Halliburton Q4 2021 Earnings Report

Halliburton EPS Results

• Actual EPS: $0.36
• Consensus EPS: $0.34
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $0.18

Halliburton Revenue Results

• Actual Revenue: $4.28 billion
• Expected Revenue: $4.09 billion
• Beat/Miss: Beat by +$191.50 million
• YoY Revenue Growth: +32.10%

Halliburton Announcement Details

• Quarter: Q4 2021
• Date: 1/24/2022
• Time: Before Market Opens
• Conference Call Date: Monday, January 24, 2022
• Conference Call Time: 11:43AM ET

Halliburton (NYSE:HAL) (NYSE: HAL) is a global provider of products and services for the energy industry. The company supports the exploration, development, and production of oil and natural gas through technologies and services used throughout the life cycle of a well.

Halliburton operates through two primary business segments: Completion and Production, and Drilling and Evaluation. Its offerings include cementing, stimulation, well completion, production enhancement, drilling services, drilling fluids, well testing, wireline and perforating services, formation evaluation, and project management. The company also provides digital and engineering solutions designed to improve well performance and operational efficiency.

Founded in 1919 by Erle P. Halliburton, the company has grown into an international oilfield services provider serving customers in North America and markets across Latin America, Europe, Africa, the Middle East, and Asia-Pacific. Halliburton is headquartered in Houston, Texas. Jeff Miller serves as the company’s chairman, president, and chief executive officer.

Halliburton Q4 2021 Earnings Call Transcript

Key Takeaways

• Multiyear upcycle: Halliburton anticipates a sustained industry upcycle as underinvestment in production meets resurgent energy demand, enabling profitable growth, margin expansion and accelerated free cash flow.
• Strong Q4 and 2021 financials: Q4 revenue rose 11% sequentially to $4.3 billion with operating income up 20% to $550 million, while full‐year revenue was $15.3 billion and operating income $1.8 billion, with 15% C&P and 12% D&E margins.
• North America tightening & eFrac: U.S. completion‐fleet utilization nears 90%, driving pricing gains on both Tier-4 diesel and low‐emission electric fracturing fleets and an expected >30% incremental margin in Q1 2022.
• International momentum: Revenue and operating income grew every quarter in 2021, supported by a 23% YoY rig count increase in Q4, as operators prioritize short‐cycle wellbore projects that boost service intensity.
• Enhanced capital returns: The board raised the quarterly dividend to $0.12, redeemed $600 million of 2025 notes (totaling $1.8 billion since 2020), and plans 5–6% revenue CapEx while targeting ~2× net leverage and further shareholder distributions.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by, and Welcome to Halliburton's fourth quarter 2021 earnings call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to David Coleman, Head of Investor Relations. Please go ahead, sir.

[David Coleman, Senior Director of Investor Relations at Halliburton]

Good morning, and welcome to the Halliburton fourth quarter 2021 conference call. As a reminder, today's call is being webcast, and a replay will be available on Halliburton's website for seven days. Joining me today are Jeff Miller, Chairman, President, and CEO, and Lance Loeffler, CFO. Some of our comments today 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, 2020, Form 10-Q for the quarter ended September 30th, 2021, 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 statement for any reason. Our comments today also include non-GAAP financial measures.

[David Coleman, Senior Director of Investor Relations at Halliburton]

Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our fourth quarter earnings release or in the quarterly results and presentation section of our website. After our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A period in order to allow time for others who may be in the queue. Now, I'll turn the call over to Jeff.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Thank you, David, and good morning, everyone. 2021 finished strong for Halliburton, and I'm excited about the accelerating up cycle as we enter 2022. We have an effective value proposition and benefit from increasing activity both in North America and international markets. At the same time, we see improving service pricing in both markets. Throughout this up cycle, I expect Halliburton to grow profitably, accelerate free cash flow generation, strengthen our balance sheet, and increase cash returns to shareholders. First, I want to take a minute and recognize the men and women of Halliburton for their execution on every dimension of our business: safety, service quality, and financial results. In spite of global complexity in 2021, you outperformed. To all of our employees, thank you. I believe 2022 will be a strong year for our industry, and especially for Halliburton.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

While global energy demand and economic growth demonstrated resilience, global energy supply has shown its fragility. The impact of several years of underinvestment in new production is now apparent, and the structural requirement to invest around the wellbore is crystal clear. We see increasing customer urgency and a pivot back to what creates value for Halliburton. Our customers demand reliable execution, dependable supply chains, effective technology, and a collaborative service provider to maximize asset value. This is at the core of Halliburton's unique value proposition. First, I'll highlight some of our 2021 accomplishments. We finished the year with total company revenue of $15.3 billion and operating income of $1.8 billion. Both of Halliburton's divisions grew revenue and margins this year. Our Completion and Production Division finished the year with 15% operating margin, driven by activity improvement despite inflationary pressures.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

