Jeff Miller
Chairman of The Board of Directors, President, and Chief Executive Officer at Halliburton
Thank you, David, and good morning, everyone. I am pleased with Halliburton's first quarter results. Our performance demonstrates the resilience of our unique strategy in action and the importance of our competitive positioning both in North America and international markets.
Here are some highlights from the first quarter. International revenue grew 15% compared to the first quarter of 2021, with activity accelerating across all international markets. Strong growth in Latin America and the Middle East/Asia offset the winter weather impacts in Europe. In North America, revenue grew 37% year-on-year with the acceleration of both drilling and completions activity. Higher utilization in March and net pricing gains drove margin expansion despite weather and sand disruptions earlier in the quarter.
Our Completion and Production division revenue grew 26% and compared to the first quarter of 2021 on activity increases in North America, Africa and the Middle East, while operating income increased 17% despite transitory U.S. land/sand delivery disruptions. Our Drilling and Evaluation division grew revenue 22% year-on-year, while margins expanded 440 basis points and started the year at 15% for the first time since 2010. This exceptional performance was largely driven by the strength of our directional drilling and project management businesses.
We added three new companies to Halliburton Labs, our clean energy accelerator. This brings the total number of program participants and alumni to 15 companies. Halliburton Labs allows us to actively participate in the future of clean energy value chain.
Finally, we retired $600 million of our $1 billion of debt maturing in 2025 and nearly tripled our quarterly dividend to $0.12 per share. These actions strengthen our balance sheet and reflect our commitment to return cash to shareholders.
Before we continue, I want to provide a few comments about the current situation in Ukraine and Russia. This is a tragedy on many dimensions and for us, especially for our people in both countries. As we've all seen, governments in the European Union, the United States, Switzerland and other countries swiftly enacted far-reaching sanctions on new investment and export controls on goods, supplies and technologies to Russia. In compliance with sanctions and consistent with our strategy for profitable international growth, we announced that we would begin steps toward a wind-down of our Russian operations, and we remain active in that process.
Russia accounts for about 2% of our business. Sanctions and export compliance impact everyone in the oilfield and operations and supply chains in Russia are, at best, challenged. The situation is far too early and evolving to say more.
Moving on to our macro-outlook. We expect oil and gas demand will grow over the near and medium term, driven by economic expansion, energy security concerns and population growth. At the same time, supply remains under structural threat of scarcity.
While the war in Ukraine has created a short-term dislocation in commodity markets, the fundamental supply tightness existed before this geopolitical conflict. Current oil supply tightness and commodity price levels strengthen my confidence in the accelerating multiyear upcycle and very busy years ahead for Halliburton.
In addition, I expect an important change in our customers' behavior and priorities will provide structural support to oil prices throughout this upcycle. I believe supply dynamics have fundamentally changed due to investor return requirements, public ESG commitments and regulatory pressure, which make it more difficult for operators to commit to long-cycle hydrocarbon investments and instead drive investment flexibility through short-cycle barrels.
The pursuit of increased investment flexibility leads operators to prioritize short-cycle projects, development over exploration, tiebacks versus new infrastructure and shale rather than deepwater. Clearly, there are important exceptions where successful long-term projects will be developed, but painting with a broad brush, I believe most investments will be directed primarily towards short-cycle activity in the near and medium term. The result of this focus is an industry-wide increase in the level of investment flexibility for operators and the subsequent support to commodity prices.
With short-cycle barrels, companies make investment decisions annually and can respond more quickly to commodity price signals. As a result, when investment stops, production at a minimum doesn't grow. And in the case with unconventionals, it quickly declines. For example, when the pandemic drove the collapse of oil demand two years ago, U.S. shale companies swiftly reduced activity and production declined 2 million barrels in nine months. In contrast, long-cycle projects have two key elements: a long-time horizon and large upfront capital investment. Once these projects begin, investment continues and production cannot quickly respond to price signals. This tends to result in market oversupply.
The pivot to short-cycle barrels creates the opposite effect, a perpetual threat of undersupply that is supportive to commodity price. I believe this pivot to short-cycle barrels is great for Halliburton and sets up fantastic conditions for us to outperform.
