哈里伯頓 (HAL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Halliburton second-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Kelly Youngblood. Sir, you may begin.

Good morning. Welcome to the Halliburton second-quarter 2012 conference call. Today's call is being webcast and a replay will be available on Halliburton's website for seven days.

The press release announcing the second-quarter results is available on the Halliburton website.

Joining me today are Dave Lesar, CEO; Mark McCollum, CFO; and Tim Probert, President, 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 risk and uncertainties that could impact operations and financial results and cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2011, Form 10-Q for the quarter ended March 31, 2012 and recent current reports on Form 8-K.

Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing the second-quarter results, which, as I have mentioned, can be found on our website.

Please note that our sequential comparisons today will exclude the $300 million charge reported in the first quarter of 2012 for estimated loss contingencies related to the Macondo well incident.

We will welcome questions after we complete our prepared remarks. We ask that you please limit yourself to one question and one related follow-up to allow more time for others who have questions. Dave.

Thank you, Kelly, and good morning to everyone. We certainly had a lot of moving parts in the second quarter, but I was pleased with the overall final outcome. Total revenues of $7.2 billion were a new company record for us. This represented a 5% growth sequentially and was the direct result of all three of our international regions achieving record revenues, as well as us being able to leverage our number one market position in North America to outperform the competition once again in terms of total revenue growth.

Before I go into the details of the quarter, I would like to remind everyone of our ongoing global strategy -- to maintain our market leading position in the US, gain market share in the international markets and deliver industry-leading revenue growth and returns. By any measure, whether sequentially, year-to-date or year-on-year, we are successfully executing on this strategy.

Now let's look at our performance. From a global product line perspective, we achieved record revenues during the quarter in eight of our 12 product lines. And in Cementing, Completion Tools, Multi-Chem, Testing and Subsea, we achieved new records in both revenue and operating income.

Operating income of $1.2 billion declined 9% sequentially, primarily due to cost issues in our North American production enhancement business, which we expect to work through by the end of the year, as I will discuss shortly.

International operating income was up 31% sequentially from activity and pricing improvements in all regions.

Let's look first at our North American results for the quarter. Compared to a rig count decline of 17%, our sequential revenues were essentially flat. The Canadian rig count dropped 70% sequentially due to the seasonal spring breakup. The US rig count declined 1%, but our US revenue actually grew 3% sequentially.

As you know, we saw a continued shift from natural gas to oil-directed activity during the quarter. The US natural gas rig count declined 18% from the first quarter and is currently down 42% from its high in October of 2011. This represents a low point in the natural gas rig count over the last decade. However, the majority of the drop in gas rigs to date has been offset by an increase in oil and liquids-driven activity as our customers had shifted their budgets toward basins with better economics.

Our North American operating income was down 19% sequentially, driven by four factors. In descending order of impact, these factors were guar cost inflation, which I will talk about in a few minutes, the Canadian spring breakup, pricing pressures that are isolated to our production enhancement product line and efficiency disruptions associated with ongoing equipment locations.

The impact of guar cost inflation was dramatic this quarter, and we expect it to continue to impact our production enhancement results throughout the rest of this year. Our US business is a well-functioning machine, and we did not want that machine to miss a beat. We are recognized as having a reputation for the best execution reliability in the industry and are the largest 24-hour operation of any supplier in the industry.

Since we were unwilling to compromise this reputation, we made a strategic decision that on top of our normal guar purchases that we would procure a large reserve of guar based on the demand we saw in the market coming out of the first quarter. At that time, rising customer requirements in the oil and gas basins was driving up demand for gel-based systems, and the elevated commodity prices at that time supported our ability to push price increases to our customers in order to counter the incremental higher input costs of our guar.

For us, the equation was a simple one -- having the frac spread that made a 20% margin using higher-priced guar was better than the one that made no margin because we had no guar to pump. So during the quarter, we were able to meet all of our customer needs, and in a number of cases, we were able to catch jobs our competitors could not get to because they lacked a supply of guar. This enabled us to take market share while demonstrating to these customers why they can rely on Halliburton when supply chains get stretched.

Today, supply concerns around guar have eased and spot prices have declined, but costs remain high relative to historical levels. Furthermore, the decline in oil and gas prices in the second quarter have made our customers more reluctant to accept price increases to cover our incremental guar costs.

Because of the large reserve of extra guar inventory we have on hand, our results will reflect an even higher average cost of sales impact over the remainder of this year as we work through our supply of this higher-than-average-cost guar. At this point, there is no shortage of guar, but most of the industry will have to work down their inventories of their higher-priced product.

