哈里伯頓 (HAL) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Halliburton's first quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) I would now like to turn the conference over to your host today, Christian Garcia, Vice President, Investor Relations. Please begin.

Good morning, and welcome to the Halliburton first quarter 2009 conference call. Today's call is being webcast and a replay will be available on Halliburton's website for seven days. The press release announcing the first quarter results is available on the Halliburton website. Joining me today are Dave Lesar, CEO, Mark McCollum, CFO, and Tim Probert, President, Trading and Evaluation Division 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, 2008 and recent current reports on Form 8-K. During the first quarter of 2009, we restated our historical financial statements for the adoption of certain new accounting pronouncements and transferred selected operations from the Completion & Production to the Drilling & Evaluation segment. For more details on the effect of these restatements in prior periods, please refer to our earnings release. 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 David Lesar. Dave?

Thank you, Christian, and good morning, everyone. The industry experienced an unprecedented decline in activity in the first quarter, which obviously had an impact on our financial results. The US rig count has dropped over 50% from its August 2008 peak. There can be no certainty on when the decline in activity will bottom out. This downturn so far is worse than previous cycles in terms of the speed of the decline. The steep drop-off in activity has led to reduced volumes and intense pricing pressure for the remaining available work, and therefore has caused severe compression in margin for all of the services industry.

Outside of North America, international markets were more resilient than the domestic market. However, our business started to see the deferral of several projects in line with the behavior of past cycles. We're also seeing E&P operators focusing their efforts on removing service costs inflation under domestic and international projects by seeking to secure cost concessions from their supply chain.

Here is a summary of our first quarter results. Total revenue was $3.9 billion, and represented a decline of 3% from the first quarter of 2008. This is against a backdrop of a 19% decline in worldwide rig count year-over-year. On a macro basis, I believe that this shows our strategy of balancing our geographic and product line portfolios continues to be successful. Despite a 30% year-over-year decline in North America rig activity, and the impact of price degradation, our North America revenues declined only 10% year-over-year, due to share increases in select locations and favorable service mix from shale plays. North America margins declined to 14% from lower volumes and intense pricing pressure.

International revenues grew 3% from the first quarter of 2008, with Latin America contributing growth of 9%. Our international growth was significantly affected by unfavorable year-over-year currency movements in select locations, but notably in the North Sea, Mexico, and Brazil. However, overall international margins remained a healthy 20%. These results indicate that we have executed well in a very challenging environment. Our strategy of protecting or increasing our market share, lowering our input costs. and growing our business in select locations, has helped mitigate the impact of this downturn on our financial performance.

Let me now turn to the results of North America and look at our prospects for the coming year. North America revenue dropped 25% on a sequential basis, on a 30% sequential decline in rig count. The largest declines came in the Permian Basin, the Rockies and the Mid-Continent. Although our revenue drop was substantial, I believe that this is a good performance, given that the 30% rig count drop and significantly lower revenue opportunities, which were then compounded by pricing pressures on all remaining work, as everyone tried to keep their equipment utilized.

We had less severe activity fall-off in the complex shale plays like the Haynesville and horizontal drilling in the northeast. Activities in these areas, along with the Gulf of Mexico. and their associated service intensity. assisted in moderating the effect of this weak drilling environment in the first quarter. In addition, as we've stated before, there was a group of customers who wanted to work with us because of our proven track record and superior technology, but we could not serve in the past because of equipment shortages. With the decline in activity, we have now been able to begin to serve these customers. However, all markets remain susceptible to additional adjustments by our customers. Canada has also shown a lower drop-off in revenue than the US land. and has now entered spring break up season. We expect Canadian activity will not recover to prebreakup levels in the latter half of the year. We also saw price erosion in all product lines and expect that pricing for our services will remain under pressure until activity stabilizes.

The timing of when natural gas supply and demand fundamentals improve is uncertain. We expect that customers will continue to look at and adjust their spending plans until this happens. We indicated in our fourth quarter call that we expect that the activity decline will lead to a supply response sometime before the end of the second quarter. Recent data points that we are seeing, although still inconclusive, provide us with positive indications that this may occur. We expected that 70 to 75% of our North America margin compression would come in the first quarter. Given the unprecedented decline in the rig count and the added impact of the financial crisis on our customers' ability to access the capital markets, I believe we will continue to see additional margin compression in our North America business.

Let's look at our international business for a second. We believe that Latin America will continue to be a bright spot in 2009, with increased activities in Brazil and Mexico. We expect to expand our already strong position in those markets by continued penetration of our differentiated well construction technologies. We expect that worldwide deep water activities for development work will be resilient in this weak commodity market. Deep water provides our company with significant opportunities, as customers value our unique technologies to increase their productivity in these challenging reservoirs. We enjoy leading deep water positions on a global basis and so many completions, stimulation, and a number two position in directional drilling, LWD, and drilling fluids.

