Halliburton Company (NYSE:HAL) Q4 2022 Earnings Call Transcript

Halliburton Company (NYSE:HAL) Q4 2022 Earnings Call Transcript January 24, 2023

Operator: Good day, and thank you for standing by. Welcome to the Fourth Quarter 2022 Halliburton Company Earnings Conference Call . Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, David Coleman, Senior Director of Investor Relations. Please go ahead.

David Coleman: Hello, and thank you for joining the Halliburton Fourth Quarter 2022 Conference Call. We will make the recording of today’s webcast available on Halliburton’s Web site after this call. Joining me today are Jeff Miller, Chairman, President and CEO; and Eric Carre, Executive Vice President and CFO. Some of today’s comments 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 31, 2021, Form 10-Q for the quarter ended September 30, 2022, recent current reports on Form 8-K and other Securities and Exchange Commission filings.

We undertake no obligation to revise or publicly update any forward-looking statement for any reason. Our comments today also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our fourth quarter earnings release and in the quarterly results and presentation section of our Web site. Now I’ll turn the call over to Jeff.

Jeff Miller: Thank you, David, and good morning, everyone. Halliburton finished the year strong with solid financial and operational performance in both divisions and both hemispheres. Halliburton’s execution in 2022 demonstrates the earnings power of our strategy, and I expect this earnings power to strengthen in 2023 and beyond. Let’s jump right into the 2022 highlights. We delivered full year total company revenue of $20.3 billion and operating income of $2.7 billion. Adjusted operating income grew 70% compared to 2021 with improved margin performance in both divisions. Our full year international revenue grew 20% over 2021, and our revenue and operating income increased each quarter in 2022. I am pleased with the international growth and margin progression Halliburton demonstrated this year despite a second quarter exit from our Russian business.

Our full year North America revenue increased 51% over 2021 with improved margins driven by activity and pricing gains. Both our drilling and evaluation and completion and production divisions grew revenue and margins this year. The Drilling and Evaluation division generated full year operating margins of 15%, an increase of 320 basis points over 2021. The steady expansion of D&E margins demonstrates the global competitiveness of our D&E business. Our Completion and Production division posted 18% full year operating margins, a year-over-year increase of 290 basis points, driven by activity and pricing improvements. We generated strong free cash flow of $1.4 billion, retired $1.2 billion of debt, maintained capital spending within 5% to 6% of revenues and ended the year with $2.3 billion of cash on hand.

Finally, our service quality performance excelled in 2022. Nonproductive time improved by 7% over 2021, which drove the highest ever uptime across our business. Execution is at the heart of who we are and our results are a testament to our employees’ continued commitment to superior service quality. I’m pleased with the fourth quarter results. Revenue grew 4% and operating income grew 15% sequentially. Margins increased in both C&P and D&E divisions and in both hemispheres. Cash flow from operations in the quarter was $1.2 billion and free cash flow was $856 million. Building on the strong foundation of execution, today, I am pleased to announce the following shareholder return actions: first, our Board approved an increase in our quarterly dividend to $0.16 per share in the first quarter of 2023, representing a 33% increase from last year; second, we have resumed share buybacks under our existing Board authorization of approximately $5 billion and in the fourth quarter of 2022, bought back shares totaling $250 million; finally, our Board approved a capital return framework that we expect going forward to return at least 50% of our annual free cash flow to shareholders through dividends and buybacks.

These actions demonstrate Halliburton’s confidence in our business, customers, employees and industry outlook. Before we continue, I want to take a moment and thank the Halliburton employees around the world who made these results possible. Our success this quarter and throughout 2022 was a direct result of your hard work and dedication. I thank you for your relentless focus on safety, operational execution, customer collaboration and service quality performance. Now let’s turn to the macro outlook where everything I see today points towards continued oil and gas tightness. On the supply side, in the US, an increased spend of almost 50% and activity growth of nearly 30% yielded a production increase of about 5%. Given the increased spend required to grow and replace production, I expect activity to remain strong and service intensity to increase through 2023.

