Good day, ladies and gentlemen, and welcome to the Halliburton Third Quarter 2013 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. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr.
Kelly Youngblood. Sir, you may begin.
Thanks, Sam. Good morning, and welcome to the Halliburton Third Quarter 2013 Conference Call. Today's call is being webcast and a replay will be available on Halliburton's website for 7 days. The press release announcing the Q3 results is also available on the Halliburton website. Joining me today are Dave Lazar, CEO Jeff Miller, COO and Mark McCollum, CFO.
Tim Probert, President of Strategy and Corporate Development, will also be available today for follow-up calls. 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 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 ks for the year ended December 31, 2012, Form 10 Q for the quarter ended June 30, 2013, recent current reports on Form 8 ks and other Securities and Exchange Commission laws. Our comments include non GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures are included in our Q3 press release, which as I have mentioned can be found on our Web 3rd quarter charges related to employee severance and asset write offs of $38,000,000 after tax or $0.04 per diluted share 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. Now I'll turn the call over to Dave.
Thank you, Kelly, and good morning to everyone. Before I talk about another strong quarterly performance, I would like to review the actions we've taken this year around our commitment to delivering shareholder returns to you. This year, we have repurchased approximately $4,400,000,000 or 10% of our outstanding shares. Earlier this year, we announced a 39% increase in our dividend. These actions reflect our continued confidence in the strength of our business outlook.
Going forward, we remain fully committed to increased shareholder returns. We are targeting a dividend payout of at least 15% to 20% of net income supplemented by additional systematic share buybacks, while leaving room for any capital spending or acquisitions we may want to do. We have been and will continue to be relentlessly focused on delivering best in class returns. Now moving to the Q3. Overall, I'm pleased with our operational results.
Total company revenue of $7,500,000,000 was a record quarter for Halliburton, while operating income was over $1,100,000,000 We achieved record revenues this quarter in our boots and coots, cementing, completion tools, drill bits, multi chem and testing product lines. From an operating income perspective, our Bayride, completion tools, drill bits and testing product lines also set new records. Turning to the geographies. On a year to date basis, our Eastern Hemisphere growth continues to lead our peer group. Compared to last year, Q3 year over year revenue and operating income grew 17% 30% respectively.
Sequentially, the revenue improvement and 9% growth in operating income was driven by our Europe Africa CIS region. In addition to record revenue in that region, we saw a strong sequential improvement in margins of 300 basis points due to improved performance in our Russia, North Sea and Angola operations. Consistent with previous years, we expect the Q4 in the Eastern Hemisphere to be our strongest quarter of the year due to seasonal year end software and equipment sales. Moving to Latin America. This has been a tough year as customer activity did not meet our expectations and Jeff will talk more about our 4th quarter outlook.
But as we look ahead to Latin America over the next few years, there are several positive factors coming into play. First, Mexico activities are expected to pick up significantly as the mega tender projects ramp up in the 1st part of 2014. And although we do not expect a material impact next year, the recent reform discussions signal a strong opportunity in Mexico shale and deepwater markets. In Brazil, we have a leading market share today in a number of long term deepwater contracts, including some that could extend past 2020. Although activity levels are just treading water today, as deepwater activity level accelerates, we see significant upside in Brazil.
However, there could be some short term bumps in the road, but in the long term, Latin America is expected to be an outstanding growth market for Halliburton. In North America, we are expecting the typical seasonal decline in the Q4 that we've experienced in previous years. However, there are some additional transitory issues we are currently facing. Due to the recent floods in Colorado, logistical and cost structure in that basin. These cost inefficiencies should be fixed by the end of the year.
In pricing, the North America market continues to have excess supply of pressure pumping equipment. And although this is improving, we anticipate pricing pressure will continue as contracts review during the next quarter or so. Accordingly, we are already working on adjusting our cost structure. Despite these transitory issues, we believe that we will see margin improvement as we go through 2014 for a number of reasons. 1st, the efficiency trend on land plays right to our strengths.
We are not only leading the industry in execution in surface efficiency, but we are now introducing new technologies, which are changing the ways that customers approach their subsurface. And you will hear more about these at our Analyst Day in a couple of weeks. In the Gulf of Mexico, activity levels are improving. Current rigs are shifting from drilling to completions where we have a leading market position. There are a dozen or so deepwater rigs scheduled on the calendar to arrive in the Gulf next year and on those we've secured a strong drilling and evaluation position.
And thirdly, our Battle Red and Frac of the Future initiatives are being rolled out now. I've seen them start to operate in the field. The benefits are real and we expect that they will be substantial. We have invested a significant amount of money in our Battle Red and Frac of the Future initiatives. As we told you on our last call, while we roll out these 2 broad corporate initiatives, we are continuously looking for ways to use them to better manage our cost structure in the organization.