The current downturn is different from past cycles due to the overlay of the global credit crisis, in combination with broad demand weakness. Certain international markets such as Russia and the North Sea are already exhibiting particular weakness in activity due to the lack of access to external financing to fund development projects. Resolution of capital access issues will be key to restoring activities in these markets in the remaining of the year. We've also seen our international customers seek to improve their project economics, by reducing execution inefficiencies and lowering costs in their supply chain. It's our intention to leverage the full breadth of our solutions portfolio to assist our customers in meeting their objectives. We think that our broad-based integrated offerings is a key competitive advantage in this marketplace.

In the first quarter, activity drop-offs have been sharp, and have accelerated throughout the quarter, and we took actions to offset some of the impact of the downturn on our financial results. We've eliminated discretionary spending, and consolidated operations in areas of reduced activities. Our large international infrastructure has provided us an opportunity to lower our vendor costs from the supply chains that we have built up over the past years. And Tim will provide you with progress in this area when he talks in a few minutes.

While it has been our desire to minimize head count reductions during this down cycle, we found it necessary to reduce personnel in the first quarter. We said last quarter our objective was to live within our cash flows. And despite the FCPA settlements, we generally accomplished this in the first quarter. We invested $518 million in capital expenditures, in line with our build program for the year. We continued to believe in the long-term prospects of this business, and our goal is to continue with our capital program in the range of $1.8 billion, which is about the same as last year.

It's a well-known fact that the industry's equipment was used extensively in the last upturn and the entire industry needed to refresh its capital fleet. Our capital program allows us to, one, refresh our equipment that has been heavily utilized during peak periods; two, to build new and more robust technologies for deep water and higher horsepower units for the new shale plays, and for higher pressure, higher temperature environments. And three, this current environment allows us to benefit from lower supply chain costs, so we can build more for the same amount of money. This capital expenditures program is consistent with our strategy of balancing growth and returns. We have historically generated one of the highest returns in the industry, and we believe that this strategy will continue to deliver superior long-term value for our shareholders.

As I stated in our fourth quarter call, we will draw upon our management's deep experience in navigating through previous downturns. Our first quarter results indicate that so far, I believe we've executed well in addressing the industry's current challenges. We have successfully increased our market position in several areas in North America, while growing in key markets internationally. We continued our investments in technology, which will expand our competitive advantage, and position us for longer term leadership in key markets.

I would like Mark McCollum now to go over in more detail the financial results for the quarter. Mark?

Thanks, Dave, and good morning. I'll be comparing our first quarter results sequentially to the fourth quarter of 2008.

Our revenue in the first quarter was $3.9 billion, down $1 billion, or 20% from the fourth quarter, as all of our product service lines showed marked declines from the previous quarter. As Dave mentioned, the steep curtailment in activity and corresponding pricing pressure affected our overall financial performance. In addition, we experienced seasonal declines resulting from the normal fourth quarter spike in revenue for landmark software, completions, and direct sales. On a geographic basis, all regions registered declining revenues. with North America experiencing a 25% sequential decline. resulting from price erosion, and a 30% drop in the average rig count. As a result, North America operating income dropped by 57% sequentially. and margins have now declined by approximately 1100 basis points since activity peaked in the third quarter of 2008.

In our fourth quarter call, we discussed that in the 2001-2002 cycle, our overall North America margins declined 1200 basis points from peak to trough. Given that the current US downturn is more pronounced than the previous cycle, we are currently anticipating that we will experience additional North American margin compression, which could exceed that level by another 300 to 500 basis points in the short-term. Ultimately, the overall contraction of our North America margins will be dependent on the eventual depth and length of the industry's downturn. International revenue decreased by 17% sequentially, due to lower activity and the typical seasonal declines for Landmark, Completion Tools and direct sales of manufactured equipment.

Overall, operating income decreased $547 million, or 47% from the fourth quarter in 2008, resulting from lower activity, pricing erosion, and employee separation costs, partially offset by cost savings previously mentioned by Dave. Our fourth quarter 2008 results included a $35 million gain from the settlement of a patent dispute, which was recognized in corporate and other. Our first quarter 2009 results included $28 million in employee separation costs. These costs are incorporated in each of our segments and regions, as well as in corporate and other, depending upon the location of the affected personnel. Unlike other companies, we have not excluded these costs and the comparisons that follow.

Now I'll highlight the segment results. Completion & Production revenue decreased $524 million or 21% from the fourth quarter, while operating income was down 42%. The decline in revenue was driven primarily by lower production enhancement results in US land and seasonal decline in completions revenue. Looking at Completion & Production on a geographic basis, North America revenue decreased 26% and operating income declined by 57%. We experienced significant declines resulting from both decreased activity and price reductions. As Dave mentioned, declines were most significant in the Permian Basin, Rockies, and Mid-Continent areas, and these areas had the most margin compression as well.

