Halliburton Company (NYSE: HAL) Q3 2021 earnings call dated Oct. 19, 2021
Corporate Participants:
David Coleman — Head of Investor Relations
Jeff Miller — Chairman, President and Chief Executive Officer
Lance Loeffler — Executive Vice President and Chief Financial Officer
Analysts:
James West — Evercore ISI — Analyst
Neil Mehta — Goldman Sachs — Analyst
David Anderson — Barclays — Analyst
Chase Mulvehill — Bank of America — Analyst
Scott Gruber — Citigroup — Analyst
Arun Jayaram — J.P. Morgan — Analyst
Ian Macpherson — Piper Sandler — Analyst
Marc Bianchi — Cowen and Company — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Halliburton’s Third 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.
David Coleman — Head of Investor Relations
Good morning, and welcome to the Halliburton third 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 June 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 statements for any reason.
Our comments today also include non-GAAP financial measures that exclude the impact of special items. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our third quarter earnings release and can be found in the Quarterly Results and 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 maybe in the queue.
Now I’ll turn the call over to Jeff.
Jeff Miller — Chairman, President and Chief Executive Officer
Thank you, David, and good morning, everyone. Last quarter, we discussed a longer view of a recovering market and our confidence in a multi-year upcycle. I am pleased that the steady march of activity and Halliburton’s performance in the third quarter, internationally and in North America, all reinforce our enthusiasm today and for what we expect in 2022 and beyond. Our results demonstrate the effectiveness of both our strategy and our execution as the market recovery accelerates.
Here are some highlights. Total Company revenue increased 4% sequentially with topline improvements across all regions, while adjusted operating income grew 6% with solid margin performance in both divisions. Our Completion and Production division revenue grew 4%, driven by increased global activity. Operating margin was essentially flat in the third quarter as we made operational choices to prepare for higher demand for our services in 2022. Our Drilling and Evaluation division revenue grew 4% with increased activity across multiple regions. Operating margin of 11% was about flat sequentially.
North America revenue increased 3% as growth in U.S. land was partially offset by a decline in our Gulf of Mexico business due to Hurricane Ida. International revenue grew 5% sequentially in line with the international rig count growth. Our year-to-date free cash flow generation of almost $900 million puts us solidly on track to deliver our full year free cash flow objective. Finally, we retired $500 million of our long-term debt and ended the quarter with $2.6 billion of cash on hand.
As this upcycle unfolds in both the international and North America markets, Halliburton is executing on our strategy to deliver profitable growth and generate industry leading returns. In the international markets, third quarter activity momentum continued and I believe it will accelerate into year-end and support mid-teen second half revenue growth compared to the second half of last year. This expected outcome is better than we anticipated a quarter ago.
In the third quarter, we started long term projects across all regions in spite of COVID-19 interruptions. While mobility restrictions and daily precautions remain in place, business activity around the world has adjusted and continues to improve. In the Middle East, countries relaxed border restrictions and OPEC members prepared for activity increases. We started work on several rigs, offshore UAE, mobilized our workover project in Bahrain, and completed multiple ESP installations on our artificial lift contract in Kuwait. We expect the Middle East to exit the year with solid activity momentum.
In Asia Pacific, we launched operations on an integrated project, offshore Malaysia, with full implementation of Halliburton’s digital well construction capabilities. We also ramped up for an increase in our Indonesia drilling operations for the local NOC plans to boost production from its assets.
In Europe/Africa/CIS region, the start of operations on a 23-well offshore integrated development campaign for Woodside and Senegal marked a new country entry for Halliburton. In Russia, we are mobilizing for a multi-year IOC-operated project on Sakhalin Island. In the UK sector of the North Sea, work continues on several new development drilling and workover projects for local independent operators.
Finally, Latin America delivered its best quarterly performance since 2015. We spudded the first well on a three-year integrated project in Brazil, deployed our new drilling technologies on multiple wells in Argentina, and prepared to mobilize for new work in Ecuador and Colombia.
In addition to contract start-ups, our pipeline of new tenders continues to grow. While large Middle East tenders and Latin America projects received most of the headlines, customers in Africa, Russia and Southeast Asia among others are also issuing tenders for new work. All of this points to increasing international customer urgency and demand for our services.
Let me describe what I’m seeing that gives me this conviction. Global supply and demand balance continues to tighten, resulting in a strong commodity price environment. In response, asset owners are eager to reverse baseline production declines caused by multiple years of under-investment. We expect, then NOCs, and other operators with short cycle production opportunities will commit additional capital and gain share to meet future oil demand. Additionally, new fields are smaller and more complex, more customers work harder to produce more barrels. Finally, as mature assets change hands, new owners move quickly to revitalize the assets they acquire and unlock remaining reserves. They require service partners who can deliver proven technology and decades of experience. All of these things have one thing in common, they require higher service intensity, more dollar spent on the wellbore rather than on infrastructure.
As the international recovery accelerates, we remain committed to a clear strategic priority: deliver profitable growth, and we have unique competitive advantages to deliver on this priority. We have the established footprint, geographic presence, and customer and supplier relationships to capitalize on growth. We have a strong presence in all major international markets. The substantial majority of our workforce is local and within the regions where we operate, our supply chain spend is primarily with local suppliers. We have proven capabilities to ramp up our services as customers enter new markets. We demonstrated this in Guyana, Suriname, and most recently in Senegal. The Halliburton team mobilized personnel and built a multifunctional operational base to support Woodside as we embarked together on a development campaign offshore Senegal.
