Weatherford International PLC (WFRD) 2003 Q3 法說會逐字稿

Welcome to the Weatherford third quarter 2003 earnings conference call. My name is Carlo and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to your presenter for the call, Mr. Bernard Duroc-Danner, Chief Executive Officer. Please go ahead, sir.

Good morning. Lisa Rodriguez will do the opening comments, and I will follow up as we normally do. Them we will open it up for questions.

Before I begin please note that I will be discussing measures that are non-GAAP. A reconciliation of non-GAAP measures to GAAP is provided in the press release, and it is also posted for reference on our website under Investor Relations.

My comments will begin with an overview of our sequential operating results, then extend to a balance sheet discussion. All comparisons will exclude nonrecurring charges.

This morning we reported diluted earnings per share of 35 cents, as compared to 31 cents per share last quarter. On a sequential basis revenue increased 7 percent and operating income increased 18 percent, resulting in 28 percent incremental operating margins.

The strong operating results were a function of international growth and the seasonal recovery in Canada. International sequential growth outpaced North American growth in spite of the Canadian seasonal recovery. International revenues exceeded North American revenues for the quarter, and international operating income comprised more than 60 percent of total operating income.

The stronger improvement was in Europe/CIS region, reporting a sequential revenue increase of 13 percent. This region is our second-largest market. North America increased 6 percent with over two-thirds of the increase due to the recovery of the Canadian revenues to first quarter levels.

Notwithstanding the aforementioned very healthy sequential improvement, the results for the quarter were less than we anticipated. The shortfall from our anticipated results was not apparent until late in the quarter. August results indicated lowered US volume than in September. Furthermore, pricing, which strengthens slightly in July, albeit only in some districts, fell back to second quarter levels at the end of the quarter as we defended market share.

On a divisional basis, drilling services revenue continued to grow, with an increase of more than 20 million over the prior quarter. All regions, except Asia, had sequential revenue improvement. Latin America and Europe/CIS increased 20 percent and 10 percent respectively.

Incremental operating margins were very strong at 49 percent. The revenue and incremental margins were primarily attributable to both revenue growth and margin improvements in drilling techniques. This segment includes both under-balance and re-entry.

Production systems -- during the quarter we completed the integration of our completion systems and artificial lift division, forming production systems. Although it is difficult to calibrate, this caused a disruption typical of what occurs during and immediately post reorganization. This was made marginally worse by the rollout of J.D. Edwards in Canada, which is significant for this set division as nearly 30 percent of its business is derived from this region.

From a geographic perspective, international markets grew by 13 percent. Setting aside the growth in the Middle East, which I will discuss in the moment, the highest growth region was Europe/CIS with a 21 percent sequential growth. North America increased 5 percent with a 16 percent increase in Canada, offset by (technical difficulty) percent sequential decline in the US.

The lack of incremental margins in this division is attributable to two factors. First, the Middle East revenues reflect an incremental 13 million low margin sale from a non-core business. The non-core sale was from a compression operating entity that was retained in the Universal transaction. We are currently evaluating a strategic plan with respect to this entity.

Excluding this non-core low margin sale, the division's operating income was 10.2 percent, or 90 basis points below the prior quarter. Lower volume and sloppy pricing in the US, particularly in the completion segment, eroded margins in this division. As a reminder, the completion segment is approximately 35 percent of this division's revenue.

Company-wide research and development expenditures were 20 million. This expenditure trended lower than the second quarter due to the completion of certain projects. Although R&D by nature is not linear, the overall downward trend will continue. Fourth quarter R&D should be in the 18 to $19 million range.

On the cost side, progress was made towards lowering our cost structure in both manufacturing and overhead. In manufacturing this quarter we began outsourcing a number of lift products from Eastern Europe. The overhead consolidation, which was announced in the second quarter, was substantially completed by the end of August, with approximately 500 positions eliminated. Both of these initiatives will benefit the fourth quarter and serve to more than offset a recent increase in insurance costs. The renewal of our insurance policies has resulted in an incremental 2.5 million of quarterly expense. In spite of that, our net permanent cost reductions were $5 million in the fourth quarter.

During the third quarter we completed our capital structure initiative. At the beginning of the quarter we issued 10 million common shares and subsequently called our 402.5 million 5 percent convertible preferred debentures. These debentures were convertible to 7.5 million. Therefore, the net issuance on a fully diluted basis was 2.5 million shares. This quarter we incurred $13.6 million, or 10 cents on a diluted earnings per share basis, related to the call premium and the write-offs on unamortized debt issuance costs. Recently we completed an offering of 4.95 percent, 10 year, $250 million senior notes. Proceeds were used to pay down our line of credit. These transactions have reduced our debt to capitalization ratio, secured long-term borrowings at an attractive rate and increased liquidity for the Company.

