哈里伯頓 (HAL) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to your Halliburton second quarter 2009 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. At this time, I would like to turn the program over to Mr. Christian Garcia, Vice President of Investor Relations. Please go ahead.

Good morning. And welcome to the Halliburton second 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 second quarter results is available on the Halliburton website. Joining me today are Dave Lesar, CEO, Mark McCollum, CFO, and Tim Probert, President Drilling & 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 an 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 regarding 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, our Form 10-Q for the quarter ended March 31, 2009, and recent current reports on Form 8-K.

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. Our comments include non-GAAP financial measures and reconciliation to the most directly comparable to GAAP financial measures is included in the press release announcing the second quarter results. Now I'll turn the call over to Dave Lesar. Dave?

Thank you, Christian and good morning everyone.

Here is a summary of our overall results for the second quarter. Total revenue of $3.5 billion represented a decline of 11% from the first quarter of 2009, driven by a sequential reduction in North America revenue of about 25%. Our international revenues remain flat sequentially. The downturn in the international markets, however, has not been as pronounced as I first believed, due the strengthening commodity prices, deflationary cost environment, and stabilizing financial markets which are improving our customers' overall project economics. International margins were 20%, despite the pricing pressures we were seeing from our customers. We are executing our strategy of maintaining our investment in technology and infrastructure, while taking steps to control our costs and improve our financial flexibility.

There are strong indications that we are executing this strategy effectively. Our revenue per rig is growing sequentially. We are continuing to expand our international footprint in select markets, evidenced by the sizable number of recent customer awards. We continue to commercialize new technologies for growing markets, such as the deepwater. We are managing our business within our cash flow, even as we continue to invest heavily in our key product service lines, such as wireline, drilling and stimulation. And we continue to implement cost-cutting measures to address this challenging environment.

Now let me turn to discuss our international business and current prospects. While the international rig count declined 4%, our revenues and operating income were flat sequentially. The depth of decline in the international markets may not be as severe as past cycles, but we believe it will mirror it in terms of its duration. In the second quarter, we also saw operators maintaining their focus on lowering project costs. However, with the increase in oil prices and recent contract wins, I'm actually feeling better about the international markets now than I did at the end of Q1.

In the second quarter, international revenue represented 64% of our total business, and activity in select markets appears to be stabilizing. In Russia, we saw 7% sequential increase in revenues, associated with the market's seasonal improvement. Activity in Russia increased 27% sequentially, due to increased activity by independent operators. We saw sequential double-digit growth in Mexico, Norway and China, while Brazil and parts of Southeast Asia also exhibited positive sequential increases. We anticipate that these countries will continue to provide growth for us in the second half of the year and into 2010.

International tender activity increased in the second quarter, and we won a number of sizable contract awards including the following. Baroid has been awarded over $1 billion in new contracts globally, including $700 million for deepwater projects in Brazil, Indonesia and Angola and other countries. And $300 million in revenue for shelf and land related work. We also won a two-year contract for our cementing and completions and drilling fluid services for StatoilHydro, which we estimate will be valued at approximately $450 million. A contract award in Algeria for the provision of integrated project management for a number of delineation wells initially with a potential to expand to 120 wells for full field development.

We have added to our integrated project management backlog with the addition of over 150 wells for the next three years in Latin America. We won a five-year contract for more than $100 million in the Middle East for directional drilling and LWD services. In addition, we won additional wireline work in Brazil and a new wireline contract in Iraq, which is testament to the strength of our formation evaluation technologies. In addition, we are augmenting our capability in the Caspian region in anticipation of a significant five-year award for multiple services with the potential value of $200 million per year.

The deepwater markets also continue to be resilient. We have a leading position in the deepwater market in a number of our product lines. We are the leader in deepwater completions and continue to invest in next generation technology for these challenging projects. We are also closely monitoring the awards of cementing skid placements for deepwater rigs that are coming into the market. Our year-to-date win rate is over 60%, which is above our current market-leading share position. These awards and contract wins are strong evidence of the successful execution of our international strategy.

Now, turning to North America, a sequential decline in the average rig count in North America of 39% led to more severe margin compression in the industry than we previously anticipated. This 39% decline comes on top of a 28% sequential decline in the first quarter. Working natural gas storage continues to be ahead of its normal seasonal patterns, which suggest that despite reduced drilling activity, the supply curtailment of gas production has not yet caught up with lower demands. Further, the expectation that gas storage may potentially reach record levels by the end of the injection period indicates that any recovery in gas drilling is likely to be relatively modest for the remainder of 2009.

