Good day, ladies and gentlemen, and welcome to the Halliburton Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, there will be a question and answer session and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Lance Loeffler, Halliburton's Vice President of Investor Relations.
Sir, you may begin.
Good morning, and welcome to the Halliburton Third Quarter 2017 Conference Call. As a reminder, today's call is being webcast and a replay will be available on Halliburton's website for 7 days. Joining me this morning are Jeff Miller, President and CEO and Chris Weber, CFO. Some of our comments today may include forward looking statements reflecting Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward looking statements.
These risks are discussed in Halliburton's Form 10 ks for the year ended December 31, 2016, Form 10 Q for the quarter ended June 30, 2017, recent current reports on Form 8 ks and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward looking statements for any reason. Our comments today also include non GAAP financial measures. And unless otherwise noted in our discussion today, we will be excluding the impact of the 2nd quarter fair market value adjustment related to Venezuela. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our Q3 press release, which can be found on our website.
Finally, after our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q and A period in order to allow more time for others who may be in the queue. Now I'll turn the call over to Jeff.
Thank you, Lance, and good morning, everyone. Overall, we had a fantastic quarter, and I'm very pleased with our results. We're hitting on all cylinders just like we said we would, and this quarter's performance is another example of why Halliburton is the execution company. Here are a few highlights from the 3rd quarter. Total company revenue was $5,400,000,000 representing a 10% increase compared to our 2nd quarter results, and we generated $1,100,000,000 of operating cash flow.
Once again, we outgrew our peers on a global basis, showing that we are taking global market share. Our North American revenue increased by 14%, significantly outpacing the average sequential U. S. Land rig count growth of 6%. Total operating income increased 55% to over $630,000,000 primarily driven by continued strengthening of market conditions in North America and improved profitability in our drilling and evaluation product lines.
Our Completion and Production division revenue increased 13% with 2 15 basis points of margin expansion despite the approximately 50 basis point negative impact of Hurricane Harvey. The Drilling and Evaluation division revenue increased 4%, while operating margins expanded by 260 basis points to approximately 9%, demonstrating solid execution in our international franchise. Finally, during the quarter, we completed the acquisition of Summit ESP, which is an important strategic step in building out our production oriented business lines and makes us the number 2 ESP provider in North America. In August, the Texas Gulf Coast was severely impacted by Hurricane Harvey and our fantastic employees work closely together to support those in our organization and the entire community affected by the storm. As a result of the weather, we had a few customers temporarily suspend activity in both the Gulf of Mexico and the Eagle Ford.
We also experienced increased costs because diesel fuel was temporarily unavailable and reduced efficiency due to sand supply chain disruptions, both of which negatively affected our margins for the quarter. In spite of these disruptions, the sophistication and hard work of our supply chain organization allowed us to quickly adapt to these challenges and continue to execute and deliver superior service quality. Let me take a moment and talk about a few things we said about North America in the Q2 call. We told you the rig count growth would plateau and that's exactly what it did. We said our North America sequential revenue would significantly outperform average U.
S. Land rig count growth, and it did. We told you that our completion and production margins would continue to expand, and they did. We said operators were beginning to optimize as opposed to maximize the use of sand and turn to technology to increase production. This trend held true as we saw average sand per well remained flat sequentially.
And finally, we said we would have the highest returns in the industry, and we do, as we continue to outgrow our peers and take market share. Now let me spend some more time on each of these topics. During the quarter, the U. S. Land rig count effectively flattened as customers reacted to shareholder input and their own view of market conditions for the balance of the year.
However, our revenue increased and we saw improved activity in our completions related product lines due to the natural lag between drilling and completing wells. Today, the industry is drilling approximately the same footage as in 2014 with half the rigs, while completions intensity has significantly increased. As the rig count stabilizes, our customers are focused on efficiencies, optimization and making more barrels. These are all things Halliburton does really well, differentiating us from our peers. I'm pleased with the progress we made this quarter towards normalized margins in North America.
Our strategy is working. And as I've said in the past, the path to normalized margins begins with customer urgency, and I still see that urgency today. We have 3 levers to achieve our margin goals. And they are 1, increasing pricing 2, improving equipment utilization and 3, structurally reducing our costs. Increasing pricing is important, but it's just one component we can leverage to reach our goal.
Ultimately, we will utilize a combination of all three levers to return to normalized margins. All three levers are important and the great thing about Halliburton's scope and scale is that we have the ability to pull on them all in a meaningful way. And you know Halliburton is the execution company. We're going to pull these levers as necessary to get to our normalized margins. The North America completions market remains tight and we continue to push pricing across our portfolio every day.