We also engineer innovative solutions, both digital and hardware to meet the complex reservoir challenges faced by our international customers. For example, in well construction this quarter, we introduced the iStar comprehensive measurement platform. This next generation intelligent platform provides multiple logging and drilling measurements that enabled reservoir evaluation, faster drilling, and consistent well delivery. For multiple customers in the Middle East and North Sea, the iStar platform provides insight into the impact of drilling parameters on wellbore conditions and optimizes the drilling process in real time.
In completions, we are the global leader in downhole completion solutions. As our customers increase their activity, our e-completions ecosystem integrates manufacturing digital twins and technology development processes to increase our speed to market for these long lead complex systems. In many regions, as customers drive for better performance in the face of increasing operational challenges, I expect adoption of integrated and bundled contracts will continue to grow. Halliburton has strong project management capabilities and a proven track record that deliver efficiencies and reduce total customer cost of ownership.
Our digital innovations reframe customer project economics through greater efficiencies and improve decision-making. For example, in the third quarter, we deployed our Well Construction 4.0 digital solution to deliver further operational efficiencies for our customer in the Middle East. Finally, our customers call on us for collaboration from an IOC looking to reduce emissions on its operations in Mexico to a European independent working to remotely monitor and control all of its global drilling operations. Halliburton’s value proposition to collaborate and engineer solutions to maximize asset value for our customers is working for both our customers and Halliburton.
Now turning to North America, the bifurcation between public and private company activity continued in the third quarter. Public E&Ps remain committed to their spending plans for 2021, while private operators continued to take advantage of a strong commodity price environment. As expected, completions growth moderated in the third quarter as operators shifted their focus from completions to drilling activity. Just like in the international markets, customer urgency and demand for our services keep growing in North America. Drilled but uncompleted well counts reached the lowest level since 2013 as operators depleted the surplus of DUCs accumulated in 2020. We expect customers to drill and complete more new wells to offset steep base decline rates and deliver production into an anticipated attractive market next year.
Completions equipment availability is tightening. Customers have responded by starting the 2022 tender process earlier in an attempt to lock in access to quality services for next year’s programs. Private companies now operate about 60% of the U.S. land rig count and current commodity prices provide a strong incentive for their activity to expand. Our market leading position in North America is rooted in the groundbreaking technologies we put to work in this market. We are the only fully integrated service provider in North America and this gives us a unique competitive advantage. We combine the full breadth of our technology disciplines, geosciences, physics, chemistry, material science, and mechanical, electrical, and software engineering to deliver innovative solutions at scale around the world and uniquely in North America to maximize production and minimize costs.
Our SmartFleet intelligent fracturing services transitioned from pilot to campaign mode. Several large operators today have SmartFleet working on multi-pad completion programs. SmartFleet, for the first time, allows operators to measure treatment placement in real time which, among other things, has demonstrated up to 30% improvement in cluster uniformity.
In the third quarter, we introduced the IsoBond cement system and prompted for multiple customers in the DJ Basin and in the Marcellus shale. By removing liquid additives, this dry blended cement provide significant operational efficiencies and lowers capital requirements for land operations. Taking advantage of the increasing demand for our services require strategic execution on many fronts, particularly in the current environment of stretched supply chains, tight labor and inflationary pressures.
Against that reality, I believe that Halliburton is best prepared to provide reliable execution for our customers. Our sophisticated supply chain organization translates Halliburton size and scale into real savings for us and our customers. We are seeing that in action as our supply chain delivers what our customers require for their projects. The labor market is tight today. We’ve seen this situation before and our human resources team knows how to navigate it. Over the last few years, we compressed our on-boarding time, strengthened our National Recruiting Network, and used digital solutions to significantly reduce our field personnel requirements. Despite real challenges, we have the scale, speed, and systems to recruit talent nationally and quickly deploy it for our customers.
In logistics, we have ready access to a fleet of drivers to make deliveries to the job site. We expanded our collaboration with Vorto, an artificial intelligence supply chain platform. Our early adoption of Vorto’s platform that connects drivers, asset owners, and maintenance charge allows us to effectively manage trucking inflation and availability constraints.
Now let me spend a few minutes on our activity and pricing outlook for 2022. First in the international markets, and then in North America. Next year, we expect international activity momentum to accelerate and international leading edge pricing to move upward in pockets as a result of higher activity. This is what we are seeing today. Large tenders remain competitive, but we are already seeing modest price increases on discrete work in underserved markets. We see increasing customer demand for Halliburton’s high-end technology and a recognition of its value.
Finally, as a result of lower spending by service companies for more than half a decade, international markets face tightening equipment supply. To meet these demands, we are strategically reallocating assets to drive improved utilization and returns. Let me be clear, Halliburton prioritizes profitable growth internationally and this will drive our capital allocation decisions to the best returning product lines, geographies, and contracts.
In North America, we expect customer spending to increase in and around 20% next year, including solid net pricing gains. Many factors drive that spending in pricing, including customer urgency, equipment tightness, and a desire to align with a reliable and differentiated service provider like Halliburton.
Last quarter, we highlighted the pricing traction that exists for low emission equipment. Today, as we tender for 2022 work, we are seeing price increases for the rest of our fracturing fleet as well. Net pricing has also increased across different non-frac product service lines, drilling, cementing, drill bits, and artificial lift. To generate the highest returns as this market grows, we are taking steps to maximize the value of our North America business. Specifically, we are repositioning our fracturing fleets to customers in areas where we can maximize returns in 2022, securing longer term premium pricing contracts for our existing and planned electric fleets, and accelerating fleet maintenance and deployment of the next generation fluid end technology, which extends the life of our equipment. Halliburton is committed to North America, and I expect we will benefit more than others as activity and pricing momentum accelerates across the board.
