Halliburton Company - Q4 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Halliburton Company Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After this presentation, there will be a question-and-answer session. To ask a question during the session, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Coleman, Senior Director of Investor Relations.

David Coleman (Senior Director of Investor Relations)

Hello, and thank you for joining the Halliburton Fourth Quarter 2023 conference call. We will make the recording of today's webcast available for seven days on Halliburton's website after this call. Joining me today are Jeff Miller, Chairman, President, and CEO, and Eric Carre, Executive Vice President and CFO. Some of today's comments may include forward-looking statements reflecting Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2022, Form 10-Q for the quarter ended September 30, 2023, 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.

Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our fourth quarter earnings release and in the Quarterly Results and Presentation section of our website. Now, I'll turn the call over to Jeff.

Jeff Miller (Chairman, President, and CEO)

Thank you, David, and good morning, everyone. 2023 was a great year for Halliburton. Both of our divisions achieved their highest operating margins in over a decade, and we returned $1.4 billion to shareholders. Here are the highlights: We delivered full-year total company revenue of $23 billion, an increase of 13% year-over-year, and operating income of $4.1 billion, an increase of 33% compared to 2022 adjusted operating income. Our international business demonstrated strong growth, with our revenue up 17% year-over-year, despite our exit from Russia in August of 2022, completing two consecutive years of high teens growth. Our North America business showed strength, with revenue up 9% year-over-year, despite rig count declines.

Completion and Production revenue grew 18% year-over-year, and margins expanded 312 basis points. Drilling and Evaluation grew 7% year-over-year, and margins expanded 171 basis points. Turning now to Q4, where Halliburton delivered exceptional margin performance, supported by better-than-anticipated completion tool sales globally, strong performance across multiple high-margin product lines, and favorable weather in North America. Completion and Production margins finished the year almost 100 basis points higher than Q4 of 2022. International revenue grew 12% year-over-year, led by the Europe/Africa region, which grew revenue 17%. Finally, during the fourth quarter, we generated $1.4 billion of cash from operations, $1.1 billion of free cash flow, and repurchased approximately $250 million of common stock and $150 million of debt.

Before we continue, I want to take a moment and thank the Halliburton employees around the world who made these results possible. Our success last quarter and throughout 2023 was a direct result of your hard work and dedication. Thank you for your relentless focus on safety, operational execution, customer collaboration, and service quality performance. Let me begin with my views on the strength of the oil field services market. As we look past the news cycle and near-term commodity price volatility, the fundamentals for oil field services remain strong. Here are two reasons why. First, we see an increase in service intensity everywhere we operate. Whether it's longer laterals in North America, smaller and more complex reservoirs in mature fields, or offshore deep water, customers require more services to develop their resources, not fewer.

Second, long-term expansion of the global economy will continue to create enormous demands on all forms of energy. I expect oil and gas remains a critical component of the global energy mix, with demand growth well into the future. With this positive macro-outlook, I believe Halliburton's strong execution, leading technology, and collaborative approach will drive demand for Halliburton's products and services around the world. Now, let's turn to international markets, where Halliburton's performance delivered another year of profitable growth. Halliburton's full-year international revenue grew 17% year on year, and our quarterly revenue grew 12% compared to the same quarter of last year. Each region delivered year-on-year revenue growth throughout 2023, and both divisions delivered improved international margins year on year.

Our results in 2023 demonstrate the effectiveness of Halliburton's profitable international growth strategy, the strength of our global competitiveness across product lines, and the power of our value proposition with customers. In 2024, we expect international E&P spending to grow at a low double-digit pace and foresee multiple years of sustained activity growth. Although we anticipate regional differences in growth rates for 2024, we believe the Middle East/Asia region will likely experience the greatest increases in activity, with other regions closely behind. As we look out to 2025, we expect Africa and Europe, among others, to demonstrate above-average growth. Beyond 2025, we see an active tender pipeline, with work scopes extending through the end of the decade, which gives me confidence in the duration of this multiyear upcycle.

While we expect overall activity growth, we also see above-market growth within our well construction product lines, where customers choose Halliburton to improve the reliability, consistency, and efficiency of their drilling operations. One such technology is our LOGIX autonomous drilling platform, which is now used on 90% of our iCruise runs worldwide. Customers also rely on Halliburton's subsurface expertise to develop today's most complex reservoirs. This requires technologies to reduce uncertainties, such as our DecisionSpace 365, Unified Ensemble Modeling, and advanced formation evaluation systems like our iStar logging while drilling platform and Reservoir Xaminer formation testing service. These technologies enable customers to target smaller reservoirs, identify bypassed reserves, and gather reservoir properties in real time. We see reservoir complexity increasing worldwide, and I expect the capabilities of these systems will continue to deliver customer value and lead in overall growth within our formation evaluation portfolio.

For Completion and Production, we also expect increased adoption of our technologies like intelligent completions, multilateral solutions, and artificial lift. Our intelligent and multilateral completions enable customers to produce, inject, and control multiple zones in a wellbore, which is critical for offshore developments, a segment we expect to outpace the overall market. In artificial lift, our strategy targets markets like the Middle East and Latin America, where our differentiated performance and existing footprint create a solid foundation for profitable growth. We also expect strong demand for our services in carbon capture and storage, where Halliburton's leading capabilities to design, deliver, and validate reliable barriers play a crucial role. As our customers invest in carbon storage, our tailored cement designs and casing equipment technology enable them to address the unique challenges of long-term carbon sequestration. With this activity growth, the availability of equipment and experienced personnel remains tight.

