Good morning, and welcome to the Halliburton's Second Quarter 2015 Conference Call. Today's call is being webcast and a replay will be available on Halliburton's website for 7 days. Joining me today are Dave Lazar, 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 ongoing discussions, we will not be taking any questions today 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 ks for the year ended December 31, 2014, Form 10 Q for the quarter ended March 31, 2015, recent current reports on Form 8 ks and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward looking statements for any reason.
Our comments today 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 Q2 press release, which can be found on our website. We had several moving pieces this quarter, so let me help you walk through the numbers. As announced in our press release, our adjusted earnings per share for the quarter was $0.44 excluding restructuring cost of $0.30 and acquisition related cost of $0.08 However, as required by generally accepted accounting principles, included in our results was a $0.06 benefit related to the cessation of depreciation the depreciation benefit would have resulted in earnings per share for the quarter of $0.38 Going forward, the benefit associated with our assets held for sale should be factored into your financial models as this is the only quarter that we intend to disclose it separately.
Now, I'll turn the call over to Dave. Thank you, Kelly, and good morning to
everyone. The services industry obviously experienced another challenging quarter with lower activity levels and widespread pricing pressures across the globe as our customers continue to respond to the impact of reduced commodity prices. Considering the difficult headwinds that worked against us, I am very pleased with our $9,000,000,000 declined 16% sequentially compared to a 26% decline in the worldwide rig count. I'm also very pleased with our Eastern Hemisphere margin expansion, which once again outpaced our primary competitor. We generated nearly $1,200,000,000 in operating cash flow.
Operating income declined as a result of lower activity levels exacerbated by prior declines, primarily in North America. Revenue for North America was down 25% sequentially, significantly outperforming the 40% decline in the average rig count. And while the North American rig count declined 40%, our stage count declined less than 10%. Therefore, we believe that a customer flight to quality emerged during the quarter. And this gives us reason to believe that pricing declines may begin to decelerate.
And I can tell you our customers are smart, responsive and adaptable in this market. And although we experienced some weather disruptions, we were able to make up this work later in the quarter. We continue to maintain an infrastructure well beyond current market needs ahead of the Baker transaction, incurring costs which we would have otherwise eliminated. This impacted margins by 300 to 400 basis points in Q2. And decremental margins this quarter were better than previous cycles, which demonstrates that our aggressive cost reduction initiatives are helping to offset the current market challenges.
The U. S. Rig count finished the quarter down 55% from the peak in late November, but has moved sideways over the last few weeks. Price erosion continued in the 2nd quarter and is likely to remain fluid in the near term. We anticipate margin compression in the 3rd quarter, but believe it will be driven more by the full impact of pricing declines that we gave up in the Q2 and from lower activity levels more than continued price erosion.
In fact, we believe that service pricing for the industry has fallen to unsustainable levels. Last quarter, we described 3 types of service companies in the market: those making a profit, which weren't very many, those covering cash costs and those operating at a loss even on a cash basis. During the Q1, Halliburton was one of just a few companies that posted profits in North America and we expect the 2nd quarter has been even more challenging for those of us in the industry. As a result, we believe many of smaller service companies are now operating below cash breakeven levels, which leads to the conclusion that pricing cannot stay at these levels for an extended period. Now looking ahead, we could begin to see a modest uptick in activity during the second half of this year, which could include increased refrac activity, which Jeff Miller will detail later.
However, we are not expecting a meaningful activity increase until sometime in 2016 depending on the pace of production declines and where commodity prices settle out in the coming quarters. Therefore, what we are continuing to do is manage our costs, service our customers that are engaged in this flight to quality and prepare for the Baker transaction. Now outside of North America, I'm very happy with where our international business is today. Our full year outlook for our international businesses remains unchanged. We still estimate a mid teens decline in total international customer spend compared to last year.
However, we expect to outpace the total market and believe our revenue decline will be less severe. We also anticipate our Q3 Eastern Hemisphere margins will be in the upper teens. Now let me provide a little bit of international regional color. In the Middle East Asia, we see a solid and stable business as project awards across the Middle East are moving forward. Europe Africa CIS is challenged today with the North Sea, Russia and Angola markets being the most vulnerable.
And in Latin America, operators are struggling with their cash flows. Although the international markets are more resilient than North America, they are certainly not immune to the impacts of the lower commodity price environment. We did experience did experience some pricing declines in the first half of the year, but negotiations are continuing and we will not see lower pricing fully built into our run rate until the second half of the year. In addition, we are continuing to work with our customers to improve project economics through technology and improved operating efficiency. The execution of our strategy in addressing this environment remains the same.
