哈里伯頓 (HAL) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to your Halliburton fourth quarter 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, Investor Relations. Mr. Garcia, you may begin.

Thank you, Mary. Good morning and welcome to the Halliburton fourth 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 fourth quarter results is available on the Halliburton website.

Joining me today are Dave Lesar, Chief Executive Officer, Mark McCollum, Chief Financial Officer, and Tim Probert, Executive Vice President, Strategy & 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 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 September 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. The Company issued a separate press release announcing it's prospective settlements with the Department of Justice and the Securities and Exchange Commission, with regard to the FCPA investigations. As a result, the Company recorded a charge to discontinued operations of $303 million, or $0.34 per diluted share. We refer you to the press release for details about the content and status of the prospective settlements. Due to the sensitive nature of the settlement discussions, we will not address the press release, or take any questions relating to this matter.

Now I will turn the call over to Dave Lesar.

Thank you, Christian, and good morning, everyone. Our fourth quarter results demonstrated our relentless focus on delivering solid performance despite the prospects of a weakening market environment. We set quarterly operating income records for all of our international regions. I am pleased to share with you the highlights of our fourth quarter performance.

Total Company revenue grew 17% from the fourth quarter of 2007. And despite a 14% decline in the US rig count from the beginning of the fourth quarter, our North American operations were essentially flat sequentially. Our Latin America region grew 37%. We have been successful in our growth strategy for this region, and continue to see expansion opportunities for growth in 2009.

International revenue grew in excess of 15% year-over-year for the quarter, with margins of 24%. For 2008, international revenue grew in excess of 22%. Our total Company operating margins were 24%, the highest we have seen throughout the year. These results show why we believe our strategy of protecting our strong US market position, and continuing to grow our international operations continue to be very successful.

Let me now turn to the results of North America, and discuss our prospects for the coming year. North America revenue for the fourth quarter was essentially flat from the third quarter, despite the 14% drop in rig count I mentioned earlier. We saw a drop-off of our activity beginning in late November.

The Gulf Coast experienced good sequential growth, as it recovered from the third quarter hurricane disruptions. This growth came despite some lingering impacts of the shut-in production that continued into the fourth quarter. So far in 2009, rig counts have fallen sharply, and are now roughly 25% below 2008 highs. We expect activity declines in North America to accelerate further in the first quarter.

Capital expenditure adjustments from our customers remain fluid, as they adjust spending to operate within their cash flows, in response to a continued drop in natural gas fundamentals. Currently we believe that drilling in unconventional reservoirs will continue to be somewhat less vulnerable to the slowdown, while activity declines are intensifying in conventional plays in the Permian Basin, and certain locations in the Mid-Continent and the Rockies. While we did not experience significant price weakness over the balance of the fourth quarter, price declines are occurring, and will be most pronounced in the commoditized area. We expect, however, prices to be less affected in those locations, where basin and reservoir complexity requires differentiated technologies.

Turning to our international business, 2008 international revenue grew 22% year-over-year, as we continue to see good growth across Latin America, north Africa, and Asia Pacific. Our Europe, Africa, CIS region showed the least growth from the prior year levels, as this region was affected by currency weaknesses, as well as slowdowns in the North Sea and Nigeria. We had discussed the lack of growth in these areas in prior earnings calls, and have put in place mitigating actions. Despite the weak revenue growth, the region's margins were 23%.

Declining oil prices have caused our customers to defer several of their new international projects. We see the most vulnerable areas internationally to be the North Sea, Russia, and exploration oriented projects. Some of you may be surprised to learn that our Russia business actually showed a 6% sequential growth from the third quarter.

The growth came from continued adoption in Russia of our well construction technologies, and was also bolstered by direct sales. Operators have announced, however, a 25% decline in spending for 2009, and we expect to see some contraction of our business in Russia. However, we continue to believe in the long-term prospects of this market and will align our business accordingly.

The UK sector of the North Sea has also been affected by capital access issues that have constrained the ability of our independent customers to fund their programs. Additionally, there has been a deferral of several platform-based projects from larger customers, until they see commodity price stabilization. But we continue to see opportunities for well intervention work in this market. And growth opportunities continue to exist, in areas like the deep water markets and Latin America, where our unique technologies and market position will provide a competitive advantage.

So in summary, we see across our markets for North America, lower volumes as customers reduce spending, and pricing pressure due to excess equipment and customer requests for discounts on existing work. In the international market, a slowdown but not cancellation of existing projects, and a deferral of new projects, especially exploration and marginal field development. Our management team has been through many previous downturns, and it is our intention to emerge from this cycle much stronger.