Our North America revenue declined 25% while our revenue per rig continued to grow this quarter and we experienced market share gains by leveraging the shift toward more service intensive resources such as unconventional plays. The number of rigs operating in the major unconventional plays has climbed and now represents over 40% of total rigs in the US. Price erosion, of course, continued in the second quarter and we believe pricing will remain fluid until activity stabilizes. Pricing declines, however, appear to be decelerating. We still anticipate that we will see some margin compression in the third quarter, but it will be driven more from lower activity than continued pricing erosion. We have said that in the past that this environment favors companies that can integrate broad-based offerings.

We've made great strides in expanding our overall market position by leveraging the full extent of our technology and solutions portfolio. As an example, earlier this year we won a five-year, $1.5 billion contract with an IOC for its work throughout North America. The contract covers services that range from well construction to completion and production and effectively doubles our share of this customer's spend, both for its land and deepwater operations. We've also picked up the work of a number of our customers we had not been able to serve previously, due to equipment shortages. Our ability to manage the delivery of integrated package services has been a key differentiator and provides customers with better project execution and lower overall cost.

The execution of our strategy in addressing this environment remains the same. We are employing a two-pronged approach. First, we are looking through this cycle to ensure that we will accelerate our growth when the industry recovers. We continue to invest in key technologies, build capital equipment, and pursue strategic acquisitions. We are are using the strength of our balance sheet to differentiate ourselves and expand our market position in key markets. The second part of our approach is managing through the downturn, drawing upon our management's experience in navigating through past cycles. We are aggressively lowering our input costs, eliminating discretionary spending, and managing our business within our cash flows. And of course, protecting our strong credit rating.

I don't believe anyone on the call today can accurately predict when commodity prices will rebound and rig counts will recover in the US or the international markets. And neither can I. What I do believe is that whatever scenario you think may happen, we have the products, technology and experience to outperform in that market. We have demonstrated this to you for the past several years. Whatever the level of industry activity, we will get more than our pro rata share of it.

I'd like Mark now to cover more details on the financial statements.

Thanks, Dave and good morning. Let me provide you with our second quarter operational highlights. I'll be comparing our second quarter results sequentially to the first quarter of 2009.

Our revenue in the second quarter was $3.5 billion, down 11% from the first quarter. Except for Completion Tools and software and asset solutions, all product service lines registered declines from the previous quarter, primarily resulting from continued lower activity and pricing pressures in North America. On a geographic basis, international revenue was flat versus an average rig count drop of 4%. North America experienced a 25% sequential revenue decline, against a backdrop of a 39% reduction in the average North America rig count. Over the past quarter, we have discussed the possibility of additional significant margin compression for North America in the second quarter, based on the continued steep decline in the rig count.

We experienced a 700 basis point decline in our North America margins. This decline reflects a gradual margin deterioration throughout the quarter as the rig count continued to fall. Going forward, as Dave pointed out, visibility for North America continues to be poor, given that record working gas storage levels by the end of the third quarter may delay the recovery of natural gas activity. We expect that margin compression may continue to occur in the third quarter, but not to the extent seen in the first two quarters of the year. Pricing declines are moderating, but margin degradation can also result from lower average activity in the third quarter.

International margins in the second quarter were 20%. We have been successful in partially offsetting the pricing pressures we discussed in our first quarter call by cost reduction efforts and by leveraging fixed cost in select growth markets. Margin pressures will continue to weigh on our international business going forward, however. While we believe this will be partially mitigated by our continued cost focus and improved volumes, we currently anticipate that a 300 to 500 basis point margin decline could gradually occur for our international business over the remainder of 2009 and throughout 2010.

Overall operating income decreased 23% from the first quarter of 2009, resulting from lower activity and pricing erosion in North America. In addition, the Company recognized $17 million for employee termination cost during the second quarter. Our first quarter 2009 results included $28 million in employee termination cost.

Now I'll highlight the segment results. Note that we have not included employee termination cost in the comparisons that follow. Completion & Production revenue decreased $276 million or 14% from the first quarter, while operating income decreased 33%. The decline in revenue was driven primarily by lower production enhancement and cementing results in North America.

