Weatherford International PLC (WFRD) 2002 Q3 法說會逐字稿

Good morning and welcome to the Weatherford's press release. All participants will be able to listen only until the question-and-answer session of the call. This conference is being recorded at the request of Weatherford International. If anyone has any objections, you may disconnect at this time.

I would like to introduce your conference leader for today's call, Mr. Bernard Duroc-Danner. Sir, you may begin.

Good morning, first Lisa Rodriguez will take you through the quarter, and then I'll give you some perspective comments. Lisa?

Thank you. My comments will focus on sequential quarterly trends as opposed to comparisons to the prior year third quarter.

Consistent with our preannouncement on October 8, we reported third quarter diluted earnings per share of 28 cents, excluding the nonrecurring charge as compare to second quarter's results of 31 cents per share. Including the nonrecurring charge of 156 million net of taxes, we reported $1.01 loss per share. The $156 million charge essentially relates to a 146 million noncash write down of our investment in universal compression. This reduced our book carrying value to under $20 per share.

We also recorded 10 million net of taxes in expensed related to planned severance for approximately 800 employees and two facilitate closures. This was in light of the extended lower activity in the U.S. and the declines in the UK. These steps and other noncyclical initiatives will reduce expenses by over 3.5 million per month. Full benefit of these steps will be felt by January 1st, 2003.

Our third quarter revenues of 585 million, represented a decrease of 8.9 million from the prior quarter. On a geographical basis, North American revenues were approximately 3 percent higher due primarily to increases in Canadian revenues, offset by the loss of approximately 10 million of offshore revenues during tropical storm Isidore. International revenues decreased approximately 5 percent on a sequential basis basis, most of the shift came out of our completion division.

Third quarter EBITDA was 125.7 million as compared to 133.4 million in the 2nd quarter. Due to the diverging division's top line trends, a more meaningful analysis of revenues and the EBITDA revenue relationship can be made at the divisional level rather than at the consolidated level.

First, drilling and intervention services.

Drilling and intervention services revenues excluding the impact of acquisitions, were 2 percent higher than the second quarter. There was no deterioration of top line in any region. The single greatest impact from this division's margins was the disruption of activity in the Gulf. The division lost approximately 7 million in high profit offshore revenues as a result of the lost days.

The secondary impact to this division was the deterioration of activity in the UK market which negatively impacted profits by over 3 million in the quarter. That impact will be mitigated in future quarters by the aforementioned cost reduction effort.

Completion systems.

Revenues declined on a sequential basis, approximately 16 percent. This quarter was difficult for this division, as we pulled our five and a half inch expandable screens off the market for an engineering adjustment. The adjustment was needed for the larger size and the trend to longer and heavier strings. This resulted in the size being out of the market for over 90 days. In other words, for all of the third quarter. As a result, the expandable product lines had sales 5 million lower than the second quarter.

We always talked that there pull through of approximately one to $2, and that's pull-through of core completion sales for every dollar of expandable sales. Although this was definitely unfortunate way to prove out this theory, we now have empirical evidence that the pull-through of this product line is approximately a dollar and a half of conventional completion products or every dollar of expandable sales.

Indeed, the ESS engineering change resulted in a 5 million of lower expandable revenues, and seven and a half million in lost associated revenues. Total, 12 and a half million dollars impact.

The lower September Gulf of Mexico activity, due to the storm, accounts for the remaining decline in revenue for this division. We expect fourth quarter revenues will return to second quarter levels as the five and a half inch size of expandable product has been reintroduced into the market. The EBITDA decremental in this division of 50 percent is a function of the lower involve and higher engineering costs associated with the rework.

Artificial lift revenues were relatively flat in this quarter. This division experienced sequential growth in the US and in Canada, offset by declines in both Latin America and Asia Pacific regions. The regional declines are not due to any significant factors and the EBITDA margin was essentially flat.

R&D.

As we expected, and as we mentioned last quarter, expenditures increased 1 million. As compared to the prior quarter. Revenues from our technology, which consists primarily of underbalanced services and expandables, reached an all-time high this quarter, exceeding 70 million. There were actually up over the second quarter in spite of the temporary disruption in the five and a half-inch expandable sales.

I would like to update you briefly on our tax status. We completed our reincorporation and have reflected a very conservative estimate of the reincorporation benefits in our third quarter tax rates. Even though there has not been any congressional legislation to date, we will continue with a conservative rate through the end of the quarter. Pending no action by Congress during the lame duck session in November/December, our tax rate will fall to 27 to 29 percent in 2003, dependent upon the geographical earnings mix. We will benefit from a further rate reduction in 24 as we continue to implement our, in 2004 as we continue to implement our tax strategy.

I will conclude my comments with cash flow information.

As I said last quarter, I will provide on a quarterly basis, total number of acquisitions and total cash invested. In some quarters we are not acquisitive, in others we are. It just depends on the opportunity During the course of the third quarter, we invested 65 million in cash for acquisitions. There were three acquisitions of size, two consolidation plays, and one technology-related. As with September 30th, total debt inclusive of 939 million of convertibles and net of cash was approximately 1.8 billion and our asset securitization was 86 million.

During the third quarter, we realized benefits from our working capital initiatives. We experienced overall inflow of cash related to working capital of approximately 25 million. Working capital days outstanding declined by four days in the quarter and 10 days since January.

Capital expenditures from operations, approximated our depreciation and amortization of 55 million. Apart from operational Capex, we invested approximately 15 million, primarily related to our enterprise-wide JD Edwards software implementation. Our full year 2002 capital expenditure projections remain at the 250 million that I mentioned last quarter.

Now I'll turn it over to Bernard.

Thank you. My comments will be essentially prospective.

Lisa mentioned he we've essentially completed a cyclical cut back, adjusting organization, the business conditions. Close to 800 positions will be closed. The positions are direct labor in the U.S. and the United Kingdom. No other locations will be affected.

The cut backs amount to $3.5 million per month due to the reduction of payroll. We do not intend to reduce payroll any further except for internal consolidations and other product activity initiatives which are not cyclical in nature.

The geographical view of our markets then I'll talk about technology.

