Ladies and gentlemen, thank you for standing by, and welcome to Halliburton's First Quarter 2022 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to David Coleman, Head of Investor Relations. Please go ahead, sir..

Good morning, and welcome to the Halliburton first quarter 2022 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 financial 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, 2021, 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.

Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our first quarter earnings release or 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’ll turn the call over to Jeff..

a long-time horizon and large upfront capital investment. Once these projects begin, investment continues and production cannot quickly respond to price signals. This tends to result in market oversupply. The pivot to short-cycle barrels creates the opposite effect, a perpetual threat of undersupply that is supportive to commodity price.

I believe this pivot to short-cycle barrels is great for Halliburton and sets up fantastic conditions for us to outperform. Short-cycle activity results in higher relative capital spend by operators aimed directly at the wellbore for services Halliburton provides as opposed to infrastructure investments required for long-cycle projects.

Our strong technology portfolio and market footprint match this activity globally. Halliburton works, innovates, and invests where it matters most for our customers.

And finally, Halliburton's value proposition to collaborate and engineer solutions to maximize asset value for our customers explicitly focuses on helping operators maximize returns and cash flow. This makes Halliburton uniquely relevant for this environment.

Our five strategic priorities are clear and effective and will drive our behavior in this upcycle. First, we focus on profitable growth in our strong international franchise. Second, we maximize value and cash flow in North America. Third, we accelerate the deployment and integration of automation and digital technologies.

Fourth, we drive increased capital efficiency in all parts of our business. And fifth, we actively participate in advancing a sustainable energy future.

As demand for Halliburton services increases, both internationally and in North America, we will execute on our five strategic priorities to deliver industry-leading returns and strong free cash flow for our shareholders.

As I look across the international markets, I continue to believe our customers' international spend will increase by mid-teens this year. Here are some leading indicators. First, we started with revenues in the first quarter much higher compared to the same period of last year.

Second, our completion tool order book increased 50% year-on-year in the first quarter, which represents work generally delivered within the current year. And third, we have a strong pipeline of new projects scheduled to start in the second half of this year, particularly in the Middle East.

We expect international activity to gain momentum in the second quarter, led by the Middle East and Latin America and further accelerate in the second half of the year. More importantly, our strong first quarter Drilling and Evaluation division margins demonstrate our focus on profitable international growth.

Beyond the shift to short-cycle barrels already discussed, we expect this international up cycle to be structurally different from prior cycles and Halliburton's international business is poised to benefit from it. Here's why. National oil companies and independents comprise a larger portion of the international customer set.

As a result of divestitures in the last few years, many international assets now have new owners who require a more collaborative service provider to help unlock remaining reserves and maximize value.

Halliburton's collaborative approach, broad technology portfolio, local expertise, and reliable execution help customers achieve their efficiency and production objectives. Halliburton's execution of our technology roadmap has completely transformed our competitiveness in Drilling and Evaluation.

We enter this upcycle with the best product portfolio in our history and we see increased customer demand for our high-end technology and a recognition of its value. For example, Halliburton recently deployed our new Strata Examiner Wireline Imaging Service for multiple customers in Norway and Morocco.

Strata Examiner helped operators acquire more accurate well data in oil and synthetic-based muds, better evaluate production potential and save rig time with log-down capability and increased logging speed.

Another example is the latest addition to our logging while drilling suite, the StrataStar Azimuthal Resistivity Service for thin interbedded formations. Similar to our premium EarthStar service, the StrataStar combines high fidelity downhole sensors with powerful digital inversion capabilities.

Multiple customers in the Middle East, Latin America, US and Canada use it for faster, more accurate reservoir characterization to precisely place wells in the most productive zones and maximize asset value. We also see a slight uptick in offshore exploration activity albeit from a historically low base.

Halliburton's increased competitiveness in drilling and evaluation resulted in a doubling of our contract win rate in global exploration work over the last two years and we expect to benefit from any additional growth in this higher-margin market.

Different from prior cycles, Halliburton's investments in specialty chemicals and artificial lift create unique growth opportunities as we expand the international footprint of these businesses. Last month, I attended the opening of our new chemical reaction plant in Saudi Arabia.

