, one of our largest customers in the Rockies delayed completing and fracking over 100 wells that we are now starting to service in the late first and second quarters of 2008.

We saw price declines for our frac service in the fourth quarter in the low to mid single digits, which were consistent with our expectations discussed in the third quarter conference call. The effects of the winter season and price declines have largely been offset by the growth of Sperry and our drill bits businesses. Consistent with our strategy, we have focused on balancing our U.S. operations by capitalizing on the trend toward more horizontal drilling. Tim will talk about this in a bit.

Now let me talk about the results of the contract rollover process for our U.S. fracturing business in the fourth quarter, and the impact this will have for the first quarter in 2008. We have successfully renegotiated all contracts that were up for renewal in Q4. Our U.S. land fracturing work is now a little over 70% under contract for 2008. In the fourth quarter, roll overs represented about half of that business. The remaining contracts will roll over in the first half of 2008. Given the price erosion that we saw in the transactional market, we have concentrated on matching our equipment with our customers' major assets that fall under longer term contracts where we expect to receive better utilization of margins.

For the contracts we rolled over in the fourth quarter, we believe we grew our market share with these customers, and in some cases, where we were unsuccessful retaining the work, we have now been contacted by some customers to see if we can serve them again. But based on the price levels that were negotiated, we anticipate seeing an average price decline for U.S. land fracturing work in the mid to upper single digits for the first quarter of 2008 relative to the fourth quarter of 2007. However, asset utilization for our fracking equipment remains very high, so we continue to see increasing demand for our customer, given the secular trend towards production from unconventional plays. This is translated to higher service intensity, and we believe this will continue to drive volume increases in the technologically-driven segment of the market, even if natural gas prices only support a flat rig environment.

This trend, coupled with signs of decelerating capital additions indicates to us that pricing should stabilize sometime in the second half of the year, although we may possibly see some additional pricing deterioration of a couple percentage points in the early part of 2008. We discussed in the previous call that we had been seeing pricing declines in other service lines, like cementing, wireline, and drilling fluids. These declines continued to be modest relative to what we've experienced in our fracturing business. We believe our ability to offer multiple product lines to our customers helps to mitigate the impact of pricing pressures on our frac business.

Now let me turn the call over to Mark, and he will give a few more highlights.

Thanks, Dave.

I will be comparing our fourth quarter results sequentially to the third quarter. Halliburton's revenue in the fourth quarter was $4.2 billion, up $251 million, or 6% from the third quarter. All regions and both divisions posted revenue increases, led by strength in the Middle East and Europe. Operating income decreased by only $3 million from the third quarter. Remember, fourth quarter operating income included charges for the oil and gas impairment and executive separation costs, and third quarter operating income included $32 million in charges for environmental matters. Operating income margins declined by 150 basis points, in part due to these special items, but also due to seasonal slowdowns and price declines in our U.S. fracturing business.

Now I will highlight the segment results. Completion and Production revenue increased $102 million, or 5% from the third quarter, while operating income declined $25 million or 4% from the third quarter. Completion and Production's revenue growth came from both completion tools and cementing, while the production enhancement product line saw relatively flat revenue quarter over quarter. Looking at Completion and Production on a geographic basis, the Europe, Africa, CIS region posted a revenue increase of 16% but a 2% decrease in operating income. Completion tools saw increased revenue throughout the region including strong demand for our intelligent well completion services, but they experienced less favorable product mix in Africa. Production enhancement benefited from improved stimulation vessel utilization in both the North Sea and Africa and strong activity in the Caspian.

In the Middle East/Asia region, production improved 13%, operating income improved 18% over the third quarter. Our completion tools product line benefited from increased well dynamics shipments. Production enhancement also improved activity in both Saudi Arabia and Oman. In North America, Completion and Production revenue declined 2%, and operating income fell 13%. As Dave mentioned, U.S. results were affected primarily by seasonality, but also by declines in the U.S. land fracturing pricing. This was partially offset by better activity for both cementing and production enhancement in the Gulf of Mexico, and increased production enhancement activity in Canada.

In Latin America, Completion and Production revenue increased 6% and operating income increased by 41%, despite the negative impact of the floods in Mexico. Completion tools had a strong increase in Brazil as they began work under its recent four-year contract award providing testing services to Petrobras in high pressure, high temperature, and deepwater environments. Cementing experienced improved activity throughout the region but especially in Mexico.

