Jeff Miller - President and CEO Chris Weber - CFO Lance Loeffler - IR

James West - Evercore ISI Bill Herbert - Simmons & Company Sean Meakim - JPMorgan Angie Sedita - UBS Jud Bailey - Wells Fargo David Anderson - Barclays James Wicklund - Credit Suisse Scott Gruber - Citigroup Waqar Syed - Goldman Sachs Dan Boyd - BMO Capital Markets Kurt Hallead - RBC Capital Markets

Good day, ladies and gentlemen, and welcome to the Halliburton First Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Later, we will conduct a question-and-answer-session and instructions will follow at that time. As a reminder, today’s conference is being recorded. I’d now like to introduce your host for today’s conference, Mr. Lance Loeffler, Vice President of Investor Relations. Sir, please go ahead.

Good morning. And welcome to the Halliburton first quarter 2018 conference call. As a reminder, today's call is being webcast and a replay will be available on Halliburton's Web site for seven days. Joining me today are Jeff Miller, President and CEO; and Chris Weber, CFO. Some of our comments today 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, 2017, 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 include non-GAAP financial measures. And unless otherwise noted, in our discussion today, we will be excluding the impact of charges related to Venezuela. Additional details and reconciliation to the most directly comparable GAAP financial measures are also included in our first quarter press release and can be found in our investor download section of our Web site. Finally, after our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A period in order to allow more time for others who may be in the queue. Now, I’ll turn the call over to Jeff.

