Ladies and gentlemen, thank you for standing by and welcome to Halliburton’s Fourth Quarter 2021 Earnings Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to David Coleman, Head of Investor Relations. Please go ahead, sir.

Good morning. And welcome to the Halliburton fourth quarter 2021 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, 2020, Form 10-Q for the quarter ended September 30, 2021, 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 statement for any reason. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our fourth quarter earnings release or in the Quarterly Results & Presentations 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, David, and good morning, everyone. 2021 finished strong for Halliburton, and I’m excited about the accelerating upcycle as we enter 2022. We have an effective value proposition and benefit from increasing activity both in North America and international markets. At the same time, we see improving service pricing in both markets. Throughout this upcycle I expect Halliburton to grow profitably, accelerate free cash flow generation, strengthen our balance sheet, and increase cash returns to shareholders. But first, I want to take a minute and recognize the men and women of Halliburton for their execution on every dimension of our business: safety, service quality, and financial results. In spite of global complexity in 2021, you outperformed. So, to all of our employees, thank you. I believe 2022 will be a strong year for our industry and especially for Halliburton. While global energy demand and economic growth demonstrated resilience, global energy supply has shown its fragility. The impact of several years of underinvestment in new production is now apparent and the structural requirement to invest around the wellbore is crystal clear. We see increasing customer urgency and a pivot back to what creates value for Halliburton. Our customers demand reliable execution, dependable supply chains, effective technology, and a collaborative service provider to maximize asset value. And this is at the core of Halliburton’s unique value proposition. But first, I’ll highlight some of our 2021 accomplishments. We finished the year with total Company revenue of $15.3 billion, and operating income of $1.8 billion. Both of Halliburton’s divisions grew revenue and margins this year. Our Completion and Production division finished the year with 15% operating margin, driven by activity improvement, despite inflationary pressures. We expect to build on this margin growth in 2022, as global activity and pricing improve. Our Drilling and…

Thank you, Jeff, and good morning, everyone. Let me begin with a summary of our fourth quarter results compared to the third quarter of 2021. Total company revenue for the quarter was $4.3 billion, an increase of 11%. Operating income was $550 million, a 20% increase compared to the adjusted operating income of $458. These results were primarily driven by increased global drilling activity and end-of-year product and software sales. Now, let me discuss our division results in a little more detail. Starting with our Completion and Production division. Revenue was $2.4 billion, an increase of 10%, while operating income was $347 million or an 8% increase. These results were primarily driven by higher completion tool sales globally as well as increased pressure pumping services in North America land and the Middle East/Asia region. These improvements were partially offset by reduced stimulation activity in Latin America, Canada and the Gulf of Mexico; lower pipeline services in Europe/Africa/CIS and Asia; reduced well intervention services in Brazil; and decreased artificial lift activity in North America land. In our Drilling and Evaluation division, revenue was $1.9 billion, an increase of 11%, while operating income was $269 million or a 45% increase. These results were due to increased drilling-related services globally, wireline sales in Guyana, improved project management activity in Ecuador and India, increased wireline activity in the Middle East/Asia region, and higher software sales in Latin America and Middle East/Asia. Partially offsetting these increases were decreased project management activity and testing services in Mexico as well as lower drilling-related activity in Russia. Moving on to our geographic results. In North America, revenue increased 10%. This increase was primarily driven by higher pressure pumping activity and drilling-related services in North America land in addition to higher completion tool sales and fluid services in the…

Thanks, Lance. To summarize our discussion today, we see customer urgency and demand for our services increasing internationally and in North America. We expect our strong international business to continue its profitable growth as activity ramps up throughout the year. In the critical North America market, we expect our business to grow and improve margins. We prioritize our investments to the highest-return opportunities and remain committed to capital efficiency. We continue to play a role in advancing cleaner and more affordable energy solutions. In 2022, I expect Halliburton to deliver margin expansion, industry-leading returns and solid free cash flow. And now, let’s open it up for questions.