Demand for our completions equipment and service quality remains strong. The improving oil price outlook provides runway for us to increase our portfolio pricing as we go forward. So let me be clear, we still have the ability to push price. Equipment utilization comes in a couple of forms. 1st, it has to be working and second, it has to be working for the right customers.
Our fleet is sold out for the remainder of the year and into 2018. We continue to place our equipment with those customers who know how to effectively and efficiently use us to increase their productivity, which improves our utilization. As for reducing costs, we continue to remove unnecessary costs from our company. It's also critical that we save cost and increase utilization through the use of technology. Our Wellhead Express Connect unit is a perfect example.
This equipment allows us to increase our utilization by switching wellheads faster and more safely when doing zipper frac operations. As a result, we're able to reduce the number of people on location and improve our equipment efficiency. Let's now take a minute and talk about a few topics that I hear frequently debated in the market. The first is sand. During the Q3, total sand volume for Halliburton continued to increase, but our average sand per well remained sequentially flat.
Data points from the last two quarters and my discussions with customers indicate customers are focused on cost effective production. We hear a lot of conflicting anecdotes about sand use today because they're based on individual operators in individual basins. But the facts are, for Halliburton, sand per well was down in the Bakken, Rockies and Northeast, and it was up in the Permian Basin. This happened because customers that know the production characteristics of the reservoirs to streamline their operations to focus on cost per barrel of oil equivalent and are optimizing sand utilization. Conversely, those customers that are still drilling the whole acreage or exploring production boundaries of their reservoirs are continuing to pump jobs with higher sand loads.
At the end of the day, Halliburton benefits from both scenarios. The second topic is supply and demand for pressure pumping equipment. Now first, let me be clear. I believe the market is undersupplied today. At the same time, equipment is being used harder and maintenance costs are higher.
As a result, there will be a greater call for new equipment just to replace the active equipment that's being worn out more quickly, meaning the day when supply and demand come into balance is further out than people think. I believe companies that are not making money will struggle to build new equipment beyond their current fleet, take or pay commitments, as they work with constrained budgets and struggle to find capital to fund further purchases. You see many announcements of new fleet deployments, but no announcements of fleet retirements. But I can tell you, they are happening. Next, completions intensity is not slowing down.
We are pumping more sand with less equipment and as a result, the maintenance costs associated with today's completion designs are increasing. The design of our equipment gives us an advantage over the market that even we have seen an increase in maintenance costs. I believe deferred maintenance is happening throughout the industry. A proxy for deferred maintenance and the simplest place to see it is in the industry horsepower creep in crew size. And while Halliburton continues to operate with an average fleet size of 36,000 horsepower per crew and half for the last several years, the rest of the industry is now averaging closer to 45,000 horsepower per crew.
Deferred maintenance is creating this equipment redundancy on location. The bottom line is that Halliburton has the advantage to respond to customer demand by bringing less equipment to the well site and designing our equipment to require less maintenance cost. Building our equipment internally gives us the ability to respond quickly to market changes and to design our equipment to reduce the total cost of ownership. As a follow-up to that point, I said last quarter I'd be crazy to talk about new build equipment in detailed terms and this remains the case. But what I said has not changed.
We are 1st and foremost a returns focused organization. We will only bring out new build equipment under certain conditions. And those conditions are 1, backed by customer commitment 2, captures leading edge pricing, which is accretive to our margins and finally, 3, it generates acceptable return on investment. Turning to the international markets. Outside North America, our more conservative outlook for the last several quarters is proving accurate.
Our customers around the world have different breakeven thresholds and production requirements that all face the headwinds of the current commodity price environment. Due to lower cash flow and project economics, they are more focused than ever on lowering costs. The result of this combination is less activity and more pricing pressure. In contrast to North America, where we believe that a 50 dollars oil price drives significant activity, customers tell me the longer duration international markets will react less to absolute oil price, but more to a positive view of where price will be for several years. This isn't surprising given the longer investment cycle that many of our customers face.
I believe that we found a floor in the international rig count earlier this year. However, due to the longer term contractual nature of international markets and the level of continuing price pressure, I expect discounts will offset activity gains over the near term. In this environment, we have to execute and maintain margin by controlling costs. Our international organization is committed to making the toughest of markets sustainable and has continued to right size the business during the quarter, demonstrating impressive control over their costs. In addition, customers embrace the way we go to market.
We collaborate and engineer solutions to maximize asset value for our customers and it's paying off. In the Eastern Hemisphere, we achieved a modest improvement in activity in the 3rd quarter, but the landscape remains challenged. Pricing pressure and cost cutting remain major themes and the use of technology to lower the cost per BOE is ever more important. Our product service lines continue to deliver technology that drives our value proposition, maximizing asset value. The Middle East remains our most active international market with the largest part of the work focused on mature fields.
