Halliburton Company (HAL) Q2 2018 Earnings Conference Call Transcript

Halliburton Company (HAL 0.34%)
Q2 2018 Earnings Conference Call
July 23, 2018, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, please standby. Your conference call will begin momentarily. Once again, thank you for your patience, and please continue to standby.

Good day, ladies and gentlemen and welcome to the Halliburton second quarter 2018 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance, please press * then 0 on your touchtone telephone. And as a reminder, today's conference call is being recorded. I'd now like to turn the conference call over to Lance Loeffler. Please go ahead.

Lance Loeffler -- Investor Relations

Good morning, and welcome to the Halliburton second 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 this morning 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, Form 10-Q for the quarter ended March 31st, 2018, 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. And unless otherwise noted, in our discussion today, we will be excluding the impact of the first quarter charges related to Venezuela. Additional details in reconciliation to the most directly comparable GAAP financial measures are included in our second quarter press release and can be found in the investor download 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. This was an excellent quarter. Thanks to all the Halliburton employees for their hard work and dedication to superior service quality. Activity improved in all geographic markets in the second quarter, and I'm happy with how Halliburton continues to outperform our major competitors. I believe that our strategy to collaborate and engineer solutions to maximize asset value for our customers will continue to generate industry-leading returns for the remainder of 2018 and beyond. Now before we dive into the details, here are a few highlights for the quarter. Total company revenue was $6.1 billion, representing a 7% increase, and operating income was $789 million, a 27% increase compared to the first quarter of 2018. Our completion and production division grew operating income by 34% sequentially, primarily driven by the strength of US land.

North America had a strong performance this quarter, once again outgrowing the rig count, and US land margins are closing in on the 2014 peak. During the quarter, we launched our new Sperry ICRUISE rotary steerable in US land, and it looks like a big success. We acquired Athlon Solutions, providing expertise and a manufacturing footprint to develop our reactive chemistry capabilities. And finally, we generated approximately $1 billion in operating cash flow. This is a great step toward generating solid cash flow for the year. And no doubt about it, this was an excellent quarter. We executed on our plan and delivered strong results. Our overall strategy continues to work, and we plan to stay the course. We remain focused on consistent execution, generating superior financial performance and providing industry-leading shareholder returns. As I said in the highlights, US land achieved margins in the second quarter that are closing in on our peak margins from 2014. I want to talk about what that means.

Despite pricing levels that have yet to fully rebound from the recent downcycle, we're achieving outstanding margins. Halliburton executes. We are resilient, adaptive, and creative. We've been able to outperform by keeping our core competency strong and delivering superior service quality. I'm very proud of our North America business. We're the leading service provider. This is the fastest growing and most dynamic energy market in the world. We have the best people, equipment, and technology, as well as the closest customer relationships in the North America market. We've grown 44% year-over-year in North America, while the rate count has increased 16%, a significant outperformance. At the same time, we believe we've achieved close to double the margin of most of our competitors. I believe that strong fundamentals and supportive commodity prices will encourage continued growth in North America. Fast growing markets present tremendous opportunities and often temporary challenges.

Halliburton is best positioned to take advantage of these opportunities and execute in the face of any challenge. Let's talk about the challenges of cost inflation, basin dynamics, and pricing, and how we're addressing them. With the expected activity in the second half of this year, we're mindful of the impact of cost inflation from trucking and increased maintenance expense. The use of trucking for sand, water, and crude oil is generating intense demand for trucks and truck drivers, thus creating cost inflation. We manage trucking costs through the use of containerized sand and integrated logistics helping offset inflation. Our equipment has never worked harder than it's working today. Increased pumping time and sand loading continues cause more wear and tear. Halliburton focuses on reliability and service quality which require well-maintained equipment that works as many hours as possible. We've kept our average crew size well below the market average by doing continued maintenance, and that comes with a cost.

In this environment of record sand usage, we believe as a result of our predicted diagnostic tools we are more efficient than our competitors in maintaining our fleet. Now with respect to basin dynamics, there's much talk in the industry about offtake capacity. But during the last few weeks, I visited with customers in the Permian, and they don't look like a group that's backing down. I can see it in their eyes. They feel good about where they are and how they're positioned for the long run. Don't underestimate this group. They are competitive, will figure out how to deal with constraints, and will adapt. Don't get me wrong. I'm not naïve to the math around the offtake issue. But as we've seen so far, our customers will not all react in the same manner. There are customers that have moved their focus from one basin to another, and we're there pursuing that work. Other customers plan to reduce activity over the short term or are adding fewer rigs than expected. And we'll find new work to replace them.

Let me put the offtake constraint in the context of what I've seen in the past. Tightness is an indicator of a great resource. And what is occurring in the Permian today is not new. We managed similar challenges in the Williston in the last cycle and in the DJ basin today. The DJ suffered constraints on gas takeaway all year, but our customers have managed their businesses and remained productive, as have we. This work may not be as efficient as it could have been, but we've taken action to maximize our revenue and control our cost. The constraints in this basin should begin to alleviate in early 2019 as additional offtake capacity comes online. The same will be true in the Permian which is best suited to handle this type of challenge, and we'll do so as quickly as possible. In the interim, we're going to keep equipment working, control our costs, and outperform our competitors. The Marcellus is beginning to see some softening in activity as our customers hit their production targets earlier than planned.

