Good day, ladies and gentlemen, and welcome to the Halliburton first quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star then the zero key on your touchtone telephone. 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 first quarter 2014 conference call. Today's call is being webcast, and a replay will be available on Halliburton's website for seven days. The press release announcing the first quarter results is also available on the Halliburton website. Joining me today are Dave Lesar, CEO, Mark McCollum, CFO, and Jeff Miller, COO. I would like to remind our audience that some of today's comments may include forward-looking statements reflecting Halliburton's views about future events and their potential impact on our performance. These matters involve risks and uncertainties that could impact operations and financial results and 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 31st, 2013, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. Our comments today include non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures are included in our first quarter press release, which, as I have mentioned, can be found on our website. In our discussion today, we will be excluding the impact of an increase to our reserve related to the Macondo litigation that was taken in the first quarter of 2013, unless otherwise noted. We will welcome questions after we complete our prepared remarks. We ask that you please limit yourself to one question and one related follow-up to allow more time for others who have questions. I'll turn the call over to Dave. Dave?
Thank you, Kelly, and good morning, everyone. We are going to change up our format this quarter to more effectively communicate the items you've told us you want to hear. I will provide the highlights, then Mark will add the financial details. That will be followed by Jeff, who will give the operations and technology update. Here are my highlights for our first quarter. Results played out about as expected, but the earnings mix was a bit different. We had record first quarter total company revenue of $7.3 billion. Operating income increased 8% over the first quarter of 2013 as a result of double-digit growth in the Eastern Hemisphere. As to our outlook by key geographies. Eastern Hemisphere activity continues to expand at a steady rate and is playing out about as expected. Our forecast for the full year remains unchanged.
We see customer spending levels increasing by the upper single digits. Our revenue growth to be in the low double digits. We still expect average full-year Eastern Hemisphere margins in the upper teens. Latin America came in slightly better than we projected. We continue to believe that 2014 will be a transitional year. For the full year, we expect Latin America revenue and profit to be in line with 2013 levels. Longer term, we are very optimistic about our position in Latin America and the future growth potential of this market. As Jeff will discuss, we were successful in winning over $3 billion in IPM contracts in Mexico during 2013. The constitutional changes in Mexico seem to be progressing as planned, and we believe the opportunity for foreign investment to come into this market will be very beneficial to our businesses beginning as early as 2015.
Turning to North America. As you know, I've been through a number of turns in the market. Let me tell you, I'm starting to feel the turn. I'm starting to feel the momentum swing. Not only that, I'm starting to see it happen. I am more excited about North America now than I have been since late 2011. I could be off by a quarter or so, but I do not believe I am wrong about this turn happening. Why is that? First, the sense of confidence I get when I talk to customers and the sense of confidence they have in their own business prospects. Supportive commodity prices today are translating into stronger cash flow and OpEx budgets for our customers. Despite the logistical issues we saw in the first quarter, during March, we saw record levels of revenues. Completions intensity is rising.
Lateral lengths are increasing. Stage counts are rising. The average well volume pumped has increased over 30% just since last year. Due to natural attrition and demand growth in the Permian, we believe that excess frac capacity has tightened much faster than expected. We don't think we'll have any problem filling our frac calendar through the end of the year and believe we will be able to pull through additional product lines. How will this play out? First, we'll derive efficiency leverage from our low-cost operating model. Second, we'll gain incremental revenue from our customer base due to increased job sizes. Thirdly, as a result of tightening supply of equipment, we can offset increases in input costs through reimbursement from our customers. Think about it, all of that comes without any help from the natural gas market.
While the first quarter margins were impacted by weather and logistical issues, this will dissipate, and North American margins should rebound to second half 2013 levels in the second quarter. We continue to expect North America margins will approach 20% before the end of the year. Based on our continued confidence in our business prospects, we bought back an additional $500 million in shares during the first quarter. We still have $1.2 billion remaining in repurchase authorizations. Along with the buybacks we executed last year, we've repurchased about 11% of the company since this time last year, while also raising our quarterly dividend by 67%. I'm going to turn the call over to Mark to provide financial details.
Before I do, I want to point out that as you work through Mark's financial commentary, you will see projected earnings per share growth of approximately 25% from Q1 to Q2, and even more increases after that. That is why I am so confident we can continue to deliver industry-leading growth, margins, and returns and continue to return significant cash to our shareholders. Mark?