For competitive purposes we will not lay out our detailed strategy for addressing this business environment. In the short term, we are putting initiatives in place, not only to temper the impact of the activity decline on our financial performance, but also to make sure that we are in an optimal position to take advantage of the market's eventually recovery. However, we can talk about the following steps.

We intend to protect our market share. We will increase our spending on technology. And we will continue to deploy our packaged service of strategy, that creates an efficiency model for our customers, in the development of assets.

We expect to compensate for some of the impact of price declines by prudent cost management, including minimizing discretionary spending, lowering the cost from our vendors, and rationalizing headcount in locations experiencing significant activity declines. And although headcount reductions will be made, our goal is to minimize the number of employees affected, to avoid the high recruitment and training costs we incur when industry fundamentals improve. I believe that this is the right thing to do for the health of our business over a complete cycle.

Next, we intend to operate our business within our cash flows. We are focused our organization on working capital management, and will maintain a strong balance sheet to maximize our financial flexibility. We are planning to maintain our capital expenditures at approximately 2008 levels, but will adjust as necessary to stay within our cash flows.

We are managing our own plants at a level which preserves our ability to ramp up, in response to increased future market activity. We plan to retire old equipment, and replace it with new capital to improve our aged fleet. As I stated, we have been through these cycles before, and we know what to do, and will execute on that experience. In fact, we have historically seen our North America market share increase during downturns, and we have no reason to believe that this downturn will be any different.

Let me turn the call over to Mark now, to give you a few more details on our financial performance.

Thanks, Dave, and good morning. I will begin with our operational highlights, and I will be comparing our fourth quarter results sequentially to the third quarter.

Our revenue in the fourth quarter was $4.9 billion, up $57 million, or 1% from the third quarter, led by Completion Tools which registered growth of 10%. We also benefited from the typical fourth quarter increase in software sales, and direct sales of capital equipment. On a geographic basis, Latin America led all regions with 4% sequential growth, driven by strong results in Mexico and Columbia.

The sequential growth of our international regions was negatively affect by currency movements in certain countries. These movements, however, did not have a significant impact on operating income, since our locally denominated revenues are designed to cover our locally denominated costs. Operating income increased $112 million, or 11%, from the third quarter 2008.

Our fourth quarter results included a $35 million gain from the settlement of a patent dispute, while our third quarter results included a $22 million acquisition related charge for WellDynamics. Both items were included in corporate and other.

Now I will highlight the segment results. Completion & Production revenue decreased $21 million, or 1%, from the third quarter, while operating income was essentially flat. The decline in revenue was driven primarily by lower production enhancement results in US land and the North Sea, offset by strong Completion Tools revenue.

Looking at Completion & Production on a geographic basis, North America revenue decreased 1%, and operating income declined by 5%. We experienced strong activity in the early part of the quarter, including a recovery in the Gulf of Mexico. But saw activity drop-off starting in late November, particularly in the Rockies. Canada also suffered from unfavorable currency movement.

In Latin America, Completion & Production revenue decreased 6%, and operating income declined 18% in the fourth quarter, as we recognized a large third quarter Completion Tool sale in Brazil. We experienced increased demand for completions and sand control systems across all areas of the region, but the timing of sales led to the unevenness of the results for this product service line.

In Europe, Africa, CIS, Completion & Production revenue decreased 4%, due to lower activity in the North Sea and Russia for both production enhancement and cementing, despite the revenue decrease, C&P operating income increased by 17%, resulting from a favorable mix of intelligent completion system sales.

In the Middle East/Asia, Completion & Production posted a sequential revenue increase of 9%, as strong Completion Tool deliveries across the region, fully offset decreased production enhancement activity. Operating income sequentially grew by 18%, primarily due to higher completion revenue.

In our Drilling & Evaluation segment, revenue increased $78 million, or 4%, and operating income increased 12%, with strong sequential results in nearly all of it's product service lines. Typical fourth quarter increases in software sales increased direct sales in wireline equipment, and continued penetration of Sperry's technologies in the US land market drove of Sperry's technology in the US land market drove this increase. Baroid was impacted by the slowdown in activity in the North Sea, and experienced lower activity in US land.

In North America, Drilling & Evaluation revenue increased 1%, led by Sperry with growth of 10% as this product service line benefited from the sequential quarterly increase in the average horizontal rig count. Higher Sperry revenue was offset by decreased activity in Baroid, and lower commodity prices impacted the results of one of our legacy oil and gas properties.

