Halliburton Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the First Quarter 2023 Halliburton Company Earnings Conference Call. [Operator Instructions]. 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, Senior Director, Investor Relations at Halliburton]

Hello, and thank you for joining the Halliburton first quarter 2023 conference call. We will make the recording of today's webcast available on Halliburton's website after this call. Joining me today are Jeff Miller, Chairman, President, and Chief Executive Officer, and Eric Carre, Executive Vice President and Chief Financial Officer.

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, 2022, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Our comments today also will include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter earnings release, and in the quarterly results and presentation section of our website.

Now, I will turn the call over to Jeff.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Thank you, David, and good morning, everyone.

Halliburton's performance in the first quarter, again, demonstrated the earnings power of our strategy, strong competitive position, and execution for our customers. Here are some highlights from the first quarter.

Total company revenue increased 33% compared to the first quarter of 2022, with strong activity in both North America and International markets. Operating income grew 91% year-over-year. Operating margin was 17%, a strong start to the year, and 530 basis points over the first quarter of last year. International revenue grew 23% year-over-year, with strong activity in all markets. North America revenue grew 44% year-over-year, with growth across every basin. The Completion and Production division posted 20% margins, an increase of nearly 700 basis points year-over-year. The Drilling and Evaluation division grew revenue 17% year-on year, while margins expanded more than 100 basis points.

Before we continue, I'd like to recognize the employees of Halliburton for their outstanding execution on every dimension of our business, safety, service quality, and financial results. The work you do each day matters to our customers and shareholders. Thank you.

I'll start with a few comments on the macro. Everything I see today validates the strength and duration of this multi-year upcycle. The world requires more energy from all sources, including oil and gas, driven by population growth and economic development. Multiple years of structural underinvestment in oil and gas supply, can only be addressed by strong activity over the next several years. The commodity price volatility experienced in the first quarter, does not change our view of customer demand and a tight services market.

Our customers around the world recognize this, and we expect their spending to grow in 2023 and beyond. Further, we expect much of this investment will be directed towards development activity, which is great for Halliburton, as it drives outsized demand for our products and services. My view of this upcycle is confirmed by what I hear from our customers and see in the world's oil and gas markets. The Halliburton outlook for both the current year and the long-term is strong.

Now, let's start with our performance in the international markets. Our revenue in the first quarter grew 23% compared to the same period of last year, reflecting strong activity in all regions. Halliburton executed its strategy to deliver profitable international growth through leading technology offerings, improved pricing, and disciplined capital allocation. I expect international spending to grow high-teens for the year 2023, with most new activity coming from the Middle East, Asia, and Latin America. I am confident in this outlook because we have a strong pipeline of awards, that will commence later this year and beyond. Our completion tool order book grew 40% year-on-year in the first quarter, which generally represents work delivered within the current year. And finally, pricing continues to trend up for all product lines in all regions. I'm excited about all segments of our international business.

Today, I would like to provide more color on our offshore business. We generated nearly 45% of our international revenue, in the first quarter, from our offshore business. Here are a few examples of differentiated technologies that drive a higher level of performance, service quality, and reliability for our customers. Halliburton's intelligent drilling and logging while drilling platforms, iCruise and iStar in combination with LOGIX, our automation platform delivered the longest reservoir section in a single run for a customer offshore Norway.

Our latest wireline imaging technology, StrataXaminer, delivered high-resolution borehole imaging data allowing a customer to increase reserve estimates during a recent exploration campaign in the Mediterranean Sea. Halliburton's digital solutions allow our customers to reduce cost per barrel, and increase efficiencies. Hess, Repsol and Petrobras, all recently selected Halliburton Landmark's DecisionSpace 365 applications, powered by iEnergy cloud. Our trusted science and machine learning algorithms enable customers to optimize subsurface, well construction, and production-related decisions.

Cognitus, Halliburton's offshore automated cementing system delivers cement jobs remotely with minimal human direction and intervention. More than 30 cement jobs were completed this quarter in the North Sea alone.

Finally, I'm excited about the progress of our TechnipFMC alliance on all electric completions. I believe this technology will over time substantially change the cost and performance of deepwater completions and subsea infrastructure.

