Halliburton Company - Earnings Call - Q4 2011
January 23, 2012
Transcript
Speaker 4
Good day, ladies and gentlemen, and welcome to the Halliburton Fourth Quarter 2011 Earnings Release Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require technical assistance throughout the conference, you may press star and then zero on your touch-tone telephone. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to our host today, Kelly Youngblood, Senior Director, Investor Relations. Please begin.
Speaker 2
Good morning, and welcome to the Halliburton Fourth Quarter 2011 Conference Call. Today's call is being webcast, and a replay will be available on Halliburton's website for seven days. The press release announcing the fourth quarter results is available on the Halliburton website. Joining me today are Dave Lesar, CEO, Mark McCollum, CFO, and Tim Probert, President, Strategy and Corporate Development. I would like to remind our audience that some of today's comments may include forward-looking statements reflecting Halliburton's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and 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, 2010, Form 10-Q for the quarter ended September 30, 2011, and recent current reports on Form 8-K.
Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing the fourth quarter results, which, as I have mentioned, can be found on our website. We will welcome questions after we complete our prepared remarks. Dave?
Speaker 1
Thank you, Kelly, and good morning to everyone. Before discussing our fourth quarter results, let me begin with a few of our key accomplishments in 2011. First, I'm very proud to say that this was a record year for our company, with revenues of $24.8 billion, operating income of $4.7 billion, and with growth, margins, and returns that led our peer group. To put this in perspective, our business has nearly doubled in size over the last five years, primarily from organic growth. From a division perspective, we achieved record revenues in both our completion and production and drilling and evaluation divisions. I want to thank all our employees for their help in making it happen. The cornerstones of our strategy remain unchanged and include maintaining leadership in unconventional plays, participating in the deepwater expansion, and impacting the decline curve in mature fields.
This year, we commercialized key technologies consistent with these growth themes, and Tim will discuss them later. As the industry leader in unconventional shale plays, we performed the first shale fracts in numerous countries around the globe, including Argentina, Mexico, Saudi Arabia, Australia, and Poland. We are now starting to invest more heavily in building out our pressure-pumping footprint in the international marketplace. We are also continuing to invest in our deepwater business and have secured key contract wins in East Africa, Vietnam, Malaysia, Australia, China, Brazil, and other markets, and are building infrastructure to support this work. In addition, it's important to note that our service quality continues to be recognized by our customers, as Tim will also discuss. We believe this improving market position and service quality reputation will benefit us as new build deepwater rigs are scheduled to arrive in the coming years.
Our customers are looking for deepwater alternatives that have the capability and technology, and increasingly, that company is Halliburton. Lastly, we continue to build our capabilities in servicing mature fields and supported that effort with some critical acquisitions in specialty chemicals and artificial lift in 2011 that enabled us to broaden the scope of our mature field offerings to our customers. The most significant of these was Multichem. We expect that synergies in sales, manufacturing, and distribution will enable us to deliver additional value to our customers and shareholders as we expand the global footprint of this product line. I'm very pleased with our results in the fourth quarter as we set new company records in both our North America and international operations.
Revenues of $7.1 billion represent the highest quarterly revenue in the company's history, with North America, Latin America, and the Middle East/Asia regions all achieving new record levels. Operating income of $1.4 billion was also a company record and was driven by strong performance in North America and the Latin America regions, where we had year-over-year revenue growth of 56% and 46%, respectively. Let me start by providing some commentary on North America. The shift from natural gas to liquids-rich plays continues and was quite apparent in the fourth quarter. The U.S. rig count grew 3% sequentially, with oil-directed rigs up 8% and natural gas rigs down 2%. The shift towards oil and liquids-rich plays is a direct result of the stability of oil prices and higher operator returns for these resources.
Completing these wells requires higher levels of service intensity due to advanced fluid and completion technologies and creates an additional opportunity for us to otherwise differentiate ourselves from the competition. We have highlighted for some time the dramatic impact that oil-directed horizontal activities have had on the North America market. For instance, in addition to natural gas rigs targeting liquids-rich plays, the oil rig count now represents more than 60% of the total in North America, a level we have not seen in decades. Our customers' sources of revenue have also shifted dramatically toward oil, with the sale of U.S. oil and liquids representing approximately 70% of total upstream revenue today. This compares with an approximate 50/50 split just five years ago.
Our customer mix continues to shift toward IOCs, NOCs, and large independents who tend to have a more stable spending pattern and more sophisticated supply chain management and away from those customers who might be more financially challenged in the current market. We are also seeing a trend toward higher average footage drilled per well up to approximately 7,000 feet from 5,000 feet just five years ago. Finally, today, reserve development demands four times as much horsepower per rig as compared to 2004. Clearly, there's been a dramatic shift over the past several years. All of this bodes well for a continuation of high demand in the North America unconventional markets. What will that market look like going forward?