So, with 20/20 hindsight, simply put, we made the wrong decision. The result is we bought too much guar too early and paid too much for it. We should not have purchased the extra inventory. The impact was dramatic in the second quarter as we absorb these higher prices, and even more so in the third and fourth quarter as we work off the inventory.

I want to be clear with you -- I supported and agreed with the decision to secure the strategic guar reserve, and I will take the heat for it.

Let me give you some additional data on the impact guar will have in 2012. In the second quarter, about two thirds of our North America margin compression was due to the impact of escalating guar costs, which rose approximately 75% from the first quarter. As we go into the third quarter, traditionally our busiest quarter in North America, we expect our total guar costs will rise an additional 25% over the second quarter as we work off our high cost reserve, and then costs should reduce as we close the year.

Keep in mind that while the market price for guar has dropped and supply is readily available, spot purchases made today could not be delivered to the industry for nearly 2.5 months due to grinding and shipping times.

We currently anticipate future guar pricing will decline, but the situation is still volatile. Spot prices for unprocessed guar splits fluctuated more than 30% just last week alone as the market reacted to the monsoon weather outlook. And depending on how the monsoon season plays out, our current excess guar supply may in fact become a strategic asset for us in North America if this year's crop falls short.

But to help protect us against these issues in the future, we are actively developing alternatives to guar, which Tim will talk about later.

Moving on to pricing pressures, we saw some impact to frac pricing in the quarter. While spot frac pricing in the dry natural gas basins was under siege in the second quarter, it now appears to be leveling off, in many cases, because there are so few competitors left in these basins today. We are also seeing increasing pressure in the oil and liquids markets as we negotiate the renewals of existing stimulation contracts and win new market share.

In contrast, the majority of our other product lines continue to maintain relatively stable pricing. Now, we continue to add new equipment in North America to support our Frac of the Future initiative. This quarter marked the first of our new Q10 fleets being deployed, and they are already surpassing expectations in terms of well site performance, efficiency and maintenance.

In the event that the market does deteriorate to where we are not earning our cost of capital, we would likely idle or retire older fleets and continue to bring new fleets out and build up our Q10 operations.

Most importantly I believe for you to note is that today, our total frac fleet remains fully utilized. Every truck we build is committed to a customer before it comes off the line. And where an existing customer has reduced demand for our services in a particular basin, we have been successful at displacing a competitor on other work for either that same customer or for a new customer we could not get to in the past.

Our strategy in this environment has been and will continue to be to take advantage of our market position, differentiated technology, a more complete set of product offerings and the general flight to quality which appears to be under way. Historically, this has resulted in market share gains during a downturn, which we have positively then leveraged during the ensuing up-cycle. We see no reason for it to be different this time and our second quarter versus our competitors certainly bears that out.

The continued migration of equipment from the gas to oil basins also means we continue to incur some lost revenue opportunities in mobilization costs with these moves. Looking ahead to the balance of the year, we still expect to see a modest reduction in the gas rig count as operators focus on basins with better economics. We believe that despite recent improvements in natural gas spot prices, downward pressure will continue throughout the injection season.

Oil and liquids-rich drilling has mostly offset recent reductions in gas rigs, and the majority of our customer base remains committed to previously stated activity levels. However, we believe that recent volatility in oil and softness in natural gas liquids may prompt certain customers to adopt a more cautious tone toward the timing of their drilling and completion activities.

As we look to 2013 for US land, we are optimistic that land activity will continue to strengthen, led by a growth in unconventional developments in oil basins such as the Eagle Ford and the Bakken, where we are very well-aligned with the long-term asset owners. In addition, we will have worked the higher-price guar out of our inventory and expect to be replacing it with more normally-priced inventories. In this environment, our North American margins can return to their normalized levels.

Turning now to the Gulf of Mexico, we continue to see activity recover and our second-quarter margins are now at pre-moratorium levels. We are optimistic about the work that we have won in directional drilling, fluids, wireline, completions and other product service lines for the new deepwater rigs arriving in the Gulf over the next few quarters. We expect that this will translate into a higher market share relative to our historical level and also believe that margins will continue to strengthen as our customers adapt to new regulations and industry efficiency improves.

Moving on to our international results, we are very pleased with the market share gains that we have made. We continue to outperform our competition in terms of revenue growth, and we are now seeing margins begin to climb as we execute our strategy around economies of scale, new market entries and selective price increases, and of course, the introduction of new technology.

I think it is important to note that while North America market share can fluctuate more rapidly, the market share that we have captured internationally is longer-term in nature, as it provides a strong incumbent position for many years to come. This is why we have been so focused on gaining international share.

