Ladies and gentlemen, thank you for standing by and welcome to the Halliburton Fourth Quarter 2019 Earnings Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I’d now like to hand the conference over to your speaker today, Mr. Abu Zeya. Please go ahead, sir..

Good morning. And welcome to the Halliburton fourth quarter 2019 conference call. As a reminder, today's call is being webcast and a replay will be available on Halliburton’s website for seven days. Joining me today are Jeff Miller, Chairman, President, and CEO; and Lance Loeffler, CFO.

Some of our comments today may include forward-looking statements, reflecting Halliburton's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements.

These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2018; Form 10-Q for the quarter ended September 30, 2019; 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 also include non-GAAP financial measures that exclude the impact of impairments and other charges. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our fourth quarter press release and can also be found in the Quarterly Results & Presentation section of our website.

After our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A period in order to allow time for others who may be in the queue. Now, I will turn the call over to Jeff..

Thank you, Abu, and good morning, everyone. 2019 solidified the pivot from growth to capital discipline in North America and marked another step on the road to recovery in the international markets.

I’m pleased with the way the Halliburton team executed our value proposition, delivered exceptional safety and service quality and stayed focused on generating healthy returns and strong free cash flow. I thank our outstanding Halliburton employees for their hard work and execution the entire year.

2020 opens a new decade and a new century for Halliburton. It brings new opportunities that I will address in a few minutes. But first, some headlines for the full-year and fourth quarter of 2019. We finished 2019 with total Company revenue of $22 billion and adjusted operating income of $2.1 billion.

I'm pleased with the continued recovery in our international business. We increased revenue 10%, outgrowing the international rig count for the second year in a row. North America revenue declined 18% as a result of customer activity and pricing reductions and our decision to focus on those customers that provide the best returns.

Systematically improving our service delivery, immediate cost reductions and the growth in non-frac product lines allowed us to stem the margin erosion. We delivered over $900 million of free cash flow for the full year, demonstrating our ability to generate consistent free cash flow, throughout different business environments.

Finally, 2019 was an exceptional year for our safety and service quality performance. Our total recordable incident rate and nonproductive time, both improved by over 20%, historical bests across our business. This is a result of our employees’ continued commitment to safety and process execution. And now, a few points about the fourth quarter.

We finished the quarter with total Company revenue of $5.2 billion, a 6% sequential decrease and adjusted operating income of $546 million, an increase of 2% quarter-over-quarter. Our Completion and Production division revenue declined 13% sequentially and operating margin remained essentially flat.

Our Drilling and Evaluation division delivered a strong quarter. We grew revenue 4% and improved operating margin 300 basis points sequentially. D&E international margins grew significantly, offset by margin decline in North America. While our North America business declined due to the significantly lower activity in U.S.

land, internationally, we delivered 10% revenue growth this quarter. This underscores the versatility and global reach of our business. In the fourth quarter, we took a $2.2 billion, largely non-cash impairment charge and made strategic decisions to market for sale our pipeline services and well control product lines.

As I mentioned, 2020 brings plenty of opportunities. The oil price is more constructive as we enter the year. The imminent global recession fears have abated with the help of economic easing from the leading central banks. U.S. production growth is slowing because of constricted capital flows. The increase in non-U.S.

non-OPEC supply coming into the market is limited. The geopolitical instability in the key oil-producing regions of the world should add an incremental risk premium to the commodity prices in the near term. That said, oil prices are still supported by the OPEC plus cuts and will fluctuate based on the group’s resolve to continue limiting production.

Gas prices in the U.S. are below breakeven levels. U.S. drilling and completions activity may be biased lower due to the consolidation and restricted access to capital. Halliburton is no stranger to navigating choppy waters. We entered 2020 and our next century with a clear sense of purpose.

We will continue to do what we do best, collaborate and engineer solutions to maximize our customers’ asset value while generating industry-leading returns and sustainable cash flow for our shareholders.

We will do this with attention to the sustainability of our business, minimizing environmental impacts and acting as a responsible corporate citizen. The international markets presented plenty of growth opportunities in 2019. We grew revenue 10% year-over-year, closing stronger than anticipated.

All regions increased revenue, led by Asia Pacific, Latin America and Europe. Both our divisions meaningfully contributed to the international growth, Completion and Production led the charge with 13% expansion due to higher activity in mature fields in Europe and unconventionals in Argentina, the UAE and Australia.

Drilling and Evaluation grew international revenues 8% as we increased activity levels in all markets, specifically in Norway, Mexico, China, and Nigeria. In 2020, we expect the international spend by our customers to increase by mid single digits, making it the third consecutive year of spending growth.

We have the right footprint and an enhanced technology portfolio to compete and win across the international markets. We expect to grow at or above the market rate this year, consistently focusing on profitable growth and improving our international margins.

Continued gas activity expansion in the Middle East, resolution of political issues in Latin America, and several pending project awards may enable us to outgrow the market again in 2020.

