哈里伯頓 (HAL) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Halliburton second-quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Christian Garcia, Vice President Investor Relations. Please go ahead.

Good morning. And welcome to the Halliburton second-quarter 2008 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 second-quarter results is available at 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. And Tim 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 would like to remind our audience that some of today's comments may include forward-looking statements reflecting Halliburton's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations 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, or Form 10-Q for the quarter ended March 31, 2008, and recent current reports on Form 8-K. Please note that we will be using the term International to refer to our operations outside the US and Canada, and we will refer to the combination of US and Canada as North America. Now I'll turn the call over to Dave Lesar. Dave?

Thanks, Christian, and good morning to everyone. The Company posted another excellent quarter with year-over-year revenue growth of 20%. Our international revenue grew 26%, which was in excess of our 20% goal. With Latin America continuing its growth momentum with a 33% year-over-year growth. We expect robust activity in this region to continue for the remainder of the year as we execute our strategy in this market. Overall, our revenues grew 11% sequentially despite the pricing pressures in Frac and the US. We had record revenue this quarter in every product line except Landmark which typically records its highest revenue in the fourth quarter.

Let me now turn to the results of North America and discuss our prospects for the second half of 2008 and onward. Despite the very negative impact due to spring break up in our Canadian operations and of course pricing pressure in the frac market, North American revenue for the quarter grew a strong 7% sequentially due to higher activity in both US land and the Gulf of Mexico. In the US our revenues increased 12% sequentially as Halliburton continues to benefit from the increase in horizontal drilling activities toward which we have focused our US service portfolio. Our well construction businesses in general and Sperry in particular have continue have continued to show strong growth in US land market this quarter. Furthermore, Canada has now recovered from its seasonal drop, and we expect strong activity in this market in the second half of 2008. More service-intensive plays such as the Montney in northeastern British Colombia also are giving us additional opportunities to ply our cross product line solutions.

Our focus on efficiency and high utilization helped us deliver strong second-quarter margins in North America. The pressure-pumping pricing environment continued to be competitive. Overall, we experienced a 1% to 2% average pricing decline for fracturing consistent with our guidance. However, we saw clear signs of prices stabilizing toward the end of the quarter. In fact, the pricing decline was at the lower end of the range we expected. We, however, did see continuation of inflationary pressures and increases in fuel and materials that we discussed in the first quarter call. And Mark will provide an update on this and how we're trying to mitigate them.

For our product lines outside of fracturing, pricing has stabilized with the exception of some minor weakness in our cementing businesses quarter. We do not expect continued pricing declines going forward. In fact, currently wire line logging, directional drilling, LWD, drill bits have the most pricing leverage upside in this market. Our customers have announced revisions to their capital programs for the remainder of 2008 and 2009 for the development of their conventional and unconventional resources. We expect unconventional drilling activity to increase over the second half of the year and be geared more toward service-intensive emerging shale plays like the Haynesville and Marcellus which will drive demand across all of our service offerings. The formations in these plays are not yet well understood and require a much more reservoir-focused approach. And Tim will provide more color on the technologies that our customers are beginning to employ to unlock the value of these reservoirs. This increased activity along with the tightening and balancing out of capacity provides us with an improved outlook for all of our businesses. It enhances our ability to increase prices modestly and cover cost inflation. Our fracturing equipment utilization remains high, and we've worked to optimize fleet placement. We'll continue to rely on our equipment with our customers' assets when we receive better long-term margins and returns.

Now let me turn to our international business. Revenue continued its strong upward momentum with a 26% year-over-year growth. All of our international regions showed growth over 20% with Latin America alone growing above 30%. Sequentially, international revenues increased 15% as operations in Norway, Saudi Arabia, Angola, Mexico, and Brazil continued to expand. International margins for the quarter were 21%, even with our continued heavy investments in people, facilities, and equipment to support the next phase of our growth in the Eastern hemisphere. Margins were additionally impacted this quarter by the ramp-up costs for our Manifa offshore award where drilling is expected to start in Q4 or early next year and reach a total of 10 rigs. We continue to expect expansion of international margins which will be driven by value created from the introduction of new technology, reliability of execution, and the fixed cost leverage offsetting the price competition we're seeing on larger tenders. Project visibility continues to be very good, giving us confidence that we will continue to see healthy growth rates throughout the second half of 2008 and into 2009, barring a significant global recession due to high commodity prices. We are making good progress in growing profitability in several underserved markets and are improving our exposure to the highest growth segments of the market. Let me turn the call over to Mark to give you more financial details.

