哈里伯頓 (HAL) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Halliburton's first-quarter 2011 earnings conference call. At this time, all lines 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 is being recorded.

I would now like to turn the conference over to your host today, Christian Garcia, Senior Vice President, Investor Relations. Please begin.

Good morning and welcome to the Halliburton's first-quarter 2011 conference call. Today's call is being webcast and a replay will be available on Halliburton's website for seven days. The press release announcing the first-quarter results is available on the Halliburton website.

Joining me today are Dave Lesar, CEO; Mark McCollum, CFO; and Tim Probert, President, Strategy and Corporate Development.

I would like to remind our audience that some of today's comments may include forward-looking statements reflecting Halliburton's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2010, and recent current reports on Form 8-K.

Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures are included in the press release announcing the first-quarter results, which, as I have mentioned, can be found on our website at www.Halliburton.com. Dave?

Thank you, Christian, and good morning to everyone. The events in Japan, geopolitical turmoil in the Middle East and North Africa, and worse than normal weather patterns impacted the global energy industry in Q1. And these events weighed on our results, particularly causing a significant decline in our Eastern Hemisphere margins in the first quarter, and magnified the seasonal drop-off we historically experience in the first quarter of the year.

This sharply contrasted with the excellent performance in North America, where margins progressed as rig activity grew modestly in the quarter. Given these factors, I am extremely pleased with our Q1 results. In my 16-plus years of experience at Halliburton, we've never had a quarter that's had so many moving parts in it.

And despite these headwinds, the events that transpired have absolutely not dampened our enthusiasm for the long-term prospects of our business. And we continue to believe that the industry is on the verge of the next major upcycle.

Overall revenue in the first quarter was $5.3 billion, which was a new company record. Against the prior year, revenue and operating income grew 40% and 81%, respectively, primarily from continued growth in our North American operations.

Let me now discuss our operating results in more detail, starting with North America. So there is no mistaking our view going into this discussion, since you know what our headline is, there is clearly room for revenue and operating income to grow as we get further into 2011.

Compared to a US rig count of just -- increase of just 2%, our North America revenue and operating income grew sequentially by very nice rates of 13% and 16%, respectively. The growth came from our continued strategic investments in the North America market. Our Q1 results were impacted by abnormally harsh weather in areas such as the MidCon, the Rockies, and particularly the Bakken, where we have a disproportionate market share of the work.

As we pointed out in our fourth-quarter call, we estimated that there were approximately 3,100 uncompleted wells at the end of the year. Given the constraints brought about by the weather in the first quarter, we believe the number of uncompleted wells increased to roughly 3,500 at the end of Q1.

We expect to work off some of this backlog in the second quarter depending on industry capacity adds and customer activity levels. The shift to the oil and liquids-rich plays remains unabated and is evidenced by oil-directed rig count growing 11%, while the gas rig count declined by 5%.

Horizontal oil-directed activity represents the fastest growing segment in the market today, growing approximately 170% over the prior year. The structural change toward oil and liquids-rich reservoirs has favorable implications to our overall business. Oil development requires longer laterals, a higher number of frac stages, much more complex fluid systems, and increased prop and volumes. These factors are driving the increased service intensity of the unconventional oil reservoirs compared to those in the dry gas areas.

Historically, service intensity has been measured primarily by horsepower deployed per job. However, given the structural change toward the liquids-rich reservoirs, the driver for service intensity has shifted toward fluid chemistry, completion design, and other technologies. Taking all of this into account, we currently estimate the average revenue per oil in liquids-rich well could be 1.4 to 1.8 times that of a dry gas well, depending on the basin that you are in.

The work in oil and liquids-rich plays is technically more complex. We believe the shift to these resources will persist and continue to benefit service providers that have reservoir knowledge, premium technology, and most importantly, integrated service offerings. We are developing also fluid solutions that set new standards for environmental performance. We continue to improve public access to the ingredients we use in our frac'ing fluids and are disclosing the ingredients used in a typical fracturing formation on our website.

Going forward, I feel even more confident about the resiliency of North America activity through 2011 than I did at the beginning of the year. Elevated oil prices are increasing operator cash flows, which together with their ability to raise capital, provide us an expanded availability to use these funds as they invest them.

In addition, the geopolitical turmoil in certain international oil-producing basins is once again forcing customers to look toward more stable markets like the US. This could lead to even further acceleration of upstream spending in the US in North America.

Gas-directed drilling activity continues to be curtailed, now down about 10% from the levels experienced during the summer of 2010. In the near term, we continue to believe that gas drilling could remain under pressure as gas produced in association with oil and NGLs inhibit the correction of the oversupply situation.

However, any curtailment in natural gas drilling should be more than offset by an increase in liquids-directed activity. As such, there is a bias toward increased activity on US land for the remainder of 2011. And this is reinforcing our confidence on the sustainability of our North American margins throughout the year.