Thank you, Lance, and good morning, everyone. Let’s get right to it this morning. In the first quarter, Halliburton experienced significant challenges in North America related to rail disruptions. One of the things I’m pleased with is the way our organization executed through the sand logistics complexities in order to minimize disruptions for our customers. The company you want to own and work with is a company that can execute through these issues and any other potential headwinds. Halliburton identified the problem, addressed it and worked through it. Business conditions are back to where we thought they would be. As a result, I really like what I see shaping up and I am confident in our ability to reach normalized margins in North America this year. After taking into account the impact from rail, we wrapped up the quarter in line with what we expected. Here are our highlights for the quarter. Total company revenue of $5.7 billion represents a 34% increase compared to the first quarter of 2017. Adjusted operating income was $619 million driven by robust market conditions in North America. Once again, for the last five quarters, we have delivered the highest returns in the industry. I’m very pleased with the way our North America business exited the quarter. In March, our production enhancement product service line achieved record stage count per crew, higher than at the previous peak in 2014. Our international run rate for tender activity in 2018 is on a pace to double 2017 levels. Our Completion and Production division was impacted by U.S. rail disruption during the quarter but we still achieved a strong exit to the quarter with March margins in the mid upper teens. Finally, our Drilling and Evaluation division had strong year-over-year revenue growth of 15% with operating income growing 54%. Today, all eyes are on North America as it continues to play a larger role as a global producer. Activity in the U.S. remains resilient as our customers have a large portfolio of economically viable projects in today’s commodity price environment. We expect our customers to remain busy through the rest of 2018 creating significant demand for our services. The combination of steady rig count growth and completions intensity is improving demand across all of our product service lines. In addition, we believe the pressure pumping market is undersupplied today and will remain tight for the rest of 2018. Despite the incremental horsepower coming into the market, I believe this undersupply will persist as wear and tear continues to degrade existing equipment. I’ve been saying this for a bunch of quarters; degradation is real. Roughly 50% of announced horsepower does not translate into new crews. I know this because we analyze the difference between horsepower additions announced and the related number of crews that are produced. This means that about half the new build equipment is being used to replace or add to crews already in the field. A key driver of this degradation is service intensity which quickly translates to shorter equipment lives and higher maintenance costs. Maintenance costs are growing and the costs are real. Today, we pump three to four times of sand volume through equipment compared to 2014. We’ve moved away from gel-based frac to slick water frac increasing the abrasion on our equipment. At the same time, we increased the pumping rate compounding the wear and tear on equipment. And with increased efficiency, we’ve improved utilization achieving more pumping hours per day; again, more wear and tear. In this environment, Halliburton has a clear advantage with our proprietary equipment and preventative maintenance technology that reduces our relative maintenance expense. The expansion in our operating margins over the last year demonstrates our superior ability to manage through the increased maintenance. We have generated industry-leading returns while expensing our maintenance costs in contrast to many of our competitors who capitalize their costs. The current activity level in the U.S. is continuing to create tightness across the supply chain. The three most significant areas of supply chain tightness that we see are rail, trucking and labor. I’ll address how we’re handling each of these next. The first quarter was a tough quarter for sand delivery. I learned more about train logistics than I ever dreamed I would; proof that getting to the future first is not always fun. We were the first to recognize the rail issue and describe it for the market. I appreciate the hard work by our sand desk to minimize the disruptions to our customers while a significant volume of our sand supply was impacted by the rail stoppages. As I stated before, this issue is temporary and is behind us. Looking forward, the U.S. rail system is experiencing high demand driven by strong economic activity. This increased overall demand is adding stress to the rail system, while at the same time our industry is attempting to move more and more sand every quarter. This stress is making the timing of deliveries less predictable. Our sophisticated sand supply desk and logistics system is working to mitigate this problem. I believe the ultimate solution is the increased use of local sand. We intend to utilize those resources to provide services for our customers as increased supply comes online in the latter half of the year. After rail, the next logistics bottleneck is trucking. The issue today is not in tractors and trailers, it’s finding qualified drivers and dealing with congested infrastructure. Containerized sand is an effective tool to reduce demurrage and truck demand per well site. We continue to roll out our containerized sand solution currently deployed across about a third of our fleet to reduce cost, increase efficiency and improve our service quality. The labor market is tight. U.S. unemployment is at an all-time low and in some basins it’s just above 2%. That is tight. We have the advantage of being able to recruit nationally to find qualified field personnel. However, given the level of activity today, there will likely be wage inflation and additional pricing will be necessary for cost recovery. I view these supply chain constraints as a welcome sign of a growing market and expect to execute through these challenges on our path to normalized margins in North America this year. We remain on the path to normalized margins and our March performance was a strong step in the right direction. To get to these margins, we will pull the three levers that I’ve discussed several times over the last year. Price is clearly important and we push price every day; first to recover costs and then to gain net pricing. Our customers understand that we have to get both cost recovery as well as return to a price that is healthy for our business. Just as important as price is utilization which we continue to optimize as the market grows. Our scale makes us even more valuable to Halliburton. And finally playing into both pricing and utilization is technology. Technology creates value for our customers, and at the same time reduces cost for Halliburton. As the market grows, North America’s role in the global supply equation is changing. This fundamental shift means that North America’s shale oil has moved from swing producer to base-load supplier to meet growing global demand. Nothing is more evident of this change than our customers actively redirecting spending from international non-OPEC opportunities towards North America. This shift in CapEx allocation is largely driven by the shorter cycle return and lower risk profile North America shale provides. This change didn’t happen overnight. In fact, it’s been occurring over the last several years. In this paradigm, we see sustainable growth over a longer period of time rather than the boom and bust, which has characterized past cycles in North America. This sustained activity is good for Halliburton. It allows us to leverage our supply chain logistics infrastructure, capture efficiencies around repair and maintenance programs and implement technologies at scale to reduce cost and increase production. Therefore, we can optimize our systems and be more efficient with our investments. This is important because in this environment Halliburton will generate strong free cash flow. Turning to the international markets, Halliburton has never been better positioned for recovery than it is today. Halliburton is in every meaningful market competing for work, winning work and executing work with outstanding service quality. This is not something I could have said ahead of the prior cycle. I’ve always said you have to be present to win and Halliburton is more than present. We are winning. In Latin America, I see improving activity offset by pricing pressures throughout the year. I am pleased with the footprint and legacy we have in Latin America and our market share today is a testament to our focus on service quality throughout the cycle. In Argentina, there are exciting improvements in unconventional resources. We successfully completed the longest lateral section ever in the Vaca Muerta formation, flawlessly pumping 42 stages, a great job by the team demonstrating their focus on our value proposition in Argentina. In addition, a record number of blocks are scheduled to be auctioned in Mexico and Brazil representing a pipeline of service activity in the coming years. We look forward to working with our customers to maximize the value of their investments. Certainly a lowlight for the quarter is the write-down of our remaining assets in Venezuela. We continue to work at a reduced level as we believe the ultimate path for resolution in Venezuela involves oil and gas. In the Middle East and Asia, we’ve experienced modest increases in activity offset by pricing pressure. We’ve grown our market share in this region throughout the downturn on the strength of our service quality and technology offerings. In the first quarter, we delivered the industry’s first in-situ bubble point measurement using our wireline CoreVault technology. This data is important for reservoir characterization allowing our customers to better understand their gas to oil ratio before flowing the well to surface. By collaborating with customers, we continue to create technology that improves our services and maximizes their asset value. In Europe, Africa, CIS, typical seasonality created a dip in activity for the first quarter but we expect to see modest rig count growth throughout the year. I expect initial activity increases to be in the North Sea, Nigeria and Ghana. One highlight from the region is progress around digital applications. We continue to believe that our approach to digital which focuses on open architecture, solving business problems and working with partners will prove the most effective over time. I remain encouraged by the long-term prospects of the international markets. Green shoots of activity are starting to create areas of localized tightness but this additional activity is not enough to reverse the pricing pressure we are under today. The run rate for 2018 international tendering activity is on a pace to double from 2017 which leads us to believe that there will be improved activity in 2019 to help soak up resources and create and opportunity for pricing inflection. Before I conclude, I want to spend a moment talking about Sperry Drilling because I am really excited about what I see. Sperry developed and launched several exciting technologies in the last year. First is EARTHSTAR, our very deep resistivity service which provides customers greater reservoir insight to create better wells by utilizing improved mapping and real-time geosteering decisions. Next is our ICRUISE intelligent rotary steerable system that reduces drilling time and increases well placement accuracy to optimize asset value for our customers. And finally, our new upgraded fleet of drilling motors are proving effective in U.S. land. These motors are more powerful and have improved reliability maximizing drilling efficiency for our customers. I am really excited about these technologies and the enthusiasm we’re seeing from our customers. We supercharged our R&D spend for this drilling technology and we made terrific progress in a short period of time. The market for these technologies and additional equipment in our development pipeline is growing. For this reason, we will spend a big part of this year’s capital budget on these tools. I expect the investment to generate attractive returns in the years ahead. Overall, I am excited about the market outlook for the remainder of the year. I am confident in Halliburton’s ability to grow revenue and expand margin in North America and the strength and performance of our international business as the international recovery unfolds. Our strategy is executable, it’s working well and resonates with our customers. Our strategy is delivering industry-leading returns and I am confident that it will continue to do so. Now, I’ll turn the call over to Chris for a financial update.

