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Halliburton Q4 2021 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to Halliburton's Fourth Quarter 2021 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to David Coleman, Head of Investor Relations. Please go ahead, sir.

David Coleman
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 31st, 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. 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 Chief Executive Officer 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 entered 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. But 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, so to all of our employees, thank you.

I believe 2022 will be a strong year for our industry and especially for Halliburton. While global energy demand and economic growth demonstrated resilience, global energy supply has shown it's fragility. The impacts of several years of under-investment 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 and this is at the core of Halliburton's unique value proposition. But 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. 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'm 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 US 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 Index, which highlights the top 10% most sustainable companies in each industry. 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 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.

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 the 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 and 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. 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 and 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. We allocate capital to the highest returns opportunities which means we are selective on what we bid for and win. Our D&E margin performance in 2021 has 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. 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 and we have the right type of equipment. We are the leaders in the low emissions equipment segment. 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 E Winch Electric wireline unit and the electric tech command center to meet the market demand for lower emitting fracturing operations.

We develop differentiated technologies to 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. 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 positioned 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% to 6% of revenue. Our business thrives in this range because of our research and development efforts and process changes. 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. As OPEC pluses spare capacity returns to normalized levels this year, we believe sufficient pent up oil demand will support a call on both international and US 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 increase by mid-teens this year.

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 under-investment. 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. Given the tool tightness that exist 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. Our 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, US land rig count increased 84% year-on-year and drilling activity outpaced completions, as operators prepared well inventory for 2022 programs. 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 plant 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? 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 four 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 ducks 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 bids and artificial lift. 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. There is no doubt, the much-anticipated multi-year up cycle is now underway. North America production growth remains capped by operators' capital discipline, while meaningful international production growth is challenged by years of under-investment.

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 and a strong commodity price environment with limited production growth options, operators turn to short cycle barrels and increased spend around the wellbore. Our value proposition works. We have the right strategies for both international and North American markets. 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 will turn the call over to Lance to provide more details on our fourth quarter financial results. Lance?

Lance Loeffler
Chief Financial Officer at Halliburton

Thank you, Jeff 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. These results were primarily driven by higher completion tool sales globally, as well as increased pressure pumping services in North America land and in 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. 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. 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. 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. 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. In 2022, we intend to increase our capital expenditures to approximately $1 billion, while remaining within our target of 5% to 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.

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 digit 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 Chief Executive Officer 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.

And now let's open it up for questions.


Questions and Answers

Operator

Thank you. [Operator Instructions] Our first question comes from James West, Evercore ISI. Your line is open.

James West
Analyst at Evercore ISI

Hey, good morning guys.

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Good morning, James.

Lance Loeffler
Chief Financial Officer at Halliburton

Good morning, James.

James West
Analyst at Evercore ISI

So, Jeff, maybe just to kick it off here. Could you talk a bit about the cadence of this cycle you mentioned several times growth and you also mentioned a key word which is urgency from customers and I think that's going to be something that's very important when we think about pricing, margins, etc. 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 '22 and into 23 and beyond?

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Yeah, well, thanks, James. Look, really like the macro setup, the macro setup and I said that before and what we really see is the fragility as I described it of supply and the returning demand. And so, and I think there are factors that the under-investment internationally means that has to be recovered over a longer period of time and 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.

But nevertheless, the activity that just means a longer up cycle in my view and I feel really good about the cadence, meaning it continues to move up this year, next year and beyond. And the way that sets up for us is, yeah, we got -- we have an opportunity to take advantage of the operating leverage, it's already in our business. The pricing environment will be good throughout that period as the equipment gets tighter everywhere and our technology is more valuable to customers in this kind of environment.

And yes, activity, I believe does ramp and it's going to be the -- the kind of short cycle barrel to drive the most activity for us because this is urgently trying to return barrels to market under those sort of constraints very good for us. And so as we look out to 2023, I'll just start there look out 2023, I don't see 2023 is an endpoint by any means. I think the road goes on well beyond that, but I can tell you what we've talked about for 2023 is biased higher.

James West
Analyst at Evercore ISI

Right. Okay, okay, makes sense to me and that's clear, clearly in line with our expectations. How are -- Jeff or Lance, the dividend increase, solidarity an increase, how do you think about and how are you guys thinking about shareholder returns going forward as we kind of move into, we're into -- but I guess as we accelerate into this up cycle.

