Halliburton Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2024

There are 14 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Halliburton Company 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After this presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I now like to hand the conference over to your speaker today, David Coleman, Senior Director of Investor Relations.

Speaker 1

Hello and thank you for joining the Halliburton 4th Quarter 2023 Conference Call. We will make the recording of today's webcast available for 7 days on Halliburton's website 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.

Speaker 1

These risks are discussed in Halliburton's Form 10 ks for the year ended December 31, 2022 Form 10 Q for the quarter ended September 30, 2023 recent current reports on Form 8 ks and other Securities and Exchange Commission filings. We undertake no obligation to revise or publicly any forward looking statements 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 4th quarter earnings and in the Quarterly Results and Presentations section of our website. Now I'll turn the call over to Jeff.

Speaker 2

Thank you, David, and good morning, everyone. 2023 was a great year for Halliburton. Both of our divisions achieved their highest operating margins in over a decade and we returned $1,400,000,000 to shareholders. Here are the highlights. We delivered full year total company revenue of $23,000,000,000 an increase of 13% year over year and operating income of $4,100,000,000 an increase of 33% compared to 2022 adjusted operating income.

Speaker 2

Our international business demonstrated strong growth with our revenue up 17% year over year despite our exit from Russia in August 2022, completing 2 consecutive years of high teens growth. Our North America business showed strength with revenue up 9% year over year despite rig count declines. Completion and production revenue grew 18% year over year and margins expanded 312 basis points. Drilling and Evaluation grew 7% year over year and margins expanded 171 basis points. Turning now to Q4, where Halliburton delivered exceptional margin performance supported by than anticipated completion tool sales globally, strong performance across multiple high margin product lines and favorable weather in North America.

Speaker 2

Completion and production margins finished the year almost 100 basis points higher than Q4 of 2022. International revenue grew 12% year over year led by the Europe Africa region, which grew revenue 17%. Finally, during the Q4, we generated $1,400,000,000 of cash from operations, dollars 1,100,000,000 of free cash flow and repurchased approximately $250,000,000 of common stock and $150,000,000 of debt. Before we continue, I want to take a moment and thank the Halliburton employees around the world who made these results possible. Our success last quarter and throughout 2023 was a direct result of your hard work and dedication.

Speaker 2

Thank you for your relentless focus on safety, operational execution, customer collaboration and service quality performance. Let me begin with my views on the strength of the oilfield services market. As we look past the new In near term commodity price volatility, the fundamentals for oilfield services remain strong. Here are two reasons why. First, we see an increase in service intensity everywhere we operate.

Speaker 2

Whether it's longer laterals in North America, Smaller and more complex reservoirs in mature fields or offshore deepwater, customers require more services to develop their resources, not fewer. 2nd, long term expansion of the global economy will continue to create enormous demands on all forms of energy. I expect oil and gas remains a critical component of the global energy mix with demand growth well into the future. With this positive macro outlook, I believe Halliburton's strong execution, leading technology and collaborative approach will drive demand for Halliburton's products and services around the world. Now let's turn to international markets where Halliburton's performance delivered another year of profitable growth.

Speaker 2

Halliburton's full year international revenue grew 17% year on year and our quarterly revenue grew 12 percent compared to the same quarter of last year. Each region delivered year on year revenue growth throughout 2023 and both divisions delivered improved international margins year on year. Our results in 2023 demonstrate the effectiveness of Halliburton's profitable international growth strategy, the strength of our global competitiveness across product lines and the power of our value proposition with customers. In 2024, We expect international E and P spending to grow at a low double digit pace and foresee multiple years of sustained activity growth. Although we anticipate regional differences in growth rates for 2024, we believe the Middle East Asia region will likely the greatest increases in activity with other regions closely behind.

Speaker 2

As we look out to 2025, we expect Africa and Europe among others to demonstrate above average growth. Beyond 2025, we see an active tender pipeline with work scopes extending through the end of the decade, which gives me confidence in the duration of this multiyear upcycle. While we expect overall activity growth, We also see above market growth within our well construction product lines, where customers choose Halliburton to improve the reliability, consistency and efficiency of their drilling operations. One such technology is our LOGICS autonomous drilling platform, which is now used on 90% of our iCruise runs worldwide. Customers also rely on Halliburton's subsurface expertise to develop today's most complex reservoirs.

Speaker 2

This requires technologies to reduce uncertainties such as our DecisionSpace 365, unified ensemble modeling and advanced formation evaluation systems like our Istar logging while drilling platform and Reservoir Examiner formation testing service. These technologies enable customers to target smaller reservoirs, identify bypassed reserves and gather reservoir properties in real time. We see reservoir complexity increasing worldwide and I the capabilities of these systems will continue to deliver customer value and lead in overall growth within our formation evaluation portfolio. For completion and production, we also expect increased adoption of our technologies like intelligent completions, multilateral solutions and artificial lift. Our intelligent multilateral completions enable customers to produce, inject and control multiple zones in a wellbore, which is critical for offshore developments, a segment we expect to outpace the overall market.

Speaker 2

In artificial lift, our strategy targets markets like the Middle East and Latin America, where our differentiated performance and existing footprint create a solid foundation for profitable growth. We also expect strong demand for our services in carbon capture and storage where Halliburton's leading capabilities to design, deliver and validate reliable barriers play a crucial role. As our customers invest in carbon storage, Our tailored cement designs and casing equipment technology enable them to address the unique challenges of long term carbon sequestration. With this activity growth, the availability of equipment and experienced personnel remains tight. We expect asset intensive offshore activity to increase, which will further tighten the market.

