Ladies and gentlemen, thank you for standing by, and welcome to Halliburton’s second quarter 2020 earnings call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Abu Zeya, Head of Investor Relations. Please go ahead, sir.

Thank you Liz. Good morning and welcome to the Halliburton second quarter 2020 conference call. As a reminder, today’s call is being webcast and a replay will be available on Halliburton’s website for seven days. Joining me today are Jeff Miller, Chairman, President and CEO, and Lance Loeffler, CFO. Some of our comments today may include forward-looking statements reflecting Halliburton’s views about future events. These matters involve risks and uncertainties that could cause our actual result to materially differ from our forward-looking statements. These risks are discussed in Halliburton’s Form 10-K for the year ended December 31, 2019, Form 10-Q for the quarter ended March 31, 2020, 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 that exclude the impact of impairments and other charges. Additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our second quarter press release and can also be found in the quarterly results and presentation section of our website. After our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A period in order to allow time for others who may be in the queue. Now I’ll turn the call over to Jeff.

Thank you Abu, and good morning everyone. The second quarter of 2020 is now behind us. It was a tough one for many industries, including the oil and gas sector. A global pandemic and the resulting collapse in demand have upended many businesses, and as economies around the world emerge from lockdowns, the path forward remains uneven and uncertain. I am grateful for our employees’ focus, dedication and perseverance during these difficult times. Employee safety is our top priority and we continue our efforts to take the appropriate measures to provide a safe working environment for everyone. COVID-19 is altering our everyday live and business operations, and it is important that we do not let our guard down. Despite this distraction, our safety performance is the best it has ever been with our total recordable incident rate improving more than 20% since the end of last year. There are three key areas I will address on the call today: first, our solid second quarter performance, demonstrating a significant reset that improves the earnings power of our business despite the severity of the activity collapse; second, the market and business outlook for the second half and full year of 2020; and finally, what we are doing today to make sure that Halliburton powers into and wins the eventual recovery. The global activity collapse in the second quarter was swift and severe, much worse than anticipated. U.S. average rig count for the quarter declined 50% sequentially while international rigs dropped 22% with absolute global rig count sinking to the lowest level in recent history. Halliburton’s response to the market disruption was equally swift and aggressive. As I’ll discuss in a few minutes, our organization responded with a tremendous sense of urgency. Let me cover a few headlines related to our financial performance.…

Thank you Jeff, and good morning. Let’s start with a summary of our second quarter results compared to the first quarter of 2020. Total company revenue for the quarter was $3.2 billion and adjusted operating income was $236 million, representing decreases of 37% and 53% respectively. In the second quarter, we recognized $2.1 billion of pre-tax impairments and other charges to further adjust our cost structure to current market conditions. These charges consisted primarily of non-cash asset impairments mainly associated with pressure pumping equipment and real estate, as well as inventory write-offs, severance, and other costs. As a result of this charge, we realized a $49 million reduction in depreciation and amortization expense in the second quarter. This impact is reflected in our division results with approximately two-thirds associated with our C&P division and the remainder related to our D&E division. We expect our third quarter depreciation and amortization expense to be approximately $225 million, reflecting one month of additional impact. As Jeff mentioned, by the end of the second quarter we also accomplished approximately 75% of the annualized $1 billion in cost reductions, and we intend to complete most of the remaining actions by the end of the third quarter. The cash cost associated with the various cost actions in the second quarter was approximately $180 million. We anticipate that we will incur an additional cash cost of approximately $60 million in the third quarter as we continue to make further structural adjustments. Moving to our division results, our completion and production revenue was $1.7 billion, a decrease of 44%, while operating income was $159 million, a decrease of 54%. These declines were largely a result of a decrease in pressure pumping activity globally primarily driven by U.S. land and Latin America, coupled with lower artificial lift activity in…

Thanks Lance. To sum up our discussion today, our second quarter performance in a touch market demonstrates our organization’s ability to execute swiftly and aggressively, and we expect to complete our remaining cost actions in the third quarter. We have an excellent international business and it is ready to deliver margin expansion and higher free cash flow conversion in the next up cycle. The actions we have taken in North America, including our service delivery improvement strategy, we believe will enable us to have higher profitability and free cash flow even in a structurally lower environment. We are moving full steam ahead with the deployment of digital technologies for our customers and internally, and finally Halliburton is charting a fundamentally different course. I believe the strategic actions we are taking today will further boost our earnings power and free cash flow generation ability as we power into and win the eventual recovery. Now let’s open it up for questions.