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Yeah, look, thanks James, I'll take that. Those are important actions that we took today and we expect to continue, continue finding opportunities to return more cash to shareholders and pay down debt. And as we pay down debt, that creates headroom in our fixed payments as we pay down debt. And think about it, we've repaid $1.8 billion of debt since January of 2020 and we get through '23 and '25 as debt is paid the next maturity is not until 2030. And so, we fully I fully expect to continue growing shareholder distributions as the upcycle accelerates.

James West
Analyst at Evercore ISI

Right. Okay, perfect. Thanks, Jeff.

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Thank you. Our next question comes from Dave Anderson with Barclays. Your line is open.

Dave Anderson
Analyst at Barclays

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

Lance Loeffler
Chief Financial Officer at Halliburton

Well, look, yeah, I mean as we look at 2021 for example 15% margins, 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 by getting fluid ends installed. And then 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 we're happy with the new price.

And so that's Q4 as we look at the order book doubling in completion tools that's really a look ahead to 2022 and that's very positive for 2022 to see those types of longer lead items building in our order book. Yeah, I think when we think about progression in 2022. I expect to see 30% incrementals in our frac business in North America in 2022 and first quarter, but with that mixed in with that are the completion tools that don't repeat in Q1, but 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 hit the 2022 doubling of the order book at some point during the year of 2022 in completion tool, I hope there is some clarity?

Dave Anderson
Analyst at Barclays

That is, that's great. That's great, Jeff, thanks. If I could just shift well, I guess somewhat related question, I want to 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 are going to need to reduce emissions, e-frac is clearly part of their solution. But of course it costs more with the power source. I think you had like five or six fleets today, maybe you could just update us where you are there. But 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, but I guess even more important, do you think E&Ps are willing to underwriter this with longer-term contracts?

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Will impact that a little bit, just from an equally deployment standpoint, we view e-fleet as replacements for our current equipment. So the pacing of that is consistent with how we think about sort of fleet management over time. And obviously that is contingent upon getting the terms and condition and pricing that are clearly returning above what anything else is returning, that's what motivates us there.

All of that lives inside of our Capex outlook to 5% to 6% of revenue. So I just want to keep all of that sort of in the right frame. We think about power, however, that is a unique piece of this puzzle and what I expect happens with electric broadly is yes, it grows, our share will grow of that and I think we got fantastic equipment in the market working today. With the power piece, we're power agnostic. And if you recall over time, I've always said the issue here was the power who owns the power? And I think we've partnered with a very good firm, successful firm that has modular power such that over time as operators can optimize power sources, meaning the grid, our partner has ability to scale that back and sort of optimize along with client.

And so I think that's the sort of unique power component that we saw for with both the grid.

Dave Anderson
Analyst at Barclays

Great, thank you very much, Jeff.

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Thanks, Dave.

Operator

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

Neil Mehta
Analyst at The Goldman Sachs Group

Hey, good morning, team. Thanks for taking the time here. Jeff, I wanted 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? And how do you feel about upside scenarios and what factors could drive that?

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Yeah look, thanks, Neil. I'm excited, encouraged about what I see more so today than I was before which was all the basically the simultaneous growth North America and International and the effectively the demand for equipment that we see which now allows both activity and price to move at the same time. So I don't -- from a risk perspective, look, I think that we're in a good place to manage those risks that might be out there whether it's 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 market see that.

And so I think that demand for activity will be there. Clearly, that's going to be biased higher at this point as we look out to 2023. And I think we're in a great position to take advantage of all of those things that happen, whether it's price and tightness, it's our technology, there is 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 by the well bore, helps them do a lot of things that are important to them to accelerate their own production at attractive price.

Neil Mehta
Analyst at The Goldman Sachs Group

Thanks, Jeff. And then 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 and if you'd be willing to put a number on utilization? And how should we think about net service pricing in US frac for the back half of '22 and into '23, especially as you get some of these new build low emission frac fleets starting to enter into the market once again.

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Well, we see it is close to 90% utilized as a market for equipment that's existing today. And so it doesn't take much increase in activity to continue to tighten that and I see that tightening more so in the back half of next year. 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 is going to work. And that team along with partner solve for sort of the power to limb.

And so I think we're in a great place to bring equipment to market, but clearly that is new capital into the market, which requires higher returns than what we have certainly have seen. And so I think a cap on that is going to be the requirement for higher returns. I think capital is capital for building equipment clearly in short supply and particularly because there's a lot of repair to come for returns in North America.

So lot of that informs our strategy of maximizing value in North America means we approach it differently, it's not can we grow, build the most equipments, can we maximize the most cash flow out of that market. And we think electric fleets position the right way, help us do that.

