Halliburton (HAL) Q1 2021 Earnings Call Transcript

Halliburton (HAL 0.34%)
Q1 2021 Earnings Call
Apr 21, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Halliburton's first-quarter 2021 earnings call. Please be advised that today's conference is being recorded I would now like to hand the conference over to Abu Zeya, head of investor relations. Please go ahead, sir.

Abu Zeya -- Head of Investor Relations

Good morning and welcome to the Halliburton first-quarter 2021 conference call. As a reminder, today's call is being webcast and a replay will be available on Halliburton's website for seven days. Joining me today are Jeff Miller, chairman, president, and CEO; and Lance Loeffler, CFO. Some of our comments today may include forward-looking statements reflecting Halliburton's views about future events.

These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2020, recent current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures that exclude the impact of impairments, asset dispositions, and other charges.

Beginning this quarter, we have modified our free cash flow metric, a non-GAAP financial measure, to include the impact of proceeds from sales of property, plant, and equipment. We believe this item is recurring in nature and including it improves comparability of this metric relative to our large-cap peers. Additional details including recalculation of this measure for prior periods and reconciliation to the most directly comparable GAAP financial measures are included in our first-quarter earnings release and can also be found in the Quarterly Results and Presentation section of our website. After our prepared remarks, we ask you to please limit yourself to one question and one related follow-up during the Q&A period to allow time for others who may be in the queue.

Now, I'll turn the call over to Jeff.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Thank you, Abu, and good morning, everyone. We're off to a good start this year. The world is reopening and even though some regions still experience lockdowns, overall economic and demand recovery continues to build. Oil demand is increasing globally, oil inventories are down near their five-year averages, and OPEC-plus actions continue to support commodity prices.

The first quarter strengthened our confidence about how this transition year will play out. Our first-quarter performance demonstrates the strength of our strategy and operating leverage in this global market recovery. Here are some highlights: International revenue grew 2% compared to the fourth quarter of 2020, marking an activity inflection in the international markets; strong recovery in Latin America more than offset declines in other regions, while margins remained resilient; North America revenue grew 13% as both drilling and completions activity ramped up throughout the quarter. Power utilization and our significant operating leverage supported sequential margin expansion despite weather disruptions.

Our completion and production division revenue grew 3% with increased North America and Latin America activity, offsetting seasonal declines in other regions. Our drilling and evaluation division delivered solid revenue and margin performance. Revenue grew 11%, while margins increased 2.6 percentage points, driven by stronger drilling activity in North America and software sales across multiple regions. Finally, we delivered approximately $160 million of free cash flow in the first quarter, which is a great first step to delivering strong free cash flow for the full year.

This was another quarter of solid execution on our five strategic priorities that define Halliburton's path and will drive our success. We are committed to drive profitable growth internationally, maximize value in North America, accelerate and integrate digital technologies, improve capital efficiency, and actively participate in advancing cleaner, affordable energy. Our first-quarter performance demonstrated that aligning our actions with these strategic priorities boosts our returns and free cash flow generation. We expect to continue delivering strong free cash flow and industry-leading returns as we move through the year.

We are encouraged by the inflection in international activity we saw during the first quarter and anticipate that recovery will gain momentum across all regions in the second quarter and beyond. Today, we see early indicators of future activity growth internationally. Our completion tool orders, a leading indicator of upcoming work, grew throughout the first quarter. The volume of tendered work has significantly increased.

We're on pace to nearly double the value of submitted bids compared to last year with the most work coming from the NOCs in the Middle East followed by Latin America. These signs give us greater conviction that the second half of this year will see a low-double-digit increase in international activity year on year. We believe the international markets will experience multiple years of growth. However, this upcycle is expected to be structurally different from prior cycles.

And Halliburton's international business is better prepared to benefit from it. Here's why. We expect the NOCs and other short-cycle barrel producers will increase investments and gain share to meet future oil demand growth. Halliburton has the established footprint and the customer relationships to capitalize on this growth.

As deals become smaller and more complex, operators work harder to produce more barrels. Their pursuit of incremental production to meet future oil demand growth should require higher service intensity. In certain markets, maturing assets are changing hands. New owners require proven technology and experience to revitalize their assets and unlock remaining reserves.

Halliburton's broad technology portfolio, local expertise, and commercial flexibility are helping these customers achieve their efficiencies and production objectives. Multiple years of service company capex reductions limit equipment availability in the international markets. In early 2020, pre-COVID, international pricing was beginning to increase on the back of equipment tightness but paused with the oil demand collapse. As the world reopens and activity rebounds, we expect large tenders to remain competitive but leading-edge pricing should increase.

Our strategic priority is clear: deliver profitable growth as the expected international recovery unfolds. We believe the following factors will help us accomplish this. First, we expect our ongoing investment in technology innovations to benefit us as the market recovers. For example, as the global leader in completions technology, we introduced the Ovidius expanding isolation packer.

Ovidius uses material science innovation to transform a metal alloy into a rock-like material when it reacts with downhole fluids. It creates a long-lasting seal for improved well integrity and is especially suited for high-pressure and high-temperature environments, as well as permanent plug-in abandonment operations. Our completion tools are in the pipeline incorporates the latest advancements in materials science, sensors telemetry, and digitalization. Ovidius is one good example of this pipeline.