Speaker 2

As offshore represents over Half of our business outside North America land, we expect this activity to drive improved pricing and higher margins for our business. I am confident in Halliburton's strategy for profitable international growth and I am excited about our performance in 2024 and well into the future. Turning to North America. Halliburton strategy yielded strong results in 2023. Our full year North America revenue of $10,500,000,000 was a 9% increase when compared to 2022 Despite sequentially lower rig count, 4th quarter margins in North America land were relatively flat quarter over quarter despite lower revenue.

Speaker 2

Our full year and 4th quarter results demonstrated the strength of our differentiated business and the successful execution of our strategy to maximize value. The dynamic North America market continues to evolve with larger customers and stable programs, elevated quality expectations and greater demand for technology to improve recovery and well productivity. This evolution fits perfectly with Halliburton's value proposition. Our Zoos Electric fracturing solution is highly sought after in this market where its seamless combination of electric frac, automation and real time subsurface measurements uniquely address customer requirements. We believe customers demand ZEUS because it provides the lowest total cost of ownership and it's shown to be the most proven and reliable solution in the market.

Speaker 2

The market pull for this technology has been strong. The combination of Zoos fleets working in the field today Anzu's fleets contracted for 2024 delivery represent over 40% of our fracturing fleet. I expect well over half of our fleets will be electric in 2025 with all of these e fleets on multiyear contracts generating full return of and return on capital during their initial contract terms. Consistent with our strategy from the beginning, We plan for our Zeus deliveries in 2024 to replace existing fleets rather than add incremental fleet capacity. This is how we maximize value in North America.

Speaker 2

The growth of Zoos and our commercial approach has transformed the North America completion services market. Technology is only transformative when adopted and is only adopted at the rate of Zeus when it works and creates meaningful value for our customers. Zoos' rapid adoption, both by new and repeat customers, tells us our solution is the right one for North America. Turning to our 2024 North America outlook. We expect a continued strong business with the combination of stable levels of activity in the market and the contracted nature of Halliburton's portfolio.

Speaker 2

We expect this results in a flattish revenue and margin environment for Halliburton. To close out, I am confident in our strategies to maximize value in North America and for profitable growth internationally. In 2023, Halliburton demonstrated the power of these strategies, the consistency of our execution and the value of our differentiated technology. We generated about $2,300,000,000 of free cash flow during the year, retired approximately $300,000,000 of debt and returned $400,000,000 of cash to shareholders through stock repurchases and dividends, which represents over 60% of our free cash flow. Today, I am pleased to announce that our Board of Directors approved an increase of our quarterly dividend to $0.17 per share.

Speaker 2

Our outlook for Oilfield Services remains strong, and I expect we will deepen and strengthen our value proposition and generate significant free cash flow. Now I'll turn the call over to Eric to provide more details on our financial results. Eric?

Speaker 3

Thank you, Jeff, and good morning. 2023 was a strong year for Halliburton. Multiple financial and operational metrics showed the best business performance in recent memory, any one of which are worthy of highlighting. More important than any single metric, however, the overall business performance demonstrated the effectiveness of our strategy. Here are a few highlights.

Speaker 3

In our C and P division, our 2023 margins of 20.7% were the highest since 2011. In our D and E division, 2023 margins of 16.5% were the highest since 2,008. In North America, our strategy to maximize value is about structurally changing the risk and return profile of our business. We delivered steady margins through the year despite lower activity, driven by the rollout of our Zoos fleet and their associated contract terms and the strength of our well construction business. Internationally, our profitable growth strategy drove revenue and margin improvement across all of our geographies.

Speaker 3

Revenue was the highest in the last 8 years and profit margins were the highest in over a decade. Beyond pricing and activity, this is the result of the multiyear investment in our drilling business and technology differentiation across multiple product Our focus on capital efficiency allowed this revenue growth and structural margin improvement, while capital spending remained within our target range of 5% to 6% of revenue. Collectively, These results generated about $2,300,000,000 of free cash flow, the highest cash generation in the last 15 years. Let's turn now to our 4th quarter results. Our Q4 reported net income per diluted share was $0.74 Net income per diluted share adjusted for losses in Argentina primarily due to the currency devaluation was $0.86 Total company revenue for the Q4 of 2023 was $5,700,000,000 Operating income was $1,100,000,000 and operating margin was 18.4%, a 95 basis point increase over Q4 2022.

Speaker 3

Beginning with our Completion and Production division, Revenue in Q4 was $3,300,000,000 Operating income was $716,000,000 and operating income margin was 22%. Our better than anticipated results were driven by the best 4th quarter of completion tool sales in 9 years, strong performance across multiple product lines and favorable weather in North America. In our Drilling and Evaluation division, revenue in Q4 was $2,400,000,000 Operating income was $420,000,000 and operating income margin was 17%, an increase of 122 basis points over Q4 last year. These results were in line with our expectation and driven by international software sales, higher project management activity in the Eastern Hemisphere and increased fluid services in the Western Hemisphere. Now let's move on to geographic results.