We continue to be very optimistic about our Latin America business, where we posted another solid quarter. Revenue was up 13% sequentially compared to a 1% gain in the rig count. In Brazil and therefore for Latin America, our margins were impacted as we incurred costs to mobilize for our recent award of the wireline package. We also believe we are well-positioned to win significant incremental work on the recent bids for both directional drilling and testing in Brazil, which should position us well in the future.

Additionally, we expect our margins for consulting and software services in Latin America to expand in the second half of the year, just as they've done in prior years.

Our consistent strategy in the Eastern Hemisphere is playing out positively, as well, as evidenced by the record revenues achieved this quarter and by our improving margins. Eastern Hemisphere revenue was up 15% sequentially relative to a rig count gain of 5%. If you look back a year, our revenues are up 23% from the second quarter of 2011 on only an 8% increase in rig count.

We continue to make progress in markets that had previously been negatively impacting our results, and are optimistic about activity levels expanding in the second half of 2012.

Europe/Africa/CIS had a strong recovery from the first quarter. The Europe and Eurasia areas as a whole are now generating margins higher than our current Eastern Hemisphere average. Libya continues to recover, while the investment in restructuring efforts made last year in other parts of Africa continue to pay off.

We are particularly pleased with the rapid ramp-up of our East Africa operations, where margins are also above our Eastern Hemisphere averages.

Across the region, our service quality and technology are being recognized by our customers. In the UK, our exceptional performance with Sperry Geosteering has led to takeaways from a competitor. And based on relative performance against two of our large peers, another customer singled out Halliburton for our superior wireline technology.

And in Tanzania, our formation evaluation team was recognized by a customer for their performance. In Russia, we were awarded Team of the Year by another large IOC customer, recognizing our ongoing commitment to safety and service quality.

In the Middle East/Asia, we recovered well from the seasonal weather experienced by Australia in the prior quarter, and China activity rebounded sharply from seasonably low levels in the first quarter. Compared to the second quarter of last year, operating income across the region is up 59%, highlighted by a 72% improvement in Asia-Pac countries.

During the quarter, we completed our second multistage frac operation onshore in Australia and are optimistic about this growing unconventional market.

Overall, our outlook for the international markets has not changed. We have always believed it would be slow and steady, and now that seems to be the consensus among our peers. We believe international activity will continue to grow steadily, which is beginning to translate into longer-term pricing improvement. Near-term, we expect that overall margin expansion will result from volume increases as our new projects ramp up, new technologies are introduced and as we continue to improve results in those markets where we have made strategic investments.

We are increasingly confident that our 2012 Eastern Hemisphere exit margins will be in the upper teens and that we will average around 15% for the year.

We remain optimistic about the long-term global demand picture and commodity prices despite the various economic uncertainties that are weighing on the global hydrocarbon demand picture in the short run. Supply disruptions, including Iranian sanctions and lower-than-anticipated production levels in Iraq, Libya and Brazil continue to pressure supply levels, and the capacity in the global liquids market is still relatively tight. Continued demand growth in non-OECD countries, the declining production in mature fields and rising marginal costs of production all support the long-term fundamentals of our service business.

So going forward, we will continue to focus on maintaining our leadership position in North America, strengthen our international margins and growing our market share in deepwater and underserved international markets. Additionally, we believe we are well-positioned to capture market share in the expanding international unconventional business by leveraging our technology and expertise that we developed in North America. I believe our revenue growth on a relative basis has proved that strategy out for this quarter.

Now let me turn it over to Mark for some more color on the financial results.

Thanks, Dave, and good morning. Our revenue in the second quarter was $7.2 billion, up 5% sequentially from the first quarter. Total operating income for the second quarter was $1.2 billion, down 9% from the previous quarter after normalizing for the first-quarter Macondo related charge. North America revenue remained flat, and operating income decreased 19% compared to the previous quarter.

As Dave mentioned, guar cost inflation was the most significant driver, combined with the impact of Canadian breakup, frac pricing pressures and equipment relocation. Excluding Canada, we expect these challenges will contribute to incrementally lower margins for the remainder of the year. We believe the majority of the margin impact will result from working through our higher-cost guar inventory and additional pricing pressure for hydraulic fracturing.

Internationally, revenue and operating income increased 15% and 31%, respectively, compared to the previous quarter, driven by the seasonal recovery of our international business, market share gains and, to a lesser extent, improved pricing.

Looking at our second-quarter results sequentially by division, Completion and Production revenue increased 4%, while operating income fell 12%. North America cost issues drove the lower profitability, but were partially offset by stronger results in our international regions.

On a geographic basis, Completion and Production revenue in North America was flat sequentially as increased activity in the Gulf of Mexico and US land, oil and liquids basins was offset by lower revenues in Canada due to the seasonal breakup.

