哈里伯頓 (HAL) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Halliburton fourth 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 conference is being recorded. I would now like to introduce your host for today's conference, Mr. Kelly Youngblood. Sir, you may begin.

Thank you, Sam. Good morning, and welcome to the Halliburton fourth 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 fourth quarter results is available on the Halliburton website.

Joining me today are Dave Lesar, CEO, Jeff Miller, COO, and Mark McCollum, CFO. Tim Probert, President of Strategy and Corporate Development, will also be available today for follow-up calls. 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 the potential impact on performance.

These matters involve risks 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 10K for the year ended December 31, 2011, form 10-Q for the quarter ended September 30, 2012, and recent current reports on form 8-K.

Our comments include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in the press release announcing the fourth quarter results which, as I have mentioned, can be found on our website. Our third quarter 2012 results included a $48 million charge which amounts to $30 million after tax, or $0.03 per diluted share, for an acquisition related earnout adjustment.

This charge is reflected in both our North America and Latin America completion and production segment results. Additionally, in the third quarter, we recorded a $20 million gain which amounts to $13 million after tax, or $0.01 per diluted share, related to a patent infringement settlement that is reflected in our corporate and other expense. In our discussion today, we will be excluding the impact of these items on our financial results.

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. Now, I'll turn the call over to Dave. Dave?

Thank you, Kelly, and good morning to everyone.

Let me begin with a few of our key accomplishments in 2012. First, I'm proud to say that we delivered industry-leading revenue growth in 2012 on the strength of our International business. Our International operations also delivered industry-leading profit growth. The result is a record year for our company with revenue totaling $28.5 billion despite the challenges we experienced in the North America market.

To put this in perspective, our business has nearly doubled in size over the last three years, nearly all of it from organic growth. We set new revenue records this year in all of our regions and in both of our divisions. From an operating income perspective, we achieved new records in our Latin America region and in 5 of our 12 product lines. At the start of each year, I find it is important to reiterate our basic strategy.

Our cornerstones remain unchanged, leadership in global unconventional development, expanding our share within the deepwater markets, and helping our customers maximize recovery from mature fields. As the industry leader in unconventional development, this year we elevated our service offerings with the start of the rollout of our Frac of the Future initiative. This provides the most efficient and effective hydraulic fracturing delivery system available in the industry today.

Globally, 2012 was a watershed year for the expansion of unconventionals. In addition to providing services on several of the first commercial unconventional wells in Australia and China, we expanded our service footprint in key markets such as Saudi Arabia, Mexico, and Argentina. Ultimately, we differentiate ourselves by offering a fit for purpose completion coupled with superior frac design that maximizes well productivity and delivers the lowest cost per BOE for our customers.

In the deepwater area, we are seeing the payoff of our recent infrastructure investments with key contract wins and market share gains in areas such as Malaysia, Mozambique, Tanzania, Kenya, and Brazil. Our value proposition for deepwater remains focused on improving reliability and integrity in well construction and completion activities and helping our customers reduce uncertainty. We believe our deepwater technology portfolio, expanding market position, and service quality reputation will benefit us as new build deepwater rigs arrive in the market.

And lastly, we continue to build out our capabilities in servicing mature fields. Over the last year we have seen great success in critical investments we have made in the areas of specialty chemicals and artificial lift. These investments, along with Boots & Coots, have allowed us to more than double the size of our Mature Field business over the last two years. Our focus here is to share our customers' production and improve recovery rates and provide the technology to optimize performance over the life of the field.

Underpinning these strategies is a continued significant investment in new technology. We've more than doubled our technology spend in the last few years. And, this year we will be expanding our R&D spend at a rate faster than our revenue growth, as we further globalize our R&D footprint and drive solutions in unconventionals, deepwater, and mature fields.

Now, let me move on to operations. Internationally, 2012 played out the way we told you it would. We exited the year with margins in the upper teens and averaged 15% for the full year. Let's look at 2013. There, we anticipate international customer spend to increase in the high single digits, maybe more, maybe less. But, whatever it turns out to be, the market share gains we have had we expect our revenue to outpace the increased spending levels. We also anticipate full-year margins should average in the upper teens for 2013.

We believe that this above market growth rate will come from volume increases, as we ramp up on recent wins and new projects from continued improvement in those markets where we have made strategic investments in the past several years, from the introduction of new technology, and some modest pricing increases, and cost recovery on selected contracts.

Shifting to North America, 2012 was a very challenging year for the industry. Operations were impacted by headwinds such as guar costs, pricing pressures, and a significant drop in the natural gas rig activity. However, I want to be clear before you listen to the rest of the presentation, we believe that the fourth quarter marked the bottom for US land margins and Jeff and Mark will tell you why we believe this.