Looking at Completion & Production on a geographic basis, North America revenue decreased 26%, and operating income declined by 69% due to activity declines and price erosion. In Latin America, Completion & Production revenue declined slightly and operating income was essentially flat, driven by lower activity in Venezuela, Colombia and Argentina, partially offset by strong completions activity in Mexico and Brazil. In Europe, Africa, CIS, Completion & Production revenue increased 3%, but operating income declined 10% as higher activity in Norway, Russia and the Caspian was more than offset by higher cost and activity declines in Nigeria, the UK, and Algeria. In Middle East Asia, Completion & Production posted a sequential decrease in revenue of 3%, while operating income was up by 5%, due to a better mix of completion tool sales and significantly higher activity in Austral-Asia and the northern Gulf.

In our Drilling & Evaluation division, revenue decreased $137 million or 7%, and operating income declined by 7% as well, with unfavorable results in North America, partially offset by strong sequential growth in the Middle East Asia region. In North America, Drilling & Evaluation revenue declined 24% and operating income decreased 56%. All product service lines except for software and asset solutions declined sequentially. The wireline product service line continues to see the greatest level of margin pressure.

Our well construction product service lines continue to benefit from the favorable mix toward horizontal drilling, notably in the Haynesville and Marcellus Shales. The proportion of horizontal directed drilling continues to increase and currently represents 43% of total rig count. Drilling & Evaluation's Latin America revenue declined 2%, and operating income was essentially flat. Like Completion & Production, we saw higher activity in Mexico, but it wasn't sufficient to offset sequential reductions we experienced in Venezuela, Colombia and Argentina.

In the Europe Africa CIS region, Drilling & Evaluation revenue and operating income were down 2% and 5% respectively as higher activity in Norway and some direct sales to Nigeria partially offset sequential declines in Algeria and Angola. Drilling & Evaluation revenue and operating income in the Middle East/Asia were up 7% and 23% respectively. Higher direct sales and increased activity in Asia offset weakness in the Middle East.

We have finalized the Khurais project in Saudi Arabia and are now in discussions with our customers to direct equipment and resources toward tight gas opportunities in that market. We expect that these opportunities will offset some of the impact of the conclusion of the Khurais project in the second half of the year. Now I'll address some additional financial items. We generated positive cash flow of approximately $120 million for the second quarter. As of June 30, we have $3.1 billion of cash and investments in marketable securities, compared to $3 billion at the end of the first quarter.

We have $1.2 billion of unused borrowing capacity in our revolving credit facility and continue to maintain our A, A2 credit ratings. We anticipate that corporate expenses will be approximately $50 million to $55 million per quarter for the rest of the year. We are currently forecasting that our 2009 effective income tax rate for the full year will be approximately 32%. We are holding to our previous full year 2009 capital expenditure forecast of $1.8 billion, 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.

Tim?

Thanks, Mark and good morning everyone.

North American rig declines and specifically a decline in the US rig count by 55% from its peak has led to a significant oversupply of all types of equipment in the market. Resizing our fleet for 2010 is a pressing issue and we have an active program to address absorption of this capacity through a retirement program. We expect to retire and remove from service approximately 10 to 15% of our pumping and wireline fleets this year, depending on the product line. Transfer to international growth areas, which in some product lines will exceed 12% of our North America fleet. Increased equipment requirement of around 10 to 15% on stimulation equipment and shale plays, as a result of the impact of accelerated maintenance on equipment in these more complicated plays.

Currently there are 244 oil directed rigs in the US reflecting a 36% increase from the trough in May this year, we are consequently seeing improved outlooks for the Bakken and Permian Basin in the second half. Gas directed rigs have declined almost 60% from peak and over 30% sequentially for the quarter. Gas rigs continue to weaken and now represent only 70% of the total activity in the US, down from 80% at peak.

Internationally, while sentiment's improved from our first quarter call, the rig count has continued to decline, is now down 13% from its peak. Significantly high value offshore rigs have declined 16% from their peak last year. And 4% sequentially. David and Mark have discussed the lightening margin compression as a result of these activity changes, and I'd like to provide a bit more color on our efforts to mitigate this.