The successful rollout of our iCruise intelligent drilling system continues to deliver excellent results. In the first quarter, iCruise improved drilling speeds 55% for a customer in the Middle East, saved an operator three days of rig time in the North Sea, and increased drilling rates 25% compared to offset wells in offshore China. Second, our production business continues to expand internationally with unique growth opportunities. We plan to start executing on our first multi-year electric submersible pump contract in the Middle East in the second half of this year.

We see significant volume and future growth potential for artificial lift solutions in the Middle East as many mature fields across the region come off natural flow and require ESPs to sustain production. With proven summit ESP technology, a strong local presence, and a focus on profitable growth, we expect to thrive in this market. As we progress toward completing our specialty chemicals plant in Saudi Arabia, we are actively participating in regional tendering activity. In addition to providing new business opportunities, this plant will also manufacture chemicals for our internal consumption.

We expect the new plant to deliver cost savings and profitable growth for Halliburton in 2022 and beyond. Finally, we are accelerating the deployment and integration of digital technologies with our customers. We believe digital creates technological differentiation, contributes to higher international margins, and drives internal efficiencies. In the first quarter, we introduced a new real-time data transmission system for a major customer in the North Sea.

This high-fidelity, low-latency data highway is an essential building block for virtual remote operations that are performed without human intervention, and use real-time data and tailored algorithms. We also launched a new digital workflow on a private cloud for an integrated services contract in the Middle East. This workflow helps our employees make better decisions. It uses a proprietary natural-language-processing service to extract specific information from a variety of documents and locate associated data in our data lake.

This is digital technology in action. Facilitating collaboration and knowledge management, while improving operational efficiencies. These digital technologies are important milestones in our journey from digital planning to virtual execution We're using our open-architecture platform to integrate real-time information from the customer, Halliburton's many digitally enabled technologies, and third-party providers across the entire asset. I believe that Halliburton's current strength and new capabilities will deliver profitable growth in the multi-year international recovery.

Today, North America is staging a healthy recovery. In the current oil price environment, shale operators have a larger portfolio of economically viable projects. As a result, the average U.S. land rig count grew 27% sequentially in the first quarter, outpacing the growth in completed stages.

We still expect the majority of our customers to remain committed to a disciplined capital program this year. But what we are seeing today solidifies our confidence in a steady activity cadence for the rest of the year as operators work to maintain their productive capacity. The market dynamics continue to improve. Supportive commodity prices should allow our customers to spend their announced budgets and meet their cash flow objectives.

Customer mix should transition as the year unfolds. Privates led the recovery in the first half, and we expect some public companies to increase activity in the second half of the year. Halliburton serves both of these customer groups, aligning with operators that have longer-term and more efficient programs. As a result, demand for our equipment is increasing, and our calendar is filling up for the rest of the year.

Last year, we used digital technology to redesign our service delivery approach and create significant differentiation in our cost structure. Adding to our cost reset in 2020, we continue to drive cost out of our North America operations. As an example, we've engaged with Vorto, a software company that designed an artificial intelligence supply chain platform to transform how we buy, move, and sell sand and trucking within our U.S. land operations.

Without human intervention, Vorto's platform optimizes thousands of logistic flows per day while also identifying and addressing issues before they occur. This fits with our strategic priorities to use digital technology to drive down costs in our business and to maximize value in North America. Together with our size and scale, our sustainable operating leverage should widen our margin differential relative to our competitors in North America. We are steadily improving margins, and our first-quarter performance was another step in the right direction.

As we look ahead, we see upside to our margin performance based on utilization, technology, innovation, and pricing. Utilization is the first step to better margins. With a smaller equipment base and the right customer alignment, we intend to continue optimizing utilization as market demand grows. Given our scale, the operating leverage impact from utilization increases alone should improve our cash flow generation in North America.

Technological differentiation and digital innovation is the next step. Halliburton has the leading low-emission solutions in the market today, both electric and dual-fuel, and we expect they will command a premium as market demand expands. As the leader in hydraulic fracturing, Halliburton has the scale and R&D depth to deliver a proven, power-agnostic, capital-efficient solution for e-frac. Deployed in the Permian Basin, our fully integrated, all-electric frac site includes our 5,000-horsepower Zeus electric pumping unit, our new ExpressBlend blending system, eWinch electric wireline unit, and the electric tech command center.

Built using our flagship Q10 pumps, Zeus delivers performance levels up to 40% higher than conventional pumps and substantially reduces emissions limited only by the grid power source. As certain components of our input cost rise, we are working with our suppliers and our customers to adjust our gross pricing in line with cost inflation we are seeing in the market. While improving U.S. economic activity and winter weather disruptions led to increases in sand, chemicals, cement additives, and raw materials costs, Halliburton's purchasing power and technology have allowed us to procure and deliver these materials in a cost-efficient manner, such that both Halliburton and our customers are more competitive.

Service pricing improvement is the final step. We're not there yet, but we see positive signs of market rebalancing that should drive future pricing improvements. Total fracturing equipment capacity has limited room to grow in the current pricing environment. Continued attrition from a rising service intensity and insufficient returns for many service companies is altering the industry dynamics.