First North America. The outlook for our U.S. business is very much like a coiled spring, one which has been and is and will be delayed until such time in which our clients feel confident of the prognosis for the U.S. industrial production. Pricing of gas, pricing of oil, will not suffice to move the U.S. market substantially further. Clarity of direction and confident in if we GDP growth is needed. When such confidence is felt, the U.S. recount will leap forward, by 300-4000 rigs over six months period, it's that simple.

In the meantime, the U.S. recount and activity in general is likely to strengthen only marginally, perhaps by 50 odd rigs over the next two quarters, prices of oil and gas notwithstanding. Although our foreign footprint is well advertised insofar as it provides fuel for high growth rates and underlying geographic markets, one shouldn't lose sight of the fact in North America is invariably half of Weatherford's top line, 1.2 billion. And a keystone to growth in our earnings and returns.

Although it is true we have grown sales dollars intensity for international rig, a lot and most specifically by about 22 percent year on year, another fact is often forgotten, which is that we've also grown our North American sales in dollars intensity per North American rig by about 20 percent, year on year, a very similar rate in the international segment.

Canada.

Canada's prognosis is in our minds, both better and worse in the U.S. Better in that the gas and heavy oil segments will move earlier and stronger than in the U.S., subject to the same factors, though. Worse in that the number of players in the Canadian E & P business is reduced, shrinking and basically in transition. Whenever you see things like that going on, there tends to be delays.

As a summary, North America is waiting on the economy, not on oil and gas prices and to restate what is financially obvious, North American rig activity and promotion of North American gas are critical factors for the earnings growth of half of our business

The international segment now, the progression nozzle for international segment is nor defined. Absent a major crisis, we see the international market, X the United Kingdom, growing a little beyond 5 percent year on year.

In that environment, and based on client commitments and indications, a 12 percent growth year on year, exhibiting the same or higher rising intensity of dollar sales per rig employed as shown historical. Much of expected performance will be fueled by technology segment as well as a facilitating effect of our footprint. The UK, about 9 percent of top line will bottom out in Q4, this quarter right now, is expected to remain flat unless and until the UK government and operators come to too mutually satisfy agreement and expiration and production taxes. When and if they do, UK activity will surge within six months of such agreement.

Russia, the Caspian Sea will be the fastest growing segment of our international business. In fact, by the end of 2003, the scope and scale of activity in both Russia and the Caspian Sea is likely to warrant the internal status of the full-blown region at Weatherford, that's an indication of scale, essentially.

Expenditures on R&D in Q3 increased by a million dollars over Q2. We anticipate that R&D will flatten at the current level in Q4, maybe a few hundred thousand dollars more, but not meaningful, to reach an annualized $18 million level or about three and a half percent revenues, a bit less, I should say 3.4 percent of revenues. That level and dollar expenditures will not rise in in '03 and therefore fall in relative terms.

The rising R&D throughout the year made this fiscal year 2002 challenging from an earnings and returns standpoint. In many respects in fact Q3 and generally 2002 were the hardest of times for us. Looking forward into '03 and into '03 and '04 R&D is likely to be a lesser burden and what was a burden will become a factor of increment the earnings. And indeed R&D has to deliver with returns.

The first year of returns is a rising top line for Weatherford Technology Segment. Technology, as a reminder, is defined at Weatherford,as strictly industry step changes, or in our case, primarily underbalanced, expandables and optical sensing systems, otherwise known as intelligent completion. It did not include in any way or form, the continuous technological changes taking place in our core park and service lines, these changes are true technological achievements but by cheer incremental nature, are competitive, by necessity, not remotely the same share holder value creator as step change technologies. Which brings me now to an issue which is Q3 issue as opposed to a perspective one, but I'll put it in context, which is the issue of the engineering modifications made to our five and a half inch expandable sand screen.

I'll get to '03 progress for technology.

As most of you know and as Lisa mentioned, engineering modifications were made strengthening the original five and a half inch expandable connections. The connections was put through finite element analysis and field tested over the past five months. During that time, we effectively pulled out of the market that particular size, five and a half inch expandable sand screen.

We reintroduced our product line in the market two weeks ago and we just completed our first installation of the modified connection a few days ago and we are installing another one as we speak. These types of engineering modifications have occurred and will occur from time to time in new technology. It's inevitable. We are in effect akin to realtime R&D.

To put that kind of event in perspective, you should understand out of 140 expandable sand screen installations to date, we have had in our history a 96 percent, that is a real statistic, 96 percent success ratio in all types of depth, angle, whether directional or horizontal, and all kinds of geological formations. 96 percent.

If you run the math, there's been a historical total of only six expandable sand screen jobs where technical difficulties were encountered over the past three years which is very low for so young a technology. And we make these things public so I think in our case they're far more visible than pretty much in anyone else's case. Only one job out of the six, which is the well in the North Sea, Harding field, to be specific, resulted in a hiatus in sales.

With the help of that North Sea client, the client whose well experienced the difficulty, the engineering modifications were completed in record time and commercialization is resumed. What this means is that expandable sand screen top line will grow substantially in Q4. And what's happened is normal, may happen again. This is a normal part of a young technology coming to market.

I'm going to sort of step away a minute from the script and say a few things on the whole notion of expandables. As I read through my script here and we explain the engineering modifications to any size of sand screen, I have the feeling that we in many respects are maybe apologizing too much for what is ultimately a normal event and we are not perhaps putting enough emphasis on the importance of expandables, and the progress made. Progress that you don't see.

Let me give you some idea, unscripted ideas of such.

If you look at the sort of per chart of product introduction expandables, you see over the next nine, perhaps 12 months, multi-joint metal skins, open hole expandable liners, open hole metal skin, expandables liners, and at the end of that period, some of the very first [INAUDIBLE] systems. As we develop our knowledge and our confidence that expandable solids, meaning changing well construction, is not only sort of an interesting idea, but a practical success. You have to look at expandables as a industry changing technology, and you have to see through the ups and downs of some of the smaller aspects of the products and some of the small failure that is get corrected and it's fine. And see through what it will do, the changes and how wells are drilled and constructed over the next two to three years and the importance that it will represent.

You cannot lose sight of that. Because if you do, we'll all be missing a very important transition change that's occurring in our industry.

Let me go back to the script.