Speaker 3

Our Q4 international revenue increased 4% sequentially, which was our highest international revenue quarter since 2015 and 10th consecutive quarter of year on year revenue growth. Q4 sequential growth was led by the Middle East region driven by improved activity across multiple product lines and strong year end completion tool sales. Europe Africa demonstrated sequential growth consistent with the overall international market with higher activity in Africa offsetting lower product sales in Europe. Latin America revenue declined slightly in the 4th quarter where reduced completion related activity following a very strong third quarter However, we experienced fewer weather related events than expected. As weather related downtime is more expensive than planned downtime, this means our Q4 North America land margins were higher than anticipated.

Speaker 3

Additionally, completion tool sales in the Gulf of Mexico delivered the strongest quarter in 3 years. Moving on to other items. In Q4, our corporate and other expense was $63,000,000 For the Q1 of 2024, we expect our corporate expenses to be flat. Our SAP deployment remains on budget and on schedule to conclude in 2025. In Q4, We spent $15,000,000 or about $0.02 per diluted share on SAP S4 Migration, which is included in our results.

Speaker 4

For the Q1

Speaker 3

2024, we expect these expenses to be approximately $30,000,000 or $0.03 per share due to the timing associated with accelerated phases of the rollout. In 2024, we expect just spent $120,000,000 $80,000,000 in 20.25. Net interest for the quarter was $98,000,000 slightly higher than expected primarily due to premiums associated with debt buybacks. For the Q1 of 2024, we expect net interest expense to be roughly $85,000,000 Other net expense for Q4 was $16,000,000 lower than our prior guidance due to the non GAAP treatment of the Argentinean peso devaluation. For the Q1 2024, we expect this expense to be about 35,000,000 Our adjusted effective tax rate for Q4 was 17.9%, lower than expected due to discrete items.

Speaker 3

Based on our anticipated geographic earnings mix, we expect our Q1 2024 effective tax rate to be approximately 21%, slightly lower than our anticipated full year effective tax rate. Capital expenditure for Q4 were $399,000,000 which brought a Full year CapEx totaled to $1,400,000,000 Approximately 60% of our CapEx was deployed to international and offshore markets in 2023 and we expect this ratio to remain similar in 2024. For the full year of 2024, we expect capital expenditures to remain approximately 6% of revenue. Our Q4 cash flow from operations was $1,400,000,000 and free cash flow was $1,100,000,000 bringing our full year free cash flow to about $2,300,000,000 For 2024, we expect free cash flow to be directionally higher. Now let me provide you with some comments on our expectations for the Q1.

Speaker 3

As is typical, Our results will be subject to weather related seasonality and the roll off of significant year end product sales. As a result, in our Completion and Production division, we anticipate sequential revenue to be flat to down 2% and margins lower by 125 basis points to 175 basis points. In our Drilling and Evaluation division, We expect sequential revenue to decline between 1% to 3% and margins to be lower by 25 basis points to 75 basis points. I will now turn the call back to Jeff.

Speaker 2

Thanks, Eric. Let me summarize our discussion today. 2023 was a great year for Halliburton. We generated about $2,300,000,000 of free cash flow and returned over 60% of free cash flow to shareholders Through dividends and stock repurchases, we're committed to return over 50% of our free cash flow to shareholders in 2024. For our international business, we expect low double digit growth driven by the power of our value proposition, global competitiveness across all product lines and our profitable growth strategy.

Speaker 2

In North America, we expect a continued strong business driven by stable activity, our differentiated technical position with our Zeus Electric Frac Solution and the increasingly contracted nature of our business. And now let's open it up for questions.

Operator

Thank Our first question comes from David Anderson with Barclays. You may proceed.

Speaker 5

Great. Thanks. Good morning, Jeff. How are you?

Speaker 6

Good morning, David.

Speaker 5

So a question on the C and P margins that held Flat during the quarter and you said U. S. Land was holding flat. I was hoping you could talk a little bit about the influence of your growing e frac on the bottom line. We know the operational advantages, but I was wondering if you could talk about how it impacts financially.

Speaker 5

How does e frac say compared to say your Tier 4 dual fuel, the diesel fleets just in terms of pricing and operating costs? Trying to get a sense of how accretive this new equipment is. And sort of secondarily on that with E and P consolidation well underway and we look out say 12 months to 24 months, would you expect the majority of your efrag fleets to be with these larger operators under multi year contracts?

Speaker 6

Yes. Well, thanks, David. Look, efleets are accretive. They're accretive For a couple of reasons. Number 1, highly efficient to operate from our standpoint.

Speaker 6

And so that makes them More accretive. Clearly, they are bringing a lot of value to clients and therefore they're priced and thought about differently in the marketplace. And so look, I expect that, that will continue into the future. But I think what's most important is the contracted nature of the fleets, which mean a couple of things also. Number 1, that the pricing is sticky, but it's sticky because it's contracted over time and the Value is thought about and so sophisticated procurers can look at that and model that and we can model it as well and comfortable with the value created.

Speaker 6

But I think the second thing as we think about what types of customers Look at eFleets, these are not these aren't a spot market solution. I mean, the Companies that are interested in eFleets are those that have steady programs, work through cycles, have a clear vision of where their business needs to go and are willing Commit to the technology to deliver that over the long term. And so and really it's an entire system. If we think about Electric Fleet, it's obviously, it's an efficient, lowest TCO electric solution, but it's also Automated, which drives a level of precision around fracking that I've never seen before. And so that clients know that they're delivering what they expect to deliver and then finally the subsurface measurement.

Speaker 6

I bring all of that up because that's part of what drives it being accretive. A, creates a lot more value, therefore, is more accretive then a Tier 4 diesel fleet clearly, and then also a different set of conditions, which also changes the return profile of these assets as they go into the market. Hope that helps, Ned.