Thank you. [Operator Instructions] Our first question comes from James West, Evercore ISI.

So, Jeff, maybe just to kick us off here, could you talk a bit about the cadence of this cycle? You mentioned several times growth and you also mentioned a key word, which is urgency from customers. And I think that’s going to be something that’s very important when we think about pricing, margins, et cetera. Could you talk about how you see both, North America and the international markets and the cadence of the increases in activity, growth and how you and the broader industry, but you particularly, are expecting things to unfold here as we go through ‘22 and into ‘23 and beyond?

Yes. Well, thanks, James. Look, I really like the macro setup, and I have said that before. And what we really see is the fragility, as I described it, of supply and the returning demand. And so, I think, there are factors that the underinvestment internationally means that has to be recovered over a longer period of time. And I think a lot of the return expectations of this industry in North America are still in place and such that is a bit of a cap on production growth. But nevertheless, the activity, that just means a longer upcycle in my view. And I feel really good about the cadence, meaning it continues to move up this year, next year and beyond. And the way that sets up for us is we got -- we have an opportunity to take advantage of the operating leverage that’s already in our business. The pricing environment will be good throughout that period as equipment gets tighter everywhere and our technology is more valuable to customers in this kind of environment. And yes, activity, I believe, does ramp, and it’s going to be the kind of short-cycle barrels that drive the most activity for us because this is urgently trying to return barrels to market under those sort of constraints, very good for us. And so, as we look out to 2023, I’ll just start there, look out to 2023, I don’t see 2023 as an endpoint by any means. I think the road goes on well beyond that. But I can tell you what we’ve talked about for 2023 is biased higher.

Right. Okay, okay. Makes sense to me. And that’s clearly in line with our expectations. How are -- Jeff and Lance, the dividend increase -- solid dividend increase, how do you think about and how are you guys thinking about shareholder returns going forward as we kind of move into -- well, we’re into, but I guess is being accelerated into this upcycle?

Yes. Look, thanks, James. I’ll take that. Look, those were important actions that we took to date. And we expect to continue, continue finding opportunities to return more cash to shareholders and pay down debt. And as we pay down debt, that creates headroom in our fixed payments as we pay down debt. And think about it, we’ve repaid $1.8 billion of debt since January of 2020. And we get through ‘23 and ‘25, as debt is paid. The next maturity is not until 2030. And so we fully -- I fully expect to continue growing shareholder distributions as the upcycle accelerates.

Our next question comes from Dave Anderson with Barclays.

I just want to ask about C&P margins during the quarter and then thinking about the progression for next year. Highlighted completion tool sales end, but margins kind of slipped a bit during the quarter. And then, Jeff, in your prepared remarks, you had talked about completion tool orders have doubled since last year. So, I’m just trying to understand what all that means in terms of the mix. Obviously, we have the kind of the pressure pumping price in there. If you could just kind of help us understand how that margin should kind of move.

Well, look, yes, I mean, as we look at 2021, for example, 15% margins, I’m pleased with those. We got a lot of important work done in our frac business in Q4, which I talked about in my comments, but getting fluid ends installed and then raising prices involves moving equipment around. And so, we probably had 10% of our fleet moving as we raised price and got moved to different customers that were happy with the new price. And so that’s Q4. As we look at the order book doubling in completion tools, that’s really a look ahead to 2022, and that’s very positive for 2022 to see those types of longer lead items building in our order book. I think when we think about progression in 2022, I expect to see 30% incrementals in our frac business in North America in 2022 in first quarter, but what that -- mixed in with that are the completion tools that don’t repeat in Q1. But the reality is we are filling a big hole largely with recurring pricing and the kind of sticky things that we plan to build on. And we still get the 2022 doubling of the order book at some point during the year of 2022 in completion tools. I hope that’s some clarity.

