哈里伯頓 (HAL) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Halliburton's third-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Kelly Youngblood, Halliburton's Vice President of Investor Relations. Sir, you may begin.

Good morning and welcome to the Halliburton third-quarter 2014 conference call.

Today's call is being webcast and a replay will be available on Halliburton's website for seven days. Joining me today are Dave Lesar, CEO; Mark McCollum, CFO; and Jeff Miller, President.

Some of our comments today may include forward-looking statements reflecting Halliburton's views about future events. These matters involve risk and uncertainties that could 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, 2013, Form 10-Q for the quarter ended June 30, 2014, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Our comments today include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our third-quarter press release, which can be found on our website.

Unless otherwise noted, in our discussion today we will be excluding the impact of restructuring charges taken in the third quarter of 2013 and an insurance recovery and a decrease to our reserves taken during the third quarter of 2014, both of which are related to the Macondo litigation.

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

Thank you, Kelly, and good morning to everyone.

I can tell you, I am really pleased with our third-quarter results. Even with all the noise out there this quarter on things such as Russian sanctions, disruptions in Libya and Iraq, the supply chain challenges we faced, and customer delays in the Gulf of Mexico, I believe we met these challenges head on, fought through them, and were successful. And I'm really proud of our employees who made it happen.

Now here are the headlines. Record Company revenue of $8.7 billion. We also delivered industry-leading revenue and operating income growth, both sequentially and year over year, once again outgrowing our peer group.

New quarterly revenue records for both North America and the Eastern Hemisphere, with double-digit sequential revenue growth in Latin America. And one I know you're going to want to hear is that the exit rate for this quarter for North American margins was over the 20% margin mark, a major milestone in delivering our Analyst Day commitment to you, our shareholders.

In addition, our job board in North America remains sold out, and we are delivering new stimulation equipment that will allow us to add incremental work in the fourth quarter with no negative impact on our margins. We believe that Macondo cases is essentially over for Halliburton, based on our settlement and the judge's ruling in the litigation.

And lastly, we continue to focus on delivering higher shareholder returns to you. This quarter we repurchased an additional $300 million in stock, and our Board of Directors has approved an additional 20% dividend increase, meaning we now have doubled our quarterly dividend over the past two years.

Now let's go through some of the geographies. Company operating income increased 21% sequentially. North America grew 15%, Europe/Africa/CIS, 16%, and Latin America more than doubled, by growing 126% from the prior quarter.

In North America, activity levels continue to surge higher month over month, due to an unprecedented level of service intensity. As you will recall, I called the turn two quarters ago. This quarter, things are clearly accelerating out of that turn and we do not see momentum slowing any time soon.

We also made excellent progress on pricing in our stimulation contract renewals and on cost recovery for ongoing contracts. Across key basins, we have negotiated higher prices that, at a minimum, should recover current and expected future cost inflation. And we should begin to see the full impact of new contract pricing as we move into 2015.

Now, a hot topic today is obviously proppant and sand logistics. And we did experience some disruptions early in the third quarter, where work was delayed because we were waiting on sand deliveries. And we did in fact miss some jobs, as did nearly every other service company. But I can tell you, we have great people who helped us manage through this challenge each and every day. And we have now taken actions to get ahead of this issue going forward, and Jeff will provide details on this in a few minutes.

Now moving to our international markets. Despite the geopolitical issues we've faced in areas like Russia, Libya, and Iraq, our Eastern Hemisphere activity continues to expand at a steady rate. On the strength of markets like Saudi Arabia, Southern Iraq, West Africa and the Caspian, we are on track to deliver double-digit revenue growth for the full year 2014.

In addition, we expect to be awarded $1 billion of new work in Iraq. And 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.

So, over the last three years, we've delivered industry-leading double-digit revenue growth in the Eastern Hemisphere. And as we look ahead to 2015, we anticipate the rate of growth may slightly moderate, due to headwinds from ongoing geopolitical issues, as well as customer spending adjustments, especially among the IOCs, as they seek to achieve better returns for their company. And although double-digit growth may be a challenge for any service company next year, we fully expect to continue to outpace our peers in revenue growth, whatever market is handed to us.

Now let's move to Latin America. This has been an area that's had a tough year. Even with better revenue in the third quarter, margins and overall activity levels still do not meet my expectations, due primarily to continued operational delays in Mexico. But as we look ahead, I see several positive factors finally coming into play.

First, we are up and running on our integrated projects in Mexico and expect to be at full operational capacity in early 2015. We're also excited about the pace of Mexico energy reform and expect to see strong opportunities in Mexico shale, mature fields, and deepwater markets in the coming years.