We are seeing some inflation on various cost items like labor, chemicals, and proppants, which may temper margin increases as we move forward throughout the year. As you know, we have been very bullish on the US market when some of our competitors were not. We remain extremely bullish on this market, and we are very happy with the position we have in it today.

Another very positive development in North America is the issuance of 10 drilling permits in the Gulf of Mexico. If you look at the service contracts associated with these wells, Halliburton will be performing approximately 30% of the drilling services and 40% of the completion work on them. This is actually higher than our historical market share. Our customers continue to communicate their commitment to the Gulf and discuss potential projects using our existing contract base.

Our strategy of keeping our infrastructure and most of our headcount during the deepwater drilling suspension of course impacted our short-term results, but is now giving us the ability to respond to our customers quickly. As activity recovers, we should start seeing the benefits of this strategy, and we will start moving some of our personnel and equipment currently deployed on US land back into the Gulf in the coming quarters.

Let me now turn to our international business, starting with Latin America. Latin America posted good results for the quarter. We are seeing shale development work evolving in many parts of Latin America, and we are excited about leveraging our expertise in unconventional resources to help our customers unlock the potential of these plays.

Mexico continues to be challenging, and we expect growth in our Latin American region for the rest of 2011 to be led by Brazil, Colombia, Venezuela and Argentina. In Mexico, we continue to make progress on our Remolino lab project that will be utilizing our horizontal and completions techniques to enhance production for the Chicontepec field.

We are also seeing potential increases in offshore activity. But despite these opportunities, the reduction in activity in the northern region will temper the expected overall growth in Mexico for 2011.

Now let's turn to the Eastern Hemisphere. In our fourth-quarter call, we reminded everyone of the typical seasonality-related declines that historically occur in the first quarter of the year. These items were further exacerbated by harsher weather and disruptions caused by the turmoil in North Africa and the continued impact of overcapacity leading to pricing pressures.

Now, so you don't get too excited about our -- don't get too excited about our Eastern Hemisphere margin drop, we expect our Eastern Hemisphere margins to improve in the second quarter. They will, however, continue to be impacted by the situation in Libya and by competitive pricing. As activity accelerates during the second half of the year, we anticipate margins will return to the levels seen in 2010.

Now let me tell you about the events that impacted the results in Q1. Normal decline from Q4 due to seasonality of software sales, direct sales, and weather-related slowdowns accounted for approximately $110 million of the decline. North Africa political unrest and other disruptions to operations causing operating losses and the Libya charge accounted for about $105 million of the decline.

We also experienced delays in Iraq, where we finished workover activity and expected to immediately begin integrated drilling programs on several of the contracts that we won. There have, however, been customer delays mainly due to site access issues and unexpected delays in the government ability to move forward with the approval of contracts. All of this we estimate reduced operating income by approximately $20 million over Q4 in Iraq.

Going forward, weather should clear itself up in Q2 and not have a significant impact on our near-term results. Egypt, while not operating at 100%, should be nearing normal activity levels in the next several months.

In Libya, there is no relief in sight, and our operations are completely shut down for the foreseeable future. We took a charge for receivables and some property -- personal property-related issues and some compromised inventory. We have, however, taken no impairments for fixed assets at this time, and we have some insurance to cover issues like this, but impairments to fixed assets could occur as the situation remains very fluid. And, obviously, we will continue to monitor it carefully.

And in Algeria, while things are getting better, the industry is still having issues getting administrative approvals on contracts and contract extensions.

In Iraq, the impact of project delays was unfortunate in its timing as we were fully mobilized to move from workover activity to integrated drilling. We have, however, maintained our mobilization readiness despite these delays, and we now expect that our work on these projects will start in Q2 and Q3. We are still very optimistic about the market in Iraq. We continue to win work there, and we expect to be profitable in our operations in 2011.

Pricing also continues to pressure profitability, and leading edge pricing remains highly competitive across the industry in almost all markets. Tendered or negotiated prices that were set in the last several years will continue to hamper any significant margin improvement in the international margins for the entire industry, despite the higher volumes that we are seeing.

So as I said, we expect our Eastern Hemisphere margins to improve in the second quarter. They will, however, continue to be impacted by the situation in Libya and by competitive pricing. But as activity accelerates during the second half of the year, we anticipate margins will return to the levels seen in 2010.

Going forward, oil fundamentals remain robust. As supply disruptions stemming from the unrest in Libya and other countries continue to exert pressure on the industry's overall production capacity, some of our customers have indicated to us that they are now looking to increase activity in other parts of the world in the second half of the year.

One example of this is in Saudi Arabia, where our customer is planning to increase the rig count approximately 30% in the coming year. Fortunately, 60% of this increase will be assigned to the Manifa project.