Thanks, Jeff. Let’s start with a summary of our first quarter results compared to the first quarter of 2017. Total company revenue for the quarter was $5.7 billion and adjusted operating income was $619 million, representing a year-over-year increase of 34% and over 200%, respectively. These results were primarily driven by increased activity in North America. Moving to our division results. In our Completion and Production division, revenue increased by 46% and operating income was in tripled to $500 million. These results were primarily due to improvements in United States land. Additionally, results improved due to increased well completion services in Europe, Africa, CIS and higher stimulation activity in the Middle East. In our Drilling and Evaluation division, revenue increased by 15% while operating income increased 54%. These results were primarily driven by increased drilling activity in North America and the Eastern Hemisphere, particularly in the North Sea. These results were partially offset by activity declines across multiple product service lines in Latin America. In North America, revenue increased 58%. This improvement was led by increased activity throughout the United States land sector in the majority of Halliburton’s product service lines, primarily pressure pumping, as well as higher drilling and artificial lift activity. Latin America revenue decreased by 1% due to activity declines in Venezuela and Mexico. These results were partially offset by increases in drilling and pressure pumping services in Argentina. Turning to Europe, Africa, CIS, we saw revenue improve by 19% mainly due to higher drilling activity and well completion services in the North Sea, coupled with increased activity in Russia and Azerbaijan. These results were partially offset by activity reductions in Angola. In the Middle East, Asia region, revenue increased 7%. This increase is largely the result of increased drilling and stimulation activity in the Middle East and increased drilling activity in Indonesia, offset by lower completion tool sales and project management activity in the Middle East. Regarding Venezuela, as a result of recent changes in its foreign currency exchange system and continued devaluation of the local currency, combined with U.S. sanctions and ongoing political and economic challenges, we wrote down all of our remaining investment in the country. This resulted in a $312 million, net of tax charge during the first quarter. We continue to work in Venezuela and carefully manage our go-forward exposure. In the first quarter, our corporate and other expense totaled $69 million and net interest expense was $140 million in line with our previous guidance. We expect these items to continue at this run rate in the second quarter. Our effective tax rate for the first quarter, excluding Venezuela-related charges, came in at approximately 21% as a result of U.S. tax reform and our geographic earnings mix. Going forward, we expect our 2018 full year and second quarter effective tax rate to be approximately 22%. Cash flow from operations during the first quarter was $572 million with capital expenditures of $501 million ending the quarter with a cash balance of approximately $2.3 billion. For the full year 2018, we now anticipate our CapEx spend to be about $2 billion. We like what the market is showing us for 2018 and beyond and while spending slightly more than our D&A, customer demand supports this investment and we expect it to generate attractive returns. We ended the quarter with 2.3 billion in cash and expect to generate strong free cash flow in 2018. Consistent with prior years, we expect our cash balance to grow in the second half of the year. Now, turning to our thoughts on the second quarter. In our Drilling and Evaluation division, we expect our revenue and margin to be similar to the first quarter, primarily due to continued pricing pressure in the international market offsetting activity increases. In our Completion and Production division, we expect strong revenue and margin growth driven by the strengthening North America market. Based on what we see today we believe current second quarter consensus EPS provides a good target for our performance. Let me turn it back to Jeff for a few closing comments.

