It's been a busy year for Halliburton, the Houston- and Dubai-based services company. After reporting two strong quarters back-to-back through September 30, and seeing its stock rise, the company's shares fell back 8% in late October when a preliminary investigation by the Presidential Oil Spill Commission showed its cement job and related testing at BP's ill-fated Macondo well may have contributed to the tragedy in the Gulf of Mexico. However, Halliburton says its contract with BP indemnifies it from further liability. And it maintains its team performed as it was asked to do, based on BP's well-design plan. Most analysts are taking a wait-and-see attitude, but they still like the company for its other strengths.

In the past two or three years, it has made 37 acquisitions. So far this year, Halliburton has acquired Boots & Coots Inc., one of the oil patch's leading wild-well control and intervention services. It also purchased The Permedia Research Group, suppliers of petroleum systems modeling software, which will be rolled into the Landmark Software and Services line.

In southern Iraq, meanwhile, Halliburton was awarded, or has pending, three contracts, with ExxonMobil, Shell Iraq Petroleum Development BV, for developing Majnoon, one of the world's largest oil fields, and Eni, to redevelop Zubair Field. Work for the multimillion-dollar contract is already under way and will include wireline logging, perforating, acidizing and testing on 20 wells.

Though operating at full capacity in fracturing U.S. shale wells, the company is starting to export that knowledge elsewhere. Halliburton recently performed the first-ever hydraulic fracturing of a shale-gas well in Poland. WellDynamics, another business line, reached the milestone of deploying its five hundredth SmartWell completion system, which has been used in more than 26 countries.

Mark Urness, managing director, oil services research for CLSA/Credit Agricole Securities (USA) Inc., expects the company's U.S. land segment will continue to benefit from frac demand in unconventional plays, offsetting mixed international results and the slowdown in the Gulf of Mexico. He maintains a Buy, citing "the monstrous second-quarter EPS beat of $0.52 vs. $0.36," and another earnings beat in the third quarter.

To get a better sense of Halliburton's direction, we visited with Mark McCollum, the company's chief financial officer. We met at Halliburton's 94-acre north Houston campus, which is abuzz with activity. More than 2,000 employees work there. Under construction are a state-of-the-art Halliburton Technology Center to serve several of the company's product service lines, as well as a new training facility, conference center, two new parking garages, and childcare and employee fitness centers.

Investor: These shale plays have really boosted your business.

McCollum: Yes. Because of our expertise in fracing gas wells, it's been an incredibly bright time for our North American business. If you look at our customers' capital-spending plans, the Eagle Ford, for example, is going to be huge. But the exciting thing is, this is just the tip of the iceberg.

The real growth longer term is going to be in the Eastern Hemisphere. We did some research and found that 75% of the horsepower to stimulate wells is in the U.S., but 75% of the resource potential is outside North America.

Investor: What is your role as CFO in making that growth happen?

McCollum: If we funded everything that came forward, every idea and opportunity, it's quite a long list. My job is to balance growth and returns. We have to allocate capital where it can go to work quickly and generate returns from day one. We want to be on top of the heap in terms of our growth profile and our returns.

Investor: To what extent is that goal tied to domestic work, versus international work?

McCollum: About 50% of our capital is allocated to completion and production services and 50% to drilling and evaluation services. The reality is, the future growth of our business will be primarily international, which will be driven by our drilling and evaluation franchise. When we went through the downturn in 2009, we as a company decided to take a contrarian strategy. It was the first time in a long while that we had the right balance sheet. We had $3 billion in cash, and no asbestos litigation hanging over our head any more.

We saw our competitors respond to the downturn by cutting costs, cutting people. I credit Dave (chairman David Lesar), who said, "No. We are going to build through the recession." Smart money would say keep investing so you are strong when you come out the other side of the cycle. We underestimated the velocity of the upturn coming off mid-2009. Demand for hydrocarbons continues at a significant pace due to the emerging countries. And we have all the opportunities in unconventional resources and in deepwater offshore around the world. This North American market has legs.

Investor: It's going to get slower now?

McCollum: We do see data that the gas-rig count in North America is flattening out, but the oil-rig count continues to move up. We thought it was overheated, but customers still are working through a backlog of three or four months out. If people are trying to schedule a completion in the Bakken now (October), they'll have to wait until first-quarter 2011.

Investor: How many trucks and crews are you adding?

McCollum: We are funding out of cash flow and trying to maintain capital discipline. I can't say how much we are adding, for competitive reasons. But you do hear analysts who compute that the industry as a whole is adding 20%-plus frac capacity, and it's lined up to go to work as soon as it hits the ground. Nothing is being built on spec. We are in a sold-out position for some time to come. A lot of the capacity we are adding won't come on until sometime in 2011.

Investor: Explain the factor of increasing service intensity.

McCollum: For Halliburton, that means more revenue opportunities from providing many different services on a well. For our customers, it means the growing complexity of bringing on new wells. Over the past five years, you could see it was going up about 10% per year.

Investor: What's causing that?

McCollum: We are drilling wells faster, using only 55% of the time previously taken, but at the same time, the completions are becoming longer, with more frac stages and longer horizontals, so across the various basins, the size of the average frac crew is bigger. If the standard truck is 2,000 horse power, you need 40,000 horsepower on a location. You could end up having 20 or more pump trucks, plus all the other equipment, so it's quite intensive. Our average size of horsepower on a frac is up about 50% and the crew stays on location 50% longer because of all the frac stages we're doing.

We've added several thousand people across the U.S. but it takes about three months to train them. We're holding job fairs everywhere we can. After the Macondo event, we moved about 500 people to other U.S. locations. Another big challenge is finding housing for them, such as up in the Williston Basin. I don't see it slowing down. It's going to be humming for a while.

Investor: What is your philosophy on pricing pressure?

McCollum: Part of our strategy in this upturn is there's always pricing power. It's a way to allocate capacity. Our strategy of building through the downturn enabled us to respond. But now things are getting tighter. What does it take to get Halliburton on your site? Price is a starting point, but if customers allow us to work with them on project management, we can drop their price and shorten the time between different aspects of the job.

We feel we can add value. For one customer in the Haynesville we cut their costs 50% and their cycle time 70%. This sort of thing begins to make our market share "stickier." We try to build a relationship, which helps us to create efficiencies and more safety.

We are not just trying to supply-chain-manage this to death. We are lowering the AFE and trying to improve well life-cycle returns.

Investor: What about the proppant supply?

McCollum: We feel we have adequate supplies. We're in good shape at this time.

Investor: How are you managing margins?

McCollum: In the U.S. and North America they've been expanding in the past two quarters by 800 basis points. Earlier it was activity-led, but now it is pricing-led. We saw strong incremental margins as drilling activity increased and those will cover the cost increases we incur as we add capacity. We could be in a protracted low-gas-price environment that flattens the rig count, and so, that will make it more challenging to preserve our margins, attract capital and go to market in a way that allows our customers to achieve their returns.

Investor: How does R&D fit in?

McCollum: The company spent $325 million on research and development in 2009, and our tech spending is a little higher this year. A fair percent is going to applied technologies. We have a strong patent portfolio. Last year, 34% of our total revenues came from technologies we introduced during the preceding three years.

But there is a lot more R&D to do. The Tupi wells in deepwater off Brazil took three days to trip in and trip out to do a perforation—a very expensive process. We've got to look at new ideas that keep the bit turning on the bottom of the hole. Tools like our single trip, multizone completion tool will be key.

We are also spending a lot of time on cleaner technologies for water handling, especially for the Marcellus.