The last time the break-even price for oil development was so far below prevailing oil prices was back in the early 1980s when the rig count was more than double what it is today. Despite the vast amount of work we've done in North America in recent years, there's only been a modest increase in net oil production as new supplies are barely offsetting declines from mature North America basins. As a result, we expect continued liquids-driven activity growth in the coming years as our customers invest in their resources and optimize their development technologies. We plan to continue to expand our capability and drive efficiency through technology and logistical improvements to enable this growth.
Now, looking at the results for the fourth quarter, our North America revenue grew sequentially by 6% versus a 3% rig count due to strong activity in the Eagle Ford, Permian Basin, Marcellus, Gulf of Mexico, and Canada. Despite this strong revenue growth, operating income declined slightly from the third quarter. Let me go over those reasons. First, our recent acquisitions and the associated M&A costs that went with them had an impact of approximately one margin point on our North America margins in the fourth quarter. Second, as you know, the Rockies and the Bakken are two areas where we have a particularly high market share, and both markets experienced some seasonal impacts yielding inefficiencies, particularly with our commuter crews. The third quarter is historically our most profitable quarter each year in these two particular areas, and this year was no different.
The impact of the holidays was more pronounced this year in these areas as customers chose not to complete wells through the Christmas holidays. Thirdly, cost inflation continues to have a negative impact. There is a delay between vendor price increases and when we are able to pass through these increases to our customers. In the natural gas basins, this is becoming more difficult, and we plan to go back to our vendors for price relief in some areas. This will take some time. Fourth, logistics and profit supply. While we have a very sophisticated logistics group, there are times when issues arise that are not within our control. We experienced logistical and profit supply disruptions in several areas in the fourth quarter, and this impacted the Bakken, Rockies, South Texas, and the Permian, all of which had a negative impact on margins.
Finally, we experienced inefficiencies associated with frack fleet relocations to address the challenges the industry is facing in 2012. I'll say more about that in a few minutes. Also, spot natural gas prices are down 33% in the last 50 days due to the resiliency of natural gas production in a mild winter. In response, we have seen the U.S. natural gas rig count decline 9% over that same period of time. This change is clearly impacting the industry as we move into 2012 as service companies' resources relocate to the oil basins. We've talked in the past about how we believe it is important to have a balanced portfolio of business in both dry natural gas basins and liquids plays because a large number of our customers have operations in both.
Our strategy was to support these customers in the natural gas basins with a hyper-efficiency business model that went beyond just 24-hour operations. We stayed with these customers in the natural gas basins even as other competitors left to chase work in the oil plays. This strategy has worked well and deepened our relationship with these customers. Our understanding with them was that in return for staying with them in the natural gas basins, we would get their work in the liquids-rich plays as equipment became available. This strategy is now playing out to our advantage. As natural gas prices have fallen to the sub-$2.50 level, we are proactively working with these customers to now serve them in the oil plays as they shift their capital spend to liquids and away from natural gas.
We have moved or are in the process of moving eight frack fleets from primarily natural gas plays to liquids plays. This requires redeployment of people and equipment. It disrupts a very efficient operation as well as requiring us to make adjustments to our supply chain. It's important to understand that these fleets that are moving are not looking for work, but in each case now are committed to an existing customer or one who we could not serve before, and in each case has or will displace a competitor in the liquids plays. While beneficial to us in the long run, these moves do not come about without a short-term impact on our margins. First, we lose the productivity of these hyper-efficient 24-hour crews as they move away from locations with a solid infrastructure and a higher level of expertise.
When they start in a new location, they're not as efficient as they get used to new operating procedures and how the reservoir responds. Finally, there is a doubling up on some costs as we generally have to use commuter crews while a local crew is changed and trained in the new operation. We believe that these pressures that come from this on revenues and margins will be limited. The additional benefit we get from these moves is that even more of our revenue will be generated in the liquids-rich plays, where we still have the ability to increase prices, which will help to offset inflation pressure. Furthermore, the shift to the oil basins requires more expensive materials, particularly gels and proppant, which are already in tight supply.
Additionally, we believe that the movement of service capacity out of the natural gas basins will eventually help remove the overhang in natural gas supply. With great success, we dealt with a number of these significant logistical challenges in 2011, and we see them being able to accommodate the tremendous growth that we see as we move into 2011, even though it's created some near-term uncertainty and pressure on margins. The concern about what will happen in the dry gas basins is a real one. However, there are customers who will continue to drill in these basins as they have a low-cost gas basis, a hedge bought before the collapse of pricing, or contracts to send their natural gas to markets where the pricing is better. These are our customers, and they will continue to need our services in the natural gas areas.
In most cases, we have a long-term contract with them that values the efficiencies we bring so they can continue to make money even at lower prices. We have not yet exhausted the demand for frack fleets that we can relocate to those customers who want our services in the liquids-rich basins, and we will continue to do that as necessary. We have established a great position in the U.S. market, and in these uncertain times, I believe it will pay off big for us. As we look at the market dynamics today and even apply a downside scenario to how it might play out based on frack equipment adds as well as reduced gas drilling, which would accelerate the equilibrium in the market for pumping, it is clear to us that the strength of liquids demand will provide a cushion to equipment coming out of the dry gas basins.