Multiple years in the making, this world-class facility establishes our chemicals manufacturing footprint in the Eastern Hemisphere. It is our launch path for profitable growth in the specialty chemicals industry in the Middle East and beyond.

This quarter, it will start manufacturing products for our production chemicals contract with a large IOC in Oman and chemicals for our own product service lines. Several years ago, I described digitalization as one of the defining trends in our industry for this decade. Today, digital innovations permeate all segments of the oilfield services market.

At Halliburton, our strategy to drive digital and automation creates technological differentiation, contributes to higher international margins and drives internal efficiencies and cost savings. Here are some examples.

On an integrated drilling project in Southeast Asia, Halliburton deployed Well Construction 4.0, our approach to digital transformation of well construction. It improved the rate of penetration by about 40% on initial wells and reduced rig site personnel by 21%.

On an integrated project in the Middle East, we combine data science, smart bits drilling automation and project management services for a more than 40% reduction in average well delivery time. We also deploy our digital solutions to advance a sustainable energy future.

In the first quarter, Energean hired Halliburton to assess the carbon storage potential of the Prinos Basin in Greece, who will use our DecisionSpace 365 cloud applications to perform long-term ploom modeling, characterize the storage complex and create a conceptual development plan with performance modeling.

We expect to deliver steady, profitable growth in the international markets for the rest of this year. Increased activity and equipment tightness continued to sharpen our pricing discussions with customers. Pricing is increasing on current contract extensions.

In the first quarter, the percentage of contract extensions exercised almost doubled compared to the same period last year, as operators generally prefer to extend existing contracts rather than bid work in an inflationary market. Pricing is also increasing on new work. Turning to North America. We see market tightness across all service segments.

In the first quarter, average US rig count increased 14% sequentially and is up 62% year-on-year. Additionally, frac activity surged in March after winter weather and supply chain disruptions occurred earlier in the quarter.

Halliburton's hydraulic fracturing fleet remains sold out and the overall market appears all, but sold out for the second half of the year. The market today presents several positive elements, previously absent in North America, and they give me confidence in the continued strength of this market over the coming years.

First, in the largest service segment in North America, the hydraulic fracturing market structure has improved. Today, the largest four pressure pumping companies account for about two-thirds of the market.

Second, I believe that poor service industry returns over many years in North America, ultimately resulted in a closed-loop capital system because access to meaningful outside capital, doesn't exist today, market participants must generate their own cash in order to reinvest and grow their businesses.

Broad-based profitability improvements are required to fund growth, not just what appears to be good economics on a single incremental fleet. Finally, I see greater differentiation in hydraulic fracturing equipment types. In prior cycles, fleets were relatively the same. Today, all equipment is not created equal.

Significant operational, environmental and pricing differences exist ranging from electric fleets at the top; dual fuel and Tier 4 diesel in the middle; and finally, Tier 2 diesel equipment at the bottom. We have a terrific fleet composition. Halliburton is the leader in low emissions frac equipment.

Our Zeus eFleets have committed contracts, earn attractive returns and deliver improved performance. Another technology that sets Halliburton apart from the rest of the hydraulic fracturing market is our SmartFleet Intelligent Fracturing System. Customers are adopting this groundbreaking technology and it has moved from pilot to campaign mode.

We are deploying it for multiple operators across different basins and expect a six-fold increase in the number of stages completed with SmartFleet this year. Tightness in North America is not just in hydraulic fracturing equipment.

It exists across the whole oil and gas value chain, in spare parts, engines, electronics and many other inputs that cost more and are sometimes, not immediately available.

While, we generally pass these increased costs on to operators, we also have effective solutions that minimize this operational impact and provide reliable execution for our customers. For example, our sophisticated supply chain organization responded by sourcing sand from Wisconsin when local mines were down in the Permian.

In trucking, our collaboration with Vorto provides us with real-time information on the market clearing price for drivers and allows us to manage inflation and significantly reduce logistics-related nonproductive time.

Years of low pricing and low returns impacted the North American oilfield services sector and the larger supply chain that supports our industry. Sustainably improved pricing is required to avoid future supply chain disruptions and to invest in the equipment, people and technology necessary to deliver production growth.