Among many important technologies deployed in the region, I'd like to highlight our Core Vault system. This system effectively stores sidewall cores with up to 2.5x more oil and gas than previously. This additional reservoir characterization and effective means for doing so allow our customers to make more barrels and reduce cost. In the Middle East, we continue to build on our leading position in project management because of our ability to work closely with our customers and deliver superior service quality. Our most recent contract win is a project to deliver over 300 wells in Oman.
And we've seen increased project management activity in this region, allowing us to showcase our services and technologies that reduce time and cost on a project. We have seen significant market share growth as we have a proven execution track record and deliver better wells for our customers. In the North Sea, this year has been about reducing production costs through standardization and technology optimization. We have the technology portfolio to solve our customers' problems from single density variable slurry cement that can be used for all sections of a well to our DataSphere array monitoring system that due to its modular design provides customized reservoir monitoring. We help structurally reduce cost by decreasing the time to drill and complete a well or by producing more barrels.
What's most important to point out is how we collaborate with customers and together we create terrific results. Another example is in the North Sea where our ruthless focus on service quality, collaboration with the operator and rig contractor, driving efficiency on critical path items and responding to customer insight has led to record breaking performance on a multi well integrated services contract. This project is truly a collaborative effort and through the collective thought and execution of the team, they've been able to reduce the time to finish a full year scope of work by over 165 days, saving over $170,000,000 The improved efficiency came from 2 areas, technology solutions for record drilling performance and collaboration, where a commercially aligned team coordinated collaborative planning and execution. Latin America saw a slight rig count growth in the 3rd quarter driven by increased activity in Argentina, Mexico and Brazil. While activity is improving, the pricing pressures across the region make it increasingly important to be efficient as we execute.
This quarter in Mexico, we designed and ran a specialty drill bit to help tackle a particularly difficult reservoir. This design reduced the necessary runs in hole resulting in a 3 day reduction in rig time. This example shows that even in a tough pricing environment, there's an appetite for new technology, especially if it will reduce cost. Finally, in recent days, commodity prices have experienced a modest rebound as we have seen some signs of tightening in the macro supply demand picture. However, I still believe that the oil and gas industry will largely remain in a range bound commodity price environment in the near to medium term.
I am confident that Halliburton has the right strategy. In this environment, we are focused on returns and capital discipline. In this type of sustaining market, I expect that our capital spending should be approximately in line with our depreciation expense. Our working capital should continue to improve over time as our day sales outstanding declines to traditional levels and our free cash
flow conversion should be in
line with or exceed our peers. To deliver these metrics, we are focused on maximizing asset utilization, improving working capital velocity and capital discipline. When I take all of those together, I am confident that we will generate solid free cash flow in today's market environment. Pure and simple, Halliburton is proud to be a service company and we believe our investors and customers appreciate that. I'm confident that we are working on the right things that create the most value and generate the highest returns.
Our strong competitive position is not only a function of geographic footprint, it's also the depth of the products and services that we provide to our customers and use to generate industry leading returns for our shareholders. Now I'll turn the call over to Chris for a financial update.
Thanks, Jeff. Good morning. I'll start with a summary of our Q3 results compared sequentially to our Q2 results. Total company revenue for the quarter was $5,400,000,000 representing an increase of 10%, while operating income was $634,000,000 an increase of 55%. These results were primarily driven by increased activity and pricing in North America.
Turning to our division results. In our Completion and Production division, 3rd quarter revenue increased by 13%, while operating income increased 32%, primarily resulting from improved activity in pricing throughout North America land and our pressure pumping, completion tools and cementing product service lines. On the international side, increased completions activity in the Middle East and the start of new contracts in Brazil improved results. In our Drilling and Evaluation division, revenue and operating income increased by 4% 44%, respectively. These increases were primarily due to increased drilling activity in the Middle East, North America and Latin America.
Globally, we saw sequential improvement in all of our drilling and evaluation product lines. Let's take a minute to review our geographic results. In North America, revenue increased 14% sequentially, driven by increased utilization and pricing throughout the United States land sector in the majority of our product service lines, primarily pressure pumping, as well as higher well completion and pressure pumping activity in Canada. In Latin America, we saw revenue increase by 4%, primarily driven by increased activity in Argentina, production group activity in Brazil and increased drilling activity in Mexico. These results were partially offset by reduced well completion activity in Venezuela.