As I look at 2023 and beyond, I'm excited about our international business. Our customers are clearly motivated to produce more oil and gas, service capacity is tight, and pricing is increasing. Our differentiated technologies and our execution, drive margin improvements, and growth across our international business.

Turning to North America, as I expected, Halliburton achieved strong results, despite volatile commodity prices. We delivered on our strategic priority to maximize value in North America through capital efficiency, differentiated technology, and alignment with high-quality customers. I know what's on your minds. So, let me briefly discuss the natural gas markets.

First, I firmly believe that the gas market softness will be solved as 6 billion cubic feet per day of additional LNG export capacity comes online in the next 24 months. Second, in response to market conditions, we are moving three fleets from gas basins to oil basins to satisfy specific customer demands. Finally, we retired one Tier 2 diesel fleet, which will reduce our near-term maintenance costs, and accelerate Halliburton's transition to e-fleets. These actions reduce our gas market exposure by about 30%, and maintain financial returns.

I reiterate my expectation that North America customer spending will grow at least 15% in 2023. At today's oil prices, I believe that our customers will execute their activity plans, and the market for highly efficient equipment and quality services will remain tight. Our strategy is to maximize value in North America. Let me be crystal clear about what that looks like.

First, we improve the performance and utilization of our existing fleet, and we align with high-quality customers who value our operational efficiency, and consistent execution. Here's what the customers are telling me. Halliburton's performance is different, not only better than your competitors, but even better than your own past performance. Our step change in performance, safety, and operational efficiency comes from our investments in new technologies, crew training, and process improvements. As a result, today, we see a 60% improvement in pumping utilization across our entire North America land fleet since 2019.

Second, we only deploy service capacity to attractive return opportunities. We are always finding ways to improve average fleet returns. Finally, we invest in differentiated products and services that improve margins and asset velocity. Our patented Zeus e-fleet and SmartFleet are examples. They maximize asset values for our customers and structurally improve returns for Halliburton. Our Zeus e-fleets continue to outperform for our customers and SmartFleet adoption is accelerating. We delivered about six times more SmartFleet stages in the first quarter than a year ago.

Halliburton's position and outlook in North America is strengthened by the uptake and contract duration of our e-fleets. The contracting structure for e-fleets, which we only deploy on multi-year contracts and our technology roadmap for the future create structural strength in Halliburton's North America business. Halliburton's e-fleet technology is proven to deliver better performance, lower total cost of ownership and increased operating efficiency. For customers with the mandate to produce barrels over the long term and maximize the value of their investment dollars, the attraction to e-fleets is self-evident.

To summarize, I believe Halliburton is uniquely positioned to deliver financial outperformance, our strong execution culture, differentiated technology portfolio and collaborative approach with customers give us a strong competitive advantage. I am confident that we will execute our strategic priorities and deliver shareholder returns by maximizing value in North America, delivering profitable international growth and driving capital efficiency.

Before I turn it over to Eric, I'd like to leave you with two financial points. First, given my outlook, I expect the execution of our strategy will deliver significant and growing free cash flow. Second, while our previously announced capital return framework provides a minimum of 50% free cash flow back to shareholders, it also gives us the flexibility to return more cash to shareholders in the form of share buybacks. Everything I see today points towards more cash to shareholders.

Now, I'll turn the call over to Eric to provide more details on our financial results. Eric?

[Eric Carre, Executive Vice President and Chief Financial Officer at Halliburton]

Thank you, Jeff, and good morning.

Let me begin with a summary of our first quarter results. Total company revenue for the quarter was $5.7 billion, a 33% increase over the first quarter of last year, while operating income was $977 million, an increase of 91% year-over-year. Operating margin for the Company was 17.2% in the first quarter, which is an increase of 530 basis points over the first quarter of 2022. These results were primarily driven by increased global activity, improved pricing and strong seasonal product and software sales. Our first quarter reported net income per diluted share was $0.72, which more than doubled from the same period last year.

Beginning with our Completion and Production division, revenue in the first quarter was $3.4 billion, a 45% increase when compared to the first quarter of 2022, while operating income was $666 million, an increase of 125% when compared to the first quarter of 2022. C&P delivered an operating income margin of 20%, driven by increased activity, improved pricing and service efficiency in North America.

