Earnings Call: Q3 2015

Oct 19, 2015

Good morning, welcome to the Halliburton third quarter 2015 conference call. Today's call is being webcast, and a replay will be available on Halliburton's website for seven days. Joining me today are Dave Lesar, CEO, Christian Garcia, acting CFO, and Jeff Miller, President. Mark McCollum, Chief Integration Officer, will also join us during the question and answer portion of the call. During our prepared remarks, Dave will provide an update on the pending Baker Hughes transaction. However, due to the ongoing regulatory review, today we will not be taking any questions related to regulatory matters. 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, 2014, Form 10-Q for the quarter ended June 30th, 2015, recent current reports on Form 8-K, 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 include non-GAAP financial measures. Unless otherwise noted in our discussion today, we will be excluding the impact of these items. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our third quarter press release, which can be found on our website. Now, I'll turn the call over to Dave. Dave? Thank you, Kelly. Good morning to everyone. As expected, it was another very challenging quarter for the services industry. Activity levels and pricing took another hit across the globe as our customers respond to the impact of reduced commodity prices and the pressure that their own shareholders are putting on them. Considering the difficult headwinds that were working against us, I'm actually very pleased with our overall financial results for the third quarter, especially for our Eastern Hemisphere operations. Now let me cover some of the key headlines. Total company revenue of $5.6 billion declined 6% sequentially, outperforming our largest peer. I'm very pleased with the resilience of our international business, where we again outperformed our largest peer on both a sequential and year-over-year basis for both revenue and margins. This demonstrates once again that we are not getting distracted as we go through the merger process. I am confident that from what we are seeing in the marketplace, this is the same for Baker Hughes. Despite lower revenues as a result of pricing concessions and activity reductions, we were able to maintain operating margins due to a relentless focus on cost management. As expected, North America revenue and operating income declined further as a result of lower activity levels and pricing pressure. However, relative to the overall market, I am pleased with our performance. From the peak that we saw last November, our completions-related activity has declined approximately 18% relative to a 58% reduction in the U.S. land rig count. This clearly demonstrates the customer flight to quality that has emerged during this downturn. It positions us well for when the market recovers. Finally, we took an additional restructuring charge to reflect current market conditions. Let me remind you, as we approach the finish line on the Baker Hughes acquisition, we continue to maintain North American infrastructure well beyond current market needs, incurring a cost which we would have otherwise eliminated. This cost impacted North America margins by approximately 400 basis points in the third quarter. Turning to operations. In North America, prices continued to erode during the third quarter, impacting the total services industry profitability, obviously including ourselves. We believe these prices are clearly unsustainable, but as we have been saying all along, pricing cannot stabilize until activity stabilizes. Looking ahead to the fourth quarter, visibility is murky at best. Based on current feedback, we believe most operators have exhausted their 2015 budgets and will take extended breaks starting as early as Thanksgiving. Therefore, activity levels could drop substantially in the last five weeks of the year. In my 22 years in this business, I've never seen a market where we've had less near-term visibility. In reality, we are managing this business on a near real-time basis, customer by customer, district by district, product line by product line, and yes, even crew by crew. You know me and you know our management team. Nobody knows the North America land market better than us. We are the execution company, and we know what levers to pull to make this market work. Our view is that the first quarter could end up being a mirror image of the fourth quarter. Just as the fourth quarter is facing a steep drop-off post-Thanksgiving, we expect to see a slow ramp-up beginning in January and improving from there, suggesting that the first quarter could be the bottom of this cycle. If you pull back and look at the full year 2016 and compare it to 2015, you could envision a similar mirror image, directionally a slow start and then perhaps picking up speed in the second half of the year. There obviously are a number of moving parts in North America, and I'm not confident enough yet to call the exact shape of this recovery. We do expect that the longer it takes, the sharper it will be. Until then, we will continue to execute on our strategy, and we will be watching the same external data points that you do. What is happening to oil production? What is the rig count doing? What is happening with operators' cash flows? How are redeterminations impacting our customers' credit lines? In addition, we have our own proprietary internal metrics that we will follow. We will continue to adjust our cost structure to market conditions. To me, it does not make sense to reduce costs or infrastructure to reflect expected fourth quarter's reduced activity levels. Instead, we are positioning our North America land business for future success and to ultimately outperform the industry as the market recovers. Internationally, I remain very happy with where our business is today. The international markets have held up better than North America, but they are not immune to the impacts of lower