As it is, in spite of what happened in the quarter, our technology segment did grow in Q3 versus Q2, to $72 million, which is a modest 6 percent, quarter on quarter, but not bad given the fact we pulled out one of the expandable sand screen product sizes. Year to date for our technology segment, adds up to approximately 200 million and will likely settle at [INAUDIBLE] or a little above for the year 2002.

This level of compares with 215 million for 2001, which is a 30 percent increase, which is less than the 50 percent growth rate we anticipated a year ago. But it still is very healthy in a cyclically down market, year on year.

Looking out to 2003, and based on client commitments and projects scheduled, we calibrate '03 top line, in the technology segment to represent, there's going to be a range, 425 to 500 million. The likely big down to the year will be underbalanced 290 to 340 million, expandables 120 to 130 and optical sensing system, 20 to 40 million. These numbers are the best estimate, the breakdown as a reminder will not be given quarter by quarter as the year progresses. However, we like to do a post mortem on the year which will be given at each Q4's conference call for the trailing year.

There's nothing new to report on inversion. Lisa touched on it, I'll just put my own comments here.

We are executing our foreign income tax structural strategy as planned. All of our structural changes can and will be readily reversed without much difficulty should Congress pass retroactive laws in the December session. We retain cautious insofar as reported earnings are concerned, we've accounted for the highest possible tax rate, which I believe is 30% in Q3, consistent with our legal structure.

Finally a word about universal compression or UCO, taking its symbol, the write-down in Q3 reflects the public market value. It's the time we completed the merger of the compression division with UCO's operations. The write down does not sanction an operating or strategic failure on the part of UCO management. UCO has excellent operating integrity. The prognosis of its GAAP compression business stands out with domestic gas with accelerating decline rates and foreign gas in fast development.

Management at UCO is squarely focussed on raising returns on capital employed. The results of the next 12 months speak for themselves. In the market which respects substance, we have to believe that [INAUDIBLE] will reflect those fundamentals.

With that, I guess I'll turn to the operator, you might want to open the session for questions, please.

At this time, we are ready to begin the formal question and answer session of the call. If you would like to ask a question, you may press star one on your touch-tone phone. You will be announced prior to asking your question. To withdraw the question, you may press star two. Once again, to ask a question, you may press star one. One moment, please. Our first question comes from Mr. Bill Aber of Simpson's & Company. You may ask your questions.

Good morning, I guess I'm now a Cajun.

That's progression.

Absolutely, thank you very much. Bernard, 800 positions to be closed, you mention that they are direct labor in the U.S. and the UK. Can you give us a split between the U.S. and the UK? And I assume that they are out of completions.

The second one is yes and the split is close to 600/200, 600 U.S., I'm sorry, it should be obvious.

Okay. Great. Second question I have for you, you touched on Russian and Caspian, talking about a fast-growing region, a segment of your international business. What are you doing in revenues on a run rate basis there presently, and what is the expectation for '03?

Well, '02, our calendar year will probably close the year just under 100 million, 90, $90 million for Russia and Caspian. Just taking year to date and analyzing it, I'm not even being clever in Q4.

Okay.

Next year a region becomes certainly -- I mean, there are other criteria to look at obviously, but a region becomes a part of the world become as candidate for special regional focus when it flirts with 200.

Okay. So I guess if you could sort of amplify as to what exactly are the opportunities that you're confronting there, are they specific project that is you're getting engaged on? What exactly is unfolding in Russia for Weatherford and in the Caspian.

There are two markets that are going to break down.

The Caspian are essentially large scale traditional projects, traditional in the sense that your client is a traditional client. And those projects are -- involve complex downhole drilling conditions which call for a great density of products and services. And we've just been successful in securing a lot of contractual commitments in that market. And so that's that.

Okay.

But I wouldn't say anything more than that, except that there's just, as a good substance of contractual commitments that we have. And okay.

And it goes for -- and your class would be people like [INAUDIBLE], BP, like Total, that sort of thing. Okay.

Russia is some of what I've just said, but then there will the actual Russian market per se, where the single item that sells, and it really is that's it as far as technology. The Russian market, as in Russian clients, as in the gamut of names that you know, from Gastron down to [INAUDIBLE] Luqual, etcetera. The one item that sells is technology. It is not the core product and service line.

The core product and service line gets dragged by technology sometimes, not always. But technology sells.

And the three -- mostly a question of being able to have the access to the clients, to demonstrate the value of such and be able to deliver operations, that's actually the threshold on how far you can go with technology in Russia.

The difference between that market and, say, other markets that are, you might also be interested in technology, I will say this: The Russian market is interested in what technology can do for them as opposed to wanting to copy the technology and remarket it under their name.

And the technology place specifically is what, under balance.

Particularly shape, no doubt, expandable is something very esoteric in Russia, but the underbalance is definitely the one, and clearly drilling with casing and optical sensing systems are quite a distance behind.

On optical sensing systems, I will say something else. There is a great deal of interest in that market, but it's not the only one, but it's premature. For what fiberoptics will do in providing the medium for seismic. Meaning the ability to have the realtime information, sort of like a movie, if you will, on how the reservoir is evolving.

It's too early for that, so the interest is welcome, but it's too early from a commercialization standpoint. But there is a great deal of -- a very high level of interest in whether we can do this with fiberoptics in a cost-effective manner, not only for the knowledge it gives you of the reservoir in terms of its evolution of the time and production decisions, but in developing the reservoir from a drilling standpoint.

Okay. And the final question is for Lisa, tax rate in the fourth quarter in Q3, what do we expect in Q4.

We'll leave it at the conservative 30 percent, then it will fall in the first quarter,pending no action by Congress.

Okay. Thank you.

You're welcome -- you're welcome.

Our next question comes from Jeff [Kyber].

Good morning. A few questions. On the completion systems, you went through the revenue impact there. Sequentially you take about a nine million dollar EBITDA hit on a 12 and a half million dollars revenue short fall. Can you split that defend what's volume effects and what is the additional, you know, engineering costs associated?

I think I'll let Lisa do it, I think the decline in revenue is a bit more than 12 and a half. I think the 12 and a half was the five on expandable sand screen and the seven and a half that you measured were pull-through sales associated with it, basically it got postponed. The 12 and a half was that, there's a little bit on the Gulf.