Thanks, Dave, and good morning. I'll be comparing our second-quarter results sequentially to the first quarter. Halliburton's revenue in the second quarter was $4.5 billion, up $458 million or 11% from the first quarter. Landmark, Baroid, wireline, and production enhancement product lines registered growth of over 10% sequentially. On a geographic basis all regions showed double-digit increases except for North America, which grew 7% but was impacted by spring break up in Canada, and as Dave pointed out, we're expecting a resurgence of activity in Canada in the second half of 2008 as a much higher level -- at a much higher level than what we had originally anticipated. Operating income increased $102 million or 12% from the first quarter of 2008, representing incremental margins of 22%.

Our second-quarter results included a $25 million gain on the sale of two investments which was recognized in North America in the drilling and evaluation segment. And a charge of $30 million for the settlement of the ReedHycalog patent dispute, which is included in corporate and other. Our first-quarter results included $23 million for impairment charges on an oil and gas property in Bangladesh, which was included in the Middle East, Asia drilling and evaluation results and a $35 million gain related to the sale of an investment which was included in the North American completion of production results.

Now I'll highlight the results of our two operating segments. Completion and production revenue increased $246 million or 11% from the first quarter while operating income increased $32 million or 6%. The higher sequential revenue was led by production enhancement with a growth rate of 15% driven by increased activity in US land in Amman and a strong vessel utilization in Mexico and the North Sea. Looking at completion and production on a geographic basis, North American C&P revenue increased 9% sequentially. Operating income was flat as the first-quarter results included the $35 million gain previously discussed. The revenue increase was driven by higher activity across all product lines in both US land and the Gulf of Mexico. That was partially offset by a decline of stimulation pricing of 1% to 2% as well as the seasonal spring breakup in Canada.

C&P margins for North America continue to be impacted by higher costs related to materials and fuel prices. However, these increases are largely offset by increased equipment utilization. We've been successful in negotiating fuel surcharges, and we should see the impact of these negotiations starting in the third quarter. We've also been talking with our customers about recovering our cost for other consumable materials and will provide an update for these discussions during the third-quarter call. In Latin America, completion and production revenue increased 6% in the second quarter due to strong activity in Mexico, Brazil, and Venezuela. However, the improved top-line results were not enough to offset the negative impact of the Union strikes in Argentina. So operating income declined 8%. We're not expecting resolution of the strikes in the coming months, and we're selectively transferring equipment to other countries in the region. Production enhancement experienced sequential revenue growth of 16%. Primarily driven by higher vessel utilization in Mexico.

In the Europe, Africa, CIS region, completion and production revenue increased 26% and operating income increased 49%. The growth in revenue and operating income was driven by increased completion tool sales and favorable pricing adjustments in West Africa. Strong activity across all product lines in Continental Europe and higher vessel utilization in the North Sea. In Middle East Asia, completion in production posted sequential increases of 5% and 9% in revenue and operating income respectively. We experienced strong activity in Amman and Saudi Arabia. Al Khurais project in Saudi Arabia is ahead of schedule and we've started mobilizing for our Manifa project. In addition strong sales of our completion tools in Indonesia and China contributed to the favorable performance.

Now in our drilling evaluation division, revenue increased $212 million or 12%, and operating income increased $96 million or 25% from the first quarter. We experienced strong sequential revenue growth in all product lines with landmark, baroid, and wireline posting double-digit increases. The sequential increase in operating income was driven by the flow through of higher revenue and the nonrecurring items previously mentioned. Baroid margins increased more than 200 basis points from the first quarter and posted strong performance across all regions, notably in the US, the North Sea, and West Africa.

In North America, drilling and evaluation revenue increased 4%, and operating income increased by 11% sequentially, as strong performance in our US land operations from baroid and Sperry offset the seasonally lower Canadian activity. Drilling and evaluations Latin America revenue increased 27%. And operating income improved by 63% from the first quarter. The improvement was driven by higher activity associated with the Alliance 2 integrated project in Southern Mexico. We are currently operating on four PEMEX supplied rigs and anticipate having six rigs by the end of the third quarter. Although this was a slower ramp-up than we planned, the project is going exceptionally well. We're also seeing strong growth rates across all other countries in the region except for Argentina, and that's, again, due to the Union strikes.

In the Europe, Africa region, drilling and evaluation revenue and operating income increased 9% and 7% respectively. The increase was driven by higher drilling and multilateral activity in the North Sea. Increased wireline activity in North Africa, and favorable pricing adjustments in West Africa. Drilling and evaluation revenue in the Middle East, Asia region increased 19%, while operating income improved 65%. Remember that the first-quarter results were negatively impacted by the $23 million oil and gas impairment in Bangladesh. Additionally, the increase in operating income was driven by higher activity in Australia, Malaysia, and China across most product lines. In addition, increased baroid revenues in the Middle East contributed to the strong performance.