We also believe that there will be a net overall increase in rig count in 2012, meaning that in our view, the increase in liquids-directed rigs will more than offset the decline in natural gas rigs. We believe a much more pessimistic scenario is currently priced into our stock, and we do not see that happening. In the Gulf of Mexico, we continue to see a gradual increase in activity levels, with our fourth quarter revenues surprisingly now exceeding pre-moratorium levels. We believe we will see an increase in the level of permit approvals in 2012, leading to additional deepwater rigs arriving over the next several quarters. Margins for the Gulf are expected to improve, but not to pre-moratorium levels until later this year or into next year as our customers adopt new regulations.
While we expect some inefficiency and therefore downward pressure on margins in the near term due to the shift in our geographic and commodity mix that I just discussed, we believe that the idea that North American margins will collapse is a ridiculous one. We believe increased activity from our customers due to support of liquid prices, good access to capital, and continued increases in service intensity are very supportive of a healthy market in 2012. Keep in mind, we have also been spending money on improving our cost structure, as we outlined in our analyst day, to stay ahead of the competition. Finally, we remain focused on providing superior service to ensure that we are the provider of choice and to maximize the value for our customers.
Overall, we are very optimistic about 2012 and fully expect that North America revenue and operating income will increase over 2011, although we could see margins normalize somewhat through 2012. We'll have a better view of this absolutely as the year goes on. Now, let's turn to our international results. Latin America had another outstanding quarter, posting sequential revenue growth of 9% compared to a rig count decline of 1%, and their operating income grew 24%. Mexico led the growth with higher drilling activity, consulting services, and software sales. Also contributing to the stellar quarter was Colombia, with higher drilling activity, and Brazil. Compared to the fourth quarter of 2010, these three countries combined and grew an impressive 50% year over year.
Our Eastern Hemisphere experienced 11% sequential revenue growth compared to a rig count growth of 3%, while operating margin improved to 13%, driven by year-end sales of software, completion tools, and other equipment. Also contributing to the strong quarter were improved results in Iraq, Algeria, and East Africa. We continue to show progress in the markets that have been negatively impacting our margins over the past few quarters. For instance, in Iraq, we are running five rigs today, two more than at the end of the third quarter. We expect to add additional drilling and workover rigs in 2012, which will enable us to be profitable as activity levels increase. Overall, we remain enthusiastic about the future of our Iraq operations despite the challenges we went through in 2011.
Libya's production is coming back online, and although we have performed some minor work in the country, we are still awaiting well-defined operational plans from our customers. In Sub-Saharan Africa, we continue to see improvements in Angola and Nigeria. While startup costs have negatively impacted operating margins in East Africa, we saw overall sequential improvement in this market. Lastly, we've been taking action over the past few quarters to improve profitability in our Europe/Africa CIS region. We've made substantial progress in our restructuring efforts and believe we are now well-positioned to deliver improved profitability in these markets in 2012. We have been consistent in our outlook for our international operations. We anticipate international pricing will continue to remain competitive, particularly in regard to larger projects.
In 2012, we expect to see a gradual improvement resulting from new rigs entering the market and increased customer budgets, which we believe will be skewed toward deepwater and international unconventional projects. With tight supply and demand fundamentals for oil and international natural gas prices that are often well above North America prices, we believe the drivers of the sustained activity in the Eastern Hemisphere are sound. In summary, we expect to see our Eastern Hemisphere margins progress through 2012 with a full-year average in the mid-teens as new projects ramp up, new technologies are introduced, and the negative impact of the areas we've mentioned previously continues to abate, which means that we should have Eastern Hemisphere margins in the mid to upper teens by the end of the year.
We believe that our growth prospects are so strong across all of our businesses that we are increasing our capital spending to the range of $3.5 to $4 billion in 2012. However, we do not expect to increase our pressure-pumping horsepower additions beyond the 2011 levels, and we plan to send more of this horsepower into our international markets. We will, of course, maintain our ability to flex the capital as the year goes forward. 2011 was a very successful year for the company with revenue growth of 38% and operating income growth of 57%. We saw record activity levels, and we will continue to expand on our market position. I believe we will continue to build on the success, which should put us in a unique position to continue to achieve our objectives of superior growth, margins, and returns versus our competitors.
Let Mark give you a little bit more detail.
Speaker 2
Thanks, Dave, and good morning, everyone. Let me provide you with our fourth quarter financial highlights. Our revenue in the fourth quarter was $7.1 billion, up 8% sequentially from the third quarter. Total operating income for the fourth quarter was $1.4 billion, up 7% from the previous quarter. Our results in the fourth quarter included a $24 million charge in corporate and other related to environmental matter. As a reminder, our third quarter results included an asset impairment charge of $25 million in the U.K. sector of the North Sea. Now, going forward, I'll be comparing our fourth quarter results sequentially to the third quarter of 2011, excluding the impact of these charges. North America revenue grew 6%, while operating income declined 1% compared to the previous quarter. As Dave mentioned, the impact of seasonality, cost inflation, and recent acquisitions negatively impacted our North America margins during the quarter.