Next, let me turn to how we are executing on our strategic priority to advance a sustainable energy future. As we are witnessing now and saw in the third quarter, the world requires a greater supply of oil and gas. As an oilfield services company, we have the core competency to help our customers deliver the supply in the most efficient and technologically-advanced ways possible. With our customers, we are bringing our technical expertise and over a century of industry experience to actively participate in the transition to a cleaner economy.
One of the most meaningful contributions we can make today to this transition is to help our customers reduce emissions from their existing production base. Emissions reduction is a critical part of our technology development process and our innovative low carbon solutions are helping oil and gas operators reduce their carbon footprint. Halliburton’s electric fracturing solution delivers results now for our customers.
In the third quarter, Halliburton completed an all-electric pad operation on a multi-year contract with Chesapeake Energy in the Marcellus shale. We deployed our electric fracturing spread with electric blending, wireline and ancillary equipment and an advanced power generation system from VoltaGrid. This high performing solution reduced Chesapeake’s emission using over 25 megawatts of lower carbon power generation from Chesapeake’s local field gas.
We are collaborating with an IOC in Mexico on their total carbon footprint reduction. Because we provide both well construction services and logistics services on this contract, we changed supply boat fueling mechanisms and optimized usage to achieve emissions reductions in the first year of operations. We are now using a similar contract structure to collaborate with this IOC on its other projects in Latin America.
We are also advancing renewable energy solutions through Halliburton Labs, our clean energy accelerator. In the third quarter, we doubled our size by increasing the number of Halliburton Labs companies from four to eight, welcoming Alumina Energy from California; Ionada from Ontario; and Parasanti, and SurgePower Materials from Texas. We help these companies scale their exciting technologies from innovative energy storage solutions to modular carbon capture systems.
In September, Halliburton Labs hosted its third Finalists Pitch Day featuring nine early-stage companies and an audience of several hundred entrepreneurs, investors, academics, and other professionals looking to engage with companies that advance cleaner affordable energy. The Halliburton Labs participants are achieving results. Enexor BioEnergy completed a $10 million Series A round of financing. Enexor’s patented modular system uses locally-sourced organic or plastic waste to generate clean onsite energy even in the most remote and inaccessible location. Other accelerator participants achieved important scaling milestones in the third quarter.
With both current and expected demand increases, Halliburton remains committed to the priorities we set in 2020. We prioritize profitable growth and returns, remain focused on capital efficiency, and are keeping our overall capital investment in the range of 5% to 6% of revenue. I’m excited about the multi-year upcycle we see in front of us. I believe our value proposition, technology differentiation, digital adoption, and capital efficiency will allow us to deliver profitable growth internationally and maximize value in North America. Halliburton will continue to execute our key strategic priorities to deliver industry-leading returns and strong free cash flow for our shareholders.
Now I’ll turn the call over to Lance to provide more details on our third quarter financial results. Lance?
Lance Loeffler — Executive Vice President and Chief Financial Officer
Thank you, Jeff, and good morning, everyone. Let me begin with a summary of our third quarter results compared to the second quarter of 2021. Total company revenue for the quarter was $3.9 billion and adjusted operating income was $458 million, an increase of 4% and 6%, respectively. During the third quarter, Halliburton closed the structured transaction for our North America real estate assets that I described earlier this year, which resulted in a $74 million gain. We also discontinued the proposed sale of our Pipeline and Process Services business, leading to a depreciation catch-up related to these assets previously classified as assets held for sale. As a result, among these and other items, we recognized a $12 million pre-tax charge.
Now, let me take a moment to discuss our division results in more detail. Starting with our Completion and Production division, revenue was $2.1 billion, an increase of 4%, while operating income was $322 million or an increase of 2%. These results were driven by increased activity across multiple product service lines in the Western Hemisphere, higher cementing activity in the Middle East/Asia region, as well as increased well intervention services in the Europe/Africa/CIS region. These improvements were partially offset by reduced completion tool sales in the Eastern Hemisphere, lower stimulation activity in the Middle East/Asia region and accelerated maintenance expenses for our stimulation business in North America, which related to upgrading our fluid and technology in preparation for the anticipated market acceleration that Jeff described earlier.
In our Drilling and Evaluation division, revenue was $1.7 billion or an increase of 4%, while operating income was $186 million or an increase of 6%. These results were due to improved drilling-related services internationally and in North America land, additional testing services and wireline activity across Latin America, along with increased project management activity in Mexico and Ecuador. Partially offsetting these increases were reduced drilling-related services in Norway and the Gulf of Mexico.
Moving on to our geographic results. In North America, revenue increased 3%. This increase was driven primarily by higher well construction, artificial lift, and wireline activity in North America land, increased completion tool sales in the Gulf of Mexico, and additional stimulation and drilling activity in Canada. Partially offsetting these increases were reduced drilling-related wireline and stimulation activity in the Gulf of Mexico as a result of the impact from Hurricane Ida.
Turning to Latin America, revenue increased 17% sequentially. This improvement was driven by increased activity in multiple product service lines in Argentina, Mexico and Brazil, as well as higher well construction services in Colombia and improved project management activity in Ecuador. These increases were partially offset by reduced fluid services in the Caribbean.