Now I'll address some additional financial items. Nothing unusual in taxes this quarter. We continue to expect our full-year 2008 effective tax rate to be in the 30% to 32% range. During the second quarter of 2008, we updated our fair value calculation related to the indemnities provided to KBR during the separation process, relating to the FCPA investigations and the Barracuda-Caratinga bolt arbitration matter. We recorded an after-tax charge to discontinued operations of $117 million to reflect our most recent assumptions on the potential resolution of these issues. We currently have $1.2 billion of 3.8% convertible bonds outstanding. The conversion option has moved deeply in the money as our stock price has risen, and the current market value of these bonds is ranging around $3 billion to $3.2 billion.

Since the market value of the bonds greatly exceeds the par value and because we now have the ability to call the bonds although we've not yet elected to do so, a number of bondholders are electing to go ahead and exercise their right to convert. We're required to settle the $1.2 billion par amount in cash. Though we have the option to settle the approximately $1.8 billion to $2 billion premium in excess of par in ither cash or stock. Now if we set the premium in stock, we will do so with the issuance of Halliburton shares from treasury stock. Since the shares required to fully satisfy the premium on the converts are already included in our fully diluted EPS calculation, settling the premium in stock increases our basic share count but doesn't negatively impact diluted EPS.

Now to the extent we've settled the premium in cash, our share count will go down, but we will have an immediate earnings charge for the value paid. However, from an EPS standpoint, the higher ongoing interest expense for the increased borrowings should be offset by the lower shares outstanding. We expect our depreciation, depletion, and amortization to average approximately $190 million per quarter for the rest of the year. And finally, we're increasing our capital expenditures guidance by $200 million to 1.9 billion to $2 billion for the full year. The incremental capital is to provide for equipment placements on the coming offshore rigs and to meet the growing demand of our customers in the emerging shale plays in North America. Tim?

Thanks, Mark, and good morning, everyone. The continuing increase in shale activity and our role in developing these plays is a very important part of our North America story. As most of you know, as activity shifts towards these plays, Halliburton is well positioned to serve shale operators because of a combination of our reservoir expertise, proven technologies, and broad infrastructure necessary to maximize the value of these assets. In the Woodford, for example, stratography and organic content are well understood. But due to their complexity compared to the Barnett, the formations are more difficult to drill and fracture. Horizontal wells in the Woodford are deeper with longer laterals, bigger frac jobs, and more stages. Cementing these long, horizontal sections has proved to be a challenge here. It's well cemented with conventional slurries have exhibited inadequate isolation of frac targets which has led to reduced fracturing effectiveness and decreased production.

Our zone field cementing systems have significantly improved the segregation of targeted frac zones, prevented communication, and improved productivity. Well bore stability is an issue in the lower Huron shale in the Northeast, where reducing exposure to the sensitive shales is critical. A combination of optimized Sperry bottom hull assemblies along with our electromagnetic telemetry technology has trimmed as many as five days from the typical drilling cycle there. Water production and water use are becoming significant challenges for our customers exploiting unconventional and tight reservoirs. In the San Juan and Green River basins, for example, our water management solutions eliminate the need to use potable water without compromising fluid qualities. Here our Omega frac fluid is the first linear fracturing fluid specifically designed to use a wide variety of field-produced brine water providing cost and environmental benefits to our customers and communities. And we're applying a similar approach in emerging shale plays.

Now the Haynesville is in the early development stage and the environment is especially challenging with average depths over 12,500 feet, bottom hole temperatures approaching 350 degrees Farenheit. And whirl head treating pressures exceeding 10,000 PSI. This requires the use of specialized drilling, pressure pumping, and fluids technology. Average drilling times are double those of the Barnett and fracturing requires almost twice the amount of hydraulic horse power at higher treating pressures. We estimate that Haynesville wells are currently about 1.5 to 1.7 times more drilling and fracturing intensive than those in the Barnett.

Understanding fracture orientation and geometry is a key element of improving well performance. However, in this microseismic monitoring technology, exact frac allows us to monitor frac propagation in real time to maximize well performance. In the Barnett we recently undertook a client study to evaluate a large number of wells using landmark reservoir modeling tools with the exact frac service to both optimize horizontal well and fracture placements. So we're pleased with these and other growing capabilities, an important component of the differentiated shale technology portfolio.

Some of you may have seen the recent results from the patent board published this month in the Wall Street Journal which provides a scorecard for industries based on indicators that track global patent activity related to innovation, technology, and science strengths. The energy and environmental industry, the latest survey showed Halliburton to be the leader for the third consecutive time. While we're pleased with our top ranking, most importantly, the survey confirms the progress we have made in the last few years in enhancing the depth of our intellectual property and gives us the confidence that we're on track in delivering technology solutions for reservoirs that are becoming increasingly more challenging.