In our Drilling and Evaluation division, revenue increased $149 million, or 9%, and operating income increased $31 million, or 8%, over the third quarter. Wireline and Perforating, Landmark, and Security DBS contributed meaningfully to the fourth quarter income growth. Baroid's fourth quarter results also improved as the third quarter was negatively impacted by a $24 million environmental charge. Operating income for Sperry was negatively impacted by increased start-up costs for new projects and a less favorable project mix. We expect a return to the growth trend in Sperry's profitability in the first quarter.

In the Europe, Africa, CIS region, Drilling and Evaluation revenue improved by 12%, while operating income was essential flat. Revenue growth was driven by wireline and Baroid activity in Europe and increased Landmark activity throughout the region. As previously mentioned, operating income was negatively impacted by increased start-up costs for new projects for Sperry, and a less favorable product mix. Drilling and Evaluation revenue in the Middle East/Asia region improved by 7%, and operating income was negatively impacted -- operating income was negatively impacted by the $34 million impairment charges.

These charges were related to our 25% non-operating interest in the Magnama prospect located in Bangladesh where drilling activity resulted in a dry hole in December. In addition to this prospect, the operator is currently drilling a well in the adjacent Hatia field. We expect to know the results of the Hatia drilling activity by the end of the first quarter, and depending on the results, we could incur an additional impairment charge. Operationally, Landmark experienced traditionally strong fourth quarter performance throughout the region. Wireline had improved Middle East activity during the fourth quarter, and security experienced higher sales volumes in Asia Pacific.

In North America, Drilling & Evaluation revenues increased 7%, and operating income increased by 47% as compared to the third quarter. Increased operating income was the result of exceptional performance from Sperry, Security and Landmark in the United States, and improved profitability for Baroid following the third quarter, which was negatively impacted by the environmental charge. The U.S. continues to see strong performance across the product lines. Canada also experienced some quarter over quarter revenue improvement within this division as compared to third quarter, driven by activity growth for both Baroid and Wireline.

Drilling and Evaluation's Latin America revenue improved 8%, and operating income improved 4% from the third quarter. This improvement was primarily driven by seasonally strong landmark sales and services throughout Latin America and Wireline was solid performance in Mexico, Colombia, and Argentina. These improvements were partially offset by lower activity for Baroid in Venezuela and Mexico.

Now I will address some additional financial items. Corporate expenses for the fourth quarter were $67 million, which included approximately $12 million of executive separation costs. The fourth quarter effective tax rate for continuing operations was 24%. Our tax rate declined throughout 2007 as our international operations continued to make up a greater percentage of our operating income quarter after quarter. Our fourth quarter rate was also favorably impacted by foreign tax credits that we had not previously thought could be fully utilized. During the fourth quarter, we repurchased approximately 2 million common shares at an average price of $36.26 per share for a total cost of $67 million. Since the inception of the repurchase program in 2006, we have repurchased 79 million shares at a total cost of $2.7 billion, or an average share price of $33.91. We currently have $2.3 billion remaining under our share repurchase authorization. In the second half of the year, we slowed the pace of our repurchases, partly in response to an increase in potential acquisition opportunities and improved valuations.

We will continue to reevaluate the allocation of our cash between acquisitions and stock buybacks as market conditions change in order to provide good return for our shareholders. Given our stock's current trading range, we anticipate increasing the pace of our repurchases in the first quarter of 2008. I would also like to provide some financial guidance related to 2008. We anticipate that corporate expenses will range between $65 million and $67 million per quarter during 2008. We currently expect the normalized 2008 effective tax rate to fall in the range of 30% to 32% as the percentage of our international earnings continues to increase. Additionally, we have the opportunity to benefit additional prior year foreign tax credits as our international earnings grow and we can support the recognition of these credits. This could cause our 2008 effective tax rate to be even lower.

We expect depreciation and amortization to be approximately $170 million to $175 million per quarter, or about $700 million during 2008. And finally, our capital expenditures should remain in the range of $1.7 billion to $1.8 billion for the full year. Tim.

Thanks, Mark, and good morning, everyone.