Thanks, Chris. Let me sum it up. First, I want to thank all of our employees for what they do to deliver our value proposition every day. It really matters and we saw it this quarter. In North America, I am pleased with the way Halliburton executed through the quarter given the challenges we faced. We managed through the supply chain issues and exited the quarter on the path to normalized margins. Looking ahead, I am excited about the way the North America market is shaping up for the remainder of the year and the role it is playing in the global supply. My view on the international market remains intact. I’m encouraged by the activity outlook that should ultimately lead to price inflection in 2019. We are the execution company. We are focused on service quality, capital discipline, generating superior financial performance and delivering industry-leading shareholder returns. Now, let’s open it up for questions.

[Operator Instructions]. Our first question comes from the line of James West with Evercore ISI. Your line is now open.

Good morning, guys.

Good morning, James.

Jeff, I want to dig in a little more on the pressure pumping market. I think you gave some good color there on what you guys are seeing, and there’s been some commentary suggesting different factors at play here and perhaps that’s because you’re sold out and demand’s coming in and others are trying to put equipment to work. But I wonder if you could talk to some of the dynamics you’re seeing both the supply and the demand side? How much demand is running above supply these days, how long this could stay tight and then how that’s going to factor in into pricing for Halliburton in particular?

Thanks, James. It is different. Our customers are asking us for equipment. We’re not trying to put older equipment into the market. And because of that it makes for a totally different conversation. But I think backing up and looking at overall supply and demand, it looks like the market’s undersupplied probably 1 million, 1.5 million horsepower today, and I expect that it stays that way certainly for this year and likely beyond, and a lot of that is because of the attrition that I talk about that is very real, and we look at horsepower announcements versus actual fleet adds. And all that does is it affected about half of the horsepower announced is going back into existing fleets tells me that that market stays tight. And so for that reason from our perspective anyway, we see solid pricing. We push it every day. We’re not going to get into the strategy around how we do that, but certainly see cost to cover – pricing to cover inflation out there as well as pushing on the net pricing side of that as well.

Okay. So we should think that the net pricing gains will continue for that time period as well?

Yes.

Okay, perfect. Thanks, Jeff.

Our next question comes from the line of Bill Herbert with Simmons. Your line is now open.

Good morning, Jeff. With regard to international, as you went through all three different geo markets, it struck me that the continued refrain is activity going to offset – not partially offset by pricing, and yet your international top line was up 8.5% year-over-year. So do we expect international top line for the year to be up for Halliburton or does – as the year unfold, the year-over-year gain is compressed to the point where topline is flat?

No, we should see some – I think we outgrow the expected spend internationally. So I see the top line is up for the full year 2018.

Okay. And then with regard to – it seems that pricing remains pretty corrosive. I’m just curious, is pricing continuing to go down or has it stabilized at really oppressive levels?

No, I would say pricing continues to go down. I mean, we look at pricing internationally. We’re excited about the volume of activity and we like to see more tenders. But I can tell you our customers know that we’re at the bottom as well. And so from our perspective price is actually continuing to move down not up internationally as we start to see the large projects come through. So I expect that we see inflection in 2019, expect that we gain share as we work through the cycle and that’s why we see revenues up for the full year. But clearly that is going to offset the benefit from higher activity.

Okay.

As we do see, like we said on D&E which is largely international, flattish second quarter to first, but we would expect as we move into the second half of the year that we’ll see it – start to see some improvement in our international results and thus our D&E results. Not a lot, but some incremental improvement as we get closer to that inflection point that we’re seeing in 2019 that Jeff talked about.

Okay. Thank you very much.

Our next question comes from the line of Sean Meakim with JPMorgan. Your line is now open.

Good morning, Sean.

Good morning. So, Jeff, maybe if we could talk about where your contract position sits for frac, just thinking about your existing fleet versus leading edge pricing, how much that roll forward do you think will support incremental margins through the year even if net pricing were more on the flatter side, just to give us a sense of how much that impact could be?

Thanks, Sean. Let’s go back and talk about the three levers. So price is always important. So when I look at margin progression, clearly price is important. But at the same time utilization is an important lever and allows us to move on the margin front as does technology help us do the same thing, and technology in effect helps our customers generate more value but at the same time reduces our cost, and that’s the important piece of that in terms of supporting our margin expansion outlook for the balance of the year. Our business development guys are in the market every single day, and because of our efficiency and technology and science, I mean that’s the price support for what we do. But at the same time, those other two levers are very important.

So in terms of looking through the year, fair to say that there’s still some pull forward as your backlog of contracts roll into current pricing, so that’s a net tailwind for you?

Yes, I would say if we look back a year now and talk about the contracts that we had there, a large part of that has rolled over. And so what we look at now is improving the margins on the contracts that we have. And a lot of this does get to efficiency and this is one of the reasons why our business development team is so focused on where are the customers where we can get the best efficiency and utilization. That’s a key part of how we expand margins. And so that opportunity is clearly still there. Customers remain urgent and that customer urgency is critical because even spending within cash flow, for example, urgency around effectiveness of every dollar spent matters a lot and that may not have been the case two years ago at the absolute bottom of the downturn but today that is a critical factor for our customers. And again where we spend a lot of our energy is making sure that we are able to execute that way.

