哈里伯頓 (HAL) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Halliburton third-quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

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

Thanks, Sam.

Good morning and welcome to the Halliburton third-quarter 2013 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 third-quarter results is also 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 their 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 10-K for the year ended December 31, 2012, Form 10-Q for the quarter ended June 30, 2013, recent current reports on Form 8-K and other Securities and Exchange Commission [filings]. Our comments include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our third-quarter press release, which, as I have mentioned, can be found on our website.

In our discussion today, we will be excluding the financial impact of the third quarter charges related to employee severance and asset write-offs of $38 million after tax, or $0.04 per diluted share unless otherwise noted. 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 will turn the call over to Dave.

Thank you, Kelly, and good morning to everyone.

Before I talk about another strong quarterly performance, I would like to review the actions we have taken this year around our commitment to delivering shareholder returns to you. This year we have repurchased approximately $4.4 billion or 10% of our outstanding shares. Earlier this year, we announced a 39% increase in our dividend. These actions reflect our continued confidence in the strength of our business outlook. Going forward, we remain fully committed to increased shareholder returns. We are targeting a dividend payout of at least 15% to 20% of net income, supplemented by additional systematic share buybacks, while leaving room for any capital spending or acquisitions we may want to do. We have been, and will continue to be relentlessly focused on delivering best-in-class returns.

Now moving to the third quarter. Overall, I am pleased with our operational results. Total Company revenue of $7.5 billion was a record quarter for Halliburton, while operating income was over $1.1 billion. We achieved record revenues this quarter in our Boots & Coots, cementing, completion tools, drill bits, multi-chem, and testing product lines. From an operating income perspective, our Baroid, completion tools, drill bits and testing product lines also set new records.

Turning to the geographies, on a year-to-date basis our Eastern hemisphere growth continues to lead our peer group. Compared to last year, third-quarter year-over-year revenue and operating income grew 17% and 30%, respectively. Sequentially, the revenue improvement and 9% growth in operating income was driven by our Europe Africa CIS region. In addition to record revenue in that region, we saw a strong sequential improvement in margins of 300 basis points, due to improved performance in our Russia, North Sea, and Angola operations. Consistent with previous years, we expect the fourth quarter in the Eastern hemisphere to be our strongest quarter of the year, due to seasonal year-end software and equipment sales.

Moving to Latin America. This has been a tough year, as customer activity did not meet our expectations and Jeff will talk more about our fourth-quarter outlook. But as we look ahead to Latin America over the next few years, there are several positive factors coming into play. First, Mexico activities are expected to pick up significantly, as the Mega tender projects ramp up in the first part of 2014. And although we do not expect a material impact next year, the recent reform discussions signal a strong opportunity in Mexico shale and deepwater markets. In Brazil, we have the leading market share today and a number of long-term deepwater contracts, including some that could extend past 2020. Although activity levels are just treading water today, as deepwater activity level accelerates we see significant upside in Brazil. However, there could be some short-term bumps in the road. But in the long-term, Latin America is expected to be an outstanding growth market for Halliburton.

In North America we are expecting the typical seasonal decline in the fourth quarter that we have experienced in previous years. However, there are some additional transitory issues we are currently facing. Due to the recent floods in Colorado, logistical disruptions in the Niobrara where we have a very high market share are lingering into the fourth quarter, which is continuing to impact our efficiency and cost structure in that basin. These cost inefficiencies should be fixed by the end of the year. And pricing, the North America market continues to have excess supply of pressure pumping equipment. And although this is improving, we anticipate pricing pressure will continue as contracts review during the next quarter or so. Accordingly, we are already working on adjusting our cost structure.

Despite these transitory issues, we believe that we will see margin improvement as we go through 2014 for a number of reasons. First, the efficiency trend on land plays right to our strengths. We are not only leading the industry in execution and surface efficiency, but we are now introducing new technologies which are changing the ways that customers approach their subsurface. And you will hear more about these at our Analyst Day in a couple of weeks.

In the Gulf of Mexico, activity levels are improving. Current rigs are shifting from drilling to completions, where we have a leading market position. There are 12 or so deepwater rigs scheduled on the calendar to arrive in the Gulf next year, and on those we have secured a strong drilling and evaluation position. And thirdly, our Battle Red and Frac of the Future initiatives are being rolled out now. I have seen them start to operate in the field. The benefits are real, and we expect that they will be substantial.

We have invested a significant amount of money in our Battle Red and Frac of the Future initiatives. As we told you on our last call, while we roll out these two broad corporate initiatives, we are continuously looking for ways to use them to better manage our cost structure in the organization. During the third quarter, based on the progress of these initiatives, we have made adjustments to headcount and assets that resulted in a charge. As we continue with the deployment of our Battle Red initiative over the next few quarters, we expect for there to be additional headcount reductions and related severance charges. However, again as you will see at our upcoming Analyst Day, we are expecting a large future payoff for these initiatives.