Dave provided some insights into North America but let me had a a few more thoughts on the secular trends that have positive overtones for our business. The industry saw over 35% growth in rigs used in horizontal drilling in 2007. Our customers are increasingly using multiple zone completions which have led to larger frac jobs, not only for these horizontal wells, but also for an increasing number of vertical [Tikas] completions. Production responses have dictated more stages, higher horsepower, and larger volumes. Overall, our horsepower per frac job increased in excess of 10% in 2007, with a corresponding increase in revenue per well. These factors give us some confidence there where signs of capacity additions abating and modest activity increases, pricing stabilize in the second half of the year.

In addition, we've seen success in our One Halliburton strategy to create an attractive efficiency model for our customers in the development of their large assets. For example, during this quarter, we signed another sizable agreement with a major client in the Piceance Basin to provide fracturing, cementing, completions, and drilling fluid services leveraged by our reservoir expertise. Growth in horizontal well has afforded us an opportunity to balance our portfolio in the U.S. A significant contributor to Sperry's growth has been the success of their electromagnetic telemetry system, which continues to set records at depths of operation and reliability. We expect Sperry's growth trend to continue in 2008, as we build critical mass with our EZ-Pilot Rotary Steering Device, and our new vertical drilling tool, V-Pilot, both designed to expand the penetration of rotary steerables in less complex land environments.

The growth of our Completions business in the U.S. was also favorable. New technologies such as our VersaFlex expandable liner, Easy Well Swell Packet Technology, and Delta Stim Sleeves are helping to drive more cost effective horizontal well completions. We are, of course, pleased with the growth of our international business and there are several contributors which will be important for our long-term outlook. Our intelligent well completions joint venture, Well Dynamics, completed a large number of deliveries in the fourth quarter. Well dynamics continues its leadership position in this business, with revenue growing by 60% in 2007. Intelligent well completion systems enable our customers to change flow characteristics of a well, while minimizing interventions and production down time. We're seeing great demand for these systems on land in the Middle East and in offshore markets in the North Sea and West Africa. We see this as a continued growth area for us.

Our global expertise in deep water was demonstrated in our involvement in the Tupi field in Brazil, which is one of the largest finds in deep water history. Halliburton has worked with Petrobras on this field since 2003, in developing the plan that involved drilling through the massive salt formation that sits atop this reservoir. Our involvement included supplying seismic interpretation and subsurface visualization software, directional drilling and drill bits in both salt and pre-salt zones, LWD, well testing and fluid sampling, and high-collapse casing accessories. Halliburton's contribution was instrumental to the success of this very important project.

In 2007, we experienced supply chain constraints related to drilling evaluation and completion tools. We made first deliveries in the fourth quarter from two major manufacturing facilities in Malaysia and Singapore, further enhancing our ability to grow in the eastern hemisphere. Let me share with you some of our expectations for the first quarter and total year 2008. In addition to the pricing impact in our U.S. frac business, it's appropriate to remind everyone that the company's results for the first quarter will be subject to the same type of seasonality we've seen in previous years. The Landmark and Completions businesses fall off in the first quarter as they benefit historically in the fourth quarter from customers' year-end budgets. As an example, Landmark's seasonal decline in the first quarter of 2007 was approximately $50 million in revenue.

Additionally, our businesses will be impacted by weather related seasonality that occur in the Rockies, North Sea and Russia this time of year. We see these declines as typical for our business following the same pattern experienced in previous years. The short-term outlook for North America has become a little more challenging to interpret. Consensus commodity levels will support modest increases in rig activity. The secular trends towards horizontal drilling and high surface intensity for our stimulation business coupled with some degree of rig and service deflation may well stimulate growth in the second half. Internationally, project visibility remains very good and paints a positive growth outlook for this business. The trend toward exploration and exploitation of more complex reservoirs bodes well for our portfolio mix and the degree of service intensity on a pro rig basis. The weighting of floating and jackup deliveries towards the second half of 2008 has prompted some discussion regarding potential project delays. This may temper the industry's growth for the year. However, this scenario simply points to a very strong outlook for 2009. We think a reasonable growth rate for our international business in 2008 is in the 20% range.

Dave?

Thanks, Tim.