Because we are an integrated provider, Halliburton participates in all key businesses in North America today and will benefit more than others when pricing moves up. We believe that Halliburton's leadership and strength in North America will allow us to take advantage of positive market dynamics and deliver on our strategic priority to maximize value in this market. Consistent with our strategy, we continue to turn every knob to manage greater capital efficiency and drive solid free cash flow generation. This takes many forms and includes important technology advancements in multiple product service lines, whether digital or equipment-related; process changes that improve the speed with which we move equipment and respond to market opportunities; and finally, actions to reduce the pace of working capital consumption required to grow our business.

The first quarter was a good demonstration of this, and we will continue to build on these actions. We're also executing on our strategic priority to advance cleaner, affordable energy and to support sustainable energy advancements using innovation and technology to reduce the environmental impact of producing oil and gas. Halliburton has a three-pronged approach to achieving this objective. First, we recently released our target to achieve 40% reduction in Scope 1 and 2 emissions by 2035 from the 2018 baseline.

This is consistent with our goal to reduce the carbon footprint and environmental impact of our operations and follows our commitment to set science-based targets announced last year. Second, we are innovating. We continue to develop and deploy low-carbon solutions to help oil and gas operators lower their current emissions profiles. We also use our existing technologies in renewable energy applications.

For example, today, the geothermal market in Europe is growing rapidly and represents an attractive expansion opportunity for our artificial lift business. We're currently supplying electric submersible pumps specifically designed for the high-temperature, large wellbore applications on a geothermal project in Germany. We're also providing drilling and cementing services for geothermal wells in Indonesia. We developed new, high-temperature cementing formulations and directional drilling techniques to increase geothermal sites' generating capacity and improve project economics.

And finally, we're excited about the progress of Halliburton Labs, our clean-energy accelerator. In the first quarter, we announced Halliburton Labs' inaugural group of participating companies. They are working on solutions for transforming organic and plastic waste to renewable power; recycling of lithium-ion batteries; and converting carbon dioxide, water, and renewable electricity into a hydrogen-rich platform chemical. We are collaborating with these companies and providing world-class industrial capabilities and expertise to help them achieve further scale and increase their valuations.

This engagement in the clean energy space will inform Halliburton's future strategic decisions as the energy transition evolves. We are taking applications for the next cohort of participants as we continue bringing early stage clean-energy companies into Halliburton Labs. To sum up, we entered 2021 optimistic and focused on innovation. We believe that the early positive momentum in North America will continue and the international market recovery will accelerate in the second half of the year.

Halliburton will continue to execute on our key strategic priorities to deliver industry-leading returns and solid free cash flow as the anticipated multiyear recovery unfolds. I will now turn the call over to Lance to provide more details on our financial results. Lance?

Lance Loeffler -- Chief Financial Officer

Thank you, Jeff. Let's begin this morning with an overview of our first-quarter results compared to the fourth quarter of 2020. Total company revenue for the quarter was $3.5 billion, an increase of 7%. And our operating income was $370 million, an increase of 6% compared to the adjusted operating income of $350 million in the fourth quarter of 2020.

Now, let me take a moment to discuss our divisional results in a little bit more detail. In our completion and production division, revenue was $1.9 billion, or an increase of 3%, while operating income was $252 million, representing a decrease of 11%. The increase in revenue was primarily driven by higher stimulation and artificial lift activity in North America, higher cementing activity in the North Sea, as well as improved stimulation activity in Argentina and Mexico, and higher completion tool sales in Latin America. These increases were partially offset by lower cementing services in Russia, lower pressure pumping activity in the Middle East, reduced seasonal completion tool sales, and lower well intervention services in the Eastern Hemisphere.

Operating income was negatively impacted primarily by decreased completion tool sales and reduced pressure pumping activity in the Eastern Hemisphere. Our drilling and evaluation revenue was $1.6 billion or an increase of 11%, while operating income was $171 million, an increase of 46%. These increases were primarily due to higher software sales globally, improved drilling-related service and wireline activity in the Western Hemisphere and Norway, and increased project management activity internationally. Partially offsetting these increases were lower drilling-related services across Asia.

Moving on to our geographical results. In North America, revenue was $1.4 billion, representing an increase of 13%. These results were primarily driven by higher drilling-related services, stimulation and artificial lift activity in North America land, as well as higher wireline activity and software sales in North America land and the Gulf of Mexico. Partially offsetting these increases were reduced completion tool sales and lower cementing and fluids activity in the Gulf of Mexico.

Moving to Latin America, revenue was $535 million, representing an increase of 26%, resulting primarily from increased activity in multiple product service lines in Argentina and Mexico, as well as higher fluid services in the Caribbean. Partially offsetting these improvements was reduced activity across multiple product service lines in Colombia. Turning to Europe/Africa/CIS, revenue was $634 million, a 1% decrease sequentially, resulting mainly from reduced completion tool sales and well intervention services across the region, coupled with lower activity in Russia and lower fluid services in Kazakhstan. These decreases were partially offset by higher well construction activity in the North Sea and increased software sales across the region.

In Middle East/Asia, revenue was $878 million or a 6% decrease. These results were primarily driven by lower stimulation and well intervention services in the Middle East, reduced drilling-related activity in Indonesia and China, and lower completion tool sales across the region. Partially offsetting these declines were improved project management activity in Iraq and Saudi Arabia, and higher wireline activity across Asia. In the first quarter, our corporate expense totaled $53 million.

