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Halliburton Company (NYSE:HAL)
Q1 2018 Earnings Conference Call
April 23, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Lance Loeffler -- Vice President, Corporate Development

Good morning and welcome to the Halliburton first quarter 2018 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, President and CEO and Chris Weber, 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 31st, 2017, recent current reports on form 8-K and other Securities and Exchange Commission filings. We undertake no obligation to advise or update publicly any forward-looking statements for any reason.

Our comments today also include non-GAAP financial measures and unless otherwise noted, in our discussion today, we will be excluding the impact of charges related to Venezuela. Additional details and reconciliation to the most directly comparable GAAP financial measures are also included in our first quarter press release and can be found in our investor downloads section of our website.

Finally, 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 more time for others who may be in the queue. Now I'll turn the call over to Jeff.

Jeff Miller -- President and Chief Executive Officer 

Thank you, Lance, and good morning, everyone. Let's get right to it this morning. In the first quarter, Halliburton experienced significant challenges in North America related to rail disruptions. One of the things I am pleased with is the way our organization executed through the sand logistics complexities in order to minimize disruptions for our customers.

The company you want to own and work with is a company that can execute through these issues and any other potential headwinds. Halliburton identified the problem, addressed it and worked through it. Business conditions are back to where we thought they would be. As a result, I really like what I see shaping up and I am confident in our ability to reach normalized margins in North America this year. After taking into account the impact from rail, we wrapped up the quarter in line with what we expected.

Here are our highlights from the quarter—total company of $5.7 billion represents at a 34% increase compared to the first quarter of 2017. Adjusted operating income was $619 million, driven by robust market conditions in North America. Once again, for the last five quarters, we have delivered the highest returns in the industry.

I am very pleased with the way our North America business exited the quarter. In March, our production enhancement product service line achieved record stage count for crew, higher than at the previous peak in 2014. Our international run rate for tender activity in 2018 is on a page to double 2017 levels. Our completion and production division was impacted by US rail disruption during the quarter, but we still achieved a strong exit to the quarter with March margins in the mid-upper teens.

Finally, our drilling and evaluation division had strong year over year revenue growth of 15% with operating income growing 54%. Today, all eyes are on North America as it continues to play a larger role as a global producer. Activity in the US remains resilient as our customers have a large portfolio of economically viable projects in today's commodity price environment. We expect our customers to remain busy through the rest of 2018, creating significant demand for our services.

The combination of steady rig count growth and completions intensity is improving demand across all of our product service lines. In addition, we believe the pressure pumping market is under supplied today and will remain tight for the rest of 2018. Despite the incremental horsepower coming into the market, I believe this undersupply will persist as wear and tear continues to degrade existing equipment. I've been saying this for a bunch of quarters -- degradation is real. Roughly 50% of announced horsepower editions announced and the related number of crews that are produced. This means that about half the new build equipment is being used to replace or add to crews already in the field.

The key driver of this degradation is service intensity, which quickly translates to shorter equipment lives and higher maintenance costs. Maintenance costs are growing and the costs are real. Today, we pump three to four times of sand volume through equipment compared to 2014. We've moved away from gel-based frack to slick water frack, increasing the abrasion on our equipment. At the same time, we increase the pumping rate, compounding the wear and tear on equipment.

With increased efficiency, we've improved utilization, achieving more pumping hours per day, again, more wear and tear. In this environment, Halliburton has a clear advantage with our proprietary equipment and preventive maintenance technology that reduces our relative maintenance expense. The expansion in our operating margins over the last year demonstrates our superior ability to manage through the increased maintenance. We have generated industry-leading returns while expensing our maintenance costs, in contrast to many of our competitors who capitalize their costs.

The current activity level in the US is continuing to create tightness across the supply chain. The three most significant areas is supply chain tightness that we see are rail, trucking, and labor. I'll address how we're handling each of these next.

The first quarter was a tough quarter for sand delivery. I learned more about train logistics than I ever dreamed I would. Proof that getting to the future first is not always fun. We were the first to recognize the rail issue and describe it for the market. I appreciate the hard work by our sand desk to minimize the disruptions to our customers while a significant volume of our sand supply was impacted by the rail stoppages. As I stated before, this issue is temporary and is behind us.

Looking forward, the US rail system is experiencing high-demand, driven by strong economic activity. This increased overall demand is adding stress to the rail system, while at the same time, our industry is attempting to move more and more sand every quarter. This stress is making the timing of deliveries less deliverable. Our sophisticated sand supply desk and logistics system is working to mitigate this problem. I believe the ultimate solution is the increase use of local sand. We intend to utilize those resource to provide services for our customers as increased supply comes online in the latter half of the year.

After rail the next logistics bottleneck is trucking. The issue today is not in tractors and trailers. It's finding qualified drivers and dealing with congested infrastructure. Containerized sand is an effective tool to reduce demerge and truck demand for well side. We continue to roll out our containerized sand solution currently deployed across a third of our fleet to reduce costs, increase efficiency and improve our service quality.

The labor market is tight. US unemployment is at an all-time low. In some basins, it's just above 2%. That is tight. We have the advantage of being able to recruit nationally to find qualified field personnel. However, given the level of activity today. There will likely be wage inflation and additional pricing will be necessary for cost recovery.