As we discussed in our first quarter call, we sought to lower input costs by aggressively pursuing price concessions from our supply chain. We have identified 17 major categories that represent about 60% of all our supplier spend. Based on these discussions so far, we secured discounts that range from high single digits to mid 30% for an annualized savings of around about $350 million. Of this amount, three quarters relate to our materials that support our operations and the rest to items procured for capital equipment. The recognition of these savings into our financial statements is dependent on a variety of factors such as our inventory turn rates, so realized savings in the first half have been modest.

We have continued our commitment to develop next generation technology focused on growth markets and extracting value from long-term contracts. For deepwater, we recently commercialized the enhanced single trip multi zone completion system. This system allows several intervals within a well to be isolated and treated with a high rate frac during a single trip of the work stream, providing major time savings for deepwater completions, a prerequisite for improving cost efficiency of deepwater projects. Importantly, it's also the only single trip multi-zone system that can also incorporate smart well technology. This technology has been purchased for example for the development of the Somala project in the lower tertiary in the Gulf of Mexico.

High temperature and high pressure applications continue to expand. Acquiring fluid samples in these elevated conditions can be crucial to a well's economic success. Halliburton's new hostile sequential formation tester was successfully used this quarter for an IOC in North Africa, at temperatures above 420 degrees Farenheit. Halliburton continues to focus on drilling optimization. XR Reamer technology was recently utilized to open two whole sections on a record extended reach application in Norway. Both sections were drilled in a single run, facilitating this record drilling performance.

We have talked previously about our focus on delivering packaged services, which allows us to create incremental value by integrating our suite of products and services. Last year we estimated that about 30% of our revenue was on contracts for multiple product service lines, some of which may have been coordinated by Halliburton's project management experts. In contrast to well-publicized IPM projects, in the past year almost half the contract value of new business we won involves multiple product service lines, suggesting that the market is increasingly favoring broader integrated drilling, Completion & Production portfolios. Adoption is growing internationally, for example in Algeria, where we are now the leading provider of packaged services projects.

IHS Sero reported that the index for upstream capital cost dropped by 9% from the third quarter of 2008, to the first quarter of this year. Its first decline in eight years. As future efforts by operators migrate from focusing on individual supply costs towards reducing total project execution costs, we anticipate that packaged services efficiency models will expand, favoring those companies that can provide reservoir solutions with enhanced efficiency.

Dave?

Okay. Thanks, Tim and Mark.

Just to quickly summarize, then, visibility to our prospects in North America continues to be poor. The continued weakness in demand and the likelihood that working gas storage will reach record levels makes it unlikely that we'll see any recovery during the remainder of this year. Our international outlook is improving but there is some uncertainty and it remains. We are seeing some projects move forward, and will mitigate some of the margin pressures we're going to see through additional cost rationalization efforts.

We are successfully executing our strategy of increasing our market position by leveraging broad-based integrated offerings and assisting our customers with their most complex reservoirs and in the second quarter, as I said, we won a number of sizable contracts. We're executing our two-pronged approach of retaining our key investments in technology and capital, even during this downturn, so we can accelerate growth when the recovery does occur. While at the same time, taking prudent steps to manage our way through this downturn. We believe that this approach will lead to long-term value for our shareholders.

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

Thank you. (Operator Instructions). Our first question comes from Pierre Conner with Capital One Southcoast.

I'm sorry. Mr. Shoemaker, your line is open.

Okay. This is Robin Shoemaker at Citigroup. Dave, I wanted to ask you about the forecast that you've made of international margins, declining by 300 to 500 basis points over the balance of this year and in 2010. And I assume that's from the current level of 20% in the second quarter. So is this -- are you anticipating revenue declines or pricing pressures principally contributing to the margin decline or other factors?

I think it's primarily it's going to just be pricing pressures. As you know, a number of our IOC customers and some NOC customers came to the entire services industry and asked for discounts earlier this year and I think it's going to take some time for those price concessions to roll through. Also, about 20% of our available work is retendered every year and of course what's being retendered today is being quoted at lower pricing than exists out there. So the discussion was really to give you an order of magnitude about what we think could happen if the environment continues as it is. Now, if commodity prices come up a little bit, if oil prices firm up, we may see some additional rigs come into the market. We may see some projects move forward and some of that downward pressure may get mitigated a bit. But we wanted to give you some sense of what we saw might happen over the next six quarters.