Now, a summary of our cash flow from working capital, capital expenditures and acquisitions. Excluding the impact of our third quarter acquisitions, days of working capital increased three days, despite a seven-day improvement in inventory. The improvement in inventory is primarily from locations where we have already implemented J.D. Edwards, our ERP system. The increase in days of working capital primarily relates to the decline in accounts payable, which is strictly a function of the timing of payments.

Days sales outstanding remained relatively flat.

We did close one acquisition during the quarter for approximately $20 million.

Capital expenditures net of loss in hole were approximately $70 million for the quarter. Capital expenditures did include $12 million related to our J.D. Edwards project. We completed our rollout of J.D. Edwards in Canada during this quarter.

Our full year 2002 capital expenditures will be approximately 275 million. Capital expenditures will approximate (technical difficulty) during 2004, or approximately 250 million.

At this point I will turn it over to Bernard.

Q3 was by any measure a strong quarter. For us it was the quarter of steady progress. Sequentially the revenues (technical difficulty) operating profits were up 18 and earnings are up 13 percent.

Revenues per employee rose to $154,000 per annum run rate. That is a three percent increase over Q2 and an all-time high in the Company's history. Q2 and Q1 had shown similar growth rates over prior quarters.

As much of a steady progress as this quarter was, performance though was not enough. Our guidance (indiscernible), originally at 38, were not met. Weatherford's earnings rose sequentially only four cents for one simple reason -- the US market was not as strong as anticipated and our pricing initiatives were not successful.

The shortfall in the US market strength was as much a mix issue as an absolute number. We expected back in the second quarter a 10 to 15 rig rise in the Gulf of Mexico Q2 on Q3. Unfortunately, US activity stubbornly remained land-based and less complex in the architecture of the wells themselves. The Gulf did not improve. In fact, it weakened quarter on quarter. The US topline was less than we expected by about $10 million as a result of this.

The pricing shortfall or the absence of an increase was the other factor. We initiated in Q2 a four percent increase in our US price book across the board. As the quarter unfolded it became evident market conditions would not support this or any other pricing increase in the near-term. We had to rescind the pricing increase, and we fell short of expected margin gains.

That and that alone explains the earnings shortfall from expectations. Pretty much everything else we were relying upon did take place.

The twin towers of Weatherford's business and typical (indiscernible) have been historically the Gulf of Mexico and the North Sea. They weigh about the same as a percentage of Weatherford's business. The North Sea accounts for between 11 to 14 percent to Weatherford's total revenues today, while the Gulf represents about 35 to 40 percent of our US region. So that works out to being like the North Sea about 12 to 14 percent of revenues.

Between them, these two regional offshore markets represent today about 25 percent of Weatherford's business, which is a very large number. As a measure of the joint cyclical downside (indiscernible) 30 percent in 2001. Both offshore markets have one of the highest value added product services and the most pricing elasticity with volume (indiscernible).

By our assessment, Weatherford has the most combined exposure -- the key word is combined to these two offshore markets of any of the Large Cap Mid Caps in the industry. It has not played to our advantage over the past 18 months, as both markets have been similarly disappointing.

Looking ahead, a gradual turn in North Sea seems inevitable. We feel equally confident in the prognosis of the Gulf's deepwater albeit in 2005 more than 2004 and there on. These markets are problematic.

Back to the quarter. The rest of the geographic segments met or exceeded our expectations and delivered Q3's strong growth in operating profit and earnings.

The Eastern Hemisphere markets grew by 7.7 percent quarter on quarter. This is close to the highest quarterly topline on record for the Eastern Hemisphere. Middle East, West Africa, Russia and Caspian led the charge. Another milestone, the Europe/CIS region passed Canada to become Weatherford's second-largest region after the US.

Latin America also had an excellent quarter in growing 9.6 sequentially, led by Mexico and Venezuela. The Venezuela progression was essentially with foreign operating companies, not Palavessa (ph) quite yet.

In a number of instances progression in the international markets involve either underbalanced or production optimization, combining lift with intelligent completion and optimization software. These are the two battle horses, if you will, for Weatherford.

Underbalanced had a strong quarter across the board. Even in the US underbalanced had an excellent quarter with advancing revenues and margins. Underbalanced is by far the largest component of drilling techniques, a segment a little over 25 percent of the drilling services division. Not surprisingly, drilling techniques is drilling services' fastest-growing segment. Underbalance is not responsible alone for the growth in drilling techniques.