As a reminder, we historically see our first quarter results affected by weather-related seasonality in the Rockies and the Northeast U.S., where we have a high percentage of 24-hour crews. It's typical to see a sequential revenue and margin decline in the first quarters. In addition, we're expecting some short-term inefficiencies as a result of rigs and equipment moving from natural gas to oil-directed basins. We're anticipating these issues will result in a sequential margin decline of approximately 100 basis points in the first quarter for North America. Internationally, revenue and operating income grew 11% and 37% respectively, driven by activity improvements across all our regions and seasonal increases in software completion tools and direct equipment sales at the end of the year. Our international margins improved to 15.2%. About half of the margin increase resulted from our seasonal increase in software and direct sales.
The other half of the margin increase was driven by activity improvement in our other operations. For the first quarter of 2012, we're anticipating the typical sequential decline in international revenue and margins due to the absence of these year-end seasonal activities, as well as the typical weather-related weakness in the North Sea and Eurasia. As a reminder, this international activity decline has historically impacted our first quarter results by approximately $0.10 per share after tax, and we have no reason to believe it will be materially different in 2012. Now, I'll highlight the segment results. Completion and production revenue increased $303 million, or 8%, due to activity growth in North America. Operating income was essentially flat as improved international profitability offset a slight decline in North America. Looking at completion and production on a geographic basis, North America revenue increased by 7% from higher U.S.
land, offshore, and Canadian activity. Operating income declined by 2%, primarily due to the holiday downtime, cost inflation, acquisition impacts, and fleet moves that Dave described earlier. In Latin America, completion and production posted a 5% sequential increase in revenue, while operating income grew by 19% as a result of increased stimulation work in Mexico and higher cementing activity in Colombia and Mexico. In Europe/Africa CIS, completion and production revenue and operating income increased 15% and 10% respectively due to improved vessel utilization in the North Sea, increased cementing work in Angola, and higher stimulation activity and completion tools sales in Algeria and Nigeria. In Middle East/Asia, completion and production revenue and operating income increased by 8% and 4% respectively due to increased work in Iraq, improved stimulation activity in Australia, and increased direct sales within the region.
In our drilling and evaluation division, revenue increased $213 million, or 8%, and operating income was up 30% due to the year-end seasonality of higher software and direct sales as well as higher activity levels in Mexico, Iraq, Colombia, Brazil, and East Africa. In North America, drilling and evaluation revenue and operating income were up 4% and 2% respectively due to higher wireline and drill bits activity in both U.S. land and the Gulf of Mexico, as well as increased software sales in the U.S. and Canada. Drilling and evaluation Latin America revenue and operating income increased by 11% and 27% respectively, primarily due to higher activity levels in Mexico and increased testing and subsea work in Brazil. We also benefited from strong project management activity in Mexico on the Alliance II and Remolino projects.
In the Europe/Africa CIS region, drilling and evaluation revenue and operating income were up 5% and 27% respectively due to increased wireline and directional drilling activity across the region, along with the seasonal year-end increase in software sales. Drilling and evaluation's Middle East/Asia revenue was up 17%, and operating income was almost one and a half times greater than prior quarter levels due to increased direct sales in Asia and higher drilling activity in Iraq. Now, let me address some additional financial items. Our corporate and other expense included approximately $23 million for continued investment in our initiative to reinvent our service delivery platform in North America and to reposition our supply chain, manufacturing, and technology infrastructure to better support our projected international growth.
These activities will continue in 2012, and we anticipate the impact of these investments will be approximately $0.02 to $0.03 per share after tax in the first quarter. In total, we anticipate that corporate expenses will range between $95 million and $105 million per quarter during 2012. In November 2011, we issued $1 billion of senior notes. This new debt issuance will increase our interest expense by approximately $10 million per quarter, and we're projecting overall interest expense for 2012 to be approximately $75 million per quarter. Our effective tax rate was 33% for the fourth quarter and 32% for the full year. Looking forward, we currently expect the 2012 effective tax rate will be approximately 33% to 34%. Finally, we expect depreciation and amortization to be approximately $1.6 billion during 2012. Tim?
Speaker 1
Thanks, Mark, and good morning, everyone. I wanted to provide some additional detail on the accomplishments that Dave alluded to and some of the technologies which not only have made a substantial contribution to our success in 2011, but where we believe underpin our focus areas for growth in unconventional, deepwater, and mature assets in 2012. In the North America unconventional market, we've made great progress in deploying elements of our PRAC of the Future strategic initiative. We're rolling out our first series of Q10 pumps that have demonstrated significant reliability and maintenance advantages in field testing over our current fleet, already generally considered to be the best in the industry. Aggressive deployment of SandCastle storage and advanced dry polymer blenders in 2011 is expected to also provide ongoing improvements in capital efficiency and environmental performance.
