Ladies and gentlemen, thank you for standing by. And welcome to Halliburton's Third 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.

Good morning and welcome to the Halliburton third 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 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, 2019, Form 10-Q for the quarter ended June 30, 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 severance and other charges. Additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our third 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 third quarter saw world economy slowly emerge from lockdowns, oil prices move off their lows and the return of shut in production. Demand recovery is starting to unfold while under investment in global oil production capacity, OPEC+ actions and expectations for effective COVID-19 treatments are providing support to commodity prices. However, the pace and magnitude of recovery going forward will vary greatly by geography and customer type, with resurgence of COVID-19 in certain economies presenting near term risks. Despite these challenges, we continue to execute on our value proposition both for our customers and our company. Every day, our employees collaborate and engineer solutions to maximize asset value for our customers, and they're doing it with the best service quality and safety in our history. Our third quarter financial performance reflects the results of this execution. Let me share some highlights. Total company revenue was about $3 billion, down 7%, and adjusted operating income was $275 million, an improvement of 17% compared to the second quarter of 2020. Our Completion and Production division revenue declined 6% sequentially, while operating income improved 33%, delivering an operating margin improvement of 4% compared to the second quarter. These results demonstrate the impact of our structural cost reductions and improved utilization in North America land. Our Drilling and Evaluation division revenue and operating income were down 8% and 17% respectively compared to the second quarter of 2020. D&E's top line outperformed rig count declines both internationally and in the US. International revenue was down 7% sequentially as international rig count trended lower by 12%, highlighting the diversity and strength of our international franchise. North America revenue decreased 6% sequentially. Completions activity increases in North America land were more than offset by lower activity in the Gulf…

Thank you, Jeff. Let's begin this morning with an overview of our third quarter results compared to the second quarter of 2020. Total company revenue for the quarter was about $3 billion, representing a 7% decrease, and adjusted operating income was $275 million, or an increase of 17%. These results were primarily driven by continuing rig count declines across multiple regions, partially offset by increased activity in Latin America and higher completions activity in North America land as well as the continued impact of our global cost savings. In the third quarter, we recognized $133 million of pretax severance and other charges to further adjust our cost structure to current market conditions. The cash component of this charge was approximately $80 million. Let me cover some of the details related to our divisional results. In our Completion and Production division, revenue decreased $98 million or 6%, while operating income increased $53 million or 33%. The revenue decline was driven by reduced completion tool sales across Europe/Africa/CIS, the Gulf of Mexico, and Latin America, coupled with lower cementing activity in the Middle East, Asia and North America land. It was partially offset by higher stimulation activity and artificial lift sales in North America land, higher activity across multiple product service lines in Argentina, as well as increased pipeline services in Europe/Africa/CIS. Improvements related to stimulation activity in North America land and the impact of our cost reductions drove the overall margin increase. In our Drilling and Evaluation, revenue decreased $123 million or 8%, while operating income decreased $22 million or 17%. These declines were primarily due to reduced drilling related and wireline services activity in North America and eastern hemisphere, coupled with lower project management activity in the Middle East Asia. They were partially offset by improved drilling activity in Latin…

Thanks, Lance. To sum up, we're charting a fundamentally different course. I believe our execution of the five key strategic priorities will deliver success for Halliburton now and into the future. Our strong international business is already delivering returns and margin expansion and I expect that will continue in the next upcycle. Our leaner North America business will enable us to successfully navigate through the market contraction and will be more profitable as the market recovers. Halliburton 4.0 is part of everything we do and enables the success of the other strategic priorities. It will grow our current business, create new revenue opportunities and drive better returns. Our lower capital intensity is expected to contribute to strong free cash flow in the future. Our commitment to a sustainable energy future in which reliable and affordable oil and gas continues to play a critical role will help us and our customers lower emissions. Our creation of Halliburton Labs will accelerate the sustainable affordable energy future. Halliburton's strategic actions boost our earnings power reset and free cash flow generation today and as we power into and win the eventual recovery. And now, let's open it up for questions.