Okay. Thank you. Just my follow-up question then is on North America and the lower average activity in the third quarter of 2009 that you're anticipating. Are there further benefits from your cost reduction program in the third quarter that were not realized in the second that might offset that lower average activity and give you possibly a slightly better margin or flattish margin with the second quarter?

Yes, as we were discussing on the call, we have some significant savings that are coming from our supply chain and obviously because of the way inventory turns work, we really haven't seen much appear in the first half of the year. So yes, there will be some benefits that will show in the second half. I think, though, that overall in North America, there's still -- we have been on sort of a bit of an unforeseen roller coaster here and I think we're certainly cautious with respect to Q3 in terms of the overall outcomes as gas-driven rigs have continued to decline through to this current week in fact, Robin.

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

Thanks. Good morning. Continuing with the road map for non-North American margins, Dave, where do you expect to see the greatest pricing and margin duress and where do you expect to see the most resilient performance?

Okay. With respect -- you're saying with respect to North America?

No, non-North America margins.

Non-North America.

Right. And back to your prophecy of down 3 to 500 basis points, just curious as to what is misbehaving the most or expectations of the greatest margin erosion and expectations of the greatest margin support.

Yes, I think if you look around the world, I wouldn't say that there's one particular area I could point to that is worse than the other or one that's better than the other. I think that if you look at the IOCs, they basically have come to the service industry across the board. So I think that that's going to apply to just about anywhere around the world. From a national oil company standpoint, obviously the pressure will be in the particular country that they represent. I would say sort of directionally, I think the hardest pressure on pricing will come in the North Sea area and probably the least will come in the South America markets. But that would just sort of be directionally. I wouldn't say that one was much greater than the other.

With regard to North America, recognizing that everybody's crystal ball is opaque at this stage but referring back to the commentary that you expect the rate of change in terms of lower to be more benign than what it has been in the first two quarters of this year, along those lines, Mark, decrementals going forward for North America, are they pretty much going to be in line with what we witness witnessed in the second quarter?

Well, clearly in the second quarter, as the rig count fell, the margins on a sequentially -- sequential monthly basis fell each month and so there is still some risk that as we go into the third quarter, fourth quarter, that margins will be lower but I don't -- it's not going to be the same extent that we saw. I mean, I guess as we view the market, we sort of see pricing stabilizing somewhat there. Activity seems to be stabilizing a little bit out there and we just don't think that as we'll hear from our competitors over the next week or so, we probably feel like we're probably close to the bottom in terms of pricing degradation. So it's really going to be more activity-dependent as well as the achievement of some of the cost benefits that Tim articulated.

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

Hi, good morning. Wondered if you could address the margin performance in the Middle East Asia region this quarter. With Khurais ramping up, was that any sort of benefit to margins in the quarter and should we expect that to normalize downward a little bit going forward?

No, I think the -- that's an easy answer. In fact, I suspect that with Khurais ramping down, we actually had a little downward pressure on margins with respect to that project, because we had a lot of equipment on that project, focused on that, getting that thing done and we're actually now in the process of trying to reorient and put those pieces of equipment on to work on other contracts. So I would say actually the opposite probably was true, is we probably had margin pressure with respect to those assets.

Now, really from -- this is Mark. From a margin perspective, the benefit in that region actually came from Asia. We did have some direct sales but we also saw some activities peak up, activity in Australia was up about 27% and we also saw benefits in Thailand, Brunei and some other areas where strong completion sales benefited our results.

That's helpful. Tim, as you walk through the retirement, can the order of magnitude of equipment retirement we can see in your pumping business in North America, are those gross numbers and is there capacity being added that somewhat offsets that? So that would indicate somewhere around a 25% decline in capacity in your business. Is that indicative of how you're sizing the overall North America business going forward, so kind of for a 25% reduction versus where we were past cycle?

That's very dependent on product line by product line basis. We've obviously just outlined the steps that we're taking to address retirements and also the transfers, et cetera. So clearly we have a capital spend of $1.8 billion, which you're well aware of and those -- that spend continues to address a number of needed activities. Some of those will be in North America. Some of those will be international. But no, I'm not dealing with a net number. Those are kind of gross numbers that I'm talking about.

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

Great. Thanks. I'm going to follow up, just one more time on that North American margin degradation you guys were kind enough to give us a 300 to 500 basis point target internationally over the next six quarters or so. You talked about North America being less than what we you saw in the first half, so are we thinking same sort of 300 to 500 basis point detriment, maybe something less than that? Can you just give us some generic range to work from?

