Yahoo Finance Halliburton Co (HAL) Q1 2019 Earnings Conference Call Transcript
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Halliburton Co (NYSE: HAL)
Q1 2019 Earnings Conference Call
April 22, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Halliburton First Quarter 2019 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. (Operator Instructions) And as a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Abu Zeya. Please go ahead.
Abu Zeya -- Senior Director, Investor Relations
Good morning, and welcome to the Halliburton's first quarter 2019 conference call. As a reminder, today's call is being webcast and a replay will be available on Halliburton's website for 7 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 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 that exclude the impact of impairments and other charges. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in our first quarter release and can be found in the Investor Downloads section of our website.
After our prepared remarks, we ask that you please limit yourself to one question and one related follow-up during the Q&A period, in order to allow time for others who may be in the queue.
Now I'll turn the call over to Jeff.
Jeff Miller -- Chairman, President and Chief Executive Officer
Thank you, Abu, and good morning everyone. What a difference 90 days make in this market. Commodity prices have rebounded, customer budgets have refreshed, and we're back to work. Our results for the first quarter played out as we expected, and I am pleased with how our organization executed both in North America and internationally.
Here are the first quarter highlights. Total company revenue of $5.7 billion was essentially flat compared to the first quarter of 2018 and adjusted operating income was $426 million. International revenue increased 11% year-over-year, which was a great first step toward our expectation of high-single digit international growth for all of 2019.
Our Drilling & Evaluation division had a strong year-over-year revenue growth of 7%, with activity improvements across all geographic regions.
Finally, as expected, hydraulic fracturing activity ramped up in US land, as customers refreshed their budgets, and despite pricing headwinds, our execution resulted in delivering better than expected margins in our Completion & Production division.
From a macro perspective, 2019 is off to a strong start. Commodity prices have been rising since the beginning of the year due to tightening oil supplies and stable demand. OPEC plus production cuts and supply disruptions from Venezuela, Iran, and Libya have supported market rebalancing. Oil demand trends, particularly in China and India, have also been constructive. Overall, the macro environment remains favorable for our industry. Against this backdrop, and with winter behind us, customer activity in both hemispheres has picked up off December lows and continues to trend higher.
Although we often discuss the hydraulic fracturing business in North America, it's important to remember that Halliburton has a portfolio of 14 product service lines operating in North America, for example, our artificial lift and cementing businesses showed excellent results in the first quarter growing both revenue and margin year-over-year. Our artificial lift product line grew top line revenues 55% year-over-year in the first quarter, driven by strong demand for ESPs that are now installed much sooner in the life of the well and sometimes right after the well's put on production. Halliburton is the number one cementing provider in US land. Demand for our cementing services continued to be strong in the first quarter. Congratulations to our artificial lift and cementing teams for an outstanding performance.
Now let's turn to our North America land hydraulic fracturing business. We experienced an increase in the stages pump every month this quarter with March finishing on a high note. Overall, the first quarter activity level was modestly higher compared to the first quarter of 2018. As expected, we had pricing headwinds throughout the quarter. However, we believe the worst in the pricing deterioration is now behind us, and as we've discussed in the past, the success of our hydraulic fracturing business is not dependent on pricing alone. Given our presence in all basins and exposure to all customer groups, we have the ability to pull other levers such as utilization, cost savings and operational efficiency to drive a better outcome for our business.
Let me describe what I believe will happen with hydraulic fracturing supply and demand throughout 2019. On the demand side, it's evolving as we had anticipated. Our customers have announced their 2019 budgets and we expect that overall spend will be down 6% to 10% in North America. Here's how I see the impact of our customers' 2019 budgets on the North America land stimulation services business. I expect that customers will operate within their budgets largely by achieving savings through sand cost deflation and by reducing drilling activity. On the other hand, I believe that net completions activity will remain essentially flat year-on-year as our customers seek to achieve their publicized production targets.
In the near term, our view on North American customer activity heading into the second quarter is shaped by the momentum that we saw building at the end of March. As for the next couple of quarters, I see demand for our services progressing modestly. The cadence of spend across basins for various companies will look different throughout the year, but Halliburton has the scale, range of services, and customer relationships to capture more than anyone else out of every dollar spent in North American land this year.
Now, let's talk about the supply side. Given the demand landscape, the service industry has adjusted accordingly and cut capital spend. Currently, new horsepower is not being added to the market. At the same time, the existing equipment is working a lot harder today leading to equipment attrition. A key driver of this is service intensity, which quickly translates into shorter equipment lives and higher maintenance costs. Let me give you some data points to put this in perspective. Halliburton is currently pushing 30% more sand volume through equipment than in 2016. The shift to local sand that is finer and more abrasive also leads to more equipment wear. Customers are drilling longer laterals and fracking more stages per well. Last year, we fracked 20% more stages per horsepower than we did in 2016. And with increased efficiency, we've improved utilization achieving more pumping hours per day, again, more wear and tear. Industry sources estimate that about 7.5 million hydraulic horsepower will need to be rebuilt in 2019 to maintain a flat horsepower supply. This equates to $1.7 billion in equipment spend that I do not see forthcoming as the service companies have cut capital spending plans. As a result of these factors, I believe the capacity attrition will occur naturally throughout the year and that there will be less horsepower available in the market at the end of the year than there is today.
