Jeff Miller
Chairman, President & Chief Executive Officer at Halliburton
Thank you, David, and good morning, everyone. This was an excellent quarter. Our financial performance shows that our strategy is working and driving value.
Let's get right to the highlights. Total company revenue increased 18% sequentially as both North America and international activity continued to improve in unison. Adjusted operating income grew 35% with strong margin performance in both divisions. Our Completion and Production division revenue increased 24% driven by robust completions activity in North America and international markets. C&P delivered operating margin of 17% in the second quarter, the first time it reached this level since 2014. Our Drilling and Evaluation division revenue grew 12%. Operating margin of 13% was down sequentially as expected due to the seasonal drop-off in software sales, but increased 270 basis points year-on-year. This gives us confidence in the strengthening margin profile of our D&E business.
North America revenue grew 26% as both drilling and completions activity marched higher throughout the second quarter. Strong net pricing gains across all product service lines supported sequential margin expansion. International revenue grew 12% sequentially with activity accelerating in all international regions, particularly Latin America and the Middle East. Finally, we recorded a historic best operational performance as measured by non-productive time for the first six months of this year.
I am pleased with the strong performance Halliburton delivered in the first half of this year. And I thank all Halliburton employees for their hard work, contribution to these outstanding results and dedication to superior service quality.
Before we discuss our execution in the international and North America markets, let me address recent market volatility. In the second quarter, central banks took actions in an attempt to control inflation, raising concerns about a potential economic slowdown. Despite this near-term volatility, I believe the oil and gas market fundamentals still strongly support a multi-year energy upcycle. From a demand perspective, oil and gas remains a critical component of long-term economic growth. Post-pandemic economic expansion, energy security requirements and population growth will continue to drive demand.
Today, oil and gas supply is tight despite an environment muted by ongoing China lockdowns and jet fuel demand below historical norms. Meaningful supply solutions will take time. OPEC's spare capacity is at historical lows, the strategic petroleum reserve release is unsustainable and the risk to Russia's supply remains high. On the industry side, despite high commodity prices, operators remain disciplined because of investor return requirements, public ESG commitments and regulatory pressure. In response, service companies invested for returns and did not overbuild. In short, this cycle has been nothing like prior cycles. This means, any economic slowdown will not solve the structural oil under supply problem.
At Halliburton, the steps we took to improve operating leverage, lower capital intensity and strengthen our balance sheet best equip us to outperform under any market conditions. Here's why we believe that? First, we used the pandemic to redesign the cost profile of our business. We structurally removed over $1 billion of costs, the most aggressive cost reductions in our history. This gives us a strong and sustainable operating leverage that we see today and meaningful year-on-year margin expansion in both divisions.
Second, we fundamentally lowered the capital intensity of our business and set our capex target at 5% to 6% of revenue compared to 10% to 11% in the prior upcycle. We advanced our technology so that new generations of equipment will have higher capital velocity. This lower capital profile is key to our strong free cash flow generation. Finally, we prioritized strengthening our balance sheet and retired $1.8 billion of debt since the beginning of 2020. This reduced our cash interest expense and put us within striking distance of our leverage targets.
Now let's turn to our second quarter performance and expectations for the rest of 2022. With energy security firmly in focus, the diversification of supply sources is the central theme in the international markets. Never has energy security been a bigger issue to governments and people all over the world. However, political agendas and years of under investment in many markets make it harder to address this critical requirement.
As I look across the international markets, our customers spend remains on track to increase by mid-teens this year with the Middle East and Latin America expected to grow the most on a full year basis. New project announcements across the world, including in the Eastern Mediterranean, Australia and West Africa, gives us confidence and continued activity acceleration in 2023 and beyond. Longer term, we believe the international markets will experience multiple years of growth.
Halliburton's International business is better prepared to benefit from the upcycle than ever before. We have a strong portfolio of well construction and completion product service lines. We greatly increased our drilling competitiveness. We are present in all the markets that matter. And we have unique growth opportunities in the production space.
Let me elaborate. The activity mix in this upcycle is different from prior cycles. Today, operators focus more on developing known resources and less on long-term exploration programs. This means drilling more well bores. The products and services customers require for drilling more well bores benefit Halliburton. For example, in one of the largest international offshore markets, over 60% of a typical well service cost goes to drilling fluids, cementing and completion hardware. This means more operators spend on services where Halliburton has a leading position.
Baroid, our drilling and completion fluids business, entered this cycle as the leading fluids provider globally. During the downturn, we brought the chemical supply chain closer to our international customers and localized our workforce. This improved our cost competitiveness and margins. We introduced new advanced chemistries and now run fluid systems that make better well bores and create value for our customers and Halliburton through higher margins and lower inventory requirements.
