Ladies and gentlemen, thank you for standing by and welcome to Halliburton’s Fourth Quarter 2021 Earnings Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to David Coleman, Head of Investor Relations. Please go ahead, sir.

Good morning. And welcome to the Halliburton fourth 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, Form 10-Q for the quarter ended September 30, 2021, 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 statement for any reason. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our fourth quarter earnings release or in the Quarterly Results & Presentations 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.

Thank you, David, and good morning, everyone. 2021 finished strong for Halliburton, and I’m excited about the accelerating upcycle as we enter 2022. We have an effective value proposition and benefit from increasing activity both in North America and international markets. At the same time, we see improving service pricing in both markets. Throughout this upcycle, I expect Halliburton to grow profitably, accelerate free cash flow generation, strengthen our balance sheet, and increase cash returns to shareholders. But first, I want to take a minute and recognize the men and women of Halliburton for their execution on every dimension of our business: safety, service quality, and financial results. In spite of global complexity in 2021, you outperformed. So, to all of our employees, thank you. I believe 2022 will be a strong year for our industry and especially for Halliburton. While global energy demand and economic growth demonstrated resilience, global energy supply has shown its fragility. The impact of several years of underinvestment in new production is now apparent, and the structural requirement to invest around the wellbore is crystal clear. We see increasing customer urgency and a pivot back to what creates value for Halliburton. Our customers demand reliable execution, dependable supply chains, effective technology, and a collaborative service provider to maximize asset value. And this is at the core of Halliburton’s unique value proposition. But first, I’ll highlight some of our 2021 accomplishments. We finished the year with total Company revenue of $15.3 billion, and operating income of $1.8 billion. Both of Halliburton’s divisions grew revenue and margins this year. Our Completion and Production division finished the year with a 15% operating margin, driven by activity improvement, despite inflationary pressures. We expect to build on this margin growth in 2022, as global activity and pricing improve. Our Drilling and Evaluation division margins remained firmly in double digits throughout 2021 and achieved full-year margins of 12% for the first time since 2014. This is a good demonstration of our steady march forward, and we are not done. I’m pleased with the trajectory of our international business. International revenue and operating income increased every quarter in 2021. In North America, Halliburton achieved 36% incrementals year-on-year as U.S. land activity rebounded, and we maximized the value of our business. We announced our science-based emission reduction targets, added 11 new participating companies to Halliburton labs and were named to the Dow Jones Sustainability Index, which highlights the top 10% most sustainable companies in each industry. Finally, we generated strong free cash flow of $1.4 billion and ended the year with $3 billion of cash on hand, even after the retirement of $685 million of long-term debt in 2021. Next, let me share a few highlights from our fourth quarter performance. Total Company revenue increased 11%, and operating income grew 20% sequentially. Our Completion and Production division revenue increased 10% sequentially and operating income increased 8% with completion tool sales showing the highest third to fourth quarter improvement in the last 15 years. Equally important, our current completion tool order book has more than doubled from a year ago, signaling strong growth and profitability again in 2022. Our Drilling and Evaluation division grew revenue 11%, which outperformed the global rig count growth for the quarter and delivered over 300 basis points of sequential margin improvement. International and North America revenue grew 11% and 10% respectively due to strong year-end sales and activity increases across all regions. Building on this strong foundation of disciplined execution, today we announced two important strategic steps we are taking to further create value for our shareholders. First, our Board of Directors increased our quarterly dividend to $0.12 per share in the first quarter of 2022. This action reflects our confidence in Halliburton’s strong cash generation capacity. Second, in order to accelerate debt retirement and strengthen our balance sheet, we’re redeeming $600 million of our $1 billion in debt maturing in 2025. When these notes are redeemed in February, we will have retired $1.8 billion of debt since the beginning of 2020. These steps demonstrate my confidence in our business, customers, employees, and value proposition. As I discussed with you on recent earnings calls, I expect the macro industry environment to remain supportive, and as we saw in 2021, the international and North America markets will continue their simultaneous growth. This is momentum that I have not seen in a long time. With this momentum, we plan to execute our unique strategic priorities, deliver profitable growth internationally, maximize value in North America, accelerate digital and automation deployment, improve capital efficiency and advance a sustainable energy future. Let’s discuss how we plan to do this. First, internationally, our strategy is to deliver profitable growth. We allocate capital to the highest returns opportunities, which means we are selective on what we bid for and win. Our D&E margin performance in 2021 is a demonstration of this discipline. We continue to invest