Operating income declined by 21%, primarily due to the cost and pricing issues that are currently impacting our production enhancement product line. The decline in US land was partially offset by the Gulf of Mexico, where operating income more than doubled from the first quarter.

In Latin America, Completion and Production posted an 11% sequential increase in revenue due to additional production enhancement activity in Argentina and Mexico and increased Cementing activity in Mexico and Venezuela. Operating income remained relatively flat, however. The increased activity was offset by higher costs for Boots & Coots in Mexico and Cementing in Argentina during the quarter.

In Europe/Africa/CIS, Completion and Production revenue increased 21%, and operating income increased 67%, primarily related to the rebound of activity following seasonal weather issues in the first quarter. All product lines had improved revenue, and the majority had increased profitability compared to the preceding quarter. The operating income increase was led by improved Completion Tools sales across the region, increased Boots & Coots profitability in Angola and improved Eurasia production enhancement and Cementing activity.

In Middle East/Asia, Completion and Production revenue and operating income increased by 16% and 40%, respectively. Australia had increases across all product lines as activity recovered from seasonal weather issues in the first quarter. And we saw a healthy increase in activity across all product lines in Saudi Arabia.

Also contributing to the sequential increase was higher Completion Tools sales in Indonesia, Brunei and the UAE, and increases in production enhancement activity in Malaysia and Cawdor.

In our Drilling and Evaluation division, revenue and operating income increased 8% and 7%, respectively, led by record revenue in our Baroid, Testing and Subsea and wireline and perforating product lines. From a geographic perspective, performance was driven by increased Testing and Subsea activity and sales in Mexico and China, as well as increased directional drilling activity in Venezuela.

In North America, Drilling and Evaluation revenue remained relatively flat, while operating income decreased 13%, primarily due to lower directional drilling in wireline and perforating services in Canada due to the seasonal breakup and the migration of drilling activity from gas to oil in liquids-rich basins in US land. This decrease was partially offset by improved fluids activity in the Gulf of Mexico.

Drilling and Evaluation's Latin America revenue and operating income increased 14% and 25%, respectively, due to higher wireline and perforating activity in Colombia, Mexico and Brazil, additional Testing and Subsea work in Mexico, as well as increased directional drilling activity in Venezuela and Ecuador.

In the Europe/Africa/CIS region, Drilling and Evaluation revenue and operating income increased 9% and 60%, respectively, due to increased directional drilling throughout most of the region, higher demand for fluids in Norway and some wireline direct sales into Poland.

Drilling and Evaluation's Middle East/Asia revenue and operating income increased by 17% and 11%, respectively. China led the increase across multiple product lines. We also had improved performance in Australia, Brunei, India, Kuwait and Saudi Arabia. Partially offsetting these improvements were higher costs related to our Majnoon project in Iraq.

Our corporate and other expense was $106 million this quarter, and includes costs for our continued investment in various strategic initiatives. The expense related to these initiatives during the quarter totaled approximately $29 million. We anticipate the quarterly impact of these investments will increase slightly in the second half of the year to approximately $0.03 per share after tax. In total, we anticipate that corporate expenses will range between $105 million and $110 million per quarter for the remainder of 2012.

In response to the increased globalization of our business, one of the key strategic initiatives that we've been focused on is a realignment of our international operations to better position us for improved delivery of our products and services to our international customers, closer alignment to our international supply base, more efficient use of our technology and an overall reduction of our costs. Some of the indirect outcomes that we expect out of this transformational initiative will be an increase in our international earnings and a related reduction of our effective tax rate in future years.

We expect to complete the first stage of this realignment in the second half of the year.

Our effective tax rate was 32% for the second quarter, and, including the impact of this realignment initiative, we currently expect the full-year 2012 effective tax rate will be approximately 32% to 33%.

During the quarter, our cash balance was reduced by approximately $500 million, driven in part by the increase in cost and volume of our guar inventory. Our higher level of revenues also contributed to increased receivables. We currently expect this working capital increase to turn during the back half of the year and maintaining our cash flow discipline continues to be an important part of our strategy.

We anticipate that our capital expenditures for the year will now be in the range of $3.6 billion to $3.8 billion. We are directing more of our CapEx spend toward international projects due to recent and expected contract wins. Based on the strength of the long-term fundamentals of our business, we feel very comfortable maintaining investments at this level. Tim.

Thanks, Mark, and good morning, everyone. To begin with, I want to follow up on the guar alternative Dave mentioned earlier. We successfully introduced a new product during the quarter in response to the escalating costs and the uncertainty of supply associated with guar. Our newly-introduced PermStim fluid systems follows in the footsteps of CleanStim, our frac fluid sourced entirely from the food industry.