Our Drilling and Evaluation division is poised to grow faster as we get the benefit of the full year in our Norway integrated contracts, the iCruise directional drilling platform rollout continues, and new offshore drilling activity starts up around the world. The international revenue growth should follow the historical cyclicality.

In the first quarter, we expect international revenue to decline due to normal seasonality and the elimination of yearend sales. Thereafter, we should see steady growth that would peak in the fourth quarter. This year, we expect to increase our international margins.

We anticipate higher utilization for our existing equipment in busy markets like the North Sea and Asia Pacific. Our project pipeline is strong, and the incremental activity will help tighten tool availability and absorb the existing cost structure.

We intend to be prudent with capital allocation, driving our organization to have the right pricing discussions with customers. Given the tool tightness in some product lines and geographies, we're strategically reallocating assets to the best returning opportunities.

Pricing in certain international regions is improving and we expect this momentum to continue throughout 2020. About one-third of our book of business is awarded every year. The remaining two thirds are existing contracts and contract extensions.

We are gaining pricing traction on new work and contract renewals, and we're making strategic choices about the work we pursue. I believe the capital and pricing discipline across all geographies will allow Halliburton to deliver rational returns-driven growth in the international markets. Turning to North America. The U.S.

shale industry is facing its biggest test since the 2015 downturn with both capital discipline and slowing leading edge efficiency gains weighing down activity and production. As expected in the fourth quarter, customer activity declined across all basins in North America land, affecting both, our drilling and completions businesses.

The rig count in U.S. land contracted 11% sequentially and completed stages had the largest drop we have seen in recent history. While holidays and weather were the usual factors, other reasons for this air pocket in activity included our customers’ free cash flow generation commitments and an oversupply of gas market.

With this backdrop, Halliburton followed our playbook and continued to proactively manage our fleet count. As announced last quarter, we also proactively cut costs and started the implementation of the strategy to sustainably improve our service delivery.

Those actions allowed us to curb margin declines in North America and deliver lower decrementals year-on-year, even though the industry’s sequential activity drop was much more severe than in the fourth quarter of 2018. In the fourth quarter, the market saw clear public evidence of the long-awaited equipment attrition. This is just the beginning.

We believe a lot more equipment will exit the market as lower demand, increasing service intensity and insufficient returns take their toll. As service companies cannibalize idle equipment for parts and new sideline pumps to beef up working fleets, the available horsepower supply in the market may be smaller than something.

Halliburton has continued doing what we said we were doing, stacking equipment to improve our returns. We exited 2019 with 22% less available fracturing horsepower. We have rationalized our equipment supply to the anticipated level of demand in 2020.

The size and scale of our business in North America gave us the ability to right size without sacrificing our market leadership position and the value that comes with it. In the fourth quarter, we started the implementation of our $300 million annualized cost savings and service delivery improvement strategy.

We moved quickly to execute the initial personnel reductions and real estate rationalization all with an eye to improving our near-term financial performance. We’ve achieved about $200 million in savings on a run rate basis in the fourth quarter. While this impacts our business globally, the majority of the savings are geared towards North America.

We're looking at 2020 with pragmatism. Early indications are that are U.S. land customers will reduce capital spending approximately 10% from 2019 levels. I believe that the current level of ducks in the market will allow operators to spend less money on new well construction and direct more of it to completions.

Depressed gas pricing is negatively affecting the activity outlook in the gassy basins, which will likely bear brunt of the activity reductions in 2020. In the first quarter operators will reload their budgets, and we expect modest improvement in completions activity as a result.

That said, the calendar cadence where some operators are biased to spend more-earlier in the year, will likely remain. Halliburton will continue to be proactive in taking actions to generate industry-leading returns and strong free cash flow in this environment. Here are the more significant actions.

After systematically rationalizing equipment in 2019 to adjust to changing activity levels, in 2020, we plan to provide the capacity that maximizes the returns on our overall fleet. This should also allow us to be efficient about our workforce and maintenance planning and to achieve higher utilization of existing fleets throughout the year.

Pricing pressure was considerable during the year-end tendering season. Consistent with our capital discipline approach, we've taken on contracts that are expected to allow our portfolio to earn acceptable returns and declined those that are not. I like the slice of the market that we’re choosing to participate in this year.

Our high-graded customer portfolio gives us confidence in a more sustainable demand level and the mix of pricing and volume that generates returns for Halliburton. Make no mistake, we will continue developing technologies whose value accrues to Halliburton and not just to our customers.

Our integrated completions offering and the iCruise rotary steerable system are prime examples of such technologies. They should allow us to reduce our capital outlay and deliver better margins, all with the purpose of generating strong returns.

We plan to continue strategically growing our share of services per well, by increasing the competitiveness of our non-hydraulic fracturing businesses in North America. Our wireline and perforating, artificial lift and specialty chemical product lines, all posted strong double-digit revenue growth in 2019, despite the overall market softness in U.S.

land. We intend to keep this momentum and spread it to other services. Finally, we will continue the implementation of our service delivery improvement strategy. Halliburton is redesigning the way we deliver our fracturing services in order to lower our unit costs and improve margins and returns in the long run.