We expect asset-intensive offshore activity to increase, which will further tighten the market. As offshore represents over half of our business outside North America land, we expect this activity to drive improved pricing and higher margins for our business. I am confident in Halliburton's strategy for profitable international growth, and I am excited about our performance in 2024 and well into the future. Turning to North America, Halliburton's strategy yielded strong results in 2023. Our full-year North America revenue of $10.5 billion was a 9% increase when compared to 2022, despite sequentially lower rig count. Fourth quarter margins in North America land were relatively flat quarter-over-quarter, despite lower revenue. Our full-year and fourth quarter results demonstrated the strength of our differentiated business and the successful execution of our strategy to maximize value.

The dynamic North America market continues to evolve, with larger customers and stable programs, elevated quality expectations, and greater demand for technology to improve recovery and well productivity. This evolution fits perfectly with Halliburton's value proposition. Our ZEUS electric fracturing solution is highly sought after in this market, where its seamless combination of electric frac, automation, and real-time subsurface measurements uniquely address customer requirements. We believe customers demand ZEUS because it provides the lowest total cost of ownership, and it's shown to be the most proven and reliable solution in the market. The market pull for this technology has been strong. The combination of ZEUS fleets working in the field today and ZEUS fleets contracted for 2024 delivery represent over 40% of our fracturing fleet.

I expect well over half of our fleets will be electric in 2025, with all of these e-fleets on multiyear contracts, generating full return of and return on capital during their initial contract terms. Consistent with our strategy from the beginning, we plan for our ZEUS deliveries in 2024 to replace existing fleets rather than add incremental fleet capacity. This is how we maximize value in North America. The growth of ZEUS and our commercial approach has transformed the North America completion services market. Technology is only transformative when adopted, and is only adopted at the rate of ZEUS when it works and creates meaningful value for our customers. ZEUS's rapid adoption, both by new and repeat customers, tells us our solution is the right one for North America.

Turning to our 2024 North America outlook, we expect a continued strong business with the combination of stable levels of activity in the market and the contracted nature of Halliburton's portfolio. We expect this results in a flattish revenue and margin environment for Halliburton. To close out, I am confident in our strategies to maximize value in North America and for profitable growth internationally. In 2023, Halliburton demonstrated the power of these strategies, the consistency of our execution, and the value of our differentiated technology. We generated about $2.3 billion of free cash flow during the year, retired approximately $300 million of debt, and returned $1.4 billion of cash to shareholders through stock repurchases and dividends, which represents over 60% of our free cash flow.

Today, I am pleased to announce that our board of directors approved an increase of our quarterly dividend to $0.17 per share. Our outlook for oilfield services remains strong, and I expect we will deepen and strengthen our value proposition and generate significant free cash flow. Now, I'll turn the call over to Eric to provide more details on our financial results. Eric?

Eric Carre (EVP and CFO)

Thank you, Jeff, and good morning. 2023 was a strong year for Halliburton. Multiple financial and operational metrics showed the best business performance in recent memory, any one of which are worthy of highlighting. More important than any single metric, however, the overall business performance demonstrated the effectiveness of our strategy. Here are a few highlights: In our C&P division, our 2023 margins of 20.7% were the highest since 2011. In our D&E division, 2023 margins of 16.5% were the highest since 2008. In North America, our strategy to maximize value is about structurally changing the risk and return profile of our business. We delivered steady margins through the year, despite lower activity, driven by the rollout of our ZEUS fleet and their associated contract terms and the strength of our well construction business.

Internationally, our profitable growth strategy drove revenue and margin improvement across all of our geographies. Revenue was the highest in the last 8 years, and profit margins were the highest in over a decade. Beyond pricing and activity, this is the result of the multiyear investment in our drilling business and technology differentiation across multiple product lines. Our focus on capital efficiency allowed this revenue growth and structural margin improvement, while capital spending remained within our target range of 5%-6% of revenue. Collectively, these results generated about $2.3 billion of free cash flow, the highest cash generation in the last 15 years. Let's turn now to our fourth quarter results. Our Q4 reported net income per diluted share was $0.74. Net income per diluted share, adjusted for losses in Argentina, primarily due to the currency devaluation, was $0.86.

Total company revenue for the fourth quarter of 2023 was $5.7 billion. Operating income was $1.1 billion, and the operating margin was 18.4%, a 95 basis point increase over Q4 2022. Beginning with our Completion and Production division, revenue in Q4 was $3.3 billion. Operating income was $716 million, and the operating income margin was 22%. Our better-than-anticipated results were driven by the best fourth quarter of completion tool sales in nine years, strong performance across multiple product lines, and favorable weather in North America. In our Drilling and Evaluation division, revenue in Q4 was $2.4 billion. Operating income was $420 million, and operating income margin was 17%, an increase of a 122 basis point over Q4 last year.