No, we really can't give you a range. It's not going to be 3 to 500 basis points. I guess that's sort of -- but I think that as we indicated, the forward -- the margins in June were the lowest margins in the quarter in North America and so it's going to be very activity dependent. As long as activity is not stable, I think that there's risk to the down side on margins. But it's just not going to be I think to the same extent that we saw. And that's about the best guidance we can give you at this point.

I appreciate that. The second question is with all the pain being endured in North America by a lot of small private players, who still haven't seen any kind of mass exodus of competition or mass M&A. Can you give us an update on what your thoughts are with respect to the consolidation of the North American market as we go into the second half of the year?

This is Tim. Yes, I think it's certainly likely, there is certainly a fair amount of chatter out there with respect to this potential, and I think that it's likely that we might see some activity. But you're right, there has been nothing of significance to this point.

Let me just add one other piece of commentary to that. I think that as some of the smaller competitors, especially those that are primarily focused on pressure pumping, have moved their assets where they typically have moved them is into the more robust areas which is the shale plays. But I think it's important to remember that the shale plays are very, very tough on equipment.

And I think that what some of these other pumping companies are finding out is that they're grinding their equipment up, and they're using it up much faster on the shale plays than maybe they had anticipated. So I actually suspect that a lot of equipment will come up -- will come out of the market, not through retirements, but by just getting used up because they're focused on these shale plays and they'll naturally have to come out of the market and at that point I doubt that some of these smaller pumping companies will be able to replace that equipment and so I think that will in fact accelerate the retirement of horsepower out of the North America market.

Our next question comes from Ole Slorer from Morgan Stanley.

Thank you very much. Wonder if I could just follow up a little bit on that latest point. You highlighted 10 to 15% retirement, scrapping of your pressure pumping or wireline -- older wireline equipment, 12% North America fleet migration to international markets. Could you give us some sort of sense of the time line that this is playing out over?

Yes, Ole, this is under way at the moment. We have already moved during the course of the second quarter some equipment to some international markets. We already have started the process of retiring or scrapping individual items of the fleet. So it's a process that's under way and we'll be moving forward with it aggressively. We think it's very important for us to size appropriately for the balance of this year and 2010 and to ensure that we have the right profile going forward. So you'll see us get that largely completed by the end of the year.

This is sort of a second half, second, third quarter maybe event, is that the way to read it?

I think that's very fair. We've done a fair amount of it already and we'll get the most of the rest of it done during the course of Q3.

And then you couple that with what you highlighted on shales being tough on equipment, grinding up, requiring spare parts maybe for people who don't have the cash to facilitate it. What's your sense on overall capacity, we clearly have too much now. Doesn't take a rocket scientist to figure that out. Seems like it's almost shrinking maybe faster than people think. Can you give us some kind of road map on how you see the whole capacity developing?

Clearly, there's a significant amount of excess capacity and we would expect the major players to do what is the appropriate thing to address their fleet sizes. That will certainly have a significant impact. The point that Dave made with respect to the shale plays is a very important one. Just for our fleet alone, we reckon that we need 10 to 15% incremental equipment to really manage effectively in shale plays and that's obviously a reflection of the up time that you have on any particular spread to enable it to perform at optimum performance and so that's obviously not going to be very different from other providers also, and I think those that don't maintain their fleet well, that may indeed be a much larger number. I think you could be right there in your directionally at least that we might see over the course of the next couple of quarters a little more capacity come out than may have been originally realized.

Our next question comes from Brad Handler from Credit Suisse.

Good morning, guys. Could you please give us a little color on some of the incremental work that you provided in the beginning of the call. You mentioned an IPM project with 150 wells in Latin America. Are you at liberty to sort of share where that's coming from and give us some sense of the opportunity there?

I think as we've said on a couple of our calls, we continue to like the potential activity in Latin America and there continues to be some good upside there but really don't think we're going to get into the specifics of where those wells are, Brad.

Okay. All right. Just figured I would try. Turning to the StatoilHydro extension, so the contract value seems to represent sort of a more than 2X of your original value. Can you share a little bit of that growth for us? Is it just about more wells? Do you think you took some share away from somebody there? Essentially, just that.