Casing is also growing fast with over 325 successful well applications to date. Reentry (indiscernible) Weatherford's Whipstock Mill and multilateral systems is also showing strong growth, particularly with the recent introduction of our quick cut casing exit system technology.

Although one-half of all directional (ph) jobs in the US, for example, are reentries, by our assessment we are the largest player in this market, overcoming our two closest rivals and quick cut casing exit technology is to be credited for it. We also expect reentry to be one of the fastest-growing segments in the Eastern Hemisphere.

In addition, to continue in underbalance, a comment on its margins; its margins are rising. In fact, underbalance has been technologies' unsung hero worldwide. After many months of teething problems, high engineering training expenditures, etc., and related low margins, underbalance is breaking out of its infancy. It EBITDA is now at 30 percent level. With further scale, which means engineering cost absorption, we expect underbalance margins to rise further, making it one of our most profitable businesses.

A quick comment on Intelligent Wells, Intelligent Wells is fiber optics primarily. Engineering and commercialization is on plan. We expect these high R&D and commercially infant segments to cross their breakeven operating profit or EBIT line in early 2004, which is pretty much what we planned for originally.

Expandables, by contrast, are behind expectations. It really isn't for lack of client interest. We have been slowed down by engineering difficulties initially in the sand screen business and now predominately in the solid application. This has delayed us by about nine months, making 2003 a hard year for expandables' P&L. Expandables should have an easier time next year in its scale and also in margins. The existing backlog of future installations is evidence of such.

I will move now to an outlook for Q4 and 2004, and I do this with mixed emotions insofar as it is clearly not always easy to provide proper guidance. But we're going to try. With a proviso that it has and clearly is difficult to provide reliable guidance, given the opaque nature of some of our markets and client decision-making, follows our best judgment for Q4 and 2004.

In Q4 we expect essentially flat markets at Q3 levels; some up, some down, but overall flat. The one exception is the North Sea. The North Sea will have a seasonal decline, lowering activity by about 30 percent -- 30-- partly offset with a seasonal strengthening in our Canadian business. But the North Sea will be (indiscernible) market. The North Sea available rig count is clearly at its lowest point -- 74 rigs, 74 -- in the North Sea, while rig utilization in the North Sea at the end of Q3 at 58 rigs was close to its historical low. There was just one other year where it was lower.

On the operating side, in Q4 we expect to realize about $5 million of cost savings. These are permanent cost savings; they're structural cost savings, net of exogenous factors that I think Lisa alluded to, primarily insurance -- the renewal of our global insurance programs in the Company, covering pretty much everything. And these cost savings to occur in the quarter driven primarily out of manufacturing.

The cost savings from a P&L standpoint are tempered with an increase in borrowing costs subsequent to the recent sale of our $250 million, 10 year. 4.95 percent bond. The bond is refinancing part of our short-term revolver line. The 10 year bond is exceptionally cheap, and over the long-term likely to provide a low cost of capital. Of course in the immediate short run, the bond is dilutive because short-term money is so cheap. It's dilutive to the tune of 350 basis differential in interest rate. However, as a businessman I have got to say that anytime we can borrow money at 10 years at less than 5 percent with no equity kickers for an oilfield service company, it is a prudent thing that we will be happy with as quarters go by. This is a good thing.

Adding the pieces together -- North Sea, flat markets, cost savings, the unfavorable interest arbitrage, the 10 year paper versus short-term money -- it makes for a flattish Q3 on Q4 earnings progression. This is as best an indication as I can give you.

2004, I will say as we move further out it gets foggier and foggier. Again, I'm going to try and help you. In 2004 we expect the following topline growth rates. Just that we all understand, we view Weatherford as going through a period of very healthy, steady progress. We're still in growth mode. We may not always be as fast as everyone wants it to be, including us, but that is our direction -- one of progress, and one of becoming healthier from all aspects, and one of growth. So it's in that light I'm going to give you the numbers that follow.

Weatherford should have topline growth in our core business overall of 4 percent. This is over Q3, Q4 levels, which should be the same and covering all geographic segments with one exception. Separate and distinct, we also anticipate growth rates of higher, of about 25 percent for $400 million of our Q3 Q4 revenues. Those are revenues associated with new products and new service offerings that are primarily technology driven.

On the cost side, we're working towards a further $20 million per annum permanent reduction in costs, and it is really again coming out of manufacturing. These costs are expected to be realized gradually throughout the year. This does not involve the systems rollout of J.D. Edwards which I don't think will spawn the kind of return that we expect until 2005, for the simple reason it is being rolled out now. For those of you who listen, when a system is rolled out it doesn't help; it typically hurts. It does help after.