We are continuing to employ a 2 pronged approach. We are looking through this cycle to ensure that we will accelerate our growth when the industry recovers. To do this, we continue to invest in key technologies, build out capital equipment and prepare for our pending acquisition of Baker Hughes. The second part of our approach is managing through the downturn, drawing upon our management's deep experience in navigating through past cycles. We are aggressively lowering our input cost, eliminating discretionary spending, managing our business within our cash flows and protecting our market position.
Now I would like to provide you with an update on the significant progress we are making towards closing the Baker Hughes acquisition. Let me begin with some of the more recent developments. During the quarter, we began marketing for sale our fixed cutter and roller In early July, we received nearly 25 indications of interest for each of the businesses, all of which included prices, and we are very pleased with the prices and the response. Because of the high level of interest we receive, we are limiting the number of bidders for the 2nd round to only the strongest responses. We expect to complete the auction process sometime this fall with the closing of the divestitures being concurrent with the closing of the larger transaction.
We have also recently provided a proposal for additional divestitures to various competition authorities around the world. In aggregate, the total divestitures being considered are still within the scope of those contemplated by us at the time that we announced the transaction. On July 10, both Halliburton and Baker Hughes entered into a timing agreement with the DOJ. Timing agreements are often entered into in connection with large complex transactions and provide the DOJ additional time to review responses to its second request. We have agreed to extend the period for their review of the acquisition to the later of November 25, 2015 or 90 days after both companies have certified substantial substantial compliance on July 14 and we expect to do so shortly.
Outside of the U. S, we continue to make progress with the required filings in foreign jurisdictions. Specific to the European Union, we expect to submit our filings later this month, which will start the formal review process. We are fully committed to our target of closing the acquisition in late 2015, though the acquisition agreement does provide the closing can be we are confident we can achieve the cost synergies of nearly $2,000,000,000 regardless of market conditions or any cost reduction actions taken by either company to that date. In closing, we are enthusiastic about and fully committed to closing this compelling transaction.
We are very excited about the benefits of this combination and what it will provide to shareholders, customers and other stakeholders of both companies. This combination with Baker Hughes will create a bellwether global oil services company, combining our highly complementary suites of products and services 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 back over to Christian, who will provide you some details on
our financial results. Christian? Thanks, Dave, and good morning, everyone. During the Q2, we announced our decision to divest our drill bits and drilling MWD, LWD businesses. These businesses were classified as assets held for sale in the Q2 and we ceased the associated depreciation and amortization for these assets resulting in an approximate $0.06 benefit to the quarter.
We've included a table in our earnings release quantifying the 2nd quarter profit uplift by geography. To provide better transparency of our current operational trends, the sequential comparisons in my comments today have been adjusted to exclude the special items indicated in our earnings release as well as the benefit of the lower depreciation, meaning both the first and second quarter results reflect the full depreciation burden in order to have an apples to apples comparison. Now let me provide a comparison of our 2nd quarter results to the Q1 of 2015. Total company revenue of 5,900,000,000 dollars represented a 16% decline, while operating income declined 18% to $570,000,000 North America led the decline as a result of lower activity levels and continued pricing pressure across all of our product lines. In the Eastern Hemisphere, 2nd quarter revenue declined by 3%, while operating income increased 17%, representing a 300 basis point margin improvement from the 1st quarter levels, despite activity and pricing headwinds.
In the Middle East Asia region, revenue declined by 5%, while operating income showed a Iraq where margins reached double digits for the first time, which we expect to sustain for the full year. Turning to Europe Africa CIS. We saw 2nd quarter revenue coming flat with operating income increasing by 69%. Seasonal activity improvements in Eurasia and Norway along with higher stimulation activity and completion tool sales in both Algeria and Angola drove the improvement for the quarter, offsetting weaker activity levels in the U. And operating income declined by 19% 21%, respectively, driven by Venezuela, primarily due to the negative currency impact of the new exchange rate.
Partially offsetting this decline was improved profitability in Brazil, resulting from the recently retendered directional drilling contract. Moving to North America, Revenue and operating income declined 25% and 59%, respectively, relative to a 40% reduction in the North America rig count. Lower customer budgets translated into additional reductions in activity levels throughout the 2nd quarter, accompanied by further significant price reductions across all product lines. Our decrementals in the second quarter were 19%, about half of what we experienced in the Q2 of 2,009. During the Q2, we took additional actions to adjust our cost structure due to the continued decline in the global activity levels.