We've been particularly pleased with the performance of our GEM wireline analysis tool, which offers rapid evaluation of complex petrophysical properties called Shale Expert. It's been widely used in unconventional fields in the U.S. and internationally. We introduced our new RapidFRAC sliding sleeve system that provides our customers with a dramatic increase in efficiency for the completion of horizontal unconventional reservoirs. We're also the first to deliver a cemented version of this technology. We realized a 10% reduction in crew size this year, and we expect ongoing improvements as we increase remote job monitoring and complete the deployment of our field mobility program, which will deliver enhanced operations and logistics efficiency. In total, we believe our PRAC of the Future initiative will make us the most cost-effective service provider in the industry.
We expect it to be fully rolled out in North America by the end of 2012 and will serve as a platform for our investment in international unconventional growth too. We continue to feel positive about international unconventionals. Customer consulting agreements have given us an opportunity to screen some 150 worldwide unconventional basins and 60 in detail. We're very encouraged by the profit as we see in many of these basins and are responding accordingly with capital investment. Drilling and LWD technology deployment moved rapidly in 2011. Geosteering activity to optimally place well bores in reservoir sections was up 75% year on year, driven by unconventional and deepwater activity. Much of this was based on our award-winning ADR, deep reading resistivity technology. Sampling technology while drilling has had a special emphasis for us.
A recent Geotab IDS run offshore was used to gather over 50 pressure and multiple reservoir fluid samples during drilling operations, an industry first. This allowed the customer to save over 80 hours of rig time and eliminated the need for a competitor's wireline run. We also set numerous records in high-pressure, high-temperature applications in 2011, both for our wireline and drilling technologies, and we continue to see new wins based on this differentiated technology as our customers increasingly exploit deeply buried reservoirs. The exciting worldwide launch of DecisionSpace Desktop in 2011 was very well received in the market and contributed to a record profit year for Landmark. Over 1,600 individual licenses were established in the first year, and 46 of our 50 largest customers have either migrated or are in the process of migrating their data to the DecisionSpace platform.
Integrated project management activities are on a steep upward trajectory. Despite a slow start in Iraq, revenues for our project management segment nearly doubled from 2010. We see this as a major growth platform, and the pipeline in 2012 is strengthening, notably in mature assets. While we've been pleased with the growth of the technology portfolio and its ability to underpin our top line and margin growth in 2012, we're also very focused on execution and service quality. We're pleased with our performance this year. For example, spurry drilling and wireline rates of nonproductive time continue to strengthen by 24% and 26% respectively from 2009 to 2011. We continue to receive positive customer feedback, including a top performance review from a European IOC for formation evaluation. The combination of fit-for-purpose technology with excellent execution provides us a strong foundation for 2012 growth. Dave?
Speaker 6
Thanks, Tim. Obviously, a lot of moving parts this quarter. Let me summarize what I think should be the takeaways. One, we do not believe that there will be a collapse in margins and pressure pumping in the U.S. Therefore, our revenues and operating income are expected to increase in 2012 in North America. We expect our revenue growth will be in excess of the rig count growth in both the Eastern and Western Hemispheres. We expect our deepwater revenue growth will be in excess of the deepwater rig count growth while we continue to earn from our customers kudos for our distinctive service quality. Although it will have a short-term impact on our margins, we are proactively moving equipment from dry gas basins to liquids-rich plays, and this equipment is immediately displacing competition.
We expect our Eastern Hemisphere margins to return to the mid to high teens by the end of 2012 as we gain traction on new projects and grow our revenue faster than rig count. Lastly, our positive view of the market supports a capital spending of $3.5 to $4 billion. Let me reiterate, pressure pumping horsepower additions are not expected to increase over 2011, and we believe more of those will go to the international markets. Let's turn it over to questions at this point.
Speaker 4
Thank you. Ladies and gentlemen, if you have a question at this time, please press STAR, then 1 on your touch-tone telephone. We request that you please let yourself do one question and one follow-up. Again, ladies and gentlemen, if you have a question at this time, simply press STAR, then 1. Our first question comes from James West with Barclays Bank PLC. Please go ahead with your question.
Speaker 5
Hey, good morning, guys. A quick question on, so your North American margins, you mentioned another 100 basis points down in 1Q. Do you expect a further, I know you don't expect a collapse, but a further deterioration as we go into kind of 2Q, 3Q, or is that where we start to stabilize out? I guess the follow-up to that is kind of what should normalized margins be in North America?
Speaker 2
I think the answer is at this point, James, that it's too early to tell. Obviously, you know, we said in our comments, you know, we look at the gas market changes right now with some level of concern. For the time being, you know, most of those rigs are shifting from dry gas to liquids-rich basins. As long as the rigs continue to shift, then we should be able to shift equipment. While there might be some temporary margin impact, we should be able to get back to some level of normalized margins once the cost passes. Right now, you know, I think it's still a little bit too early to tell.