Thanks, Dave. Good morning, everyone. Let me begin with an overview of our first quarter results. In the Eastern Hemisphere, revenue and operating income increased by 11% and 16%, respectively, as a result of year-over-year growth in both the Middle East Asia and Europe Africa CIS regions. Sequentially, we experienced a typical decline in revenue and margins during the first quarter due to the absence of seasonally higher year-end software and product sales, as well as the normal first quarter weather-related weakness in the North Sea, Russia, and Australia. In the Middle East Asia region, both revenue and operating income increased by 13% compared to the prior year. Middle East Asia is projected to be our highest growth region this year, led by Saudi Arabia.
In the first quarter, Saudi Arabia grew by almost 50% compared to the first quarter of 2013, which clearly demonstrates the success we've had in expanding our integrated project capability and our ability to leverage our unconventional leadership and expertise outside of North America. The improvement was also driven by solid growth across the majority of our Asia Pacific countries, with Thailand, Malaysia, and Indonesia leading the pack. Turning to Europe Africa CIS, we saw revenue and operating income increase 9% and 21%, respectively, on a year-over-year basis. This improvement was led by higher completion tool sales and increased drilling and open-hole wireline activity in Angola. We also posted increased activity in the United Kingdom, the Netherlands, and Algeria.
Latin America revenue and operating income declined by 9% and 8%, respectively, compared to the same quarter last year, in large part due to a decline in drilling-related activity in Brazil. Increased unconventional stimulation and cementing activity in Argentina partially offset this decline. We also continue to be impacted by an activity reduction in Mexico related to the cessation of older contracts in anticipation of new integrated projects awarded late last year and early this year. We are currently mobilizing for our Humapa and Mesozoic projects, and these should get underway in the second and third quarters. Moving to North America, revenues were up 5% year-over-year relative to a 1% increase in the U.S. land rig count, and operating income was flat. This was a challenging quarter for our North America business.
We experienced the coldest winter in 20 years, which impacted activity in the Bakken, Niobrara, Marcellus, and other operating areas, including Canada, during the early part of the quarter. Severe weather also disrupted rail movements, further reducing efficiency. Pricing contributed to lower margins in the quarter as a result of pressure pumping contract renewals that went into effect late in the fourth quarter or early this year. Additionally, we saw rising costs in certain expense categories, such as freight and fuel. Our corporate and other expense totaled $89 million this quarter. We invested approximately $15 million in our HalVantage strategic initiatives during the first quarter, a bit lower than we expected. These activities will continue throughout 2014, but the related costs should begin to decline in the second half of the year.
We anticipate the impact of these investments will be approximately $0.02 per share after tax in the second quarter. Including these strategic costs, we anticipate that corporate expenses for the second quarter will run approximately $95 million-$100 million. Our effective tax rate for the first quarter also came in slightly lower than expected at approximately 27%, due to a tax basis adjustment. For the remainder of 2014, we're expecting the effective tax rate to be approximately 28%-29%. Cash flow from operations during the first quarter was $954 million, nearly triple the cash flow from the first quarter of 2013. Adjusting for the $500 million in stock repurchases, we generated approximately $300 million in cash 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 grow sustainably in the coming years.
As a reminder, we're working to grow the percentage of cash available for distribution to shareholders up to roughly 35% of our operating cash flows over the next few years, which is nearly double our historic average. For the second quarter, we expect our average share count will be approximately 850 million. We continue to expect that our capital expenditures for 2014 will be approximately $3 billion. We also expect depreciation and amortization to be approximately $2.1 billion during 2014. Moving to the Eastern Hemisphere outlook. In the second quarter, we're anticipating a low double-digit percentage improvement in revenue as we recover from the first quarter seasonal drop-off, and we expect margins to move solidly into the mid-teens. Over the course of the year, revenue and margins should continue to progressively stairstep higher with full year margins averaging in the upper teens.
In Latin America, we expect for Brazil to be a headwind for the remainder of this year. An average of 24 rigs were drilling during the first quarter, and activity is expected to remain at this reduced level for the rest of 2014 and into 2015. IPM activity is beginning to pick up in Mexico to offset the Brazil slowdown. For the second quarter, we expect a high single-digit percentage improvement in revenue in Latin America. We believe margins will only be modestly higher than the first quarter, due not only to lower Brazil activity, but also to project mobilization costs in Mexico. We expect a more meaningful step-up in revenues and margins in the second half of the year, which should bring full-year revenue and margins in line with 2013.
Concluding with North America, in the second quarter, we're expecting higher U.S. land activity to more than offset the seasonal Canadian spring breakup. The logistics issues we experienced in the first quarter should also abate, and we will yield more benefit from our HalVantage initiatives. The net result is that we should see a low to mid-single digit percentage improvement in North America revenue in the second quarter, and margins will return to second half 2013 levels. As Dave commented earlier, we fully expect North America margins will approach 20% before year-end. I'll turn the call over to Jeff for an operational update. Jeff?