Halliburton will significantly reduce North America hydraulic fracturing CapEx this year. We have sufficient size and scale in the market today and see no reason to invest in growth when it comes at the expense of returns. The capital that we do spend will be mostly directed toward improving efficiency, reducing emissions, and refurbishing equipment. I'm frequently asked, when will we add hydraulic fracturing capacity again. Let me tell you, I don't see that happening until the market has better supply and demand balance and substantially better pricing, and despite the ongoing market rebalancing I just described, the market conditions are not conducive to adding capacity. In this market, we're focused on maintaining the right level of capital spending to support our business, but most importantly, on continuing to deliver strong cash flow and industry-leading (ph) returns.
As the North American land market rebalances over the next few quarters, we will continue to control what we can control, we are positioning ourselves to outperform the market even if demand is substantially different from what we currently expect. I already mentioned our CapEx reduction. That was the first step.Second, we're reorganizing our structure in North America land to be more nimble and operate more efficiently. This will make us more effective in any market. Third, I often talk about continuous improvement. I want to make it clear that this is not a temporary initiative at Halliburton. It's part of who we are as a company. We're constantly looking for ways to eliminate waste and improve productivity in all parts of our organization, from technology to training, from supply chain to field operations. And we will continue to drive cost and capital efficiency throughout our company. Finally, and most importantly, we're a returns driven organization and where pricing concessions would have pushed returns below an acceptable threshold, we've instead elected to stack equipment including frac fleets. Emerging from the industries focused on cash flow and returns, we see stable growth over a longer period of time. This sustained growth will be good for Halliburton. It will allow us to leverage our supply chain and logistics infrastructure, drive asset velocity, capture efficiencies around our repair and maintenance programs and implement technologies at scale to reduce cost and increase production. Therefore, we can be more efficient with our investments.
Halliburton is well positioned to navigate the near term and thrive in the long run. Our company is 100 years old and we got here by evolving with our markets and our customers. We will continue to do so in the future.
Turning to international markets, I am excited by what I see. The international recovery continues to build momentum, Halliburton has gained share in key international markets over the last several years. This gives us a strong base to capitalize on the recovery and we expect high single-digit international revenue growth this year. The international recovery was initially led by the national oil companies and focused on mature fields. Now, the offshore markets are also entering recovery mode as project economics become more attractive. International offshore spending is projected to be up 14% in 2019 and the average offshore international rig count increased 29% year-on-year in the first quarter.
A great example of an emerging offshore rebound is our recent win with Shell in Brazil. In the first quarter, we started to work on Shell's three-year integrated well construction campaign in the Santos and Campos Basins offshore Brazil. These are some of the most complex but also most prolific basins in the world. Halliburton is excited to collaborate with Shell on the first green shoots of long-term activity recovery in this critical deepwater market. Middle East activity is increasing, driven by rig additions in Iraq and Saudi Arabia. However, we expect pricing pressures in the Middle East to continue in the near term. A steady volume of activity and excess equipment capacity in the region continue to drive competitiveness. Going forward, a call on production and tightening spare capacity should lead to positive pricing movements.
The North Sea is showing pricing improvement with available drilling equipment capacity essentially absorbed. However, we expect margin pressure to remain for the first half of the year as we optimize performance on our competitively priced long-term contracts and continue to incur mobilization costs. Activity ramp-up continues across Asia-Pacific and Africa with the rig counts in both regions now at the highest level since the first quarter of 2015. We're starting to see pockets of pricing improvement in these areas, as they come back from the downturn low. Latin America activity will improve this year driven by Mexico and Argentina. I'm excited about the near-term growth and long-term potential in that region.
As we see more capacity tightness internationally and the pipeline of projects progressively expands, we expect to continue demonstrating rational returns driven growth in the international markets. The pricing discussions with our customers in some markets have become more constructive and we expect this momentum to build going into 2020. As the rationalization of the US shale industry unfolds and the international markets ramp up, Halliburton is best positioned to capitalize on the future opportunities. We make thousands of decisions every day, and our global presence, our diversified product and service portfolio, our culture, our processes and our depth of leadership will allow us to win. We will win through responsible capital stewardship, prioritizing capital efficiency, investing in the technologies that deliver differentiation and generating strong cash flow and returns.
I will now turn the call over to Lance to provide more details on our financial results. Then I'll return to discuss how we are strategically positioned to differentiate ourselves in the current market and deliver returns for our shareholders. Lance?
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Thanks, Jeff. Let's begin with an overview of our first quarter results compared to the first quarter of 2018. Total company revenue for the quarter was $5.7 billion, essentially flat year-over-year, while adjusted operating income was $426 million, a 31% decrease.
Now, let me take a moment to discuss our divisional results. In our Completion & Production division, revenue was $3.7 billion, a decrease of 4%, and operating income was $368 million, a decrease of 26%. These results were primarily driven by increased stimulation activity in North America which was offset by lower pricing. The Completion & Production division also benefited from higher artificial lift and cementing activity in US land, increased stimulation activity in Latin America, and higher completion tool sales in the Middle East Asia and Latin America regions.
In our Drilling & Evaluation division, revenue increased 7% to $2.1 billion, driven by activity improvements across all regions. Operating income was $123 million, a decrease of 35%. These results were primarily driven by mobilization costs that we incurred on multiple international drilling projects coupled with reduced project management activity and lower pricing in the Middle East.
Moving to our geographical results. In North America, revenue decreased 7% primarily driven by lower pricing in stimulation services partially offset by higher artificial lift, cementing and stimulation services activity. Latin America revenue increased 28%. This increase was driven by higher activity for the majority of our product service lines in Mexico, increased stimulation work in Argentina and improved fluids activity throughout the region, partially offset by reduced drilling and testing activity in Brazil.