Manifa would add approximately 900,000 barrels per day to the country's production capacity. Halliburton, as you will recall, won the offshore portion of Manifa in 2008. The project was delayed due to the global recession, but will now start mobilizing in the next several months. And we believe you will see an impact from the increased activity on Manifa in the second half of the year.

The potential activity increase in Saudi, although positive, has not changed our view on the pace of the international recovery. We have won a number of recent contracts in strategic growth areas, giving us further confidence in this strengthening. And Tim will discuss these in a few minutes.

We are very pleased with the progress we have made so far in focusing our resources into the market's fastest growing segments. We continue to commercialize our core technology. We continue to win key contracts. We continue to make the necessary investments to ensure that we gain momentum as the industry enters the coming upcycle, both in the US and the international markets. Now I'll have Mark give a little more flavor on the financial results. Mark?

Thanks, Dave, and good morning, everyone. Our revenue in the first quarter was $5.3 billion, up 2% from the fourth quarter. Total operating income for the first quarter was $814 million, down 17% from the previous quarter, as strong growth in North America was offset by declines in our Eastern Hemisphere business. As Dave mentioned, the first-quarter results included a charge of approximately $59 million to primarily reserve from doubtful accounts receivable from the Libyan national oil companies and certain inventory that we believe has been compromised during the unrest.

Now, I will be comparing our first-quarter results sequentially to the fourth quarter of 2010, excluding the impact of the Q1 Libya charge.

For North America, margins in the first quarter increased from the prior quarter due to stronger activity and improved pricing across most basins. March activity came in much stronger and margins significantly improved coming out of the winter season, assisted by higher capacity and pricing.

Even with relatively stable pricing and activity, we are anticipating an increase in North America margins in the second quarter, although they could be somewhat restrained by cost inflation. Now in terms of the segment results, completion and production revenue increased $187 million or 6% while operating income remained flat. Strong North America and Latin America results were offset by the declines in the Eastern Hemisphere, where we saw lower vessel and other activity in the North Sea; seasonally lower completion tool sales; and political unrest and other disruptions in North Africa.

Looking at completion and production on a geographic basis, North America revenue increased by 16% while operating income grew by 19% due to higher activity and pricing in oil and liquids-rich shale basins, where increased completions intensity continued.

In Latin America, completion and production revenue and operating income increased 11% and 50%, respectively, due to increased cementing activity in Columbia; higher stimulation activity in Argentina, driven by shale work; higher well intervention and vessel activity in Mexico.

In Europe, Africa, CIS, completion and production revenue and operating income decreased 22% and 89%, respectively, due to lower vessel and other activity as a result of weather-related issues in the North Sea; seasonally lower completion tool revenue across the region; and activity disruptions in Egypt and Libya.

In Middle East/Asia, completion and production posted sequential decreases in revenue and operating income of 7% and 31%, respectively, due to project delays in Iraq, as Dave mentioned, and seasonally lower completion tool sales in China. This was partially offset by stronger Boots & Coots activity, particularly in Oman, Saudi Arabia, and Australia.

In our drilling and evaluation division, revenue and operating income declined, primarily as a result of seasonally lower direct sales for wireline in landmark software; delayed drilling activity in Iraq and the UK; and the shutdown of operations in Libya. This lower activity was partially offset by improved North America results.

In North America, drilling and evaluations revenue increased 7% as most of our product service lines continue to benefit from the increased horizontal rig count, which grew approximately 4% from the fourth quarter. This has favored our well construction technologies, and we expect this underlying trend will continue.

Drilling and evaluation's Latin America revenue and operating income declined 3% and 26%, respectively, due to the typical slowdown in landmark revenues across the region, offsetting higher shale activity in Argentina and Mexico and increased fluids business in Brazil.

In the Europe/Africa/CIS region, drilling and evaluation revenue and operating income were down 7% and 38%, respectively, due to weather-related seasonality in the North Sea and Russia and activity disruptions in North Africa, which were partially offset by higher offshore drilling activity in Angola and East Africa.

Drilling and evaluations Middle East/Asia revenue and operating income were down 12% and 56%, respectively, from seasonal declines from Landmark software and direct sales in China and costs incurred from delayed project startups in Iraq.

Now I will address some additional financial items. As we discussed in our fourth-quarter call, we are making some additional investments in our business model throughout 2011 to lower our service delivery costs in North America and reposition our supply chain, manufacturing and technology infrastructure to support our projected international growth. These investments, which we're including in corporate and other, impacted our results by approximately $0.01 per share in the first quarter. We slowed down these activities as we experienced significant declines in our Eastern Hemisphere operations.

Over the coming quarters, we plan to continue to separately highlight these investments for you, and we currently expect the impact to be $0.1 to $0.02 per share in the second quarter. And outside of these investments, we expect our corporate and other expenses to be in the range of $60 million to $65 million per quarter for the rest of the year.