I believe our customers understand this. Against this backdrop, we see a long runway for ongoing net pricing improvement across all of our product service lines. In this recovery, Halliburton is focused on maximizing value in North America. For us, this is a margin cycle, not a build cycle.

Last quarter, I shared with you my view that North America customer spending would grow more than 25% year-on-year. Today, as I look at a combination of customer activity and inflation, my outlook has improved, and I now expect North America spending to increase by over 35% this year.

With respect to activity, over 60% of the US land rig count sits with private companies and they keep growing, while public E&Ps remain committed to their activity plans. Activity and demand for our services are increasing, both internationally and in North America.

With our unique value proposition, clearly defined strategic priorities and global presence, I expect Halliburton will deliver profitable growth, solid free cash flow and industry-leading returns and outperform as this upcycle accelerates. Now I will turn the call over to Lance to provide more details on our first quarter financial results.

Lance?.

Thank you, Jeff, and good morning, everyone. Let me begin with a summary of our first quarter results, compared to the first quarter of 2021. Total company revenue for the quarter was $4.3 billion, an increase of 24%.

Adjusted operating income was $533 million, or a 44% increase compared to the operating income of $370 million in the first quarter of 2021. These results were primarily driven by increased activity across all regions and improved pricing in North America. In the first quarter, we recorded pre-tax charges of $64 million.

Of these, impairments and other charges totaled $22 million, including $16 million of receivables related to the write-off of all of our assets in Ukraine. The remainder of the charges totaled $42 million and was related to the redemption premium and unamortized expenses associated with the early retirement of $600 million of our 2025 senior notes.

Now let me discuss our division results in more detail. Starting with our Completion and Production division, revenue was $2.4 billion, an increase of 26%, while operating income was $296 million or an increase of 17%.

These results were primarily driven by increased pressure pumping services and artificial lift activity in the Western Hemisphere, higher completion tool sales throughout the Western Hemisphere in the Middle East, increased cementing activity in Africa and Middle East Asia, and improved well intervention services in North America land and the Eastern Hemisphere.

These improvements were partially offset by lower activity across multiple product service lines in Europe and lower completion tool sales throughout Asia. In our Drilling and Evaluation division, revenue was $1.9 billion, an increase of 22%, while operating income was $294 million or a 72% increase.

These results were due to increased drilling related services globally; improved wireline activity in North America land, Latin America and the Middle East; increased testing services internationally; and higher project management activity in Latin America, India and Oman.

Partially offsetting these increases were lower project management activity in Iraq as well as lower fluid services in the Caribbean, Brunei and Mozambique. Moving on to our geographic results. In North America, revenue increased 37%.

This increase was primarily driven by improved pressure pumping activity and drilling related services in North America land, higher stimulation, artificial lift and drilling related activity in Canada and higher completion tool sales in the Gulf of Mexico. These increases were partially offset by reduced fluid services in the Gulf of Mexico.

Turning to Latin America.

Revenue increased 22% due to improved activity across multiple product service lines in Brazil, Argentina and Mexico; increased well construction services in Colombia; higher completion tool sales in Guyana; improved project management activity in Ecuador and Colombia; increased testing services and wireline activity across the region; and increased artificial lift activity in Ecuador.

Partially offsetting these increases were reduced fluid services in the Caribbean and lower project management and stimulation activity in Mexico. In Europe/Africa/CIS, revenue increased 7%.

This improvement was primarily driven by higher activity across multiple product service lines in Egypt, increased drilling-related activity in Azerbaijan, increased well intervention and testing services across the region, improved well construction services in West Africa, and higher completion tool sales and cementing activity in Angola.

These increases were partially offset by reduced activity across multiple product service lines in the United Kingdom, reduced well construction services and completion tool sales in Norway and decreased fluid services in Mozambique.

In the Middle East/Asia region, revenue increased 17%, primarily resulting from improved well construction services in Saudi Arabia and Oman, increased wireline activity and completion tool sales in the Middle East, and increased testing services across the region.

These increases were partially offset by reduced project management activity in Iraq, lower completion tool sales throughout Asia, decreased fluid services in Brunei and lower stimulation activity in Bangladesh.