Got it, understood. And then just thinking about the other service lines in North America, curious how pricing progressed end of quarter when thinking about drilling services, cementing, wireline, coiled tubing? You touched on it a little bit in prepared comments but just what are your expectations for those other lines as we move through the year and the impact on C&P as well as C&E?

Well, I think none of those service lines declined as much as pressure pumping did through the downturn, so they don’t have as far to move up. Though that said, I do expect a growing market and as the rig count rise up I suspect we’ll see more tightness around those things and the ability to move price up modestly.

Okay, fair enough. Thank you.

Thank you.

Our next question comes from the line of Angie Sedita with UBS. Your line is now open.

Angie?

Good morning, guys. Sorry about that. Jeff, so I agree. There’s certainly a big difference between incremental horsepower and replacement horsepower. Can you give us your thoughts on how much horsepower incrementally do you think is coming into the market? And then you touched on also a very fair point on the ability to deploy new versus older equipment and maybe talk about the pricing differential on the newer equipment versus the older equipment?

Sure, Angie. We look at sort of headline horsepower in the marketplace. We think it’s probably 18 million horsepower, somewhere in that range. We look at what’s been announced in terms of new build and reactivations that comes to maybe 4.5 million horsepower. Of that, we expect roughly half of that is going to get plowed back into existing fleets. In Halliburton, we’ve maintained our fleets at 36,000 horsepower on average which tells me that we’re getting differential performance around that equipment. And so that clearly in my view with the kind of rig count that we have today and the outlook for growth this year keeps that tight. And so I think that’s how we see it unfolding for the balance of the year. Now your question around horsepower age, so much of that has to do – we think about our horsepower in terms of how effective is it on location and clearly we’ve got proprietary technology around our pumping and in other things we do around maintenance, et cetera. And I think because of that, we’re differentially positioned in the market and of course that has an impact on where we can work, how effective we are, what kind of margins we can earn.

All right, okay, fair enough. And then I don’t know if you can talk about it at a high level as far as the pricing mechanism of your contracts. Is it fair to think that the majority of your contracts are re-priced at the beginning of the year or is it daggered, number one? And then midyear as pricing continues potentially to move higher, do you have an opportunity to revisit it or is it normally done once a year, twice a year? Or just at a high level, how do those contracts work?

Angie, that’s really maybe the way it was several years ago. But I’d say today it’s staggered. It’s all over the place as we work through the downturn and back out of the downturn, a lot of variability in what contracts look like. So I certainly wouldn’t frame it that way. Really it’s a matter of execution every day and demonstrating the value so that we can have a value discussion.

All right, thanks, Jeff. I’ll turn it over.

Our next question comes from the line of Jud Bailey with Wells Fargo. Your line is now open.

Thanks. Good morning. I wanted to ask about or circle back on getting back to normalized margins this year and all the discussion around pricing. Jeff, just to be clear, do you think you could hit normalized margins this year if leading-edge frac pricing does not increase from here or we’re trying to get an understanding of what can be efficiency driven, what’s just simply new contracts rolling up to kind of leading edge if you could help us think through that please?

Yes, the short answer is price is always important but I talk about the three levers because I believe we get there on the back of improving utilization and technology. And I’ve said that for a long time. Pricing’s certainly helpful but not a requirement.

Okay, all right. Thanks for that. And my follow up is on the higher CapEx. Could you maybe give us a little bit of insight as to maybe where that incremental capital is going to go? You mentioned Sperry and ramping up there. How much of it maybe replacement and how do you think about the return on that incremental capital you’re going to be spending this year?

Jud, this is Chris. Like we said, we bumped our CapEx budget. Now I think so full year will be about $2 billion, a little bit higher than we were guiding before. And I think it’s important to note that we’re pretty thoughtful about our capital investment decisions always looking at it through the returns lens and is it going to be value accretive, is it going to generate attractive returns. And that’s what we saw with the opportunity with regards to the CapEx rate. And the majority of the increase is going into Sperry. And so we’re excited about it. As Jeff talked about, this is a product line that we underinvested in for a number of years. This is a strategic priority for the organization. We’re seeing great demand both for existing technology and the new technology and it’s actually positioning equipment for work in 2019. And we think we’ll generate attractive returns over the long term. So we’re excited about the opportunity. But this CapEx raise in terms of guidance doesn’t change our outlook or expectation for generating strong free cash flow this year nor our focus on capital discipline.

Okay, got it. I appreciate it. I’ll turn it back. Thank you.

Thanks.

Our next question comes from the line of David Anderson with Barclays. Your line is now open.

