Good day, ladies and gentlemen, and welcome to Halliburton Second Quarter Earnings 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 conference is being recorded. I would now like to turn the conference over to your host today, Christian Garcia, Vice President, Investor Relations.
Please begin.
Good morning, and welcome to the Halliburton's Q2 2010 conference call. Today's call is being webcast, and the replay will be available on Halliburton's website for 7 days. The press release announcing the 2nd quarter results is available on the Halliburton website. Joining me today are Dave Issar, CEO Mark McCollum, CFO and Tim Probert, President, Global Business Lines and Corporate Development. In today's call, Dave will provide opening remarks, Mark will discuss our overall financial performance and liquidity position and Tim will provide comments on our operations and business outlook.
We will welcome questions after we complete our prepared remarks. I'd 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 financial results and cause our actual results to differ from our forward looking statements. These risks are discussed in Halliburton's Form 10 ks for the year ended December 31, 2009, Form 10 Q for the quarter ended March 31, 2010 and recent current reports on Form 8 ks. Note that we will
U. Year benefit from the significant increase in U. S. Land activity and the seasonal recovery in the international markets. Our operating income grew 60% from the prior year, led by more than a 400% increase in North American profitability.
Let me talk first a little bit more about North America. North America was our stellar performer in the Q2 with sequential revenue increasing 24% versus U. S. Land rig count growth of 13%. This is the Operating income improved over 90% sequentially despite the negative earnings impact of the Canadian seasonal slowdown
in the deepwater
drilling suspension in the Gulf of Mexico. The gas directed rig count rose 8% during the quarter. Gas operators are benefiting from productivity gains driven by improved drilling and completion times that lower their breakeven thresholds and enhance their returns. Also, drill to hold activity continues to also influence buoyed by stabilized commodity prices for liquids. Oil rigs now number close to 600 in the U.
S, a level which we have not seen since the early 90s. The continued rebound in oil and gas directed activity in the Q2 led to increased utilization levels for our equipment and provided us opportunities to to adds value to our customers. In this upturn, however, price increases have not been uniform across all the various basins in the U. S. Because we're taking a different approach in today's market environment.
We are working with customers to understand their production economics, developing equipment efficiency models and setting prices at rates that allow them to earn the returns that they require while enabling us to also generate an appropriate return for our capital investment in that that force us to leave a particular basin to seek higher returns for our equipment. Across this spectrum, pricing power is highest in the oil and liquid rich basins and lowest in the conventional dry gas basins with dry gas shale plays somewhere in between. Utilization levels for our equipment have those at the rig count peak in the Q3 of 2008 and are fast approaching levels not seen since the fall of 2,000 and 6. Utilization levels are highest in the place with the strongest growth such as the Bakken and the Eagle Ford where we have significantly expanded to 24 hour operations. Discussions are underway with some operators regarding longer term contracts, and we are experimenting with a few of these.
These contracts may contain take or pay or standby rate provisions, which can provide a certain level of revenue stability for U. S. Land operations. We are currently evaluating these types of contracts, but I am not yet convinced that they generate the highest returns for our equipment over a full business cycle and we are not pursuing these arrangements aggressively at this point in time. In the second quarter, interest in liquids rich gas plays plays remained high because of the relative stability of oil prices and improved operator returns on these resources.
These plays now account for 10% to 15% of total rig count. And while they are typically counted as natural gas in the coming months. One of our key strategies in the downturn was to build market share based on our strong belief in the long term potential of the North American market. And I believe we were very successful in that effort. Our strategy now is to defend this expanded market position.
We have been and we will continue to do this by deploying sufficient incremental capacity to meet the robust demand for our services. We believe the actions we are taking will strengthen the long term health of our will moderate and we expect our sequential revenue growth will more match the rig count in the coming quarters. Any improvement in our margins also be limited due to increased oilfield costs as we are now seeing significant inflation creep into our U. S. Cost structure in such areas as higher commodity, freight and labor costs.
Let me spend a few moments discussing the situation in the Gulf of Mexico. The around new drilling requirements and the extent of activity decline during and after the drilling suspension will influence the future requirements for shallow water permits. I believe these delays combined with the drilling curtailment in deepwater will cause E and P spending to shift on shore and outside the U. S. To enable operators to meet their production targets.
