Good morning, welcome to the Halliburton second quarter 2017 conference call. Today's call is being webcast, a replay will be available on Halliburton's website for 7 days. Joining me this morning are Dave Lesar, Executive Chairman, Jeff Miller, President and CEO, Chris Weber, CFO. Before we begin, I would like to point out that this will be Dave's last time to participate on our earnings call, given his new role as Executive Chairman. As a reminder, 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-K for the year ended December 31st, 2016, Form 10-Q for the quarter ended March 31st, 2017, recent current reports on Form 8-K, 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. Unless otherwise noted in our discussion today, we will be excluding the impact of the early extinguishment of debt and charges related to an interest-bearing promissory note that Halliburton intends to execute with its primary customer in Venezuela. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our second quarter 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&A period in order to allow more time for others who may be in the queue. Now I'll turn the call over to Dave.
Thank you, Lance, good morning to everyone. Our performance this quarter demonstrates that Halliburton is The Execution Company, we are the leader in North America. Here are a few key highlights. Total North America revenue increased 24%, outpacing the average sequential U.S. land rig count growth of 21%. North America margins grew into the double digits. Although our international operations continue to be challenged, the numbers came in about as expected, we continued to tailor our business to the market as we wait for a recovery. We outperformed our major peer in every single geomarket, demonstrating once again that we continue to grow our market share globally.
Since this is my last call, today I want to share with you my view of the evolution of the North America land market, our customer base there, why I believe it will continue to surprise to the upside. For 25 years, I've had a fantastic front-row seat to the development of U.S. unconventional resources. We have become the largest service company in North America, that growth didn't happen by accident. It was due to the leadership of Jim Brown, his visionary management team. They saw the potential of unconventional resources in the region at the same time as a group of key early mover customers. We decided to work together using lots of trial and error to unlock this resource. We established enduring customer relationships, gained unparalleled base of knowledge that still provides us a sustained advantage today.
I think it's important to look at the North America unconventional ecosystem to understand our customers' behavior, and why their ability to so quickly increase production has expanded rapidly. Currently, there's a strongly held view by energy investors that the U.S. independent operators behave as a group. That view is wrong. When thousands of companies make discrete decisions about the same market each day, they do have a tendency to swing the activity and production pendulum too far one way or the other. That is not groupthink. It's the impact of individuals trying to do the right thing for their investors. Our U.S. customer base is not 10 or so countries like OPEC. It is made up of thousands of companies, from IOCs to individually owned businesses. When you look at them separately, you see thousands of entrepreneurial, smart, and motivated risk-takers.
They readily adapt to the quality of their reservoirs, have almost unlimited access to capital, aggressively apply new technology, and quickly morph their business models and structures to meet changing market conditions. Yes, sometimes even take advantage of U.S. restructuring laws. They are your classic American entrepreneurs, their success should be recognized. In Silicon Valley, such a success would be greatly celebrated as another industry disruptor. The unconventional disruption is not widely celebrated beyond the energy space, it should be. The development of U.S. unconventional resources has been as disruptive to the global energy markets as Amazon has been to big-box retailing or Uber to the taxi business. It unleashed a wave of cheap, reliable energy that has disrupted global geopolitical and energy dynamics, made the U.S. more energy independent, caused OPEC to react, and changed the fundamental economics of offshore production.
I believe it has created hundreds of billions of dollars of economic value, added hundreds of millions of dollars to government tax coffers, and provided untold savings for consumers. Unconventional is what I would call a disruptor, let's celebrate that. I've heard energy investors say that today's customer behavior shows nothing was learned in the last downturn. That simply is not true. Our customers are smart and adaptive, they do learn from the past. Their business DNA is to be survivors, they are. Look at the reaction in the past several weeks. Today, rig count growth is showing signs of plateauing and customers are tapping the brakes. This demonstrates that individual companies are making rational decisions in the best interest of their shareholders. This tapping of the brakes is happening all over the place in North America.
I can tell you the market will respond, it will rebalance, these companies will stay alive, survive, and thrive, because that is what they do. I said several quarters ago that customer animal spirits were back, they are with a vengeance, they are now running free through North America. Here is my last piece of wisdom for you. Do not bet against the animal spirits that our North America customers embody. I never have, I never will, because that is a bet that you will lose. Today is my last conference call, I'd like to take a moment to thank our analysts and investors. It's been a pleasure working with you, although we haven't always agreed, I've always enjoyed the spirited debates and intelligent conversations. I would also like to thank the employees at Halliburton for their hard work throughout my career.