[Operator Instructions]. Our first question comes from Angie Sedita with Goldman Sachs.

Just on the pace of activity, maybe some thoughts around 2021. In the past, for the US markets, you talked about a strong start early 2021. And so, thoughts if that's really driven by the DUC cleanup or do you think we could see a pickup of drilling activity and additional wells? And then along with that, on the international side, you noted that the pace of decline is slowing. Do you think that we've seen the bottom in most of these countries? Is there some reason to believe that we have not even ignoring the seasonality and thoughts around the pace of the international activity in 2021?

Just broadly, both your questions, 2021 feels better from here. I think the second half of 2020, thinking about that as the bottom, we see progressive improvement in 2021. Separating that a little bit, North America, we're seeing DUC activity now. We'll see DUC activity I suspect into next year. And then, the drilling activity would follow that. But again, if we step back and think about North America, to maintain steady production, whatever the exit rate ends up being, implies the number of wells that need to be drilled. And so, if drilling is below that, then we start to see production drift lower, which then would have a positive impact on commodity price and an impact on – more so on international activity. From an international perspective, again, we see improvement in 2021 from where we are certainly now and we see that strengthening more so in the back half of 2021 or the second half of 2021 because we do work through seasonality and some other things. But in either case, we see improving activity.

And then if you could talk about operating margins in 2021, giving you all the full year benefit of the $1 billion in structural cost cutting and the activity outlook you just outlined, thoughts around the pace of C&P and D&E margins and even the potential exit rate for 2021?

Obviously, the earnings reset or the earnings power reset is a critical part of our strategy. So, those cost cuts are permanent. I expect when activity moves up, we'll see margin improvement follow. We'd see D&E margin start moving upwards when we see broader international drilling activity recover. As I've described, how we might see that next year. C&P is going to benefit from stronger completions activity recovery in North America and also internationally. So, I think C&P probably sees recovery more so first. And margins in D&E improves, gets into the double digit range as we see more sustained recovery internationally. So, again, really like where we are strategically. I think our strategy addresses that and would expect to see the margin progression follow along with the activity.

Our next question comes from James West with Evercore ISI.

International, Jeff, and I know that – you spent most of your career working international. The business has contracted, of course, but sounds like you're seeing a bottoming here. What type of or what level of recovery would you expect in 2021 and are there geographies that stand out as more robust than others?

James, look, I think we went into the first part of this year very active. In fact, we were seeing a lot of good things happening in Q1 and it tailed off in Q2. So, I don't think the full year of 2021 eclipses 2020. But trajectory I think is really important because that leads to the eventual recovery that I believe happens. And so, I think we get on that pace starting in 2021? Does it overcome 2020 immediately? Not necessarily. But it's going to just be slightly below. I think we're on a pace because of the sort of under investment that we're seeing. And we're seeing it in the US today and we'll see it – we've seen it really internationally. And this is just too important to too many governments, to too many people in the world to see it under invested for that long.

And as we think about the US market which is kind of an impaired market, but the structure is getting better with some of the M&A that's happening. Are you guys comfortable that you see a more profitable future as we kind of pull out of this downturn in North America than we've seen for the last almost a decade?

Yes, I do. I think what we're seeing, service company consolidations is great for Halliburton. It's happening as we expected it would happen. And our approach to this market, which is a different playbook, we wouldn't be doing it if we weren't convinced that it drives better free cash flow and a more profitable market. And so, there are a lot of things that we're doing that are different that will allow us to make more free cash flow in this type of market. And so, I think all of these things are positive. And I would say whether it's consolidation and attrition and rationalization, all of those things are conspiring to create tightness. But even in spite of not having the tightness today, we're seeing the improving margins and returns.

Our next question comes from Bill Herbert with Simmons.