Gulf activity may also remain restrained after the drilling suspension as operators need to adjust to more stringent drilling and permitting requirements. Further, I do not believe that the deepwater offshore rigs that were mobilized to to all. 1st, we are rationalizing our equipment capacity in the Gulf. We are transferring drilling and downhole wireline tools to 2 and we intend them to keep them in the Gulf during this period. At this point, overall equipment movements are just starting and it is too early to tell if this will meaningfully impact the pricing dynamics in the international markets.
We also currently have an aggressive hiring program in our U. S. Land operations and we are transferring a significant number of our Gulf field personnel to intact in the Gulf of Mexico. This obviously will impact our short term results, but will allow us to Mexico have not at all stifled our enthusiasm for increased global deepwater activity in the upcoming years. Help our customers operate safely and efficiently in these challenging conditions.
And I believe we'll generate a corresponding increase in service
with
stand out in terms of revenue growth. In the second quarter, our Brazil operations generated sequential double digit revenue increases significant strides in solidifying our market position in Brazil with wins in directional drilling, wireline, fluids, to However, we believe that the current quarter activity levels for Mexico are unlikely to be sustainable. Our customer has informed its service providers that due to budgetary constraints, we will be reducing the number of rigs allocated to Chicanopec for the remainder of the year to about 2 rigs per major service company. We are currently operating on 4 rigs and we're about to add a 5th. Additionally, we anticipate activity in the Virgo's basin to remain depressed given the continued weakness in natural gas prices.
To counteract this, we have started adjusting our Mexico's cost structure and are transferring equipment to other locations in Latin America and the U. S. As a result, we may incur some restructuring charges in Q3 to account for these actions. For the remainder of the year, we see Argentina, which may offset weaknesses in Mexico and Venezuela. Given the unevenness of the growth prospects in these countries, we are not anticipating a material net improvement in overall revenues and margins for our Latin America region in the second half of the year.
Now for the Eastern Hemisphere. Eastern Hemisphere revenue and operating income increased 9% and 23% sequentially, while incremental margins were 36%. Our 2nd quarter results reflect a seasonal rebound from bad first quarter weather experienced in Russia, China, Australia and Indonesia. Despite the strong rebound in our Eastern Hemisphere results, we are cautious about a number of factors that may impact the rate of the industry's growth the rest of the year. Continued concerns around the current pace of economic recovery and corresponding energy demand are causing some of our customers to reevaluate their execution plans for the second half of the year.
Furthermore, based on the Gulf spill, international customers are revisiting their deepwater processes and that also is causing short term delays in the startup of certain projects. These factors together with continued very competitive levels on international pricing may lead to a slower ramp up in revenues and margins in the 3rd quarter with stronger growth reserving toward the of beyond, we will continue to increase our exposure to the industry's highest growth markets like deepwater and unconventional resources to
Dave, and good morning, everyone. As I go to our financial highlights, I'll be comparing our Q2 results sequentially to the Q1 of 20 10. Our revenue in the 2nd quarter was $4,400,000,000 up 17% from the 1st quarter. Total operating income for the 2nd International margins in the 2nd quarter improved to 16% as all of our international regions registered steady improvement from levels. For North America, margins in the 2nd quarter increased from the prior quarter due to strong activity and improved pricing across most basins, with overall incrementals exceeding 50%.
North America margins were generally consistent month to month throughout this quarter. Now I'll highlight the segment results. Completion and production revenue increased $429,000,000 or 20 2 percent and operating income more than doubled with solid contribution from all regions. Looking at completion and production on and production on a geographic basis, North America revenue increased by 27%, while operating income grew by 126% from better led to high utilization rates that are exceeding levels experienced during the 2,007, 2008 time period. In Latin America, completion and production revenue increased by 5% and operating income increased 17%, primarily from improved performance in Mexico, Colombia and Argentina.
In Europe Africa CIS, completion and production revenue and operating income increased 19% and 144%, respectively, due to strong production enhancement activity in the Congo, Algeria and the North Sea and increased completion tool sales in Norway and Nigeria. In Middle East Asia, and production posted sequential increases in revenue and operating income of 14% and 76 percent respectively due to strong completions and production enhancement activity in Saudi Arabia, Australia and Southeast Asia. In our Drilling and Evaluation division, revenue and operating income increased by $197,000,000 48,000,000 respectively, primarily as a result of higher activity across all of our regions except Europe, Africa, CIS. In North America, drilling and evaluations revenue and operating income increased 17% and 41% respectively, as most of our product service lines continue to benefit from increased horizontal drilling, which grew approximately 18% from the 1st quarter. Represent over 50% of total U.