During the Q3, based on the progress of these initiatives, we've made adjustments to headcount and assets that resulted in a charge. As we continue with the deployment of our Battle Red initiative over the next few quarters, we expect for there to be additional headcount reductions and related severance charges. However, again, as you will see at our upcoming Analyst Day, we are expecting a large future payoff for these initiatives. So overall, I'm very optimistic about Halliburton's relative performance as we move into 2014. And based on early conversations with our customers, we are anticipating overall spend levels to increase.
Our strategy is working well and we intend to stay the course. At our Analyst Day, we intend to provide you more detail about our outlook for the coming years, our ability to outperform our peer group, how we will continue to balance our geographical portfolio and describe our path toward normalized margins for both the Eastern and Western Hemisphere operations. We will continue to drive toward expanding our global portfolio
in the deepwater, mature fields and unconventionals. Now let me turn the call over to Jeff for some operational details. Thanks, Dave, and good morning, everyone. Let me begin with an overview of our 3rd quarter results. The Eastern Hemisphere had record revenue in the 3rd quarter with sequential operating income growth of 9% driven by record quarterly revenue and improved profitability in the Europe Africa and CIS region.
Relative to the Q2, Europe Africa CIS grew both revenue and operating income by 3% and 29% respectively. The sequential improvement was led by improved cementing, boots and coupes activity in Russia, increased drilling and cementing activity in the North Sea and higher drilling and completion tool sales in Angola. In Norway, Statoil has awarded contracts to Halliburton that provide us with the leading market share in multiple services including drilling and completion fluids, cementing, stimulation, special tools and waste management for both onshore and offshore. The initial scope of this contract is for 3 years with up to 6 years in extensions. This award represents a significant statement of confidence from our customer for the value added technologies that we're bringing to the Norwegian market.
In addition, we're expanding our testing portfolio in the pre salt deepwater market in Angola. In addition to discrete testing awards for drill stem testing and our Dynalink service, Halliburton has recently been awarded contracts by multiple customers to provide a full suite of testing and subsea services in their pre salt operations. Activity on these wins is expected to start throughout 2014 and will give Halliburton a significant position for testing in subsea services in the Angola presalt market. In conjunction with our successes in testing offshore discovery wells elsewhere in Africa and in Brazil, these wins demonstrate the strength of our deepwater testing and subsea business. In the Middle East Asia region compared to the prior quarter, revenue and operating income were lower by 2% and 5% respectively.
Higher activity in Saudi Arabia was partially offset by activity delays for stimulation activity in Australia. Also contributing to the sequential decline was the prior quarter benefit from the conclusion of the Majnoon project in Iraq and increased completions activity in Malaysia that did not repeat. Let me speak specifically to the Kurdistan market for a moment. This is an area that until now has been primarily focused on exploration, but we're expecting development work will ramp up over the next few years following a series of successful appraisal programs. Halliburton has completed construction of a large multi product line facility in Kurdistan and we're mobilizing for recent awards in cementing, Sperry, Bayreoid among other product lines.
We're still in early days, but we expect this to be a growth market for Halliburton. In Saudi Arabia, Halliburton was awarded an important 3 year contract to drill and complete new wells in an existing field. Saudi Arabia is a core market for Halliburton and we believe this win demonstrates our customers' confidence in Halliburton's ability to help plan and mobilize to execute significant program of work. Turning to Latin America. We saw significant improvement compared to the 2nd quarter as revenues increased 6% sequentially and operating income improved by 57%.
Mexico was the primary driver where recent contract approvals resulted in an increase in the consulting and software revenue for the quarter. In the offshore market, stimulation vessel utilization was improved relative to the first half of the year. Additionally, improved profitability in wireline and cementing in Argentina contributed to the sequential growth. The improved results in Mexico and Argentina more than offset the activity related weakness in Brazil and Venezuela. With respect to Brazil and Mexico, we believe that the 4th quarter activity levels may be significantly lower than originally anticipated.
There are 2 primary reasons for this decrease. First, in Mexico, activity levels on our Southern Alliance 2 project are expected to decline over the remaining months of the year as Pemex ramps down the ongoing IPM work in preparation for the mega tenders. We averaged 7 rigs in the Southern Alliance project during the Q3 and expect to exit the year at 2 rigs. This lower level of activity is then expected to continue through early 2014 until the new mega tender projects are expected to ramp up. 2nd, in Brazil, we've seen a significant reduction in drilling activity over the course of the year with a shift in focus to completions.