In Latin America, Completion & Production revenue decreased 10%, but operating income increased 6% from the fourth quarter, as lower activity in Venezuela was offset by higher margin sales in Mexico and Brazil. In Europe, Africa, CIS, Completion & Production revenue decreased 14%, and operating income declined 30% due to lower vessel utilization and declines in the North Sea, Kazakhstan and Russia. Partially offsetting these declines in these locations were revenue increases in north Africa from higher cementing activity.

In Middle East Asia, Completion & Production posted a sequential decrease in revenue and operating income of 16% and 22% respectively, due to higher Completion Tools sales in the fourth quarter. In our Drilling & Evaluation division, revenue decreased $479 million, or 20% and operating income declined 46% with unfavorable sequential results in nearly all product service lines. Typical fourth quarter increases in software sales and direct sales contributed to the decline. In addition, the division experienced significant activity weakness in North America, Russia, Venezuela and the North Sea.

In North America, Drilling & Evaluation revenue declined 24% and operating income decreased 59%, with all product service lines registering sequential decreases. On a percentage basis, Sperry's revenue declined the least among the product service lines in this division, as it benefited from a favorable mix toward horizontal drilling, which now accounts for over 40% of total rig count. In addition, Sperry had sequential revenue increase in the Gulf of Mexico, as activity shifted toward drilling rather than completions in the quarter.

Drilling & Evaluations Latin America revenue declined 22% and operating income decreased 47%, driven by lower activity across the region, but most notably in Mexico and Venezuela. The division benefited from strong Sperry activity, and seasonal revenue increases for Landmark in the fourth quarter of 2008. In the Europe-Africa-CIS region, Drilling & Evaluation revenue decreased 16% and operating income declined 39%, due to lower Sperry and wire line direct sales activity in Russia and north Africa. We continue to expect growth in north Africa for the remainder of the year.

Drilling & Evaluation revenue and operating income in the Middle East , Asia were down 20% and 38% respectively. Lower direct sales in Asia and weak activity in Saudi Arabia were the primary drivers for the decline. We are currently ramping down the Khurais project and expect that demobilization will be complete by the middle of the second quarter. We are anticipating that our work on the Manifa project would partially offset the revenue impact of the finalization of Khurais, however, the startup of the offshore portion of this project has been deferred.

Now I'll address some additional financial items. In the first quarter, we issued $1 billion of 10-year senior notes at a fixed rate of 6.15% and $1 billion of 30-year senior notes with a fixed rate of 7.45% for a total of $2 billion. While these notes provide incremental carrying costs of approximately $34 million per quarter, we believed it was prudent to issue them when we saw a window in the market rather than be dependent upon the proper functioning of the credit markets at whatever future point in time we might need to access them. These notes provide us with additional flexibility to weather this financial storm and to take advantage of potential strategic opportunities on our terms and within our timing. As of March 31, we had $3 billion of cash and equivalents, an increase of $1.8 billion from December 31, primarily resulting from the $2 billion note issuance.

For the first quarter, we used $84 million of cash before financing activities, primarily due to the settlement payments related to the FCPA investigation of $274 million. Without these payments, we would have generated positive cash flow, consistent with our focus on working capital management and cash generation. We anticipate that corporate expenses will be approximately $50 million to $55 million per quarter for the rest of the year and we expect our 2009 effective income tax rate will remain in the range of 32 to 33%. And finally, we expect depreciation and amortization to be approximately $225 million to $230 million per quarter, or about $900 million in total during 2009.

Thanks, Mark, and good morning, everyone.

Drilling activity declines within the current North America cycle have been discussed in some detail, but let me add a few comments on pricing. The current pricing environment is extremely challenging, but the actions we've taken have been consistent with our focus on protecting our share and improving our market position. While the eventual debt for the North America cycle is uncertain, it's worth noting that the subcycle of oil-directed activity is exhibiting signs of a bottom. The international down cycle is under way, with rig count falling by 9% from the September peak in 2008.

Using past cycles as a guide, there's a clear risk of a further decline in the international drilling market and the current demand in commodity price scenarios. Generally, past international cycles demonstrate differences in amplitude and timeframe compared to the US. International cycles tend to be shallower and longer in duration and follow US cycles by one or two quarters, much like we're experiencing now. International work is primarily driven by larger IOCs and NOCs involving more complex projects, and involve service contracts with longer terms. These attributes have historically made international activity lag during periods of rising commodity prices, but likewise, slower to adjust when oil prices fall.

