哈里伯頓 (HAL) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Halliburton first quarter 2008 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 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, Mr. Christian Garcia, Vice President of Investor Relations. Mr. Garcia, you may begin.

Good morning. Welcome to the Halliburton first quarter 2008 conference call. Today's call is being webcast and the replay will be available on Halliburton's website for seven days. A podcast download will also be available. The press release announcing the first 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 turning the call over to Dave, I'd like to remind our audience that some of today's comments may include forward-looking statements, reflecting 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, 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 disclosures. Also note that in our prepared remarks, we'll be using the term international to refer to our operations outside the U.S. and Canada, and we'll refer to the U.S. and Canada as North America. Now, I'll turn the call over to Dave Lesar. Dave?

Thank you, Christian, and good morning, everyone. It isn't often in a business as complex as ours that things go about as predicted, but this was one of those quarters for Halliburton. I will first comment on our first quarter results for both North America and the international markets. I will then talk about where we see things heading for the second quarter and onwards.

We had two non-recurring items in the first quarter that essentially offset each other, a gain on the sale of a joint venture interest and a write-off on the last required well to be drilled on a 1996 investment in an oil and gas property. My comments will exclude the impact of both of these items.

We said in our fourth quarter call that despite the pressures in the U.S. market and the traditional seasonal fall off of our international business, that we saw business remaining strong well into the future. We still strongly believe that this is the case. In Q1 we achieved the following results. Total revenue for the quarter was $4 billion which represents growth of 18% over the first quarter of 2007. All of our service lines showed strong revenue growth over the prior year with completion tools, drill bits, Sperry, and Landmark each generating growth rates above 20%. We posted quarterly record revenue for cementing, Sperry, and drill bits, and we continue to make good progress in developing a balanced service portfolio.

We said in our fourth quarter call that sequential revenue and operating income would likely be down in both North America and internationally, and overall our revenue was down 4% sequentially. However, North America revenue was flat sequentially as the rebound in Canadian activity and excellent performance by our Drilling and Evaluation segment, which was up 5% sequentially, offset the expected decline in production enhancement revenues from the impact of lower pricing that was discussed extensively with you last quarter.

We also had weaker results in the Gulf of Mexico as work during this period shifted towards drilling and away from completions where we have a leading market position. Like many of you, we were pleasantly surprised by the upswing in the Canadian market this quarter. There are signs of strong resurgence in activity after spring breakup and, if appropriate, we will selectively transfer resources to Canada to take advantage of that market's recovery.

Our margins in North America only declined by 210 basis points from fourth quarter levels, primarily as a result of the lower effective pricing for our U.S. fracturing business which was somewhat offset by a 7% sequential growth in operating income from the Drilling and Evaluation segment. The pricing declines in our fracturing business were in the mid to upper single digits and were consistent with our guidance. For our U.S. fracturing business, we are starting to see pricing pressures level off in certain areas, but overall the environment remains very competitive.

Pricing declines in the transactional markets are easy in areas where activity is increasing, and where job and base and complexity favors our differentiated fracturing technologies. We also reported to you in the fourth quarter that we saw pricing pressures for cementing, drilling fluids and wireline. We are now seeing those prices stabilize and even improve for some of these businesses. All of this helped to mitigate the impact of the drop in production enhancement margins.

In addition to the impact of pricing from the fourth quarter, and now some of the first quarter contract rollovers, we are also experiencing some cost inflation for fuel and fuel-based supplies and services which are putting downward pressure on the entire industry's margins. We are attempting to mitigate these costs by optimizing procurement practices and implementing fuel surcharges to customers when applicable.

We also discussed in the fourth quarter call that we expected international revenues to grow year-over-year, but also to decline sequentially due to the typical large seasonal drop off we see from the fourth quarter to first quarter, and from lower completion products and landmark sales. Revenue was also negatively impacted by slowdowns in the North Sea, Nigeria, and fracturing activity in Russia. We see Russia improving in the second quarter and for the rest of the year, but are less optimistic about business in Nigeria in the North Sea coming back strong due to geopolitical and rig constraint and project delay issues.

We said that we have set a target to grow our international business at around 20% year-over-year with sustainable margins, and we certainly accomplished this in the first quarter. Our international markets saw strong year-on-year revenue growth of 24%, lead by Latin America with a growth of 26% over the prior year. Our Latin America region achieved record quarterly revenue generating more than $500 million for the first time. Latin America operating income was also a record, surpassing $100 million in the quarter. We experienced strong growth rates in Columbia, Brazil, Argentina, and Mexico, across both of our divisions. In the past year, we have worked in aligning the delivery of our technology with the requirements of the international market, and the first quarter's results demonstrate the success of those efforts.

In the quarter, Halliburton had two significant contract wins -- the Statoil completions work in the North Sea and the offshore portion of the Manifa project in Saudi Arabia, which demonstrates the confidence our customers have in our ability to execute on large-scale complex projects. These awards not only provide us incremental business for two of our largest markets, but also solidify our position in the offshore market and Tim will provide additional comments on our offshore opportunities.