Let's look at how we see 2013 for North America. First, due to the significant post-Thanksgiving slowdown we experienced, we closed the year with approximately a one-month supply of high priced guar inventory remaining. We will be taking delivery of lower-priced guar this quarter and by the second quarter we expect our guar inventory cost to be at market rates. Although current guar market prices have reduced from the highs we saw in early 2012, guar prices remain above historical levels. This has had a silver lining as it is making our fast-growing PermStim fluid system a compelling economic alternative. And, more importantly puts a ceiling on the prices we will need to pay for guar in the future.

In the US, we believe the rig count will continue to grow from current levels, but will average down slightly for the year compared to 2012. However, we are seeing higher well efficiencies due to increased pad drilling, more 24-hour operations, rig fleet upgrades, and significant advancements in drilling and completion technologies.

In 2012, we saw the average days per horizontal wells drilled drop approximately 15% compared to 2011, and we anticipate continued efficiency improvements in the upper single digits for 2013. We believe that this continued shift toward efficiency bodes very well for us in the coming years as no company has the ability to execute factory type operations like Halliburton.

We are also beginning to see signs of activity improvements in the first quarter as compared to December. But, given the pronounced seasonal decline we saw in the fourth quarter, it could take longer for activity levels to fully rebound to second or third quarter levels from 2012. For the remainder of the year, we expect activity levels to gradually increase, but we are expecting continued pricing pressure as we renew our last tranche of stimulation contracts.

Many of our competitors are operating at breakeven or loss positions, which should set a floor on stimulation pricing. However, an improvement in pricing will require a meaningful decrease in excess capacity, which can happen, of course in two ways. Either equipment wears out, it is not replaced, or increased activity takes up the slack. We are expecting the industry to add hardly any capacity this year. And, over time we should see a drop in excess horsepower due to normal attrition.

Increasing oil activity and rising service intensity will also help to a certain extent. However, we believe that without a significant uptick in natural gas drilling, it is difficult to see a path for pressure pumping equivalent to reach equilibrium this year. Our view is that the US natural gas drilling will not be a major activity driver in 2013. Although, the rig count in that area appears to have flattened. The decline in output from existing natural gas wells will likely be offset by additional volumes generated from new gas wells, the restart of shut-in wells, and associated gas from new oil wells. If we see any meaningful uptick in gas activity, it likely will not occur until the second half of the year.

That being said, we still strongly believe in the long-term fundamentals of the gas business and are not going to abandon that market. We have stayed with those customers in the natural gas basins, even as some of our competitors left to chase work in oil plays. This strategy has deepened our relationship with these customers and positions us well when gas activity rebounds.

In the meantime, remaining in these basins as a focus has a negative ongoing impact on our margins. But, we believe this is the right decision for the long run. Our growth strategy going forward remains the same, we will continue to grow our market share in deepwater and global unconventionals, and in mature assets. I am optimistic about the coming year and our ability to rebuild our North America margins and realize continued revenue and margin growth in our International business. And lastly, we remain laser focused on capital and margin discipline when it comes to pressure pumping.

Now, I'll turn the call over to Jeff to provide an operational update and come back at the end of the call to summarize. Jeff?

Thanks, Dave, and good morning everyone.

Let me begin with an overview of our fourth quarter results. Overall, I'm pleased with our results for the quarter. Revenue of $7.3 billion was up 3% sequentially and represents the highest quarterly revenue in Company history, with record revenue from all three of our international regions, our drilling and evaluation division, and eight of our product lines.

From an operating income perspective, our Latin America and Middle East Asia regions delivered record profit. And, our completion tool product line, which holds the number one global market share position, also had record operating income. Consolidated operating income of $981 million was flat to the previous quarter and was driven by strong performance from our international regions where we saw a revenue and operating income growth of 20% and 39%, respectively, compared to fourth quarter of 2011. Latin America posted an excellent quarter with revenue up 14% sequentially despite a 2% drop in the rig count and operating income increases of 25% compared to last quarter.

Increased drilling fluids activity, along with higher software sales in Mexico and Colombia, led to the growth for the region. Also contributing to the stellar quarter was project management in Mexico followed by higher stimulation in cementing activities in Argentina. An operational highlight this quarter was our tremendous success with various turbo powered turbine drilling tools in deepwater Brazil. Drilling a horizontal [prestyled] well, the turbine tools surpassed customer expectations achieving a record rate of penetration on its first run in the Campos Basin and saving the operator multiple days of rig time.

Moving to the Eastern hemisphere, revenue grew 11% sequentially and operating income increased 35% driven by year-end sales of software, completion tools, and other equipment as well as the ongoing service revenue from key contract wins that have now started up. Now, compared to the same period last year, operating income has increased by over 50%, which we believe is a solid proof point that we are successfully executing on our international strategy. Sequentially, Middle East/Asia revenue and operating income increased 14% and 46% respectively.