What's so unique about this international cycle is the pace at which our customers have focused their efforts on lowering the cost of their projects. According to CERA, upstream capital costs have increased by 130% since 2000, with much of the costs rising since 2005. While it's important to point out that this data includes execution inefficiencies, as well as inflation, operators have approached their key service providers to facilitate the reduction of the project costs nonetheless. We are working closely with them to trade an expansion of scope and the lengthening of duration with contract renegotiation milestones for price concessions. Improving international project economics is the key driver for our customers, and it's incumbent on us to participate in this effort, which in some respects could lead to what could be characterized as a cost inefficiency-led recovery in the current price environment.

To address the impact on margins, we are focusing our efforts to lower our input costs across our global network. Of our total costs, about one third are personnel based and two-thirds are dependent on our supply chain management structure in one form or another. We've targeted 17 categories that represent 60% of the spend, comprising several hundred suppliers from whom we're seeking reduced pricing to match current market realities. In the first quarter, we finalized negotiations with suppliers that represent over half of the targeted spend.

Additionally, we are benefiting from new manufacturing centers in emerging markets opened in 2008. As activity weakens in 2009, we're carefully preserving work in our lower cost manufacturing centers located in Malaysia, Singapore, Mexico, and Brazil. The timing of lower supply costs being reflected in our financial results is a function of several factors, including our inventory turnover rates. We do not expect to see meaningful impact of these cost savings until the second half of the year.

As Dave pointed out, it was also necessary to take more significant actions relating to our labor-related costs in the quarter than we had expected earlier. For example, we've reduced our head count in North America by 12% in the quarter. Overall international margin pressure was modest in the first quarter and while we are working hard to mitigate its impact, we expect the pressure will intensify in the coming quarters. The less acute trajectory of the international cycle does, however, afford us the opportunity to address many aspects of our cost structure on a more timely basis. As a result, ultimate pressure on margins will be less severe than North America.

Dave?

Thanks, Tim. Let me just wrap up with a few closing comments and then we'll open it up for questions. I think as the first quarter results show, I believe we responded well to the unprecedented decline the industry has experienced in the first quarter.

We have protected our overall market share and included and enhanced it in other areas. We've made significant progress in lowering our supplier costs and continue to make strategic investments that will expand our competitive advantage. Industry prospects will continue to be weak in the coming quarter and visibility to the ultimate depth and length of this cycle remains a bit uncertain. However, we are confident that our management team is prepared to meet the challenges that are forthcoming.

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

(Operator Instructions) Our first question comes from Brad Handler with Credit Suisse.

Thanks, good morning.

Good morning.

Can you all please just amplify a little on your US, your North America margin comments. I think I heard you say down another 300 to 500 basis points from the first quarter level. But perhaps -- I just want to sort of clarify if I heard that right or if it was a 300 to 500 basis points from a different reference point, first of all. Then maybe as a related side question, can you comment on kind of the March exit margin at all, perhaps we are already pretty close to that, down another 300 to 500 basis points in March. So are you looking for something that's essentially already kind of flattish, if that's the guidance?

Hi, Brad. Good morning. This is Mark. I don't know that I can comment on our March exit margins, but I can clarify the comment on the 300 to 500 basis points. That was in reference to the 1200 basis point decline that we had seen back in 2001 and 2002. As Dave mentioned, we were expecting to see about 70 to 75% of the overall margin decline in the first quarter and based on then what we saw happen during the first quarter, we're sort of extrapolating on what we think will happen again over the next, over the next short-term period. Obviously it's a very fluid environment. I think the ultimate extent to what the margin compression will be in this cycle is going to be very dependent upon the length and the depth of the downturn, how far rigs fall and the resulting excess capacity that we see in the market, as customers continue to adjust their capital plans and there is going to be excess capacity in certain product service lines. It could be different over the longer term, but this is sort of what we can see at this point in time.

And is that timeframe close enough, near enough that you're basically saying you're not getting any of the benefits of cost savings in that? This is purely the revenue and the price -- the volume and the pricing pressures could take you down another 500 basis points, or total of 1700 basis points, I suppose you would say from a year ago.

This is Tim. Just sort of with respect to the reduction of our input costs, as I had explained, absent the adjustments that have been made to personnel which we unfortunately had to make in Q1, the 60% of that sort of cost structure, which is represented by our supply chain, we don't expect to hit until the second half of the year. We obviously have to move it completely through our inventory with the slowing of activity that has a tendency to reduce the number of turns which you see in the system. So I think it's appropriate to reflect any of those savings during the course of the second half of the year.

That makes sense.