In addition, we're currently operating under a cost structure in line with the original scope of work, which has not materialized. We're working with our customer to right size our operational footprint, but we expect reduced activity levels to extend through the Q4 and continue into the next year. Ultimately, this does not change our long term positive outlook for Latin America. The transition to the mega tenders in Mexico in conjunction with the start up of our incentivized Xemapa contract and an improved deepwater rig count give us confidence that the activity levels in Mexico will recover as each of these areas gets underway. And in Brazil, our recent deepwater contracts have a potential term of up to 8 years.
So although drilling activity may track sideways for several quarters, Brazil remains the largest and most active deepwater market in the world and we believe higher drilling activity levels will resume. As a result, we expect both these countries to continue to be strong contributors to our growth and profitability over time. Now switching to North America. Despite the significant revenue and operating income disruption from the Colorado floods, we delivered sequential revenue growth and higher operating income. Activity levels improved across the rest of the U.
S. Land market with seasonal recovery in Canada and increased activity in the Gulf of Mexico deepwater market. U. S. Land rig count remained sluggish and the focus from our customers continues to be on pad operations and on drilling efficiency.
As we discussed in our previous call, multi well pads account for over half of our customers' drilling activities in key North America basins including the Marcellus, Eagle Ford, Bakken and Niobrara and we see this percentage increasing. But more importantly, we see increased service efficiency on horizontal drilling, which is providing a mid teens percentage reduction in drilling days on a year over year basis. And together, these two efficiency factors are contributing to a well count that has modestly improved even in a flat rig environment. We're also seeing a trend towards increasing stage counts per well and in certain basins increased volumes pumped per stage. Already we've seen average stage count per well increase by 15% to 20% year over year in the Eagle Ford and in the Marcellus.
We're still in an oversupplied market today with as much as 20% excess pressure pumping capacity. Nevertheless, we believe that an increase in wells drilled per rig combined with greater service intensity driven by increased fluid and proppant volumes per well will ultimately help balance the market. We believe that these trends play to Halliburton's strength as the leading service provider in North America. In the Gulf of Mexico, we saw sequential improvement tempered by some activity delays and extended dry dock maintenance on one of our large stimulation vessels. In the 4th quarter, we expect revenue improvement in the Gulf as that vessel returns to service as well as higher completions activity and end of year sales.
Looking ahead, we're excited about expanding our share position in this growing market. In addition to our leading completions position, we recently deployed 2 new vessels focused on the shelf, an intervention vessel and a fit for purpose stimulation vessel. Additionally, we believe we are well positioned with drilling and evaluation services on the next round of incoming deepwater rigs. To recap North America. Activity levels continued to improve across the U.
S. Land market this quarter despite the disruption from the Colorado floods. Increased rig efficiency combined with greater service intensity continues to benefit us even with a rig count that is flat. We are increasingly optimistic about 2014 based on early data points and we'll continue to be very focused on our cost structure to enable margin growth in the coming year. Internationally, we're very pleased with our year over year growth.
In spite of short term activity disruptions in Latin America this year, we have led our peer group in year to date growth and plan to continue balancing our geographic portfolio and growing our global business going forward. And now Mark will provide some additional financial commentary. Mark?
Thanks, Jeff, and good morning, everyone. As Dave discussed, we're continuously evaluating our cost structure within the organization as we deploy our corporate initiatives. The ongoing Frac of the Future build as well as the final deployment of our Battle Red program is having a significant impact on the support and operational headcount needs of North America as well as equipment and inventory requirements. During the Q3, as we began to roll out these initiatives, we completed an initial evaluation of these areas and took our first action, which resulted in severance and other charges during the quarter of approximately $38,000,000 after tax. As Dave said, based on the early impact of these strategic initiatives, we believe that further rollout may result in some additional adjustments going forward.
Our corporate and other expense came in at $102,000,000 this quarter, slightly lower than expected due to lower cost for our strategic initiatives and some lower legal expenses. Approximately $27,000,000 of our corporate costs were for continued investment in Battle Red and other strategic initiatives. We anticipate the impact of these investments will be approximately $0.03 per share after tax in the 4th quarter as we begin the field deployment of the last phases of the North America Battle Red Initiative. In total, we anticipate that corporate expenses will be between $110,000,000 $120,000,000 for the 4th quarter. Our effective tax rate this quarter came in at 29.5%, in line with our previous guidance.
For the Q4, we anticipate that our tax rate will be approximately 29%. Our capital expenditure guidance of approximately $3,000,000,000 for the full year remains unchanged. Also during the quarter, we purchased 68,000,000 shares of common stock at a price of $48.50 per share for an aggregate cost of $3,300,000,000 excluding fees and expenses related to our tender offer. These shares represented approximately 7.4% of our total number of outstanding shares. Year to date, we have repurchased approximately 10% of our outstanding common stock.