We expect to build on this margin growth in 2022 as global activity and pricing improve. Our Drilling and Evaluation Division margins remained firmly in double digits throughout 2021 and achieved full year margins of 12% for the first time since 2014. This is a good demonstration of our steady march forward, and we are not done. I am pleased with the trajectory of our international business. International revenue and operating income increased every quarter in 2021. In North America, Halliburton achieved 36% incrementals year-on-year as U.S. land activity rebounded and we maximized the value of our business. We announced our science-based emission reduction targets, added 11 new participating companies to Halliburton Labs, and were named to the Dow Jones Sustainability Indices, which highlights the top 10% most sustainable companies in each industry.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Finally, we generated strong free cash flow of $1.4 billion and ended the year with $3 billion of cash on hand even after the retirement of $685 million of long-term debt in 2021. Next, let me share a few highlights from our fourth quarter performance. Total company revenue increased 11% and operating income grew 20% sequentially. Our Completion and Production Division revenue increased 10% sequentially and operating income increased 8%, with completion tool sales showing the highest third to fourth quarter improvement in the last 15 years. Equally important, our current completion tool order book has more than doubled from a year ago, signaling strong growth and profitability again in 2022.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Our Drilling and Evaluation Division grew revenue 11%, which outperformed the global rig count growth for the quarter and delivered over 300 basis points of sequential margin improvement. International and North America revenue grew 11% and 10%, respectively, due to strong year-end sales and activity increases across all regions. Building on this strong foundation of disciplined execution, today, we announced two important strategic steps we are taking to further create value for our shareholders. First, our board of directors increased our quarterly dividend to $0.12 per share in the first quarter of 2022. This action reflects our confidence in Halliburton's strong cash generation capacity. Second, in order to accelerate debt retirement and strengthen our balance sheet, we are redeeming $600 million of our $1 billion in debt maturing in 2025.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

When these notes are redeemed in February, we will have retired $1.8 billion of debt since the beginning of 2020. These steps demonstrate my confidence in our business, customers, employees, and value proposition. As I discussed with you on recent earnings calls, I expect the macro industry environment to remain supportive. As we saw in 2021, the International and North America markets will continue their simultaneous growth. This is momentum that I have not seen in a long time. With this momentum, we plan to execute our unique strategic priorities, deliver profitable growth internationally, maximize value in North America, accelerate digital and automation deployment, improve capital efficiency, and advance a sustainable energy future. Let's discuss how we plan to do this. First, internationally, our strategy is to deliver profitable growth.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

We allocate capital to the highest returns opportunities, which means we are selective on what we bid for and when. Our D&E margin performance in 2021 is a demonstration of this discipline. We continue to invest in technology, both digital and hardware, that maximizes asset value. In 2021, we brought to market over 50 new technologies, including our iStar intelligent formation evaluation platform and the next generation of our iCruise system for harsh drilling environments. Our multi-year investment in drilling technologies is paying off, and we expect to outgrow the market as international drilling activity ramps up. We have unique international growth opportunities in specialty chemicals and artificial lift. As Halliburton expands the international footprint of these businesses, we have a pipeline of opportunities that are longer cycle and should be margin accretive.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Halliburton's size, scale, and sophisticated supply chain and HR teams reliably execute for our customers in the face of supply shortages and labor tightness. Second, in the structurally smaller North American market, our strategy is to maximize cash flow, and it dictates how we approach our North America business. Strong cash flow starts with strong margins, and Halliburton's margins are the best in class. We completed the most aggressive set of structural cost reductions in our history. We also made significant changes to our processes that drive higher contribution margin, for example, how we perform equipment maintenance and provide engineering support. These changes give us meaningful operating leverage as North American activity accelerates. We consistently replace equipment as it wears out and avoid outsized recapitalization requirements. We have the right type of equipment. We are the leaders in the low emissions equipment segment.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

We believe this gives us a structural pricing advantage as operators are willing to pay a premium for differentiated, more environmentally friendly solutions. Our second generation ZEUS electric fracturing technology is working in the field today and delivers results for a growing list of customers. Importantly, in addition to emissions reduction, electric fracturing technology provides unprecedented operational control and precision. For example, ZEUS makes pumping rate adjustments at least four times faster than a diesel pump, allowing us to respond to surface and subsurface changes more quickly than with a conventional frac spread and precisely execute the job design. We expect fully electric locations to become a larger share of the market. Halliburton has the right kit, including our ZEUS electric pumping unit, the ExpressBlend blending system, the eWinch electric wireline unit, and the Electric Tech Command Center to meet the market demand for lower emitting fracturing operations.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

We develop differentiated technologies that focus around the wellbore. As the oil price and customer urgency increase, these technologies become more valuable to operators. For example, our SmartFleet intelligent fracturing solution helps customers optimize fracturing performance and maximize production. Several large operators will have SmartFleet working on multi-pad completion programs this year. Additionally, SmartFleet delivers fully automated frac operations, which ensures more consistent fracture placement on every stage, improves cluster uniformity, and manages offset frac hits. Finally, I want to highlight the importance of our well construction and production service lines. They each have unique competitive advantage and technology to maximize value in North America. Third, our strategy is to advance digitalization and automation in all aspects of our business. Our digital investments drive higher margins through customer purchases of software, smarter tools and answer products, and cost savings for Halliburton. Let me give you an example.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Currently, 100% of Halliburton's drilling jobs run on a cloud-based real-time system to deliver data and visualization to our customers around the world. Close to 60% of icruise operations are fully automated, allowing for up to a 70% reduction in headcount per rig. Automation alleviates health and safety concerns by removing personnel from rigs, accelerates service delivery improvements, and reduces the environmental footprint of oil and gas operations. Our fourth strategic priority is to drive capital efficiency across the balance sheet. This positions Halliburton to generate industry-leading returns and strong free cash flow as markets grow. We will optimize the working capital required to grow our business and maintain our CapEx in the range of 5%-6% of revenue. Our business thrives in this range because of our research and development efforts and process changes.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

These allow us to build tools cheaper, lengthen their run life, and move assets quicker to where they make the most money. Our final strategic priority is to advance a sustainable energy future. Our clean energy accelerator, Halliburton Labs, continues to add new participants. We help these early-stage companies achieve important scaling milestones and significantly increase their enterprise value. Through Halliburton Labs, we are actively participating in the clean energy space without committing shareholder capital. Halliburton will evolve as energy evolves, and we will add to our already expanding opportunities to participate as clean energy value chains mature. However, we will do so consistent with our capital allocation strategy and mindful of our commitment to deliver industry-leading returns and free cash flow generation. We will proceed with patience, discipline, and resolve. Now, let's review our fourth quarter 2021 performance and expectations for 2022.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