Thanks. Good morning. Jeff, just kind of a general question around the normalized margin target. Now you’re reiterating that margin target. Can you just help us understand how you define normalized? It seems like everybody has a different view on what that means. Just curious what that means to you in terms of activity utilization and pricing?

Yes, Dave, I’ve defined normalized margins as 20%. That’s been something we’ve talked about it over some period of time and that’s where I think the business settles. And if we go – we were getting to that place, we were at that place in 2014 realistically. What we had was demand go away but it wasn’t necessarily an oversupplied market. What we had was a downturn where demand went away. But I fully expect that we’ll work back into that range and that’s just what we’re doing with the levers I described. Clearly price is important but the kind of utilization that we’re able to get today because of our process or technology that’s always a key component of any kind of margin outperformance.

So in other words this is sort of a steady-state level that you think you can achieve for a couple of years here at these levels based on what you mean by normalized?

Yes, that’s why I used the word normalized because really we’d always describe that as a normal range for this business was in that range and the work that we’re doing is build around having this business operate at those levels.

And then if we think about kind of the fourth quarter, we often see some seasonal weakness here in North America. Do you think you can – so does that imply that you should be able to hit this target by third quarter if we assume sort of a downtick in fourth quarter like we usually see?

Yes, I would say the behavior of the market probably looks somewhat consistent with what it does sort of every year and I’ll just leave it at that. And in terms of timing, Q4 always have some spotty weather and Q1 this year had cold weather – had the rail issues that we had. So as we work through the year I suspect it’s over the next couple of quarters.

And then a separate question on the sand side. You had talked about increasing use of local sand to mitigate some of these issues that you’re seeing in the first quarter here. Can you give us a sense of how you see that the magnitude of that shift you think is going to happen over the next 12 months? Just kind of curious, sand’s a big portion – a crucial element of your pressure pumping operations you always want to have for your customers. So like roughly how much of that – I’m just trying to get in big picture numbers, so like what percentage of your Permian is sourced from rail and where do you think that could potentially lower to in 12 months?

Well, that’s a moving target as we speak. So if we go back six months ago, it was zero and I suspect as we get into some time next year, there is a – for the market anyway there’s a path to oversupply that market from the Permian. And that’s sort of the projects that we see or at least are in process of getting built. So it’s probably never a 100% but it could be a substantial portion of the sand demand in the Permian will come from buy-ins in the Permian. It’s a dynamic we’re starting to see in other basins as well. What it ultimately does is it serves to relieve pressure on rail and then certainly provides for more availability of Northern White to the markets that will probably continue to demand that.

Great. Thank you, Jeff.

Our next question comes from the line of James Wicklund with Credit Suisse. Your line is now open.

Good morning, guys.

Good morning, James.

Having worked international for 15 years, the contingency always needed the contingency both on price and time and I understand your comment that the bidding activity is up but we really won’t see the impact until '19. But there’s been a great deal of talk about lump sum turnkey contracts in the Middle East especially and I know that we’ve done those for a while but the level or the percentage of total business appears to have picked up. Can you talk a little bit about where that is today, where that is versus a couple of years ago? Do you do it with the same people or different people? And more importantly, we’re all concerned that lump sum turnkey increases the risk to a company that bids that. Not all of them are executed well. And so the concern is or the hope is that you execute well and boost those margins and maybe surprise us for the upside by the end of the year on results. But can you talk about how that plays into lump sum turnkey contacts play into your view of international?

Thanks, Jim. As you say, LSTK has been around for a long time. It’s gone by a lot of different names over the years; integrated solutions, IPM, as I say a number of names. I think the key again is execution risk and how well we manage that. We’re not afraid of execution risk and that’s really the basis for the contract is that execution risk. What I do like about them is that they aren’t the kind of investments in oil and gas that take long time in commodity exposure. So from a cash return standpoint, it certainly work. I’d say the key components of executing those well around project management and understanding that risk. We’ve got terrific experience during this. That share for Halliburton grew dramatically through the last two or three years and we’ve done it for a long time. And so the skill sets are different and it takes time to develop those and I’m pleased that we have those skills today at Halliburton and compete very effectively. But I would wrap up with though is that they do get progressively more competitive over time.

Okay. So the same pricing pressures have to exist in those that exist from the overall market. Okay. And my follow up, if I could, you recorded record stages in the quarter which is good. You talk about the three levers that you can pull. Some people think because you have all this equipment, 100 – spreads out in the field that if they’re out in the field, they’re 100% utilized. Can you talk about – we can all guess what pricing might do but can you talk about the upside to utilization that exists over time in pressure pumping?

