哈里伯頓 (HAL) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Halliburton 2008 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this is being recorded.

I would now like to turn the conference over to Mr. Christian Garcia, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to the Halliburton third quarter 2008 conference call. Today's call is being web cast and the replay will be available on Halliburton's website for seven days. A pod cast download will also be available. The press release announcing the third 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 and liquidity position 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. Our form 10-Q for the quarter ended June 30, 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?

Thank you, Christian and good morning to everyone. In the third quarter, the stock and commodity markets saw unprecedented volatility which, of course, has been very unsettling to investors. Amidst all of this, we have remained very focused on delivering solid growth and returns, while executing on our strategy of balancing our portfolio both geographically and by product service line. I'm happy to share with you our third quarter results today.

Third quarter operating income reached a new milestone with over $1 billion generated for the first time in operating income. All of our product service lines had record revenues. The company posted year-over-year revenue growth of 24% with our international business registering growth of 25%. Latin America continued its momentum with 42% revenue growth over prior years and international margins of 22% exceeded our stated target. Currently we've not experienced any business impact from the equity and credit market volatility and despite the growing prospects of a global economic slowdown and related decrease in hydrocarbon demand, we continue to believe in the long-term fundamentals of the oil and gas industry. We expect that any major macro economic disruptions will ultimately correct themselves as the underlying trends of smaller and more complex accumulations, higher depletion rates and a need for continued reserve replacement will drive the long-term demand for our services. We remain committed to investing in technology and appropriate levels of capital and infrastructure to ensure we align ourselves with the industry's long-term growth trajectory.

Let me now turn to the results of North America and discuss our prospects for the remainder of the year and onward. North America revenue for the quarter grew a solid 13% sequentially despite the hurricane disruptions. We have previously stated that the shift toward new emerging plays will benefit our differentiated technologies and we started to see evidence of this in the third quarter. The US land operation showed strong sequential growth of 13% as it benefited from the higher technical requirements needed to unlock the value of these new resource plays. For instance, Sperry's revenue growth of 16% sequentially resulted from good penetration of our MWD and LWD technologies. North American margins of 25% reflect strong performance in US land due to higher activity and the success of our surcharge program.

The uptick in margin performance in US land overcame the impact of the hurricane and the two gains recognized on the sale of assets in the second quarter resulting in flat North American margins sequentially. The drop in natural gas prices is creating uncertainty on future activity levels and it's caused some of our E&P customers to adjust the level of their capital expenditures. Despite this, we see secular trends in the market to provide us with unique opportunities. First, as operators make modifications to their drilling plans, their capital expenditure cuts appear to be directed primarily towards conventional and shallower drilling activities, preserving their focus on end conventional plays where we have a stronger position. This can translate to a more favorable business mix for us, utilizing our services and technology and tents of offerings.

Second, access to capital may constrain the growth of service industry capacity. The inability of some service providers to raise capital could lead to a tightening of supply and this along with favorable activity mix creates the opportunity for market share gains in a constrained activity environment.

And, third, our strategy of aligning our people and equipment to the largest players in North America should temper the impact of a slowdown to our business, while production levels adjust to balance the supply and demand relationship. The significant portion of our revenues in North America consists of large independents and international oil companies. These large independents and IOCs tend to have longer drilling plans and are not as vulnerable as private EMPs to the short-term fluctuations in the commodity markets. If we have spare capacity available, we will then be able to serve other customers in the market.

Finally, we believe that the natural gas market has been and will continue to be self-correcting. These trends may not entirely counter act the effects of a slowdown in activity, however, we think we're in a good position to handle any operational downturn and we will use this environment to strengthen the long-term health of our US franchise.

Turning to our international business. Revenue continues its upward momentum with 25% year-over-year growth led by Latin America growing by more than 40%. All of our key markets in Latin America have grown substantially, but most notable is Brazil where we experienced year-over-year growth of 70% in the third quarter. We have seen higher utilization of our reservoir evaluation and sand control technologies and expect to see the continued growth in this market as we assist Petrobras and other IOCs in their deep water projects.