We have been through many cycles, emerging stronger from each one. I am proud of what we have accomplished together. Even though I will be absent from future calls, I look forward to the next 18 months serving Halliburton as Executive Chairman. I am happy to leave these calls in the capable hands of Jeff, Chris, and the other members of our experienced management team. I have no doubt they will continue to lead the company as a customer-centric and returns-focused business. Remember one thing, we are the execution company. With that, I'll turn the call over to Jeff.
Well, thanks, Dave. Good morning, everyone. I'm pleased with our second quarter results. We continue to execute our strategy to maximize asset value for our customers and deliver differentiated technology and services that we believe will generate superior returns over the long term. Here are some highlights for the second quarter. Total company revenue was $5 billion, representing a 16% increase compared to the first quarter of this year. Total adjusted operating income was $408 million, primarily driven by continued strengthening of market conditions in North America, which were partially offset by pricing pressure internationally. Our North America revenue increased by 24%, outperforming the average sequential U.S. land rig count growth of 21%. The Completion and Production division revenue increased 20% and operating margins improved by an impressive 700 basis points to approximately 13%, driven by the strength of our production enhancement, cementing, and completion tools product service lines.
Cash flow from operations delivered about $350 million. I'd like to take a moment now to welcome Summit ESP and its employees to the Halliburton family. We were pleased to announce this recent transaction and are excited about what it means for us as we continue to strengthen our artificial lift capabilities. I'd like to provide some regional commentary around our quarterly performance. I believe I found the bottom of the international rig count in the first quarter. However, I don't expect a near-term rebound in the international markets for several reasons. First, the lengthy contracting cycles will mute any near-term pricing inflection. Second, our international customers need confidence in commodity prices in order to overcome the duration risk in their projects.
We continue to collaborate with our customers to lower the cost on these projects. While some are moving towards FID, it's important to remember that there's a significant time between planning FID and revenue generation for Halliburton. Finally, I've been consistently more conservative on the international market, and it's played out exactly how I called it. Today, I expect that there will be improvement in activity over the remainder of the year, but these improvements are not concentrated enough to offset the continued pricing pressure. As a result, international markets will continue to move sideways. With all of this said, it's important to understand that we are now into the third sequential year of significant underspending in the international markets.
This implies that the production declines outside of certain OPEC countries will begin to accelerate. Particularly next year as the backlog of new projects are completed and additional projects are not coming behind them. In the meantime, we are actively managing costs while protecting our valuable international position for the eventual market recovery. With the current level of under-investment internationally, production declines are a certainty, and you know where that leads. Our Drilling and Evaluation division is driven in large part by our international footprint. While we experienced a modest increase this quarter, largely driven by increased drilling activity in Latin America and the seasonal rebound of North Sea and Russia, the overall market continues to move sideways with continued pricing pressure. Turning to North America. After the operational update we gave in the first quarter, some of you were skeptical when we accelerated our equipment reactivation.
Based on our performance during the second quarter, there is no doubt we successfully executed our plan and that this decision was not only right, but dead on target. Why is that? During the second quarter, we continued to see strong incremental demand for completion equipment from our customers. The reactivated equipment we brought back went to work at leading edge pricing and has been accretive to overall margin and is expected to deliver acceptable returns that exceed our cost of capital. Our sand war room and logistics infrastructure allow us to manage the completions intensity our customers demand today, and we've been successful passing along supply cost increases to our customers. Our internal manufacturing capability is a proven differentiator in today's environment. It allows us to be flexible by being able to build what we need, when we need it, particularly in a rapidly changing market.
Today, we believe that current customer demand has outpaced the supply of completions equipment, and this should create a runway for a strong utilization through the second half of the year. We remain committed to generating industry-leading returns, and reactivating our equipment was the first step towards delivering the results you have come to expect from us. As some of you have heard me say before, customer urgency is the foundation for the path to normalized margins. Today, our customers remain urgent, and therefore, we believe our path to normalized margins is achievable. We get there through a combination of increasing leading pricing, improved legacy pricing, better utilization, and continued cost control. Let me be clear. Our pressure pumping equipment is sold out in the third quarter.
As we gauge the utilization of our equipment on a twenty-four/seven basis, we see a significant opportunity to improve and drive the downtime out of our calendar. In this environment, it's imperative to be aligned with the most efficient customers where we can create value for them while delivering the best returns for Halliburton. Filling our calendar with hyper-efficient customers is an important part of what allows us to achieve our margin goal. Looking forward, it's too early to tell the impact of commodity prices on customer plans for 2018. However, as Dave said earlier, at Halliburton, we never underestimate our customers' ability to adapt to the environment. In the first quarter, we experienced significant inflation in sand prices and increased volumes. As we continue to pass through sand costs to our customers, we expect to see greater technology adoption making better wells through engineered solutions.