So overall, I am very optimistic about Halliburton's relative performance as we move into 2014. And based on early conversations with our customers, we are anticipating overall spend levels to increase. Our strategy is working well, and we intend to stay the course. At our Analyst Day, we intend to provide you more detail about our outlook for the coming years, our ability to outperform our peer group, how we will continue to balance our geographical portfolio, and describe our path toward normalized margins for both the Eastern and Western hemisphere operations. We will continue to drive toward expanding our global portfolio in the deepwater, mature fields, and unconventionals.

Now let me turn the call over to Jeff for some operational details.

Thanks, Dave, and good morning, everyone.

Let me be begin with an overview of our third-quarter results. The Eastern hemisphere had record revenue in the third quarter with sequential operating income growth of 9%, driven by record quarterly revenue and improved profitability in our Europe, Africa and CIS region. Relative to the second quarter, Europe Africa CIS grew both revenue and operating income by 3% and 29%, respectively. The sequential improvement was led by improved cementing, Boots & Coots activity in Russia, increased drilling and cementing activity in the North Sea, and higher drilling and completion tools sales in Angola.

In Norway, Statoil has awarded contracts to Halliburton that provide us with the leading market share in multiple services including drilling and completion fluids, cementing, stimulation, special tools, and waste management for both onshore and offshore. The initial scope of this contract is for three years, with up to six years in extensions. This award represents a significant statement of confidence from our customer for the value added technologies that we are bringing to the Norwegian market.

In addition, we are expanding our testing portfolio in the presalt deepwater market in Angola. In addition to discrete testing awards for drillstem testing in our Dynalink service, Halliburton has recently been awarded contracts by multiple customers to provide a full suite of testing of subsea services in their presalt operations. Activity on these wins is expected to start throughout 2014, and will give Halliburton a significant position for testing of subsea services in the Angola presalt market. In conjunction with our successes in testing offshore discovery wells elsewhere in Africa and in Brazil, these wins demonstrate the strength of our deepwater testing and subsea business.

In the Middle East Asia region, compared to the prior quarter, revenue and operating income were lower by 2% and 5%, respectively. Higher activity in Saudi Arabia was partially offset by activity delays for stimulation activity in Australia. Also contributing to the sequential decline was the prior quarter benefit from the conclusion of the Majnoon project in Iraq, and increased completions activity in Malaysia that did not repeat.

Let me speak specifically to the Kurdistan market for a moment. This is an area that until now has been primarily focused on exploration, but we are expecting development work will ramp up over the next few years, following a series of successful appraisal programs. Halliburton has completed construction of a large multi-product line facility in Kurdistan, and we are mobilizing for recent awards in cementing, sparing, Baroid, among other product lines. We are still in the early days, but we expect this to be a growth market for Halliburton. In Saudi Arabia, Halliburton was awarded an important three-year contract to drill and complete new wells in an existing field. Saudi Arabia is a core market for Halliburton, and we believe this win demonstrates our customers' confidence in Halliburton's ability to help plan and mobilize to execute a significant program of work.

Turning to Latin America. We saw significant improvement compared to the second quarter, as revenues increased 6% sequentially, and operating income improved by 57%. Mexico was the primary driver, where recent contract approvals resulted in an increase in the consulting and software revenue for the quarter. In the offshore market, stimulation vessel utilization was improved relative to the first half of the year. Additionally, improved profitability in wireline and cementing in Argentina contributed to the sequential growth. The improved results in Mexico and Argentina more than offset the activity-related weakness in Brazil and Venezuela.

With respect to Brazil and Mexico, we believe that the fourth quarter activity levels may be significantly lower than originally anticipated. There are two primary reasons for this decrease. First in Mexico, activity levels on our Southern Alliance II project are expected to decline meaningfully over the remaining months of the year, as Pemex ramps down the ongoing IPM work in preparation for the Mega tenders. We averaged seven rigs in the southern Alliance project during the third quarter, and expect to exit the year at two rigs. This lower level of activity is then expected to continue through early 2014, until the new Mega tender projects are expected to ramp up.

Second, in Brazil, we have seen a significant reduction in drilling activity over the course of the year, with a shift in focus to completions. In addition, we are currently operating under a cost structure in line with the original scope of work, which has not materialized. We are working with our customer to right-size our operational footprint, where we expect reduced activity levels to extend through the fourth quarter and continue into the next year. Ultimately, this does not change our long-term positive outlook for Latin America.