Sequentially international revenues and operating income were up 4 and 5% respectively as all regions except Europe, Africa saw a good flow through from increased revenue. Europe, Africa operating income was down 6% sequentially as some contracts in the North Sea have expired and we are currently redeploying equipment and personnel to those locations. Additionally, we experienced increased operational costs in an unfavorable business mix in west Africa. International margins for the quarter were 22%. As we mentioned in previous calls, we will see regional fluctuations between quarters depending on where projects are mobilized and started. Our international business has not yet experienced the impact of the weakening global economy or the decline in commodity prices. At this time, barring a significant or prolonged global recession, we expect that our international growth will continue, perhaps albeit at a slower rate than 2008.

Now, let me turn the call over to Mark who will provide more details on our financial performance.

Thanks, Dave and good morning. I'll begin with our operational highlights and I'll be comparing our third quarter results sequentially to the second quarter. Our revenue in the third quarter was $4.9 billion, up $366 million or 8% from the second quarter led by production enhancement which registered growth of 15%. On a geographic basis, North America led all regions with 13% growth, driven by higher activity in US land and a seasonal recovery in Canada. This was partially offset by a decline in the Gulf of Mexico due to the hurricanes. Operating income increased $102 million or 11% from the second quarter of 2008, representing incremental margins of 28%. Our third quarter results included a 28 -- I'm sorry, a $22 million WellDynamics acquisition related charge which included in corporate and other. Our second quarter results included a $25 million gain on a 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 was included in corporate and other.

Now I'll highlight the segment results. Completion in production revenue increased $227 million or 9% from the second quarter while operating income increased $99 million or 18%. The higher revenue was led by production enhancement driven by increased activity in US land, the seasonal recovery in Canada from spring break up and completions activity in Brazil. Looking at completion and production on a geographic basis, North America completion and production revenue increased 15% due to strong activity for US land in Canada, partially offset by decreased revenue in the Gulf of Mexico due to the hurricanes. Operating income was up 28% due to better fleet utilization in US land in Canada. Third quarter operating income also reflected the benefit of successfully negotiating fuel surcharges in the second quarter which contributed approximately 70 basis points of sequential margin improvement. These surcharges are generally billed on a one quarter lag and reflect the higher fuel costs we experienced in the second quarter. Since fuel costs had moderated in the third quarter, we don't expect as much impact on margins in the fourth quarter. Also, as we've seen in previous years, we expect activity will decline in the fourth quarter due to environmental stipulations in the Rockies and the extended holiday weekends.

In Latin America, completion and production revenue increased 16% in the third quarter due to strong activity in Mexico, Brazil and Columbia. We experienced increased demand for completions in sand control systems across all areas of the region, but most notably in Brazil where we've seen good application of our completions technologies in deep water activity. In the Europe, Africa CIS region, completion and production revenue increased 2% and operating income was flat compared to second quarter levels. Strong activity in the Caspian and higher vessel utilization and pipeline processing activity in the North Sea were offset by the absence of a favorable pricing adjustment recognized in the second quarter in West Africa. In addition, we experienced higher completion tool sales in Libya. In Middle East, Asia, completion and production posted a sequential revenue decrease of 4% as decreased regional cementing activity and lower completion tool sales were partially offset by higher production enhancement activity in Australia and in India. Despite lower revenue, the segment of an increase in operating income of 2% due to a favorable product mix and completion tools.

Now, turning to our drilling and evaluation segment, revenue increased $139 million or 7% with strong sequential revenue growth in all product service lines. Operating income, however, declined by 2% due to the impact from hurricane disruptions and the gains we recognized last quarter from the sale of two investments. Further, the second quarter for D&E was also favorably impacted by a pricing adjustment in West Africa. In North America, drilling and evaluation revenue increased 9%, led by Sperry with sequential growth of 16% as this product line continues to benefit from the trend of increased horizontal drilling. Further, all product lines benefited from the seasonal recovery in Canada.

Operating income for the quarter decreased 12%, due to the impact of the hurricane disruptions and the gain on the asset sales last quarter. D&E's Latin America revenue increased 2% driven by increased utilization of NWD, LWD technologies by Petrobras for their deep water projects. Additionally we saw strong demand for our fluid services in Venezuela this quarter. These increases were partially offset by lower drilling activity in northern Mexico, due to weather related issues and lower efficiencies delivering civil works on well locations. This lower activity along with unfavorable mix for Sperry in Ecuador resulted in D&E's Latin America operating income being down 9%. With regard to the alliance two project in southern Mexico, we are currently operating on seven Pemex supplied rigs and right now we anticipate no additional rigs for the remainder of the project.