2019 closed the decade of the shale revolution that transformed the United States into the world's top hydrocarbon producer. Halliburton was an early participant in this development and has been investing in it and innovating ever since hand-in-hand with our customers.

As unconventionals enter maturation phase, Halliburton is committed to the North American market and taking appropriate actions to thrive in the new environment. I will now turn the call over to Lance to provide more details on our financial results.

Then, I will return to discuss digitalization, a topic that will define the next decade for our industry.

Lance?.

Thank you, Jeff, and good morning. Let's begin with an overview of our fourth quarter results, compared to the third quarter of 2019. Total Company revenue for the quarter was $5.2 billion, a decrease of 6% and adjusted operating income was $546 million, an increase of 2%.

During the fourth quarter, we recognized $2.2 billion of pretax impairments and other charges to further adjust our cost structure to current market conditions. These charges consisted largely of non-cash asset impairments, mostly associated with pressure pumping and legacy drilling equipment.

They also included approximately a $100 million of cash costs, primarily related to severance. As a result of the charge, in the fourth quarter, we recognized a benefit of approximately $35 million from a reduction in depreciation and amortization expense, which reflects two months of DD&A impact.

The after-tax impact of this reduction in the fourth quarter is approximately $0.03 of EPS, of which $0.02 is included in our Completion and Production results and the remainder in Drilling and Evaluation numbers.

As Jeff mentioned, we've also accomplished a significant portion of our intended annualized cost reductions with the remainder to come in the first quarter. Let me take a moment to discuss our divisional results in more detail.

In our Completion and Production division, revenue was $3.1 billion, while operating income was $387 million, both decreased 13%.

Reduced activity and pricing in multiple product service lines, primarily associated with stimulation services in North America land, coupled with lower activity for stimulation services in Latin America and well intervention services in the Middle East drove our results.

These declines were partially offset by higher pressure pumping activity in the Eastern hemisphere, coupled with year-end completion tool sales globally. In our Drilling and Evaluation division, revenue was $2.1 billion, an increase of 4%, while operating income was $224 million, an increase of 49%.

These results were primarily driven by increased activity in all product service lines in the Middle East/Asia, coupled with higher drilling activity in Europe/Africa/CIS, and yearend software sales globally. These improvements were partially offset by lower drilling activity in North America and reduced testing activity in Latin America.

Moving on to our geographical results. In North America, revenue was $2.3 billion, a 21% decrease. This decline was mainly due to lower activity and pricing in North America land, primarily associated with pressure pumping and well construction. This decline was partially offset by higher yearend completion tool sales in the Gulf of Mexico.

In Latin America, revenue was $598 million, a 2% decrease, resulting primarily from lower activity in multiple product service lines in Argentina coupled with decreased testing activity across the region.

These results were partially offset by higher activity for all product service lines in Colombia, increased project management activity and cloud infrastructure installations in Mexico and higher yearend completion tool sales across the region. Turning to Europe/Africa/CIS.

Revenue was $883 million, a 6% increase, resulting primarily from increased well construction activity in the North Sea, coupled with increased activity in multiple product service lines in Algeria. These improvements were partially offset by lower pipeline services across the region.

In Middle East/Asia, revenue was $1.4 billion, a 19% increase sequentially, largely resulting from increased activity in multiple product service lines across the Middle East, India and China, higher pressure pumping activity in Australasia and higher year-end incompletion tool sales across the region.

These results were partially offset by lower well intervention services in the Middle East. In the fourth quarter, our corporate and other expense totaled $65 million, and we expect it to be the same in the first quarter of 2020. Net interest expense for the quarter was $141 million and should remain approximately the same for the first quarter.

Our effective tax rate for the fourth quarter was approximately 22%. Based on the market environment and our expected geographic earnings mix, we expect our 2020 first quarter effective tax rate to be approximately 21% with a projected full-year tax rate of approximately 23%.

We earned approximately $1.2 billion of cash from operations during the fourth quarter.

As expected, we improved our working capital and generated strong free cash flow of approximately $827 million for the quarter, delivering approximately $1 billion of free cash flow for the full year, excluding the cash impact of the restructuring charges I discussed earlier. As a result, we ended the year with $2.3 billion in cash.

Capital expenditures during the quarter were $340 million with our 2019 full year CapEx ending just above $1.5 billion. As we look ahead to this year, we intend to reduce our capital expenditures by approximately 20% to $1.2 billion.

We believe this level of spend will still allow us to invest in our anticipated international growth while continuing to rationalize our business to the current market conditions in North America.

Within this reduced CapEx budget, we will continue investing in and growing our production group businesses, namely constructing a chemical manufacturing plant in Saudi Arabia and expanding our artificial lift footprint.

We will also move forward with the iCruise system global rollout, but at a more normalized pace than what we accomplished over the last couple of years. Our digital efforts and new technologies aimed at improving our efficiency and reducing our operating costs will also get an appropriate share of spend.

