Good day, ladies and gentlemen, and welcome to the Halliburton Second Quarter 2014 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Kelly Youngblood. Sir, you may begin.
Good morning, and welcome to the Halliburton's Q2 2014 conference call. Today's call is being webcast and a replay will be available on Halliburton's website for 7 days. Joining me today are Dave Lazar, CEO Mark McCollum, CFO and Jeff Miller, COO. 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 ks for the year ended December 31, 2013, Form 10Q for the quarter ended March 31, 2014, recent current reports on Form 8 ks and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward looking statements for any reason. Now, I'll turn the call over to Dave. Dave?
Thank you, Kelly, and good morning, everyone. I am obviously very pleased with our 2nd quarter results. And here are the headlines. Record company revenue this quarter of $8,100,000,000 double digit sequential revenue growth and new quarterly records in both North America and Middle East Asia. We once again delivered industry leading revenue growth both sequentially and year over year compared to our primary peers.
We had strong cash flow from operations of $1,100,000,000 and our Board has approved an increase in our buyback authorization to $6,000,000,000 I am also pleased to announce the promotion of Jeff Miller to President and his appointment to Halliburton's Board effective August 1. I've known and worked with Jeff for 25 years and I'm absolutely confident he will do an excellent job leading our very strong management team. Now for some details around our performance this quarter. Company operating income increased 23% sequentially, led by a 31% increase in North America operating income with an impressive 280 basis point improvement in margins to 18.2%. The Eastern Hemisphere had an equally impressive 220 basis point margin improvement to 16%, resulting from a 26% growth in operating income.
Now on our last call, some of you may have been skeptical when I said I was beginning to feel the turn in North America. But based on our performance during the quarter, I believe this feeling was dead on target. Today, we are not feeling the turn, we are in the turn. And I feel even more excited than I was last quarter about the outlook for the North American market. Why is that?
During the quarter, we saw completion volumes continue to rise and I don't see that changing. Our logistics infrastructure is more of a differentiator than ever before. We were successful in getting cost recovery from our customers and we estimate the percentage of excess horsepower has dropped below the 10% mark and capacity has tightened to the point that the market will require new power to meet customer demand. As you know, based on the competitive advantage of our frac of the future, our plan has always been to upgrade our fleet to Q10s over time. These current trends provide us confidence that now is the appropriate time to accelerate our Q10 build schedule.
We anticipate incremental fleets arriving in the Q4 and throughout 2015. We've also been investing to increase our logistics capability as well. I am confident that these are the right moves. So even in the unlikely event the market softens, we always have the option of accelerating the retirement schedule of older equipment and replacing them with Q10s. Now moving to our international operations.
The Eastern Hemisphere activity continues to expand at the steady rate that we expected. But you know what, steady is exciting for us, because it demonstrates that our view of the market was the correct one and that we are sized and scoped correctly to turn industry leading revenue growth into steadily increasing margins. Our outlook for the full year remains intact. We are still targeting our Eastern Hemisphere revenue growth to be in the low double digits with average full year margins in the upper teens and approaching 20% by the end of the year. 2nd quarter margins of 16% show we are on track to deliver that.
Turning to Latin America. We faced issues around revenue timing during the quarter. Now it's easy for me to get my head around the issues and I can see a path forward to normalize profitability. But I'm certainly not thrilled with how some of the things played out this quarter. First, there was an issue with the late receipt of our software and consulting blanket order from Pemex, which impacted our ability to book revenue to offset our costs, which of course significantly hurt 2nd quarter results.
This should reverse itself in the second half of the year. 2nd, we were mobilizing for 2 large integrated projects, which resulted in cost, but minimal revenue for the quarter. This also should reverse itself in the second half of the year. Lastly, the rig count approached a 10 year low and social disruptions impacted operations, resulting in a reduced discrete service activity in Mexico. However, we remain encouraged by the prospect of energy reform in Mexico and believe that as the market gains more certainty around the direction of reform, future service activity will increase.
And in Brazil, we are pleased with our customers' decision to retender the deepwater drilling contract, which should allow us to right size our footprint there. So looking at the full year, we continue to target 2014 Latin America margins to be in line with the prior year at approximately 13%. Now let me be clear about one thing and I've been around long enough to know. Headwinds become tailwinds. Therefore, I am optimistic about our future growth potential in Latin America as we go into 2015.
So our overall strategy is working well and we intend to stay the course. Our leadership position in North America And we are continuing to realize significant revenue and margin expansion in our international business. We remain dead focused on to you. Now I'm going to turn the call over to Mark to provide financial details. Mark?
Thanks, Dave, and good morning. Let me begin with an overview of our 2nd quarter results. Starting with North America, revenues were up 11% sequentially relative to a 4% increase in the U. S. Land rig count, and operating income was up 31% over the same period.
