Halliburton Company (NYSE:HAL) Q1 2024 Earnings Call Transcript

Halliburton Company (NYSE:HAL) Q1 2024 Earnings Call Transcript April 23, 2024

Halliburton Company misses on earnings expectations. Reported EPS is $0.68 EPS, expectations were $0.74. Halliburton Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

David Coleman: Hello, and thank you for joining the Halliburton First Quarter 2024 Conference Call. We will make the recording of today’s webcast available for seven days on Halliburton’s website after this call. Joining me today are Jeff Miller, Chairman, President and CEO; and Eric Carre, Executive Vice President, and CFO. Some of today’s comments may include forward-looking statements, reflecting Halliburton’s views about future events. These matters involve risks 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, 2023, 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 also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter earnings release and in the Quarterly Results & Presentation section of our website. Now, I’ll turn the call over to Jeff.

Jeffrey Miller: Thank you, David, and good morning everyone. Halliburton delivered solid first quarter results that again demonstrated the power of our strategy and the strength of our execution. Here are the quarter highlights. We delivered total company revenue of $5.8 billion, and operating margin of 17%. Both divisions demonstrated margin improvement year-over-year. International revenue was $3.3 billion, and grew 12% year-over-year, led by Latin America, which delivered a 21% increase. North America revenue was $2.5 billion, a 5% increase over the fourth quarter of 2023. Finally, during the first quarter, we generated $487 million of cash flow from operations, $206 million of free cash flow, and repurchased $250 million of our common stock.

Let me begin today’s discussion with my views on the strength of the oilfield services market. Global energy use is on the rise, with crude oil demand projected to grow between 1.2 million and 2.3 million barrels per day in 2024. This demand growth is greatest in non-OECD countries, where we expect more per capita energy consumption, not less as they develop their economies and improve their quality of life. Globally, secure, reliable hydrocarbon production powers industries, moves people, and advances economies. In the U.S., after stable electricity demand for nearly two decades, we now expect it to grow more than 15% by 2030. Today, over 40% of United States electricity is supplied by natural gas, and we expect strong demand for natural gas as a base fuel well into the future.

The world requires more energy, not less, and I’m more convinced than ever that oil and gas will fill a critical role in the global energy mix for decades to come. My outlook is confirmed by our customers’ multiyear activity plans across multiple markets and asset types. Everything I see points towards long-term growth for Halliburton’s services. My outlook for the industry is not new, and it drives our focus on oilfield services, and sets our strategy. This focus is the basis for our technology investment, capital allocation, and culture. This multiyear upcycle together with our successful strategy execution make this a great time for Halliburton. Now, let’s turn to international markets, where Halliburton’s strategy of profitable growth delivered another solid quarter.

International revenue grew 12% year-over-year with growth demonstrated by each region. This marks the 11th consecutive quarter of year-on-year growth in our international business. For 2024, I expect full-year revenue growth in the low double-digits. Equally important, the international market remains tight for equipment, and people, and therefore, we expect to see margin expansion over last year. One of the many things that excites me about our international business is our technology that creates meaningful value for our customers, and drives above-market growth for Halliburton. In the Drilling and Evaluation Division, our leading formation evaluation tools such as the EarthStar X logging-while-drilling system, and our Reservoir Xaminer Formation Sampling Service, both see strong adoption and increasing levels of demand.

The advanced measurements these systems provide create unique insights for our customers and drive profitable growth for Halliburton. In the Completion and Production division, our Artificial Lift technology continues to generate profitable growth throughout each of our international regions. Our electric submersible pump portfolio proved to be a market leader in the competitive North America market, and we expect to deliver similar results over time in the international markets. Our complete solution, which includes downhole motors, pumps, and surface systems with remote monitoring and automation, provides an end-to-end solution, and the ability to operate at scale. A great example is in Kuwait, where in less than three years, we captured a nearly 20% market share with over 700 ESP installs.

Before we move on, I want to share an observation. I’m consistently seeing more global interest in unconventionals. I can recall over a decade ago, the global scramble to find unconventionals with limited success. Today, two significant markets outside of North America achieve scale, which serves as a proof point for what is possible, and drives interest by others. As global markets grow, the technologies and processes Halliburton developed as the leader in North America over the last three decades have broad applications to unconventional reservoirs throughout the world, which makes this a fantastic long-term opportunity for Halliburton. I’m confident in the duration of this international upcycle in 2024 and beyond. Turning to North America, our first quarter revenue grew 5% over last quarter.