This is Dave. So let me sort of summarize, I think what you've heard. I mean the issue is that price compression is today and is now. And so as Mark has indicated, I think we are looking at potentially a 3% to 5% -- 300 basis points to 500 basis points additional pressure off the margins we saw in Q1, and of course, that is going to be dependent on where the rig count ends up bottoming. And then I believe we will start to get some help in the back part of the year as we start to push through some of the cost savings that we are now starting to get from our customers through our financial statements and hopefully that will mitigate and maybe reverse some of the margin hits that we're taking at this point in the year.

Understood, okay. Thanks.

Our next question comes from Robin Shoemaker with Citigroup.

Thank you. In staying with the North America theme, in terms of the activity decline we're seeing, and your response to it, what part of your current strategy in response to this downturn is more of a permanent or structural nature? You mentioned that Permian, Rockies and Mid-Continent are down worse than other markets. I assume you have -- you kind of have a view of where activity will recover and where it will not. And I wish -- I would just ask you if you could address that question as to how much permanent cost reduction are you taking out now based on your view of the market going forward?

There are two elements really. I think number one is what ultimately does activity come back, I should say at what level does it come back, and certainly it will not come back to the same level that we went into the downturn. That's point number one. Then point number two relates to the geography, where will the focus be. And clearly I think we will definitely see some differences with respect to the picture of North America as we come out of a down cycle. And clearly we're making adjustments to our infrastructure to reflect that. But truly, Robin, just sort of telegraph what sort of changes we might be making to those structural elements of our business probably is a little bit premature at the present.

Okay. And also, Tim, you mentioned your strategy on the international side of trying to get some value in return for lowering your prices, or granting some price concessions in already negotiated contracts in terms of either lengthening the contracts or something that would give you value for what you're giving up. Could you -- are you having success at that? Is that something that's going over?

There are a couple of key levers we can pull with respect to these situations. I mean number one obviously is duration. That gives us an opportunity to extend the duration beyond the current downcycle in the industry. The second relates to scope. That is to add additional services or products into a contract which may not necessarily be currently in place.

The third lever is to, in some way tie that, an opportunity to renegotiate to some element. It could be commodity price. It could be some other elements of time duration, for example. So I would say yes, we are having some success in negotiating along those lines.

Okay. Thank you.

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

Hi, good morning. So on the international market, then, you guys found to be a bit more constructive relative to prior cycle terms. So is it fair to say that you won't see -- you don't expect to see the same sort of margin compression that, let's say, you experienced during the '97 and '99 downturn in international markets? Do you think it will more look like 2001, 2002, or maybe somewhere in between?

Yeah, this is Dave. I think, we really only have sort of one quarter of data points in front of us in terms of the international market, but I would say that it's behaving more like the latter than it is like the former at this point in time and that's where we would expect it to turn out given what we see right now.

Okay, and then, Dave, it seemed like coming into the year, January, February, all your customers pretty much had put everything on hold, gave you guys absolutely zero visibility. Conversations I've had the last couple of weeks, it seems like there's been some subtle change in intonation, where customers are now giving you some general sense as to what they are planning on doing for the rest of the year. Are you guys seeing the same thing? Is that adding to your confidence? And what do you think the trigger point is for your customers all of a sudden to start to give you a little more visibility?

Well, I think, yeah, there's a number of questions there. A lot of it had to do with the fact that we have had significant discussions with our customers about their plans because they went through many, many iterations of their own capital budgets before they announced anything and then are constantly updating them. So part of the discussion is just give us some indication what you're going to do here, so we can make sure we have the people and the equipment available and that the whole, the industry doesn't look at either closing down locations or furloughing employees or stacking equipment and then you, customer XYZ, turns around and wants some services. So part of it was just a more intensive dialogue with our customers about their plans.

I think you're seeing a variety of behavior in the marketplace today. You have some customers that are just flat shutting in gas production until the pricing gets better. We have a subset of customers that are drilling, but are not completing wells. And we have some customers that are drilling and completing and then shutting their production in. And so the discussions we're having with them are on a day to day basis on a rig to rig basis about what their plans are for that rig, where it's going to go, what it's going to be doing and what services we're going to get on that. So I'm not sure that we're getting any clearer of a picture as to where ultimately it might go, but the communication is a lot more intensive than it has been.

Thanks, Dave.

Our next question comes from Ole Slorer with Morgan Stanley.

Thank you very much. So if I understand you guys correctly, you seem to indicate that margins will trough in the second half of the year, sorry, in the second quarter in North America, that you'll get some benefit of the cost reductions in the second half, but that it's too early to talk about what sort of shape the recovery will be. If you if we look internationally again, I think the debate right now is does this market trough in 2010, in other words, benefiting in a big way from contract signed at historic prices this year that will gradually roll over and result in lower margins in 2010? It just strikes me that that thought is a little too simplistic in that the volume that you'll execute under a contract might very -- say we have a first quarter environment that everybody's trying to figure out the economy and everything else under the sun. Can you just gain -- bring us up to speed on how you see this dynamic play out in the various regions around the world, whether you can actually see certain margins that might have already troughed?