At this time, we cannot realistically plan for an increase or much change in pricing. Absent the wholesale (indiscernible) consolidation of the US market. We believe, though, that the US oilfields needs to be consolidated and this on essentially two grounds. One, the US is definitely a harvest market; it's very mature. I'm suppose calling it a harvest market is looking at it on a positive light. You can also look at it as basically a market which is slowly liquidating. Second comment, the capital base in the US is excessive. It needs to shrink over time by either being redeployed or retired. Both can be best achieved through consolidation. It is not the only way, though.

Capital is leaving the US oilfield and to a degree the North Sea oilfield, albeit in the case of the North Sea not forever. It is being redeployed primarily in large project developments under way in Russia, Caspian and the Middle East. This is well-known. Most of the big dollar increases in those markets will start late in 2004, early 2005 in terms of being spent. These are increments, big increments, and they will be big increments. Many of the contractual commitments, though, will be secured in 2004. This is where I think the players in these markets, essentially larger oilfield service companies, will have to position themselves in '04 to start reaping late '04 and in '05. And these will be big contracts.

We're in the midst of a major secular change in the industry. Excluding China and the CIS, which is hard to measure, international expenditures in drilling and completion already represent about 60 percent of the industry in total. Adding the best estimates for China and the CIS for non-domestic serviced -- meaning not serviced by (indiscernible) oilfield services companies -- oil field expenditures -- and that is a soft number -- international segments is more like 65 percent of 2004 pie total.

The US market will gradually be pushed out to 25 percent of the oil field pie, with Canada closing in at just under 10 percent. So US shrinking as a percentage of the pie and Canada hanging onto its percentage, possibly shrinking, but to a lesser degree.

Oilfield wealth, which in a time of declining stock prices, a hard word to use, but oilfield wealth will be earned and must be earned, either and by capturing as large of a share of the Eastern Hemisphere growth as possible, without incurring the risk, without incurring too much, undue risk -- you always incur risk. Two, reducing the cost structure of your operations aggressively without disrupting the normal cost of business. This is true overall; this is also more particularly true in the US Gulf Coast. Three, being an agent of or a willing participant in the consolidation of the US oilfield market. This needs to happen.

Weatherford is exceptionally well positioned to harvest one, that is the Eastern Hemisphere play. We're doing our very best to realize two, that's the cost play. The third factor takes more than just Weatherford to make happen.

That's the end of my prepared comments. I will now turn back to the operator. Operator, if you want to proceed with the question and answer session, please.

(OPERATOR INSTRUCTIONS) Bill Herbert, Weatherford International.

I didn't know I joined you guys. It is actually Bill with Simmons, as you know. Bernard, a couple of questions with respect to your commentary on the US and capital moving to the Eastern Hemisphere and other international ports of call. We think you're right and we think that's going to continue for a while. And the Gulf of Mexico, at least for the foreseeable future, looks to be intransigent and really quite static here for a while.

In that regard I know we've taken a cut the cost structure. The question I have is are we doing enough on that front. We talked about the fact that you gave up some pricing in the third quarter and the domestic environment likely isn't going to change demonstrably going forward. What's your perspective with respect to your infrastructure in the US and your overall cost structure?

We've sort of worked internally very diligently on the overall cost structure, which is really in my mind initially manufacturing. That doesn't really address particularly the US; it addresses everything.

There is a secondary question, which is do you have too much infrastructure in the Gulf Coast. It's really the Gulf Coast we're talking about, which is about 40 percent of what we do in the US. "Do you have too much infrastructure?" which is people and equipment. Let's put some numbers on it.

You've got just under 2000 people, 1900 and some change, who are in the Gulf Coast. And if you look at the revenue per head of people in that particular part of our market, it's not that different than many other parts of our market. So at first blush it doesn't seem as if we have excessive amount of payroll there. And we have taken out, as a matter of opportunities, a number of people from that market over the past two quarters. Not a big number, but we've taken out 10 or 20 people, mostly middle to senior management, re-deployed them through international locations because they asked to essentially because you've got better job opportunities for them long-term. So mostly it was people volunteering to go and do assignments overseas. That has happened. It's hardly dented the payroll, but has begun to happen.

We're looking at it carefully now, notwithstanding my comment on the fact that it's not clear that we have a less efficient use of payroll in that part of our market than anywhere else. We are looking at it carefully district by district as we speak.