Operating income for the quarter decreased 5% from lower land activity, partially offset by increased drilling activity in the Gulf of Mexico. Drilling & Evaluations Latin America revenue increased 12%, and operating income increased by 51%, driven by increased activity across the region, but most notably in Mexico and Columbia. The division benefited from strong Sperry and Baroid activity, and seasonal revenue increases at Landmark.

In the Europe/Africa/CIS region Drilling & Evaluation revenue increased 5%, led by Sperry and wireline activity in Russia, north Africa, and Angola. Partially offsetting this revenue growth, was weakness in Nigeria and the North Sea. Operating income increased 37% from a favorable mix of services, the impact of direct sales, and increased pricing on certain west African projects.

Drilling & Evaluation revenue and operating income in the Middle East/Asia were essentially flat from the third quarter. Increased revenue in wireline, Landmark, and Security DBS, were offset by lower Sperry activity in Asia.

Now I will address some additional financial items. In the fourth quarter we recognized a $24 million loss relating to foreign exchange, reflecting the rapid strengthening of the dollar against certain currencies. This amount, which is reflected in Other Net on the income statement below operating income, represents the impact of these currency changes on our net unhedged working capital position.

Fourth quarter 2008 minority interest reflected a $28 million gain net of tax, related to an increase in our effective ownership of one of our joint ventures. This change arose from an increase in the dividend rights of the preferred shares we hold, which resulted in an increase in our ownership percentage for accounting purposes. The gain reflects the elimination of most of the minority interest we had previously recorded related to this entity.

As of December 31st, we had $1.1 billion of cash and short-term investments. Our debt to total capitalization is 25%, and we do not have any debt maturing until the fourth quarter of 2010. Before providing any guidance relating to 2009, I would like to reiterate Dave's comments regarding how we intend to operate in this environment.

Our first priority is to operate within our cash flows. We have been focused on working capital management for the past few years, and our metrics have shown that we have outperformed our peers in this area. We plan to intensify this focus in 2009.

Here are some points of guidance you can use as a starting point, but understand that these may, shift as the environment dictates. We anticipate the corporate expenses will be approximately $60 million per quarter in 2009. We currently expect the 2009 effective tax rate to be in the range of 32 to 33%.

We expect Depreciation & Amortization to be approximately 220 to $230 million per quarter, or about $900 million in total during 2009. And finally, as Dave indicated, our 2009 capital expenditures will be roughly in-line with 2008, where we were over about $1.8 billion. But we intend to remain flexible given the uncertainty going into 2009. This guidance on capital reflects some spending for carry-over projects from the previous year, the deployment of technology, and capital to be used to retire old equipment.

Tim.

Thanks, Mark, and good morning, everyone. Forecasting the depth and length of the current recession and it's impact on demand is challenging, while comparisons with historical downturns are difficult to make, they do provide us clues on cycle characteristics and supply side response.

First, in North America, we believe the speed of the rig count drop, correlates well with the depth and length of past downturns. In the 2001 downturn, which we feel is a closer match than that of 1997, peak to trough drilling activity approximated three-quarters. So far we have seen a 25%, or over 500 rig drop, from the Q3 2008 peak. This percentage drop is consistent with the same timeframe in the 2001 cycle.

Second, we estimate base annual production declines for gas in North America approximate 30%. This decline, together with the current trajectory of rig counts, suggests to us that supply could begin to show a response in Q2. The inventory of drilled and yet to be completed wells is not insignificant, however, and will, in our opinion, contribute to this lag, but should be helpful to us given our strong position in completions and production.

Third, and as expected, the secular trend towards horizontal drilling appears to be much less affected by the down cycle. In the 2001 downturn, from peak to trough the proportion of horizontal directed rigs increased from 6% to 8%. In this cycle so far, the horizontal rig percentage climbed from 31% at the peak in Q3 to the current level of 37%.

Neither horizontal rig count nor shale plays have been immune to reductions in activity, but their increased proportion should translate to a more favorable service mix of our differentiated offerings. As we have pointed out in the past, horizontal drilling translates to a service intensity of two to five times that of vertical drilling, and is a positive contributor to several of our product lines.

Finally, we started to see signs of pricing weakness in our services in North America in December and January. We can make no prediction as to the outcome, but in past cycles the sector has reached margin compression of as much as 1,200 basis points. In international markets, projects and contract structures tend to be longer-term oriented than North America. This has historically resulted in significantly less year-on-year volatility.