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

Hey, good morning guys.

Morning James.

Congrats on the execution in a really [indiscernible] quarter here. Jeff, you talk about this--you’re charting a fundamentally different course, and I think it’s definitely appropriate. We have a vision of the oilfield that I think aligns with your vision for the future of the oilfield - of course digital, lower capital intensity, higher returns are all part of that strategy. Could you maybe talk about where you are in the various parts of that journey, both the digital side, obviously the cost structure in North America - you’re pretty far along in that and you talked about that, maybe the international and the technology delivery?

Yes, thanks James, and again when I look through the noise of the COVID disruption and industry consolidation and rationalization, clearly we do focus on what is that new course, and we are working on those things right now. I talked about a number of them in my commentary, but we are focused on doubling down on the technology that’s important, drilling, iCruise, EarthStar, Cerebro, digital, growing our lift in chemicals businesses, which I described in the commentary, and then feeding that technology into our fantastic international business, finally delivering on North America service delivery improvement strategy while at the same time demonstrating structurally lower capex built on capital efficiency in an organization that executes under any conditions. So yes, we are charting a different course. Progress along digital, we’d talk about each quarter different things that we’re doing. We’re making terrific progress around Halliburton 4.0, feel very good about the kinds of contracts we’re signing today and the work that’s being done behind the scenes to continue to advance that, and obviously you saw some of our announcements with partners this quarter.

Okay, so you feel good about the path you’re charting here. What about on the customer side? It seems to me it’s a fundamentally different mindset from the customers as well. What’s their approach or their adoption of these new technologies, particularly on the digital side, and how is that progressing? Are they impediments to change now, or are they really aligning with your view and others views?

Look, I’ve always said that digital has to evolve. It’s something that’s built out over time, and it’s done often with partners, so we’ve talked about our partners, but yes, there is appetite for it, absolutely. I think that--when I think about it in terms of reservoir drilling and production, those are the bites that can digested today, and so that’s why when we talk about progress and the things that we’re doing, we’re doing them in those sort of silos not because we view them long term as silos, but because that’s the way that they can be digested right now.

I see, okay. Thanks Jeff.

Our next question comes from Angie Sedita with Goldman Sachs. Your line is now open.

Thanks, good morning. Really impressive quarter. It’s almost unbelievable, the numbers are so good, so kudos to you guys. International markets, as you touched on Jeff, really important for growth, and you highlighted some of the initiatives there. But can you talk a little bit about cost cutting opportunities and the opportunity to further improve margins? Obviously D&E margins had a nice move in Q1, but can you talk about additional efforts there on the cost cutting side, and then I know there’s a focus on generating more free cash flow out of the international markets, so maybe--and it is over 50% of your revenue, so maybe talk a little bit further about international.

Yes, thanks Angie. Look, I think we are positioned in the right markets, the strong markets. We’ve got the technology uptake that’s so important in those markets, and then what we’re doing around lower capital efficiency, or improving capital efficiency, plays straight into that. I expect that we will continue to see progress in those markets, and they will be stronger over time.

Okay, so maybe you can talk a little bit about the evolution here in your capex profile. I think that’s really shone through here in ’19 and ’20 in becoming a lower capital intensive company, and really re-thinking the U.S. land market. Maybe can you talk a little further about that capex profile, how you’re looking at the market differently particularly in the U.S., and the long term ability to generate more cash flow, free cash flow?