As a result, we incurred an additional after tax restructuring charge of $258,000,000 in the 2nd quarter, consisting primarily of severance related costs and asset write offs. Since the beginning of the year, we have now reduced our global headcount by over 16%. We continue to evaluate our operations and we'll make further adjustments as required to adjust to market conditions. Our corporate and other expense totaled $70,000,000 for the quarter. We estimate that our corporate expenses for the 3rd quarter will be approximately $75,000,000 and this will be the new quarterly run rate for the remainder of 20 15.
Our effective tax rate for the 2nd quarter came in at 26% and is expected to be between 26% 27% for the remainder of the year. We continue to focus on cash flow generation. And given the continued decline in activity levels, are reducing our capital spend for the year by another $200,000,000 to $2,600,000,000 representing a 21% year over year decline. Manufacturing our own equipment provides us with the utmost flexibility to adjust our capital spend based on our visibility of the market. Finally, let me give you some comments on our 3rd quarter operations outlook.
My guidance commentary will include the benefit of our lower depreciation and amortization run rate from assets held for sale. Starting with the Eastern Hemisphere outlook, we expect to see a full quarter impact of price reductions, which will affect our Q3 results. We currently expect a low to mid single digit decline in sequential revenues with margins declining modestly into the upper teens. For Latin America, we also anticipate a modest decline in the 3rd quarter for both revenues and margins. In North America, if we extrapolate the current rig count forward, it suggests that the average rig count for the Q3 should decline by at least 5% compared to the prior quarter.
This in combination with a full quarter impact of lower pricing leads us to believe that revenues and margins in the 3rd quarter will be under pressure. This pattern is consistent with previous cycles where we typically see at least a 1 quarter lag when the market is transitioning towards a bottom. Based on our visibility today, we are currently expecting a low single digit decline in sequential revenues with margins also drifting modestly lower. Now I'll turn the call over to Jeff for the operational update.
Jeff? Thanks, Christian, and good morning. I'd like to start by congratulating our Eastern and Western Hemisphere operations teams for delivering solid results in a very difficult market. We are the execution company and our guys are flat out executing right now. Internationally, we continue to make progress with our mature field strategy.
During the quarter, we completed a successful infield drilling program in Malaysia, while mobilizing for projects in Iraq and Russia. In Mexico, we completed drilling the first well using rigs from our joint venture with Trinidad Drilling, setting a new drilling record for South Mexico Mesozoic Basin. We're seeing strong interest from our clients tendering new activity and the global pipeline of opportunities that we're evaluating continues to be in excess of $35,000,000,000 The deepwater economics were challenged at $100 a barrel and are clearly challenged in the current commodity price environment, which is precisely why we are focused on technology that both delivers better production and reduces the structural cost of drilling wells. This generally means removing complete activities from the work stream. A terrific example of this is how Landmark's decision space software allows clients to reduce drilling days by integrating geological data with well construction design.
In a recent deepwater project, this integration reduced drilling time by 15 days by eliminating 1 entire directional build phase. In another case, the President of another large client was quoted at a recent conference saying that his company reduced its seismic survey data analysis time by 80% through working with Landmark. The point is that Landmark is making a meaningful contribution to our strategy to lower the cost per barrel oil equivalent for our clients by eliminating activities and reducing structural costs while also delivering more productive wells. Another example of technology driving efficiency was the delivery of 3 lower cursory completions in the Gulf of Mexico using our enhanced single trip multi zone packer system. The ESTMZ is proving to consistently reduce rig time in these high cost environments.
Turning to North America land. The industry saw a sharp 40% sequential decline in the average rig count during the Q2. Against this backdrop, let me provide a few data points around Halliburton's operations in the quarter. North America revenue was down 25%. Our stage count was down less than 10%.
Average proppant per well increased 7% sequentially. And finally, approximately 85% of our active fleet continues to work on a 24 hour a day operations. And we believe these factors clearly indicate why operators prefer to work with a more reliable service provider like Halliburton for more complex completions. So now that the rig count appears to be scraping along a bottom, what happens next? The exact timing is difficult to predict, but the previous cycles would point us to the following and margins.