Short-cycle activity results in higher relative capital spend by operators aimed directly at the wellbore for services Halliburton provides as opposed to infrastructure investments required for long-cycle projects. Our strong technology portfolio and market footprint match this activity globally. Halliburton works, innovates and invest where it matters most for our customers.
And finally, Halliburton's value proposition to collaborate and engineer solutions to maximize asset value for our customers explicitly focuses on helping operators maximize returns and cash flow. This makes Halliburton uniquely relevant for this environment.
Our five strategic priorities are clear and effective and will drive our behavior in this upcycle. First, we focus on profitable growth in our strong international franchise. Second, we maximize value and cash flow in North America. Third, we accelerate the deployment and integration of automation and digital technologies. Fourth, we drive increased capital efficiency in all parts of our business. And fifth, we actively participate in advancing a sustainable energy future.
As demand for Halliburton services increases, both internationally and in North America, we will execute on our five strategic priorities to deliver industry-leading returns and strong free cash flow for our shareholders.
As I look across the international markets, I continue to believe our customers' international spend will increase by mid-teens this year. Here are some leading indicators. First, we started with revenues in the first quarter much higher compared to the same period of last year. Second, our completion tool order book increased 50% year-on-year in the first quarter, which represents work generally delivered within the current year. And third, we have a strong pipeline of new projects scheduled to start in the second half of this year, particularly in the Middle East. We expect international activity to gain momentum in the second quarter, led by the Middle East and Latin America and further accelerate in the second half of the year. More importantly, our strong first quarter Drilling and Evaluation division margins demonstrate our focus on profitable international growth.
Beyond the shift to short-cycle barrels already discussed, we expect this international up cycle to be structurally different from prior cycles and Halliburton's international business is poised to benefit from it. Here's why. National oil companies and independents comprise a larger portion of the international customer set. As a result of divestitures in the last few years, many international assets now have new owners who require a more collaborative service provider to help unlock remaining reserves and maximize value. Halliburton's collaborative approach, broad technology portfolio, local expertise and reliable execution help customers achieve their efficiency and production objectives. Halliburton's execution of our technology road map has completely transformed our competitiveness in drilling and evaluation.
We enter this upcycle with the best product portfolio in our history, and we see increased customer demand for our high-end technology and a recognition of its value. For example, Halliburton recently deployed our new StrataXaminer Wireline Imaging Service for multiple customers in Norway and Morocco. StrataXaminer helped operators acquire more accurate well data in oil and synthetic-based muds, better evaluate production potential and save rig time with log-down capability and increased logging speed.
Another example is the latest addition to our logging while drilling suite, the StrataStar Azimuthal Resistivity Service for thin interbedded formations. Similar to our premium EarthStar service the StrataStar combines high fidelity downhole sensors with powerful digital inversion capabilities. Multiple customers in the Middle East, Latin America, U.S. and Canada use it for faster, more accurate reservoir characterization to precisely place wells in the most productive zones and maximize asset value.
We also see a slight uptick in offshore exploration activity albeit from a historically low base. Halliburton's increased competitiveness in drilling and evaluation resulted in a doubling of our contract win rate in global exploration work over the last two years and we expect to benefit from any additional growth in this higher-margin market.
Different from prior cycles, Halliburton's investments in specialty chemicals and artificial lift create unique growth opportunities as we expand the international footprint of these businesses.
Last month, I attended the opening of our new chemical reaction plant in Saudi Arabia. Multiple years in the making, this world-class facility establishes our chemicals manufacturing footprint in the Eastern Hemisphere. It is our launch path for profitable growth in the specialty chemicals industry in the Middle East and beyond. This quarter, it will start manufacturing products for our production chemicals contract with a large IOC in Oman and chemicals for our own product service lines.
Several years ago, I described digitalization as one of the defining trends in our industry for this decade. Today, digital innovations permeate all segments of the oilfield services market.
At Halliburton, our strategy to drive digital and automation creates technological differentiation, contributes to higher international margins and drives internal efficiencies and cost savings. Here are some examples. On an integrated drilling project in Southeast Asia, Halliburton deployed Well Construction 4.0, our approach to digital transformation of well construction. It improved the rate of penetration by about 40% on initial wells and reduced rig site personnel by 21%.