However, our customers, IOCs, and OCs and independents alike, are all reassessing their priorities. Project visibility today can best be described as opaque. Service intensity in our international markets as measured by revenue per rig, has grown over the years, but more acutely since 2004, as the underlying trends towards smaller and more complex accumulations, drove demand for services.

Interestingly, the Company continued to experience growth in this metric through the 2001 downturn. Despite negative demand trends, it is worth noting that the industry's supply issues impacted primarily by accelerating decline curves, are more pervasive today than they have been in the past. Non-OPEC production fell in 2008, and is likely to decline in 2009. Russia, which accounted for the majority of the increase in non-OPEC production in the past decade, contracted in 2008 and will likely do so again in 2009. Any period of underinvestment driven by constraints in operator spending, should lead to a resurgence in commodity price.

While the mid-term remains uncertain, we do have some clarity around the first quarter. The Company's results will be subject to the same type of seasonality that we have seen in previous years, the Landmark completions and direct sale activities fall off in the first quarter, as they benefit historically from customers' year-end budgets, and our businesses will be impacted by weather-related seasonality the occurs in the Rockies, the North Sea, and Russia.

These items contributed to an approximate $0.07 per share decline from Q4 '07 to Q1 '08. In 2009, these volumes are significantly larger, so this will be more impactful. Also, we will see volume reductions as a result of the drop in US rig count, which is already down 20% from the Q4 average of around 1,900 rigs, as well as the accompanying price reductions from our fourth quarter contract renegotiations with our customers in North America.

Dave.

Thanks, Tim. In summary, our fourth quarter results demonstrate our ability to execute in a weakening market environment. We grew revenue, operating income, and margins, despite the curtailment of customer activities in the latter part of the quarter. And we set revenue and operating income records for most of our product lines and regions. As we have discussed, the industry's prospects in 2009 are more uncertain, but we will take the opportunity to strengthen the long-term health of our franchise. We are going to selectively cut costs as I said, but at the same time, we are going to continue to invest, where we can expand our competitive position.

Our management is ready to meet the challenge in this coming year. And let me just once again reiterate what I think has been a very successful strategy for us, of protecting our strong US market position, and investing in and growing our international operations. It has been successful in the past, and I believe it will be successful going forward. I want to thank all of our employees for their significant efforts in 2008, and we look forward to 2009.

So let's now go ahead and open it up for questions.

Thank you. Ladies and gentlemen, (Operator Instructions). First question, David Anderson, UBS.

Good morning Dave. Back in the fall you had talked about the scope of the Manifa project remaining intact, but the timing of it stretched out another year or so. Since then obviously the outlook has dimmed considerably. Wondering if you have seen these larger projects continue to get pushed out, as the need for capacity expansion, particularly in the OPEC nations is considerably less now?

Yes certainly, Dave, and I can talk specifically about Manifa, which has been stretched out, and I understand they are looking at some of the E& C contracts, and potentially retendering them, but that is a symptom of what we are seeing in a number of the larger projects in the international marketplace. Not a cancellation of existing projects, but basically drawing them out over a longer period of time, so that they don't have a big slug of production coming on in a weakened oil price environment.

What we are seeing is a cancellation though, of projects that perhaps we are going to about get tendered and move forward, so I think our customers right now, really are taking a wait-and-see attitude toward the supply response to pricing, especially those customers that are inside OPEC.

How much longer is that wait?

Your guess is as good as mine. I think that they are really wanting to see whether this last substantial reduction in OPEC quota will have some results, and at least stabilizing prices, but I think as we have all seen and read, there is a view out there that oil prices need to push back up into the sort of $75 range, before OPEC will be satisfied with bringing additional production on.

Our next question comes from Ole Slorer from Morgan Stanley.

Thank you very much. Congratulations with a very solid performance there.

Thank you, Ole.

I understand the difficulty in giving any type of forecast, given the macro environment that we are within, but essentially the debate is, is this going to be a steep down cycle that troughs in 2009, or is the trough going to be flatter? What is your view here on when we see the biggest quarterly year-over-year decline?

Ole, this is Tim. Let's just talk about the North American first, and then talk about the international markets. As far as North America is concerned, as I mentioned earlier, we do see a lot of similarities, in terms of the pace and rate of change with the 2001 cycle, in which case it would suggest to us that we would be kind of look at sort of a three quarter cycle, and we are obviously already in the second quarter of that right now. So that obviously, it remains to be seen, but we are monitoring performance against that cycle and we certainly see similarities to it in the present.