We also continue to enhance our technology portfolio through acquisition. During the quarter, we purchased the remaining 49% of Well Dynamics, the world's leading provider of intelligent well completion technology. The acquisition provides us significant competitive advantage in delivering increased reservoir productivity and maximized ultimate recovery for our customers. We acquired the Protec Centerform, the only provider of casing centralization that uses a carbon, fiber, and ceramic composite applied directly to casing. This complements our range of casing solutions, particularly for our customers' deep water and high-pressure, high-temperature drilling and completion challenges. We also completed the purchase of Knowledge Systems, Inc., a respected provider of software and services that improve well planning and drilling by helping clients predict well bore geomechanics and pore pressure so wells can be drilled safely and economically. So these three acquisitions strengthen our technology portfolio and give us greater resources to put into our broad distribution channels to support our next phase of growth. Dave?

Thanks, Tim. To summarize, we completed another excellent quarter. With overall year-over-year growth rates of 20% and continued strong margins. We have seen prices stabilize across all of our product lines in North America. Our customers increased drilling plans are providing us with a more robust outlook for our services in the second half of the year. And all indications are that the shift of activity towards more service-intensive plays will drive demand for our technologies that are specifically designed for more complex reservoirs. Internationally, we continue to make progress in balancing our geographic portfolio with year-over-year revenue growth of 26%. Margins were above our stated target. We have seen competition intensify but we believe we are well positioned given the breadth of our technology and the execution capabilities of our people. And I'd like to publicly thank our employees worldwide for delivering another excellent quarter. Let's go ahead and open it up for questions now.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question comes from David Anderson from UBS. Your question, please.

Thank you very much. Can you guys just talk a little bit about where you are with the utilization on the frac side. Is that -- and you base that generally on a five-day work week?

Utilization, thanks, Dave. Utilization is very high at the moment. And we certainly have the preponderance of activity on a five-day week. We also have some Saturday work, as well. So really a combination of the both at the moment.

And I assume you expect that to continue to increase throughout the year?

Yes, we do. I think particularly as you sort of heard the commentary during the course of the call. As we get into the third and fourth quarter, we certainly expect the pressure to increase.

And with regards to Canada right now, can you just kind of chat a little about in terms of the capacity situation up there. And how does that compare to the US, and do you think you'll see any equipment start to migrate north, or is there just too much activity down here to see that?

I think as you -- as you heard us say, we really are expecting a much stronger second half in Canada. Certainly much more strong than we had anticipated in the early part of the year. And as you know, a fair amount of equipment did head South and elsewhere during the -- during the sort of the fall in Canadian activity. I think it's reasonable it assume that some of that will return to Canada to meet the expectations there at the market. Certainly it's an area that we're -- we're undertaking careful consideration in terms of the disposition of our fleets.

So do you think pricing should move up, as well, in Canada? I guess judging from your comments, I guess -- I'm shooting for a yes? Yes. I think most certainly. Okay. One last question -- you had mentioned in the Haynesville comparing to the Barnett, you said 1.5 to 1.7 times more fracture in intensity. Could you just expand upon that a little bit? Are you talking about, say, two comparable five-stage fracs, or is this kind of like an all in well?

This is really sort of more on a monthly basis really. I mean, obviously drilling times in the Haynesville are longer. By the way, that 1.5 to 1.7 was both sort of drilling and fracture intensity.

Okay.

Really, try to sort of pare that down to a monthly evaluation so you can get an assessment of what it means in terms of a monthly or quarterly revenue stream.

So the Haynesville, seems like that's an area where you're most focused on right now over the next call it six months, is it fair to say?

It's clearly early days yet. There's a lot of work to be done. I think we just wanted to frame it as a point of reference for you in terms of what it might mean for the service industry.

Great. Tim, thank you.

Our next question is from Chuck Minervino from Goldman Sachs. Your question, please.

Hi, good morning. Just a question on pressure plumbing, as well. Given the increased demand outlook here and activity levels, have your supply expectations changed at all for the pressure market for the rest of the year?

We have basically told you on our last call that we expected a sort of 12% to 15% increase in capacity for 2008. We still believe that to be a fairly good number in terms of capacity increases. Again, lead teams for equipment are still fairly long, probably in the range of nine months. So any decisions that were made in the last month or so really won't have any impact in terms of North America until clearly well into 2009.

Okay. And then when you stack that up with your demand outlook, are you looking for really flattish pricing for the remainder of the year? Or do you actually see pricing increasing in the second half of '08?

I think that clearly it's going to be a matter of timing here. We had earlier expected to see stabilization in the second half of the year. And clearly, that came quite a lot earlier than we expected. That stabilization occurred in really toward the end of Q2 rather than in Q3 that we had originally expected. I think it's reasonable to assume that we'll see some modest increases during the course of Q3. But ramping up perhaps slightly more as we move into the back half -- back end of the year. And clearly as you know, we're going to be -- back end of the year. And clearly as you know, we're going to be in a renegotiation phase at the end of the year for 2009. And the climate for negotiation is clearly quite a bit different at the end of 2008 than it was at the end of 2007.