We have approximately $1,700,000,000 remaining in Board authorization for future share repurchases. For the Q4, our average share count is expected to be approximately 855,000,000 shares outstanding, which reflects the full benefit of our share buyback to date. Additionally, due to our recent $3,000,000,000 debt offering, we expect interest expense to average approximately $100,000,000 per quarter going forward. Now moving on to our near term outlook. For our Eastern Hemisphere business, we currently expect 4th quarter year over year revenue to increase by low double digits with a meaningful sequential improvement in margins into the high teens.
As mentioned earlier, Latin America sequential growth and margins are expected to be significantly impacted by activity levels in Mexico. For the Q4, we now anticipate Latin America revenue to be flat sequentially and do not expect a material change in margins relative to the 3rd quarter. Finally, for North America, we anticipate the typical weather and holiday related seasonal decline in revenue and margins in the Q4, with the transitory issues Dave outlined earlier weighing on the number a little more than usual. As a result, we believe North America will be down sequentially, although we are not expecting as sharp of a decline as we had in 2012. As we move into 2014, we anticipate North America margins to recover as customer activity resumes and we see the payoff of our strategic efficiency programs and recent cost optimization efforts.
Now I'll turn the
call back over to Dave for some closing comments. Dave? Thanks, Mark. So just a quick summary. Eastern Hemisphere continues to deliver top tier growth, leading the industry year to date and we expect a strong 4th quarter with margins in the high teens.
Latin America will be flattish, but expect strong growth in 2014. For North America, we anticipate typical seasonality in the 4th quarter with some pricing pressure and lingering effects of the Colorado floods, but margin improvement as we go into 2014. And finally, as demonstrated by our dividend increase earlier this year and the repurchase of 10% of our shares, we are very confident in the strength of our business outlook and are focused on delivering leading shareholder returns. So with that, let's open it up for questions.
Thank Our first question comes from James West of Barclays. Your line is now open.
Hey, good morning, guys.
Good morning. Good morning.
And congratulations on continued strong growth in Eastern Hemisphere, very impressive. Dave, a question for you about the outlook for 2014, specifically on the international side, your peers seem to be coalescing around E and P spending growth somewhere in the kind of 10% range with a higher technology content, which of course plays into your strengths as well as theirs. Is that similar to your thinking at least initially?
Yes, absolutely. I think based on discussions with customers sort of contract flow that we've got in hand, I would be surprised if it isn't around that number for next year.
Okay. That's very helpful. And then perhaps a little bit of an unrelated follow-up for me with the Colorado flooding. I know Mark you had mentioned at a presentation that you thought it was $0.02 to $0.03 in the Q3, but that was an initial assessment. Do you have an updated number or some type of sizing of that impact that we could think about?
James, this is Jeff. For competitive reasons, we're not going to give you the number just because other than to say that it's certainly an important part of our business. And I guess I would leave you with absent that it would have been enough to move our completion margins up for North America.
Okay. Okay. That's helpful. Thanks, Jeff. Thanks, guys.
Thank you. Our next question comes from Jud Bailey of ISI Group. Your line is now open.
Thank you. Good morning.
Hi Jud.
Question on your Latin America market. 2 biggest markets Mexico and Brazil have some different issues going on. I was wondering if you could help us think about margins beyond the Q4. What has to happen in Brazil in 2014 and in Mexico to see a nice recovery in margins? Is it just a simple increase in activity?
Or are there some other things you guys can do to facilitate better margin growth for Latin America in 2014?
Hey, Jeff here. I would say that Brazil is a combination of activity increase with health as well as rightsizing our investment, which we're in the process of doing now. So there are some things that we can do and others that we need the client to do. With respect to Mexico, I think we really need to see sort of a settling down of all the moving pieces, which right now we've got incentivized contracts to get started, which certainly helps us as well as sort of the turnover in the contracting around these mega tenders also bring some stability. And so I think those two things do as much as any to sort of improve market margins into next year.
Would it be fair to say that the visibility on in both those markets is fairly limited near term? And if you do get some margin improvement, is it going to be more back end loaded for the year? Or is there some reason we could see better improvement earlier in the year?
Well, I'd say we typically see quite a bit of seasonality in Latin America. And so all the moving parts I don't think help in Q1. So I would say it would tend to be more back end weighted.
Our general profitability in Mexico is very strong. And so when this activity does kick up and kick back in, we expect a fairly good and solid snapback. As Jeff said, we're getting started in these new contracts in Brazil. We need more activity, but even starting those for there'll be a period of time when the Brazil margins may be decremental to our overall Latin America margins. But remember these are very long term contracts, 8 years and longer and there'll be significant upsell opportunities as those contracts gain traction and we have the ability to introduce new technologies into that marketplace.
Okay. That's good color. Thank you. And my second question just relates to the U. S.