I view these supply chain constraints as a welcome sign of a growing market and expect to execute through these challenges on our path to normalize margins in North America this year. We remain on the path to normalize margins and our march performance was a strong step in the right direction. To get to these margins, we will pull the three levers that I've discussed several times over the last year.

Price is clearly important and we push price every day, first to recover costs and then to gain net pricing. Our customers understand that we have to get both cost recovery as well as return to a price that is healthy for our business. Just as important as price is utilization, which we continue to utilize as the market grows. Our scale makes this even more valuable to Halliburton.

Finally, playing into both pricing and utilization is technology. Technology creates value for our customers and at the same time reduces cost for Halliburton. As the market grows, North America's role in the global supply equation is changing. This fundamental shift means that North America shale oil has moved from swing producer to baseload supplier to meet growing global demand.

Nothing is more evident of this change that our customers actively redirecting spending from international non-OPEC opportunities toward North America. This shift in CapEx allocation is largely driven by the shorter cycle return and lower risk profile North America shale provides. This change didn't happen overnight. In fact, it's been occurring over the last several years. In this paradigm, we see sustainable growth over a longer period of time rather than the boom and bust, which has characterized past cycles in North America.

This sustained activity is good for Halliburton. It allows us to leverage our supply chain and logistics infrastructure capture efficiencies around repair and maintenance programs and implement technologies at scale to reduce costs and increase production. Therefore, we can optimize our systems and be more efficient with our investments. This is important because in this environment, Halliburton will generate strong free cashflow.

Turning to the international markets, Halliburton has never been better positioned for a recovery than it is today. Halliburton is in every meaningful market, competing for work, winning work and executing work with outstanding service quality. This is not something I could have said ahead of the prior cycle. I've always said you have to be present to win and Halliburton is more than present. We are winning. In Latin America, I see improving activity offset by pricing pressure throughout the year. I'm pleased with the footprint and legacy we have in Latin America and our market share today is a testament to our focus on service quality throughout the cycle.

In Argentina, there are exciting improvements in unconventional resources. We successfully completed the longest lateral section ever in the Vaca Muerta Formation, flawlessly pumping 42 stages, a great job by the team, demonstrating their focus on our value proposition in Argentina. In addition, a record number of blocks are scheduled to be auctioned in Mexico and Brazil, representing a pipeline of service activity in the coming years. We look forward to working with our customers to maximize the value of their investments.

Certainly a lowlight for the quarter is the write down of our remaining assets in Venezuela. We continue to work at a reduced level as we believe the ultimate path for resolution in Venezuela involves oil and gas. In the Middle East and Asia, we've experienced modest increases in activity offset by pricing pressure. We've grown our market share in this region throughout the downturn on the strength of our service quality and technology offerings.

In the first quarter, we delivered the industry's first in situ bubble point measurement using our wireline CoreVault technology. This data is important for reservoir characterization, allowing our customers to better understand their gas to oil ratio before flowing the well to surface. By collaborating with customers, we continue to create technology that improves our services and maximizes their asset value.

In Europe, Africa, CIS, typical seasonality created a dip in activity for the first quarter, but we expect to see modest rig count growth throughout the year. I expect initial activity increases to be in the North Sea, Nigeria, and Ghana.

One highlight from the region is progress around digital applications. We continue to believe that our approach to digital, which focuses on open architecture solving business problems and working with partners will prove the most effective over time.

I remain encouraged by the long-term prospects of the international markets. Grain chutes of activity are starting to create areas of localized tightness, but this additional activity is not enough to reverse the pricing pressure we are under today. The run rate for 2018 tendering activity is on a pace to double from 2017, which leads us to believe that there will be improved activity in 2019 to help soak up resources and create an opportunity for pricing inflection.

Before I conclude, I want to spend a moment talking about Sperry Drilling because I am really excited about what I see. Sperry developed and launched several exciting technologies in the last year. First is Earthstar, our very deep resistivity service which provides customers greater reservoir insight to create better wells by utilizing improved mapping and real time geo-steering decisions.

Next is our Icruise rotary steerable system that reduces drilling time and increases well placement accuracy to optimize asset value for our customers. Finally, our new upgraded fleet of drilling motors are proving effective in US land. These motors are more powerful and have improved reliability, maximizing drilling efficiency for our customers.

I am really excited about these technologies and the enthusiasm we're seeing from our customers. We super-charged our R&D spend for this drilling technology and we make terrific progress in a short period of time. The market for these technologies and additional equipment in our development pipeline is growing. For this reason, we will spend a big part of this year's capital budget on these tools. I expect the investment to generate attractive returns in the years ahead.

Overall, I am excited about the market outlook for the remainder of the year. I am confident in Halliburton's ability to grow revenue and expand margin in North America and the strength and performance of our international business as the international recovery unfolds. Our strategy is executable. It's working well and resonates with our customers. Our strategy is delivering industry-leading returns and I am confident that it will continue to do so.

Now, I'll turn the call over to Chris for a financial update.