The equipment issue is a separate issue. There's no doubt in my mind that we have equipment in that market that probably should be redeployed elsewhere. And that, I think, is probably more -- I suspect that's probably where we will make more of a difference, is having dollar generating equipment redeployed in an orderly manner to markets where it can be utilized, South America being probably the most likely base of destination. There is an issue of where can equipment be utilized in terms of specs of the equipment. But I think that you'll find that is going to be more -- will find more to extract out in that region than just a clear payroll. That said, it is at first blush. But we're looking at it very (multiple speakers) right now.

Switching gears on expandables, you talked about the fact that 2003 has been a relatively difficult year, not so much due to the pace of client acceptance but due to some engineering difficulties. Yet the outlook looks reasonably encouraging, backlog looks decent. Can you talk a little bit about what the backlog looks like and what kind of improvement that conceivably represents over 2003, which has been a tough year?

That is presumably not the last question I'll have on this topic, so maybe over the question I will be able to give a full answer. But me give a first slice of answers.

You have got two different market applications, which is the sand control and then the solids. It is true that we had a high level of expenditures and engineering, again caused by two different things.

On the one hand, on the sand control side, we by our own decision decided to rework pretty much every single piece of equipment that we had to new standards and new specs that we designed subsequent to the single failure I can report in 230 insulations is insulation 118. I actually know it by heart -- 118 -- which occurred in Q2 of last year. And the failure in many respects was something that we should have anticipated and we didn't. We've correct it. We change the design. And since that 118 installation -- well, 118 minus 230 -- it's been immaculate. It has come at a cost, which is not only did we have to reengineer the product line, we also had to -- again, (indiscernible) made all the changes required. This is the problem with new technology, that you almost have to do that when you are in your infancy. So that was a cost aspect there.

In terms of the utilization rate of sand control, expandable sand screens, let me maybe give you some numbers that will be helpful.

We have approximately 150,000 feet of expandable stands screens that are alive and well inside wellbores today in the world. The installation rate has been around 20,000 feet in Q2 and a little over 20,000 feet in Q3. So you can run the numbers and see what is going on in terms of acceleration, meaning that if we're running at -- we've got 150,000 feet that we started this in 2000 and then you can draw some sort of curve as to what's going on.

The reason why there's a backlog comment at the end of that paragraph on expandable is because we have in hand sufficient amounts of feet of client order that the demand side seems to be strong. I will tell you we have today more than 60,000 feet of order on and around expandable sand screen product line. Without putting a dollar to it, this should give you enough of an indication.

Now, the engineering problem also on the solids side, and on the solid side it has everything to do with being able to design a process that has a high expansion ratio for the monobore applications. Maybe I will let that be a question that is drilled by one of your peers later on if anyone wants to drill it further. And I can explain what is the nature of the problem there and what sort of timing and what sort of expenses are we incurring trying to crack the barrier of high expansion ratio for solid applications.

Finally, Lisa, more of a question for you -- actually questions. Flattish Q3 -- I think had some other income in there, maybe kind of 1 to 2 cents. So from an operating standpoint maybe it is kind of a 33 to 34 cent quarter. Is that what we're talking about for Q4, not put slice it to finely? Are you talking flat versus 35 or flat versus 33 or 34?

I'm talking flat versus 35.

With respect to '04, playing around with some of your topline commentary on the 4 percent revenue growth over the Q4 run rate on the core business and 25 percent growth on the technology side, very quickly done here I guess what I'm dialing in is $1.65 to $1.75. Is that in the ballpark of what you're thinking for '04?

I come up with $1.70 to $1.80.

Thank you very much.

James Wicklund, Banc of America Securities.

Okay, Bernard, I will do the second one; tell us about the solids and explain the process of high expansion rates. If you want to finish that now go ahead.

Actually, I'll answer. In order to really get the maximum application for solid expandables you must strive to expand the diameter of the well by 30 percent or more. And doing it reliably with all likely metallurgies is something that is challenging.

If you want to know what sort of problems you can have, it runs the gamut of all kinds of failures or liability issues when you have a lot of mechanical parts moving together. Bearings would be a typical example of the sorts of challenges that you have. So that it has taken time, it is taking time, to make sure the process that we have, which is both a hydraulic process and a rotating process, are reliable not just in 1000 feet increments, but in 5, 6, 7, 8,000 feet increments so that we can then launch the process in the manner where we are really confident that it's going to do the job.

At the same time this is happening, the clients are specing these solid applications inside their wellbores. And they are specing them from the applications in '05 and thereon, some of them actually late in '04. So the clients are way ahead of us.