In the Europe, Africa region, drilling and evaluation revenue increased 1% while operating income declined 10%. As mentioned, the second quarter included a favorable pricing adjustment in West Africa, which impacted the comparisons between the quarters. In addition, we had weaker results in the North Sea and will be redeploying equipment to other locations. The highlight for the region is the continued growth of drilling in Russia. For the third quarter, Sperry in Russia grew 31% from the prior year. Drilling and evaluation revenue and operating income in the Middle East, Asia region grew 14% and 29% respectively. The increase was driven by higher activity in Sperry across the region with sequential revenue growth of 22%. Additionally, we experienced strong wireline and Baroid revenues in Asia.

Now I'll address some additional financial items. As you know, we've worked very hard to reduce our leverage and improve our liquidity and credit profile in recent years. We currently have $2.8 billion of debt outstanding, down from $3.9 billion at the end of 2004. Our debt to total capital ratio stands at 27% down from 50% at year end 2004. We have an undrawn $1.2 billion revolving credit facility that extends until July 2012 and we just entered into an additional six-month revolving credit facility on similar terms that adds another $400 million of credit capacity should we need it to fund operations. The convertible bond outstanding at the end of the second quarter, which represented an approximately $2.7 billion total liability has been extinguished. We were able to pay it off in the third quarter with a combination of cash on hand, the issuance of treasury stock and the proceeds from a new $1.2 billion bond offering during the early part of September before the credit markets became difficult. While we took an accounting charge of $693 million, representing the cash portion of the premium paid, this transaction had the impact of reducing our fully diluted share count by approximately 15 million shares. At September 30, 2008, we held $973 million of cash and cash equivalents. We manage our cash investments conservatively and are currently investing principally in US treasury securities and repurchase agreements backed by US treasuries. We suffered no loss to date in our cash investment portfolio despite meltdowns in several sectors of the money markets.

The effective tax rate for continuing operations was 106% for the third quarter of 2008. Excluding the nontax deductible loss of $693 million on the note redemption, the effective tax rate was slightly above the guidance we provided in the second quarter. The sequential increase in the tax rate was driven by higher relative earnings from the United States versus foreign subsidiaries this quarter. We expect our fourth quarter 2008 effective tax rate to return to the 30% to 32% range. We expect our depreciation depletion and amortization will continue to average approximately $190 million for the fourth quarter and finally, we're marginally lowering our capital expenditures guidance for the full year 2008 to $1.8 billion to $1.9 billion due largely to the temporary shutdown of manufacturing in our Houston area plants because of the hurricane that directly hit the city.

Tim?

Thanks, Mark and good morning, everyone. Dave provided commentary on our strong quarterly performance in North America and I would like to add some thoughts on this because it has important implications for our business in 2009. He noted the natural gas supply demand imbalance has been exacerbated by the credit crunch and will lead drilling activity below current levels in 2009. Here the ongoing shift from conventional to unconventional drilling will continue to influence Halliburton's business. Service intensity for our stimulation business expresses revenue per well has grown 15% annually since the first quarter of 2006 as the activity mix has changed towards these more service intensive wells. Also, horizontally directed rigs have increased to roughly 30% of total rigs activity in the US in response to their use to develop the shale resources. These wells translate to a service intensity of between 2 and 5 times greater than those of the conventional vertical well.

Technology continues to be a significant differentiator. This quarter we closed the acquisition of Pinnacle Technologies from Carbo Ceramics and are pleased to welcome the 150 or so Pinnacle professionals to the organization. Pinnacle's stimulation monitoring and analysis minimize fracturing uncertainty, rapidly verify pay zones and optimize reservoir drainage. Pinnacle is also a catalyst for our VeriStim service, a key work flow of our digital asset which combines microseismic monitoring with distributed temperature sensing and a variety of post well tools to deliver the most effective hydrocarbon recovery from the asset.

In summary, we expect differentiated technology and the strong service intensity trend to provide a favorable overlay for Halliburton on reduced 2009 North America rig count. For our international business, while macro economic uncertainties cloud our view at this point, we still believe growth will continue in the fourth quarter and in 2009 but at a lower rate than that which we have experienced in the first three quarters of 2008. As our international customers prioritize their activities, it is likely we may experience delay or curtailing of some new projects, notably new heavy oil and potentially some GTL projects. We may also see a slightly increased orientation away from exploration and towards production and development projects as 2009 unfolds. Dave?