These results were in line with our expectation and driven by international software sales, higher project management activity in the Eastern Hemisphere, and increased fluid services in the Western Hemisphere. Now, let's move on to geographic results. Our Q4 international revenue increased 4% sequentially, which was our highest international revenue quarter since 2015 and 10th consecutive quarter of year-on-year revenue growth. Q4 sequential growth was led by the Middle East region, driven by improved activity across multiple product lines and strong year-end completion tool sales. Europe, Africa demonstrated sequential growth consistent with the overall international market, with higher activity in Africa offsetting lower product sales in Europe. Latin America revenue declined slightly in the fourth quarter, where reduced completion-related activity, following a very strong third quarter, outweighed activity improvements in the Caribbean.

In North America, revenue in Q4 decreased 7% sequentially, driven primarily by a decline in U.S. land activity as a result of typical holiday-related slowdowns. However, we experienced fewer weather-related events than expected. As weather-related downtime is more expensive than planned downtime, this means our Q4 North America land margins were higher than anticipated. Additionally, completion tool sales in the Gulf of Mexico delivered the strongest quarter in three years. Moving on to other items. In Q4, our corporate and other expense was $63 million. For the first quarter of 2024, we expect our corporate expenses to be flat. Our SAP deployment remains on budget and on schedule to conclude in 2025. In Q4, we spent $15 million, or about $0.02 per diluted share, on SAP S/4HANA migration, which is included in our results.

For the first quarter 2024, we expect these expenses to be approximately $30 million or $0.03 per share, due to the timing associated with accelerated phases of the rollout. In 2024, we expect to spend $120 million and $80 million in 2025. Net interest expense for the quarter was $98 million, slightly higher than expected, primarily due to premiums associated with debt buybacks. For the first quarter of 2024, we expect net interest expense to be roughly $85 million. Other net expense for Q4 was $16 million, lower than our prior guidance, due to the non-GAAP treatment of the Argentine peso devaluation. For the first quarter 2024, we expect this expense to be about $35 million.

Our adjusted effective tax rate for Q4 was 17.9%, lower than expected due to discrete items. Based on our anticipated geographic earnings mix, we expect our first quarter 2024 effective tax rate to be approximately 21%, slightly lower than our anticipated full-year effective tax rate. Capital expenditure for Q4 were $399 million, which brought a full-year CapEx total to $1.4 billion. Approximately 60% of our CapEx was deployed to international and offshore markets in 2023, and we expect this ratio to remain similar in 2024. For the full year of 2024, we expect capital expenditures to remain approximately 6% of revenue.

Our Q4 cash flow from operations was $1.4 billion, and free cash flow was $1.1 billion, bringing our full-year free cash flow to about $2.3 billion. For 2024, we expect free cash flow to be directionally higher. Now, let me provide you with some comments on our expectations for the first quarter. As is typical, our results will be subject to weather-related seasonality and the roll-off of significant year-end product sales. As a result, in our Completion and Production division, we anticipate sequential revenue to be flat to down 2% and margins lower by 125-175 basis points. In our Drilling and Evaluation division, we expect sequential revenue to decline between 1%-3% and margins to be lower by 25-75 basis points.

I will now turn the call back to Jeff.

Jeff Miller (Chairman, President, and CEO)

Thanks, Eric. Let me summarize our discussion today. 2023 was a great year for Halliburton. We generated about $2.3 billion of free cash flow and returned over 60% of free cash flow to shareholders through dividends and stock repurchases. We're committed to return over 50% of our free cash flow to shareholders in 2024. For our international business, we expect low double-digit growth, driven by the power of our value proposition, global competitiveness across all product lines, and our profitable growth strategy. In North America, we expect a continued strong business, driven by stable activity, our differentiated technical position with our ZEUS electric frac solution, and the increasingly contracted nature of our business. And now, let's open it up for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from David Anderson with Barclays. You may proceed.

David Anderson (Managing Director)

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

Jeff Miller (Chairman, President, and CEO)

Good morning, David.

David Anderson (Managing Director)

So a question on the C&P margins that held flat during the quarter, and you said U.S. land was holding flat. I was hoping you could talk a little bit about the influence of your growing e-frac fleet on the bottom line. We know the operational advantages, but I was wondering if you could talk about how it impacts financially. How does e-frac, say, compare to, say, your Tier 4 dual fuel, the diesel fleets, just in terms of pricing and operating costs? Trying to get a sense of how accretive the new equipment is. And sort of secondarily on that, with EMP consolidation well underway, and we look out, say, 12-24 months, would you expect the majority of your e-frac fleets to be with these larger operators under multi-year contracts?

Jeff Miller (Chairman, President, and CEO)

Yeah, well, thanks, David. Look, E-fleets are accretive. They're accretive for a couple of reasons. Number one, highly efficient to operate from our standpoint, and so that makes them, you know, more accretive. Clearly, they are bringing a lot of value to clients, and therefore they're, you know, priced and thought about differently in the marketplace. And so, look, I expect that that will continue into the future. But I think what's most important is the contracted nature of the fleets, which, you know, mean a couple of things also. Number one, that, you know, the pricing is sticky, but it's sticky because it's contracted over time, and the value is thought about.