Land market. I know your customers are still going through the budgeting process, but maybe you could share with us anything you're hearing from your customers in terms of give us a little more color on your thoughts for 2014 in terms of activity levels and what your customers are telling you for next year?
Yes. For 2014, the outlook is fairly strong. I mean that would have the discussions we're having now sees confidence in the oil window and continuing to invest. So the positive we certainly have a positive outlook for 2014.
And It may not necessarily reflect itself in rig count, but certainly the well count and efficiencies everybody is very, very focused on continuing to drive efficiencies in the marketplace.
Thank you. Our next question comes from Bill Herbert of Simmons and Company. Your line is now open.
Thanks. Good morning. Back to North America and the Q4 seasonality. Dave, I think you prophesied the typical seasonality in the Q4 and yet what unfolded in the Q3 was largely atypical with regard to the flooding in Colorado. So wouldn't that mute the seasonality in the Q4 relative to the 3rd?
Well, I guess if we were up and blowing and going in the Niobrara, it might. But as I said, that's sort of lingering into Q4. And I think it's fair to say the visibility on Q4 right now is not as great as we'd like it to be, because based on conversations we're having with customers, the holiday work schedule is sort of one of the big unknowns at this point in time with Christmas sort of following in the middle of the week and just sort of where various customers are in terms of spending their budgets for the year and those sorts of things. So I think we're just as we sit here today, what we see is a typical Q4 unfolding in front of us. And if it changes from that, obviously, we'll have either a positive or a negative impact from there.
Got it. And with regard to capital allocation, I know you guys are not done with your planning process, but could you just give us some broad parameters with regard to capital spending for 2014? And then moreover the mechanics of the dividend implementation 15% to 20% of net income, when does that get announced? And what is that predicated on? Is that an internal view as to what you guys will be generating in terms of net income or what?
Okay. So on the capital side, it is still early in the planning process. But I think that right now as we look ahead while there are we're pretty excited about the growth trajectory going into 2014. We're driving hard on efficiencies and so that will probably continue to allow us to be more disciplined around how much capital we're putting into the marketplace. So we don't sit here today expecting a significant increase in capital overall.
There'll be some expecting a significant increase in capital overall. There'll be some specific projects maybe some reorientation within the budget. We'll continue to roll out our Q10s and the frac of the future into the North American marketplace. And the question is how rapidly do we do that visavis the overall market trajectory. But right now, I don't see significant changes in the capital overall.
The dividend policy 15% to 20% of net income will it will always be sort of a moving target. The Board has the discretion to set that dividend target. They do so always in looking not just at the net income, but also our cash flow and looking at our relative investment opportunities that fall ahead of us. I guess the answer is stay tuned and we'll be talking with the Board and making adjustments as necessary. But our cash flow continues to be very, very positive.
Even with all the actions that we took this quarter. We're very pleased with the cash flow in the quarter.
Thank you very much.
Thank you. Our next question comes from wakkar Saeed of Goldman Sachs. Your line is now open.
Thank you. My question relates to international service pricing. What are you seeing there? And is it the same trends? Are you seeing some better pricing
now? This is Jeff. Yes. We look out into the Eastern Hemisphere. The we continue to see steady improvement, but not no inflection point if that's where that question is leading.
So there's a lot of visibility on the growth in the Eastern Hemisphere or internationally and to a large degree we were built into that. John, well Cara, I
guess this is Dave. I'd also add to that. Any tendering on large projects still is tending to be very, very competitive.
What will it take to change that competitive pressure? What do you think the industry needs to see?
With the industry, I mean, what we it would be a dislocation sort of event where there's inadequate capacity to meet demand. But I would say that as Dave said, the majority of the contracts are fairly large and there's a lot of visibility of those contracts. So I don't see kind of any surprises in the Eastern Hemisphere supply demand dislocation.
And then visavis Brazil, you mentioned about rightsizing and you also mentioned that you need to customer approval for that. But when do you think you'll know one way or the other whether you can right size there or not? What's kind of the time line there?
Yes. We expect to see some of those answers into Q1 I would expect.
Okay.
Thank
you. Our next question comes from Angie Sedita of UBS. Your line is now open.
Great. Thanks. Good morning, guys.
Hi, Angie.
Hi. Can you say so we talked a little bit about on your last conference call.
Can you give us your updated thoughts on the U.
S. Pressure pressure pumping markets and maybe could reach equilibrium in conjunction with that on the Frac of the Future initiative given this competitive environment is there value to rolling out the Frac of the future program at an accelerated pace? And as you're rolling out this program, are you retiring or relocating equipment?
Okay. With respect to frac of the future, we are continuing to roll that out. And as we've rolled it out, we've retired equipment or moved that equipment overseas. So yes, we see value in continuing that program and getting the equipment into the market. With respect to attrition sort of on the back of current utilization in North America, as we said, there's about a 20% we believe oversupply in the market now, though we do see increasing drilling efficiency sort of a rate that is greater increasing completion efficiency.