We believe our capital allocation decisions are consistent with our focus on generating strong cash flow for our investors, regardless of the market environment. Finally, let me provide you with some comments on how we see the first quarter playing out.

As is typical, our results will be subject to weather-related seasonality and the roll-off of year-end sales, which will mostly impact our international business. North America will see a modest increase in completions activity, as Jeff described earlier.

We will continue to pull the levers that allow us to mitigate margin declines across the business this quarter. As such, in our Completion and Production division, we expect sequential revenue to increase 2% to 4% with margins declining 125 to 150 basis points.

For our Drilling and Evaluation division, we anticipate sequential revenue will decline 4% to 6% with margins decreasing 200 to 250 basis points. I'll now turn the call back over to Jeff.

Jeff?.

Thanks, Lance. One of the key trends that will define the new decade in our industry is digitalization. The next 10 years will see digital technologies and artificial intelligence going mainstream, just like the smartphones did in the last second.

In the oil and gas industry, digitalization unlocks the potential to structurally lower cost, shorten the time to first oil, increase optionality in exploration and production, and enhance performance across the entire value chain. Digital is not a separate strategy at Halliburton, rather it is an integral part of our value proposition.

Our ability to collaborate engineered solutions and maximize customers’ asset value is evolving through the seamless integration of digital technologies into our operations. Digital permeates everything we do and has the same goal as our business strategy, deliver value for our customers and returns for our shareholders.

At Halliburton, we are hard at work on the next frontier solutions that will shift the balance in the people, process, technology triad by replacing labor and reducing capital investments through automation and self learning processes.

We believe this will allow us to harness the transformative power of digitalization and make a quantum leap in productivity, similar to going from horses to horsepower. It takes time to build the scalable software and hardware infrastructure required to fully capitalize on digital solutions.

We're well along that path and have been building up our digital capabilities for a number of years with the long-term view of how digitalization will evolve. I'm pleased with the internal and customer adoption we’re seeing. Halliburton is in a unique position to reap the benefits of the industry's move towards digitalization.

Our Landmark product line is an established leader in petrotechnical software with the powerful cloud-enabled DecisionSpace 365 software platform. In 2019, the cloud-native software was our fastest growing business within Landmark, increasing revenues 50% year-over-year.

Landmark provides us with solid foundation, established through decades of investment in software development, people, domain expertise and processes to create and scale digital solutions. This benefits all of our product lines.

In addition, we have strategic partnerships with Accenture, Microsoft, AWS and Schneider Electric, all of which validate and expand both our vision and our capabilities.

We now have over 100 customers with thousands of users across the globe, leveraging our iEnergy digital ecosystem to integrated software and workflows across their organizations, regardless if they're Halliburton's, third-party or internally developed.

This open architecture platform is unique in the industry and in our view is a necessary condition for the successful adoption and scaling of digital solutions. True to our D&A, we are also bringing to market practical, smart and interconnected products and services that help unlock value for us and our customers.

We are pioneering new approaches to subsurface understanding, well construction and reservoir recovery. Let me spend a few minutes on each. First, we transformed subsurface understanding using big data, digital frameworks and evergreen models.

We've created a unique geological model of the entire earth to provide insights into the origin and productivity of reservoir. Once drilling starts, we deliver improved field measurements with next-generation wireline and logging-while-drilling tools, fiber and sensors.

We then translate these measurements into faster and more informed decision-making using a new class of models made possible by digital technologies. For example, our EarthStar ultra-deep resistivity sensor automatically feeds into our industry first, scalable earth model that updates in real time.

Customers can now make faster decisions about their development programs and reduce cycle times by a factor of 10. Second, we improve well construction through collaborative well engineering and drilling automation.

Landmark’s digital well program enables seamless collaboration between operators and service companies across a multitude of software platforms. The iCruise drilling system increases the number of built-in sensors by a factor of 5 and offers self guiding capabilities.

Working with our rig partners, our digital twin technology delivers better collaboration and faster decision-making. All of these solutions boost efficiencies and lower costs, while demanning the process of well construction.

Last but not least, we improved recovery and production by using our digitally enabled tools to connect customers’ assets and leveraging this to monitor and enhance performance outcomes. In completions, we use our intelligent completions for monitoring production trends and connecting them to broader reservoir management studies.

In artificial lift, we leveraged digital to monitor ESP health and extend run life. In simulation, we use our industry-leading fracture modeling software and full-scale asset simulator to model fracture propagation and frac hits.

These are examples of how we deliver digital innovation today, with a focus on specific domains and aligned with the customers’ buying behavior. They provide immediate value to customers, increased customer loyalty and generate returns for Halliburton.

Over time, we believe digitalization will seamlessly connect subsurface, drilling and production, enabling customers to make asset-level decisions at the speed of execution. We have a solid foundation, the tools, the open architecture and the domain expertise to successfully deliver this vision. Let me summarize what we’ve talked about today.

In 2020, Halliburton is focused on delivering margin expansion, industry-leading returns and strong free cash flow. In our view, international growth will continue.

