哈里伯頓 (HAL) 2009 Q3 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to Halliburton's third quarter 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 conference call is being recorded.

I'd 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 Third Quarter 2009 Conference Call. Today's call is being Webcast and the replay will be available on Halliburton's website for seven days. The press release announcing the third quarter results is available on the Halliburton website. Joining me today are Dave Lesar, CEO, Mark McCollum, CFO, and Tim Probert, President Drilling and Evaluation Division and Corporate Development.

I'd 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, our Form 10-Q for the quarter ended June 30, 2009 and 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. Reconciliation to the most directly comparable GAAP financial measures are included in the press release announcing the third quarter results.

Dave?

Thank you, Christian, and good morning to everyone. Here is a summary of our overall results for the third quarter. Total revenue for the third quarter grew 3% from the second quarter and represents the first sequential revenue increase we've experienced since the fourth quarter of 2008. Most of our product service lines registered sequential growth from the prior quarter with software and asset solutions and production enhancements showing mid to high single digit growth from second quarter levels. Our international business registered an overall revenue increase of 3% despite a 1% decline in the rig count from the prior quarter.

While there is a risk of further decline in international activity in the coming quarters, I am more optimistic than I was previously that this downturn will not match previous cycles in terms of duration and depth. However, we believe operators will not materially increase their spending levels despite stable commodity prices without compelling evidence of recovery in hydrocarbon demand. As a result they continue to reduce capital expenditures by deferring projects and exerting pressure on the oil service companies to improve their project economics.

In North America, the market continues to be challenging. Natural gas fundamentals remain fragile despite the first signs of a supply response resulting from the severe curtailment in drilling activity. Weak domestic gas demand coupled with the productivity of the new shale resources has lead to gas storage reaching record levels. We believe that a significant improvement in the natural gas market in the next few quarters is unlikely without the resurgence of a broad market economic demand in support of winter withdrawal and supply patterns. While we expect that the industry will see accelerating production declines in the coming months in response to reduced drilling activities, we don't believe these declines will be adequate to provide a meaningful near term correction of the current supply and demand imbalance. Despite these challenges, we are continuing to successfully execute our strategy implemented at the beginning of the downturn to navigate through this environment by aligning our resources to those areas that best leverage our differentiated technologies.

Let's discuss now in more detail the international and North American markets. International revenue grew 3% sequentially and now represents 64% of our total business. We saw double digit sequential growth in the North Sea, the northern Gulf in the Middle East, and Russia. For example, our Russian revenues grew 18% sequentially and it is clear that the Russian market bottomed from the depressed levels in the first quarter. Production has not declined as feared with production coming on stream from greenfield areas such as Salym, Uvat and Bancor, all of which were serviced by Halliburton. While we expect to see a slight increase in meterage drilled in Russia for 2010, Operators continue to be challenged by lingering financial market issues that could restrain some of the strength of the recovery in Russia.

We also saw a 9% sequential revenue increase in Brazil in the third quarter. As you know, we've been awarded several new contracts that expand our market position with Petrobras and other participating IOCs. In addition to winning a package for drilling fluid services, we also secured additional contracts for wireline, drill bits, and directional drilling, all with Petrobras. We also continue to increase our exposure to the growing IOC market in Brazil with a new fluids contract. Deepwater Brazil is an important and growing segment and this expansion of our position there will be beneficial to our long term prospects. We expect solid revenue growth into next year with a ramp up of these new contracts as well as overall higher upstream development activity being forecast for the Brazilian market.

Excluding our employee separation costs, international margins for the third quarter were a healthy 22% versus 20% for the second quarter. As we stated last quarter, we continue to believe that international margins will be under pressure through 2010. This is based on our knowledge of the lower pricing in the recently competitive tendering activity that took place for work that will begin later this year and into next year. That pricing would suggest downward risk to current margins which could be partially offset by a more significant rebound in upstream spending. Also, unlike the US market, where volume and pricing fell so rapidly that we could not keep our revenues in balance with costs, we have more visibility and time to proactively work on our cost structure and introduce new technologies in the international market and this may help mitigate some of this pricing impact. I'm very pleased with the progress we've made in the last few years in building our international franchise and I believe it will continue to pay dividends as we go forward.

Let's turn to North America. Revenue grew 2% sequentially. While the overall US rig count increased from the prior quarter, the increase was predominantly in oil directed rigs with gas directed rigs declining 6% from the second quarter. In addition, most of the rig activity increase was vertical in nature and operated by the private E&P companies who are not our traditional customers and are not as service or technology intensive. Despite the lower service intensity and the 6% gas rig activity decline, we saw our first sequential revenue increase in North America since the third quarter of 2008. We continue to see our market share increase across most basins as operators direct their work preferentially toward those providers that have broader offerings and better service quality.