For the first time in years, in the second quarter, we experienced our first decline in average sand pumped per well. Let me repeat that because I think this is important. We saw a decline in the average sand pumped per well. While this is only one data point, it's something we'll be watching. We believe current sand price levels have encouraged operators to optimize their completion design using more science as opposed to simply maximizing sand in a trade for increased production. We maximize returns on our technology investment by being the most effective in the market at lowering our customers' cost per BOE. Our strategy around technology development is to make returns for Halliburton. Very simply, our decision process around technology can be summed up into three questions. First, does it reduce costs? Second, does it produce more barrels? Third, does it do both?
As a result, we create cutting-edge technology that sets new standards for service quality and performance while making better wells for our customers. For example, in a recent effort in the Permian Basin, we used our Transcend permeability modifiers to increase production by over 60% compared to previous completion methods. The Transcend permeability enhancer portfolio is our premier offering for flow-enhancing technology. Using proprietary microemulsion technology, Transcend enhancers expand the reservoir contact area and improve fluid flow to increase the recovery factor for our customers. For unconventional mature fields, we developed the BaraShield light fluid system, tailored to reservoirs with salt formations and low fracture pressure to reduce circulation loss and washout. This custom tailoring allows us to reduce mud loss, increase drilling efficiency, and ensure zonal isolation for an efficient completion. In today's environment, it's crucial that technology be adaptable to customer demands and improves efficiency.
During the second quarter, our industry-leading cementing technology, NeoCem, was used in over 350 wells per month, including cementing the longest onshore lateral in history, a well that we are now completing. NeoCem delivers high-performance compressive strength, elasticity, and shear bond at lower density than conventional systems, saving time and providing improved performance. These three examples show the creativity of our chemistry-based research and development teams. We have terrific engineers and scientists looking at every way we can create efficiencies, reduce cost, and make more barrels. Internally, we have similar initiatives of continuous improvement, including reducing the time for R&D projects to come to market, like our very deep resistivity tool, which went from design to field in only nine months. Our surface efficiency initiatives with hydraulic fracturing that reduce the downtime between stages.
We are always pushing to improve our processes and optimize the services that we bring to market. Overall, I am confident about Halliburton's ability to grow North America margins and maintain the run rate for our international business for the remainder of the year. Our strategy is working well, and we intend to stay the course. We'll continue to drive superior execution and remain absolutely focused on delivering best-in-class returns. North America is clearly serving as the world's swing producer, which means this is where the game will be played, and Halliburton is the distinct leader in this market. I'd like to welcome Chris Weber to the Halliburton team as our new CFO. Throughout his career, he has worked in consulting, operations, and finance with significant international experience. These combined traits will help Halliburton, and they make him an excellent fit for our team.
With that, I'm going to turn the call over to Chris to provide some details around our financials. Chris?
Thanks, Jeff, good morning, everyone. Let's start with a summary of our second quarter results compared sequentially to our first quarter results. Total company revenue for the quarter was $5 billion, representing an increase of 16%, while operating income doubled to $408 million. These results were primarily driven by the improved activity and pricing in our Completion and Production division in North America. Now let me compare our divisional results to the first quarter of 2017. In our Completion and Production division, second quarter revenue increased by 20%, while operating income increased 170%, primarily driven by increased activity and pricing in our U.S. land pressure pumping business. We also experienced increased well completion activity, primarily in the Gulf of Mexico, North Sea, and Russia, partially offset by pricing pressure in the Middle East.
Turning to our Drilling and Evaluation division, revenue and operating income increased by 9% and 2% respectively, primarily due to increased U.S. drilling activity. In the United States, our Drilling and Evaluation revenue grew in line with rig count. On the international side, revenue was up due to increased drilling activity in Latin America, North Sea, and Russia, partially offset by price pressure across the international markets. Now, let me take a minute to compare our geographic results. In North America, revenue increased 24% sequentially, primarily driven by continued improvement in pricing and activity in our U.S. land business, particularly our pressure pumping and well construction product service lines, as well as higher completion tool sales in the Gulf of Mexico. In Latin America, we saw revenue increase by 10%, primarily driven by increased drilling activity in Mexico, Venezuela, and Colombia, as well as higher stimulation activity in Argentina.
Turning to Europe, Africa, CIS, revenue increased 12%, primarily due to a seasonal rebound in the North Sea and Russia, resulting in higher drilling, well completions, and pipeline and process service activity. For Middle East/Asia, revenue increased 2%, primarily as a result of increased fluid services in Asia Pac and higher wireline and well completion activity in the Middle East. Partially offsetting these increases was pricing pressure throughout the region, as well as declines in fluid and stimulation services in the Middle East.