As expected, North America land completion activity bottomed in the fourth quarter of last year and rebounded in the first quarter as our customers quickly resumed operations after the holidays. Looking ahead for the rest of 2024 in North America, we expect steady activity levels for Halliburton. Our customers are planning for the long-term and I expect they will execute work throughout the year as planned. This is consistent with a more industrialized approach to asset development in North America. And while we expect an eventual recovery in natural gas activity driven by demand from LNG expansions, our 2024 plan does not anticipate this recovery. Overall, we expect that full-year North America revenue and margins will be flattish compared with 2023 levels.

Clearly, our strategy is to maximize value in North America. We do it in multiple ways. Today, I want to talk about two of them. The first is the ZEUS platform and the second is our new North America focused directional drilling system. The ZEUS platform, its electrification, automation and subsurface diagnostics continue to advance. This quarter, we introduced Sensory, which is the latest generation of our subsurface measurement technology. Sensory provides an easy to deploy, cost effective and automated system for real time subsurface measurement of fracturing operations. Additionally, our automation technologies are at the heart of our highly efficient simul-frac and trimul-frac operations and they continue to expand their capabilities creating value for Halliburton and our customers.

The ZEUS platform demonstrates its uniqueness every day. And importantly, it’s deployed at scale. Our scale allows for rapid technology innovation. Each technology improvement to the ZEUS platform widens the moat around our leading position in the fracturing market. This creates outsized value for Halliburton and our customers. I am pleased with the results we see in North America from our drilling services product line, which late last year launched a new version of our iCruise Rotary Steerable System specifically engineered for the North America unconventional market. The new iCruise CX system is designed for the challenging curve and lateral applications in North America. The system’s performance is driving strong uptake and this quarter, our iCruise footage drilled in North America more than doubled over last year.

We also coupled this high performing system with an asset light sales and rental model that increases the addressable market when compared to a full-service model. This is how iCruise CX both participates in new market segments and increases its speed of market penetration. The key trend that I see in North America drilling is the move to longer laterals and more complex wells which customers drill to improve economics. iCruise CX is specifically designed for these applications. And its performance is why I am excited about Halliburton’s growth in the North America drilling market. To close out, I would like to thank our employees. I regularly hear from our customers about the work you do. How much it means to them, and how your execution of our value proposition differentiates Halliburton from our competitors.

Well done. I am excited about the business outlook for Halliburton. Energy demand growth is strong and so is demand for our services. I expect that our focus on oilfield services and execution of our strategy will generate strong free cash flow and shareholder returns. This quarter, Halliburton repurchased $250 million of our common stock, a solid start to the year and a good benchmark for our expectations going forward. Now, I’ll turn the call over to Eric to provide more details of our financial results. Eric?

Eric Carre: Thank you, Jeff, and good morning. Our Q1 reported net income per diluted share was $0.68. Adjusted net income per diluted share was $0.76. Total company revenue for the first quarter of 2024 was $5.8 billion. Operating income was $987 million. And operating margin was 17%; flat compared to Q1 2023. Beginning with our Completion and Production division; revenue in Q1 was $3.4 billion, down slightly from Q1 2023. Operating income was $688 million, up 3% when compared to Q1 2023. And operating income margin was 20%. Compared to Q1 of last year, these results were primarily driven by reduced pressure pumping services in U.S. land. Partially offset by higher activity in international markets. In our Drilling and Evaluation division, revenue in Q1 was $2.4 billion, an increase of 7% compared to Q1 2023.

Operating income was $398 million, up 8%, and operating margin was 16%, an increase of 10 basis points over Q1 last year. These results were primarily driven by higher drilling-related services in the Middle East and North America as well as improvements across multiple product lines in Latin America. Now let’s move on to geographic results. Our Q1 international revenue increased 12% year over year. Europe/Africa revenue in the first quarter of 2024 was $729 million, an increase of 10% year over year. This increase was primarily driven by higher completion tool sales in the region and fluid services in Norway and the Caspian area. Middle East/Asia revenue in the first quarter of 2024 was $1.4 million, an increase of 6% year over year. This increase was primarily related to improved activity in multiple product service lines in Kuwait, Saudi Arabia, and Oman.

Latin America revenue in the first quarter of 2024 was $1.1 billion, an increase of 21% year over year. This improvement was primarily related to higher drilling-related services and increased software sales in Mexico, improved pressure pumping service and fluid services in Argentina, and increased activity in multi-product service lines in Brazil and Ecuador. In North America, revenue was $2.5 billion, representing an 8% decrease year over year, but a 5% increase from the last quarter. This year-over-year decline was primarily driven by lower pressure pumping services in U.S. land as well as lower wireline activity. Moving on to other items, in Q1, our corporate and other expense was $65 million. For the second quarter of 2024, we expect our corporate expenses to be approximately flat.