In Brazil, negotiations on the recently retendered directional drilling contract are progressing and we expect to be operating under the new and more profitable contract as we transition into the first quarter.

And last but not least, we are very excited about our recent multi-billion dollar award in Ecuador, where we expect strong growth as these projects ramp up next year. So for Latin America, I expect a much stronger 2015. And we are well positioned for tremendous growth potential in the coming years.

Now, before I close, I have to recognize that there is currently a concern about the recent decline in commodity prices. I'm not going to predict what the oil price is going to be; but on a longer term, we believe industry fundamentals suggest that these lower prices are not sustainable.

While we might be in a slight oversupply situation right now, remember, demand is still growing. Therefore, considering North America and OPEC production expectations, the continued tightness in global spare production capacity, and potential geopolitical impacts on non-OPEC production, we believe that supply and demand will essentially be back in balance in a relatively short period of time.

Nevertheless, we are keenly aware that there is a risk of a moderation in activity if oil prices remain weak for an extended period of time. What I can tell you is that, in recent conversations with our North America customers, we have not received any indication of activity level slowing as we transition into 2015.

For example, last week the IEA commented that approximately 98% of North America liquids projects have a breakeven price below $80 per barrel and over 80% were below $60 a barrel. On the international front, the majority of our NOC customers have not indicated that their activity levels will slow down at all.

However, as I mentioned before, we were already expecting our IOC customers to moderate their capital budgets in 2015 to improve their individual company returns. That being said, we can't be in denial about what is happening in the market today.

As you know, I've been around the block a few times and I can tell you our management team is well equipped to handle this kind of uncertainty. We will control what we can control in areas such as cost management, contract price renewals, and managing customer relationships. We know that we can do these things very well.

My experience has taught me that, if we keep the franchise strong and growing -- and I can tell you, we're going to do that -- aligned with the right customers, which we've already done, and take care of our employees, we will be fine in the long run.

Whether this uncertainty lasts for a few months or longer, we are ready for any market. I think we are well positioned as a company to capture all of the market upside potential for you, while giving you protection to any downside.

Strategically, we are structured to deliver the lowest cost per barrel to our customers, which in turn positions them and Halliburton to perform best in volatile markets. As such, we believe oil prices would have to remain at lower levels for a sustained period before the long-term economics would begin to impact our primary customers.

So to sum it up, our overall strategy is working well and we intend to stay the course. Whatever the market, we believe we can outperform our peers; and we remain focused on consistent execution, generating superior financial performance and providing industry-leading shareholder returns. We have delivered this to you in the past and I believe we will continue to do so in the future.

Now let me turn the call over to Mark to provide you some financial details. Mark?

Thanks, Dave, and good morning.

Let me begin with an overview of our third-quarter results. Starting with North America, revenues were up 9% sequentially. This strong, all-organic growth was relative to a 3% increase in the US land rig count.

Operating income was up 15% over the same period. Margins for the quarter averaged 19.2%, with our September exit rate coming in slightly higher than the 20% mark.

Stronger activity levels in US land and the rebound from the Canadian spring breakup drove the improvement for the quarter, more than offsetting increased logistics cost and the impact of loop currents in the Gulf of Mexico. Margins also benefited from modest pricing improvements on pressure pumping contract renewals, which were designed to cover inflation on specific cost categories such as transportation, fuel and labor.

In the Eastern Hemisphere, revenue and operating income increased sequentially by 4% and 6%, respectively. Growth was led by Europe/Africa/CIS, where revenue and operating income increased 6% and 16% respectively compared to the prior quarter. Seasonal increases in Russia and the Caspian, higher activity in Angola, along with increased well construction activity in Continental Europe led the sequential improvement. Partially offsetting these increases were activity declines in Libya, Algeria and Norway.

The seasonal recovery in Russia was negatively affected by the recent sanctions; and growth in this market is expected to be a challenge for the foreseeable future, since we'll be prohibited from tendering projects that fall under the sanction restrictions. We expect our Russia business will continue to face headwinds next year, including the possibility of additional sanctions; but we're hopeful that full year 2015 could come in at similar levels to this year.

Middle East/Asia region revenue increased by 3% sequentially and operating income was in line with the second quarter. Activity improvements in Saudi Arabia, Kuwait, Oman, India and Indonesia during the quarter were mostly offset by sequential declines in stimulation work in Malaysia and Australia.

On a year-over-year basis, we have seen tremendous revenue growth across Middle East/Asia. Saudi is leading with a 60% improvement; and India, Iraq and Thailand have all delivered growth over 30%.