I see the same supply side challenges in the international markets. One indicator being that despite OPEC’s 2022 production quotas, several members did not meet their goals. On the demand side, we saw the resilience of oil and gas demand throughout 2022, even as central banks raised interest rates to combat inflation. I expect oil and gas demand to remain strong. As we start 2023, I also expect China’s reopening to further increase demand. It’s clear to me that oil and gas is in short supply and only multiple years of increased investment in both stemming declines and reserve additions will solve short supply. I believe these investments will drive demand for oilfield services for the next several years. The unique feature of this up cycle, as I see it, is the investor driven return discipline by both operators and service companies, which I expect drives a longer duration cycle and translates into years of increasing demand for Halliburton services.

Now let’s turn to Halliburton, starting with our performance in the international markets. We successfully executed our strategy to deliver profitable international growth through competitive technology offerings, improved pricing and selective contract wins. International revenue grew 20% year-on-year with strong growth and margin expansion from both divisions. This gives me confidence in the earnings power of our international strategy. In 2023, we expect international activity to grow at least mid-teens with most new activity coming from the Middle East and Latin America. As this up cycle continues, I believe that we will see substantial growth in all international markets, both onshore and offshore, led by development activity and increased spend at the wellbore.

This is excellent news for Halliburton. About half our revenue comes from international markets. We have leading positions in key well construction product lines and a strong geographic footprint. I’m excited about the growth and profit opportunities that will come with the adoption of our new drilling technology platforms. Our iCruise drilling technology, iStar logging while drilling platform and LOGIX automation capabilities. Each of these technologies are in different stages of implementation, and we are already seeing benefits. Our iCruise directional drilling system represents about half of our rotary steerable fleet while drilling about 70% of our global footage. It is a key contributor to increasing international profitability. Our iStar logging while drilling platform now delivers high definition measurements closer to the bit and deeper into the formation.

While early in its rollout with only 600,000 feet logged, the iStar platform directly complements the iCruise directional drilling system. Finally, LOGIX automates drilling with iCruise and iStar. With more than 7 million feet drilled in 20 plus countries the LOGIX platform reduces operational risk and delivers wells reliably. Turning to North America. We had a terrific year. Our performance demonstrated our strategy to maximize value in North America through capital efficiency, improved pricing, differentiated technology and alignment with high quality customers. In 2022, our North America revenue grew 51% year-over-year, while revenue in the fourth quarter was flat sequentially due to weather related downtime late in the year. Looking ahead, we expect strong activity and anticipate customer spending to grow by at least 15% in 2023.

The market for equipment is tight. Lead times for new and replacement equipment remain long and service companies remain disciplined. Our completions calendar is fully booked and pricing continues to improve across all product service lines. Against this constructive market backdrop, Halliburton will outperform with our unique strategy to maximize value. We see strong demand for our Zeus e-fleets with several repeat customers contracting additional fleets. Zeus is a proven design with a strong operational track record. Our new automated fracturing platform, Optiv, fully automates equipment operation, reduces maintenance and extends component life. We are in the early innings of this rollout, having proven it over 15,000 stages, and I expect it to drive higher capital efficiency.

Finally, our SmartFleet intelligent fracturing system is gaining significant traction with customers. SmartFleet data helps customers answer key questions such as the existence of flow barriers, well interference, parent-child performance and depletion, all to improve completion performance. These are a few examples of how technology maximizes value in North America. Each example delivers better margins either by reducing capital cost or increasing capital velocity and in many cases, both. Halliburton is unique and is the only integrated services company to have a strong presence in both North America and international markets, a strong execution culture and differentiated technology. We will continue to sharpen our value proposition to collaborate and engineer solutions to maximize asset value for our customers.