Thank you, Tim. Let me finish up by just saying that we had another solid quarter, strong revenue and margin growth, however, the global events that have transpired in the last few weeks have produced an environment of uncertainty. However, in North America, we believe our customer concentration, differentiated technologies and position in more service intensive assets should enable us to manage our way through any reduction in overall activity. Internationally, we continue to expect growth as we leverage our worldwide infrastructure but perhaps at a slower rate than 2008. Long term we continue to believe that the fundamental trends in this industry will favor our company's expertise in well construction and production technologies.

I want to thank all of our 55,000 plus employees for their achievements this quarter. Let's go ahead now and open it up for questions.

Thank you. (Operator Instructions). Our first question comes from Alan Laws of Merrill Lynch.

Hi, good morning. I got a whole list of them here. You made some comments around looking longer term for what remains a pretty attractive service horizon. Can you give us your early thoughts on CapEx in 2009 given the developing back log -- back drop, Schlumberger noted kind of looking at it and maybe cutting it second half and Wetherford cut theirs this morning. Is there any opportunity if you were to keep it higher to gain share?

With respect to capital spending, as Mark mentioned, it's going to be slightly lower than we had previously forecast for 2008. We're obviously monitoring it very closely as we move into 2009. The key issue for us is essentially the lead time that's associated with the manufacture of our capital equipment. That actually has shrunk a little bit from actually close to a year, approximately 6 to 9 months ago to the sort of three month to nine month time frame depending on the product itself. That gives us the ability to respond appropriately for the circumstances if they arise.

So you're more nimble and efficient now on your manufacturing side?

I think, yeah, I think as you probably know, we've invested in international supply chains, which have given us the opportunity to essentially shorten our supply lines and give us a little bit more flexibility in response to emerging market conditions.

Would those be the areas that would be most vulnerable if the slowdowns were to get more severe?

The international markets, no, I think on the contrary, I think, traditionally the international projects that we see are longer term, they're larger and they tend not to be disrupted in the same way we see the sort of rapid volatility in the US gas market.

Okay, great. One last question here. You said in the release that most international projects are okay at current oil prices. Kind of a qualified statement. What or where are you seeing projects potentially at risk? Is this a longer term or like a nearer term issue?

Well, the issue is always really sort of the margin -- the cost of the marginal barrel and the marginal barrel really sort of revolves primarily around obviously high cost elements of production and a good example of that would be new heavy oil projects which obviously are going to be very challenged at prices that are sort of probably much below about $75.

Okay. Great. I'll turn it back. Thank you very much.

Our next question comes from Earl Store from Morgan Stanley.

Thank you very much. You mentioned credit constraints with respect to potential stock ups in North America. There's been an army of smaller, particularly pressure pumping entrance. Can you talk a little bit about how you see that market unfolding and whether we can see some consolidation or some companies fail in their expansion ambitions?

Well, I guess our comments are directly related to what we've seen in the press just like you have, that there are some of our customers who have been adjusting their capital plans going forward based on their individual credit situations and liquidity. We expect that -- possibly that that may persist and there may be others that could come in. But, as we kind of look at it, obviously it's difficult to say what people may do in the market with stock prices low when everybody is sort of focusing on making sure that their liquidity positions are very strong. You know what we do know about the North American market is that it has the ability to turn very rapidly and if people adjust their capital plans down and production falls with it, that the market may self correct very quickly and we could find ourselves back in the game within a very short time period.

Yeah. I think all it is, this is Dave, with respect to the service contractors that are out there, especially those that were privately financed that came into the pressure pumping markets, we believe that a downturn in North America markets will put pressure on their financial results and is unlikely to attract the sort of additional equity necessary to continue to expand their fleets and I think to answer your questions, perhaps there will be opportunities for consolidation among that group.

When it comes to the international potential slowdown, what areas should we focus on and be on exploration, which is sort of obvious, but what product lines? Are there any product lines that could -- we had oil services company express some grave concerns about the impact on the sustainability of the global oil production base if we were to see CapEx cuts, can you talk a little bit about what your views are on that, what region you could see some slowdown, what product lines and what production implications that might have down the road?