Our corporate and other expense for the quarter totaled $57 million, and I expect that to serve as a good quarterly run rate for the remainder of the year. Net interest expense for the quarter was $107 million.

I expect this level of interest expense to drift slightly lower in the second quarter as a result of a full quarter impact of our reduced debt balance. Our normalized effective tax rate for the first quarter was approximately 21%. Based on our anticipated geographic earnings mix, we expect our second quarter effective tax rate to be approximately 24%.

Capital expenditures for the quarter were $189 million. Our expected CapEx spend for the full year remains at approximately $1 billion, and we anticipate that our remaining capital expenditures will increase quarter-over-quarter into the end of the year.

Our first quarter cash flow from operations and free cash flow was a use of cash of $50 million and $183 million, respectively. These results were primarily driven by investment in working capital, consistent with our strong activity growth. As is typical for our business in an upcycle, we expect our cash flow to be back-end loaded for the year.

We still expect to generate strong free cash flow for the remainder of 2022. Finally, turning to our near-term operational outlook, let me provide you with some comments on how we see the second quarter unfolding.

In our Drilling and Evaluation division, we expect the seasonal revenue decline in software sales to be offset by further improvements in global drilling activity. Therefore, second quarter revenue is anticipated to grow low- to mid single-digits. As a result of the falloff of software sales, we expect D&E margins to decline 125 to 175 basis points.

In the Completions and Production division, activity is accelerating globally and scarcity will drive pricing in North America in the second quarter. As such, we expect second quarter revenue to grow in the mid-teens and margins to improve 350 to 400 basis points. I'll now turn the call back over to Jeff.

Jeff?.

Thanks, Lance. Let me summarize what we've talked about today. We believe that this accelerating multi-year upcycle is different and more sustainable than prior cycles due to operators' focus on short-cycle barrels. Halliburton's strategic priorities are clear and effective and drive outperformance.

Our technology portfolio and market presence mean that we are poised for profitable growth in the international markets. In the tight North America market, we remain focused on maximizing value and improving returns.

And finally, I expect Halliburton to continue to deliver profitable growth, strong free cash flow and industry-leading returns in this up cycle. And now, let's open it up for questions..

[Operator Instructions] Our first question comes from David Anderson with Barclays. Your line is open..

Hi. Good morning, Jeff. .

Good morning, Dave..

Your sales force in the U.S. has been playing defense the past five or six years, returns of software, but now your customers are actually reaping record cash flows basically on the back of low service cost. And as you said, equipment is essentially sold out in the U.S., activity is ramping up, oil's at 100, fundamentals are pretty tight.

I'm not sure if I've ever seen a better environment to push pricing. So I was wondering if you could talk about this process. What are you telling your sales force now in terms of pricing? And more importantly, what's the pushback from E&P? I understand the sense of sticker shock, but the situation is only going to get worse a year from today.

I don't see capacity being built, E&P costs are only going in one direction. If you could kind of frame your -- frame the whole pricing debate for me, I'd appreciate that. Thank you..

Yes. Yes, I will do that. Look, I think the most important -- I mean, obviously, pushing price all of the time, so guidance to the sales force is literally -- this is the amount of equipment, we expect it to earn more. And the sold-out conditions make that a lot clearer, certainly, for our folks and I think for our customers as well.

And I think the other key here is, though, it's a more iterative process and it continues to be iterative. By that, I mean, we've moved on price and we'll continue to move on prices. We work certainly this quarter, next quarter and through the year. And so, I expect to continue to move that direction with price.

I think it is a bit of a sticker shock, because you're seeing inflation across the entire sector. So we've got inputs that are going up meaningfully. Our own costs are going up meaningfully, and we're outpacing those costs in terms of net pricing. And so, I would describe it, I think you're accurate. It's more around sticker shock.

I described last quarter, we were moving around a little bit between customers as customers, sort of, felt around in the marketplace for what's out there, what's possible. And so, I think that, obviously, we plan to continue moving..

So, Jeff, I recognize it's early to talk about 2023. A lot has changed over the last 90 days, though, especially kind of, if you think about kind of global hydrocarbon movement.