That is. That’s great, Jeff. And if I could just shift -- well, I guess, somewhat related question. I want to ask about kind of further e-frac deployment and kind of how you see that developing over the next several years. It’s pretty clear that E&Ps are increasingly looking to reduce emissions. They’re going to need to reduce emissions. E-frac is clearly part of that solution. But of course, it costs more with the power source. I think you’re at like 5 or 6 fleets today. Maybe you could just update us where you are there. But I’m just kind of wondering kind of thinking out the next 12, 18 months, is it possible you could kind of double that deployment? But I guess even more important, do you think E&Ps are willing to underwrite this with longer-term contracts?

Let me unpack that a little bit. Just from an e-fleet deployment standpoint, we view e-fleet as replacements for our current equipment. So, the pacing of that is consistent with how we think about sort of fleet management over time. And obviously, that is contingent upon getting the terms and conditions and pricing that are clearly returning above what anything else is returning, and that’s what motivates us there. All of that lives inside of our CapEx outlook of 5% to 6% of revenue. So, I just want to keep all of that sort of in the right frame. We think about power, however, that is a unique piece of this puzzle. And what I expect happens with electric broadly is, yes, it grows, our share will grow of that. I think we’ve got fantastic equipment in the market working today. But the power piece, we’re power-agnostic. And if you recall, over time, I’ve always said, the issue here was the power, who owns the power. And I think we’ve partnered with a very good firm, successful firm that has modular power such that over time, as operators can optimize power sources, meaning the grid, our partner has the ability to scale that back and sort of optimize along with clients. And so, I think that’s the sort of unique power component that we solve for with both the grid.

Our next question comes from Neil Mehta with Goldman Sachs.

Jeff, I wanted to start on the 400 basis-point margin increase target for 2023. As you look at that, what do you think represents the biggest risk to achieving it? And how do you feel about upside scenarios, and what factors could drive that?

Yes. Look, thanks, Neil. I’m excited and encouraged about what I see, more so today than I was before, which was all the -- it’s basically the simultaneous growth, North America and international and the -- effectively, the demand for equipment that we see, which now allows both activity and price to move at the same time. So I don’t -- from a risk perspective, look, I think that we’re in a good place to manage those risks that might be out there, whether it’s a range of things. But all of those things appear to be manageable, particularly given how important producing oil clearly is to really our way of life, but also the markets see that. And so, I think that demand for activity will be there. Clearly, that’s going to be biased higher at this point as we look out to 2023. And I think we’re in a great position to take advantage of all of those things that happen, whether it’s price and tightness, it’s our technology. There’s more demand for our technology in this kind of environment because it is our technology that -- drilling technology, for example, that help operators find more barrels nearby the wellbore, helps them do a lot of things that are important to them to accelerate their own production at an effective price.

And there’s been a lot of questions about where we are in terms of frac fleet utilization. I’d love your perspective on that. How do you see this market as tight and if you’d be willing to put a number on utilization? And how should we think about net service pricing in U.S. fracs for the back half of ‘22 and into ‘23, especially as you get some of these new built low-emission frac fleets starting to enter the market once again?

Well, we see it as close to 90% utilized as a market for equipment that’s existing today. And so, it doesn’t take much increase in activity to continue to tighten that, and I see that tightening more so in the back half of next year. The electric equipment as it comes into the market, a testament to our R&D organization, but we were able to bring that technology to market very quickly. It’s best in class, and that’s one of the reasons it’s going to work. And that team along with partners solve for sort of the power dilemma. And so, I think we’re in a great place to bring equipment to market. But clearly, that is new capital into the market, which requires higher returns than what we certainly have seen. And so, I think a cap on that’s going to be the requirement for higher returns. I think capital is -- capital for building equipment, clearly in short supply and particularly because there’s a lot of repair to come for returns in North America. So, a lot of that informs our strategy of maximizing value in North America means we approach it differently. It’s not can we grow -- build the most equipment? Can we maximize the most cash flow out of that market? And we think electric fleets positioned the right way help us do that.