The Gulf of Mexico had a weak quarter due to the continuing decline in shelf activity with the offshore rig count down 33% sequentially from the second quarter. However we continue to make progress in expanding our well construction businesses which will benefit from the influx of deepwater rigs in the upcoming quarters. We also benefited somewhat from the seasonal recovery in the Canadian market. However as you all know, the proportion of the Canadian market to our overall North American business is quite small.

We continued to see significant pricing pressure during the third quarter for those product lines that have the most excess capacity in the market. However, improved activity as the quarter progressed helped stabilize margins. During the quarter, pricing for our stimulation business stabilized in some basins and reservoirs but continues to decline in areas of robust activity like the Haynesville and Marcellus Shales which are particularly competitive.

As we have stated in the past in our view, much of the industry's existing stimulation equipment is unsuitable for the lower depths and pressures of the new shale plays. We believe that the continued use of suboptimal equipment by the oil service industry for these harsh shale environments is unsustainable. This will facilitate the absorption of this oversupplied equipment situation in the market as equipment is much more quickly used up, particularly if our competitors are unwilling or unable to explain the appropriate funds to maintain their equipment.

So while we see signs that pricing is stabilizing across all product service lines in certain basins, as I said in others it is not But overall margins are bottoming out. They may be under pressure slightly in the fourth quarter due to the typical season weather factors, the environmental stipulations that affect the operations and the Rockies, and potential declines during the holidays when customers typically stop spending in an environment like this and send their people home.

In addition, in the third quarter we saw customers continue to drill more wells than they completed. We now believe that there is an inventory of about 1,300 to 1,500 uncompleted wells in North America. Part of this is due to the low gas price and part is due to customers not wanting to grow their actual production until they have their 2010 hedges in place. While this will be very positive for us when this completion backlog is worked off in 2010, it clearly created a disconnect between demand for drilling related services versus completion related services in the third quarter. We expect this to continue into the fourth quarter.

This disconnect can be seen in our third quarter results for our US land operations where our drilling related product service lines showed an 8% sequential increase in revenue and some actual margin expansion, but our completion related product lines, primarily stimulation, showed only a 1% sequential increase in revenue with some related margin contraction. This lower level of completion activity affected the product lines of course with the largest industry over capacity and we believe this is another contributor that could pressure fourth quarter pricing. All this being said, however, we believe that margin expansion in 2010 is possible, that it will result from the activity increases rather than be pricing led, and that further pricing erosion can be mitigated by realization of our cost savings initiatives.

We are also anticipating a structural shift in the US land market as unconventional resources become a more prominent component of the production profile. We expect to benefit from this trend as operators are drilling longer horizontals and increasing their fracture and stimulation treatments to enhance initial production rates. This is why it is so important for us to direct our resources to those areas. We have expanded our facilities this year to support our growth in the Marcellus, Haynesville, and Williston Basins. We believe these investments in our differentiated technologies will insure that we will retain our market share gains and accelerate our growth once the market recovers.

While the near term look for both North America and international continues to be challenging,, we have been executing against our strategy of improving our position in key markets. Internationally our incremental capital spending has been geared disproportionately toward deeper water where we are well positioned. And in North America we have seen our market share increase in a number of basins as operators prefer to rely on Halliburton's broad offerings and service quality for their work. The success of this strategy appears to be supported by the recent oil field market report by Spears & Associates that indicates that we have gained market share in all of our product lines on a worldwide basis. And Tim will talk about this in more detail.

Uncertainty about the timing and breadth of the recovery remains and various factors will influence the path of growth coming out of this downturn in the many markets we serve. However our strategic imperative has been to continue to identify and increase our exposure to the industry's highest growth Markets. The underlying trend toward well complexity will drive increased service intensity and provide beneficial overtones to our business as we go forward, whether it's in increased reliance on unconventional resources or expansion of the deepwater drilling activity worldwide.

Let me turn the call over to Mark and he can go into more detail on our financial results.

Thanks, Dave, and good morning, everyone. Let me provide you with our third quarter operational highlights. I'll be comparing our third quarter results sequentially to the second quarter of 2009. Our revenue in the third quarter was $3.6 billion, up 3% from the second quarter. As Dave mentioned, this is the first time since the fourth quarter of 2008 that we have shown a sequential quarterly increase. On a geographic basis, most regions grew sequentially, led by our Eastern Hemisphere regions, each with a 4% increase. International revenue grew 3% versus an average international rig count decline of 1%. North America revenue grew 2% despite the challenging pricing environment.