Margins increased to 18.2%. Stronger activity levels in U. S. Land primarily drove the improvement for the quarter. Margins also benefited from modest pricing improvements on pressure pumping contract renewals, which were designed to cover inflation on specific cost categories such as transportation, fuel and labor.
These improvements were partially offset by the Canadian spring breakup and lower sequential profitability in the Gulf of Mexico due to the timing of completions activity. In the Eastern Hemisphere, revenue and operating income increased sequentially by 9% and 26%, respectively, as a result of growth in both the Middle East, Asia and Europe Africa CIS regions. We experienced a seasonal rebound 1st quarter weather related weakness in the North Sea, Russia and Australia. In our Middle East Asia region, revenue and operating income increased by 11 percent and 25%, respectively, compared to the Q1. Saudi Arabia showed strong sequential improvement driven by our consulting, directional drilling and drilling fluids product lines.
We're very excited about this market and continue to see revenue and profitability improving at a very aggressive rate. Additionally, we continue to see solid growth across the majority of our Asia countries, with Australia, Malaysia and China leading the pack for the quarter. The current situation in Iraq has resulted in some logistics bottlenecks and increased security measures, but our operations, which are in Southern Iraq and in Kurdistan, are away from the and are continuing. We continue to expect the Middle East region to have the highest growth rate for the full year 2014, despite the potential for activity disruptions in Iraq later this year. However, contract renewals and tenders for new work in Iraq are currently being pushed back, which may mute our growth expectations as we exit the year.
Turning to Europe Africa CIS. Revenue and operating income increased 6% 27%, respectively, compared to the prior quarter. The seasonal activity rebound in the North Sea and Russia led to sequential improvement. Additionally, Sub Saharan Africa showed sequential led by drilling activity gains in Angola and higher completions, intervention and pipeline processing services in Nigeria, Ghana and Congo. The Russia sanctions have not had a material impact on our activity levels up to this point, but there is some risk related to certain projects that are being tendered later this year.
Latin America revenue increased 4% sequentially, while operating income declined by 39%. Despite double digit revenue improvement this quarter in Venezuela, Argentina and Colombia, we were negatively impacted by project mobilization and the blanket order delays in Mexico, which Dave previously discussed. Our corporate and other expense totaled $107,000,000 for the quarter, a little higher than anticipated, driven by retirement cost and higher professional fees. We invested approximately $15,000,000 in our How Vantage strategic initiatives during the Q2. These activities should wrap up this next quarter.
We anticipate that corporate expenses for the Q3 will run approximately $90,000,000 to $100,000,000 Our effective tax rate for the 2nd quarter came in at approximately 28%. For the remainder of 2014, we're expecting the effective tax rate to be approximately 28% to 29%. Cash flow from operations during the 2nd quarter was $1,100,000,000 an increase of approximately 18% compared to the Q1. Excluding the $215,000,000 in acquisitions made this quarter, we generated approximately $356,000,000 in cash and marketable securities during the quarter. As we progress through 2014, we believe we are well positioned to generate significantly more cash and that our cash flow will continue to grow in coming years.
As a reminder, we're working to grow the percentage of cash available for distribution to shareholders to roughly 35% of our operating cash flows over the next few years, which is nearly double our historic average. As discussed, we intend to accelerate our Q10 build schedule and expand our logistics infrastructure. As a result, we now expect that our 2014 capital expenditures will be approximately $3,300,000,000 an increase of $300,000,000 compared to our previous guidance. We also expect depreciation and amortization to be approximately $2,100,000,000 during 20 14. Now moving to the Eastern Hemisphere outlook.
In the Q3, we're anticipating a mid single digit percentage improvement in revenue and we expect margins to migrate modestly higher into the upper teens. Revenue is expected to continue to step higher in the 4th quarter, which is seasonally our strongest quarter of the year with margins approaching 20%. We continue to expect full year revenue growth to be in the low double digits and margins averaging in the upper teens. In Latin America, we expect mid teens sequential revenue expansion in the 3rd quarter and believe margins should approach the mid teens with continued improvement in revenue and margins in the 4th quarter. As a result, we expect full year revenue and margins to be in line with 2013.
However, our second half outlook assumes the timely approval of our billings under the blanket order in Mexico as well as a swift resolution of the retender of our Brazil drilling contract. And concluding with North America, we're expecting revenue growth in the Q3 to outpace the rig count with North America margins approaching 20%. While we expect the rig count to continue to increase, utilization levels are very high and growth in the Q3 could be constrained by the availability of equipment until incremental fleets begin to arrive later in the year. Now I'll turn the call over to Jeff for an update on our strategy. Jeff?