Our first-quarter 2011 effective tax rate was favorably impacted by a tax election we made with respect to a foreign subsidiary that allowed us to recognize some additional foreign tax credits. We expect the effective tax rate for the balance of the year to be between 32% and 33%.

And finally, a year ago this week, the industry experienced one of its biggest operational and environmental challenges with the accident in the Gulf of Mexico. While more than 100 crew members survived, it's with great sadness that 11 lives were tragically lost. Out of this tragedy, however, have come unprecedented changes in establishing improved best practices, particularly when it comes to safety in the approach to sustainability.

Along with all the changes in industry practices, there are also many moving parts on the legal front. Over the next several weeks, we expect a number of claims, counterclaims, and lawsuits to be filed among all parties involved in the well, alleging ordinary and gross negligence against each other in order to preserve their options in the ongoing litigation. Given the current and impending legal challenges related to the incident, we will not entertain further questions regarding these issues on this call. Tim?

Thanks, Mark, and good morning, everyone. As Dave mentioned, we've been very pleased with a series of contract awards this quarter which underpin our thematic growth areas.

Internationally, we are seeing strong trends in the development of complex, higher-temperature and higher-pressure reservoirs, and we saw success in penetrating key deepwater basins with our high-pressure, high-temperature technologies and key wins with Chevron Thailand and Statoil in Norway.

We've invested in the development of the broadest portfolio of high-pressure high-temperature technology in the industry, allowing us to execute complex wells in the harshest offshore environments and, of course, to strengthen our position in these markets. Since the beginning of 2010, we've won approximately 70% of all HP/HT services that have been tendered in the North Sea.

In addition, we are pleased to have been selected for the provision of a wide range of services in the Malay Basin, including directional drilling, logging well drilling, cementing, fluids and testing and completion services. The Malay Basin, incidentally, has the highest temperatures amongst offshore basins, and this project pushes existing technology limits with requirements exceeding 450 degrees Fahrenheit.

Integration of our services has been an important differentiator for us in driving market penetration in support of our key growth themes. We've supported this with technology investment in highly efficient workflows under our digital asset initiative, and they are providing compelling value propositions to our customers. We recently announced a contract award for integrated drilling and well services in Norway, for fast-track development projects on up to three offshore rigs that are designed to reduce time from plan to production in half.

This, together with the shale Majnun and Exxon drilling package contracts awarded in Iraq, provide growing evidence of our customers' interest, and our ability, to integrate drilling and completions workflows to provide efficiencies for their projects.

We envision that these types of contracts will continue to grow faster than our discrete business portfolio. Upcoming projects for Apache in Argentina and Pemex on the Mexico side of the Eagle Ford play will also largely be delivered through our packaged and integrated services model.

Contract models are evolving from fixed-price contracting arrangements to models that include performance-based and various other risk-reward mechanisms, which are quite attractive to us.

The integrated and packaged services model has grown significantly for us over the last two years, and our project management team is, today, managing over 100 strings globally. Dave?

Thanks, Tim. Just to summarize the call, going forward, I feel even more confident about the prospects of our North America business in 2011 and beyond. We believe there is room for upside in both revenue and margins as we respond to the continued increases in service intensity. And while our Eastern Hemisphere margins were adversely impacted in the first quarter, we expect recovery in the second quarter, and as activity accelerates in the second half of the year, expect margins to return to 2010 levels.

And finally, we are gaining momentum in targeted growth areas as evidenced by us winning several large key contracts. So with that, let's open it up for questions and we will go from there.

(Operator Instructions). David Anderson, JPMorgan.

Thanks. Good morning, Dave. Quick question about your margins going forward, really on the D&E side. Seems to me one of the keys to earnings growth for Halliburton, kind of 12 and 13 is getting the D&E international margins up higher. Just taking -- stepping back I guess from some of the issues we've seen this past quarter, can you talk about whether you see some of the drivers to materially improve these? And when do you see them kind of eclipsing the 20% mark?

Dave, this is Tim. I think a couple of points there. Clearly D&E was impacted quite significantly by the unrest in North Africa, important market for us. And as you know, we've been gearing up quite significantly in Iraq for our drilling packages there also. And the sort of delays that Dave referred to on the call with respect to the startup of those projects because of delays in clearing sites and getting the civils completed were also quite impactful to us too.

So I think number one, obviously, then is the restoration of some of those activities around getting back to normality for some of those projects. Clearly, we're going to see a significant improvement in Saudi in the coming couple of quarters. We're going to see a significant impact. The Saudi activity offshore Moneta is a significant project for us. And as you well know, the service intensity in Saudi in their offshore and onshore projects is quite high.

So the combination of that plus the mobilization for a number of the project wins which we have made, I think are all contributing factors to us getting back onto a stronger trajectory for D&E margins in the second half of the year.