Yes, thank you. When I think about the type of equipment we’re building and actually using equipment more efficiently, lowering the cost of that equipment, those are all the kinds of things that we look at. Obviously we’re focused on improving returns, using our digital capabilities to eliminate costs. We’ve removed roughly 100 facilities, but we only removed 100 facilities by changing the way we work dramatically so that it just takes less capital, and that plays into everything from maintenance to where people work, etc. That’s sort of a North America view. Now, those same skills and capabilities are applicable everywhere in the world, and so I expect us to continue to drive cost out of our business. That’s really--so when I talk about charting a different course, digital international strength and then a leaner organization that drives technology and efficiency, I think leaner and efficiency and the technology applications will be driving cost out all of the time, including internationally.

Great, thanks Jeff. I’ll turn it over.

Thank you.

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

Good morning, and thank you. Lance, a couple questions for you on cash flow. First of all, do you expect the working capital harvest in the second half of the year to be as substantial as it was in Q2? And then also, difficult to be precise in [indiscernible] with regard to--

Bill, you’re breaking up on me. I’m sorry, I didn’t get all of your question.

Sorry, can you hear me now?

It’s a little muffled.

Yes, okay. The question was, one, working capital as a source of cash, is it as substantial in the second half of the year as it was in the second quarter? Then with regard to your cash cost saves, difficult to answer, but in the event of a change in regime in November, how do you think about it with regard to your cash costs, as in do you have enough cash--do you have enough tax shield to offset a rise in the corporate tax rate? Thanks.

Yes, so let me address the first part of your question, which is, I think, the working capital unwind and the momentum in the second half of the year. Clearly we had a strong cash flow associated with the unwind in working capital in Q2. I suspect that that momentum continues into Q3 and Q4. It may not be as strong just because we had such--you know, with the revenue declines just in the course of Q2 and the unwind around receivables, and then offset by payables, it was good to see. The organization continues to be really efficient on how we continue to wring out the cash flow generated for working capital. It may not be as strong as the third quarter but I still expect momentum to--excuse me, the second quarter, but I still expect momentum from the unwind to continue to occur in Q3 and Q4. Can you repeat the second question? I think you were talking about administrative expenses, but again, Bill, it’s kind of hard to pick you up.

Yes, sorry about this. [Indiscernible] in the event that we have a change in regime in early November, I guess what Biden’s talking about is a 28% corporate tax rate. I’m just curious as to whether with your tax shield, net operating losses, losses etc., do you expect to be [indiscernible] in 2021?

No, we don’t, Bill. We’ve got--certainly we do have the NOLs associated--I mean, look, there’s always other ways that Halliburton continues to pay tax, cash taxes, but at the federal tax level we expect that we’ll have tax shields from NOLs.

Thank you very much.

Thanks Bill.

Our next question comes from Sean Meakim with JP Morgan. Your line is now open.

Thank you, good morning.

Good morning, Sean.

So the decrementals were very impressive - you know, a huge difference compared to what we saw in 2015 and 2016. I was hoping we could just get a better sense of the run rate for C&P going forward. Impairments helped with lower D&A, I appreciate you quantifying that for 3Q. It looks like a 400 basis point assistance from 1Q to 3Q. Were there margin benefits from the inventory write-downs? I’m just curious if completions activity gets a little better in 3Q, does the margin follow at the EBITDA line, so looking past EBIT to the EBITDA line?

Yes, look - I think the changes that we’ve described, and based on the guidance we’ve given, I think this has been a--you know, the margins that we’ve reset today clearly have been helped by some of the accounting changes and the impairments that we’ve taken over the first part of the year. But look, it’s not to say that we haven’t done a significant amount of work around the cost cuts, which we believe are permanent. It goes across everything that we’re doing, whether it’s drilling, digital, production, frack in North America as Jeff has described, and so I think in terms of our margin progression, we’re going to continue to work that as hard as we can. We’ve still got some room to continue to improve on that cost cutting journey, as we described in our remarks, and I think it sets us up ultimately that when activity moves up, all of this is done with the expectation that we ultimately have stronger incrementals with these permanent cost cuts and changes.