This will then allow our input cost savings to catch up and our efficiency programs and well solutions can begin driving margins up. Pricing improvement will then be a challenge until we see capacity tightening in the market. Therefore, any margin improvement will likely be the result of lowering our cost base. We stacked a nominal amount of equipment during the quarter and expect to put this equipment back to work when the economics justify doing so. We currently estimate that approximately 40% to 50% of industry capacity has been idled, although our percentage stacked is significantly lower.
What's unique about this cycle is how service intensity has evolved since 2013. Over the last 2 years, average job size has essentially doubled. And at the same time, both average pump rates and pressures are also up. On the plus side, bigger jobs mean more revenues and better equipment utilization for us. The downside is we believe larger completions are taking their toll on pumping equipment.
In fact, these factors point to higher equipment attrition rates for the industry. Now this is precisely why we continue to invest in our surface efficiency strategy at Halliburton. Close to 40% of our pressure pumping fleet has been converted to frac of the future with a target to reach 50% by year end. Our customers appreciate the reliability and efficiency of our Q10 units and we are pleased with the progress updating our fleet to this more cost effective model. In addition, the downturn has allowed Halliburton to retool and improve our maintenance and value engineering processes.
The result is that in spite of increasing service intensity, our maintenance cost on a per unit basis is trending down, while our service quality and efficiency are the best in company history, differentiating us from our competitors. And while the market has been myopically focused on service pricing, we know that ultimately it will be lower cost per barrel oil equivalent that we'll carry today. So to this end, in addition to surface efficiency, we continue to deliver technology to help our customers reduce the structural cost of their wells. For example, the illusion dissolving frac plug, which we launched in the Q2 will ultimately eliminate the requirement for coiled tubing to mill out plugs. The illusion frac plug provides high performance isolation during plug and perf operations and functions like a normal plug, meaning it does not require any balls, baffles or any sort of special casing design.
When dissolved, it leaves the full wellbore open to maximize production. And I'm pleased to see the growing customer interest in using technology for better well placement and better perforation efficiency. An example of this is our proprietary Frac Insight solution, which gathers the necessary logging data, but does it in a case tole environment, meaning it does not consume valuable rig time required by open hole solutions. In a joint study with a large customer in the Eagle Ford, Frac Insight data eliminated the pumping of unnecessary out of zone treatments, which helped reduce stimulation costs by over 35% and significantly improved the cost per BOE equation for our customer. Let me spend a minute on refrac technology in the market.
We've been involved in refrac operations for decades and have executed at least twice as many as any other service provider. Although relatively small today, we believe this market has significant potential in the coming years. So why are customers interested? Early horizontal wells were arguably under stimulated as stages per well are up more than 30% and proppant per well is up more than double since 2010. What's changed is 2 key components of technology.
First is our diversion chemistry that more effectively stimulates wells and then second is our diagnostic technology to validate those results. Diversion technology like Halliburton's access frac more effectively stimulates the entire lateral through better proppant placement, creates greater complexity within the formation and helps mitigate wellbashing scenarios. Thus far through our candidate selection process and design, access frac contributes an average of 80 percent increase, an estimated ultimate recovery for our refrac clients, while greatly improving the predictability of results. More importantly, Access Frac is equally effective as a solution on new wells, improving cluster efficiency and delivering 20% to 25% production increases for our customers compared to offset wells. Access frac is becoming a standard process for a growing portion of our clients and is delivering better production and EURs.
Our suite of fiber optic diagnostic tools deployed either as a permanent installation or on coil tubing allows us to monitor individual stage results and validate the treatment performance of our refrac solutions. This means that we can demonstrate that our diversion technology and equally critical delivery process together dramatically increase stimulated clusters along the lateral, thereby maximizing our customers' production and EUR. Though a relatively small market today, we see significant runway for refrac in the future. There's an opportunity to address the needs of operators to increase their production and expected ultimate recovery from the tens of thousands of unconventional wells drilled over the last several years. And we anticipate that customers will begin to dedicate a percentage of their annual spend to refracturing operations.
Because of our confidence in our technology and ability to lead this market, we've laid the groundwork to execute large scale refrac operations through alternative business arrangements. To this end, we're pleased to announce that we have entered into a memorandum of understanding with BlackRock to provide a funding mechanism specifically for refrac projects, up to $500,000,000 in capital over the next 3 years. We're pleased to work with a tremendous partner like BlackRock. This arrangement allows Halliburton to focus on candidate selection, execution and generating best in class returns, while allowing BlackRock to pursue innovative opportunities with their clients. We've seen it before.