Turning to Europe, Africa, CIS, revenue grew 4% driven by higher activity across multiple product service lines in Ghana and the United Kingdom. These results were partially offset by lower drilling activity in Azerbaijan. In Middle East Asia, revenue increased 7% year-over-year, largely resulting from higher completion tool sales across the region, coupled with increased project management activity in India, and improved drilling activity in the Middle East. These improvements were offset by reduced fluids activity and lower pricing in the Middle East.
In the first quarter, our corporate and other expense totaled $65 million which is in line with our previous guidance. We expect corporate expense in the second quarter to remain approximately the same.
During the quarter, we recognized a pre-tax charge of $61 million, primarily related to a non-cash impairment of legacy sand delivery equipment as we have adopted a more efficient sand logistics solution. Net interest expense for the quarter was $143 million and we expect it to remain approximately the same for the next reporting period. Our effective tax rate for the first quarter was approximately 21%. Going forward, we expect our second quarter and 2019 full-year effective tax rate to be approximately 23%.
Our first quarter cash flow from operations was a use of cash of $44 million, primarily driven by short-term working capital movements. We experienced some customer payment delays that should get resolved as the second quarter progresses. We have also built up inventory primarily for the international rollout of our strategic investments and we plan to work this inventory down throughout the year. Historically, it's not unusual for our cash flow to be back-end loaded and we expect to generate strong operating cash flow for the remainder of 2019.
Capital expenditures during the quarter were $437 million with our 2019 full-year CapEx firm at $1.6 billion. On a full-year basis, we expect to generate higher free cash flow than last year by engaging the appropriate levers in different markets, optimizing capacity and structure in North America, driving pricing improvements and contract optimization internationally and managing working capital and CapEx.
Now, turning to our near-term operational outlook, let me provide you with some comments on how we believe the second quarter is shaping up. For our Drilling & Evaluation division, we are anticipating a second quarter rebound from typical seasonal disruptions in drilling activity offset by ongoing mobilizations. Therefore, we expect sequential revenue to be up low-single digits with margins increasing 50 basis points to 150 basis points.
In our Completion & Production division, with North America land activity improving and the worst in pricing deterioration behind us, we believe that revenues will increase mid single digits while margins should be up 50 basis points to 150 basis points.
Now I'll turn the call back over to Jeff to highlight some of our ongoing strategic initiatives and make a few closing comments. Jeff?
Jeff Miller -- Chairman, President and Chief Executive Officer
Thanks, Lance. More than ever, we are focused on exercising prudent capital allocation to the right priorities. We have solid long-term strategies aligned with value generation for our shareholders. We will continue to expand in the product service lines and penetrate the markets where we see opportunities to generate growth and returns. As we implement these strategies, we expect to generate economic and technical differentiation that will lead to higher returns and free cash flow.
There are three main areas where we are investing this year and I'll walk you through each one of them. First, we will continue to enhance the competitiveness of our Sperry Drilling product line. I've talked to you a lot about iCruise, the new rotary steerable platform we introduced last year. The global rollout of this advanced drilling technology is on track, with the tool already working in Argentina, the Middle East and across the US shale basins. We are currently building out the tool inventory and by the end of 2019, iCruise will constitute over a third of our rotary steerable fleet. Growth in the higher margin rotary steerable market is extremely encouraging, but conventional motors remain the workhorse of directional drilling, especially on land.
Another initiative we undertook at Sperry to increase our competitiveness and differentiation was to launch our Motors Center of Excellence, it is a new approach to drilling motor development that combines specialized engineering and manufacturing capabilities to customize motor designs for specific basin challenges. The center deploys the latest mechanical engineering expertise to build more durable motors that drill faster and allow for longer runs with a higher rate of penetration. We have assembled a dedicated team of scientists in bearing and power section design, polymer chemistry and materials that is focused on accelerating research and development activities to deliver differentiated drilling motors to the industry. As part of our Motors Center of Excellence, last quarter, we opened two new realigned facilities equipped with state-of-the-art technology and strategically located in Houston and Saudi Arabia to serve our customers in the Western and Eastern Hemispheres.
Next, we will continue investing in our production businesses, artificial lift and specialty chemicals. They are critical to both unconventionals and mature fields, they fit well within our existing product portfolio and they have a lot of growth potential for Halliburton going forward. This year will be all about international expansion for these businesses. It is already well under way for artificial lift offering, we opened a testing and dis-assembly facility in the Middle East and are making ESP deliveries in several countries in Latin America and in the Middle East. Plans for international manufacturing of ESPs are in the works as well.
I recently went to Saudi Arabia to attend the groundbreaking ceremony for Halliburton's first chemical manufacturing plant in the Eastern Hemisphere. Leveraging the expertise added through the Athlon acquisition last year, we're building a plant that will provide an advantage location for Halliburton to deliver superior service and chemical applications expertise to our Eastern Hemisphere customers. Upon completion in 2020, the plant will have capabilities to manufacture a broad slate of chemicals for stimulation, production, midstream and downstream engineered treatment programs. We will not only supply our customers with next-generation specialty chemical solutions, but we'll also be able to manufacture chemicals for our own drilling fluids, cementing and stimulation businesses.
Finally, the third focus area for this year. We will continue to differentiate in a very important but highly competitive space in hydraulic fracturing. The intense exploration of top tier acreage fueled by rapid trial and error technology cycles led to the explosive increase in production from US unconventionals that we have seen in the past decade. As shale matures and operators have to step out to second tier acreage, it will become increasingly hard to add enough production capacity to replace the significant legacy decline volumes as well as drive new production higher. Going forward, higher activity and more advanced technology will be needed to maintain flat production levels in unconventionals.