The conflict in Iraq resulted in a shutdown of the majority of activity in Kurdistan and Northern Iraq. However, the majority of our operations have been in Southern Iraq, away from the fighting, where activity levels have remained relatively stable. At this point, activity is gradually returning to Kurdistan, and overall we expect Iraq to be a growth market for us in 2015.

In Latin America, revenue increased 16% sequentially, while operating income more than doubled compared to the previous quarter. Mexico was the primary driver, where we saw the benefit of higher activity on our Humapa project and recent contract approvals, which resulted in an increase in consulting and software revenue for the quarter. We also experienced higher testing and directional drilling activity in Brazil, as well as increased workover and stimulation activity in Venezuela.

Our corporate and other expense totaled $83 million for the quarter, a little lower than anticipated, driven by a reduction in strategic initiative cost and lower legal expenses. We anticipate that our corporate expenses for the fourth quarter will be approximately $90 million.

Our effective tax rate for the third quarter was approximately 25%, primarily driven by an adjustment to reflect the recoverability of our net operating loss carry-forwards in Brazil. For the fourth quarter, we're expecting the effective tax rate to return to our normalized rate of approximately 28% to 29%.

We now expect our 2014 capital expenditures will be approximately $3.2 billion, and depreciation and amortization to be approximately $2.1 billion for the year.

During the third quarter, we recorded income of $66 million in discontinued operations. This is primarily related to a settlement with KBR for amounts owed to us under our tax sharing agreement with them.

We announced today that our Board of Directors approved a 20% increase to our quarterly dividend, from $0.15 to $0.18 per share, resulting in a cumulative 100% increase to our quarterly dividend over the last two years. As previously stated, our intention going forward is for our dividend payout to equal at least 15% to 20% of our net income.

Additionally, based on our continued confidence in our business prospects, we bought back an additional $300 million in shares during the third quarter. We still have $5.7 billion remaining in repurchase authorization from our Board of Directors, available for future stock buybacks.

Now, moving to the Eastern Hemisphere outlook. In the fourth quarter, we're anticipating moderate growth resulting in a mid-single digit percentage sequential improvement in revenue, with margins in the upper teens. Middle East/Asia is expected to have a high single-digit sequential improvement, with margins approaching 20% for the quarter. We expect our Europe/Africa/CIS region to be relatively flat, as a result of geopolitical challenges in Russia and Libya and reduced customer spending in the Norwegian sector of the North Sea.

In Latin America, we expect mid single-digit sequential revenue growth in the fourth quarter, with margins improving modestly from the third quarter. This improvement is expected to result from year-end software and product sales, as well as the continued ramp-up of our IPM and asset management projects in Mexico.

Concluding with North America. In the fourth quarter we typically see a seasonal decline in both revenue and margins. This year, however, based on the exit rates we saw in the third quarter, as well as the incremental equipment we are currently deploying and considering our forecast for minimal holiday down time this year, we believe fourth-quarter revenue and margins will be flat to modestly higher than the third quarter.

Now I'll turn the call over to Jeff for an update on our strategy. Jeff?

Thank you, Mark, and good morning, everyone.

I'm excited about our results this quarter. The Halliburton team is dead focused on strategy execution and the results are clearly evident in the quarter's industry-leading growth, with both of our divisions setting revenue records, as well as revenue records for 11 of our 13 product lines.

As a reminder, our strategy's built around three key growth markets: unconventionals, deepwater and mature fields. Our unconventional strategy is designed to deliver the lowest cost per barrel of oil equivalent for our customers with surface efficiency, custom chemistry, and subsurface insight. Our deepwater strategy is to increase reliability and reduce uncertainty.

And finally, our mature field strategy is to deliver additional hydrocarbons in declining fields by identifying new reserves and optimizing the recovery of existing reserves. Clearly, these strategies are working.

In North America unconventional market, the topic on everyone's mind this quarter was logistics, driven by big increases in both horizontal activity and completions intensity, which is right in the sweet spot of surface efficiency. Compared to the prior year, the US horizontal rig count in the third quarter was up more than 20%. Over the same time frame, our stage count was up more than 30% and our average sand per well increased by more than 50%.

While the rising rig count was predominantly a Permian Basin phenomenon, our customers are experimenting with larger completion volumes in almost every basin. This is a fundamental change in well design that we believe is part of a continuing trend.