Ole, this is Dave. Let me take a first shot at that. I think unlike the US business, which has traditionally been more of a short-term or a callout sort of business, pricing has collapsed ahead of our ability and the industry's ability to sort of push costs through our supply chain to try to preserve the margin base.

I think the one positive aspect of the discussions that we're having with our customers on the international front right now, because we know what contracts we hold, we know what option periods those contracts involve, and we know the discussions we're having about either expanding scope or expanding the duration, and the fact that these are contracts we know we will have 12, 18, 24 months from now, we're much better able to get our supply chain costs in line with the sort of cost reductions that our customers are asking for, so therefore I don't think you'll see the mismatch of our prices going down, but our costs not being able to closely follow.

So I think we'll be able to more closely match the revenue reduction opportunities with the cost and supply chain reduction side of it. So I don't believe that you are going to see, as far as we can see at this point in time, the sort of margin compression that you're having in the US in the international marketplace.

One follow-up. You mentioned a 9% down rig count, Tim, but a lot of the business is also rigless. And what are you seeing in terms of volume in general under your frame agreements? Is any of that international starting to pick up because you're talking about -- there are several types of activity that can be curtailed if another company wants to be in cash conservation mode. Are you seeing any of this turn around yet?

Ole, I think it sort of varies from place to place. If we take a look at the North Sea, for example, or the UK section of the North Sea, there are only 18 expiration and appraisal wells drilled during the course of the first quarter. And in that case, there's a fair amount of rigless activity, intervention activity, which is planned. In other areas where there are major projects planned, the sort of rigless activity sometimes takes a second seat or a back seat to the major capital program, so it's a little bit difficult to generalize. However, I think in a reasonable price commodity environment, there certainly are plenty of opportunities for rigless activities to essentially bolster the overall revenue strength.

But to sum it up, so 2010, should margins trough in 2009 or 2010 internationally?

I think it's a little too early to say, Ole, at the moment. I mean we're sort of one quarter into this, and as you know, I would just sort of add one thing to emphasize that many of our customers are very concerned about their overall project costs and those concerns are clearly being manifested in terms of discussions we're having with them as are others. But it's the timing of them getting back to their primary programs, which will determine the exact trough, whether it's in 2009 or whether it's in 2010.

Okay, thank you very much.

Our next question comes from Jim Crandell with Barclays.

Good morning. First question is about the horrific price discounting and stimulation in the US. Given where we are on a capacity utilization basis, say it's less than 50%, and given there's some, I don't know, 13 or 14 publicly traded or significant private companies in the business, is it possible or maybe even likely that even in a recovery we may not see prices recover or recover much at all in that business?

This is Tim, Jim. I think that clearly we're starting to, you know, we're seeing some extreme pricing pressure right now. I think we're starting to see some of the smaller supplies clearly pricing on a cash basis, which is placing quite a bit of stress in the system. I think that's quite clear. In terms of a recovery, I think we just have to look back at past cycles to be our best guide in terms of the way in which pricing, pricing recovers and I think that clearly, as we discussed a little earlier during Robin's question, the industry is going to look quite a lot different, I think, when it recovers this time and I think we're going to certainly ensure that we place ourselves in a position where we take best advantage of the newer plays and structure ourselves on to take advantage of a rising pricing environment.

Yeah, I think, Jim, this is Dave. Let me just add a little bit to that. I think we've talked on a number of calls, that there is a lot of pressure pumping, and there are a lot of pressure pumping companies out there, but we really don't compete head to head against very many of them. We have focused on the high pressure, high temperature, high horsepower, tight gas, CBM, shale plays into the business and really work with a select group of customers. And, you know, that group of customers is going to be there, is going to survive through this, and is going to continue to want our technology and our capability when we get out, get out the other end of this. So I think that for the part of the business that we compete in and the customer base we have, I don't think I would be as concerned about our ability to get price increases at the time when this thing turns.

Okay, but I would just say, Dave, there's a lot of anecdotal evidence on big horizontal, multistage jobs of frack pricing by Halliburton and others being 40% down or more in the marketplace and I would say that the weakness in pricing is certainly not just a shallow area that you don't compete in. It seems to be square in your markets as well.

Well, I mean, it's easy to point to an individual job with an individual customer, where a pricing decision got made. But I think, Jim, that we're pretty confident that when the supply demand tightens up, that we should be able to look at pricing increases at that point.

Okay, and just a follow-up question. Back to the international markets, certainly your competitors are saying that the Russian market and the UK North Sea market as well as maybe Latin America, ex Mexico, have now bottomed. Would you agree with that, particularly in Russia?