Our next question comes from Arun Jayaram with JP Morgan.

My first question is you guys have repositioned assets, frac fleets to improve utilization returns. And I just wanted to ask is absent pricing gains, what kind of tailwinds do you think that these types of actions could provide to margins as well as we think about adoption of SmartFleet and other Hal 4.0 offerings?

Well, we move equipment to raise margins. And I expect that we will see that kind of margin improvement into 2022. You mentioned SmartFleet. I think that’s a key component of what makes Halliburton unique in the fracs business in North America, and it’s one of the unique things of being -- of our large peers, we’re the only one in the frac business in North America, and that allows our technology budget is meaningful. And I think over time, applied consistently R&D investment has always been what moves this industry both from a productivity standpoint and a return standpoint for us. And so SmartFleet being but an example of what that R&D at scale looks like when it’s applied to North America. And so, yes, I think that does contribute to margins as does electric fleets as the many other sort of technology solutions that we’re working on all of the time.

Fair enough. And my second question is, you guys mentioned in your prepared remarks about what’s going on with DUCs. DUCs have been down for 18 months in a row, and you’re starting to see the mix of drilling increase over time. I know that DUCs have been a tailwind for operators and led to, call it, lower frac needs in last year and the year before. And I know it’s difficult to measure, but I just wanted to know if you could maybe measure or quantify what kind of tailwind do you think this could provide the frac demand if the current fleet count’s around 235 or so?

Well, you’re thinking about it the right way. And I expect that it does increase demand just because there’s going to be more disruption in the system, meaning fleets will have to follow rigs. That will then create demand for more fleet. Yes, if we’re at 90%, clearly, we sort of run to the end of that quite quickly and expect the entire market needs to get better from a price standpoint. And I expect that we will see that as it gets -- we’re seeing it now. I think that is a dynamic that will continue certainly throughout the balance of this year.

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

So Lance, I guess, maybe this question’s for you, just thinking about the 1Q guide. I guess, I can kind of connect the dots with the C&P margins being flat because you’ve got completion tool sales kind of rolling off and obviously frac getting better. But thinking about the D&E side, resilient margins as we get into 1Q, and typically, you have software sales in the fourth quarter. So, just maybe help us kind of connect the dots here between 4Q and 1Q with kind of flat to down 50 bps on the D&E side because typically, you see some seasonality in the Eastern Hemisphere and you have software sales that will be rolling off. So, do you have some -- maybe some software sales that kind of linger into first quarter? Or just kind of help us understand the resiliency of margins in the first quarter.

We do, Chase. It’s a good question. We do. So, in our software business, the way that we recognize revenue is sort of spread now between the fourth quarter and the first quarter. So, we still have some resiliency from the software sales. But I wouldn’t discount what we’re doing on the drilling side. You heard Jeff talk about it in his prepared remarks. We’re really excited about what that means for our business. I mean, clearly, we have the weather-driven seasonality that will continue, and that’s always something that exists during the real hard winter months in places like the North Sea and Russia, in particular. But I really think that we’re excited about what the drilling business and the change that we’re making and the impact that’s coming from sort of that investment that we made in rekitting Sperry, for example, is really beginning to pay off.

Okay, perfect. And then, a follow-up, obviously, you said multiple times here, 90% utilization of frac. But there is some cold-stacked equipment that may or may not come off the sidelines. Obviously, it depends on pricing. I guess maybe could you give us some comments -- or your comments around cold-stacked equipment? How much pricing would have to move for people to spend $10-plus-million because you probably converted some of those from Tier 2 to Tier 4 DGB? So just how much would pricing have to move for the industry to start kind of reactivating and spending more on cold-stacked reactivations?