So, you know, sophisticated, you know, procurers can look at that and model that, and we can model it as well, and we're comfortable with the value created. But I think the second thing, as we think about what types of customers look at E-fleets, these are not, these aren't a spot market solution. I mean, the companies that are interested in E-fleets are those that have steady programs, work through cycles, have a clear vision of where their business needs to go, and are willing to commit to the technology to deliver that over the long term. And so, and really, it's an entire system. If we think about electric fleet, it's obviously, it's an efficient, lowest TCO electric solution, but it's also automated, which drives a level of precision around fracking that, you know, I've never seen before.

and so that, you know, clients know that they're delivering what they expect to deliver. And then finally, the subsurface measurement. But I bring all of that up because that's part of what drives it being accretive. creates a lot more value, therefore, is more accretive than a Tier 4 diesel fleet, clearly. and then also a different set of conditions, which also changes the return profile of these assets as they go into the market. Hope that helps, David.

David Anderson (Managing Director)

Oh, it does. Ah, a clear differentiation there. So separate question here. I noticed in your release, you announced two new collaborations with other service companies, one in reservoir analysis, the other in MPD. It sort of effectively fills a few of your weaker spots of your portfolio. Now, if I just think back to last cycle, we saw a number of acquisitions, but I don't recall too many collaborations out there. I mean, on the one hand, I guess from my point of view, on the one hand, maybe you're testing the waters a bit, but on the other, it seems like it's a pretty good way to fill product lines without spending a lot of capital.

I was wondering if you could talk about this strategy and why it's different during the current cycle, and would you expect to enter more collaborations in the coming years?

Jeff Miller (Chairman, President, and CEO)

Well, look, I think it's more a function of technology that we have, and when we see, you know, we've developed some things around, you know, digital cores and the ability to evaluate them digitally, for example. But trying to buy our way into the entire core space, we'd rather partner with who we think the premier core analysis company is. And so we're able to bring our technology to that, and effectively, it's a complementary strategy where we make better returns, doing the things that we've developed and know how to do. And obviously, we believe, Core Lab is a fantastic company, and so we're able to bring something to that, that we believe creates more value rather than trying to, you know, enter into a different type of arrangement. You mentioned the, the, the other one with Oil States. Similar kind of thing.

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

David Anderson (Managing Director)

Very helpful. Thank you very much, Jeff.

Jeff Miller (Chairman, President, and CEO)

Certainly.

Operator (participant)

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

Neil Mehta (Head of Americas Natural Resources Equity Research)

Yeah, good morning, Jeff, team. Appreciate the time. The first question is around. It's more a macro question, which is one of the things that surprised us last year, was the exit-to-exit of U.S. oil production, which came in above, I think, where consensus expectations were. You know, you have unique visibility into the U.S. completion and volumes. What do you think happened there? And as we think about 2024, how do you think about exit rate of U.S. growth, you know, and maybe talk about the moving pieces, including DUCs?

Jeff Miller (Chairman, President, and CEO)

Yeah, look, if I'm thinking about production growth in 2024, you know, production's a function of service intensity. So simply put, more sand, more barrels. And, you know, we saw peak levels of service intensity throughout last year, really, in the first half of last year. And a lot of that comes on in the latter half, and I think, you know, some of this is efficiency in the sense that we are delivering more sand to the reservoir, and that comes in a lot of forms. E-fleets are part of that, and some of the technology that we've brought to market. But I also think that the market that we see for next year, you know, it's hard for me to forecast at this point exactly what operators should do, because every operator plays their own game.

But at the same time, you know, I would probably take the over on rigs, because I think that, you know, we'll run out of DUCs at some point. I think I would take the under on production only because, whatever you think it is, I'll take the under, only because, you know, what we see are stable customers delivering to their plans. But what we don't see is a lot of the, you know, smaller companies coming into the market in an effort to really amp up production. So I think, you know, from our perspective at Halliburton, very stable market.

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

Neil Mehta (Head of Americas Natural Resources Equity Research)

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

Jeff Miller (Chairman, President, and CEO)

Well, look, I mean, we are working on tenders today for work all of next year and the following year. I mean, when we talk with customers, okay, about what's going to happen, really, I don't think the North Sea and West Africa even really wake up until 2025. We've seen strong growth in those markets. However, the real growth that we're working on planning today doesn't even start until 2025, and all of these things are three- and four-year type efforts. I mean, these aren't individual wells in places like that. These are programs. And so we've spent. We're actually on contract with a client, working on just the planning of logistics for 2025, 2026, and beyond.

I've just got a lot of confidence in terms of what we see in hand, the tender pipeline, and then the pipeline of work that we are planning with customers that may or may not even be tendered. It's just more a matter of it will be done, and we've got clarity on that in 2025 and beyond.

Neil Mehta (Head of Americas Natural Resources Equity Research)

Thanks, Jeff.

Jeff Miller (Chairman, President, and CEO)

Yes, sir.

Operator (participant)

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

Arun Jayaram (Research Analyst)

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

Jeff Miller (Chairman, President, and CEO)

Well, look, I think, number one, it's the value created by ZEUS is what drives the contracting nature. A couple of things. You know, when we started to develop ZEUS, and we started, like I said, quite a while back, you know, our view was we want to maximize value to North America, number one. And in order to do that, we just had to—and we believed that the technology created enough value, so much value, that we aren't going to build it unless it's demonstrated for customers. And I think the contracting nature of the longer-term contracts, three-year type contracts, is because we let the market pull rather than trying to push something into the market. It is that different and special.