Increased activity, disciplined capital allocation, pricing improvements and our ability to compete for a larger share of high-margin services we believe will lead to international margin expansion in 2020.

As North America customer spending declines again this year, Halliburton will continue to execute our playbook to maximize returns and free cash flow.

We plan to provide the service capacity that we believe will maximize the returns on our overall fleet, continue to invest in technologies that improve margins, keep strategically growing our non-hydraulic fracturing product service line and continue the implementation of our service delivery improvement strategy.

We believe digitalization will define this decade in our industry. Halliburton continues to move full steam ahead on the digital journey and is uniquely positioned to reap its benefits. And now, let's open it up for questions..

[Operator instructions] Our first question comes from the line of James West with Evercore ISI. Your line is now open..

So, Jeff, towards the end of your prepared comments, you've talked a lot about international and international margin progression. I wonder, if we could dig into a little more detail there with mid single digit it sounds like growth, you may be able to outpace that a touch here as well, plus you're seeing some pockets of pricing strength.

How should we think about the margin expansion as we go through the year, what type of incremental should we be expecting?.

Yes. Thanks, James. Look, I think I spent a fair amount of time on the catalysts themselves, obviously activity improving, rational project choices and technologies. I think, the key is, it's going to be shaped -- we're starting at a higher point going into Q1 than we certainly did last year.

And then, I would expect the shape of that to look similar where we start and it moves up a little, just that shape of the international margins should stay consistent, but obviously starting from a higher point..

And then, maybe for Lance here on the free cash flow next year, looks like it's going to be pretty significant based on some growth but also lower CapEx here.

How should we think about when we're going to see the free cash flow start to show up, will it be similar to this year, or it should be backend loaded, or would it be more even throughout the year?.

Yes. Look, I think you're right in terms of the expectations to grow free cash flow this year. You're right around the -- I don't think that the -- our ability to drive sort of the working capital consumption is going to remain in the first half of the year like it has historically for us.

I expect some of the extreme volatility that we saw last year to not repeat this year, but there still is a consumption of cash from a working capital perspective. But overall with the reduction in CapEx, the improvement around margins and some stability around our working capital, we expect free cash flow to grow in 2020..

Our next question comes from Sean Meakim with JP Morgan. Your line is now open..

So, you touched on the margin progression internationally. Can you maybe just talk about how that translates into D&E in 2020? So, we had the margin ramp in 4Q, maybe 70 basis points or so comes from the D&E benefit that will help year-on-year in ‘20.

But, can we see 2020 margins on a full-year basis get back to 2017, 2018 levels? Do we think we can get back to a double digit type of outcome for the year? I’m just curious how you think investors will get comfortable with the trajectory like that, just given it’s been a difficult business to forecast last couple of years?.

Yes. Sean, it has been difficult to forecast, but we've done a lot of things during that time. So, the platform around iCruise technology and EarthStar has been rolling out at the same time. We're seeing a lot of international choppiness that we see some recovery sort of happening, which obviously lends itself towards D&E.

And so, I think these are multi-year efforts that we -- and we view them that way. I’d say digital as well will contribute to probably early days to D&E. For all of those reasons, I don't think it's unreasonable also to expect that we get back to I think 2018 looking kind of number or beyond..

Got it, okay. Thank you for that. And then, so on the digital strategy, competitors made a lot more noise about their strategy maybe than you have so far. But the [indiscernible] contracts sound pretty similar in terms of the offering.

Could you maybe just expand a little bit in terms of the scalability that you see for those types of avenues maybe across a broader set of customers and where you see the most opportunity?.

Yes. I think I tried to describe today our vision around digital and then the mechanics for realizing that vision, which then quickly becomes in today's market what are the things we actually do. So, I used an example of some of the tools that are in the market. As we integrate those, obviously the moat expands around those.

So, I think, it will take many forms over time. Again, it will be big projects, which we’ve talked about a few of those where it's either a cloud infrastructure and the cloud environment that we either install or operate and we’ve got examples of each of those.

But equally important will be the day in, day out march around how this work really gets done, which is around drilling, production and reservoir filling in those spaces with tools, they all contribute to that vision. And so, I think that there is a lot of scalability here.

And I think what's most important is really the production capital that Halliburton has invested in Landmark that really makes it scalable.

In fact, to do these things at scale, there's a lot of discipline and practice and agile DevOps that are required at scale to reliably develop software and then operate, maintain and then ultimately continue to advance. And we have that. So, and I’m really confident in how that rolled out over the longer term.

And I think the thing to focus on is, what are those tools that we’re doing now that deliver returns. Obviously, they contribute to the vision..

Our next question comes from the line of Angie Sedita with Goldman Sachs. Your line is now open..

So, just on C&P specific to North America, could you talk a little bit about the cost cutting that's unwinding here? You said you have a $100 million left. Is there more that could be done beyond that $100 million? It’s for Jeff or Lance. And then, maybe you could talk also about the pricing.