In some ways, we're a victim of our own success as we develop longer laterals with better production. As a result, we expect this area to have temporary softness in the back half of 2018. But it's poised to regain activity as the calendar turns to 2019, and additional pipeline capacity is available. We will manage through the year-end and be ready for the increased activity next year. I expect that these temporary efficiency drags will create headwinds for additional upward pricing in the third quarter. Our competitors' new and uncontracted equipment is also creating pricing pressure in some areas. We will continue our efforts to optimize pricing and utilization, pursue continued technology implementation, and control cost to maintain our industry-leading returns. For example, the continued implementation of our express connect system, containerized sand, and new Sperry tools will help improve our efficiency in returns.

Look, I could take some actions that would allow us to achieve our margin goals today, but I believe that would sacrifice our market position and impair our long-term value. We do not manage the business to achieve short-term expectations. We manage the business around long-term strategic goals. We will stay focused on our strategy, maintain our market share, and not sacrifice either to achieve our margin goals in the near-term. We built market share during the downturn on our strong belief in the long-term potential of the North America market. We're a returns-focused company. To deliver returns, market share and scale matter. We intend to maintain this expanded market position as our scale delivers outsized operating income, cash flow, and returns. I'm excited about the growth in activity we expect next year, and we are best positioned to maximize our growth and returns.

We have the largest revenue base, among the highest margins in North America, the best customers, the best technology, and the best people. Why risk our position when we're working toward a stronger market in 2019? In the meantime, we plan to protect our market share, maximize our cash flow, and achieve the best margins in the industry. Shifting to technology, part of what keeps Halliburton outperforming is our implementation of improved technology. This quarter, we introduced our ICRUISE rotary steerable technology in the US land market, and our customer feedback has been extremely positive. We deployed ICRUISE in two major US basins, proving its drilling speeds and complex geosteering capabilities. The wells were successfully drilled while remaining entirely in the pay zone of the reservoir. We will continue to deploy this technology globally over the coming months. And I want to thank our design, manufacturing, and operations teams for their hard work and dedication to this rollout.

We've been clear about our desire to grow our artificial lift and production chemicals capabilities to better position us for the future. Now this month marks a year since we bought Summit. In that time, we've expanded our market share and started delivering this product offering into the international markets. We've experienced exceptional growth, growing at three times the rate of the US land rig count while executing our integration plan. We remain optimistic about the opportunities ahead. The customer feedback is positive, and we are well-positioned to grow this business into a global market leader. In the second quarter, we entered the reactive chemistry space through the acquisition of Athlon Solutions. Athlon is a manufacturer of chemicals for the upstream oil and gas industry and is a leading provider of specialty water and process treatment chemicals. This acquisition provides expertise in reactive chemistries and facilities.

We expect Athlon will enhance growth and profitability in our multi-chem product service line and across our chemistry portfolio. This acquisition is the first step in developing our reactive chemistry capability in North America and complements our ongoing efforts to manufacture chemicals in international efforts. We had a plan to grow artificial lift and production chemicals, and we are executing our plan. However, this will have a short-term impact on our C&P margins. I want to thank all of the employees that are making this happen and welcome our new Athlon employees to our team. Without our employees' hard work and dedication, these acquisitions would not be successful. I'm excited about these added capabilities and look forward to their future growth and contribution. Now turning to the international markets. I believe that the international markets will continue to steadily improve over the coming quarters. Halliburton doesn't always get the credit it should for our international business, but it is strong.

And we consistently execute to manage the changing market dynamics. I'm excited about where we are in the international markets. Halliburton is better positioned than ever, and we are ready to make the most of it. We're in every market. We made the investment last cycle. We have the technology. We grew the breadth and depth of our portfolio. As an example, in the last cycle, we only competed in part of the wireline market. Today, we offer technology that goes head to head with the competition in every geography. We have strengthened relationships. We're collaborating with customers to maximize their asset value. Our value proposition is resonating. We are present, and we are winning. You must be present to win in the international business. There is no doubt the pricing environment in the international markets has been challenging. We saw a large number of tenders in the first half of the year.

These tenders were competitively bid as service companies vied for market share and our customers sought to capture pricing at the bottom of the cycle. In many countries, large tenders set a baseline for activity for the industry which will cover basic in-country overhead and should allow any incremental activity to be bid with healthier pricing. As we look ahead, we see emerging conditions that should enable leading-edge pricing to improve next year. Growth in geographies like the North Sea and volume increases in the Middle East should create an inflection point that leads to improved overall pricing in 2019. How much improvement and how quickly it comes will depend in large part upon commodity prices and equipment absorption. Two great examples of our success in the international markets are recent contract wins and unconventionals in Saudi Arabia and offshore in Norway. Both of these locations present technical challenges, and we're meeting those challenges.