Looking ahead to the second quarter, we anticipate corporate expense to be slightly higher. Net interest expense for the quarter was $125 million, and we expect this level of interest expense to drift slightly lower in the second quarter as a result of our reduced debt balance. Our effective tax rate for the first quarter was approximately 23%. As we go forward into 2021, based on the anticipated market environment and our expected geographic earnings mix, we expect our full-year effective tax rate to be approximately 25%.

Turning to cash flow. We generated $203 million of cash from operations during the first quarter and $157 million of free cash flow. We also repaid $188 million in maturing debt with cash on hand in the first quarter, and we'll continue to prioritize reducing leverage in the near term. Capital expenditures during the quarter came in at $104 million.

We expect capital equipment deliveries for international projects to ramp up in the second half of the year, and as a result, our full-year 2021 capex guidance remains unchanged. Finally, turning to our near-term operational outlook. Let me provide you with some comments on how we see the second quarter unfolding. In North America, we expect both completions and drilling activity momentum to continue, but sequential activity growth should moderate.

In the international markets, we expect a seasonal rebound in a broad-based activity increase, the pace of which will vary across different regions. As a result, for our completion and production division, we anticipate low double-digit revenue growth sequentially, with margins expected to expand by 125 to 150 basis points as a result of our strong operating leverage across all markets. In our drilling and evaluation division, we anticipate a mid-single-digit revenue increase with margins declining 100 to 125 basis points sequentially. The moderate growth and anticipated reduction in margins are primarily attributed to the seasonal decline in our software sales globally.

I'll now turn the call back over to Jeff. Jeff?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Thanks, Lance. To sum up, I'm optimistic about how this transition year is shaping up. The demand outlook continues to improve both internationally and domestically, even as some regions still experience lockdowns. This year is headed in the right direction, and Halliburton is focused on the right things to deliver on our shareholders' objectives.

We expect our strong international business to continue its profitable growth as activity increases throughout the year. In North America, our business has recovered and is demonstrating margin improvement on the back of our strong operating leverage. Digital is growing our revenue and helping us and our customers increase operational efficiency and reduce costs. Our commitment to capital efficiency is expected to support growth and solid free cash flow generation.

And finally, we believe that our strategy to advance cleaner, affordable energy positions us well for the future. And now let's open it up for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from James West with Evercore ISI.

James West -- Evercore ISI -- Analyst

Hi, guys.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Good morning, James.

James West -- Evercore ISI -- Analyst

So Jeff, clearly, international looks -- looks good in the back half. We're 90 days in your last conference call. And obviously, you and I have spoken several times in between. But your visibility on the second half and even more so on '22, which I think is more important, should have increased at this point.

And -- and so I'd love to hear your thoughts on kind of how the international recovery takes shape. I understand, you know, double-digit year-over-year second half of this year. But really, as it kind of runs into '22, you know, how we should be thinking about regions, markets, where the growth is going to be. And should that double-digit momentum continue?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yeah. Thanks, James. The -- yes, confidence improving and visibility improving around our outlook, both for '21 and for '22. And in fact, you know, when we see -- I see, you know, tender pipeline strong, strengthening, these are all sort of the things that, you know, start sometime later this year but really start to get traction into '22 and even '23.

Some of the, you know, the programs that we're seeing are shorter-cycle barrels. But the fact is those are actually service-intense barrels to find, so it's things that's going to drive more upstream spending faster. And even if I look at just '21, you know, outlook confidence is more so today, you know, we -- I think earlier -- we see it, you know, at a minimum, improving to flat year on year, which is an improvement from what we thought earlier.

James West -- Evercore ISI -- Analyst

Right. OK, OK. Makes sense. And then as we think about North America, obviously, the big E&Ps are going to remain capital disciplined and, you know, probably show some really good cash flow this year given where the oil price is.

But they'll step up next year as it committed to spend, you know, a certain percentage of cash flow. So are you starting to have conversations or started to think about '22 as it reflects to North America and -- and kind of what the increase could be in spending if, you know, oil prices are, you know, 30% higher than they were going into this year?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yeah. James, I think we're going to see sort of the steady cadence of increase as we move through this year and even into next year. I think the, you know, just the -- the feedback and sense I get is that there is a lot of discipline around production and where -- and what they can do profitably. I also think as we see improvement into 2022, they will face, you know, service cost inflation just because of where everything is today.

James West -- Evercore ISI -- Analyst

Right.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Equipment needs to be replaced. So I don't think it's -- it won't be, you know -- it certainly won't be the same. And I think that tightening of capacity is very good for Halliburton. And I think that, if anything, that will be a bit of a governor.

James West -- Evercore ISI -- Analyst

Gotcha. OK. Thanks, Jeff.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Thanks.

Operator

Our next question comes from Scott Gruber with Citigroup.

Scott Gruber -- Citi -- Analyst

Guys, good morning.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Good morning, Scott.

Scott Gruber -- Citi -- Analyst

So as you guys, you know, probably heard some of your investor conversations, you know, there's been, you know, some concern around Halliburton in terms of C&P margins. As we start the year, just, you know, given the mix toward, you know, the domestic completion market, and we heard the 2Q guide, obviously. How should we be thinking about, you know, the second half? And assuming no net pricing in the U.S., you know, with the international side starting to accelerate, U.S. continuing to expand on a more efficient and streamlined platform, how should we think about, you know, second half incrementals, you know, kind of from a high level, if you could put some color around that? And can we do better than the -- the 2Q pace, which looks like to be, you know, around 25%?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Well, look, thanks, Scott. We're confident about the progression in North America, certainly for C&P and globally. And I think that the -- you know, our goal is to maximize the value of this business. And, you know, I've said I think we expect mid-teens full year.