S. Rigs and are now about 33% higher than the levels we saw at the peak rig count in the Q3 of 2,008. Drilling and Evaluation's Latin America revenue and operating income increased 20 1% and over 2 24%, respectively, from higher testing activity in Brazil and increased software sales and project activity in Mexico. In the Europe Africa CIS region, drilling and evaluation revenue and operating income were down $13,000,000 $38,000,000 respectively, due to lower activity in the North Sea and certain locations in West Africa, which were partially offset by the seasonal recovery in Russia. In Drilling and Evaluations, Middle East, Asia revenue and operating income were up 13% and 14% respectively from higher drilling activity in Saudi Arabia and Indonesia, increased fluids revenues in Australia and from wireline services in Iraq.
In the second quarter, we completed 7 wells relating to our Ghawar project in Saudi Arabia as scheduled. This quarter's effective income tax rate was 30%. That's lower than our previous guidance due to the favorable impact of an R and D credit settlement that we received late in the quarter. We continue to forecast that our effective income tax rate for the balance of the year will be somewhere between 32% and 33%. Dave discussed our current plans to address the deepwater drilling suspension in the Gulf of Mexico, but I'd like to provide some additional color if I may.
Our Gulf of Mexico region of
Mexico
65% of our Gulf of Mexico region business relates to deepwater. We have also said that labor after the deepwater drilling suspension, we have started redeploying to other markets close to 20% of the 2,200 employees serving in the Gulf of Mexico region as well as some of our mitigation efforts, we're currently estimating that the drilling suspension will impact our earnings by somewhere between 0 point 0 $5 and 0 point 0 dollars per quarter starting in the Q3 and continuing for a few more quarters. As all of you would appreciate, in the Gulf continues to evolve and there will continue to be some level of uncertainty around the full impact of the drilling suspension on our future financial results. With respect to the Deepwater Horizon incident, we continue to be confident that Halliburton performed all work with respect to the Macondo well in accordance with BP's specifications for its well construction plan and BP's instructions. Our contract with BP Exploration provides specific indemnification of Halliburton for claims and expenses relating to situations just like the Macondo incident.
However, this obviously could be subject to challenge by various parties. In addition, while some have questioned BP's financial survivability, we do not believe this is a likely outcome. But clearly, our indemnification is dependent on BP's financial ability to perform under its contractual indemnity obligations. As you know, there are also a number of announced congressional and other governmental investigations that are currently ongoing. We are and will continue to cooperate not be taking further questions regarding the Deepwater Horizon incident during this call.
Tim?
Thanks, Mark, and good morning, despite the recent events in the Gulf of Mexico. I'll provide a few additional observations on the development of these resources. The U. S. Has had around 15% of the world's 242 floating rigs, the 3rd largest market after Asia Pacific and and percent of global new discoveries, with the size of deepwater discoveries being about 3 times those of shallow water.
Core water. Have providing increased opportunities for oilfield service companies. The application of new technology to aid our customers in the planning and execution of their deepwater developments is critical for them in balancing their risk reward seismic interpretation and analysis tools are providing real value in West Africa and Brazil in helping customers gain an understanding of complex reservoirs, including sub salt. In the area of reservoir characterization, Halliburton's Geotap IDS technology is allowing operators for the first time to capture and analyze reservoir fluids during the drilling process. While after drilling, during well testing, newly introduced Dynalink technology Deepwater production represents roughly 6% to 7% of total world oil production today and is expected to double in the next 5 years.
Oilfield service companies that have the unique combination of technology, expertise and infrastructure will participate meaningfully in the development of these reservoirs.
We believe that Halliburton's past and current investments are placing the company in an excellent position to benefit from the growth of deepwater activity worldwide. Doug? Thank you, Tim. Let me now just quickly summarize where we're at. The increase in overall activity and completions intensity in the second quarter have led to very high utilization will continue to grow but at a slower rate.
While we are and also we expect further pricing opportunities, our already high utilization rate and growing cost pressure will serve to somewhat slow down the rate of improvement in our margins. Our will be better for our international markets. However, we now expect that the growth will be more weighted toward the end the utilize our technology capabilities and global infrastructure to benefit also from this secular trend. Let's go ahead and open it up for questions at
this point. Thank Our first question comes from Dan Boyd of Goldman Sachs. Your question please.