Speaker 5

It does. A clear differentiation there. So separate Question here, I noticed in your release you announced 2 new collaborations with other service companies, 1 in Reservoir Analysis, the other in MPD. It sort of effectively fills a few of your weaker spots of your portfolio. And if I just think back to last cycle, we saw a number of acquisitions, but I don't recall too many collaborations out there.

Speaker 5

I mean, on the one hand, I guess, from my point of view, on the one hand, maybe you're testing the waters a bit, but on the other, it seems like it's a pretty good way to fill product lines without spending a lot of capital. Was wondering if you could talk about this strategy and why it's different during the current cycle and would you expect to enter more collaborations in the coming years?

Speaker 6

Look, I think it's more a function of technology that we have and when we see we've developed some things around Digital cores and the ability to evaluate them digitally, for example, but trying to buy our way into the entire core space, we'd rather partner with who we think the premier core analysis company is. And so we're able to bring our technology to that. And Effectively, it's a complement our strategy where we make better returns, doing the things that we've developed and know how to do. And obviously, we believe Core Labs is a fantastic company. And so we're able to bring something to that that we believe creates more value rather than trying to enter into a different type of arrangement.

Speaker 6

You mentioned the other one with oil states, Similar kind of thing, got terrific technology, but we don't know that we want to try to plow that much capital into the rest of their business, But we do know where we can generate outsized returns for Halliburton. Yes, I would throw in another similar type thing as a subsea with TechnipFMC, who I really believe TechnipFMC is the absolute premier subsea company in the world. And we work closely with them developing joint IP, delivering on electric completions, all electric completions. And so there are a lot of things we're able to do where we can mine what I think is our core competency or advantage along with others without trying to broaden our way into things that aren't really strategically fits. Hope that helps, Dave.

Speaker 5

Very helpful. Thank you very much, Jeff.

Speaker 6

Certainly.

Operator

Thank you. One moment for questions. Our next question comes from Neil Mehta with Goldman Sachs. You may proceed.

Speaker 7

Yes. Good morning, Jeff, team. I appreciate the time. First question is around it's more a macro question, which is one of the things that surprised us last year was the exit to exit of U. S.

Speaker 7

Oil production, which came in above, I think, where consensus expectations were. You have unique visibility into U. S. Completion and volumes. What do you think happened there?

Speaker 7

And as we think about 2024, how do you think about exit rate of U. S. Growth and maybe talk about the moving pieces including DUCs?

Speaker 6

Yes. Look, thinking about production growth in 2024, production is a function of service intensity. So Simply put, more sand, more barrels. And we saw peak levels of service intensity Throughout last really in the first half of last year, and a lot of that comes on in the latter half. And I think some of this is Efficiency in the sense that we are delivering more sand to the reservoir And that comes in a lot of forms.

Speaker 6

The e fleets are part of that and some of the technology that we brought to market. But I also think that the market that we see for next year, it's hard for me to forecast At this point, exactly what operators are doing because every operator plays their own game. But at the same time, I would probably take the over on rigs, because I think that we'll run out of DUCs at some point. I think I would take the under on production only because whatever you think it is, I'll take the under only because What we see are stable customers delivering to their plans, but what we don't see is a lot of the smaller companies coming into the market in an to really amp up production. So I think from our perspective at Halliburton, very stable market.

Speaker 6

From a production standpoint, as we watch it unfold, it'll be a matter of how much incremental sand gets pumped to overcome what is clearly going to be a decline rate that comes with when we add barrels rapidly, obviously, they fall off rapidly.

Speaker 7

Thanks, Jeff. Good color there. And then you made a comment that you feel like you have international visibility Through the end of the decade, can you expand there and help give the market a little more confidence about what the post 2024, 2025 profile looks like?

Speaker 6

Look, I mean, we are working on tenders today for work all of next Here and the following year, I mean, when we talk with customers, okay, about what's going to happen, really, I don't think the North Sea and West Africa even really wake up 2025. We've seen strong growth in those markets. However, the real growth that we're working on planning today doesn't even start until 2025 and all of these things are 3 4 year type efforts. I mean, these aren't individual wells in places like that. These are programs.

Speaker 6

And so we spent we're actually on contract with a client working on just the planning of logistics for 'twenty 25, 'twenty 26 and beyond. And so, I've just got a lot of confidence in terms of what we see in hand, the tender pipeline and then the pipeline of work that we are planning with customers It may or may not even be tendered. It's just more a matter of it will be done and we've got clarity on that in 2025 and beyond.

Speaker 7

Thanks, Jeff.

Speaker 8

Yes, sir.

Operator

Thank you. One moment for questions. Our next question comes from Arun Jayaram with JPMorgan. You may proceed.

Speaker 9

Yes, good morning. Jeff, you mentioned that 40% of your contracted fleets this year will be ZEUS going to 50% or more in 2025. I was wondering if you could give us a sense of how your commercial model for ZEUS has evolved. And One of the things we get questions on is just the significant amount of completion efficiency gains that the industry is generating and what is the sharing of that between E&P and Service Company?

Speaker 6

Well, look, I think, number 1, it's the value created Hi, Zoos is what drives the contracting nature, a couple of things. When we Started to develop Zeus, we started like I said quite a while back. Our view was we want to maximize value in North America, number 1. And in order to do that, we just had that we believe that the technology created enough value, So much value that we aren't going to build it unless it's demonstrated for customers. And I think the contracting nature of the longer term contracts, 3 year type contracts is because we let the market rather than trying to push something into the market.