in technology, both digital and hardware, that maximizes asset value. In 2021, we brought to market over 50 new technologies, including our iStar intelligent formation evaluation platform and the next generation of our iCruise system for harsh drilling environments. Our multiyear investment in drilling technologies is paying off, and we expect to outgrow the market as international drilling activity ramps up. We have unique international growth opportunities in specialty chemicals and artificial lift. As Halliburton expands the international footprint of these businesses, we have a pipeline of opportunities that are longer cycle and should be margin-accretive. Halliburton’s size, scale, and sophisticated supply chain and HR teams reliably execute for our customers in the face of supply shortages and labor tightness. Second, in the structurally smaller North American market, our strategy is to maximize cash flow, and it dictates how we approach our North America business. Strong cash flow starts with strong margins, and Halliburton’s margins are the best in class. We completed the most aggressive set of structural cost reductions in our history. We also made significant changes to our processes that drive higher contribution margin, for example, how we perform equipment maintenance and provide engineering support. These changes give us meaningful operating leverage as North American activity accelerates. We consistently replace equipment as it wears out and avoid outsized recapitalization requirements. And we have the right type of equipment. We are the leaders in the low-emissions equipment segment. We believe this gives us a structural pricing advantage as operators are willing to pay a premium for differentiated, more environmentally friendly solutions. Our second generation Zeus electric fracturing technology is working in the field today and delivers results for a growing list of customers. Importantly, in addition to emissions reduction, electric fracturing technology provides unprecedented operational control and precision. For example, Zeus makes pumping rate adjustments at least four times faster than a diesel pump, allowing us to respond to surface and subsurface changes more quickly than with a conventional frac spread and precisely execute the job design. We expect fully electric locations to become a larger share of the market. Halliburton has the right kit, including our Zeus electric pumping unit, the ExpressBlend blending system, the eWinch electric wireline unit, and the electric tech command center to meet the market demand for lower-emitting fracturing operations. We develop differentiated technologies to focus around the wellbore. As the oil price and customer urgency increase, these technologies become more valuable to operators. For example, our SmartFleet intelligent fracturing solution helps customers optimize fracturing performance and maximize production. Several large operators will have SmartFleet working on multi-pad completion programs this year. Additionally, SmartFleet delivers fully automated frac operations, which ensures more consistent fracture placement on every stage, improves cluster uniformity and manages offset frac hits. Finally, I want to highlight the importance of our well construction and production service lines. They each have unique competitive advantage and technology to maximize value in North America. Third, our strategy is to advance digitalization and automation in all aspects of our business. Our digital investments drive higher margins through customer purchases of software, smarter tools and ancillary products, and cost savings for Halliburton. Let me give you an example. Currently, 100% of Halliburton’s drilling jobs run on a cloud-based, real-time system to deliver data and visualization to our customers around the world. Close to 60% of iCruise operations are fully automated, allowing for up to a 70% reduction in headcount per rig. Automation alleviates health and safety concerns by removing personnel from rigs, accelerates service delivery improvements, and reduces the environmental footprint of oil and gas operations. Our fourth strategic priority is to drive capital efficiency across the balance sheet. This positions Halliburton to generate industry-leading returns and strong free cash flow as markets grow. We will optimize the working capital required to grow our business and maintain our CapEx in the range of 5% to 6% of revenue. Our business thrives in this range because of our research and development efforts and process changes. These allow us to build tools cheaper, lengthen their run life, and move assets quicker to where they make the most money. Our final strategic priority is to advance a sustainable energy future. Our clean energy accelerator, Halliburton Labs, continues to add new participants. We help these early-stage companies achieve important scaling milestones and significantly increase their enterprise value. Through Halliburton Labs, we are actively participating in the clean energy space without committing shareholder capital. Halliburton will evolve as energy evolves, and we will add to our already expanding opportunities to participate as clean energy value chains mature. However, we will do so consistent with our capital allocation strategy and mindful of our commitment to deliver industry-leading returns and free cash flow generation. We will proceed with patience, discipline, and resolve. Now, let’s review our fourth quarter 2021 performance and expectations for 2022. As OPEC+’s spare capacity returns to normalized levels this year, we believe sufficient pent-up oil demand will support a call on both international and U.S. production, and lead to increased activity. International activity accelerated in most markets in the second half of the year and finished strong in the fourth quarter with a 23% rig count increase year-on-year. All Halliburton regions grew revenue, led by Asia Pacific, the