Look, I think prices would have to move a long way. And some of the conversion you’re talking about, that’s dramatic. That’s open heart surgery. Getting from Tier 2 to Tier 4 is not something that happened simply. And it’s really going against the direction the entire market’s going, which is towards environmentally friendly equipment. So, things that come off the bench aren’t going to be in that category for sure. And I think the cost of getting things off the bench for what’s there is going to be a lot higher than people think, and so I think that’s a barrier to that coming back. A lot of that equipment was consumed in the last cycle as spare parts and all of the rest of that. So, I think we underestimate -- excuse me, I think there’s a lot less of that and its cost is much higher.

Our next question comes from Scott Gruber with Citigroup.

I want to come back to the shareholder return question. Jeff, you commented on further actions to come down the road, which is great to hear. But just given the inherent volatility in the market, is the next move likely to be a buyback or a variable dividend? And then, we’ve also seen many of your E&P customers commit to returning a certain percentage of cash flow or free cash flow. Is that something Halliburton would consider, especially in the context of a multiyear upcycle?

Sure, Scott. This is Lance. Look, we think about it very similar to sort of the line of question you’re going down. I mean, look, today, I think this is a first step in a long line of other things that we expect to do to really accelerate cash returns to shareholders. It will come in the form of both increasing the dividend over time but doing it responsibly. And with any excess free cash flow that we would like to dedicate, we may reinstitute share repurchases. So, I think it will be a balance. We’ll see what it’s like when it gets there, not big band of a variable dividend today. Feel like we have the right things in place, and our communications to The Street are pretty clear around how we’re managing this business and prioritizing free cash flow. And we’ll be really good stewards about how we send it back to shareholders.

Got it. I also want to come back to Dave’s question on e-frac and ask a little bit broader question. We got the CapEx figure for the year, and you’re keeping CapEx below the 6% level. But there’s been this kind of outstanding question for Halliburton. As the frac market recovers, do your CapEx need to surprise and you have to go above that level? So, I guess the real question is, are you happy with the cadence of fleet renewal within the frac fleet? Are you able to kind of keep up your competitiveness with the pace of spend embedded in the budget this year? And just kind of as you think about over the medium term, do you think you can keep up your competitiveness with this -- with the cadence of renewal in the frac fleet that’s built into that 6% -- sub-6% reinvestment level?

Yes. Yes, we do, is the answer. We believe we thrive in this type of environment and managing or maintaining CapEx where it is. Look, it’s a 5% to 6% of revenues. In my view, this very much show me story and we expect to deliver returns. And we do things ratably. And strategically, we view North America as maximizing value in North America. That means managing the right level of spend, the right type of technology, the right pacing of equipment. Clearly, the right pricing for equipment and making the right cash flow from that equipment. And so, the target is -- we are very consistent around our strategy, and that strategy is actually quite exciting for us to pursue a strategy that delivers the most free cash flow and grows and improves margin. So, I view this as a margin cycle, not a build cycle. And like I said, our team is excited about pursuing that, delivering on that. And that’s why very comfortable with sort of that balance of the right level of investment, while we invest in D&E and international businesses at the same time. I mean, all of that fits together into how do we deliver and our plan to deliver accelerating free cash flow.

Next question comes from Connor Lynagh with Morgan Stanley.

I wanted to return to the potential shareholder returns. And Lance, I wanted to just clarify a comment that you made in regards to excess free cash flow. I mean, how should we think about what that is? Is there a level of cash balance that you want to maintain in the business? Is there a sort of standard amount of delevering you want to occur over the next few years here? Basically, how would you define that for people?

Yes. Good question. I appreciate the follow-up. I think today, a minimum cash balance for us to run our business is around $2 billion, give or take. And so, we’re always sensitive a little bit to that or mindful of it. But I would say, I’ve been pretty clear about what we want to do in terms of strengthening the balance sheet. We need to be closer to 2 times debt to EBITDA. We spent a lot of time on this call, I know Jeff has, talking about the trajectory of the denominator in that equation. And we have work to do on the numerator. So, we expect to continue to find ways to attack gross debt. And I think starting with retiring the ‘23s and what’s left of the ‘25s post this redemption is a good target.