Thanks, Mark, good morning, everyone. As you've heard, we're excited about the North American market. We're confident that we're going to hit our Eastern Hemisphere growth expectations. The key point that I want to make today is that our strategies for unconventionals, deepwater, and mature fields are working well. Our unconventional strategy continues to focus on driving a lower cost per BOE for our customers. Our discussions with operators about their unconventional assets today are almost entirely centered around how to make more barrels, and our strategy is dead focused on just that. Using Frac of the Future, CYPHER, and custom chemistry, we've consistently demonstrated that we can help operators get more barrels and improve their efficiency. As Dave said, we're seeing rising servicing intensity across North America, and this underscores the importance of our unconventional strategy. Lateral lengths have grown to over 10,000 feet in the Bakken.
Stage density has increased by 20%-25% year-over-year in basins like the Eagle Ford and the Marcellus. In the Permian Basin, the horizontal rig count has crossed over the 50% mark, and you know this is great for us. The net result is that year-over-year, we've seen average completion volumes per well increase by 30% for our customer set, which is driving demand for improved surface efficiency at the wellhead. Our Frac of the Future is delivering the increased efficiency we expected, reducing maintenance, headcount, and the capital required on location. At the end of the first quarter, over 20% of our fleet has been converted to Frac of the Future, and we have largely completed the HalVantage rollout across our U.S. land operations.
The CYPHER is making a difference in helping our customers increase their EURs, telling them where to drill, how to drill, where to complete, and how to complete. CYPHER is now gaining traction internationally as well as we deploy the platform to projects in Saudi Arabia, Russia, Argentina, and Australia. When it comes to how to complete, the goal is maximum reservoir contact, and this is where our customized chemistry is generating results. One example is AccessFrac. AccessFrac is a system that combines leading-edge unconventional hydraulic fracturing techniques with proprietary diversion chemistry, and the result is substantially better multi-zone completions during plug and perf operations. AccessFrac has been used in thousands of stages in every major U.S. basin and in a number of emerging international plays as well. Through successful application, our customers are seeing a production improvement on the order of 20%-30%.
Moving to deepwater, our outlook has always been one of steady growth, which is precisely what we are seeing play out. Our strategy to reduce uncertainty and increase reliability is more important to our clients than ever. As we think about our deepwater strategy, reducing uncertainty for our clients shortens their cycle time and improves their decision-making. Our ICE Core fluid analysis technology does exactly that. It performs lab-quality fluid analysis downhole using spectroscopy and proprietary algorithms. This is important to our clients because one logging run can potentially save an operator costly weeks of waiting on lab results. Instead, oil, gas, water, and other fluid composition can be determined during testing operations. Not surprisingly, this unique Halliburton technology is really gaining traction, and it's gaining traction in every deepwater market in the world.
It's been successfully run in the North Sea, Latin America, West Africa, and Asia Pacific. We're also reducing uncertainty with our sub-salt reservoir characterization software, GeoShell. GeoShell is part of our leading DecisionSpace 3D seismic interpretation software, and it allows our clients to better image salt structures and therefore map the subsurface more accurately. We're gaining traction in markets like the deepwater Gulf of Mexico, where a large customer is now using GeoShell to improve technical success and reduce exploratory drilling risk. I am very excited about the pipeline projects that we see in mature fields. Our discussions with clients are increasingly focused on how to improve mature field production. These assets are a terrific annuity for our customers, whether they may be a simple workover or a full field optimization project.
As evidence of increasing demand, we have over $6 billion in awarded integrated projects and over $25 billion in projects in the pursuit pipeline, primarily in mature assets. In Mexico, we have two significant integrated mature field mobilizations underway, the JMAPA project in the north and the Mesozoic project in the south. We expect JMAPA to be generating revenue in the second quarter. With Mesozoic, we're currently preparing the rigs required to deliver these high-pressure wells and expect to spud the first well late in the second quarter. This 4-year project is the largest of the recent mega tender awards and represents over 20% of the recent $4 billion tender round. We expect to be operating at our full run rate in early 2015. There are two takeaways here. First, we have built the organizational capability to successfully execute large mature field projects.
We have aggressively developed the reservoir skills to increase recovery factors for our customers at a fieldwide level and have built the service portfolio required to drill, complete, and produce mature fields. Second, we are more constructive on Mexico than at the end of last year. In spite of any near-term transition, it's clear that the future activity in Mexico is taking shape. In closing, our strategies are working and working well in mature fields, deepwater, and unconventionals, and we're more confident than ever that we're on track to deliver on our commitments. I'll turn the call back over to Dave for his closing comments. Dave?