While our international operating margins remained above 20%, they were impacted by the absence of the higher margins experienced from the seasonally impacted landmark software in completion tool sales revenues between the fourth and first quarter. Also impacting margins were the previously discussed decline in revenues in the North Sea, West Africa, and fracturing businesses in Russia, all of which are serviced from established, high-fixed cost operating businesses for Halliburton. In these countries, a decline in revenue has a significant impact on the bottom line.

Looking forward, our North America customers are telling us that with continued strong natural gas fundamentals, they will be re-evaluating their drilling plans for the second half of the year. We expect that this will lead to volume increases over what we originally anticipated, as well as start to mitigate the pricing pressures we have seen in our fracturing business.

On the international front, we expect to see our growth initiatives continue our upward momentum. With international spending expected to increase this year, our global footprint gives us an outstanding position to benefit disproportionately from the spending growth and we do not believe international margins have peaked although price competition has increased. Let me turn the call over to Mark for a few minutes and let him comment on the financial results.

Thanks, Dave, and good morning. I'll be comparing our first quarter results sequentially to the fourth quarter. Halliburton's revenue in the first quarter was $4 billion, down $150 million or 4% from the fourth quarter. This is consistent with the Company's typical seasonal patterns for the beginning of the year. We registered good growth rates for Sperry drilling services, Drill Bits and cementing. On a geographic basis, Latin America revenue grew 4% and, as Dave pointed out, North America revenue was essentially flat from the prior quarter. All other regions showed seasonal declines.

Operating income decreased by $60 million from the fourth quarter or 7%. Our first quarter included $23 million for impairment charges on the oil and gas property, and a $35 million gain related to the sale of a joint venture interest. Our fourth quarter 2007 numbers included $34 million in oil and gas impairment charges, and $12 million of executive separation cost. Operating income margins declined by 70 basis points from the prior quarter due to the seasonal slowdowns and price declines in our U.S. fracturing business, offset in part by these special items.

Now, I'll highlight the segment results. Completion and Production revenue decreased $98 million or 4% from the fourth quarter while operating income declined $42 million or 7% from the fourth quarter. Included in the segment's operating income is the gain on the sale of the joint venture interest. We experienced lower sequential revenue for production enhancement and completion tools which were partially offset by higher activity and cementing.

Looking at completion and production on a geographic basis, Latin America revenue increased 19% and operating income increased by 38% sequentially. The growth in revenue and operating income was driven by higher vessel utilization in Mexico, recovery from the fourth quarter union strike in Argentina, and increased activity in Venezuela and Brazil. In North America, completion and production revenue declined 3% and operating income fell 5% compared to the fourth quarter.

U.S. results were affected primarily by the impact of fracturing pricing from the contract rollovers in the fourth quarter and by lower completions activity in the Gulf of Mexico. This has been partially offset by stronger Canadian activity for production enhancement, completion tools, cementing and the gain related to the sale of the joint venture interest. As Dave indicated, we're experiencing cost pressures in the U.S. for fuel and fuel-based products and services. We estimate that this negatively impacted our U.S. margins by about 50-100 basis points, but we're actively taking steps to mitigate this impact going forward.

In the Middle East/Asia region, completion and production revenue declined by 6% and operating income declined by 24% over the fourth quarter. Completion tools had lower revenue and a less favorable product mix in the first quarter from both India and China due to the customers' seasonal buying cycles and reduced intelligent well system sales for the Middle East. In addition, production enhancement revenue declined, resulting from lower activity in Oman, Australia and China.

In the Europe/Africa region, we posted a revenue decline of 15% and a 20% decrease in operating income from the prior quarter. This was the result of lower activity for production enhancement due to seasonality in the North Sea and contract delays in Russia and West Africa. Completion tools had lower intelligent well system shipments from our well dynamics joint venture compared to the fourth quarter.

Now in our drilling and evaluation division, revenue declined $52 million or 3%, and operating income declined $19 million or 5% from the fourth quarter. Strong sequential revenue growth in Sperry and Drill Bits partially offset declines in Landmark, Wireline and Baroid. Operating income declined sequentially due to the typical first quarter seasonal decline in Landmark revenue and reduced sales for Wireline. We expect to see increased Wireline activity over the course of the year driven by strengthening demand. Our Drill Bits product line is benefiting from strong customer acceptance of our XR reamer tool internationally.

In North America, drilling and evaluation revenue increased 5% and operating income increased by 7% as compared to the fourth quarter. Increased operating income was the result of exceptional performance in Canada from Sperry, Drill Bits, and Baroid. In addition to the strong performance in Canada, Baroid and Drill Bits experienced robust activity in U.S. land, and Sperry had higher activity in the Gulf of Mexico. While the Canadian market rebounded from fourth quarter levels, we will see lower activity in the second quarter as spring breakup will be in full swing.