Middle East and Africa, with both of our divisions contributing to the revenue and margin expansion. I’m excited about our future international growth. Despite typical first-quarter seasonality, we are starting 2022 a lot higher than where we entered 2021. I expect our customers’ international spend to increase by mid-teens this year. We anticipate projects in the Middle East, Russia, and Latin America to attract the most investment with activity increases in Africa and Europe limited to a few markets. Asset owners are eager to reverse base production declines caused by multiple years of underinvestment. We expect that operators will focus on shorter cycle production opportunities to meet increasing oil demand. This disproportionately benefits Halliburton as these short-cycle barrels require higher service intensity and spending directly focused on the wellbore as opposed to long-cycle infrastructure investments. In 2022, we expect to deliver steady, profitable growth across the international markets. Our tender pipeline is strong. We anticipate higher utilization for our existing equipment in busy markets like the Middle East, Russia, and Latin America. We plan to allocate our capital dollars to the opportunities that generate the highest return. Given the tool tightness that exists today in some product lines and geographies, we intend to strategically reallocate assets to drive improved utilization and returns. A tightening market focuses our ongoing pricing discussions with customers. We see pricing traction on new work and contract renewals, including integrated contracts. Additionally, we have introduced pay-for-performance models, negotiated favorable terms and conditions, and applied price escalation clauses. While large tenders remain competitive, we are consistent with our strategy to pursue profitable growth. Turning to North America. In 2021, the recovery in North America was faster and more pronounced than in the international markets. In the fourth quarter, U.S. land rig count increased 84% year-on-year, and drilling activity outpaced completions as operators prepared well inventory for 2022 programs. Completed stage count growth moderated slightly due to the holidays, sand supply tightness, and lower efficiency levels typically experienced in the winter months. In the fourth quarter, we finished the plant upgrade of all fracturing fleets to the next generation fluid end technology that extends the life of our equipment and helps reduce maintenance costs. We expect a busy 2022 in North America. Given a strong commodity price environment, we anticipate North America customer spending to grow more than 25% year-on-year. We believe the highest increase will come from private operators. Public E&Ps will continue to prioritize returns while delivering production into a supportive market. In North America, Halliburton uniquely benefits as the largest oilfield services provider in the largest oilfield services market in the world. We anticipate solid net pricing gains in North America throughout 2022. Here’s why. The North America completions market is approaching 90% utilization, and Halliburton is sold out. Pricing for our fracturing fleets is moving higher across the board, both for our market-leading low-emissions equipment and our Tier 4 diesel fleets. As a result, we expect to see over 30% incrementals in our hydraulic fracturing business in the first quarter. Anticipated demand growth for equipment provides a runway for us to increase pricing throughout the year. We expect some market-wide operational efficiencies afforded by completing a backlog of DUCs in 2021 to reverse as frac fleets return to the usual mode of following drilling rigs. This will further increase the call on equipment as operators add rigs throughout the year. Finally, during the tendering season, we secured net pricing increases across several different non-frac product service lines: drilling, cementing, fluids, drill bits, and artificial lift. As activity accelerates, the market is seeing tightness related to trucking, labor, sand, and other inputs. While we pass these increased costs on to operators, Halliburton has effective solutions that minimize the operational impact of this tightness and provide reliable execution for our customers. As an example, in 2021, we expanded our collaboration with Vorto and now benefit from 5F, the largest integrated transportation platform in the oil and gas industry. This platform has several thousand drivers, hundreds of carriers, and a chain of asset maintenance yards. It allows us to effectively manage trucking inflation and availability constraints and significantly reduce logistics-related nonproductive time. Our human resources team and systems effectively mitigate local labor tightness. We recruit nationally and hire, train, and manage a commuter workforce that makes up to 80% of our personnel in some areas. There is no doubt the much-anticipated multiyear upcycle is now underway. North America production growth remains capped by operators’ capital discipline, while meaningful international production growth is challenged by years of underinvestment. Energy demand has proven its resilience, fueled by pent-up economic growth and a global desire to return to normalcy. This is a fantastic set of conditions for Halliburton. In a strong commodity price environment with limited production growth options, operators turn to short-cycle barrels and increased spend around the wellbore. Our value proposition works. We have the right strategies for both international and North American markets. We are leaders in digital and automation, and we drive capital efficiency while advancing a sustainable energy future. I fully expect that Halliburton will accelerate cash flow generation, strengthen our balance sheet, and increase cash returns to shareholders in this upcycle. Now, I’ll turn the call over to Lance to provide more details on our fourth quarter financial results.