Right, actual total 16 and a half.

The question is nor like nine on 16 is the question then then.

It is, incrementals at the EBITDA level of about 50 percent, a little bit higher than what you would expect, but it had a few -- a little over a million of rework costs.

Okay.

Then you have lower volume to cover your fixed costs in manufacturing.

Okay. That was really the rework cost that I was trying to get a handle on.

I don't know if this is a fair question or not, taking that you made the point, Bernard, that this is a typical part of a new technology evolution in commercialization, if you look at expandables on a cumulative basis, you know, including these, you know, kind of second for third quarter events, has the business been acceptably profitable on a cumulative basis up until now, or are we still waiting for it to reach that?

The answer is yes, and the answer is no, Jeff. The margins on expandables is very high. Very very high.

The EBITDAs on an expandable depends on what product line and so forth, but the margins on expandables on the EBITDA level are somewhere between 40 and 50 percent.

The problem with my saying that is I am not loaded, not loaded in that assessment. The burden of R&D which has nothing to do with what's being commercialized right now. Understand that the R&D, in expandables is entirely on completion applications and solids.

That is, on well construction. There is not a lot of R&D being done on expandable sand screens per se, the slotted application. It is considered a -- an application which is in full commercialization, so it's -- one actually does not require the R&Ds.

If you base the R&D of expandables, I think it's $12 million, Lisa, or something like that? It becomes actually a negative really, if you will, as a contributor. But it's not economically correct insofar as there's no matching between the R&D that you're doing and the top line at that you're getting.

I think if the solid side of the business, which is -- has always been thought of as being much larger than the sand control side, the solid side of the business behaves in terms of EBITDA the way the sand screen side has, and given the fact that it is very likely to be a bigger market at the end of the day, then I think all -- everyone who is in expandable is is in good shape.

Because with that kind of EBITDA contribution, when the top line grows, you you -- and you do not lose any EBITDA margins, that's obviously a premise, then the returns are high.

Okay. And from what you said before, it sounded as if you are thinking that within 12 to 18 months, you may be in a position to start commercializing in -- and generating some revenue.

I think Jeff, the exciting thing for us and there's another company which [INAUDIBLE] Ventures, Haliburton, which is also a pioneer in this business, the indications in field tests done is that the solid expandable application or the applications of expandables on solids, which is essentially casing for the -- whether you call it drilling liner or just casing, work, and work well. And we know enough about them now that the risk that we could not commercialize this is now very low.

So it's a question really of time. So one big difference between saying we think it's interesting, we need to test it, and it's another to say, no, this stuff works. It's a question of getting all the bugs, you know, dealt with, but they are bugs to deal with. Nothing earth-shaking. And then we agree to commercialize.

And given the implication of well construction cost of this technology and given that we now are comfortable that field tests prove that this technology will work in solids, that is really the -- by far, the biggest market. That, yes, your assertion is correct.

Okay. You mentioned drilling wall casing. Did you have any brief comments in terms of where that stands in the Weatherford portfolio?

You'll notice that when we gave, when I read from my script, you know, I talk about technology and I mention optical sensing systems because it is a number, 20 to $40 million, I know three -- in '03, that's just -- it's not -- or the widgets that go with it which is essentially the valve systems that open and close the zones. I don't mention casing and the reason for that is that I think that although we've drilled about 50 wells or so primarily in the Far East with drilling with casing, our system is still far from doing what the alternative system in the industry is doing, in terms of debts, in terms of being able to handle an angle.

So as far as I'm concerned, so far our system in drilling casing is more a sort of first zone-type system, meaning from zero to 6,000 feet, if you will, and it is going to become a full system, but not I think until the middle of next year. I'd rather not include the top line there.

Really in order to get a significant top line, you really have to be able to have a, you know, from the wellhead down to PD if needed-type system. That would take some more months.

So I sort of pushed it aside in order not to add a number which would be sort of too small to make a difference. If I told you it was 10, $15 million, frankly who cares.

Right.

I'll also that he that drilling with casing is -- I don't think it's in the same league as underbalanced expandables or even optical sensing systems, but it's going to be important from everything I know. The cost of drilling, but -- not only in the cost of killing but also in terms of eliminating drilling problems.

And just the last question, you through out a number of 300 to 400 rig increase in the U.S., I guess basically confident in GDP growth is achieved. Can you just give us a little idea where that number comes from?

It's -- I've had, I think, too many conversations to even mention with, you know, domestic clients who are getting tired of being asked the question of, you know, what's wrong with you guys? Why aren't you loosening up a little bit?

And there's a lot of hemming and hawing and a lot of, yeah, you know, comments as to the fact they can maintain the production rate in spite of not drilling and finally in the 11th hour, the admission that one, there used to be more activity, and two, they're going to have at that hard time keeping up production rates, and, three, they're just not comfortable taking any risk right now because for all they know, industrial production making down, we've been told, August and September, production has been negative in this country by .3 in August and .1 in September negative, if I'm not incorrect. And these numbers are dished out by our clients who seem to be more attuned to it than I am.

Maybe demand is suppressed. So the question is, look, if we can get some confidence that we're on a roll here from an economic standpoint, then, yes, we're going to do X and Y.

All I'm doing Jeff is a very simple, simplistic but meaningful, the math of adding what X and Y of those various clients mean, it's all the same, a return to the 1100,-1200 rig type, if they're confident in a nice two, three-year run in the me. And they're not. They are not.

The way I characterize this is by saying they are like most of us, one derivative away from the CNN, listen to the same thing day in and day out and basically the bulk of the news has to do with the military or quasi-military event, that's not good for business.

So people aren't confident, they're not confident, they don't want to be aggressive. They know they need to be, but there will be a time for that. I hear that too often from too many people.

It's about as, you know, coherent a -- an environment as I've seen. May not be the one we want, but it's coherent, which is get on the good economy and we'll spend.

Thanks very much.

The next question comes from Kevin Simpson of Merrill Lynch. You may ask your question.

Morning, Bernard.

Good morning.

I wonder if you could give us a little bit of a timetable on the, you know, the other products in the expandables suite in terms of when you would expect them to be on, what kind of contributions we're looking for next year.