I was wondering, is it fair to say that your top line expectations for next year have materially increased, particularly around the international outlook that you're talking about ramping up? And kind of -- and part of that is 35% incremental margins are sort of the baseline, I guess, if we talk about double-digit growth, but could that actually be closer to 40% or even 45% on how you see pricing particularly on that -- based on what we saw in the mid-2000s? So it doesn't seem like much of a stretch..

Yes. Look, Dave, I'm really excited about the outlook. And what I don't want to do is get in the business of refining a two-year outlook every quarter. But clearly, every quarter trajectory changes. And I'm very excited about those changes.

And I think everything we see, including what you described as energy security, sets up a busier North America, clearly and strong growth internationally. And what's key is we're seeing them both at the same time. And that's -- it's something we really haven't seen in a very long time and sets up very well for certainly us..

Thank you..

Our next question comes from James West with Evercore ISI. Your line is open..

Hey, good morning, Jeff. Good morning, Lance..

Hey, good morning, James..

Good morning, James..

So Jeff, you talked a lot about short-cycle barrels, which makes a ton of sense, given the situation the world's in now being short oil in a pretty significant way that, that would be the focus today.

When do you think that, if it does, that the cycle turns into one of a more balanced mix of short-cycle barrels and some longer-cycle barrels, some of the more complex, maybe more offshore or just maybe bigger development-type projects?.

Well, I think that what we see offshore generally today are tiebacks or development-type activity. But I think when I look further into the future, it's a combination of sort of ESG pressure is clearly one….

Right..

…capital returns, returns is another key element of that. And I don't think those are changing anytime soon. And so what I think we see is a marketplace that's going to have more optionality clearly for our clients. And in some respects, for us as well.

I mean that's the approach we've taken sort of longer-term maximizing value in North America is a view that we are going to be where we need to be. But clearly, in places where we have optionality also, I think you see that in sort of CapEx spend.

And I think that we've done -- everything I see, it just takes a long time to get those things underway and lots of money upfront, and I just don't really see over a longer period of time, like I don't know -- I want to give you a time, but a much longer period of time, could we see that creep back in? We probably could, but I don't see it in the viewfinder today..

Okay. Okay. That's fair enough. And then Jeff, we hear a lot about and we've been talking to a lot of the NOCs, particularly the ones in the Middle East and North Africa, who are reworking their budgets or have been over the last seven, eight weeks and using a little bit higher oil price estimation.

And I'm curious what they're telling you and probably your competitors as well about how these budget increases will flow through? I mean these are, in some cases, fairly bureaucratic operators. And so their ability to change and to get capital into the field and get service companies lined up in rigs and frac spreads, et cetera, takes some time.

So I know you're certainly more optimistic now than you were probably yesterday, a day before and six weeks ago, but are – do you think you see a lot of this in the back half, or are we really starting to talk about a 2023, 2024, 2025 story for a lot of these big NOCs?.

Look, I think we're going to see building activity sooner than that. I think it builds throughout the balance of 2022 and then probably continues to get legs in 2023, likely beyond. I think the key is that $100 oil, everything is busy.

And people want to be busy, but the question is, can they be busy? And what we've seen is really seven years of underinvestment around the entire world spending about half of what we used to spend. And that's not something that's overcome in a day or a year or – that just takes time to – to get momentum.

And I talked there are clearly all of Middle East, not the same. Clearly, there are NOCs that take a very long view and will build into growing production over time. But that's not the case everywhere. Lot of activity for us, but I think – and we'll see that sooner. But I don't think that you see the real long cycle-type work.

It's just going to take quite a bit of time..

All right. All right. Okay. That's very helpful. Thanks, Jeff..

Thank you..

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

Hey, good morning, everybody..

Good morning, Chase..

Hey, Chase..

Hey, Jeff and hey, Lance. So I guess I wanted to follow-up on the margin guidance on the C&P side. Obviously, pretty strong sequential increase, I think you said 350 to 400 bps of margin improvement on the C&P side. So Lance, I don't know if you could step back and kind of walk us through some of the moving pieces.

Obviously, 1Q was a little bit softer than we all thought.