Speaker 5
Okay. Can you just, Mark, remind us what kind of contract coverage you have for the pressure pumping equipment you have in North America today, and for the incremental capacity you have coming in this year?
Speaker 6
Yeah, James, this is Dave. All of our equipment that we have out there today and all that we anticipate bringing out in 2012 is already allocated to a specific set of customers. None of it will be sort of in the open speculative market.
Speaker 5
Okay, great. Thanks, guys.
Speaker 4
Our next question comes from Brad Handler with Credit Suisse. Please go ahead with your question.
Speaker 5
Thanks. I guess I'll stick with North America as well, please. If there is, and ultimately that sense of where margins can go, if you're positioning assets more in liquids markets, what implications does that have on 24/7 operations once you're doing what you think they should be doing? Maybe just conceptually then, if you have more pricing leverage than you've had in the last six months, just talk to us a little bit about where you think sort of the margins can, all things, let's strip out a couple of things, if you will, but can margins get back to above levels where you saw, say, in the third quarter?
Speaker 2
I think, you know, obviously, as they shift into the oil basins, the opportunity to go toward 24-hour operations improves. Right now, activity is still fairly robust in those markets, and there's a clear shortage of people and equipment, as well as some of the supply chain issues that we find. Based on all the reports that we get from our guys in the field, we're continuing to get some pricing improvements in those oil or liquids-rich basins. The problem I think that we face as we look forward is what will inflation do? As Dave commented, we're going to have continued challenges with logistics, with the supply chain and moving profits and gels and other things into those basins because they're in short supply. We're fighting back inflation as hard as we can.
Most of the price increases that I think that we're being able to achieve right now are serving to basically offset that inflation. We're going to have to work hard, as Dave commented, to really push back and see if we can get some relief from some of our suppliers as things soften in the gas basins. We'll have to continue to work to make sure that we can get all of that passed through with the price increases that we get. I think, as I've said, it's a little early to comment as to how much we can move pricing on a net basis north. I just can't speculate at this point whether we'll be able to go back and get them back above those levels that we had in Q3 or even higher.
Speaker 5
Understood, and I appreciate the color. As a follow-up on related coming back to pricing, but maybe touching on a couple of things slightly differently, can you comment on your pricing realizations recently in natural in dry gas basins? Can you give us some color on non-fracking pricing in the U.S. as well?
Speaker 1
You want it? This is Tim. Clearly, in the dry gas basins, there has been significantly more pressure than there has been in liquids basins. I think that one of the things I've tried to sort of outline for you here just on the call is a few of the key technologies which are giving us an opportunity to extract some pricing realization, pretty much across the board from drilling and evaluation through to completion. There's leverage, I think, in North America to do that. That's the technology side. As Dave and others have alluded to, we're also working hard on the cost efficiency side, investing substantially into an effort to lower our cost of delivery. I think we've got a couple of tools in our chest here, in our war chest here, to ensure that we minimize the impact of the transfer from dry gas to liquids basins.
Once there, we have the tools to make sure that we get value for what we're delivering.
Speaker 5
Fair enough. The absence of technology, and then I'll let others go, absence of technology opportunity set in non-fracking related activity, say, also in liquids-rich basins, for example, are you seeing, whether it is in coil tubing or whether it's in your drilling suite, are you seeing pricing opportunities like for like products today?
Speaker 1
There are some pricing opportunities. I think, you know, completions would be a bright spot, obviously, with the introduction of RapidFRAC. I would say that, and to use a negative example, obviously, as you move out of some of the deeper, hotter dry gas basins like the Haynesville, where high temperature, high pressure tools have been under great demand, there's less demand for those in liquids-rich basins. There are a couple of pluses and minuses for you.
Speaker 5
Okay. All right. Thanks for the color, guys.
Speaker 4
Our next question comes from Jim Crandall with Dahlman Rose. Please go ahead with your question.
Speaker 0
Good morning. Another question on North America. Dave, it seems like one of the reasons for your success in North America is that you've been able to get your customers to take at least four other product lines for new frac spreads when you contract with them for frac equipment. Your competition says this will change when things come back into balance. Do you see it changing, or do you think this can be a somewhat permanent feature of the business?
Speaker 6
No, I think it's more of a permanent feature of where we see the market. We were able to use the leverage of the frac fleet and still continue to use the leverage of the frac fleet. Don't get us wrong that we've lost it. It's still there. To bring some of our other product lines along, what we've been able to do is prove to our customers that by integrating those products together with a frac, either through an integrated completion or integrated drilling, there's actually a benefit to doing that. Therefore, our customer gets a well down faster, cheaper, more efficiently, or more quickly. I don't see the world going back to that because I think we've been at this long enough to prove the benefit of that strategy out.
Speaker 0
Thank you. My follow-up is an international question. In your opinion, will increased demand alone start to be the catalyst that gets pricing to improve on large tenders, or will it take a change in mindset by at least one of the major companies in the business?