In our Drilling and Evaluation division, revenue in the first quarter was $2.3 billion, an increase of 17% when compared to the first quarter of 2022, while operating income was $369 million, an increase of 26% when compared to the first quarter of 2022. D&E delivered an operating income margins of 16%, driven by strong wireline, testing and drilling related services globally and an uptick in international activity.

Now, let's move on to geographic results. Our first quarter international revenue increased 23% year-over-year due to solid product sales, activity increases and pricing gains across multiple product lines. In North America, revenue in the first quarter was $2.8 billion, a 44% increase when compared to the first quarter of 2022. This increase was primarily driven by increased stimulation activity and efficiencies, higher activity across our well construction product lines in North America land, as well as higher activity across multiple product lines in the Gulf of Mexico.

Latin America revenue in the first quarter was $915 million, a 40% increase when compared to the first quarter of 2022 due to increased well construction services and stimulation activity in Mexico and Argentina, and higher completion tool sales across the region. Europe, Africa revenue in the first quarter was $662 million, a 2% decrease when compared to the first quarter of 2022 as a result of the sale of our Russian operations, along with decreased activity across multiple product service lines in Norway. This decrease was partially offset by increased well construction services and stimulation activity throughout Africa.

Middle East Asia revenue in the first quarter was $1.3 billion, a 30% increase when compared to the first quarter of 2022, primarily due to improved activity across multiple product service line in Saudi Arabia, higher completion tool sales, improved well construction services and increased project management activity across the region.

Now, I'd like to cover some additional financial items. In the first quarter, our corporate and other expenses was $58 million. For the second quarter, we expect our corporate expenses to be up about $5 million. Net interest expense for the quarter was $79 million. For the second quarter, we expect this expense to be about flat. Other net expense for the quarter was $69 million, primarily related to unfavorable foreign exchange movements. For the second quarter, we expect this expense to decline approximately $15 million.

Our effective tax rate for the first quarter came in at approximately 21%. Based on our anticipated geographic earnings mix, we expect our second quarter effective tax rate to increase about 50 basis points. Capital expenditure for the first quarter were $268 million. We anticipate that our remaining capital expenditures will increase quarter-over-quarter into the end of the year and total capital expenditures to be approximately 6% of our revenue for the full year.

Our first quarter cash flow from operations was $122 million, and free cash flow was a use of $105 million. These results were primarily driven by seasonal investments in working capital. As is typical for our business, we anticipate our cash flow will be back-end loaded for the year. We expect to generate strong free cash flow for the rest of 2023. As a step toward achieving Halliburton's capital return policy of returning at least 50% of annual free cash flow to shareholders, we repurchased approximately $100 million of common stock during the first quarter.

Finally, turning to our near-term operational outlook, let me provide you with some comments on how we see the second quarter unfolding. In our Drilling and Evaluation division, we expect the seasonal revenue decline in software sales to be partially offset by further improvements in global drilling activity. As a result, we anticipate sequential D&E revenue to increase low to mid-single digits and margins to decline 50 basis points to 100 basis points. In the Completion and Production division, we anticipate sequential revenue to increase low to mid-single digits and margins to improve 25 basis points to 75 basis points.

I will now turn the call back to Jeff.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Thanks, Eric.

Let me summarize our discussion today. Halliburton's performance in the first quarter demonstrated the earnings power of our strategy. My outlook for Halliburton is strong. I expect international year-on-year growth in the high-teens and North America growth in excess of 15%. And finally, everything I see today points towards more cash to shareholders.

And now, let's open it up for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions]. Our first question comes from Dave Anderson with Barclays. Your line is open.

[Dave Anderson, Analyst at Barclays]

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

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Good morning, Dave.

[Dave Anderson, Analyst at Barclays]

So, let's just get right into it. Despite the strong numbers you put up in North America this quarter, and the guide for second quarter, which looks -- which kind of firmed up everything, the bear case is then -- has been heating up during the quarter with the rig count softening a bit, E&P is suggesting pricing is poised to come down. On the other hand, we're hearing from you, other service companies that you don't see this slowdown, and in fact, prices continued to rise.