And I think that's a solid number, and that's reflecting an activity increase that is driving the incremental margins as opposed to pricing. No pricing in that. And I think we have visibility toward what will drive pricing, which will substantially improve, in fact, supercharge those incrementals. But I think right now, we're building our outlook around what is the steady cadence of improvement and maintaining -- actually, continuing to drive further efficiencies in North America with respect to keeping our cost under -- the reset that we did last year is still alive, and well, and in place.

Scott Gruber -- Citi -- Analyst

Gotcha. And then similar question on the D&E side. You know, obviously, some -- some noise on the margin front around the software sales. But maybe some color on the second half for D&E.

You know, I guess the question is, in the past, as we've seen the international side of the business accelerate off the bottom, you know, we've often seeing start-up costs limit the margin improvement potential, at least, for a couple of quarters at the start of the cycle. Is there a risk of that this cycle? Or is that really diminished given, you know, the digital applications and streamlining the platform? You know, how should we think about D&E margin expansion in the second half, you know, as things start to pick up internationally?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yeah. Thanks. Look, I think the, you know, the D&E, starting at a higher point than it did finish last year, is important. I think it says two important things.

One, our software business is strong and accretive. And it also says, though, that the rest of the business margins, the breast of D&E's margins, the baseline is improving. And so we're knocking on double digits as we look out through the rest of the year. You know, as I look at the back half for the international expansion on D&E, you know, we're positioned today for that.

And so I -- you know, the kind of investment we're making, you know, we view it as a march. We want to continue to improve the baseline margins in that business. So it's continuing to improve. And so, you know, I think we'll see improvement in 2021.

I think that continues beyond that. And so our outlook is, you know, for continuing to grow those margins. I don't see the kind of headwinds that we might have seen a year ago when we were ramping for one of the largest contracts in the North Sea. I mean I don't see that repeat.

And -- and some of what we're getting also is the benefit of the capital efficiency that's baked into a lot of our D&E, you know, ability to move things around. In fact, that's, you know, at the core of our strategy is capital efficiency, and I think that manifests itself around how we move tools and other things.

Scott Gruber -- Citi -- Analyst

Great. Appreciate the color, Jeff. Thank you.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from David Anderson with Barclays.

David Anderson -- Barclays Capital -- Analyst

Hi, good morning, Jeff. I was just wondering if you could just talk briefly about the pressure pumping market. Sure, you want to talk about, you know, DGB engines and E&Ps increasingly looking to move away from diesel. Some of you are suggesting higher pricing on a separate equipment.

I was just wondering if you could kind of tell us where you stand on this and are your customers pushing for this type of equipment and, you -- you know, are you starting to see any bifurcation in the market on -- on pricing because of this?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yeah, thanks, Dave. Look, I think as we look into the future, those types of solutions will get pricing earlier. And more so, you know, we are seeing more demand for those types of solutions and we have a leading position around whether it's Tier -- Tier -- Tier 4 dual fuel or also the electric. And so yes, we're seeing the demand.

I think that, you know, the bifurcation will happen gradually simply because of the ability to do two things. One, put equipment into the market. And so the way we look at that is that's replacement equipment generally. So we've got 10% to 12% of our equipment that goes off every year.

And so what we're able to do is replace that with what we view would be higher-margin better-returning equipment over time. But that's more of the pacing that we see. And then the other sort of key components around pricing, I mean, when we look at -- and then we'll -- get into all of this, but when we think about returns for new equipment, any kind of new equipment, but particularly technology, we expect some premium around the technology and also derisking the time horizon impact of making those returns also. I think that's equally key.

David Anderson -- Barclays Capital -- Analyst

That makes sense. And if I could just switch over to the international side. You -- you talked about improved project manager activity in Iraq and Saudi Arabia. I was just wondering, first, was there anything noteworthy behind this improvement or is this more of the course of business? But kind of more importantly, as you talk -- look at the tendering activity out there, is this going to be a preferred contracting model for NOCs, I guess assuming we're at the beginning of a multi-year growth phase? And if so, are you comfortable increasing your exposure to project management activity?

Jeff Miller -- Chairman, President, and Chief Executive Officer

The answer to the first question, Dave, if is this sort of normal course of business, we see improvements then we see more, you know, activity at different times. So that's really all to read through on that. Yeah, I think the -- with respect to project management broadly and how we see those contracts in the future, obviously, a lot of activity around that. Yeah, we'll be certainly very thoughtful around how we increase that exposure.

We manage that risk. You know, in fact, the -- the most important component of looking at those types of things is understanding and managing the risk.

David Anderson -- Barclays Capital -- Analyst

Of course.

Jeff Miller -- Chairman, President, and Chief Executive Officer

And it's one of the reasons I'm so, you know, I thought you hear me say it a lot, but I'm talking about profitable growth internationally. And so that profitable component is going to be the lead punch around how we grow internationally. So we'll take a, you know, certainly, we're in that business. We're good at that business.

But we're also pretty circumspect around how we make money doing that.