Chris Weber -- Chief Financial Officer

Thanks, Jeff. Let's start with a summary of our first quarter results compared to the first quarter of 2017. Total company revenue for the quarter was $5.7 billion and adjustment operating income was $619 million, representing a year over year increase of 34% and over 200% respectively. These results are primary driven by increased activity in North America. Moving to our division results.

In our Completion and Production Division, revenue increased by 46% in operating income, more that triple to $500 million. These results were primary due to improvements in United States land. Additionally, results improved due to increased well completion services in Europe, Africa, CIS, and higher stimulation activity in the Middle East.

In our Drilling and Evaluation Division, revenue increased by 15% while operation income increased 54%. These results were primary driven by increased drilling activity in north America and the Eastern Hemisphere, particularly in the North Sea. These results were partially offset by activity declines across multiple product service lines in Latin America. In North America, revenue increased 58%.

This improvement was led by increased activity throughout the United States land sector and the majority of Halliburton's product service lines, primarily pressure pumping as well as higher drilling and artificial lift activity. Latin America revenue decreased by 1% due to activity declines in Venezuela and Mexico. These results were partially offset by increases in drilling and pressure-pumping services in Argentina.

Turning to Europe, Africa, CIS, we saw revenue improve by 19%, mainly due to higher drilling activity and well completion services in the North Sea, coupled with increased activity in Russia and Azerbaijan. These results were partially offset by activity reductions in Angola. In the Middle East/Asia region, revenue increased 7%.

This increase is largely the result of increased drilling and stimulation activity and increased drilling activity in Indonesia, offset by lower completion tool sales and project management activity in the Middle East. Regarding Venezuela, as a result of recent changes in its foreign currency exchange system and continued devaluation of the local currency, combined with US sanctions and ongoing political and economic challenges, we wrote down all of our remaining investment in the country.

This resulted in a $312 million net of tax charge during the first quarter. We continue to work in Venezuela and carefully manage our go-forward exposure. In the first quarter, our corporate and other expense total $69 million and net interest expense was $140 million, in line with our previous guidance. We expect these items to continue with this run rate in the second quarter.

Our effective tax rate for the first quarter, excluding Venezuela related charges came in at approximately 21%, as a result of US tax reform and our geographic earnings mix. Going forward, we expect our 2018 full year and second quarter effective tax rate to be approximately 22%. Cash flow from operations during the first quarter was $572 million, with capital expenditures of $501 million, ending the quarter with a cash balance of approximately $2.3 billion.

For the full year 2018, we now anticipate our CapEx spend to be about $2 billion. We like what the market is showing us for 2018 and beyond. While spending slightly more than our DNA, customer demand supports this investment and we expect it to generate attractive returns. We ended the quarter with $2.3 billion in cash and expect to generate strong free cash flow in 2018. Consistent with prior years, we expect our cash balance to grow in the second half of the year.

Turning to our thoughts on the second quarter, in our drilling and evaluation division, we expect our revenue and margin to be similar to the first quarter, primary due t o continued pricing pressure international market, offsetting activity increases. In our completion and production division, we expect strong revenue and margin growth driven by the strengthening in North America market. Based on what we see today, we believe current second quarter consensus EPS provides a good target for our performance.

Let me turn it back to Jeff for a few closing comments.

Jeff Miller -- President and Chief Executive Officer 

Thanks, Chris. Let me sum it up. First, I want to thank all of our employees for what they do to deliver our value proposition every day. It really matters. We saw it this quarter. In North America, I am pleased with the way Haliburton executed through the quarter given the challenges we've faced. We managed through the supply chain issues and exited the quarter on the path to normalized margins.

Looking ahead, I am excited about the way the North America market is shaping up throughout the year and the role it is playing in the global supply. My view on the international market remains intact. I'm encouraged by the activity outlook that should ultimately lead to price inflection in 2019. We are the execution company. We are focused on service quality, capital discipline, generating super financial performance and delivering industry-leading shareholder returns.

Now, let's open it up for questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you'd like to ask a question at this time, please press the *, then the number 1 key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing the # key. Again, if you'd like to ask a question at this time, that's * then 1.

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

James West -- Evercore ISI -- Analyst

Hey, good morning, guys.

Jeff Miller -- President and Chief Executive Officer 

Good morning, James.

James West -- Evercore ISI -- Analyst

Jeff, I want to dig in more on the pressure pumping market. I think you gave some good color on what you guys are seeing. There's been some commentary suggesting different factors at play here, perhaps because you're sold out and demands are coming in and others are trying to put equipment to work. But I wonder if you can talk through some of the dynamics you're seeing on both the supply and demand side, how much demand is running above supply, how long that's factoring into pricing for Halliburton in particular.

Jeff Miller -- President and Chief Executive Officer 

Thanks, James. It is different. Our customers are asking us for equipment. We're not trying to put older equipment into the market. Because of that, it makes for a totally different conversation. I think backing up and looking at overall supply and demand, it looks like the market is under-supplied probably a million, million and a half horsepower today. I expect that it stays that way, certainly for this year and likely beyond.

A lot of that is because of the attrition that I talk about that is very real. We look at horsepower announcements versus actual fleet ads. All that does is the fact that half the horsepower announced is going back into existing fleeting tells me that market stays tight. For that reason, from our perspective anyway, we see solid pricing, we push it every day. We're not going to get into the strategy around how we do that, but certainly see cost to cover, pricing to cover inflation out there as well as pushing on the net pricing side of that as well.