Turning to Europe, Africa and CIS, revenue increased 6%, primarily due to improved utilization in the majority of our product service lines in the North Sea and improved drilling and well completion services in Russia and Nigeria. The results were partially offset by reduced activity in Angola. For Middle East Asia, revenue increased 3%, primarily as a result of increased activity in the Middle East and project management activity in Indonesia, partially offset by reduced activity and pricing across Southeast Asia and lower project management activity in Iraq. Our corporate and other expense totaled $71,000,000 in the 3rd quarter, and we expect our 4th quarter will be comparable to this quarter. As a function of our reduced debt balance, we reported $115,000,000 in net interest expense for the quarter.
Looking ahead, we expect net interest expense for the 4th quarter to remain at a similar level. Our effective tax rate for the Q3 came in at approximately 27%, slightly lower than expected due to variability in our earnings mix. For the Q4, we expect the effective tax rate to range between 27% 29%. Cash flow from operations during the quarter was approximately $1,100,000,000 Providing some color on our near term operational outlook. As is typical for the Q4, a combination of weather, holidays, budget constraints and year end sales make forecasting a challenge, but this is how we see it playing out right now.
Similar to prior years, we expect our U. S. Land results to moderate in the 4th quarter due to holidays and lower efficiency levels experienced in the winter months, particularly across the Rockies and Northern U. S. In our international business, we believe the typical seasonal uptick in year end product and software sales will be lower this year versus traditional levels as customer budgets are largely exhausted.
Given these factors, in our Drilling and Evaluation division, we expect North America revenue will change in line with the average U. S. Land rig count, while international revenue will increase by low single digits. For our Completion and Production division, we expect that our North America revenue will outperform the average change in U. S.
Land rig count by several 100 basis points, while international revenue will increase by low single digits. We expect operating profitability for both of our divisions to increase marginally in the 4th quarter. Let me turn it back to Jeff for a
few closing comments. Thanks, Chris. In closing, there are a few things I want to highlight. First, I am very pleased with our 3rd quarter results. I want to thank each of our employees for their hard work and commitment to execute at every turn and deliver Halliburton's value proposition.
These results clearly demonstrate the strength of our franchise and our ability to adapt to any environment. 2nd, Halliburton's relative performance into 2018 will remain strong as a result of our ability to grow our North America revenue and margins and improve our position in our international businesses. Finally, our strategy is working and we intend to stay the course. We are focused on delivering superior execution for our customers and achieving industry leading returns and cash flow conversion for our shareholders. Now let's open it up for questions.
Thank
Our first question comes from James West with Evercore ISI. You may begin.
Hey, good morning guys.
Good morning, James.
Jeff, for the first time, I think I can remember, your earnings met or if you exclude some
of the
Harvey impact at Topps Lumberger, which is pretty impressive, I think. What part of your strategy would you attribute that to?
Thanks, James. Look, our strategy is pretty simple and very executable and it's to be the best service company. And that means we focused on leading returns, margins and revenue growth. And along with that technology directly focused on returns, collaborating with our customers, our strong BD group and then delivering service quality. And I think that returns focused, I mean, that is our strategy and it's working.
Got it. And then, Jeff, a follow-up for me to a comment that you made towards the end of your prepared statements. It sounds like spending within or spending levels, CapEx spending levels at depreciation would be really just sustaining CapEx. So little kind of growth in PP or no growth in PP and E. Can you perhaps discuss the discipline here on your side with respect to adding equipment to the market?
Look, when we look at the market as it's playing out, I think we have half what we need to execute. And as I described, what we see in front of us in terms of activity as I described international, I described North America, I think at that sort of pace that then we ought to have a business that returns solid cash flow from that kind of market. And so when I describe those types of parameters, it's to describe what we see. And again, focused on returns means that we're very efficient and we drive a lot of velocity with the equipment that we have, utilization, things of that nature. I spent a lot of time talking about that.
But that is in fact how we see generating a lot of cash flow.
Got it. Thanks, Jeff.
Thank you.
Our next question comes from David Anderson with Barclays. You may begin.
Yes. Thanks. Good morning, Jeff. So just staying on the pressure pumping side just for a second here. Your strategy in the downturn is to gain share in stimulation.
You talked about all your equipment deployed. So I guess I'm wondering right now, does pricing out there currently support newbuild economics? It seems like we're at another one of these crossroads between maximizing returns or continuing to protect share?
Can you discuss your thinking, please?
Well, I think we're always going to be about returns. Clearly, we need share to drive the volume and the scale and that's where the efficiency and some of the things that I talk about are more meaningful at scale. But specific to the building question, I'm just going to go back to what I've said on this and I've answered this a couple of quarters now. But the three conditions being a committed client, leading edge pricing and generating adequate returns. But I don't think that there's a lot of juice in utilization, there's a lot of juice and in effect, market share that comes from better utilization.
So I think you kind of underestimate the number of levers that we have in the market, but it comes down to something that binary.