Have you seen the market starting to stabilize on the frac side for pricing, are you still seeing pressure in frac and across the other product lines?.

Yes. Thanks, Angie. Look, the $300 million in savings, and we've moved quickly on that. And I think, the $200 million that we've taken out on an annualized basis already, expect to get the rest of that done in Q1. And I think that really speaks to how that team in North America executes. And we execute very quickly and with a lot of purpose.

And so, obviously that contributes. Beyond that, we've talked about our playbook and how we expect to execute our strategy in North America. And I think over time that continues to drive improvement in margins, less concentrated in a moment, but obviously a set of activities that yield value over time.

From a pricing standpoint, it’s still very -- it’s competitive information. Obviously, Q4 was quite competitive. And so, I think the market in spite of attrition is still oversupplied. What's important though is that we make our own choices around how to maximize fleet profitability.

And by virtue of doing that, I view it as more stable in that respect..

Angie, I might add a comment too on the $300 million in cost savings. Just to be clear too to add to Jeff, that's sort of cash structural savings..

Yes..

Okay. Thank you. That's helpful. And then, maybe staying along the themes on pricing. It's obviously the reverse internationally. Maybe you could talk a little bit or give more color on the pricing power or momentum you’re seeing in the international markets.

Is it fairly widespread, is it by specific regions or product lines, and do you think there could be a little bit of momentum going into 2020, or is it slow and steady?.

Look, I'd more describe it as slow and steady, Angie. I think, what the key is that the setup is constructive. And so, managing capital in a more prudent way, focusing on profitable growth as opposed to growth, all of those things conspire to create an environment, where we're able to get better pricing.

Is it widespread, I'd say it’s generally widespread, but there is probably pockets who are more concentrated than others, sometimes driven by availability and complexity of work and things that would normally and rationally drive our pricing. And so, I think that's what we're seeing in the market. And yes, it is getting traction..

Our next question comes from Bill Herbert with Simmons. Your line is now open..

Thank you. Good morning. Lance, you talked about it conceptually, but I'd like to kind of refine it, if you will, with regard to the discussion of the evolution of working capital for this year, less pronounced seasonal trends, you were a huge consumer, cash, working capital was in the first half of 2019 a nice contributor to cash in the second half.

I'm trying to kind of peg the order of magnitude of the reduction in cash consumption during the first half of this year versus the first half of last year..

Yes.

I think, what you see, Bill is sort of a year-over-year comparison as we don't have -- I mean, last year we were carrying a lot of inventory associated with the boost in the iCruise rollout and in some of our C&P product lines that I don't think that you see that consumption taking place again this year, as we consume more of that inventory, as opposed to build it.

The collection cycle is still going to be very similar. Albeit as the international business becomes a bigger part of our business that typically has longer DSOs, so we may see some impact there. But still a view where we build receivables early in the year and then unwind those as we get into the later part of the year..

Okay.

And so, just to take a stab at it, would you expect that your cash consumption from working capital in the first half of this year would run it like half of what it did in 2019? I mean, is that a reasonable starting point?.

I think that's probably a reasonable starting point..

Okay. And then, secondly, again a lot of moving parts, but it's kind of a 20% reduction in CapEx, you should have better working capital improvement for this year. Net income should be up as well. So, at least from my numbers, I'm getting to kind of a free cash flow yield, assuming a $24 stock price of kind of 7% to 8%, which is getting pretty sporty.

And I'm just curious with regards to priorities of the deployment of that surplus cash flow.

Is it still a reduction of net debt first and foremost?.

Yes, I think it is. I think with the excess cash, I think we do have a near-term priority on reducing debt. The reality is Bill is while we're focused on that debt reduction in the near term, what it does and what it offers us as we continue to chip away at it, is give us more flexibility to return cash to shareholders in the future.

And I think today, our business, we need to address the $3.8 billion of debt that we have coming due over the next six years. So, I think we'll do that -- do some of that in the near-term, but also with an eye on ultimately returning cash to shareholders..

Our next question comes from Scott Gruber with Citigroup. Your line is now open..

Kind of staying on a similar line of questioning. Lance, you mentioned the $1.2 billion of CapEx in 2020, which is good to see. Could you just provide some color on how you think about the sustainability of CapEx around that level? There is a few moving pieces year-on-year in '20 and there will be a few more in '21 in particular with the Saudi chem.

supplying investment now recurring.

But, just how should we think about kind of broad strokes on that level of CapEx and feel free to frame it as a percent of sales, if it’s easy?.

Yes. Scott, this is Jeff. I think, the key is around prioritization. And we are focused on the best returning opportunities. But, we were able to fund international growth in 2019 and expect with that level of CapEx can continue to fund the growth that we see in 2020. So, it isn't that we are starving anything.

The reality is we're feeding things appropriately and around our return expectations. We think about spending this year, it's probably two thirds international, a third U.S. but in our view very sustainable. And so, we're comfortable with that level of CapEx and also what it means to making better returns..