commodity prices. We did experience lower prices during the quarter, but in anticipation of these reductions, we aggressively went after further cost adjustments. Although we had to concede some on pricing, we have worked closely with our customers during the past year to improve their project economics through technology and operating efficiency. Internationally, for 2016, we expect to see a continuation of trends from 2015. Land-based activity, including mature fields, should be the most resilient, while we expect offshore to see additional project delays. Now I'd like to provide you with an update on the Baker Hughes acquisition. During the quarter, we announced the second tranche of businesses to be marketed for sale in connection with the acquisition of Baker Hughes, and we expect that marketing process to begin shortly. On the first tranche of divestitures, we have now moved into the negotiation process. On the regulatory front, during the quarter, the timing agreement with the DOJ was extended by 3 weeks, and accordingly, Halliburton and Baker Hughes agreed to extend the closing date to December 16th. Outside of the U.S., we continue to make progress with completing the required filings and obtaining the necessary approvals. Specific to the European Commission, we are working cooperatively to respond to their information requests and expect to resubmit our filing in the near future, which will start the formal review process. Let me be very clear. We remain confident this deal will be approved. We continue to target a 2015 close, but the transaction could move into 2016, which is allowed under the merger agreement. We are enthusiastic about and fully committed to closing this compelling transaction and achieving our annual cost synergy target of nearly $2 billion. I want to be clear, this $2 billion will be on top of any cost reductions that we've made to date. We are very excited about the benefits of this combination and what it will provide to the shareholders, customers, and other stakeholders of both companies. This combination with Baker Hughes will create a bellwether global oil field services company, combining our highly complementary suites of services and products into a comprehensive offering that will deliver an unsurpassed depth and breadth of cost-effective solutions to our customers. Now let me turn the call over to Christian to provide more details on our financial results. Christian? Thanks, Dave. Good morning, everyone. Let me begin with a comparison of our third quarter results to the second quarter of 2015. Total company revenue of $5.6 billion represented a 6% decline, while operating income declined 21% to $506 million. North America led the decline as a result of continued activity and pricing headwinds. For our international business, third quarter revenue declined by 5%, while operating income margins remained unchanged to second quarter levels. The impact of price negotiations with our customers in the first half has been offset primarily by a proactive reduction in operational costs. In the Middle East Asia region, revenue declined by 4%, with a similar decline in operating income of 3%. Lower activity levels across the Asia Pacific markets were partially offset by increased activity in the UAE and Iraq. Turning to Europe, Africa, CIS, we saw third quarter revenue decline by 7%, with a decrease in operating income of 9%. The decline for the quarter was primarily driven by lower activity in Angola and East Africa. Latin America revenue and operating income both declined 4% during the quarter, driven primarily by reduced activity in Mexico. Partially offsetting this decline was improved unconventional activity levels in Argentina. Moving to North America, revenue declined 7% with operating income at near breakeven levels. Reduced activity levels throughout U.S. land were accompanied by further price reductions across the business, especially in the pumping related product lines. Globally, the continued activity declines and pricing pressures led us to take additional actions to adjust our cost structure. As a result, we incurred an additional restructuring charge of $257 million after tax in the third quarter, consisting primarily of asset write-offs and severance related costs. As this market plays out, we will evaluate our operations and make further adjustments as required. Our corporate and other expense totaled $58 million for the quarter, and we estimate that our corporate expenses for the fourth quarter will be approximately $65 million. Our effective tax rate for the third quarter came in a bit higher at 29% due to the impact of gains from our foreign currency hedging program. We expect our effective tax rate to be approximately 26%-27% for the fourth quarter. Given the ongoing decline in activity levels, we are reducing our capital expenditure guidance by an additional $200 million to $2.4 billion for the year. This represents a 27% year-over-year decline. However, our Q10 program remains intact as we derive significant cost savings from its deployment, and the Q10 provides us the ability to address the higher completions intensity experienced by the industry. Finally, let me give you some comments on our operations outlook, starting with our international business. We believe the typical seasonal uptick in year-end sales will be minimal this year as customer budgets are exhausted and may not fully offset continued pricing pressures. As such, we expect fourth quarter revenue and margins to come in flat to modestly lower compared to the third quarter. In North America, the prospects of reduced borrowing capacity for operators and a prolonged holiday season make the fourth quarter challenging and difficult to predict. The average horizontal rig count is down a little less than 10% from the third quarter average. If these headwinds play out, we estimate that the fourth quarter average horizontal rig count could drop about 15%-20% sequentially. We expect our North