As OPEC Plus's spare capacity returns to normalized levels this year, we believe sufficient pent-up oil demand will support a call on both international and U.S. production and lead to increased activity. International activity accelerated in most markets in the second half of the year and finished strong in the fourth quarter with a 23% rig count increase year-on-year. All Halliburton regions grew revenue, led by Asia Pacific, the Middle East, and Africa, with both of our divisions contributing to the revenue and margin expansion. I'm excited about our future international growth. Despite typical first quarter seasonality, we are starting 2022 a lot higher than where we entered 2021. I expect our customers' international spend to increase by mid-teens% this year.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

We anticipate projects in the Middle East, Russia, and Latin America to attract the most investment, with activity increases in Africa and Europe limited to a few markets. Asset owners are eager to reverse base production declines caused by multiple years of underinvestment. We expect that operators will focus on shorter cycle production opportunities to meet increasing oil demand. This disproportionately benefits Halliburton, as these short cycle barrels require higher service intensity and spending directly focused on the wellbore as opposed to long cycle infrastructure investments. In 2022, we expect to deliver steady, profitable growth across the international markets. Our tender pipeline is strong. We anticipate higher utilization for our existing equipment in busy markets like the Middle East, Russia, and Latin America. We plan to allocate our capital dollars to the opportunities that generate the highest return.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Given the tool tightness that exists today in some product lines and geographies, we intend to strategically reallocate assets to drive improved utilization and returns. A tightening market focuses our ongoing pricing discussions with customers. We see pricing traction on new work and contract renewals, including integrated contracts. Additionally, we have introduced pay-for-performance models, negotiated favorable terms and conditions, and applied price escalation clauses. While large tenders remain competitive, we are consistent with our strategy to pursue profitable growth. Turning to North America. In 2021, the recovery in North America was faster and more pronounced than in the international markets. In the fourth quarter, U.S. land rig count increased 84% year-on-year, and drilling activity outpaced completions as operators prepared well inventory for 2022 programs.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Completed stage count growth moderated slightly due to the holidays, sand supply tightness, and lower efficiency levels typically experienced in the winter months. In the fourth quarter, we finished the planned upgrade of all fracturing fleets to the next generation fluid-end technology that extends the life of our equipment and helps reduce maintenance cost. We expect a busy 2022 in North America. Given a strong commodity price environment, we anticipate North America customer spending to grow more than 25% year-on-year. We believe the highest increase will come from private operators. Public E&Ps will continue to prioritize returns while delivering production into a supportive market. In North America, Halliburton uniquely benefits as the largest oilfield services provider in the largest oilfield services market in the world. We anticipate solid net pricing gains in North America throughout 2022. Here's why.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

The North America completions market is approaching 90% utilization, and Halliburton is sold out. Pricing for our fracturing fleets is moving higher across the board, both for our market-leading low emissions equipment and our Tier 4 diesel fleets. As a result, we expect to see over 30% incrementals in our hydraulic fracturing business in the first quarter. Anticipated demand growth for equipment provides a runway for us to increase pricing throughout the year. We expect some market-wide operational efficiencies afforded by completing a backlog of DUCs in 2021 to reverse as frac fleets return to the usual mode of following drilling rigs. This will further increase the call on equipment as operators add rigs throughout the year. Finally, during the tendering season, we secured net pricing increases across several different non-frac product service lines, drilling, cementing, fluids, drill bits, and artificial lift.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

As activity accelerates, the market is seeing tightness related to trucking, labor, sand, and other inputs. While we pass these increased costs on to operators, Halliburton has effective solutions that minimize the operational impact of this tightness and provide reliable execution for our customers. As an example, in 2021, we expanded our collaboration with Vorto and now benefit from 5F, the largest integrated transportation platform in the oil and gas industry. This platform has several thousand drivers, hundreds of carriers, and a chain of asset maintenance yards. It allows us to effectively manage trucking inflation and availability constraints and significantly reduce logistics-related non-productive time. Our human resources team and systems effectively mitigate local labor tightness. We recruit nationally and hire, train, and manage a commuter workforce that makes up to 80% of our personnel in some areas.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

There is no doubt the much-anticipated multiyear upcycle is now underway. North America production growth remains capped by operators' capital discipline, while meaningful international production growth is challenged by years of underinvestment. Energy demand has proven its resilience, fueled by pent-up economic growth and a global desire to return to normalcy. This is a fantastic set of conditions for Halliburton. In a strong commodity price environment with limited production growth options, operators turn to short-cycle barrels and increase spend around the wellbore. Our value proposition works. We have the right strategies for both international and North American markets.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

We are leaders in digital and automation, and we drive capital efficiency while advancing a sustainable energy future. I fully expect that Halliburton will accelerate cash flow generation, strengthen our balance sheet, and increase cash returns to shareholders in this upcycle. Now, I'll turn the call over to Lance to provide more details on our fourth quarter financial results. Lance?

[Lance Loeffler, EVP and CFO at Halliburton]

Thank you, David, and good morning, everyone. Let me begin with a summary of our fourth quarter results compared to the third quarter of 2021. Total company revenue for the quarter was $4.3 billion, an increase of 11%. Operating income was $550 million, a 20% increase compared to the adjusted operating income of $458 million in the third quarter. These results were primarily driven by increased global drilling activity and end-of-year product and software sales. Now let me discuss our division results in a little more detail. Starting with our Completion and Production Division, revenue was $2.4 billion, an increase of 10%, while operating income was $347 million or an 8% increase.

