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Halliburton plans $300M in cost cuts after struggling in North America in Q3

While meeting earnings expectations for the third quarter, oilfield services major Halliburton Co. continued to face challenges from its North America land operations, which will necessitate equipment stacking and other cost-cutting measures, executives said Oct. 21.

At 34 cents per share, third-quarter earnings matched S&P Global Market Intelligence estimates. However, revenue from the North American land segment fell quarter over quarter, prompting the company to focus on discipline and high-return projects for its nonfracking businesses going forward.

CEO Jeffrey Miller said Halliburton is already benefiting from a new business strategy as the company generated about $530 million of free cash flow in the third quarter despite challenges in the North America land market.

Activity in North America slowed in the third quarter as operators exercised cautious spending in favor of higher shareholder returns, Miller said. That cadence is expected to continue in the fourth quarter, impacting Halliburton's drilling and completion businesses.

Miller said during the company's Oct. 21 third-quarter earnings call that customer feedback implies a year-over-year drop in fourth-quarter rig counts and completion activity. Customers' free cash flow generation commitments and oversupply of the gas market, along with concerns about oil demand softness in 2020, will combine with the typical holidays and potential weather impacts to soften activity in the fourth quarter, the CEO said.

To navigate the challenges, Halliburton will make further changes to the way it delivers services in order to improve margins and maximize returns.

"We continue to evaluate the way we work and will keep reducing cost in our North American operations," Miller said. Halliburton remains committed to reducing its fixed costs in North America and has plans to capture $300 million in annualized cost savings over the next few quarters, the CEO said.

"You've seen us do these before. We took out $1 billion in 2016. We reorganized and reduced our fixed cost in North America earlier this year," the CEO said.

To meet its continued cost-savings objectives, Halliburton will err on the side of stacking equipment rather than "work for insufficient margins and wear out our equipment," Miller said. In the third quarter, Halliburton stacked more equipment than it had in the first six months of the year. Miller said attrition will continue into 2020.

"Regardless of the cuts and idling of equipment, the size and scale of our business in North America give us the ability to drive a sustainable model without sacrificing our leadership position," Miller said. "I believe that the actions we are taking will enable Halliburton to evolve and emerge stronger in the future."

Halliburton will also deploy technology to lower its cost and accrue value for the company, Miller said. Halliburton will integrate its wireline and fracturing services and will develop new proprietary technologies to enable integration to minimize nonproductive time, improve efficiency, and reduce personnel, location and capital costs for the company.

In the third quarter, North America revenue tumbled 11% quarter over quarter to $2.9 billion. The Houston-based oilfield services company saw the market for drilling and completion services in North America soften during the third quarter, but by managing operating costs, third-quarter operating margins were slightly higher in both segments despite sequential revenue declines.

Completion and production revenue in the third quarter was $3.5 billion, a decrease of $299 million, or 8%, compared to the second quarter, while operating income was $446 million, a decrease of $24 million, or 5%. Drilling and evaluation revenue in the third quarter was $2.0 billion, a decrease of $81 million, or 4%, compared to the second quarter, while operating income was $150 million, an increase of $5 million, or 3%.

While failing to offer specific details as to how the company will achieve the anticipated $300 million in cost savings, CFO Lance Loeffler said, "We are focused on lowering our service delivery cost. And I think probably the most important point is that we're being decisive, right? We are looking to move quickly around cost reductions in North America. We have seen ... some of the benefit of those actions that we took in 2Q."

In early October, Halliburton laid off about 650 employees in its Rockies region, which includes Colorado, Wyoming, New Mexico and North Dakota. The company said it offered the employees the option to relocate to other Halliburton operating areas, where more activity is anticipated.