David Anderson -- Barclays Capital -- Analyst

Thanks, Jeff.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from Sean Meakim with J.P. Morgan.

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

Thank you. Hey, good morning.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Good morning, Sean.

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

So C&P are pretty good quarter, all things considered, and you expected some mix shift for the back half of the year. You know, private E&Ps led to earl -- early recovery. You know, you said you're expecting some publics to add rigs in the back half. Does this also suggest that you think private E&Ps have mostly add what they can under the current oil price environment? You know, they've been -- through over half the rig count today, they're two-thirds of the rigs as off the trough.

But their end market -- their end economics are not that different maybe than from the public. So just curious, your visibility on private E&P activity for the balance of the year.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yeah. Look, I think that, you know, they're the most nimble group. They're going to move the quickest to engage. They also have the least impact on the overall headline production number also.

So I think that -- I really am encouraged by the activities that we've seen. You know, the ability to continue that. You know, I -- I think -- they're all making their own economic decisions and they make that really without a lot of, you know, stakeholder beyond the owners, you know, direction. And so I think what we're seeing is a natural reaction to that, but I don't think it's indicative of how the whole market behaves.

And so they have the ability to get real busy and then slow down and back it down as they see production start to ramp up a little bit for them and it changes their economics. So, you know, a hard march up into the right, not necessarily. I think they'll all make their own decisions and, you know, could easily, you know, I'm not going to say, you know, back off, but what they will do is make those decisions as other, you know, operators start to ramp up, and it's obviously a much more disciplined group who have plans in place. You know, I think the key point to make here though, we're at the end of the first quarter, we're into Q2, and we haven't talked about any of that kind of budget blow outs that we talked about in prior years where it got, wow, we've overspent.

So there's something coming that's going to slow things down. That's not at all what we see. In fact, what I'm describing in terms of confidence in the cadence is the confidence in the cadence that we are going to stay busy and marching through the second half of the year, likely up some. In fact, I think our outlook today is up North America -- yeah, up North America, maybe close to 10% on the full year.

So that's some moderation but that's still growing.

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

That's a good point. I -- I appreciate that feedback. On D&E, you know, results are obviously impressive. You've sort of unpacked the impact of seasonal software sales spilling into the first quarter.

But you've also been press releasing a lot of the new contracts and agreements tied to digital initiatives. So I'm just curious how much of the confidence underlying your margin commentary is driven by the improved mix from digital and could it eventually be justified to maybe enhancing disclosure around the materiality of digital to your results?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Well. it's certainly -- digital is enhancing -- enhancing our margins. But that's -- and that's certainly where we want to see that go and we expect it to continue. It's also baked into all aspects of our business.

So from a digital perspective, it is sort of equal parts customer-oriented, like just consulting and software sales. It's also equal parts making our tools better so they become answer products and we sell them through the normal course of business, but they meaningfully impact the value of those tools. And then finally, what it does internally to drive our own costs down. And so helping, yes.

But I think more importantly when I look at D&E is, again, back to that baseline of improving margins, which is built on the back of sort of the high [Inaudible] performance and technology there, wireline performance and technology there. So those kind of things that are our operational. We can see them. We see them getting traction, more broad traction.

Those are the kind of things that as we look into a multi-year upcycle internationally, that's what's going to drive margin up '21, '22, '23.

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

Really helpful. Thanks, Jeff.

Operator

Our next question comes from Ian Macpherson with Simmons.

Ian Macpherson -- Simmons Energy -- Analyst

Thanks. Good morning, guys. Jeff, I wanted to ask you for an update on your -- your innovative frac operations. You spoke interestingly last quarter about the SmartFleet, as well as, you know, we've -- we've seen what you've accomplished with the grid frac.

I know there's been some IP contest there. I don't -- I don't -- we don't need to talk about that. But just kind of an update on -- on how those operations on leading-edge technology and domestic frac are going and how you see that blossoming over the course of the year with -- with incremental fleets of those varieties?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yeah, look, I'm -- I'm -- really like the technology. I like what we've done. The -- you know, the SmartFleet is as advertised. We've got more trials to do.

But we continue to find more effective ways to deliver that solution which should allow it to scale even more quickly. I think it's going to continue to gain a lot of traction, very capital efficient approached in planning technology because it implements with the equipment that we have. You know, from an e-fleet standpoint, again, certainly pleased with the performance that we've seen. Yes, it continues to drive or deliver on the kinds of efficiencies we thought we would see, both from, you know, for us in terms of utilization and dollars per horsepower.

Lot of interest from customers around that technology also. But let's remember, we're maximizing value in North America. So we only put this equipment out when it meets our return expectations and we can derisk the time horizon. And -- and so it's not, you know, it's going to look more like replacement of upgrading replacements as opposed to sort of new investments.

Ian Macpherson -- Simmons Energy -- Analyst

Understood. Thanks, Jeff. And then separately, Lance, I wanted to ask you about the free cash flow progression going into Q2 and for the rest of the year. Obviously, the capex was light loaded in Q1.

And so just thoughts on how -- how the se -- the capex sequences through the year, and just general maybe a refresh on -- on total absolute dollar working capital framework for this year? Not -- sorry, not working capital, but -- but bottom line free cash.

Lance Loeffler -- Chief Financial Officer

Yeah. No. Good -- good question, Ian. Look, I -- I think, overall, as -- as everyone knows, maximizing free cash flow remains the key priority for us and what we're focused on.