This is obviously an important extension for us and I don't believe that we can say specifically that we're taking any additional or significant amount of additional share away. But we felt it was important, just to highlight the fact that there is a significant amount of tender activity at the moment and these volumes are really quite significant and perhaps give you a little bit of steer with respect to how our customers are behaving at the moment with respect to their forward activity. In fact, we've been quite pleased with the overall spending patterns of our IOC and NOC customers in the first half and that continues to follow the patterns which they had established for us in the late fourth quarter.

Our next question comes from Mike Urban from Deutsche Bank.

Thanks, good morning. Wanted to try and reconcile some of the comments on the international markets, broadly speaking. You were pretty clear that you expect some further margin degradation there, but at the same time you've had a number of tenders go forward, sounds like some projects shaking loose, so would it be fair to say that you feel like you've seen the activity bottom internationally and then just in terms of the operating income impact is going to depend on how much the activity is offset by the margins? Am I hearing you correctly in that?

I think we have to be quite realistic in that from -- the international market is following what we would say is a traditional cycle, Mike, and as I mentioned in my segment of the call, we are seeing a continued decline in the high value rigs, the offshore rigs, which for us represent about 50% of our activity in the international market. So we are in a cycle. We are seeing these declines in these high value rigs and even though bidding activity is up quite significantly from Q1, that sort of suggests to us that based on the start-up dates, we start to see incremental activity later this year but as Dave pointed out, obviously the tendering process at the current time is much more aggressive than it was at, say, this time last year, so it's only reasonable to expect that we'll see some decline in margin. That ultimately obviously is somewhat off set by volume increase and as Dave also mentioned, we have a significant investment in technology and one of the reasons we have that obviously is because it provides us the potential upside on any given contract to provide technological advantages during the life of a given contract.

Great. That's helpful. And shifting back to North America, you had referenced a nice contract win from an IOC in North America. Presumably, that's a trend that you would expect to see more of going forward as the large IOCs and even some of the NOCs being bigger players in North America. Is that reasonable to expect?

Yes, I mean, if you look at the -- who were making the big investments and the big plays in the Rocky Mountain gas, over the past several years it clearly was a move back into that market by the IOCs. But now you're also starting to see the IOCs make major investments and major in-roads into some of the shale plays so I think that as they get more heavily involved, totally through the US gas cycle, I think it bodes well for us because typically they are looking for more packaged services to try to keep their cost down.

Our next question comes from Jim Crandell from Barclays.

Good morning and very nice quarter. Two questions. First of all, it seems to me in US stimulation you've had a sort of a utilization oriented strategy in that market. Can you specifically comment on what you consider to be the success of that strategy and maybe give us a feel for both utilization and price discounts in the US stimulation market?

Yes, Jim, we certainly have had a utilization strategy in North America and I think the North America team have really executed that extremely well. I think as the numbers would show. And I think the key element I think to that was acting early, and really being focused on those customers and basins which it appeared to us had the highest potential for activity and as I say, the team has done an excellent job in executing that.

Okay. But no specifics, yes?

No specifics.

Okay. And Dave, can you comment on -- I know that you seem to be less optimistic on some on how quickly you think Iraq will unfold. Can you give us your expectations about that market and the contact structure that will likely occur, particularly with the IOCs in that market?

I think, Tim, in my view the Iraq market continues to be a little bit open as to what the contracting philosophy is going to look like. We are having discussions -- we're having discussions essentially with every IOC that's interested in going in there and I think that the IOCs will probably use the service companies on a more traditional basis. There may be some packaged services but I think for the most part, they're going to want to pick and choose like they typically do.

We're also having discussions with some of the smaller players and also with the Iraqi national oil companies and there may be enhanced opportunities there to look at something on a broader basis, maybe an IPM basis, maybe a packaged basis. I just am a little more cautious than maybe some are about how quickly that market is going to develop as the year sort of unfolds here. There's no doubt we're excited about it. We are focused on it. We are investing in it right now. But I think that, yes, we'll have to see where the market and how the market comes to us before I think we're going to see any meaningful level of revenue generated out of there.

Our next question comes from Geoff Kieburtz from Weeden.

Thanks, good morning. Couple clarifications. Mark, I think I heard you say on North America that you weren't prepared to give any margin guidance but it wasn't going to be 300 to 500 basis points. So I'm not -- either I misheard you or if not, maybe you could clarify that. And then also on the clarification, the 300 to 500 basis points in regards to international margin erosion is something you expect to be kind of steady over the next six quarters and then what? So that's my first question.