Just wondering if you can help us sort out the disconnect here. Does the difference line to customer mix? I know you highlighted that gas market has been particularly weak. Is the differentiation of equipment? Just a lot of rhetoric heat-up during the quarter. I'm just wondering how we should be thinking about your US land activity and the pricing trends in the second half? Thanks.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah. Well, thanks, Dave. Look, prices aren't moving down. And I think from our comments, I've told you what we've done, and what we plan to do. Overall margin improvement comes from structurally bifurcated market, as you described, demand for high-quality services are very much in demand and hard to deliver. And quite frankly, the cost of the frac hasn't changed. I mean, the engines are moving up. There's still inherent inflation in the frac business today. So, there's not a connection there. And so, as I look out at the rest of the year, we continue to improve the earnings power of our fleet through bifurcation, delivery of the fleets, retirement of equipment that needs to be retired, to be clear, not stacked, but retired. And then finally, efficiency and sort of repositioning around better pricing.

[Dave Anderson, Analyst at Barclays]

But pricing in your mind continues to move higher, and I would assume that pricing from last year still continue to roll through your fleets?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

I would say on average, yes.

[Dave Anderson, Analyst at Barclays]

And if I could just shift gears over on the international side, your Middle East business doesn't get a ton of credit on the Street, despite actually being just as big as kind of one of your bigger peers on a relative sense. I was wondering if you could talk about how you see the pace of activity progressing this year in the Middle East. Are you still ramping up on contracts? I think you would kind of alluded to that in your prepared remarks, but kind of what is your outlook on tenders in the Middle East this year? And I guess, finally, should we expect to see a lift in D&E margins next year based upon what you're seeing in pricing activity level this year in the Middle East?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah. Look, pricing is improving. And so -- and I would expect D&E margins to improve along with that. I would still argue early innings of activity increase in the Middle East. So, I'm pleased with our growth, so thank you for pointing that out. But I see this continuing rig counts aren't necessarily at near peak. And I think we've got a lot of opportunity to continue to run. And then broadly, international, it's beyond the Middle East, pleased with the growth that we saw in the first quarter. And just a reminder to everyone that in Q1 of '22, Russia was 2% of our business. And so, that's really pretty strong growth.

[Dave Anderson, Analyst at Barclays]

Absolutely. Okay. Thank you, Jeff.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Thank you.

[Operator]

Thank you. One moment for our next question. We have a question from Arun Jayaram at JP Morgan.

[Arun Jayaram, Analyst at JP Morgan Cazenove]

Yeah. Good morning, Jeff. Just digesting service prints and outlooks thus far, we are seeing or observing more resilient conditions in US frac versus drilling. I wanted to get your thoughts on why do you think this is the case, and how do you see things playing out in terms of your drilling-related segments at Sperry in North America for the balance of the year?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah. Look, I think, wells drilled in North America are really a function of DUC count. So as the DUCs get drawn down, more wells have to be drilled. And so, I think fluctuation in drilling, and it's interesting that you see fluctuation in drilling, but a very steady march in terms of frac, and I think some of that is managing cost at the margin. But the fact is, they don't produce more without fracking wells. And so, I'm not surprised to see that. I think our D&E business in North America remains strong. We're confident on what we're seeing there. We continue to sort of make gains in the drilling part of the business, and I would say, the other service lines are very strong.

[Arun Jayaram, Analyst at JP Morgan Cazenove]

Great, great. And just my follow-up, Jeff, you mentioned that you have some sort of relationship with FTI on the electric side. I was wondering if you could maybe give us some more details on that partnership?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah, look, this is an opportunity combining what the two companies really do well, and there are particularly areas where we overlap, and we're taking advantage of that. We've been working on a series of things and one of which is all electric completions for about five years is -- and we just signed up for another five years with TSMC. So great partner in this area. What we've delivered ultimately will be, I think, revolutionary all-electric solution. That really only -- it takes the two of us to solve for, it's not the bulk of either one of our businesses. But the fact is in this narrow space, we bring some really unique synergies and opportunity to develop technology. And so, very pleased with the relationship and the progress that we're making up to, and including we're jointly marketing and selling some solutions today.

[Arun Jayaram, Analyst at JP Morgan Cazenove]

Great. Thanks a lot.

[Operator]

Thank you. Our next question comes from James West with Evercore ISI. Your line is open.