In the Europe/Africa region, drilling and evaluation revenue declined by 5% and operating income was down by 12% sequentially, due to seasonal declines in Landmark revenue and in the North Sea. Additionally, we incurred logistics cost and lower activity in West Africa, particularly in Nigeria. The revenue and operating income declines were partially offset by strong performance by Sperry and Drill Bits elsewhere in the region. Sperry's revenue in Russia grew by almost 80% sequentially, as we integrated the first of each acquisition we announced late last year. Sperry also had higher multi-lateral and LWD activity in the Caspian this quarter.

Drilling and evaluation's Latin America revenue declined 7% and operating income decreased 18% from the fourth quarter. The decline was primarily driven by lower Landmark revenue throughout the region, partially offset by higher Sperry activity in Ecuador and Mexico.

Baroid had lower revenue sequentially, but improved operating results due to more favorable product mix and higher activity in Venezuela. Drilling and Evaluation revenue in the Middle East/Asia region declined 10% while operating income declined 11%. The decline in operating income for the region was driven by the Landmark seasonality and reduced Wireline sales and services to Asia.

Now, I'll address some additional financial items. Corporate expenses for the first quarter were in line with our previous guidance, and we expect them to remain in the $65 million to $70 million range for the remainder of the year. The first quarter effective tax rate for continuing operations was 29%, slightly below our guidance but in line with our recent trend of lower effective rates driven by increased international earnings. We continue to expect the normalized 2008 effective tax rate to fall in the range of 30% to 32%.

During the first quarter, we repurchased approximately 10 million common shares at an average price of $37.26 per share for a total cost of $360 million. As we indicated in our fourth quarter call, we evaluate the allocation of our cash between acquisitions and stock buybacks as market conditions change in order to provide good return for our shareholders. That allocation strategy will certainly be a factor in our evaluation of the escrow opportunity that we're currently considering. And finally, our capital expenditure guidance remains in the range of $1.7 billion to $1.8 billion for the full year. Tim?

Thanks, Mark and good morning, everyone. As Dave mentioned, the second half of this year suggests more robust drilling activity in North America given the strong commodity prices. The past few months have seen announcements from our customers regarding increased activity in newly targeted shale developments. This recent surge in new plays has been enabled by developments in fracturing and horizontal drilling technologies that have increased recovery rates and improved shale gas economics, and continues the established trend towards unconventional production in North America.

Ultimately, production from each shale development requires a high level of reservoir understanding as the shale's composition and behavior can change during drilling, completion and even production. In the Marcellus and Woodford shales for example, we work with our customers using techniques such as our proprietory shale [eval] service to provide enhanced understanding of the reservoir and to improve completion efficiencies from less than 25% to over 75%.

Dave also touched on our U.S. pricing environment, but let me share with you some thoughts on what we expect to see going forward. We previously anticipated U.S. recount growth in the 3.5 to 4.5% range, and this estimate is likely to be exceeded given the current commodity prices. We continue to see an increase in fracturing intensity. We anticipated that capacity additions for the North America simulation market would be in the 10% range for the year. We're monitoring this closely and estimate that the industries' capacity is now likely to grow 12 to 15% as equipment returns from overseas due to an improving outlook in the U.S. and the possibility of a few small entrants into the market.

The prospects of increased drilling activity, increased service intensity, indicate to us that the additional capacity from our revised estimate can be meaningfully absorbed. The overall market outlook provides us greater confidence in the stabilization of pricing by the end of the second quarter. We expect that having concluded pricing rollover negotiations, our average frac pricing will decline in the second quarter by 1 to 2 percentage points while leading edge pricing will stabilize.

We continue to be pleased with the growth of our international revenue. There are some areas I'd like to point out that will be important in shaping the Company's outlook. There have been considerable discussions regarding the impact of the influx of offshore rigs in 2008 and 2009. Currently, offshore activity represents approximately half of the Company's total revenue internationally. It's a service and technology intensive segment. Our average offshore revenue per rig is three to four times that of our onshore business, and has grown about 50% since 2005.

We're satisfied with our offshore market share which is meaningfully higher than that of our land-based businesses, and the contract wins this quarter offer us the opportunity to solidify our position. Deepwater spending represents approximately 30% of total offshore expenditures and deepwater reservoirs are providing significant challenges to the industry, including increasingly complex geology, sub salt targets, and high temperatures and pressures.

Halliburton enjoys leading deepwater market share positions in cementing, completions and simulation, and a number two position in directional drilling and LWD, and drilling fluids. Our suite of sand management technologies for deepwater applications has been used effectively in a broad range of environmental conditions in the Gulf of Mexico, West Africa and Brazil. Our deep quest ultra-deep water stimulation services have demonstrated proven benefits in high temperature and pressure environments.