If I could answer that question two ways, just, first of all, I think on the global supply/demand situation with respect to liquid hydrocarbons, oil, essentially, I think we feel very positive about the long-term view because there really is still a pretty good tightness really between supply and demand given the fact that we really are in an era of quite significant acceleration in decline curves and we think this bears some close scrutiny and we really feel that for the long term this looks a very positive arena for our Company and for the service industry in general. Specifically with respect to particular product lines, I think that we've got a very good portfolio for the markets that we see going forward. We probably see a -- as you mentioned, the sort of obvious decline somewhat in exploration activities and as you know, we really are not heavily involved in sort of broad seismic acquisition and that's not an area that really impacts us, but we don't really see any particular areas within our portfolio that would be particularly at risk, I think, to the current environment internationally.

With respect to Mexico or UK, North Sea, or Russia, you don't see any particular risk in any of those markets?

Well, I think as we mentioned before, where the cost of the marginal barrel is higher, that's where the biggest risks are in place and so by type of hydrocarbon, I guess I would say heavy oil is probably our greatest risk for new projects which are underway and those are projects which frankly we really hadn't expected to see come fully on stream until sort of 2014, 2015, but we will need that production by that time, we feel, and that obviously -- if it's not there, then it means it puts more pressure on conventional production. That's point number one and point number two is there are certain basins and probably the UK sector of the North Sea would be a good example of where we would expect to see perhaps a little bit more challenging environment than we've historically seen with higher oil prices.

Finally, just how flexible do you think you are in your organization in order to ride out what could come your way?

I think we're very flexible. We've got sort of a very geographically focused organization internationally and we're already in the process in fact of moving some equipment out of parts of the North Sea into our areas where we can utilize it more effectively in anticipation of some changes in that environment.

Thank you very much.

Our next question comes from Jim Cantrell from Barclay's Capital.

Thank you, good morning. At this time, would you think your annual renewals in US pressure pumping would be up, down, flat or do you think the customers will want to defer a decision?

Jim, this is Dave. I think we actually were out in the Rockies earlier last week and I think right now the discussions we're having generally with customers is to just renew with some negotiation the contracts that we have with them at this point in time. We don't see the sort of orgy of rebidding that we saw this time a year ago.

Okay. So that should be fine with you, right, because you think that you'll continue your strategy of pushing through oil cost increases on them?

We would hope to, sure.

Our next question comes from Dave Anderson from UBS.

I guess just going down the same line of the CapEx reductions we're hearing out there. Most of the comments have been coming out of the small guys. Just wondered if you could kind of talk specifically about your customers, about how they're reacting, I guess specifically compared to integrated and large cap ENPs, versus the small ENPs and I guess the private operates, which I suspect you have many fewer customers. I guess with the exception of a few, it seems this is isolated to one certain area. Am I correct in that assumption or have you seen that in other areas that just hasn't materialized yet?

There's been ten companies that have come out and made significant modifications to their 2009 capital spending and that's primarily been sort of focused on North America, of course, TNKBP did also come out and make adjustments, about a 9% reduction in their planned spending for 2009. But primarily focused in the US to this point.

Okay. And then if we -- I guess taking it -- another follow-up question on the capacity issue. You look at the Spears numbers, it looks like smaller players contributed about two thirds of the capacity growth the last couple of years. Is it fair to say in light of your comments so far, you can safely see single digit capacity expansion and pressure pumping and the like for next year?

Very hard to predict exactly what that may look like. I think I would just sort of perhaps draw your attention to the point I made a little earlier and that is that there still is a lead time obviously for new equipment which is being committed to a particular market. That seems for us at least to be between 3 to 9 months. One can assume that orders that were placed perhaps six months ago may still find their way into the market unless there is some other reason for them not to do so.

Our next question comes from Michael LaMotte from JPMorgan Chase.

David Smith jumping on for Michael. First, regarding the redeployment of capital out of the North Sea, how much of that is high grade versus anticipation of a weaker market?

Well, constantly sort of looking at our capital allocation and making sure that we allocate our capital in the most appropriate way for our shareholders, so I think that's a given, but we definitely do see a slightly -- for us at least a slightly weaker environment which, you know, would prompt that activity for us.

And also sorry if I missed this, but can you provide a rough split between C& P and D&E of the $33 million impact from the Hurricanes?