We're bringing our industry-leading technology to help develop unconventional plays in the kingdom. I believe this work represents the largest unconventional completion contract ever awarded in the Middle East. This is a great opportunity to provide a customized application of Halliburton's technology, logistics management, and operational excellence to maximize asset value and deliver optimal recovery. This opportunity places Halliburton at the forefront for expansion in unconventional activity in the Middle East. In Norway, we improved our market share through collaborating in engineering solutions with our customers. The North Sea is in the midst of recovery, and additional activity is starting to reduce excess capacity. The contract wins we have seen in this region are due to our technology development, service quality, and willingness to collaborate with our customers. This is a market where improved wireline and Sperry technology have been most effective.

Acceptance of our new technology is positive, and we plan to build on this activity to improve price and efficiency, thus improving margins. I recently returned from a trip to Latin America. This region is continuing to fight through reduced activity levels and pricing pressure. Our employees remain focused on winning work and delivering superior service quality. A bright spot in the region is Argentina. I'm pleased with the progress we're making in unconventionals in that country. Basin infrastructure is slowly improving, and we have a strong customer base that is collaborating, investing, and doing what is required to make the market work. Working with our customers, we see the opportunities that will help us reach the efficiencies necessary to make unconventional plays even more successful. We believe in our customers in this region, and we'll implement our industry-leading technology to reduce cost for barrel of oil equivalent.

Moving to our long-term view of the international markets, we will continue to increase our business in the industry's highest growth markets, including mature fields and unconventional resources, and optimize our company's growth and returns. We expect an improvement in our international operations in 2019 as new contracts start up, leading-edge pricing improves, and new technologies are introduced. Looking to the third quarter, I expect our earnings will be similar to what we delivered in the second quarter, due to the temporary issues facing North America. That's a great outcome.

I like where we are, and it will serve as an excellent bridge to a strong 2019. The temporary challenges will soon abate, and I believe global supply and demand dynamics will support continued industry growth, which I expect will accelerate in 2019. Halliburton is best positioned to outperform in the short term and to capitalize on a period of prolonged future growth for the industry. Now I'll turn the call over to Chris for a financial update.

Chris Weber -- Chief Financial Officer

Thanks, Jeff. I'll start with a summary of our second quarter results compared to the first quarter of 2018. Total company revenue for the quarter was $6.1 billion, and operating income was $789 million, representing increases of 7% and 27% respectively. These results were primarily driven by increased activity in US land. Looking at our division results, in our completion and production division, revenue increased by 9% while operating income increased 34% and operating margin increased by nearly 300 basis points. These results were primarily driven by increased pressure pumping and artificial lift activity in the United States land sector as well as increased pressure pumping services in Europe, Africa, and CIS. These increases were partially offset by reduced completion tool sales in Europe, Africa, and CIS and reduced pressure pumping services in the Middle East. In our drilling and evaluation division, revenue increased by 3% while operating income increased 2% and operating margin was roughly flat.

These results were primarily due to increased drilling activity in the United States land sector as well as increased drilling services and project management activity in the Middle East and India. These increases were partially offset by reduced drilling fluid activity in the Gulf of Mexico. In North America, revenue increased by 9%. This improvement was led by increased activity throughout the United States land sector within the majority at Halliburton's product service lines, primarily pressure pumping as well as drilling and artificial lift activity. Partially offsetting these increases were lower pressure pumping activity in Canada and reduced drilling fluid activity in the Gulf of Mexico. Latin America revenue grew by 5%, resulting primarily from increases in software sales and project management activity in Mexico as well as stimulation activity in Argentina. Turning to Europe, Africa, and CIS, revenue was slightly improved.

These results were primarily driven by higher pressure pumping and pipeline services throughout the region, offset by lower completion tools sales, primarily in the North Sea and Angola, along with reduced drilling activity in Azerbaijan. In the Middle East/Asia region, revenue increased 6%. This increase was largely the result of increased drilling services, project management activity, and completion tools sales in the Middle East as well as increased project management activity in India. In the second quarter, our corporate and other expense totaled $71 million, in line with our guidance. Next quarter, we expect to see a slight increase to about $76 million, primarily due to the implementation of cost saving projects. Net interest expense was $137 million which is in line with our previous guidance. We expect to continue around this run rate in the third quarter. Our effective tax rate for the second quarter came in at approximately 20% which was lower than anticipated due to discreet tax benefits.

Looking ahead, we expect our third quarter effective tax rate to be approximately 20%. Turning to cash flow, we ended the quarter with a total cash position of $2.5 billion, inclusive of marketable securities. Cash from operations during the quarter was approximately $1 billion, driven by higher business activity and working capital improvement. Capital expenditures were $565 million, and our full-year 2018 CapEx remained unchanged. Going forward, we expect to generate strong free cash flow and still plan to retire the $400 million note that matures in August. In addition, in the second half of this year, we are targeting to both retire our $500 million 2021 debt maturity as well as initiate share repurchases under our existing authorized program. Let me turn it back to Jeff for a few closing comments.

Jeff Miller -- President and Chief Executive Officer

Thanks, Chris. To summarize, despite the temporary challenges affecting North America, I believe we are in the beginning of a prolonged cycle to continue to expand our revenues and improve our margins. The international markets continue to see pricing pressure, but we are seeing signs that pricing is stabilizing. We're experiencing the positive impact of incremental activity on margins. We believe that the second half of 2018 will be better for our international markets, and contract wins in key segments are providing us the foundation to expand international margins in 2019. We will generate strong, free cash flow through the balance of the year and look forward to reducing debt levels and initiating buybacks. Halliburton is the best position for this market. Our value proposition resonates with our customers, and we will continue to maximize their asset value while providing industry-leading returns for our shareholders. Now let's open it up for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen on the phone lines, if you'd like to ask a question at this time, please press * and then the No. 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. And our first question comes from James West of Evercore ISI. Your line is now open.