But more so, free cash flow that's driven by margin progression and then off aspects of the capital efficiency. I know Jeff covered a little bit in his prepared remarks around efficiency and working capital and remaining disciplined around capex. Look, more operating profit we see ahead based on our activity outlook improving and -- and obviously the progression around margins that we've discussed already this morning. You know, we're pretty optimistic about what all of that means for 2021 free cash flow target, which today gives us, you know, more confidence that we will be, you know, sort of ahead of where consensus sits today, even excluding the -- the change in the metric that we've outlined this quarter.

Ian Macpherson -- Simmons Energy -- Analyst

Perfect. Thanks, Lance.

Lance Loeffler -- Chief Financial Officer

You bet, Ian.

Operator

Our next question comes from Chase Mulvehill with Bank of America.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Hey, good morning, everybody.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Hey, good morning, Chase.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Hey, Jeff. Hey, Lance. Hey, Jeff. So you know, I guess, in your prepared remarks you talked about a -- a doubling of -- of the value of submitted bids across the international market if we compare that to -- to what you saw last year.

So I guess, I was hoping that maybe you could provide a little color, you know, relative to the mix between NOCs, IOCs, independent EMPs. and maybe the regions that you see the -- the most pick up in --in bidding activity. And then, I don't know if you'd be willing to kind of step out of your skews a little bit and say, you know, what it might -- would mean for activity as we kind of get into 2022 if you start signing a lot of -- a lot of these contracts. So I know you talked about some -- some continued growth and some strong growth on the international side over the medium term but I don't know if you'd like to quantify that at this point, just given the bid activity you're seeing.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yeah. Look, I think, the -- the type of activity we're seeing is -- is probably more weighted toward the Middle East, Latin America broadly in terms of tender activity. I think that you know, I'm not going to try to quantify things that are, you know, too derivatives -- standard deviations in the future. But what our view is that certainly indicative of a growing market and the kind of market that you know will grow over time.

You know, we're going to engage in that and participate in it but in the end -- and -- and be successful. But our view is, you know, a focus on profitable growth and drive international revenue growth that way. But I think, we're also going to see that sort of lead to the broader-based kind of recovery, which is equally important to price. And so I bring that up just to say that you know, these big tenders are always very competitive from the price standpoint.

But where we start to see price improvement, typically, is as the market sort of starts to fill up and we see more opportunities and that is how we see the international market shaping up. So you know, I think that's an equally important concept of what we're seeing in terms of growth.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

OK. Thanks for the color there. And maybe if I can kind of come back to the conversation around U.S. onshore in Tokyo and try to tease out a little bit more in the public versus private.

You know, I don't know if you'd kind of be willing to share your mix of public service versus private from the U.S. onshore. I know the overall rig activity is roughly halfway between the public and private today and continues to kind of see a shift toward province as -- as activity continues to rebound because they're obviously responding to a higher oil price while the public is not. So maybe just talk to your mix in -- in kind of what advantages you think you have when you look to kind of pursue more opportunities on the product side versus -- versus your competitors.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Look, we have a great footprint in North America. We've got a leading position in North America, which means we really work for all of the customers in North America. So from a mixed perspective, what we look for is efficiency, we look for opportunity, we look for growth opportunity, and we look for uptake on technology and performance. And so you know, I think the, you know, that's the way we view the market less around A versus B but is more do they have the characteristics that allow us to drive our value proposition and market and maximize the kind of returns like we're talking about.

And so I think that that moves at different times depending on where the market is. But it doesn't usually change a whole lot.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

OK. All right. I'll turn it back over. Thanks, Jeff.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from Marc Bianchi with Cowen.

Marc Bianchi -- Cowen and Company -- Analyst

Thank you. I guess thinking about the cost structure going forward, there are few variables I think with COVID that normal -- normalization hopefully coming out of COVID where, you know, maybe there could be some increased travel and entertainment expense. I'm curious how -- how that sort of factors into the margin outlook that you have and if there's -- if there's any risk to maybe a headwind to margin as we get into the back half of the year?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yeah. Thanks. Look, those -- those types of costs are in our -- in our outlook. So I don't, you know, we manage cost all of the time.

I don't see a bow wave of that coming back.You know we've reset the earnings, we reset it in terms of how we work and how we move people around, and how we go to market. So you know, I look forward to the market opening and I think that's going to drive a lot more demand and we'll continue to drive demand for oil. But I think from -- from our standpoint, we're going to -- we just manage those costs.

Marc Bianchi -- Cowen and Company -- Analyst

Yep. Thanks for that, Jeff. Lance, back on the free cash flow of working cap was a positive number this quarter but then there was another sort of 250 drag or outflow from other operating outflows. Could you -- could you talk about that? And then just as I think about those two lines over the course of the year, would you -- would you expect them to be net neutral, positive, negative?

Lance Loeffler -- Chief Financial Officer

Yeah. So other operating in the cash flow line item tends to be pretty heavy in the first quarter. We've got compensation that tends to hit in the first quarter as well as, you know, taxes are heavy with property taxes, etc. And so that's not typical from us from a, you know, intra-year cyclicality perspective.

We expect that to lighten up obviously into Q2, but that's -- that's sort of the color I would give you on that.

Marc Bianchi -- Cowen and Company -- Analyst

OK. Thanks for that. I'll turn it back.