The range is very tight that you're giving for a product that's been, you know, has had its ups and downs in terms of contribution. It seems like it surges and then goes back. Even before this setback in the last quarter.

Good question. The range is tight because the range is essentially a sand screen range. There's not a lot for solids applications in that number.

In the 120 to 130.

That's correct. We'll say it is a reasonably safe number insofar as there is a whole category of products that are not included in that number. Why aren't they included in that number, Bernard? Because I can't exactly tell you --

You asked it better than myself.

I mean, you know why, I can't tell you exactly when they're going to be commercialized, February 1st, March 1st profits, I don't know.

What I do know is that on the metal skin application, which is an intervention application, on the expandable liner application, which is the beginning of a solids application, and a drilling liner application, all these things are scheduled to be introduced in the course of the year 2003.

And some of the first dates, looking at my chart right now, probably the most spectacular being the 13 and 3/8 expandable drilling liner with expandable casing due to be commercialized sometime in the second quarter of next year. Okay?

But I -- because I don't know, we don't know exactly if it's going to be that month, that week and so forth, we need to have also some willing wells initially to be basically to be commercialized. I mean, we will, because the clients have not been the problem.

It's difficult to put a number there. So that's why the range is tight. It's an incomplete range, it's a range that is incomplete in the scope of products it covers.

The metal skin going to be not that big a number, and I thought it was already kind of quasi-commercial. Is that not the case?

Well, no, it is. I mean, the single joint metal skin is now -- is commercial, but the multimetal skin is not.

There are issues of sizes and metallurgy. Stainless skill, multi-joint metal skin is not.

Remember when we give one name for an application, there's a whole family that goes behind it, the fact you've done one which might be the simplest form in terms of size and metallurgy, doesn't equate in the whole line being on the market. Remember that also.

The really meaningful application would be something multi-joint.

That's correct. I think by the end of 2003, for example, specifically the entire metal skin family of applications should be commercialized.

Of course it will be top line and everything else. And of course, it's not -- it's hard for us to measure.

I mean if what I've said is true, based on client indications and blah blah blah, then by definition, I can't put things like that in there. We can't because there are no client indications because they don't know when we're going to be able to deliver it. So we're not sure if it will be ready in March or April, these sorts of things.

I wanted to switch over to underbalanced, you know, looks like you had a, you know, good surge or you pick up in the latter part -- in the second half of the year. And I wonder just a couple things, one, could you kind of detail some of the successes there and then what kind of follow-throughs you may be having. I guess there was a lot of -- significant interest in Oman by Shell, PDO.

Actually, you've answered your own question. Middle East and Far East, Russia, are the places where there's a real surge in activity in underbalanced. While you have to go to the actually -- to the literature of the company itself, unfortunately, but we do have it, there is a -- I think it's an internal magazine at Shell.

They feature in the internal magazine two fields, the Nimmer field and on Oman. In addition to production benefits, they're realizing significant cost savings in utilizing the underbalanced, and also a significant additions to their reserves.

A thing also, it was proven to be of a great help in understanding the reservoir because of the information that you get while you drill. And so from a reservoir modeling standpoint in terms of developing further drilling strategies in the field, it has proven to be of far more useful than expected.

So you have this internal article which is coming out in a magazine which I haven't read yet, it's been out a few days, it's on my desk and Don has read it, which gives you a very good, I think, viewpoint. And we don't agree with everything they say, but a very good viewpoint, yes, I know it's Shell but, you know, one of these days, there will be other people, too.

A lot of our clients in Shell, I'm almost apologizing for quoting Shell here, they are not a Number 1 client, there you are, they are a Number 2 client. But there is that, very recently on record, very, very recent information since the drilling has just been, My God, we started a few months ago.

They're halfway through a 10-well program.

They talk about -- again, I didn't read the article, but from what other people told me internally, they talk about taking that and making it into a much more global program in Oman, assuming they can defense -- remember, they only own 30 to 35 percent of the JB in Oman. It would be easily accessible and we can get it to you, it's on the Internet that kind of stuff, a recent review of recent results of a process, an underbalanced process from a client.

One last comment. The geology in Oman is very similar to geology throughout the region, they think there might be broader applications.

There is. I'll tell you again, the Middle East, North Africa, the Middle East, Caspian, Russia, the Far East, including China, you really have a surge of interest in underbalance and a surge in projects, a much of '03 will be in that part of the world, not to forget the United States. The United States remains a very high growth market for underbalanced.

But, you know, if you look at the most recently documented results comes out of the eastern hemisphere, not the North Sea, mind you, not yet. Although you will have some, you will have two or three operators who are very likely to go back in fields in in '03 using underbalanced for the first time. That's not a certainty, just talk.

Looking at the outside, some of the issues you did mention Shell but it hadn't proliferated customer-wise. So is that -- [INAUDIBLE] is that going to be a significant issue for '03 or is it going to stay inside most of the same customer base? And then the other issue was the issue of that, you know, you were running, you know, kind into protocol type, you know, contractor-type issues that were as much an inhibitor to potential growth as, you know, application acceptance. So I'm just wondering where those stand. I mean, really, do you have the capability of doing 350 million or 340, whatever the number was? Because you said it, but I mean, is that going to be an issue for next year?

Some questions are easy to answer, others are harder. I'll leave the easy ones for last. 340, yes, we have the capabilities. And if we don't have the capabilities today, we're getting them as we speak. So that's one thing.

The contractor-type issues, that's a real issue. But one has to define what it is. If you look at the -- let me explain, how can I explain it?

The best is as follows: If you look at the type of people that we have in underbalanced, they -- I mean, I'm going to use -- I'm going to be simplistic but think of it in terms of people that are more likely going to be dressed with white coats on and design well programs and be involved in looking to software applications to optimize this step or that step. And they're most, I think, comfortable talking to their, sort of equivalently educated clients on the other side of the desk.

The problem is that part and parcel of what underbalanced does involves a lot of equipment, which is what you're alluding to. And I would add something else, which is when you are starting the business like we are, particularly in the early phases, you have issues of learning from an operating standpoint, how to maintain your equipment, which is basically a sort of -- the ABC of being in the contractual business.