Neil Mehta
Analyst at The Goldman Sachs Group

Thank you, sir.

Operator

Our next question comes from Arun Jayaram with JPMorgan. Your line is open.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Yeah, good morning. My first question is, you guys have repositioned assets frac fleets to improve utilization returns. And I just wanted to ask is, 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 adoption of SmartFleet and other help 4.0 offerings?

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Well, we move equipment to raise margins and I expect that we will see that kind of margin improvement into 2022. You mentioned SmartFleet, I think that's a key component of what makes Halliburton unique in the fracs business in North America and it's one of the unique things of being of our large peers. We're the only one in the frac business in North America and that allows our technology budget, it is meaningful.

And I think overtime applied consistently, R&D investment has always been what moves this industry both from a productivity standpoint and return standpoint for us. And so SmartFleet being but an example of what pat R&D at scale looks like when it's applied to North America. And so, yes, I think that does contribute to margins as does electric fleets. Has though -- many other sort of technology solutions that we're working on all of the time.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Fair enough. And my second question is, you guys mentioned in your prepared remarks about what's going on with Ducks, Ducks have been down for 18 months in a row and you're starting to see the mix of drilling increase overtime. I know that Ducks have been a tailwind for operators and led to call it lower frac needs last year and the year before. And 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 the frac demand if the current fleet counts around 235 or so?

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Well, you think it about it the right way and I expect that it does increase demand just because there is going to be more disruption in the system, meaning fleets that we'll 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. And I expect what we will see that as it gets, we're seeing it now. I think that is a dynamic that will continue certainly throughout the balance of this year.

Arun Jayaram
Analyst at JPMorgan Chase & Co.

Great, thanks a lot.

Operator

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

Chase Mulvehill
Analyst at Bank of America

Hey, good morning.

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Good morning, Chase.

Chase Mulvehill
Analyst at Bank of America

Yeah, good morning, Lance. So, Lance, I guess maybe this question is for you, just thinking about the 1Q guide. I guess I can kind of connect the dots with the C&P margins being flat because you've got completion tool sales kind of rolling off and obviously track getting better, but thinking about the D&E side, resilient margins as we get into 1Q and typically you have software sales in the fourth quarter. So 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. So do you have the -- 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
Chief Financial Officer at Halliburton

We do Chase, it's a good question, we do. So in our software business the way that we recognize revenue sort of spread now between the fourth quarter and the first quarter. So we still have some resiliency from the software sales. But I wouldn't discount 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 exist during the real hard winter months in places like the North Sea and Russia in particular.

But 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-kidding Sperry for example is really beginning to pay off.

Chase Mulvehill
Analyst at Bank of America

Okay, perfect. And then a follow-up, obviously, you said multiple times here, 90% utilization of frac, but there is some cold stacked equipment that may or may not come off the sidelines obviously depends on pricing. I guess maybe could you give us some comments or your comments around cold stacked equipment. How much pricing would have to move for people to spend 10 plus million because you probably convert some of those from Tier 2 to Tier 4 D2B [Phonetic]. So just how much would pricing have to move for the industry to start kind of reactivating and spending more on cold stacked reactivations?

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Look, I think prices would have to move a long way and 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 happen simply. And it's really going against, the direction the entire market is going which is towards environmentally friendly equipment. So things that come off the bench aren't going to be in that category for sure. And I think the cost of getting things off the bench for what's there it is going to be a lot higher than people think.

And so 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. So I think we underestimate, excuse me, I think there is a lot less of that and it's cost is much higher.

Chase Mulvehill
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 now open.

Scott Gruber
Analyst at Smith Barney Citigroup

Yes, Good morning.

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Good morning, Scott.

Scott Gruber
Analyst at Smith Barney Citigroup

So I want to come back to the shareholder return question. Jeff, you commented on further actions to come down the road, which is great to hear, but just given the inherent volatility in the market, is the next move likely to be a buyback or variable dividend? And then 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 will consider especially in the context of a multi-year upcycle?

Lance Loeffler
Chief Financial Officer at Halliburton

Sure, Scott, this is Lance. Look, we think about it very similar sort of the line of question year 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 will come in the form of both increasing the dividend overtime, but doing it responsibly and with any excess free cash flow that we would like to dedicate, we may re-institute share repurchases. So I think it will be a balance, we'll see what it's like when it gets there not big fan of a variable dividend today, 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 and prioritizing free cash flow, that we'll be really good stewards about how we send it back to shareholders.