Total operating income for the third quarter of $474 million was essentially flat from the previous quarter, as increased operating income in international markets offset continued weakness in North America. In addition, we recognized $28 million in employee separation costs during the third quarter as we continue to execute our cost control program. Our second quarter 2009 results included $17 million in employee separation cost. International margins in the third quarter were 22% excluding employee separation cost. Up from the second quarter due to the strong completion tool sales in the Middle East, Asia and pipeline services and vessel activity in Europe, Africa CIS. These types of activities tend to be lumpy from a timing standpoint. In fact our other international region, Latin America, registered a margin decline from the second quarter due to lower activity in select markets and the impact of pricing pressures.

As Dave indicated, despite the overall strong margin results for Q3, we believe that our international margins are at risk to fall into the upper teens over the next five quarters driven by lower pricing. The timing and the depth of the margin decline will be dependent on various project startups which we expect to predominantly occur in the first half of 2010.

For North America, margins in the third quarter fell from the prior quarter consistent with our guidance at our second quarter earnings call. Average pricing continues to deteriorate in the third quarter but we are now seeing pricing stabilize for most of our product service lines. Overall North American margins experienced a gradual improvement throughout the quarter driven by improved activity in cost savings, so leading edge margins suggest to us that we are near the bottom. However, as Dave pointed out, we still expect that we could see a slight margin decline in the fourth quarter due to the typical seasonal issues in the Rockies and operators' holiday schedules.

Now I'll highlight the segment results, and note that we've excluded employee separation cost in the comparisons that follow. Completion and Production revenue increased $69 million or 4% mainly due to increased activity in Russia, the North Sea, and Angola. Production enhancement revenue grew 6% from the second quarter from increased international activity. Overall Completion and Production operating income was flat as the flow through of increased international revenue was offset by continued pricing declines in North America. Looking at Completion and Production on a geographic basis, North America revenue increased while operating income declined as higher US land activity was outweighed by price erosion. As Dave mentioned, we're seeing strong signs that pricing is bottoming across most basins which may lead to the stabilization of margins in the next couple of quarters.

In Latin America, Completion and Production revenues slightly declined and operating income fell 14% driven by lower activity across all product lines in Venezuela and Argentina. In addition, higher second quarter deliveries, of completion tools in Mexico and Brazil also affected this segments results in the third quarter which is typical off this product service line since it often experiences irregular delivery patterns from quarter to quarter.

In Europe, Africa, CIS, Completion and Production revenue and operating income increased 10% and 57%, respectively, due to recovery in Russia and improved vessel and pipeline and processing services activity in the North Sea and West Africa. We expect to see vessel activity decline in the fourth quarter consistent with historical seasonal patterns.

In Middle East Asia Completion and Production posted sequential increases in revenue and operating income of 6% and 17%, respectively, with higher production enhancement activity in Southeast Asia and increased completion tool sales in Saudi Arabia, China, and India.

In our Drilling & Evaluation division, revenue and operating income increased slightly on sequential growth in America and Middle East Asia. We continue to see considerable improvement in our Baroid product service line which had operating income growth across all regions. In North America, Drilling and Evaluation's revenue and operating income each increased 3% as our well construction product service lines continue to benefit from the favorable mix toward horizontal drilling, notably in the Haynesville and Marcellus Shale. Growth in land operations was offset by a decline in the Gulf of Mexico from lower shelf activity and deepwater rig delays. Looking ahead, we see stronger Gulf of Mexico activity for the division as additional deepwater rigs come online.

Drilling and Evaluation's Latin America revenue and operating income remain flat from the prior quarter. Lower revenue in Venezuela was offset by increased drilling in Mexico and wireline and testing jobs in Brazil. During the quarter, we commenced our Chicontepec drilling project and are currently working on four rigs. The heavy rain that occurred in the last week of September had a minimal impact on our drilling operations in the field.

In the Europe Africa CIS region, Drilling and Evaluation revenue was flat and operating income was up 15% from the prior quarter as a result of the strong flow through of the revenue increases in the Caspian and Russia as well as a better mix and higher margin directional drilling activity in Norway and Angola. Drilling and Evaluation's Middle East Asia revenue was up 3% but operating income declined 6% due to the mix of projects in Saudi Arabia and project startup cost in Southeast Asia.