And I think we've had problems bridging the culture which would be more of an engineering culture of the underbalanced people, which is very necessary, because at the end of the day, you sell this process today not on cost, maybe tomorrow you sell on cost, today you sell it on production rates, on productivity of reservoir recovery and perhaps you sell it tomorrow on ease of drilling, but you don't sell it on cost, not quite yet, I think the time will come to do that.

So you sell it to people who are interested in the reservoir basically, hence the caliber of people you need. Yet you're asking these same people to manage considerable piece of equipment which calls for a particular type of talent, not better or worse but a specific type of talent. And the matching of skills has been difficult for us.

I think we've found a way to do it, drawing on the resources of our core product and service line where we have talent which is very, very adept at managing the maintenance of the -- what is a fleet of equipment. And that's basically what it took.

So, you know, the question you asked is a very good one, and has been a real problem, may remain a problem. But I think that the way it's being addressed, in many respects, the Middle East was sort of a lab for us in the sense that we tried different methods on how to handle the surge in business and the sort of the surge in reservoir, sort of optimization from a drilling standpoint, talent we needed at the same time and sort of maintenance and equipment talent we needed. We tried different methods, and we found a simple one, a good one, which is a cross-over of support from core parts and services. So.

So width type people.

Absolutely, bingo.

With respect to Shell, that's an easy one, I feel guilty when I mention them, I shouldn't, my Dutch friends would be upset if they heard me. But no no no, I think other than the other suspect, which is BP, I think you can add Conoco, Chevron, Hess, and others on the list, no, really not. And let alone the Russian, it's a very long list.

In fact, probably what we ought to do is establish a list and make it available of people that are, you know, on our roster of clients of underbalanced, not one-time clients but repeat clients. That's not an issue, that's the easiest one.

Thank you, Bernard, that's it for me.

Our next question comes from Mike Arbind from Deutsche Banc, you may ask your question.

Good morning. You detailed some of the head count reductions and cost savings that you will get from that and you mentioned that there would be some other potential sources of savings, consolidations, manufacturing efficiencies maybe. I was wondering if you could go into into that a little bit and what that might save you, kind of in dollar terms?

Well, in a perfect world, I'd rather not. I'll tell you, I think that it's best in some respects it's best to do rather than tell. But I'll just -- let me just maybe elaborate a little bit on the topic.

You have, you know, you have two types of actions that when it comes to cost that you can take. One is the classic one, which is cyclical, you know, which is -- and you hear about it, sort of will almost move in waves in the industry. You know, business is good, it's good, and it stops being good, it stops being good, it becomes bad, and all of a sudden, people talk about, you know, thinning down direct labor. And so it's a layoff and as time goes along, I think we look at it with more and more -- it's counter-productive in many respects and very hard to keep quality people if you can't give them any kind of stability. So we're very careful how we do it, but we still do it from a cyclical standpoint.

There's a completely different aspect to the question, which is a little bit like motherhood, something that's quite fundamental. Mike, what is the favorite word used by the gentleman who runs the fed? Do you know?

The word is productivity.

Right.

And he gets all excited with productivity, to the extent he can get excited.

And productivity is not a question of chopping heads off necessarily. The definition of productivity is essentially more output for the same quantity of resources. You can get there one of two ways. More output or less resources, but not necessarily one or the other. Not necessarily both.

When you look at a company like Weatherford, and what I'm describing could be, I think, done for just about any company, it's a well-run company. Weatherford has no need to go in in some sort of restructuring Jihad or anything like that. It's not necessary.

Weatherford is well-run, has good quality of parts and services, and it definitely is a growth company, which is trying to also become a returns company. It remains a growth company.

However, having made those statements, take a look at Weatherford on -- take a look at the costs of Weatherford. How do you get to the costs? You take the EBITDA and take the reverse of the EBITDA. You be very simplistic. The EBITDA is 21, 22 percent right now.

25.

25 percent because it's -- well, historical it's more accurate and second of all, easier to compute.

So you've got 75 percent of revenues are cash costs, and if your revenues are, say, something like $2.4 billion or thereabouts, take 75 percent of that, you've got a lump of number. I think you should excise out of it the R&D because it's not that it's sacred, not at all, but it's in a different bucket in terms of focus, and your left with something like 1.6 billion dollars of cash cost.

The question really is, if you look at it in a very simplistic manner like, that Mike, is that $1.6 billion, do you need to spend that much to, you know, provide the parts and services that you provide with the quality, culture, the growth emphasis that you have, or can you do it for less?

Uhm, and then sort of when you look at it that way, you get involved in, you know, what is the structure of your costs, which in our case is roughly 45 percent manufacturing, 35 percent service -- no, the other way around, 35 manufacturing, 45 service and 20 percent overhead roughly and you have to ask yourself, can I -- can we, as an organization, can we organize ourselves a bit more creatively? Can we be more productive? Can we also set ourselves up to where, you know, X years from now, we'll be way ahead of the curve?

One of the things that strikes me in our industry is we work in very difficult countries, and we sort of supply parts and services for strategic commodities, they're really good things, but it seems to be five or 10 years behind other industries when it comes to productivity, be it manufacturing or for for example.

Why don't we try to be proactive and apply the same growth culture to top line to a growth culture of productivity, in other words, let's try to improve it dramatically.

So I'm babbling here, and obviously I don't want to give you any details, because it's premature. But please take the babble seriously because there's something to be said about changing your cost structure and please don't equate that as we're going to restructure and all that kind of nonsense because we don't need though. It is a well-run company, we can just run it better perhaps, it's in that spirit that we may be thinking about doing things.

But I would suggest you should wait until we actually, over the quarter, show it through earnings, then you can ask us how we got the numbers, it's probably safer.

I will do that. If you can comment on what you're seeing pricing wise, I know it's kind of a broad question, but I guess maybe if you have a sense for it, what you've seen in terms of pricing declines, peak to what is hopefully trough right now.

It was, I think, late in the second quarter, early in the third quarter, you could see some -- it was spotty, but here and there, you could see price softeners. Essentially, I think people in the industry having too many, you know, basically a payroll that was bloated, bloated because expectations were that rig count would move to a thousand or something like that in the U.S. This is a U.S. discussion.