Production enhancement led the growth with year-end equipment sales in China and increased activity in Australia and in Saudi Arabia. Also contributing were completion tool sales in Saudi Arabia, Malaysia, and Indonesia, and higher software sales in China and Thailand.

As we continue to lead in global unconventionals, there are two items to note in the Middle East and Asia market. In the fourth quarter, we saw our first CleanStream unit, a mechanical ultraviolet alternative to biocides and part of our CleanSuite environmental system, successfully deployed in the Cooper Basin of Australia. And, in the Malay Basin, we executed the first high pressure, high temperature hydraulic fracturing job utilizing our sirocco frac fluid. Tests indicated up to 10 times improvement in production against offset wells and we are optimistic that this advancement will lead to further tight gas development in the area.

Our mature asset strategy continues to deliver with several key wins this year. In Malaysia, we were selected to provide the services to exploit the remaining reserves in the Bayan Field with the potential total value of $1.2 billion. In the Middle East, we provided production monitoring SmartWell capability that reduced water production by two-thirds and increased the recovery factor by a fold.

Turning to Europe, Africa, and CIS, we saw revenue and operating income increase 8% and 23%, respectively, compared to the prior quarter. The improvement was driven by the seasonally higher year-end completion tool sales in the North Sea in Angola, followed by improved drilling activity in the North Sea in Russia. Higher end of year software sales in Russia and Nigeria also contributed to the improved profitability.

In deepwater East Africa, we were awarded a six-year multi-country, multi-product line contract. This is the single largest contract award in East Africa to date and is evidence of our deepwater leadership and service quality that we have been delivering in this market.

Also in the third quarter, we opened the industry-leading advanced perforating flow lab. This state-of-the-art facility allows us to simulate a wide range of downhole conditions to evaluate perforation solutions in a controlled environment, enabling us to maximize our customer's production.

Now, before we move onto North America, I want to be very clear on one of my top priorities as Chief Operating Officer. While I have not met many of you, you can be certain that I am dead focused on capital discipline. Especially in the frac equipment area. Capital discipline to me means two things. First, that we won't increase our horsepower capacity until we are achieving a better return on our deployed fleet. And, second, we will not put stacked equipment back to work until it's at an acceptable contract rate. If we have to stack more equipment to achieve these results, we will do so.

Now, let's look at North America results for the fourth quarter where the market played out consistent with our previous commentary. We saw a significant drop off in activity in the back half of the quarter as customers exhausted their budgets. Our North America revenue was down 5% compared to the previous quarter, right in line with the sequential 5% drop in the US land rig count.

North America operating income was down 22% sequentially, driven mainly by reduced activity levels around the holidays, increased consumption of our high-priced supply of guar, and continued pricing pressure in hydraulic fracturing as we renewed contracts. Fourth quarter margins were also negatively impacted by the tactical decisions we made to position our business for higher future profitability.

These impacts include the upfront costs associated with our Frac of the Future initiative, the margin impact of our continued presence in the North America natural gas basins, and cost related to the idling of equipment and crews during the quarter. And, on our last call, we said that we would park equipment in order to help stabilize the transactional priced market and to avoid setting a new low price point for stimulation.

We also said that we would be retiring older equipment as we upgrade to our more efficient Q10 pumps. In keeping with these strategies during the quarter, we temporarily stacked 10 fleets and retired two older fleets from service. We continue to incur the personnel costs as we retained those crews from the stacked fleets.

In addition, we expect that the new Q10s deployed into the North American market will be offset by the retirement of older fleets. Now, as an update to the Frac of the Future, we are continuing the multi-year rollout of our Q10 pumps. Where they are deployed, we are seeing a marked improvement in terms of well site efficiencies. As a result of an improved operating cycle and reduced maintenance profile, our Q10 fleets deliver the same capabilities as a traditional fleet, with up to 20% fewer trucks on location and with fewer personnel.

In the fourth quarter, we also introduced our first spread of dual-fuel Q10's into the field. These units use both diesel and clean burning natural gas, which is more environmentally friendly than traditional pump trucks, and, as the infrastructure matures, will position us to use the abundant supply of North American natural gas as our power source.

In the second quarter of 2012, we introduced PermStim, and after 2,000 successful stages it has established itself as a premium fluid system. The proprietary chemistry of this fracturing fluid results in improved well performance. As an alternative to guar based systems, its cost profile will also protect us against escalating guar costs in the future.

Regarding stimulation pricing, the bulk of our customer contracts have been renewed and we expect a small remainder to be renegotiated in the early part of this year. There is still risk of further pricing declines, but we believe they are mainly behind us, as there will be virtually no incremental equipment entering the market in 2013.