And because of that, we expect to see attrition continue. At what point that is, expect certainly out into next year, late next year or beyond, though any spike in gas activity would certainly take that out very quickly.
Okay. So you're thinking at this point late this year or late 2014 or potentially even early 2015?
That's right.
Okay. And then as an unrelated follow-up, can you give us an update on your efforts to enter the artificial lift segment? I know you purchased a smaller artificial lift company some time ago. There other acquisition opportunities out there? Or do you think you can grow this business internally?
And if you do grow it internally, how long do you think it will take to have critical mass in the segment?
Angie, this is Dave. Let me handle that one. We've talked over the last couple of calls about the entry into artificial lift, especially ESPs. And I can tell you it's a fantastic business. So it's one of our fastest growing businesses, although it's not big enough to move the needle for us right now.
But because we like it so much, we're going to look at both driving organic growth as well as bolt on acquisitions.
Thank you. Our next question comes from David Anderson of JPMorgan. Your line is now open.
Thanks. Good morning. On the Europe Africa CAS side, I noticed that the C and P margins really spiked this quarter. I was just wondering, is this from point forward product sales into the 3rd quarter? And should therefore should we expect those margins to kind of head back into the mid teens in the Q4?
No. I mean this is just on the back of a strengthening business both completions and stimulation.
Okay. That's great. Okay. And I had one other question is completely unrelated here. Just on your Battle Red and the frac of the future.
I guess I was wondering if you could just kind of help us conceptualize how the impact is going to play out here. Can you just kind of tell us like what if you look at say one of your frac fleets say 2 years ago versus to one of the new fleets today, where is the biggest difference here in terms of the cost and efficiency? You've talked about kind of reducing labor. I'm just wondering is it the size of the frac spread? Is it the reduced maintenance spending?
Now you've been into this for like a couple of years now. Where do you see the biggest impact here?
Stay tuned for our Analyst Day, Dave. That's where we're going to lay it all out here in a couple of weeks.
Thank you. Our next question comes from Jim Wicklund of Credit Suisse. Your line is now open.
Good morning, guys.
Hey, Jim. Hey, Jim.
Your CapEx is significantly above your DD and A and has been for a while and it's significantly higher on a ratio basis above your peers. Now you're generating bad returns on capital, so I'm not complaining. But can you explain to us why your CapEx versus your DD and A is so much higher than your peers?
I don't have enough insight into our peers to understand what they're doing on their capital spending. I know what drives ours. We for a long time were spending a lot of maintenance cost on old fully depreciated equipment. So when we evaluate what we're doing, we're looking at maintenance cost and depreciation as sort of a combined whole. And so, yes, our depreciating is going up as we have new equipment.
We have relatively fast depreciation rates relative to useful lives of those that equipment in terms of what we can do with it long term and it's driving our maintenance cost down on a percentage of revenue basis overall. So it's a zero sum game. The other thing that we've of course had to do over the last several years is make some fairly substantial investments in manufacturing, technology centers and fixed assets, bases and things around the world to position ourselves for the growth in Eastern Hemisphere and Latin America that we're achieving. And so it may not look as productive, but the fact is that's the ante for being able to be there and to serve those customers in the places around the world. And so that's been a fairly large percentage of our overall CapEx that will probably continue as we continue to expand and particularly in the unconventional market around the world over the next several years.
Yes. Tim, this is Dave.
Let me just give you a little perspective on what Mark manufacturing our big new facility in Singapore, our big new technology centers in Houston and in Saudi and Brazil, they're probably pushing $1,000,000,000 just for those. Plus you add up the infrastructure we've built out in the U. S. To help our logistics. And those are sort of current cash flow, long term depreciation, but I'm telling you long term payback things for Halliburton.
So I think that we've had a spike in sort of the fixed asset side of the business, but they will pay off in the long run.
Like I say, it's the returns you're generating. I'm not complaining, but I was curious. My follow-up, if I could, Battle Red, when we hear you have record revenues, but that you're laying people off, people get spooked. They think that's foreshadowing. What where are the where's the Battle Red Initiative?
Where are the layoffs being done? Is this all the U. S. Initiatives so far? I realize they're initiatives, but can you kind of tell us where the target or goal is in terms of people, where it's occurring so we can have greater confidence that this isn't foreshadowing for some slowdown?
Yes, Jim. The bulk of that was in North America. It geared around our efficiency drive and it was taking out basically as we figure out how to do things more efficiently. We find that there are people that are excess. We're able to effectively do more efficient work in the back office.