Can we understand what the progression of margin was throughout the quarter in North America, Presumably the exit rate was much higher than what you reported?
Dan, this is Mark. As I mentioned in my comments, the margins were actually fairly consistent in North America month to month. We had seen in the Q1 a steady progression upward at quite a
a
mentioned a couple of times, we're starting
to have to deal a little bit with the As I mentioned a couple of times, we're starting to have to deal a little bit with the effect of increasing costs. So we are attempting obviously to continue to raise pricing and raise margins, but our vendors are wanting a piece of that ability at this point in time.
Okay. And then as a follow-up, Latin America is the one area that also surprised us with margins coming in a little better than expected. Understanding that Mexico is going to pull back a little bit, but can you help us understand what sequentially drove the increase in Mexico And have you started the cost, I guess, cutting costs there already?
Well, the big story in Latin America is Brazil. And Brazil is really what was the primary driver for the strength of Latin America during the quarter. With respect to Mexico, I think the best way to think about Mexico is that the current quarter sort of provided a peak, if you like, of Mexico performance. And as Dave alluded to, we do not expect that to continue. Clearly, the budgetary constraints are going to have a significant impact on that.
As you go to, I guess, right size your cost basis in Mexico and you potentially look to take a charge, excluding that charge, should we expect Latin America margins more or less flat from here?
I think that's a good assumption.
Okay, thanks. I'll turn it over.
Our next question comes from Bill Herbert with Simmons and Company.
Thanks. Good morning. Dave, you mentioned that your international and especially your Eastern Eastern Hemisphere customer base was a little bit more reticent with regard to the pace of spending increases given the economic outlook. Is that reticence coming predominantly from IOCs or is it NOCs well?
No, it's primarily the IOCs and it's really hard to tell what there's 2 things at play here. One is sort of them taking a look at the economic conditions and getting these big projects started because on these major projects, once you start and sanction them, there's really no turning them off until you've spent a lot of money. So I suspect that a lot of our customers are using a pause from the Gulf of Mexico to sort of do a last study of their processes is really a way for them to step back, take a couple of more deep breaths before they embark on some of these major long term projects. So we're not concerned that these projects are not going to go forward. They will go forward.
But I think that everybody is just, as I said, taking a last breath or 2 and maybe delaying by a quarter or a half a quarter the sanctioning of these projects.
Right. And I get the fact that clients are more introspective with regard to deepwater well designs and processes and that's mostly IOCs. But the economic outlook, that's IOCs as well?
That's correct.
And I would say it's actually primarily IOCs.
Okay, good. And then secondly, again focusing on the second half of this year, which Eastern Hemisphere markets do you think relative to the first half are going to show the most positive rate of change?
Well, the most obvious one will be the North Sea. The North Sea has really struggled through the 1st two quarters and I think any help in that market can't help but look better against sort of the first half performance. And Algeria has been another one that has been troublesome in the 1st part of the year. That's a big business for us and for other service companies. And with the changeover in management and some of the delays sanctioning projects, that's been a country that has relatively underperformed our expectations in sort of half one, which we would hope would get better in the second part of the year.
And I will sneak one last one in here. Any comments with regard to Russia, how it's performing and outlook for the second half of this year relative to your expectations coming into the year?
I think we would say in general that Russia is a little bit below our original expectations for the second half of the year. That obviously remains to be seen, Bill. But our sort of general sense of this at the present time is that it may not perform quite as strongly as we had originally intended. And that was sort of in the double digit growth range that we'd announced, I think, at the end of the year.
Okay. Thanks very much.
Our next question comes from David Anderson of JPMorgan. Your question please.
Dave, I just wanted to get back to you, you mentioned talking about some long term contracts on the U. S. Land market. It's pretty clear you're trying to avoid the 'five, 'six repeat when too much capacity entered the market. But now obviously access to capital isn't what it used to be, but I would just think the long term contracts would seem to be the best way to offset any kind of capacity concern.
So I guess 2 part question. 1, how concerned are you about capacity as of the next 12 months in the U. S. Land market? And what do you need to see in the contract structure to make it more attractive to you?
Is it a function of locking a prescribed utilization rate? Is it index pricing? I'm just kind of what it would take for you to enter in more of those?