James West -- Evercore ISI -- Analyst

Okay. We should think the net pricing gains will continue for that time period as well?

Jeff Miller -- President and Chief Executive Officer 

Yes.

James West -- Evercore ISI -- Analyst

Okay. Perfect. Thanks, Jeff.

Operator

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

Bill Herbert -- Simmons & Company -- Managing Director

Good morning, Jeff. With regard to international, as you went through all three different geomarkets, it struck me that the continued refrain is activity going up offset, not partially offset by pricing and yet your international topline was up 8.5% year over year. So, do we exact international topline for the year to be up for Halliburton or as the year unfolds, the year over year gains compress to the point where topline is flat?

Jeff Miller -- President and Chief Executive Officer 

No, I think we outgrow the expected spend internationally. I see the topline as up for the full year of 2018.

Bill Herbert -- Simmons & Company -- Managing Director

Okay. And then with regard to -- it seems that pricing remains pretty corrosive. I'm just curious -- is pricing continuing to go down or has it stabilized at really oppressive levels?

Jeff Miller -- President and Chief Executive Officer 

No. I would say pricing continues to go down. We look at pricing internationally. We're exciting about the volume of activity and we like to see more tenders, but I can tell you our customers know that we're at the bottom as well. From our perspective, price is actually continuing to move down, not up, internationally as we start to see the large project come through. So, I expect that we see inflection in 2019, expect that we gain share as we work through the cycle and that's why we see revenues up for the full year, but clearly, that is going to offset the benefit from higher activity.

Chris Weber -- Chief Financial Officer

Bill, this is Chris. We do see, like we said on D&E, which is largely international, flattish second quarters or first, but we would expect as we move into the second half of the year that we'll start to see some improvement in our international results and thus our D&E results, not a lot but some incremental improvement as we get closer to that inflection point that we're seeing in 2019 that Jeff talked about.

Bill Herbert -- Simmons & Company -- Managing Director

Okay. Thank you very much.

Operator

Our next question comes from the line of Sean Meakim from J.P. Morgan. Your line is now open.

Sean Meakim -- J.P. Morgan -- Analyst

Good morning. So, Jeff, maybe if we could talk about where your contract position sits for fracked, thinking about your existing fleets versus leading edge pricing, how much of that role forward do you think will support incremental margins through the year, even if net pricing were more on the flatter side, just to give us a sense on how much that impact could be.

Jeff Miller -- President and Chief Executive Officer 

Yeah. Thanks, Sean. Let's go back and talk about the three levers. Price is always important. So, when I look at margin progression, clearly price is important. But at the same time, utilization is an important level and allows us to move on the lever front as does technology help us do the same thing. Technology in affect helps our customers generate more value, but at the same time, reduces our cost. That's the important piece of that in terms of supporting our margin expansion outlook for the balance of the year.

Our business development guys are in the market every single day. Because of our efficiency and technology and science, that's the price support for what we do. But at the same time, those other two levers, very important.

Sean Meakim -- J.P. Morgan -- Analyst

So, in terms of looking through the year, fair to say that there's still some pull forward as your backlog of contracts rolls into current pricing and that tailwind for you?

Jeff Miller -- President and Chief Executive Officer 

I would say if we look back a year now and talk about the contracts that we have there, a large part of that has rolled over. What we look at now is improving the margins on the contracts that we have. A lot of this does get to efficiency. This is one of the reasons why our business development team is so focused on where are the customers where we can get the best efficiency and utilization. That's a key part of how we expand margins.

That opportunity is clearly still there. Customers remain urgent. That Customer urgency is critical because even spending within cashflow, for example, urgency around effectiveness of every dollar spend matters a lot. That may not have been the case two years ago at the absolutely bottom of the downturn, but today, that is a critical factor for our customers. Again, where we spend a lot of our energy is making sure that we are able to execute that way.

Sean Meakim -- J.P. Morgan -- Analyst

Got it. Understood. Thinking about the other service lines in North America, I'm curious how pricing progressed in this quarter. I think about drilling services, cementing, wireline, coiled tubing. You touched on a little bit in the prepared comments, but what are your expectations for those other lines as you move through the year and the impact on C&P as well as D&E?

Jeff Miller -- President and Chief Executive Officer 

Well, I think none of those service lines declined was much as pressure pumping did through the downturn, so they don't have as far to move up. That said, I do expect a growing market. As the rig count grinds up, I suspect we'll see more tightness around those things and the ability to move price up modestly.

Sean Meakim -- J.P. Morgan -- Analyst

Okay. Fair enough. Thank you.

Operator

Thank you. Our next question comes from the line of Angie Sedita with UBS. Your line is now open.

Jeff Miller -- President and Chief Executive Officer 

Angie?

Angie Sedita -- UBS Investment Bank -- Managing Director

Good morning, guys. Sorry about that. Jeff, I agree there's certainly a big difference between incremental horsepower and replacement horsepower. Can you give us your thoughts on how much horsepower incrementally is coming into the market and you touched on also a very fair point on the ability to deploy new versus older equipment and maybe talk about the pricing differential on the new equipment versus the older equipment.