America revenues and margins to decline, but we anticipate sequential decrementals to be only in the mid-teens due to our cost reduction efforts. Now I'll turn the call over to Jeff for the operational update. Jeff? Thanks, Christian. Good morning, everyone. To begin, I'd like to take this opportunity to commend our operational teams for once again executing to our playbook. I'm telling you, we are not distracted. I'd particularly like to recognize the performance of our international employees for staying dead focused on our business in a very difficult market. What's on everyone's mind is North America. Let me give you a little more granularity on North America by division. Our drilling related businesses have been much more resilient than our completions related businesses. In fact, drilling division margins increased this quarter to 10%. This is including the 400 basis point impact of the added costs that we're carrying in anticipation of the Baker Hughes acquisition. Obviously, the most stressed part of our business is pumping. This is the business that we know the best. It's the business that recovers the fastest. It's the business that recovers the most sharply. We know what that path looks like. It looks like this. It looks like staying with the fairway players in the basins that we know. It does not mean chasing every stage. It looks like staying with the customers that are loyal, even if that means working at a price that we don't like, collaborating on a path forward that lowers their cost per BOE to a place where we can both be successful. It looks like staying with the overall strategy to focus on long-term returns, meaning we see a path to profitability. This is a very simple solution. Simple does not mean easy. If you're looking for a silver lining here, the most competitive piece of the business, pumping, is the one that we know the best. It's the business that recovers the fastest and the most sharply. You can be confident that we have the team that gets it done. Last time we reported earnings, oil was in the upper 50s. The outlook was cautiously optimistic. Since then, we saw oil drop into the 30s, which I can tell you elicited an immediate and visceral reaction from our customer base. As I described at a conference during the quarter, the rig count followed the oil price down soon thereafter. This has caused us to continue to look carefully and strategically at the business and how we're structured to execute. In the short term, we further adjusted our operations. Recent actions we've taken include partnering with our suppliers to find better ways to work together in these tougher times, leveraging our logistics infrastructure, including higher rate usage of unit trains, and stacking additional equipment during the quarter where we either were unable to make an acceptable return or cannot see a path to acceptable returns. Finally, right-sizing the business to reflect current activity levels. Unfortunately, since the beginning of the year, market conditions have forced us to reduce our global headcount by over 21%. These are always tough decisions affecting great people. They are simply decisions that we have to make. Consistent with maintaining our service delivery model to obtain the cost synergy savings in the Baker acquisition, we've taken a bottoms-up look at our service processes, including comparing our current structure to previous similarly sized markets. This is an examination of how we work. Those things absolutely required to deliver our value proposition, which also means stripping away everything that is not required. For example, in the third quarter, we eliminated an entire level of management in North America. In my view, this is not a one-time initiative. By clarifying and controlling how we execute, we can retain this efficiency, these cost savings as the market recovers. We have a two-pronged strategy, the first part being to control what we control in the short term, and the second is looking beyond the cycle and preparing for the recovery. Q10s are a great example. The cost savings we derive from these new generation fleets is substantial compared to legacy equipment, 25% less capital on location, 30% less labor on site, and up to 50% less maintenance cost. Q10 spreads now represent close to 50% of our fleet, and we should be near 60% by the end of the year. At the same time, those legacy assets that are still deployed are being strategically placed to maximize their potential in locations or functions that maximize their cost effectiveness. While the industry has seen average fleet sizes increase by 15%-20% over the last two years due to rising completions intensity, our average fleet size has been essentially flat as a result of the more efficient Q10s. When coupled with our logistics platform, we believe Halliburton offers the lowest total cost of service to our customers at any point in the cycle. We're pleased with our customer portfolio. Both in North America and on an international basis, we've aligned with customers who have strong balance sheets and assets in the fairway positions in the basins. These are the customers that have better well economics and are continuing to work through the downturn and are engaged in the important cost per barrel discussions. Improving a customer's cost per barrel of oil equivalent is core to our value proposition. This is why we continue to invest in technology, and our emphasis is on two basic tenets. One is increasing reliability, eliminating moving parts, simplifying designs, and helping eliminate non-productive time at the well site. The second is making better wells. Products like AccessFrac, CoreVault, and DecisionSpace help customers identify and access the sweet spots of their reservoirs. More importantly, these products have seen increased uptake during this downturn. Adoption of DecisionSpace is up double digits from 2014, for example, and the usage of AccessFrac has grown more than 60% over last year. There