Speaker 6

It is that different and special. And as that system continues to develop and evolve, meaning Automation, measurement, all of these things that drive really meaningful value, that is what's creating, I think, the different dialogue around Zoos with our customers because it will become more and more integral to how they create value as well. And then from an efficiency standpoint or like volume standpoint, our equipment is very efficient. So as we go from Zipper frac to Sima frac, in this case, the Primal frac with a customer, that is not a 1 to 1 increase in horsepower requirement. So we become more efficient as those volumes go up.

Speaker 6

That is also a unique feature though of Zoos and its ability to scale up, but it's not one for 1. And so from Halliburton perspective, we do create outsized value for Halliburton and also for our clients because we're using less equipment than we would had we gone at it in a traditional fashion. So I think that The combination of reliability, but also automation because as fracs get larger, The precision gets more important. There are a whole lot of things that start to happen. And so very collaborative efforts with our clients to utilize that technology.

Speaker 6

In the case of Primal frac, really groundbreaking type work, super excited to do it with this customer.

Speaker 9

Great. Jeff, my follow-up, natural gas is on people's minds in North America, just given the contango in the market, 2024 is just above $250,000,000 I was wondering if you could give us a sense of how much of your activity is levered just to dry gas and what are some of the risks to the earnings picture from a soft market for gas this year?

Speaker 6

Look, we've got Very little gas exposure in our business today. The ones the exposure that we do have is contracted under sort of the Zeus solution somewhat and then we've got, I guess, a little bit of other things. Look, the gas work that we have is not a significant part of our overall portfolio. And so we plan for what we can see. I think, legitimately, there could be equal upside on gas as LNG comes on.

Speaker 6

But we haven't baked it into our outlook today, but I would say that's clearly one of the upsides to North America, maybe more so than a downside to North America.

Speaker 9

Fair enough. Thanks, Jeff.

Speaker 8

Thank you.

Operator

Thank you. One moment for questions. Our next question comes from Roger Read with Wells Fargo. You may proceed.

Speaker 10

Yes. Thank you. Good morning. And Actually, I had the opportunity last week to visit a trimal frac site and saw the eFleet. So pretty impressive setup.

Speaker 10

One of the things the customer mentioned was a slightly different, I guess, sort of price to value contract structure. It looks like from a margin standpoint, you're doing fine on that. But is there anything you can kind of Enlighten us on maybe how we thought about traditional pressure pumping contracting and a lot of spot exposure versus Kind of how this is going through, what does it mean in terms of sharing gains with the customer? What's the right way for us to think about that Look,

Speaker 6

from our standpoint, Roger, thank you. We want to create value for our customers. You have to create meaningful value for customers in order to be a long term supplier and partner to So we start from that position. And as you said, solid contract for us over the very long term. We went into this focused on maximized value, which in our view means maximize returns, which we're able to do under these types of environments.

Speaker 6

And so rather than play sort of the spot we don't intend to play the spot game. That spot game is kind of a It's a win lose on either side of the market really. When the market is getting tight, probably operators are losing. When it's going the other direction, service companies lose a lot. And our strategy is to stay out of that.

Speaker 6

And so to strike contracts with customers that in our view are fair and deliver a lot of value both in terms of pumping value and also recovery value. And I think that We're uniquely positioned to do that. And so improving recovery per foot or production per foot is a long term game and we want to play that long Term gain with customers that are working on that long term gain. And we're ecstatic about the customers we have and who we get to work with to try to solve what we think are the real pressing issues of the future in North America frac. And so we don't get to play that game.

Speaker 6

That game doesn't get played successfully if it's The frac de jure, we need to be part of that process and our clients allow us to do that.

Speaker 10

Appreciate that. The follow-up question I have, it's unrelated, but I think kind of critical to the announcement this morning raising the dividend. What is the right way for us to think about your uses of free cash flow between as you did in the 4th quarter sort of Elective repurchases of debt as opposed to maturities. But as we're thinking debt, dividends pretty fixed here and then share repurchases, What way do you want us to think about the return of free cash flow?

Speaker 4

Yes. Thanks, Roger. It's Eric. So Think about it in a fairly similar way as what we did in 2023, except higher. So we increased the dividend 6%.

Speaker 4

We are now back to about 95% of where we were pre COVID. In terms of buyback, we intend to continue buying back share, our intention today is to buy back more share in dollar terms in 2024 than we did in 2023. At the same time as we did also in 2023, we intend to continue to retire debt and continue to the balance sheet. So overall, fairly similar structure in 2024 as what we did in 2023, but kind of bump everything up a bit higher.

Speaker 10

Great. Thank you.

Operator

Thank you. One moment for questions. Our next question comes from James West with Evercore ISI. You may proceed.

Speaker 11

Hey, good morning, Jeff and Eric.

Speaker 4

Good morning, James. Good morning, James.

Speaker 11

So, Jeff, You talked about West Africa, and North Sea not wakening until 2025. A lot of Pindering or just conversations about 25%, 26%. I know some of the your partners like FTI are bidding for deliveries that wouldn't happen until 'twenty nine and 'thirty, the offshore rig companies are getting locked up into 'twenty six, 'twenty seven. I mean the visibility This cycle seems to me to be somewhat unprecedented. And I'm curious If that's consistent with your view of how things are playing out, how customers are behaving, How your conversations are going?