So let me summarize where we believe we are. In the eastern hemisphere, we had great sequential revenue growth of 12%, annual revenue growth of 27%, our investment in eastern hemisphere product lines will continue. Eastern hemisphere margins are now consistently in the 20% plus range, and as Tim said, we expect we will continue to follow our strategy of growing eastern hemisphere in the 20% range, and that should continue. In the western hemisphere, we see a more challenging environment, but I believe that we have the top industry management team in the western hemisphere, and they will get us through it.

Fracturing margins declined by the low to mid single digits in Q4, in line with what we said. We have maintained or grown market share in the frac contract rollover process. Most of our 2008 frac work will be on a contract basis, as that market gives us the better returns than we see in the transaction market, which we believe is giving insufficient returns today. Fracturing margins will decline by the mid to high single digits from Q4 to Q1. But we believe that pricing will stabilize in the second half of 2008. And if customers drill at the level that they have indicated to us, we may, in fact, experience growth in the second half of the year. So 2007 was the successful year as we executed our strategy of growing eastern hemisphere while maintaining our strong U.S. position amidst a tough pricing environment, and I want to thank all our employees around the world for this achievement.

In 2008, we will continue to grow our already strong position in the international market while optimizing our position in the U.S. We strongly believe in the longevity of the current cycle and the long-term structural trends favor our company's expertise in well construction and production technology. With that, let's open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Jim Crandell from Lehman Brothers.

Good morning. Dave, you just announced a large Mexican IPM win. Can you comment on the performance of the IPMs you've been involved in to date, how you see it growing and your expectations for margins for IPM jobs relative to other parts of your business?

I'll let Tim handle that.

Hi, Jim. First point is this particular award has not actually started. It will be starting curing the latter part of this month and early February. The Project Management activities for us have always been an important feature of our business, but I think it it's true to say that we kind of deemphasized them somewhat at a time when we were really struggling to keep up with our supply chain to provide activities to all our key customers around the globe. However, looking forward, we really do see it as an important component of our business, and with sort of a potential bid award list of some 3 billion just in Latin America alone over the course of the next 12 to 18 months it's clearly an important one to focus on.

In terms of service work related to IPM, there's sort of a combination of service work and pass-through, and that ranges anywhere from sort of 10% to about 40% of the total revenue base, and clearly with that pass-through revenue towards the lower vend that range we're pretty comfortable that we can maintain our margins consistent with that typical of our normal service work.

Okay. And one quick follow-up, Tim, if I could. Could you talk to the market penetration and performance of your deep reading resistivity measurement you've introduced last year?

Yes, we're really pleased with our deep reading resistivity measurement, we call it ADR, and it continues to make good inroads into the market and we continue to build our fleet of tools to take advantage of the pool from our customer base.

Our next question comes from Geoff Kieburtz from Citigroup.

Good morning. Hello?

Good morning.

Can we come back to the outlook for international growth? I think, Tim, you phrased it as international growth of 20%. Can you give us any breakdown there, Latin America versus eastern hemisphere? And maybe also give us some idea of what your expectations are for incremental margins as compared to what you achieved in '07.

I think that, first of all, as we look around the globe, all our international regions have some particularly positive outlooks. Latin America looks like it's going to be particularly strong in 2008. So we're looking for good things there. Obviously part of that is going to be driven by the large integrated Project Management work which we've just received in Mexico. So really good outlooks around the globe for us. In terms of incremental margins, clearly we would expect to have incremental margins above the rate of growth of our revenue, so north of 20%.

So better than 20% incrementals, stronger than 20% growth in Latin America, maybe a little less in eastern hemisphere, and what would you expect at this point '09 might look like relative to '08?

Well, you know, I think one of the things that we can say about our business is that we do have a strong offshore drive to our business. When you lack at the rig deliveries which are anticipated, new rig deliveries or refurbs, for that matter, coming into the market in late 2008 or 2009, I think 2009 has the potential to be stronger than 2008.

Our next question comes from Ken Sill from Credit Suisse.

Good morning, guys. Wanted to ask about the share buyback. It was surprisingly small this quarter, fairly small last quarter. I was interested, though, in your comment that there may be opportunities to buy things. Generally it seems like you guys are a little bit price sensitive on using the share buyback money to purchase shares. Could you talk about your philosophy there?