is no question that this is a challenging market today, but our playbook remains the same. We are looking through this cycle to ensure that we will accelerate our growth when the industry recovers, and we are managing through the downturn by drawing on our management's deep experience in navigating through past cycles. In the long term, we anticipate that unconventionals, mature fields, and deep water will offer the most significant growth opportunities. That hasn't changed, although each of these markets faces economic challenges right now. Ultimately, when this market recovers, we believe North America will respond the quickest and offer the greatest upside, and Halliburton is best positioned to outperform. Now I'd like to turn it back over to Dave for closing remarks. Okay. To sum up, we continue to make progress with the Baker Hughes acquisition, and we are diligently focused on finalizing all regulatory matters, completing the divestiture process, and preparing for integration activities after closing the deal. We are managing the downturn by executing our two-pronged strategy, getting down to our purest form of cost while retaining the flexibility to grow in our usual disciplined way as activity levels recover. For the fourth quarter, there's a lot of uncertainty as we approach the holiday season, but we believe that customer budgets will reload in the first quarter and anticipate activity to ramp up in the second half of 2016. Looking ahead, we're not going to try to call the exact shape of recovery, but we do believe that the longer it takes, the sharper it will be. When that recovery comes, we expect North America will offer the greatest upside and that Halliburton will be best positioned to lead the way. Finally, there is no doubt that this is going to be a bumpy road. History would tell you that we have outperformed in these kinds of markets, turning them into a new catalyst for growth. We are the execution company, so you can be sure that whatever the market gives us, we will take it and then take some more. Now let's open it up for questions. Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. As a reminder, please limit yourself to one question and one follow-up. Our first question comes from Judson Bailey from Wells Fargo Securities. Your line is now open. Please go ahead. Thank you. Good morning. I wanted to start off by asking about your international margins, where you continue to put up good results in spite of the downturn. Could you maybe give us maybe a little more color, first of all, on the resiliency of your margins and what you're doing there to keep those at levels of 2Q in year-over-year? Also, how should we think about margin progressing internationally in 2016 with pricing continuing to come down and offshore activity probably going to be weak again? Yeah, thanks, Judd. This is Jeff. Well, look, really, these guys internationally are absolutely on top of their business. They are, as you say, continuing to outperform our competitors in a very tough market. It really gets down to a couple of things. They're winning the right contracts, and they're winning quite a few important contracts in markets that are important to them. Also managing the heck out of their costs. This is a team that I fully expect will continue to outperform even when the market starts to recover. Judd, this is Christian. Let me take your question on 2016. If you look at how our margins behaved on a year-to-date basis, our international margins actually had improvement despite revenues slower by 11%. We actually had incrementals this year. In fact, we have compressed the margin gap between us and our largest competitor by about 200 basis points in a scenario where our revenues declined less. In 2016, it is unrealistic for us to think that we can continue to see our margins increase or even remain at these levels over the next year, given that we're going to continue to deal with a tough environment. In terms of margin progressions or decrementals, it would be very dependent on the magnitude of the declines between activity and pricing. It is way too difficult to say at this point. I will tell you, we will continue to aspire to continue to outperform our competition. All right. Thanks for that. Then I guess my follow-up, maybe for Dave, if I could just follow up on your comment to clarify the mirror image that you see maybe in one Q relative to four Q. Do you think we can actually see revenues maybe rebound modestly, it sounds like, in the first quarter? If so, do margins slip down a little bit more in the first quarter, or do you think they can hold stable with where you come in in the fourth quarter? Yeah, I think, Judd, it really depends. Obviously, there has to be and there will be a budget reload that takes place in Q1. I think the big question mark is how fast do our customers go back to work once they do reload their budgets, given off what we think will be a relatively low sort of rig count volume in the latter part of the quarter, especially in December. It really depends on the bounce back. The cash will be there. I think one of the things that our customers demonstrate, and believe me, we love all our customers, if they have cash, they're going to spend it. Really it depends on how quickly they want to ramp up. I do think that as we look at the potentiality of Q1, if there's a slow ramp up that gets a little better toward the end of the first quarter, I think that could be the bottom from a margin standpoint then at that point in time. Then my comment about sort of the rest of 2016 for North America looking a bit like a mirror image of 2015. If you could get off the mark slow when you spend, I think it really does come a little stronger in the back half of the year, and that gives us some hope at this point in time. Thank you. Your next question comes from Sean Meakim from JPMorgan. Your line is now open. Please go ahead. Thank you. Good morning. Good morning. I was hoping, Dave, just to get