Now I'll address some additional financial items. As a second part of our two-pronged strategy of navigating through this downturn, we continue to generate positive cash flow and maintain our strong liquidity position while at the same time investing the necessary capital to improve our overall competitive position. By focusing on the management in our working capital we generated approximately $100 million of positive cash flow for the quarter and have $3.2 billion of cash and equivalents in investments in marketable securities at the end of September. Our current net debt to total capitalization ratio has decreased to 11% at the end of the third quarter. We continue to hold $1.2 billion of unused borrowing capacity on our revolving credit facilities and continue to maintain our investment grade debt ratings.

We anticipate the corporate expenses will be approximately $50 million to $55 million for the fourth quarter. We continue to forecast our 2009 effective income tax rate for the full year of 2009 to be between 31% and 32%. And finally, we're currently in the process of setting our capital expenditure plan for 2010 and will be providing more specific CapEx guidance during our fourth quarter call. A key part of our capital strategy in 2009 has been to spend within our operating cash flows and at this point that strategy will continue to be our guiding principle for next year. However, if we see positive changes in activity or the industry outlook we'll make adjustments accordingly. Further we continually reassess the configuration of our tools and equipment based on our view of the market. So for competitive reasons we'll not be providing further updates on additions and retirements of our equipment.

Tim?

Thanks Mark, and good morning everyone. Earlier this year we discussed the parallels of this cycle compared to previous cycles. This quarter provides the industry with additional reference points and with that in mind it's a good time to revisit analogies from parts to engines. Based on the familiar mix that we've discussed earlier in the call of supply, storage and demand, it's our view that the North America cycle could be consistent with that of the 2002 recovery. In 2002, gas directed recants rebounded from trough levels and within range bound for around 33 weeks versus being range bound for around 17 weeks at this point in the 2009 cycle. If we follow this pattern, then drilling activity may remain at restrained levels into the first half of 2010 before demonstrating a meaningful increase.

Complicating factors in the recovery include shut in wells and the impact of the 1,300 to 1,500 wells which have been drilled and not completed, as referenced by Dave earlier. The largest concentration of these appears to be in the Barnett. For reference, there were approximately 4,200 gas welcome completions in the second quarter, down sharply from last year. Accordingly the inventory of wells is now becoming statistically significant and could represent 7,000 or more frac stages.

Internationally the '97 cycle took about 84 weeks to reach trough and then rebounded sharply. Currently we're in the 48th week of decline but expect that this international downturn will be shallower in amplitude and shorter in duration than the previous cycle. In our view, the industry's supply issues, impacted primarily by accelerating decline curves, are more pervasive today than they've been in the past. Where operators are continuing to constrain incremental upstream spending, they're taking advantage of lower service costs while keeping activity levels relatively steady. However, as prolonged unde investment exacerbates supply concerns, this may lead to a robust rebound in international activity as the global economy recovers.

We've been working hard to execute our strategy and, as Dave pointed out, the current Spears oilfield market report provides additional data points to support our progress. Halliburton participates in roughly 25% to 30% of all of the oilfield segments monitored by Spears. According to the latest report, Halliburton is growing share by 5% to 9% across all of our product lines except in directional drilling and testing where they report an approximate 15% increase in these businesses. We're especially pleased that our directional drilling business has overtaken our closest competitor and garnered to the number two spot. The same holds true for our drill bits product service line where we're now the number three player in that segment.

Dave?

Okay, thanks, Tim. To summarize, we're seeing signs that pricing has bottomed in North America, though as we said, margins may decline slightly in the fourth quarter due to the items that we enumerated. Our international market and outlook remains unchanged. Operators are currently not increasing their spending until they see evidence of broad based demand recovery. We believe margin degradation is possible over 2010 based on the competitive tendering we've seen. Although we may be able to mitigate some of this with cost controls and increased volumes from the recently awarded work we've gotten. We are successfully expanding our market position in key markets during this down cycle and we believe that by deploying our resources where we think activity will be robust, we will retain the share gains we've experienced and accelerate our growth once the industry rebounds.

I think it would be good to open it up for questions at this point, and Christian, do you want to lay down the rules?

Right. We will entertain questions. Please be reminded that we will just have one question and one follow-up for each caller. Sea?

Thank you. (Operator Instructions) Our first question comes from Bill Herbert with Simmons & Company.