With respect to our other product lines, we did experience some pricing pressure in specific basins, notably, for those services closer to the frac. We believe this issue is primarily related to the significant drop in activity that occurred in the fourth quarter. And, as activity levels return, we would expect to see these product lines follow suit and stabilize, as well.

In the Gulf of Mexico, we had a record quarter in terms of both revenue and operating income. For the year, our Gulf of Mexico operation grew 37% as we gained market share during the recent activity increases. Given the deepwater rig arrivals in 2012 and those scheduled for the back half of 2013, we anticipate this activity improvement will translate into double-digit revenue growth and higher incremental margins. We also believe we will continue to grow our market share as these rigs move to a completion cycle on the new wells and anticipate that 2013 will be another record year for the Gulf.

So, to summarize North America, we see margin pressure in two major categories. First, the transitory ones which include our higher guar exposure, the cost of our idle equipment and crews, upfront costs associated with Frac of the Future, and our ongoing commitment to operate in the gas basins. These costs should take care of themselves as the year progresses.

The second category covers market-based issues. Specifically, around natural gas activity and excess pressure pumping capacity, which in turn is affecting stimulation pricing. These will balance out as the broader market corrects.

Given the market dynamics, 2013 will be a year where we focus on driving cost out of the system. The Frac of the Future initiative will help us get there. But, in the meantime, we've already made headcount reductions in the quarter and we are looking at areas where we can further optimize our cost structure. As a result, you may see an impact from severance in our first quarter results.

And now, Mark will provide some additional financial commentary. Mark?

Thanks, Jeff, and good morning everyone.

Our corporate and other expense totaled $106 million this quarter and included approximately $35 million for continued investment in our Battle Red completion tools manufacturing and other strategic initiatives. These activities will continue throughout 2013, but the related costs should begin to decline in the second half of the year. We anticipate the impact of these investments will again be approximately $0.03 per share after tax in the first quarter. In total, we anticipate that corporate expenses will average between $110 million and $115 million per quarter during 2013 including these strategic costs.

Our effective tax rate was 34% for the fourth quarter and 32% for the full-year 2012. As mentioned previously, we are nearing completion of a strategic project to realign our international operations to better position us for improved delivery of our products and services to our international customers, closer alignment to our international suppliers, more efficient use of our field technology, and an overall reduction of cost. 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 going forward. As a result, we are currently forecasting that 2013 effective tax rate will be approximately 29% to 30%.

During the fourth quarter we recorded an $80 million tax benefit in discontinued operations related to the payment of our liability to Petrobras under a guarantee relating to work performed a number of years on the Barracuda-Caratinga project by KBR. As we move into 2013, we are anticipating the typical sequential decline in international revenue and margins during the first quarter due to the absence of year-end seasonal activities as well as weather related weakness in the North Sea and Eurasia.

Now, this drop off could be more pronounced compared to previous years due to our strong fourth quarter performance. Compared to the first quarter of 2012, we are anticipating a mid-teen percentage increase in revenues with a modest improvement in margins which is evidence of our expanding international market share.

Beginning in the second quarter we expect international activity levels to recover from the seasonal impact and margins to steadily improve over the course of the year with full-year international margins averaging in the upper teens. Moving on to North America, we expect the US rig count in the first quarter will be somewhat roughly the mirror image of the fourth quarter but down slightly on average.

Our expectation is that the rig count will improve throughout the year as activity resumes but the full-year average for 2013 will be down in the low single-digits compared to 2012. In this activity environment, we anticipate frac pricing will continue to be somewhat soft. However, for Halliburton, we've got a very beneficial tailwind going into 2013 which is our significantly lower guar input cost.

We expect the continued activity improvement in the Gulf of Mexico will also positively contribute to margins, as well as cost optimization in our North America land operations as a result of our Frac of the Future and Battle Red initiatives. Therefore, as Dave mentioned previously, we are optimistic about the coming year and our ability to improve our North American margins beginning as early as the first quarter.

As you know, we've been trying to operate within our cash flows, but we've also been trying to achieve higher investment yields on our excess cash. So, during 2012 we started investing in some longer-term fixed-income securities that don't meet the accounting definition of cash equivalents.

During the fourth quarter I'm proud to say our cash and investments securities increased by $779 million. For the full-year we also achieved an increase in cash and investment securities even as we absorbed a record $3.6 billion of capital expenditures and an additional $200 million of acquisitions. We anticipate a continued reduction in working capital as a result of lower guar inventories, and, coupled with the lower capital spend, we expect to see higher free cash flow in 2013.

We are anticipating that our CapEx for 2013 will be approximately $3 billion, which is about 16% lower than our 2012 spend level. We currently intend to direct less capital toward the North American market and our Q10 horsepower build will be focused on fleet replacement. The displaced equipment will be retired from the market and the emphasis will be on the rollout of the Q10 pump and other ancillary equipment designed to advance our Frac of the Future goals. Finally, we are expecting depreciation and amortization to be approximately $1.9 billion during 2013.