Yes, good question. I made the comment that I'm not yet convinced they're the way to go and for a couple of reasons, especially they're not the way to go for us where we are in the cycle right now because you essentially locking in essentially a fixed price for a set amount of utilization. And as I indicated, I believe that we have upside to prices in North America and I would not want to tie equipment down with a long term contract and miss some of the pricing upside, while at the same time not being able to fix the cost side of the equation. The second is that although people get enamored or sometimes our people get enamored enamored with sort of the recurring fixed price nature of these, our customers have shown no compunction to just tear the contract up when it's to their advantage when pricing is going down. So I don't see that we're getting any downside price protection.
And I believe we are limiting our upside. We term contract that's got a fixed price component to it right now. The ones we are experimenting with have an element of a fixed price and a commitment as to percentage utilization. But again, those are very difficult to measure practice and therefore we're just going to stay away from them right now for the most part as I said because I'm not convinced they yield us the highest overall return over a cycle.
That contract you indicated last quarter and the 750,000,000 dollars contract with the Wilson, does that qualify for that evaluation?
No, it does. That was a different kind of contract.
Okay. On a different subject, you're talking about reallocating cost structure in the Gulf of Mexico. I guess, two questions. How quickly can you get this done? Is that by the end of the year?
And also internally, how many active rigs are you guys counting on the deepwater 12 months from today? I think last I spoke with you guys, you were thinking about 17 rigs. That was about a month and a half ago. I can't imagine things have gotten any better in your opinion.
Well, with respect to our planning, what we told you last time was that we were planning on about 50% of the level of activity, roughly 17 rigs, approximately 6 to 12 months after the suspension was lifted. There's probably no reason to change that right now in terms of an assessment of what might take place. And you have to have a basis for planning your business. That's the one that we've used. And we'll obviously modify that based on the flow of information that we receive.
Okay. With respect to the movement of
you're you're moving, obviously everybody else is moving as well. I think you highlighted that you're not too sure margins are going to go. How concerned should we be about excess capacity? I didn't think there was a big capacity issue with a lot of this equipment internationally. Is that true?
There is a limited amount of assets that are likely to be moved into the international markets for a variety of reasons. Some of it is the type of equipment, some of it is size, some of it is suitability. So there's always that potential that everyone doing everything at the same time may have an impact. But there's certainly no evidence that that's taken place at the present.
Things like vessels, as an example, might be more impactful if vessels move on a wholesale basis to other markets.
Okay. Thank you.
Our next question
I wanted to start to turn back to the guidance for the earnings impact from the drilling suspension in the Gulf. Do you assume any deepwater activity in those figures?
No, I think in the if you think about the 5% to 8% we announced, if a reasonable level of drilling goes forward in the next couple of quarters and I think that's a little iffy at this point in time, then I think the hit to earnings will be at the low end. If the shelf continues to find it very difficult to get permits and therefore they can't drill, then I think it's going to be toward the upper end. One of the things we are not doing is we are not going to diminish our infrastructure in the Gulf of Mexico. So yes, we're going to try to move people. Yes, we're going to try to move equipment, but we are going to maintain our vast Gulf of Mexico facilities, lab, manufacturing, all of those facilities on the basis that the Gulf is going to come back, which we believe it will.
And that will be part of the drag on earnings for a period of time. But in our view, when the Gulf comes up, again, you're going to have to have that stuff in place. I'd just rather keep it and pay for it on a as we go basis than try to recalibrate it and reconstitute it at some point in time in the future.
So just to be clear, the upper end of the range includes an anemic outlook for shallow water activity and virtually no deepwater activity?
Yes. The 8% is anemic shallow water and the bottom of the range is a more robust shallow water environment.
Okay. Scott, it's $0.05 to $0.08 of course.
Yes, the lower of $0.05 and the higher of $0.08 Yes.
So I it is interesting to note that we were mobilized last week on a shelf well construction project. So it's not it's by no means a trend, but it does sort of indicate that we're starting to see some movement on the permitting front.
Okay. And an unrelated follow-up, can you provide some color on where you think the industry stands in the drill to hold acreage by production trend?
Of course, there is no sort of repository of this information, but the general information that we have from our own organization suggests that we saw a decline in Q1 in the overall position. And drill to hold, the inventory of wells that is out there increased somewhat in Q2, and we expect to see a sharp increase in Q3 based on the information that we have particularly and Eagle Ford. So we'll see that inventory continue to rise. With respect to drill and holes specifically, most of our customers really indicate to us they still have a fair amount of activity to take them through into 2011.