Speaker 2
I guess our planning assumption at this point is that it's going to take an increase in demand overall. I think that clearly there are situations where service quality and technology can come to bear that might help us in pricing. Our planning assumption is that the competition, our competition is continuing to price very, very aggressively to prop up their share positions. We're continuing to battle hard on that front. That means that it's our responsibility to execute well and to continue to roll out technologies to make sure that we can improve our margins and improve our returns over time, at least for the foreseeable future.
Speaker 0
Got it. Okay, Mark, and just one more quick. Your international contracts, if you have a year or two contracts for your frac equipment, do they have a clause which allows the customers to suggest a lower price to you or to ask for a lower price and you then consider it?
Speaker 2
No, they typically don't have a clause that allows them to consider a lower price. A number of them have clauses that allow them to step away from the contractual arrangement after some period of time, and there are usually some penalties and make wholes that are associated with that. What we're seeing in a number, as they've alluded to, when they begin to shift equipment, there also is a discussion of them shifting the arrangements to continue to work with them as the rigs move to the liquids-rich basins.
Speaker 0
Got it. Okay. Thank you.
Speaker 4
Our next question comes from Bill Herbert with Simmons & Company. Please go ahead with your question.
Speaker 0
Hi there. With regard to your Eastern Hemisphere margins or international in general, if we're looking at a $0.10 hit quarter on quarter Q1 due to reasons that you mentioned, which are largely seasonal, are we looking then for the balance of the year in order to hit your mid-teens target on the Eastern Hemisphere front for the year up 200 or 300 basis points per quarter as 2012 unfolds, at least?
Speaker 2
don't want to set specific expectations on that, but yeah, I mean, I think that you have to, when you do the math, that's generally how it's going to need to work.
Speaker 0
Okay. With regard to your deployment of pressure pumping internationally, that's going to outpace the deployment of the domestic frac assets in North America. Is that international deployment at this juncture trying to capture a growth option value, or is it specifically correlated with project ramps which you've been contracted for or you're in specific dialogue with customers?
Speaker 6
No, I think, Bill, it's really the latter. If you look at the spaces that we enumerated where we've done shale frac last year, you have to think of those as really exploration plays still. We are having enough discussions with enough customers in those geographies to indicate to us that the demand will be there for that equipment. Similar to what we saw in the U.S., the demand for additional horsepower to do these shale fracs is there. Typically, where the investment is going is to augment the horsepower that we already have in place in these countries to basically take advantage of and have adequate horsepower on standby to be able to do the larger shale fracs versus maybe conventional work we've done there in the past.
Speaker 0
Gotcha. Also, thank you.
Speaker 2
Hey, Bill, this is Mark. I want to just make sure we correct a statement that you said. We weren't saying in our comments that we're sending more horsepower to international than we are into North America in 2012. We're just sending more to international than we sent in 2011.
Speaker 0
Okay, great.
Speaker 2
Higher %.
Speaker 0
Good. Thank you. One more from me. Mark, I'm not sure if you addressed this with regard to your guidance, but corporate expense for 2012, how should we think about that?
Speaker 2
We should run probably in total about $95 million to $105 million per quarter. In the first quarter, you know, there's going to be $0.02 to $0.03 on an after-tax basis of cost that will be for these corporate initiatives. That probably will run in about the $0.02 range for the remainder of the year on an individual quarter. That's a large part of why the corporate expenses have stepped up on a year-over-year basis.
Speaker 0
Okay, thank you.
Speaker 4
Our next question comes from Walker Sy with Goldman Sachs Group. Please go ahead with your question.
Speaker 3
Thank you. Good morning, gentlemen. I just want to follow up on the international shales as well. A year ago, when I asked you a question about how many rigs may be working in international shales, I think at that time the number was maybe in the 10 to 15 kind of range. How has that number changed now in the last 12 months, and where do you expect that number to go in the coming 12 months?
Speaker 1
Carl, this is Tim, and I'll use an example to maybe help with that. Latin America has quite a lot of opportunities in the combination of Mexico, Colombia, and Argentina. It seems to us that the opportunity continues to grow. In 2012, it feels to us like there's somewhere between 75 and 100 wells which will be drilled for shale activities in Latin America. If we put that in perspective with respect to a Hainesville, for example, which is about 99 rigs or thereabouts at the moment, if you divide that or multiply that 99 rigs by three or, let's say, four to six wells per year, we're dealing with a significantly smaller opportunity today. The opportunity is growing.
As David alluded to, we're in the primarily exploration appraisal phase, low horsepower requirements, primarily vertical, now shifting to horizontal where horsepower requirements are doubling, as well as an increase in activity. We think 2012 is a pretty good transition year for unconventionals, and we'll see the most significant uptake in 2013 and 2014.
Speaker 3
Okay. This is just Latin America. How about some of the other markets, Europe or Asia?