On an integrated project in the Middle East, we combine data science, smart bits drilling automation and project management services for a more than 40% reduction in average well delivery time. We also deploy our digital solutions to advance a sustainable energy future.
In the first quarter, Energean hired Halliburton to assess the carbon storage potential of the Prinos Basin in Greece, who will use our DecisionSpace 365 cloud applications to perform long-term ploom modeling, characterize the storage complex and create a conceptual development plan with performance modeling. We expect to deliver steady, profitable growth in the international markets for the rest of this year. Increased activity and equipment tightness continued to sharpen our pricing discussions with customers.
Pricing is increasing on current contract extensions. In the first quarter, the percentage of contract extensions exercised almost doubled compared to the same period last year as operators generally prefer to extend existing contracts rather than bid work in an inflationary market. Pricing is also increasing on new work.
Turning to North America. We see market tightness across all service segments. In the first quarter, average U.S. rig count increased 14% sequentially and is up 62% year-on-year. Additionally, frac activity surged in March after winter weather and supply chain disruptions occurred earlier in the quarter.
Halliburton's hydraulic fracturing fleet remains sold out and the overall market appears all but sold out for the second half of the year. The market today presents several positive elements previously absent in North America, and they give me confidence in the continued strength of this market over the coming years.
First, in the largest service segment in North America, the hydraulic fracturing market structure has improved. Today, the largest four pressure pumping companies account for about two-thirds of the market. Second, I believe that poor service industry returns over many years in North America ultimately resulted in a closed-loop capital system because access to meaningful outside capital doesn't exist today, market participants must generate their own cash in order to reinvest and grow their businesses. Broad-based profitability improvements are required to fund growth, not just what appears to be good economics on a single incremental fleet.
Finally, I see greater differentiation in hydraulic fracturing equipment types. In prior cycles, fleets were relatively the same. Today, all equipment is not created equal. Significant operational, environmental and pricing differences exist ranging from electric fleets at the top; dual fuel and Tier 4 diesel in the middle; and finally, Tier 2 diesel equipment at the bottom.
We have a terrific fleet composition. Halliburton is the leader in low emissions frac equipment. Our Zeus e-fleets have committed contracts, earn attractive returns and deliver improved performance.
Another technology that sets Halliburton apart from the rest of the hydraulic fracturing market is our SmartFleet Intelligent Fracturing System. Customers are adopting this groundbreaking technology, and it has moved from pilot to campaign mode. We are deploying it for multiple operators across different basins and expect a sixfold increase in the number of stages completed with SmartFleet this year.
Tightness in North America is not just in hydraulic fracturing equipment. It exists across the whole oil and gas value chain, in spare parts, engines, electronics and many other inputs that cost more and are sometimes not immediately available. While we generally pass these increased costs on to operators, we also have effective solutions that minimize this operational impact and provide reliable execution for our customers. For example, our sophisticated supply chain organization responded by sourcing sand from Wisconsin when local mines were down in the Permian. In trucking, our collaboration with Vorto provides us with real-time information on the market clearing price for drivers and allows us to manage inflation and significantly reduce logistics-related nonproductive time.
Years of low pricing and low returns impacted the North American oilfield services sector and the larger supply chain that supports our industry. Sustainably improved pricing is required to avoid future supply chain disruptions and to invest in the equipment, people and technology necessary to deliver production growth. I believe our customers understand this.
Against this backdrop, we see a long runway for ongoing net pricing improvement across all of our product service lines. In this recovery, Halliburton is focused on maximizing value in North America. For us, this is a margin cycle, not a build cycle.
Last quarter, I shared with you my view that North America customer spending would grow more than 25% year-on-year. Today, as I look at a combination of customer activity and inflation, my outlook has improved, and I now expect North America spending to increase by over 35% this year.
With respect to activity, over 60% of the U.S. land rig count sits with private companies and they keep growing, while public E&Ps remain committed to their activity plans. Activity and demand for our services are increasing, both internationally and in North America. With our unique value proposition, clearly defined strategic priorities and global presence, I expect Halliburton will deliver profitable growth, solid free cash flow and industry-leading returns and outperform as this upcycle accelerates.
Now I will turn the call over to Lance to provide more details on our first quarter financial results. Lance?