Thanks, good morning. Dave, you mentioned that you were more confident with respect to the international markets, and you provided some commentary along those lines but you also mentioned that you were seeing continued reticence on the part of the IOCs with regard to prosecuting spending increases due to a lack of confidence demand, so forth and so on. How is your increased confidence internationally manifesting itself with respect to your international business?

I think, Bill, in a couple ways. One, if you look, commodity prices have bounced around a little bit in Q3 but now seem to be settling into the $70 to $80 range. Part of it is just due to a lot of the discussions I've had with our customers in the international marketplace about their spending plans and the fact that some major projects, like the Gorgan project and several of those have now been sanctioned and are going forward. And I think as one IOC sees other IOCs take big projects forward, then I think that tends to just build on itself. So I think that it's really been more based on discussions and my confidence level is therefore increased that this is not going to be maybe as hard a downturn as we thought, or I thought, a quarter or so ago.

Okay, great. And then secondly with respect to the follow-up. If you could provide just some brief commentary on outlook and insight with regard to two markets -- Mexico, especially Chicontepec, as well as Iraq.

Okay. Let me handle Iraq first. Actually I was recently in Baghdad and there's clearly a lot of activity, a lot of people are going in and out of there. It certainly is a market that has a reserve base that will support a large and diversified oil services industry going forward. And I think that it's also going to be a market that really calls for every type of philosophy of service work from an integrated packaged drilling market to traditional services to maybe even some risk taking, and I think there's really going to be room for all of that in there.

That being said, there's really not a lot going on in there other than people looking at building some infrastructure. We are in the process of staffing up in Iraq, we are moving equipment in, but I really don't see that we will have a significant revenue stream out of there certainly for several years. We will have revenue, we'll have revenue this year, we'll have more revenue next year but it's not really going to be meaningful I don't think for a couple of years. But clearly it is a big prize out there for oil services and I think you see everybody trying to establish a base there and we're no exception, but clearly a great future there and one we will participate in in a big way.

In Mexico, I think everybody has been reading the news around Chicontepec. We obviously have some exposure in Chicontepec with some of the projects that we have won. We don't have the exposure that maybe some of our competitors do. I think there really is a rethink going on within PEMEX on the contracting philosophy around Chicontepec. Right now the contracting philosophy has been drill the cheapest hole and really don't worry about maximizing production, and I think that concept is being rethought within the upper reaches of PEMEX. And we think that perhaps they would envision changing that contracting philosophy going forward to make it more of one that it increases production versus just drilling the cheapest hole. We are just getting started on our Chicontepec project and it really isn't providing any meaningful revenue or operating income at this point in time so we continue to watch that market and see whether that philosophy is going to result in a change.

Okay, thank you.

Our next question comes from Geoff Kieburtz with Weeden.

Good morning, thanks. First question on international margins. If I understand your comments correctly it sounds like you're still looking at a 300 to 500 basis point margin compression but it's from the third quarter level of around 22% as opposed to, let's say, the second quarter level. Is that correct?

Yes, I think, Jeff, if you look at what we said last quarter we thought it would be 300 to 500 basis points and our margins were lower. Our margins are a bit higher this quarter which is why I think we've adjusted our thinking into the high teens, from the mid to high teens so I think generally you would conclude that. Let me just reiterate now that you've opened the door there. The issue is, if you look at the pricing that we're having to tender to work, it would suggest and will result in lower margins going forward. However, because of the length of time that we have to prepare for these contracts, we also can more easily adjust our cost structure to anticipate that revenue stream and therefore perhaps some of that pricing decline can get mitigated, especially the more time you have to get ready. So I'm not trying to be cute here, it's just that the more time you have to get ready for a project the better you can do to get your costs in line. And one of the silver linings, I think, of this slowdown is even though a lot of this work has been tendered and we've been successful in winning it, the delay of implementing these projects has, in fact, given us even more time to work on our supply chain and to work on our infrastructure costs to try to offset some of the margin decline that you had to give up in pricing. So that's really why we believe the pressure is going to be there but the longer we have, the less that impact is going to be.

Just to add some color on that, Geoff, I calculate that probably about 50 basis points of the margin improvement in Q3 is due to cost savings.

And as a follow-up, the comments you made, Dave, are pretty broad and would apply across your international business in terms of supply chain and so on, but as you look, are there markets where you would expect to see perhaps no margin compression or markets where you would expect to see outsized margin compression? And if you do see differentials, would that be more because of mix, differential pricing pressure, or really just the timing of projects?