Thanks, Mark, and good morning, everyone. Our strategies in deepwater, mature fields and unconventionals are clearly delivering results. These led not only to record company revenues, but also quarterly revenue records for our production enhancement, ferroids, cementing, wireline, production chemicals and artificial lift product lines. So for today's comments, I'll focus on our execution against these three strategies. Recall that our unconventional strategy is to deliver the lowest cost per barrel of oil equivalent through surface efficiency, custom chemistry and subsurface insight.
Let's start with surface efficiency. We're seeing record activity levels with year over year stage counts up more than 20% and proppant volumes per well up about 35 We also saw record sales of our drillable plugs for plug and perf operations as well as record installations of our RapidSweep sliding sleeve technology. All of these indicators point to larger volume jobs, which is precisely where the Q10 pump excels, consistently delivering 20% higher flow rates with about 50% lower maintenance cost than a legacy pump. And one last comment on North America surface efficiency regarding profit and infrastructure. While we see sufficient quantities of sand at the mines, the transportation infrastructure has and will continue to experience unprecedented levels of congestion.
And we see proppant competing for delivery not only with other proppant types, but also with oil and agricultural products. While we are not immune to this impact, we are confident that we have the best developed logistics infrastructure and we plan to continue adding to this capability throughout the year. Moving on to subsurface sight. We continue to gain traction with our Cipher platform that optimizes where to drill, how to drill, where to frac and how to frac to make better wells. Cipher applications continue to grow with over 50 projects underway across more than a dozen basins globally, which makes me even more excited about our recent release of Cipher 2.0 that refines our earth modeling capability, increases our simulation accuracy and allows real time adjustments during frac treatments.
And finally, our custom chemistry solutions are helping deliver better wells. Our AccessFrac diversion technology, clean breaking perm stem and our rock perm formation analysis have all demonstrated better production for our clients. For example, Access Frac has delivered on average 20% better performance than offset wells with market uptake tripling since last year. Rock perm was first introduced only 1 year ago as a means to enhance production through better hydrocarbon mobility and it's now used in more than 1 third of our North American completions. As we work across every basin, we get to see the different methods used in all of those basins.
And even as volume trends emerge, our new techniques gain popularity, we are more convinced than ever that customized frac design and customized fluid chemistry deliver better sustainable production for our clients. Now turning to the mature field space. We are pleased with the progress of our large IPM and asset management projects. During the quarter, we were either awarded or began mobilizing on large integrated projects in India, Kuwait, UAE and Indonesia. For example, our 93 well integrated project with Tern India is the 1st IPM project in India to employ Tier 1 land rigs.
These projects and others provide us with a strong platform for growth in addition to a pursuit pipeline of over 30,000,000,000 dollars in project managed opportunities that we're currently evaluating. During the quarter, we started on the multi decade JEMAPA incentivized asset management project in Mexico. Early workover operations have been successful and the production levels are already well ahead of schedule in the project. We expect to spud new wells in this asset during the second half of twenty fourteen running up to 2 rigs by the end of the year. Also in Mexico, we spud at our first well in the Mesozoic project in late June and expect our 2nd well to spud in late July.
Our Mesozoic project represents $1,000,000,000 opportunity over the next few years. We plan to mobilize additional rigs over the next several quarters, moving towards 4 rigs by early 2015. During the Q2, we expanded our artificial lift capabilities through the acquisition of Europump, an industry leader in progressive cavity pump systems. This acquisition is an important step forward in our artificial lift strategy, which complements our existing electric submersible pump technology and positions us to benefit from this growing market. Overall, we're very pleased with the progress of our mature field strategy.
The Europump acquisition expands our discrete service offerings, and we're confident in our ability to execute on these large integrated projects. Looking at deepwater, we continue to increase reliability and reduce uncertainty for our customers. As we introduce new technology, we are dramatically simplifying equipment design to increase the operability of the equipment. Examples include our full suite of high pressure open hole logging tools designed for the deepwater Gulf of Mexico and our new ultra deepwater subsea control system, -EH, which is integrated with VITO, Halliburton's premier 3 inches 15 ks subsea safety system that performs emergency well shut in and critical landing string disconnect in less than 15 seconds. Specific to the Gulf of Mexico, we continue to see incremental deepwater activity for the balance of the year and an increase in lower tertiary completions in early 2015.
In the Q3, we expect to begin operations on an integrated deepwater project for a major customer providing drilling and completion services across multiple wells. During the Q2, we also acquired Neftex Petroleum Consultants, a market leader in reducing uncertainty in basins the world over. Neftex has created a unique 4 d model of the subsurface already used by E and P companies worldwide to evaluate and identify resources more quickly and more accurately. We expect this acquisition will touch all three of our key strategies By integrating data and interpretations from the Neftech's Earth model with Landmark's decision space platform, we expect to be able to accelerate our customers' ability to explore prospects and increase our ability to predict drilling success. In closing, I want to be clear that our strategies are working.