Speaker 1
Obviously, similar pictures there too. I was just using Latin America as an example for you. You know, there are emerging opportunities around the globe. As I alluded to earlier, we've had the opportunity to do some basin evaluation work of some 60 basins in detail. Those evaluations are not escaping our customers either. You know, we're going to see a very positive trend here.
Speaker 3
Okay. Now, would it be fair to say that, you know, when pressure pumping trucks were traditionally being employed internationally for, let's say, cementing and maybe acidization jobs, as the shift to fracturing, the revenue potential per crew could increase maybe 10 to 15 times? Is that fair to say? Or 10 times or so?
Speaker 1
It's not a math that I've necessarily done with Carl. I don't know that we could say right now. Clearly, it's a substantial revenue pop. I mean, the difference normally in a horizontal well in the U.S. that's fracked versus a conventional well's almost two times. You think about the entire revenue opportunity. It's going to step up quite dramatically if that becomes the norm outside the U.S. as well.
Speaker 3
Okay, thank you very much.
Speaker 4
Our next question comes from Angie Sedita with UBS. Please go ahead with your question.
Speaker 7
Great. Thanks. Good morning. Dave or Tim, in the liquid basins on pressure pumping, can you give us an idea today of what you're seeing in wait time for frac crews today versus three months ago versus six months ago?
Speaker 1
Obviously, we're dealing specifically with the liquids-rich basins here just to sort of see dry gas is different. I think that we can, you know, based on the reports from our field guys, we're still very heavily booked through Q1, which is pretty much as far as we ever look out. That to us is a good indication.
Speaker 7
Okay. Given that you're mobilizing equipment from your gas basins into the liquid basins, I assume others are doing the same. Could we reach a balanced market in the liquids basins earlier than originally expected?
Speaker 1
I think, as Dave alluded to, we continue to expect to see an increase in rig count. As you have noted yourself, probably, our customer base is striving to balance their dry gas and liquids-rich exposure. We're seeing a significant shift, if you like, from their dry gas element of their portfolio to the liquids element of their portfolio. It's not just a function of individual customers stopping activity. It's the transference of activity. We tend to get higher service intensity in liquids-rich basins, which obviously is beneficial in terms of the overall revenue picture.
Speaker 7
Thank you. Very, very helpful. Finally, you talked about mobilization, and you were speaking earlier about cost and logistic issues. It seems like you're still getting your head around whether that will continue through Q1 and into Q2 and the time horizon. At least on the mobilizing of eight crews from the gassy place to the liquid place, when will that be completed by, and from what regions are you moving equipment from, and what regions are you moving it to?
Speaker 1
That'll be completed this quarter.
Speaker 7
Okay. Okay. To what regions?
Speaker 6
Primarily into the Rockies, the Niobrara, the Bakken, the liquids part of the Marcellus, and a couple of other areas that maybe haven't hit the radar screen yet.
Speaker 7
Perfect. Thanks.
Speaker 2
Hey, Sean, we'll take one more question.
Speaker 4
Thank you. Our final question comes from J. David Anderson of JPMorgan Chase & Co. Please go ahead with your question.
Speaker 5
Yeah, thanks. Can I just get a little clarity on your capacity additions in North America on pressure pumping? You're just not going to, you're just growing at a slower pace in 2012, is that, or is it going to be flat versus 2011?
Speaker 2
The amount of horsepower that we will be producing is going to be flat on a year-over-year basis. There'll be more going into international than we did in 2011, which means that there will be a fewer amount of horsepower going into North America. The numbers go up on a year-over-year basis because of the manufacturing of the Q10 pump, which is in full production as we speak, as well as the addition of other kits to go along with that, the replacement of blenders, the SandCastle storage, and other equipment that's part and parcel to our FRAC of the Future strategy.
Speaker 5
Now, should we interpret this as your views that the market is getting closer to being in balance, or is this just, or is this somewhat of a reaction to what's happening in natural gas? How should we interpret that?
Speaker 1
I think one of the things that we should respond to there is the fact that, particularly with the Q10 pump and some of our other capital investments that Mark mentioned here, the SandCastle storage, ADP blenders, etc., it is a much more efficient set of assets. The Q10 pump in particular is going to be very substantially more efficient than the current fleet. We just will not need to put as many assets into the marketplace to cover the same territory.
Speaker 5
Okay. I guess one last question. People have been asking about artificial lift the last five years, and you finally do an acquisition on Global Oilfield Services. Can you talk a little bit about it? Does this fully address your needs in artificial lift, and can you talk a little bit about kind of the strengths of this business and where you think you need to build out more?
Speaker 1
We certainly have talked about artificial lift for a long time, specifically electric submersible pumps, and Global Oilfield Services is an opportunity for us to enter that segment, for us to extract knowledge and continue to build that business. It's a relatively small business today and one which we have a long horizon on to build its capability and expand it into other areas of artificial lift. Pleased to have it under our belt.
Speaker 5
Okay, thank you, Tim.
Speaker 2
Okay. Thanks, everybody, for your participation. Sean, you can go ahead and close out the call.
Speaker 4
Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.