Clients are also beginning to factor in the cost savings that are involved in the solids applications. I can tell you with first-time direct knowledge that one of our large clients -- and it is not Shell -- has just finished a study on solids expandables in one of its field. It's large, well-known field in the Eastern Hemisphere. That engineering study, which has gone a through numerous level of analysis and report, highlights the fact that they believe that the use of expandables will save them in excess of 25 percent of field costs, which is an enormous number.

All this is fine and well, but to a degree we are behind the clients in terms of timing. And we're going as fast as we can in order to feel very comfortable that the engineering is where it needs to me.

At a deep jump (ph) conference recently, Ron Erskine raised about using solids in drilling deep shelf wells. He was pretty positive about that.

Bernard, is there any change in your solids business if the Halliburton-Shell-Enventure joint venture dissolves?

No, I don't know what will happen there. I suppose one would say it is none of our business. But no, it has no bearing either way. Period.

You focus on international and shifting to international; have you moved any of your manufacturing overseas in the last year?

Yes we have. The paradox is that also closed down so many factories overseas.

Where is the growth; where are you closing?

We closed down in the North Sea. The growth has been in South America, in Brazil; it has been in Eastern Europe and it has been in the Far East. So Eastern Europe, South America in Brazil and Argentina to a lesser extent and the Far East in China up. North Sea -- the European manufacturing base, if you will, down and US down. That has happened, but it's going to happen far more now and in '04 and presumably beyond '04.

You have talked in the past about the number of yards that you have outside the US and the size of these yards. Is that the point?

No, I think the yards (indiscernible) facilities are a separate part of our fulfillment tally (ph). I'm referring to the fact that we have -- my goodness, in terms of manufacturing facilities how many do we have, Lisa? I forget -- 50 or so worldwide?

Between 50 and 60.

And of the 50 and 60 we have roughly speaking half of them in North America, the other half outside of North America. And some of the ones outside North America, the European ones, are going to have a hard time. And the ones in North America are going to the hard time too. Not all of them, of course not. But it's a matter purely of costs. The ones in South America and East Far East, ones in Central Europe are likely to do better. That's not true of all of them. It depends what you are manufacturing.

It's really that, not the -- the other locations are service locations that are no different than the large service locations that some of our larger peers have. And those locations are well utilized, could be utilized even further. That's not a cost issue; that is really a leverage of regional growth issue. In other words, can you utilize them with more business, that is really all. Outside North America there isn't any service locations sort of cost issues. In the US there is, yes.

Thank you very much.

Jamie Stone, UBS.

My first question is a related to the structural cost savings, and Bill talked a little bit about this. But I just want to go back. You had targeted, I believed, at the meeting in May an annual costs savings rate for the end of next year of about $85 million structural savings. Can you update us where you are on that plan; if you're expecting to be in line with that number, below or above that number? And how much of that, Lisa, would be baked into the number that you gave to Bill, the 1.70, 1.80 range?

Lisa, do you want to start off and then I will pick up with conversation?

What I have in the fourth quarter is about 7.5 million of incremental savings over the third quarter, which there is about net 1 million in the third quarter. We will have 8.5 on a quarterly rate achieved by the end of this year. And then we have baked in the cost savings in year's, but recognizing that it's coming in throughout the year. It won't all be in at January 1st.

We baked in $20 million.

We baked in 20 million over and above what we will have at the fourth quarter.

The rate towards the end of the year will be higher than $20 million on an annualized basis.

Basically assuming it's coming in at an even rate throughout the year.

So we can help Jamie with his numbers. If he's got 85, and you've got -- you have baked --

You would have a $21 million exit rate, is your run rate for the quarter? Is the exit rate the fourth quarter of next year going to be running above the 85 million?

If you have 20 incremental throughout the year in '04 -- I don't have it in front of me the allocation by quarter. So if you do some quick math, and you've got already behind you 7.5, which was basically 30 on an annualized basis, and you add another 20, but 20 towards the end -- I don't know what the run rate at the end of the year is.

More in the 40s.

That's what I thought.

40, 45 (multiple speakers)

40 plus 30 would be 70, so what we are saying it that it looks like 70 altogether, as opposed 85. Is that correct?

That is correct.

So we would tell Jamie that we would slipping by a quarter or so or something like that, at least that's what it seems on a paper basis. Needless to say, we will try to get as much as we can. But on the first paper analysis on the conference call, suggests more 7.0 as opposed 8.5 by the end of next year.

These things have a long, long, long, long pipeline and they're not as easy to calibrate with precision. What is easy to calibrate is that they are big. They are big and they are permanent.

They're big and they are underway. And one thing that we've done is we've gone in and some of the savings actually relates to, as you can imagine, tools that we use. And so I have not factored a lot of that in next year because it goes to your balance sheet and you benefit over the life of the tool (multiple speakers). Some of that is not factored into next year because it benefits beyond next year.