Our SAP deployment remains on budget and is on schedule to conclude in 2025. In Q1, we spent $34 million, or about $0.04 per diluted share, on SAP S4 migration, which is included in our results. For the second quarter, we expect SAP expenses to be approximately flat. Net interest expense for the quarter was $92 million. For the second quarter 2024, we expect net interest expense to be roughly flat. Other net expense for Q1 was $108 million, higher than expected, primarily due to impairment of an investment in Argentina and currency devaluation in Egypt. For the second quarter 2024, we expect this expense to be approximately $35 million. Our adjusted effective tax rate for Q1 was 21.5%. Based on our anticipated geographic earnings mix, we expect our second quarter 2024 effective tax rate to increase approximately 75 basis points.

Capital expenditures for Q1 were $330 million. For the full year of 2024, we expect capital expenditures to remain approximately 6% of revenue. Our Q1 cash flow from operations was $487 million, and free cash flow was $206 million. During the quarter, we repurchased $250 million of our common stock. For the full year 2024, we expect free cash flow to be at least 10% higher than 2023. Now let me provide you with some comments on our expectations for the second quarter. In our Completion and Production division, we anticipate sequential revenue to be up 2% to 4% and margins to increase by 25 to 75 basis points. In our drilling and evaluation division, we expect sequential revenue to increase 1% to 3% and margins to increase by 25 to 75 basis points.

I will now turn the call back to Jeff.

Jeffrey Miller: Thanks, Eric. Let me summarize our discussion today. Halliburton delivered solid first quarter results. I am confident in the strength and duration of this up cycle. We expect our North America business to deliver flattish revenues and margins year-on-year despite lower activity levels. We also expect our international business revenue to grow at low double digits year-on-year. I’m excited about the outlook for Halliburton and expect Halliburton to deliver strong free cash flow and shareholder returns. And now let’s open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] One moment for our first question, and it comes from the line of David Anderson with Barclays. Please proceed.

David Anderson: Thanks. Good morning, Jeff. I want to ask you about a couple of things that you talked about in your prepared remarks. And the first is on the ZEUS fleet. You had an impressive 5% sequential increase in North America this quarter, despite the flat rate count. I have to think it’s probably attributed to these e-fleets being rolled out. It’s pretty clear, this is a big step change in efficiency for your customer, and demand seems to be exceeding supply at least for the next couple of years, but I guess, the question is what prevents the industry from building out? And can you talk about your competitive advantage today and how you maintain that? You were first to market, establish leadership, but is there differentiated technology? Is it more about relationships? I guess, the question is really on the moat on this business as you see it over the next few years.

Jeffrey Miller: Yes. Thank you, Dave. Look, the most important point is this is a comprehensive platform. ZEUS is a platform. Clearly, it’s electric. Yes, it drives efficiency, but the embedded automation actually really changes the dynamics of how it performs. And then, also the subsurface measurements with Sensory that are embedded in this system, and uniquely embedded. And so, that widens the moat. And I think equally important is being at scale. So, it’s one thing to do a research project around a thing, but when we’re working at scale, these are solutions that can be pushed to the platform at any point in time. So, it’s really the ability to grow the moat on existing equipment as well as any new turns on the science as it goes forward. So, I’m super excited about it. Yes, obviously lowest TCO, but it’s the technology differentiation as well that widens the moat.

David Anderson: And then, just to touch on something else, you had talked about some unconventional fields in international markets. Clearly, one of the big stories this year has been the Saudi shift in CapEx from offshore towards those unconventionals, specifically around Jafurah. You have a toehold in that field with that liquid mud plant facility, but this is just starting development. My understanding is there’s a bunch of tenders on the way more coming. Can you talk about sort of the opportunity set for Halliburton on this field in the near-term, maybe incremental growth you see in ’25? And how do you support these build-outs? You said capacity is really tight in the market. Is this a market maybe you bring some diesel fleets in there? Is there other equipment in the region, or how do you think about that, the tightness and the capacity as it relates to building out to some conventional field?