PermStim delivers the proppant-carrying capacity of a guar-based gel, but with the advantage that it is engineered to provide a residue-free channel when the gel is broken, enhancing the hydrocarbon flow. We pumped well over 500 stages in the Rockies, MidCon and South Texas during the quarter, and believe we have confirmed its premium performance characteristics relative to native guar-based gels.

We are working to ramp up production to establish it as a permanent part of our product lineup, increasing the performance and the reliability of our delivery platform.

We are pleased with the execution of our international strategy and the record revenues seen in all three international regions this quarter. In Middle East/Asia, we've significantly expanded our offshore and deepwater position with a series of major Pan Malaysian contract awards and extensions. These contracts are valued at more than $700 million, with services across our portfolio, including drilling, wireline, perforating, testing and completions.

In Australia, as the unconventional market unfolds there, operators are looking for empirical knowledge and a proven track record to help them develop their assets. Our Pinnacle, microseismic and tiltmeter technologies were successfully utilized to characterized unconventional assets for our customers in Queensland and South Australia in the quarter.

In Europe/Africa, our deepwater activity in East Africa continues to grow, and we are currently providing services on all deepwater rigs there, with a leading position in fluid services, cementing, completions and drilling. I should add that our entry into East Africa wireline markets has been successful, too.

The position we've established in East Africa Deepwater has provided us a platform for recent contract awards for onshore exploration areas in Ethiopia and Uganda.

In the Latin America region, we reported last quarter on the delivery of the record-setting PA 1565 well in Mexico's Chicontepec basin, the Remolino lab, which had outstanding performance. We followed this success completing six additional wells, all exceeding initial production estimates as well.

During the quarter, a zipper frac, a stimulation of two separate and parallel unconventional wells, was performed with Halliburton's RapidFrac sleeve technology, a first in Latin America and with excellent production results.

Now as you know, we are committed to growing our share internationally without sacrificing long-term margins and returns. The latest market report from Spears & Associates indicates our share position grew last year in all major product lines except for pressure pumping.

Our Completion Tools product line is a notable success and has just taken the number one global market share position. This is a culmination of a multiyear effort focused on new technology development and cost and efficiency gains through an aggressive supply chain strategy. This incorporates new roofline in Singapore and Malaysia to serve the needs of our international customers.

One highlight of the completions growth story is our expandable Liner Hanger system, VersaFlex, which has shown 40% plus annual growth rates over the last three years as it displaces standard systems and becomes our customers' preferred method of delivering liner-top pressure integrity.

New completions technology is playing a part, too. We've also just deployed our new enhanced single-trip multistage completion system in the Gulf of Mexico. Designed for use in deep and ultra deepwater, the system enables several intervals within a well to be isolated and treated with a high-rate frac pack during a single trip of the work string. This unique technology saved this deepwater operator 18 days of rig time. Dave.

Thanks, Tim. Let me just summarize. I know a lot of people got on the call late today. We are very proud of our second-quarter results. We set new revenue record totals for the Company and in all three of our international regions and for eight of our product lines.

North America, we expect our frac margins will be compressed by higher-cost guar and additional pricing pressures, but our other product lines, however, remain stable.

Internationally, the story is playing out as expected. We continue to gain share and fully expect our Eastern Hemisphere margins to be in the upper teens in the second half of the year, with a full-year average in the mid-teens. Finally, we intend to deliver industry-leading revenue growth and returns.

So let's open it up for questions now.

(Operator Instructions) Waqar Syed, Goldman Sachs.

Thanks for all the input on the different moving parts. But is there a way to quantify some of the margin impact in North America for pressure pumping? And how we could be in -- maybe by the end of the year where could margins be? Do you see fourth quarter could benefit from guar price declines, maybe start to offset some of the seasonal declines and pricing pressures?

In the comments, we tried to give you a little bit of color. There is going to be a fairly significant impact for guar inventory costs as we move through the year. As Dave said, about two thirds of our margin delta in the second quarter related to guar costs, as we look -- and that inflated about 75% over first-quarter levels.

We expect guar to inflate another 25% in the third quarter. And so probably sort of in relative terms, that is going to end up being about two thirds of the impact as we look forward.

That should abate as we go into Q4. There will be some pricing impact. We are expecting as long as there's risk to the gas rig count, which we expect will continue to be pressured through the end of the injection season, there will be pressure on hydraulic fracturing margins. But there will be some benefit for Canada getting back to work as well to offset that.

So it is difficult to say exactly where that will be. We are not going to give specific margin guidance sort of beyond that, but I think that ought to be sufficient to kind of help you find where we are.