Our customers and unconventionals are highly adaptable and they are actively seeking the surface efficiencies, downhole technologies and business arrangements that will make the economics work. When the recovery does come, it's our belief that North America will respond the quickest and offer the greatest upside. And when that happens, we are confident that Halliburton will be the best positioned to outperform in the recovery phase of the cycle. I'd like now to turn it back over to Dave for closing remarks. Thanks, Jeff.
To sum things up, this is
a damn tough market, one of the toughest ones that I've ever been through. And I don't believe anyone on the call can accurately predict when What I do What I do believe is that when the recovery occurs, North America will offer the greatest upside and that Halliburton will be the best position to lead the way. We are pleased with the progress of the proposed Baker Hughes acquisition and are working diligently to close this transaction before the end of the year. Looking ahead, whatever shape you think the recovery will take, we have the products, the technology and the management expertise to outperform the market. We have demonstrated this during the previous cycles and have no reason to believe that this cycle will be any different.
As we have said, our customers are smart, responsive and adaptable. And we are already seeing that by working together, we can figure out a way to have both of us earn returns for our shareholders even in this challenged commodity market. With that, let's open it up for questions.
And our first question comes from James West from Evercore ISI. Your line is now open. Please go ahead.
Hey, good morning guys.
Good morning. Good morning.
It looks like contrary to I guess popular belief on Friday you guys not have to work all weekend to change what you were going to say today. So congratulations on a good quarter.
Yes. Thanks, James. Yes, I had a stress free weekend, that's for sure.
Good to hear. Quick question on the North American 400 basis points of extra costs that you're holding on to right now, is that just Halliburton related costs? Or are you actually adding to your cost structure in anticipation of the Bakersfield transaction? And if so, will you have all the railcars, facilities, etcetera that you need once the transaction closes later this year?
Yes. Thanks, James. This is Jeff. The I mean, we have the best operating platform in North America. So when we look at that and anticipate adding a second story basically to the house, Our management structure, the operating bases that we have, the logistics infrastructure including things like Battle Red and our business development we know are critical to delivering the synergies and delivering them quickly.
So as we manage our business, we continue to invest in those things that support that sort of in spite of the market. So the answer is managing our investment in new things, but obviously retaining those things that we know are important.
Okay. Okay. Fair enough, Jeff. And another question, a follow-up for me on a related note on the synergy number for the Baker Hughes for Cobus transaction, it sounds like you're very confident still in that $2,000,000,000 number. However, both companies have taken your cost reduction efforts.
Is that I mean, are you synthetically raising that synergy number then if you're already both companies are already going through cost cutting right now?
Yes. I mean, that's the way to look at it. But I think what's most important to take away is that the while market adjustments are required, we want to be crystal clear that the current activities do not impact the our view and confidence in the $2,000,000,000 worth of post acquisition Please
go ahead. Thanks guys. Indeed a solid quarter. Thank you. Thank you.
Thank you. Our next question comes from Angie Steeda from UBS. Your line is now open. Please go ahead.
Thanks guys. Indeed a solid quarter, particularly given the markets. I guess, I think, about how you look forward into 2016 on the U. S. Pressure pumping market and just your thoughts on the outlook, not thinking about oil prices, but just the outlook for scrapping of equipment by some of your peers, maybe laying down equipment that's going to be cannibalized and are not returning?
When you think about 2016, how do you think the pressure pumping market will play out ignoring the oil price scenario?
Yes. Thanks, Angie. I mean 2016 looks better than 2015. But I'd like to reframe your question as how really does attrition play out. And for example, I was just out in the southern region looking at when I travel, I look at our locations and competitor locations and I see more equipment than required showing up on competitor locations to compensate for the lack of maintenance and the lack of capital investment.
In some cases, 2 times as much as what would be required. Now that's attrition in action. And capacity can tighten very quickly and we saw in 2014, how quickly attrition or actually capacity tightens. So I mean that's why we're so committed to frac of the future. I mean it clearly performs in the downturn and it's even more valuable as the industry recovers.
Okay. That's helpful. And then I was actually going to ask a surprise on the BlackRock side, the transaction. Can you give us a little detail there, further details on how that will play out, the logistics of the arrangement and just some color?
Well, yes, I mean, what we see is this is enables returns. It also lays the groundwork for us to move quickly at scale. And the short answer is set up around a 3 year sort of window. I mean it provides a lot of flexibility for us to act quickly.