Thank you, Jeff, and good morning, everyone. Let me begin with a summary of our fourth quarter results compared to the third quarter of 2021. Total company revenue for the quarter was $4.3 billion, an increase of 11%. Operating income was $550 million, a 20% increase compared to the adjusted operating income of $458 million. These results were primarily driven by increased global drilling activity and end-of-year product and software sales. Now, let me discuss our division results in a little more detail. Starting with our Completion and Production division. Revenue was $2.4 billion, an increase of 10%, while operating income was $347 million or an 8% increase. These results were primarily driven by higher completion tool sales globally as well as increased pressure pumping services in North America land and the Middle East/Asia region. These improvements were partially offset by reduced stimulation activity in Latin America, Canada, and the Gulf of Mexico, lower pipeline services in Europe/Africa/CIS and Asia, reduced well intervention services in Brazil, and decreased artificial lift activity in North America land. In our Drilling and Evaluation division, revenue was $1.9 billion, an increase of 11%, while operating income was $269 million or a 45% increase. These results were due to increased drilling-related services globally, wireline sales in Guyana, improved project management activity in Ecuador and India, increased wireline activity in the Middle East/Asia region, and higher software sales in Latin America and Middle East/Asia. Partially offsetting these increases were decreased project management activity and testing services in Mexico as well as lower drilling-related activity in Russia. Moving on to our geographic results. In North America, revenue increased 10%. This increase was primarily driven by higher pressure pumping activity and drilling-related services in North America land in addition to higher completion tool sales and fluid services in the Gulf of Mexico. These increases were partially offset by reduced stimulation activity in Canada and the Gulf of Mexico, coupled with reduced artificial lift activity in North America land. Turning to Latin America. Revenue increased 7% sequentially. This improvement was driven by higher project management activity in Ecuador, increased drilling-related services in Mexico, increased activity across multiple product service lines in Brazil, wireline sales in Guyana, and higher activity across multiple product service lines in Colombia. These increases were partially offset by reduced project management and stimulation activity and testing services in Mexico. In Europe/Africa/CIS, revenue increased 8% sequentially. These results were partially driven by higher software and completion tool sales across the region, improved activity across multiple product service lines in Norway and Egypt, and increased well control activity in Nigeria. These improvements were partially offset by reduced activity in multiple product service lines in Russia, reduced pipeline services and well construction activity in the United Kingdom, and decreased stimulation activity in the Congo. In the Middle East/Asia region, revenue increased 16%, resulting from higher completion tool sales and wireline activity across the region, improved well construction services in Saudi Arabia and Oman, higher software sales in Kuwait and China, improved project management activity in India, and increased stimulation activity throughout Asia. These increases were partially offset by reduced pipeline services in Asia, along with lower activity across multiple product service lines in Vietnam. Now, I’d like to address some additional financial items. In the fourth quarter, our corporate and other expense totaled $66 million, which was slightly higher than expected due to an increase in legal reserves. For the first quarter, we expect our corporate expense to be about $60 million. Net interest expense for the quarter was $108 million, slightly lower than anticipated due to higher interest income from our cash balance. Today, we announced our decision to redeem $600 million of the 2025 senior notes using cash on hand. This action will reduce future cash interest expense and reflects our desire to continue reducing debt balances. As a result of the debt retirement in late February, our net interest expense should remain roughly flat in the first quarter. During the quarter, we recognized a noncash gain of approximately $500 million due to the partial release of a valuation allowance on our deferred tax assets. This reversal is based on the improved market conditions and reflects our increased expectation to utilize these deferred tax assets going forward. Our normalized effective tax rate for the fourth quarter came in at approximately 23%. Based on our anticipated geographic earnings mix, we expect our 2022 first quarter effective tax rate to be approximately the same. Capital expenditures for the quarter were $316 million with our 2021 full year CapEx totaling approximately $800 million. In 2022, we intend to increase our capital expenditures to approximately $1 billion while remaining within our target of 5% to 6% of revenue. We believe that this level of spend will equip us well to execute on our strategic priorities and take advantage of the accelerating market recovery. Turning to cash flow. We generated nearly $700 million of cash from operations during the fourth quarter and delivered approximately $1.4 billion of free cash flow for the full year. As a result, we ended the year with approximately $3 billion in cash. I’ve spoken before about our ability to concurrently reduce debt and increase the return of cash to shareholders, and today, we put that into action. This is a great start to a longer-term goal of returning more cash to shareholders. Now, let me provide you with some comments on how we see the first quarter playing out. As is typical, our results will be subject to weather-related seasonality and the roll-off of year-end product sales, which will mostly impact our international and Gulf of Mexico businesses. However, we expect pricing recovery in North America to help offset these dynamics. As a result, in our Completion and Production division, we anticipate sequential revenue and margins to be essentially flat to the fourth quarter. In our Drilling and Evaluation division, we expect revenue to decrease in the mid-single digits sequentially, while margins are expected to be flat to down 50 basis points.