In Europe/Africa/CIS, revenue was essentially flat sequentially. These results were driven by higher well intervention services across the region, increased well construction services and completion tool sales in Nigeria, additional pipeline and fluid services in Russia, and increased activity across multiple product service lines in Senegal. These improvements were offset by decreased activity across multiple product service lines in the North Sea and Algeria and lower completion tool sales in Angola.
In the Middle East/Asia region, revenue increased 2% resulting from improved well construction activity in the Middle East and Australia. These improvements were partially offset by lower completion tool sales across the region, along with reduced wireline and stimulation activity in Saudi Arabia, lower project management activity in India and lower stimulation activity in Malaysia.
In the third quarter, our corporate and other expense totaled $50 million. For the fourth quarter, we expect our corporate expense to moderately increase. Net interest expense for the quarter was $116 million. In the third quarter, we retired $500 million of 2021 senior notes using cash on hand. As a result, our net interest expense in the fourth quarter should decline modestly. Our effective tax rate for the third quarter came in at approximately 24%. Based on our anticipated geographic earnings mix, we expect our fourth quarter effective tax rate to be approximately 22%.
Capital expenditures for the quarter were approximately $190 million. In response to higher demand for our services in both international and North America markets, we are pulling forward spending on long lead-time items for our premium equipment and now expect our full-year capital expenditures to be closer to $800 million for the full year.
Turning to cash flow. We generated approximately $620 million of cash from operations and almost $470 million of free cash flow during the third quarter. I am very pleased with our working capital performance this quarter as we delivered net cash proceeds from working capital, despite our revenue growth.
Now let me describe our near-term outlook. In North America, we expect moderate pricing and activity improvements in drilling and completions to drive sequential growth. In the international markets, we expect continued improvement in rig counts, the pace of which will vary across regions. As a result, for our Completion and Production division, we anticipate mid single-digit revenue growth sequentially, with operating margins expected to expand by approximately 50 basis points. The higher year-end completion tool sales will be partially offset by seasonal North America land activity, impacted by the holidays and lower efficiency levels typically experienced in the winter months.
In our Drilling and Evaluation division, we anticipate sequential revenue growth of 5% to 7% and a margin increase of 150 to 200 basis points due to seasonal software sales and higher overall global activity.
I’ll now turn the call back over to Jeff. Jeff?
Jeff Miller — Chairman, President and Chief Executive Officer
Thanks, Lance. To summarize our discussion today, Halliburton is on track to deliver strong results and our financial commitments for this year. We see customer urgency and demand for our services increasing internationally and in North America. We expect to benefit from the accelerating recovery and deliver profitable growth in the international markets and maximize value in North America. We prioritize our investments to the highest returns opportunities and are committed to capital efficiency. As our forward outlook unfolds, we expect to deliver strong free cash flow and industry-leading returns for our shareholders.
And now, let’s open it up for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from James West with Evercore ISI. Your line is open.
James West — Evercore ISI — Analyst
Hey, 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 West — Evercore ISI — Analyst
Jeff, clearly very bullish, your global outlook, both North America and international. It seems though the international really stepped up even further than you thought maybe initially in the last three months since the last conference call. Could you perhaps describe where these pleasant surprises are coming from?
Jeff Miller — Chairman, President and Chief Executive Officer
Well, thanks, James. Look, I think, broadly, If I look out at the improvements, it’s really a function of the tightening macro, and what we see, and so, I think supply is clearly short. I mean this underspending that’s been happening for really seven years is starting to have an effect on the supply side and that drives clearly urgency, but it’s harder to do and then along with that, we’ve got short supply of service assets and that is also driving great environment for us, and Halliburton is in the right places. And so, when I think about profitable growth internationally and also maximizing value in North America, that’s right in the fairway of where we want to be. And so this beginning of an upcycle, I think what we’ll see are our operators work very hard to improve production, but it’s — short cycle style barrels are just going to take a lot more work around the wellbore and all very good and it’s really — as I said, the beginning of what I see as a very strong upcycle for services.
James West — Evercore ISI — Analyst
Sure, no doubt about that and we certainly agree. One follow-up for me on North America. The 20% number that you put out there, which is actually the same number that we’re using, but how much of that increase is activity versus kind of pricing in the inflationary environment that we’re now seeing in North America? Meaning, is activity in that scenario up 10%, 12%? Is it up 15%? What — how are you thinking about activity levels versus the overall spend level?
Jeff Miller — Chairman, President and Chief Executive Officer
Look, I think clearly, it’s a combination of both. I think that we will see certainly inflation, I’m not going to give you a number today, but I think that we’re seeing strengthening pricing into 2022. So, I think that will be a part of it. Back to our strategy of maximizing value in North America, I think that we’re going to be really sharp around where we work and how we generate those returns. So I would — I think that pricing will move up more and I think there’ll be a lot of effort put into activity, but the combination of equipment shortages that drive prices are going to probably be a headwind to a degree on activity as we get into the year.
James West — Evercore ISI — Analyst
Right.
Jeff Miller — Chairman, President and Chief Executive Officer
Biased more to price than activity, probably.
James West — Evercore ISI — Analyst
Okay, got it. Thanks, Jeff.
Operator
Thank you. Our next question comes from Neil Mehta with Goldman Sachs. Your line is open.
Neil Mehta — Goldman Sachs — Analyst
Good morning, team. I want to go back to the comps last quarter as a 400 basis points set of margin improvement by 2023. Given we’re in a firmer oil macro environment and the activity pickup up that you anticipate, do you see potential for that to actually get pulled forward? And how are we tracking relative to the 400 basis points there, upside or downside as you tested out real-time?