We're experiencing good commercial success in the introduction of other innovations, specifically Sperry had an outstanding quarter for the InSite ADR, an azimuthal deep reading resistivity tool with successful jobs in seven countries including U.S, Brazil and Norway. Customers are finding significant advantages with the ADR as it provides new levels of control in the guidance of wells through the reservoir and removes the ambiguity regarding the steering of wells into the highest resistivity sweet spots in a wide range of offshore and onshore environments. We're very pleased with customer acceptance and demand.

Project visibility for our international markets is very good, as are delivery schedules for rigs. Some 170 rigs are entering the market over the next four years and they will provide meaningful incremental revenue for the industry and, given our strong market position, for Halliburton.

A word of caution in the modeling process though. Material delays either in the delivery of the rigs or, more importantly, their functioning and full efficiency, will temper the timing of expected growth which we now anticipate late in 2008 and into 2009. In the interim, we continue to expect our international growth to be in the 20% range while margins may vary as they reflect costs associated with the major project start-ups.

As many of you are aware, a press release regarding Halliburton's interest in acquiring Expro was issued last week. We're in discussions with the company, and currently performing due diligence which may or may not lead to an offer being made. We do not have additional details to provide today, but would like to reiterate that any offer will be consistent with our previously expoused strategy of making acquisitions accretive to shareholder value. Dave?

Thank you, Tim. As we've indicated, our results this quarter are what we expected. I believe we've engineered a soft landing in a very tough pricing environment in North America. And now with our customers rethinking their drilling plans, we are poised to take advantage of any increased activity in this market. We think the pricing environment will continue to be competitive in the second quarter, but are very well-positioned with our leading technology and execution capabilities. We are even more confident today that pricing will stabilize, and that it will occur earlier than we had previously anticipated.

Internationally, we are pleased with our performance with revenue growth rates above our target of 20% with sustainable operating margins. As we have discussed in our previous calls, Latin America will be our fastest growing region and the first quarter's results bear this out. We recently saw two significant contract wins internationally which is continuing evidence of the success of our growth strategy. Our outlook for Halliburton remains very favorable, and we expect to see strong global demand for our products and services through the end of the decade. Let's go ahead and open it up for questions now.

(OPERATOR INSTRUCTIONS) David Anderson of UBS.

Thank you. Tim, you were just talking about the offshore sector and how it's poised to start to pick up at the end part of the year. Can you talk specifically about rotary steerable and your plans there? I guess partially your comment on how much capacity you have in these tools, and where you were last year and what you plan to do out of the next several years.

I think as we look back, clearly there has been some shortage in supply of rotary steerables into the industry, causing some spot shortages in certain areas. I think as we look forward, we've got very good visibility of the rigs that are arriving, where they're going, and I think that the industry is clearly ensuring that it's going to supply the industry as required. So no, I don't see any particular challenges there in the delivery of rotary steerables. Of course, looking at the offshore sector, that is the highest usage sector for rotary steerables. Very high indeed in fact, so we can expect to see them utilized very broadly in these new rigs that are arriving.

Is there any particular market that uses rotary steerable more like say the Gulf of Mexico at X percent versus say, Australia at another percent?

I think any offshore environment where drilling is complex will use rotary steerables today.

Okay and then Dave, outside North America, you've talked about positioning yourself very well for the growth -- your growth prospects. Are there any regions that you expect to be reallocating capital towards this year in advance of 2009? In other words, are there any changes in your patterns that you foresee?

No, I think, Dave, if you look at the demand across the globe today outside the U.S, there's increased demand essentially wherever you look. Obviously, our business in Latin America is one that needs to have additional capital allocated to it, but we knew that coming into the year, and that was part of our plan. As Mark has indicated, our capital plan pretty much is on schedule and the capital is going to where we originally thought it would go.

Okay. You don't really see any kind of changes over the last couple of years going forward then?

No. I think if you look at a couple of the weak spots I mentioned, obviously we will continue to keep an eye on them. I think project delays and some difficulties attracting rigs and some weather issues in the North Sea is a place that we are keeping our eye on. Then I think with some of the issues around geopolitics and some of the financial stresses that we're seeing in Nigeria, obviously is another area that we're focused on. But I think as we've indicated in past calls, the focus for international capital build up is eastern hemisphere, and focused on Sperry and Wireline, and completion products.

Okay, that's great. Then one last question if you don't mind. You were talking about some pricing pressures internationally. Can you get a little bit more specific on those pricing pressures? What is that caused from? Is that just from your peers, is that smaller up starts coming on the market? Is that a particular region you're seeing that in?

No. I think the issue in the international market is it's a longer-term contracting market, so you are essentially either in or out and can be in or out for a number of years. That means that you have to get your initial bids right and have to get your foot in the door on some of these larger projects. Then you have a base of business to essentially build your market share and your operations in a particular country from that base. So it's really the traditional larger service companies that we're competing against, but I think as the stakes have gotten bigger and the projects have gotten bigger and longer, getting it right on the front end is very important.