Thanks, Lance. To summarize our discussion today, we see customer urgency and demand for our services increasing internationally and in North America. We expect our strong international business to continue its profitable growth as activity ramps up throughout the year. In the critical North America market, we expect our business to grow and improve margins. We prioritize our investments to the highest-return opportunities and remain committed to capital efficiency. We continue to play a role in advancing cleaner and more affordable energy solutions. In 2022, I expect Halliburton to deliver margin expansion, industry-leading returns, and solid free cash flow. And now, let’s open it up for questions.

Thank you. Our first question comes from James West, Evercore ISI.

So, Jeff, maybe just to kick us off here, could you talk a bit about the cadence of this cycle? You mentioned several times growth and you also mentioned a key word, which is urgency from customers. And I think that’s going to be something that’s very important when we think about pricing, margins, etc. Could you talk about how you see both North America and the international markets and the cadence of the increases in activity growth and how you and the broader industry, but you particularly, are expecting things to unfold here as we go through ‘22 and into ‘23 and beyond?

Thank you, James. I really like the current macro conditions, and I've mentioned this before. We are seeing a fragile supply situation alongside increasing demand. The underinvestment on an international scale means recovery will take a longer time. I believe the return expectations for our industry in North America remain strong, which somewhat limits production growth. However, this just indicates a longer upcycle in my opinion. I feel positive about the momentum we have, with growth continuing this year, next year, and into the future. We have a chance to leverage the operational efficiencies that exist in our business. The pricing environment should remain favorable as equipment availability tightens, enhancing the value of our technology for customers. I believe activity will increase, driven mostly by short-cycle barrels, as there is urgency to bring barrels back to the market under these conditions. Looking at 2023, I don't see it as a conclusion; rather, the journey continues well beyond that. What we’ve discussed for 2023 is leaning towards the optimistic side.

That makes sense to me and aligns with our expectations. Jeff and Lance, regarding the solid dividend increase, how are you both thinking about shareholder returns as we move further into this upcycle?

Yes, thank you, James. I appreciate that. The steps we've taken so far have been significant, and we plan to keep looking for ways to return more cash to shareholders and reduce our debt. As we decrease our debt, it gives us more flexibility with our fixed expenses. Since January 2020, we have paid off $1.8 billion in debt, and as we move through 2023 and 2025, debt will continue to be cleared. Our next maturity is not until 2030, so I fully anticipate that we will keep increasing shareholder distributions as the upcycle gains momentum.

Our next question comes from Dave Anderson with Barclays.

I just want to ask about C&P margins during the quarter and then thinking about the progression for next year. Highlighted completion tool sales end, but margins kind of slipped a bit during the quarter. And then, Jeff, in your prepared remarks, you had talked about completion tool orders have doubled since last year. So, I’m just trying to understand what all that means in terms of the mix. Obviously, we have the kind of the pressure pumping price in there. If you could just kind of help us understand how that margin should kind of move.

As we look at 2021, I am pleased with the 15% margins. In the fourth quarter, we accomplished significant work in our frac business, particularly in getting fluid ends installed and raising prices, which required moving equipment. Approximately 10% of our fleet was in transit as we adjusted prices and reallocated to different customers who accepted the new rates. Looking ahead, the order book for completion tools has doubled, indicating a positive outlook for 2022 with longer lead items being added. For the first quarter of 2022, I expect to see a 30% increase in our frac business in North America, although we won't see a repeat of the completion tools in that quarter. We are effectively addressing a substantial gap mainly through recurring pricing and reliable elements that we plan to build upon. The order book for completion tools is also set to double at some point in 2022, which I hope clarifies our position.

That’s great, Jeff. I have a somewhat related question about the further deployment of e-frac and how you see it evolving over the next several years. It’s evident that E&Ps are increasingly focused on reducing emissions, and e-frac plays a significant role in that. However, I know it comes with higher costs due to the power source. I believe you currently have about 5 or 6 fleets. Could you provide an update on that? Looking ahead to the next 12 to 18 months, do you think it’s feasible to double that deployment? More importantly, do you believe E&Ps are ready to support this with longer-term contracts?