Our corporate and other expense totaled $114 million in the second quarter, which was higher than originally anticipated, primarily due to approximately $42 million in litigation settlements and one-time executive compensation expense during the quarter, of which $29 million is a loss contingency in connection with an understanding with the SEC staff to settle the previously disclosed investigation of certain past matters related to our operations in Angola and Iraq. The settlement is pending approval by the commissioners of the SEC. Separately, the DOJ has advised us that it has completed its investigation of these matters and will not be taking any action. We anticipate that our corporate expenses will be approximately $70 million for the third quarter of 2017.
During the quarter, we also recognized a pre-tax charge of $262 million for a fair market adjustment, which is required by accounting rules related to an expected exchange of $375 million of our Venezuela receivables for an interest-bearing promissory note of that same value. This note is with our long-standing primary customer in Venezuela. Similar to the Venezuela notes exchange we did in the second quarter of 2016, this new instrument will provide a defined payment schedule while generating a return. We intend to hold the notes to maturity and expect to collect 100% of the principal. It is important to note that to date, we have received all payments required by the 2016 notes. As a function of our reduced debt balance, we reported $121 million in net interest expense for the quarter.
Looking ahead, we expect net interest expense for the third quarter to remain at a similar level. Our effective tax rate for the second quarter came in lower than expected at approximately 23% due to certain discrete items related to prior year audits. For the remainder of 2017, we still expect the effective tax rate to be approximately 29%-30%. Cash flow from operations during the second quarter was approximately $350 million, and we ended the quarter with approximately $2.1 billion in cash and equivalents. These results were largely driven by an improvement in days sales outstanding. Historically, our annual cash flow is back-end loaded for the year, and we don't believe that 2017 will be any different. Continued improvement in our earnings and a number of working capital initiatives should strengthen our cash generated from operations as the year progresses.
Now I would like to provide some color on our near-term operational outlook. The macro market dynamics make forecasting a challenge. This is how we see the third quarter playing out. For our Completion and Production division, we expect that our North America sequential revenue will outperform average U.S. land rig count, while international revenue will remain flat. In addition, we expect margins for the division to increase by 225-325 basis points. In our Drilling and Evaluation division, we are anticipating North America revenue will grow in line with the average U.S. land rig count, while the international market will remain flat to slightly down. We expect margins for this division to remain relatively flat sequentially. Now I'll turn the call back over to Jeff for a few closing comments. Jeff?
In closing, there are a few things I want to highlight. Our second quarter results clearly demonstrated the strength of our franchise in North America and our ability to adapt to a rapidly changing environment. If you believe in energy, you should be invested in North America. Halliburton's relative performance for the balance of the year will remain strong as a result of our ability to grow our North America margins and continue to maintain revenue and margins in our international business. Our strategy is working well. We intend to stay the course. We will continue to drive superior execution and remain focused on delivering best-in-class returns. I want to take a moment to thank Dave for his leadership of Halliburton during his 17 years as CEO. He created an amazing legacy. Our employees, customers, and shareholders have benefited greatly from his management of our company.
I've had the pleasure of working with Dave for almost 30 years. He's an important mentor to me. Together, we developed a strategy and leadership team for our company. I look forward to working with him over the next 18 months. Before we open the call up for questions, I'll go ahead and ask the first one myself because I know it's on everyone's mind. What are we doing around new build equipment? The simple answer is that we are first and foremost a returns-focused organization. We have the ability to make a series of discrete decisions around equipment. We'll only bring it out under certain conditions. First, that it's backed by customer commitment. Second, that it captures leading edge pricing, which is accretive to our margins. Finally, it generates acceptable return on investment.
Let me remind everyone that we have not invested in our legacy fleet in two and a half years. Prudently managing the health of our fleet is important to maintain the type of service quality and reliability that our customers have come to expect. Therefore, some replacement of equipment will be necessary over time. Our manufacturing center in Duncan is a powerful competitive differentiator for our organization. It allows us to be nimble and build equipment as needed with short lead times. This flexibility allows us to control the rate at which we manufacture, building as little as 2,000 horsepower at a time if need be. We delivered what we said we would on the reactivation plan. When we build additional equipment, we'll do it with the same discipline around returns.
Halliburton is the execution company. You have to trust me to do the right thing, run the business in the right way, and make the right decisions. That answers it. Now, let's open it up for other questions.
Thank you. Ladies and gentlemen on the phone lines, if you would like to ask a question at this time, you may press star, followed by the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Due to time constraints, we ask that you please limit yourself to one question and one follow-up. Once again, that's star 1 to ask a question. Our first question comes from Jud Bailey of Wells Fargo. Your line is now open.
Thank you. Good morning.
Good morning, Jud.