Let me just follow that up with--I mean, the way to look at things in my view is what’s that new course look like, and that new course looks like substantially lower costs, like a reset around costs, where we’re directing our energies towards digital being much sharper in North America around how we invest, what we do, and how we manage that cost structure, internationally continuing to protect and pour technology in that market, and then the structurally lower capex. That all comes from changing things that we’re doing, and so we are changing many businesses processes and just the way we view things, which ultimately drives substantially lower costs and resets margins and cash flow higher.

Right, got it. I appreciate that. So then just as a follow-up, if we think that EBIT will be higher quarter over quarter, modestly higher margins as a percentage, does that follow same for EBITDA? Do you think EBITDA can grow quarter over quarter?

Well, I think the implications with everything that we’ve described, Sean, on our prepared remarks will tell you that EBITDA is relatively flat, even though the top line is coming down.

Got it. Very helpful, thank you.

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

Hey, good morning Jeff. Obviously international is a bigger part of your business now going forward. Just wondering, in your outlook as you think about international markets, how they’re trending, how you’ve thought about pricing in that outlook, and in particular in the second half of the year. Hearing some reports about pricing concessions being asked for the NOCs, particularly in the Middle East, so I was just wondering if you could talk about that and whether you think that’s a concern or risk for the industry. I know you have a lot of other contracts, LSTK contracts and whatnot, so maybe you can just talk about both sets, if you wouldn’t mind, please?

Yes, I think the fact is pricing never recovered internationally, and at this point we haven’t seen many tenders so we don’t have much of a view of that. But bottom line is there’s much less capital internationally - I mean, the excess capital just isn’t there maybe the way that it is in the U.S., so that’s probably getting sorted out in the U.S. as well. Most of the dialog has been more around working on efficiencies, how to drive more efficient operations both for our customers and for us, and less so around pricing. It doesn’t mean that they don’t get asked about, but at the same time the only effective path forward is to drive better efficiency, utilization of technology, and that sort of thing internationally. I’d say that applies to NOCs and IOCs.

So you’re not being asked to cut your--I didn’t mean on new tenders, I meant on existing work, you’re not being asked to cut price on existing work?

Yes, I understand, and I would say that certainly the first response is let’s look for ways to drive better efficiency, not address pricing, because most of these contracts that are in place today were lit arguably at the bottom international cycle, which was in 2016.

Fair point. You mentioned digital quite a bit on today’s call. Just curious about something as you’re looking forward. In terms of where you want to be, let’s just think two or three years down the road here, do you think you can pull all the technology out internally; in other words, can you create all this organically, or do you need to look outside? I guess if I look back in the past, looking back in the mid-90s, technology acquisitions were critical obviously to you and some of your biggest competitors - I’m thinking about Landmark, or course. How are you thinking about that going forward? Is that something you’re going to have look outside of Halliburton? Is it a combination? Just your broader views on that, please.

Yes, broadly I treat that the same as we do most of our M&A, in the sense that when we see opportunities to accelerate R&D or we see things that are important adds, we make them, and we’ve continued to do smaller transactions around our digital offerings, so we’re very thoughtful around the build versus buy approach, and that’s a lot of the valuation. We feel like we can, through partners and others, get into all of the things we need to do and deliver platform solutions, and so there’s not a big transformational thing that’s in our minds. More importantly in my view is continuing to advance the R&D around digital.

Thanks Jeff.

Our next question comes from Chase Mulvehill with Bank of America. Your line is now open.

Hey, good morning everybody. I guess we’ll kind of stick on this digital and remote operations that you guys have been talking about through the quarter, the past couple quarters. I guess first, how should we think about the structural margin improvement from these cost savings initiatives on the remote operations and automation side, and how much benefit did you see in 2Q? Then the second part of the question is really how easily can competitors replicate this strategy over time?