I think Geoff, I'm not going to be as foolish as to say there's a market where we won't have any compression or I guarantee our customers in that area will come straight at the service industry and want some compression of margins. There are markets like that but I'm certainly not going to enumerate them. But there are markets that have gotten very very competitive just because of the prizes that are out there. Two that would come to mind. One of the first would be Brazil. We've been very successful in winning projects down there but that's also a very big prize that our competition also sees and I think that therefore the pressure on the tendering process has been pretty good.

West Africa in Angola would be another where you see big projects, long term projects, lots of dollars involved, and those also have tended to get very very competitive. And then I would say that markets where activity is less robust but us and our competitors have large embedded infrastructures like, the North Sea where there's very little activity going on but a large fixed cost base, so anything that comes up for tender in an area like that -- I'm talking about the UK sector of the North Sea -- also tends to get very very competitive in terms of pricing.

Okay, great. Thank you. Our next question comes from Brad Handler with Credit Suisse.

Hi, guys. A couple unrelated ones but the first question is maybe the recontracting cycle. Often as you head towards the end of the year you wind up recontracting with your clients. Has the current market changed that? Did you do so much recontracting in the first half of the year and fixing your pricing base out for a while that we're not going to see or hear about a lot of the recontracting now as we turn to the end of the year?

Yes, you will not hear much about it as we get to the end of the year mainly because that philosophy has essentially been tossed out the door by our customer base, because of the overcapacity especially in the pressure pumping side of the business. It really is, I wouldn't quite say it's a job by job, but certainly it's a maybe 30 well program or 50 well program at a time and then the customer tends to go out and retender it or rebid it or in many cases with us renegotiate it. It doesn't go out for tender but they try to renegotiate based on the current market. So the process that was in place over the last several years when things were a lot busier for the service industry was to try to tie up the service company for a year, negotiate a price and then sit back and say, "Great, now I have the resources." WIth the excess capacity that's available today, customers feel no compunction about tearing up an agreement and basically taking it back out for tender, and I don't really see that that's going to change until some of this overhang of equipment goes out of the market.

Makes sense. I'm glad we covered it but it makes sense. And another Q4 type of question, as it relates to what I'll call the normal seasonal uptick in things like export sales and your wireline business and the tools business, I assume you have some visibility about that. Where do you see that as it relates to this Q4 and what does that say about what the customers are willing to commit to with regarding programs for the following year?

I would say that that's a thing that's changed also a bit. We have pretty good visibility in terms of backlog for traditional sales and we're not seeing the build up in backlog that we typically would this time of year. I think part of it is just our customers are also paying a great deal more attention to their inventory supplies, their supply chain. As our supply chain has gotten more efficient at being able to produce and ship stuff on a realtime basis, our customers have started to draw down their own inventory stocking expectations. And then of course I think you've got the whole element of the projects that have slowed down and not knowing when they're going to start up.

And so I don't think you're going to see -- and that's part of what we're trying to broadcast here -- I don't think you're going to see the spike up of sales that we typically see in Q4, at least our order books wouldn't support that at this point in time. It doesn't really concern me greatly because as I said, I think part of it is just a more efficient supply chain all the way through the industry, but certainly some of it is a reluctance on the part of our customers to spend what capital they have here the balance of the year, and I would hope that we would see that backlog pop up as we get into next year, but we'll just have to wait and see.

Very good, thanks.

Our next question comes from Alan Laws with BMO Capital.

Good morning. Got a couple questions. The first one being on, you seem to have got a lot of fluids contracts recently. Could you tell us what's changed or changing in that Baroid. Is it just like a cluster or has your competitive position changed at all?

This is Tim. Alan, we've had a significant focus on Baroid over the last couple of years. Jeff Miller, who leads that product line, has been really very focused on developing a strategy to essentially rebuild and strengthen the franchise, and it's one which has been particularly successful. So I wouldn't characterize this as a flurry of activity around a concentration of particular bids. It's really more of a fundamental structural change in the way in which we do business, and as a result of that, we're obviously looking for sustainability in terms of performance of Baroid.

Is there a mix improvement as well in more deepwater?

Very much so. I think that we've clearly been significantly more successful in deepwater and that's all about gaining confidence of our customers since deepwater is something which they take very very seriously in terms of service selection. So Baroid's success rate in deepwater clearly is a function of the confidence they've built with major customers around the world.

Perfect, thanks. Another question, more of a high level issues question. Could you talk a little bit about the controversy the sector faces in respect to frac fluids and the bristling that we have on the environmental side?