Scott Gruber
Analyst at Smith Barney Citigroup

Got it. And I also want to come back to Dave's question on e-frac and ask you a little bit broader question, we got the Capex figure for the year and you're keeping Capex below the 6% level, but there has been this kind of outstanding question for Halliburton as the frac market recovers, do your Capex need a surprise and you have to go above that level. So I guess the real question is, are you happy with the cadence of fleet renewal within the frac fleet? Are you able to kind of keep up your competitiveness with the pace of spend embedded in the budget this year and just kind of as you think about over the medium term, do you think you can keep up your competitiveness with this -- with the cadence of renewal in the frac fleet that's built into that 6% sub-6% reinvestment level?

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Yeah, yes, we do is the answer. We believe we drive in this type of environment and managing or maintaining Capex where it is. Look, it's or it's 5% to 6% of revenues. In my view this very much show me story and we expect to deliver returns and we do things ratably and strategically we view North America is 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.

And so the target is -- we are very consistent around our strategy and that strategy is actually quite exciting for us to pursue a strategy that delivers the most free cash flow and grows and improves margins. So I view this as a margin cycle not a build cycle. And I've said, our team is excited about pursuing that delivering on that and that's why 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 think that's all of that fits together into how do we deliver and our plan to deliver accelerating free cash flow.

Scott Gruber
Analyst at Smith Barney Citigroup

That's great color, Jeff, appreciate it.

Operator

Our next question comes from Lynagh with Morgan Stanley, your line is open.

Connor Lynagh
Analyst at Morgan Stanley

Yes, thanks. I wanted to return to the potential shareholder returns and 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, is there a level of cash balance that you want to 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
Chief Financial Officer at Halliburton

Yeah, good question, appreciate the follow-up. I think today you a minimum cash balance for us to run our business is around $2 billion give or take. And so we're always sensitive, a little bit to that or mindful of it. But I would say I've been pretty clear about what we want to do in terms of strengthening the balance sheet. We need to be closer to 2 times 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 and we have work to do on the numerator.

So we expect to continue to find ways to attack gross debt. And I think starting with retiring the 23's and what's left to the 25's post this redemption is a good target.

Connor Lynagh
Analyst at Morgan Stanley

Got it. Maybe just switching gears a little bit here, Drilling and Evaluation margins, 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 year-over-year looking at something 250 basis points to 300 basis points above where you were in 2021. I guess 2 parts to that, is that a good bogey for how we should think about the rest of the year in Drilling and Evaluation? And just as we think structurally about return of International and the like, how should we think about the potential profitability cycle over cycle certainly is trending a lot higher right now, so just want to make sure we understand the moving pieces there?

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Well, look it's a great starting point and we expect that trend higher overtime as we move through. And so this is -- this is the result of technology investment and excellent drilling business, drilling 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 bids, I won't try to name them all here, but that very strong group of businesses and 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 manage the data around that with the 3D inversion.

So 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. So our expectations are that we're starting at a higher point, we're starting the year lower, but we are moving to a higher point and I think we'll see that sort of repeat great expectations for that business.

Connor Lynagh
Analyst at Morgan Stanley

Good to hear. Thank you.

Operator

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

Ian MacPherson
Analyst at Piper Sandler Companies

Thanks, good morning, Jeff and Lance.

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

Good morning, Ian.

Lance Loeffler
Chief Financial Officer at Halliburton

Good morning.

Ian MacPherson
Analyst at Piper Sandler Companies

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

Jeff Miller
Chairman, President, and Chief Executive Officer at Halliburton

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

Ian MacPherson
Analyst at Piper Sandler Companies

Okay. Thanks, Jeff. Lance just looking at our cash flow calculator for this year, you obviously had some good tailwinds in '21 with working capital release, which we know will reverse with cycle growth and you also had probably better then sort of ratable disposal proceeds. So when we think about 5 to 6 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
Chief Financial Officer at Halliburton

Yeah, look, you're right, really happy with the way '21 free cash flow performed for us. And I think that 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 or things that help drive us to that end But you're right, I think stronger free cash flow starts with stronger margins and I think what you should expect for 2022 is see that continued strength, operating cash flow less or excluding working capital to continue to drive higher obviously.

But I think that we're running into 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, but as I've always said, we are looking to put that investment back much more efficiently than when we took it out. And personally that's something that I am committed to and working really hard with the organization to find those benefits.

Ian MacPherson
Analyst at Piper Sandler Companies

Got it, thanks.

Lance Loeffler
Chief Financial Officer at Halliburton

Appreciate it.

Operator

Thank you. And 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 Chief Executive Officer 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 and 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

[Operator Closing Remarks]

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