But all of those things should be relatively transitory. As we go into 2013, we are expecting the rig count to begin to grow again, the guar cost issues to be behind us, and normalized, based on sort of what ought to be market industry averages. And from there, then we also should start seeing the benefits of our Frac of the Future initiative. All of the things that we've been doing to try to transform the business and reduce our costs will continue to provide some uplifted to our margins as we go into 2013.

In the past, you've said that your normalized margin is around 25%, 26% for North America. Has anything changed in your view that at some point in 2013 you could not get back to that kind of level?

No, nothing has changed from that front. We still believe sort of that mid 20s range is our normalized area of margins.

James West, Barclays.

Just to follow up a little bit on the North America simulation topic, curious as to when you roll over contracts now, are you still able to achieve pretty significant pricing premiums versus your competitors? So if the market is down 20, you are only down -- call it 10 -- just to throw a number out there.

And then second, are your customers still asking for the same level of term contracts as they were say three to six months ago?

So two parts to that question, James. First of all, obviously, contracts are renewing throughout the year, and that is a bit in contrast to the way it was three or four years ago, when we kind of had the big renegotiations at the end of the year.

The answer is yes, we believe that we are continuing to get a premium as we renew those contracts. That is quite clear.

Secondly, in terms of the term, I would say they are getting shorter. Obviously you are in an environment when there is more uncertainty than there was when the original contracts were undertaken. So it is reasonable to assume that those terms will be shorter than they were previously.

Okay, that's helpful. Then --

That's not necessarily a bad thing, either, because if we (multiple speakers) see some recovery, we have an opportunity to move things.

Sure. Absolutely. That makes sense.

Then Mark, I'm going to ask a question on North American margins again. But the gap down we saw from 1Q to 2Q was pretty significant. There are a lot of moving parts in there. But is it safe to say as we think about the rest of this year that we've already seen kind of the biggest gap down? Margins of course will go down, as you've said, but have we seen the biggest kind of at least sequential drop?

Yes, definitely.

Angie Sedita, UBS.

Could you, Tim, talk a little bit about what you are seeing in frac pricing today? Are you seeing some areas that it is starting to stabilize or is it still declining?

And then of your term contracts, on percentage terms, can you say generally how much has actually rolled over at least to today's spot market prices, versus still has yet to roll over? And then as you roll over your contracts, has any of the terms changed besides pricing?

Just a couple of comments on the sequencing of pricing, I guess. As Dave mentioned, the dry basins have been the most challenging to this point, but they appear to be stabilizing.

And secondly, the next in the sequence was the more accessible oily basins, which received the greatest pressure, like the Eagle Ford, for example.

But I think that really the changing terms that we see, I think are solely restricted at this point to pricing and term, as we just referenced on the question with James.

I do want to sort of reinforce the fact here that we tend to not talk about this too much, but outside pressure pumping, really all -- pretty much all other product lines are very stable in their pricing outlook. So we are dealing with a single product line here. Did I miss anything from your questions?

One more -- you did a great job, but one more is that on your term contracts, how many of the contracts as a percentage terms have rolled over to today's spot rates or have yet to roll over?

We are still on a sort of 80% to 85% contract basis. As I mentioned before, we are much more evenly oriented through the year in terms of our renewals these days than we were several years ago. So it is hard for me to give you an exact percentage, but clearly we are a ways through the conversion process.

All right. And then as a follow-up, or unrelated follow-up, on the international markets, obviously congratulations on the record results there on the revenue side. You've had very impressive market share gains. Are you going to start -- from here going forward, will you start to put international margins as a priority over additional market share gains, or is market share gains still your number one priority?

We think we can do both. And the reason we say that is, as Dave referred to, we are focused on a couple of things. We are focused on the economies of scale, and that is being large enough in a given market to be able to be as efficient as we can be, which we can't say in all markets has been the case historically.

And secondly, the issue around underserved markets, markets which we have had a very, very limited presence in. And thirdly, the repair of certain markets which have been damaged through time. So are we going to focus on our margins? Are we focusing on margins? Absolutely. But this is not a binary equation. We are going to do both.

David Anderson, JP Morgan.

Just sticking on the international side. A question on the margin expansion you had talked about in Eastern Hemisphere in the second half of the year. Is this all going to be volume-driven on basically these cost absorptions at this point? And how soon can we start thinking about the impact of pricing and technology upside? Are we a couple of quarters away? I guess I'm just trying to hone in a little bit more specific on that question.

I think that clearly there is a volume effect; we are starting to see -- finally see the rig count activity move, which is encouraging and has been great. It has been slow-growing to this point in terms of the move of rig count. So volume is an element.