As Dave said, earlier in the quarter, we experienced issues related to logistical disruptions, primarily around proppant. Cast in terms of surface efficiency, increasing intensity presents a terrific opportunity for us. We've addressed these rising completion volumes by expanding our infrastructure and transport capability. This includes increasing our sand terminal capacity by over 100%, and we're on a path to double our current rail fleet.

In terms of the last mile, trucking from the rail head out to the location, we've added over 30 new contract suppliers so far this year, giving us a better footprint and the capacity to handle these intense volumes of work.

Additionally, we implemented a sand logistics command center in Houston, where operations personnel monitor supply levels in the basins and they sit with transport and procurement specialists who are tracking our rail and trucking fleets, all in real-time. The combination of these steps resulted in a sharp increase in efficiency, and we're confident that this integrated approach to logistics will continue to differentiate Halliburton.

A quick update on our CYPHER seismic-to-stimulation platform. We are now at over 60 projects running, with more in the pipeline. In addition to taking on new work, we're also seeing customers expand CYPHER engagements to multiple basins in North America. Most recently, we started a multi-year CYPHER project in the Permian Basin incorporating the full breadth of our products and services. We're only a few months into the study, but early wells have already seen more than a 20% increase in average production compared to offset wells.

And CYPHER continues to serve as an engine for commercializing new technologies like RockPerm, our proprietary chemistry service that enables better oil flow; and then Frac Insight, a Halliburton software package to help customers optimize their perforation placement and deliver the most efficient wells.

We're very pleased with the client uptake on the CYPHER platform and typically see follow-on work in additional basins with those same clients. Our execution of surface efficiency, custom chemistry and subsurface insight led to the more than 20% exit rate margins for North America in the third quarter.

In deepwater, we remain focused on technology that reduces uncertainty and improves reliability for our customers. I'll give you a couple examples of technology that are getting traction right now. The GeoTap IDS, which is a sampling while drilling tool, allows clients to take multiple fluid samples, which reduces uncertainty, while at the same time reducing costly rig time.

Another is Baroid ECD, which is a drilling fluid that allows customers to stabilize circulating density, enabling them to reliably drill more complex wells. We've already seen success on a global basis, from the Gulf of Mexico to the North Sea to offshore Asia, and most recently in deepwater Angola. But the real point here is that we are executing a technology strategy that does exactly what we say. It helps clients reduce uncertainty and increase reliability in deepwater.

And now finally, in mature fields. Our customers continue to look for ways to enhance recovery rates, whether through discrete product offerings, such as our recently acquired progressive cavity pump technology, or through large scale asset management projects.

Let me highlight just a couple of these large project opportunities. The first is the recently awarded Igapo project in Ecuador. This is a project to provide asset management across nine mature fields.

This is a 15-year project that we expect to provide a stable, long-term revenue stream that could potentially double our business in the country, representing a multi-billion dollar opportunity over the full term of the project. We're very excited about this opportunity in Ecuador and expect work to begin late in the first quarter of 2015.

Second, we recently extended an integrated drilling project in Southern Iraq and are encouraged by progress on several other significant IPM projects in the country. We believe these opportunities will provide a platform for continued double-digit growth in the Middle East region throughout 2015.

Now beyond these recent awards, we're currently evaluating a pipeline of well over $30 billion worth of IPM work, which gives us confidence that we're on the right track with our mature field strategy. And in closing, we believe that our strategies continue to provide growth opportunities. Our technology, infrastructure, and processes are aligned and we are relentlessly focused on superior growth, margins and returns.

Now I'll turn the call back over to Dave for his closing comments. Dave?

All right. Thank you, Jeff.

Before we go to questions, let me summarize what you heard today. North American exit margins greater than 20%. Our new equipment will be going to work at least those exit margins.

We are building our North American logistics to get ahead of the curve. We made good progress this quarter negotiating price increases with our customers. And in Latin America, headwinds are becoming tailwinds and 2015 is shaping up to be a much stronger year.

In the Eastern Hemisphere, there are a few trouble spots, but we still see an opportunity for steady growth in the coming year. And we continue to focus on delivering the highest shareholder returns, as evidenced by our 20% dividend increase and additional $300 million in stock repurchases during the quarter.

Before I close, I want to make one final comment on the current environment. The strategic initiatives we've been working on the last several years, Battle Red, Frac of the Future and others, make us what I believe is the most efficient and adaptable organization in the industry. We are able to execute equally well in either a boom market or one that's more challenged.

Across the board, we are focused on making better wells for our customers and better returns for you, our shareholders. So no matter what market is handed to us, our strategies give us confidence that we will continue to outperform our peers.

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

Thank you.