Jeff Miller — Chairman, President and Chief Executive Officer
So, thanks, Neil. But, look, I’m really excited about the outlook and the possibility to pull that forward. Certainly, that’s a possibility. I think that we’re on track, I mean, everything that I see indicates that that’s well in our viewfinder in terms of getting to the sort of ’23 outlook that I had. The pace at which oil demand comes back, which I would say is surprising a little bit to the upside in spite of what’s out there with respect to COVID, certainly encouraging, certainly highlights what we’ve been saying for some time, which is how important oil is, and more importantly, sort of the impact that not spending at sort of normal rates for quite a long time has on the supply of oil. And of course, operators are going to work really hard to accelerate that, which is fantastic for Halliburton. So, I’m very encouraged about the outlook and the pacing.
Neil Mehta — Goldman Sachs — Analyst
All right, Jeff. And the follow-up is just return of capital. You knocked off $500 million of debt this quarter, next year set up to be a good free cash flow year. How do you think about getting the dividend or capital returns profile to be more competitive relative to the rest of energy?
Lance Loeffler — Executive Vice President and Chief Financial Officer
Yeah, Neil, this is Lance. Look, we certainly — no doubt we see an environment that provides us with a lot more flexibility as we look towards 2022. And I would just say, this year, 2021, we’ve had a strategy and we’re continuing to execute that. It starts with EBITDA growth, capex control, and a focus on deleveraging throughout the course of the year. The dividend raise is certainly in the viewfinder as our outlook plays out. We’re still going to continue to be focusing on deleveraging our business and, to a certain extent, accelerating it when it makes economic sense. So there’s still work to do there, but I think the message is that we’ve got a great opportunity to address all of these things as we move into next year.
Neil Mehta — Goldman Sachs — Analyst
Thanks, Lance.
Operator
Thank you. Our next question comes from Dave Anderson with Barclays. Your line is open.
David Anderson — Barclays — Analyst
Hey, good morning, Jeff. So, the question on everyone’s mind right now is net pricing in the U.S. and whether or not you’re getting that now. I was wondering if you could just confirm. You have, in fact, recently put through a pricing increase in U.S. pumping business and in addition, if you could address the topic of labor inflation and how much of that offsetting pricing and what could that mean if the industry looks to add say 20 or so fleets in the coming quarters. E&Ps seem to think pricing is going to stay flat outside of inflation. So, I’m just kind of curious where you think that disconnect could be.
Jeff Miller — Chairman, President and Chief Executive Officer
I think the disconnect will be around supply of equipment and also the type of equipment. There is a lot of demand out there. I’ll talk about pricing maybe, first. Yeah, we’re seeing it now. It looks a little different than maybe in prior cycles in the sense that it’s more of a process than it is a point in time, but yes, making a lot of progress around that. We’ve talked about premium equipment and clearly that’s — a lot of demand for that and it’s in short supply and likely stays that way. And so, that’s certainly positive. The — and our outlook is that, we are going to certainly get net pricing, getting some net pricing now and we expect to continue that particularly as equipment tightens. It starts with the premium equipment, but my view is that we will see that across the entire fleet as we go into 2022.
And so with respect to inflation, yes, seeing that. I think that’s been passed along fairly straightforward manner, but that’s not the pricing that actually we’re looking forward to and seeing some of now. From a labor perspective, if you describe 20 more fleets into 2022, 84% [Phonetic] to 85% utilization today, that takes us, what, like close to 100. That drives a lot of pricing activity around equipment. And the labor, I think will exacerbate that. And we’re very fortunate at Halliburton, that we’re able to manage the labor and other elements of transportation, I think, more effectively than the market. Described some of that in my comments. But, I think that will continue to get tight now like the way we’re differentially positioned around those things also.
David Anderson — Barclays — Analyst
Yeah. Clearly, labor is an issue everywhere and I’d have to think at oilfield especially, acutely. A separate question, you touched on this a little bit. But I’m really wondering about the inventory of kind of both directional drilling and completion tools globally. Now, you’re spending only about 5% of revenue on capex, it’s less than half the rate of just a few years ago. Your competitors have also been very capital disciplined. So obviously, not just the E&Ps are capital disciplined, but you guys have been as well. But now we’re on this cusp of this global recovery in activity, as you said multi-year upcycle unfolding, and we’re also seeing the supply chain issues across the industry.
I guess my question is, if there is going to be the shortage of type of specialized equipment next year, and where do you see it most acute? You talked about reallocating equipment, but I think we’ve done this already a couple of times, and I know you’ve been moving it around, but it feels like we’re kind of coming to this inflection on a lot of this equipment out there and I’m just kind of curious, your views on that.
Jeff Miller — Chairman, President and Chief Executive Officer
Well, we likely are and we are — it’s getting tight, it’s tighter and we’re going to reallocate equipment to the highest return opportunities. And I think we’re just going to see some tightness, which is a healthy thing, which is going to drive better asset allocation to projects. We’re — we see capital velocity as a strategic plank for us that we are very focused on and we think that’s sort of the key to driving profitable growth. And I say it that way because there’ll be many opportunities, our focus is on the profitable slice of that and on things that we’re seeing set up as it gets more active internationally. Short cycle barrels, clearly, will ease equipment. But as we see some element of offshore activity creep into that, that soaks up more capacity. And so I expect we’ll see quite a bit of tightness, which is very, very positive for Halliburton and our outlook. I mean, I don’t — I think that the returns haven’t been there and we expect to see solid returns and growth in returns and free cash flow and a tight market is what makes that happen.