Yes. And I think one other area that's sort of pushing drilling that a lot of people have not focused on and that is S. S. Gas players have announced transactions with primarily outside of the U. S.
IOCs and in cases other money players to essentially have them carry their drilling programs for them. And I think that is actually going to also drive some additional drilling because the customers have the liquidity provided by others to be able to do so.
Okay, great.
Our next question comes from Kurt Hallead with RBC Capital.
Hey, good morning. Hey, Kurt. A quick follow-up here on once again that $0.05 to $0.08 impact in the 3rd Q4. Is that you think the increase in your North American land related business will fully, partially or more than offset that $0.05 to $0.08 impact from the Gulf of Mexico in the second half of the year? Better activity, better pricing on North American land, is that going to offset that $0.05 to $0.08 number?
Kurt, this is Mark. I mean, I think as we look forward in terms of what the U. S. Business is doing that in the Q3, it seems like the U. S.
Land will probably fully offset or at least get very close to fully offsetting the weakness in the Gulf. Q4, as we move into winter weakness in the Gulf. 4th quarter, as we move
into winter steps in our business, it might be a little bit less, but that's
we're still very excited about what's happening on U. S. Land right now.
Yes. And then thanks. And then question for Dave. In your discussions with your varying oil company customers, how do those customers handicap what the Gulf of Mexico could look like 12 months out? What kind of rules and regulations are they preparing for?
And when are they when do they think that they're going to be able to start to ramp up their activity?
Well, I think the discussions are many and the conclusions are varied. I guess it'd be the best way to put it. I think that nobody believes that they will be out of business in the Gulf of Mexico, let's say, a year from now. I think one of the big concerns concerns is going to be the ability to get the deepwater rigs to come back into the Gulf of Mexico market. If they're absorbed in other parts of
the world, remember these
things take a long time to drag out of the Gulf and halfway around the world. It's a lot of downtime on those rigs. So the concern is the ability to get the rigs, bring them back in here. What is the in the next 12 months that there in the next 12 months that there's probably very little discussion taking place about the ability to ramp up to anywhere near the level that we were at. But if you look at the prospects, you look at the reservoirs there, a number of the big IOCs are very heavily committed to the Gulf of Mexico.
They certainly will start up as fast as is practical after they get the go ahead.
Okay. And then last follow-up here. Your reference on pricing, I was wondering if you just might be a little fair to assume that pressure pumping has the best pricing dynamics at the moment. Just wondering what product lines have the least ability to get pricing at this stage?
Well, clearly, our stimulation business leads the pack in terms of pricing. I think the important thing really to understand here from our standpoint is the way we try and use our simulation business to provide an integrated package of value proposition for our customers. Probably as we look at the across the board, clearly stimulation is at the high end, directional drilling, drill bits, completions in the middle and wireline probably is at the bottom end of the range in terms of pricing realization.
But all product lines are getting some element of pricing at this point. Is that true?
Correct.
Okay. Thank you.
Our next question comes from Ulf Sluor with Morgan Stanley.
Thank you. Mark, could you give us an update on CapEx for the year?
Oli, we're still looking at approximately $2,000,000,000 in that range, the $2,000,000,000 range for total CapEx for the year. So it's still sort of in line with the previous guidance at this point.
Okay. And when you increased the previous guidance, it was because you saw some international projects from 2011 moved to 2010. And it sounds like some of that is slipping a little bit again. So does that mean that you're tweaking your CapEx more in favor of North America simulation at the moment?
Well, I think part of the increase the last time around was also an acceleration of some capital deliveries into the US market where we saw demand for things like pressure pumping equipment increasing. So that was serving to offset that and I think that continues to be the case. Any kind of weakness that we might see in capital deliveries in international will be offset by deliveries for additional capacity in the U. S. Land.
Okay, thank you. Tim, second
American market. And right now, clearly, the North American
market is divided North American market. And right now, clearly, the North American market is divided between the very hot land market and the not so hot deepwater offshore market. So what are you seeing in terms of the psychological impact on overseas markets based on what's going on in the U. S. At the moment?