I am confident in Halliburton’s strong long term outlook. This is the best setup and market outlook for oilfield services and Halliburton that I have seen in a very long time. Our exceptional financial performance this year is a clear result of the execution of our strategic priorities to maximize value in North America, deliver profitable international growth and drive capital efficiency. I expect Halliburton to continue to deliver financial outperformance. Now I will turn the call over to Eric to provide more details on our financial results. Eric?

Eric Carre: Thank you, Jeff, and good morning. Let me begin with a summary of our fourth quarter results. Total company revenue for the quarter was $5.6 billion, a 4% increase over the third quarter while operating income was $976 million, an increase of 15% over third quarter operating income. Operating margin for the company was 17.5% in the fourth quarter, a 460 basis point increase over operating margins in the fourth quarter of 2021. These results were primarily driven by increased global activity, pricing and year end product and software sales. Our fourth quarter reported net income per diluted share was $0.72, an increase of $0.12 or 20% from the third quarter. Our 2022 full year adjusted net income per diluted share nearly doubled from 2021.

Beginning with our Completion and Production division. Revenue in the fourth quarter was $3.2 billion, a 1% increase when compared to the third quarter, while operating income was $659 million, an increase of 13% when compared to the third quarter. Despite weather related downtime late in the year, C&P delivered an operating income margin of 20.7%, the highest operating income margin since 2012. This was due to improved pricing, service efficiency and activity mix in North America land as well as increased activity in international markets. In our Drilling and Evaluation division, revenue in the fourth quarter was $2.4 billion, an increase of 8% when compared to the third quarter, while operating income was $387 million, an increase of 19% when compared to the third quarter.

These results were driven by higher year end software sales and an uptick in international activity. Operating margin increased 210 basis points above Q4 2021, which demonstrates the global competitiveness of our D&E business. Moving on to geographic results. Our international revenue increased 9% sequentially due to solid year end sales, pricing gains and activity increases. In North America, revenue in the fourth quarter was $2.6 billion, a 1% decrease when compared to the third quarter. This decrease was primarily driven by weather related downtime in North America land. Latin America revenue in the fourth quarter was $945 million, a 12% increase sequentially due to higher activity in Mexico and across the region. Europe/Africa revenue in the fourth quarter was $657 million, a 3% increase sequentially driven by higher completion tool sales, drilling activity and well intervention services across the region.

These increases were partially offset by lower activity in Norway. Middle East/Asia revenue in the fourth quarter was $1.4 billion, a 10% increase sequentially, primarily resulting from higher software sales and drilling and evaluation services across the region. Now I’d like to cover some additional financial items. In the fourth quarter, our corporate and other expenses was $70 million. For the first quarter, we expect our corporate expenses to be slightly lower. Net interest expense for the quarter was $74 million, a slight decrease due to higher yields on cash balances and debt retirement in September. For the first quarter, we expect this expense to remain approximately flat. Other net expense for the quarter was $60 million, primarily related to unfavorable foreign exchange movements.

For the first quarter, we expect this expense to be slightly lower. Our normalized effective tax rate for the fourth quarter came in at approximately 21%. Based on our anticipated geographic earnings mix, we expect our first quarter effective tax rate to increase roughly 150 basis points. Capital expenditures for the fourth quarter were $350 million with our 2022 full year CapEx totaling approximately $1 billion. Turning to cash flow. For the full year, we generated $2.2 billion of cash from operations and delivered approximately $1.4 billion of free cash flow. As a result, we ended the year with approximately $2.3 billion in cash. Next, I’d like to provide a few more details about our capital return framework. First, an important pillar of our capital framework is to maintain CapEx between 5% and 6% of revenue.

I believe the spending level is appropriate and supports our earnings growth and free cash flow generation over the next several years. Second, we expect to return a minimum of 50% of free cash flow to our shareholders in the form of dividends and share buybacks. Our Board of Directors increased our quarterly dividend by 33% to $0.16 per share, effective with a dividend payment in March 2023. Finally, in the fourth quarter, we repurchased $250 million of shares and we have remaining authorization of approximately $5 billion. We were clear about our goals to reduce debt and increased cash returns to shareholders, and I am pleased that we’ve announced these actions today. I believe Halliburton’s capital return framework provides visibility for investors and affords us the flexibility to pursue acquisitions and strengthen the balance sheet.