What she's saying, Jamie, is take, for example, something called a service tool, which is the setting tool for completion, which is a tool that you manufacture and you use for a period of time while you do the (indiscernible). That's one example of something that we make and that we are planning on making cheaper, and so we use it with less capital. That means your CapEx and DD&A go down.

Another example, which probably you can relate to even better, would be a drilling jar. A drilling jar you don't sell; a drilling jar you rent. You go out and you rent it and you hope you lose it in hole because it's your best business. But many of them do not get lost in the hole and you get used up and eventually replace it. It has a life, very much like drill pipe, if you will. And that would be another example of the types of tool or equipment that we manufacture and that flow through our P&L, but not directly, as opposed to, say, a PCP -- progressive cavity pump. You make it, you sell it and it's gone. And that one, if you make it 5, 10, 15, 20 percent cheaper and you sell it, your margins go up by the cost planning (ph) amount immediately. And obviously that's preferable from a P&L standpoint to the other category of tools and equipment. But I don't think that (indiscernible) more one versus the other because they're both opportunities.

And I also think that the manufacturing strategy that we have does not privilege direct or non-direct P&L. As I know it, it privileges essentially where do we have the most obvious, easiest to achieve and fastest to execute opportunities to change our manufacturing cost structure without major disruptions. You have to be careful with major disruptions. It is already hard enough to roll in a new system, but you start having some major manufacturing disruptions it would make for very difficult times, Even if it's for the greater good. So you also have to think about that.

These are the ingredients in the decision-making, more so than whether they are direct or indirect P&Ls. They really are both.

On production side of the business, where you did struggle with no incremental margin in the third quarter for reasons that you've outlined, as you look out into the fourth quarter, is that really one of the areas where you're kind of making up for the higher interest expense --?

It's interesting (multiple speakers) what you'll find in the fourth quarter -- well, let's wait and see -- you'll find that North Sea will impact the drilling division because they're the biggest there. It is what it is.

You will find that the cost savings will benefit both, but they will benefit production handsomely. And there will not be, to my knowledge, any sort of non-core or low margin business that Lisa referred to.

This is incidentally a fabrication shop in Singapore that is left over from the compression base, which periodically has lumpy business. It is a business, just not our business and creates a little bit of (indiscernible). It's not a big business; it's a small business. I don't see that as having an impact in Q4 in the production side at all.

(multiple speakers) the production will benefit from the cost savings as much as drilling. They will not have any exposures in the North Sea. So actually time -- well, will tell. But the production side should make you happier, and us too, happier in Q4 that it has in Q3.

Lastly, I might as well ask this question while (indiscernible). You did spend quite a bit of time talking about consolidation. By and large the oil service segment has gone without any significant consolidation for the last couple of years, at least among the service and equipment companies. Is it your sense that we're heading into another period, or need to head into another period, of M&A in the group? And do you think that's feasible from an antitrust perspective?

The answer to the latter question is yes. That's the easiest one to answer. I can't say yes just generically because t depends on the market segment and there are some where it is not feasible. But by and large the answer is I think there is a lot of room to maneuver from an antitrust standpoint.

As to whether we will see a phase of M&A, I'm not suggesting that Weatherford is actually doing this or actively doing that. We're not. We're very introspective and we're very organic. It should be obvious by now. We're trying to make Weatherford into basically a better operating and better performing company, not going down the way of DLs (ph) and things like that. It should be pretty obvious by now.

I said what I said because it strikes me as kind of obvious that what we have here -- we've got a US market, which all of us have made money in, wonderful amounts of money. And it's been the best of markets. It has been a markets you could rely upon to have high-volume increases and high pricing increases. We habitually got 25 percent pricing expansion in our markets.

What we see happening in the US market is that with an environment of certainly higher lows -- there's no doubt -- that I don't (indiscernible). Markets have a way of making us all look like fools. But with that as a proviso, the US market is likely to be one of higher lows so that the terrible troughs that we've seen in the past, we're not likely to see anymore.

However, the US market, if only because the class of players have changed so dramatically, is not likely to see the higher highs or just the highs that we saw.

So now you you're operating in a smaller diameter snake, as opposed to a wide diameter snake of a market. And the implications from a consolidation standpoint are that all of us are equipped -- more so equipment-wise than people-wise -- but equipment-wise, capacity-wise and I think also psychology-wise, emotionally. We're all equipped for this time where the rig activity is 1400 or so and with a large segment of it being offshore and a large segment of it being deeper wells.