Now, turn the call back over to Dave for some closing comments.

Okay, thanks, Mark.

Just real quickly, we are very proud of our record-setting fourth-quarter international results. This has been an ongoing focus of our growth strategy and I think these results bear that out. So, for 2013 we expect international margins will average in the upper teens. And, as we have discussed we have called the bottom on US land margins for the fourth -- as of the fourth quarter. With our lower capital spend and improved working capital, we expect to generate an even higher level of free cash flow in 2013 and we remain very focused on capital discipline.

So, with that let's open it up for questions.

Thank you.

(Operator Instructions)

Angie Sedita, UBS.

Great, thanks. First, congratulations on the very strong fourth quarter and clearly for the year as well, particularly in the international markets.

Thank you, Angie. I appreciate it. Some folks have been critical of us chasing the international, especially the deepwater market, aggressively over the past few years. But, as I said then and I will say now, I think that it is worth it. These are long-term markets. These are long-term contracts that allow for aggressive use of our technology and aggressive up-selling opportunities. So, I think you are starting to see the payoff now and you certainly will see it for the next several years.

I agree. And, even better, I would add to that, that you've done it on the top line but you've also as shown very strong improvements in margins, also above the peer group. So, a double bonus.

Yes, thank you.

To follow up with that, in your guidance for Eastern hemisphere margins average in the high teens, slightly higher than our estimates. This is obviously a positive, but I assume Middle East is a big driver of that. However, you referenced E&T spending in the high single digits for 2013. Would it seem reasonable to you that growth for revenues in 2013 could be in the low to mid-double digits? And, where do you expect to see the greatest strength?

Angie, this is Mark, the answer is, yes. We do expect to outgrow the market, in line with our strategies of outgrowing the overall increase in the deepwater market, which we think will be a particular strength in 2013. On the back of our market share gains in Latin America, as well as some of the increased activity in unconventionals in Saudi Arabia and Australia -- and then, of course, I should also reference the deepwater market in East Africa -- those will probably be areas that will be primary growth areas. But, we are expecting a growth rate in the low single digits -- I'm sorry, low double digits, even though we are probably a bit more pragmatic about what customer spend rates will increase on a year-over-year basis in the international markets.

Right now you mention low double digits of revenue growth based on what you see today?

Yes.

Okay. And then, as an unrelated follow-up, I know in the past you have mentioned that returning capital to shareholders in 2013 is a priority. I guess the question is, is it still a priority for '13? And, is there a preference for share buyback versus a dividend? Or could both be considered? And, does the Macondo timing have any influence on this decision?

That is a great question, Angie, and the answer is that, yes, it is still a priority. We, as you heard through our comments, have been very focused on trying to not only just achieve a positive cash flow result, but improving that cash flow result as we go into 2013. We are in the process of finalizing our discussions with the Board and internally about our strategic initiatives for 2013. We will have that wrapped up in the coming weeks. And, in that discussion I think the answer is that everything is on the table -- dividends, share buyback; we certainly are staying close attuned to what happens on the Macondo front, but it is not an issue that will preclude us from consideration of some of those options. And so, I guess the best way that I can say is stay tuned.

James West, Barclays Capital.

Congratulations again on another good quarter. Question on North America, as we look at the progression throughout this year, you've got clearly some tailwinds with guar, the Gulf of Mexico, some improving US land rig count. But, you've talked in the past about normalized North American margins much higher than where they are today. Is that something that is possible to get to in this type of environment where we have a slowly growing US rig count? Or is this more likely when we get back to a better environment in '14?

This is Mark, again. I think, James, the answer to that is that probably in this slower-growing environment where we continue to see some pressure around frac pricing in the broad market and it's going to be difficult to close up the excess capacity situation until we see some meaningful increase in the gas rig activity. I think that is also going to mean that it is going to be difficult to get us back to normalized margins, which we still believe are in the mid-20%s for Halliburton.

Right.

And so, as we said, we are calling the bottom. We see that at least the things that we perceive as tailwinds to our margin situation trump the continued pressure that we will feel in frac pricing and possibly peripherally in some of the other product service lines that are little bit -- they are closer to the frac than others. But, I think that it just is going to be difficult to drive them up back to those historical normalized levels without what we perceive as a normalized rig count environment which includes a healthy dose of gas activity.

Okay, so -- but you would suggest, though, that healthy margin gains just not getting back to what you see as normalized?

Yes, that is right.

Okay. And just one follow-up from me on the fracture side. Obviously a few more contracts to roll over. But, some of the initial rollovers of your longer-term contracts would've happened when pricing was still above where it is today. Can you give us maybe some help on percentage of contracts that maybe are above what you think pricing is in the market today and how many roll over as we go through the year?