Got it. Maybe just switching gears a little bit here. Drilling and Evaluation margins, very strong, and it doesn’t seem like you’re expecting that much of a falloff. I appreciate the software accounting dynamics. But you’re still year-over-year looking at something 250 to 300 basis points above where you were in 2021. I guess, two parts to this. Is that a good bogey for how we should think about the rest of the year in Drilling and Evaluation? And just as we think structurally about the return of international and the like, how should we think about the potential profitability cycle-over-cycle? It certainly is trending a lot higher right now. So, I just want to make sure we understand the moving pieces there.

Well, it’s a great starting point, and we expect it to trend higher over time as we move through. So, this is the result of technology investment, an excellent drilling business, drilling technology, collaborative approach with our clients, our value proposition; and the other service lines that are in D&E, very strong service lines, drilling fluids, I won’t try to name them all here, but a very strong group of businesses. And I think what you’re seeing in the margin is a demonstration of the improvement in capital velocity that we saw from the new technology in Sperry; also the improved capabilities, whether it’s LWD or the ability to manage the data around that with the 3D inversion. So, there’s a whole series of things that we’ve been working on and actually have many more things left to deliver in that business during 2022. So, our expectations are that we’re starting at a higher point -- or we’re starting the year lower, but we are moving to a higher point. And I think we’ll see that sort of repeat. Great expectations for that business.

Our next question comes from Ian Macpherson with Piper Sandler.

Just sort of having to squint for concerning issues here as everything is set up pretty well for you here and executing well also. But just curious with escalating tensions in sabre rattling in Ukraine and given that Russia has been a pretty good growth market for the industry. Are you considering any risk with regard to sanctions impacting the trajectory of the business in Russia or Eastern Hemisphere on a knock-on basis at this point, or does this look like things that you’ve seen and done before?

Look, these are things we’ve seen and done before. Always unfortunate in so many ways for so many people. But from a business perspective, we’ve managed these sorts of things up and down for, I hate to say, nearly 100 years. So, these are the kinds of things that we would manage through.

Okay. Thanks, Jeff. Lance, just looking at our cash flow calculator for this year. You obviously had some good tailwinds in ‘21 with working capital release, which we know will reverse with cycle growth. And you also had probably better than sort of ratable disposal proceeds. So, when we think about 5% to 6%, you’ll be probably closer to 5% and 6% of gross CapEx this year. How are you thinking about the other pieces? Because I did hear something in the prepared remarks about containing working capital expansion with growth, so maybe not a monster number of working capital expansion this year.

Yes. Look, you’re right. Really happy with the way ‘21 free cash flow performed for us. And I think that we’ve talked about before how we’ve meaningfully, I believe, transformed the free cash flow profile of Halliburton and all the strategic priorities that we’ve sort of discussed are things that help drive us to that end. But you’re right. I think stronger free cash flow starts with stronger margins. And I think what you should expect for 2022 is to see that continued strength, operating cash flow less or excluding working capital to continue to drive higher, obviously. But I think that we’re running into a period of time in 2022 that the amount of growth that we expect in the business is just going to drive an investment in working capital as opposed to a release of cash. But, as I’ve always said, we are looking to put that investment back much more efficiently than when we took it out. And personally, that’s something that I’m committed to and working really hard with the organization to find those benefits.

And this concludes the question-and-answer session. I would now like to turn the call back over to Jeff Miller for closing remarks.

Thank you, Shannon. Look, I’ll just conclude that this upcycle is a great setup for Halliburton to achieve profitable growth and accelerated free cash flow generation. Today’s dividend increase and debt retirement announcements provide just two examples of what Halliburton expects to deliver throughout this multiyear upcycle. I look forward to speaking with you again next quarter. Shannon, let’s close out the call.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.