Well, I think as we said in our comments, we did back down the pace of our repurchases in the second half of the year. We did, as the year went on, the number of acquisition opportunities that went into our -- what we call our M&A funnel, as we're evaluating this, did increase, and the all of situations on those improved dramatically as private equity became a less significant player in the M&A market in our industry. And so as we were -- and, of course, Chris, in front of me, were evaluating the various opportunities we felt like that holding our cash back in order to potentially take advantage of those opportunities was a wise and better investment for us. As we look forward into this year, particularly as our stock prices have fallen, but also as we look ahead at some of the other financial activities that we'll have this year, we think that it the's appropriate to be back in the market, be a bit more aggressive in terms of our share repurchases, so you should expect us to be back in the market repurchasing our shares very soon.

And I had a follow-up on the Mexican IPM project. Could you describe how that is bid? Is that a turnkey project or is it more of a cost-plus? How are you guys sharing the risk with PEMEX?

To execute these projects, one has to have access to a complete suite of services and also to rigs themselves. Halliburton has made a conscious decision not to enter into the rig markets, So for us to execute these contracts typically means for us to develop an alliance with a rig provider to enable us to execute the work. So, no, they're not on a turnkey basis for us.

Our next question comes from Ole Storer from Morgan Stanley.

Yes, thank you. Just to follow up on the Project Management, could you give some sort of number on how large your Project Management business is now as a percentage of the total or in revenues and where you see it it going on the [2 to 3 area]? Is this going to be an important change in your strategy to be more involved with this type of project around the world?

We typically haven't given backlog data for our Project Management activity so I'm not in position to give you that data, but could I give you a couple of data points, and really what's driving our interest, I think, is the overall increase in opportunity, and, you know, the opportunity seems to be increasing, and as I mentioned before, there's something like $3 billion plus of opportunities in Latin America alone as we look forward into 2008 in the first part of 2009. So it stands to reason that as our supply chain really sort of catches up with our demand, that we more aggressively pursue these projects. And so they will become an important feature of our business going forward.

And, Tim, what have you done over the past few years to feel that you are in a good position to assess the risks of the project that you're taking on?

It's something that we have been active with for a number of years. This is certainly not an isolated contract at all, so we've just perhaps not talked about it greatly but we believe we've built a cadre of expertise which will serve us very well in the execution of these jobs.

Our Next question comes from Dan Pickering from Tudor Pickering.

good morning, gentlemen. Wanted to talk a little bit about the Completion & Production segment, specifically North America. Dave, I want to clarify a comment that I heard you say toward the end of your discussion. You said pumping margins declined mid to high single digits. I just want to confirm. That was pricing, not margins, correct?

Dan, that was pricing, and it was fracturing, not to include cementing.

Okay, great. And so cementing is not saying -- seeing the same type of pricing declines that you're seeing in fracturing, correct?

That is correct. It has seen some, like the other product lines are, but much more modest than we're seeing in frac.

Okay. And then as we look at the sequential impact of the contract rollovers and the impact there on margins, I'm just trying to gauge, as I looked at Q3 to Q4 we lost about 370 basis points or so of margin in the North America Completion & Production segment. My math is getting me to about the same magnitude of decline. Am I in the ballpark ace think about pricing mix Canada?

Mark is shaking his head yes, so I guess that's a pretty good ballpark, Dan.

Our next question comes from Mike Urban from Deutsche Bank.

Wanted to kind of get a more holistic view of North America overall and -- you certainly have a lot of different data points out there, frac pricing down, utilization up, and other product lines doing well. Do you think, as you look out over the course of the year and on a combined company basis, obviously the margins are coming down, that's just math. Can you hold the line on the contribution or tee bit aus go through the year as all those things kind of offset, or are we lacking at a decline?

I think it's really difficult to say at this point in time, because the second and third quarters tend to be a lot of where we make our money during the year, but I think that if you -- if you look at the math on the margin compression, it would be difficult to say you can get there. However, when I talk to customers and I listen to their drilling plans, and what they expect to do during the year, you could come to a different sort of conclusion. So at this point in time, you know, as I said in the comments, if the customers drill to the level they say they will, then I think that we have a chance of having a positive EBITDA contribution for the year, but I think it's really too early to tell at this point in time, because it will take a lot of additional drilling and volume to make up for the margin declines that we know are going to be there.