And also even at the coalface, so our ability to relook at how efficiently we go to work. So I would say that's not foreshadowing. What that is, is really the coming to fruition of sort of our confidence and the ability to execute the work either with fewer people or fewer people in the back office.
Thank you. Our next question comes from Brad Handler of Jefferies. Your line is now open.
Thanks. Good morning, guys.
Hey, Brett.
Maybe I'll stick with
the Western Hemisphere as well please and start with a question that may feel a little more open ended than I'd like, but let's see how you guys respond to it. I guess I'm curious as 2014 is shaping up for you, whether you see the relative opportunity, looking at things like reduced cluster spacing, higher sand per stage, some of the things you've mentioned, I guess I'm curious whether the opportunity seems more bent or more shaped by more customers of yours adopting those kinds of measures more aggressively or in other words sort of raising the averages if you will across the landscape? Or if it is a little bit more sort of rig count and well count driven?
That is more customer driven than that is rig count driven. And I think this is really just a view of how to get better frac propagation, what could be the technologies. And so I would say it is a technical view more so than it is sort of the overall average is just moving up.
In other words okay, but more of your customers are applying some of those enhanced recovery if you will or enhanced techniques?
I guess, Brad, we've talked about it in the past. It's really service intensity and it's sort of service intensity beyond just getting more fracs or more wells down per pad. It's actually now applying some of the new technologies that we have to make better wells, lower cost of BOE and make our customers more money, but also generate additional revenues for us. And then if the rig count kicks up on top of that, that would just be additional plus to the upside.
Right. Okay. That's some food for thought. And unrelated follow-up, I just I would appreciate some more clarity also on Mexico. If your current activity is declining at least onshore, first of all, is the jackup market at all an offset here even as you hit early in 2014?
And then secondly, can you maybe just give us an update on the mega tenders and if there's been any kind of delay in terms of your expectations in terms of getting those awarded? And again trying to place hold some of that work might kick in for everybody?
Yes. I mean there are offsets. It's a big that's a big market in Mexico. So there are offsets. There's offshore work that's being done.
There's deepwater work that's being done. So there are and for example the incentivized contracts. So there are offsets in that market. So but with that said, mega tenders are important because it sort of refreshes budgets and resets the table in terms of work well into the future. As far as the timing of that goes, no, I mean, I'm not surprised organized around how to put that out.
So again, our view is sort of early or excuse me, early Q2 is a realistic sort of startup time for that activity if things proceed as planned.
Thank you. Our next question comes from Doug Becker of Bank of America Merrill Lynch. Your line is now open.
Thanks. Jeff, you mentioned the completion efficiencies are increasing at a slower rate than the drilling efficiencies. Just hoping to get some order of magnitude here. And what technologies should we be keeping an eye on that could flip this? And in other words, what technologies might make completion efficiencies outpace drilling efficiencies going forward and just perpetuating the over supply in frac?
Yes. If we look at that, if we think that the drilling efficiency is up in the kind of 20% range and we look at completion efficiency somewhat less than that. We see probably about a net 7%, 8% sort of efficiency in drilling that's sort of outpacing the efficiency in completions. I think one of the things that Tempur's completion efficiency is going to be kind of the size of the jobs and the amount of activity required as completions actually get in some cases bigger rather than smaller. Again this is where the frac propagation happens.
So again, my outlook is that we continue to attrit equipment over time as opposed to the other. Okay.
And then Mark, you mentioned that North American margins would be down in the 4th quarter, but not as bad as last year. Does this mean for margins we should be assuming kind of a normal seasonal decline 50, 100 basis points at least on our numbers?
Yes. That's exactly what you should expect.
Okay. Thank you.
Thank you. Our next question comes from Kurt Hallead of RBC Capital Markets. Your line is now open.
Hey, good morning.
Good morning. Hi, Kurt.
I'm just curious you guys have addressed the excess capacity situation. We continue to do this it seems on a quarter by quarter basis. And just wanted to get an update from you as to whether your latest thoughts as to when you think the supply demand curves may balance? Any guesses on that in 2014?
Yes. This is Jeff. I would say that it's late 2014, early 2015 by the time that we start to see that tightening. Though as I've just described, I do think that we are down the path that consumes more equipment rather than adding more equipment.
Okay. And then you guys referenced some contract renewals and repricing and so on. In general, what kind of magnitude of pricing pressures are you seeing at this point visavis your prior contracts?
For competitive reasons, that's something we just can't give. Okay.
No worries. Fair enough. All right. That's it
for me. Thanks a lot.
Thank you. Our next question comes from Jim Crandall of Cowen. Your line is now open.
Good morning. You said in the I think your press release that you had lower profit from Iraq and then you stated on your call about the Najmou contract ending. I thought you had written that down to breakeven anyway. Could you reconcile that for me?