[James West, Analyst at Evercore ISI]

Hey, good morning, Jeff.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Good morning, James.

[James West, Analyst at Evercore ISI]

So, Jeff, I know you spend, I guess, probably 60% plus of your time on the road seeing customers and a lot of that -- the majority of that internationally. Could you maybe describe the customer conversations at this point, where they are with their sense of urgency, where the pushback is, if any, with pricing, or is there more concern about availability is kind of how we're thinking about the cycle as it takes off from here? Just curious to hear what you're hearing on the ground.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah. Thanks, James. The discussion is more around availability than anything else. Whether it's services that we provide, capital, more importantly, availability of tools and people. And a lot of the planning -- we're even doing planning today, I mean, deep planning today for '24 activity that we expect to ramp up. And so, there's enough concern around availability in '24 that significant resources are committed now to solving for that. So, I've got a lot of confidence in the runway internationally, and the amount of work that we've won.

[James West, Analyst at Evercore ISI]

Okay, that's great. That's great to hear. And then, on North America, the 15%-plus growth that you're anticipated in forecasting for this year. I guess, could you describe how much of that you think is just kind of the pure inflation in the market, whether it's rig rates or frac rate costs, that kind of stuff versus rig count or, I guess, activity-led growth?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah. Yeah, James, I think, it's a combination of the two and certainly the more activity you have, the more sort of replacing type you see. But if I just sort of look back to look forward, if I take last year, 5% production growth last year year-on-year translated into about 50% revenue growth for us. I know in '23, the outlook is for, let's say, 3% production growth, and I think published estimates at least today around operator capex are 17% or so. I think it says a couple of things. Number one, producing oil doesn't get easier, meaning, it demands more of our services and higher quality services. And so, I'm confident that we're going to maximize value in North America, and I think that combination of activity and price is what delivers the north of 15%.

[James West, Analyst at Evercore ISI]

Okay. Got it. Thanks, Jeff.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Thank you.

[Operator]

Our next question comes from Roger Read with Wells Fargo. Your line is open.

[Roger Read, Analyst at Wells Fargo & Company]

Yeah, thanks. Good morning, and congrats on the quarter there. Just a couple of things to follow up on Jeff. Your comment in the opening about 45% of your international coming from offshore, and, obviously, talking a little bit about planning for '24, which greater visibility on offshore, a lot of times than others. I was just curious how you see that potentially changing. Does it increase as a percentage of mix, and how should we think about that in terms of enhanced visibility, top line growth, and maybe margin expansion?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah, thanks. Look, I'm pleased with the growth, particularly on a percentage basis of our position in offshore or the amount of offshore work that we're doing. Look, I think it continues to grow and I expect our position as we continue to bring out the types of technologies I talked about, continue to help drive our growth in offshore work. And so, we are levered heavily to offshore, and this is all service lines, or levered to offshore.

And I think that as we see that business grow, I expect, yes, it does translate into top line growth and margin growth, and I think that what's clear though, also is its higher service intensity, but it also requires more equipment to do offshore work. So, it has a bit of a double effect in terms of growing revenues and margins, but it also tightens up the rest of the business by virtue of consuming backup tools, and additional shifts of people. And so, as offshore grows, that has a tightening effect really on everything, which, again, helps to drive better margins and better growth.

[Roger Read, Analyst at Wells Fargo & Company]

Okay. And then, mine-related follow-up on that. You mentioned the smart frac had picked up quite a bit in the U.S. I think it was up six times roughly versus a year ago. Any thoughts to what that growth rate is going forward, and should we anticipate sort of any change in terms of margins as that goes forward, positive, negative, or unchanged?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah. Look, I think that, that growth continues at sort of that pace. This is one of those solutions that is very affordable, and scalable, and provides important data to operators, particularly as the focus becomes productivity per foot. And so, this is really the best way, maybe the only way to meaningfully measure where the sand goes. And as a result of that, that's the building block of what produces more or what's better complexity, where is the sand, what's the most efficient solution.

And so, I expect that continues to grow at a very fast pace, and we've continued to introduce more technology around that solution, so that it's easier to deploy and ultimately, this is one of those things that our target is to be, the most efficient solution in the marketplace. And as it scales, it becomes more valuable to us. And in my view, it's a very sticky solution because it's one of those things that once you have that data and it becomes part of a working process, then, it becomes very sticky over time.