Okay. And the follow-up is, you mentioned an example of successful bundling contract, or agreement toward the end of last year, early this year. How much of an impact can we expect that to have? Is that an idea that you're increasingly seeing customers be receptive to just given that the U.S. market has traditionally been kind of an a la carte market?

We're certainly seeing that they're being receptive. Obviously, it's something we want to lead with. Typically a customer will go out to bid on an a la carte basis, and it is ourselves who are going, ad sort of bundling together a package of services, to them. So it's really more of sort of a push approach than it is a pull approach from our customers.

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

Yes, good morning, gentlemen. Mark, I guess the first question in the area of capital spending, I think on the last quarter's conference call, the guidance for '08 was $1.5 billion to $1.7 billion. And I think I heard you say now $1.7 billion to $1.8 billion. Could you just give us some color as to why the increase? Is it just inflation, or is it more project? I'll leave that open to you.

Okay. Well, I think it's not really inflation so much as it is we just, as we look ahead we see projects coming our way. The capital that's going to be required to meet those projects is going up. We're anticipating putting more capital into our Drilling and Evaluation division, and particularly in our international markets. This PEMEX award is an example of where we will need some capital, and so we're just -- our outlook for international growth is improving, and that's going to require tools on the ground.

Do you have a breakout between North America and non-North America on the '08 spending?

No, we don't.

Our next question comes from Waqar Syed from Tristone Capital.

Hi, I have a question on the IP project in Mexico. Could you guide us about how many rigs are involved in this project and when are the rigs going to come in? Are these incremental to Mexico or is it just shifting from one job to another?

There's about close to 60 wells in total that have to be drilled and these going to take approximately 17 rigs or something like that. And some of the rigs are going to be indigenous already, some of them will be new.

Okay. But all these rigs, are they already working, or are they kind of idle in Mexico?

There's really not a lot of idle fleet at the moment in Mexico. So they will be transferred over from existing PEMEX activities.

Okay. Great. That's all I have. Thank you.

Thank you.

Our next question comes from Brad Handler with Wachovia.

Thanks. Good morning. Could you please -- let's come back to the CapEx, then I have a follow-up on the supply chain. But in terms of that CapEx, just to clarify your comments, I think, Mark, you made them, how much is -- how much is based, in a sense, on kind of what you anticipate winning versus in a sense what you've already won and need to then deliver on for '08?

We always, in doing our capital planning, hold back a level of capital that we call sort of discretionary at the corporate level, which is designed to anticipate potential projects that we might win during the year. And I would say a significant amount of the increase from our last guidance to this guidance relates to that discretionary capital as we see on projects that are yet to be awarded.

Okay. That's helpful color. Appreciate it. The follow-up is a little unrelated, like I said, but Well Dynamics, you have mentioned in this the past as being a sort of supply change angst, correct my word if you don't like it, but it sounded like maybe some resolution on. That can you just give us an update on where you stand there?

We have certainly commented on that previously, and as always, these things are a work in progress, but we are very fortunate to have been able to transfer some talent over from Halliburton in the supply chain arena to assist with that process. So we believe that we're seeing progress in that arena.

Our next question comes from Doug Becker with Banc of America. Doug, your line is open. Try unmuting your phone. Our next question comes from Roger Read with Natixis Bleichroeder.

Good morning, gentlemen. Following up on the international margins, 23%, on a clean basis in the fourth quarter, clearly expecting incrementals at least in that region, given earlier comments. Can one of you talk to sort of a long-term standpoint where you think international margins could go given a fairly positive outlook for 2009 can we see international margins sustained 25% or so, or does the mix of projects, these IPMs, et cetera, say that maybe something in the lower to mid-20s is the way to look at it?

I think, Roger, the mid-20s is certainly an achievable goal, and something that we continue to shoot for. The opportunity environment in the eastern hemisphere is so strong today that we continue to have to expand our footprint, and we have a large footprint out there, but have to expand our facilities, the number of tools we have out there. We are hiring ahead of the demand that we see for the next several years, so we're bringing people on, and we're putting them into training, and that always has a bit of a dampening effect on the margins, but given the customer reception to our technology and the desire for us to be involved in a big way in the eastern hemisphere, in particular, I see nothing but sort of continued expansion opportunities there, and I think that as long as we're sort of meeting the mid-20s margins requirements and making the required capital investments, I'll continue to do that all day long.