Thanks, Jeff, let me just do a quick wrap-up. In summary, the Eastern Hemisphere is playing out as we said it would. Based on our contract pipeline, we are confident in our estimates. Latin America will be a transitional year, our project wins in Mexico set us up for a stronger second half and an improved 2015. As I said, in North America, I can feel and I can see the turn coming, which gives us confidence in our outlook for the year. Overall, our strategy is working well, and we intend to stay the course. I am optimistic about our ability to grow our North America revenue and margins, realize industry-leading revenue and margin growth in our international businesses, which will result in EPS growth and significantly higher cash generation. We remain focused on consistent execution, generating superior financial performance, and providing industry-leading shareholder returns.
Thank you.
Okay, Sam, we're ready to open it up for questions now.
Thank you, ladies and gentlemen. If you have a question at this time, please press star then the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. As a reminder, please limit yourself to one question and one follow-up. Our first question comes from James West of Barclays. Your line is now opened.
Hey, good morning, guys.
Hey, James.
Good to hear your confidence on North America. We certainly are aligned with you there. One quick question on NAM. If we think about, Dave, you mentioned you're getting reimbursables for higher costs
Are you also at the point now or getting close to the point where you can get net pricing on the product lines that have been somewhat out of balance here?
Yeah, James, this is Jeff. The first thing with respect to pricing, we're not going to discuss our pricing strategy. If you go back to what Dave said, we have seen some capacity tightening and the ability to pass on some of the increased prices to customers. The point being, from our standpoint, we stay focused on returns.
Okay. Fair enough. Then Jeff or Dave, you mentioned that a lot of the confidence comes from everything outside of the gas markets. What are you seeing in gas markets today, given where gas prices sit and where gas prices could go given the tightness in the gas market?
Yeah. The short answer is gas, we don't have it in the plan for 2014. Our view is-
Right
sustainable prices north of $450 would be what's required to see gas move. Though we are seeing it support probably cash flows for some clients. If anything, the takeaway is it would be a 2015 event.
Okay. Great. Got it. Thanks, guys.
Thank you. Our next question comes from David Anderson of J.P. Morgan. Your line is now opened.
Thanks. Good morning. I just have a question on the pressure pumping pricing comments. Obviously you guys are pretty fired up. Help us understand kind of how you see this playing out. It sounds like there should be a couple more quarters of seeing contract rollovers kind of pushing pricing down. I was wondering if you could give us a little more, say, context as to what you're seeing out there. Is this primarily in the Permian that things are kind of changing around, but just a little bit more color in terms of how that should play out this year.
We don't see pricing pushing down. What we've described is contract rollovers through Q4 taking effect now, having pricing effect. What I will just reiterate is that we stay focused on returns for our business. The ability to push through the pricing for inputs has been a bit of what we've seen. The vagaries of the tightening, it's tough to call that at this point. We have seen some tightening.
Okay. Dave, I was just curious on your comments. You had talked about kind of seeing the beginnings of another upswing here. You've been here before. I was just wondering if you could kind of maybe give us a little color in terms of how you're approaching this cycle different from the past. Obviously, if you're seeing this, I would have to think some of your smaller competitors are starting to get fired up as well. Are you concerned about capacity coming to the market? Do you start building capacity a little bit sooner? I'm just curious if you could help us understand a little bit how do you approach this cycle different without obviously giving away the secret sauce and whatnot.
Yeah, I think, Dave, first of all I do feel the turn coming. I want to see it get here first. When it gets here, we'll be making those kinds of decisions. I think a couple of things to keep in mind. One is we will continue to high grade our customer base as we go through this process. Working with the ones that want to work with us to basically get the efficiencies that we need, the rate of returns that we need. We are going to continue to roll out the Q10, as we said at our Analyst Day. We believe it's a differentiating platform to go to market with. We'll just sort of analyze the market as it comes to us and make those decisions at that point in time.
I'm certainly not going to give away our strategy at this point. I think we're pretty well down the road in thinking about what we're going to do.
Okay. Thanks, Dave.
Thank you. Our next question comes from Bill Herbert of Simmons & Company. Your line is now opened.
Thanks. Good morning. I was a little bit unclear with regard to your commentary on the earnings growth envisioned for the second half of the year following the 25% upswing in the second quarter. Did you call for an additional 25% increase in EPS sequentially in Q3?