Clearly,
international pricing is still very competitive, Ole. We have as you recall, we had a very active 2,009 in terms of bidding processes as our customers took advantage of the changing dynamics in the industry. And those contracts clearly have come into play during the course of 2010. And as you would appreciate, there is some time between the ability to move those prices and the start up of those contracts. So I would say, in general, international pricing is still quite challenging.
There are a few areas that are little brighter than others. But in general, that psychology, if you like, from the North America market is still prevailing in the international markets.
Okay, Tim, that sounds very similar to what you said last quarter and yet you increased Middle East margins by 300 basis points and the rest of the Eastern Hemisphere by 100 basis points sequentially. So is there a volume effect here then or what's going on?
No, I think, Oli, one of the things is that once you get a handle on what your pricing dynamics are in the Eastern Hemisphere market because of the longer term nature of those contracts, it's easier to get your cost structure in line to support those contracts at what is a sufficient margin to take them on. And as Tim said, in 2,009, we were really dealing with a rapidly changing pricing environment. Not do a lot of changing to our cost structure last year. Now that we know what these contracts are, what we've won, what the pricing is on them, we can sure that our organization by country, by product line is now aligned with supporting that contract, but also being able to give us a chance to increase our margins going forward.
So you see the continued improvements to right size your infrastructure, your cost structure relative to the business that you've signed?
Yes. I mean we every quarter that's something that we work on and we try to focus on and sharpen up our operating capabilities by country at a lower cost.
Okay. Just finally one more on Iraq. There's been a whole bunch of announcements over the past 24 hours with whether it's Blue Coil or BP and some very large headline numbers. Is this 2010, 2011 or 2012? Or when do you should we expect this will be a meaningful contributor for you?
I don't think you should expect to see anything in 2010. We're in the back half of the year now. You see a lot of headline numbers. I saw the same ones you did. We're having the same discussions with a lot of these customers.
It'll take a while to get these contracts awarded. Typically then they don't have startups for 3 to 6 months after award. So I would say that you'll see awards in 20 11 with some commensurate revenues and then sort of a more reasonable operating environment probably into 2012.
Okay. Thank you very much.
Our next question
Angie.
The first question talking about pressure pumping, which we have at length already, but are you do you have any concerns you said you're going to protect market share. Any concerns so far on what you're seeing from your peers as far as new capacity additions? And then coupled with that, one of your peers obviously with the recent merger and then your other peer with a renewed focus on North America, are you seeing any change in their behavior specifically?
Yes. I think at this point in time everybody appears to be acting pretty responsibly. And we did work hard to increase our market share in the last downturn and we believe we have that market share is ours to keep and we're going to bring the equipment in necessary to support it. We don't see anything happening right now, which would let us conclude that there's a big wave of equipment coming into the North America market other than what an individual company believes is necessary to support their own market share.
Okay. Good to know. And then finally and then another is a follow-up to Bill's question earlier in the call. He asked about where you expect to see stronger growth internationally. What markets outside of Mexico and Venezuela could see a slower recovery in the back half of the year?
Which markets could be slower? Exactly. Clearly, you've already touched on Mexico. I think that clearly, North Africa, particularly Algeria, as Dave mentioned a little bit earlier, is somewhat of a concern primarily because we see some, should we say, slowness in general, there has been a little bit of a slowness there in terms of the mobilization of new contracts, which we had expected to take place by now. Though the full force of those, I think, will come in during the course of the late 2010.
Other than
that, Angie, I don't have any specifics other than, of course, the North Sea continues to be a bit of a challenging chestnut here. Activity has been quite slow in the first half of the year. We have better expectations for the second half, but we said that before.
Okay. And then finally, just as a follow-up to that is, do you think there's any risk to a push out to the international recovery to 2011 given global economic conditions, the Gulf of Mexico, a little bit nervous by the IOCs or you think clearly the NOCs should start to pick up in Q4 and we'll see at least some of it this year?
Yes. Every indication at the present time is that, as Dave said in his comments, that we'll see a slightly slower rate of change in Q3 than we'd originally expected, picking up momentum in Q4.
All right. Thanks.
Our next question comes from Jim Crandall with Barclays. Please go ahead.
Good morning. Dave, last cycle in U. S. Pressure pumping, there were shortages of equipment, competitors built capacity and you and your main competitors lost considerable market share. And I think you said we will never not let that happen again.