We continue to see strong long term growth opportunities across unconventionals, deepwater and mature fields. In fact, I'd like to highlight the performance of our Eastern Hemisphere where we've seen revenue expand by more than 50% over the last 3 years with margins stair stepping higher year after year. It's been a consistent focus on our 3 key themes that has driven this success. In mature fields, we're now the leading service provider of primary customer in Norway, driven by our focus on both discrete and integrated solutions. In unconventionals, we're the leading provider of unconventional services in Australia and recently inked a joint venture to expand our footprint in China.
In deepwater, we have seen tremendous growth with all product lines, growing baroid fluids in Asia Pacific, creating a testing business almost from scratch and a completions business that is now number 1 globally. Looking ahead, with the projects we have in place and the technology we're putting to work, we are very optimistic about our growth prospects for the Eastern Hemisphere in the coming years. Before I hand the call back to Dave, one final note. It is truly a privilege to serve as President of Halliburton. I've been part of the management team for several years and I've been part of developing our current strategies.
So you should expect us to stay the course and remain dead focused on superior growth, margins and returns. I'd also like to take this opportunity to thank the Board and the over 80,000 Halliburton employees for their steadfast support. Now, I'll turn the call back over to Dave for his closing comments. Dave?
Thanks, Jeff. In North America, we are past feeling the turn. We are in the turn. And we will be accelerating our Q10 build in order to meet customer demand. In Latin America, we feel optimistic about improved second half, but are still monitoring few potential headwinds.
Regardless of that, 2015 is shaping up to be a strong year. In the Eastern Hemisphere, we are still on track for low double digit full year revenue growth with margins averaging in the upper teens. And finally, our strong outlook for the business provides us with confidence in providing increased shareholder returns going forward, as is evidenced by our increase in stock buyback authorization to a new total of $6,000,000,000 which represents approximately 10% of our market cap today. With that, let's open it up for questions.
Thank you, Our first question comes from Kurt Hallead of RBC Capital Markets. Your line is now open.
Great. Thank you. Good morning.
Hi, Kurt. Good morning.
Hey, good question for either Dave or Jeff. With respect to the re tendering Brazil, when do you think you might get the bids opened? And how do you expect to see that playing out going forward, I guess, in the context of you still expect to be awarded the same package that you were awarded before?
Yes. Thanks, Kurt. That rebid is in process right now. So the documents haven't been resubmitted. We still expect to see that conclude this year, expect early Q4.
With respect to competitive positioning, I'm not going to share that with you here. I expect it will be competitive. But in any case, expect to see a healthy reset as we look ahead into the 2015 and beyond.
Okay, great. My follow-up relates to the U. S. Frac business and the accelerated deployment of the Q10 pumps and I'm sure you're aware of increased equipment orders by other players in the market. Can you help us calibrate what this may mean as it relates to the potential for pricing?
You think it's going to be more of a volume driven market or you think there's an opportunity to get some price as time goes on?
Yes. Kurt, let me just kind of go through what we're seeing in the marketplace with respect to activity. We're seeing all the right signs. As capacity starts to tighten, which we've seen fall below sort of 10% spare capacity. We see activity increasing at breakneck rate.
We're seeing some pass through of cost increases at this point. And probably most importantly, we have clarity of our frac calendar through the end of the year. So all of those things give us a lot of confidence in adding our equipment because we see where that's going to go to work. I think from a if we think more broadly about the market, again, we believe in our equipment. It's doing exactly what we thought it would do, what we described at our Analyst Day.
So from a Halliburton perspective, very confident that the Q10 equipment is delivering.
All right. Thanks. Appreciate it.
Thank you. Our next question comes from Angie Sedita of UBS. Your line is now open. Angie, please check your mute button.
Thanks. Good morning, guys.
Hey, Angie.
So on the Q10 rollout, are is there any constraints in adding this
incremental equipment if you want to accelerate it even further?
And can you talk percentage wise what you were adding at the beginning of the year?
Yes. Thanks Angie. From a competitive standpoint, we're not going to share with you quantities of equipment and that sort of thing. But suffice to say that we have the ability that's one of the reasons we stay in the manufacturing business. It gives us the ability to flex more quickly and then put the equipment when and where we need it.
So there's no constraints in adding equipment at a more accelerated rate if you want to even up it from here? Or do you have any constraints in the system? And then to add to that, on the legacy equipment, is it fair to say that all retirements will stop at this time? Or are you still seeing some retirements of the older equipment?