That's great. Thanks, Jeff. Kind of a different question, more strategic question. Back in September, you had talked about how Hal is not interested in financing E and P projects. It's been a subject that's been coming up quite a bit lately.
Can you update us on your thoughts around performance based contracts? And is there any desire on Halliburton's part to invest in these type of projects alongside your customers?
Yes, thanks. This is for us, we call that integrated asset management and it is really a capital allocation question. And it's where do we put our capital and what will make the best returns. And so and along with those better returns, in my view, a key part of that is asset velocity and to produce returns for our shareholders. And so we're not going to tie up our cash in things that we think have longer duration and likely lower returns.
We have done some smaller deals. We've done a few things. We understand this space. And when we do it, we'll do it with other people's money to maintain those kind of returns.
Okay. Thank you, Jeff.
Thanks.
Our next question comes from Bill Herbert with Simmons and Company. You may begin.
Thank you. Good morning. Hey, Jeff and Chris, I guess the comment with regard to I mean, you've made some I think some realistic and some encouraging comments with regard to your visibility and the continued pricing strength and tightness in the frac value chain accordingly. What should we expect for incrementals going forward? If you look at Q3 C and P,
they were in the low 30s,
which is typically reflective of volumetric incremental absent pricing. And I recognize that there was some Harvey noise, but kind of in the market that we expect, not necessarily red hot from an activity standpoint, but still tight and pricing still accommodating your utilization. You said that there is runway for improvement. Shouldn't we expect incrementals to be higher than what we witnessed in the Q3?
Yes. This is Chris. We're not giving guidance on incrementals. We're focused on margin expansion. We talked about marginal improvement in our profitability.
When we look at the pace that we're at, I mean, we've got almost 1,000 basis points of margin expansion in 2 quarters in C and P. And just a lot of time talking about the path towards those normalized margins, the levers that we have to pull. So we're confident of that path. Now remember, CMP is more than just frac and PE in North America. We've also got our production business lines.
We're investing in those business lines, looking to grow in line with that Summit acquisition. So there are other elements of that, but we feel strongly about that path with the levers that we had to pull that Jeff laid out.
Okay. And if we could drill down on pricing just a little bit more. I guess the narrative industry wide coming into this quarter was that leading edge pricing was still supportive of newbuild economics, but the slope of the ascent that we witnessed year to date was flattening, not flattened, but flattening. And there was still continued convergence between leading edge and legacy pricing. Is that a fair summation as to where pricing stands today?
Yes. Bill, I think that's reasonable. I mean, our guys push price all of the time. And so maybe not accelerating the way it did in the spring, but still opportunity and momentum in North America. I think if we looked at Q3, bit of a pause just as commodity prices bounced into the 40s.
But as we talked about, 1st and foremost, finding the right customers that drive efficiency, and it doesn't change the demand for our services today. And along with that comes the ability to move on price.
Okay. Thank you, guys.
Thank you. Our next question comes from Angie Sedita with UBS. You may begin.
Thanks. Good morning, guys.
Good morning. Good morning, Angie.
Jeff, so I appreciate the color on returning to normalized margins for North America. And maybe you could talk a little bit more about 2 of the levers, right, utilization and cost cutting. A little bit more color there on how much more you think you have to be done on the utilization side as well as on the cost cutting and maybe even a little bit of the timeline on how much we could see that carrying into 2018?
Well, I think the questions around the path to normalized margins, I've always said it starts with customer urgency. We see that calendar power being also important in terms of driving utilization and working with the efficient clients. In terms of how far there is to move, each of those levers has a fair amount of ways to move. And I won't give you the specifics, but it's one of those things that we work every day. But it's the precision around, for example, what happens on location and being able to measure all of those steps.
And again, to measure them scale is a bit of a different matter. But what's so special about that is that now when we make changes and drive efficiency, again, driving better utilization, we can drive it across the fleet, not just a fleet at a time. And so that gives me a lot of confidence around the ability to improve the number of turns on equipment in a day. From a cost perspective, we're constantly working that. I talk about our continuous improvement being one of the pillars of our strategy.
But really, Angie, that's what we do to systematically drive cost out of all of the components of our business. And oftentimes that includes technology. I referred to some of that in my script. But there will also be technology that takes all kinds of forms, some customer facing, a lot of it's internally facing, so that all of that value accrues to us in terms of reducing costs. Hope that helps.
Yes, that does help. I appreciate that. And then as an unrelated follow-up, maybe you could talk a little bit about your fleet today. And just as a reminder, how much of your frac fleet that's in the field today is Q 'ten versus legacy assets? And just thoughts on the life of those assets and replacement or upgrades over time?