(Operator Instructions)

Our first question comes from James West of ISI. Your line is now opened.

Good morning.

Good morning, James.

And first off, just congratulations on the substantial year-over-year growth in Eastern Hemisphere, well above your peers. I suspect Joe Rainey is pretty proud of what he's been able to accomplish.

He is.

Then Dave, as you mentioned, you've been around the block a couple of times here. And I wanted to know, what's your gut telling you right now about the outlook for North America as we go into next year? I know it's a tough question, but it's on everybody's mind. And given your history in the industry, I was curious about your feel for what you think's going to happen next year.

Let me let Jeff take the first crack at it, then I'll come in at the end, if I feel I need to add something.

Okay.

Thanks, James. Our outlook today is very positive. We're in the heavy part of our renewal period now. And I would tell you that renewals are rolling up, not down. And as of last week, I talked to a lot of customers, and budgets are moving up, not down.

So in terms of activity, everything I see looks like it's increasing into 2015. And quite frankly, our strategy that we have in place around delivering the lowest cost per barrel, cost per BOE, in the market's more valuable than ever.

I guess, let me just add, I think if you want to summarize it, we're not feeling, hearing, seeing anything that says this momentum is going to change that we had coming out of Q3.

Okay. Good. Good. And then on the international side, I think you gave a good outline of most of the regions around the world, some obviously slowness from the IOCs. But the same type of commentary around the NOCs in the international markets, no real -- no commentary around them slowing down?

Not seeing any of that, James. This is Jeff. The capital is going to work. It's going to work in mature fields. It's going to work in unconventionals, maybe more so than deepwater. But again, where we're positioned and what we're seeing around integrated asset management opportunities and then just the traditional work, nothing leads us to believe that from an IOC perspective there's any change, NOC perspective.

Thank you. Our next question comes from Jud Bailey of Wells Fargo. Your line is now opened.

Thank you. Good morning.

Question on the fourth quarter, you had indicated North America margins are -- you exited at 20%. I believe Mark indicated you thought only a slight increase in margins from 3Q to 4Q. Is that just allowing for seasonality or how should we think about the fourth quarter, a seasonally stronger fourth quarter, but your exit rate was above what you had indicated, I guess.

Jud, this is Mark. That's exactly right. We always try to consider that fourth quarter you have some holiday down time. You're going to have some seasonality, particularly in the Rockies, where we have a dominant market position that will impact operations as you close out the year.

But what we're doing is sort of looking at everything on balance. First of all, very strong exit rates; second of all, very strong activity levels that month over month continue to increase. When we are working, our equipment is working very hard. We had already indicated earlier in the year that we've been building additional frac equipment. We'll have new spreads that are already hitting the street today that will be active during the fourth quarter that we'll be adding to our complement of equipment that will be generating revenues.

So when you the take all of that on balance, we're just saying that this fourth quarter uniquely looks like one that we could have a slightly better earnings and profits in this fourth quarter, North America, than you might see in a traditional fourth quarter. Now, that's assuming a very sort of standard weather pattern, standard holiday down times. But from our base outlook, it looks like it's going to be a very good Q4.

Okay. Thank you.

And then if I could maybe stretch the margin outlook into 2015, understanding that your customers aren't really indicating a slowdown at this point. If we were to see some operators start to scale back activity or just flatten out their budgets, can you help us think about -- Halliburton's going to have a lot of moving parts. You're negotiating new contracts with higher pricing, it sounds like now.

If you see a softness in utilization -- and you're obviously recovering some of your recent cost increases, as well -- how should we think about your margins in 2015 if we were to see a slowdown? Is it a situation where you think you could hold the line on margins? Would they decline, potentially, or could they still go up because of the net pricing you're already starting to see in your contracts?

Judd, this is Jeff.

Our entire strategy's built around delivering Frac of the Future and HALvantage. If we roll back to our Analyst Day, we had always said that we would continue to put more efficient equipment in the market and more efficient work practices, so that we would be able to improve margins on the back of the way that we're working. So as I look out into 2015, we see those fundamental pieces of our business continuing to deliver, which clearly means that we continue to see positive impact on margins.

Let me just add one thing. Again, go back to Analyst Day. The impact of things like Battle Red, Frac of the Future and other things that we were doing at that point in time we thought could add 5 points in margin without any price increases. And we're not backing off that view. A lot of the push-up in margins right now are just those things being implemented and us being more efficient as an organization. So, I think to answer the question specifically, if you did have a flattening out, I would expect that our margins would be at least where they are today.