With respect to the international markets, obviously the amplitude of change in the international markets has historically been quite different, more muted, and over a longer period of time. And I think it still remains to be seen at present how that will play out, but our expectations are that it will probably be somewhat similar to past cycles.

Have you had, another company reporting last Friday suggested that they were a little bit surprised by the uniform cuts in activity on a global basis, compared to previous cycles. It seems to be declining everywhere, and how that could set us up for a shorter cycle. Are you see going similar, or are you take market share, or what is going on?

There are some very large projects which were going to bring in some significant production, as Dave was just describing, Manifa would be a good example, which clearly are going to be delayed substantially, and those were going to obviously contribute significantly to the overall supply base.

I think that any time that you see a short and sharp reduction in activity, particularly given the fact that the overall decline curves for liquids, do appear to be getting somewhat steeper, and we clearly, if we take the case of Russia, for example, as I mentioned, it was a major contributor to non-OPEC production over the last decade, clearly turning over somewhat here in 2008 and 2009. We think that shortfalls in investment over any kind of period will get some, or provoke some supply response relatively quickly, and obviously that impacts pricing directly.

Our next question comes from Geoff Kieburtz from Weeden.

Thanks, good morning. You mentioned, Tim, in your comments a 1,200 basis point margin compression. I think you were talking about North America in past cycles, correct?

Correct.

Are you thinking that somewhat of a maximum here? As you think about the, all of the differences, as well as the similarities of the current environment with past, I guess kind of help us understand how you are thinking about that 1,200 basis point margin compression?

We were trying to be helpful by comparing ourselves to past cycle, and obviously that has been an experience in past cycles, I think there are some positives that come into play. I think obviously the horizontal component is a significant positive. Overall levels of service intensity are clearly a positive as well.

So there are obviously presumably some negatives in there as well, particular with respect to the uncertainty relating to the economy. But I think in general terms, our feeling is that our best guess at the moment, is that we would pursue a path which is very similar to the 2001 downturn.

Could you extend that to the international market? How are you thinking about the international market relative to past cycles?

I think that it is probably too early to say at the present time, Geoff.

Yes, Geoff, this is Dave, let me add, the international marks obviously are a longer term contract market. They did not have the swing up in profitability that we saw in the North American markets, even in this cycle, and obviously the push down in pricing and margins, if it does come, will come at a much slower rate than it would in North America, because we do after good supply of contracts that have fixed prices on them, that will mitigate some of the downward pressure right now.

Our next question comes from Michael LaMotte from JPMorgan.

Thanks, good morning guys. If I could follow up on CapEx guidance, and in particular try to ferret out what flat means, in terms of confidence in expectations for non-North American growth, particularly given that you highlighted project-related CapEx and technology before replacement, in terms of the mix of CapEx, are we reading too much into it, can you expand on that a bit?

I don't know if the order of the way we mention is necessarily the way we are thinking about it, what we were trying to do, is just help you understand exactly why we think that it is going to be not that much dissimilar to the 2008 spend. We along the way had given guidance that our spend in 2008 would be somewhere in the neighborhood of $1.8 to $2 billion, as we went through the year we spent a little over $1.8 billion, and because we had a number of projects that were coming on along the way, there is some carry-over capital that spills over into the next year.

We manufacture the lion's share of our own capital equipment for Sperry, for our pressure pumping business lines, and so there is an emphasis always to make sure that our plants are efficient, that we keep those things working, to maximize not only the amount of equipment that we have out there to take advantage of opportunities, but to also get new technologies out there, and around the globe as quickly as we can.

And so as we look at this, given some of the guidance that Tim suggested, in terms of how we are thinking about the cycle, we are continuing to make sure that we have got the right equipment and the right places around the world, we are taking advantage of replacing older equipment, that we have got a fairly significant percentage, about 25% of our fleet that is over 10 years old, and so we are going to be upgrading our equipment, to make sure that we have the very best quality equipment out there, when this market begins to turn.

Will that 25%, do you expect to scrap a good bit of that?

Well, there are different ways to look at. Some of it may be cold stacked for a period of time, if that is necessary. We will continue to maintain that if we need to. Some of it may go into other markets, where we, like in some international markets, that have a better environment for some of the used equipment.

This is Dave. Let me just add to this, Mike, I think a couple of things that Mark touched on are important points to take away. One, I don't think that a lot of people realize just how intensively everyone's equipment, new and old, has been used in this latest up cycle, because of the pinch that was on the service industry's ability to supply into this marketplace. So equipment was used much more aggressively, much harder, and with much higher up times than we have seen in the past. And frankly, I think there is a lot of equipment throughout the entire service industry that could use an upgrade.