[Lance Loeffler, EVP and CFO at Halliburton]

These results were primarily driven by higher completion tool sales globally, as well as increased pressure pumping services in North America Land and the Middle East/Asia region. These improvements were partially offset by reduced stimulation activity in Latin America, Canada, and the Gulf of Mexico, lower pipeline services in Europe, Africa, CIS, and Asia, reduced well intervention services in Brazil, and decreased artificial lift activity in North America Land. In our Drilling and Evaluation Division, revenue was $1.9 billion, an increase of 11%, while operating income was $269 million or a 45% increase. These results were due to increased drilling-related services globally, wireline sales in Guyana, improved project management activity in Ecuador and India, increased wireline activity in the Middle East/Asia region, and higher software sales in Latin America and Middle East/Asia.

[Lance Loeffler, EVP and CFO at Halliburton]

Partially offsetting these increases were decreased project management activity and testing services in Mexico, as well as lower drilling-related activity in Russia. Moving on to our geographic results. In North America, revenue increased 10%. This increase was primarily driven by higher pressure pumping activity and drilling-related services in North America Land, in addition to higher completion tool sales and fluid services in the Gulf of Mexico. These increases were partially offset by reduced stimulation activity in Canada and the Gulf of Mexico, coupled with reduced artificial lift activity in North America Land. Turning to Latin America, revenue increased 7% sequentially. This improvement was driven by higher project management activity in Ecuador, increased drilling-related services in Mexico, increased activity across multiple product service lines in Brazil, wireline sales in Guyana, and higher activity across multiple product service lines in Colombia.

[Lance Loeffler, EVP and CFO at Halliburton]

These increases were partially offset by reduced project management and stimulation activity and testing services in Mexico. In Europe, Africa, CIS, revenue increased 8% sequentially. These results were partially driven by higher software and completion tool sales across the region, improved activity across multiple product service lines in Norway and Egypt, and increased well control activity in Nigeria. These improvements were partially offset by reduced activity in multiple product service lines in Russia, reduced pipeline services and well construction activity in the United Kingdom, and decreased stimulation activity in the Congo. In the Middle East/Asia region, revenue increased 16%, resulting from higher completion tool sales and wireline activity across the region, improved well construction services in Saudi Arabia and Oman, higher software sales in Kuwait and China, improved project management activity in India, and increased stimulation activity throughout Asia.

[Lance Loeffler, EVP and CFO at Halliburton]

These increases were partially offset by reduced pipeline services in Asia, along with lower activity across multiple product service lines in Vietnam. Now I'd like to address some additional financial items. In the fourth quarter, our corporate and other expense totaled $66 million, which was slightly higher than expected due to an increase in legal reserves. For the first quarter, we expect our corporate expense to be about $60 million. Net interest expense for the quarter was $108 million, slightly lower than anticipated due to higher interest income from our cash balance. Today, we announced our decision to redeem $600 million of the 2025 senior notes using cash on hand. This action will reduce future cash interest expense and reflects our desire to continue reducing debt balances.

[Lance Loeffler, EVP and CFO at Halliburton]

As a result of the debt retirement in late February, our net interest expense should remain roughly flat in the first quarter. During the quarter, we recognized a non-cash gain of approximately $500 million due to the partial release of a valuation allowance on our deferred tax assets. This reversal is based on the improved market conditions and reflects our increased expectation to utilize these deferred tax assets going forward. Our normalized effective tax rate for the fourth quarter came in at approximately 23%. Based on our anticipated geographic earnings mix, we expect our 2022 first quarter effective tax rate to be approximately the same. Capital expenditures for the quarter were $316 million, with our 2021 full year CapEx totaling approximately $800 million.

[Lance Loeffler, EVP and CFO at Halliburton]

In 2022, we intend to increase our capital expenditures to approximately $1 billion while remaining within our target of 5%-6% of revenue. We believe that this level of spend will equip us well to execute on our strategic priorities and take advantage of the accelerating market recovery. Turning to cash flow, we generated nearly $700 million of cash from operations during the fourth quarter and delivered approximately $1.4 billion of free cash flow for the full year. As a result, we ended the year with approximately $3 billion in cash. I've spoken before about our ability to concurrently reduce debt and increase the return of cash to shareholders, and today we put that into action. This is a great start to a longer-term goal of returning more cash to shareholders.

[Lance Loeffler, EVP and CFO at Halliburton]

Now, let me provide you with some comments on how we see the first quarter playing out. As is typical, our results will be subject to weather-related seasonality and the roll-off of year-end product sales, which will mostly impact our international and Gulf of Mexico businesses. However, we expect pricing recovery in North America to help offset these dynamics. As a result, in our Completion and Production Division, we anticipate sequential revenue and margins to be essentially flat to the fourth quarter. In our Drilling and Evaluation Division, we expect revenue to decrease in the mid-single digits sequentially, while margins are expected to be flat to down 50 basis points. I'd now like to turn the call back over to Jeff. Jeff?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Thanks, Lance. To summarize our discussion today, we see customer urgency and demand for our services increasing internationally and in North America. We expect our strong international business to continue its profitable growth as activity ramps up throughout the year. In the critical North America market, we expect our business to grow and improve margins. We prioritize our investments to the highest returns opportunities and remain committed to capital efficiency. We continue to play a role in advancing cleaner and more affordable energy solutions. In 2022, I expect Halliburton to deliver margin expansion, industry-leading returns, and solid free cash flow. Now let's open it up for questions.

[Operator]

Thank you. To ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from James West, Evercore ISI. Your line is open.

[James West, Senior Managing Director at Evercore ISI]

Hey, good morning, guys.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Morning, James.

[Lance Loeffler, EVP and CFO at Halliburton]

Morning, James.