Great. Thanks, Mark.

Thank you.

Operator

Our next question comes from Connor Lynagh with Morgan Stanley.

Connor Lynagh -- Morgan Stanley -- Analyst

Yeah, thank you. I was hoping we could put a finer point on some of the discussion on -- on pricing in international. You know, you've made the comment that obviously large tenders will be competitive but leading-edge pricing should increase. Can you maybe frame for us the extent to which leading-edge pricing is meaningfully different from what you're more sort of contracts book looks like? In other words, if leading-edge pricing is moving higher would that imply that contract pricing will follow, or is there a market-to-market impact we should talk about?

Jeff Miller -- Chairman, President, and Chief Executive Officer

No, I think contract pricing will follow. It's the way that works generally. It starts there, you know, the contracts themselves improve over time. And I think that you know, having alternatives that are higher priced also helped to create pressure -- upward pressure on, you know, pricing even in large contracts.

Lance Loeffler -- Chief Financial Officer

And I would add. I mean, that's -- that's -- what Jeff is describing is -- is exactly what we were seeing, you know, in the early part or late part of 2019 and 2020, was that dynamic in terms of large tenders still bid competitively. But you know, the rising level of activity was tightening, you know, the rest of the broader market. Obviously, we took a pause with COVID but we expect as we see activity levels creep back to where we were in those -- in that period of time, I think, you know, we're optimistic that we start to see the same behavior from a pricing perspective.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it, makes sense. And I guess just further to that, so on the large tenders side of things, there's been some discussion about some of the softer elements maybe improving before pricing. You know, how do you, guys, feel about the potential for terms and conditions or you know different types of ancillary charges improving in the near term? And I guess the other question is you've made a lot of changes to your cost structure, do you think you can maybe drive improved margins without -- without the increasing pricing?

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yes, we expect to do that. And that's as we continue to see activity come on, we will see improving margins. Always working on T's and C's, there are always leading edge sort of things that we're working on that they come easier to do become very important overtime to do and we're doing those all of the time and we're doing those, you know, now. Also, digital sort of implicit through all of this and so we see our digital improving driving margins better all of the time.

And so you know, I think, we should see improving margins before we see even the pricing but I think the pricing, that's what allows us to really you know that's where we see the real traction and incremental.

Connor Lynagh -- Morgan Stanley -- Analyst

Appreciate the color. Thanks.

Operator

Our next question comes from Chris Foy with Wells Fargo.

Chris Foy -- Wells Fargo Advisors -- Analyst

Thanks. Good morning. Just want to ask first about some of the cost inflation that was mentioned in the -- in the prepared remarks. Is that mostly getting offset in the pretty near term maybe this quarter next or is there any impact that could be flowing through as you get price recovery in the second and third quarter? Just curious if there's going to any tailwind from that?

Lance Loeffler -- Chief Financial Officer

Yeah, Chris. This is Lance. Yeah. I mean, a lot of that has largely, you know, the cost of inflation that we describe is driven by what's happening in -- in North America and the growth that we're seeing there.

Some of it was driven by the impact of the storms, right? And some of the shortages that we saw across the value chain. But you know I would say, look, our size and scale give us an inherent advantage to negotiate the best deals in a lot of those consumables. And to the extent, you know, a lot of our commercial arrangements allow us to pass that through to the customer. Our guidance overall sort of incorporates that and I think, you know, look, we're always going to be continuing to focus on maximizing our value in North America regardless of the challenges in the environment.

But -- but that sort of baked into how we see, you know, at least, the near-term playing out and obviously the outlook we've given -- given for the -- for the year.

Chris Foy -- Wells Fargo Advisors -- Analyst

OK. Thanks. That's helpful. And then maybe on capex, so I think in the past you said 5% to 6% range.

You know, in the data it looks like service intensity is very high. Pricing has not really caught up with the amount of work that is getting done. So just curious to check in on the 5% to 6% range, if you expect that would still be in place for '21 and -- and probably 2022 as well.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Yes. Yeah. I mean, that's what we talked about capital efficiency and driving capital efficiency through all parts of our business. That's what allows us to get to that 5% to 6% of revenues in terms of capex spend.

So yes, for '21 and '22.

Chris Foy -- Wells Fargo Advisors -- Analyst

Perfect. Thank you.

Jeff Miller -- Chairman, President, and Chief Executive Officer

Thanks.

Operator

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

Jeff Miller -- Chairman, President, and Chief Executive Officer

Thank you, Liz. Before we end the call, I'd like to make a few closing comments. I am encouraged by this year's positive momentum and demand recovery. We are well-positioned globally for growing international demand.

The expected steady activity cadence in North America and with our leading digital technologies, which allow us to maximize value for Halliburton and its shareholders. We look forward to speaking with you again next quarter. Liz, please close out the call.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Abu Zeya -- Head of Investor Relations

Jeff Miller -- Chairman, President, and Chief Executive Officer

Lance Loeffler -- Chief Financial Officer

James West -- Evercore ISI -- Analyst

Scott Gruber -- Citi -- Analyst

David Anderson -- Barclays Capital -- Analyst

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

Ian Macpherson -- Simmons Energy -- Analyst

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Marc Bianchi -- Cowen and Company -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Chris Foy -- Wells Fargo Advisors -- Analyst

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