Yes, thanks, Jim. That’s a really meaningful lever for Halliburton. And having spreads spoken for is radically different from utilization in terms of pumping hours per day. And so we spend a lot of time and apply big data and apply algorithms and have a lot of effort put into how do we drive better utilization of our equipment every minute of every day. And there is a lot of room to run there. And that also is why I spend so much time talking about customers and where we are most effective and customers that better utilize our value proposition because that is truly a win-win. But again to go back to the idea is there’s plenty of room for us to run in that regard.

Okay. Gentlemen, thank you very much.

Thank you.

Our next question comes from the line of Scott Gruber with Citigroup. Your line is now open.

Good morning.

Good morning, Scott.

Jeff, as we think about potential inflection in international pricing in 2019, what level of market growth do you think about that’s required to drive that inflection? Is it a mid-single digit growth rate, again, so the market’s efficient? Do we need to get the high-single digits, low-double digits? How do you think about what’s required to drive some pricing next year?

Thanks, Scott. It’s probably less than overall market number though mid upper single digits is a good place to think. But it’s more around specific markets where we see tightness. And part of what we see right now is a sort of thinly spread addition of sort of activity is not sufficient in any particular market to create the tightness that would allow for pricing inflection. And so I think it’s better to look at particular markets as we go through this process and it is maybe the overall. Clearly there’s a place where overall growth is enough to create overall tightness. But I think the early innings of this will look more like specific markets or technologies that are tight.

Got it. And how do we think about what should be a normalized margin in D&E just given the shift towards more onshore work as we start this next up cycle and what appears to be more bundling, more turnkey contracts, how do we think about what normal on the D&E side of the business which is more international? And when can we get there given the contract roll schedule?

Look, I’m not going to call that right now. I’m really excited about where we’re going in that space in terms of differentiated equipment and I talked about Sperry but I’d also talk about our other service lines in D&E, excited about all of those. We’ve made a lot of gains over the last several years in terms of open hole and deepwater technology around drilling fluids is fantastic and growing. And so I feel like those margins will continue to expand as we see sort of tightness appear around the world internationally. Those tend to be more heavily weighted internationally just because that’s where more of the drilling activity is on a relative basis in North America. The actual drilling of a well is a smaller part of the overall ticket than the completion.

Got it. I appreciate it.

Thanks.

Our next question comes from the line of Waqar Syed with Goldman Sachs. Your line is now open.

Thank you. Jeff, in early February you had guided down to like $0.10 impact to the quarter from sand-related issues. In hindsight, do you still feel that the impact was $0.10 during the quarter or was it less or more?

Waqar, this is Chris. It was generally in line with what we thought it was going to be and we felt good with regards to the outlook that we provided and delivering on that. When you step back – we were the first to actually see this problem and get our arms around it. We’re able to provide an update to the market and more importantly be able to start executing on the solution as it relates to working through the logistics constraints and minimizing disruption for our customers. And then when you think about our expectations for exiting the first quarter in a strong position and delivering on that, this all for the most part played out like we thought it was going to.

So that would be somewhere around – if I estimate it, around $600 million, $700 million of revenue impact, is that fair?

From a revenue impact, I wouldn’t want to comment. We talked about from $0.10 perspective. I think we were generally in that range. And so I think – and that’s what I focus on.

It’s not just the days that we were slowed down but in addition to that it’s the response to those things which involves spot buying of very expensive sand, trucking things that ought to be railed. It’s a long – number of things that play into that response that served to impact margins.

Okay. So it’s more – a lot more cost issue and then some revenue impact, okay, that’s fair. And that’s probably my question but on the international side your revenue growth year-over-year was much better than what you’ve seen for the competitors. Now you’re guiding to kind of more flattish kind of international revenues in the second quarter. So was this just like an anomaly in 1Q or you think there was some market share gains underneath that?

No. I think that we’re well positioned to continue to grow. Q1 is always down relative to Q4. Q2, it’s following the same trajectory or curve that we’ve seen sort of year-upon-year-upon-year. So I don’t expect to see any changes there and expect to see continued outperformance or market share performance as we move into the next cycle. What’s important is how well we’re positioned internationally and I think that’s the change then until now. We made a lot of investment back in '12, '13 to be better positioned internationally. I love where we are competing in every market. So I expect we’ll perform very well into the next cycle.

And just one final question in terms of sand intensity per well, what are you seeing from your customers in the U.S.?

Yes, I would say that we are continuing to see sort of that flattish kind of activity. It’s not wildly up, wildly down. Again, as I’ve said before, sands one of those things we clearly want to optimize over time. It’s certainly a cost but at the same time as companies figure out how to best complete wells, better design completions, sand can move up for a time. And then they sort of define the limits of up and down – of high and low. They tend to find some places most effective in the middle.

Okay. Thank you very much.

Our next question comes from the line of Daniel Boyd with BMO Capital Markets. Your line is now open.

Thanks. Jeff, you mentioned internationally there are a number of markets or pockets that are stronger than others. So is the organization right-sized for that recovery or are you still spending to reallocate resources and is there an opportunity to maybe reallocate resources to those pockets of strength?