As that system continues to develop and evolve, meaning automation, measurement, all of these things that drive really meaningful value, that is what's creating, I think, the different dialogue around ZEUS with our customers, because it will become more and more integral to how they create value as well. And then from an efficiency standpoint or a, like, volume standpoint, you know, our equipment is very efficient. So as we go from zipper frac to simul-frac, to, in this case, trimul-frac with a customer, you know, that is not a one-to-one increase in horsepower requirements. So we become more efficient as those volumes go up. But that, that is also a unique feature, though, of ZEUS and its ability to scale up, but it's not one for one.

And so, you know, from a Halliburton perspective, we do create outsized value for Halliburton and also for our clients because we're using less equipment than we would had we gone at it in a traditional fashion. So I, I think that, you know, the combination of reliability, but also automation, because it's, as fracs get larger, the precision gets more important. There are a whole lot of things that start to happen, and so very collaborative efforts with our clients to utilize that technology. In the case of the trimul-frac, really groundbreaking type work. Super excited to do it with this customer.

Arun Jayaram (Research Analyst)

Great. Jeff, my follow-up, natural gas is on people's minds in North America, just given the contango in the market, you know, 2024 is just above $2.50. I was wondering if you could give us a sense of how much of your activity is levered just to dry gas, and what are some of the risks to the earnings picture from a soft market for gas this year?

Jeff Miller (Chairman, President, and CEO)

Look, we've got very little gas exposure in our business today. The ones, the exposure that we do have is contracted under, it's sort of the ZEUS solution somewhat, and then we've got, I guess, a little bit of other things. But look, the gas work that we have is not a significant part of our overall portfolio. And, you know, and so we plan for what we can see. I think, you know, legitimately, there could be equal upside on gas as LNG comes on, but we haven't baked it into our outlook today. But I would say that's clearly one of the upsides to North America, maybe more so than a downside to North America.

Arun Jayaram (Research Analyst)

Fair enough. Thanks, Jeff.

Jeff Miller (Chairman, President, and CEO)

Thank you.

Operator (participant)

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

Roger Read (Senior Energy Analyst)

Yeah, thank you. Good morning, and actually, I had the opportunity last week to visit a typical frac site and saw the E-fleet, so pretty impressive setup. One of the things the customer mentioned was a slightly different, I guess, sort of price to value contract structure. It looks like from a margin standpoint, you're doing fine on that, but is there anything you can kinda enlighten us on, on maybe how we thought about traditional pressure pumping, contracting, and a lot of spot exposure versus, you know, kinda how this is going through? What does it mean in terms of sharing gains with the customer? What's the right way for us to think about that on, you know, kind of a pricing?

Jeff Miller (Chairman, President, and CEO)

Look, from our standpoint, Roger, thank you. You know, we wanna create value for our customers. I think you have to create meaningful value for customers in order to be a long-term supplier and partner to a customer. So we start from that position. And as you said, solid contract for us over the very long term. You know, we went into this focused on maximized value, which in our view, means maximize returns, which we're able to do under these types of environments. And so rather than play sort of the spot, we don't intend to play the spot game. You know, that spot game is a win-lose on either side of the market, really. When the market's getting tight, probably operators are losing. When it's going the other direction, service companies lose a lot.

Our strategy is to stay out of that. So to strike contracts with customers that, in our view, are fair, and deliver a lot of value, both in terms of pumping value and also recovery value. And I think that we're uniquely positioned to do that. So, improving recovery per foot or production per foot is a long-term game, and we wanna play that long-term game with customers that are working on that long-term game. And, you know, we're ecstatic about the customers we have and who we get to work with, to try to solve what we think are the real pressing issues of the future, in North America frac. So we don't get to play that game. That game doesn't get played successfully if it's, you know, the frac du jour.

We need to be part of that process, and our clients allow us to do that.

Roger Read (Senior Energy Analyst)

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

Eric Carre (EVP and CFO)

Yeah, thanks, Roger. It's Eric. So, think about it in a fairly similar way as what we did in 2023, except higher. So we increased the dividend 6%. We're now back to about 95% of where we were, pre-COVID. In terms of buyback, we intend to continue buying, buying back share. Our intention, today is to, buy back more share in dollar terms in 2024 than we did in 2023. At the same time as we did also in 2023, we intend to continue to retire, debt and continue to strengthen the balance sheet. So overall, fairly similar structure in 2024 as what we did in 2023, but kind of bump everything up a bit higher.

Roger Read (Senior Energy Analyst)

Great. Thank you.

Operator (participant)

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

James West (Senior Managing Director)

Hey, good morning, Jeff and Eric.

Jeff Miller (Chairman, President, and CEO)

Morning, James.

Eric Carre (EVP and CFO)

Morning, James.

James West (Senior Managing Director)

So, Jeff, you know, you talked about West Africa, and obviously not waking in until 2025. You know, a lot of tendering or just conversations about 2025, 2026. I know some of your partners, like FTI, are bidding for deliveries that wouldn't happen until, you know, 2029 and 2030. The offshore rig companies are getting locked up into, you know, 2026, 2027. I mean, the visibility this cycle seems to me to be somewhat unprecedented, and I'm curious if that's consistent with your view of how things are playing out, how customers are behaving, and, you know, how your conversations are going. Because it seems like the industry's on board with this is gonna be a long cycle.