Right. First let me say, Dave, congratulations on a great career as CEO of Halliburton. I enjoyed working with you the last several years.
Same back at you.
Okay, thanks. First question, I wanted to just circle back on the impact of reactivations in 2Q and how to think about any impact on the third quarter. It was talked about in terms of negatively impacting margins on your first quarter call. You still had incrementals in C&P close to 50%. Could you maybe walk us through how you were able to offset some of the reactivation costs? Then to what extent will reactivation cost impact the third quarter? Do you intend to reactivate any more equipment, or is it more refurbs or new builds at this point?
Look, Jud, thanks. Bottom line is the costs were lower than expected in Q2, and that's because we got there faster and cheaper than we thought. Our Duncan manufacturing team just simply way outperformed, both by speed and bringing down the cost of everything. The other thing that happened was our people went back to work faster, and that's principally because of all of the demand that we saw for our equipment. I suppose one other thing is we were successful in bringing back a large quantity of former Halliburton employees, which is something we always wanted to do, but that also means that they go back to work more quickly with substantially less training. As we look ahead to Q3, obviously there'll be new challenges to deal with. For example, our employees.
Our employees haven't had raises in three years, we plan to, for example, provide our employees with raises. What I would like you to do is listen to Chris's guidance on Completion and Production. We said we'll outperform the rig count growth on revenue and continue to improve margins. That's really how we see that.
Okay. I guess just as my follow-up, just to kind of think about the progression on, I'll just stick there to C&P for now. One of the scenarios that's talked about if oil prices stay between $45 and $50, is that we continue to step up in terms of completion activity next couple of quarters and then maybe level off. Is getting to normalized margins a realistic scenario in your mind? If so, do we hit those by the fourth quarter, or would it be reasonable to anticipate being at normalized margins in next year if activity were to kind of level off at 4Q levels?
Well, look, we're not backing off our expectation on normalized margins. As I'd said, I won't give you a date, I don't have a crystal ball, I would expect it would be into 2018. It starts with customer urgency, as I've described. That really means having targets to meet targets, that's where we absolutely shine it on. That's what our value proposition does. We still see supply and demand tightness. I mean, our calendar is full as we look out. I don't see any change in my outlook.
Okay. All right. Thank you. I'll turn it back.
Thank you. Our next question comes from James West of Evercore ISI. Your line is now open.
Hey, good morning, gentlemen.
Morning, James.
Morning, James.
Dave, my congrats as well on one hell of a run at Halliburton.
Thank you.
Jeff, I know you've answered my question already to a certain extent at the end of your prepared comments there. As we think about new builds in the market, you laid out your three criteria for new builds. Are we at those criteria yet? Are you contemplating new builds kind of as we speak, besides replacements, incremental new builds?
Yeah. Look, I'm going to go back to what I said on this, James, and I'd be crazy to lay out our market strategy in detail here. I laid out the conditions, which is committed client contracts or commitment from clients, leading edge pricing, and then the ability to generate adequate returns. Short answer is we haven't built anything so far this quarter. I would say if the opportunity above does present itself, then we have the ability and the capability to quickly meet that demand with Duncan.
Okay, fair enough. Jeff, as my follow-up here, we have seen some additions by smaller companies that are mostly the ones that have either IPO'd or are trying to IPO and need to show some growth to do that. As you look at your major competitors and look across the pressure pumping marketplace, do you see much additional or incremental horsepower being added outside of kind of what's probably the natural attrition in the market?
No. I mean, our view had always been that there would be attrition. We see that. Today our view of the market is, in fact, sold out. That's part of the reason we see DUCs building and other things. We've really got the same amount of horsepower that's been in the market. It's changed hands in a couple of instances, but with respect to the headline amount of horsepower that was there in 2014, we're well short of that today.
Right. Okay, great. Thanks.
Thanks, James.
Thank you. Our next question comes from Bill Herbert of Simmons. Your line is now open.
Thank you. Good morning. Jeff, a quick question here for you. Just given the absence of reactivation friction, or at least not as much in the third quarter, assertive pricing that you're gleaning, given the undersupply nature of the frack market and the sense of urgency that you talked about, and the leveling off of the supply chain inflation, and yes, you sort of mentioned some wage inflation, why wouldn't incrementals in the third quarter for C&P be better than what they were in the second quarter? Your guidance implies assuming a low double-digit rate of revenue expansion somewhere kind of in the 40%-45% incremental margin range. That strikes me as conservative based upon the facts as you have laid them out.
Well, first of all, I won't lay all of that out, let's think about what Dave said in terms of tapping the brakes. We see some tapping of the brakes, which in my view Better described as, let's say, going from 80 miles an hour to 70 miles an hour.