In light of this, I firmly believe that the future of unconventional technology will be more heavily weighted toward enabling higher well productivity. As I've told you before, Halliburton's first step in this direction is investing in the Prodigi fracturing automation platform. We are using the latest machine learning technology to make our hydraulic fracturing treatment smarter and help our customers achieve optimal production from tougher and deeper rock. Today, Prodigi applies automated rate control to more effectively breakdown all perforation clusters. This eliminates human error and yields more consistent fracturing treatments. On a recent application in North Dakota's Williston Basin, Prodigi enabled more even distribution of profit and fluid to each cluster, resulting in a 30% increase in cluster efficiency. This is just the beginning of what Prodigi will provide as we continue to work smarter going forward, and Halliburton is best positioned to develop and deploy the advanced technologies that will ultimately improve well performance.
With shale maturation, capital discipline on both the operator and the services side and an escalating focus on technology and efficiency, we expect customers to demand both surface execution and subsurface effectiveness. It won't just be about getting the most number of stages fracked today. Improving the quality of those stages and their production output will be just as important. In this environment, a strong integrated franchise will matter, size and scale will matter, technology depth will matter, superior service quality will matter, customer collaboration will matter, and Halliburton has all of these.
In summary, as supply and demand rebalance in North America land over the next few quarters, Halliburton is well positioned to navigate the near term and thrive in the long run. Second, a broad-based recovery is ongoing internationally and will continue into 2020. Halliburton will keep achieving rational returns driven growth in the international markets. And finally, against this backdrop, Halliburton is focused on the right things. We are investing in the products and services that generate growth and returns, managing our costs and other operating levers and committed to generating strong free cash flow and industry-leading returns.
And now, let's open it up for questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) And our first question comes from Angie Sedita of Goldman Sachs. Your line is now open.
Angie Sedita -- Goldman Sachs -- Analyst
Thanks, good morning guys.
Jeff Miller -- Chairman, President and Chief Executive Officer
Good morning Angie. Welcome back.
Angie Sedita -- Goldman Sachs -- Analyst
Thank you. Glad to be back. So Jeff, maybe we could touch on your commentary on the worst in pricing is behind us. Is that -- give us a little color there? Does that imply that the pricing pressure is not completely gone? And then also you touched on your levers to drive margins and of course utilization and operational efficiency does drive margins in a big way. So, can you talk about those levers and how much more you have to pull there?
Jeff Miller -- Chairman, President and Chief Executive Officer
Thanks, Angie. Yeah, I'd say, the worst is behind us. That doesn't mean there is nothing, but it also means that when we look at the market and how it's shaping up, you know that does it -- will there be some trickling effects potentially, I'm not going to give precision around our strategy there. But what I will tell you is that we are saying, no, where the thresholds aren't met which gives me confidence. And then -- align that with what we see around activity and tightening capacity which all of that should progress as the year goes on and I view that as lending support to pricing being behind us.
Angie Sedita -- Goldman Sachs -- Analyst
Okay. And so, does that with the tightening capacity and you talked about the attrition that's ongoing, do you -- what's your thoughts on pricing for the back half of the year or is that more of a 2020 event?
Jeff Miller -- Chairman, President and Chief Executive Officer
Yeah. Again, I'm not going to try to pick the date on where things are, I think broadly though our view is that we will see tightening capacity on the balance throughout the year. I described how hard equipment's working. Also, the capital discipline that our customers see, we see the same and so I think the reduction in CapEx or the actual the discipline around CapEx goes a long way to support balancing of the market now. When does it balance? You know I think it's more balanced later in the year certainly than it is today. So I think that's all supportive.
Angie Sedita -- Goldman Sachs -- Analyst
Okay. And then as unrelated comment, but as a follow-up, reorganization in the US land, can you give us more color there? Is there a cost savings opportunity for the reorganization or is this more operational changes?
Jeff Miller -- Chairman, President and Chief Executive Officer
Well, like there's always -- there's always cost associated with reorganization, but let me focus on making us more efficient and more nimble. So, a couple of years ago, we took a fair amount of cost out, but most of that cost came in the form of an organization that would operate more efficiently and more quickly and that's really what we're doing here, this is not targeted at front line by any means, but this is more around how do we brighten the lines and more quickly operate, make decisions and go to market, now efficiency or lower cost is useful in any market in terms of driving performance, but that's not the intent.
Angie Sedita -- Goldman Sachs -- Analyst
Right. Great, thanks. I'll turn it over.
Jeff Miller -- Chairman, President and Chief Executive Officer
Thanks.
Operator
Thank you. And your next question comes from James West of Evercore ISI. Your line is now open.
James Carlyle West -- , Evercore ISI Institutional Equities -- Analyst
Hi, good morning guys.
Jeff Miller -- Chairman, President and Chief Executive Officer
Good morning, James.
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Good morning, James.
James Carlyle West -- , Evercore ISI Institutional Equities -- Analyst
Jeff and Lance, on North America, real quick, I think this is pretty -- pretty easy to respond to, but one, are you stacking fleets now if you can't get the appropriate return? And two, are you starting to see a push toward maybe a rebundling, meaning that as operators have debundled previously when they were spending as much as they could, now that their budgets have shrunk in size, perhaps the rebundling, the reorganization, the better collaboration part of the business should start to unfold. I'm curious about both those topics.
Jeff Miller -- Chairman, President and Chief Executive Officer
Yeah, thanks James. On the first topic, we did stack equipment in the first quarter and I'm not going to go any further than that, but as we look at the market and look at returns on equipment that caused us to make those decisions, and we'll continue to manage our business around returns. The second question though was around rebundling, and look, I've always had a view that over time, those things that make sense to come back together do, I think we're early days of that, but there is just such an elegance and efficiency around how things fit together, and that doesn't mean we're not very competitive with each slice and I think we've demonstrated that, but at some point, once the pieces and parts have been examined, you start to see, wow, it's a lot simpler to put those pieces and parts back together. But you have (inaudible), James, but I feel good about where we are in that process.