We recognize, of course, macroeconomic events could derail things, but at least for now, with this oil price range that we're in, it's kind of all systems go for a long time.

Jeff Miller (Chairman, President, and CEO)

Look, I'm careful speaking for the entire industry, but I would say at this end, including Halliburton, very focused on running our businesses for strong returns over the long term, which is precisely what we all do. And I think that's good for our clients, and it's good for us as well. And so that level of visibility is not inconsistent with companies planning a future around how to make money for shareholders, and that's what we're doing as well. And so I think it's a very good setup for the rest of this decade, quite frankly. Just because, A, we know there's demand, B, we are able to, you know, our whole value proposition around is how we collaborate and engineer solutions to maximize asset value for our customers, and this type of setup allows us to do that.

The other thing that happens, though, when we run a business for returns, is we don't overinvest in the business. And so we've told you kind of where our CapEx will fall and the level of growth that we're looking at. And so we're very thoughtful about the growth because we are keeping profitable international growth firmly in hand. And so I think assets are tight, and they'll remain tight, for those very reasons. It's very natural economic reasons for an industry that's running their businesses for return, which is clearly what we're doing. And I think our level of CapEx, the way that's structured, drives that level of thoughtful investment. It manages the contracts that we win indirectly, and it also maximizes returning cash to shareholders. So it's a very good environment, in my view.

James West (Senior Managing Director)

Okay, that's. We certainly agree with that. And then maybe a follow-up for me and potentially, I don't know, Eric, if you're going to take this one, but the D&E margins, which I know are more levered towards international, where a lot of the volume growth is certainly going to come from, and you're going to have natural operating leverage from that, and inflation seems to be, you know, cooling somewhat, so incremental should improve here. You know, where are you anticipating. I know you gave the first quarter guidance, but that's seasonal. Where do you anticipate margins, or maybe if you want to talk about incrementals, however you want to discuss it, for D&E, you know, going forward as we go through 2024 and into 2025?

Eric Carre (EVP and CFO)

Yeah, Jim, so if, to your point, if you just look at Q1, obviously, you get seasonal effect. So, but more importantly, looking at the year-on-year and the general trend of the D&E margin. So first, I think it's worth noting, as Jeff mentioned in the script, that we had our best D&E margins in 15 years. So it means that a lot of the investment we have done in the last few years are paying off. So what to watch really is the general trajectory of margins in the business. And for us, it's a matter of balancing revenue growth, improvements in margin, improvements in returns as we continue to invest in the D&E business.

So, all of that to say that we expect margins to continue to firm up as we get into 2024, and we're expecting our margins to be materially higher in D&E in 2024 than they were in 2023. Now, there might be some bumps along the road from one quarter to the next, et cetera, as it's a business that typically, you know, tends to have a lot of moving parts. But directionally, margins will be higher in 2024 than they were in 2023.

James West (Senior Managing Director)

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

Jeff Miller (Chairman, President, and CEO)

Thank you.

Operator (participant)

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

Scott Gruber (Director of Oilfield Services and Equipment Research)

Yes, good morning.

Jeff Miller (Chairman, President, and CEO)

Morning, Scott.

Eric Carre (EVP and CFO)

Morning, Scott.

Scott Gruber (Director of Oilfield Services and Equipment Research)

So, Jeff, you know, as I step back and think about the outlook for your, your U.S. business, it appears that you're on a pathway to establishing a business that will deliver more consistent and, and better free cash flow, you know, in the years ahead, you know, than we, than we've seen historically. In part, that's given the, the e-frac investment, but investment across the portfolio. So I'm wondering if you just, you know, give some color kind of, you know, around that. And we're seeing the consistency now, you know, if I heard correctly, the, the CapEx color doesn't suggest, you know, a material reduction in domestic CapEx in, in 2024.

So, curious, you know, kind of your thoughts around kind of bending that curve lower and just kind of overall, you know, developing this business model, you know, that's, that's much more consistent and, and less capital intensive ultimately.

Jeff Miller (Chairman, President, and CEO)

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

And so when it comes to cash flow or capital allocation of our capital budget, and we're going to allocate it to those things where we see that opportunity, which we certainly see that with ZEUS fleets. But remember, that's a demand pull, not a push strategy. So we, we don't build fleets until we have contracts for fleets. And so, you know, that's a different, completely different environment than maybe we would have seen in prior cycles... You know, anything else we do in North America, like we've developed some very good, in my view, fit for purpose, drilling technology for North America. But we're not gonna overbuild it. We're selling it into the market as the market will take it.

There's a lot of excitement about it, but our approach is still going to be, consistent delivery of margins and free cash flow in North America. And so, I think you'll see us continue to do that, and that, and that means, you know, we put E-fleets in the market, we retire sort of the fleets that are at the bottom of the stack, and continue that march forward.

Scott Gruber (Director of Oilfield Services and Equipment Research)

Got it. Appreciate the color,

Jeff Miller (Chairman, President, and CEO)

Thank you.