David Anderson — Barclays — Analyst
Looking forward to it. Thanks, Jeff.
Operator
Thank you. Our next question comes from Chase Mulvehill with Bank of America. Your line is open.
Chase Mulvehill — Bank of America — Analyst
Hey, good morning, everyone.
Lance Loeffler — Executive Vice President and Chief Financial Officer
Good morning, Chase.
Jeff Miller — Chairman, President and Chief Executive Officer
Good Morning, Chase.
Chase Mulvehill — Bank of America — Analyst
Good morning. I just wanted to follow up on kind of the commentary around North America capex being up 20%. Obviously U.S. onshore will be up a little bit more. But, I just wanted to kind of connect the dots there and just try to understand kind of how you’re getting to the 20%, because if you just kind of look at operating cash flow of E&Ps, I mean those could be up 30% to 40% year-over-year. So that would imply that they would spend less of operating cash flow, where today, they’re spending about 50% of operating cash flow. And if you just look at consensus for public E&Ps, we’re talking high-teens already for growth. So that implies kind of a more modest pace of growth for the private E&Ps. So I just want to kind of understand kind of the 20% bogey that you kind of put out there for North America?
Jeff Miller — Chairman, President and Chief Executive Officer
Thanks, Chase. Look, 20% is a good starting point. Obviously, could it be more? It could be, certainly, and I think the more activity there is, the more price there will be and so kind of take those in tandem. When we look at 2022, clearly there is a call on U.S. production at the current commodity prices that we see today, and particularly given the supply shortage. So, we’ve always expected that we would see North America move first and strongest as we got into sort of the real heavy lift around short supply. That said though, I do believe that it has moderated to a degree, because there are formulas in place around how reinvestment — around reinvestment rates, around dividend requirements, around compensation scheme. So, all of that’s in place, which serves to certainly moderate activity for the publics, and I suspect we’ll — those budgets aren’t out, but I certainly expect that we’ll see those.
I think, the privates clearly are very active. An evidence to me that we see sort of that strengthening is we’re finding more work. I mean the reality is, as we readjust pricing and look at the market that requires moving around to different operators at different times and we’re doing some of that now, but the old adage, you don’t quit a job till you have a job, and we’re finding jobs. And so, I mean all of that’s positive, but I think that there’ll be tightness around equipment in that environment. I don’t — we’re in and around 20% is just sort of a current outlook on ’22. I don’t mean that to be prescriptive. Could it be more? Clearly, it could be more, but I also think it will be very tight.
Chase Mulvehill — Bank of America — Analyst
Okay. Great. I mean, can I follow up on the frac maintenance expense? I mean you noted in the press release, you talked about it during the earnings call. I don’t know if you would offer up how material it was, does it recur again in 4Q, and so maybe that’s impacting margins on the C&P side a little bit. I mean, then also maybe is — should we think about this as an indication that you think you’re going to be able to get the pricing you need in 2022 to really kind of drive more activity on the frac side?
Jeff Miller — Chairman, President and Chief Executive Officer
Yeah, look, the right answer to this is, maybe a penny, but clarity around where that equipment will go, I mean that’s an indicator that we have certainty around where that equipment will go to work and the kind of things we’re doing are like the Q-10X fluid end are things that drive better margins for us and a longer life over the life of that, so, it’s just wise to do. I think more important is that we’ve got real clarity around where that equipment goes in ’22 and we want to make certain that we’re ready and it goes to work at prices that clearly eclipse any cost of maintenance on the equipment. It’s just the sort of thing that we want to do. Q4, we’ve given you our guidance and all that’s in that guidance. So, look, I think it is a real positive that we’ve got the clarity that we have and just sort of the concrete evidence of where this equipment will go and we just want to make certain that we’re taking care of everything in real time.
Chase Mulvehill — Bank of America — Analyst
All right, perfect. I’ll turn it back over. Thanks, Jeff.
Jeff Miller — Chairman, President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from Scott Gruber with Citigroup. Your line is open.
Scott Gruber — Citigroup — Analyst
Yes, good morning.
Jeff Miller — Chairman, President and Chief Executive Officer
Hey, Scott.
Lance Loeffler — Executive Vice President and Chief Financial Officer
Morning, Scott.
Scott Gruber — Citigroup — Analyst
I just want to come back to the domestic inflation question again. Are there any numbers you could put on the delta in your inflation versus the market inflation just given your advantages? And now that you’re securing, what I assume is market-based price increases, kind of what that combination to be, on the framework is, if the market pricing is up 15% but peers are seeing like 10% inflation, they’re only getting kind of net side, but there is a meaningful gap for Halliburton, maybe your net inflation or your net pricing gains are at 10%, because you’re only experiencing half the inflation. So is there any color on kind of what that inflation gap could be? And, I would say, just made this figures out, so any color on the potential net pricing gains for Halliburton vis-a-vis the competition would be great.
Jeff Miller — Chairman, President and Chief Executive Officer
Yeah, look, very competitive information. I’d say, we outperformed the numbers you laid out but the — maybe I’ll just walk through the components of how we manage these things. It’s very — we have very sophisticated supply chain organization and they are working over time but absolutely getting it done. Price fairly passed on to customers. The labor [Technical Issues] the ability to recruit nationally in the U.S. and the ability to have a strong local workforce internationally, both are key elements of managing inflation for Halliburton. From a raw materials perspective, again, supply chain bias from the entire world, we manage logistics and we actually see that improving in terms of tightness as we go into 2022. Particularly, we’re seeing sort of space on airplanes as the world opens up and we see more carriers sort of get back to work. We actually believe, the international logistics around raw material, it’s better.