[Roger Read, Analyst at Wells Fargo & Company]

Understood. Thank you.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Thank you.

[Eric Carre, Executive Vice President and Chief Financial Officer at Halliburton]

Thank you.

[Operator]

One moment. Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Good morning, Jeff. Good morning, team. First question is about the comments about moving three frac fleets from gas to oil basins. Can you talk about whether you see more potential for this to happen? What are some of the switching costs associated with that? And is this the beginning of a greater trend?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Well, look, I think what we demonstrated is that's what we're going to do. Clearly, gas economics are challenged today, and I don't think it's something that service prices solve. And so, I think gas is incredibly important and I expect that it continues, and even get stronger as we build into the LNG capacity that gets built here in the US. But along the way, we see opportunities for unmet demand in oil, and we've made the moves we described. We also want to accelerate our e-fleet as a percentage of our overall fleet, which requires that we retire fleets along the way. And so, from our perspective, that is the path that we take. Now, I think gas operators are continuing to operate, and they are working, and really to that end, actually, just placed an e-fleet into a gas basin with an operator. So, there's clearly an outlook that gas recovers.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Jeff, and then can you talk about the return of capital comments. You had mentioned you could see a scenario where you go in excess of the 50% of free cash flow back to shareholders. So, talk about how you're thinking about using the buyback as a tool to create value.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Well, as I described, our outlook is strong. I expect we generate a lot of free cash flow. And yes, I believe that as we do that, we'll be able to return more cash to shareholders, and so we took a step in Q1. But obviously, the ability to the flex there is going to be with share buybacks.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Thanks, Jeff.

[Operator]

One moment. We have a question from Scott Gruber from Citi. Your line is open.

[Scott Gruber, Analyst at Smith Barney Citigroup]

Yes. Good morning. Just want to stay on that same line of inquiry, given the appetite to go above the 50% threshold, Jeff, is there an appetite to pursue buybacks with bigger here near term when the stock is quite attractively priced? Or do you wait until the cash flows show up later this year and risk buying at a higher price if the fundamentals stay tight as you foresee?

[Eric Carre, Executive Vice President and Chief Financial Officer at Halliburton]

Yeah, Scott, it's Eric. So generally speaking, how we think about cash returns today is, I mean, obviously, we just raised the dividend, we intend to continue to do small bolt-on acquisition, technology-driven type acquisition, continue to chip at the debt as well as we go along. But clearly, today, the bias is towards increasing buyback as we go through the year. So yes, directionally, that's correct.

[Scott Gruber, Analyst at Smith Barney Citigroup]

Got it. And then, an unrelated follow-up. I'm just looking at your year-on-year incrementals in D&E and they appear quite strong. And I would guess this is largely driven by operating leverage and mix around offshore and technology, just given previous commentary. And I would guess pricing is less impactful today at this juncture with potentially more of a price contribution in the years ahead. Is that a fair assessment? Or is pricing having a significant impact here already in 2Q if you look year-on-year at D&E margins?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Well, pricing certainly has improved year-on-year, but I think more importantly is the depth of the technology that we're introducing and sort of the duration. And I don't want to get away from that. It's not a point in time. I think we've got pricing improving, but at the same time, we've got substantial capital efficiency happening also in terms of the technology, so the -- we've been pretty clear about the technology that we are investing in is driving capital efficiency, which means that we capture more of the value and cash flow over time. And so, I would expect to see the margin improvement that you saw this quarter year-on-year to continue in terms of incrementals. And I say it that way, I've always said that our expectation is that we stack improvement each quarter in terms of margins in D&E, and expect that to continue to happen. Obviously, there's some intra-year cyclicality. But I think the key is if we look at each year by quarter, then we ought to be stacking improvements quarter-on-quarter, and I think we've got a long runway ahead of us in D&E.

[Scott Gruber, Analyst at Smith Barney Citigroup]

But it just sounds like it's more of the kind of structural investments you made around technology and driving your asset turns and mix more than pricing today. Is that fair, Jeff?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah, I think that is reasonable to say. Yeah.