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

Thanks. Good morning. So that service intensity growth of 50% quarter-over-quarter, or year-over-year, was pretty amazing. And I know Jeff touched on it a little bit. But could you give us additional color there on what you're seeing on the oil service intensity side? And I know you indicated it was not basin-specific. But can you go into that a little bit?

And then thoughts on 2015, what kind of -- any insights at this point on the degree of service intensity growth that we could see this year? And clearly it's worth noting that even if the rig count is flat and the well count is flat, it's still driving higher revenues and margins.

Thanks, Angie. The service intensity continues to increase on the basis of the types of jobs that are being designed. And so we've seen a consistent increase in the amount of proppant and the amount of stages. So I referred specifically to 30% increase in stage count, 50% increase in sand consumption.

I would say that you see bigger ramp in the more mature basins, because that's where we're really getting into what I call sort of hyper efficiency and increasing the production of existing wells, as opposed to maybe where it's a little bit more, I would use it with quotes around it, exploratory in a few basins.

But as I look into 2015, I don't see anything that changes the pace of increase, necessarily, across the piece, simply because we're making better wells. And that's what takes us back to the importance of sand logistics and the ability to deliver.

I'll give you one quick anecdote. For us, the sand trans load, we can unload an entire unit train in 9 hours and we can load a truck in 7 minutes. So that's kind of where we're focusing our attention.

Okay. That's helpful. And then thinking about this oil service intensity growth, and it's reported out there we're going to add 1.5 million to 2 million in horsepower next year, how much do you think of that as being added with stand-alone crews and they're actually full frac plates, and how much of that horsepower do you think is reinforcement for existing fleets? Could that be as much as 33% or even more?

When we look at that expectation, that's probably less than 10% coming into the market. And the fact is, the equipment is working harder than it has ever worked before, given the size of the stages and the amount of the sand. So my expectation is most of that equipment will either be back-up equipment for big jobs.

With our Q10 pumps, we are more effective, typically 20% less horsepower on location and, quite frankly, less back-up. We put very little back-up equipment to work in the market. So that's kind of the take-away is not that concerned, really not concerned about additional horsepower.

Great. I'll turn it over. Thanks.

Thank you. Our next question comes from Ole Slorer of Morgan Stanley. Your line is now opened.

Thank you very much. Sorry to harp on the sand issue, but some pretty staggering numbers of 50% up high. And also heard from other players. Do you think that's something that deals with Halliburton's customer base and your position in the market, or do you think this is sort of an industry trend?

I think it's a little bit of both, Ole. We're working with fairway players. We've always said that we make it a point to work with the most efficient operators in the marketplace so that we get the maximum utilization of the technology we're putting in the market. So that we're pumping more sand maybe than competitors would not surprise me at all.

But I do think longer term there will be a continued move towards better frac design, thinking about our CYPHER technology, how we design the best fracs to get the most production out of the wells. And I do believe that will lead us to a continuation of larger volumes.

So how are you scaling your infrastructure over the next, say, two years? What are you planning for as far as your experience in, say -- for 2015, 2016, volume growth per well?

Let me think about it this way and in terms of what we're doing to address that, I think the volumes will continue to increase across the piece. It may not stay at the same rate of increase. But from our standpoint, we'll continue to invest in logistics to control the supply chain, really from the mine to the last mile that gets us to a location, which looks like sand trans loading and investment in rail cars. And these are the things that overcome the logistics problems that seem to occur.

We're certainly -- Ole, this is Mark. Just to add to that. From a contracting standpoint, we're working very hard to make sure that we've got all of the sand needs that we're forecasting under contract. We'll probably have 80% of our sand needs contracted this year. It may go up to 90% next year. By contracting our sand, looking forward, that allows us to shave off anywhere from 15% to 20% off of spot sand pricing.

Doing the same on railcars, making sure that we've got plenty of capacity to run full unit trains, making sure that our trans loading facilities are -- each one are designed to off-load complete unit trains. We're the only ones, so far, I think, who've managed to be able to really off-load complete unit trains on site, in some of our locations. And we're just going to look forward to where our customers are saying they're going to be running these volumes and make sure that the infrastructure's on site to be able to run as lean and efficient as we possibly can.

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

Thank you. Good morning.

Dave and Jeff, to tackle the international question just a little bit differently, you have been consistent and you've been correct here with regard to just the pace of international expansion, in general, over the past several years. And when I look at your numbers for 2014 and juxtapose them against the preceding couple of years, you will likely end up somewhere high single digits year-over-year in 2014 versus a low teens rate of expansion in 2013 and a 20% rate of expansion in 2012. So when we contemplate 2015, and against the slate of opportunities and threats, at this juncture, do you think you will do well to match your international rate of growth of this year or should we expect something less?