your perspective, maybe from Jeff as well. Looking at, we've got Paul, maybe at least half or more than half of the pumping equipment on the sidelines these days. Do you have any sense of how much of that equipment is unlikely to come off the fence once there is a call on it? Does the duration of the downturn increase what that could look like in terms of attrition? Yeah. Thanks, Sean. If we look at the amount of horsepower that's idled right now, just on the sidelines, about half of it's on the sidelines today in terms of stacked equipment. That's equipment that's not getting any maintenance, and it's being cannibalized for parts. The other factor that we see now is service intensity continues to increase, actually, on a per well basis. That's yet again harder on the equipment that is working. If we look at what's stacked today, we think about half of that equipment stacked today will not be ultimately serviceable. That may be in their estimates 4 to 6 million horsepower out of the market in 2016. That's very realistic. If we go back and think about 2013 Q4, we had talked about a 30% or so overhang of equipment then, that capacity overage narrowed to 5% by the end of Q1 of 2014. That didn't happen in 90 days. That happened throughout that downturn period. The takeaway is that's exactly why we're committed to Frac of the Future and having equipment in place that's able to perform sort of in this environment. That's very helpful. Thank you. I guess just to follow up on North America, what do you think E&Ps need to see in terms of not just higher oil prices, but their perceived sustainability of those higher levels? If we don't see maybe the number is 60 plus WTI early in 2016, is there a point in which you think that starts to put a second half recovery at risk? Yeah, I think this is Dave, you can argue all the macroeconomics. Where is the break-even price point? I think there's really actually, I think, a different way you need to think about the customer base in North America, especially the independent customer base. That's essentially with the high decline curves that exist on these unconventional plays. They really are in drill or die mode. If you go a year without drilling a well and your production starts to turn over, you're going to have to start drilling, or you're going to have to take your infrastructure apart that you've built up as a company. I think that as we get to the end of the year, if these guys have money, they're going to drill it up. That's just the facts that it is. Now, if oil's at 60, I think the banks will be more comfortable with extending lines of credit with sort of the debt positions that are there. I think that the real key is going to be the production declines you see, and when these companies get to the point where they have to start drilling, or they have to start dismantling their companies, and they're not going to want to do that. Thank you. Your next question comes from David Anderson from Barclays. Your line is now open. Please go ahead. Thanks. In regards to your cost control efforts, you mentioned on the call removing an entire level of management in North America. That got me thinking here. Can you maybe expand a bit in terms of what this redundancy was and perhaps maybe what some of the other opportunities to remove fixed costs from your system? Yeah, thanks. As we look at how we do business, we get a lot of opportunities to clarify precisely what are those moving parts. As we looked at what's absolutely required to deliver in terms of span of control and oversight of process execution, it became clear that there was a service line component in North America, an entire layer that we were able to remove. We can do that because of the discipline that we have around how we execute process. As that's continued to tighten, we've actually seen into the downturn service quality getting better, not worse. That's unusual actually going into a market like this. I attribute that to the discipline around execution, and so that then allows us to remove that layer. That's that thought. If we think about other opportunities, we're constantly evaluating things that we can do to take cost out of our business. This is in North America and the rest of the world in terms of maintenance process, value engineering exercises, Kaizen events. We're highly engaged in looking at those opportunities. As you're saying, the nearly $2 billion in cost synergies after closing Baker Hughes, I was just curious if what you just talked about impacts that $2 billion number at all. Obviously, market conditions have deteriorated. I assume there's some give and takes around that figure. Can you maybe provide a little bit of color around maybe some of the expectations of how that's changed at all? Or are there more opportunities, or is there maybe a little bit less opportunities considering the market's shifted, obviously? No. We are absolutely confident in the synergies of nearly $2 billion that we've talked about. I say that because those aren't synergies associated with necessarily the market related taking out a layer at Halliburton that we were talking about. These are more around changing basic ways that we work that then drive meaningful, sustainable savings. They range, won't give you too much granularity on them, but it's the way that we, for example, plug into North America supply chain being an example of that. That is a very valuable asset that immediately allows cost savings that are very sustainable. We can think about the same things in technology and a lot of places around the company where changing the way we work together is actually going to eliminate the bigger piece of cost. Thank you. Your next question comes from Angeline Sedita from UBS. Your line is now open. Please go ahead. Thanks. Good morning, guys, good job on international. It was pretty impressive. We think about North America, if we go back to, if we think actually about 2012 when we had significant overcapacity