Yes. I would add, in an environment, an increasing pricing environment that generates the appropriate returns, we may spend more, but it will be commensurate with the focus on returns and overall driving better free cash flow..

Got it. And then, just a question, circling back on the domestic frac market. With pricing hopefully stabilizing here in early 2020, and Jeff you had mentioned a focus on maximizing returns on the frac fleet.

But, broad strokes, does that strategy likely mean that your frac business trends with the market in 2020 or they had lagged the market to a degree in 2020, would be focused on returns? How should we think about it?.

Yes. I think that it will -- yes, I would expect we stay consistent with the market, but we don't feel like we have to just because we mostly focus on the returns and free cash flow out of that business. But, I wouldn't think we would be out of the market at any point in time.

But that said, we’re focused on the slice of customers that make the best returns for us, which gets to a number of factors, efficiency, but also calendar cadence piece of spend. This year going into Q1 for example, we’re 95% committed on the fleet, which is the best we've been since the downturn..

Our next question comes from David Anderson with Barclays. Your line is now open..

Hi. Good morning.

Jeff, going back to your comments on the digital side, as we move beyond the proof of concept and it becomes more broadly accepted, you kind of talked about sort of two different types of customers out there, I guess as sort of maybe on the E&P side as those who have kind of realized, they can do themselves and you provide certain discrete operations, different applications like you just mentioned on some of your tools.

On the other side, you have other bigger broader customers which you can implement your ecosystem across the organization kind of the announcements you made today.

How do you see those two sets of customers evolving over the next let say, next several years? Is it fair to assume just kind of the former and then the former is the majority of that business and then hopefully it kind of evolves more into more the broader implementation? Can you just talk about how you see the customers’ acceptance?.

Yes. Look, I think customers do this at the pace at which they can digest it realistically. And that is the reason why I think you see that bifurcation today, it's more apparent just because customers that can actually operate and execute at that level of integration are fewer and far between today. And I kind of view it that way.

It gets implemented at the pace it could be absorbed. That’s why I tend to talk about the vision and then bring it down to -- okay, here are the more digestible groupings being drilling, production and reservoir, and then even down into the tools.

Because the reality is number of these tool don’t have to be integrated but they can be and they are more effective when integrated. And so, if I use a fairly simple example, like in EarthStar tool, it’s a tool, it’s metal, it runs in the well, it’s fantastic tool, but what's most important about it is the answer product, which is the 3D inversion.

And now, that 3D inversion becomes even more valuable when integrated in an Earth model and likely yet again more valuable when integrated into the entire ecosphere. But that’s difficult for everyone to do that at one time and it's very hard to do that given sort of the proliferation of different systems.

So, the key in my view is we continue to advance the platform, the ecosystem as you described it, while at the same time, driving immediate returns around these tools. And they're available to be integrated into that ecosystem. I hope that's helpful..

That makes, a lot of sense, Jeff. Thanks. Now, the other side of digital here is that it appears to be deflationary to traditional oilfield services going forward. Your customers can do more with less.

Would you agree with that? And do you think that future digital revenue to Halliburton, presumably it comes at higher margins, it’s more sustainable, can that more than offset this deflation over the next several years?.

I think it can, because I think what's missing in this deflation discussion is the moat that comes in around our equipment, that allows so much cost savings on the client side part of the business that we’ll be able to reap better margins and better returns on those assets to deliver those solution.

And obviously, at the same time, we’ll likely be reducing our own costs as we work through this.

So, I think it will be deflationary in some ways but I think the value and the returns on the not just the componentry but how that componentry is part of that ecosphere really winds the moat that may be isn't there, is prevalent today, but I think we will see that widen and that ultimately drives better returns for us, in spite of what might be deflationary in a number of other areas of the business..

Our next question comes from Chase Mulvehill with Bank of America Merrill Lynch. Your line is now open..

Hey. Good morning. I guess, I want to come back to the CapEx question and ask it maybe a different way.

If we think about that $1.2 billion of CapEx, what's the split between D&E and C&P?.

Yes. Chase, this is Lance. I would say that, it’s very similar to the 60-40 split that we talked about between NAM and international is a good proxy..

Okay.

So, 60% C&P, is that what you're saying?.

No, no, no. 60% D&E..

Got it. Okay. All right. If you’re 40%, I think that puts you sub 4% of C&P revenues if we think about CapEx as a percentage of revenues. Obviously, lower than kind of what you did in 2016 as a percentage of revenues.

If we look over the next couple of years and kind of call it a sluggish, modest growth North America environment, how should we think about C&P CapEx over the next couple years and maybe frame it on a percentage of revenues?.

Yes. Look, I think structurally lower, as we described it, based more on the market and the opportunity set that we see.

But, we are really careful not to -- we don't peg this to percents of revenues and others things because then when get sort of odd answers when we see markets growing, and I don't think growth is geared that way to our CapEx necessarily. And so, we will continue to focus on the best returning opportunities where we see those.

But, the idea that it's going to have to move -- the CapEx is going to move as percentage with revenues is really not -- that's not how we approach that..