But just kind of walk us through price, so maybe some costs coming out or things just to help us kind of get confidence in that big sequential increase in margins on the C&P side?.

Yeah. And you're right, Chase. A lot of noise in Q1, we've discussed before sort of the air pocket that exists as we move across the calendar year with completion tool sales and the profitability that goes with that. And certainly, the headwinds that we faced with sand supply early in the first quarter.

But I think the real underpinning of the guidance is what we're beginning to see now on pricing in North America, and it really beginning to take hold. I mean, as Jeff said, we've been very careful about the equipment we've told you were sold out. So it's not like we're adding incremental equipment.

This is really a pricing story for North America as it begins to turn..

Okay. I guess, the follow-up is really on pricing. Obviously, pretty tight US market, you're really starting to gain momentum on the pricing side.

And Lance, if we were to kind of squint really hard and look at leading-edge pricing, can we say that leading-edge pricing is starting to feel like its back to kind of 2018 levels, or are we kind of a long way from being able to kind of make that comparison just yet?.

I think it's a little early, but I think that we're heading in that direction, and we'll get there, we'll eclipse that as we go throughout the course of the second and third quarter..

Yeah. I think what's important, though, Chase, is that it's not the marginal fleet at the front edge of the curve, it's really the entire business that needs to get the recovery. And I think that's what we're in the process of doing. So does the leading edge makes sense, yes.

But the fact is, as I described in my comments, an incremental fleet is not really the decision point here, it's the recovery of the whole business in order to generate free cash flow..

And improved returns..

Yes..

Great. Makes sense. I’ll turn it back over..

Our next question comes from Neil Mehta with Goldman Sachs. Your line is open..

Good morning, team. Jeff, if I heard you right, you talked about North America growing 35% in terms of CapEx this year versus your previous estimate of 25%.

Can you talk a little bit about what gives you confidence around that view? Is the composition of that more of the privates, or do you actually see it showing up in public E&Ps? And is that activity-driven, or is it inflation-driven? Any color around the margin because that's a material increase in your macro expectations..

Well, a lot of that inflation that we see. It's -- and obviously, there's been a lot of inflation if we just look at the cost of inputs separate from our own, we've seen inputs ranging and cost increases from 20% to 100%, depending on what the item is. And so that weighs on it.

Rig counts up 45% if we were to stop today, frac crews are up 20% if we were to stop today and the cost of each of those are more. And so look, I think really what we're seeing is public companies will stick -- are sticking with activity outlook. It's not necessarily increasing activity.

And then with privates, we continue to see more activity and they keep growing. And so I think that operators all have different strategies and are very, very sharp around this.

And so I expect that they will manage their business the way they plan to manage it, but there's just no question that when I see inflation and activity and clearly privates, to make clear, the private growth is an important part of that outlook. We just -- my view is that we've moved up from where we were a quarter ago..

And Jeff, we clearly build in the rig count here and we're seeing an intention for to come into 2023 a little bit hotter from a production standpoint. But when we talk to producers, the constraint continues to be around labor and pressure pumping equipment.

Do you see new capacity being added into the market by your competitors? And ultimately, will that be a constraint on the US production profile over the next couple of years?.

Yes. I think it will be a constraint. I'm going to go back to my earlier remarks about a closed-loop system and terms of generating cash in order to build equipment and there’s a lot of equipment repair that needs to still happen or replacement in the marketplace. So I think that will be a constraint, labor and certainly equipment.

And that's one of the reasons we take a very long view of fleet health, and we've got one of the healthiest fleets in the marketplace. But inside of our capital budget, we're always replacing aging equipment, and we're looking ahead today to 2023 and 2024 in terms of what that fleet composition needs to look like.

So we're unique in that regard in terms of where we sit. But I do think that we don't -- I don't see capacity and I don't see meaningful capital to support any kind of build cycle at this point. Reality is this industry is still in recovery mode..

Thank you, guys..

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

Yes, good morning. I just want to come back to the C&P margin outlook, especially given what's happening in the marketplace here with your improvement in frac pricing.

When I look at the margins and the incrementals, obviously a lot of noise in 1Q, which you've talked about, but when I look at margins embedded in your guide versus the second half of last year, that the incremental still look pretty modest.