and pressure pumping. If you think about going into 2013 and 2014, we had no movement in price, but you saw steady increases in your margins on activity gains, right? Increasing utilization. If we think about this cycle, then Jeff, you made the reference that you see the path for return of profitability in North America. If we think about this cycle going into 2016 and 2017, have you guys done some work to think through where you need to be on utilization or even a rig count to get back into those high single-digit margins and even move back into the double-digit margins? Could you even see high single-digit margins at 1,100 or 1,200 rig count, assuming we get there in 2017? Thanks, Angie. Yes, the playbook as I described is simple but not easy. It means that we stay with the customers that can be efficient, that want to be efficient, and that are in the fairways. We stay in the basins where the efficiency matters, and by matters, I mean it always matters, but it matters the most to us when it creates the critical mass that allows us to leverage up on the volume and take advantage of our lowest unit cost delivery. Finally, is clients with a sense of urgency. By sense of urgency, I mean the urgency to keep the equipment working which ultimately does drive outsized profitability for Halliburton. With activity, I see the same path as we saw before. That hasn't changed at all. All right. Your thought would be we could move back to those single-digit margins, high single-digit margins, even in a muted recovery in 2016 going into 2017, even double-digit margins? Yes, absolutely. Thank you. Our next question comes from James West from Evercore. Your line is now open. Please go ahead. Hey, good morning, guys. Hey, James. Good morning. Dave or Jeff, you guys talk to your customers every single day. I'm curious about how those conversations are evolving, given that the vast majority of them are facing production declines next year. Dave, I know you highlighted you either dismantle your business or you drill, but is there some percentage of the companies out there that are willing to allow production declines in 2016 and not get after it? Well, I think it really depends on what their bankers are going to let them do, or whether their stock price has reasonably well held up in this market. Obviously, some of our customers had their share prices just crushed, and some have pulled back, but also to the point where they do believe that maybe they can go back in the market for equity if there is a more optimistic view of where WTI prices are. I think the customer discussions are really, we're going to wait and see right now, but we are going to reload our capital for next year. Some of them are talking about getting back to work as early as January, coming off a Q4 lull. Some, I think, are going to take a bit of a wait and see. I think very few of them, and certainly, I don't think I've had a single discussion with a customer, are going to let themselves get into a position of a meaningful decline in production before they figure out a way to start drilling again. There's another group of customers out there that really view that there is a subset of the customer base that will not get access to money, that will see a decline, that have good acreage, and they are going to be absolutely juicy takeover candidates at that point in time. Right. I think we just got to sort of wait and see. These redeterminations are going on. It looks generally, to me, like it's a sort of kick-the-can-down-the-road approach that's being taken at this point. That really just pushes the day of reckoning into the first quarter of next year. The reality is that the strong customers are going to survive, they're going to have money, and they're going to drill at some point next year. Got it. Then a follow-up for me on North America. Pricing, obviously, visibility is not great, so the pricing's still sloppy here. At what point do you kind of say, "All right enough's enough. We're not going to go down further." I guess the flip side is the attrition rate's picking up pretty quickly with your smaller competitors. At what point can pricing just not drop because the competition's basically gone away? Yeah. I won't give you a price, James, on the call. What I will tell you is that we look at a number of factors when we look at customers, challenging as it is right now. I'll give you not the price, but I'll talk about the factors. We absolutely look at the efficiency is clearly a component of how we look at pricing. It's also, again, customers and basins where we know we see resilience and customers able to execute. It's not so much a number, though we have taken equipment, and we have stacked equipment in 2015 when we got into situations where it simply did not make sense to put equipment to work. Yeah, I guess, let me just add to that. There is a point that, yes, we have walked away from work and are walking away from work every day. However, there are some key customers, as Jeff said, in key basins that have been very loyal to us, and we want to stay loyal to them. We know they're going to survive. We know they have good assets. We know they're going to get a budget reload. We know that they want to take advantage of the services pricing that's out there today. Even if I don't like that service pricing, it is there. It's a fact of the market, this is a long-term game we're in. These are long-term customers we have. We typically make good money from them in good times, and I'm not going to walk away from them in the kind of times we're in today because it'll pay off in the long run. I think that's, in my view, the smart way to approach this. Thank you. Our next question comes from Bill Herbert from Simmons & Company. Your line is now open. Please go ahead. Thank you. Jeff or Dave, can you just comment a little bit, and/or Christian, with regard to you've given a pretty Darwinian outlook for the fourth quarter in North America, but D&E so outperformed