Lance, free cash flow, and I'm just looking at the relationship between Street expectations for next year, EBITDA down 5%, 7%, but free cash flow down close to 40%. Does that make sense, given the fact that you're not going to have the restructuring and severance cash expense that you had this year. Maybe working capital is not the tailwind in 2021 that it was in 2020, but if revenues are flat to down, it's hardly a huge consumer of cash in your margins, and so I'm just curious, how do we think how should we think about free cash flow for 2021 at this stage. Your capital intensity, 5% to 6%. It would seem that your free cash flow would be actually up year-over-year.

I agree with a lot of the commentary in the questions, meaning that, yes, working capital will be less of a tailwind for our free cash flow next year, but that's replaced by healthier operating profit led by increased activity in the markets that you heard Jeff describe, also a full year benefit of the cost cutting activity that we've been through this year rippling through our operating margins. And so, it'll be much more of an operating-led free cash flow draw and in relationship to the capital intensity that we've talked about, as opposed to working capital unwind next year.

In the event that EBITDA is relatively flat, do you think – flat, flat to down, flat to up, do you think that free cash flow is in the vicinity of this year or higher next year? Look, I think it's a little early to call, Bill. But I think we've been pretty clear on what the levers are the drive it, and we'll be more prescriptive about it when we get into the course of next year.

Jeff, I'm just curious as to your perspective here with regard to the consolidation that we're seeing, first Noble goes to Chevron, WPX goes to Devon, Concho goes to Conoco. And these are basically at stock prices that are 20% to 30% of recent peak. And I'm just curious, in your discussions with your clients and your customers, is the sense that this is a fundamentally disrupted industry and that basically, with regard to the lower 48 market opportunity, it's been fundamentally redefined, and at this juncture, the best alternative is define a relatively safe piece of paper in the form of a consolidator. What are you hearing from your customers?

I think it's what you see when market efficiency start to come into play, in the sense that these larger operations allow for better application of D&A for all. There's just a lot of costs associated with operating all these different companies. And so, I suspect at some level there's the opportunity to better leverage and make more cash flow by bigger operators. I think the value you're seeing, obviously, the stock price is depressed, but nevertheless the outlook, the long-term outlook and the importance of that production is still very relevant. And so, in the discussions, I think that's more of what I hear, is around how to be more efficient. Obviously, this is one way to be more efficient.

Our next question comes from Chase Mulvehill with Bank of America.

I guess the first question I wanted to ask is about C&P guide. Lance, I think you guided up revenues 10% on a sequential basis. I guess, one, can you tell us how much benefit is coming from kind of year-end completion tool sales? And then number two, I would expect that margins would have been up given the strong sequential improvement in revenues. So, kind of help us connect the dots on why margins will be flat?

Well, I think, one, Chase, on your question about completion tools, I think we were clear even in the guidance language that completion tools will be more muted than they have been in recent fourth quarter just given the size of the market and level of activity. In terms of the guide, I think you have a lots of puts and takes. We have an improving North America structure. But we also have, again, the sort of the muted impact of completion tools that have traditionally led to accretive margins impact in the fourth quarter.

And if I can just talk more specifically about North America, I think Angie kind of asked about E&P CapEx. And obviously, it will be up from here. I don't think it was quite clear if you thought it would be up on a year-over-year basis. But maybe if we can just talk to kind of frac fleets and kind of where you think the active frac fleet count is today and when we'd get to that kind of 200 level that you guys talked about being kind of required to hold production flat. And then, any thoughts on when you think that rig activity will begin to meaningfully recover?

I think with the activity in Q1, and offset by Q2, I think, overall, 2021 will be slightly down from 2020 in terms of overall. But, again, that's sort of factoring out Q1 and Q2 offsetting. So, let's take the second half of this year and project that forward. I think it feels better from here and we see sequential recovery. I think it really comes down to where does production exit in 2021 will drive then how much activity in 2021. So, we can see a path to that in 2021 in terms of the 200 fleet sort of level. Again, it's going to depend on what is the appetite for producing barrels in North America inside of that time frame. I think from an overall – when I think about the frac fleet, I also think about the health of the frac fleet for all of the market. And I think the pace of attrition is going to weigh on that, which means it could create more tightness sooner, even if we were somewhat below that.