James West -- Evercore ISI -- Analyst

Hey. Good morning, guys.

Jeff Miller -- President and Chief Executive Officer

Morning, James.

James West -- Evercore ISI -- Analyst

So, Jeff, I wanna make sure I get your guidance correct here, especially with regards to North America. So, clearly, it's temporary, but we're gonna see some weakness. The Marcellus I think is one that's a little bit new to at least myself. We obviously understand the issues in the Permian. But are you suggesting that revenue comes down in the second half and there's a commensurate impact on the margin profile in North America getting in the second half? And then at some point obviously in '19 we're gonna see, again, a short squeeze and a pickup in activity probably pretty significant. But is that the profile you're thinking about over the next several quarters?

Jeff Miller -- President and Chief Executive Officer

Yeah, James. Look, when I talk about flat earnings, that does not mean flat revenues. We see revenues up in North America and, quite frankly, internationally and expect to outgrow the rig count in both. But from an earnings perspective, let's say this. Internationally, we face the same issues as our competitors. In North America, quite frankly, no one knows it better than we do. And I've already mentioned a lot of those challenges in my remarks. So, the bottom line is I think that headwinds and the tailwinds are about the same. But very positive in terms of outlook as we look at 2019.

James West -- Evercore ISI -- Analyst

Okay. Okay. Fair enough. And then on the international side, you talk about a little bit of pricing starting to at least tighten as we go into 2019. Are you already having these discussions with the customer base at this point? And do you see your utilization of equipment basically getting to that trigger point where you have to raise pricing in order to justify CapEx investments before year-end?

Jeff Miller -- President and Chief Executive Officer

Well, James, we're clearly having those discussions with clients. We are seeing the ramp-up in activity internationally and seeing some tightness in certain product lines. For example, we bumped up CapEx last quarter at Sperry in anticipation of rolling out technology and what we see as that runway. But we're coming off of a tough bottom here. So, discussions don't necessarily mean price increases, certainly not immediately.

James West -- Evercore ISI -- Analyst

All right. Okay. All right. Got you. All right. Thanks, guys.

Jeff Miller -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Jud Bailey of Wells Fargo. Your line is now open.

Jud Bailey -- Wells Fargo -- Analyst

Thanks. Good morning.

Jeff Miller -- President and Chief Executive Officer

Good morning, Jud.

Jud Bailey -- Wells Fargo -- Analyst

Jeff, I wanted to narrow back down on the North America margin topic. You cited several things that'll probably impact things in the back half of the year. Pricing in some area's a little bit of risk, new mix with chemicals now and there, uncertainty in a couple of basins. How should we think about -- you can frame it C&P or just North America margins. Do margins flat to down in the third quarter or up? And then how do we think about them in the back half of the year? And what are gonna be the main moving pieces that will impact profitability in North America over the next couple of quarters in your mind?

Jeff Miller -- President and Chief Executive Officer

Look, and maybe I'll just take a minute on the second half or this quarter and look ahead. This was a fantastic quarter and delivered the highest revenue, highest margins, and best returns. But I did talk about customer dislocation in the northeast to a degree as they've met their production goals and the least likely moderation or perception of moderation in the Permian Basin. But I do know with certainty that 2019 is going to be humming. We're looking at demand that's already on the books. And I know this business. And so, whenever equipment moves around or we see any kind of slack in the system at all, I know that maintenance goes up, cost. And I've told our people to take advantage of that and spend more but be ready for 2019 which realistically translates into about a $0.04 incremental impact on Q3. And that additional $0.04 is already baked into the guidance that I gave you. So, I don't know if that gives you a little more color. This is great market and great business.

Jud Bailey -- Wells Fargo -- Analyst

Okay. So, just to circle back on that, do we think margins can hold firm? Or do they deteriorate a little bit due to some of these issues we're talking about in the third quarter?

Jeff Miller -- President and Chief Executive Officer

Look, I think in the third quarter because of the things I've talked about, there may be some softening. But yeah. We're gonna be still at or well above where the rest of the market is.

Jud Bailey -- Wells Fargo -- Analyst

Okay. Appreciate that. And then maybe if you could talk a little bit in a little more detail perhaps about Athlon, the acquisition during the quarter. You touched on it in your prepared comments, but maybe you could give us a little bit more detail on how you view that business and how it's gonna impact the North America business moving forward.

Jeff Miller -- President and Chief Executive Officer

Look, really excited about the Athlon acquisition. And it's part of a strategy that we've had in place to grow our chemicals business. It's a small acquisition, but it's the kind of thing that I like to do because it gives us all of the platform to grow it organically from here, and it complements some things we're doing internationally. Over time, it's gonna deliver terrific returns. We're early in that cycle having just closed. The approach that we take on this kind of acquisition really works. This is an example where we buy a plant that's moderately utilized. We've got internal utilization that will actually ramp it up to a high rate of efficiency and lower our costs. So, over time, that's gonna be a very good acquisition and part of our strategy around chemicals.