Let us come back to you on that. We'll need to look that up. We haven't publicly provided that yet.

Great, thank you.

Our next question comes from Charles Minervino from Goldman Sachs.

Hi, good morning. You've been through a number of these natural gas cycles many times before. Can you talk us through some of the lessons you learned from the past down cycles or slowdowns in activity and kind of how that factors into how you're strategically preparing for this one in North America right now?

Yeah. You know, I think there's two or three lessons we've learned and I think we've actually, unfortunately gotten pretty good at this. One is that it's critical that you are aligned with the major players that are going to at least keep some of their rigs up and going as you go through one of these cycles. And I think that as we indicated earlier, our customer base tends to be the IOCs and the larger independents. So I think, one, we have a customer base that we want to have.

Two is basin knowledge. We have concentrated our efforts with those customers in making sure that we understand the basins that we operate in and therefore make it very difficult for those customers to switch away from Halliburton because of the inherent knowledge and history we have of those locations.

Thirdly, I think, is that these things can turn very quickly up and down and, basically, to make sure that you keep your cost structure as variable as possible and don't get yourself into a big fixed cost position and I think that the last would be that we generally actually gain market share in a downturn and I suspect that that may happen in this type of a situation because at this point in time, our equipment is still sold out everyday and we have customers that are coming to us that some of the smaller providers that don't have the technology are currently assisting and are asking us to do their work. So even if we do have some downturn among our existing customer base, there is built in demand out there from other customers that we are currently not serving that we could go to. And so that's why I think we feel pretty confident that we can weather any up and down as well as anyone can.

That's really helpful. And just one follow up. Are there some shorter term actions that you can take right now and then is there like more of a medium term plan if this kind of slowdown in activity lasts maybe more than just a couple of quarters, maybe you can just give us a sense of how long you're kind of positioning yourself for this slowdown activity to take place and what you would maybe need to do if it lasts longer than you expect?

This is Tim. Clearly operationally, it's -- one has to have a plan, a contingency plan in place to deal with that eventuality and clearly for us that revolves around making sure that we have a good handle on our costs, that we're deferring any kind of unnecessary spending that can be deferred and that we adjust our -- the overall profile of our recruitment to ensure that we're balanced. As you probably know, we've added some 14,000 people on board during the course of the last 12 months and so we have a large -- a large intake of employees, which needs to be adjusted to address the realities of the forward market.

The other side of that, also, from a financial side, we're very focused on cash flow, our working capital, managing our working capital effectively so that we don't let that get away from us. Our current working capital statistics are in our view at the top of the peer group and we intend to make sure that they stay that way.

By the way, I was going to answer the question that was asked earlier about the hurricane impact on D&E and C& P. For drilling and evaluation, the revenue impact from the hurricanes was $40 million and the operating income impact was $27 million. For the completion of production division, the revenue impact was $34 million and the operating income impact was $25 million.

Our next question comes from Bill Herbert from Simmons & Company.

Thanks, good morning. It's Bill Herbert. Question with regard to contemplating possibilities and that is in the event of a reasonably consequential contraction in drilling activity next year, pick a number, call it 300 to 500 rigs, do margins get as weak as they did in 2001 and 2002 and if not, why?

I think it's kind of helpful to sort of split the thought process up here, Bill.

Yep.

-- into a couple of areas. First of all, I think it's appropriate for us to talk perhaps about -- about oil and secondly maybe we can talk about gas.

Great.

Firstly, for oil, we've seen pretty healthy growth in oil directed activity, running a little over 400 rigs as a total right now. That's about 22%, I think, of total rig count. So it seems to us that unless we see a real collapse in liquids pricing, we could continue to see activity hold around that level. By the way, Halliburton has a real strong position in oil, particularly so in pressure pumping in North America.

Now, for gas, rigs peaked in Q3 at around 1606 rigs or thereabouts, I think, and with the huge discount that the US gas trades relative to European and Asian supply, it seems to us that as a result of that, there really are a couple of questions. How quickly do we get a demand/supply balance back in place in North America? As a result of that, how many rigs need to come and do the new shale plays really have an impact on that and our ability to get back to balance.