James Carlyle West -- , Evercore ISI Institutional Equities -- Analyst
Okay. Okay, got it, and then on the international side, Jeff, it sounds like you're a bit more bullish now than you were maybe a quarter ago, I guess one is that, is that fair to say? And then the second is kind of top line looks like it's going to be pretty strong this year, has been strong, you've been outperforming. When do you think the bottom line or the incrementals will start to outpace normalized incrementals?
Jeff Miller -- Chairman, President and Chief Executive Officer
Yeah, thanks. Look, I think what gives me more confidence is how broad based this recovery looks today and so we start to see, not just green shoots here or there, but I think as I described in my commentary, nearly every region, I talked about in terms of some form of growth, we also see a broadening base of offshore sort of activity, not maybe activity and also the tendering activity that leads to more activity as we go into 2020.
From a margin standpoint, I'll focus those comments on D&E obviously, we expect stronger decrementals as we -- incrementals -- excuse me, stronger incrementals -- clarify that, but what we saw in the first quarter, James, was, I mean, it really was a mix of different things, both mobilizations that generally get done at mid-year or as we move through the year, the mix of services, there is a real pricing impact from the Middle East that we saw, I mean, a lot of the tender activity that happened in '18, it all started in earnest on January 1st of this year. So we saw some of that. But what's important, I think is, we expect strong incrementals in the Q2 for that business and clearly Q1 in my view is a bottom for D&E margins.
James Carlyle West -- , Evercore ISI Institutional Equities -- Analyst
Got it. Okay, great. Thanks, Jeff. Thanks, Lance.
Jeff Miller -- Chairman, President and Chief Executive Officer
Thank you.
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Thanks, James.
Operator
Thank you. And our next question comes from Jud Bailey of Wells Fargo. Your line is now open.
Judson Edwin Bailey -- Wells Fargo Securities -- Analyst
Thank you. Good morning.
Jeff Miller -- Chairman, President and Chief Executive Officer
Good morning.
Judson Edwin Bailey -- Wells Fargo Securities -- Analyst
Hey, Jeff, you started off your comments by saying, what a difference 90 days makes and that's probably appropriate. Could you maybe talk about how you've seen the year progress from I'm speaking to North America and how maybe customer tone or conversations have changed and to the extent visibility over the next couple of quarters we have in the back half of the year has or has not improved as the macro environment has kind of stabilized here?
Jeff Miller -- Chairman, President and Chief Executive Officer
Well, I think the macro environment stabilizing, is the key point, I mean in 90 days ago, we were coming off what was -- wasn't a clear path for commodity prices, obviously Q4 was pretty hard on everyone , so in in the range of 90 days, commodity prices set up, what we had thought would happen has happened in terms of customers going back to work, and as I said in my commentary, sort of each month was progressively building in that shapes our view. You know as we talk with customers, we look at the calendar, those things are all constructive as we look out to the next couple of quarters.
More specifically around the second half of the year, a couple of ways we think about that, but I think importantly is the production targets that are out there today, all of that require some level of completion activity to meet that. I also think that some part of the CapEx reduction gets captured in sort of other things, that's -- whether it's sand or service price deflation and maybe lowering rig count a bit.
And I think the last question really be around, what do the smaller operators do going into the back half of the year? And I think they may be the most opportunistic, it's most important to them also just with the smaller asset base investing in completions really matters a lot to the value, not just of the asset, but likely the company.
Judson Edwin Bailey -- Wells Fargo Securities -- Analyst
Okay. I appreciate the color there. And my follow-up is maybe for Lance, your guidance on C&P revenues up mid-single digits, my impression is that pricing is still on average a bit of a headwind as we head into the second quarter. Can you maybe give us your thoughts on how much the lag effect from the pricing weakness throughout 1Q impacts how C&P revenue growth looks in the second quarter? Just trying to balance what's the volume and what's -- what the headwind on pricing is?
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Yeah, I think -- thanks, Jud. I think the -- it kind of goes back to what Jeff was saying maybe an earlier comment, I think you may see some of the trickling effect to continue from the pricing side, but it's more than offset by the level of activity that we see, which is what informs our guidance, so it's really volume related with some modest impact from pricing.
Judson Edwin Bailey -- Wells Fargo Securities -- Analyst
Okay, all right, I appreciate the color. I'll turn it back.
Operator
Thank you. And our next question comes from Bill Herbert of Simmons. Your line is now open.
William Andrew Herbert -- Simmons & Company International -- Analyst
Thanks. Good morning.
Jeff Miller -- Chairman, President and Chief Executive Officer
Good morning.
William Andrew Herbert -- Simmons & Company International -- Analyst
Good morning. Jeff, when you speak about the second half, is this -- and your frac calendar specifically, is this based upon specific visibility, which is populating the frac calendar or kind of a plausible expectation that completions needs to move higher even I mean for any number of reasons including meeting customer budgets, filling Permian pipes et cetera? So distinguish between optionality and actually tangible visibility that's unfolding.
Jeff Miller -- Chairman, President and Chief Executive Officer
Yeah, Bill, you know we've got visibility in the calendar out a couple of quarters and so we've got a view of that and that's more specific, as we look further in the year, particularly the back half, I think there are some sign posts that we look for in terms of production targets met, not met, also around rig count with smaller operators, what that may look like, and I think that cadence also could be different in different basins, but I think we obviously have discussions with customers and I think there's -- it's quite a mixed bag in terms of outlook and how they plan to manage activity throughout the year, but we are asking those kind of questions certainly earlier than we have in the past and I feel like you know with our business development organization and ability to be very sharp around the edges in terms of where we are and how we perform, I feel confident in at least Halliburton's outlook for the balance of the year.