And I think there was a bit of nibbling in market share here and there, there is not a Weatherford comment, just a general industry comment. If -- so you had a little bit of price softness. It's hard to measure when you look at the results. So whatever there was, was not -- it was not, fortunately, statistically significant. And by and large, whatever I saw, which was, again, late second quarter, early third quarter has stopped. So, Mike, all is quiet on that front.

Okay, great. Thank you.

Our next question comes from James Woodland of Banc of America Securities. You may ask your question.

I'm getting slow in pushing those buttons.

Hi, Jim.

Good morning. Of your total expandable sand screen line, what percentage is made up of the five and a half?

Well, in what quarter. In the third quarter is zero.

Agreed, but I mean, how many sizes do you have?

Oh, okay. Well, I mean, okay. Let me answer, we have about six sizes.

Okay.

But five and a half would be a large third of the application. And it also depends a little bit on the region of the world

Right.

So it's a large third, I will say when we're finished, it's likely to be closer to almost half. And five and a half and four range work together very often so that one basically triggers the other to boot. So let's call it a large third, but with potential to nibble up to half.

Okay.

Underbalanced. When you talk about underbalanced, and I noticed that one of your competitors is deciding that it actually is a business line after all, in underbalanced, what all do you include in revenues? Do you include the historical old Weatherford equipment rentals, the Williams rotating head? What's all included in that line?

There's no rentals or fishing or anything else like that. No.

What you're doing -- you do include rotating heads, yes, you do include that. You include -- basically, you include the compression equipment, rotating heads, the -- obviously the foam and the chemicals that are used as drilling medium, the down hold tools such as the down hold deployment valve and the like, the software and the engineering of the whole thing, and I forgot, all of the filtration devices, the membranes and nitrogen generation devices. That's pretty much it, there's nothing else.

Order of magnitude, you talked about how expandable margins are reported at 50 percent unburdened by R&D. What are underbalanced margins running these days?

Materially less because of the maintenance cost of equipment. One of the questions that one of your peers asked early on, which is very much on point, which is difficulties in learning how to manage the fleet of equipment which is quite considerable, given the talents that were responsible for it, and how can we finally address this after a little bit of trial and error, I think the EBITDA margin is 25 to 30 percent range. Is that fair?

That is fair.

I think if you analyze the cost structure, you find out -- and you compare it to other businesses very similar in terms of skills that are required, we spend way too much. I mean, this is equipment, I think historical we did not, it's a question of organizing for it. I think we did not organize quite as well as I think we hope to do. You may find the margin moving up as the maintenance of equipment is something that's behind us.

The other thing I can point to, to be fair to underbalanced, is that I'm thinking of the Middle East, there was some talk about Oman initially, and we talked about stuff that our friends at Shell put out very recently, but truth be known, we put in initially probably twice the engineering staff. That is actually true, twice the engineering staff we needed on that project, if only because it was a defining project for the whole Middle East.

And so that obviously makes your margins look much worse than they would normally be. And probably also true with training, Jim, you don't go from 200 to 300 in terms of activity without having to seat some people. That's the messy part of organic growth in technology, as opposed to going out and buying a business.

People in terms of segment.

That's correct. There's another way, you can't pick someone who used to be in direction or wireline, welcome to the brand-new world of underbalanced, you've got to spend the money, unfortunately, and that is the dark side of organic growth. No doubt.

Last question. You filed a shelf recently? I think I saw it was to fund acquisitions.

Actually, we have -- had the shelf before sitting there for I don't know how long, for years, and when we when we inverted, when we went to Bermuda, de facto, our prior shelf was terminated.

Thank you very much.

You're welcome.

Our next question comes from Dan Eggert from Credit Suisse First Boston.

Good morning.

Good morning. I guess one of my questions, if you look at the completion segment on I have of back of the envelope numbers to walk out with the expandables portion of profitability would be, and what it looks like is over the course of this year, we've seen a bit of a slide in margins on the traditional baseline completion business. You know, if that is correct, what are you guys doing to remedy that and does it have a lot to do with some of the management changes we've seen there?

No, I actually -- I mean, I'll let Lisa answer, but from my observation, I don't think this is -- that's going on. That's not why the management change took place. It's -- more of an evolution than a change. A predicable one.

If you're looking at operating income margins as opposed to EBITDA margins, you do have the additional license with Shell and some of the other technology amortization coming in there year. It came in basically middle of the second quarter, which does have an impact on the operating income margin. If you look at the EBITDA margin, I think the only impact you see is in the third quarter, which is a function of volume.

And I would also add that the Shell license has done a value and an implication for solids really, not for sand screens. Sand screens were there already. So they are paying for something today which is of no economic value from a P&L standpoint today.

That also sort of gives them a burden which seems to have no return. But that will be coming. If there was an issue of margins declined in the core partners, I would tell you. But, no, that's not the case.

Okay. With the decision that's under the UCO position, just with accounting standards, getting them on the same footing, does this give you more flexibility as far as a long-term decision on universal and its position as part of the Weatherford portfolio?

Well, first to the -- I can't remember in my 16 years, having written things down like this to the degree we did. So let me just say that although yes, it is an accounting decision, and, yes, it's not a cash cost, it's -- I would describe the, you know, the psychological effect of doing that as horrible. But it is what it is.

Yes, I suppose that now that it's we wrote it down somewhere between 19 and $20, I think closer to 20, I think.

Close to 20.

Using whatever methodology. Yes, of course, we don't have any cosmetic or esthetic issues anymore. But we're not as moved by esthetics as we probably should be. I can't make it go up, it is what how it is.

But the comment I -- I mentioned at the end of my comment, I meant it, UCO is a well-run operation, it's a clean shop. Yes, it needs though focus on their returns. They know this. But they had a great second quarter story. And I do realize they are liquid because our position, I understand that.

It's hard to trade it, on the other hand, from what we know, it strikes us as being inexpensive. We don't -- we're not in the habit of selling things that are inexpensive. So I'm -- that's come by way of an answer, but you're right, obviously aesthetically, we are liberated, if you will, but I'm not sure it's a great feeling.

One final one, Lisa, you -- could we get the break on international revenues, a little more detail in the eastern hemisphere that you guys gave in the press release?

We can do that off-line.

I can send you a schedule.

That's probably better.

All right, thank you, guys.