Yes. Thanks, James. This is Jeff. I think the -- those contracts tend to roll each year so we are working our way through the bulk of those. So -- and from a competitive standpoint as we look out, we have probably 80% of our business under contract and so we don't see a huge step down that will occur resetting the prices from the first quarter of last year.

Yes, I think, James, let me add one thing. Obviously, as Jeff said, about 80% of our stuff is under contract and, yes, we have some of the stuff that rolled a year ago at this time rolling over now. But, if we don't see a price that is acceptable to us, we may just roll it on a month-to-month basis. There is nothing that says you are required to roll it from year to year. And, in some cases we won't do it, because we don't want to get locked into a price we don't like. So, we will just go on more a month-to-month or quarter-to-quarter basis.

Waqar Syed, Goldman Sachs.

Thank you very much. And, congratulations on a great quarter. Couple of things, first of all, on the North American margin front, could you help us a little bit understand the trajectory here? Could you quantify on the margin front what kind of help guar could provide in the first quarter?

This is Mark, Waqar. I don't think we want to give specific margin guidance. We are trying to step away from that for competitive reasons. But, I think we have been fairly transparent that the guar situation for Halliburton impacted us through the end of the third quarter about 600 basis points. In the fourth quarter, that went up, because we stepped back our usage of PermStim and tried to drive harder on using some of the higher-priced guar. So, the marginal impact in Q4 of guar, as compared to pricing of guar back in January 2012, was about 650 basis points.

And then, the difference in margins, I would say, roughly from there is split about 50%/50% on pricing and activity in the fourth quarter. And so, I guess that gives you some roadmap; as we then step back, we will wrap up this quarter using that higher-priced guar, average in lower market-based guar pricing into our inventory averages, that should take us down. Now, the difference in -- I think I've also articulated that we triangulate the difference in our guar pricing and our competitors' -- has been, in our view, about 400 basis points or so through the third quarter. And, I think that that may be another marker you can see as we start rolling back, that is the big opportunity that we have vis-a-vis our competitors.

Okay. Secondly, just on the pressure pumping revenue growth side, obviously November and December were impacted by the harder season. But, when you compare the month of October, how did that compare with the third quarter?

Well, I'm sorry -- your question is on just overall activity?

Activity or the revenues in pressure pumping or CMP in the month of October, how did that compare to the third quarter? Did you see any uptick or did you see continued decline in October?

The month of October actually was very strong for us, it was a really good month. And, in fact, early part of November was really strong, too. As we looked at the market overall, we saw a fairly modest step down in the rigs, at least our activity, through Thanksgiving and then a more dramatic step between Thanksgiving and December 15. But, we triangulate if you look across the overall rig count, most of the rig count drop happened in the last three weeks of December.

And, the bottom fell out, and in our triangulation about 80 rigs went out of the market in the last three weeks of the month. And, our business tended to follow that and we think that, maybe overall for the entire quarter, at least our calculations, about 170 rigs went out. So, that gives you a sense, 50% of them in three weeks. Does that help?

Jim Wicklund, Credit Suisse.

Good morning, guys, and thank you for making me look smarter than I really am.

You're welcome, Jim.

Jeff, a question, whenever a company management talks about a transformational event, my ears perk up. You were talking about the strategic reorganization, supply chain, can you wax poetic for me for a few minutes on that and the implications of that?

Yes, thanks, Jim. We call it Battle Red, but it is a combination of rolling out our Q10 technology which is more efficient. It runs at a lower cost point and allows us to take people off location. So, that is part of that. It is broader, though, because we are also doing things in the back office with smartphone technology, which has been rolled out to a large degree.

It also allows us to take out a lot of back-office costs. So, from a transformational standpoint, it is lower surface efficiency, the lower costs per BOE for our clients. But then, also internally to make sure that we are taking advantage of really what is possible today from a smartphone computational platform.

And you mentioned this both internationally and domestically?

Starting domestically, at some point it would move internationally.

Okay, thank you very much. And, my follow-up question, can you guys give us some help on the magnitude of year-end sales for the international market? Just so we can normalize expectations going forward. I know that Baker Hughes, their end-of-year sales were double last year. Just give us some idea, because obviously you did fabulous in international markets.

We don't typically try to give that much of the detail information on our direct sale, so I apologize. It certainly was a step up from where we had been on a year-over-year basis. It was a little bit higher. It was -- but in terms of our expectation it was in line. We saw more direct sales in our completion and production division than we had seen in prior years, some equipment and things into China.

And, that probably was the year-over-year difference that we had. But clearly, it has -- it's going to be a big step down in Q1. I think in line with what everybody else has said, there will have an impact. But, in terms of our, as I said on the call, our growth on a year-over-year basis is still going to be about 16% roughly.