Is that partly also a function of where we are in the cycle? I guess would you expect the D&E -- because I guess I'm noticing kind of '06 to '08 is when you really saw the D&E margins pick up. So is that sort of a function of the cycle as you kind of get more into the exploration side as well?

Yes, most definitely. I think as exploration activity starts, and we're clearly going to see a significant increase in exploration during the front end of the cycle, that's always very helpful to D&E margins.

I guess on a related note, I was curious about what you're hearing out there on offshore development activity. Would you expect that to start picking up over the next 12 months? And the discussions you are having with operators, are they talking about moving projects forward? Is there kind of a greater sense of urgency out there right now with kind of oil prices and potential supply disruptions?

Yes, I think in general, I would say that there is an increasing confidence. The psychology of the market, as you well know, is really important. And so this does create a sense of confidence in terms of the underlying commodity price. So I would say just generally, yes, there is a stronger sense of wanting to move ahead confidently. However, we also have to say that I don't think it's actually been seen yet in terms of actually increasing overall activity or putting incremental rigs to work.

But in general, to answer the first part of your question, clearly, we're pretty enthusiastic about offshore activity in general in the second half of this year.

Doug Becker, Bank of America.

Thanks. Dave, you mentioned that international pricing is still highly competitive in most markets. Does this mean that we're still seeing pockets of weakness? And what would have to change to change your expectation about the pace of the international recovery?

Well, I think you got to look at it sort of two ways. One, I think we clearly see the volume increases coming at us because of the activity increases, and that will absorb the overcapacity out there. And I really wouldn't say that there's pockets on a geographic basis of sort of price competition. I would just say on any large tender today, there's plenty of competition and significant price concessions being given. That tends, in my experience, to go away as capacity gets absorbed and people start to focus more on margins and returns and less on getting the original contract in hand. And I think right now we're still in sort of the competitive phase of this, but we see sufficient volume coming at the end of this year and into next year that hopefully will absorb that capacity.

And just a quick follow-on then. In terms of -- when you think about capacity utilization, how do you think about that? Should we be looking at rig count? Or is there a better way to be measuring that?

No, I think rig count is probably the best surrogate, especially if it's a deepwater offshore rig. And then you sort of apply your service intensity multiple to that. And I think you can make a pretty good estimate of how fast industry -- spare industry capacity in oil services can get soaked up.

Stephen Gengaro, Jefferies & Company.

Thanks. Good morning, gentlemen. Two related questions -- one, on the CapEx side, are there any changes to your plans? And how is sort of the rollout of equipment in North America proceeding? And along those lines, how should we think about North America pricing as we kind of go forward over the next several quarters?

Stephen, on the CapEx side, I think we're still -- on our plan, you should expect I think 2011 CapEx to be probably closer to about $3 billion. That's sort of where we have been aiming. Again, most of that CapEx or at least a higher majority of it will be North America as we're rolling out pressure pumping capacity this year. We've got a number of infrastructure projects going on around the world as well that will be influencing that number.

In terms of capacity rollout, we're on schedule. I think that you saw a little bit of that influencing our March results and why they came in so strong. And we continue to see that CapEx rolling out systematically as the year progresses. It's contracted. We know where it's going to go to work, and we are staying the course as we speak.

Your second question, I think that our general view, because that capacity is basically being fully absorbed, we saw in the quarter continued increase in service intensity. We saw increases in the amount of horsepower required per job. And we saw an increase in the amount of 24-hour operations. That tells you that the environment is still ripe to continue to move pricing. And so we are continuing to do that, particularly with regard to making sure that we are more than covering cost inflation that's also pushing against us. And so we still believe that we can continue to move margins forward as the year progresses in North America.

That's helpful. Thank you.

Dan Boyd, Goldman Sachs.

Just, I would like to follow up on maybe that last comment in looking at North America, pressure pumping intensity versus overall service intensity. Clearly up nicely in the quarter; but can you talk about how much of that sort of revenue growth came from the pressure pumping intensity side of it than versus the just overall increase in service intensity from some of the other value-added services that you mentioned in the press release and during the conference call?

Yes, I think just a quick comment on pressure pumping first. We, during the course of the quarter, utilization levels actually surpassed those of 2008, which I think is another interesting data point for you. But to answer your question fully, I think we are seeing it across the board. Whether or not it's pressure pumping, drilling and evaluation or completions activity, or others for that matter, it's an across-the-board phenomenon.

And I think as I referred to in my kind of prepared comments, the sort of concept of integration is something that is working very positively for us. And we believe it's a differentiator for us, and it gives us the ability to provide a platform in which we can essentially bring everything along in that portfolio at a fairly sort of even level, and benefit all elements of the company equally.