The transition to the Mega tenders in Mexico in conjunction with the startup of our incentivized Humapa contract, and an improved deepwater rig count give us confidence that the activity levels in Mexico will recover as each of these areas gets underway. And in Brazil, our recent deepwater contracts have a potential term of up to eight years. So although drilling activity may track sideways for several quarters, Brazil remains the largest and most active deepwater market in the world and we believe higher drilling activity levels will resume. As a result, we expect both of these countries to continue to be strong contributors to our growth and profitability over time.

Now switching to North America. Despite the significant revenue and operating income disruption from the Colorado floods, we delivered sequential revenue growth and higher operating income. Activity levels improved across the rest of the US land market, with seasonal recovery in Canada and increased activity in the Gulf of Mexico deepwater market. US land rig count remained sluggish, and the focus from our customers continues to be on pad operations and on drilling efficiency. As we discussed in our previous call, multi-well pads account for over 50% of our customers' drilling activities in key North American basins including the Marcellus, Eagle Ford, Bakken and Niobrara, and we see this percentage increasing.

But more importantly, we see increased service efficiency on horizontal drilling, which is providing a mid-teens percentage reduction in drilling days on a year-over-year basis. And together, these two efficiency factors are contributing to a well count that is modestly improved, even in a flat rig environment. We are also seeing a trend towards increasing stage counts per well, and in certain basins increased volumes pumped per stage. Already we have seen average stage count per well increase by 15% to 20% year-over-year in the Eagle Ford and in the Marcellus. We are still in an over-supplied market today, with as much as 20% excess pressure pumping capacity. Nevertheless, we believe that an increase in wells drilled per rig, combined with greater service intensity driven by increased fluid and profit volumes per well will ultimately help balance the market. We believe that these trends play to Halliburton's strength as the leading service provider in North America.

In the Gulf of Mexico, we saw sequential improvement tempered by some activity delays and extended dry dock maintenance on one of our large stimulation vessels. In the fourth quarter, we expect revenue improvement in the Gulf as that vessel returns to service, as well as higher completions activity and end of year sales. Looking ahead, we are excited about expanding our share position in this growing market. In addition to our leading completions position, we recently deployed two new vessels focused on the shelf, an intervention vessel and a fit-for-purpose stimulation vessel. Additionally, we believe we are well-positioned with drilling and evaluation services on the next round of incoming deepwater rigs.

To recap North America, activity levels continued to improve across the US land market this quarter, despite the disruption from the Colorado floods. Increased rig efficiency, combined with greater service intensity continues to benefit us even with a rig count that is flat. We are increasingly optimistic about 2014, based on early data points, and we will continue to be very focused on our cost structure to enable margin growth in the coming year. Internationally, we are very pleased with our year-over-year growth. In spite of short-term activity disruptions in Latin America this year, we have led our peer group in year-to-date growth, and plan to continue balancing our geographic portfolio and growing our global business going forward.

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

Thanks, Jeff, and good morning, everyone.

As Dave discussed, we are continuously evaluating our cost structure within the organization as we deploy our corporate initiatives. The ongoing Frac of the Future build, as well as the final deployment of our Battle Red program is having a significant impact on the support and operational headcount needs of North America, as well as equipment and inventory requirements. During the third quarter, as we begin to rollout these initiatives, we completed an initial evaluation of these areas and took our first action, which resulted in severance and other charges during the quarter of approximately $38 million after tax. As Dave said, based on the early impact of these strategic initiatives, we believe that further rollout may result in some additional adjustments going forward.

Our corporate and other expense came in at $102 million this quarter, slightly lower than expected due to lower costs for our strategic initiatives and some lower legal expenses. Approximately $27 million of our corporate costs were for continued investment in Battle Red and other strategic initiatives. We anticipate the impact of these investments will be approximately $0.03 per share after tax in the fourth quarter, as we begin the field deployment of the last phases of the North America Battle Red initiative. In total, we anticipate the corporate expenses will be between $110 million and $120 million for the fourth quarter.

Our effective tax rate this quarter came in at 29.5%, in line with our previous guidance. For the fourth quarter, we anticipate that our tax rate will be approximately 29%. Our capital expenditure guidance of approximately $3 billion for the full year remains unchanged.

Also during the quarter, we purchased 68 million shares of common stock at a price of $48.50 per share for an aggregate cost of $3.3 billion, excluding fees and expenses related to our tender offer. These shares represented approximately 7.4% of our total number of outstanding shares. Year-to-date, we have repurchased approximately 10% of our outstanding common stock. We have approximately $1.7 billion remaining in Board authorization for future share repurchases. For the fourth quarter, our average share count is expected to be approximately 855 million shares outstanding, which reflects the full benefit of our share buyback to date. Additionally due to our recent $3 billion debt offering, we expect interest expense to average approximately $100 million per quarter going forward.