Second of all, as Mark has said, since we have our own plants, we have the ability to sort of modify our build rates to suit our own needs, and to suit the level of demand that we see out there. Because of that we are now able to take advantage of a cheaper input price to a number of our key product lines. The prices for diesel engines, for transmissions, for electronic components.

All of those things where our vendors had plenty of pricing power, with the worldwide economic crisis, they don't that have pricing power, and we want to take advantage of some of that. And we think that by continuing to build through this down cycle, we actually can build more for less, than we would have been able to do a year ago.

We also had not been able to catch up to the demand for some of the newer technologies that we had brought out, especially some of our drilling and logging tools, and there still is a very high demand for those high-end, high tech, brand new types of products that we have brought out, and so we want to continue to invest in those products, which are generally going into our international market places.

So I think the combination of sort of refreshing the fleet of tools that we have, and building up the supply, and the redundancy in those pieces of technology that still remain in high demand, and because we can do all of this cheaper than we would have been able to do a year ago, we really believe that as long as we can live within the cash flow that we have, it really is the best thing to position us to come out of the other end of this thing in a better relative position than we went in.

Next question comes from Alan Laws from Bank of America.

Good morning I have a couple of questions. One high level, the other on North America. First one, is it fair to say that you and your peers are preparing for an extended slowdown, or sort of which you look at the changes in the array of indicators and customer discussion versus other periods, are there material differences in this one?

I think if you look at our customers in three buckets, I think we are seeing a different response from each group. Our national oil company customers, which are an increasingly larger piece of our total customer base, clearly are looking at their cash flows. A lot of their revenue stream that they generate actually goes to fund their host government's operations. So although they are carefully looking at their spending, and I think the announcement from Petrobras this weekend, about sort of reaffirming a fairly large capital build going forward, is indicative of where the national oil companies will go over time.

So I think they are looking at commodity prices. They are slowing things down, but we are not seeing a substantial reduction in our business opportunities with the NOCs. The IOCs are having the typical response to lower prices.

You are seeing some capital budget reductions. The deferral of projects getting started, continuing projects they have going, but we have been down that road a number of times with the IOCs, and we are pretty good at sort of ramping our business with them up or down. I think the one thing that has changed, and certainly bears some watching in this marketplace, is the big US independents.

And so many of them were basically funding their cash flows, out of leverage and out of borrowings, and of course with the credit windows being shut, I think we are seeing those customers try to come up with a way to live within their cash flow. However, as Tim has indicated, these are the ones that are more US gas denominated, and I think they will see a supply response, i.e., their production will go down if they don't continue to at least do some maintenance drilling.

So I think that is the group we see to be the quickest hit, and the one where we are seeing the most pressure, in terms of our business opportunities with them, but I also believe that is the group that as production goes down, and their own revenues go down, they will to have start to drill, so I think we will see that group actually respond more quickly. So that is sort of a lay of the land with our general customer base.

Great. That actually ties nicely into my next question. We just came off a record rig count North America before this large drop. You noted in your comments there is a backlog of completion work to carry you through into 2009 for a while. How far do you think that will carry you, and is there any evidence that producers will just curtail completing these wells all together?

There is --

I don't think that once drilled, that they are not going to complete it. Certainly having sunk costs of the drilling in, they are certainly going to complete them at some point in time. You don't want your well bore stability to deteriorate, so you can't just leave them out there forever. So I think that that is going to be sort of the first slug of business opportunities that we see, when our customer base decides that the time is right to move forward with bringing these on. But I don't see that they are going to be permanently curtailed.

No, to follow on from Dave's comment, the amount of wells in inventory varies from customer to customer, and it varies from area to area. So it is a bit difficult to give you a broad generalization, but there a meaningful number in inventory, and it will have an impact on two things. Obviously, service delivery being one of them.

The second being the sort of lag that we are going to see between the significant drop-off in activity, and the overall production response. That is why I think we commented a little earlier in the call, that we expected to see some sort of production response show up in Q2.

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

Thanks, good morning. I was struck with the fact that you mentioned Russia and UK North Sea, as two of the more poorly behaved markets in 2009, but no mention of Venezuela. I was just curious as to what your expectations are for that market. all indications are, Bill, that from an overall activity standpoint, there clearly is a significant requirement for the services in Venezuela, and clearly absent any sort of major issues with respect to the current environment that we have all been reading about, I think that we will continue to see some expansion there. So you expect Venezuela for Halliburton and industrywide will be up year-over-year in 2009?