Scott Gruber (Director of Oilfield Services and Equipment Research)

Unrelated follow-up here. Leverage, you know, is down to about 1x now, which is good to see. It sounds like, you know, the cash return, you know, could step up a bit. Can you just kind of walk us through your thoughts as you move forward in time, the cycle continues, you'll generate more free cash flow, leverage continues to come down. You know, outside of any M&A, should we think about that shareholder return as a percentage of free cash flow moving higher, you know, given that, you know, you'll be trending, you know, sub 1 on leverage on a go-forward basis?

Eric Carre (EVP and CFO)

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

Scott Gruber (Director of Oilfield Services and Equipment Research)

Gotcha. Thank you, Eric. Thanks, Jeff.

Eric Carre (EVP and CFO)

Thank you.

Operator (participant)

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

Luke Lemoine (Managing Director)

Hey, good morning, Jeff, Eric. Jeff-

Jeff Miller (Chairman, President, and CEO)

Morning, Luke.

Luke Lemoine (Managing Director)

Hey, morning. Jeff, your North America rev significantly outperformed the U.S. land rig count in 2024, and I would guess some of the factors were reduced fleet, service quality, more stable customer base, and a pickup in the Gulf of Mexico. But could you talk about any other factors that drove this? And then, with the U.S. land rig count most likely down again in 2024, do you think North America revs could be up in 2024 for you?

Jeff Miller (Chairman, President, and CEO)

Yeah, look, the outperformance is just the stability of the business as I described it. And so a big part of that is having 40% of our fleet, you know, by the end of 2024, under long-term contracts. That creates a steady environment. So the rig count's gonna move around and do what it does, but our largest part of our business, very stable. And the reality is, the North America business is very big. We saw growth Gulf of Mexico and other offshore environments. However, you know, a very large, stable North America business, land business is going to mute some of that. And as we go into 2025, I expect the same kind of performance out of our North America business, sort of in spite of what rigs do.

Now, I do believe we've reached a point where DUCs are drawn down, they're largely drawn down, and I think that we'll see rig count increase only because it's supplying the inventory of DUCs required to run a very smooth, stable type business. I would say our customers largely plan their business around turning wells into production more than they do numbers of rigs in the air. So I think there's a lot of planning that goes on to deliver a very stable business of completing wells. So I think, yeah, one of the reasons I would say I'd take the overall rig count. I don't think, you know, I won't try to forecast rig count at this point, but I do think there's upside in North America. We plan the business for what we can see, and we expect it to be stable.

But that being said, I think there, you know, there are obviously factors that could push that up, like gas activity is clearly out there, and I don't control the pace at which LNG plants come online, but we know that they will, as at a 2024 event or a 2025, I think, you know, we'll get to that point and see that Halliburton participates in that upside, and that it could happen this year. But at this point, you know, we're planning the business around returns.

Luke Lemoine (Managing Director)

Okay, and I guess to follow up with this more stable North American business, you know, you talk about your North American land margins, you describing flat in 4Q. Could you loosely talk about how you see these progressing in 2024, kind of with that stable business?

Jeff Miller (Chairman, President, and CEO)

Well, look, let's just leave it at steady and stable moving forward. I think that we've got a very strong international business as well, that contributes, and I think that continues to grow and expand margins. But, you know, we're really pleased with where we are. But, you know, U.S. revenue and margins, you know, flattish through any cycle, I think is, you know, where we wanted to get this business. Clearly, there's upside, and I do expect from a C&P standpoint, we're gonna see, the benefit of our market leadership positions in PE, cementing, yeah, Baroid and other things that we do around the world. So I think that we're gonna continue to participate in that meaningfully, particularly from a margins standpoint. But again, our key in North America is stability through cycles, and I think we're demonstrating it.

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

Luke Lemoine (Managing Director)

... Very great. Thanks so much, Jeff.

Jeff Miller (Chairman, President, and CEO)

Thank you.

Operator (participant)

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

Stephen Gengaro (Managing Director)

Thanks. Good morning, gentlemen.

Jeff Miller (Chairman, President, and CEO)

Morning, Stephen.

Stephen Gengaro (Managing Director)

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

Jeff Miller (Chairman, President, and CEO)

Look, you know, these are long-term deals that we go into knowing the cost of the asset and knowing what the return needs to be. So now it just becomes a bit of a math problem around duration. And so, you know, there are variable costs in the market that we don't control, and we don't try to own. We just pass through to customers, whether it's sand costs and many other things. But for where we create competitive advantage and for our equipment, as we go into these long-term deals, we don't need price openers and all of that sort of jazz. There's no reason for it. We literally sit down and work through what is this return for client, return for Halliburton, and then we fix that and move forward. That doesn't change over time.

And so, you know, I won't comment, you know, the rest of the market, the spot-type market, all of that is gonna do what it's going to do. But I think that's when we take a long view of the market and value creation, that's math that both clients and Halliburton can do, and I think that's what makes it so very different, our approach to North America. You know, it's not particularly differentiated, if at all, in the spot market, and as a result, it's just kind of does what it does. It's a bit of a free-for-all. But I would say, in the market where we wanna play, which is technology-driven, lowest total cost of ownership, and working on what I think is most important, which is productivity per foot, that's a different game. That's a long-term game.