Yes, thanks Chase. Q2, I mean, the digital technology and the digital approach that we are taking is what enables the cost reductions that we are--a large part of the cost reductions that we’re seeing in Q2. I wouldn’t describe it as enough activity to actually drive the kind of incremental--I mean, it will drive terrific incrementals as we see any activity grow, but the ability--I’m going to stick with real estate rationalization just as a proxy for the kind of things that can be removed when we use the digital solutions that we have internally. For our customers, I think I described in my remarks at least one example around how digital solutions are driving much better performance, both for our customers and for ourselves, and so I think that we will continue to see that play a role. Replicating digital at scale is very difficult. I mean, I think that will prove to be--I know what’s involved in it for us, and I know that we’re working with some of the very best partners in the industry, and it’s not--it takes a lot of work on our part and a lot of discipline around platform outcomes that are scalable and reliable all the time, so I think that I’m quite confident about where we’re going.

Okay, great. Appreciate the color. One quick follow-up on the capex side. You mentioned 5 to 6% of revenues being spent on capex. Can you confirm that that’s a long-term capex number and maybe how much of that is maintenance versus growth, and then if this implies that maybe on the international side that the market share gain strategy is less of a focus over the medium to longer term?

Yes, I think that the 5 to 6% versus the 10 to 11 is a longer term outlook that’s based on capital efficiency, just to how we build things and how we take them to market, how fast we move them around, all of the things that drive lower capital requirements. I believe those changes are largely permanent also. When I think about how that plays out internationally, I think that same efficiency, a lot of the technology and tools that I described particularly around capital efficiency, whether it’s iCruise or Cerebro or some of those technologies, are inherently lower capital requirements when they’re being used. Obviously we went through a period of building that out over the last year, but operationally they operate at probably 20% less--you know, more efficient, better velocity. I think we have that to reap internationally over time.

Perfect. All right, I’ll turn it back over. Thanks Jeff.

Thank you.

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

Yes, good morning.

Good morning Scott.

The big question for you and peers has been how to make a profit in a smaller U.S. market, and you guys obviously took a great stride here in Q2 to proving that’s very possible. Lance, you mentioned strong incrementals during the recovery here, and I realize we’re just starting to poke out heads out of the bunker from one of the worst downturns we’ve ever seen, but if we do get back to 500 or 600 rigs operating in the U.S., which is more or less consensus I think, what’s a reasonable range to think about where C&P margins could rise to?

Scott, I’ll talk to that. Look, I think as you look into the future and to what the recovery may look like in North America, and the picture that you painted around activity, I think this is going to continue to be a good business that delivers mid-teens margins and produce a heck of a lot of free cash flow. Given the things that we’ve talked about on this call today operationally and the way that we’re becoming sharper in North America with our service delivery improvement initiatives, on top of just structurally lower capex requirements to achieve that business, drives a really nice free cash flow profile, we believe.

Yes, and I think in North America--go ahead? Sorry.

No, go ahead, Jeff.

I’ll only add one thing to that, because as we look at North America, if we just sort of assumed a flat level of production in ’21 and then we moved that forward into ‘22, we see all of the attrition and tightening that is happening. I think we were well on this path at the end of last year coming into this year, and we saw solid performance in Q1. We expect we get back to a market that’s probably size and shape, at least from the supply and demand of equipment standpoint, something that looks like Q1 2020 sometime further out, and the approach that we’re taking, I think will work very well for us.

Got it. Then just given your technology investments on the D&E side and given the cost reset on that side of the business as well, kind of just where you stand in terms of the market share gains internationally, do you think when we’re at mid cycle in the next cycle, is the gap between C&P margin and D&E margins much smaller than what we’ve seen in the last few cycles?

Yes, I would expect so. I mean, again we have expectations that that business continues to improve also, and we were well on the way to doing that really up until we got into the pandemic situation and where we are today, but none of the fundamentals have changed around what we’re doing other than, I think, a sharper cost structure around these things.

Appreciate it, thank you.

Thank you.

Our next question comes from Marc Bianchi with Cowen. Your line is now open.