Jeffrey Miller: Thank you, David. And I’m really excited about it. And there’s a lot of opportunity for Halliburton around unconventionals, as you know. How we address it, we’ve got a lot of ways to address it, including some of the technology we’ve talked about today. We’ve got a good position in there, but I think with even more opportunity to grow, particularly with drilling technology that continues to advance. You mentioned mud, but also other aspects of that where we’ll be very competitive. So, I think that’s a big move forward. And I think more broadly, so good for Halliburton, but I think that more broadly, just the discussion around unconventionals internationally, what can you see today are two markets, at least outside the U.S., that are truly at scale.

And I think that serves as a bit of a template for how that can be done, because it was really unclear a decade ago, as you recall. But I think we’re in a different place with unconventionals today. And so, we do hear more discussion around, hey, this is possible, and how Halliburton would play a more meaningful role in that in additional markets, so super encouraged.

David Anderson: Thank you, Jeff.

Jeffrey Miller: Thank you.

Operator: Thank you. One moment for our next question, please. One moment, it comes from the line of Neil Mehta with Goldman Sachs. Please proceed.

Neil Mehta: Good morning, Jeff, and team. Jeff, you’ve talked about wanting to drive your free cash flow per share higher. And so, it’s great to see the share repurchases for a couple quarters run rating at this $250 million mark. Can you talk about why you think that’s the right number to use going forward? And how does share repurchase fit in the seriatim of capital allocation?

Eric Carre: Yes, Neil, it’s Eric. So, the baseline that we use is the framework that we announced several quarters ago to return a minimum of 50% of free cash flow to shareholders. We actually returned over that at just about 60% in 2023. So, when we look at the improvements in free cash flow year-over-year, which we mentioned to be about 10%. So, when we think through that, we think that the $250 million of buyback is a good base load for us to be repurchasing shares. So, expect more buybacks in dollars, expect more overall returns to shareholder dollar-wise, and then, we see where the overall percentage lands, but it should be pretty close to what we did last year. Yes.

Neil Mehta: Okay. That’s really helpful. And then, the follow-up is, we are seeing signs of industry consolidation, certainly more in E&P and services, but we start to see some in services as well. Halliburton always struck us as more of a organically driven business, but be curious on how you’re thinking about M&A as you plan to go forward for the business?

Jeffrey Miller: Look, Neil, no change to our strategy. You’re correct. We like bolt-on M&A technology acquisitions. We think about M&A in terms really of research and development. Is it something that advances research? Does it move it more quickly so that we get to market more quickly? But we see significant organic growth in the businesses that we’re in. And so, we like where we are and we see plenty of growth. And we also, I believe that organic growth generates more value for shareholders. And we’ve seen that with other things that we’ve done in the past in terms of small acquisitions that we’re able to then grow and push through our channel. But we like the space where we compete and we like the technology and how we develop that. And so, you shouldn’t expect any change from Halliburton.

Neil Mehta: All right. Thanks, team.

Jeffrey Miller: Thank you.

Operator: Thank you. One moment for our next question, please. And it comes from the line of Arun Jayaram with JP Morgan Securities. Please proceed.

Arun Jayaram: Yes. Good morning, Jeff. I wanted to see if you could characterize your thoughts on the future prospects of the OpEx versus the D&C cycle on a go forward basis. Can you talk about your current leverage to OpEx and production? And is this an area strategically you’d like to grow either organically or inorganically over time?

Jeffrey Miller: Yes. Well, I want to answer the second part of that first in terms of organically. Yes. So, we don’t see a change to our strategy or approach to markets. So, yes, we do see quite a bit of organic growth for us in the OpEx part of the market. We’re in that business today. We’ve got strong, I mean, strong lift business today. We’re in the chemicals business today. And we’re in the intervention business today in a pretty big way. And we continue to develop technology similar to as we’ve done in the past. And so, it’s my outlook for OpEx cycle. We’ve got plenty of exposure to that and have had. Now, I want to be careful and say the D&C cycle is very strong and continues to grow. And I suspect that it continues to grow also.

So, I think we’re well balanced across really all elements of this, whether it’s exploration, development, drilling, and OpEx today. Some of the things we’ve done in the past, again, we bought smaller businesses that we’ve grown into bigger businesses. And so, again, a strategy that works for us and it delivers the organic growth that we believe is really good for our shareholders.

Arun Jayaram: Great. Jeff, second question is, I wanted to see if you could give us your perspective on any potential impact to how from the changing mix of activity in Saudi Arabia, which looks to be a little bit more onshore versus shallow water. And maybe you could just talk about the year over growth in MENA, which at 6% seemed a little bit lower than we were expecting.