Jim, I think that, there's a lot of evidence, anecdotal evidence around, but I think that worry just going to be cautious in our reflection of that. I think it's just too early to say at the present time. You know, we still, we're still continuing to see some slippage in terms of overall rig counts. Again, looking back in history towards our traditional international cycles, we still have a ways to go yet. So I really think that one quarter into this thing is just too early to say.

Although, Jim, let me just add, I think of the two markets you referenced, I think we feel that the Russia market on the long-term and even in the short-term probably is closer to turning around than the North Sea is.

Okay, thank you.

Our next question comes from Bill Sanchez with Howard Weil.

Good morning. Was curious, Tim, or Dave, if you could provide a little bit of color as it relates to we're hearing about IOCs gearing up for upstream bidding in Iraq. I thought perhaps you could share your thoughts as far as Halliburton's positioning there and your outlook.

Halliburton's had a long history in Iraq through the years and once we have a presence there and we're generating revenue in Iraq, we don't have operations on the ground currently. We're obviously monitoring very closely the activities both in terms of the potential for service contracts for the majors in Iraq and also conventional activities. And we certainly feel that notwithstanding security issues which could still derail current plans, that there will be some significant opportunities over the next three or four years.

Okay. So is that something, Tim, you're gearing up for now to take advantage of 2011, 2012 type situation, or what is timing for you getting on the ground there?

Yeah, this is Dave. Let me add to that. I think there's really two sort of thrusts that will go on in Iraq. We are having discussions with any number, any large number of IOCs about their ongoing discussion with the Iraqi government about starting up operations in there, and for us, that will be done on a more traditional services-type strategy and philosophy.

But there is also discussions going on at this point in time with some of the Iraqi oil and gas companies about integrated project management, IPM, turnkey, whatever you want to call it types of opportunities. And we do see that there may be a number of those opportunities starting to come up, maybe even faster than the opportunities come up with the IOCs. As Tim has said, we recently won a wire line bid in Iraq, so we'll start operations in there shortly, but I don't think it will be any meaningfully large addition to our revenue stream certainly for a number of years.

Okay. Thanks for that. Tim, or Mark, I think last quarter you'll mention the seasonality in fourth quarter 2007 to first quarter 2008 had cost Halliburton $0.07. Mark, do you have that number for this quarter?

Bill, sorry, I don't have that exact number, but I think it was just sort of thinking broadly. It was a fairly close to in line with what we thought it was going to be in terms of the seasonality, from the particular pieces, the direct sales, Landmark, seasonal decline, as well as completions and how they fell.

Okay. Thank you all.

Our next question comes from Michael LaMotte from JPMorgan.

Thanks, good morning, guys. First question, I guess Dave or Tim on the demob around Khurais and the opportunity for replacement work, is there anything in Saudi on a gas side that would keep you in country, or are you looking to reallocate those resources elsewhere in the region or the world?

Mike, this is Dave. As you know, the Saudis are very good at sort of reallocating market share within the country once they decide which contractors they want to work for. So as we indicated, with Khurais ramping down, we thought Manifa would essentially replace it. Manifa has been deferred at this point in time. I still think it will come at some point in time in the future. But what they are doing is they are reallocating some of the rigs that we were on, two other rigs that they are operating within Saudi, but they are also talking about potential of looking at some gas plays and more importantly, some tight gas plays that they are very interested in in the country and I suspect that we'll get a shot at doing some of that.

Okay. So when you say demob it's just sort of pulling back to base, it's not actually leaving the country?

At this point in time, I think we see that we can reallocate the equipment on Khurais to other opportunities inside of Saudi.

And, Mark, was there a performance bonus in the first quarter on early completion surrounding that project, I'm just trying to think about impact potentially margin Q1 to Q2 in the EMEA region?

No, that was just a straight-up time and materials contract that we happened to give very good results on. But there was no bonus payment.

Okay. And then last one, Dave, if I could ask you to elaborate, perhaps, on the final statement in your prepared comments from the press release, that is we will make the strategic investments to emerge even stronger. Are you referring there to the capital program, the strength of it this year, and the recapitalization of the fleet, or were you sort of alluding at potentially more interesting M&A environment?

I think what we're trying to do is indicate that we are getting and keeping our powder dry. I mean I think we have not backed off on our technology spend. And we've got some very interesting technology coming down the pipeline. When we -- want to have the capital budget available to be able to manufacture and bring that technology to the marketplace. The refresh of the fleet I think is something that really needed to be done, not only by us, but by the industry. And then I think we would look at whatever interesting and strategic M&A opportunities might be out there at this point in time. But as Mark indicated, we want to have the financial fire power to be able to do some combination of all of those, and be able to take advantage of whatever the market ends up giving us.