Jud Bailey -- Wells Fargo -- Analyst

Okay. Great. Thank you. I'll turn it back.

Jeff Miller -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Angie Sedita of UBS. Your line is now open.

Angie Sedita -- UBS -- Analyst

Thanks. Good morning, guys.

Jeff Miller -- President and Chief Executive Officer

Morning.

Angie Sedita -- UBS -- Analyst

So, Jeff, just to get into a little bit further the comments on the Permian and the customer behavior. Some are moving forward and very active. And then some you're saying are reducing activity or adding fewer than expected rigs. If you could give a little bit more color on the mix as far as the number of customers. Are we starting to see some slowing of activity? And then also your comments on the pricing pressure in some areas. Just a little bit more color there would be great.

Jeff Miller -- President and Chief Executive Officer

Okay. Thanks, Angie. But look, Permian offtake has nominal impact today. But as I described it, not naïve to the math. Clearly, this is a world-class resource, and the entrepreneurs in that market will get it solved. Never bet against them. But in the near-term, I think perception has as much impact as anything. And by that, I mean it weighs on customer urgency which ultimately has an impact on our utilization and efficiency. But look, no doubt this is a world-class resource. As far as more color, not much more to give other than a couple of very small but leading and I would say nominal factors at this point with respect to offtake.

Angie Sedita -- UBS -- Analyst

Okay. So, then let's think about 2019. And obviously, you're positive on the outlook for 2019. But if we put it in the context that pricing is flatish -- I think you've done a very good job in the past, and correct me if I'm wrong, that the biggest driver of your margins are efficiency gains, not pricing. So, thoughts on the ability to drive margins in 2019 and maybe potentially a flat market environment for pricing?

Jeff Miller -- President and Chief Executive Officer

Well, look, Angie. Very confident in the levers that we have and excited about how those continue to get rolled out, and I described some of them in the call. But I think what's important is along the way, as we get to '19 and beyond, I wanna deliver the highest North American revenues and the best returns in North America. So, we're gonna take whatever the market gives us and get an outside share of that. Also, along the way, we deliver terrific free cash flow. And so, I believe Halliburton's where you wanna be. And I think those other levers -- in fact, I know those other levers well in place moving to '19.

Chris Weber -- Chief Financial Officer

And when you look at '19 -- and Jeff talked about demand on the books starting early next year. We would expect that to positively impact utilization and positively impact pricing.

Angie Sedita -- UBS -- Analyst

All right. Thanks. I'll turn it over.

Operator

Thank you. And your next question comes from Sean Meakim of JP Morgan. Your line is now open.

Sean Meakim -- JPMorgan -- Analyst

Thanks. Hey. Good morning.

Jeff Miller -- President and Chief Executive Officer

Morning, Sean.

Sean Meakim -- JPMorgan -- Analyst

So, Jeff, maybe just to clarify a little bit further on frack, leading-edge in the Permian. Can you give us a sense of where your folks in the field see pricing heading and how you think that could eventually flow through into your fleets over the next couple quarters?

Jeff Miller -- President and Chief Executive Officer

Look, Sean, I'd be crazy to talk about pricing strategy on this call. This is not a place where we'll discuss that. I know that all of our competitors, probably most of our customers are listening. But what we're committed to do is what's best for both our customers and our shareholders.

Sean Meakim -- JPMorgan -- Analyst

Okay. Fair enough. So, internationally, it sounds like you're gonna feel some impact of the start-up cost on some of these projects, similar to what we've heard from your peers. Is that a fair characterization? And as we look toward 2019, would you say that there's gonna be opportunity for increased growth capital internationally?

Jeff Miller -- President and Chief Executive Officer

Yeah, I think there will be in 2019. I'm very, very excited about what we're seeing unfold internationally. And we'll see some of that in the second half of 2018 with respect to increase in activity. There will be some mobilization around that. But as we look out to 2019 and really beyond, yes. I see a solid demand set coming together in front of us. And I've been I think pretty clear on the international outlook over this last cycle and well, even right now. And as we see that grow into 2019, we'll need some capital. But it's probably as we get into the year.

Sean Meakim -- JPMorgan -- Analyst

Okay. That's helpful. Thank you.

Operator

Thank you. And our next question comes from Bill Herbert of Simmons. Your line is now open.

Bill Herbert -- Simmons & Company -- Analyst

Hey. Good morning, guys.

Jeff Miller -- President and Chief Executive Officer

Good morning.

Bill Herbert -- Simmons & Company -- Analyst

So, I just want to discuss a little bit with regard to the timing of the perceived recovery, if that's the right word for the Permian with regard to the resolution, these takeaway capacity issues. Totally agree that these are transient. But most of the incremental capacity comes on second half of '19. We've got an exceptionally tight labor market in the Permian. The whole value change super tight, this could actually get pushed out by a little bit. So, I'm just curious, in light of the fact that this could be a multi-quarter stagnation, if you will, with regard the Permian -- call if four quarters, maybe a bit more. Who in the heck knows? Yet, we're maintaining the capital spending budget, Chris, at $2 billion for this year. Walk us through that.