Now moving on to our near-term outlook. For our Eastern hemisphere business we currently expect fourth-quarter year-over-year revenue to increase by low double digits, with a meaningful sequential improvement in margins into the high teens. As mentioned earlier, Latin America sequential growth and margins are expected to be significantly impacted by activity levels in Mexico. For the fourth quarter, we now anticipate Latin America revenue to be flat sequentially, and do not expect a material change in margins relative to the third quarter.

Finally for North America, we anticipate the typical weather and holiday-related seasonal decline in revenue and margins in the fourth quarter, with the transitory issues Dave outlined earlier weighing on the number a little more than usual. As a result, we believe North America will be down sequentially, although we are not expecting as sharp of a decline as we had in 2012. As we move into 2014, we anticipate North America margins to recover as customer activity resumes and we see the payoff of our strategic efficiency programs and recent cost optimization efforts.

Now I will turn the call back over to Dave for some closing comments. Dave?

Thanks, Mark.

So just a quick summary. Eastern hemisphere continues to deliver a top-tier growth leading the industry year-to-date, and we expect a strong fourth quarter with margins in the high teens. Latin America will be flattish, but expect strong growth in 2014. For North America, we anticipate typical seasonality in the fourth quarter with some pricing pressure and lingering effects of the Colorado floods, but margin improvement as we go into 2014. And finally as demonstrated by our dividend increase earlier this year, and the repurchase of 10% of our shares, we are very confident in the strength of our business outlook, and are focused on delivering leading shareholder returns.

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

Thank you.

(Operator Instructions)

Our first question comes from James West of Barclays. Your line is now open.

Hi, good morning.

Good morning.

And congratulations on continued strong growth in Eastern hemisphere, very impressive. Dave, a question for you about the outlook for 2014, specifically on the international side. Your peers seem to be coalescing around E&P spending growth somewhere in the 10% range, with a higher technology content which, of course, plays into your strengths, as well as theirs. Is that similar to your thinking, at least initially?

Yes. Absolutely. I think based on discussions with customers' contract flow that we have got in hand, I would be surprised if it isn't around that number for next year.

Okay. That's very helpful. And then perhaps a little bit of an unrelated follow-up from me. With the Colorado flooding I know, Mark, you had mentioned at a presentation that you thought it was $0.02 to $0.03 in the third quarter, but that was an initial assessment. Do you have an updated number, or some type of sizing of that impact that we could think about?

James, this is Jeff. For competitive reasons, we are not going to give you the number. Just because -- other than to say, that it is certainly an important part of our business. And I guess, I would leave you with, absent that, it would have been enough to our completion margins up for North America.

Okay. Okay. That's helpful. Thanks, Jeff. Thanks.

Thank you. Our next question comes from Jud Bailey of ISI Group. Your line is now open.

Thank you. Good morning.

Hi, Jud.

A question on your Latin America market. Two biggest markets in Mexico and Brazil have some different issues going on. I was wondering if you could help us think about margins beyond the fourth quarter? What has to happen in Brazil in 2014 and in Mexico to see a nice recovery in margins? Is it just a simple increase in activity, or there are some other things you can do to facilitate better margin growth for Latin America in 2014?

Hi, Jud. Jeff here.

I would say that Brazil is a combination of activity, increased with health, as well as right-sizing our investment, which we are in the process of doing now. So there are some things that we can do, and others that we need the client to do. With respect to Mexico, I think we really need to see sort of a settling down of all the moving pieces, which right now we have got incentivized contracts to get started, which certainly helps us. As well as sort of the turnover in the contracting around these Mega tenders, also brings some stability. So I think those two things do as much as any, to improve market -- or margins into next year.

Would it be fair to say that the visibility on -- in both those markets is fairly limited near-term? And if you do get some margin improvement, is it going to be more backend loaded for the year, or is there some reason we could see better improvement earlier in the year?

Well, I would say, we typically see quite a bit of seasonality in Latin America. And so, all the moving parts I don't think help in Q1. So I would say, it would tend to be more backend weighted.

Okay.

Our general profitability in Mexico is very strong. And so when this activity does kick up and kick back in, we expect a fairly good and solid snapback. As Jeff said, we are getting started in these new contracts in Brazil. We need more activity, but even starting those there will be a period of time when the Brazil margins may be decremental to our overall Latin America margins.

But remember these are very long-term contracts, eight years and longer. And there will be significant upsell opportunities as those contracts gain traction and we have the ability to introduce new technologies into that marketplace.

Thanks. That's good color. Thank you. My second question just relates to US land market. I know your customers are still going through the budgeting process. But maybe you could share, is there anything you are hearing from your customers in terms of -- give us a little more color on your thoughts for 2014, in terms of activity levels and what your customers are telling you for next year?

Yes. For 2014, the outlook is fairly strong. I mean, that would -- the discussions we are having now sees the confidence in the oil window and continuing to invest. So the positive -- we certainly have a positive outlook for 2014.