Jeff Miller -- President and Chief Executive Officer 

Sure, Angie. We look at headline horsepower in the marketplace. We think it's 18 million horsepower, somewhere in that range. We look at what's been announced in terms of new build and reactivation. That comes to maybe 4.5 million horsepower. Of that, we expect roughly half of that is going to get plowed back into existing fleets. At Halliburton, we've maintained our fleets at 36,000 horsepower on average, which tells me we're getting differential performance around that equipment.

That clearly in my view, with the kind of rig count that we have today and the outlook we have for growth this year keeps that tight. I think that's how we see it unfolding for the balance of the year. Your question around horsepower and age, we think about our horsepower in terms of how effective is it on location. Clearly, we've got proprietary technology around our pumping and other things we do around maintenance, etc. and I think because of that, we're differentially positioned in the market and that has an impact on where we can work, how effect we are and what kind of margins we can earn.

Angie Sedita -- UBS Investment Bank -- Managing Director

Okay. Fair enough. I don't know if you can talk about it at a high level as far as a pricing mechanism of your contracts, is it fair to think the majority of your contracts are repriced at the beginning of the year or is it staggered. Then midyear, as you have potentially to revisit or is it normally done once a year, twice, a year? Just at a high level, how do those contracts work?

Jeff Miller -- President and Chief Executive Officer 

Yeah, Angie, that's maybe the way it was several years ago. I'd say today it's staggered and all over the place as we work through the downturn and back out of the downturn, a lot of variability in what contracts look like. Really, it's a matter of execution every day and demonstrating the values so we can have a value discussion.

Angie Sedita -- UBS Investment Bank -- Managing Director

Alright. Thanks. I'll turn it over.

Operator

Our next question comes from the line of Jud Bailey with Wells Fargo. Your line is now open.

Jud Bailey -- Wells Fargo -- Managing Director

Thanks. Good morning. I wanted to ask about or circle back to getting back to normalized margins this year. Jeff, just to be clear, do you think you could hit normalized margins this year if leading edge frack pricing does not increase from here? We're trying to get an understanding on what could be efficiency driven and what's simply new contracts rolling up to leading edge, if you can help us think through that, please.

Jeff Miller -- President and Chief Executive Officer 

Yeah. The short answer is price is always important. But I talk about the three levers because I believe we get there on the back of improving utilization and technology. I've said that for a long time. Pricing is certainly helpful, but not a requirement.

Jud Bailey -- Wells Fargo -- Managing Director

Okay. Thanks for that. My follow-up is on the CapEx. Higher CapEx, could you maybe give us a little bit of insight into where that is going to go. You mentioned Sperry and ramping up there. How much of it may be replacement and how do you think of the return on that capital you're going to be spending this year.

Chris Weber -- Chief Financial Officer

Jud, this is Chris. Like we said, we've bunched our CapEx budget, now I think it's hopefully it will be about $2 billion, a little bit higher than what we were guiding before. I think it's more to note that we're pretty thoughtful about our capital investment decisions, always looking at it through the returns lens. Is it going to be value accretive? Is it going to generate attractive returns?

That's what we saw with the opportunity with regards to the CapEx rate. The majority of the increase is going into Sperry. We're excited about it. As Jeff talked about, this is a product line we underinvested in for a number of years. It's a strategic priority for the organization. We're seeing great demand, both for existing technology and the new technology. It's actually positioning equipment for work in 2019. We think we'll generate attractive returns over the long-term. So, we're excited about the opportunity.

But this CapEx raise in terms of guidance doesn't change our outlook, our expectation for generating strong free cashflow this year, nor our focus on capital discipline.

Jud Bailey -- Wells Fargo -- Managing Director

Okay. Got it. Appreciate it. I'll turn it back. Thank you.

Chris Weber -- Chief Financial Officer

Thanks.

Operator

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

David Anderson -- Barclays -- Director

Good morning, Jeff. Just kind of a general question around the normalized margin target. Now, you reiterated that margin target. Can you help us understand how you define normalized? It seems like everybody has a different view of what that means. I'm just curious what that means to you in terms of activity utilization and pricing.

Jeff Miller -- President and Chief Executive Officer 

Yeah. I define normalized margins as 20%. That's been something we've talked about over some period of time. That's where I think the business settles. If we were getting to that place. We were at that place in 2014. What we had was demand to go away, but it wasn't necessarily an oversupplied market. What we had was a downturn where demand went away. I fully expect that we work back into that range and that's just what we're doing with the levers I describe. Clearly price important, but the kind of utilization that we're able to get today, because of our process, our technology, that's always a key component of any kind of margin outperformance.

David Anderson -- Barclays -- Director

So, in other words, this is sort of a steady state level you think you can achieve for a couple of years here for these levels based on what you mean by normalized?

Jeff Miller -- President and Chief Executive Officer 

Yeah. That's why I used the word normalized because really, we used this as normal range for this business was in that range. The work that we're doing is built around having this business operate at those levels.

David Anderson -- Barclays -- Director

Then if we think about the fourth quarter, we often see some seasonal weakness in North America. Does that imply that you should be able to hit this target by third quarter if we assume a downtick in fourth quarter like we usually see?