Yes. Thanks, Angie. That's probably about 60% of the fleet's Q10 today. But again, we're the big push several years ago to retrofit the fleet with Q10s don't have that same requirement today. So and that's when we talk about capital, that's why I'm comfortable with the kind of capital progression we laid out in this kind of market because there is a very natural sort of replacement that happens over time.
And we'll do that with Q10s, but I don't think it's going to be it won't be anything like maybe what you've seen in the past. And the Q10s really have delivered and we continue to go to market with solidly less horsepower than competitors. And I think that also gets to, if we think about the industry's pace of replacement, I think we're going to well outperform that and that's going to show up in the form of return.
Great, great. Thanks. I'll turn it over.
Thank you. Our next question comes from Jud Bailey with Wells Fargo. You may begin.
Thanks. Good morning.
Good morning, Josh.
Jeff, just to follow-up on Angie's question. You highlighted kind of the 3 levers you still have to pull, you think you can pull to get to normalized margins. I'd be curious is of the 3, is 1 a bigger driver than the other at this point or are they all kind of equal or is one going to be a bigger driver? And is there a way to think about the timing in which to kind of get to that level? Is that still a realistic possibility in 2018?
Yes. Short answer, yes, Jud, on the to get there in 2018. The pulling on the different levers, yes, you know us, man, we're going to pull every lever we got, but those are the big levers that when we pull them, have the more meaningful impact. So I'm not going to rank 1 above the other necessarily. Actually, all 3 of them are very powerful and we're working those.
Okay. That's fair. And my follow-up question is, you alluded to in your prepared comments that your strategy on artificial lift and kind of the production side of the business. Could you you have Summit, is the strategy to just kind of grow that platform across the Halliburton Global Platform? Or do you still see other opportunities out there that could supplement Summit on both the production chemicals and the artificial lift side?
Yes, thanks. Look, I see all of production as an opportunity for us to grow. It's in our wheelhouse. It's as I talk about our strategy to collaborate and engineer solutions that fits well with what we do. Summit was such a nice add.
I give a shout out to the new employees we have from Summit, fantastic business. And yes, very scalable. And clearly, the plan is to scale that beyond the U. S. Into our international operations and that those activities are underway.
The other components of that, I've talked about chemicals. I think that will likely be a more organic move than it is M and A, maybe a little bit bolt on around that. But the guys are working hard at that every day and I really think that that is something that we will just systematically build out and we'll talk about it from time to time along that path, probably not every quarter, but as it continues to grow, we'll give you better insight into that.
Okay. I appreciate it. Thanks, Jeff.
Thanks.
Our next question comes from Jim Wicklund with Credit Suisse. You may begin.
Good morning, guys.
Good morning, Jim.
The biggest issue, of course, now we're talking about what 2019 R and D is going to be. But for the last several weeks, you've had an oil price high enough that E and Ps have been hedging. The Head of Total mentioned at a London concert conference that U. S. E and P have been hedging like crazy.
You guys have a little bit of visibility into 2018. I realize your customers really haven't set their budgets yet. But the discussions that you're having, are they more constructive now than they were before? Can you give us what little outlook you may be able to have for 'eighteen as we sit here today?
Yes. I mean, Jim, our Board is full through the 1st part of 2018. And the reality is the only people that probably talk to more customers than me is my BD group. And I talk to the BD group every day. And so we're having constructive conversations about 2018 and encouraging discussions.
I think the $50 oil through the planning cycle is a great thing. Yes, and I mean, this is the right time. And so they are absolutely planning to work next year. Hedges are getting in place. And I think it's from our interesting thing, when we talk to our customers, we don't lecture our customers.
I mean, we listen to them. And because we listen to them, we hear the message that they're getting from their stakeholders. And I think this is an important point because all of our with all of our conversations, my personal conversations, some are very focused on returns and there are others that are going to shoot the moon because they like the acreage that they have. But that's because that's what their shareholders want. And at the end of the day, we work for both sets of customers.
And so I'm very encouraged going into 2018, Jim. That's positive. I'll take that.
Good. Second question, if I could. Judd mentioned artificial lift. We all know Dover is in the market. Your balance sheet is a little over levered.
Can you talk about what the plan is, Chris, maybe through 2017 and through 2018 in terms of balance sheet ratios and freedom to do deals?
Yes. So I mean just in terms of the balance sheet, I mean we've talked about desire to further delever. We retired the $1,400,000,000 earlier this year. We've got a maturity in August of next year, dollars 400,000,000 that we plan to retire. We'd like to see our credit metrics normalized, debt to EBITDA under 2.5x, debt to cap moving back into 30s, and so focused on working towards those metrics.
Yes. And Jim, I'll just add the discussion around production and some of these things as part of what makes that C and P group a big group and there are a lot of moving parts in there.
Okay. Thank you, guys. Appreciate it.