Yes, I think that clearly, there has been a great deal of discussion around the whole legislative process. Not to belabor the point but I think clearly studies that have taken place through the years have really detected no evidence that fracturing has any impact to drinking water sources which has been the primary focus of this discussion since its inception 60 years ago or so. So we're continuing to investigate opportunities within our technology to minimize exposure. As an example of that, at the SPE just last week in fact, we introduced something we call a chemical scoring index which provides a benchmark metric on the relative environmental performance of our suite of fluids and enables our customers to really make a selection of treatments based on the balance between reservoir performance and environmental performance. And so we certainly anticipate this becoming an industry benchmark which we hope will drive an increased awareness in environmental issues and stewardship and at the same time provide us with an opportunity to continue to advance the science surrounding improving our customers' performance of their wells.

So it's more of an education issue for customers and many of the politicians.

Yes, I think it will give our customers an opportunity to select the appropriate fluid that gives them the balance between environmental sensitivity and also reservoir performance.

Okay, I appreciate the answers. I'll turn it back, thank you.

Our next question comes from Jeff Tillery with Tudor, Pickering, Holt & Co. Securities.

Hi, good morning. Just with regards to Russia, you guys showed a really big sequential increase in that market. One of the industry recap services showed a fairly significant drop off in September of activity. Is that something you guys saw in the field or is Russia just pushing forward ahead?

We've been very pleased with our performance in Russia. When we take a look at Russia overall and clearly 80%, 85% of the production today is coming out of western Siberia which is a very very mature province, and as Russia looks to try and maintain its leadership position in terms of global production it's going to force a great deal of incremental activity into eastern Siberia and other locations, all of which are significantly more service intensive locations for companies like Halliburton. So all in all, we're very positive on the outlook, though of course as Dave pointed out in his commentary, there are some financial overtones which still have to be resolved in order to perhaps allow Russia to achieve its full potential. But we don't think, the month to month data collection is probably a little bit iffy. We certainly didn't see any significant change which would alter the picture which we outlined on the call here.

Great. That's very helpful. And then my follow-up question, just regarding some of the contracts that were negotiated earlier this year internationally I believe had some oil price escalation clauses in them, presumably those oil prices at a point where those escalators potentially kick in. Could you just comment on how Halliburton is treating those and if you're trying to push for higher pricing or increased scope on those contracts?

Yes. Those escalators basically included, in a number of cases, oil price triggers for a period of time, and so it's necessary for those oil prices to be sustained above a certain level for a period of time. Clearly, that gives us the right to have a discussion with our customers, and we're certainly having discussions with a number of our customers. But we're also in a very competitive environment so we are reserving that right and the timing of improvement in pricing relative to those triggers is yet to be seen.

Great. Thank you very much.

Our next question comes from Ole Slorer with Morgan Stanley.

Thank you. First of all back on the fluids situation again. Would you say that you are -- clearly gaining market share given the announcements in your press release -- but are you gaining market share by replacing incumbent operators or are you gaining market share by winning new rigs that are coming into the market?

I think the answer to that is really both. The deepwater experience has been a function of both and that's obviously one which everyone pays a great deal of attention to. So I guess the short answer is both the combination of new rigs and also replacing incumbents.

A little bit more specific, Tim? Is it predominantly -- Brazil is clearly a replacement but on the other rigs are they new rigs? Is it evenly balanced or is it predominantly one of them?

Yes, I can't really give you a detailed break down of that but it's a combination of both of those elements. I think to elaborate a little bit further certainly the data would suggest that we have indeed been gaining market share and we're obviously very proud of that.

Okay, congratulations. On the market outlook, Tim, you gave a pretty robust outlook although referenced in previous cycles. I don't think we've had a cycle where we have $77 oil at the trough. But you seem pretty optimistic when you said a rigorous international recovery. Yet, Mark, you keep on talking about your 300 to 500 basis point negative margins. So there seems to be a little bit of a dichotomy the way the two of you are describing the outlook. Could you clarify if you differ at all?

Yes, Ole, this is Dave. I think it's important to understand that we have a pretty robust view of the international markets. We've seen the contracts that have been tendered so we know that there is a good revenue stream and it's going to come off of those contracts. But they're not going to be at the margins we saw at the peak in the last cycle because of the longer term nature of the international contracting market. And therefore you could see the revenues kick up but they aren't going to bring with that initially the incremental margins that we would have seen two, three, four quarters ago because it will take us time, as I said, to make sure our costs are in line, our supply chain is in line and then we can bring appropriate new technology into those contracts and upsell from that opportunity.