And then in North America, our relationship with Vorto is having quite an impact. I mean we are able to add drivers. We were able to retain drivers. It’s been quite disruptive but very effective and so — look, I’m confident that we outperform in terms of managing inflation for Halliburton, but that’s sort of the separate topic from where we see pricing going in 2022 and in many cases now.
Scott Gruber — Citigroup — Analyst
Got it. And then just a quick one on international, Jeff. You mentioned an acceleration in international activity next year. Any early read on where that figure could go? Or are you thinking potentially mid-teens, high teens? We’ve seen 20% growth in past years, very strong upcycles. Just any early read on kind of where international activity growth could ascend to next year?
Jeff Miller — Chairman, President and Chief Executive Officer
Yeah, look, I mean the entire international market is a huge market and so to move all of that at a high rate is probably more difficult to do, particularly, given where the supply chain actually and project backlog is for clients. But, nevertheless, could it be low-teens to mid-teens? Yes, certainly it could be, super excited about Latin America and the paces of growth and the outlook there. Middle East should be very strong. And I think we’re going to see the kind of broad-based improvement that allows sort of pricing in pockets of places to continue to get better. So, it’s going to be good. It should be really, really good market internationally. I think we’ve built into it throughout ’22 as well.
Scott Gruber — Citigroup — Analyst
Got it. Appreciate the color. Thank you.
Jeff Miller — Chairman, President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from Arun Jayaram with J.P. Morgan. Your line is open.
Arun Jayaram — J.P. Morgan — Analyst
Yeah, good morning. I wanted to get a bit more color on some of the implications of HALs decision to reposition some of your frac fleets to get better pricing. You mentioned an exposure to long-term contracts. So, I wanted to maybe get a sense of, are you mobilizing that equipment today so is that going to be a little bit of a drag on 4Q and as you get that equipment into those newer markets, does that give you some tailwinds as we think about 2022?
Jeff Miller — Chairman, President and Chief Executive Officer
Yeah, I think it does give us tailwinds as we go into 2022. Drag or headwind near-term, not much — any of that would be in our guidance. But look, this is making — maximizing the value in North America, which is clearly what strategically we want to do and plan to do and are doing. It involves making decisions around what we do with the assets that we have. And I think you’re seeing that and you’ll continue to see that from Halliburton. And so I’m super encouraged and a lot of the discussions we’re having today with customers are around 2022, most of that dialog is 2022 and beyond, actually, even into some sort of ’23-type discussion. So I’m super encouraged.
What we want to make sure is that our assets are deployed where they are the most valuable for us and our clients. And yes, that does include moving them around. When we’re moving them around, we tend to do more maintenance on it and whatnot. That’s the opportunity that we take typically to do high grades of fluid ends and that kind of thing. And so, it should be interpreted in a very positive way, what we’re doing and particularly a demonstration of really two strategic planks. One is maximizing value in North America and the second is capital velocity — capital efficiency.
Arun Jayaram — J.P. Morgan — Analyst
Got it. Got it. Any color, Jeff, on which basins that you sense is a better opportunity to get better pricing in these long-term commitments?
Jeff Miller — Chairman, President and Chief Executive Officer
Well, fortunately we’re in all the basins and so I don’t really take a view basin-by-basin as much as we do sort of customer opportunity-by-customer opportunity and that can be sort of wherever it might fall. So, I’m not going to necessarily carve out a particular location. Clearly, there is more activity nearly in all of the basins today and so that’s very encouraging.
Arun Jayaram — J.P. Morgan — Analyst
Okay. My follow-up is just on international. There is 3.5 million, 4 million barrels offline by OPEC+. I wanted to get your views on, are you seeing any shifts internationally from customers perhaps shifting from a focus on maintenance capex, sustaining capex projects to growing productive capacity and if so which markets are you seeing perhaps some shift towards that into a bit more growth?
Jeff Miller — Chairman, President and Chief Executive Officer
Look, I think what we’re going to find internationally is there has been a lot of underspend for quite a long time and a lot of countries are declining today. Declining is hard to overcome, they’ll work hard to do that, but that doesn’t necessarily move the needle in terms of production and might get it back to flat and steady, even with extra work. It takes extra work to just stem the decline. All of that’s positive for us. I mean, clearly, we see more activity as we go into 2022 in the Middle East and Latin America. But again, I think that those that can spend and are in a position to do so will, but there is the sort of the capital austerity by a number of clients is still well in place. And so I think that — and I say that in the sense that I think that production is going to all be near wellbore, which is very good for us and I think that a lot of work will get done.
But I still see supply as tight for really quite some time. I mean it doesn’t turn back on. Maybe a point worth remembering, in 2014, the number of big multi-billion dollar projects with 30-year payouts that were being completed or in the process of finishing, we don’t see those today. And the reality is that means there’s less spend on infrastructure and a lot more spend on what we do, and I think that’s all very, very positive.
Arun Jayaram — J.P. Morgan — Analyst
Thanks a lot.
Jeff Miller — Chairman, President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from Ian Macpherson with Piper Sandler. Your line is open.
Ian Macpherson — Piper Sandler — Analyst
Thanks, good morning.
Lance Loeffler — Executive Vice President and Chief Financial Officer
Good morning, Ian.