Makes sense. Can you comment or give us a little more detail on the strategic placement of frac stages that you highlight in the press release? And just sort of how meaningful is that to the business? Where are you in the evolution of that? And I assume that's something that is more unique to the integrated providers like yourself.

I think that, clearly, as Dave referred to, we're seeing a significant shift in the way in which the industry is evolving towards both oily and liquids-rich activity. And there are significant differences in terms of the way in which we complete those wells relative to dry gas wells. And so what you are seeing is an increased degree of complexity, and frankly, an underlying commodity price which allows you to drill longer laterals, more stages, and complex completions than we have seen hitherto. And that's driving the service intensity change of sort of 1.4 to 1.8 relative to dry gas that Dave referenced in his call.

Ole Slorer, Morgan Stanley.

Thank you very much. On the seasonality and the weather number highlighted at $110 million, how much of that was domestic versus international?

None of it was domestic. It was all international. As I said, we had a slight disruption to our US operations due to weather, mainly in the Rockies, the MidCon and the Bakken, that caused a slight decrease to the margins and revenue stream with respect to Q1, but the amounts we highlighted were totally Eastern Hemisphere.

So if we add all that up, then, the $110 million, $105 million and $20 million, that's $235 million at a $2.3 billion of sales internationally, so that should suggest about a 10% margin effect?

Yes, that's about right, Ole.

And you did 9.4% margin internationally, so does that suggest that in a normal environment, in today's pricing -- normal environment we can all scratch our head and ask what that is, of course -- but does that mean that we are looking at an underlying run rate really in the high teens when the world settles down again, with no further pricing improvements?

You know, I don't know. I haven't sat here and tried to do the math, but I don't know that that would work out that perfectly. Clearly, there's a pricing impact that's continuing to impact margins overall. As Dave indicated, pricing continues to be fairly competitive, and as contracts start, we're still having the endpoints of that -- of the negative pricing over the last year or so that's still creeping into the margins. So I don't think it would work out that perfect.

But clearly some of these things have an impact on margins strictly because of your fixed cost level that you have to incur to maintain operations, even if the weather shuts things down.

Yes, but it does suggest that the underlying international activity or profitability level might maybe be significantly better than what these numbers suggest.

Yes, I think, Ole, that's why we indicated that we're confident that margins will start to increase next quarter and head back to where they were last year.

And then you've got to factor in sort of where the pricing competition evolves the balance of the year. So as Mark said, I don't think it's a perfect calculation as you laid it out, but the trend would certainly be towards swinging it back to last year's margins, if not a little higher.

Perfect. And how do you think about the allocation of the capital constrained equipment, whether it's directional drilling, rotary steerable? I'm sure you have a whole bunch of tools that you consider where to send around the world when you're making these kind of returns in North America.

What -- why -- I'm a little baffled that international pricing is as competitive when we really can make these outstanding returns in North America in a market that arguably is becoming a lot more visible and transparent with the everyday order lag. How do you think about that?

Ole, I think that argument would presuppose that all equipment is created equal for all applications, and that's really not the case. What we use, how we use it, and essentially orientation of businesses in North America tend to be quite different than the international markets. As you know, in the international markets, they tend to be much more drilling and evaluation-led; the North America markets tend to be more production and completion led. And so I think that's probably one of the underlying reasons why you don't see the sort of complete freedom of movement of assets around the globe because they're not always completely suitable in those applications.

Of course the other thing I also say is that we were hurt clearly by the issues in North Africa. We can't get those assets out of Libya right now. That's part of the issue. So you've assets that are sitting there that no service company can actually get access to.

As a closing comment, in general, the international markets tend to use a higher service level. Our service intensity in international markets, even on land rigs, tends to be much higher. Use [Serbe] as an example or Kuwait as an example, it's much more comparable in terms of equipment delivery with some things that we might utilize in the Gulf of Mexico than it is onshore in the US.

Bill Herbert, Simmons & Company.

Thanks. Good morning. Mark, back to North American pricing and margins for a second here. You talked about the fact that there isn't a whole lot of difficulty absorbing the incremental frac capacity that's being brought online. As pricing continues to move higher, you're going to be offset by oil service cost of goods sold inflation. And my question is, how does that distill into a view on incremental margins? And last year, for the first three quarters, while you were getting pricing activity and service intensity uplift, incrementals for [CMT] were between 45% and 56% quarter on quarter. We had a drop in the Q4 of 28% because of -- I would assume in part due to the drop in your Gulf of Mexico work. And then we had, again, relatively subdued incrementals in Q1 of 31%, 32%. So how should we think about incrementals going forward?