And --?

It may not necessarily reflect itself in rig count, but certainly the well count and efficiencies. Everybody is very, very focused on continuing to drive efficiencies in the marketplace.

Yes.

Thank you. Our next question comes from Bill Herbert of Simmons & Company. Your line is now open.

Thanks, good morning. Back to North America and the Q4 seasonality. Dave, I think you prophesied a typical seasonality in the Q4, and yet what unfolded in the third quarter was largely atypical, with regard to the flooding in Colorado. So wouldn't that mute the seasonality in the fourth quarter relative to the third?

I guess, if we were up and blown and going in the Niobrara, it might. But as I said, that is sort of lingering into Q4. And I think it is fair to say the visibility on Q4 right now is not as great as we would like it to be. Because based on conversations we are having with customers -- and the holiday work schedule is one of the big unknowns at this point in time, with Christmas sort of falling in the middle of the week. And just sort of where various customers are, in terms of spending their budgets for the year, and those sorts of things. So, I think we are just -- as we sit here today, what we see is a typical Q4 unfolding in front of us. And if it changes from that, obviously we will have either a positive or negative impact from there.

Got it. And with regard to capital allocation, I know you are not done with your planning process, but could you just give us some broad parameters, with regard to capital spending for '14? And moreover, the mechanics of the dividend implementation, 15% to 20% of net income, when does that get announced, and what is that predicated on? Is that an internal view, as to what you will be generating in terms of net income or what?

Okay. So on the capital side, it is still early in the planning process. But I think that right now as we look ahead, while there are -- we are pretty excited about the growth trajectory going into 2014. W are driving hard on efficiencies, and so that will probably continue to allow us to be more disciplined around how much capital we are putting into the marketplace.

So we don't sit here today, expecting a significant increase in capital overall. There will be some specific projects, maybe some reorientation within the budget. We will continue to roll out our Q-10's and the Frac of the Future in the North America marketplace. And the question is, how rapidly do we do that vis-a-vis the overall market trajectory?

But right now, I don't see significant changes in the capital overall. The dividend policy, the 15% to 20% of net income will -- it will always be sort of a moving target. The Board has the discretion to set that dividend target. They do so always, in looking not just at the net income, but also our cash flow and looking at our relative investment opportunities that fall ahead of us.

I guess the answer is, stay tuned, and we will be talking with the Board and making adjustments as necessary. But our cash flow continues to be very, very positive. Even with all of the actions that we took this quarter, we are very pleased the cash flow in the quarter.

Thank you very much.

Thank you. Our next question comes from Waqar Syed of Goldman Sachs. Your line is now open.

Thank you. My question relates to International service pricing. What are you seeing there? And either the same trends, or are you seeing some better pricing now?

This is Jeff. Yes. The -- as we look out into the Eastern hemisphere, we continue to see steady improvement, but not -- but no inflection point, if that is where that question is leading. So there is a lot of visibility on the growth in the Eastern hemisphere or internationally, and to a large degree we are built into that.

Yes. And Waqar, I guess -- this is Dave. I would also add to that, any tendering on large projects still is tending to be very, very competitive.

What would it take to change that kind of competitive pressure? What do you think the industry needs to see?

Well, the industry -- I mean, it would be a dislocation sort of event where there is inadequate capacity to meet demand. But I would say that as Dave said, the majority of the contracts are fairly large, and there is a lot of visibility of those contracts. So I don't see kind of any surprises in the Eastern hemisphere that would create that sort of supply-demand dislocation.

And then, vis-a-vis Brazil, you mentioned about right-sizing, and you also mentioned that you need to get customer approval for that. By when do you think you will know one way or the other, whether you can right-size there or not? What is the timeline there?

Well, we expect to see some of those answers into Q1, I would expect. Okay? Next --?

Thank you. Our next question comes from Angie Sedita of UBS. Your line is now opened.

Thanks. Good morning.

Hi, Angie.

Hi. Could you -- so we talked a little bit about on your last conference call, can you give us your updated thoughts on the US pressure pumping markets, and when you could reach equilibrium? In conjunction with that, on the Frac of the Future initiative, given the competitive environment, is there value to rolling out the Frac of the Future program at an accelerated pace? And as you rolling out this program, are you retiring or relocating equipment?

Okay. With respect to Frac of the Future, we are continuing to roll that out. And as we have rolled it out, we have retired equipment or moved that equipment overseas. So, yes, we see value in continuing that program and getting the equipment into the market. With respect to attrition, on the back of current utilization in the North America, as we have said, there is about a 20%, we believe, oversupply in the market now. Though we do see increasing drilling efficiencies, a rate that is greater than increasing completion efficiency. And because of that, we expect to see attrition continue. At what point that is, expect certainly out into next year, late next year or beyond, though any spike in gas activity would certainly take that out very quickly.