Okay. That makes sense. And then, coming back to frac, you talked about 22% less frac horsepower. Is that the amount that you've actually retired? Is that the amount that you've actually taken out of the market from an active fleet reduction? And then, a quick one follow-up to that.

You talked about improvement in frac utilization in 2020 for your active fleets.

Do you care to kind of quantify that? How much improvement in utilization across your active fleets you think you can get in 2020?.

Look, I'll start with the first question. The 22% that we described is out of the market sold by the pound retired. But that’s done some good things for us. I mean, the reality is that we're 90% Q10s at this point, our costs are lower, our service quality is the best it's ever been. So, that's how we view that.

The activity, I guess, is -- as we look out at the balance of the year or in terms of utilization, part of maximizing profitability of that fleet and the returns on that fleet is keeping it busy. And as I described earlier we started the year 95% committed, which is the best we’ve been in sometimes.

So I'm encouraged by that outlook based on the fleet that we have..

Our next question comes from Kurt Hallead with RBC Capital Markets. Your line is now open..

I was kind of curious first and foremost on the international front, when we look at 2020. Where do you think the best relative growth prospects are for Halliburton? You mentioned that Asia Pac was a major contributor here in ‘19.

So just kind of curious on how you see the regional dynamics play out for 2020?.

Look, I think it's again led by Asia Pac. In 2020 Europe/CIS continues to be strong as we get into a full year of activity on a number of the contracts we talked about in the past. Africa grows but it will be a bit more-choppy, as it works through exploration and regulatory sort of resetting in that market.

Middle East remains robust, but obviously starts at a fairly high point as the market itself, and LatAm likely brings up the rear..

Okay. I appreciate that dynamic. And then, I just want to get a little bit better understanding here on just the guidance you provided for first quarter on the margin progressions for C&P and D&E. And I want to try to get in this context.

For C&P, when you look at the margin degradation on a quarter-on-quarter basis, could you give us some general sense of how much is that related to the absence of the tool sales versus market dynamics?.

Yes. Kurt, this is Lance. Yes. It’s definitely impacted by just a non-recurring nature of year-end product sales in the C&P division, which were probably up 10% to 15% versus what we saw in 2018. So, we had a good fourth quarter at our C&P division in terms of year-end equipment sales. .

Okay.

And then, can the same be said for D&E?.

I'm sorry?.

I'll let you continue, Lance. Sorry..

No. And then -- and that is obviously, those margins are accretive. So, what we see replacing that in the first quarter in terms of activity, largely in the resumption of our pressure pumping business in North America is coming at lower margins. And so, you see offset of that..

Okay.

Can the same be said for D&E?.

Yes, same can be said for D&E, probably more comparative, flattish year-over-year in terms of year-end product sales in our D&E division..

The next question comes from the line of Marc Bianchi with Cowen. Your line is now open. .

Jeff, you were talking about oversupply still in the frac market, and with your retirements and what we've heard from the others, there has been pretty significant reduction so far.

What do you think is needed from here to kind of balance the market and what do you think the timeline is for that?.

Yes. Look, I think, what's most important is that that attrition is real. I get this question a lot. And I think a quarter ago, I said -- I thought it was 20%, which was viewed as high, turns out that's right in the fairway. So, that attrition is in fact occurring.

And the market forces or the forces that drove that attrition haven't changed at all in terms of amount of sand pumps, number of stages per day. All of those things that drive that attrition haven't changed. And so, I suspect we continue on a pace that’s at least consistent with that. As far as the timeline of when we see it, it happens at some point.

It doesn't change the way we go to the market today. And so, we are so focused on delivering our strategy around cost reduction and our service delivery improvement that when that happens it will be terrific and we will see a great boost from that.

I think in the meantime, we’ve got a plan to deliver solid free cash flows and return sort of in any market..

Okay. Thanks for that. Maybe someone related, we’ve got the guidance here for first quarter for C&P margins, which includes the full benefit of all the cost cutting you are doing.

Where do you think those margins can get absent any kind of pricing recovery for the frac side of business? Is there -- just through the self-help I think you’re talking about a bogey that you would point to, over the next number of quarters?.

Look, no, I mean, I think we’ve provided guidance on Q1. I view strategy as something that we executed and we continue to see the value and benefit from. And so, we’re taking a very long view of this business and the actions that we’re taking beyond Q1 to continue to contribute and improve the business.

And I think that we will continue to outperform, like we have the highest margins today in North America and we will continue to add to that..

And that will conclude today's question-and-answer session. I’d like to turn the call back to Mr. Miller for closing remarks..

Thank you, Liz. Before we wrap up, I’d like to close with a few points. First, I expect that Halliburton’s international growth will continue in 2020, and that the combination of capital discipline, pricing improvements and technology will lead to margin expansion.

Second, Halliburton will continue executing our North America playbook to maximize returns and free cash flow. And finally, I believe digitalization will define the next decade, and Halliburton is uniquely positioned to reap the benefits. Look forward to talking to you again next quarter. Liz, please close out the call..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..