Yes, and that, Jim, that -- what Mark said, I think, in the call, maybe we weren't as clear as we should have been. If you just compare where we think we will be Q1 2013 to Q1 2012, we will be up about 16%. So, that, in my view, normalizes out the product sales and tells you what service revenue increase we're looking at year over year.

Kurt Hallead, RBC Capital Markets.

Great, thanks, good morning. Dave, thanks for that clarity. I am a little bit slow, can you just say that one more time? That up 16%, was that first quarter to first quarter or second quarter to second quarter?

No, it is first quarter of 2012 to first quarter 2013.

And, that should be up 16%.

Internationally?

Internationally.

Okay, thanks for clarifying that. Now, in terms of the North American market, you guys indicated some pricing pressures of some other product lines, but those that were more closely related to frac. So, can I take that to mean that you are really not seeing any pricing pressures for any of your drilling related service lines at this juncture? And, what would be your perspective on expectation for pricing pressures in those pipelines going forward?

Yes, this is Jeff. As we look ahead and -- looked through the fourth quarter and we saw mostly activity declines having an impact, which we think rights itself to a degree next year. So, from a pricing pressure perspective we are not seeing that now. As we look out into next year, we don't see that, we don't see the oversupply necessarily the same way as we have seen in frac. But, we are not seeing it.

Okay. And then, my final one here is just, in Iraq you guys indicated the Majnoon Project has been a drag on international margins, and so on and so forth. I was wondering if you could just give us some rough guidelines as to what that impact had been and are you guys still on schedule to -- for that project to roll off, I think it was some time here in the second quarter, right?

Yes, in the second quarter of 2013 the project should come to an end. Over the last quarter we had much better rig performance, things have been looking up. The performance in Iraq overall was significantly better in Q4 and basically at breakeven. And so, we feel good about how things are shaping up. We've got some new contract work going in into 2013 in that market and scale helps, from an absorption standpoint. So, we are continuing to press forward and hopefully once this Majnoon Project is behind us, which at this point, as long as we are executing, it shouldn't be an issue. What we are really trying to do is to move beyond and put ourselves in a firmly profitable standpoint, which we believe will happen in 2013 toward the middle of the year.

Jim Crandell, Dahlman Rose.

Thank you. And let me add to the previous comments, great job, Dave, in the quarter and for the year as a whole.

Thanks, Jim.

My question has to do with Russia. And, you highlighted a contract with BPT-NK in the quarter. Can you, one, give us some idea as to the significance of that contract win? And then, secondly, your market position in Russia is, let's just say, well below your normal market share. Especially given its -- and I would imagine that this is a real area of emphasis for you, because of the size of the Russian market given it is the second largest market in the world. Can you talk about your strategy in Russia and whether you think you can get up to your desired market position through internal development? Or do you think acquisitions of maybe existing Russian companies have to play a part in that?

Yes, thanks, Jim. The contract we refer to is Em-Yoga which is a mature-field-type activity where we are able to go in and prove, really, the breadth of our technology. So, in fact rediscovering reservoirs and then adding to those. So, we are excited about that. It is the leading edge of what we think could be more to come. So, I won't give you numbers in terms of significance. But, it is, I think, consistent with our strategy to use our consulting capability to not just pull through our services, but actually develop new thoughts and new applications of existing technology as well.

More broadly, with respect to Russia, it is a place where we are excited about the outlook. We think we've got the right team on the ground. We think we are -- have the right technology as that market moves more into what I would say is our sweet spot around multi-stage fracturing and some other types of mature-field activity. We would expect that to grow. With respect to M&A, we always consider those things, but I don't think it is a requirement.

So, you're saying that you think you can get up to what is a normal -- or are you saying you can get up to what you would consider to be an acceptable, or normal, market share position just by internal growth? You are 25% the size of Schlumberger and maybe 50% the size of Weatherford in Russia?

Yes, Jim, let me handle this one. Yes, there is no doubt that our market share in Russia is not consistent with the market share that we would like or we experience in other parts of the world. But, my view is we've got to be smart about this. And, there are certainly organic growth opportunities to grow in Russia and we are growing our business there. But, for us to get up to the size of some of our competitors, we would have to look at some major M&A. And, as you know, we've talked about this many times, with you and with the broader group, we are focused on returns and focused on capital discipline.

So, my view is that the need to be larger in Russia does not trump the need to continue to be focused on capital discipline. So, I am not going to go out and do a major M&A deal in Russia just to get a revenue base that is the same size as our competitors but really never generates the kind of returns that we want to see off of that. So, I would say the book is still open on it. But, we don't feel any particular corporate need to go out and get a lot bigger in Russia, because we're not going to do it and sacrifice margins and returns.

Jud Bailey, ISI Group.