Thank you. And your next question comes from Jud Bailey from Wells Fargo. Your line is now open. Please go ahead.
Thanks. Good morning. Dave in your prepared comments you noted that service pricing is generally unsustainable across all product lines. And I was wondering given the potential for attrition in the industry and given how low pricing is, how do you think do you think pricing can normalize back up to a more reasonable level before we fully utilize the fleet given the amount of stacked capacity? Or how do you see that first step in pricing playing out given how depressed pricing is and given how much idle capacity there is?
Should it normalize a little bit quicker because there's so much that capacity and people are investing in their fleets? Or is it going to take just as long as it has off of prior troughs and up cycles?
No. I think, Jud, the certainly, it's not going to pop back up to where it was even a year ago today. It will normalize in an incremental fashion and it's going to be a combination essentially of pricing increases, equalization or equilibrium in terms of equipment across the board and also allowing the input cost to continue to catch up with where we are. So it's going to be a lot of blocking and tackling and it's just going to go step by step.
Okay. Thank you for that. And then my follow-up is on international pricing. Christian, you noted in your prepared comments that taking into account you'll have a full quarter of lower pricing rolling through. How should we think about in the 4th quarter?
Have you already adjusted or have you already seen a lot of the new pricing rolling through the P and L? Or are we going to have more of an as more contracts reprice in the Q4 as well?
Chad, the 4th quarter is still early to call what the 4th quarter will look like. But if you think about this, we will still continue to have pricing pressures impacting the Q4. However, we would have the usual seasonal uptick that we experience on the during the end of the year.
Okay. Is it too early to see if you think those can kind of offset each other by the Q4?
At this point, we think that the seasonal uptick will offset the any sort of additional pricing impact that we might have in the 4th quarter.
Thank you. And your next question comes from Bill Herbert from Simmons and Company. Your line is now open. Please go ahead.
Thanks. Good morning. I just wanted to drill down a little bit further on BlackRock and also kind of broaden the discussion with regard to business models. With regard to BlackRock, what are they bringing to you that you can't do on your own? Is it simply balance sheet?
And then moreover, what exactly are you sort of purporting to do with regard to pursuing the refracs? Are you underwriting the cost of the refracs? Who are you targeting etcetera? And then secondly, more broadly speaking in terms of that the evolution of your business model, are you willing to put your balance sheet to work and make use of your robust holistic value proposition with regard to underwriting the cost of drilling and completing a well even a new well?
Yes. Bill questions in there. Let me try to synthesize and answer sort of one at a time. Think about what a service company brings to the table is sort of the people process and technology. And what we're looking for is sort of revenues and an income tail that goes out a number of years.
So it an income tail that goes out a number of years. So in my view, it sort of dovetails together very nicely. To specifically answer your question, yes, we believe in our technology. We believe in the refrac market going forward. And we believe that we can make a difference.
And so we would leverage our balance sheet to ramp that part of the business up. But what BlackRock gives us is an ability to lever beyond that, look at additional ways of doing business with our customers, different business models push beyond where we have been today or where we might be going in the future. But we're not going to lay those out for you here on the call, because I think those discussions are going to be with specific customers in specific circumstances and we'll remain confidential between us.
Okay. And who are what type of customer are you targeting? I mean, it's not I mean, it's not I would assume just the E and Ps and duress, but who else are we targeting?
No. We're not targeting marginal assets here. We're targeting a good we're targeting good sets of assets that for whatever reasons are not being able to get access by our customer base today.
Thank you. And your next question comes from Scott Gruber from Citigroup. Your line is now open. Please go ahead.
Yes. I want to reiterate great quarter especially with regard to those international profit margins. I'm curious as to your opinion on when the domestic industry could see some friction in rehiring labor if this recovery gains momentum? I realize that you're in a great position given that you're one of the very few companies actually has the ability to carry extra labor and extra cost today. So the question for you is really what rig count do you think you could see competitors become more aggressive in trying to steal your employees simply because there's a dose of quality labor on the sidelines?
Yes. I mean, that's probably less of a rig count question more of a capacity question as things start to tighten. And I think we've demonstrated through the last cycle our ability to ramp up very quickly with people. So not particularly concerned about that.
For the industry more broadly though, do you think it would happen this cycle at a lower rig count relative to the past because given the service intensity trends?
I think tightness could occur at a lower rig count most certainly. And I think that the lack of investment in the industry today could drive that tightness at a lower rig count.