So a couple of thoughts for you. Obviously new gas wells declined quickly, more than 65% in the US and while we will see some rig count reduction, the supply becomes meaningfully impacted relatively quickly and I don't think we can predict how many rigs are going to come out. Is it 100, 200 or is it more? I don't think we know that. The fact of the matter is I think we do believe this is a self correcting mechanism and, also, as Dave mentioned earlier and I mentioned in my comments, we're in quite a different situation here with respect to the sort of flight to quality here with respect to a number of these assets. Flight to quality really does provide us with some sort of favor -- a favorable overlay. So can't predict what the margins are going to do, but I think what we can say is that we see this cycle as being a little different than those that we may have historically seen in the past.

Which I would concur with, but I also reference the comment that you made earlier, roughly ten E& P companies now with their budgets and of course those are fluid as we know because a cold winter and strong gas prices, spending will be better, but thus far their '09 budgets look to be 10% to 45% lower year-over-year versus '08 spending. So for the moment it looks lower, by how much, time will tell.

Second question is with regard to Mexico and bidding on the subsequent (inaudible) projects. Hearing that Pemex is looking for concessions on receivables for example from suppliers, wondering if you could just sort of illuminate the whole bidding process with regard to subsequent (inaudible) projects and are they asking for any concessions and if yes, how do you respond to those?

Yeah, Bill, to the best of our knowledge, these projects look like they're going to be delayed and what the profile of those projects will be when they sort of reemerge, I think, is clearly a question. So probably best for us to defer answering that until we've got a better view of what those packages may look like.

Our next question comes from Jeff Tillery from Tudor, Pickering, Holt and Company Securities.

Can you talk a little bit about how you guys are thinking about your balance sheet and share repurchase? Should we think of that of kind of living within free cash flow and wanting to maintain kind of the billion dollars you have on hand for flexibility or how are you thinking about that?

You know, we did a little share repurchase in the third quarter, about $120 million, 3.5 million shares on top of the impact of the share reduction that happened as a result of the refinancing -- the redemption and refinancing of the convertible bond, but that was all sort of before the credit markets got disrupted. So we've got maybe about $1.8 billion of authorization left, but today, in this environment, we're sort of operating by keeping our powder dry. We think just to say it another way, cash is king and it's important to make sure that we're maintaining our liquidity until we have a better view about where the market is going and if there is a downturn, how prolonged that downturn might be and at some point when we feel that we've got a better view of that, then we'll reconsider going back into the market to repurchase shares.

Okay. And my follow-up question, unrelated. You guys talked earlier about prospective '09 capital expenditure plans. Could you help us out in terms of how you're thinking about '09 in an actual infrastructure cost, to kind of dial in or understand a little bit better depending on what the revenue growth profile looks like how much your fixed costs are growing internationally, kind of aside from the typical equipment pieces?

Yeah. As we mentioned before, monitoring the potential for 2009 capital very closely, but one thing is for sure. It is our objective to continue to drive balance in our operations globally and so we will continue to invest in our international markets to sort of drive long-term growth. We have, you know, a strong feeling that the international markets, particularly the international oil markets, are a good long-term opportunity for the company.

Our next question comes from Robin Shoemaker from Citigroup.

Yes. Thank you. Wanted to ask about -- again, going back to the international revised growth outlook. You've had for the last two years very steady kind of year on year revenue growth of around 25% and with the things you're talking about slowing down, heavy oil, gas to liquids projects, a little more development than exploration in the business mix, do you see a meaningful decline in that rate that you've sustained now for two years?

And if I may also ask about the margins which have been very consistently in the 20% to 22% range each quarter going back a couple of years for international, how much impact could you see there with the slowdown you see in international revenue growth?

To sort of answer the first part of the question, I think it's really perhaps a little too early to say at the present time as we look forward. Our customers clearly are going to go through an analysis of their projects and reprioritize those. So it's really too early for us to say. However, it continues to be, you know, our objective as we've stated, our objective that is to drive our markets forward internationally in the 20% range. It remains to be seen whether or not the market will cooperate with us on that, but that continues to be our overall objective. With respect to margins, I think it's just too early to say at the present time what the margin outlook might be.

Okay. If I may ask just one follow-up. The acquisition market, could you describe what you might be looking for there? You mentioned that you're probably going to hold off on share repurchases. Does that also mean that conserving cash would lead you to hold off on pursuing any acquisition opportunities even in an environment where you may see some very attractive acquisition opportunities that would give you growth in the international markets?