[James West, Senior Managing Director at Evercore ISI]

Jeff, maybe just to kick us off here, could you talk a bit about the cadence of this cycle? You mentioned, you know, several times growth, and you also mentioned a keyword which is urgency from customers. I think that's gonna be something that's very important when we think about pricing margins, et cetera. Could you talk about how you see both North America and the international markets and the cadence of the increases in activity growth and how you and the broader industry, but you particularly, are expecting things to unfold here as we go through 2022 and into 2023 and beyond?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Yeah. Well, thanks, James. Look, I really like the micro setup, the macro setup, and I've said that before. You know, what we really see is the fragility, as I described it, of supply and the returning demand. I think there are factors that, you know, the under-investment internationally means that has to be recovered over a longer period of time. I think a lot of the return expectations of this industry in North America are still in place, and such that is a bit of a cap on production growth. Nevertheless, the activity, that just means a longer upcycle in my view, and I feel really good about the cadence, meaning it continues to move up this year, next year and beyond.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

The way that sets up for us is, you know, we have an opportunity to take advantage of the operating leverage that's already in our business. The pricing environment will be good throughout that period as equipment gets tighter everywhere and our technology is more valuable to customers in this kind of environment. Yes, activity, I believe, does ramp, and it's gonna be the kind of short cycle barrels that drive the most activity for us because this is, you know, urgently trying to return barrels to market under those sort of constraints, very good for us. As we look out to 2023, I'll just start there, look out to 2023, you know, I don't see 2023 as an endpoint by any means. I think the road goes on well beyond that. I can tell you what we've talked about for 2023 is biased higher.

[James West, Senior Managing Director at Evercore ISI]

Right. Okay. Makes sense to me. That's clearly in line with our expectations. How are Jeff and Lance with the dividend increase, solid dividend increase, how do you think about and how are you guys thinking about shareholder returns going forward as we accelerate into this upcycle?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Yeah. Look, thanks, James. I'll take that. Look, those were important actions that we took today, and we expect to continue finding opportunities to return more cash to shareholders and pay down debt. You know, and as we pay down debt, that creates headroom in our fixed payments as we pay down debt.

[James West, Senior Managing Director at Evercore ISI]

Sure. Yeah.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Yeah, think about it. We've repaid $1.8 billion of debt since January of 2020, and we get through 2023 and 2025. As debt is paid, the next maturity is not until 2030. You know, I fully expect to continue growing shareholder distributions as the upcycle accelerates.

[James West, Senior Managing Director at Evercore ISI]

Right. Okay. Thanks, Jeff.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Thank you.

[Operator]

Our next call comes from Dave Anderson with Barclays. Your line is open.

[Dave Anderson, Managing Director at Barclays]

Hey, good morning, gentlemen. Just wanna ask about C&P margins during the quarter and then thinking about the progression for next year. You know, you highlighted completion tool sales and the margins kind of slipped a bit during the quarter. Jeff, in your prepared remarks, you had talked about completion tool orders have doubled since last year. I'm just trying to understand what all that means in terms of the mix. Obviously, we have the kind of the pressure pumping pricing in there. If you could just kind of help us understand how that margin should kind of move.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Well, look, yeah, I mean, as we look at 2021, for example, 15% margins, you know, I'm pleased with those. We got a lot of important work done in our frac business in Q4, which I talked about in my comments, but getting fluid ends installed. Raising prices involves moving equipment around, and so we probably had 10% of our fleet moving as we raised price and got moved to different customers that were happy with the new price. You know, that's Q4. As we look at the order book doubling in completion tools, that's really a look ahead to 2022, and, you know, that's very positive for 2022 to see those types of longer lead items building in our order book.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

You know, I think when we think about progression in 2022, you know, I expect to see 30% incrementals in our frac business in North America in 2022 in first quarter. What that's, you know, mixed in with that are the completion tools that don't repeat in Q1. The reality is we are filling a big hole, largely with recurring pricing and the kind of sticky things that we plan to build on, and we still get the 2022 doubling of the order book at some point during the year of 2022 in completion tools.

[Dave Anderson, Managing Director at Barclays]

Got it.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

I hope that's some clarity.

[Dave Anderson, Managing Director at Barclays]

That's great, Jeff. Thanks. If I could just shift, well, I guess somewhat of a related question. I wanna ask about kind of further e-frac deployment, and kind of how you see that developing over the next several years. It's pretty clear that E&Ps are increasingly looking to reduce emissions. They're gonna need to reduce emissions. e-frac is clearly part of that solution, but of course, it costs more with the power source. I think you're at, like, five or six fleets today. Maybe you can just kinda update us where you are there. I'm just kind of wondering, kind of thinking out the next 12-18 months, is it possible you could kind of double that deployment? I guess even more important, do you think E&Ps are willing to underwrite this with longer term contracts?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Let me unpack that a little bit. You know, just from an e-fleet deployment standpoint, we view e-fleets as replacements for our current equipment. The pacing of that is consistent with how we think about sort of fleet management over time. Obviously, that is contingent upon getting the terms and conditions and pricing that are, you know, clearly returning above what anything else is returning, and that's what motivates us there. All of that lives inside of our CapEx outlook of 5%-6% of revenue. I just wanna keep all of that sort of in the right frame. We think about power, however, that is a unique piece of this puzzle. What I expect happens with electric broadly is, yes, it grows. Our share will grow of that.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

I think we've got fantastic equipment in the market working today. The power piece, we're power agnostic. If you recall over time, I've always said the issue here was the power, who owns the power. I think we've partnered with a very good firm, a successful firm that has modular power such that over time, as operators can optimize power sources, meaning the grid, our partner has the ability to scale that back and sort of optimize along with clients. I think that's the sort of unique power component, that we've solved for with VoltaGrid.

[Dave Anderson, Managing Director at Barclays]

Great. Thank you very much, Jeff.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Thanks, Dave.