[Scott Gruber, Analyst at Smith Barney Citigroup]

Okay. Got it. Thank you.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Thanks.

[Eric Carre, Executive Vice President and Chief Financial Officer at Halliburton]

Thank you.

[Operator]

One moment. We have a question from Chase Mulvehill with Bank of America Merrill Lynch. Your line is open.

[Chase Mulvehill, Analyst at Bank of America Merrill Lynch]

Hey, good morning, everyone.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Good morning, Chase.

[Eric Carre, Executive Vice President and Chief Financial Officer at Halliburton]

Good morning, Chase.

[Chase Mulvehill, Analyst at Bank of America Merrill Lynch]

Good morning, Jeff. Good morning, Eric. I guess, maybe if we can kind of hit on free cash flow. If we think about your outlook, your North America outlook was maintained, and it looks like you kind of bumped up your international outlook. So, I'm guessing that it would probably imply a bump to your free cash flow outlook. I think last quarter, you said free cash flow should grow at least 20%, which seemed conservative when you gave it, so with a better international outlook and still maintain North America. Any updates on how we should be thinking about 2023 free cash flow?

[Eric Carre, Executive Vice President and Chief Financial Officer at Halliburton]

Yes, Chase, it's Eric. So directionally, as you said, we're very confident in the outlook of the business, the kind of profile of free cash flow. Typically, we're going to start generating meaningful free cash flow in Q2 and in H2 as we're done with the buildup of working capital we did in Q1. And directionally, you're right, our outlook right now is more north of 30%, then it was 20% in Q1. So yes, our -- we're revising our projections up.

[Chase Mulvehill, Analyst at Bank of America Merrill Lynch]

Okay. Awesome. And then, unrelated follow-up, you highlighted a lot of digital wins in your press release and also in your prepared remarks today. So, question around this, are you starting to see more digital adoption by your customers? And if so, what's been the catalyst for accelerated adoption? I'm going to give this one a try. And any chance that you could speak to how material digital revenues are today for Halliburton?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah. I think the adoption is going to always be around business cases and what creates value for customers. And I think the idea that we're just going to go digital has started and stopped because it was proven unsuccessful, and so what we see is now more meaningful adoption around real solutions, software solutions and automation solutions. It is a big business, but it's not one -- it's one that's sort of spread throughout the business as well, and so I think that we tend to think about it in two buckets. We tend to think about it as software is one activity and automation as another, and both are generated sort of from the same technical capacity. By that, I mean the capacity to do software at scale, a lot of that resident and landmark, the software business sort of being one thing and then the automation, which is many of the same tools and maybe buy differently throughout the rest of the business. And it has a meaningful effect on our performance, our margin outlook. It's going to have -- it will continue to do that, even in our offshore, in the drilling business in terms of automation of what the drilling tools can do and probably equally onshore North America in terms of what we can do with frac fleets from a maintenance and performance standpoint. It's not something we necessarily advertise, but it's very inherent in the type of performance and efficiency that we see today.

[Chase Mulvehill, Analyst at Bank of America Merrill Lynch]

Perfect. Appreciate the answers. I'll turn it back over.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah, thank you.

[Eric Carre, Executive Vice President and Chief Financial Officer at Halliburton]

Thanks, Chase.

[Operator]

Our next question comes from Luke Lemoine with Piper Sandler. Your line is open.

[Luke Lemoine, Analyst at Piper Sandler Companies]

Hey, good morning, Jeff, Eric.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Good morning, Luke.

[Eric Carre, Executive Vice President and Chief Financial Officer at Halliburton]

Hey, Luke.

[Luke Lemoine, Analyst at Piper Sandler Companies]

Hey. Jeff, you raised your international growth outlook this year from mid -- well, at least mid-teens to high-teens. Can you unpack this a little bit, and maybe just talk about what's changed, what's accelerating and what you have more confidence in?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah. I think I have more confidence in number -- well, really three things. One, the indicators that we're looking at, things like completion tool, order book, which has grown meaningfully, and that all focuses on this year. I would say, pricing sort of improvement that we're seeing, pricing and tightness around equipment around the world, internationally, is another meaningful one. And then, finally, just we -- we're winning awards and we're growing. We're selective about the awards we're winning. Again, our strategy is profitable international growth, emphasizing the profit part of that statement. But at the same time, we are seeing success and foreseeing success in a lot of different markets. And so, because of that, we see a path to sort of high-teens.