Hey, Angie, this is Mark. Just so I oversee the capital side. Let me weigh in. We did during the Q2 stop the retirement of some of our equipment just because of the activity levels were so great. We were rolling Q10s out.
The ability to leave some of the older equipment out there allowed us to basically gain a spread or so to sort of address some of that activity. From a capital standpoint, we're building to contract. We're building to what we can see. There is the ability to dial it up further if the market accelerates further. But we think that this build schedule is aggressive enough to make sure that we're addressing the market as we see it that will be available for Halliburton over the next 18 months or so.
Okay. Helpful. And then as a follow-up, you mentioned it briefly in your remarks. On the cost recoveries, are you now seeing that in every instance? Or are there still some regions of pushback?
And I believe you signed a new agreement earlier this year that would actually reduce your sand cost and that you're also doubling your rail fleet as far as your ownership of the rail fleet, could both of these start to help margins in Q3? Or is it more Q4 2015?
Yes. Angie, to address the first part of the question, which is really what we're seeing across the entirety of North America, not all the same in terms of tightness nor is it the same in terms of cost. So the ability to get the cost pass throughs, we're able to do that where we see that kind of inflation. The second part of your question around logistics, truly a place where we have a lot of confidence in our ability and our supply chain organization has a great window into the market in terms of how to acquire the inputs. And as you suggested or as we've said in our comments, we'll continue to build the logistics capability that we have.
And so that will cross a number of different parts of that supply chain. Great.
Thanks. I'll turn it over.
Thank you. Our next question comes from Jim Crandall of Cowen. Your line is now open.
Thank you.
Just to follow-up on the pricing question, cost pass throughs are usually the first step and you went out of your way say that there's less than 10% excess capacity in the industry, which seemingly sets the stage for real pricing increases. And as we know, your prices are well below where they were at the peak of the last cycle. When do you see us do you see us? And if so, when do you see us coming going from more cost recovery to real price increase environment in domestic pressure pumping?
Yes. Jim, I can't I'm not going to give you a date or a time in that case. What I best I can do is describe the conditions precedent, which is what we're seeing. The recall oil cycles are a little different than gas cycles in terms of spikiness. So but we our build schedule and sort of our view into the market confidence around kind of what we see for the balance of this year and into 2015.
Okay. Do you see last cycle as I recall when you were building equipment, you would not add equipment unless you sold at least 4 other services along with the stimulation equipment. Do you have a similar strategy now this year? And will you be requiring your customers to order at least 3 or 4 product lines?
Jim, we see pull through on services consistently. I mean that's part of our value proposition in terms of how we go to work most efficiently. From a competitive standpoint, I'm not going to get into the requirement or where we are in that cycle, but we are confident that the package of services that we put to work really work well particularly as the market gets tighter and busier.
Okay. Thank you.
Thank you. Our next question comes from David Anderson of JPMorgan. Your line is now open.
Thank you. And I apologize if I ask a question, it might have been answered already. My line dropped off. But just a question in terms of the capacity of how it's going to tie you in the market. How much of this do you think is due to, you've seen some of these smaller guys that haven't had a lot of extra backup on wells and also we have a kind of refurbishment cycle, which I think is probably starting to kick in.
Is that playing a factor in terms of the market tightening up to kind of less than 10% of excess capacity now?
Well, volume matters a lot. And so our strategy has been to build equipment into the market that handles a lot of volume and handles the volume more efficiently than competing equipment in the market. So what we're seeing shape up in terms of tightness, which is a function of volume, size of jobs that we've described, plays right to us. I think that so anyway they give us a lot of confidence in the direction both the market's going and where we are.
So do you need less backup capacity on a given well than your competitors? Can you give us some sort of sense as to how much less that would be?
Clearly less. How much less that kind of depends on the size of the job and where it is and some of those things. But again our whole strategy was around putting equipment that is basically the lowest total cost of ownership and the ability to handle bigger jobs with less backup. And we're seeing that happen. That's why we're and we described a 20% better efficiency out of our equipment.
And we're
consistently seeing that
work that way.
Okay. A question for Mark on Q3
guidance, you guided to kind of close to 20% margins in North America in the 3rd quarter. Now, if I recall correctly, a if I recall correctly, a lot of that's all coming from the cost side. Is there more to go on the cost side to see margins picking up? And should we start thinking can we kind of start layering in? I know you're kind of holding off on kind of seeing the timing of pricing, but is that kind of next phase as we think about margin progression in North America?
Yes. I think in terms of cost it is. If we look back at sort of the margin progression Q1 to Q2, there was a little bit of cost. Some of that's cost of goods sold in commodities. As Angie highlighted earlier that we certainly were able to add some share.