We clearly are seeing sort of a bifurcation in terms of contract structure. The very, very large contracts are still quite challenging from a pricing standpoint. But we are pushing pricing where we can on smaller contracts. And I think we have some good examples from each of our operating regions where pricing has actually moved. So it is going to be a combination of both those elements.

Part of the situation, Dave, is we will still have some mobilization costs during -- really the next two quarters, as we mobilize on some of the new contract wins that we've had. But that is -- we still think our overall forecast that the margin targets that we've set are very, very achievable. And it is based on a lot of deepwater activity we are seeing coming into the market, as well as the repair of these markets that we've been working on quite a bit, that is sort of within our control to manage the cost side.

Okay. I guess switching over -- or switching back to North America. Dave, you had mentioned getting back to normalized margin levels in North America. I was wondering if you could give us a little bit of a peek into your playbook there. How does that play out under your base case scenario? I don't know if you were assuming oil prices hold here. You had talked about rig count kind of modestly declining the rest of the year.

How does this all kind of play out in terms of the way you're looking at this? And particularly in light of limited capacity additions, I'm trying to figure out kind of how this market tightens. How are you guys thinking about the different mechanisms that have to happen here to get back to normalized margins?

I think obviously, Dave, the big one is get the guar pig through the python, as we call it sort of here internally. That actually will have the most impact on moving margins back up.

Second is -- the playbook says that as the gas rig count comes down, oil continues to go up. You have the issue around the liquids plays today. But for us, it is a pretty simple strategy. Use our economies of scale, number one. Pull through additional product lines with the products we have. And even in a looser market, from a frac equipment standpoint, the execution reliability and the ability to demonstrate that we have a better response in terms of production to our PE activities does allow us to pull through other product lines.

And then I think is letting the dust settle around a lot of these equipment moves that we've had to make as we've moved not only frac equipment now, but also other product line equipment, out of the gas plays into the liquids and oil plays. So we have a lot of equipment on the move right now. We've got a lot of people on the move.

But I think those would be the elements, that as the dust settles on them should allow our margins to basically get back to where they would be considered normal, actually without a tremendous amount, if any, ability to increase prices.

Bill Herbert, Simmons & Company.

Mark and Dave, you've provided us with a margin target for Eastern Hemisphere, and it looks like you are well on your way to doing that -- upper teens by year-end and mid-teens for the year.

Any thoughts with regard to how Latin America margins progress from this point forward, with the thought in mind that it sounds like you guys have won this big tender in Brazil on the MWD or LWD front, or are well-positioned to do so? Mark, you talked about increased MOB costs the next couple quarters; I assume that relates in part to that. How do Latin American margins unfold from this point?

One of the larger drivers of margins for the back half of the year will not only be the playing out of that MOB cost, which for a big chunk of that will be finished toward the end of the third quarter. But also as Dave mentioned, we've got some other work that we know is coming on the Landmark, the software service sales, the service consulting work that typically shows itself across the board in Latin America, particularly in Mexico. I think that is just now getting underway. It is very high-margin business.

And if you look at over the last couple of years, our Latin American margins were relatively benign coming out of the first quarter recovery sort of activity levels, and then jumped significantly in the back part of the year. So as we look at the volume of activity that we are doing, particularly across not only Brazil but Argentina, Venezuela, Colombia and Ecuador and then Mexico, this pickup of activity in Mexico around the Remolino lab, our Southern Alliance project, and then this Landmark pop that we get at the end of the year, we feel pretty good about where that will move. And it should meet or exceed our levels that we had achieved last year, which were at that point in time sort of back to normalized record levels of Latin America margins.

Okay, great. And then secondly, Dave, you had talked about sort of a recipe, if you will, for North American margin recovery oil rig count moving higher. , was one of your stipulations. Assuming that basically WTI doesn't have significant uplift from here, the E&P industry continues to be somewhat cash flow constrained and the oil rig count is basically flattish from this point forward, can margins get back to target levels in a relatively flattish environment?

I think that the ultimate issue is probably in a relatively flattish market, the answer would be no, other than the recovery of the loss that we've had around the guar inventory. Once that flushes through, we've given you a roadmap as to what that should add back. But I think as we look ahead, it is difficult to see a relatively flat rig count environment if commodity prices hold at this level for a significant period of time.

We think at some point here in the next quarter or two, the gas rig count is going to basically bottom out. And once that does, the oil rig count should be able to grow unfettered, which should provide some upside to it.

The other side of it that we see also is the Gulf of Mexico recovery, which again is counting as we look at the end of the year should be approaching 40 deepwater rigs. We think our share is higher in this type of market than it was in the previous upturn, and that provides some fairly significant margin uplift as well to the numbers that should help.