Speaker 11

Because it seems like the industry is on board with this is going to be a long cycle. We recognize, of course, macroeconomic events could derail things. But at least for now with this oil price range that we're in, it's kind of all systems go for a long time.

Speaker 6

Look, I'm careful speaking for the entire industry, but I would say I have this including Halliburton, very focused on running return businesses for strong returns over the long term, which is precisely what we all do. And I think that's good for our clients and it's good for us as well. And So that level of visibility is not inconsistent with companies planning a future around how to make money for shareholders. That's what we're doing as well. And so I think it's a very good setup for the rest of this decade, quite frankly, just because, A, we know there's demand.

Speaker 6

B, we are able to our whole value proposition around is how we collaborate and engineer solutions maximize asset value for our customers. And this type of setup allows us to do that. The other thing that happens though when we run a business for returns is we don't over invest in the business. And so we've told you kind of where our CapEx will fall at the level of growth that we're looking at. And so we're very thoughtful about the growth because we are keeping profitable international growth firmly in hand.

Speaker 6

And so I think assets are tight and they'll remain tight for those very reasons. It's very natural economic reasons for an industry that's running Their businesses for return, which is clearly what we're doing. And I think our level of CapEx, the way that's structured drives that level of smart thoughtful investment, it manages the contracts that we win indirectly, and it also maximizes returning cash to shareholders. So it's a very good environment in my view.

Speaker 11

Okay. That's we certainly agree with that. And then maybe a follow-up for me and I don't know if Eric is going to take this one, but the D and E margins, which I know more levered towards international, where a lot of the volume growth It's certainly going to come from and you're going to have natural operating leverage from that and inflation seems to be Cooling somewhat, so incremental should improve here. Where are you anticipating I know you gave the Q1 guidance, but That's seasonal. Where do you anticipate margins or maybe if you want to talk about incrementals, however you want to discuss it for D and E going forward as we go through 'twenty four and into 'twenty five?

Speaker 4

Yes, Jim. So to your point, if you just look at Q1, obviously, So you get seasonal effect. So but more importantly, looking at the year on year and the general trend of the D and E margin. So first, I think it's worth noting, as Jeff mentioned in the script, that we had our best D and E margins in 15 years. So means that a lot of the investment we have done in the last few years are paying off.

Speaker 4

So what to watch really is the general trajectory of margins in the business. And for us, it's a matter of balancing revenue growth, improvements in margin, improvements in returns as we continue to invest in the D and E business. So all of that to say that expect margins to continue to firm up as we get into 2024 and we're expecting our margins to be 1 quarter to the next, etcetera, it's a business that typically tends to have a lot of moving parts, But directionally margins will be higher in 2024 than they were in 2023.

Speaker 11

Got it. Okay. Thanks, Eric. Thanks, Jeff.

Speaker 6

Thank you.

Operator

Thank you. One moment for questions. Our next question comes from Scott Gruber with Citigroup. You may proceed.

Speaker 8

Yes, good morning.

Speaker 4

Good morning, Scott. Good morning, Scott.

Speaker 8

So, Jeff, as I step back and think about the outlook for your U. S. Business, It appears that you're in a pathway to establishing a business that will deliver more consistent and better free cash flow in the years ahead than we've seen historically, in part that's given the e frac investment, but investment across the portfolio. So I'm wondering if you just Give some color kind of around that. We're seeing the consistency now.

Speaker 8

If I heard correctly, the CapEx color doesn't suggest a material reduction in domestic CapEx in 'twenty four. So curious kind of your thoughts around kind of Spending that curve lower and just kind of overall developing this business model that's much more and less capital intensive ultimately?

Speaker 6

Yes, thanks. And that is precisely what we set out to do and that's what's playing out now. And so in terms of a consistent business to generate strong free cash flow Through the cycle, and that's been our intent all along, with the way we bring Zoos Leach to market, the way we invest in North America broadly, We are very deliberate about how we maximize value over the long term in North America. And I think you saw that play out the last two quarters, as we've seen the market moving around, but nevertheless, steady drumbeat of execution and cash flow delivery by Halliburton and I expect continue that because that is precisely our strategy. And so when it comes to cash flow or capital allocation of our capital budget.

Speaker 6

I mean, we're going to allocate it to those things where we see that opportunity, which we certainly see that with Zeus fleets. But remember, that's a demand pull, not a push strategy. So we don't build fleets until we have contracts for fleets. And so that's a different completely different environment than maybe we would have seen in prior cycles from Halliburton. Anything else we do in North America, like we've developed some very good, in my view, fit for purpose drilling technology for North America.

Speaker 6

But we're not going to overbuild it. We're selling it into the market as the market will take it. It's a lot of excitement about it, but Our approach is still going to be consistent delivery of margins and free cash flow in North America. And so I think you'll see us continue to do that. And that means we put e fleets in the market, We retire sort of the fleets that are at the bottom of the stack and continue that march forward.

Speaker 8

Got it. Appreciate the color.

Speaker 4

Thank you.

Speaker 8

An unrelated follow-up here, leverage It was down to about one times now, which is good to see. And it sounds like the cash return could step up a bit. Can you just kind of walk us through your thoughts as you move forward in time, the cycle continues, you'll generate more free cash flow, leverage continues to come Outside of any M and A, should we think about that shareholder return as a percentage of free cash flow moving higher, Given that you're going to be trending sub-one on leverage on a go forward basis?