Okay. So, you are thinking at this point late this year, or late 2014, or potentially even early 2015?

That's right.

Okay. And then as an unrelated follow-up, can you give us an update on your efforts to enter the artificial lift segment? I know you purchased a smaller artificial lift company some time ago. Are there other acquisition opportunities out there, or do you think you can grow this business internally? And if you do grow it internally, how long do you think it will take to have critical mass in the segment?

Angie, this is Dave. Let me handle that one. We have talked over the last couple calls about entry into artificial lift, especially ESPs. And I can tell you, it is a fantastic business. So it is one of our fastest-growing businesses although it is not big enough to move the needle for us right now. But because we like it so much, we are going to look at both driving organic growth, as well as bolt-on acquisitions.

Thank you. Our next question comes from David Anderson of JPMorgan. Your line is now open.

Thanks, good morning. On the Europe Africa CIS side, I noticed that the C&P margins really spiked this quarter. I was just wondering, is this from pulling forward product sales into the third quarter? And therefore, should we expect those margins to kind of head back into the mid-teens in the fourth quarter?

No. I mean, this is just on the back of a strengthening business, both completions and stimulation.

Okay. That's great.

So --

Okay. And I had -- one other question is completely unrelated here, just on your Battle Red and Frac of the Future. I guess, I was wondering if you could help us conceptualize how the impact is going to play out here? Can you just kind of tell us -- like what -- if you look at say, one of your frac fleets say, two years ago versus to one of the new fleets today, where is the biggest difference here in terms of the cost and efficiency? You have talked about kind of reducing labor. I am just wondering, is it the size of the frac spread? Is it the reduced maintenance spending? Now you have been into this for a couple years, how -- where do you see the biggest impact here?

Stay tuned for our Analyst day, Dave. That is where we are going to lay it all out here in a couple of weeks.

Thank you. Our next question comes from Jim Wicklund of Credit Suisse. Your line is now opened.

Good morning.

Hi, Jim.

Your CapEx is significantly above your DD&A, and has been for awhile. And it is significantly higher on a ratio basis above your peers. Now you are generating fabulous returns on capital, so I am not complaining. But can you explain to us why your CapEx versus your DD&A is so much higher than your peers?

I don't have enough insight into our peers to understand what they are doing on their capital spending. I know what drives ours. We, for a long time were spending a lot of maintenance costs on old fully depreciated equipment. So, when we evaluate what we are doing, we are looking at maintenance costs and depreciation, as sort of a combined whole.

And so, yes, our depreciating is going up as we have new equipment. We have relatively fast depreciation rates relative to the useful lives of those that equipment, in terms of what we can do with it long-term. And it is driving our maintenance costs down on a percentage of revenue basis overall. So it is a zero-sum game.

The other thing that we, of course, have had to do over the last several years is make some fairly substantial investments in manufacturing technology centers and fixed assets, bases of things around the world, to position ourselves for the growth in Eastern hemisphere and Latin America that we are achieving.

And so, it may not look as productive, but the fact is, that is the ante for being able to be there, and to serve those customers in the places around the world. And so that has been a fairly large percentage of our overall CapEx. And that will probably continue as we continue to expand, and particularly in the unconventional market around the world over the next several years.

Yes, Jim, this is Dave. Let me just give you a little perspective on what Mark is saying.

If you add up the amount that we have spent on manufacturing, on our big new facility in Singapore, our big new technology centers in Houston, and in Saudi and Brazil, they are probably pushing $1 billion just for those, pus you add up the infrastructure we have built out in the US to help our logistics. And those are current cash flow long-term depreciation, but I am telling you, long-term payback things for Halliburton. So, I think that we have had a spike in the fixed assets side of the business, but they will pay off in the long run.

Well, like I said, at the returns you are generating, I am not complaining, but I was curious.

My follow-up if I could, Battle Red, when we hear you have record revenues, but that you are laying people off, people get spooked. They think that is foreshadowing. What -- where are the -- where is the Battle Red initiative? Where are the layoffs being done?

Is this all the US initiative so far? I realize there are initiatives, but can you kind of tell us where the target or goal is in terms of people? The, where it is occurring, so we can have greater confidence that this isn't foreshadowing for some slowdown?

Yes, Jim. The bulk of that was in North America. It was geared around our efficiency drive. And it was taking out, basically as we figure out how to do things more efficiently, we find that there are people that are excess. We are able to effectively do more efficient work in the back office.

And also, even at the coal face, so our ability to relook at how efficiently we go to work. So, I would say that is not foreshadowing. What that it is, is really coming to fruition of sort of our confidence and the ability to execute the work, either with fewer people or fewer people in the back office.

Thank you. Our next question comes from Brad Handler of Jefferies. Your line is now open.