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

Thank you. Another question first on the CapEx. You seem to get more bullish on your business in raising the CapEx I think you said from $1.7 billion to $2 billion. Mentioning that this was partly because of offshore rigs and partly because of shale. Particularly on the offshore, what is it that's changed since the beginning of the year given that most of these offshore rigs under construction have been visible for quite a while? So what is it that's triggered the greater enthusiasm for that space?

Ole, of course, we monitor all of our projects on an ongoing basis. Really, this is really as much as anything an adjustment to our view of the future with respect to the projects which we see. The projects which we think we should receive. And clearly, North America plays a part in that picture, as well. So I think, you should take this generally speaking as a good sign of our confidence in the market ahead.

Ole, this is Dave. Let me add to that, also with the delay of the arrival of a lot of the offshore rigs, we diverted that equipment that we had built in anticipation of that marketplace developing into other parts of the business. And to some extent, we're now having to backfill that equipment to meet those rigs as they're coming on.

Okay. That makes sense. Secondly, Mexico -- you made that quite a different level to the company that was awarded the contract. Could you comment a little bit on that, as well as your strategy on future IPM work or project management work in Mexico? You've been awarded a small contract there. Are you targeting some of the bigger tenders coming up, or -- what's your strategy?

Let's sort of talk about IPM in general for us. That's obviously a very important part of our portfolio, and as we may have mentioned before, sort of on any given day we're sort of operating typically around about 30 IPM projects of one kind or another, and about 10 countries around the globe. So we have a pretty important portfolio. And certainly Latin America represents the most important part of that portfolio, also the US, North Africa, and so forth, are other important elements of the portfolio. Yes, we certainly intend to participate in support primarily of our NRC customers as they tend to turn a little bit more towards this approach to help them develop and exploit the fields.

So to finish -- how do you see that opportunity compare to what's going on in the offshore market? Is there any difference in margin if you allocate your tools to an onshore project versus allocating them to the offshore?

I think it's -- as we may have commented to you on the prior call, actually, if we look at our international business in general, about half our business internationally is driven by offshore activity. And both our share and margin are slightly better in offshore activities. So that sort of gives you sort of a general guide. Of course, IPM-type activities are not always exclusive to onshore. They also take place in offshore activities, as well, such as we completed in the North Sea. So it's really a blend I think of both.

Okay. Well done, congratulations for a good performance.

Thanks, Ole.

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

Just as a follow-up to Ole's question. You had said earlier or Dave said earlier that one of the negative things about margin was pricing competition on large tenders. Do you consider your IPM business in general to be a lower margin business than your ongoing international business since you cited it in your opening comments? And B, it seems that everybody likes to snipe at each other's IPM contracts. There's certainly been a lot of talk about how -- how far down you bid on Manifa to win that contract. Would that fall into that category about a lower margin business than your total?

Yes. I think that there's a lot of discussion around IPM activities. And just sort of for the record, we really don't consider Manifa to be an IPM project. It's something which we project manage ourselves, but for us, the definition of IPM really requires us to have some involvement in the management of rigs and the total operation. Just to sort of put a little clarity to that. But I think with -- within the scope of our definition in terms of IPM as I said, we think it's a really important part of the portfolio. It's clearly a model which is in favor for -- a number of our national oil company customers. It's something that we intend to respond to as a Company. We also intend to manage the risk and ensure that clearly our execution is up to snuff to ensure that we deliver the margins which are consistent with the rest of our business.

You said though, Tim, that price competition on larger tenders would be sort of a negative, offsetting factor to other factors giving profit margins. So to ask the question again, is your IPM business lower margin business overall than your rest of your international oil service business? And how many of these -- can you give some percentage, or rough guidance on how many of these 30 IPM projects you consider to be competitively bid and where there is the price competition that you said right off the bat in your opening comments?

Tim, with respect to the comment regarding larger contracts, in the international space we can clearly say that the overall sort of size of the tranches of work which are being left by our customers, IPM or not, are becoming significantly larger. And this is for a number of reasons. Some of which are related to the ability to get access to services and some obviously are related to bargaining power of our customer base. But the point is that the projects are tending to get larger. And it requires us to ensure that we obviously execute well. But it also requires that we -- we provide new technologies into those contracts to ensure that during the life of those contracts we manage them from start to finish to ensure that we drive margin improvement during the life of the contract.

Jim, this is Mark. Also want to add on to your specific question about the margin differentials between IPM work and the rest of our international business. They are not that much different. They're very much in line. That's how we risk manage these things, to make sure that we deliver for our shareholder.