But when you look back, I mean, our analysis, it is very much activity driven. Our units out there are working harder and there's a breakpoint that really adds to the margin. We just finished the rollout of the core components of our Battle Red program. It's now in field fully deployed. We're working through the change management of that process now.
As that stabilizes in the next couple of months, there's going to be additional cost savings that will be added to it. We're going to continue to work on supply chain and logistics. All I think across the space faced some logistics bottlenecks and issues in the early part of Q2 with moving sand where it needed to be. I will think as we continue to iron out logistics and add to our infrastructure there, we're going to be able to continue to drive additional savings. So at least we said all along, we believe that we could get to close to 20% without the benefit of pricing.
And that is still the internal goal and we're driving hard to that. And we think that the results of Q2 were a strong step toward
that goal.
Thank you. Our next question comes from Brad Handler of Jefferies. Your line is now open.
Thanks. I guess I'll stay in the Western Hemisphere too. But first in Latin America, have you received the blanket order from Mexico for consulting and project management? I wasn't quite clear from the comments thus far.
Brad, the answer is yes. We did get the blanket order, but we didn't get it in time to be able to book any revenues in Q2. And so now that we have the blanket order in hand, the process now is submitting billings that ultimately need to be approved
by Pemex management that ultimately can
translate into revenue. So I mean, offsetting that even on an unbilled basis. So that we're going to have to book offsetting that even on an unbilled basis. So that we've got it now on hand and that's why we feel fairly those
of those of your bills.
That's right. I mean, clearly it's still customer dependent. We're subject to their timing. And if they approve those bills on an expeditious manner, then we get to book the revenues and have the margin uplift associated with it.
Okay. Makes sense. And then and if I can come back to the U. S. Too, I guess, we're all sort of bouncing around some different questions here.
But have you experienced in your view, do you think you've experienced some taking away of work from somebody else because of your distribution capabilities? Have others already struggled whether it's getting enough sand in place or some other facet of logistics? But do you think you've already taken share because of constraints of others?
We do that all the time Brad. This is we rely on our infrastructure. We're very proud of the logistics capability that we have and we really put it to work in the second quarter.
Fair enough. All right. That's fine. Thank you very much. That makes sense.
Thanks.
Thank you. Our next question comes from Bill Herbert of Simmons and Company. Your line is now open.
Thank you. Good morning. Back to Latin America. Mark, high confidence level with regard to your Latin America second half guidance and your rationale for that with regard to the invoicing of the software order makes sense. You also had a statement however in the press release that we believe our full year Latin American margin should improve sufficiently to be in line with 13 assuming approval of the billings under the blanket order in Mexico as well as a swift resolution of a swift resolution of the retender in the Brazil drilling contract.
It doesn't sound like given your commentary that in fact your Latin American targets for the second half of the year are all that contingent on the resolution of the retender, correct?
No. They are contingent on that as well. I mean, the both issues are there. The Mexico lack the inability to bill on the blanket order and of course the mobilization cost that we incurred were the larger issues of why the margins were off of Q1. So I think that relative to guidance that we gave at the end of Q1, the blanket order was the culprit that really hurt us in terms of being below what we thought the Latin American business was going to look like in Q2.
So as we go to Q3, getting that back certainly helps us. The Brazil retender, obviously, we're subject to our customers' calendar as well on that front. They have a fairly aggressive schedule. And so far they've been executing against that schedule. We're hopeful that we can get some relief under that contract and again And again right now I can't see that, but assuming that that happened it could have a marginal impact on us later in the year in the Q4.
But the vast majority of the margin bridge for the second half of the year is the combination of the blanket order in Mexico coupled with object inception in Mexico as well?
That's exactly right.
Okay, great. And then secondly, this is probably a dead question, but maybe not. With regard to or Russia, you made some comments here that there are some project tenders in the latter part of the year, which now which could be delayed based upon the possibility of sanctions or just the turmoil that's underway in the region. Could you elaborate on that and what that means?
And then
moreover, if you could remind us kind of what percentage of your revenues are actually derived from Russia these days? Thank you.
Yes. Thanks, Bill. The Russia business for us has been a growing business. And I think the commentary that you're describing is more around our outlook if sanctions were to be increased or become more so. You've currently or at least till now the sanctions themselves have had a minimal impact on the business.
But as we as tensions potentially escalate and the risk of more sanctions sort of looms, that's what we believe puts some risk into the business in the back half of the year.
I think on your sizing question Bill, this is Mark. I don't want to give any kind of specifics, but really I mean the Russia business is a low single digits percentage of our total revenue company revenue, low single digits.
Thank you. Our next question comes from Jeff Tillery of Tudor, Pickering, Holt. Your line is now open.