2008 was certainly up year-over-year, and I think that the fundamental requirement is clearly there.

Our next question comes from Jim Crandell from Barclays Capital.

Good morning. Dave, if you thought that international E&P spending was going to be down 10% in 2009 versus 2008, would you think in that environment, number one, that you could have up international revenues given all of the things that you have going on? And secondly, in that environment, would you think that you can maintain margins?

Well, I don't have obviously after crystal ball, Jim, but I think that if you look at the nature of contracting in the international market, and the fact that a lot of the spend that will happen is basically on ongoing projects, so if in fact spend went down 10%, it really would have to be a reduction on the front end of projects that had been considered to get started in 2009, and that typically would mean a reduction in exploration drilling.

And obviously exploration, although we have good products and good technologies there, we really draw more of our revenue stream off of the Completion & Production side of the cycle. So I think, to answer your question is yes, we could grow our international revenue in 2009, even with a 10% reduction in capital expenditures in that year.

Okay. Thank you. My follow-up question for you, Dave or Tim, is industry wide, not what Halliburton strategy, but industry-wide in the US, how far would you expect and you can use range, US stimulation prices to come down, both on a contract basis and a spot basis, from where they were in the third quarter, early fourth quarter of 2008?

I think we have provided a little bit of guidance earlier, in terms of our expectations about prior cycles, using them as models for the current cycle. I think what we can say also is that our experience has been that we clearly see a significant portion of that shortfall, which we described as 1,200 basis points, we historically have seen a significant portion of that occur in the early part of the down cycle.

So that perhaps provides you a little bit of indicator there. But I am afraid really not possible for us to provide you any detailed expectations here at the present time.

Yes, I think, Jim, this is Dave again,obviously the big question mark is where does the rig count end up dropping to. The only thing we can use past downturns to judge from is with the benefit of hindsight, knowing what the rig count did from top to bottom, and in looking back for some sort of correlation. I think right now the question is where is the rig count going to sort of bottom out. And I know that even within the group on this call there is a wide variety of conclusions around that.

I think the points that we want you to take away are one, we have a strong position in the US. We have the strongest position in stimulation. A lot of the rigs that have fallen off so far have been those commodity-type rigs, drilling in conventional areas, for a customer that we did not work for anyway. And I think that with our differentiated technologies, we really do believe we can outperform the market. The question is what is the market going to be?

And I think the other point that Tim made is an important one, is that if you look back historically, most of the fall-off in pricing, basically happens in the first quarter or so, and then sort of pricing finds the bottom, and gets stabilized, and so it creeps back, or attempts to creep back from that point. But as I said, we are going to protect our market share. We typically grow our market share in these kinds of markets, and I just don't see any reason why that is not going to happen again.

Our next question comes from Dan Pickering from Tudor Pickering and Holt.

Good morning guys. Dave, can you talk about, obviously this is a fluid marketplace, and how long do we sort of watch the commodity price environment, before actions get more stringent, whether that means a slower CapEx number, or more aggressive cost cutting measures? What is sort of the timing of making decisions around more significant actions?

I think, Dan, it really goes back to, we can watch commodity prices, we can watch the rig count, but the one thing we absolutely have control over and can watch is our cash flow. And so those will be inputs to the amount of cash flow we can go ahead and generate, and whatever the market hands to us.

It is going to be within that free cash flow that we make our decisions around additional cost cuts, or trimming back the capital budget, and since we can watch our cash flow almost on a daily basis, I would say that we can make that decision on a real-time basis.

Okay. Thank you. And then in an environment where things are slowing, last year we took a run at a big acquisition. Do you think acquisition opportunities are going to emerge, and sort of where do they fall on your level of interest, relative to organic capital spending and share repurchase and the like?

I think clearly there are some M&A targets out there that look more attractive, at the pricing that we are seeing in the market today. I think up until the last 30 days or, so I think the expectations of value versus what the market was putting on in terms of value, there has been a huge disconnect.

I think to some extent, that emotional disconnect is starting to contract a bit. But I think that, as we have said, as long as we continue to see growth opportunities within our ability to grow organically, that would be the safest, and I think most prudent direction to go.