And do you think the equipment burn rate is going to be an issue before labor or vice versa?
I think equipment precedes labor.
Got it. Thanks.
Thank you. And your next question comes from Kurt Hallead from RBC Capital Markets. Your line is now open. Please go ahead.
Yes. Good morning. I do follow-up to the prior question there. In one of your earlier comments, you mentioned that industry capacity for frac, roughly 40% or 50% excess at the moment. But when you factor in the attrition or prospective attrition, what would you say the net effective excess capacity in the marketplace might be?
I think it's Kurt, this is Jeff. I mean, it's if you think about attrition, it's happening all of the time, but it's not necessarily apparent all of the time. And by that I mean it's you don't see it until there's a call on the equipment and we really saw this last time. So as competitors consume more equipment on location to do the work, you don't feel the tightness. But as that equipment is called on for even a little bit of incremental activity that's when it's seen.
So recalculating the 50% overhang is difficult to do until there's a call on it. But we're certain that it's happening today.
Okay. And then from a follow-up, Christian was mentioning some continued pricing pressures or lingering effects of pricing pressures going out into the Q4. Just wondering if you might be able to give us some general sense, the pricing pressures going to be roughly equivalent in North America and international. I would be under the impression that the pricing elements would have largely abated during the Q3 if rig count is going to stabilize. Just give us more color on the price dynamics on a regional basis.
I mean, I don't know.
Well, I think pricing internationally all the customers ask for discounts. But the reality is there's not much to give. We never recovered from the 2,008 cycle internationally. And so the better that leverage is precisely what we do at Halliburton. North America, as we've said, we see the price decline rate maybe a description decelerating, but nevertheless still some pressure as we move through the quarter.
Thank you. And your next question comes from Jeff Tillery from Tudor Pickering and Company. Your line is now open. Please go ahead.
Hi, good morning. I guess, I'm curious to hear how the last few weeks have impacted the customer discussions, whether it be I mean, I imagine it's mostly focused on North America, but it did feel like completion activity was finding a floor and then kind of oil price rug gets pulled out from everyone. So I'm just curious how the your view around the Q3 has evolved over the last 3 weeks?
Well, over the last 3 weeks, it hasn't changed that much. I mean, we think about the rig count, it has puts and takes. And so it was seeing some improvement. But then Friday, I suppose those gains were erased. So I would describe where we are today as scraping along the bottom.
And scraping along the bottom means that we don't anticipate dramatic change of any sort certainly over the very near term.
My follow-up just on the profit pressures in North America. Should we expect Halliburton's North American business in Q3 to stay profitable?
Most certainly. Right. So obviously there's still uncertainty on the depth and length of the cycle. However, we are doing everything possible to make sure that our North America will be profitable.
Okay. Thank you.
Al. Thank you. And our next question comes from Dan Boyd. Your line is now open. Please go ahead.
Hi, thanks. So a lot of focus on the attrition rate in pumping this call, but how about on the demand side? You mentioned that you're seeing the average job size increase significantly year over year. How should we rule of thumb that we should think about? And how is that changing?
Count? Is there a rule of thumb that we should think about? And how is that changing?
Well, the demand for equipment and the increasing demand on equipment is really a function of the increasing job sizes. And so we see more and more of the capital spend on completions. And I don't see anything that dials that back. Obviously, technology that we deliver is focused on making better wells sort of within the current job sizes. So I don't think job size growth is not infinite because it starts to have an impact on neighboring wells and other things.
But the quality of the fracs will continue to improve.
I guess said another way though, if you think about the job sizes increasing, is there something that we could tie to a rig count? I know the rule thumb used to be sort of 4 or 5 rigs per pressure pumping crew. Is it something lower than that today that you're experiencing in your Or are the increased efficiencies that you're able to realize offsetting that?
Well, I would think more in terms of well count than rig count today driving completions. And from our perspective, the basis for the Q10 and frac of the future is for us to be able to do that which we are doing with substantially less capital on location. So that's clearly part of our competitive advantage.
Yes. And I would say just one additional thing is, although the rig count has been decimated this year, the rigs that are running today, keep in mind are the most efficient rigs that are out there. And therefore, they are drilling more wells sort of per rig than we've ever had in the past. So I think the fixation on rig count, yes, it's important to the industry, but I think well count is another thing that folks need to look at and concentrate more on because it's the well count that ultimately drives how much completion work is done.
Thank you. And your next question comes from Brad Handler from Jefferies. Your line is now open. Please go ahead.