Halliburton was founded as a cementing company over 100 years ago. And since then, we never stopped leading and innovating in cementing. Every well in the world, be it a mature producer in the Middle East or a deepwater well bore in Brazil must be cemented. The secret to our enduring success in cementing is our capacity and drive to innovate and develop new methods to design, deliver and validate sustainable well barriers.
Our latest innovation is The Cognitus Automated Cementing Platform, which allows us to deliver cement jobs autonomously with limited human direction and intervention. A standard offshore cementing operation typically requires over 300 commands. The Cognitus Platform consolidates and automates this to only five mouse clicks by an onshore operator. We already completed over 70 cementing jobs using the system in the North Sea, delivering safer operations, improved service quality and cost efficiency.
Well completion tools constitute a larger portion of well services spend internationally than in North America and they are high-tech and high value-add products and services. Halliburton is a global leader in completions technology, especially in advanced completions that includes sand control solutions, multi-lateral wells and intelligent completions. With over 20 years of multi-lateral installation experience globally, Halliburton is the market leader in multi-laterals, a key technical component in many development wells. They help operators increase reservoir drainage in mature fields, address limited subsea infrastructure and reduce environmental impact.
Over the past few years, we strengthened our completion tools product service lines in Singapore, which is closer to our international customer base and supply chain sources. With our world-class manufacturing facilities, strong local technical support and continuous innovation, Halliburton completion tools position us to outperform in the international upcycle.
Another key well construction service is directional drilling. Over the last five years, we made a concerted effort to improve our drilling technology competitiveness. Our strong D&E margin performance this year demonstrates that our investment is paying off and we expect it to continue as international drilling activity ramps up. Our iCruise Intelligent Drilling System delivers excellent results and now constitutes about half of our rotary steerable fleet and has been a key contributor to year-over-year margin improvements, which reflects higher asset velocity compared to prior generation tools.
Last month, for a Middle East customer, Halliburton achieved a new world record. The longest well ever drilled at 50,000 feet measured depth. This extended reach well redefined what's possible with advanced drilling technology. In many regions, as customers face increasing operational challenges and urgency to increase production, I expect that the adoption of integrated contracts will continue to grow. Today, about 20% of our international revenue comes from integrated projects. And this percentage is considerably higher in some markets like Norway, Mexico and Iraq.
Halliburton's strong project management capabilities and a proven track record compress the learning curve and drive cost savings and efficiencies for both us and our customers. The future is without a doubt more collaborative. Customers across the world increasingly call on Halliburton for collaboration and that perfectly fits with our value proposition to collaborate and engineer solutions to maximize asset value. Geographic presence is very important in the international markets. And today, we are present everywhere that matters, which is different from prior cycles. We expect to benefit from our established footprint, geographic presence and customer and supplier relationships as international markets grow.
Finally, I want to highlight the international growth opportunity. Halliburton has an artificial lift and specialty chemicals which is new for this upcycle. This month, we completed our first year of operations on our electric submersible pump contract in Kuwait. We have already installed almost 200 ESPs, built in artificial lift service facility in country and delivered excellent performance for KOC. We also have successful installations in Oman and have ongoing ESP trials in Saudi Arabia. Upon completion of trials at the end of the year, we expect pre-qualification to participate in Saudi Aramco's future artificial lift tenders.
Latin America is another successful market for our artificial lift business where we operate in all significant land markets and just installed our 500th ESP in Ecuador. Our new chemical reaction plant in Saudi Arabia, mixed the first batch of chemicals last month and is on track to meet its ramp-up goals. This year, we expect the plant to manufacture products for our production chemicals contract with a large IOC in Oman and chemicals for our drilling fluids specialty chemicals and hydraulic fracturing product service lines. Today, Halliburton is a much stronger international competitor. And we expect to benefit more from this multi-year upcycle than ever before. This aligns perfectly with our strategy to deliver profitable international growth.
Turning to North America. This market remains strong, steadily growing and all of it's sold out. Our strategic priority is to maximize value in North America by focusing on cash flow and returns not market share. The second quarter saw another step up in both U.S. land rig activity and stages completed, with the first quarter sand supply interruptions resolved, frac activity steadily increased throughout the quarter.
As we look at the second half of 2022, Halliburton remains sold out. As for the overall market, I believe it will be all but sold out for the second half of the year due to service company discipline, long lead times for new fleet and supply chain bottlenecks for consumables. We expect public companies will steadily execute on their drilling and completion programs. Private E&Ps capitalize on available rigs and equipment in the first half of the year and will likely maintain a measured level of activity growth for the rest of the year.