No, Jim. What happened in the second quarter as we sort of we really made a hard push to get that contract done at the end of the second quarter. It spilled over a little bit, but the reality of that push and kind of increased our profitability on that contract as we kind of took it across the finish line. Now it's over and while there's a little bit of work left sort of a very small Phase 2, we sort of finished that first phase of those big contracts, the initial awarded contracts. And so it has an impact of reducing
the overall profitability
in Iraq overall. But that isn't to say that we're losing money there, just the opposite. In fact, as we go forward on our new contracts, we're trying to be very, very disciplined about the work that we take on and making sure that it continues to improve our profitability in that region going forward. It's just sort of the magnitude of the dollar not the margins.
Mark, how do you see the overall levels of activity trending for Halliburton in Iraq going forward?
Go ahead, Jeff. Yes. We've I mean, I've got a positive outlook on our activity as we go into 2014. So what I would say is we are much more disciplined around the contracts that we pursue and the terms under which we'll accept them. So it's returns and margins first as opposed to top line growth.
And we've been as I said very disciplined about that. And so I'm confident that we will grow that business, but again grow a business that we can all be happy with.
Okay. And just one quick follow-up. Did you say that the price deterioration that you're seeing in the U. S. And that you expect in the U.
S. Is frac only? And are there any other product lines in the quarter which experienced price deterioration in the U. S?
Jim, this is Jeff. No, I would say that that pricing the pricing pressure we see is more widespread than just fracturing.
Thank you. Our next question comes from Jeff Tillery of Tudor, Pickering, Holt. Your line is now open.
Hi, good morning. Hey, Jeff.
With Q4 a heavier time of the year for contract rollovers in the frac market and spot crews for the industry generally just not making any money? I think it's obvious that contracts will be a bit more competitive. Could you just talk about how your strategy as you go into these rollovers, how you seek to differentiate yourselves?
From a differentiation standpoint, Jeff, we absolutely believe that in our ability to deliver efficiency, we've got technology like I'll run through them, but PermStim, but a whole range of chemistry technologies and others that absolutely differentiate Halliburton in the market. And so as we look at contracts in any sort of environment, those are the things that we turn to and that our clients count on Halliburton to do.
The competition varies basin to basin. And so depending on the amount of capacity that's there or the complexity of the reservoir, we can make a different value proposition with customers on differentiation. In some cases, where they've gone off and the customer's experience what someone else has done, we've been able to take that work back at a little bit higher price.
And then around Dental Red, it's been focused from my understanding mostly in North America with the successes you're having there. Any reason to think you won't continue this push globally?
No. No. We expect that as we go into 2014 and beyond, we'll be staging the rollout. Once we kind of get all the kinks out in North America, the rest of the world is ready to go. And so we'll be rolling those out over time, although probably at a slightly slower pace than we use for the North America rollout just given its size and complexity.
Sam, we probably have
time for one more caller.
Yes, sir. Our final question comes from Scott Gruber of Sanford Bernstein. Your line is now open.
Yes. Thanks for squeezing me in. So back on the domestic frac market, pricing continues to decline, but it appears that the operating margin for the industry is actually up. Is it fair to say that the primary driver of the pricing weakness today is the willingness by the pumpers to actually lower rates to improve asset turns via these 24 hour services. My question is actually would we still be seeing pricing declines if there wasn't a trend toward more 24 hour work?
The question was would we see a decline without the 24 hour work? It's an interesting question.
I don't know. Yes, I don't know for sure whether we would know that or not because obviously you can't ever exactly know what motivates our competitors to sort of come in with the pricing that they do. But I do think that oftentimes what we're seeing is guys really wanting to get equipment to work and willing to take a lower price if that's necessary to do that. The question always is, okay, but are they really creating the value for the customer? In our sort of overall value proposition, we're always focused on it's not just the cost per stage to the customer, but what are they achieving on an increased production, driving down the overall cost on a per BOE basis.
And when customers get focused on that, I think that the results begin to change in our favor.
Well, are you still seeing declines in pricing for single spot wells? Or are you I mean, can you identify contracts new incremental 24 hour work where the pricing pressure is a lot more severe as pumpers compete for that work? I guess the turn improvement is huge.
Well, I guess what I'd say we don't typically I mean, we don't pursue that one off market that you just described. And so I would just from competitive standpoint, we're not going to I wouldn't walk through our contracts and our pricing on those different contracts. So suffice to say that we tend to work in a more contracted fashion over a longer period of time.
Thank you. And at this time, I'd turn
the call back to management for any closing comments. Yes.
Before closing the call, and it will
be webcast. You'll be able to access the webcast and it will be webcast. You'll be able to access the webcast link from the Investor Relations page on halliburton.com. And with that, Sam, I'll turn it back over to you for to close-up the call.
Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.