Thanks. Hey, guys. Maybe first question relating to the international activity. There were some references, maybe several references, particularly in Europe CIS Africa related to product sales. Should we read anything into that?
Is it was there a bit of catch up from buyers that weren't buying say in the Q4 of last year in the downturn? But was there some sort of truing up to a normalized level? And I guess what I'm hinting at is perhaps there's some fall off as guys have caught up a little bit in their product purchases as your customers have caught up in their product. Purchases? Does that undermine the Q3 outlook at all?
No. I think what we're trying to say service work is fairly consistent and fairly predictable. Product sales sort of come lumpy all the time. And so when you get a product sale, it might push your margin and revenues up or down. But I wouldn't other than sort of a 4th quarter push around Landmark and things like that, product sales do happen throughout the year.
We just like to be transparent and point out when they've helped. But they're going to help nearly every quarter. But it just depends on sort of what the location is, what the geography is and perhaps in some cases what the
Unrelated follow-up. Maybe it's my I'm not that strong in the accounting side and I don't want this to devolve to an accounting lesson, but I was a little surprised to see the stoppage of depreciation without things getting pulled into some sort of a discontinued state as the assets were held for sale. Does that happen? Or what's the trigger point for the businesses to be pulled out and put into a discontinued state?
Right. So Brad, obviously, you don't want to just an accounting asset, but accounting standard calls for a business that's planned to be divested to be classified as asset sale for sale when they meet certain criteria and we met those. Those are there are 6 conditions. To be reported as a discontinued operation, well, you have to put the results of that business in a separate line item. That business needs to represent a strategic shift by the company and that's what the accounting standards require.
And clearly, this is not the case in this situation because we will continue to be in those businesses for drilling services and drill bits. So our treatment is consistent with other merger situations that require sale of overlapping businesses.
Thank you. And your next question comes from Rob McKenzie from Iberia Capital. Your line is now open. Please go ahead.
Thank you. A quick question for you. Coming back to the North American margin impact, commenting about 300 basis points, 400 basis points of excess costs you're bearing. I guess I'm a little bit curious with your viewpoint for a muted recovery and uncertainty well into 2016. Pretty
simple.
I
mean,
I think we pretty simple. I mean, I think we have a superior delivery platform in North America. We know where we are going to be adding a tremendous number of people and assets to it. And in my view, it'd be crazy to get rid of it. If you look historically, the cost to carry something ultimately outweighs the cost to have to replace it, go out and get people, retrain those people, rebuild your infrastructure and all of that.
So it's a decision I made. It's on me if you disagree with it. But I think that it's easily defendable and I think it's certainly the way we need to go here. And I tell you, it's going to pay off once we get this deal done.
Great. Thanks, Dave. And then on the international margins, I think this quarter, obviously, up sequentially, I guess, in every geo market. Yet you're guiding that down slightly again, going into Q3. Can
you give us a
little more color on the Q2 performance? Obviously, some of that was the contract status in Brazil and elsewhere, but it seems like there was a fair bit of cost cutting that went into that that should carry forward, correct?
Yes. The Eastern Hemisphere team and the international group absolutely executing on the strategy we laid out, which is to manage costs over the near term. And they have done that taking out quite a
bit of cost, while at
the same time looking through the cycle. And we like the contracts that we've won and we've got some very strategic wins that are continuing to go on in places like Sakhalin and Brazil and other places. So it's really just execution, world class execution in the international business. But if
I can add to that in terms of our outlook, our Eastern Hemisphere margins were 19% in the Q2 and we're expecting this to come down a little bit into the upper teens. This would then suggest that our margins are being sustained at a higher level than what they were in the
Q1.
Thank you. At this time, I would like to turn the call back to management for closing remarks.
Thanks, Danielle. And I'd like to wrap up the call with just a couple of comments. First, there's no question that this is tough market. In markets like this Halliburton's operational execution becomes an even more valuable source of differentiation, which was demonstrated by our 2nd quarter results. And I'm confident that our team will stay dead focused on delivering both best in class service quality along with our long term strategies in deepwater, unconventionals and mature fields.
Secondly, we're pleased with the progress of the Baker Hughes acquisition on many fronts, including the regulatory process and the divestitures. We are confident that we can achieve the cost synergies of nearly $2,000,000,000 independent of the current market related actions by either company and are excited about closing the acquisition. Look forward to speaking with you next quarter. Danielle, please close the call.
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.