Thanks, good morning.

Hi, Brad.

Maybe I will stick with the Western hemisphere, as well, please, and start with a question that may feel a little bit more open-ended than I would like, but let's see how you respond to it. I guess, I am curious as '14 is shaping up for you, whether you see the relative opportunity -- if looking at things like reduced cluster spacing, higher sand per stage, some of the things you have mentioned, I guess I am curious whether the opportunity seems more bent, or more shaped by more customers of yours adopting those kinds of measures more aggressively?

Or in other words, sort of what was raising the averages, if you will across the landscape? Or if it is -- if it is a little bit more rig count and well count driven?

That is more customer-driven than that is rig count driven. And I think this is really just a view of how to get a better frac propagation, and what could be the technologies. And so I would say, it is a technical view more so than it is sort of all the overall averages just moving up.

In other words more -- okay -- more of your customers applying some of those enhanced recovery if you will or enhanced techniques?

I guess, Brad, we have talked about in the past, it is really service intensity. And it is sort of service intensity beyond just getting more fracs or more wells down per pad. It is actually now, applying some of the new technologies that we have to make better wells, lower costs of BOE, and make our customers more money, but also generate additional revenues for us. And then if the rig count kicks up on top of that, that would just be additional plus to the upside.

Right. Okay. That's some food for thought.

An unrelated follow-up, I just would appreciate some more clarity also on Mexico. If your current activity is declining at least onshore -- first of all, is the jackup market at all an offset here, even as you hit early in '14?

And then secondly, can you maybe give us an update on the Mega tenders? And if there has been any kind of delay in terms of your expectations, in terms of getting those awarded? And again, trying to place hold when some of that work might kick in for everybody?

Yes. So I mean, there are offsets. That is a big marketing in Mexico. So there are offsets. There is offshore work that is being done. There is deepwater work that is being done. So there are -- and for example, the incentivized contracts, so there are offsets in that market.

So but with that said, the Mega tenders are important, because it sort of refreshes budgets and resets the table, in terms of work well into the future. As far as the timing of that goes? No, I mean I am not surprised by where that stands. We knew that that would be a large undertaking, and take time for our client to get organized around how to put that out.

So again, our view is early -- or, excuse me, early Q2 is a realistic start up time for that activity, if things proceed as planned.

Thank you. Our next question comes from Doug Becker of Bank of America Merrill Lynch. Your line is now open.

Thanks. Jeff, you mentioned the completion efficiencies are increasing in the slower rate than the drilling efficiencies. Just hoping to get some order of magnitude here. In what technologies, should we be keeping an eye on that could flip this? In other words, what technologies might make completion efficiencies outpace drilling efficiencies going forward, and just perpetuating the oversupply in frac?

Yes. As we look at that, if we think that the drilling efficiencies up in the kind of 20% range, and we look at completion efficiency somewhat less than that, we see a probably about a net 7%, 8% sort of efficiency in drilling that is outpacing the efficiency in completions.

I think one of the things that tempers completion efficiency is going to be the size of the jobs, and the amount of activity requires completions actually get in some cases bigger rather than smaller. Again, this is where the frac propagation happens. So I again, our -- my outlook is that we continue to attrit equipment over time, as opposed to the other.

And then, Mark, you mentioned that North American margins would be down in the fourth quarter, but not as bad as last year. Does this mean for margins, we should be assuming a normal seasonal decline, 50, 100 basis points, at least on our numbers?

Yes. That is exactly what you should expect.

Thank you.

Thank you. Our next question comes from Kurt Hallead of RBC Capital Markets. Your line is now open.

Hi, good morning.

Good morning. Hi, Kurt.

I was just curious, you have addressed the excess capacity situation. We continue to do this it seems on a quarter by quarter basis. And just wanted to get an update from you as to whether -- your latest thoughts as to when you would think the supply-demand curves may balance? Any guesses on that in 2014?

Yes, this is Jeff. I would say, that it is late 2014, early ' 15, by the time that we start to see that tightening. Though I, as I have just described, I do think that we are down the path that consumes more equipment rather than adding more equipment.

Okay. And then you referenced some contract renewals and repricing and so on. In general, what kind of magnitude of pricing pressures are you seeing at this point vis-a-vis your prior contracts?

For competitive reasons, that is something we just can't give.

Okay.

Sorry.

No worries. Fair enough. That's it for me. Thanks a lot.

Thank you. Our next question comes from Jim Crandell of Cowen. Your line is now opened.

Good morning. You said in the, I think your press release that you had lower profits from Iraq. And then you stated on your call about the Majnoon contract ending. I thought you had written that down to breakeven anyway? Could you reconcile that for me?