[Luke Lemoine, Analyst at Piper Sandler Companies]

Got it. Good deal. And then, maybe on the geo market, you touched on the Middle East growth earlier, but could you expand on what you're seeing in Asia and Latin America for the balance of the year?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yeah. I'm seeing Asia, again, pick up, particularly in terms of development type work, which is obviously right there in our wheelhouse. And then, also, in Latin America, clearly, we see activity growth in Brazil. But really throughout the region, we see the imperative to produce more oil and gas. And clearly, oil and gas is an important part of the economies of Latin America, and so there's a lot of motivation to be more effective and to deliver more oil and gas, partly for economic reasons and for tax revenues. But I think I'm really encouraged by what we see.

[Luke Lemoine, Analyst at Piper Sandler Companies]

All right. Great. Thanks, Jeff.

[Operator]

One moment for our next question. We have a question from Stephen Gengaro with Stifel. Your line is open.

[Stephen Gengaro, Analyst at Stifel Nicolaus]

Thanks. Good morning, everybody.

[Eric Carre, Executive Vice President and Chief Financial Officer at Halliburton]

Good morning, Stephen.

[Stephen Gengaro, Analyst at Stifel Nicolaus]

So curious, when we look at the U.S. pressure pumping world, a lot of the competitors have expanded services at the wellsite, I mean, going through all things from vertical integration to wellsite integration. How are you seeing it from your eyes as far as how it impacts HAL, how it impacts pricing and your profitability in the business at the wellsite?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Well, we view all of this very strategically in the sense, we're looking at returns, long-term returns and where we create value in terms of competitive advantage. And so, we don't -- vertical integration for the sake of vertical integration, in my view, is not necessarily creating more value. What we're doing in the frac space and really, in every business that we're in, is focus on where do we create technical differentiation, so what our -- creates competitive advantage for Halliburton. And so, when I think about what we've done with electric fleets, what we've done with the SmartFleet, really meaningful things. The inputs to the business are the inputs to the business and those are may be good businesses for others, but there are places where we create competitive advantage. So, for that reason, it's not just how much volume can we capture around the wellbore, it's really where can we capture volume and create competitive advantage. And so, I like where we are in our approach to it.

[Stephen Gengaro, Analyst at Stifel Nicolaus]

Thanks. And then, just as a quick follow-up, are you seeing tightness in sand? And is that a profit center for you? And any material movements in that over the last couple of quarters?

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

No. Not a lot of movement in the last few quarters. And again, I view it like all inputs to our business. It's going to fluctuate at different times, different levels. There's a lot of sand in the world and it's quite available, so I don't view that as a long-term impediment to anything that we're trying to do, just given the availability and really how to go about producing it.

[Stephen Gengaro, Analyst at Stifel Nicolaus]

Excellent. Thank you for the color.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Thank you.

[Operator]

Thank you. And that's all the time we have for questions. I'd like to turn the call back to Mr. Jeff Miller for any closing remarks.

[Jeff Miller, Chairman, President and Chief Executive Officer at Halliburton]

Yes, thank you, and thank you all for participating in today's call. Let me close out the call with just a couple of comments. First, Halliburton's performance in the first quarter demonstrated the earnings power of our strategy. And then, secondly, my outlook for Halliburton is strong and everything I see today points towards more cash to shareholders. I look forward to speaking with you next quarter. Let's close out the call. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• David Coleman, Senior Director, Investor Relations
• Jeff Miller, Chairman, President and Chief Executive Officer
• Eric Carre, Executive Vice President and Chief Financial Officer

Analysts

• Dave Anderson, Barclays PLC
• Arun Jayaram, JP Morgan Cazenove
• James West, Evercore ISI
• Roger Read, Wells Fargo & Company
• Neil Mehta, The Goldman Sachs Group, Inc.
• Scott Gruber, Smith Barney Citigroup
• Chase Mulvehill, Bank of America Merrill Lynch
• Luke Lemoine, Piper Sandler Companies
• Stephen Gengaro, Stifel Nicolaus