If we think about strategic initiatives for M&A, there's a handful of reasons to do a deal. One is consolidating market and rationalized market. I think the deals you and others have looked at in the last few years have been more about geographic expansion or broadening product line. Any, any change in priority from the last few years, is consolidation more of an interest now?

Well, I think, the price, the prices of the various assets have certainly been sort of marked down to more reasonable values. I think it would be -- it wouldn't be in our best interest for me to try to telegraph what direction we would want to go. But I think the strategy we've had of niche acquisitions, geographic expansion, certainly would still be the top priority. But we clearly would -- clearly would and are looking at broader things than that.

Okay. That's helpful color. Thank you.

Our next question comes from Dan Pickering with Tudor Pickering Holt and Company Securities.

Good morning. I just want to clarify something that came up earlier in the Q&A. I think one of the questioners indicated that you said Q2 was the margin trough for North America. Did you guys say that, do you think it? Can we just revisit that?

I think, Dan, this is Dave. If you can give me a rig count bottom, then I can probably do a better job articulating when we see a margin compression bottom. But I think what I was trying to indicate is that, is that the pricing compression, I think we will see sooner rather than the mitigating effects of the cost savings. So if you ask me when I believe we'll see a pricing compression, margin compression bottom related to pricing, I'm hoping that it is Q2. If the rig count continues to fall all the way through Q2 and into Q3, then, no, Q2 won't be the bottom because we're going to keep chasing it down at that point in time. You know, I would hope that we would start getting some help from the cost savings in Q3 and even if we were starting -- continuing to see price compression, that would be mitigating at that point in time.

Okay. That's helpful. Thank you. My other question, or follow-up question, would be something that hasn't been talked about I guess for probably six months now. But are the Capital Markets and the outlook now such that the company would consider share repurchase as one of the options? That kind of came off the table when the Capital Markets closed. Are we open enough now to think about buying back stock, or is that back burner at this point?

Dan, this is Mark. I think that we are more open to it than we were maybe six months ago. I mean it's a good question and I think that the Capital Markets have proven more resilient for the higher investment grade companies such as us. We did access the capital market and it seemed that we could continue to do so. It's certainly not our interest to borrow, but we've got -- we would like to use the cash on our balance sheet to grow with capital, as well as with prudent M&A opportunities, but if they are not out there and we deem it to be the best use of cash to start buying some shares back, then you may find us doing so.

Okay. So it sounds like CapEx first, M&A second, opportunitistically share repos third, but no longer off the table?

Sure. As Dave obviously alluded to in the call, it's very important to us this year, given the lack of certainty that we have about the direction of the financial markets, to operate within our cash flow. And so that's, that's an important directive. And obviously we intend to try to generate cash through this, through the unwind of working capital, and through some of the cost savings initiatives that we've done. But we're going to watch it very closely in discussion with our board.

Thank you.

Okay. We'll take one more question.

Thank you. Our final question comes from Mike Urban with Deutsche Bank.

Thanks. Good morning. Did I hear you correctly in saying that you saw some anecdotal evidence that you would expect a supply response in North American gas during the second quarter or starting during the second quarter? Was that right?

Yeah, we had said, I think, during our last call that it was our expectation that we would see some sort of supply response during the second quarter, and Dave commented in his prepared remarks that there clearly was, though far from perfect, data beginning to emerge which suggests that that might actually take place before the end of Q2.

And could you reconcile that with, you know, your additional comments that you have seen a lot of shut-ins, that you've seen customers drill, but not complete, drill, complete, but then shut in? So is it the kind of current production which starts to roll over and then does, if that happens, then we get a gas price response, do then you just go back and see the completions come in, any additional production or even LNG for that matter? I'm just trying to roll all of those together vis-a-vis, is it enough that you see rig activity to come back, or is it just a case where existing production drops and then we bring out the completions and you don't necessarily need to put a drilling rig back to work?

Well, clearly, our service operations would benefit from completing those completions. And take a look at the API data. The API data sort of tells us that there has been actually a slip in the correlation between drilling and completions over the last quarter or so, which sort of adds to the kind of support of the view that there is an inventory of wells in place, which is drilled, but not completed. And certainly, the anecdotal evidence from our field operations provides some support for that, too. So, yeah, I think the idea is that those will get completed into a rising price environment and clearly we would benefit from a service standpoint from that when that takes place.

Okay. So it would be more of the completion side of the business, to which you guys obviously have a great bit of exposure rather than expecting a rig count rise? Is that fair?

The count will come back, but clearly those completions will benefit us right away.

Sure, okay. That's all for me. Thanks.

All right. That will do it. Thank you for your participation in today's call.

Thank you. Ladies and gentlemen, thank you for your participation. Everyone may now disconnect. Good day.