Section I: Management Presentation
Good day, ladies and gentlemen, and welcome to the Halliburton third quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.
I would now like to introduce your host for today’s conference, Mr. Kelly Youngblood. Sir, you may begin.
Kelly Youngblood – IR, Halliburton Company
Thanks, Sam. Good morning and welcome to the Halliburton’s third quarter 2013 conference call. Today’s call is being webcast and a replay will be available on Halliburton’s website for seven days. The press release announcing the third quarter results is also available on the Halliburton website.
Joining me today are Dave Lesar, CEO, Jeff Miller, COO, and Mark McCollum, CFO. Tim Probert, President of Strategy and Corporate Development will also be available today for follow-up calls.
I would like to remind our audience that some of today’s comments may include forward-looking statements, reflecting Halliburton’s views about future events and their potential impact on performance. These matters involve risk and uncertainties that could impact operations and financial results and 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 31, 2012, Form 10-Q for the quarter-ended June 31, 2013, recent current reports on Form 8-K and other Securities and Exchange Commission laws.
Our comments include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our third quarter press release which, as I have mentioned, can be found on our website. In our discussion today, we will be excluding the financial impact of the third quarter charges related to employee severance and asset write-offs of $38 million after-tax, or $0.04 per diluted share, unless otherwise noted. We will welcome questions after we complete our prepared remarks. We ask that you please limit yourself to one question and one related follow-up to allow more time for others who have questions.
Now, I’ll turn the call over to Dave.
David J. Lesar – Chairman, President, and CEO, Halliburton Company
Thank you, Kelly, and good morning to everyone. Before I talk about another strong quarterly performance, I would like to review the actions we’ve taken this year around our commitment to delivering shareholder returns to you. This year, we’ve repurchased approximately 4.4 billion, or 10% of outstanding shares. Earlier this year, we announced a 39% increase in our dividend. These actions reflect our continued confidence in the strength of our business outlook. Going forward, we remain fully committed to increase shareholder returns. We are targeting a dividend payout of at least 15% to 20% of net income, supplemented by additional systematic share buybacks, while leaving room for any capital spending or acquisitions we may want to do. We have been and will continue to be relentlessly focused on delivering best-in-class returns.
Now moving to the third quarter. Overall, I am pleased with our operational results. Total company revenue of $7.5 billion was a record quarter for Halliburton, while operating income was over $1.1 billion. We achieved record revenues this quarter in our Boots & Coots, Cementing, Completion Tools, Drill Bits, Multi-Chem and Testing product lines. From an operating income perspective, our Baroid, Completion Tools, Drill Bits and Testing product lines also set new records.
Turning to the geographies. On a year-to-date basis, our Eastern Hemisphere growth continues to lead our peer group. Compared to last year, third quarter year-over-year revenue and operating income grew 17% and 30%, respectively. Sequentially, the revenue improvement, a 9% growth in operating income, was driven by our Europe/Africa/ CIS region. In addition to record revenue in that region, we saw a strong sequential improvement in margins of 300 basis points, due to improved performance in our Russia, North Sea and Angola operations. Consistent with previous years, we expect the fourth quarter in the Eastern Hemisphere to be our strongest quarter of the year, due to seasonal year-end software and equipment sales.
Moving to Latin America. This has been a tough year as customer activity did not meet our expectations, and Jeff will talk more about our fourth quarter outlook. But as we look ahead to Latin America over the next few years, there are several positive factors coming into play. First, Mexico activities are expected to pick up significantly, as the mega tender projects ramp up in the first part of 2014. And although we do not expect a material impact next year, the recent reform discussions signal a strong opportunity in Mexico shale and deepwater markets.
In Brazil, we have a leading market share today in a number of long-term deepwater contracts, including some that could extend past 2020. Although activity levels are just treading water today, as deepwater activity level accelerates, we see significant upside in Brazil. However, there could be some short-term bumps in the road, but in the long-term, Latin America is expected to be an outstanding growth market for Halliburton.
In North America, we are expecting the typical seasonal decline in the fourth quarter that we have experienced in previous years. However there are some additional transitory issues we are currently facing. Due to the recent floods in Colorado, logistical disruptions in the Niobrara where we have a very high market share, are lingering into the fourth quarter, which is continuing to impact our efficiency and cost structure in that basin. These cost inefficiencies should be fixed by the end of the year.
And pricing — the North America market continues to have excess supply of pressure pumping equipment, and although this is improving, we anticipate pricing pressure will continue as contracts review during the next quarter or so. Accordingly, we are already working on adjusting our cost structure. Despite these transitory issues, we believe that we will see margin improvement as we go through 2014 for a number of reasons.
First, the efficiency trend on land plays right to our strengths. We are not only leading the industry in execution in surface efficiency, but we are now introducing new technologies, which are changing the ways that customers approach their subsurface. And you will hear more about these at our analyst day in a couple of weeks. In the Gulf of Mexico, activity levels are improving. Current rigs are shifting from drilling to completions where we have a leading market position. There are dozen or so deepwater rigs scheduled on the calendar to arrive in the Gulf next year, and on those we have secured a strong drilling and evaluation position.
And thirdly, our Battle Red and Frac of the Future initiatives are being rolled out now. I have seen them start to operate in the field. The benefits are real, and we expect that they will be substantial. We have invested a significant amount of money in our Battle Red and Frac of the Future initiatives. As we told you on our last call, when we roll out these two broad corporate initiatives, we are continuously looking for ways to use them to better manage our cost structure in the organization.