And then, what about rig activity, when do you think that starts to pick up meaningfully?

Look, I think that follows the frac activity. So, I would expect we would see rig activity picking up middle of next year, probably middle of 2021 just because that sort of will follow probably the most frac intensity.

Our next question comes from Sean Meakim with JP Morgan.

So, Jeff, thinking about normalized margins, you reset the cost base this year. You've indicated you think both segments can generate normalized margins in the mid-teens in the next cycle. So, in 2015 through 2019, normalized margins were maybe 10%, 11%. But you're able to get to that mid-teens level in 2008 to 2014. So, it would be great if you could walk through the building blocks to those normalized expectations, particularly in D&E which I think seems to be a little more of a heavier lift from here.

I always talked about a lot of what we're doing in D&E in terms of our iCruise cruise technology, what we've done around other service lines in that business, whether it be wireline and even testing. And so, I think that the building blocks are around, A, getting that technology footprint implemented, which we're doing. I've described sort of the uptake that we've seen in that even in the current market. So then, sort of the next step from that is getting any amount of improved activity, which I believe we will see. And then, in the international markets, the capital over supply is much less. In fact, capital was getting tight in Q1 of this year, and it remains tight. And so, I don't think it's – in fact, I think it's quite realistic to expect to see some pricing improvement, which is another key component of how we step those margins up.

And that dovetails into – can you talk a little bit more about the international cycle? So, some of your IOC customers are committing to divert capital away from upstream oil and gas. Your independent customers are being forced by financial markets to commit more cash flow to their balance sheets. Seems like the next international cycle is going to be shorter cycle and more NOC focused. Is that fair, that long cycle maybe falls more out of favor in terms of mix of spend? And just how you think Halliburton is positioned for that type of environment.

Well, look, I think we're very well positioned for that kind of environment. A, we're in all of the right locations, we've got relationships with all of the customers you're describing. I think that what we're doing with project management and our investment in lift and chemicals, and those sort of things all play to that type of market even more so. And so, I think that's a place where we've been very successful in the past, and I think that that will ultimately be even a more stable market. I think oil and gas is so important on so many dimensions that I believe that we'll see more investment, even by NOCs as we move forward into certain of these geographies anyway. But from a positioning perspective in the international markets, really like where we are and really like our technology footprint, and particularly for the kind of outlook you describe that informs our strategy actually, key elements of our five strategic pillars.

Our next question comes from Scott Gruber with Citigroup.

Jeff, a couple of times in the call you highlighted your improving position abroad. Obviously, a number of interesting initiatives there and some good momentum. As we look out into 2021, if we think about things on an exit to exit basis, when the market is hopefully starting to grow again, not asking for your market growth outlook, but how much of a delta do you think you'll be able to deliver versus whatever the underlying market delivers next year, just given your initiatives?

Look, I think if that's a top line question, I think we've had a history of outgrowing the market over the last several years, so we know how to grow. We're very much focused on driving profitable growth out of that market. And again, that's precisely what our strategy is intended to do. So, I'm certainly comfortable with our ability to outperform the market and from a growth perspective. Equally comfortable with our ability to drive profitable growth. But I think what you'll see us doing is driving those things that drive a capital efficiency. So, whether it's iCruise or it's digital or it's elements of our business that allow us to make more free cash flow out of that growth going forward. Again, like I said, very excited about how that all shapes up and what the team is working on.

And then, a question on Hal Labs, a very interesting initiative. You highlighted several areas of additional expertise we have exposure to, energy transition theme, and where you have some ability to generate revenues. But as we step back and kind of look at the overall revenue opportunity for both you and peers, it seems somewhat small over the next 5 or 10 years with without a material investment and potentially opening some new revenue channels, how do you think about that potential balance? How do you think about allocating R&D dollars and CapEx dollars and potentially some M&A dollars to the transition theme while also trying to deliver better returns next cycle? And how do you think about when it's potentially time to ramp those investments up a little more aggressively?