But going forward, obviously, a building completion tool backlog, frac prices improving, but obviously, pretty stout inflation coming through the system.

How should we think about those factors impacting C&P incrementals in the second half? Can we see incrementals rise into the 40s, although inflation constrained those incrementals kind of in the 30s? How should we think about it?.

Yes. Well, if we look at the Q2, I mean, the way you described it, everything we're doing is driving better margins in C&P, whether it's the operating leverage in the business, moving on price, equipment is tight. I think the Q2 guide is -- puts us in that sort of range.

Yes, there's a lot of inflation on other inputs to the business that we are recovering, but even recovering the cost of those other inputs will have a bit of a dilutive impact on overall margins, but that doesn't change the recovery for us and the speed and the momentum of that recovery.

And so I feel very good about where we're going and expect incrementals to be at the high end of what a range would be as we move through this process..

Got it. Got it. And one of the concerns we've heard just on the capturing the next round of pricing in frac is just around timing. Your pricing leverage is improving.

But I guess the question is, when do you see the next round really hitting? Is that kind of in 2Q, 3Q, or do we have to wait until kind of late in the year in the next budget season to really see a -- the next big step-up? How quickly does the next round of pricing in frac [indiscernible]?.

Yes. Yes, look -- crazy to get into the strategy for different customers and where we are. But obviously, this is an iterative process, meaning it's not something we wait until next year to do again. It's something that we are doing sort of in real time on a very regular basis. And so I expect -- we're in a $100 oil environment here.

And this is part of the cost of delivering $100 oil. And so, a healthy recovering industry, we will continue to iterate on price as we move through the year, not planning for next year..

Got it. Understood. Thanks, Jeff..

Our next question comes from Ian Macpherson with Piper Sandler. Your line is open..

Good morning team. The situation in Russia has shifted the paradigm not only for crude, obviously, but also natural gas and coal, both of which land on the shoulders of natural gas everywhere else. So, we've seen that strip move radically recently.

What do you think the customer response will be from US and international producers of natural gas with regard to activity response to what might be a structural higher strip just like crude that maybe hasn't shown up yet in the fundamentals of your business through April?.

Yes. Look, I think, Ian, that has to strengthen certainly in terms of activity, and I expect we'll see that in the important gas-producing countries internationally, we will see more of that activity and even likely in the US.

But the fact is, there still are some important constraints in place around pipeline capacity and whatnot that is serving to keep some of that market constrained today. But look, our business in the gas basins is improving and is busy and really not too dissimilar from kind of the demand response or the activity response that we see from oil..

Okay. And then, Jeff, just going back to the outlook on C&P margins. You -- obviously, there was significant weather and sand bottlenecks that distorted Q1 and you have a healthy recovery guided for Q2.

But does your margin guidance for Q2 for C&P embed an assumption that the sand problem is sort of contained fully now, or do you -- or is that an area for remaining incremental recovery of margins from enduring bottleneck on sand as you've guided Q2 later in the year?.

No, I think the sand is largely behind us. That was a good example of underinvestment in supply chain. And as it was turned back on, it had a lot of maintenance, lack of maintenance thereof, and we even participated with some of our vendors to help them get things back online and I believe that's largely behind us.

Look, I think the important point here is this trend is moving up. We're going to see all sorts of things, but our guide accounts for sort of all of the things that we see.

And I think that we are just in this place where we're going to continue seeing improvement sort of over whatever the labor bottlenecks happen to be, those are going to all be overcome consistently as we move through year and really beyond.

I mean I think that we'll continue to power through all of that and continue to see solid incremental growth at margins..

Super. Thanks Jeff..

Yes, thank you..

Our next question comes from Connor Lynagh with Morgan Stanley. Your line is open..

Yes. Thank you. I know it's a bit early to say precisely, but just returning to the topic of international pricing.

Do you see meaningful constraints in either your available equipment in select markets or your availability of labor, or is that more of a US issue at this point?.

Look, I think a lot of the same tightness discussion that we talk about in the US is similar internationally. It comes in smaller pockets generally because it's 70 countries as opposed to one. But we're seeing more tightness in tools, clearly in people, and I think that's what's driving extensions today.