It hasn't limited the ability to push on price, and our guys are absolutely doing that every day. As I said, we still see the customer urgency. We are moving on price all of the time. I think that if we go back to Chris's guidance, that's solid progress, particularly as I described kind of the macro environment that we, I guess, all have talked about.
Okay. With regard to the cadence of reactivations during the second quarter, would you describe those as having been relatively evenly distributed over the course of Q2, front-end loaded or back-end loaded?
Yeah. Just ratable sort of Q1, Q2.
Okay.
There was no particularly weighting one way or the other.
Thanks very much.
Thanks, Bill.
Thank you. Our next question comes from Angie Sedita of UBS. Your line is now open.
Thanks. Good morning. Certainly an impressive quarter to be your last one, Dave, and you will certainly be missed, and we wish you well on your new role.
Thank you.
On the questions for Jeff or Dave on the completion of frac intensity, is it fair to say that you haven't seen that yet peak? If so, when you think about North American revenues going into 2018 in a flat rig market, should we still see revenues starting to flatten out as well? Could you see still some growth in that revenue cadence with the completion intensity for thoughts on 2018 in a flattening rig market?
Well, Angie, it's too early to call on 2018. What I would say is, the pace that we see, we see a solid ramp in terms of our ability to execute, and deliver on the things that we've talked about with respect to normalized margins. We do see currently DUCs building. There's back-end weighting to activity. Quite frankly, the science continues to drive the business. I think, in terms of peak, the peak is going to be probably more science-based in the future and maybe less volume driven.
All right. Fair enough. On pricing and pressure pumping, thoughts on the outlook for pricing as we go into the back half of 2017 and even into 2018. Have you started to see a deceleration in recent weeks? Again, going back to that flat rig market, thoughts on pricing in a flat rig market.
Well, as I said, Angie, I'm not going to lay out our pricing strategy here on this call by any means. What I would go back to is, we push price all the time. What we do is in high demand and particularly in a market like we're in now, where urgency matters, delivering targets matters to our customers, and that's where hyper-efficiency and the technology that we bring are so valuable. I am confident that we are continuing to work. We talked about the levers that we have in terms of leading edge price, the legacy fleet, and then obviously cost and efficiency. We work on all of those all the time.
Great. Thanks. I'll turn it over.
Thanks.
Thank you. Our next question comes from Sean Meakim of J.P. Morgan. Your line is now open.
Hey, good morning.
Morning.
Jeff, you made a point of emphasis around sand demand perhaps starting to get smarter. Is it fair to say that service intensity likely continues to increase on an average well basis going forward? How would you characterize the rate of change on overall service intensity?
Yeah. The intensity continues to increase, both rate, and numbers of stages and those sorts of things. I think I bring it up simply because I have always believed that sand, A, is not infinite and it's not free. As we started to put constraints on sand in terms of availability and cost, it's actually had a very rational impact on driving thought around where it goes and how much, in terms of total volume. I would say in terms of how it gets placed, and I talked about a couple of technology examples in my prepared remarks, those are the kind of things that the equipment works just as hard. It is how it's applied. That's why I bring that up, that we haven't seen that before, really, gosh, in five years, six years.
It's one data point, but it's one that I'm certainly going to watch.
Absolutely. Just wanted to also touch base on the acquisition, on Summit. Could you give us maybe a little more detail on the expansion strategy for that new business? Just as you think about M&A, are there other tuck-ins needed to keep filling out that lift portfolio, or can you build off of Summit here to really get where you think you need to go?
Yeah. Thanks, Sean. The Summit deal is a fantastic fit and fantastic people is what I can say about that. It was a great add for our artificial lift business. When we put our business together with Summit, it creates a solid number 2 position in U.S. ESP. Love their technology and really love their value proposition. They are so dialed into how they respond to customers, and they've built the plumbing around that to do it very, very well. The strategy going forward is to use our footprint to create even more value, which we know we can do. Regarding here in the U.S., but also internationally. We talked about M&A before, and we've continued to be interested in growing our production group, which includes all forms of lift. Happy with where we've gotten to on ESP today.
I've also talked about chemicals being probably more organic and less M&A, but nevertheless, there'd be some M&A in that.
Got it. Thanks, Jeff.
Thank you.
Thank you. Our next question comes from Jim Wicklund of Credit Suisse. Your line is now open.
Good morning, guys. Dave, it's been a fabulous almost two decades, but you're not gone yet, so we'll see you other than on the conference call. Congratulations on a great run.
You're right, and I am not gone yet.
No, I got to bring that up, make sure everybody understands he's hanging around for 18 more months. Jeff, you make an excellent point on the pricing of international, saying that while overall activity is quick going down, there's not enough bulk of activity in several markets to really get pricing improvement. Where do you expect to see internationally, the first level of activity getting high enough that we're not giving away price anymore and a beginning of recovery?