Chris Weber -- Chief Financial Officer

From a capital budget perspective, plans are set. And we've got a good view with regards to what we're putting into Sperry and what we're doing. And a lot is about positioning for '19. And a lot of that capital is focused toward international, not necessarily just North America. So, we feel like it's still in the right place.

Jeff Miller -- President and Chief Executive Officer

I guess I'll follow that up, as well, Bill. I'll go back to the ability to react very quickly to capital requirements in North America. So, unlike our competitors, there are no orders that we placed a year ago that are being delivered today. We can move as quickly as 30 days if required to move in 30 days. So, we continue to look for leading-edge pricing returns, and we have a really great business development organization. So, we know how to get things placed quickly and don't pull the capital lever until all of those conditions are right.

Bill Herbert -- Simmons & Company -- Analyst

Okay. So, in the event that this is a little bit slower for longer than anticipated, then the deployment of incremental track horsepower slows down?

Jeff Miller -- President and Chief Executive Officer

Yes.

Bill Herbert -- Simmons & Company -- Analyst

Okay. Got it. And then the second question for me is switching gears to international. At this stage, it seems like rest of world oil prices ex-Permian, if you will look to be pretty constructed with regard the supply and demand fundamentals based upon a myriad of different factors that we all know about. So, in light of the visibility improving for international, do you think at this juncture, the expectation for a double-digit increase in revenues for 2019 is realistic? And ditto for D&E as a result of that formulation.

Jeff Miller -- President and Chief Executive Officer

Realistic is the short answer. All of the things that we thought would unfold around supply are unfolding. And declines because of underinvestment are starting to manifest. And that sets up for a terrific long-term ramp internationally. And I feel like even in the Permian that we described, that's a moderation in growth as opposed to a pullback.

Bill Herbert -- Simmons & Company -- Analyst

Right. Got it. Thanks, Jeff. Appreciate it.

Jeff Miller -- President and Chief Executive Officer

Thanks.

Operator

Thank you. And our next question comes from Jim Wicklund of Credit Suisse. Your line is now open.

James Wicklund -- Credit Suisse -- Analyst

Good morning, guys. Jeff, you have laid out the long-term and the longer-term issues very well. There's no question that the Permian is a world-class asset. I think it's supposed to be 60% of global oil growth for the next three to five years. But what this does do is it sets it back a couple of quarters. And investors often care more about the short-term than the longer-term. And your stock's down 7% on the open this morning. And so, the real question is how long does it take you to get back to where we expected Q3 to be? In your internal planning -- and I'm not gonna -- I don't wanna belabor earnings or anything, but you just got it down $0.10 for Q3, and that's obviously means we're gonna have some guy down in Q4. In your planning, when do we get back on track to where Q3 was expected to be? Is this a two-quarter event, a three-quarter event, or a four-quarter event?

And while I know we don't know, I'm just talking about your expectation of the market today. When do we get back on track? The market's a discounting mechanism. We're now discounting six months ahead. So, when do we get back on track? I have no question of this long-term trajectory, but how long does this [inaudible], this pause actually last?

Jeff Miller -- President and Chief Executive Officer

Well, Jim, I think we see -- I'll go back to the perspective on what we saw the Williston recover. We've seen the DJ Basin's in the midst of takeaway capacity now, and that's being resolved. And I would bet on the sooner rather than later in terms of west Texas. But I expect that what we do in the meantime is make a lot of free cash flow between now and when that's resolved and expect that it happens -- when I say sooner rather than later, there are probably lots of things that can be done to improve that as they work through 2019. But it's certainly within the confines of 2019.

James Wicklund -- Credit Suisse -- Analyst

Okay. Within the confines of 2019 helps a lot. And you've had a high debt to cap ratio following the paycheck to Baker, running about 60%. You talk about how you're gonna pay off your $500 million early and your $400 million this year and then look at buying back stock. What's the current goal or objective on a debt to cap ratio or a EBITDA ratio or however you wanna do it? Where do you need to get the balance sheet to go before you start getting more aggressive in the stock buybacks with all the free cash flow generation?

Chris Weber -- Chief Financial Officer

So, we've talked about target credit metrics, debt to EBITDA under two and a half times. And comfortable on that. Debt to cap as you mentioned is still low 50s. We wanted that to be down in the 30s. So, some work to do there. We've made a lot of progress on debt repayment. $1.5 billion in 2017, targeting about another billion second half of this year. That's $2.5 billion in total over two years. And that's had a meaningful impact on credit metrics. But we still have some work to do, and we'll be thoughtful about looking for opportunities to do that going forward, as we think about how to deploy excess cash. But consistent with what we said before, we're not going to look to pay big premiums to retire debt. We'll be thoughtful and efficient about how we do it. But again, balancing that with growth, things like the Athlon acquisition, and return of cash to shareholders.

James Wicklund -- Credit Suisse -- Analyst

Okay, guys. Thank you very much.

Jeff Miller -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from David Anderson of Barclays. Your line is now open.