Ian Macpherson — Piper Sandler — Analyst
Jeff, it seems like an unsung hero of your year so far has been Latin America. It’s — that’s where you’ve had really outsized growth and the market there, the total activity has grown, but it looks like you’ve punched above your weight in Latin America. Can you speak to those strengths and you said — I think you — not to put words in your mouth, but synchronized global international growth going into next year. For Latin America, in particular, do you expect to see continued momentum on par with the rest of Eastern Hemisphere growth into next year as well?
Jeff Miller — Chairman, President and Chief Executive Officer
Yes, I do. Look, I’m very encouraged about Latin America and that team has punched above its weight in Latin America. Got an excellent team, great position, we’re in every country and the technology introduction has been effective there which I talked about, sort of our drilling tools and what we’ve been able to accomplish. Our project management capabilities are very strong in Latin America and has allowed us to outperform, in my view. And so — and I think that continues into 2022 as more work comes on. And again, that’s a part of the world where oil production and — is very important to economies and to operators, and I think that we’ll continue to see a strong Latin American business.
Ian Macpherson — Piper Sandler — Analyst
Great. Thanks, Jeff. And then I was going to ask a follow-up to Lance, after. You had a really good quarter here with free cash, with the disposals and some working capital as well. Any indicators for Q4, Lance, with regard to extras outside of the basics of free cash with respect to net disposals and working capital movements to close the year?
Lance Loeffler — Executive Vice President and Chief Financial Officer
Yeah, I think — look, I think we certainly expect continued strength in operational profit piece of the equation. That’s pretty obvious based on our guidance for the quarter. Some of that will be offset by some of that acceleration in capex spend that we’ve talked about in my prepared remarks. So, we’ll be looking to round out the year around capex. And look, I think we’ll have to see how working capital continues to play out. We have clearly been very focused on working capital and the required investment it would take to put back that investment as we continue to grow. Sort of a great outcome this quarter where we actually still generated cash from working capital, despite the fact that our revenue was growing globally. So, all good facts historically.
Whether we can keep if — whether it’s realistic that we can keep that momentum from a working capital perspective going forward might be a little bit harder. So those are all the things that we think about. I mean, look overall, I’m excited about the way that free cash flow has behaved so far this year, and I continue to be encouraged about what that means for next year as well.
Ian Macpherson — Piper Sandler — Analyst
Great. Thank you, both.
Lance Loeffler — Executive Vice President and Chief Financial Officer
You bet.
Jeff Miller — Chairman, President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Marc Bianchi with Cowen. Your line is open.
Marc Bianchi — Cowen and Company — Analyst
Thank you. I guess with regard to C&P in North America here, you’ve got these little bit of maintenance overhang, I guess it’s about 50 basis points based on your comment, Jeff. And then there’s these pricing initiatives. Is there any way you could give us a sense of the margin leverage that you could see in 2022 from all of this? I don’t know if it’d be perhaps unreasonable to get to 19% or 20% margins towards the end of the year in C&P, if you’re willing to comment on that or any other color about how you would see the margin leverage shaping up.
Jeff Miller — Chairman, President and Chief Executive Officer
Yeah. Look, I feel good about our business in 2022, most certainly for the reasons I’ve described, not going to try to give an outlook today on 2022. But, what I can say from an operating — from an earnings power standpoint, we’ve been very effective at maintaining the earnings power reset that really happened a year ago, but that’s well in place and all of the things — there were a lot of things that we did when we were reducing costs a year ago that really — they were going to be savings as we saw activity pick up, but they were sort of the things that improved margins with activity. We didn’t have much activity, so we didn’t see the benefit of that. But a lot of the digital work that we’ve done in North America and reduction of roofline and changing of the maintenance and all of those things become more valuable as we get into an environment where we see more activity. And so, really encouraged about the outlook and I think not only the activity, but our technology offering, particularly around frac in North America, is very unique and I think we’ll see the power of that also.
Marc Bianchi — Cowen and Company — Analyst
Yeah. Okay, great. And then Lance, going back to the free cash flow, it looks like you’re going to be approaching maybe 50% conversion of EBITDA here in ’21. Maybe walk us through the puts and takes as you look at ’22 capex probably in that 5% to 6% range, but just any other color you could talk to around the conversion there would be great.
Lance Loeffler — Executive Vice President and Chief Financial Officer
Yeah. So — look, I think as we look to ’22, it’s certainly healthier, right? Generally speaking, I describe it that way because it means that our operational profit contribution is clearly moving higher into the year — into next year. But, like I said earlier, even as I was relating to the fourth quarter, our revenue increase is going to require incremental working capital. But, look, ’21 is proof that we’re focused on it and managing it as tight as we can and as efficiently as we can. And then you’re right, Marc, from a capex perspective, I think we’ve been pretty clear what the guard rails are on our business even into next year, 5% to 6% of revenue. But look at the end of the day, maximizing value in North America, growing international profitably and that keeping real tremendous amount of focus on capital efficiency, I think all leads to free cash flow growth next year.
Marc Bianchi — Cowen and Company — Analyst
Great. Thanks so much.
Operator
Thank you. That’s all the time we have for questions today. I’d like to turn the call back to Jeff Miller for closing comments.
Jeff Miller — Chairman, President and Chief Executive Officer
Yeah, thank you, Catherine. Look, I’m pleased with the quarter and look forward to speaking with you again at the end of the next quarter as we see this multi-year upcycle continue to unfold. Catherine, you can close out the call.
Operator
[Operator Closing Remarks]