Bill, this is Mark. We did not call for a 25% sequential from Q2 to Q3. I think what Dave was alluding to is that if you just translate the notion of getting us back toward 20% margins in North America as the year progresses.
Yes.
As well as the continued strong growth, double-digit growth that we expect in our international or Eastern Hemisphere markets, that's going to continue to add to what we think is going to be a good solid Q2 for us coming off of a Q1 seasonal low.
Understood. Secondly, in light of the increased service intensity that you're seeing in the business and the increased vigor with regard to the overall business, can you comment a little bit on your capital spending intensity overall? We've gone from, call it a low-to-mid teens capital spend rate as a percentage of revenues down to high single digits. I'm just curious, given the runway that you see now, your restraint with regard to adding horsepower for a considerable period of time, your rollout of Frac of the Future, how is that all interwoven into kind of your capital spending intensity, your capital allocation with regard to new horsepower going forward?
It's a great question, Bill, one of the things that we're, as Dave alluded to, as we think about our strategy for looking at North America, we're keenly focused on. Clearly, several years ago, we accelerated our capital bid quite dramatically, anticipating a fairly dramatic turn in North America, coming off of the bottom of the financial crisis, seeing the growth of opportunities that were available to us in international markets. We felt like that that was a season of time, overall, because of our focus on returns. We wanted to get our spending back down to something that was a more reasonable growth rate and really focus the business on capital utilization, asset turnover, and return to our penultimate focus on returns.
As we look at this market today what may be happening, I would tell you, while we're still expecting capital expenditures to be at $3 billion, I'm sort of keeping a tight grip on the reins in terms of what the opportunity set that's out there for the growth of our business. There's a lot of things that we can do, we're going to try to maintain that focus on returns. Remember, one of the things that we also have available to us as we do the rollout of Q10s, we're bringing equipment out of the market itself for reclamation or repositioning into international markets. It, in a sense, gives us some opportunity to spread our assets, improve our utilization overall that maybe some other businesses don't have within their capital budget.
Okay. Thanks very much. That's helpful.
Thank you. Our next question comes from Angie Sedita of UBS. Your line is now open.
Thanks. Good morning, guys.
Hey, Angie.
I thought it was interesting, your comments first on that you're seeing frac capacity tighten faster than expected, which you would expect to some degree. Can you give us your thoughts on where the market's frac capacity or frac utilization is today, and then thoughts towards the exit rate at the end of the year, given we still are seeing frac efficiencies, moderate activity growth clearly, and some capacity additions, and where we could be on the frac capacity or utilization side at the end of the year?
Thanks, Angie. This is Jeff. Certainly, as we look out, we've seen some tightening, but what I would say about broadly capacity is that I don't have any reason to disagree with some of the numbers that you saw last week. That's that view.
Let's move to Latin America. On Mexico, your comments certainly were a little bit more positive on the opening of the country and that you could see something as early as 2015. What are you seeing? What are you hearing that gives you more confidence and more confidence on that timing?
A couple of things. First, it's the country's making a lot of the right moves. As we see the reform sort of taking shape, clearly, I'm impressed and pleased to see the schedule sort of keeping pace. Equally important as we see the contract opportunities in the market, that work's being lit, being tendered and won, which gives me confidence that the base activity, though we see the transitory sort of slowdown in the contracts that were in place, we also see the path to the contracts are going to take their place.
Finally, the Q10 pumps. Based on your remarks, it does appear or it does sound as if you are not making net additions to your horsepower in the U.S. Is that fair, that you're still actually adding capacity on the Q10 side, but retiring or refurbishing older capacity?
Right now, we're sticking to our same policy. We're not going to comment on our overall capacity additions just for competitive reasons.
All right. I'll turn it over.
Thank you. Our next question comes from Jim Wicklund of Credit Suisse. Your line is now open.
Hey, Jim.
Jim, please check your mute button. We'll move on to our next question. Our next question comes from Kurt Hallead of RBC Capital Markets.
Hey, good morning.
Hey, Kurt.
Just had a follow-up question. Your forecast and guidance, I think, speaks to this, but there have been significant investor concerns about the deepwater drilling market and potential utilization declines, in conjunction with the prospect for lower international oil company E&P spending dynamics throughout the course of the year. I know, again, given the context of your forecast, whether or not you can give us some views on IOC spend plans maybe versus NOC or independents, and how you see this rolling up into your forecast.
Thanks, Kurt. We've always called the growth in that market as sort of slow and steady, it's staying on the pace that we've sort of described all along. I won't comment necessarily on the deepwater drillers, our view and their view may be a little bit different around that growth pace.