Jeffrey Miller: Well, I think the first part of that in terms of Saudi growth, ’24 is still growing, by the way. We expect growth in Saudi in ’24. And the rebalancing, the gas and unconventionals is very good for Halliburton. We’ve got a very strong onshore business in Saudi Arabia. We participate in all aspects of that market. And that market remains tight for equipment. So, I feel good about that market. And I’m very confident in the long-term growth of that market. The rebalancing again to gas is, we’re meaningful players in that part of the market and expect that will only be good for Halliburton. Pivot to growth, look, a couple of things. Number one, international business grew 12% overall. So, I want to start there. Clearly, I’d expect more growth in the region, but here’s what we’re doing.

I want to be really clear that profitable growth has been our primary focus. We see a good pipeline of opportunities. We expect to continue to see growth in MENA. But at the same time, we want to make certain we’re building a foundation shipment for growth. That means that we are delivering the technology, we’re making the investment while expanding margins and growing, and that’s been sort of our mantra, our strategy is profitable international growth. And that’s what we saw this quarter.

Arun Jayaram: Thanks, Jeff.

Jeffrey Miller: Thank you.

Operator: Thank you. And one moment for our next question, please. And it comes from the line of Roger Read with Wells Fargo Securities. Please proceed.

Roger Read: Yes, thanks. Good morning. Jeff, I’d like to get back in on the international growth. So, double digits, what you’ve delivered, double digits, where you’re guiding or where you’re headed. How much of this would you describe as due to new products or products and services or new markets and how much of it to just underlying expansion? Why don’t you get kind of an — you’ve talked about a lot of the new stuff you’re putting in, just how effective that is in driving some of this growth?

Jeffrey Miller: Yes, thanks. Look, I think the growth is broad based, but the technology matters. It’s not necessarily new products. It’s actually an expanding market. A couple of things are happening at one time, yes, activity is growing, but we’re participating in a larger share of that growth than maybe in the past based on some of the technology I described. So, we’re competing differently technically, and so we get a bigger part of that growth. We’ve added some new things, yes, like Lift internationally, that’s a new product for growth, a new product that’s a whole business, but it’s growth end markets, and we’re really pleased with the progress that that’s making. And then, obviously, pricing in the tight market internationally helps us well because that’s helping growth all around.

But I would not overlook the importance of the improvement in drilling technology, particularly just because it’s more access to a larger market and at a much better rate of return for us given the improvement over legacy technology. The capital efficiency of the new technology is probably is right about 40% more capital efficient than the legacy tools. So, getting sort of improvement along several dimensions there, growing market, bigger share, better pricing and better capital efficiency.

Roger Read: Thanks for that. And then, just to pivot back real quick to North America, you mentioned not really anticipating or certainly not built into the expectations for recovery in gas this year. Presuming that that’s kind of a well completions way you’re thinking about it, at what point of the year would you have to see an increase maybe in activity spending rig count in gas to think that there was a chance that you could outperform I say you, but the market could outperform your expectation. Like if we get to the third quarter and we haven’t seen an improvement, we should close the books on ’24 having any improvements to dig about ’25?

Jeffrey Miller: Yes, look thanks. I think that’s the next big leg of growth in North America. It’s a question of timing, but it is no question going to drive a lot of growth in North America. And I expect it will drive market growth ’25 and beyond. And I think what’s overlooked, look through the current timing and look forward to what’s coming, attrition has really shrunk the fleet. The fleet for the market is shrinking to meet the demand that is there today and that happens every day. Equipment is not being built, new equipment. So, when we get to that point in time, it will be an incredibly tight market. And so, I’m actually quite excited and confident about what gas means to the North America market. Just saying, yes, the leading indicators of that will be well construction, it will be offtake contracts for LNG.

There will be a number of things that sort of happen, but it will happen just given the capital has been invested on the export side. There’s no question that the gas will be developed to meet that.

Roger Read: Great.

Jeffrey Miller: Thank you.

Operator: Thank you. One moment for our next question, please. And it’s from the line of James West with Evercore ISI. Please proceed.

James West: Hey, good morning, Jeff. Good morning, Eric.

Jeffrey Miller: Good morning, James.

Eric Carre: Good morning, James.

James West: So, Jeff, one of the areas that we haven’t discussed in detail yet in the Q&A is really deepwater where you guys have an advantage position this cycle, I think relative to prior cycles even though you’ve been strong there for a while. But the technology enhancements that have happened at Halliburton puts you in a unique position to have more share, better profitability. And I’m curious kind of where you’re seeing right now the biggest growth? And I think we know kind of Brazil and some other places, but where do you think we’re going to be surprised as we go into kind of probably ’25 and ’26?