The answer to that, we expect to outgrow the market or outgrow our competitors in that space. There clearly are some headwinds when we look around the world right now. So the North Sea, Russia and Libya are clearly going to present headwinds, though quite encouraged around tailwinds in the Middle East and Asia-Pacific.

So when I think about growth more specifically, it may be more where capital gets put to work maybe than it has been in the past. We've talked a lot about deepwater potential moderation as IOCs look at their capital budgets. But that said, the barrels come from somewhere, and our expectation that is we may see more of that capital going into development and mature field type opportunities. And so for that reason, I'm still very encouraged about our ability to sustain growth into 2015 that would be similar to where we are now.

Okay. And the billion dollar project in Iraq, can you elaborate on that? And also, I guess to play devil's advocate for a second, why would we even want that, given the travails that the industry has witnessed over the past several years there?

Let me answer that two ways. The first question was -- I'll do it in reverse order. Why would we want that work? The fact is, we are a lot smarter in that market than we've ever been. I think we were early into that market and underestimated the risk around logistics and a few other things. We really like the contract, the way this one looks, in terms of terms and conditions. So feel good about that.

The project itself, I won't name the project, but it's a great project. It's 4 rigs to drill 120 wells over the next, probably 3 years. And we have invested heavily in putting our IPM team together, and they are really executing. So if I think about how we execute on mature fields longer term, these are the kind of projects that we're going to do.

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

Thanks. Good morning. Maybe just a quick one. Your CapEx commentary, a little bit lighter than the second quarter commentary. What are you reflecting in that? Is that a difficulty in spending some capital and you'll spend it in FY15, or are you actually shaving it relative to some of the commentary you've given us this morning?

No, there's not been any kind of concerted effort to shave capital. I think it's probably a little bit tighter forecast, particularly as we look forward in some of the projects in the Eastern Hemisphere. It just takes some time, oftentimes, to get things approved. And so it's just a timing. So you'll see some of that coming into probably the early part of 2015.

Very good. Thanks.

And then maybe an unrelated follow-up. Maybe it's a bit broader. If I look at your North America D&E revenues, over the 9 months, it's sort of tracking the rig counts, but I think it's up 6%, again, 9 months versus 9 months, and that's relative to your horizontal rig count up 13% in US land, anyway, or in the US. So I know there's some other factors and maybe you'll fold that into the answer.

But how does that -- what's the prognosis for how that is moving forward? Are there some things that might move in place that can accelerate D&E and make it align better with the horizontal rig count, or are there some factors that continue to suggest it will be somewhat less than that?

I think what you're seeing in the current quarter is a bit of impact of the Gulf of Mexico. So we experienced loop currents like everybody else, and so we had quite a bit slower activity in the Gulf of Mexico in the current quarter.

But the well construction type activity is going to track, generally speaking, the rig count. But we're really encouraged as we look Q4 and beyond, get the loop current behinds us, we really like our share in the Gulf of Mexico right now, and it's a growing share in the Gulf of Mexico.

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

Good morning. Eastern Hemisphere production really hasn't grown much in the last couple of years, and you are setting records in terms of operating income and revenues. And as the US, of course, has been growing, is the level of activity in the Eastern Hemisphere somewhat inelastic, considering that we at least have to maintain production?

Yes, Jim. I mean, that's the right answer. We're working harder and harder to produce, arguably, the same number of barrels. But those barrels are critical to a number of economies around the world.

And so when we look at outlook, two things. One, the projects that are started have to continue. These are long duration type projects. They don't turn on and off. And then secondly, there are a lot of mature field type activity that we know with lower exploration risk, almost nil exploration risk, those are projects that create terrific returns for our customers. So I think those two conspire to give you an inelastic sort of outlook.

My follow-up, if I could do it, is somewhat the same for North America. If the US unconventional production starts to decline on an unconventional hyperbolic, the amount of effort it takes to reverse that is huge. So how much activity in the US is needed to maintain, not grow, but just maintain existing US production? Have you all done that work?

It's quite a bit of the work that's going on now. And I guess, Jim, the way I'd answer that is rather than give you a percentage, I would say that we know the decline rates on existing wells, fairly dramatic. We know what it takes in order to continue to improve that. So I would expect that sustaining activity, or sustaining production in North America takes quite a big chunk of the work that's going on now.