Let me unpack that a little bit. Just from an e-fleet deployment standpoint, we view e-fleet as replacements for our current equipment. So, the pacing of that is consistent with how we think about sort of fleet management over time. And obviously, that is contingent upon getting the terms and conditions and pricing that are clearly returning above what anything else is returning, and that’s what motivates us there. All of that lives inside of our CapEx outlook of 5% to 6% of revenue. So, I just want to keep all of that sort of in the right frame. We think about power, however, that is a unique piece of this puzzle. And what I expect happens with electric broadly is, yes, it grows, our share will grow of that. I think we’ve got fantastic equipment in the market working today. But the power piece, we’re power-agnostic. And if you recall, over time, I’ve always said, the issue here was the power, who owns the power. And I think we’ve partnered with a very good firm, successful firm that has modular power such that over time, as operators can optimize power sources, meaning the grid, our partner has the ability to scale that back and sort of optimize along with clients. And so, I think that’s the sort of unique power component that we solve for with both the grid.

Our next question comes from Neil Mehta with Goldman Sachs.

Jeff, I wanted to start on the 400 basis-point margin increase target for 2023. As you look at that, what do you think represents the biggest risk to achieving it? And how do you feel about upside scenarios, and what factors could drive that?

I’m really excited and optimistic about what I see today, more so than before. We're experiencing simultaneous growth in both North America and internationally, along with strong demand for equipment. This situation allows both activity and pricing to rise together. From a risk management perspective, I believe we are well-positioned to handle potential risks that could arise. All these factors seem manageable, especially considering the critical importance of oil production to our lifestyles and the recognition of this by the markets. Therefore, I anticipate that demand for activity will persist, and it looks to be trending higher as we look ahead to 2023. We are well-equipped to capitalize on these developments, whether it involves pricing, market tightness, or our technology. In this environment, there's increasing demand for our technology, such as drilling technology, which enables operators to locate more barrels close to the wellbore and enhances their ability to boost production at effective costs.

And there’s been a lot of questions about where we are in terms of frac fleet utilization. I’d love your perspective on that. How do you see this market as tight and if you’d be willing to put a number on utilization? And how should we think about net service pricing in U.S. fracs for the back half of ‘22 and into ‘23, especially as you get some of these new built low-emission frac fleets starting to enter the market once again?

We estimate that the current market for existing equipment is about 90% utilized. A slight increase in activity could further tighten this market, and I anticipate that tightening to be more pronounced in the latter half of next year. The introduction of electric equipment reflects the efficiency of our R&D team, enabling us to bring this technology to market swiftly. This equipment is top-tier and will likely perform well. Our team, in collaboration with partners, addresses the power challenges in this sector. Therefore, we are well-positioned to introduce new equipment, but this also means requiring greater returns than we have experienced so far. There will be limits due to the demand for these higher returns. Capital for manufacturing equipment is currently limited, especially given the necessary repairs to ensure returns in North America. This situation shapes our strategy to maximize value in North America, leading us to focus on generating the highest cash flow from that market rather than just building the most equipment. We believe that properly positioned electric fleets will facilitate this goal.

Our next question comes from Arun Jayaram with JP Morgan.

My first question is you guys have repositioned assets, frac fleets to improve utilization returns. And I just wanted to ask is absent pricing gains, what kind of tailwinds do you think that these types of actions could provide to margins as well as we think about adoption of SmartFleet and other Hal 4.0 offerings?

We move equipment to enhance margins and I expect to see continued margin improvement into 2022. You mentioned SmartFleet, which is a key part of what sets Halliburton apart in the fracking business in North America. Among our large peers, we are the only company engaged in fracking in North America, allowing us to maintain a significant technology budget. Over time, consistent investment in research and development has always driven advancements in productivity and returns for us. SmartFleet exemplifies the scale of our R&D when applied in North America, and I believe it contributes to margins, along with our electric fleets and other technology solutions that we are continuously developing.

Fair enough. And my second question is, you guys mentioned in your prepared remarks about what’s going on with DUCs. DUCs have been down for 18 months in a row, and you’re starting to see the mix of drilling increase over time. I know that DUCs have been a tailwind for operators and led to, call it, lower frac needs in last year and the year before. And I know it’s difficult to measure, but I just wanted to know if you could maybe measure or quantify what kind of tailwind do you think this could provide the frac demand if the current fleet count’s around 235 or so?

You are thinking about it correctly. I believe that it will drive demand due to increased disruptions in the system, which will require fleets to follow rigs. This situation will lead to a higher demand for more fleets. If we are at 90%, we will reach that limit quickly, and I expect that the entire market will need to improve in terms of pricing. I anticipate that we will observe this improvement, and we are already seeing it. I think this trend will persist throughout the remainder of this year.