expectations in the third quarter. Do we see similar resilience in the fourth quarter, or how should we think about that? I mean, C&P is clear, but how should we think about D&E for North America in Q4? Bill, this is Jeff. Q4 right now is murky across the piece. I think it'd be unrealistic that if Clients stop working at Thanksgiving. If we look back to 2012, there was significant slowdown around Thanksgiving that sort of continued through to the new year. It'd be hard to imagine that D&E is immune to that same activity slowdown. That said, though, what it does emphasize is sort of the bifurcation in the marketplace and how stressed pressure pumping is today. That's why I get back to, I have a lot of confidence in our team, and our team knows how to manage through a market like this. Okay. Christian, with regard to I think I heard you say $2.4 billion in CapEx for 2015, and how should we think about free cash flow generation and working capital harvest for the next few quarters? For the next few quarters, our year-to-date cash flows has been impacted by a couple things, Macondo legacy payment with the restructuring and acquisition-related costs. If you look at our historical seasonality and cash generation, we typically do not generate a lot of cash in the third quarter anyway. We generate the majority of our cash for the year in the fourth quarter. We anticipate that our historical seasonality will hold true for this year and expect to generate cash in the fourth quarter. In terms of CapEx, as we pointed out, it's $2.4 billion, took out another $200 million, as we reiterated in our prepared remarks, we're still committed to the Q10 program. Thank you. Our next question comes from Scott Gruber from Citigroup. Your line is now open. Please go ahead. Yes, good morning. Good morning. Most of my questions have been answered, but I had one on the agreement that you guys executed with BlackRock to execute refracs in the U.S. Can you just provide an update on that? What's been the reception from the E&P community, and has capital been put to work? Thanks, Scott. The reality is this is a very small piece of the market, certainly today, with respect to refracs. That said, we are finalizing terms on a deal under that arrangement. I think the real and probably more important story is around the technology and the diversion capability and how that applies not only to refracs and to new wells and how that's able to improve production and make better wells. The other thing that's when we look at refrac is we see it really more as a portfolio approach to asset management, meaning it's in the toolbox. It's something important that clients can use to better manage pressure in the field, pressure sinks, and the relationship between parent wells and daughter wells. The takeaway, though, is that the technology and the funding are both in place, and we're well prepared for that to the extent that it does develop. As you look out into 2016, do you see an environment where pumping demand could do better than the horizontal rig count for the market as a whole, given some incremental refrac demand and incremental demand to draw down on the drilled but uncompleted? Yes. When I think about drilled but uncompleted, it's arguably deferred revenue. It makes sense to do when rigs are under contract and a company's trying to conserve cash. Nevertheless, those are there in the ground, and they are a ready source of cash flow. I think they may end up a little bit uncoupled from the rig count per se, just because it's there and needs to be done. Thank you. Our next question comes from Jeff Tillery from Tudor, Pickering, Holt. Your line is now open. Please go ahead. Hi, good morning. Christian, just had one question around the near term. You talked about North America kind of relatively harsh year-in, but also relatively shallow decremental margins. I'm just curious, how you manage costs in the near term to achieve those shallow decrementals. That's right. Our decrementals was 67% in the third quarter. We're guiding to decrementals in the mid-teens in Q4. The reason for that is most of the cost reductions that we did were towards the end of the quarter, savings of which did not have a material impact in the third quarter. We expect those savings will be in the fourth quarter, and that's why we expect to see a drop in decrementals quarter-over-quarter. Thank you. You talked a little bit perspectively about the international margin outlook, but I was just curious, of the pricing reductions internationally that have been agreed to to date, how much of that would you say was realized in the Q3 results? Is it more than half? Less than half? Just looking for a ballpark. Yeah. These are negotiations that are ongoing. Round 1 arguably occurred early in the cycle. Actually, much was stressed even at 100 in deep water. This has been an ongoing discussion of both negotiation and re-tendering of work. What we talked about last quarter, probably a quarter to a half has been absorbed during the current quarter, though as long as we see commodity pricing where it is and delays in terms of activity, I fully expect we will continue to see this. Now, the better discussion that we have with clients is around how to drive efficiency and how to use those things that are in our value proposition around increasing reliability and reducing uncertainty to help lower their overall cost. I would say I'm pleased that we're having more discussions that look like that with clients as they realize that they reach kind of limits around what's available in the service sector. Yeah, let me just add a little bit more color to that, because I think it's important to sort of sit back and understand where does a customer have a leverage point in these negotiations. If you go back to, let's say, a U.S. horizontal unconventional well, it costs $1, about $0.70 of that dollar is focused on the completion, particularly the frac. That's naturally where customers have gone