Great. Thank you very much.

Charles Minervino of Goldman Sachs.

Hi, good morning. Just had a couple questions on the Manifa announcement. First, was there really a specific technology competency that drove the award of that contract or was it more the group of services that you were offering?

With respect to Manifa, I think when you take a look at the components of technology, there's a broad range of technologies which are utilized in the scope of the project. However, I think we have to say that by far the largest value relates to drilling and logging well-drilling related activities.

Okay. Then, I also noticed that stimulation services are part of that contract. How critical was that in terms of the award of the contract? Was that a big component there as well?

It was a component, but not a significant component compared with that of the sort of well construction activities. No.

Okay. Just a couple other questions on stimulation. Can you give us some color on how big offshore stimulation work is for you? Maybe as a percentage of total revenues or as a percentage of C&P revenues?

That's not a breakdown that we typically provide. What I can say is that really clearly, the largest single component of our stimulation business is in North America. We operate on a global basis and in some cases that will be offshore and in some cases it will be onshore, but the -- North America represents the largest single sort of concentration of activity.

I guess what I'm trying to get at is are we going to see --- is this a theme that we're going to see going forward of more stimulation work where we see above average growth in the international market from stimulation?

I think as we all know, the sort of hydrocarbons are getting harder to find and they're getting harder to extract. We certainly feel that stimulation technologies will be a very important feature of the portfolio going forward in all international markets, yes.

Great. Thank you.

Jeff Kieburtz of Citigroup.

Sorry about that. Had the mute button on. I guess what I wanted to ask was whether you would talk at all about your -- the reasons for your interest in Expro or whether we're just going to skip that subject this morning?

Geoff, I think that if you've listened to our discussion about M&A activity over the past several years, we've said that we would look for sort of niche acquisitions, geographic expansion outside the U.S., and new potential product lines for Halliburton. All of which need to be accretive to the shareholders and I think Expro would fall into potentially a couple of those. But I don't think it's worth us debating it or discussing it on the call any further than that. We'll obviously update all of you when we've made a conclusion on it.

I guess you touched on the one thing, Dave, that I was trying to understand as to whether -- if something happened, would Expro add a new business line to Halliburton?

Yes, Geoff. It certainly would. I think as you probably know, Expro is very well-established in the flow management arena which is an area which really Halliburton does not participate significantly. That's clearly one of the attractions.

Okay, great. And Tim, I'd like to come back on your comment about the revised estimate of the capacity additions in the stimulation market for North America. I think you said you had thought 10%, were now thinking 12-15%, the difference being capacity coming back into the market?

Yes. I think there are a couple of markets internationally, Geoff, which clearly are over-supplied. Russia is one of those, for example. We don't think that with the North America market improving that it's reasonable to assume that markets will remain over-supplied for a long period of time. In fact, we're actually moving a spread out of Russia into another international location in response to that.

With respect to capacity in North America in general, I think we feel that we want to keep you updated in terms of the changes which will help you understand what's taking place in North America. We really don't see that as being a significant move, but nonetheless wanted to keep you posted so that you're aware of our thoughts with respect to what it takes to continue to stabilize pricing in North America.

Yes, also, Geoff, I think it's important to understand that a lot of this potential horsepower that we see being added to U.S. is really, with the newer entrance of the smaller players, most of which we don't compete against.

Okay. I guess what I found a little bit surprising, and maybe there's another consideration here. But that with the U.S. market apparently still in some degree of price erosion that it is the market the surpluses elsewhere are going to go to. It suggests that there -- no other stimulation market in the world that is stronger than the U.S. Is that correct or is there something else going on?

No. I think, Geoff, it's -- the issue is a lot of these folks that have put equipment into these what are now over-supplied markets, can't access a lot of the other markets that are available outside the U.S, setting up in Algeria, going offshore West Africa, offshore Middle East, Australia, places like that. Also, I think people have begun to get pretty excited about some of these new potential shale developments. You've seen a lot in the press lately about the Marcellus shale.

I think you're seeing some people also try to pre-position themselves in some of these up and coming shale plays to be able to take advantage of the opportunities as they come along. You don't go away from this thinking that we see a dramatic overcapacity. As Tim said, what we see is that there is going to be enough demand in the U.S. going forward to absorb the capacity and not have any material degradation on pricing.

But also, I think it's the natural way for new entrants or those that are a little bit at the lower end of the technology curve, to find the easiest-to-access markets. As the U.S. appears to now be popping up faster than people thought, and Canada appears to be coming on maybe faster than people thought, I think it's actually natural that people would look back to the U.S. as a place to expand their capacity.

Okay. Great. Thank you.

Scott Gill of Simmons.

Yes, good morning.

Good morning, Scott.