Hi, good morning. You mentioned several numbers just around completion size and intensity and the leading edge is still even a kind of a leap ahead of what you're seeing year to date. What are the answers for the industry just in terms of preparedness? Is that just greater local storage? And do you see infrastructure as a limiter in terms of the E and P industry actually being able to transition completions to where they want to go over the next 12 months?
Yes. Thanks. I mean, we're seeing, as you described, record levels of congestion. Rather than speak for the industry itself, I'll speak for Halliburton. And so where we spend our time is focused on building out that logistics capability to have access to adequate supplies of both proppants and chemicals.
And it's there are many elements along that supply chain and we focus on each of them.
And we also maintain a broad base of suppliers on the sort
of the source maintain a broad base of suppliers on the source end of that business. So I think from our to location to location and then just as importantly have the equipment on location that can handle it and deliver jobs very effectively. And the
follow-up question I had is just around any sort of inflationary pressures you're seeing here in the U. S. Anything at this point where you're not able to recover your cost inflation from the customers, even if it's not matched perfectly in timing, but anything that you're stuck with?
Not at this point. We are able to we've got great visibility into the inflationary pressures. And because of that, I think we have the ability to respond to those quickly and get those in front of our customers.
Thank you, guys.
Thank you. Our next question comes from Jim Wicklund of Credit Suisse. Your line is now open.
Good morning, guys. Hey, Jim. I won't ask a pricing question because the antitrust, but I do want to drill down on something. Investors don't want anybody in the industry adding capacity. If anybody adds capacity, it slows down the pricing improvement.
So some people are going to see your acceleration of capacity adds as a negative. And I just want to ask, I would assume that these capacity additions won't reduce your margins and won't reduce your returns. Is that a fair statement?
That's a fair statement, Jim. I mean, we're building to contract and we're building to Fairway customers. I say Fairway players. So we've got a lot of confidence that our equipment goes to work in the market.
Okay. Okay. I appreciate that. That's going to probably be one of the hottest topics following the conference call is what that's going to be. And I would assume that the $300,000,000 increase in CapEx would be to a large extent that acceleration of hydraulic horsepower?
Yes, it is.
Okay. My follow-up if I could, Bill asked it and I'll kind of chime in, in the end. The two areas that we are worried about going forward are Iraq and Russia, but only if sanctions or violence continues. If memory serves, you guys only have about $100,000,000 in assets in Iraq. How material could that be in a year or 2 if things get worse than better?
Does that would that be enough to drive your earnings down in 2 years?
Jim, as we look at that market, I mean, it's a bit of an unknown over 2 years' time what that could mean. What we're seeing happen today are delays in getting contract approvals through the government and the extensions of contracts, I have to believe that that rights itself over a period as long as 2 years, because of the importance of hydrocarbons in that market and to the government etcetera. So as we look further down the road, I mean, I can see where this comes right as things settle out. If it were to continue to escalate, clearly, we've got other places we could move equipment and put it to work even in that very region. So I think we've got lots of options and just prefer not to exercise them.
Thanks for the clarification guys.
Thank you. Our next question comes from Doug Beka of Bank of America Merrill Lynch. Your line is now open.
Thanks. So back of this November Analyst Day kind of laid out the North American target that that's important in the second half of the year margins would be approaching 20%. Activity levels are better than expected at that point in time. The frac market is tighter. You're getting cost recovery.
Just what's the market dynamic that keeps from seeing margins above that 20% at that time, the target that was laid out at that time?
And Doug you're a tough customer. I think that ultimately the dynamic largely is the fact that there's inflation offsetting a lot of what we're doing too, right? You talked about activity. You talked about increased the ability to pass through. But we're constantly, as Jeff has alluded to, managing logistics challenges.
We're inflation across a number of cost categories. And so that really is ultimately is pushing against us. We're continuing to navigate through that very effectively. And as I indicated earlier, what we're seeing our largest margin improvement thus far has been on just the sheer efficiency of running our crews, really, really stretching out what we can do with these Q10 fleets and what our guys can do in the field every single day. It's differentiator for Halliburton that we see other people not being able to grab.
We're going to continue to push on that until such time as I would say the pricing logjam breaks.
And so maybe if I just summarize it, it's yes, you're getting cost recovery. It's just not instantaneous relative to the cost inflation that you're seeing.
Yes. It never is. Yes.
Okay. And then just a quick clarification. The less than 10% excess capacity in horsepower, is that before or after what I'd call just normal industry friction?
Not sure what you define as friction,
but Just crews moving in the yard, just something that there's always some amount of capacity that's not available even if it truly is in the market?
Our view is that it probably has some view of that right? The reason we believe it's fallen that low is in part sort of twofold. 1 is crew sizes have had to grow. It seems like 20% to 50% in some cases as the equipment is working harder. So you've got more equipment in the field per fleet.