Our next question comes from Terry Darland of Goldman Sachs.

Thanks, a couple of follow-ups, I guess for Lisa, to try and understand some of the numbers that we've got here.

We look at the drilling and intervention services business first. You indicate we've got revenues up here sequentially, you indicated 3 million EBIT hit for North Sea, high margin impact on a 7 million or so revenue hit in the Gulf of Mexico, that's call that root 3 million. It looks like, you know, if we make those adjustments, you're around 59 and a half million of operating income, 18.6 percent margin, you're flat sequentially on an increase in revenues. I'm wondering if the answer there is price or whether there's a mix issue there as well? There is a mix issue.

I would say -- I quantify the mix, you're looking at over $2 million of mix be, which explain as fair amount of it.

Of EBIT mix, you mean?

Of product line mix, yes.

Okay. And then on the completions business, we got the 12 and a half million on the expandables hit, and I guess actually as an aside to that question, when you talk about 425 to 500 for next year for that business, are you including this other completion pull-through?

No, no, never. That's a very good question, Terry. We'll just be very specific. It is underbalanced, expandables, optical sensing systems, yes, a small drilling with casing, but it's not specifically meaningful. It is the top line that is directly associated with those technologies.

It's not incremental anything as in we've got a new system which is level this and that, and another system which is level this and that. None of that, very increment incremental -- incremental and none of the associated pull-through top line.

Otherwise, frankly, we should do away with it, because it's meaningless.

Also Mexico impact on the completions business, did you indicate two to 3 million, Lisa?

Approximately three.

Okay. 3 million. Okay. So right around 103, 104 million adjusted there.

I want to make sure I understand the adjusted EBITDA explanation. We're adding back, you know, high margins called 40 percent margins on 12 and a half million of expandables. I think you said 1 million of, you know, sort of extra engineering costs, and then presumably that 3 million Gulf of Mexico loss went right to the bottom line, so if I add that up, you're around 16, 16 and a half million of EBITDA adjusted, am I missing something there?

I'm shifting papers here.

She's shuffling papers, Terry.

I apologize, there are so many moving pieces here.

There's definitely a lot of moving pieces. If you look at completions they also had -- you had a shift in your product line which also contributed to the decline in the EBITDA.

Okay. That's --

That was significant.

You actually -- you're indicating you had basically flattened down revenues but up margin has been the -- adjusting for all these factors.

Yes.

On the cost savings, the 40 million-ish annually completions and drilling and renting services, what is the breakdown between those two, is it half has been half, one-third, 23rd, ballpark, what are we thinking there? Just for the head count piece.

25/56/10th.

It's 65 DIS. There's about 10 percent of that that is [ALF]

The lift guide have performed consistently very well, of the three and a half million dollars per month pie, you know, I was sort of answering before I -- before Lisa, that's very bad, but it's 65/25/10 would be the rule of thumb.

The lift guys are very -- the lift guys are by culture and tradition, are ahead of the productivity curve.

Okay. And then the last question on the balance sheet, Lisa, I think you said debt net of cash is 1.8 billion, I want to make sure I got this right here, that's actually up about 60 million sequentially; is that correct?

It's up 50 million, our debt is. That's how we're rounding. It's up 50 million.

Can you give us the cash balance at the end of the quarter?

The cash balance is 58 million.

60 million.

60 million.

Okay, great. Thank you very much.

You're welcome.

Our next question comes from James Stone of UBS Warburg. You may ask your question.

Good afternoon everybody, or good morning. Hey, I'm gonna pass and just do questions offline.

Thank you, Jamie, call any one of us. Maybe one last question, one last question because it is late.

Okay. Our last question comes from Robin Shoemaker of Bear Stearns. You may ask your question.

Thanks a lot. I have one question and Bernard it's really to ask you if you can just elaborate a little bit on your North Sea comments. You had quite a bit more to say the last time you spoke to us about a potential for scenario for North Sea recovery, which the ingredients were kind of a repeal of the royalty on older fields, the UK wanting to, you know, boost production and not being able to live with a production decline and the independents sort of stepping into the shoes of the majors.

Now, you've done some cost-cutting in the North Sea, you didn't sound, I think you just said six months after a resolution of the tax dispute, but has your thinking changed there?

No, it hasn't, it's a good question.

One looks at business, particularly on conference calls and analytically as being a rational set of decisions made by rational people, and once in a while they make a mistake, but it's all very rational. Well, when you live in the real world, rationality is not the prevalent attribute of people's behavior. Let me apply that to the North Sea.

From -- the only thing I've heard, directly from customers, the biggest issue in the North Sea is not the profitability of the North Sea, the North Sea is far more profitable, leave the issues of the price of oil aside. So just take the price of oil that so many of our clients seem to be budgeting, $16, that's how they review the P&L, tuck that in.

North Sea shows very high returns for clients, whether they choose to advertise it or not is a separate issue. But from prior discussions, the North Sea in the U.K. is a very profitable business.

No. The issue really and the taxation has to do with the style.

As I understand it, decisions were made by the UK government with absolutely no coordination, no forewarning, no anything, consultation that the large operators in the North Sea, essentially Shell and BP.

So the fact that they weren't consulted, it has writ a lot of nickels over there. One or two clients, I'll leave that identity alone, is taking it to heart. So there's definitely a conflict of wills. That is one layer.

Separate and distinct from that layer which has to do with emotions, do not underestimate that, even though you probably will. There's another layer, that layer is an evolution. It is absolutely true that 10 years from now the North see will start, commence the same process as the Gulf of Mexico, 20 years ago, which is that you have the emergence of smaller, middle sized players taking over fields and reworking them. No doubt about it.

That transition needs to take place. The two largest players in the North Sea, which Shell and BP will, 5-10 years from now, be smaller players. That will take place.

So the emotional reaction is one thing, the transition is another. Where does that leave us in terms of the resolution of the present dispute?

The transition will actually take place regardless and people, middle sized players who come in, interested in exploitation will get some breaks from the UK tax code. The resolution with Shell and BP, you know, I don't know, but irrationality aside, I suspect that you will have the basis of an understanding between the two sides sometime in the first quarter, but I can't guarantee that, Robin. Thanks very much. You're more than welcome.

I think that concludes this session.