Well, Jim, it's going to be in some spot where there's a discovery or there is enough sort of base load of activity to move quickly. If I had to guess, there's probably some places in Latin America that might fill that bill. As far as a broad region, that's really part of the issue, Jim, is it's like peanut butter being spread around the world, and it never.
Yep
gets enough traction in a particular spot. That's why what makes it tough is simply because it will be very concentrated in a place when we start to see that. Now, the other side of that's one of the reasons we do protect our international franchise. We think that the investment we made over the last several years is valuable and will be more valuable in the future when that time comes. I think we're moving sideways for a little while.
In Drilling and Evaluation, you note that you had a $150 million increase in revenue, but only a $3 million increase in income. That clearly points to price issues. I'm just wondering that you had a seasonal recovery in the North Sea and in Russia, and those are two places we normally don't associate with Halliburton being leading edge. Were those two of your better markets or your worst markets? Can you talk about just on the Drilling and Evaluation side, where those two markets fit?
On a relative basis, relatively smaller, but quite frankly, very good markets for us, and ones where I really want to give kudos to Joe Rainey and that team who have absolutely executed and built those businesses. Those are businesses that are, in my view, gaining traction in the D&E part of our business. Better alignment around customers, I think closer alignment with customers, particularly in Russia today, and very encouraging.
Thanks, guys, and good quarter. Appreciate it.
Thanks, Jim.
Thank you. Our next question comes from David Anderson of Barclays. Your line is now open.
Great. Dave, all that time on the road, I think you've earned your downtime. Good luck on your next venture there.
Hey, appreciate it.
Jeff, I was just wondering if you could talk a little bit about the pricing slightly different way. You talked about getting leading-edge pricing on your reactivated equipment, but I'm curious about your legacy fleets out there. I think that's been one area you've been trying to keep that. You want to keep those relationships there. What's that spread now in the pricing between legacy and kind of new equipment on the market? When do you think that starts to close? Is that a year-end? Is that kind of a 12 months it takes to close that gap? What's your thoughts there?
That's something that is closing, I'd say sort of every day as we work it. Let's go back to why there is a spread there, it's because we're aligned with very good customers. They're very efficient, we want to be part of their business, we believe we can do a lot to help drive down sort of their overall cost and lower their cost per BOE. That's why we never had a, we abandon half the market to go move somewhere else. We absolutely want to support all of our customers. I'm not going to give you that spread, but I will tell you it's something that I think I'd said in Q1 that we would be closing in on that over four quarters. Look for some time early in 2018 to have that done.
Okay, great. Thanks. In terms of your fleet now, what percentage of your overall fleet has your modern Q10 pump out there? I was wondering if you could expand a little bit upon that pump and how that changes in terms of the useful life of your equipment versus what's out there in the market. You touched on it before about the attrition out there, just trying to get kind of a sense as to kind of how your equipment is different in the market than other equipment out there, why we should think about that differently.
Yeah. I would say we're probably in the 60% range or so for the following reactivation. The important thing about that equipment is that it is built for total cost of ownership. We don't sell this equipment in the market. Our guys at Duncan are absolutely motivated by one thing. What is the most resilient, efficient piece of equipment? I go out and check to make sure that it's competitively priced, which it is. More important than its cost is what it does for our guys in the field and the way that it's integrated. It runs at higher rates. It uses all available horsepower. It's more efficient by still about a 20% efficiency compared to what we see in the market.
When I think about how do we make the best returns in the marketplace, we always think about how do we drive capital off of location, first thing to do is have more efficient pumps on location.
Great. Thanks, Jeff.
Thanks.
Thank you. Our next question comes from Kurt Hallead of RBC. Your line is now open.
Hey, good morning. Dave, congratulations and all the best.
Thanks.
Hey, Jeff, you brought up a very interesting comment a little bit earlier about seeing the first quarter here where sand use per well has declined. I was wondering if you might be able to elaborate on that a little bit more. Do you sense that it, as you mentioned, that it is truly, purely an economic decision? Do you think it's an anomaly? Do you think there is a shortage of sand that's driving it? Just trying to look for a little bit more color on what you may be seeing.
Look, I think it really is part of the science of frack, that is it's not the only thing, it's not that customers are running from the economics, but they are making very thoughtful economic decisions. As the availability, or actually the applicability of science, and the better they understand, and we collectively understand how to make more barrels, that gets put to work with clearly an economic backdrop. I think that back to Dave's earlier comments on our customers, I mean, this is an incredibly adaptive group of customers that I think have demonstrated through the toughest cycle in our history, an ability to consume science, consume lessons learned, and move the cost per BOE down almost in the face of anything.