Jeff Miller -- President and Chief Executive Officer 

I would say the behavior of the market looks somewhat consistent with what it does every year and I'll just leave it at that in terms of timing. The Q4 always has some spotty weather and Q1 this year had cold weather and had the rail issues that we had. As we work through the year, I suspect it's over the next couple quarters.

David Anderson -- Barclays -- Director

Separate question on the sand side—you talked about increasing use of local sand to mitigate some of these issues here. Can you give a sense of how you see the magnitude of that shift you think is going to happen in the next 12 months? Just kind of curious, sand is a big portion, a crucial element of your pressure pumping operations you always want to have for your customers. I'm just trying to get big picture numbers. What percentage of your Permian is sourced from rail and where do you think that could potentially lower to in 12 months?

Jeff Miller -- President and Chief Executive Officer 

Well, that's a moving target as we speak. So, if we go back six months ago, it was zero. I suspect as we get into sometime next year, for the market anyway, there's a path to oversupply that market from the Permian. That's sort of the projects that we see or at least are in process of getting built. It's probably never 100%, but it can be a substantial portion of the sand demand in Permian will come from mines in the Permian. It's a dynamic we're starting to see in other basins as well. What it ultimately does is it serves to relieve pressure on rail and it certain provides for more availability of Northern white to the markets that will probably continue to demand that.

David Anderson -- Barclays -- Director

Okay. Thank you, Jeff.

Operator

Our next question comes from the line of James Wicklund with Credit Suisse. Your line is now open.

James Wicklund -- Credit Suisse -- Managing Director

Good morning, Guys. Having worked international for 15 years, the contingency always needed a contingency both on price and time. I understand your comment that the bidding activity is up, but we really won't see the impact until '19. But there's been a great deal to talk about lump sum turn key contracts in the Middle East especially. I know that we've done those for a while, but the letter or percentage of total business appears to have picked up. Can you talk a little bit about where that is today, where that is versus a couple years ago? Do you do it with the same people or different people? More importantly, we're all concerned that lump sum turnkey increases the risk to a company that bids that. Not all of them are executed well.

So, the concern is or the hope is that you execute well and boost those margins and maybe surprise us to the upside by the end of the year on results. Can you talk about how that plays into lump sum turnkey contracts play into your view of international?

Jeff Miller -- President and Chief Executive Officer 

Yeah, thanks, Jim. As you say, LSTK has been around for a long time. It's gone by a lot of different names over the years, integrated solutions, IPM. It's had a number of names. I think the key, again, is execution risk and how well we manage that. We're not afraid of execution risk is the execution risk. What I do like about them is they aren't the kind of investments in oil and gas that take a long time in commodity exposure. So, from a cash return standpoint, they certainly work.

I'll tell you the key components of executing those well are around project management and understanding that risk. We've got terrific experience doing this. That share for Halliburton grew dramatically through the last two or three years and we've done it for a along time. So, the skillsets are different and it takes time to develop those and I'm pleased that we have those skills today at Halliburton and compete very effectively. But what I would wrap up with, though, is they do get progressively more competitive over time.

James Wicklund -- Credit Suisse -- Managing Director

Okay. The same pricing pressures have to exist and they always did exist in the overall market.

Jeff Miller -- President and Chief Executive Officer 

Sure.

James Wicklund -- Credit Suisse -- Managing Director

And then my follow-up, if I could -- you recorded recorded stages in the quarter, which is good. You talk about the three levers you can pull. Some people think because you have all this equipment that if they're out in the field they're 100% utilized. We can all guess what pricing might do, but can you talk about the upside to utilization that exists over time in pressure pumping?

Jeff Miller -- President and Chief Executive Officer 

Yeah. Thanks, Jim. That's a really meaningful lever for Halliburton. Having spread spoken for is radically different from utilization in terms of pumping hours per day. We spend a lot of time and apply big data and apply algorithms and have a lot of effort put into how do we drive better utilization of our equipment every minute of every day. There is a lot of room to run there. That also is why I spend so much time talking about customers and where we are most effective and customers that better utilize our value proposition. That is truly a win-win. Again, to go back to the idea, there's plenty of room for us to run in that regard.

James Wicklund -- Credit Suisse -- Managing Director

Okay. Gentlemen, thank you very much.

Jeff Miller -- President and Chief Executive Officer 

Thank you.

Operator

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

Scott Gruber -- Citigroup -- Analyst

Good morning.

Jeff Miller -- President and Chief Executive Officer 

Good morning, Scott.

Scott Gruber -- Citigroup -- Analyst

Jeff, as we think about a potential inflection in international pricing in 2019, what level of market growth do you think about that's required to drive that inflection? Is it a mid-single-digit growth rate, again, for the market sufficient? Do we need to get the high single-digits, low double-digits? How do you think about what's required to address pricing next year?

Jeff Miller -- President and Chief Executive Officer 

Thanks, Scott. It's probably less an overall market number, though mid-upper single digits is a good place to think. It's more around specific markets where we see tightness. That's part of what we see right now is a thinly spread position of activity is not sufficient in any particular market to create the tightness that would allow for pricing inflection. I think it's better to look at particular markets as we go through this process than it is maybe the overall. Clearly, there's a place where overall growth is enough to create overall tightness. I think the early innings of this will look more like specific markets or technologies that are tight.