Now let me provide you with some comments on how we see the first quarter. 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 business. As a result, in our Completion and Production division, we anticipate sequential revenue to be essentially flat with the fourth quarter while margins will drop between 75 and 125 basis points. In our Drilling and Evaluation division, we expect revenue to decrease in the low to mid single digits sequentially while margins are expected to be down 25 to 75 basis points. I will now turn the call back to Jeff.

A – Jeff Miller: Thanks, Eric. Let me summarize our discussion today. Oil and gas is tight and only multiple years of increased investment will solve short supply, which translates into years of increasing demand for Halliburton Services. The announced dividend increase, share buybacks and Halliburton’s new capital return framework provides shareholders with clarity and consistency on how we expect to return cash to shareholders. This exceptional financial performance is a clear result of our execution of Halliburton’s strategic priorities. I expect Halliburton to continue to deliver financial outperformance, strong free cash flow and shareholder returns. And now let’s open it up for questions.

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Q&A Session

Operator: Our first question comes from David Anderson with Barclays.

David Anderson: So Halliburton’s international business is now half of overall revenue. Middle East has been a big part of that growth over the years, it was up 10% this quarter. Just wondering if you could just give us a little bit more insight into kind of your views on that market over the next kind of couple of years. So based on activity is how it’s trending and the ramp up is going on, I guess, in the near term, is it reasonable to think the growth should sort of stay at these levels the next several quarters? And also, if you could highlight some of the countries where you see most of the growth coming from over the next several years, including kind of where you think you’re best positioned in terms of footprints or product lines in the Middle East?

Jeff Miller: Look, I’m really excited about international growth. I think I said in my call, north of 15%, which clearly, I expect it will be north of that and should continue actually to expand, I think, over the next few years just because we will — it takes longer to get traction internationally, get things contracted. And so really excited about what we see. With our international business being about half of our business today, that indicate or demonstrates that we have strong footprint sort of everywhere where we think it’s important and our technology, as I described, rolling out. So clearly, it’s got strong application in the Middle East and Latin America, which we kind of saw this year but it’s the same technology that’s applicable in all corners of the world.

And so I think we’re early in the rollout a lot of this technology and that’s only going to help strengthen our international business. As we see activity grow, I expect our share of that to grow and improve margins as we focus on profitable international growth.

David Anderson: And if I could shift over on the US side, there’s been a lot of recent talk about activity levels slowing down in the US. The rig count has drifted down a bit in recent weeks, been some weather, as you highlighted, and there’s also some concerns out there in the natural gas market. I also know how any E&Ps have announced any spending budgets this year. So I was wondering if you can just help us out with a little bit of visibility on the market. Kind of what are your customers saying about kind of how activity is going to play out into the spring? And then based on that, kind of how do you see sort of the dynamics of that pressure pumping market in terms of capacity and the tightness for 2023?

Jeff Miller: Look, North America is going to, in my view, will surprise to the upside. Our outlook is north of 15% growth. Clearly, we outpaced that last year and that’s what I said last year. I don’t have any clients that are not — that are — that plan to get smaller, they all plan to grow. And I think that North America has a dynamic of the more — the more you grow, the more the market has to work in order to maintain even the growth given decline curves. And so I expect we see increased service intensity throughout ’23 and likely beyond, the market is extremely tight for frac equipment and the supply chain still backed up. And so I don’t see — I see discipline in the marketplace and more importantly, I see sort of required discipline based on equipment being unavailable.

So the more activity we see then ultimately, the more price we will see. And so I am very positive on ’23 North America. So I think the the concerns are misplaced and rig count likely moves up actually as DUCs get blown down.

Operator: Our next question comes from Arun Jayaram from JPMorgan.