But if we do see market opportunity to add to our portfolio in a way we think would add some long-term value, and we think we can pick it up on a basis that makes sense, we clearly would take a look at it. So we certainly have have our radar up and working, but I think that it is really now that sort of the emotional view of value, is now starting to equal what the marketplace is putting on in value. So those discussions may accelerate, and they may go nowhere at this point.

Our next question comes from Mike Urban from Deutsche Bank.

Thanks. Good morning. I bet you hope you never would have to talk about KBR again, but here we are unfortunately. I realize you can't speak specifically to FCPA settlement, but more broadly regarding the indemnification, with KRB, can you remind us of the scope and timing of that, for instance, are there any other potential liabilities out there be should be aware of? I know KBR has been in the news recently with some potential issues on their [award]. Just wondering if there are there any caps, the timeframe of that, and any other things that are at least on the radar screen?

Mike, I am sorry, but we are not going to take any questions regarding KBR, and the indemnification there. What I encourage you to do, is go back and look at the third quarter 10-Q, which discusses the indemnity, and the specifics about what is left out there. We don't really have any other update on timing on other issues.

Okay. Will do. That is all for me. I think the rest of my questions were answered. Thanks.

Our next question comes from Waqar Syed of Tristone Capital.

My question is, on continental Europe there are some reports that activity may be up even this year and in coming years. My question is, how are you positioned there vis-a-vis your competition, to capture incremental business there?

And second question relates to share buybacks. You had no share buybacks in the fourth quarter. What makes you change your strategy regarding that in '09? Thanks.

This is Tim. I will take the first part, then Mark will comment on the share buybacks.

With respect to Continental Europe, you are absolutely correct, it has been a particularly active area for us in 2008. We feel are very well-positioned throughout continental Europe and eastern Europe, and we do expect to see a continuation of activity, both in terms of sort of gas activity, storage activity, and we expect to see that continue.

One of the advantages of that marketplace is that it actually plays very well into some of our strong suit. It is directional drilling, it is fracing, it is completions, and as Tim has said, that is an area that we have been pleased, particularly pleased with the direction that market is going. That is one of those markets that we are investing in and have invested in in 2008, and into 2009.

With respect to the question on the share buyback, obvious we were in active negotiations with government officials in Q4, and therefore could not get back into the market to purchase our shares back. Obviously with the announcement today, and hopefully the prospective conclusion of this effort, once we get that behind us, obviously that is something we will take a look at.

All right. Thank you very much.

Our next question comes from Kurt Hallead of RBC Capital Markets.

I am fine, I will take it offline. Thanks.

Mary, we will take one more question.

Our last question comes from Robin Shoemaker from Citigroup.

Yes, thanks. Just wanted to pursue a little bit you comment about the restrained nature of your workforce reduction that is ongoing, and I fully appreciate in that the last two downturns we kind of has a V-shaped bottom, and you had a recovering market, relatively soon after hitting the bottom of the rig count slide.

At what point might you decide that this time might be a different scenario, where we stay at a relatively low level of drilling for a while, or I am sure you have a Plan B with regard to this restraint, but it obviously has earnings implications for the near term, and I just wonder what timeframe you are thinking about, to make a decision about the recovery potential of the market?

Just to reiterate, the strategy we have is basically to minimize the reductions, because if you look at that time severance costs, the rehiring costs, and the retraining costs of an employee base to handle an upside, it almost always is more than or at least equal to the cost of carrying that employee base through a rather sharp downturn.

So I would say that what we will do is we will probably want to go a couple quarters into this year, albeit maybe carrying a few more people than people would think. It is always one of these hindsight kinds of decisions. You look back and say, well, you should have kept more, our you should have cut more people. My view is that we will probably wait until the end of the second quarter, size up the market at point in time, then see whether any further actions are necessary.

Right. Okay. And just one other thing. In terms of the capital, living within your cash flow in terms of capital spending, if the consensus earnings estimate for Halliburton is anywhere near correct, you would have, and given also your 900 million of DD&A, you would have quite a bit more cash flow, than your $1.8 billion CapEx budget.

And yet you are indicating that you may cut CapEx if earnings declined. So to the extent you have free cash flow, it sounds like acquisitions would be first priority, then potentially share repurchases? Is that correct?

Yes, and I wouldn't say that acquisitions first, and share repurchases second. I think that they are not mutually exclusive. But we certainly would have have the ability to look at both of those, and weigh them in the balance. But you are absolutely right, we are going to live within our cash flow, but we expect to be able to spend capital at the levels that we indicated to you, and still be well within the cash flow we have.

Thank you.

That will do it. Thank you for participating in the call. Mary, let's close it out.

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