Scott Gruber -- Citigroup -- Analyst

Got it. How do we think about what should be a normalized margin in D&E given the shift toward more on shore work as we start this next upcycle and what appears to be more bundling, turnkey contracts? How do we think about what's normal on the D&E side of the business, which is more international? When can we get there given the contract role schedule?

Jeff Miller -- President and Chief Executive Officer 

Yeah. I'm not going to call that right now. I'm more excited about where we're going in that space in terms of differentiated equipment. I talked about Sperry, but I'd also talk about our other service lines in D&E. I'm excited about all of those. We've made a lot of gains over the last several years in terms of open hole and deep water, our technology around drilling fluids is fantastic and growing.

So, I feel like those margins will continue to expand as we see tightness appear more around the world. Those tend to be weighted more internationally just because that's where more of the trilling activity is on a relative basis in North American, a smaller part of the overall ticket than a completion.

Scott Gruber -- Citigroup -- Analyst

Got it. Appreciate it.

Operator

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

Waqar Syed -- Goldman Sachs -- Analyst

Thank you. Jeff, in early February, you got it down to like $0.10 impact to the quarter from sand-related issues. In hindsight, do you still feel the impact was $0.10 in the quarter or was it less or more?

Chris Weber -- Chief Financial Officer

This is Chris. It was generally in line with what we thought it was going to be. We felt good that was in regards to the outlook that we provided and delivering on that. You sit back and we were the first to actually see this problem and get our arms around it. We were able to provide an update to the market and more importantly, be able to start executing on the solution as it relates to working through the logistics constraints and minimizing disruption to our customers. Then when you think about our expectations for exiting the first quarter in a strong position and delivering on that, this all for the most part played out like we thought it was going to.

Waqar Syed -- Goldman Sachs -- Analyst

That would be something around -- if I've estimated $600 million, $700 million of revenue impact, is that fair?

Chris Weber -- Chief Financial Officer

From a revenue impact, I wouldn't want to comment. We talked from a $0.10 perspective, I think we were gently in that range. That's what I focus on.

Jeff Miller -- President and Chief Executive Officer 

It's not just the days that we were slowed down, but in addition to that, it's the response to those things, which involves spot buying of very expensive sand, trucking things that ought to be railed. The number of things that play into that response that serve to impact margins.

Waqar Syed -- Goldman Sachs -- Analyst

It's a lot more cost issue and then some revenue impact. That's fair. That's primarily my question. But on the international side, your revenue growth year over year was much better than what we have seen from the competitors. Now you're guiding to more flattish international revenues in the second quarter. So, was this like an anomaly in 1Q or do you think there were some market share gains underneath that?

Jeff Miller -- President and Chief Executive Officer 

I think we're well positioned to grow. Q1 is always down relative to Q4. Q2, it's following the same trajectory or curve that we've seen year upon year upon year. I don't expect to see any change there. I don't expect to see continued outperformance or market share performance as we move into the next cycle. What's important is how well we're positioned internationally. I think the change then until now, we made a lot of investment back in '12, '13 to be better positioned internationally, I love where we are, competing in every market. I expect we'll perform very well into the next cycle.

Waqar Syed -- Goldman Sachs -- Analyst

Just one question in terms of sand intensity profile -- what are you seeing from your customers in the US?

Jeff Miller -- President and Chief Executive Officer 

Yeah. I would say that we're continuing to see sort of that flattish kind of activity. It's not wildly up or wildly down. As I said before, sand is one of those things we want to optimize over time. It's certain a cost, but as soon as companies figure out how best to complete wells, best design completions, sand can move up for a time and they design new limits of high and low. They tend to find some place that's most effective in the middle.

Waqar Syed -- Goldman Sachs -- Analyst

Okay. Thank you very much.

Jeff Miller -- President and Chief Executive Officer 

Our next question comes from the line of Daniel Boyd with BMO Capital Markets. Your line is now open.

Daniel Boyd -- BMO Capital Markets -- Managing Director

Yeah, thanks. Jeff, you mentioned internationally there are a number of markets or pockets that are stronger than others. Is the organization right-sized for that recovery or are you still spending to reallocate resources and is there an opportunity to reallocate resources to those pockets of strength?

Jeff Miller -- President and Chief Executive Officer 

We're going to manage our cost structure pretty tightly as we go into our next cycle. Our value proposition is that collaborate and engineer solutions to maximize asset value for our customers. Our plumbing is in place to execute that strategy. If we deploy resources, they'll be more focused on executing the work, but the key is to maintain the efficiencies that we developed through the downturn and make sure that's part of whatever that ramp looks like going internet of things the second half of this year and '19.

Chris Weber -- Chief Financial Officer

We take a global view of our equipment and tools and we're going to allocate where we see the demand, assuming it's cost-effective to move them there. Definitely take a global perspective as it relates to our equipment allocation.