Jim, this is Dave. I would just add one thing, and I think we referred to it as sort of the treadmill effect. What you want to do is get your customers in a basin where they've got sufficient amount of production that they have to get on the treadmill, if you will, to keep that production going. Because that's a great place for a service company to be and a great place for the lowest cost, most efficient service company to be, because helping the customer stay on that treadmill as it gets faster and the incline goes up is part of the whole hyper efficiency model that we try to offer up to our customers.

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

Hello. Good morning.

I just had a follow-up question regarding the frac dynamics in the US. And you have discussed for many quarters now cost recovery processes, and it seems like that is now beginning to take hold. Just wondering what your perspective is in terms of the incremental capacity that's been added recently and whether or not some of that cost recovery can turn into net pricing gains, from an industry standpoint, going forward.

I can't speak for the industry. But I will speak for Halliburton. And this is right in our wheelhouse. As you said, recovering inflation's really been the order of the day. But as we go through the renewals and we establish inflationary increases that keep us whole, very quickly we drop back into our ability to manage cost and drive efficiency, which should allow us -- or it does allow us -- to convert that inflation into net pricing, the extent to which we out compete at the market. And this is precisely why we implemented HALvantage and the logistics advantages we have: Battle Red, Frac of the Future, and that's what conspires to deliver exit rates in excess of 20%.

Great. Thank you so much. Appreciate it.

Thanks, Kurt.

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

Thanks. Mark, you mentioned Europe/Africa/CIS would be relatively flat in the fourth quarter. Wanted to confirm that this is for revenues as well as margins. And then get a little additional color on the growth, or how that region grows revenues and margins next year, given that North Sea revenues are likely down and would be a challenge just to keep Russian revenues flat.

The answer is it does relate to both, yes, revenues and margins. Fiscally, you might see margins climb up a bit on the back of some level of direct sales, completion tool sales, things like that. But I think this quarter, given where we're seeing some of the softness, particularly the Norwegian sector of the North Sea in Q4, we're expecting it to be more flat to Q3 on both the revenue and the margin side.

And for next year?

It's a little early to know for next year where it's going to go. Obviously, everything that we're trying to do across the board is to improve margins, by cutting costs and things like that. As we look forward to next year, I think we do see some continued softness in the Norwegian sector of the North Sea.

Russia, as I said on the call, will likely be -- hopefully, we're working to be flat year-over-year on an overall basis. And we'll have -- Libya's down for the count right now. It's difficult to forecast when that will be.

But when you look at other markets across Europe, Africa, and CIS, the Caspian continues to do very well. When you look at Sub-Saharan Africa itself, we had a very good year. Expect that will continue to grow on the back of mature field projects there. And Continental Europe for us is doing exceedingly well right now, and we expect that that will go up, as well.

So as we go into the year, while it's still a little bit early in the planning cycle, I would say we're still expecting it to be up. And with that, we're continuing to leverage incremental margins that are higher than current margins, and so we're expecting margins to continue to climb in that area, as well, even though it might be a little bit less than the Middle East/Asia.

Thank you. And our final question comes from Waqar Syed of Goldman Sachs. Your line is now opened.

Thank you for taking my question. Mark, you promised us 500 basis points margin improvement through the course of the years from internal measures, Frac of the Future or HALvantage. How much of that has already been realized and what is left for the coming years?

I would tell you, our goal was to get a 200-basis point improvement in 2014. As of today, we've accomplished that objective. We had hoped that it would be for the entirety of Q3. We didn't quite get there. But we were very close. And if it hadn't been for some of the logistics challenges that we had in the month of July, we would have indeed had hit that target.

So as we look forward, we're comfortable with where we're at. But I can tell you that really on the face of Battle Red, we've still got a long way to go. All of the systems are in place. We've been working out a lot of the kinks in that process. But a lot of the upside from that project are still in front of us. On the Frac of the Future side, we're only still a quarter deployed. We've got a long way to go in terms of achieving that.

So we're going to continue to work very, very focused and determinedly to make sure that we capture all that upside. So as we sit today, we feel very good about our progression. And there's no -- from our standpoint -- no retreat from our objective of getting 500 basis points over the next couple years.

Okay. And then, I may have missed that before, but could you quantify the impact of Gulf of Mexico on the D&E margins and revenues for the quarter?

I don't know if we could quantify it overall for D&E, but I'd say that the Gulf of Mexico, the loop current issue, probably cost us about $0.01 in the quarter.

Thank you. At this time, I'd like to turn the call back to management for any closing comments.

Thanks, Sam. I want to thank everybody for your participation today. And Sam, you can go ahead and close 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.