Halliburton Earnings Call Nuggets: Normalized Margins, CapEx and Capacity

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On Wednesday, Halliburton Company (NYSE:HAL) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Normalized Margins

Brad Handler – Jefferies & Co.: I guess in light of going first, let me try to just make sure I understand some of what you’re trying to guide us to. First, maybe a clarification of what you consider to being normalized margins in the U.S. If you’re working towards that, how would you think about 2013 evolving? I recognize, of course, in that there are elements sort of the revenue side you don’t see, but let’s just (indiscernible) clarify the normalized margin comment; that would be helpful.

Mark A. McCollum – EVP and CFO: Well, without giving – trying to give specific guidance as to when this might happen because that’s not what we’re doing. We continue to hold that we think normalized margins are in the mid-20s. That’s as we look at the business historically and sort of a balanced market, balanced cost structure, that those mid-20s margin seem to be appropriate to us and that’s what we’re targeting internally to drive our business toward.

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Brad Handler – Jefferies & Co.: And the follow-up in the same vein, maybe it’s a bit more fourth quarter-focused. You all helped us in saying, okay traditionally, internationally now you see a modest – when you say low single-digit revenue increase, I actually thought it might have been higher traditionally and them some margin increase. Are you suggesting that from what you can see the fourth quarter of ’12 would be a traditional year? In other words, that’s what you’re encouraging us to think about for the fourth quarter in non-North America or are there some elements – I’m sorry, are there some elements that changed that?

Mark A. McCollum – EVP and CFO: Well, no. I think the way that we’re looking at it right now and based on our forecast, we’re seeing it as a fairly traditional year maybe with a slight bias to the lower end. I mean obviously some of the macro headwinds that Dave discussed continue to be out there. We’re watching them very carefully. There seem to be more headwinds than tailwinds in the broad market itself. But as our business is performing and particularly with regard to the share gains that we’ve had and as some of those contracts come in, we think that that those things coupled together will allow us to post a revenue gain that’s in line with what we have traditionally seen. Does that make sense?

Brad Handler – Jefferies & Co.: It does.

Mark A. McCollum – EVP and CFO: In other words, the broad market may not be up, but with regard to our revenues because of our share gains we think that that they’ll look fairly typical.

CapEx and Capacity

Jim Wicklund – Credit Suisse: A question; I understand that CapEx being down in 2013 because the current overcapacity in U.S. pressure pumping, but you might comment about unconventional work in China and Australia, and of course the big deepwater projects that you won and that you’re chasing. Is CapEx going to continue to be a high number? I mean are we going to have to continue to invest in this market at the levels close to what we’ve seen this year. Do we have enough capacity for the international shale boom and the deepwater boom?

Mark A. McCollum – EVP and CFO: Part of the reason we didn’t give specific guidance, Jim, is because there is something that we are still working on. We got to have input from our customers as to what the not only the amount but the timing of their capital spending will be. And I think the other sort of data point to always consider is that we don’t build speculative capital so as we address our capital budget for next year I mean I think it is fair to assume that there are going to be capital being placed in international markets around unconventionals, around some of the deepwater markets for us to be able to satisfy what our customers are doing on the share wins that we’ve got and on the projects that they will be doing. As Dave said, we are focused like lasers on returns right now and we are going to be trying to drive that as carefully as we possibly can but we do continue to be encouraged about the pace of development in international deepwater and unconventionals. The industry as a whole is undercapitalized, I think, it’s fair to say particularly around unconventionals we are undercapitalized and we are going to continue to be working to try to make sure that we have assets on the ground to do that work on a real time basis.

Jim Wicklund – Credit Suisse: And the second follow-up, if I could. The international strategic initiative that you talk about better delivery of technology, closer to supply bases, can you kind of give us more layman’s term as to what it is you are doing to accomplish this. I mean, what the $32 million this quarter was actually spent on so we can better understand what that is?

Mark A. McCollum – EVP and CFO: There are several different initiatives, Jim, that we are working; one, is we’ve been completing a fairly significant manufacturing plant in Singapore for our completion tools, product service line. Our completion tools product service line management now reside in Singapore. We’re operating that business internationally. And so that’s been a fairly significant change and it also because of the way that we procure has required some system changes to back that up. Secondarily, we still are continuing to work on our project we internally call Battle Red. That is associated with our Frac of the Future initiative that really is designed to look at our back office operations, the order to cash process, the use of mobility – mobile technologies in the field itself to allow our business development, our operations people to be better connected to move our paper flows, to expedite that flow so that we can build faster, be more responsive to customer changes when work moves, as it always does. That’s a fairly significant rollout that require some changes to SAP, some reorientation of our business support centers and that change will probably be sort of come to full fruition in the middle part of next year, but it’s something that we’re spending some ongoing cost around. We’re pretty excited about the opportunities that it will hold or reduce our working capital in terms of day sales outstanding and to allow us to improve our service quality as we work with customers. Then the final step really is around other changes that we see, particularly in our Drilling and Evaluation business; orients to be more international. We are taking steps with our legal entity organization and other things to be able to expedite that work, and a lot of that relates to moving IP and other things, offshore that allows to better utilize that in some of our foreign jurisdictions.

A Closer Look: Halliburton Earnings Cheat Sheet>>

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