We feel confident about the book of business that we see over the near term, clearly contracts that are being let appear to be going to work. I'm confident that from our standpoint our outlook is still intact and our commitment to outgrow that market by 25% stays intact.
Okay, great. Just follow up, I had commentary about the North American market capacity tightening and maybe more quickly than anticipated. What do you see as the potential impact on a global standpoint from pricing? Typically when North America gets tight, it's pretty good opportunity to improve pricing on the international front as well. Any sense on that prospect as we head out into the rest of 2014?
I think as we sort of our experience in the last up cycle following the financial crisis, that potential connection doesn't always work. We continue to believe that, while there are pockets of opportunity maybe to adjust our pricing when contracts are awarded for specific product service lines, the large mega tenders that come out continue to be very competitive. We don't anticipate that necessarily changing in a slow and steady growth market over time, regardless of what happens in the North America market in the short term.
Okay, thanks.
Thank you. Our next question comes from Jeff Tillery of Tudor, Pickering. Your line is now opened.
Hi, good morning.
Hey, Jeff.
Given that some of the volume increases you talked about in North America, 30% on a per well basis in your customer mix, can you just talk about the challenges that brings and what you're doing to address it, whether it be sand, water, kind of whatever else on the logistics side?
Yeah. Thanks, Jeff. The increased volumes, put a lot of, not pressure, but gives us an opportunity really to use our logistics and infrastructure that we've put in place over the last several years. Clearly the ability to deliver the large volumes is crucial to our business, and we do that through managing that delivery really from the beginning to the end, from the mine to the well site. The takeaway is, yes, we manage it, and yes, we see it as a key component of our advantage.
In the second quarter in North America, seasonally, Canada is obviously at least takes a step backward, but could you comment on weather risks and how you see it in kind of northern part of the U.S., whether it be the Bakken breakup or whatnot? Just curious how you see that playing out at this point.
Yeah. The Canada breakup is always an impact. That's always part of the outlook, but in our case, that is part of our outlook that's included in the commitments that we've made for next quarter and then beyond in North America. We continue to be positive on that. Really the takeaway, the equipment works harder in the lower 48 than it does in Canada, just given that impact breakup.
Any thoughts on the Bakken and just given coming off the very cold weather, do we need to expect a normal seasonal impact, better or worse, or just any thoughts around the Bakken this quarter?
Yeah. I mean, the Bakken, I think is back to work, it works its way through breakup and don't have any reason to believe that it's impacted any differently. It was extremely cold winter, that market knows how to rebound.
Great. Thank you.
Thank you. Our next question comes from Jim Wicklund of Credit Suisse. Your line is now open.
Sorry guys, I'm obviously technically challenged on a Monday morning.
We already knew that.
That's no surprise. Let me talk about sustainability, if I could. It's great that you're excited about the North American market. A lot of people seem to forget there was a price-fixing litigation last year. It's good that you can be excited, but we understand why you can't talk details, so that's fine. It just strikes me and, Jeff, your comments about natural gas, but we all kind of know that volumes have to increase over time. I'm just wondering how you guys view the sustainability of growth in the North American market. I would think that you get paid on volume as much as what the gas price is. David, to your point, you all are increasing volumes so much that maybe that's not the case. Can you talk about the broader five-year outlook for North American activity, the sustainability part of it?
Yeah. Thanks, Jim. If we look out five years, a lot of the structural things, in my view, are happening that support a sustainable gas market. If we look at LNG export, clearly a positive and it's moving the right way. If we look at sort of the uptake on gas and its positioning in the market as a long-term fuel for electricity, we look at sort of the economy and the upside in this economy, all of those conspire to, in my view, a sustainable gas market.
Should we expect to see? I'm looking at the consensus numbers for you guys and your biggest competitors, and 8%-10% revenue growth seems to be sustainable, at least through the consensus. You guys just say that the business is no longer cyclical. David, to your point, is this the momentum leading into a two-year cycle or a five-year cycle? Do y'all have a thought on that?
Yeah, Jim, it's clearly, in my view, more than a two-year cycle because, as I indicated earlier, we're not getting any help from gas essentially at this point in time. I have a view on gas. I happen to believe that over the next 5 to 10 years, the gas market is going to be there and potentially be there in a big way. Everyone else on the call probably has their own view as to whether I'm right or wrong there. I think that what we're trying to indicate is that if you just look at the liquid side of the business right now, that's actually what's giving us our excitement. Is it sustainable? Yes. Duration? Yeah, it is still a cyclical business, I clearly think that we're looking at something that is going to be turning up for more than two years.