We continue to believe that North America operator spending growth will eclipse 35% this year. Our customer conversations have already pivoted to 2023 plans, well in advance of the typical timeframe. These conversations make it clear that equipment capacity for 2023 is tight. Today, we see a services market in North America that is almost unrecognizable from prior cycles or even a handful of years ago. I believe that the returns focus we now see in the services market is not a temporary phenomenon.
The largest more publicly-traded pressure pumping companies now account for about two-thirds of the market. This means that investors forced discipline on the majority of the industry today. In addition, industry consolidation, structural changes to customer behavior and the requirement to self-fund capital investments, all drive capital discipline. In short, it's the result of rational economic behavior and I believe that it is here to stay.
Halliburton is well prepared to compete in this new paradigm in North America. We have the largest technology budget in the North American services industry and our advanced technologies deliver what matters to operators; efficiency, insight and emissions reduction. For example, today our customers can reduce environmental impact with our proven Zeus electric frac offering and optimized completions performance by capturing downhole insight with our SmartFleet Intelligent Fracturing Solution.
We operate in every major oil and gas basin across the United States using the same design of equipment built by in-house manufacturing to our specifications. This one design approach greatly simplifies equipment maintenance and helps minimize the supply chain challenges for spares and equipment. Finally, we have global capabilities in managing supply chain and labor complexities that we believe give us a distinct competitive advantage over domestic service providers.
To conclude on North America, I expect Halliburton to uniquely maximize value in the strong, steadily growing and all but sold out market. Globally, supply chain and labor shortages are front and center for many industries as the post-pandemic recovery stressed both raw material supply and transportation logistics. I believe Halliburton manages these shortages better than competitors.
Our global business development, supply chain and technology organizations closely monitor market trends and work to mitigate cost impacts through economies of scale in global procurement, technology modifications and efficient sourcing practices. For example, as chemical costs increase, we work with our customers to adjust our pricing for cost inflation. Operators appreciate that these price adjustments are required for us to continue delivering our services. Most customers expect and accept these adjustments.
Halliburton's world-class technology organization gives us the ability to change formulations for certain products to avoid the most inflationary inputs. We have already implemented these design changes for some of our drilling fluids and completion tool elastomers. Finally, we have internal chemical manufacturing capabilities in the U.S. and Saudi Arabia, which allow us to diversify supply, mitigate risk and better control input prices.
In North America, we employ our global HR capabilities for managing commuter labor to higher out-of-basin and avoid labor shortage pressures in local markets. This allows us to secure talent from states outside of white hot labor markets in traditional oil and gas basins. At the same time, our voluntary attrition numbers remain stable both globally and the U.S. This demonstrates that once we attract the right talent, we provide them with the right incentives and growth opportunities.
Turning now to pricing dynamics that we see playing out in North America and internationally. As I stated before, this is a margin cycle not a build cycle. In North America, net pricing improvements drove our strong C&P margin expansion in the second quarter and I expect pricing gains to continue. Here's why. Existing active equipment and experienced crews are in high demand and will continue to be highly sought after to efficiently execute programs in the second half of this year and into 2023.
The market remains all but sold out. Supply chain bottlenecks even for diesel fleet make it almost impossible to add incremental capacity this year. Halliburton has the additional advantage that our fleet primarily competes at the higher end of the pricing spectrum. Our portfolio of low emissions equipment commands premium prices and our customers see value in the efficiency and emissions profile we provide.
Internationally, we see structural tightness in many product lines, particularly drilling and wireline. Increasing activity soaked up capacity market wide. And recently, some customer request for additional equipment have to go unanswered. As equipment availability continues to tighten, we expect prices will increase further. Due to the long-term nature of international contracts, only about one-third of our work reprices every year. This means that margin and pricing inflections internationally will always materialize at a slower pace than in North America. We see evidence of customer urgency indicated by customer preference to pursue direct negotiations for contract extensions.
The efficiency gains over the last several years have all accrued directly to operators. And there is still a great deal of room in customers' economics for service providers to earn a fair and durable return. Though it often goes unsaid, a robust and investable service industry is a key enabler of our customers' ability to grow and maintain production to address the world's energy needs.
I'm thrilled with Halliburton's performance in the second quarter and our immediate and long-term opportunities. Our team is executing well on near-term tactical objectives and the long-term strategic priorities provide real tangible value for Halliburton and our shareholders. Halliburton's competitive position is unique among our peers. We have the scale and technology to benefit meaningfully and differentially from the international market expansion. And we are the leader in the strong, steadily growing and all but sold out North American market. I could not be more excited about the future of Halliburton.
Now I will turn the call over to Eric to provide more details on our second quarter financial results. Eric?