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

So Lance, I suppose this question is directed at you regarding the guidance for the first quarter. I can see the connection with the C&P margins remaining flat due to the decrease in completion tool sales while frac is improving. However, looking at the D&E side, we're expecting resilient margins as we enter the first quarter. Generally, there are software sales in the fourth quarter, so could you help us understand the relationship between the fourth and first quarters, especially with a potential decrease of 50 basis points in D&E margins? We often experience some seasonality in the Eastern Hemisphere, and the software sales will be decreasing. Do you anticipate any software sales carrying over into the first quarter? Please provide some clarity on the expected margins for the first quarter.

We do, Chase. It’s a good question. We do. So, in our software business, the way that we recognize revenue is sort of spread now between the fourth quarter and the first quarter. So, we still have some resiliency from the software sales. But I wouldn’t discount what we’re doing on the drilling side. You heard Jeff talk about it in his prepared remarks. We’re really excited about what that means for our business. I mean, clearly, we have the weather-driven seasonality that will continue, and that’s always something that exists during the real hard winter months in places like the North Sea and Russia, in particular. But I really think that we’re excited about what the drilling business and the change that we’re making and the impact that’s coming from sort of that investment that we made in rekitting Sperry, for example, is really beginning to pay off.

Okay, perfect. As a follow-up, you've mentioned several times that there is 90% utilization of frac. However, there is some cold-stacked equipment that may or may not be reactivated, depending on pricing. Could you share your thoughts on cold-stacked equipment? What kind of pricing increase would be necessary for companies to invest over $10 million, considering you probably converted some of these from Tier 2 to Tier 4 DGB? How much would pricing need to rise for the industry to start reactivating and spending more on cold-stacked equipment?

I believe that prices would need to increase significantly. The conversion you mentioned is quite substantial; it's akin to open heart surgery. Transitioning from Tier 2 to Tier 4 is not an easy process and contradicts the broader market trend towards eco-friendly equipment. Equipment that is being held in reserve definitely won't fit into that category. Additionally, I expect that the costs associated with bringing this equipment back online will be much higher than anticipated, creating a barrier to its reactivation. Much of that equipment was utilized in the last cycle as spare parts, so I think we underestimate its scarcity and the increased costs involved.

Our next question comes from Scott Gruber with Citigroup.

I want to come back to the shareholder return question. Jeff, you commented on further actions to come down the road, which is great to hear. But just given the inherent volatility in the market, is the next move likely to be a buyback or a variable dividend? And then, we’ve also seen many of your E&P customers commit to returning a certain percentage of cash flow or free cash flow. Is that something Halliburton would consider, especially in the context of a multiyear upcycle?

Sure, Scott. This is Lance. Look, we think about it very similar to sort of the line of question you’re going down. I mean, look, today, I think this is a first step in a long line of other things that we expect to do to really accelerate cash returns to shareholders. It will come in the form of both increasing the dividend over time but doing it responsibly. And with any excess free cash flow that we would like to dedicate, we may reinstitute share repurchases. So, I think it will be a balance. We’ll see what it’s like when it gets there, not big bang of a variable dividend today. Feel like we have the right things in place, and our communications to the market are pretty clear around how we’re managing this business and prioritizing free cash flow. And we’ll be really good stewards about how we send it back to shareholders.

I want to revisit Dave’s question on e-frac and expand on it. We have the CapEx figure for the year, and you’re keeping it below the 6% level. However, there’s still a lingering question for Halliburton. As the frac market improves, will your CapEx need to exceed that level? The main concern is whether you are satisfied with the pace of fleet renewal within the frac fleet. Are you able to maintain your competitiveness with the spending pace that is in the budget for this year? Looking at the medium term, can you maintain your competitiveness with the rate of renewal in the frac fleet that is set within that sub-6% reinvestment level?

Yes, we believe we excel in this environment and can manage our capital expenditures appropriately. We maintain CapEx at about 5% to 6% of revenues. This is definitely a story that requires evidence, and we plan to deliver favorable returns. Our approach is methodical, and strategically, we aim to maximize value in North America by controlling spending, utilizing appropriate technology, pacing our equipment investments, pricing our equipment correctly, and ensuring healthy cash flow from these assets. Our strategy remains consistent and is exciting for us as it focuses on generating free cash flow while improving margins. I see this as a margin cycle rather than a build cycle, and our team is eager to achieve our goals. Therefore, I am confident in balancing our investments while also investing in development and international businesses simultaneously. All of this aligns with our objective of delivering accelerating free cash flow.