I described the increase in the number of extensions we are seeing at higher prices. That's a great sign. But that's really predicated on tightening markets and the importance of having services available. Equipment is getting tighter. New work is pricing better.

It moves more slowly than the US, so it may be a little less pronounced, but I expect that, that continues to improve. The large tenders remain competitive, but the fact is they're soaking up noticeable equipment. And in fact, some of that tightness in the marketplace is creating opportunity for Halliburton.

There are a number of situations where, because of our supply chain and access to raw materials and products, we were able to supply when others could not. And so, I think that's a real -- that's the evidence that, that market is getting tighter.

When we get a third call from a customer says, hey, do you have anything' and we're able to supply it, that's an indicator that the market is getting tighter..

Got it. That's helpful color. Just on the supply chain side of things, there's obviously been a lot changing in the world over the last month or two here.

Have you had any sort of hot spots that you're monitoring? Are there any areas that, we should think about being -- something we should be watching as you ramp activity through the back half of the year here?.

No, I don't think so. I mean I think what we're going to just see is the lengthening of delivery times. Things take longer to deliver, and therefore, planning matters more than ever. Obviously planning on our part, but also planning on the parts of our customers. And again, it is creating opportunity for us.

And I think along the way, the key here is, we can't and won't subsidize operators in this process. So, we've been very transparent in terms of the cost to acquire things, the timing to acquire things. And I think that, again, our supply chain organization is very sophisticated and it outperforms.

And so, I put Halliburton right at the top of that when it comes to solving those kinds of shortages, bottlenecks, whatever it may be..

Got it. Thank you very much..

Thank you..

Our next question comes from Stephen Gengaro with Stifel. Your line is open..

Thanks. Good morning, gentlemen. .

Good morning, Stephen..

Two things for me.

Just to start with, with the world evolving and you mentioned kind of the pull on short-cycle barrels, how do you think about CapEx? How do you think about investing in assets which have 5-year-plus lives in an environment where things have changed so dramatically?.

Well, we look at that returns on that equipment inside the time that we know it will work. And so, it much of that at all. Anything that we're doing, we've got line of sight to not only the initial project, but its full cycle return, and expect that to get returned in the life of that contract.

I'd use eFleets as an example of that, where our view is, they have to make a return on capital and a return of capital inside of the time it goes -- its initial contract. And we view a lot of things that way. And so, I think just as operators sort of retain flexibility – budget flexibility around what they choose to do, we're doing the same.

And that's what allows us really in my view, to confidently drive profitable growth internationally, which D&E margins are an example of that, and then also maximize value in North America, which is our approach to North America is demonstrating that also.

And so I really like our strategy very much, and I think it's very consistent with the kind of market that we see unfolding..

Thanks. And I guess the follow-up, just when you think about -- and you mentioned the concentration of frac equipment in the hands of just a few operators now and you've seen consolidation.

Have you seen behavioral change from -- in general, just from all the players in the market? Do you think it's just a function of the market being sold out? Do you think other -- your competitors are truly acting better when it comes to pricing?.

Look, I can't comment there. I mean, what I see is an industry broadly that has underperformed for a long time.

And I know in our own case, for Halliburton, in order to reinvest in even replacement equipment, we need fundamentals that are better and returns that are higher in order to generate the cash back to my point around maximizing value in North America.

We're only going to do that if the investment is produced by the equipment that is working in the marketplace. And so independent of what others are doing, that's what we are doing. And when I look across the marketplace, I see a whole industry that has largely suffered the same thing. And so that's just pure economics at work there..

Great. Thank you..

Thank you. That concludes our question-and-answer session for today. I’d like to turn the conference back over to Jeff Miller for closing remarks..

Yeah. Thank you, Michelle. Look, before we end the call, let me just close with these comments. I am confident in my outlook on the strength of this market upcycle. And I expect Halliburton will deliver profitable growth, strong free cash flow and industry-leading returns as this upcycle accelerates.

The pivot to short-cycle barrels only confirms this upcycle staying power. Look forward to speaking with you next quarter. Michelle, let's close out the call..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining, and have a wonderful day..