Thanks. Good morning, and, again, congratulations on good results. I was wondering if you could give us a little more detail on Brazil as you guys get ramped up down there with some of your recent gains? And, just help us think about how we think about revenues growing as the joint contract kicks in and maybe margins and start-up costs there that you may incur?

The interesting thing is there is still some of the contracts that have not been completely approved or signed. We have been in a transitional period for a number of months on things like drilling that has actually allowed us to -- we've been mobilizing, but that actually allowed us to spread the cost some to take off some of the brunt of what otherwise might appear more difficult in terms of a margin environment. But, from an activity standpoint, the activity is beginning to pick up. Brazil grew very dramatically for us in 2012.

We expect that to continue to grow. We will be putting the infrastructure capital to work in that area. We are -- we have a new technology center that has continued to expand and working with some very specific projects with Petrobras down there and we are pretty excited about, and those are going to begin to show themselves. And, I guess from our standpoint we feel very, very good about what Brazil will do in 2013.

The challenge is on. We also feel great about Mexico, so pretty exciting things happening in Mexico and the Latin American environment. We have a horse race going on in that market as to who is going to get the revenue poll and growth crown there. And, I think you should stay tuned for a very good 2013 coming out of Latin America, again, just like 2012.

All right. So, just to make sure I'm clear, so, it sounds like, in terms of Brazil anyway, you've already incurred some of the start-up cost and mobilization cost but haven't really felt the impact to the revenue yet and that will probably come in 1Q and 2Q? Is that fair to say?

I think that is fair to say, yes.

Okay.

But, again, as we look at it and plan and in our margin forecast, the great thing that has happened as a result of the expansion of our share there is while, yes, there are some pricing impacts of that new revenue, the higher level of activity is allowing absorption of a fixed cost base that is blunting the impact of that lower price. And so, on a marginal basis, our margins in Brazil have continued to improve over this point in time even though some of the contracts have already kicked in at lower pricing.

Okay, that is good color. Thank you. And, if I could, just my follow-up would just be one more on North America. You guys have done a pretty good job of articulating how you see that market evolving over the course of the year. I'm just curious -- I know the month isn't over yet, but I'm just curious, how has activity or customer inquiries been so far in January, maybe relative to your expectation 60 days ago?

Yes. We're seeing it about the way we thought it would roll out last quarter, which is we saw the seasonal declines between Thanksgiving and New Year's. And then -- but then have seen, as customer budgets were exhausted and towards the end of the year we are seeing the mild -- the uptick that we were expecting to see into January as our key customers get back to work.

Brad Handler, Jefferies.

Maybe, I guess, to the degree that you feel that you can speak about it, maybe you can give us an update on the MDL process here in front of the trial start date in late February. Any comments you can make on potential negotiations with the class action group, et cetera.

I think that probably the easiest thing to say is the trial is scheduled to start in late February. We are moving forward hard toward that process, the lawyers have been furiously working through all of the discovery actions and in preparation for the trial. That is our course at this point. I know there has been some other activities with the other participants in the trial. But, at this date, I would say there has been no discussions on our side, or our front. So, our general view is we are moving to litigation and that is what our preparations are set to do.

Okay. Got it, that is helpful. Maybe just an unrelated follow-up that maybe helps to tee us up even though it's, at some level, I appreciate that this could be a bit misleading. The last couple of years have been marked, and maybe more so I guess '11 than '12, but they have been marked by some very sizable tenders, particularly in the offshore environment. And, that has allowed you to grab very significant market share, as you guys have discussed. Are there -- as '13 emerges, are there -- how many significant kind of tenders are you looking at? Should we expect to see that that's another chance to seize more market share or have, to some degree, have those large tenders -- do they wind down now?

Without being specific with respect to tenders, and our backlog as we look out into the next year or so is probably bigger than it's ever been in terms of opportunity set. So, those tend to be out there quite often. And, yes, some big ones occurred last year, but we're pretty confident that there will be opportunities to win.

As saying that, it is always very competitive in those large tender situations. And so, we go at those carefully with always a solid plan on how we make the returns that we want to make. Just look back to last year, putting the Eastern hemisphere numbers together as evidence of that.

Let me just add a little color to it. I think I think as Jeff has said, the opportunity set, or pipeline as we call it, is probably as big as it's ever been. But, what is not there are the big, mega, must-win kind of tenders. It is just a lot of small to medium-sized tenders that are out there that add up to the biggest pipeline that we've ever seen. So, we think that is a good thing. Because with the infrastructure we've put down, and some of the track record we will have developed off of some of these prior tenders, I think that it has put us on the map in some of the customers' eyes of looking at us as a real alternative on some of these. Which, again, is why we are so excited about what we see going forward in the international and especially the offshore and deepwater markets.

And, with that, I think we've went past our time. So, I wanted to, on behalf of the Halliburton management team, thank you for your participation today. And, Sam, you can go ahead and close the call.

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.