We’re going to manage our cost structure pretty tightly as we go into the next cycle. Our value proposition is that we collaborate and engineer solutions to maximize asset value for our customers. Our planning is in place to execute that strategy. And if we deploy resources, they’ll be more focused on executing the work but the key is to maintain the efficiencies that we develop through the downturn and make sure that’s part of whatever that ramp looks like going into the second half of this year and '19.

And we take a global view of our equipment and tools and where they are, so we’re going to allocate where we think we see the demand assuming it’s cost effective to move in there. So definitely take a global perspective as it relates to our equipment allocation.

Okay. And then the follow up there is just on pricing. On the last call you said that international pricing was possible later in '18 and it sounds like now you’re more definitively pushing that into 2019, a lot of that sort of driven based on these pockets of strength. But what’s changed that is giving you less confidence in pricing this year?

Look, nothing’s changed. I think it’s more about when you see that in the P&L, the reality is pricing in pockets as market tightens towards the end of this year, I suspect that we see the ability to move on price. But overall we’re going to still see working off of contracts that were either light last year or this year. And so when I talked about inflection, I don’t suspect you actually see much of that until we get into 2019.

Okay. But from a leading-edge perspective you think pricing could happen still this year?

It could happen later this year.

Okay. Thanks.

Our next question comes from the line of Kurt Hallead with RBC Capital Markets. Your line is now open.

Thank you. Hi, good morning.

Good morning, Kurt.

Jeff, just wanted to follow up on the comments you made about the challenges on the rail side and how that’s opening up opportunities to source for your customers and base in, let’s say, in the Permian and other places. It kind of seems like it’s kind of trading one logistical challenge for another logistical challenge, rails versus trucks. As you guys are going to think through the process and prepare for that shift, do you expect the truck dynamic to be less of an intensive challenge than the rails as you move into using this local sand?

Look, I think to start with, our logistics investment and our logistics team is terrific. And so we will work through whatever those challenges are as they appear. But I think some of the key building blocks are in place particularly around how we move sand on a local basis. I think the box technology gives us a lot of options around how to move sand in ways to be more effective with that. We’ve got a lot of different ideas that I won’t layout on this call for all the reasons you might imagine. But I’m really excited about that shift and I don’t think Northern White gets more focused on other parts of the country which again we’ve got terrific logistics infrastructure to deal with that. And I think it actually creates just new opportunities. Will there be congestion? Yes, there probably will. But at the same time it feels – I can see a path to how we manage that that’s exciting.

Great. That’s good color. And maybe on a quick follow up on that, how are things progressing in context of contracts for E&Ps relating to the local sand? And I don’t know about the best way, maybe you can provide us some color without getting too specific for competitive reasons, but how much adoption have you started to see and how much do you have already kind of committed to go to customers for local sand going into late '18 and '19?

Look, Kurt, we’re going to participate in that market. I think that our value proposition – when we view that market, things that bring the structural costs down are good for our business, all of our business including our customers, including Halliburton. And so we look at that as an opportunity to reduce the cost of this which actually allows our customers to do more work and do more of the work that I think is differential for Halliburton which is how to design and place fracs in a way that makes better well and does it more efficiently. So real excited about that. It’s going to probably be more adopted as it becomes more available and clearly everything would indicate that there will be a lot of availability of that sand as we work through the balance of 2018, certainly into '19.

Got it. Thanks. And then just one more follow up just on the international front. You guys referenced pickup in activity, the prospect for better pricing into '19. So it seems to me that some of these contracts that had been I guess awarded here recently, it looks like they contrast sharply to other market periods where they were maybe two or three-year contracts and kind of were a drag on margins for an extended period of time. So am I understanding the dynamics, so you had much more shorter duration contracts in your international market and therefore you’ll start to get better margins in '19 and '20, is that how things are progressing?

Well, I would say it’s certainly smaller and shorter as we worked into the downturn, and at least at this point in time feel somewhat shorter. Clearly we prefer that just so that we got the ability to flex around equipment as time moves on. Obviously there will be a mixed bag of contract both duration and prices. We worked through this. But I think the short answer is certainly up until this point we’ve tended to see shorter duration contracts.

That’s great. Thanks, Jeff.

That concludes today’s question-and-answer session. I’d like to turn the call back to Mr. Miller for any closing remarks.

Thanks, Liz. Before we close, I’d like to just highlight a couple of key takeaways. First, I’m excited about the outlook for North America and our March exit margins clearly demonstrate our path to normalized margins. And secondly, I’m pleased to see the recovery trajectory in the international markets demonstrated by the increase in tender activity and believe that this will lead to pricing inflection in 2019. So I look forward to speaking with you all next quarter. Liz, you may now close out the call.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day.