Thank you. Our next question comes from Timna Tanners with Bank of America Merrill Lynch. You may begin.
Hey, thanks. Good morning.
Good morning, Timna.
I was wondering if you could talk
a little bit more about any future improvement in international, in particular, your comments on taking market share, if you can elaborate a little bit on how and where you've been doing that and if you have further rightsizing internationally?
Yes. Thanks, Timna. I mean, that team absolutely executing in the marketplace. I think we are taking share by virtue of the performance that we saw this quarter and we've seen for several quarters. But I think probably what's more important when we think about international is I think we have a more realistic view of what that market is.
For example, we're seeing more activity or at least signs of activity in the form of FIDs and things. But those are not tenders, those don't convert to service revenue quickly. We did find the bottom, but the I think that those are very competitive markets with a lot of visibility around the activity in those international markets. And so I do believe that the pricing pressure will persist and likely offset a lot of the gains that you might expect from that kind of activity, particularly as we go into
2018. Okay. So rightsizing may continue there, it sounds like?
Yes. And I think that that's just part of a process. It's a combination of our continuous improvement activities where we're consistently looking at technology to drive cost out. But at its heart, it is taking those things and turning it into how do we operate at a lower cost point. And I would say that that team has done that consistently.
That's not a projection. They will just manage all the levers that they have to manage.
Okay. And just want to follow-up on Harvey, if there's lingering impact into the Q4 and if that or if that's been left behind in the Q3?
No, I think that's behind us at the end of Q3.
Okay, great. Thanks.
Thank you.
Thank you. Our next question comes from Scott Gruber with Citigroup. You may begin.
Yes. Good morning.
Good morning, Scott.
Jeff, I wanted to start with your digital transformation strategy. I think Halliburton is doing more than many investors realize. Can you discuss your broader strategy around this effort, such as the Open Earth initiative, the Microsoft Alliance? And importantly, are E and Ps more willing to share data in the current environment? Or how do you work around the reluctance to share data if not and still deliver value enhancing tools?
Yes. No, very excited about our strategy. And I think we've laid that out. But it is at its heart, and this is an important distinction of an open architecture strategy, which makes it a lot easier for customers to use. I think there will always be competition around data between customers.
And I think customers are taking a closer and closer look at their own data and who owns and controls that data. And I suspect they will control it more so. It's just very competitive for our customers. And so when we think about that, we want to make certain that we have the right set of tools that can be used effectively by them and they're open in the sense that our customers uptake of those tools then, they can make them do what they need them to do. And I think tools is probably an oversimplification.
I'm describing more of a platform and a philosophy. But as we work with the Microsoft, for example, that's again an ability to leverage, I think, a lot of investment in R and D and cloud that will help our customers. But again, I will tell you we are very returns oriented. And so when I think about what we do, we're very specific about where we create value and what accrues to us versus necessarily, scatter shooting across the space.
Got it. Appreciate the color. An unrelated follow-up on the domestic frac market and the sand per well trend. What are you hearing from your customers regarding their potential response to falling sand prices as the new local Permian mines come on? Do you anticipate them using more sand per well?
Does that uptrend begin anew? Do they simply go out and drill more wells, which you may hear about through in discussions around fleet expansion? How do you think they respond to falling sand prices, particularly in the Permian?
Yes, I think all of our that will create lower cost, will create more headroom for our clients to work, no question. But I think the more important dynamic in the Permian than the price necessarily today is, as they better understand those reservoirs and how to make the best production at the lowest cost per BOE, that's why I held out the Permian as one where we see sand per well increasing. And I think that's more evidentiary of a market that's being learned as opposed to one being optimized. And that is makes perfect sense and that's what our customers do. I mean, they make the best investments and they manage their business very carefully.
And so when they make decisions to do more of something, there'll be a reason for that. I think that's more of the reason in West Texas. Today, as reservoirs are better understood in other parts of the country, that's where you start to see more of that optimization. But I would expect that it does free up more cash for doing more work, which is certainly positive. But I would not assume that they don't optimize in West Texas at some point either.
Got it. Appreciate it.
Thank you. Our next question comes from Chase Mulvehill with Wolfe Research. You may begin.
Hey, good morning. Hi, guys. Good morning, Jeff. So quick question on the C and P margin side. It came in a little bit light of kind of market expectations.
Can you talk about what you're seeing as potential bottlenecks on the U. S. Completion side and if they had an impact in 3Q?
Well, I think as I described earlier, specific to margins in C and P, we are making investments and other things like production group is in that group. And so there is more moving more going on in that than purely North America frac. But on a as it's a different question in terms of what kind of bottlenecks do we see, obviously, the hurricane drove some bottlenecks here and across the country. I think that as mines come on, a lot of the bottlenecks you hear about around sand get alleviated. Again, we have a bit of a differentiated view to those things given where we are and in fact our ability buy at scale, particularly with respect to sand, but then equally around people.