So I really wouldn't think of it as a dichotomy in the view. Clearly, we see a kick up on the revenue side but the margin side I think is going to lag and that's what we're trying to sensitize our investor base to, is that we're not going to have the kinds of incrementals you saw 12 or 18 months ago. It's going to take some time to work our way back to those incrementals. But as activity does increase, then the margins will start to come up.

That's very clear. I'm with you now. So it's led by strong revenue growth then margins follow later.

Exactly. And that's what we're trying to say.

Perfect, thank you.

Our next question comes from Robin Shoemaker with Citigroup.

Thank you. I wanted to ask you about the market share gains in North America that you referenced. I know you've had an initiative to try and bundle or package your products. A typical package might be bits, motors and mud. I wonder if that is having some success or can you give us an update on that strategy?

Yes, Robin. I think it is having a success. What we would like to do is package bits, motors, muds, frac and completions. But as Tim has said and I have said, we've been very successful at doing the bits, muds and motor piece but because of the really pretty amazing number of wells that are being drilled but not completed right now, you aren't able to bring the full suite of services to bear. But there clearly has been a push on our part to do that, and in my view, we've been very successful at it and when we get back to a more normal routine of basically being able to do what is essentially a turnkey well from the drilling all the way through completion, I think that strategy will pay even more but it certainly is paying even in this marketplace.

Okay. Just following up on your comments about the pressure pumping equipment supply relative to demand, I think you've cited that wear and tear on pumping units has increased and it's I think we've seen examples in the Haynesville wells which are notoriously pump eaters, and I think you've experienced that as well as others. Predominantly where is the excess use and wear and tear coming from that is leading to perhaps a greater rate of decline in the pressure pumping that units supply?

Generally, Robin, I would say that the combination of high pressures and high temperature and long stages are really driving the wear and tear equation. And as we outlined before, and I think as many others have outlined in the industry, we're certainly not alone in that fact, that this is a source of potential using up of equipment, if you like, and restricting the amount of capacity that is ultimately going to be available. And it really benefits those and certainly rewards those who have strong maintenance programs and those that are continuing to invest in making sure that their technology is up-to-date just to service these wells. And in some respects it's not a lot different with drilling equipment either, so I think it's just a general source of the tougher, more complex wells which require more service intensity than we have historically seen.

We're seeing this particularly in the Haynesville. That's an area where this situation is most acute. And as we see our customers, they might go and use equipment that is underpowered for it and they will walk away from it because of poor service quality and the inability to meet their requirements on getting those jobs done.

Right. Thank you.

We'll take one more caller.

Our last question comes from Mike Urban with Deutsche Bank.

Thanks. Good morning. Wanted to talk about the margin dynamic you talked a little bit about in the US and how some of the higher end shale plays were potentially coming under some pressure there. Presumably that's because you're coming from a higher level there, the rest of the US I think has been pretty depressed for a while and I believe margins have held up a little better in that space and now you're seeing competition coming. Is that reasonable?

Yes. I think that it's two things. One is that as we've successfully executed the strategy, our market share strategy, a lot of our competitors, especially the smaller competitors, have really concentrated their efforts in the two big shale plays that are robust today, the Haynesville and the Marcellus. So I think if you look at where there is the most overcapacity in the industry in pressure pumping today, it clearly is in those two Basins. And then you couple that with the very difficult frac conditions that Tim just talked about, you are having to bid fairly cheap to get work but then the work you are doing is very tough and consumes a lot of propment, it consumes a lot of pumping time, you have to take a lot of equipment to location, so therefore, you don't get the efficiency that we typically would have in some of the other more established basins around the US.

It's pretty clear that as time went on in the other basins in the US we have figured out a way to most efficiently frac wells. The level of activity to date in the Haynesville hasn't allowed us to be able to get that model precisely where we want it. We certainly are making progress in that area. But I think if you couple a relatively inefficient way of fracking right now with the way over capacity of competitors that are in those markets, it really makes for a very very fierce competitive situation and we're well-suited to fight in a marketplace like that and we very much are.

So then I think you basically just answered this but going forward, as you are able to drive those efficiencies as you have in the past, as competitors presumably aren't able to performance as well as you think you are or will be, that's still going to be a very good market for you rather than a good market for your customers?

No, I think that it will be a good market for both of us.

Okay. That's all for me, thanks.

Before we close out our call, we would like to announce that our fourth quarter 2009 earnings call will be held on January 25, 2010, at 9:00 am Eastern. Please mark your calendars, and thank you for participating in today's call. Sean?

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.