Okay. Well, let me take the back part of the question first. The international markets right now, yes, when we talk about the 300 to 500, it's going to be a slow bleed-out over time, as different projects come under way and I think it will be biased toward the late part of this year and early part of next year when we'll start seeing that. But we do expect it to go out. Beyond 2010, I mean, we don't have any reason to believe it won't be stable after that point. Because a lot of these tenders will be active then for a number of years.

On the North America market, just want to be clear, we're not giving specific guidance. It will not be as severe as the 300 to 500 basis points of margin degradation we talked about at the international markets but we don't know where it will be underneath that. But we are saying that there is still continued risk for some margin degradation in Q3. One, because we don't really know whether activity is fully stabilized and number two, because the margins in the back part of Q2 were lower on a monthly basis than they were at the beginning of Q2, and if you just think about the average margin for Q2 versus the leading edge margin. It was lower and that will -- that's going to have an impact. Offsetting that will be the impact of some of the cost savings initiatives that Tim talked about, as well as any further other cost initiatives that we will undertake to make sure that we stay ahead of it or can get ahead of it to the best that we can.

And would the just seasonal progression of Canadian activity be meaningful in terms of helping the North American margins?

Certainly will help. Canada is only about 3% in terms of our total revenue, so it's a fairly small percentage but clearly anything can help, in terms of an activity pick-up and we do usually experience higher activity in the third quarter than any other point in the year and so all things equal, if rig count stabilizes, then certainly that little pick-up in activity in Canada and the rest of the US will help us.

Our next question comes from Bill Sanchez from Howard Weil.

Good morning. Tim, I was hoping maybe you could comment, we've heard about some international activity pick-ups here, I was hoping you could talk a little bit about Manifa and where that stands for Aramco.

The Manifa project is clearly still on the books. And it is under way but at a much lower rate than had been originally anticipated, clearly before the sort of collapse in the global economy. And there certainly are a number of scenarios which are being considered with respect to the speed and the rate at which that may pick be up but I think it's a bit premature to discuss those in a lot of detail, though I think, Dave, you may have a you few comments on that.

I think I would just echo what Tim said. It has not been cancelled. It's been deferred. We did win the major offshore portion of that. I'm actually going to leave here this afternoon and go straight to Saudi, so I'll have a much better idea within the next couple of days where it sits, but I would say at some point in time, they will move forward with that project.

Okay. Thank you. Mark, is it too early to give us a read on the 2010 CapEx at this point? Or maybe a range that you could talk about for next year?

It is a bit premature to talk specifics about the 2010. I think, though, if you see what we have done over the last several years, we have tried to fairly level load our CapEx spend, balancing a higher percentage toward international markets, a higher percentage of of our capital toward our well production product service lines. I don't think that that will change in terms of our planning for 2010 and I think as we go into the later part of the year, we'll be very focused on the level of activity, the capital needs to address a number of these tenders that we have won, which will be influencing some of the spend in the early part of 2010 to make our decisions about that.

We'll take one more caller.

Our last question comes from the from Waqar Syed from Tristone Capital.

David, my question is regarding international gas outside of North America. What are you seeing there, what are the chances of growth later this year and then into 2010 and 2011 time frame? And which markets do you see the most growth potential and how is Halliburton positioned? Thank you.

I think we're very well positioned, mainly by leveraging the capabilities, the technology and experience we've developed in the US gas market. If you look at the unconventional plays around the world, there are a number of basins that look very interesting. You have sort of the coal bed methane plays in Australia, a number of large investments by some of our major customers in CBM and Australia, in an attempt to get an LNG plant off the ground there. I was just recently through Europe and you have a fairly high interest in shale plays and producing gas out of those shales and then into underground storage in the European market. And of course, you have an emerging tight gas potential in Saudi Arabia. So I think we're well positioned. We're very excited about sort of the transfer of this technology into these plays around the world and I don't see that any of them are going to provide a significant revenue stream in 2009, but certainly as we get into 2010 you could start to see some of them develop a meaningful revenue stream for us.

Great. Thank you very much.

I will now turn the conference back over to you.

Okay. Mary, let's close it out. Thank you everyone, for your participation in today's call.

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