Yeah, I'm going to be really clear. We're an oilfield services company. And we believe the world needs a lot of oil and gas for a very long time. And really, to the extent capital is shifted away by certain customers, more capital will be invested by others. But with that as a backdrop, clearly, Halliburton Labs is exciting for us. Let's be really clear how we're doing that. We are, in effect, exchanging our expertise and access to our labs and business network for an equity investment in early stage companies. So, our intent is not to invest capital dollars into that process today beyond what little support – in fact, not capital dollars. They're engaging in our – in effect, taking advantage of invested capital that we already have that we know we can take better advantage of doing this. So, we'll have a front row seat in this space. We'll watch it closely. We have a lot of skills that are applicable to helping companies be successful in this space, and we'll learn a whole lot about this over time. But I want to be clear, oilfield services is where we're spending our capital today.

Our next question comes from Kurt Hallead with RBC.

I do want to actually extend the conversation a little bit more on that last topic, Jeff. I think as is painfully aware for everybody on this call, investors are definitely shifting their focus, at least in the very near term, toward more the renewable dynamic and clean energy dynamics. And it's good to see that you're going to have that front row seat through Halliburton Innovation Labs. I think we've also seen a number of the major oil companies that are customers of yours start to pivot their budget, some more so than others, like BP, for example, into more the renewable space. And then, I heard you quite clearly that you're an oil services company, and that's kind of where your capital is going to go. But I'm kind of interested on kind of delving beyond those dynamics and getting into how you may be looking longer term through this process. Do you think the shift on renewable energy is just going to fizzle out, like it has been prior cycles, or do you actually see Halliburton playing a meaningful role in that dynamic and having it be a meaningful piece of the business and maybe having a third business line with Completion and Production and Drilling and Evaluation as part of the Halliburton portfolio in the future?

I think that there will be the different forms of energy, renewable energy, alternative energy, they will all compete for space. And I believe oil and gas is very affordable and very effective. And it will be for a very long time. But that's not to say there won't be competitors in the space. Nuclear has been in the space a long time. And so, what I think from a Halliburton Labs perspective, it's looking at the disruption that happens, of which there will be much. But oil and gas remains very competitive in that kind of environment. So, I won't try to call, does it fizzle, does it make it. What it will have to do over the long term is compete and feel very good about oil and gas as a competitor.

And my follow-up then is just along the lines of more the traditional business dynamics. So, you guys referenced a tighter market for both North America and International going forward, the prospect to get margin improvement on the heels of higher activity, even without pricing. So, I was just wondering if you could help us frame that dynamic. In the context of prior cycles, you typically would get maybe incremental margins anywhere around 35% to maybe 50% with pricing power. Without the pricing power, with the cost savings and higher activity, how are you guys thinking about the prospect for incremental margins as we as we move off the second half of 2020 and go into 2021?

Kurt, this is Lance. Look, I think everything that we've done around sort of the structural cost cutting exercise that we've been through this year in major form will also continue on the edges as we move forward. But it was all built to reset our cost structure in order to drive better incrementals going forward. Now, look, clearly, activity helps on a lower fixed cost base. You'll see improvement, so I expect that just activity alone will help bolster or incrementals. But, clearly, if you add pricing on top of that, they are supercharged. I think a lot of what this management team on is looking to deliver outside incrementals even in this market in a recovery versus a historical.

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, Shannon. Before we wrap up today's call, I would like to leave you with a few closing comments. Our third quarter performance demonstrates tangible results of Halliburton's execution from our five strategic priorities and the early impact of our earnings power reset. Our strong international business is already delivering returns and margin expansion and I expect it will continue in the next up cycle. Our leaner North America strategy will enable us to both navigate through the current market conditions and be more profitable as the market recovers. Finally, our strategic actions boost our earnings power reset and free cash flow generation today and as we power into and win the eventual recovery. I look forward to speaking with you again next quarter. Shannon, please close out the call.

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