Okay. Mark. Mark, thank you. That's very helpful. One final question. Would you -- you talked about the one-year tenders being renegotiated in a much different environment as we get toward the end of the year. Would you expect given the cost increases for labor, materials, et cetera, would you expect to have real price improvement on your one-year tenders, rollovers to take place later this year or in early 2009?

Jim, this is Dave, let me answer that one. I think that we're somewhat in the environment we were a couple of years ago where I think we will -- we were clearly pressed for price increases. But I think what you are going to see is you will get specifically allocated price increases for such thing as maybe shortage of certain commodity chemicals, fuel prices, that sort of thing. As sort of a -- a pass-through increase. Then you will -- we will negotiate for a price increase on the base services work. And I think we probably are a little bit further down the road before we'll be able to push for sort of a peer price increase like we were getting a couple of years ago.

I think it's also fair to say we're not waiting for the contract rollovers to go after the -- the cost recovery portion.

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

Thanks, good morning. Wanted to dig a little bit more on today's favorite topic, IPM. Is some of the competitive pressure that you're seeing out there based on competitors who own rigs, bidding those more aggressively, or is it difficult to tell? Or is it just kind of across the board competitive pressure on those large projects?

I think that really the main -- the main issue is having access to rigs and our position to this point has been that we do not wish to own rigs. We partner with suppliers of rigs to execute. We have a number of I think very good examples in a number of markets where we've developed strong relationship and execute collectively very well against our targets for our customers. At this point, no, I don't think it's a particular disadvantage to us at all.

I mean, I would agree in terms of the efficiency that you guys offer and the quality of the service. But I mean, is there a sense out there that those competitors are bidding perhaps below market rates on the rigs in order to come in low on the project as a whole?

I'm not sure why anyone would want to do that in today's current market. I guess it's possible. But I think they would be leave something money on the table if they did.

Yes. And the follow-up to that pertains to the international margins as a whole. I think you've spoken to this a little bit. Given that you are getting aggressive pricing on the large projects, would you say that pricing on kind of the non-IPM work is improving on average, or is it more the infrastructure leverage and the upselling that's driving the margin improvement that you expect?

I think -- this is Dave. I think it's a little bit of both. Certainly you have the leverage of the expanding footprint, and your ability to take on more volume and provide you absolute operating income dollars. But also, the theory around these bigger projects is to get in and then upsell your new technologies because typically these are multiple year contracts in many cases with options to extend that our customers hold. So it's paramount basically to get in, get the project, and then upsell. And I think that we have done a pretty good job at doing that over the past several years. And that's no secret formula out there. I mean, everybody tries to do it. But I think it's something that we've gotten pretty good at.

All right. Thank you.

Our next question is from Kurt Hallead of RBC. Your question, please.

Good morning. Just wanted to try to calibrate a couple of things. On Weatherford's call yesterday they referenced price increases about 10% to 15% in North America. Then they mentioned 15%-plus price increases internationally. They did reference the fact that it was varied by product line and so on. But I just want to try to gauge how that jives with how you're seeing the market right now?

I'm sure it's not unreasonable to expect on certain items or products to see pricing increase in those ranges. Certainly when you take a look at the overall inflation for hydrocarbon-based goods, let's say specialty chemicals, for example, or for that matter machined items, et cetera, the inflation has really been quite substantial. So it's not unreasonable to assume that those may be quite reasonable rates. I think, however, for a broad basket of services such as -- is within Halliburton's portfolio, I think the guidance that we gave you a little earlier is probably closer to being more appropriate.

Okay. And just wanted to follow-up also, in -- when Schlumberger talked last Friday, they gave a pretty positive outlook with respect to an acceleration in international programs. And I wanted to see if that's kind of caused you guys to get more optimistic with your growth rate for international business for 2009?

Oh, as we commented a little bit earlier, we did adjust our capital outlook slightly as we readjusted our portfolio with respect to portfolio projects if you like. So we continue to see a very robust outlook. And certainly have no reason to sort of diminish our enthusiasm for the coming year.

Again, that CapEx increase was for offshore and for shale. Most of that seems like it's going to be good for North America. So I was just trying to get a reference point on how incrementally optimistic you are about international growth rates?

I think the -- I think what I said was that a lot of the stuff that we had planned for the offshore rigs has actually been diverted already into the US market. So the increase in capital we're looking at actually is to serve the non-North America and offshore markets. So I think that sort of bodes well and gives an indication of our enthusiasm for what we see to be continued growth rates in the Eastern hemisphere.

Okay. Great. Thank you.

Your next question is from Michael LaMotte of JPMorgan. Your question, please.