Okay. Thanks. Then on another margin question, but a little bit different, the corporate expense, the guidance there is up quite a bit over where we saw it this year. I was just wondering if there's anything in particular directing that?

I don't know that there's anything in particular driving that. If you recall earlier in 2007, we reclassified as we redid our segments some additional expenses there that hadn't historically been included in corporate. That is where we're capturing some parts of our legacy cost when we deal with things like an environmental cleanup or something like that, but I think that as you see, we're going to be investing some more in IT. This year we're going to the next version of SAP. That's going to drive some of the costs up. There will be some additional legal expenses that we will be incurring as we're being more aggressive and protecting our intellectual property. It's sort of across the board, I think, but not anything in particular.

Our next question comes from Robin Shoemaker with Bear Stearns.

Good morning. I wanted to probe Tim's comment a little bit about the project delays or project slippage that was anticipated in 2006. We immediately think of issues such as offshore rig availability, supply chain bottlenecks, funding of projects. What are the projects that you are -- that you have in mind when you talk about delays and the principal causes?

Robin, there's been quite a lot of chatter about project delays, and to a certain extent, these have been quite normal for our business, and we take them within the normal scope of our business activity. However, we do have a significant number of rigs arriving, both jackups and floaters over the course of the next couple of years. In fact, approximately 160 over the next three years or so. And so they really do have a significant impact on the overall growth potential for the business, particularly since they represent a pretty high percentage of the overall offshore fleet out there today. So delays can kind of come at the front end during the drilling phase, and they can come at the back end when you're trying to hook everything up. All we're really doing is just registering the fact that, yes, we do -- we do hear that there may be some potential delays, and that there's the potential that it could temper growth activities in 2008. If rigs are a little late arriving. But I think this just serves to strengthen 2009, 2010, and really sort of extend the overall cycle.

Understood. Okay. One very short question then. On the tax rate guidance for 30 to 32%, is it possible that you have enough unused foreign tax credits that there is a scenario in which case it could be as low as the 26% that you had this year?

Doing some quick math in my head, I think that the answer is yes, there is a scenario, given the amounts that we have that it could be that low, but I guess as we sit here today, we don't necessarily anticipate that. A large part of it is we're going back in prior years because of a different tax laws, we have the ability to go further back in time to pick up foreign tax credits. As our business outlook changes, we can collect those. But then you have to support that indeed you've got tax receipts and things to evidence that indeed you deserve those credits, and that's part of the process that we have to go through to recognize them.

Our next question comes from Alan Laws with Merrill Lynch.

Good morning. Another question on the international side. How healthy would you say the international bid flow for projects looks right now, versus last year, and are they increasing in size or are they about the same as they've been?

There's a very significant visibility today to the major projects which are out there in the marketplace. So I think probably at least as good as we've ever seen it. So that's really good news. I think it's quite correct to say also that a number of these projects are very large in nature, they require significant scope to be able to execute them, and I think it's also true to say that a number of these are fairly keenly priced, because they are so large. However, because of the duration of the projects, and because they tend to be technologically driven, it it really gives ample time during the scope and duration of the contract to add new technology that improve margins into those projects so essentially improve the overall margin experience during the scope of the contract.

Okay. And I think it was Roger's question on margins in the international arena, just as a clarification, were you say that you go were expecting them to remain in the sort of flat into the 20, 25% range, closer to where your incrementals are, I guess?

We've sort of, just during the scope of 2008, in Q1, our margins were sort of in the 19% range, moving up without the impairment charge into sort of the 23% range at the end of the year. So we've continued to steadily move our margins, and we'll continue to try and do that into the mid-20s, as Dave suggested.

But as you look forward, are you suggesting that that's are kind of the right margins for your capital intensity of your businesses and building out people and infrastructure and that kind of thing?

We'll always try and push our margins as well as we can. We'll continue to sort of drive them upwards, but I think we have to respect the fact that we are in a competitive environment, and there's probably a rate at which they tend to slow down somewhat from the increases which we've seen.

Our next question comes from Kurt Hallead from RBC Capital.

Good morning.

Good morning.