Stephen Gengaro (Managing Director)

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

Eric Carre (EVP and CFO)

No, I, I think what's important around free cash flow for 2024 is, as I mentioned earlier, is we're expecting the free cash flow to be at least 10% over 2023. That's gonna be on the back of improved income. It's gonna be on the back also of improved efficiencies around working capital. So we spend a lot of time working on improving DSOs, working on improving DIOs. And when I speak like this, I don't mean just pushing the organization; I mean implementing different initiatives. For example, I'll give you a couple of examples. On DSO, we spend a lot of time on automating the invoicing process on integrated services. For example, invoicing on integrated services is extremely complicated.

We have multiple product line, multiple, parts of our organization, customer organization, so it takes a lot of time, and to the extent that you can, automate that and then remove, reduce cycle time, then you improve DSO. We just rolled out, 18 months ago, a, company-wide, demand planning software, which when combined with, the rollout of S/4 in the future, is gonna give us totally different capabilities to plan our business and, or reduce inventory, while not increasing the risk from an operation perspective. So these are the things where we're spending a lot of our time to basically structurally, improve the efficiency of working capital. So that's gonna be the other component of why we're expecting our free cash flow to, improve next year.

Stephen Gengaro (Managing Director)

Excellent. Thank you for the color.

Operator (participant)

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

Marc Bianchi (Managing Director)

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

Jeff Miller (Chairman, President, and CEO)

Look, we think that Q1 is up from Q4, so there's activity that comes back that was seasonal in Q4. You know, as we look at the balance of the year, I think that there are, you know, as we plan the business for what we got visibility of, and we can see our fleets are largely contracted for 2024, that's what we know. Are there factors that may add to that? I think, yeah, could do that. I think, you know, if production levels are low, clients may speed up. You know, there's a lot of variables that could happen that I think are to the positive. But nevertheless, as we look out to 2024, and we plan a business that generates the kind of returns we expect to generate, you know, that's what we see.

Marc Bianchi (Managing Director)

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

Eric Carre (EVP and CFO)

No, there's nothing unusual. I think if you actually, if you were to go back and look at the Q1 2024 over Q4 2023 guidance that we just gave, it is very much in line with the typical Q4 to Q1 seasonality that we saw prior to COVID. So you go back to 2020, 2019, 2018. So what we're seeing here is really a business that's fully in line with historical trend. What's happening on the D&E side, the influence of software sales in Q4 typically is maintained in Q1, but we're having a lot of weather-related issues in the Eastern Hemisphere, in the North Sea, et cetera, that is influencing our D&E margins. But again, very much in line in terms of quarter-over-quarter guidance as we have had historically in our business. Nothing unusual.

Marc Bianchi (Managing Director)

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

Operator (participant)

Thank you. One moment for questions. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. Our next question comes from Kurt Hallead with Benchmark. You may proceed.

Kurt Hallead (Head of Global Energy)

Hey, good morning, everybody.

Jeff Miller (Chairman, President, and CEO)

Good morning, Kurt.

Kurt Hallead (Head of Global Energy)

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

Jeff Miller (Chairman, President, and CEO)

Yeah. Thanks, Kurt. Look, I think, software and automation, and I say it that way because software business is strong and focused on enterprise solution, which will adopt, you know, all sorts of AI and generative AI as we continue to move forward, and that'll create efficiency and seamlessness in a lot of ways for our customers. Internally, as we adopt automation and AI into our tools and service delivery, I expect that it will have a meaningful impact, probably over the next two to three to five years. Just as those things are adopted, it's going to reduce service costs, it's gonna drive de-manning, and it's also gonna improve service quality, and I think will actually improve, you know, the capability of tools, which I think is so fundamental to how we generate long-term returns.

Kurt Hallead (Head of Global Energy)

Appreciate that color. Also noticed that, Halliburton Labs entered into a, venture to, for some direct lithium extraction. So curious as to how you might see Halliburton, you know, get involved in that process as well.

Jeff Miller (Chairman, President, and CEO)

Well, look, that's one of our Halliburton Labs companies. We're excited to have them here. We make a very, very small investment in companies that join Halliburton Labs, but it's very small. It's around $100,000. So it's we're a tiny piece of their Series B, which we're excited for them. But Halliburton Labs continues to attract, in my view, more quality investable companies over time. We're watching them enter Series As, and in some cases, Series B. And so it's a journey. We're learning a lot about different industries, but we're careful. This is clearly not corporate venture capital. We are not investing in the companies that join Halliburton Labs other than a small 3%-5% stake that we get from them, generally for the services that we provide to them as a member of Halliburton Labs.

Super excited about where that's going. But, you know, we just need to let that continue to progress on its own.

Kurt Hallead (Head of Global Energy)

All right. Fair enough. Thanks, Jeff. Appreciate it.

Jeff Miller (Chairman, President, and CEO)

Thank you.

Operator (participant)

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

Jeff Miller (Chairman, President, and CEO)

Yeah, thank you, Josh. Let me close the call with this. I'm excited about 2024. I mean, our outlook for oil field services is strong, and I expect Halliburton will generate significant free cash flow for shareholders in 2024. Look forward to speaking with you next quarter. Let's close out the call.

Operator (participant)

Thank you for your participation. You may now disconnect.