Again, we talk about people a lot and our ability to hire at a national level for people, I think gives us a differentiated position as we view those bottlenecks.
Okay. And the guidance for 4Q on the margin side, you said profitability will be marginally better in 4Q. Was that percentage margins or an absolute margin dollar when you said marginally better?
Percentage margins.
Okay. All right. So the last one, on the three levers that you mentioned with pricing utilization and cost reduction, how close are we to optimizing each of these levers?
Plenty of room to move on all three.
Okay.
All right. I mean, that's what we do every day. We're always working on those.
Okay. Thanks, Jeff. Yes. Thank you.
Our next question comes from Sean Meakim with JPMorgan. You may begin.
Thanks. Good morning.
Good morning, Sean.
So Chris noted in the marginally better margins on DME specifically, trying to get a better sense of the sustainability of that 3Q run rate given pricing remains pretty challenging internationally, activity is up but not dramatically. Can we give a little more context of that move in the margin to give us a sense of the look forward?
I mean, if the questions are the one offs in there, the reality, there aren't any one offs in there. That group absolutely executing very well. And I would say systematically driving cost out of the business, they're winning the contracts they need to win. And they are we continue to drive technology into the D and E Group that I think is paying off. And I've talked about the investment we've made in Sperry for some time.
And I think that's beginning to pay off. I think there's a lot of runway actually left to go there. But it will come probably in fits and starts as we go into next year.
Okay. Thank you for that, Jeff. That's helpful. And then just on following up on the expansion plans for Production and Summit, how do you think about strategically owning assets versus aligning Halliburton in partnerships with others where you're trying to expand your reach globally?
With respect to production specifically, it will be we'll invest in those things that we think we can uniquely use to drive value for us. And in those places where we can't, we'll look to partner. Very much a strategy being executed now. So I won't get into all any more details than that. But I would say, generally speaking, we're not afraid to and in fact, we'll seek to, in some cases, partner with companies that we believe are in businesses that we don't want to be in, but maybe form part of the value chain.
And I think we've demonstrated the ability to do that very effectively. In fact, with rigs, we work very closely with rig contractors and have had a lot of success in our project Got it. Great. Thanks, Jeff. And
Got it. Great. Thanks, Jeff.
Thank you. Our next question comes from Kurt Hallead with RBC Capital Markets. You may begin.
Hey, good morning.
Good morning, Kurt.
Hey, Jeff. I was wondering if you can give us an update, generate significant amount of cash and maybe kind of run through the priorities on that cash again for us between growth dividend, buying back stock and when you think about the growth dynamics, where would you be directing that? Sounds like North America, but just looking for some color on that.
Yes. This is Chris. I'll take that. I mean, as I mentioned earlier, in terms of use of free cash flow, we are still focused on debt retirement and we have the $400,000,000 maturity next year that we intend to pay off. We'll consider growth opportunities, both acquisitions and organic and ones we value accretive, generate industry leading service company returns, and that's in terms of absolute level and the speed with which we realize those returns, so short duration or rapid payback.
And after that, we'll look at returning cash to shareholders and considering both dividends and share buybacks.
Okay. Great. And maybe follow-up to one of the prior questions when you kind of talk about your 3 levers, trying to get back to normalized earnings. In your mind, Jeff, which one of those 3 would probably carry the most weight in 'eighteen as you see it right now?
We'll have to see when 'eighteen gets here, Kurt. I mean, we use all of them that are available and I'm not and I will tell you, I put sort of equal time into all three of them. I'll just go back to sort of Chris' view, incredible as he mentioned earlier, we've come a long way in 2 quarters and we will continue to use all of those levers as we move into next year.
And this is Chris. And like
we said, we're on the path 4th quarter with the seasonality and weather, holidays, customer budgets, I mean obviously not representative of what that normal path looks like. But with the margin guidance, the revenue guidance that we provided, we think that's generally in line with consensus estimates.
Okay, great. Thanks guys. Appreciate it.
Thank you. At this time, I would like to turn the call back over to Jeff Miller for closing remarks.
Okay. Thank you, Shannon. Look, I'd like to wrap the call up with a couple of key takeaways today. First, the 3rd quarter results demonstrate the strength of our franchise and the effectiveness of our strategy. I thank all of our employees for their commitment to execution.
Finally, I expect Halliburton's relative performance in 2018 will remain strong as a result of our ability to grow North America revenue and margins and improve our position in our international businesses. So I look forward to talking with you next quarter. Shannon, you may close out the call.
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.