Okay. My follow-up, if I could. On the mature fields end of the business, you guys have mentioned several times that you'll probably have to make some acquisitions to get to where your guidance at your analyst meeting was. Obviously those are around pumps of all different kinds and chemistry of all different kinds. Should we expect to see some continuing level of M&A over the next couple of years, or could it come in big bursts? I'm just trying to think of not who you'd buy or what you'd buy, but how you'd go about doing it over the next couple of years.
Well, I think the honest answer is, while we would always love to do some big bites, it takes two to tango, right? You've got to have those opportunities in front of you. In the absence of those opportunities, the way I describe our M&A strategy is we play small ball, right? That ultimately can win the games. We're out there constantly keeping our M&A pipeline full of prospects that address the strategic technologies and niches that we want to fill and keep a constant dialogue. Not all of those will come to fruition, but enough of those along the way are filling up the prospects that can ultimately get us there. We would love to have some bigger deals. We have the balance sheet. We think we have the management team, the ability to integrate in a way that could make that very successful.
Those have been few and far between.
Okay. Thanks, guys. Appreciate it.
Thank you. Our next question comes from Jim Crandall of Cowen. Your line is now opened.
Thank you. Mark, are there any chances of any adjustments to your Brazilian contracts? If the answer to that is no, when do you expect them to be rebid, and when might that take effect?
Thanks, Jim. This is Jeff. To answer your question, I'm not going to comment on specific discussions with a client, but I am confident that we work through those during the current year. At some point this year, we'll see some relief there, and certainly going into 2015, it would look different.
Secondly, another question about a South American country. Have you seen any improvement in your receivables situation from PDVSA? Have you at all curtailed shipments of product or services to PDVSA because of that?
We saw a significant improvement in our receivable position at the end of the fourth quarter. This quarter, it didn't necessarily improve, but I think that that was driven probably more by an expansion of our operations there in Venezuela versus a lack of payment that still is slower than we would like it to be. We continue to work with our customer there to try to find an arrangement that's mutually beneficial. I think that at this point in time, we take a long-term view on Venezuela. We continue to be constructive about that market, think it can work for us, and we're continuing to invest and operate there, to help them achieve their goals.
Good, Mark. One final question about two categories of companies and how you see this category of E&P spending. One is the majors. The majors' budgets, if you add them up, are actually slightly lower in 2014 versus 2013, and they make up about 26% of spending. We're also seeing, at least in the budgets, a significant slowdown coming out of Asia-Pacific companies, particularly the NOCs out of China, India, Malaysia, Indonesia. When do you expect that this condition is going to change? If so, when do you think it could change?
It's a challenging question, your second part, is when it necessarily will change. I think that our overall view of the market as being slow and steady, and we have supportive commodity prices. Ultimately, when things will change will really relate to the supply and demand balance. Right now everything seems to be well in balance, and I think as macroeconomic indicators improve globally, demand will grow. The need for supply will start growing and I think accelerate activity. Your first part of the question on IOC. IOC is a part of our overall portfolio. They're an important part, but they're less than 25% as a percentage of our total revenues. I would also say that even though their relative budgets have stayed flat, what we see internally that they've adjusted some of that spending toward E&P and away from infrastructure this year.
The overall budget, totals that they give may not be necessarily indicative of what we see them spending. We expect that, particularly in areas like the Gulf of Mexico, that spending will be creeping up as the year goes by.
Thank you, Mark.
Thank you. Our next question comes from Doug Becker of Bank of America. Your line is now opened.
Thanks. I'll stick with Latin America. Mark, you've mentioned expectations for slightly higher margins in 2Q versus 1Q, pretty flat for the full year. What assumptions are you making regarding work in Brazil and the signing of the blanket contract with Pemex in that guidance? Maybe if you could help us think about the range of outcomes in terms of margins related to those factors.
Okay. Just sort of, I guess, to reiterate the guidance, right? We're expecting that revenues will be slightly up, but that margins will be flat in Q2, but that they will be increasing over the rest of the year, so that when you look at the total 2013-- I'm sorry, 2014 year, it will be on balance the same as 2013 was, both from a revenue standpoint and a margin standpoint. That's the overall guidance. That anticipates a higher margin in the back part of the year than we're currently experiencing. The forecast that I gave you for Q2 on the blanket contract assumes a Q2 award, but probably later in the quarter versus earlier. Its large impact will be the back half of the year versus for Q2.
Okay. As it relates to Brazil, just that the contract stays in place as is. Is that the underlying assumption?
Yes, it is. Yeah.
Okay.
We have not anticipated any kind of contract reform in Brazil over the course of the year. If something happens there earlier than toward the end of the year, that would be beneficial for us.