[Operator]

Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Hey, good morning, team. Thanks for taking the time here. Jeff, I want to start on the 400 basis point margin increase target for 2023. As you look at that, what do you think represents the biggest risk to achieving it? How do you feel about upside scenarios and what factors could drive that?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Yeah, look, thanks, Neil. I'm excited and encouraged about what I see more so today than I was before, which was all the—it's basically the simultaneous growth in North America and international and the, you know, effectively the demand for equipment that we see, which now allows both activity and price to move at the same time. I don't, you know, from a risk perspective, look, I think that we're in a good place to manage those risks that might be out there. You know, whether it's a range of things, but all of those things appear to be manageable, particularly given how important producing oil clearly is to really our way of life, but also the markets see that. I think that demand for activity will be there.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

You know, clearly that's going to be biased higher at this point, you know, as we look out to 2023. I think we're in a great position to take advantage of all of those, you know, things that happen, whether it's price and tightness, it's our technology. There's more demand for our technology in this kind of environment because it is our technology that drilling technology, for example, that help operators find more barrels nearby the wellbore, helps them do a lot of things that are important to them to, you know, accelerate their own production at a you know, effective price.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Thanks, Jeff. There's been a lot of questions about where we are in terms of frac fleet utilization. I'd love your perspective on that. How do you see this market as tight? If you'd be willing to put a number on utilization. How should we think about net service pricing in U.S. frac for the back half of 2022 and into 2023, especially as you get some of these new build low emission frac fleets starting to enter the market once again?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Well, you know, we see it as close to 90%, utilized as a market for equipment that's existing today. It doesn't take much increase in activity to continue to tighten that. I see that tightening more so in the back half of next year. You know, the electric equipment as it comes into the market, I mean, a testament to our R&D organization, but we were able to bring that technology to market very quickly. It's best in class, and that's one of the reasons it's going to work. That team, along with partners, solve for sort of the power dilemma. I think we're in a great place to bring equipment to market. Clearly, that is new capital into the market, which requires higher returns than what we certainly have seen.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

I think CapEx, that's going to be the requirement for higher returns. I think capital is, you know, capital for building equipment clearly in short supply, and particularly because there's a lot of repair to come for returns in North America. A lot of that informs our strategy of maximizing, you know, value in North America. Means we approach it differently. It's not can we build the most equipment, it's can we maximize the most cash flow out of that market? We think electric fleets positioned the right way help us do that.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Right. Thank you, sir.

[Operator]

Our next question comes from Arun Jayaram with J.P. Morgan. Your line is open.

[Arun Jayaram, Research Analyst covering Oilfield Services and Energy Stocks at JPMorgan]

Yeah, good morning. My first question is, you guys have repositioned assets frac fleets to improve utilization returns. I just wanted to ask, as absent pricing gains, what kind of tailwinds do you think that these types of actions could provide to margins as well as we think about, you know, adoption of SmartFleet and other, Halliburton 4.0 offerings?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Well, we move equipment to raise margins, and I expect that we will see that kind of margin improvement into 2022. You know, You mentioned SmartFleet. I think that's a key component of what makes Halliburton unique in the fracs business in North America. It's one of the unique things of being, you know, of our large peers, we're the only one in the frac business in North America, and that allows our technology budget is meaningful. I think over time, applied consistently, you know, R&D investment has always been what moves this industry both from a productivity standpoint and a return standpoint for us.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

You know, SmartFleet being but an example of what that R&D at scale looks like when it's applied to North America. Yes, I think that does contribute to margins, as does electric fleets, as do many other sort of technology solutions that we're working on all of the time.

[Arun Jayaram, Research Analyst covering Oilfield Services and Energy Stocks at JPMorgan]

Fair enough. My second question is, you guys mentioned in your prepared remarks about, you know, what's going on with DUCs. You know, DUCs have been down for 18 months in a row, and you're starting to see, you know, the mix of drilling increase over time. I know that DUCs have been a tailwind for operators and led to, call it, lower frac needs in, you know, last year and the year before. I know it's difficult to measure, but I wanted to know if you could maybe measure or quantify what kind of tailwind do you think this could provide to frac demand if the current fleet counts around 235 or so?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Well, you're thinking about it the right way. I expect that it does increase demand just because there's going to be more disruption in the system, meaning fleets will have to follow rigs. That will then create demand for more fleets. Yes, if we're at 90%, clearly we sort of run to the end of that quite quickly and expect the entire market needs to get better from a price standpoint. I expect what we will see that as it gets, you know, we're seeing it now. I think it's a dynamic that will continue, certainly throughout the course of this year.

[Arun Jayaram, Research Analyst covering Oilfield Services and Energy Stocks at JPMorgan]

Thanks a lot.

[Operator]

Our next question comes from Chase Mulvehill with Bank of America. Your line is open.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Hey, good morning.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Good morning, Chase.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Yeah. Good morning, Lance. Lance, I guess maybe this question is for you. Just thinking about the 1Q guide. You know, I guess I can kind of connect the dots with the C&P margins being flat because you've got completion tools sales kind of rolling off and obviously frac getting better. But thinking about the D&E side, you know, resilient margins as we get into 1Q, and you know, typically you have software sales in the 4Q.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Just maybe help us kind of connect the dots here between 4Q and 1Q with kind of flat to down 50 bps on the D&E side. Because typically you see some seasonality in the Eastern Hemisphere, and you have software sales that will be rolling off. Do you have some, maybe some software sales that kind of linger in the first quarter? Or just kind of help us understand the resiliency of margins in the first quarter.