You seem to be more restrained on price and seem to be planning to be more aggressive in adding equipment early on than you were last cycle. Am I assessing things correctly?
I think, Jim, one of the lessons we learned from the last time is that you can push pricing up so hard, so fast across all basins that you make it un economic for your customers to continue to drill. And once that cycle sort of turns over, it can get pretty ugly as we've seen. So as I indicated in my comments, we're trying to go basin by basin, understanding the returns they need and helping them understand the returns we need. And the returns we need sometimes are more about efficiency than they are about market. And we have a targeted market share that we have right now and we are going to build equipment to meet that targeted market share, but we're not going to build any equipment beyond being able to do that.
And I hope everybody else is sort of equally responsible. And what do you on that, on
that score today? On that score today?
I see everybody being pretty responsible right now. Okay.
My second question is exclusive of Iraq, how active do you see bidding on IPM in the second half and over the rest of the year? And specifically, where might that bidding activity occur?
The IPM market right now, if you look at the markets that we're embracing IPM in a big way, obviously, we're rock a little bit in Saudi Arabia. As you know, we won the South Ghawar project, which by the way is going very, very well, in Algeria. And then of course, Mexico. Algeria, it's still a market that there's a lot of IPM activity in, but we have been successful as have our competitor unsuccessful as have our competitors in getting extensions signed by Sonitrack on a lot of the existing ones. So that's out there as a market, but right now it's pretty slow in Algeria.
Iraq obviously will be a big IPM market. But you see scatterings of it here and there, but it doesn't seem to be developing a big bow wave out in front of it right now. And I think that as commodity prices have stabilized, especially liquid commodity prices, I think you're seeing more and more of sort of the standard type of contracts
Dave, on Iraq, what would you do you think that all 11 or 12 sanctioned projects by the major oil companies will in fact be awarded this year? We've seen announcements as was alluded to by West Kurna and Majinun and Zubair. But do you think that other companies like Petronas and Gazprom, do you think that all 12 will go forward with contract awards?
I don't think all 12 will get done with just some of the major initial big ones. Number 2, I think our customers are finding it maybe more difficult than anticipated to get a tender award through the National than anticipated to get a tender award through the National Oil Company approval process, which all of them are required to do in Iraq. And therefore, I don't you will see the major ones awarded this year, but you definitely will not see them all.
And would you expect to see, the bidding for the first one on Revel wasn't so hot? Do you think that the bidding will be reflective of the fact that capacity is going to be tight as we get into the second half of the year and we hopefully will see better margins and pricing on future contracts there?
I hope so.
Me too. Okay. Thank you.
We'll take one more caller.
Our final question comes from Stephen Gengaro with Jefferies.
Thank you. Good morning, gentlemen. Just a quick sort of follow-up on North America, if you don't mind. Over the last 6 months, I mean, we've certainly been surprised by the pace of utilization increases. And can you sort of highlight, if you will, the areas where that has been maybe the strongest and the biggest surprise to you?
And then second, improving because of that versus a couple of years ago?
I mean certainly the benefits of being big, we believe in it. And when we say big, I mean, have the ability to bring multiple product lines to a customer offering and have one pull through the other. So I think being integrated and having multiple product lines certainly is working to our advantage. If you look at why the sort of sudden increase in capacity, 1, we have been talking for a number of quarters about the higher horsepowers that are needed to frac these shale plays and we're you now have to show up on a major shale play with 40,000 horsepower just to sort of anti into the game. And if you look at the average horsepower per job all the way across the U.
S, it's doubled in the last 6 to 12 months. So not every job takes 40,000 horsepower, but the average job in North America has doubled its horsepower utilization. So that in itself is absorbing a lot of the industry drilling tools up. The higher eating drilling tools up. The higher horsepower, higher flow rates on the fracking is eating frac equipment up, eating drill bits up.
And so the nature of the drilling, the more difficult type of situations and the higher horsepower needs all are increasing the demand for what you have to show up with on the job and it's also consuming that equipment a lot more quickly. And that in itself, as we have said in prior quarters, we thought would help balance out the supply and demand of equipment in the U. S. And I think that's turned out to be a dead on call.
And that phenomenon is obviously pretty sticky versus normal sort of cyclical dips and peaks?
No, that's correct. Okay. Thank you.
All right. Before we close, we'd like to announce that Halliburton's 3rd quarter
Sean? Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. Everyone may now disconnect.
Good day.