Thanks, good morning, guys. I don't know if Dave or Tim, if you're better to answer this question. But I'm trying to think about the North American market and really how it's changing versus maybe the '05, '06 timeframe, where it was all about, build the equipment and provide as much slick frac capacity as you can and as the new shale plays emerge, it's very clear that the technology penetration and uptake is a lot greater. And I'm just wondering sort of how I guess, a two-part question here. One is how you market -- how is marketing to the client different today versus a few years ago with respect to North America? And two, if we consider the margin opportunity in this kind of technology-oriented environment, could we actually see profitability get better than what we saw in '05, '06?

I think on a broad basis, let's just sort of take a look at the sort of -- I think the roots of this question really revolves around sort of is there a bifurcation of the market or not between the sort of the major players and perhaps the new entrants. And it might be helpful just to sort of reference some data that Speers and Associates provided, in terms of trending of both horsepower and revenues over time. So they indicated that from 2003 to 2007 that the horsepower of the big three in proportion to the total industry dropped from around about 75% to about 50%. And interesting that if you look at the amount of revenues for the same time period, the portion of revenue that the big three had in relation to the entire industry dropped from about 80% to roughly 75%. So I think you can really see there's really a significant difference in the revenue for horsepower between the big three players and the smaller fracturing players. And I'm convinced that this is clearly a representation of the technology which is applied and the value which is received. So I think that's point number one.

And point number two for us, you've heard us say a couple of times that we're really very focused on trying to balance the portfolio in North America between all our various product lines. So no longer for us is it solely about fracturing by itself. We're really trying to put together a group of products and services in an efficiency model for our customers that really can drive value and productivity for them. And if I was to sort of call out one most significant change for us over the 2005 timeframe, I think it's the maturity which we have in that kind of approach to the markets and our customers.

That's helpful color, Tim. Maybe -- if I think about that trend of '03 to '07 with the technology penetration rate seeming to increase, would it be fair to say that that should trend at a faster rate over the next few years?

Yes--.

It terms of revenue per horsepower?

Yes. I believe that our customers today are really becoming very focused on the productivity of their wells. And some of the color commentary that I was trying to provide a little earlier was -- I think commentary on some of the thoughtfulness which our customers are entering into with respect to the longevity and the investment that they're making in these plays and the need to ensure that it's not about simply punching wells down. It's really about maximizing the productivity. And I think that really, is really something which will be very beneficial to us and others that can offer something similar to the market.

Yes. I think -- this is Dave. Let me just add one last comment. I think not only do you have sort of a bifurcation going on around the ability and the technology of the frac, but you also have much more of a linking together of other product lines on some of these -- these shale plays. Tim mentioned earlier the need to get a very specific and different sort of cement job on down before you can do the number of stages of fracing you want to do. The placement of the well using directional drilling is much more important. So we're seeing more of our customers in these types of plays come to us for sort of a multiple product line solution. And I think that will also help to differentiate the bigger service companies from those that perhaps don't have as strong of cementing or drilling or completion position than some of the newer entrants might have.

That's great. Thanks. Mark, a couple of quick cleanup questions for you. Looking at cash balances, I'm trying to reconcile the dip in interest income from run rate the last few quarters.

It's really driven by a couple of different things. One is obviously interest rates have fallen this year. And so that's having an influence. The other side of it, last year we did have some auction ate securities. We got out of those in early January. No losses on our part, but effectively that lowered our overall yields. So that's really the two drivers of lower income.

Okay. Then lastly, on the KBR arbitrations, any time table of when that investigation, arbitration process will be wrapped up?

No. No, there's really no timetable. Obviously we've had ongoing discussions all along with the Department of Justice, with the SEC, and then the arbitration matter is continuing on. The -- and we've been fully cooperating with those investigations. The update that we -- we did from an accounting standpoint is a normal process. Use an outside third party to help us do that. And we're just -- we are obviously working to resolve them as quickly as we can. But we're not really the sole drivers of that timetable.

Your next question is from Dan Pickering from Tudor, Pickering, Holt & Company. Your question, please.

Good morning, guys. I wanted top circle back to this international growth opportunity. Dave, in your comments earlier you kind of called out that the second quarter grew 26% year over year and above your 20% expectation. Just coming back to -- is this growth rate sustainable?

Well, I think, Dan, we set a long-term goal of growing in excess of 20% a year in our non-North American operations. And we don't see anything out there right now that would say it's not sustainable.

Okay. Thank you. And then I guess a philosophical question as it relates to the North American market particularly in pressure pumping, last cycle pricing went up very quickly. Margins expanded very quickly, and a lot of new competitors came in. Capacity additions. Tim, you addressed that in your discussion around capacity growth. Do -- as you think about this market developing going forward, do we just let prices go where they will, run them up as much we can, or is it a more measured approach to sort of manage the capacity additions that might come, as well?