William Andrew Herbert -- Simmons & Company International -- Analyst
Okay, thank you. And then with regard to international margins, it seems like at least in the ordering the elements conspiring to weaker D&E margins in Q1 that the major issue with this was the mobilization expense associated with several different drilling projects, that's a transient issue. So, I'm curious as to when the mobilization, well, first of all, how broad was the mobilization headwind in Q1 apart from the North Sea? Secondly, when does that abate? And thirdly doesn't that represent a nice margin opportunity in the second half of the year?
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Yeah. Bill, this is Lance. I -- look, I think there is opportunity and we do expect D&E margins to improve throughout the course of the year. I think we've been pretty vocal around that. While the mobilization sure will provide that uplift, not to discount the pricing pressure that we continue to see in the Middle East, right --
William Andrew Herbert -- Simmons & Company International -- Analyst
Okay.
Lance Loeffler -- Executive Vice President and Chief Financial Officer
-- so, as we get through the first half of this year, we expect D&E margins to be markedly improved in the second half to sort of land at flat year-over-year margins in D&E.
William Andrew Herbert -- Simmons & Company International -- Analyst
Okay. So, it's flat year-over-year margins for FY'19 or second half versus second half?
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Flat year -- FY'19.
William Andrew Herbert -- Simmons & Company International -- Analyst
Okay, thank you very much, sir.
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Yeah.
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 -- Chairman, President and Chief Executive Officer
Good morning, Scott.
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Good morning, Scott.
Scott Gruber -- Citigroup -- Analyst
Jeff, you mentioned in your prepared remarks that the US market is likely settling into one that's less volatile which would be good for you. It sounds like mainly a demand comment and obviously there's only so much you can control. But we thought about ways of further reducing the volatility from your side, and how do you think about customer exposure? Does the growth of the majors presents an opportunity to tender into some contracts which maybe stickier and longer term. Is there an ability to look at the E&Ps in that they're settling into a spending cadence that maybe steadier. Is there an ability to go after some longer term deals with them? How do you think about overall reducing the volatility in the business?
Jeff Miller -- Chairman, President and Chief Executive Officer
Yeah, without going into like specific things that we do, I mean, what you're saying, obviously, we think about that. We've historically, and look, and we do a lot of business with IOCs. We do a lot of business with all -- all of the customers in the marketplace along different of those 14 service lines that we have. Historically, we've optimized your frac fleet around what we viewed as the most efficient customers, we could drive the most margin. But I also think with the industrialization of shale sort of at scale, larger scale today, those types of things become more attractive and so we have good relationships, we have the ability to scale to those growth plans. And look and we plan -- plan to do so, but we're going to do it always with an eye to what are the best returns for our shareholders.
Scott Gruber -- Citigroup -- Analyst
Got it. And then you mentioned 20% efficiency gains in frac over the last two years. How should we think about those gains in '19 and '20? Are you seeing efficiency improvement on par is starting to slow, just some color on that trend as well will be great.
Jeff Miller -- Chairman, President and Chief Executive Officer
Yeah, I think we are seeing that, to a degree we're reaching some sort of maximum velocity here, just in terms of hours a day. If I would think back there have been some big sort of milestones in efficiency when Halliburton has been at the front edge of each of those. So the first was going from 12-hour to 24-hour a day operations. That was a big step. Next was more around zipper fracs as opposed to single well fracs and then multi-well pads as opposed to single well pads. All of those are sort of structural step changes. We've done a lot at the margin around being more efficient and our focus is taking capital off location not putting more capital on location. And so we do some things to drive our capital efficiency. But the big steps, I don't necessarily see those today. What I really see over the next cycle or the next few years is more emphasis around what's happening around the well bore as opposed to on surface and you hear a lot of discussion around that. But I say that to include everything from parent child, the spacing, the velocity, the all of these other things that we believe and I believe will have more impact on productivity and efficiency over the next three, five years.
Scott Gruber -- Citigroup -- Analyst
If you had to put a number of efficiency improvement this year, where would you peg it at?
Jeff Miller -- Chairman, President and Chief Executive Officer
I don't know -- last time it's been -- I'd just call it 5%, 10% maybe in that range.
Scott Gruber -- Citigroup -- Analyst
Okay, appreciate it. Thank you.
Jeff Miller -- Chairman, President and Chief Executive Officer
Thank you.
Operator
Thank you. And our next question comes from Sean Meakim of JP Morgan. Your line is now open.
Sean Meakim -- JP Morgan -- Analyst
Thank you. Good morning.
Jeff Miller -- Chairman, President and Chief Executive Officer
Good morning, Sean.
Sean Meakim -- JP Morgan -- Analyst
So you mentioned, you've got a lot of different levers to drive cash flow depending on what the market gives you. I think a lot of your 2019 CapEx budget was committed prior to the reduction that you took end of the year. So, conceptually, if 2020 looks a lot like 2019, in other words, activity in North America is comparable, international's improving modestly, could your CapEx budget take another cut lower, as some of the recent growth initiatives in Drilling & Production start to roll off?