Jim Crandell, Dahlman Rose.

Back to North American pressure pumping. My question is not on new contracts but on existing term contracts that you have; are you in any cases willing to renegotiate an existing contract down to keep, let's say, all of the associated work that you have with it, the fluids, the bits, the wireline completions, etc.?

The one thing I think we can say is that the contract -- the sanctity, if you like, of the contract structure has been very, very good. Jim, in life, everything is negotiable. If there is a quid pro quo which makes sense for us, then a renegotiation may well take place.

So I think suffice to say that we -- as Dave had said, we are very focused on maximizing the pullthrough for our operations from our hydraulic fracturing footprint. If that were, for example, to be an opportunity for us to negotiate, then that would be a good example of something we would probably go for.

So if we are looking at sort of the percentage of frac fleets that you have under, let's just say, old pricing, it seems that at least it is a possibility that the prices could come down a bit, just for the frac piece of it, earlier than -- I guess than what the original contracts would suggest.

I'm not (multiple speakers).

I guess, Jim -- this is Dave -- it is possible. But as Tim said, there is a quid pro quo with everything. And so we are if we trade off some frac pricing early before the contract, we are going to insist on additional market share with that customer or we are going to insist on pullthrough of other services. From a customer's perspective, they are going to spend it with us or spend it with somebody else, so that is actually a pretty good conversation to be in with a customer.

Jeff Tillery, Tudor, Pickering & Company.

In North America, we spend a lot of time talking about margins, but revenue was quite good this quarter. And what you see from an activity standpoint plus Canadian probably a weaker seasonal recovery than normal, is revenue able to grow in the third quarter, do you think?

The answer is yes. Typically, Q3 is our strongest quarter of the year, our highest activity levels across the board. Canada is getting a little bit of a slow start this quarter. Don't know whether that will persist or not. But as Dave mentioned, we are continuing to add equipment. It is going to work. We know it is going to go to work. So that is part of what is creating the uplift on our revenue side. As well, we also believe that Gulf of Mexico will continue to improve during the third quarter, as well. So all in all, revenue is expected to be up.

And a follow-up question, just in domestic D&E segment, given that Gulf of Mexico op income doubled for the Company sequentially, I'm surprised that the margins eroded as much as they did. Was that just a really harsh Canada or could you just give us some color on what happened?

We have a particularly high exposure for D&E in Canada, and that hit us quite hard during the quarter.

Secondly, we also had some sort of end effects associated with some relocations from deep gas basins into oily plays, which impacted us quite a bit as well. But our expectation for D&E as we move into Q3 is that we will recover and we will be at or modestly above the Q1 D&E numbers for Q3.

Okay. Thank you, guys.

Operator, we have time for one more question.

Mike Urban, Deutsche Bank.

Thanks for sneaking me in. I wanted to talk about Iraq a little bit. Sounds like activity continuing to ramp up there. You did reference some costs in the quarter. Was that above and beyond what you had expected or just a function of the higher activity in some of the bids that we've seen in that market?

I think the honest answer is yes, it was a little bit above what we had expected that it would be. Across Iraq, we've had some good activity. Our business across almost every single one of our projects has done very, very well. We also have had some issues around getting diesel and things out to some of our sites.

The issues, as I referenced, really are isolated to the Majnoon contract. And that has been probably -- that is the one field which is sort of -- from a logistics standpoint is the furthest field that we deal with. And that is where diesel has been an issue. Some of the rigs sort of staying engaged have been an issue. And so we took some additional cost on Majnoon in the quarter that we were not expecting.

We're continuing to try to work on that. I think that we feel positive about what else is happening there and we feel positive about Iraq in the long-term. This one particular project has been a little bit of an issue, and we are trying to get that righted so that overall results -- I mean, that -- sort of what is standing between us and profitability is this particular project, and we are almost there.

Okay, that's helpful. And could you expand a little bit on the outlook there in terms of where you are going? Again, I think there were some additional work being bid, some additional projects, maybe Kurdistan a little bit. And just kind of your path there going forward in terms of potential additional ramp-up versus volume and contracts and the path to profitability there.

We won our project with Gazprom during the quarter. I think that was publicly announced and so feel good about that. We are doing a little bit of work in Kurdistan, and are looking for opportunities to expand our operations to the north as well.

So we are continuing to feel pretty good about what is happening there and looking at other various opportunities. It is going to be a slow and measured pace, just like the rest of the Eastern Hemisphere, but from a long-term perspective we feel great about that market.

Operator, you can now close the call. Thank you.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.