Now Jim, what happened in the second quarter, as we -- we really made a hard push to get that contract done at the end of the second quarter, it spilled over a little bit. But the reality of that push increased our profitability on that contract, as we took it across the finish line. Now it is over. And while there is a little bit of work left, a very small phase two, we finished that first phase of those big contracts, the initial awarded contracts. And so, it has an impact of reducing the overall profitability in Iraq overall.

But that isn't to say that we are losing money there, just the opposite. In fact, as we go forward on our new contracts, we are trying to be very, very disciplined about the work that we take on, and making sure that it continues to improve our profitability in that region going forward. It is just sort of the magnitude of the dollars, not the margins.

Mark, how do you see the overall levels of activity trending for Halliburton in Iraq going forward?

Go ahead, Jeff.

Now we have -- I have got a positive outlook on our activity as we go into 2014. So what I would say is, we are much more disciplined around the contracts that we pursue, and the terms under which we will accept them. So it is returns in margins first, as opposed to top line growth. And we have been as I have said, very disciplined about that. And so I am confident that we will grow that business. But again, grow a business that we can all be happy with.

Okay. And just one quick follow-up. Did you say that the price deterioration that you are seeing in the US, and that you expect in the US is frac only? And are there any other product lines in the quarter which experienced price deterioration in the US?

Jim, this is Jeff. No, I would say that the pricing -- the pricing pressure we see is more widespread than just fracturing.

Thank you. Our next comes from Jeff Tillery of Tudor, Pickering, Holt. Your line is now open.

Hi, good morning.

Hi, Jeff.

With Q4 a heavier time of the year for contract rollovers in the frac market, and spot crews for the industry generally just not making any money, I think it is obvious that contracts will be a bit more competitive. Could you talk about how your strategy as you go into these rollovers, how you seek to differentiate yourselves?

From a differentiation standpoint, Jeff, we absolutely believe that, in our ability to deliver efficiency. We have got technology like -- I will run through them, but PermStim -- but a whole range of chemistry technologies and others that absolutely differentiate Halliburton in the market. And so as we look at contracts in any sort of environment, those are the things that we turn to, and that our clients count on Halliburton to do.

The competition varies basin to basin. And so, depending on the amount of capacity that is there or the complexity of the reservoir, we can make a different value proposition with customers on differentiation. In some cases, where they have gone off, and the customer has experienced what someone else has done, we have been able to take that work back at a little bit higher price.

And then around Battle Red, it has been focused from my understanding mostly North America. With the successes you having there, any reason to think you won't continue this push this push globally?

No.

No. We expect that as we go into '14 and beyond, we will be staging the rollout. Once we kind of get all the kinks out in North America, the rest of the world is ready to go. And so, we will be rolling those out over time, although probably at a slightly little slower pace than we used for the North American rollout, just given its size and complexity.

Sam, we only have time for one more caller.

Yes, sir. Our final question comes from Scott Gruber of Sanford Bernstein. Your line is now opened.

Yes, thanks for squeezing me in. So back on the domestic frac market, pricing continues to decline, but it appears that the operating margin for the industry is actually up. Is it fair to say that the primary driver of pricing weakness today is a willingness by the pumpers to actually lower rates to improve asset turns via these 24 hour services? My question is actually, would we still be seeing pricing declines, if there wasn't a trend toward more 24-hour work?

The question was, would we see a decline without the 24-hour work? It is an interesting question. I don't know. (Multiple Speakers).

Yes, I don't know for sure whether we would know that or not. Because obviously, you can't ever exactly know what motivates our competitors to come in with the pricing that they do. But I do think that oftentimes what we are seeing is guys really wanting to get equipment to work, and willing to take a lower price if that is necessary to do that.

The question always is, okay, but are they really creating the value for the customer? In our overall value proposition, we are always focused on -- it is not just the cost per stage to the customer, but what are they achieving on an increased production -- driving down the overall costs on a per BOE basis? And when customers get focused on that, I think that the results begin to change in our favor.

Well, are you still seeing declines in pricing for single spot wells? Or are you -- I mean, can you identify contracts, new incremental 24 hour work where the pricing pressure is a lot more severe, as pumpers compete for that work?

We are going to -- (Multiple Speakers)

The asset turn improvement is huge.

I guess what I would say, we don't typically -- I mean, we don't pursue that one-off market that you just described. And so, I would -- just from a competitive standpoint, we are not going to -- I wouldn't walk through our contracts and our pricing on those different contracts. So suffice to say, that we tend to work in a more contracted fashion, over a longer period of time.

Thank you. And at this time, I would turn the call back to management for any closing comments.

Yes. Before closing the call, I just want to remind everybody that on November the 6th, we will be having our Analyst Day, and it will be webcast. You will be able to access the webcast link from the Investor Relations page on Halliburton.com. And with that, Sam, I will turn it back over to you for -- to close up the call.

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