Yeah, I'll just sort of comment on our overall strategy and I'll let sort of Mark perhaps follow up on that comment. But I mean I just really want to reiterate our overall strategy. We're very focused from an acquisition standpoint on really two key elements, those opportunities which provide us some technological opportunity to expand an existing product offering or to fill a gap and also geographically where it may make sense for us to add some acquisitions and that's obviously within the scope of the allowables if you like within our balance sheet.

And I think, as you pointed out, obviously preserving cash, keeping liquidity strength is an important aspect of what we're looking at, given this period of uncertainty that we have. But our strategy remains the same and our view is if an acquisition along the way presents itself that has compelling, very compelling economics, we will analyze that within our current liquidity outlook and do our best to try to continue to execute our strategy.

Our next question comes from Waqar Syed from Tristone Capital?

My question relates to the [Minifa] project. Have you started seeing revenues come in from there, what sort of growth you see in the fourth quarter and next year?

No, the project for us does not start until Q1. Drilling starts in Q1. So we have not seen any revenues at this point, though we are in the process of mobilizing for the project.

Previously you mentioned you expect the fourth quarter -- there's been delays there or am I mistaken, it was supposed to be starting in the fourth quarter.

No, I think we've pretty much -- certainly have had no material delays in the start up of the project. The end of Q4, beginning of Q1 has always been kind of the target range.

I think -- this is Dave. I think what we've said in the past was that we would be incurring costs during the fourth quarter and would have perhaps hoped to have some revenue in Q4, but right now it looks like we have the costs, but the revenue will come into next year.

Our next question comes from Pierre Conner from Capital One.

Good morning, gentlemen. Maybe further to Bill's question on North American margins, I wanted to ask a little bit on the cost recovery piece of that, I think Mark mentioned 70 basis points of recovery costs were passed on, so presumably that doesn't go away, you keep those recoveries on until your costs come down and then related to that, without repeating all the stuff that Bill was talking about, you did mention sort of the time frame similar to '07, I think you were speaking about the recovery and balance in the gas markets, but '07, '06 margin compression, is that the kind of margin compression we could be looking at? Is that potentially what we would be alluding to there?

Let me talk about the fuel surcharge and I'll let Tim sort of handle the second part of the question. On the fuel surcharges, again, it is a surcharge and what those agreements did was sort of establish a base level of cost that we were incurring for fuel and fuel-based chemicals and things like that prior to the run up in cost in the second quarter and it works on a one quarter lag. So this quarter we were getting recovery for incremental costs incurred in the second quarter and as you know, I mean fuel prices decreased during the third quarter and so while there might be a little bit that comes thousand, we don't expect to have a similar impact in the fourth quarter and the mechanism will adjust, you know, going forward as fuel prices move up or down.

And to the second part of your question with respect to margins, I think it's really too soon clearly for us to make any kind of prediction in terms of the impact on margins, just simply sort of refer you back to the fact that I think we do feel there are a couple of -- there's kind of an overlay with some mitigating elements here with respect to sort of the flight to quality that I sort of commented on earlier with respect to the assets that our customers are choosing to develop relative to some of their more traditional assets, which they're probably going to sit on for the time being.

We'll take one more question.

Thanks.

Our next question comes from Curt Elliott from RBC Capital Markets.

Good morning. I just had a question on -- as we head out into 2009 with these CapEx cuts, whether or not you think that it's going to be more broader based across your product lines than what occurred in the 2000 -- the late '06 and into 2007 and at that point I think it was predominantly just frac based. You saw some pretty good strength in MWD, LWD, et cetera. Do you think that whatever down tick happens in '09, do you think it's going to be more broad based?

Again, as I mentioned before, too early to say, but we've seen certainly a significant change in well construction activity since the last cycle and that well construction activity change has really revolved around the increase in service intensity driven by horizontal wells, so that's certainly something that we would need to take into account as we look forward because that clearly has a more positive element here because horizontal rig activity probably will continue to rise as a percentage of total rig activity in the US.

Okay. Just as a follow-up, any rough guidelines for us as to how much of your international business is already a lock for '09?

No. Just as you know, typically North America tends to be on much shorter term agreements, international agreements tend to be longer term, typically in the three to five-year range and -- but that's really all we can say at the present time.

Okay. That will do it. We'd like to thank everyone for participating in today's call. Mary?

Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.