I guess Dave, for you. Earlier when someone asked about Expro, you were talking about your rationale for making acquisitions. I was wondering if we could talk a little bit about the land rig business. We've seen Weatherford leverage land rigs in Russia for IPM work. There's a release out today that Schlumberger is looking at Faxon. Can you talk a little bit about how you see land rigs potentially within Halliburton's portfolio as it relates to future IPM work?

Obviously, rigs are an important component of completing major integrated projects. Our preferred approach has been to develop relationships with key providers of rigs in order for us to have an opportunity to complete those jobs effectively. That's worked very well for us to this point. To this point, Scott, we really don't see changing that approach.

Okay. Then Tim, lastly, the question I had just following up on Geoff's questioning, do you have any quantitative way to capture frac intensity here in this U.S. market? In other words, the rig count is up 5%. Is there some formula you use to gauge how much of that overall frac business would be up?

Yes. We monitor that closely internally. I think what we told you in our last call was that during the course of 2007, we thought that the amount of horsepower per job had gone up by about 10%. We expect that trend to continue. We'll monitor it closely. We have one quarter's worth of data this year under our belt. I think it's probably a little bit premature at this moment to make detailed projections, but suffice it to say that we continue to expect that trend to continue.

Okay. Thank you.

Dan Pickering of Tudor, Pickering, Holt.

Good morning, guys.

Hi, Dan.

Tim and Dave, could you walk us through -- I'm coming back to the Expro question. I think we know mechanically that if Halliburton were to be successful in a bid, you've got to pay more than the Candover guys by 12, 13, 14%. That's about $4 billion. Tell us how you think about $4 billion in an acquisition, whether it be Expro or elsewhere, on a return basis relative to share repurchase, buying back Halliburton stock.

Dan, we really don't have any additional details to provide today on that particular proposed acquisition.

Okay. How do you think about share repurchase relative to acquisition?

Well, Dan, this is Mark. I think that, as I said in my earlier comments, that we always, when we look at the use of our excess cash, evaluate closely the returns that could come back to our shareholders on acquisitions versus doing share re-purchase, and what's the best use of our cash. We'll certainly factor the available cash that we have into any evaluation that we do on the Expro deal, once we complete our due diligence and determine what the relative values are.

Okay. North Sea, you indicated you thought that the rest of the year might be slightly softer. Is that a sale of products issue? Is it a vessel utilization issue? What are the driving components of that commentary?

The UK sector in particular is really a little bit challenged in terms of rig supply, and is very susceptible to any sort of minor disruption. It's really a commentary on the fact that until we get new rig deliveries finalized for the North Sea, and a more aggressive activity scenario, we're going to see an environment which is going to be somewhat muted.

Okay, so Tim, it's not worse, it's just not better?

That's correct.

Okay. Thank you.

Ole Storer of Morgan Stanley.

Thank you very much. Just wanted to touch a bit on your international growth projections. You comfortably went ahead of the targets that you set. Does it mean that you are implicitly lowering your year-over-year growth expectations for the rest of the year? Or should we look at your old guidance for the rest of the year in isolation of what happened in the first quarter?

No. I think that we have said for the past several years that we would expect to grow our international business over 20% over a period of two or three years. We certainly have hit that mark the last couple of years. I think that we had a very good year-over-year increase in Q4 to Q1. So no, we are not implicitly reducing our growth rates. It's just that Q1 was a great start on the year. But we remain very excited about our opportunities in the international market, and fully anticipate and believe that we could hit that long-term plus 20% growth rate.

So you expect the 20% plus for the rest of the year?

I think the guidance we've given here is in the range of 20%. That's probably as best as we can say on the call, Ole.

Okay. Thank you. North America, you highlighted that 50% of your international activity was offshore. What would that ratio be for North America?

Well, North America is obviously going to be quite different. We've got a very large and robust onshore market in North America and obviously, a fair amount of onshore activity in Latin America too. Don't have numbers at my finger tips, but significantly less offshore activity in the western hemisphere than our eastern hemisphere operations for example.

Okay.

If you think about the big offshore basins in North America, obviously it's the Gulf of Mexico. We have a market-leading position in the completions and production end of that business. We also have a very good market share in the ever-expanding offshore Brazil market.

But now, what percentage of North America revenue would roughly be represented by the Gulf of Mexico?

That's just not data I have at my finger tips I'm afraid, Ole.

Okay, just one follow-up question on delays that you highlighted. Is it just the North Sea where you are seeing project delays, because of scheduling on rigs? Or are you seeing it elsewhere as well?

I think it's true to say that there are -- really the market is very, very tight. Projects are not necessarily always starting exactly on time as rigs may be delayed, completing one program and moving to the next. Typically, these things do take place. We normally factor them into our planning. However, I have to say that probably we're seeing a greater degree of delays today than we have typically seen, not just in the North Sea but also in Asia for example, as well. I think it's just a feature of the environment that we're going to be in until we see some significant new rig deliveries in late 2008 and into 2009.