[Lance Loeffler, EVP and CFO at Halliburton]

We do, Chase. It's a good question. We do. You know, in our software business, the way that we recognize revenue is sort of spread now between the fourth quarter and the first quarter. We still have some resiliency from the software sales. I wouldn't discount you know, what we're doing on the drilling side. You heard Jeff talk about it in his prepared remarks. We're really excited about what that means for our business. I mean, clearly we have the weather-driven seasonality that will continue, and that's always something that exists during the real hard winter months in places like the North Sea and Russia in particular. I really think that we're excited about what the drilling business and the change that we're making and the impact that's coming from sort of that investment that we made in re-kitting Sperry, for example, is really beginning to pay off.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Okay, perfect. And then a follow-up, you know, obviously you said multiple times here, you know, 90% utilization of frac. You know, but there is some cold stacked equipment that may or may not come off the sidelines. Obviously, it depends on pricing. You know, I guess maybe could you give us some comments or your comments around, you know, cold stacked equipment. You know, how much pricing would have to move for people to spend, you know, $10+ million because you'd probably convert some of those from Tier 2 to Tier 4 DGB. So just how much would pricing have to move, you know, for the industry to start kind of reactivating and spending more on cold stack reactivations?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Look, I think prices would have to move a long way. Some of the conversion you're talking about, that's dramatic. That's open heart surgery. Getting from Tier 2 to Tier 4 is not something that happens simply. It's really going against the direction the entire market's going, which is towards environmentally friendly equipment. Things that come off the bench aren't gonna be in that category for sure. I think the cost of getting things off the bench, you know, for what's there, is gonna be a lot higher than people think. I think that's a barrier to that coming back. A lot of that equipment was consumed in the last cycle as spare parts and all of the rest of that. I think there's a lot less of that, and its cost is much higher.

[Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America]

Okay, perfect. I'll turn it back over. Thanks, Jeff. Thanks, Lance.

[Operator]

Our next question comes from Scott Gruber with Citigroup. Your line is open.

[Scott Gruber, Managing Director and Senior Analyst at Citigroup]

Yes, good morning.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Morning, Scott.

[Scott Gruber, Managing Director and Senior Analyst at Citigroup]

I wanna come back to the shareholder return question. Jeff, you commented on further actions to come down the road, which is great to hear. Just given the inherent volatility in the market, is the next move likely to be a buyback or a variable dividend? You know, we've also seen many of your E&P customers commit to returning a certain percentage of cash flow or free cash flow. Is that something Halliburton would consider, especially in the context of a multi-year upcycle?

[Lance Loeffler, EVP and CFO at Halliburton]

Sure, Scott, this is Lance. Look, we think about it very similar to sort of the line of questioning you're going down. I mean, look, today I think this is a first step in a long line of other things that we expect to do to really accelerate cash returns to shareholders. It'll come in the form of both increasing the dividend over time, but doing it responsibly. With any excess free cash flow that we would like to dedicate, we may you know, reinstitute share repurchases. I think it will be a balance. We'll see what it's like when it gets there. Not a big fan of a variable dividend today.

[Lance Loeffler, EVP and CFO at Halliburton]

Feel like we have the right things in place, and our communications to the street are pretty clear around how we're managing this business, prioritizing free cash flow. We'll be really good stewards about how we send it back to shareholders.

[Scott Gruber, Managing Director and Senior Analyst at Citigroup]

Got it. I also wanna come back to today's question on e-frac and ask a little bit broader question. You know, we got the CapEx figure for the year, and you're keeping CapEx below the 6% level. There's been this kinda outstanding question for Halliburton, you know, as the frac market recovers, you know, do your CapEx needs rise, and you have to go above that level? I guess the real question is, are you happy with the cadence of fleet renewal, you know, within the fleet?

[Scott Gruber, Managing Director and Senior Analyst at Citigroup]

You know, are you able to kinda keep up your competitiveness with the pace of spend embedded in the budget this year? You know, just as you think about over the medium term, you know, do you think you can keep up your competitiveness, you know, with the cadence of renewal in the frac as it builds into that 6%, sort of 6% of reinvestment?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Yeah. Yes, we do is the answer. I believe we thrive in this type of environment and managing or maintaining CapEx where it is or at 5%-6% of revenue. You know, in my view, this is very much a show-me story, and we expect to deliver returns. We do things ratably and strategically. We view North America as maximizing value in North America. That means managing the right level of spend, the right type of technology, the right pacing of equipment, clearly the right pricing for equipment, and making the right cash flow from that equipment. You know, the target is we are very consistent around our strategy. That strategy is actually quite exciting for us to pursue a strategy that delivers the most free cash flow and grows and improves margin.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

I view this as a margin cycle, not a build cycle. Like I said, our team's excited about pursuing that, delivering on that. That's why we're very comfortable with sort of that balance of the right level of investment while we invest in D&E and international businesses at the same time. I mean, that all of that fits together into how do we deliver and our plan to deliver, accelerating free cash flow.

[Scott Gruber, Managing Director and Senior Analyst at Citigroup]

That's great color, Jeff. Appreciate it.

[Operator]

Our next question comes from Connor Lynagh with Morgan Stanley. Your line is open.

[Connor Lynagh, Executive Director at Morgan Stanley]

Yeah, thanks. I wanted to return to the potential shareholder returns. Lance, I wanted to just clarify a comment that you made in regards to excess free cash flow. I mean, how should we think about what that is? You know, is there a level of cash balance that you wanna maintain in the business? Is there a sort of standard amount of delevering you want to occur over the next few years here? Basically, how would you define that for people?