David Anderson -- Barclays -- Analyst

Hi. Good morning, Jeff. So, you talked about seeing some of these efficiency drags in the past. Not the first time you've seen some of these issues creep up. I was just hoping you could talk about how this cycle compares to last cycle, particularly with E&P trends, So, we've been hearing a lot about these four well pads being the preferred size. Some of them are being drilled simultaneously here in bigger pads. So, I'm just curious that as these operations start to scale up, I would think this really increases your visibility into customer activity quite a bit more, particularly with stock inventories. Can you talk about how that potentially can help you during issues like this and whether or not that can actually ultimately lift your margins going forward, this increased visibility you have? Because I don't think you've ever had visibility like this in the past on your customers

Jeff Miller -- President and Chief Executive Officer

No. Thank you, David. These are bigger capital expenditures than what you typically see in unconventionals. But it also increases utilization and better utilization throughout the day. It also allows us to better organize work. And because of the size of these, yes, there's more visibility of them as they manifest out in front of us. I also think though it's a demonstration of just the market moving toward better returns in general. So, our customers look for ways to produce more and more quickly and try to get returns sooner in the cycle on the types of capital investments required for these larger paths.

David Anderson -- Barclays -- Analyst

On a completely different subject, on your international commentary, you had talked about competitors aggressively taking up some of these lower-priced tenders out there. You talked somewhat positively about pricing going forward. I got the sense from your commentary that capacity has tightened up now to the point internationally that you feel better about the pricings on contracts going forward. Or is there something with the mix of the contracts that are coming out that suggests that pricing or the margins at the very least could be better?

Jeff Miller -- President and Chief Executive Officer

Oh, a couple of things there. So, first, we are seeing some tightening in certain markets. And I think it's not going to be -- international's a really big place, and you can't paint it with one brush. As I described in North Sea, seeing some tightness there. We'll see some tightness in markets as we move around. And as a baseline of work is tendered, the follow-on work after that, quite frankly, is where there's more opportunity from a pricing standpoint or a bidding, tendering standpoint to do things around price. And I expect that will unfold as we work into '19. But the base level of business is always very competitive. And that's where a lot of the efficiencies and work is done to improve those. So, my comment around tightness is I'm seeing some tightness in certain service lines that describe drilling tools which I think will drive some tightness. But it will come in geographies. Now, fortunately, we're seeing this across a number of geographies in terms of an uptick. But as far as that tightness goes, that will be one at a time, I expect.

David Anderson -- Barclays -- Analyst

Okay. Thanks, Jeff.

Jeff Miller -- President and Chief Executive Officer

Yup.

Operator

Thank you. And our next question comes from Scott Gruber of Citigroup. Your line is now open.

Scott Gruber -- Citigroup -- Analyst

Yes. Good morning.

Jeff Miller -- President and Chief Executive Officer

Good morning, Scott.

Scott Gruber -- Citigroup -- Analyst

Jeff, I wanna circle back to Bill's line of inquiry on international growth potential, double-digit potential next year which is great to hear. What's your view on how the international cycle evolves? Not just over the next 12 months, but let's look out over the next three years. What I'm curious about are we going to see a genuine deep water recovery? Are we gonna see a genuine exploration cycle? And what I mean by genuine is not just a bounce of the bottom, which given the decline we've seen, 10% would really be just that, just a bounce off the bottom. Are we setting the stage here for multiple years of double-digit growth on the international side and within deep water?

Jeff Miller -- President and Chief Executive Officer

Yeah. Well, look. Deep water, as I've always said, is the last to come into the frame. And I think deep water still is pushed to the right as far as widespread recovery. But the macro that we see shaping up is certainly encouraging. But the kind of deep water, new AFE type activity I expect is gonna require confidence and what is the long-term outlook on the forward look on oil, which I think is improving and is reaching a point that it's supportive. So, as we look out a couple years, I think that's where we see inside of that three-year window, as you described it, is we see deep water pick up probably in a more meaningful way. And exploration, again, the exploration that we've seen so far has been certainly more focused around step outs and things that are nearer to existing infrastructure, generally speaking. And I think more confidence, A, and cash flows by our clients, and -- again, speculating here, but I would expect that as confidence builds, so will that.

Scott Gruber -- Citigroup -- Analyst

Got it. And an unrelated follow-up here. What's your view on the market penetration potential of electric frack fleets? Is this a technology that can move beyond a niche application? And where do you stand on a development of a fully electric frack offering?

Jeff Miller -- President and Chief Executive Officer

Well, we look at everything through the lens of returns. And that hasn't changed. So, we've certainly done some work around electric frack fleets and have tested that process and what we think about it. Not convinced today that -- well, I shouldn't say that. We need to see that unfold and see what are the real return capabilities of that. The physics say it still has to generate energy. We have to move big things around. So, I'm not as convinced that we see the type of return around the cost of that. And it's probably a 2x cost of getting into that electric power generation versus what we're able to accomplish today.

Scott Gruber -- Citigroup -- Analyst

Got it. Thanks for the color.

Jeff Miller -- President and Chief Executive Officer

Thanks.

Operator

Thank you. And our next question comes from Kurt Hallead of RBC. Your line is now open.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey. Good morning.

Jeff Miller -- President and Chief Executive Officer

Good morning.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey, Jeff. Great color commentary so far. I was hoping to maybe explore a little bit more on the fact that you talked about you have demand on the books going out into 2019. It sounds like that is very much geared toward the international market. I just wanna get some clarity. Is it mostly international, or does it also include some Permian? And in your mind, is this tend to be a little bit earlier than usual, your customers, especially on the international front getting some sense of urgency to get moving?