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Yeah, thanks Sean. Look, I think in terms of the sort of CapEx to revenue relationship that we sit at today, believe is like high 6% is lower than it's been on average over the last 10 years where we've averaged closer to 10%. I think, you know, clearly this year, we've been pretty vocal about what buckets we're out spending as a part of that $1.6 billion of CapEx. I don't know that that -- to me, it feels like in and around 7% today, feels like a good number even for next year. Now the slices of that pie, right, as we go -- as we think about how we invest may change, but I think the rate of CapEx spend as we reinvest in the business feels pretty good.
Jeff Miller -- Chairman, President and Chief Executive Officer
Maybe just step in there too, I mean when we think about the outlook. I mean, we are focused on what I'd call our returns focused growth. And so if we think about where we are spending this year, we are continuing to invest in strategic initiatives and we're building out sort of our Sperry iCruise fleet and investing in international growth. So we're doing all of that today, sort of in and round where we and sort of the 7% -- 6% -- 7% of revenues today so. It feel sustainable to me and I don't see this as a shift in our approach. I mean in this market, that level of spend's appropriate to generate returns.
Sean Meakim -- JP Morgan -- Analyst
Got it. Thank you for that feedback. And just one point of clarification, when you highlighted pricing pressure in the Middle East, is -- would you consider this to be incremental pressure from customers? Or is this really just a rolling through of contracts that were won last year?
Jeff Miller -- Chairman, President and Chief Executive Officer
Well, it's -- principally, what we see in this quarter is the rolling over or the establishment beginning of contracts at lower prices. It doesn't necessarily mean that it's abated. But it is certainly that's what we're seeing now -- somewhere in the -- as we look ahead, we will work on how to optimize things and perform more profitably over time.
Sean Meakim -- JP Morgan -- Analyst
And so, which would you say that -- would you characterize the magnitude of the decline due to the mobilization and that pricing basically in line with what you would've expected for the quarter?
Jeff Miller -- Chairman, President and Chief Executive Officer
Yeah, no that's -- no that's what we've generally thought we would see and we also saw a number of things that I described in my comments with mobilization, that pricing, also weather in the North Sea was pretty tough this quarter more so than probably we would have expected. So, those sorts of things.
Sean Meakim -- JP Morgan -- Analyst
Very good. Okay, thank you.
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Thanks, Sean.
Operator
Thank you. And our next question comes from Chase Mulvehill of Bank of America Merrill Lynch. Your line is now open.
Jeff Miller -- Chairman, President and Chief Executive Officer
Chase, are you there?
Operator
Please check your mute button.And our next question comes from Kurt Hallead of RBC. Your line is now open.
Kurt Hallead -- RBC -- Analyst
Hey, good morning, everybody.
Jeff Miller -- Chairman, President and Chief Executive Officer
Good morning, Kurt.
Kurt Hallead -- RBC -- Analyst
I just had a follow-up question here, when you guys are talking about the overall spending activity -- spending levels for the US being down 6% to 10% and for international kind of be up high-single digits. When we look at say Completion & Production and we look at Drilling & Evaluation, what could be safe to assume that in aggregate Completion & Production would be up you know like you say completion activity be up so I would imagine that overall C&P revenues to be up on a year-on-year basis, maybe in that high-single digit range, and then conversely on Drilling & Evaluation you know with the drilling activity being down in the US, that kind of offsetting growth internationally. So I just wanted to try to get general sense, so C&P up kind of on a year-on-year revenue and D&E maybe kind of flattish. Is that kind of a safe way to think about it right now?
Lance Loeffler -- Executive Vice President and Chief Financial Officer
The way that I would think about it, Kurt, is that, I mean and we've mentioned this I think in some of our prepared remarks, was that we expect our completions activity to be sort of flat year-over-year, right, even though spend is down in North America, that takes the form of lower sand pricing or lower drilling expenditures versus the actual completions activity and then as we think about you know D&E, particularly driven by the international markets, we see a broad recovery, pockets of pricing improvement, but also weighed down by pretty competitive Middle East today. So it's a balance of all of that.
Kurt Hallead -- RBC -- Analyst
Got it. Appreciate that, Lance, and then Jeff, maybe follow-up for you, I know you've had a very continuous focus on returns and that being the key mantra, one of the key mantras for the company, I was wondering if you could give us some perspectives on how you think about return thresholds and you know when you think about it in the context, is it -- when you think about our through cycle, is that a three-year period, five-year period, 10-year period, kind of some general insights on that dynamic would be helpful.
Jeff Miller -- Chairman, President and Chief Executive Officer
Look, when I think about returns, broadly, I think the -- I think about sustained growth over a period of time and I also believe that the value for growth at any cost is over and so when we will talk about returns focused growth, that's the right kind of growth, and look, I feel great about Halliburton in this kind of paradigm. I mean, we've always been returns focused, clearly it starts with margins, so improving pricing and managing costs, we're always managing costs in that environment.
And then I think disciplined investing, I think that maybe in a form was more of what you're asking, but we make capital scarce when we need to make capital scarce and we're also and might be investing in the right businesses. So if we think about lift and chemicals and where we've put our CapEx, we will do that very thoughtfully and certainly focused on returns.
Kurt Hallead -- RBC -- Analyst
Right, that's helpful. And maybe one follow-up just on the attrition comment, Jeff, you referenced earlier that 7.5 million horsepower will need to be rebuilt in '19 and you wouldn't think the spending level required to rebuild that equipment you know what happened. So in the context of attrition then, you know, how much horsepower do you think could shake out of the market this year?
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Kurt, this is Lance. I think it's tough to call -- hard to really put a number on it, right, I mean I think attrition has always been a tough one to try to define in the pressure pumping industry, but one that we know it's happening because we see what it's -- how it's working on our fleet, right, and we talked about some of the stats that we had in our prepared remarks, you can't ignore it, and today, we know that there is under-investment, we know that there is more pressure than ever on all of the fleet in North America around wear and tear and therefore the repair and maintenance costs associated with it and the burden that a lot of our space has had to shoulder it, I think, look, at the end of the day, there's going to be some that are just going to flat out, be retired.