[Lance Loeffler, EVP and CFO at Halliburton]

Yeah, good question. Appreciate the follow-up. I think today, you know, a minimum cash balance for us to run our business is around $2 billion, give or take. We're always sensitive a little bit to that, or mindful of it. I would say, you know, I've been pretty clear about what we wanna do in terms of strengthening the balance sheet. We need to be closer to 2x debt to EBITDA. We spent a lot of time on this call, I know Jeff has, talking about the trajectory of the denominator in that equation. We have work to do on the numerator. We expect to continue to find ways to attack gross debt.

[Lance Loeffler, EVP and CFO at Halliburton]

I think, you know, starting with retiring the 2023s and what's left of the 2025s post redemption is a good target.

[Connor Lynagh, Executive Director at Morgan Stanley]

Got it, maybe just switching gears a little bit here. Drilling and Evaluation margin's very strong, and it doesn't seem like you're expecting that much of a follow-up. I appreciate the software accounting dynamics, but you're still, you know, year-over-year looking at something 250 to 300 basis points above where you were in 2021. Just two parts to this. Is that a good bogey for how we should think about the rest of the year in Drilling and Evaluation? Just, you know, as we think structurally about the return of international and the like, you know, how should we think about the potential profitability cycle over cycle? It certainly is trending a lot higher right now, so just wanna make sure we understand the moving pieces there.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Well, look, it's a great starting point, and we expect it to trend higher over time and, you know, as we move through. This is, you know, the result of technology investment and excellent, you know, drilling business technology, collaborative approach with our clients, our value proposition, and the other service lines that are in D&E, very strong service lines, drilling fluids, bits. I won't try to name them all here, but that very strong group of businesses. I think what you're seeing in the margin is a demonstration of the improvement in capital velocity that we saw from the new technology in Sperry, also the improved capabilities, whether it's LWD or the ability to, you know, manage the data around that with the 3D inversion.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

There's a whole series of things that we've been working on, and actually, have many more things left to deliver in that business during 2022. You know, our expectations are that, you know, we're starting at a higher point, or we're starting the year lower, but we are moving to a higher point, and I think we'll see that, you know, sort of repeat. Great expectations for that business.

[Connor Lynagh, Executive Director at Morgan Stanley]

Good to hear. Thank you.

[Operator]

Our next question comes from Ian Macpherson with Piper Sandler. Your line is open.

[Ian Macpherson, Equity Research Analyst at Piper Sandler]

Thanks. Good morning, Jeff and Lance.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Good morning, Ian. Good morning.

[Ian Macpherson, Equity Research Analyst at Piper Sandler]

Just sort of having to squint for, you know, concerning issues here as everything is set up pretty well for you here and executing well also. But just curious with escalating tensions and saber-rattling in Ukraine, and given that Russia's been a pretty good growth market for the industry, are you considering any risks with regard to sanctions impacting the trajectory of the business in Russia or Eastern Hemisphere, you know, on an ongoing basis at this point, or does this look like things that you've seen and done before?

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Look, these are things we've seen and done before. You know, always unfortunate in so many ways for so many people. But from a business perspective, you know, we've managed these sorts of things up and down for, I'd say nearly 100 years. These are the kinds of things that we would manage through.

[Ian Macpherson, Equity Research Analyst at Piper Sandler]

Okay. Thanks, Jeff. Lance, just looking at our cash flow calculator for this year, you obviously had some good tailwinds in 2021 with working capital release, which we know will reverse with cycle growth. You also had probably better than sort of ratable disposal proceeds. When we think about 2025 to 2026, you'll be probably closer to 5% and 6% of gross CapEx this year. How are you thinking about the other pieces? Because I did hear something in the prepared remarks about containing working capital expansion with growth, so maybe not a monster number of working capital expansion this year.

[Lance Loeffler, EVP and CFO at Halliburton]

Yeah. Look, you're right. Really happy with the way 2021 free cash flow performed for us. I think that, you know, we've talked about before how we've meaningfully, I believe, transformed the free cash flow profile of Halliburton and all the strategic priorities that we've sort of discussed are things that help drive us to that end. You're right. I think, you know, stronger free cash flow starts with stronger margins, and I think what you should expect for 2022 is to see that continued strength, you know, operating cash flow less or excluding working capital that continues to drive higher, obviously.

[Lance Loeffler, EVP and CFO at Halliburton]

I think that, you know, we're running into, you know, a period of time in 2022 that the amount of growth that we expect in the business is just going to drive an investment in working capital as opposed to a release of cash. As I've always said, we are looking to put that investment back, much more efficiently than when we took it out. You know, personally, that's something that I'm committed to and working really hard with the organization to find those benefits.

[Ian Macpherson, Equity Research Analyst at Piper Sandler]

Got it. Thanks.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Appreciate it, Ian.

[Operator]

Thank you. This concludes the question and answer session. I would now like to turn the call back over to Jeff Miller for closing remarks.

[Jeff Miller, Chairman, President, and CEO at Halliburton]

Thank you, Shannon. Look, I'll just conclude that this upcycle is a great setup for Halliburton to achieve profitable growth and accelerated free cash flow generation. Today's dividend increase in debt retirement announcements provide just two examples of what Halliburton expects to deliver throughout this multi-year upcycle. I look forward to speaking with you again next quarter. Shannon, let's close out the call.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Participants

Executives

• David Coleman, Senior Director of Investor Relations
• Jeff Miller, Chairman, President, and CEO
• Lance Loeffler, EVP and CFO

Analysts

• Arun Jayaram, Research Analyst covering Oilfield Services and Energy Stocks at JPMorgan
• Chase Mulvehill, Director and Oilfield Service Analyst at Bank of America
• Connor Lynagh, Executive Director at Morgan Stanley
• Dave Anderson, Managing Director at Barclays
• Ian Macpherson, Equity Research Analyst at Piper Sandler
• James West, Senior Managing Director at Evercore ISI
• Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs
• Scott Gruber, Managing Director and Senior Analyst at Citigroup