Speaker 4

Yes. Just starting with free cash flow, I think that you can expect 2024 free cash flow to be at least 10% over 23%. So that is going to basically help us return increase returns on a dollar basis. Now in terms of the percentage, we're still guided by our overall 50% return to shareholder, but directionally, it would make sense to believe that we'll do at least what we did in 2023 in terms of the percentage return.

Speaker 8

Got you. Thank you, Eric. Thanks, Jeff.

Speaker 4

Thank you.

Operator

Thank you. One moment for questions. Our next question comes from Luke Lamoyne with Piper Sandler. You may proceed.

Speaker 12

Hey, good morning, Jeff, Eric. Jeff, your North America rev significantly outperformed the U. S. Land rig count in 24. And I would guess some of the factors were reduced fleet service quality, more stable customer base and a pickup in the Gulf of Mexico.

Speaker 12

But could you talk about any other factors that drove this? And then with the U. S. Land rig count most likely down again in 24, do you think North America revs could be up in 24 for you?

Speaker 6

Yes, look, the outperformance is just the stability of the business as I described it. And so Big part of that is having 40% of our fleet by the end of 2024 under long term contracts. That creates a steady environment. So the rig count is business is very big. We saw growth in Gulf of Mexico and other offshore environments.

Speaker 6

However, a very large Stable North America business, land business is going to mute some of that. And as we go into 2025, I expect same kind of performance out of our North America business, sort of in spite of what rigs do. Now I do believe we've reached a point where DUCs are drawn down, they're largely drawn down and I think that we'll see rig count increase only because it's Supplying the inventory that's required to run a very smooth, stable, tight business. And I would say our customers largely plan their business around turning wells into production more than they do numbers of rigs in the air. And so I think there's a lot of planning that goes on to deliver a very stable business of completing wells.

Speaker 6

And so I think one of the reasons I would say I'd take the Over on rig count, I don't think I won't try to forecast rig count at this point, but I do think there's upside in North America. We plan the business for what we can see and we expect it to be stable. But that being said, I think there are obviously factors that could push that up like gas activity is Clearly out there and I don't control the pace at which LNG plants come online, but we know that they will as it a 2024 event or 2025, I think We'll get to that point and see that Halliburton participates in that upside and that it could happen this year. But at this point, we're planning the business around returns.

Speaker 12

Okay. And I guess a follow-up with this more stable North America business, you talk about Your North American land margins you're describing flat in 4Q. Could you loosely talk about how you see these progressing in 2024 kind of with that stable business?

Speaker 6

Well, look, let's just leave it at steady and stable moving forward. I think that we've got a very strong International business as well, that contributes and I think that continues to grow and expand margins. But We're really pleased with where we are. But U. S.

Speaker 6

Revenue and margins Flattish through any cycle, I think, is where we wanted to get this business. Clearly, there's upside. And I do From a C and P standpoint, we're going to see the benefit of our market leadership positions in PE, cementing, Yes, Bayreaux and other things that we do around the world. So I think that we're going to continue to participate in that meaningfully, particularly from a margin standpoint. But again, our key in North America is stability through cycles.

Speaker 6

And I think we're demonstrating that. I don't think I know we're demonstrating that now.

Speaker 12

Great. Thanks so much, Jeff.

Speaker 6

Thank you.

Operator

Thank you. One moment for questions. Our next question comes from Stephen Gengaro with Stifel. You may proceed.

Speaker 13

Thanks. Good morning, gentlemen.

Speaker 4

Good morning, Stephen.

Speaker 13

2 for me. 1, just a follow-up on the prior question around sort of margins in C and P and the Zeus fleets. When you talk about these assets being contracted, is there any difference in sort of the pricing dynamic versus sort of Prior cycles and price openers quarterly and how should we just think about the pricing for those assets in an environment where maybe there's a For those assets in an environment where maybe there's a little excess capacity near term from some, quite honestly, maybe not as competitive assets, but older assets in the market. Does it matter? Is pricing pretty stable?

Speaker 13

Can you talk about that a bit?

Speaker 6

Look, these are long term deals that we go into Knowing the cost of the asset and knowing what the return needs to be, so now it just becomes a bit of a math problem around duration. And so There are variable costs in the market that we don't control and we don't try to own. We just pass through to customers whether it's sand cost and many other things. But for where we create competitive advantage and for our equipment as we go into these long term deals, We don't need price openers and all of that sort of jazz. There's no reason for it.

Speaker 6

We literally sit down and work through what is this return for client, return for Halliburton and then we fix that and move forward. That doesn't change over time. And so The rest of the market, the spot type market, all of that is going to do what it's going to do. But I think that's when we take a long view of the market and value creation, that's that both clients and Halliburton can do and I think that's what makes it so very different our approach to North America. It's not particularly differentiated, if at all, in the spot market.

Speaker 6

And as a result, it's just kind of does what it does. It's a bit of a free for all. But I would say in the market where we want to play, which is technology driven, Lowest total cost of ownership and working on what I think is most important, which is productivity per foot. That's a different game. That's a long term game.

Speaker 13

Great. Thanks for the color. And then just one quick one, probably for Eric on the cash flow statement. Anything we should know about working capital parameters in 2024 versus 2023 that would be much different as We kind of build out the models, whether DSOs or payables, etcetera.