Got it. Dave, you did mention that March saw record revenues in North America. Can we get any sense for just how much better March was, whether it's in terms of revenue, profitability compared to January and February?
Yeah. This is Jeff. I mean, that was solid exit rates. On the basis of that, we feel confident about the forecast we've laid out for you and also see the path to the commitments that we've made for 2014, which was adding the 200 basis points in North America.
Maybe another way of approaching it, just any quantification of what the weather impact was in North American margins in the first quarter?
Maybe to help, when we gave our guidance at the end of the fourth quarter, about what would happen in Q1, we highlighted that we expected that there would be some pricing degradation that we'd have to fight against because of contract rollovers as well as weather. Some of the pricing was basically anticipated, but I think that the weather and the knock-on impacts of the weather, the logistics impacts, stuff like that, were not anticipated to be as bad as they were. That's probably, I guess, as much as I want to give. Again, looking at March exit rates, they were very strong, very solid, and that gives us high confidence for not only just Q2, but the rest of the year.
Thank you.
Thank you. Our next question comes from Waqar Syed of Goldman Sachs. Your line is now open.
Thank you very much. My question relates to the Middle East. As we look at the margins in the Middle East in the first quarter versus last year's first quarter, they're relatively flat. Could you talk about that given what's going on in Saudi Arabia and UAE? I would expected the margins to be year-over-year much better. Is there anything special going on there? Is it on Iraq or equipment relocation that's impacting first quarter?
Yeah. Thanks, Waqar. The Middle East growth is solid. Don't forget we have won a number of projects in the Middle East, and we're mobilizing for those, including in Saudi Arabia. What you're seeing is some of the sorting out of that activity. That said, the takeaway is we are very confident about the business in the Middle East and expect to see strengthening there.
Okay. Where could the margins in the Middle East head to? I know you've given guidance for all of Eastern Hemisphere. Just looking at Middle East on its own, any guidance in terms of revenues and margins for not just 2014, maybe longer term as well?
Waqar, we're not going to provide any guidance specifically on the Middle East. Middle East, Asia is our reportable region. If you look at it tends to have higher margins, and we anticipate it will have higher growth than the average of Eastern Hemisphere overall. Otherwise, we're going to stay with our Eastern Hemisphere guidance.
Okay. Now we've heard from some of your peers saying that rig count growth could be 17%-18% in the Middle East area. Is that your thinking as well?
Have no reason to dispute their estimates on rig count growth there.
Okay. Just one finally on the labor. We hear that labor is pretty tight, not just in Permian, but other places too. Do you see that having any impact on work or the industry's ability to perform work this year?
No, this is really where we've built the machine that's able to hire people. We know how to do that. We've seen this sort of tightness in labor before. We may see some increased cost, but the ability to execute and deliver the people, I'm quite confident that we'll do that.
Okay, great. Thank you very much.
Sam, I think we have time for one more question.
Yes, sir. Our final question comes from Scott C. Gruber of Sanford C. Bernstein. Your line is now open.
Thanks for squeezing me in. Dave or Jeff, have you started to see a turn in the appetite for shale technology, particularly by the domestic E&Ps? Just from a 20,000-foot level, it appears that the domestic industry is just running so hard right now that customers are simply demanding more and more of the conventional services. Obviously, you have a much more detailed perspective than we do. I wanted to see if you're starting to sense a turn in that mentality.
Yeah, this is Jeff. No, there's a strong appetite for better technology. That's really the crux of most of the conversations I have with customers today is around how to make more barrels and what technology will allow them to do that. That's really what our CYPHER suite is all about, is how to frack and how to drill to make more barrels. That's where we're seeing that increase in appetite. That's really across the piece. The takeaway is, yes, there is more activity, but every application of better technology in that higher volume environment is able to even create more value for our customers.
Do you think that's a product of where we stand with the evolution of shale, more in the development phase today? Is it a product of the emerging tightness for people and equipment? If you could comment on any change in your sales strategy and whether that's having an impact as well.
Well, let me comment on this place we are in the cycle. Clearly, as client goes into development, there's such a premium on making more barrels out of that existing asset that I think that's driving some of that appetite. I won't comment on our sales strategy necessarily other than to say we really like the suite of tools that we have in the marketplace right now and the benefit that it's delivering for our customers.
Okay, great. Thanks.
Thank you. At this time, I'd like to turn the call back to management for any closing comments.
Okay, Sam. No, I think we're ready to close the call. I just want to thank everybody on behalf of the management team for participating today. You can go ahead and close the call.
Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's