Next question comes from Connor Lynagh with Morgan Stanley.

I wanted to return to the potential shareholder returns. And Lance, I wanted to just clarify a comment that you made in regards to excess free cash flow. I mean, how should we think about what that is? Is there a level of cash balance that you want to maintain in the business? Is there a sort of standard amount of delevering you want to occur over the next few years here? Basically, how would you define that for people?

Yes. Good question. I appreciate the follow-up. I think today, a minimum cash balance for us to run our business is around $2 billion, give or take. And so, we’re always sensitive a little bit to that or mindful of it. But I would say, I’ve been pretty clear about what we want to do in terms of strengthening the balance sheet. We need to be closer to 2 times debt to EBITDA. We spent a lot of time on this call, I know Jeff has, talking about the trajectory of the denominator in that equation. And we have work to do on the numerator. So, we expect to continue to find ways to attack gross debt. And I think starting with retiring the ‘23s and what’s left of the ‘25s post this redemption is a good target.

Got it. Maybe just switching gears a little bit here. Drilling and Evaluation margins, very strong, and it doesn’t seem like you’re expecting that much of a falloff. I appreciate the software accounting dynamics. But you’re still year-over-year looking at something 250 to 300 basis points above where you were in 2021. I guess, two parts to this. Is that a good bogey for how we should think about the rest of the year in Drilling and Evaluation? And just as we think structurally about the return of international and the like, how should we think about the potential profitability cycle-over-cycle? It certainly is trending a lot higher right now. So, I just want to make sure we understand the moving pieces there.

It's a strong starting point, and we anticipate it will continue to improve over time. This outcome reflects our investments in technology, an excellent drilling business, advanced drilling technology, and a collaborative relationship with our clients. Our value proposition and the various robust service lines within Drilling and Evaluation, including drilling fluids, contribute significantly to our success. The margin improvements highlight the increased capital efficiency we've achieved through new technology in Sperry, along with enhanced capabilities such as Logging While Drilling and data management with 3D inversion. We have made substantial progress and have more advancements planned for this business in 2022. We believe we are beginning at a higher level and will continue to see growth. We have high expectations for this business.

Our next question comes from Ian Macpherson with Piper Sandler.

Just sort of having to squint for concerning issues here as everything is set up pretty well for you here and executing well also. But just curious with escalating tensions in saber rattling in Ukraine and given that Russia has been a pretty good growth market for the industry. Are you considering any risk with regard to sanctions impacting the trajectory of the business in Russia or Eastern Hemisphere on a knock-on basis at this point, or does this look like things that you’ve seen and done before?

Look, these are things we’ve seen and done before. Always unfortunate in so many ways for so many people. But from a business perspective, we’ve managed these sorts of things up and down for, I hate to say, nearly 100 years. So, these are the kinds of things that we would manage through.

Okay. Thanks, Jeff. Lance, just looking at our cash flow calculator for this year. You obviously had some good tailwinds in ‘21 with working capital release, which we know will reverse with cycle growth. And you also had probably better than sort of ratable disposal proceeds. So, when we think about 5% to 6%, you’ll be probably closer to 5% and 6% of gross CapEx this year. How are you thinking about the other pieces? Because I did hear something in the prepared remarks about containing working capital expansion with growth, so maybe not a monster number of working capital expansion this year.

Yes. Look, you’re right. Really happy with the way ‘21 free cash flow performed for us. And I think that we’ve talked about before how we’ve meaningfully, I believe, transformed the free cash flow profile of Halliburton and all the strategic priorities that we’ve sort of discussed are things that help drive us to that end. But you’re right. I think stronger free cash flow starts with stronger margins. And I think what you should expect for 2022 is to see that continued strength, operating cash flow less or excluding working capital to continue to drive higher, obviously. But I think that we’re running into a period of time in 2022 that the amount of growth that we expect in the business is just going to drive an investment in working capital as opposed to a release of cash. But, as I’ve always said, we are looking to put that investment back much more efficiently than when we took it out. And personally, that’s something that I’m committed to and working really hard with the organization to find those benefits.

And this concludes the question-and-answer session. I would now like to turn the call back over to Jeff Miller for closing remarks.

Thank you, Shannon. Look, I’ll just conclude that this upcycle is a great setup for Halliburton to achieve profitable growth and accelerated free cash flow generation. Today’s dividend increase and debt retirement announcements provide just two examples of what Halliburton expects to deliver throughout this multiyear upcycle. I look forward to speaking with you again next quarter. Shannon, let’s close out the call.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.