So does that mean that that project that you've announced to have equipment ready for by your customers are getting postponed because of scheduling issues on rigs?

Well, particularly on the well construction side, equipment assets are still in relative short supply. Those are very mobile assets and we'll utilize them on a real time basis to make sure we maximize revenue opportunity.

Okay. Thank you very much.

Jim Crandell of Lehman Brothers.

Good morning. Tim or Dave, we had hosted a dinner about a month back for one of the largest independents that operates in the shale plays. What he said was at least a little bit surprising to me, that they didn't use any of the big three pressure pumping companies. They considered these long mopey stage fracs a commodity business. They basically knew as much about the business as the large pressure pumping companies, and even represented that other companies felt the same way. Can you comment on what you feel is -- if there is any technology to add in these shale plays? It seems like activity is growing pretty rapidly there, and what you might be doing to try to change that perception?

Yes. I think I can. One of the things that you're hearing obviously is that there's a significant increase in the water frac market, and it's growing. It has been growing quite quickly as the shale plays are being developed. I think one of the issues that a number of our enlightened customers see at least, is that there's a significant choking effect of the formation changes that take place which impedes hydrocarbon flow following conventional water frac treatments.

It's really important to ensure that you have a package of chemistry that really enables you to prolong that production potential. We've certainly found we have a service, we call it our aqua-stem service in fact, Jim, which is really used to overcome that effect. It has got very good traction with our customer base and is used really quite broadly now.

Okay. I had a follow-up question on the stimulation business. We now have 12 or so, maybe even more, publicly-held companies who probably can't wait for the market to increase, at least the other nine that aren't the big three, so they can start adding capacity again. If you look at yourself as the market leader, and figure that the three major companies have maybe lost 25 to 30 points of market share since '03. What's your plan on how you might counteract this?

Well I think, Jim, a couple things. One, we do sort of command the technology heights with respect to the fracturing business. I think it's continuing to bring out technology and process that allows our customer to get the highest production at the lowest net cost for that production, which doesn't mean necessarily that we're the cheapest. In fact in many cases, and we continue to see it in the rollovers of the contracts in Q1, we got work awarded to us where we were not the low bidder.

I think our customers do recognize the differentiated technology, service quality, performance that they get from Halliburton, and I think even the bigger service companies. Yes, I think there will be more equipment in the business, but we believe that every frac spread, every cementing unit, every piece of pressure pumping equipment that we can bring into the market, there's a market there for that equipment.

Okay. Dave, just one other topic and it involves IPM. And particularly, I'm referring here to Manifa and the big job you won in Mexico. Can you characterize pricing on those jobs and how competitive pricing is on the IPM work? Certainly, you have some competitors that you're bidding against in each one who are claiming that you're very aggressive on pricing to get into the IPM business in these areas.

Yes. We have a very broad-based project management, integrated project management business. We operate in nine or ten countries around the globe, and have been doing so for a number of years, Jim. I think that the number of companies that can offer and operate a well-integrated project are very few. So no, I don't feel that the pricing in those cases is particularly aggressive.

With respect to general large international projects, our customers are obviously exercising their ability to put together large traunches of work. As Dave pointed out earlier, these in some cases give you the opportunity to be there for multiple years or not be there for multiple years. I think that large companies such as ourselves do a very good job, particularly on the well construction side, of introducing new technologies to our customers during the course of the contract which gives us a very good opportunity to provide additional opportunities for them to improve efficiency and for us to improve margins.

Yes. I think Jim, just let me add one more thing and I think it's an important aspect of the investment that we made a number of years ago in our global footprint. Because a large level of the cost on these bigger projects are logistical costs and footprint costs. If you have a large project for a number of years, you can set up your logistics in a way. You can set up your manufacturing, staging, and get the economies of scale from your local footprint that you wouldn't otherwise be able to get. All that actually means your costs are lower than someone who maybe is looking at going into a larger project, doesn't have that footprint and logistical capability.

Just to reiterate what Tim said, not only do we have a strategy to grow our revenues at more than 20% a year, it's at sustainable margins. I think we've demonstrated over the past couple of years that we can continue to move our margins up and make them sustainable in the non-North America markets, and get the growth rates we want. I think that we have a model that we apply, and I think it's been successful. Other companies have different situations that they have to play the hands of cards that they got.

Okay. That's a good answer, Dave. That's helpful. Thank you.

Kurt Hallead of RBC Capital Markets.

Hi, good morning. I think you may have partially answered what I'm going to ask, but I'm going to see if there's a different attack here. But I was a little bit confused, you referenced the fact that you said international margins were not peaking. Then you referenced there's some element of pricing pressures on the international market as it relates to getting these initial work on these projects. I'm just trying to see if you can help me connect the dots between what you just said about sustainable margins, margins not peaking and then having some interim issues on that margin front. Can you help me on that?