Daniel Boyd -- BMO Capital Markets -- Managing Director

Okay. Then the follow up there is jus ton pricing. On the last call, you said that international pricing was possible later in '18 and it seems like now you're more definitely pushing that into 2019, a lot of that driven based on these pockets of strength. What's changed that is giving you less confidence this year?

Jeff Miller -- President and Chief Executive Officer 

Nothing has changed. I think it's more about when you see that in the P&L. The reality is pricing in pockets at the end of this year, I suspect that we see the ability to move on price. But overall, we're going to still see working off of contracts that were lit either late last year or this year. So, when I talk about inflection, I don't suspect you actually see that until we get in to 2019.

Daniel Boyd -- BMO Capital Markets -- Managing Director

Okay. But from a leading edge perspective, you think pricing could happen this year?

Jeff Miller -- President and Chief Executive Officer 

It could happen later this year.

Daniel Boyd -- BMO Capital Markets -- Managing Director

Okay. Thanks.

Operator

Our next question comes from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead -- RBC Capital Markets -- Managing Director

Good morning. Hey, Jeff, just wanted to follow up, the comments you made about the challenges on the rail side and how that's opening up opportunities to source for your customers and basin, let's say in the Permian and other places. It seems like it's trading on logistical challenge for another logistical challenge, rails versus trucks. As you guys think through the process and prepare for that shift, do you expect the dynamic to be less of an intensive challenge than the rails as you move into using this local sand?

Jeff Miller -- President and Chief Executive Officer 

To start with, our logistics investment and our logistics team is terrific. We'll work through whatever those challenges are as they appear. I think some of the key building blocks are in place, particularly around how we move sand. I think the box technology gives us a lot of options around how to move sand and ways to be effective.

We've got a lot of different ideas that I won't lay out on this call for all the reasons you might imagine. I'm really excited about that shift. I think Northern White gets more focus on other parts of the country, which again, we've got terrific logistics infrastructure to deal with that. I think it creates new opportunities. Will there be concession? Yeah, there probably will. At the same time, I can see a path to how we manage that that's exciting.

Kurt Hallead -- RBC Capital Markets -- Managing Director

That's good color. Maybe a quick follow-up on that. How are things progressing in terms of contracts for EMPs relating to the local sand? I don't know the best way, maybe you can provide us some color without getting too specific for competitive reasons. How much adoption have you started to see and how much have you started going to customers for local sand into late '18 and '19?

Jeff Miller -- President and Chief Executive Officer 

Look, Kurt, we're going to participate in that market. I think that our value proposition—when we view that market, things that bring the structural cost down are good for our business, all of our business, including our customers, including Halliburton. So, we looked at that as an opportunity to reduce the cost of this, which actually allows our customer to do more work and do more work that I think is differential for Halliburton, which is how to design and place tracks in a way that makes better well and does it more efficiently. So, real excited about that. It's going to be more adopted as it becomes more available. Clearly, everything would indicate there will be a lot of availability of that sand as we work through the balance of 2018, certainly into '19.

Kurt Hallead -- RBC Capital Markets -- Managing Director

Got it. Thanks. Then just one more follow-up on the international front. You guys referenced pickup activity for better pricing into '19. It seems to me that some of these contracts that have been awarded here recently, it looks like they contrast to other market periods where they were two to three-year contracts and kind of were a drag on margins for an extended period of time. Am I understanding the dynamics? You had much more shorter duration contracts and therefore you'll get better margins in '19 and '20. Is that how things are progressing?

Jeff Miller -- President and Chief Executive Officer 

I would say certainly smaller and shorter as we work into the downturn. At least at this point in time, feel somewhat shorter. We prefer that just so that we've got the ability to flex around equipment as time moves on. Obviously, there will be a mixed bag of contracts, both duration and price as we work through this. The short answer is certainly up until this point, we've tended to see shorter duration contracts.

Kurt Hallead -- RBC Capital Markets -- Managing Director

That's great. Thanks, Jeff.

Operator

That concludes today's question and answer session. I'd like to turn the call back to Mr. Miller for any closing remarks.

Jeff Miller -- President and Chief Executive Officer 

Thanks, Liz. Before we close, I'd like to highlight a couple of key takeaways. First, I'm excited about the outlook for North America and our March exit margins clearly demonstrate our path to normalized margins. Secondly, I'm pleased to see the recovery trajectory in the international markets demonstrated by the increase in tender activity and believe this will lead to pricing injection in 2019. I look forward to speaking with you all next quarter. Liz, you may not close out the call.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may not disconnect. Everyone, have a great day.

Duration: 61 minutes

Call participants:

Jeff Miller -- President and Chief Executive Officer 

Chris Weber -- Chief Financial Officer

Lance Loeffler -- Vice President, Corporate Development

James West -- Evercore ISI -- Analyst

Bill Herbert -- Simmons & Company -- Managing Director

Angie Sedita -- UBS Investment Bank -- Managing Director

Jud Bailey -- Wells Fargo -- Managing Director

David Anderson -- Barclays -- Director

James Wicklund -- Credit Suisse -- Managing Director

Scott Gruber -- Citigroup -- Analyst

Waqar Syed -- Goldman Sachs -- Analyst

Daniel Boyd -- BMO Capital Markets -- Managing Director

Kurt Hallead -- RBC Capital Markets -- Managing Director

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