in terms of the pressure to reduce cost. If you go to an offshore kind of a project, the cost is really in the E&C cost. It's in the day rate on the drilling rig, and the services work that we do is maybe 20% of that. The leverage point that customers have gone for there, and obviously you all follow the sector, has been to the day rates on the drilling contractors and to the E&C companies with a discussion with us on services rates. We're not the sort of cost tail wagging the dog on the offshore stuff. It's really the other guys, and that's really where the pricing leverage has been directed initially. Thank you. Your next question comes from Dan Boyd from BMO Capital Markets. Your line is now open. Please go ahead. Thanks. Dave, sounds like you don't expect a lag between higher oil prices and activity in North America, what's your best guess on the lag between higher oil prices and the first quarter we may see higher international activity? That's actually a great question, I don't know the answer to that, it will be a longer lag. Mainly because you look at sort of the two tranches of customers internationally. The NOCs have not pulled back as dramatically as the IOCs have with respect to their deepwater projects. The NOCs, if you think about sort of a slow wave up and down, I think that's what you're going to see. I think that if you look at the economics of deepwater development, I believe the IOCs are going to have to be convinced that not only are the prices at a point where these things can at least cash flow in the long run, that they see an upward trajectory in oil prices, that they can make a return on these deepwater projects over a period of years. It's certainly not going to be the first quarter or two of higher oil prices before you see a bounce back in the actual contracting for revenue in the offshore. You might see some FEED start up. You might see some pre-engineering start up. You might see project planning starting up, and all of that would be good because it's a sign that they're thinking about going more and quickly into the deeper water. It's going to be several quarters, and it really is going to be building confidence back up in the IOCs that the market is there for the long run. Thanks. Just the follow-up would be, of the three international regions, is there one you would expect to respond more quickly? Probably, I could see response in West Africa pretty quickly. The infrastructure's in place. It's not as hard to start up there as it would be maybe in some other markets. Again, there certainly would be the lag that Dave was describing. Thank you. Your next question comes from James Wiklendt from Credit Suisse. Your line is now open. Please go ahead. Good morning, guys. Good morning. The Middle East has been one of the better markets for everybody for a while, and Saudi always gets mentioned. You guys have a lot of exposure there. There were reports out yesterday, this morning, that Saudi, like every other oil company, I guess, out there, is being slow to pay its bills. When we hear that from Saudi, we get a little bit more concerned than your credit checks on E&P companies. Can you tell us if you're being impacted by that in Saudi or any place else in the world, and the implications for that? Jim, as just general statement that we are seeing lengthening of payment patterns from our customers, whether it's in the Middle East or everywhere else. I'm just happy to say that when we look at us versus our peers, our day sales outstanding continues to lead the pack. Okay. You don't have any particular issues in Saudi? No. No. We do not have. No. I wouldn't point to anything there. Okay. My follow-up. Jeff, getting to double digit margins by late next year gives me some idea of this. You make some pretty good points about changes in prices and cost and structural. If we assume 30% just as a rounding point, there's been 30% cost deflation to an E&P company, how much of that 30% do you think will end up being structural several years from now, and how much of that will end up being cyclical? That's a great question, James Wicklund. Look, I think at the margins or at the tail, the beginning and ending tail, you see sort of dramatic behavior. I think that has not been given away. I think that the path sort of more in the middle will be retained when we kind of get back in balance here with the service company. The short answer is, I think we keep most of that. We do get most of that back under the right conditions. The very right-hand side or the upper limits that we saw even going back to 2012 or 2009, 2010, 2011, those sort of numbers, we see more sustainable higher margins based on how we execute, how we take cost out of the system. That may be preferentially better performance by Halliburton around those things. I guess, Christian Garcia, if the other thing I would add, James Wicklund, is to the extent we have seen any structural change that we have given up to our customer, we will take the same structural change out of our supply chain, hopefully would end up basically net even. Thank you. At this time, I would like to now turn the call back to management for any closing remarks. Thank you, Danielle. I'd like to wrap up this call with just a few key takeaways. First, the pumping business in North America is clearly the most stressed segment of the market today, it's also the market that we know the best. We know our approach works when the market turns, and it will, this is the segment that we expect to rebound the most sharply. Second, we are maintaining our North American infrastructure required to accelerate delivery of the Baker Hughes acquisition synergies at a cost of about 400 basis points. Finally, our international franchise continues to deliver market-leading performance on a relative basis, both year-over-year and sequentially in a tough market. I look forward to talking to you again next quarter. Danielle, you can 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.