A couple of differences perhaps. I'll make a comment and then Dave will obviously add any comments as he sees fit. I think we're in a different environment. We're clearly in a more inflationary environment today than we were in the sort of 2005 timeframe. So I think there clearly is an element of sort of recovery here. Which -- which has to take place. Which clearly will mute pricing realization relative to the 2005 timeframe. I think that having been through a cycle of unbridled optimism in North America, I think it's our general belief that we will see perhaps a sort of more ordered process this time, and we'll also certainly see some pricing leverage. I'm not sure that we're planning on anything like the 2005, 2006 timeframe.

And I think, Dan, just to add a little bit to that, I think the larger pressure pumping companies on sort of the last cycle really tried to balance revenue growth with margin growth, whereas I think some of the newer entrants were very much interested in market share and revenue growth, with not as much attention being paid to sort of return -- the return on capital and the return on investment they made on that equipment. And I think that as the market has moved more back into balance, I would hope that everybody sort of has learned that lesson. And that you really do need to balance the revenue growth with the margin growth. But I think for the reasons we articulated earlier, there really has been a bifurcation in the market, too, in terms of where -- sort of what part of the streets or what part of the neighborhood you can play in as a pressure-pumping company. And I think that will -- that will be a bit of a limiting factor on the number of newer entrants that perhaps can come in to some of these more specialized plays.

Thank you.

Your next question is from Robin Shoemaker of Citigroup.

Thanks, just to change the topic for a minute, I wanted to ask a question about your M&A strategy post the Expro situation. It seemed that that would have been clearly a much different kind of merger than the ones you've transacted here in the last year. And I think you described it as transformational. But in light of that experience, what do you think are the prospects for Halliburton making a merger or acquisition that would grow your international footprint, enter new markets such as Expro would have done in the current kind of competitive environment for M&A?

Well, thanks, Robin, for that question. I think, it's -- clearly we continue to be very active in terms of our M&A pursuits. You saw that we've closed three acquisitions here in the course of the quarter. All of which have some element of support for international markets. And so really we're focused in two main areas. Number one is the sort of shall I say technology additions which -- for which we can utilize our distribution network around the globe to enhance their growth. And secondly, in a certain number of areas, some geographic acquisitions where we feel are not as well served as we would like to be. In which case we can take our technologies and puts them through that distribution network. We continue to have an active program. We committed to you that we would continue to focus on that. That's something that we certainly expect to do. I think it's fair to say that there is a fairly aggressive market and we have to make our choices. And we have to have a bright line beyond which we will not cross in terms of pricing and value. But nonetheless we still feel there are a number of opportunities out there.

Great. Yes. Understood. And you mentioned earlier, I think you described them as underserved markets. I assume that's both organic and potentially M&A. What -- I mean, on a geographic kind of basis. What are the -- in your mind, the primary underserved markets?

We've sort of publicly stated several of those underserved markets. Clearly Russia is one of those markets where we do feel we've got significant headroom opportunity. I think India's another market for -- to which we were somewhat late to play. So those would be two examples of two significantly underserved markets for us.

Yes.

I should add that though it would only be fair to add that our growth rates in those markets is very good. However, it is clearly from a smaller base than we would ideally like.

Yes, right. Okay. Thank you.

We'll take one more question.

Our final question is from Alan Laws of Merrill Lynch. Your question, please.

Good morning. I know we always ask you about fracturing capacity additions. I wonder if you could talk a little bit about the supply and demand balance? Wondering what that looks like for the cementing equipment? You talked about in your comments some weakness in the quarter. Was that a regional phenomenon, or is that kind of a broadly based statement?

No, the -- actually, the cementing overall sort of really held up much more so than the fracturing business during the course of the last couple of quarters. And our feeling is that the slight softness that we saw during the course of the second quarter was somewhat temporary. So we really don't see this being a long-term phenomenon. We're fairly sure that the capacity adds in this sector don't materially change the overall balance here.

Okay. Great. And you also talked about the multiple product lines and wondered if you could comment a little bit on if there are any choke points in providing those packaged services and maybe talk a little bit about in particular directional drilling business and how tight that presently is in North America?

Directional drilling clearly is an area of tightness on a global basis actually. And so if I was to sort of point to one area in the sort of provision of services overall, I would probably say that in North America, that is one where there is some degree of tightness. Though I believe that within Halliburton, the work which we've undertaken to expand our manufacturing and supply chain capacity is something which allows us to meet the demand from our key customers.

Okay. Thanks. One -- one last thing I just wanted to ask was about the Rockies' market. Big market for you. Can you talk about maybe the outlook for growth there given developing capacity issues on the rec pipeline? Have thought about those things at all internally?

Yes. I mean, clearly, this sort of continues to -- the Rockies clearly is a very important location for us in North America. Clearly, one of the -- one of the stars for us. And we continue to be very enthusiastic about the outlook particularly driven by Rex.

All right. Thanks a lot.

Okay. That concludes our call this morning. Please call us if you have any further questions. Thank you.

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