Thank you. I wanted to ask first on the third quarter outlook for completions. I think you mentioned up for your North America C&P business. Do you see that outperforming the market; in other words, do you think that the market could be flat to down but Halliburton’s up, or do you also see the market up in the third quarter?

For completions, I think we’re off the bottom in May and I think you’ll see a little bit of an uptick in Q3 as DUCs get completed. Drilling, we think will be down a little bit, and I think that will be many of our customers managing decline rates into the end of the year. But you know, our view of the market is it stays with making returns and taking on the work that we believe we can execute well, so I think that’s what the overall market will do and I think we’ll be in around that.

Great, thanks for that, Jeff. Then you guys had mentioned in the press release and then a few times on this call about winning the recovery. Maybe if you could offer for us a little bit more color on what that means, what are the metrics we should be looking for from you guys in terms of claiming victory on that front?

I think that’s returns and cash flows. We spent a lot of time talking about free cash flow and returns, and that’s what we’re setting up for today. I think we get well through whatever this period of time is until we see commodity prices tighten. I think we do well through this near term, but then when we start to see tightening, we’re going to have the right cost structure that scales very efficiently with strong incrementals, and it delivers a lot of free cash flow and very, very good returns. That’s what winning the recovery looks like to me.

Is there a threshold? Is there a target that we should be looking for, percentage of revenue in terms of free cash--

I think we ought to get closer to that point before we start setting targets around that, but my expectations are that it’s a very strong performance by Halliburton. But it’s out there a ways.

Great, thank you.

Thank you.

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

Hey, good morning.

Morning Kurt.

Jeff, I was just kind of curious, when you provided the outlook here for the second half of 2020, you indicated an uptick in completion activity in the third quarter and then a seasonal decline in the fourth quarter. I’m just curious on that, just given how rapid the decline in that overall activity was and how sharp the decline in overall spending has been for 2020, so I guess you’re picking up that dynamic from your discussions with customers, so they’re going to get a little more active in the third quarter and just pull back again in the fourth? It seems a little bit counterintuitive, just given how sharply spend and activity has already been cut.

Yes, look - I think it’s going to rest more around DUC activity as we go into the second half of the year, so on a relative basis, more pronounced Q3, less pronounced Q4 would be my impression. I think every customer is working their own strategy around what do they need to do as they go into 2021, which will be obviously a time where some stability needs to return to productive capacity and those sorts of things. So is it more modest in Q4? It may be, but my overall outlook is it will be relatively biased even if you just take into account holidays and all the sorts of things that happen in Q4, along with weather. This isn’t the kind of market where you power through terrible weather in an effort to try to get to some point, I don’t think, in Q4.

Okay, that’s good color. Just maybe one quick follow-up here. It looks like the run rate on capex will be a little bit higher in the second half than it was in the first half. You indicated that your capex is project pipeline driven, so is it safe to assume here that you’re starting to see an increase in potential project activity going out into 2021?

No, I think what we see are some long lead time items that we do. We talked about projects being deferred but not necessarily cancelled, so we have to manage all of that together, so precisely where those things fall in the calendar is where they fall. I think what’s most important to think about around capital really is the overall efficiency that we’ve driven into both the tools, the process, the asset velocity which will structurally help us keep that at a much lower point than it has been in the past.

Okay, great. Appreciate that follow-up. Thanks.

Thank you.

Thank you. That concludes our question and answer session for today. I’d like to turn the conference back over to Jeff Miller for closing remarks.

Thank you Liz. Before we wrap up today’s call, I’d like to leave you with a few closing comments. Our second quarter performance demonstrates Halliburton’s ability to execute swiftly and aggressively. The actions we have taken in North America we believe will enable higher profitability and free cash flow, even in a structurally lower environment. We have an excellent international business and are moving full steam ahead with the deployment of digital technologies, both for our customers and internally. Most importantly, Halliburton is charting a fundamentally different course. I believe the strategic actions we are taking today will meaningfully reset our earnings power and free cash flow ability as we power into and win the eventual recovery. I look forward to speaking with you again next quarter. Liz, please close out the call.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for joining, and have a wonderful day.