Well, we're not going to give any specific guidance for competitive reasons, Bill. Appreciate that. But I think that you should pick up from our comments that we do remain confident that we think that the incrementals will continue to be good, that it will continue to increase. We feel we've kind of hit the bottom on the Gulf of Mexico. Obviously with the increased permits, while it takes some time, we still expect that as the year progresses, the Gulf of Mexico will start getting back to work, and that comes at a nice, consistent margin that historically has been quite good, so that will add to the mix favorably.

And then when we look at our margins, particularly in March, where you had a month that was not influenced by weather, with stronger activity and the rig count, it just says we do expect a bump in our margins in Q2. And as we look out across the year, there's no reason in our view today to expect that will not continue to sort of move up as the year progresses.

Now it's not going to be at the same pace as we had last year. That's certainly the case, but there is incremental opportunity to continue to improve our margins.

And of course, the second thing, a part of these strategic initiatives that we're working on that we highlighted at our analyst day last year is continuing to work hard on addressing our cost structure as well, so that we can continue to be the lowest cost service provider out there.

(Operator Instructions). Roger Read, Morgan Keegan.

Good morning. Just wanted to follow up on the issues weighing on the international margins. As you kind of look by region, obviously, Manifa is going to kick off here. You've got the trouble in North Africa, but maybe a little more detail on Latin America and the Asian markets if you could.

Well first of all, just on Manifa, obviously, Manifa will be a benefit. But bear in mind that those rigs will come in sort of rapidly over the balance of this year, so we will not see a significant one-time impact of that. It will be a -- it will change as we go through the course of the year.

You mentioned Latin America. Clearly we -- Brazil continues to be a positive growth environment for us. Argentina, we've referenced a couple of times, particularly as it relates to unconventionals and the growing benefits there, particularly as our customers derive benefit from, quotes, new gas pricing, which is providing them some confidence to do additional work and invest incrementally. [Andean] countries in particular are also showing some positive signs.

Mexico, the brightest spot there, I think revolves around two things for us. Number one is the southern development of the Eagle Ford, both in terms of the dry gas leg and also the oily leg for Pemex in northern Mexico, which is clearly a positive for them and us. And the very good progress that we're making with our Remolino lab in Chicontepec, which if you recall, is Pemex's focus on really adding a greater degree of G&G capability and underlying science to the development of that reservoir.

Okay. And as kind of an unrelated follow-up, in North America on the cost inflation side, can you kind of give us an idea of what the bigger issues there are other than the obvious one of labor?

Well, clearly labor, yes, it most definitely is tight. That is a significant component of all of our -- in fact, the largest single component of our cost structure. And clearly, all elements of inflation are kicking in for us, whatever they may be, whether they are on proppants, whether they are on transportation, you name it. There's (multiple speakers)

(multiple speakers) cost obviously has gone up quite dramatically, so --

Inflationary pressures are there across the board. And we're working hard to make sure we, A, contain them, as Mark said, in terms of making sure that we are as efficient as we can be in delivery of services and also recovering those inflationary factors through price increases.

Bill Sanchez, Howard Weil.

Good morning. There's been a lot of conversation as it relates to the margins in the Eastern Hemisphere and what the progression may be there. I was just curious as we look more from a top-line perspective, 2010 versus 2009, Eastern Hemisphere revenues were essentially flat. Can you talk about what kind of growth we're expecting on the top-line in Eastern Hemisphere, maybe 2011 versus 2010, as you guys see it right now given what's going on in North Africa?

You know, again, I don't think that we want to give specific guidance as to what we think will be happening. We do -- as we've said it several times, we think activity is coming. We've seen that. We've seen our customers' budgets, as you have, increase significantly. We see a significant number of offshore rigs coming into the market, and so areas like the North Sea, West Africa, you know, we expect as the year progresses, will begin to pick up.

Tim mentioned Brazil just a second ago. I think that the issue that we are seeing right now, and part of the reason why you see the impact of just sort of year-over-year flat revenues, flat top-line growth, is the impact of pricing -- that pricing has remained competitive and that that influence continues to mask some of the other activity-related increases that we have experienced and we believe will be coming.

And so we think that, as Dave mentioned, activity is coming. It's going to pick up as the year progresses. And that will have a pull -- activity-led sort of margin pull for us in the early part of the year. And we are hopeful that as capacity utilization increases, that the market sentiment will change, that will allow us to begin to think differently about pricing as we tender for contracts later in the year between us and our competitors, which will probably have more of an influence in 2012, but hopefully we'll get some of that in the late part of this year.

Sure. The project delays that were noted in Iraq of roughly $20 million, do you all believe that's specifically just a function of your specific customers, or was that something that you think everyone in country likely experienced?

Yes, I think that if you look at -- if you had [instead of] a brown-field drilling site, you have your infrastructure in place and you probably are not as likely to have been delayed. And we didn't see delays, for instance, in a lot of our workover activities that we were doing for various companies.