Speaker 4

No, I think what's Important around free cash flow for 2024 is, as I mentioned earlier, is we're expecting the free cash flow to be at least 10% over 23%. That's going to be on the back of improved income. It's going to be on the back also of improved efficiencies around working capital. So we spent a lot of time working on improving DSOs working on improving DIOs. And when I speak like this, I don't mean just pushing the organization, I mean implementing different initiatives.

Speaker 4

For example, I'll give you a couple of example, invoicing on integrated services is extremely complicated. We have multiple product line, multiple parts organization, customer organization, so it takes a lot of time and to the extent that you can automate that and then reduce cycle time, then you improve DSO. We just rolled out 18 months ago a companywide demand planning software, which when combined with the rollout of Sfour in the future, is going to give us totally different capabilities to plan our business and reduce inventory, while not increasing the risk from an operation perspective. So these are the things where we're spending a lot of our time to basically structurally improve the efficiency of working capital. So that's going to be the other component of why we're expecting our free cash flow to improve next year.

Speaker 13

Excellent. Thank you for the color.

Operator

Thank you. One moment for questions. Our next question comes from Marc Bianchi with TD Cowen. May proceed.

Speaker 8

Hi, thanks. I just wanted to first clarify on the North America outlook that you provided for it to be flat. That's a comment for the full year. Is that correct? Or was that a comment from where run rates are today?

Speaker 6

Look, we think that Q1 is up from Q4. So there's activity that comes back that was seasonal in Q4. As we look at the balance of the year, I think that there are as we plan the business what we got visibility of and we can see our fleets are largely contracted for 2024. That's what we know. Are there factors that may Add to that, I think gas could do that.

Speaker 6

I think production levels are low, clients may speed up. There's a lot of variables that could happen I think are to the positive, but nevertheless, as we look out to 24 and we plan a business that generates the kind of returns we expect to generate, Yes, that's what we see.

Speaker 8

Okay. Thanks, Jeff. The other question I had was on D and E in the 1st quarter here, I think historically, there have been some one time sales that continue for D and E in the Q1 and then margin Could be down in the second quarter. Is that sort of the base case outlook here or is there something unusual going on this year versus the prior years?

Speaker 4

No, there's nothing unusual. I think if you actually if you were to go back and look at The Q1 'twenty four over Q4 'twenty three guidance that we just gave, It is very much in line with the typical Q4 to Q1 seasonality that we saw prior to COVID. So you go back 2020, 2019, 2018. So what we are seeing here is really a business that's fully in line with historical trend. What's happening on the D and E side, the influence of software sales in Q4 typically is maintained in Q1, but we're having a lot of weather related issues in the Eastern Hemisphere and the North Sea, etcetera, that is influencing our D and E margins, but again, very much in line In terms of quarter on quarter guidance as we have had historically in our business, nothing unusual.

Speaker 8

Got it. Thank you very much. I'll turn it back.

Operator

Thank you. One moment for questions. Our next question comes from Kurt Holly with Benchmark. You may proceed.

Speaker 8

Hey, good morning everybody.

Speaker 6

Good morning, Kurt.

Speaker 8

Hey, a Lot of good stuff to digest here today, Jeff. Appreciate all that color. I think my question here kind of what piqued my curiosity Again, a couple of things that you one of which you put in the press release, which was a kind of AI driven dynamics that you have going on with Badcock and maybe start with that one. And in the context of how you are seeing AI evolving As a tool for the customer base, as a tool for your company, How do you see the adoption of that? And how do you see the financial impact of that evolving over the course of the next couple of years?

Speaker 6

Yes. Thanks, Kurt. Look, I think software and automation, and I say it that way because Software business is strong and focused on enterprise solutions, which will adopt all sorts AI and generative AI as we continue to move forward, that will create efficiency and seamless in a lot of ways for our customers. Internally, as we adopt automation and AI into our tools and service delivery, I expect that it will have a meaningful impact Probably over the next 2, 3 to 5 years, just as those things are adopted, it's going to reduce service cost, going to drive demanding and it's also going to improve service quality. And I think we'll actually improve the capability of tools, which I think it's so fundamental to how we generate long term returns.

Speaker 8

Appreciate that color. Also noticed that Halbert Labs entered in A venture to for some direct lithium extraction. So Curious as to how you might see Halliburton get involved in that process as well?

Speaker 6

Well, look, that's one of our HAL Labs companies. We're excited to have them here. We make a very, very small Investment in companies that join Owl Labs, but it's very small, it's around $100,000 So it's we're a tiny piece of their Series B, which we're excited for them. But HALO Labs continues to attract, In my view, more quality investable companies over time, we're watching them enter Series As and in some cases, Series B. And so It's a journey.

Speaker 6

We're learning a lot about different industries, but we're careful. This is clearly not Corporate Venture Capital, we are not investing in the companies that join HAL Labs, other than Small 3% to 5% stake that we get from them generally for the services that we provide to them as a member of Halliburton Labs. So Super excited about where that's going. But we just need to let that continue to progress on its own.

Speaker 8

Fair enough. Thanks, Jeff. Appreciate it.

Operator

Thank you. Thank you. I would now like to turn the call back over to Jeff for any closing remarks.

Speaker 6

Yes. Thank you, Josh. Let me close the call with this. I'm excited about 2024. I mean, our outlook for Oilfield Services is strong, And I expect Halliburton will generate significant free cash flow for shareholders in 2024.

Speaker 6

Look forward to speaking with you next quarter. Let's close out the call.

Operator

Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Halliburton Q4 2023
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