Kurt Hallead -- RBC -- Analyst
Got it. Right, that's helpful. Thank you very much.
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Thanks, Kurt.
Jeff Miller -- Chairman, President and Chief Executive Officer
Thanks.
Operator
Thank you. And your next question comes from Dan Boyd of BMO Capital Markets. Your line is now open.
Dan Boyd -- BMO Capital Markets -- Analyst
Hi, thanks guys. One of the follow-up on the international outlook, you put up 11% growth in the first quarter, the guide for the second quarter sounds like about 10% first half growth year-on-year and presumably the mobilization costs are calling out suggest continued growth in the back half, so just wondering what keeps you with a little bit more of a conservative high-single digit revenue number for the year?
Jeff Miller -- Chairman, President and Chief Executive Officer
Look, we want to be very realistic about what we see unfolding in the market I think the -- you know lot of the tender activity that we see today is probably not going to begin until 2020 and so we see activity building, but we're also going to be -- I've talked about returns focused growth, so part of that discussion is making sure that we're investing and pursuing the right things, and look, we're really encouraged, in fact, I think what we'll see is growth as I described in '19 and then certainly building into 2020 as sort of that broad based sort of offshore activity starts as opposed to being tendered and talked about. So encouraged, but again, we're going to manage our business.
Dan Boyd -- BMO Capital Markets -- Analyst
Yeah, just conservative. I would go with Lance, I wanted to follow up on Bill's question on the D&E margins, so in order to keep them flat year-on-year it sounds like we need to exit the year in the fourth quarter low-double digits and so just wondering as you look past mobilization cost that you're incurring, is that a number that you sort of see without pricing and without big contract wins from here on out, but basically is how de-risked is that low double-digit margin /
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Well, look, I mean we're going to have to work toward it, no doubt, but I think the tailwinds that you get as you begin to put revenues across the costs that we've been running and around the actions that we're taking in the North Sea and those mobilizations, I also think that we expect to start to see some benefit as we get more Sperry tools in the market, I think we told you that a third of the Sperry fleet will be iCruise by the end of the year, we are working hard to get those tools out, that's part of the working capital build that you saw on the inventory side that I mentioned in my commentary around the international strategic investments and so those are the things that give me confidence that we can continue to build on what we need to get to those commitments.
Dan Boyd -- BMO Capital Markets -- Analyst
All right, thank you.
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Thanks, Dan.
Operator
Thank you. And our final question comes from the line of Marc Bianchi of Cowen. Your line is now open.
Marc Bianchi -- Cowen&Company -- Analyst
Hi, thank you. First question, just back to the pricing discussion for North America, Jeff, you noted the 14 product service lines that Halliburton offers. Is there any distinction among those lines in terms of where pricing is bottoming, specifically everybody is focused on frac, but as you mentioned you're a big player in cementing, there's been some concern about cementing competition. Just curious if there's any distinction you could offer on those product lines?
Jeff Miller -- Chairman, President and Chief Executive Officer
Yeah, I'm going to -- it's a very competitive space in North America so I'm not going to get any more detailed around pricing and where the other service lines are. Clearly, hydraulic fracturing is probably the biggest piece of sort of the North America landscape today and it probably is the most over-supplied, so I'll leave it at that.
Marc Bianchi -- Cowen&Company -- Analyst
Okay, thanks for that, and then, Lance, in terms of the outlook for free cash flow growth for the year, big working capital consumption here in the first quarter, which is seasonal. Would you anticipate working capital for the year to be a neutral, a positive, or negative?
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Well, I think we're going to see a lot of benefit as we sort of work through the DSOs that we've built up in the first quarter of the year, I think we'll continue to work down a lot of the inventory that we built up, I would suspect that we have -- the working capital does release cash some point throughout the year.
Marc Bianchi -- Cowen&Company -- Analyst
Okay, super. Thanks so much.
Jeff Miller -- Chairman, President and Chief Executive Officer
Thanks, Marc.
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Thanks, Marc.
Operator
Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to management for closing remarks.
Jeff Miller -- Chairman, President and Chief Executive Officer
Yeah. Thank you, Candice. Before we wrap up the call, I'd just like to highlight a few points. First, I'm excited about the broad-based international recovery that we see unfolding and Halliburton is well positioned to take advantage of this growth. Second, I believe that demand for North America completions will be up modestly over the next few quarters and that capacity will tighten over the balance of the year. Finally, our focus on capital discipline, capacity tightening, and cost management will deliver leading returns and free cash flow in excess of last year.
Look, I look forward to speaking with you again next quarter. Candice, 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: 61 minutes
Call participants:
Abu Zeya -- Senior Director, Investor Relations
Jeff Miller -- Chairman, President and Chief Executive Officer
Lance Loeffler -- Executive Vice President and Chief Financial Officer
Angie Sedita -- Goldman Sachs -- Analyst
James Carlyle West -- , Evercore ISI Institutional Equities -- Analyst
Judson Edwin Bailey -- Wells Fargo Securities -- Analyst
William Andrew Herbert -- Simmons & Company International -- Analyst
Scott Gruber -- Citigroup -- Analyst
Sean Meakim -- JP Morgan -- Analyst
Kurt Hallead -- RBC -- Analyst
Dan Boyd -- BMO Capital Markets -- Analyst
Marc Bianchi -- Cowen&Company -- Analyst
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