But when you go to more of the green-field opportunities, one of the things our customers are experiencing is preparing pad sites. And typically that is out of scope of our contract. And when they are developing the roads to and these drilling sites, what they are finding is lots of unexploded ordnance resulting from the Iraq, Iran war and various wars that have been in there. And it's taking them substantially longer to get these drilling sites ready for us to mobilize to.

And so I think -- I would think of it more in terms of it's brown-field versus green-field. It's the green-field projects that are tending to get pushed back a bit because of these site development issues.

Kurt Hallead, RBC Capital Markets.

Good morning. Just wanted to -- I know you've mentioned the international margin on a number of different fronts. And just for clarity point at this -- wanted to make sure I understand it, that on the international margin for 2011, on the year -- if you look at 2011 versus 2010, are you looking at the same margin for the full year, or are you guys thinking more on the second, third and fourth quarter that '11 would look like 2010? I just want to get some clarification on that please.

Yes, I think we're looking at the -- obviously going forward here, Kurt, I think clearly the first quarter has been a very challenging quarter. And I don't think that we would expect at this stage to sort of get that one to make it up. So I think you're looking at it correctly by looking forward.

And second -- okay, all right.

And then just a follow-up here on the frac capacity. What do you think is coming into the market here in 2011? And are you still seeing interest from your customers in -- on term contracts? And are those term contracts 12 months, 24 months, 36 months? Has there been any change in the length that your customers are trying to contract out this frac capacity?

Essentially, we could contract out most of our capacity probably about any terms we wanted to dictate at this point in time. But typically, we are keeping that relatively short. We are not doing essentially fixed-price contracts. We're doing performance-based contracts, which force us and our customers to reach certain levels of productivity or we have the right to move that spread on to someone else. And we think that's the best way in this -- basically, this market that doesn't have enough capacity to handle everything that's there. So we're trying to preserve our ability to be opportunistic, but make sure that as every piece of equipment comes out of the manufacturing plant we have, that it has a home to go to on day one.

I was going to say I think in terms of the overall estimates of overall capacity coming to market, our estimates haven't really changed. I think we still think that probably in the 3 million, 3.5 million horsepower is probably what's coming into the market this year.

Jim Crandell, Dahlman Rose.

Good morning. I want to ask another question on pricing internationally. It seems to me that the anecdotal stories about pricing, not just at the commodity end, but what has heretofore been the very largest, highest margin jobs has gotten extremely competitive out there. And I think, Dave, you voiced optimism that when activity comes, it will all go away but -- or least it will improve. But is it true in your opinion that pricing conditions are worse at this time than you might see at this point in other cycles? And do you think it may not all go away just due to various companies' strategies that exist out there?

I would say in general, yes, I think things are more competitive today than we have seen in the last couple of years certainly. Typically when we think about pricing, and you think about tightening pricing, you really think about changing the trajectory of the market. And I think you would agree that we haven't seen a significant trajectory change in the market. I think what we're starting to see now is -- are some significant signs of trajectory change.

Our IOC customers and independent customers are getting more confident about their spend. And in particular, the NOC customers, and you see that, obviously, Saudi Aramco would be a good example; KOC is another example, and also in the UAE, we're starting to see some significant changes in terms of NOC spending patterns. They don't always typically follow the natural progression of commodity prices, but as they kick in, you're going to see a change in trajectory of the market. You're going to, therefore, see a tightening of supply, and I think that, to Dave's point, as we get towards the end of this year and into 2012, we will see more stability in the pricing market.

Okay. Thanks, Tim.

We'll take one more caller.

Brad Handler, Credit Suisse.

Thanks. Good morning, guys. Could I ask you -- let's see what's left here. Maybe Tim, you could come back to your comment about your receptiveness to performance-based and the risk/reward mechanisms and your enthusiasm about that. Are you now driving -- in tenders, are you now driving offerings to that regard? Or rather are you generally being pulled into offering that sort of thing? Talk to us a little bit about that please.

No, I think we're very much driving towards incentive-based contracts. I think they provide good value for us. And I think that we have invested, as you know, Brad, quite a bit over the course of the last couple of years, in really developing efficient workflows which can stitch together all the key elements of our operation.

The key to our customer is a value proposition. They're not interested in just a collection of services at the well site; they want to see real value. And I think that we are delivering that value proposition, and it's making it a much easier sell for us to engage them in discussions around incentive contracting. And so I do expect that to continue over the course of the next year or two.

To what extent are these about the timing, efficiency of well construction, versus say productivity or really production related?

Yes, I think today, we are very much focused on the -- on time-based efficiencies, I would call them, both -- primarily in the well construction phase. But I definitely think that over time, we have the potential to evolve those to production based efficiencies too.

All right. Before we close, we would like to announce that our Q2 2011 earnings call will be held on Monday, July 18, at 9 AM Eastern, 8 AM Central. Sean, let's close out the call.

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