And the second issue is because it's working so much harder there's more in the shop and in the base being worked on at any one point in time. And so the net what we're trying to do is sort of get a percentage calculation of what's available to work. And it appears to us that's what's available to work now is less than 10%.
Perfect. Thank you.
Thank you. Our next question comes from wakar Syed of Goldman Sachs. Your line is now open.
Thank you. My question relates to the share buyback program or the expansion that you announced. Mark, are you going to just do kind of a regular share buybacks on a monthly basis? Or there's a Dutch auction that you're considering as well as you've done in the past?
Waccard, there's no limitation as to how we can spend the money that the Board doesn't
feel like that's the appropriate way
to approach the now it doesn't feel like that's the appropriate way to approach the market. We just did one last year. It was debt financed and so our debt ratio is high. What I'm primarily focused on is thinking about how do we deploy excess cash either obviously, we have an opportunity here for reinvestment in the business that we've been discussing in North America. We have an opportunity along the way for additional M and A transactions similar to what we accomplished in Q2.
But to the extent that we're generating more cash flow than we thought we would and that certainly has been the case over the last couple of quarters and we believe will continue to be the case over the next few quarters, you'll see us be in the market doing ratable share purchases until such time as it makes sense collective sense financial sense to do something on a larger scale.
Okay. And then on Brazil, so retrending certainly a positive, but when do we when should we expect kind of activity to actually pick up? Is there something that could happen early in 2015 or late in What's your view on that?
Yes. Well, Carr, we don't see a lot of change in 2015. I mean this could be a 2016 event when see things pick back up there. There is opportunities for things to be done, but I think there's also a lot of sorting out to be done.
Okay. Great. Thank you very much.
Thank you. Our next question comes from Chuck Minervino of Susquehanna. Your line is now open.
Hi, good morning. Just wanted to go back also to the Analyst Day comments as well. And I was hoping you can maybe update us on the context of the guidance. I believe you gave at that Analyst Day around a $6 number for 2016. I also believe that was very heavily dependent on the self help you could do and didn't really contemplate this improvement in this North America cycle.
So maybe clarify that for us if you can. And then also kind of maybe give us some update on how you're thinking it? Is it possible that that kind of $6 number, I know it could have gone higher. I remember that slide at your Analyst Day. Can we see that $6 kind of run rate sooner than that or that $6 number going higher in 2016 as well?
Maybe an update there?
Well, Chuck, 2016 seems like a long, long time away. But I think that fair to say 6 months or so off of our Analyst Day, we're very pleased with the progress that we're making on all fronts on each of our strategies, unconventionals, deepwater, mature fields. From a financial standpoint, the things that we're being able to accomplish in terms of improving cash flow, we are tracking right along the line in terms of maybe a little ahead of where we thought we would be in terms of reducing working capital. And so as I look at it, I think that everything is going exactly the way that we had planned maybe a little bit better, but don't necessarily want to get out there right now with the 2016 forecast. But we're certainly we firmly believe in our strategy both operational as well as financial strategy and we're going to execute against that strategy.
We're not going to waiver off of that right now and feel like that certainly is being successful in driving us
forward. Okay. And then just a couple of quick ones. When you did lay that out at that particular time, did you anticipate having to add pressure pumping capacity? Or was that kind of planned with when you laid that out, was that more of a using what you had in the field?
We had always planned to implement the Q10 and frac of the future strategy. So the timing and the pace of that was not as clear certainly at that time. But given the value and the efficiency of that equipment, part of our strategy has always been to put that newer technology to work.
All right.
Thank you very much.
Thank you. At this time, I'd like to turn the call back to management for any closing comments.
Okay. Thank you, Sam. On behalf of the Halliburton management team oh, I'm sorry, Dave.
Yes. Kelly, let me just add one last comment to what Jeff said, because I think it's an important one in that And it goes back to the issue that the question Jim Wicklund had around our market expectations and adding pumping capacity. Of course, we're not going to be crazy enough to add equipment into the market. If we see that it's going to have an impact on our margin expectations from the direction that they're headed right now. We build to market expectations.
We build to the customer base we have. We build to the market share we believe that is sufficient to second to none in the marketplace. So as Jeff said, all we really are doing is accelerating a build that we had previously laid out to everybody to get it done faster to take advantage of the efficiencies and the competitive advantage we have from it sooner rather than later. So I wouldn't get too exercised about it in my view. I think it's a smart business decision.
And clearly, we wouldn't do it if we didn't think it was in the best interest of our shareholders. And with that, I'd
like to thank everyone for your participation. And Sam, I'll turn it back over to you to close the call.
Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all