Question I have for you, as you look at the growth rates of 20% for 2008, I was wondering if you can just give us some general sense whether or not the ECA, or Middle East, Far East, are he they going to grow about the same? Do you think one will grow faster than the other? 20% could be anywhere from 20 to 30, obviously. Is it kind of 20 to 25 or 25 to 30 that you're thinking for eastern hemisphere?

I think we captured that on an earlier question. Basically, we're expecting Latin America to grow slightly higher than the norm, and the balance of the eastern hemisphere to grow slightly lower than that norm that we stated. So that's probably the best guidance that we can give you at the present.

So no further kind of differentiation between ECA and Middle East, Far East?

Not at this time, no.

Our next question comes from Doug Becker with Banc of America.

Thanks. Tim, another IPM question. The prospects look very good right now, but wanted to get a little more color to gauge the contract risks. What type of cancellation provisions are normal, how often are you getting paid out of production, are there any regions that tend to have more favorable provisions?

There's a great variety in these kind of contracts. Really, it would be very difficult for me to give you a generalization, except to say that we really take the risk profile very, very seriously. Bear in mind that we have an opportunity to essentially put a bunch of our capital to work, not in a completely risk-free environment, but in a relatively low-risk environment today with the demand that we have in international markets. So we're very cautious about the degree of risk which we take on, and that's subject of obviously tough negotiations with our potential customers.

Then just on the offshore market, certainly got into discussion today. What percentage of your revenues come from the offshore market, and do you have any quantification of the potential impact of the new offshore rigs and what it might mean for Halliburton over the next several years?

Frankly, I just can't give you, because I don't know, the percentage of our revenue that comes from offshore off the top of my head, but offshore does drive a significant amount of potential growth for us, and in general we talk in terms of service intensity, and offshore rig is approximately 10x the revenue in margin generation of on shore rig in the U.S., for example, so very, very important for us. And given our strong position in exploration and deep water, we're obviously looking forward to those rigs arriving.

Thank you.

Our next question comes from Rob MacKenzie with FBR.

Thanks. Question on costs. I guess another way to think about incremental margins, you had some pretty steep cost inflation year over year, at least looking at fourth quarter numbers, recognizing there's some moving parts, but how should we think about cost inflation going forward into 2008, and if you could break it down in terms of underlying core inflation in wages, material and stuff is and separately in the start-up costs and how we should think about that quarter on quarter going through the year?

To daily with the latter part first, we always have start-up costs in most quarters during the course of the year. However, occasionally, we get to a situation where we have multiple start-ups in the same quarter, and the effect of something that's somewhat lumpy, and we highlight it for you. So we expect a continuation of those as we move into markets which we feel that we underserve today. In terms of cost inflation, yes, the most significant element of cost inflation during the course of 2008 was, frankly, wage inflation. And that's probably not going to slow down a whole lot. However, the good news on wage inflation is that of all the discussions that we can have with our customers, wage inflation is the one which they are generally most sympathetic to since all our customers want access to the best people. So that's probably the best guide line I can give you with respect to inflation.

we'll take one more question.

Our final question comes from Ben Dell with Bernstein.

I had a couple questions on your international business. Obviously, progress in Iraq seems to be moving forward with some of the majors rumored to be looking at some of the projects. If they went back in, would you consider going back in, in a meaningful way? And also, on the M&A market, you made some comments that seemed to be fairly bullish about looking at opportunities. Are there any specific products or regions you're particularly interested in?

I think it wouldn't be behoove us to tip our hat in terms of any direction we may be looking but it's really clear the private equity players as left the playing field that there's a lot more attractive opportunities out there, and it's something that we're taking a look at right now. With respect to Iraq, clearly a number of our major customers are having some discussions about going back in there. There's clearly still security issues around going in to doing service work there, and that's impacting all the major service companies today. But certainly if our major customers decided they could go in there and we could all feel comfortable that the security situation was such that we could work in there in a safe way, we certainly would go back in there with them.

Okay. Thank you. Just lastly, on Angola, you didn't make any comments around block 31 timing or activity. Do you have any follow-up on that?

Just simply to say that Angola is an extremely important market for us. We feel we have a very strong market position there and we'll obviously try and exploit that as best we can as new discoveries and new developments are undertaken.

Okay. We'd like to thank everyone for their participation in the call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.