I think what you're seeing is really the natural evolution of, okay, as inputs move up, what are better ways to get more barrels? In some cases, we're seeing that. This is not across the board, but on an overall basis, that was the data point we saw.
Okay. Thank you. Just maybe on the international front, I know you mentioned that you'd be spreading the peanut butter analogy. It seems like there's a more concentrated increased activity levels going on in Latin America in a number of different countries. Do you feel like you could get pricing power moving in the right direction in Latin America before some other regions?
Well, again, I'm not going to give our strategy around price anywhere, but what I would say, Latin America is not too different in terms of the contract cycle, in terms of the length of contracts typically have a muting impact. There's quite a bit of equipment in the world today. Certainly look forward to that. It's not enough to change the overall trajectory.
Got it. Thank you.
All right. Thanks.
Thank you. Our next question comes from Waqar Syed of Goldman Sachs. Your line is now open.
Thank you. Dave, congratulations again, and you'll certainly be missed, and your comments would be missed greatly on the calls.
Hear that.
My question relates to the Permian sand that's been recently, a lot of new capacity additions have been announced, there's a good chance that prices are going to fall quite sharply in the Permian for E&P companies there. What impact does that have for pressure pumping companies as sand prices fall in the Permian? Is it neutral, or is it negative or positive? Also, how do you think about your own investments in transloading and rail transportation? Would that change if most of the sand is regionally sourced?
Look, that's great for us. It's good for our customers, it's good for us in terms of lowering cost per BOE. I've been fairly vocal about why we don't own mines, this is an example of why not, from Halliburton's standpoint, why we wouldn't want to be invested and tied with sunk costs to a place as technology moves a different direction. The transload infrastructure that we have is valuable. I would say probably the toughest spot to get to realistically is the Permian Basin. Local sand, in my view, opens up a whole new avenue of what is lower cost. Some of the things that we're doing around delivering sand, we're always looking at how do we get sand delivered at a lower cost point, and I think our containerized solutions that we're implementing are right in the sweet spot of that kind of development.
Okay. Are there any long-term negative implications or cost implications for rail cars or other things that you may have leased, or the industry may have leased?
No. I mean, the stuff works all over the country, and that's a fairly localized solution. I like what we're invested in, and we've always been careful. Again, we target about 50% of our capacities managed internally. We do that so that we can flex with the market. That's how I see this.
Okay, great. Thank you very much.
Thank you. Our next question comes from Ole Slorer, Morgan Stanley. Your line is now open.
Thank you very much. Again, Dave, congratulations with a very solid run at Halliburton.
Thank you.
Jeff, a quick question to you, again, regarding the sand logistics and the changes in completions again. Before you highlighted that Halliburton doesn't really have any interest in owning sand, but wants to focus on the logistics because of the changing nature of the type of proppant that's preferred. Could you talk a little bit about the kind of capacity that's being added at the moment in West Texas? It's kind of 100 mesh largely and some 40/70, and address that in context of other proppant and how you see the mix evolving and how that impacts Halliburton.
Look, we're in large part agnostic to the type of sand. The reality is we study sand closely, to understand how to better design chemistry to make better fracs. Cost is always a component of that. We've seen other media sort of go into vogue and out of vogue, and we've got MicroScout, which is a nano-style solution, a micro-style solution. I think that obviously what's being talked about today is consistent with what I hear from customers, and what is being consumed today. Again, the drive for better science is always going on, and that's one of the reasons our labs are constantly looking at how to take what's available and make it better and how to or to substitute with things that are better. I think the sand is appropriate.
In your view, the reduction that you saw on a per well basis, was that a function of shortages of sand pricing and therefore forcing the industry to adopt different methods? Do you see this trend continuing even as sand gets debottlenecked?
Well, it's one data point. I will clearly be watching that. The sense that I get is more around design. Our clients are dead focused on lowest cost per BOE, making more barrels and at a lower cost. Designing things that can consume less sand but deliver more barrels or as many barrels, is clearly what they want to do.
Okay. Well, thanks for your insights, Jeff. I will hand it back.
Thank you.
Thank you. That concludes our question and answer session for today. I'd like to turn the conference back over to Jeff Miller for any closing remarks.
Thank you, Candice. Before we close, there are a couple of points I'd like to highlight. First, our second quarter performance demonstrates the strength of our North American franchise and our ability to adapt to a rapidly changing environment. Second, Halliburton's relative performance for the balance of this year will remain strong as a result of our ability to grow North American margins and maintain revenue and margins internationally. Look forward to talking with you next quarter. Candice, you may now close out the call.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.