Halliburton Company (HAL)

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Halliburton Company (HAL)

Barclays CEO Energy-Power Brokers Conference

September 5, 2018 7:45 a.m. ET


Jeff Miller - CEO


John David Anderson - Barclays Bank PLC


John David Anderson

Welcome to day two of the Barclays Energy Conference. This morning, we're kicking it off with Halliburton. Let me introduce Mr. Jeff Miller, he is the CEO of Halliburton. And Halliburton, of course, is one of the largest providers of services to the energy industry, products and services across the full upstream oil and gas chain throughout the lifecycle of the reservoirs.

Jeff has held a number of executive roles at Halliburton during his tenure there, including COO, up until 2014 when he was named President. He's also a CPA beginning of his career at Arthur Anderson. So please help me introduce Mr. Jeff Miller, CEO of Halliburton. Thanks, Jeff.

Jeff Miller

Thank you.

Well, good morning, everyone, and it's very good to be here. Before we begin though, I at least want to ask that you note our Safe Harbor language behind me which indicates that our presentation today will include forward-looking remarks, and that outcomes may differ over time. And today I'm going to talk about four things really; first the macro outlook, then a deeper dive on international and North America activity, then our strategy, and then finally, our views around capital allocation.

Let me start with a look at macro, the supply and demand. The short answer is that the macro outlook is the best it has been in four years. I'm super excited about the outlook and its positive implications for Halliburton, translated, even better returns and free cash flow. So let me start with demand.

Global demand for hydrocarbons is solid. The IMF global GDP growth outlook is 3.9% for 2019. The combination of economic growth, affordable fuel prices and demand for petrochemicals sets the stage for continued positive demand trends. The bigger topic for the last four years however has been supply. And we have more clarity today regarding both sources of supply and limitations on those sources, the three meaningful sources being North America, Middle East Russia, and OPEC non-U.S.

And I get the benefit of spending a lot of time in each of these markets and I believe that the temporal issues affecting North America, the spare capacity limitations in the Middle East and Russia and the significant under-investment in OPEC non-OPEC for the last four years creates an outlook for supply tightness.

In North America, unconventional production has become less of a swing producer and more part of the global base supply. Now this means it's a consistent part of the supply outlook and no longer a surprise. We also see that the service intensity and the market constraints, like pipeline takeaway, inflation, labor, trucking, et cetera, will likely moderate the pace of production growth at times. Nevertheless, the amount of resource in place, the short cycle returns, and the lower country risk will continue to attract investment to this robust resource base.

Middle East and Russia have been clear in their intent to stabilize oil prices, and have done so through limiting production. The recent production increases that we've seen from them appear to be the result of their intent to fill the supply gap created by production declines in other OPEC partners and the sanctions on Iran. Therefore, the result of spare capacity in the Middle East and Russia is reduced.

Non-OPEC non-U.S. capital investment has declined significantly in recent years, and I expect that the effects of that under-spending will cause production to plateau in 2019. Given the multi-decade lows in oil discoveries and long lead times for investment, I would also expect declines in 2020 and beyond. And additional service activity will be required to address each of these things.

The tightening market supports oil price and drives more activity for Halliburton. Further, the type of activity that we see is even more valuable to Halliburton, given our relative strength in completions, which is how the market will respond, drilling more mature fields, infield drilling, and production optimization. The current commodity price stability is evidence of this macro outlook.

So now let's move on and take a closer look at our international business. We see a broad-based recovery underway, demonstrated by a two times increase in tender activity that we see, increasing rig counts, and more constructive customer discussions. And Halliburton is better positioned to take advantage of this growth than ever before.

I call the bottom of the international market about this time last year. And the international rig count is up about 4% since that time. The increase from then and till now is focused mostly in the Middle East and the North Sea. It started with the flurry of large scope tenders. Our customers are smart, and sense that the bottom -- that they were at the bottom. The good thing is this better defines activity increases for the future. Unfortunately, these early cycle tenders are very competitive.

These tenders are important though for three primary reasons. First, they indicate the beginning of an upcycle. Two, they establish a baseline of activity that covers geographic fixed costs. And finally, they begin to tighten spare service capacity in those geographies.

Now, clearly there is work to be done to optimize these early cycle contracts and improve margins, but that work is underway. Going forward, pricing should stabilize, and overall margin should grind higher going in to next year. In the near-term, we are seeing slower-than-expected activity ramp on several new contracts in the Middle East, which will have a short-term impact on our results. But what we see going forward is much broader; meaning, we see signs of improvement in Africa, Southeast Asia, and selected countries in Latin America. And while this recovery is off a low base, we see E&P spending projections it show double digit growth in 2019. Now the broader recovery will tighten capacity for both equipment and people increasing pricing in certain markets. And thus, the combination of increasing activity and better pricing will generate margin inflection.

Read the rest of this transcript on seekingalpha.com