Yes. I think the focus that Wall Street, and a lot of you on this call, as well as all of us in the service industry, put on these mega projects as they come available I think by definition means that being successful on one is important to companies. Certainly, it has been to us. I think that attracts an element of price competition that maybe we hadn't seen before. But I don't see that as inconsistent with all about our ability to continue to grow the margins for the reasons I talked about.

The longer-term contracts give you better logistical support. It gives you lower manufacturing costs, because you can feed your plans at the rate that you need it. You can leverage your economies of scale and the footprint in a particular country that you might be in. And because you are on the contract, you have the ability to up sell new technology as it becomes available.

I think if you look at the Khurais project for instance, that was a very competitive bid when it went in. But as we have spent money on and developed new technologies that we've been able to offer to our customer, they've seen the benefit of that technology and are willing to pay for it. By virtue of being on that project, we've been able to be successful in that, and I don't see any reason why that model can't continue.

Great. Thank you.

Brad Handler of Wachovia.

Thanks. Good morning, guys. Could you please speak to a couple of the issues related to margin in North America in the next quarter or two? I guess you mentioned some steps you're taking to manage your costs. Have you already implemented fuel surcharges? Do you have any response back from customers about it?

On the fuel surcharge, that's obviously as diesel prices and all other sort of energy-related prices have really kicked up in Q1. We are having those discussions with our clients. I don't think from a competitive standpoint, it would behoove me to talk about the level of success we've had in getting our customers to pay for that, but I think that it will help mitigate the issue going forward.

As Tim indicated and I indicated, we had a fair number of year-old contracts rollover in Q1. They essentially got some of the reduced pricing that we saw coming out of Q4. But as Tim has indicated in his comments, some of the latter price increases or price negotiations that we've been having on -- sort of within the last week or two, would indicate that that has started to stabilize and moderate. And outside of the fracturing business has in fact, I think stabilized. In some places we're seeing -- and being able to get some price increases at this point in time.

I think that we'll see maybe one more quarter of sort of compression on the margins due to another full quarter with the new pricing that came out of Q4 last year, plus some of the rollover pricing from Q1. But in the back half of the year we would expect to have seen it stabilize or maybe even increase at that point.

Okay, we'll take one more question.

Michael LaMotte of J.P. Morgan.

Thanks for squeezing me in. If I could get to the capacity question again on pumping. Can one of you tell me what the payback looks like now on new build equipment? Are we still looking at about plus or minus eight years cash-on-cash return?

Let me just talk about that. I think that there's one fundamental assumption that you have to make in any payback equation, and that is the utilization of your equipment. Clearly, there are a wide variety of utilization factors which are being experienced in the industry at the moment. Clearly, it's a business which we like. It's one which is very profitable for us, but it's one also in which we have very high levels of utilization. I think the anecdotal evidence is that that is not uniform across the industry, really just want to sort of introduce that fact to you in terms of the analysis of any payback.

Yes. I think, Mike, just -- I mean to give you a ballpark estimate. Obviously, we're not going to give you exact numbers. Where I think the in-pressure pumping, maybe the cash-on-cash payback in the industry is probably in the seven to nine-year category that you put. Ours is actually in the two to three-year payback, because of the more aggressive utilization we have in our equipment.

Okay. I guess where I'm going with the line of questioning is while we're all encouraged to hear about sort of the bottoming out of margins and pricing, what is it that's going to get actually prices to increase over the next two, four, six, eight quarters in that business? Is it technology penetration? It's just not sort of asset inflation, two to three-year payback is great. What's to really push the margins higher in pumping?

I think you are going to see a suite of new products, new technologies which will assist our customers in the development of these new shale plays. Technology is going to be a key factor. Clearly, the delivery, the execution is also a key factor. Completion efficiency is very important to our customers. The anecdotal information is that completion efficiency for a large segment of the industry is rather low. The combination of technology, the abilities to execute and deliver high-completion efficiency numbers are going to be the key to delivering price increments in the course of the balance of 2008 and into 2009.

Okay. If I can squeeze in one more on Sperry. With the tightness in the D&M market, with growth in horizontal both domestically with shale and overseas, is it possible that -- and I could throw in a third. You're obviously, sort of the richness of the technology portfolio now within Sperry. Is it possible that that business line really becomes the principal driver over the next 12 months of incremental earnings?

Yes. I think it's a great observation. Certainly, outside North America or outside the U.S. market, it clearly is going to be the driver of revenue for us because of the footprint, the reputation and the technology portfolio that Sperry has. Of course, the other reason is that a lot of the incremental revenue going forward are going to come from these new rigs which a lot of the revenue stream to the service industry is going to come from the drilling and evaluation side first, before it moves into the completion and production side where we also have great opportunities. But I think it should be Sperry-led or certainly drilling and evaluation division-led as we look out over the next couple of years.

That's helpful. Thanks, guys.

Okay. Let's close out the call. Thank you, everyone, for participating.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Thank you, and have a nice day.