Q2 2011 Earnings Call
July 18, 2011 9:00 am ET
Mark McCollum - Chief Financial Officer and Executive Vice President
Christian Garcia - Vice President of Investor Relations
David Lesar - Executive Chairman, Chief Executive Officer and President
Timothy Probert - President of Strategy & Corporate Development
Kurt Hallead - RBC Capital Markets, LLC
John Anderson - JP Morgan Chase & Co
William Herbert - Simmons & Company International
Angeline Sedita - UBS Investment Bank
Brad Handler - Crédit Suisse AG
James Crandell - Dahlman Rose & Company, LLC
Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc.
Douglas Becker - BofA Merrill Lynch
Ole Slorer - Morgan Stanley
Previous Statements by HAL
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Good morning, and welcome to the Halliburton's Second Quarter 2011 Conference Call. Today's call is being webcast and a replay will be available on Halliburton's website for 7 days. The press release announcing the second quarter results is available on the Halliburton website. Joining me today are Dave Lesar, CEO; Mark McCollum, CFO; and Tim Probert, President, Strategy and Corporate Development.
I would like to remind our audience that some of today's comments may include forward-looking statements, reflecting Halliburton's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2010, Form 10-Q for the quarter ended March 31, 2011 and recent current reports on Form 8-K. Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures are included in the press release announcing the second quarter results, which can be found on our website. Dave?
Thank you, Christian, and good morning, everyone. I'm very pleased with the overall performance of our business in the second quarter. Total revenues of $5.9 billion, which was a new company record, represents 12% growth sequentially. Our operating income grew 43% sequentially, with our North American and international businesses both registering double-digit growth rates. North America continued to experience strong margin growth while our international business saw a modest seasonal recovery from the first quarter.
Against prior year, revenue and operating income grew 35% and 52%, respectively, with operating income more than doubling in North America. International revenue surged 9% against the rig count growth of 5%, while operating income declined from prior year level due to the disruptions caused by the turmoil in North Africa and international pricing deterioration.
We are now seeing evidence that the international pricing is stabilizing. We believe that steady volume increases should be a precursor for overall international pricing to improve toward the end of the year.
We also believe that continued execution of our strategies will lead to margin expansion in both our North America and international businesses and provide us with continued overall strong performance for the remainder of 2011 and beyond.
Let me now discuss our operating results in more detail, starting with North America. North America experienced sequential revenue and operating income growth of 16% and 36% in the second quarter compared to a U.S. rig count growth of just 6%. We achieved these results despite weather-related issues in the Bakken and high decrementals we get from the Canadian spring breakup. Sequential incremental operating margin for the quarter was 57%, which is the highest level since the start of the North American recovery in the third quarter of 2009. More importantly, for the first time in many years, incremental margins were consistent between our C&P and D&E divisions, evidence of the continued adoption of our integrated services offerings and that all of our well construction-related PSLs are benefiting from this strong market.
Overall, growth in the demand for our services has outpaced capacity additions, and we expect this imbalance to continue going forward. We have always been confident in the strength of this North American cycle even when others have not been, and our results this quarter validate our bullish view of the market.
The continued shift to oil and liquids-rich activities has propelled sustained volume growth in our U.S. land business. Even gas drilling, which was down only 2% in the quarter, remained relatively resilient, spurred by the increased demand for power generation due to substitution of natural gas for coal and harsh summer temperatures in various regions. Last year, we discussed the strategy of staying with our dry gas basin customers and not moving equipment elsewhere, and to work with them to find a business model that allowed both of us to achieve our financial goals by driving project efficiencies in the high-quality portions of their gas portfolios.
While we did sacrifice some margin opportunities at that time, and some of you were critical of that, I believe the strategy is starting to pay off. Our customers are seeing the returns they need, and we are now seeing only a small difference in operating margin between the gas plays and our liquids-rich shale plays.
Despite the success, we remain a bit cautious on natural gas drilling for the rest of the year. We continue to believe, however, that any further curtailment would be outweighed by continued expansion in liquids activity.