Jeff Miller -- President and Chief Executive Officer

No. That comment is a North America comment in terms of activity that we see in 2019, certainly in markets where really, across the piece, there is demand. We still have inbound demand in a market like this. So, I'm describing the efficiency, the challenges to utilization efficiency through the second half of the year. But that's not to say we don't see inbound demand today, and we also see very strong demand as we go into 2019. That's a North America comment. As I talked about international, again, we see a contract set that we've won today, and we also have visibility of, as I described last quarter, the doubling of tender activity. That's all going to manifest over the second half of this year. And so, I'd make the same comment internationally. Like I say, this is a great outlook and a great market.

Kurt Hallead -- RBC Capital Markets -- Analyst

Great. And then you referenced the fact that US land margins were approaching that peak level in 2014. I know that in prior comments, your target's been put out there about 20%-reaching 20% by the end of 2018. Given the most recent comments about some elements of a slowdown or increase maintenance CapEx, do you still feel it's feasible to get to that 20% margin by the end of year?

Jeff Miller -- President and Chief Executive Officer

Look, what we're doing is making decisions around the longer-term. And it's critical that we deliver leading returns and the most free cash flow that we can deliver. We're gonna lead the market in doing those things. And so, the kind of decision -- we could have made it -- the getting to the target could have happened last quarter, this quarter, or next quarter. But those decisions would be short-sighted and, in my view, not right for the business. So, as I've said what hasn't changed is Halliburton does have largest revenues, highest margins, best returns. And so, we're gonna do those things to capture as much of 2019 as you'd expect and probably more. All of these things, as I've said, solve themselves as we go into 2019. And I am really excited about next year.

Kurt Hallead -- RBC Capital Markets -- Analyst

All right. Great. Appreciate that perspective. Thanks.

Jeff Miller -- President and Chief Executive Officer

Thanks.

Operator

Thank you. And our next question comes from Waqar Syed of Goldman Sachs. Your line is now open.

Waqar Syed -- Goldman Sachs -- Analyst

Good morning. My question relates to pressure pumping capacity. I think in the past, you've said that the market may still be undersupplied by about a half million hydraulic horsepower. What's your current thinking in where you're taking the second half based on what capacity conditions are coming in, what the supply/demand balance looks like?

Jeff Miller -- President and Chief Executive Officer

Yeah. Thanks, Waqar. Because of the things I've described this morning, I think the total market is temporary balanced. Look, and I know our equipment's sold out, and we could sell more. And that's because of there's a lot of demand for what Halliburton does from a service quality standpoint, reliability, efficiency, and technology. And the demand or the pressure of the workload on the equipment hasn't changed. So, it means that the attrition's story hasn't changed either. And we still see probably half of the incremental horsepower that comes into the market being filed back into existing fleets. And that's the reason I spend so much time and we spend so much time managing fleet size. And we have fleet sizes that are well below the industry average. And that's one of the ways that we deliver leading returns.

Waqar Syed -- Goldman Sachs -- Analyst

Okay. And just a follow-up on that. We hear about decoupling pumping services from fracks and supply. Are you seeing the same trends? And how would that impact margins for you guys? And then are you going to change any strategy as a level of that changing trend?

Jeff Miller -- President and Chief Executive Officer

Yeah. With respect to sand debundling, that's a mixed bag. Ultimately, customers hire Halliburton to pump sand down hole. That's what we get paid for. And we make money off a range of business models today. And we'll continue to make margins off of making better wells. So, I don't see a change in our strategy there. But obviously, we look at everything through a returns lens. And whatever that best returning model is is how we view that.

Waqar Syed -- Goldman Sachs -- Analyst

Great. Thank you very much.

Jeff Miller -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And that concludes our question and answer session for today. I'd like to turn the question back over to Jeff Miller for any closing remarks.

Jeff Miller -- President and Chief Executive Officer

Thank you, Candace. Before we close, I'd like to wrap up with a few key points. First, I believe we're in the beginning of a prolonged upcycle in both North America and the international markets. And Halliburton's best positioned to grow and expand margins. Second, we expect to generate strong free cash flow and plan to reduce outstanding debt levels and are targeting to initiate share repurchases. Finally, our value proposition resonates with our customers and delivers industry-leading returns to our shareholders. We all look forward to speaking with you next quarter. Candace, please close out the call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.

 

Duration: 60 minutes

Call participants:

More HAL analysis

Lance Loeffler -- Investor Relations

Jeff Miller -- President and Chief Executive Officer

Chris Weber -- Chief Financial Officer

James West -- Evercore ISI -- Analyst

Jud Bailey -- Wells Fargo -- Analyst

Angie Sedita -- UBS -- Analyst

Sean Meakim -- JPMorgan -- Analyst

Bill Herbert -- Simmons & Company -- Analyst

James Wicklund -- Credit Suisse -- Analyst

David Anderson -- Barclays -- Analyst

Scott Gruber -- Citigroup -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

Waqar Syed -- Goldman Sachs -- Analyst

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.