And that's what we sort of -- we know it doesn't last long, but we all want to capitalize on it. And I think it's a little bit like Pavlovian dog; we're ready to react to it and the fact that it is not likely to occur means it's going to be hard for us to create those types of earnings and returns in that market. It will come from the Eastern Hemisphere, it'll come from efficiency, it's true. It's slower. But the same time there is definitely an opportunity to try and create wealth by sort of agreeing amongst ourselves, "we're not going to be able to have these higher highs, let's try to make more money in the level of business we are at which is not that bad incidentally." It's not as good as it was, but it is not that bad. We can make more money at it by hacking at our own capacity, but doing it collectively. Doing it individually is hard because you're giving a market share de facto. So the consolidation possibility makes it easier. So it is just a point logic.

Whether what we're saying is commonly believed in the industry, I wouldn't say that. And I'm sure that our peers and competitors will say that, "well, we are the biggest this and that in the marketplace and then as a result if we behave better then maybe the market would be better because everyone misbehaves." So I'm not sure that I'm announcing an industry change; it's just a point logic from someone who realizes that we can make more money in the US if there was less of us out there, given the fact that is not a bad market, not as rich as it was and it's not likely to become as rich as it was. That's all.

Thank you.

Robin Shoemaker, Bear Stearns.

I know at the outset of this year you had anticipated that revenues from new technologies -- which would encompass underbalanced, expandables, sensors -- would come in at a 400 to 500 million range for '03. I was wondering if you could update us as to whether that will actually be achieved.

I think that it's on the low-end of the scale. I also think that one of them, which is underbalanced, has now becomes such a large business that it really has become one of our cores. So to a degree you'll find that we talk about underbalance as one our core businesses, very much like well construction, like all the others. Just a fact of growing one. So in other words, it has matured, it has graduated.

At the same time, I'm reminded constantly here -- and it's right -- that we have a lot of (indiscernible) that qualify completely as technologies that I never talk about. It is as if Weatherford was made upon two parts, which is the core businesses, sort of where people have low IQ, and the technology businesses, expandables (indiscernible) where all the IQ is. It's absurd. That's not the case at all since more than half of our R&D is in our core businesses.

Underbalanced has become our core (ph), so that numbers is going to become even a higher percentage. For example, I referred to our one of the casing exit system technology we put in the markets about six months ago which has done so well. And that's in my commentary. So that particular technology has cut down the cost of the casing exit process to about a little over two hours and has allowed us to gain market share for the casing exit reentry business above and beyond anything I had hoped for. So I have to be a little careful how I categorize things.

When you referred to new to new products and service offerings and kind of achieving a 25 percent growth rate, so underbalanced would not be with --?

Actually, the way I did it is I took a slice of underbalanced, which is the fastest growing one, I took expandables' optical sensing system and a few other things that are new product introductions that are the sort of very young part of Weatherford, which I calibrated about 400. It also looks like the low-end of your scale, but actually it's a bundle of different things at the end of the day because not all of underbalanced is "technology". Not all of underbalanced is going to grow as fast as the segment of underbalanced. The segment of underbalanced that is growing the fastest is the most engineered one. And that's just a slice of it.

If we are making your life analytically difficult, you probably have to start looking at -- again, as underbalanced as basically something close to 25 percent of our drilling services division. If you look at the fact that we are committed to introducing a large amount in parts and processes, not only expandables and fiberoptics, but everywhere else. And there is a second business which will grow much faster than the overall markets. How big is that segment? That's debatable. At start we used 400 million out of a $0.7 billion number. That is something that probably should -- is worth more analytical sort of work, so that we can buttress that number, and that number may change over time. But it's covering much more than just the traditional three that we talked about, if only because one of them has becomes so large now.

In terms of the North Sea, everybody got a little bit excited about property sale early this year, the 40's field and new historical players -- our theme is that historical players are selling out new players entering. Are you surprised that -- or do you see that continuing still, being a catalyst for the North Sea; or was perhaps our enthusiasm initially a little too high?

Your enthusiasm was our enthusiasm, so we're just as guilty. I think unfortunately, I think the North Sea transition will be slow. It will be slow, and -- essentially because some of the larger players are hanging onto the assets they have, and why wouldn't they? It's making wonderful cash flow, they're not reinvesting time or capital. They're just living off of it. As (inaudible) some of those large players it's a great bridge to the projects that they have in mind, typically the Eastern -- further east, Caspian and Russia, and Middle Eastern (inaudible) to some of them. Which will take some time to get started. And so this provides them a cash flow bridge, an earnings bridge. So they don't have a great incentive to sell, is what I'm trying to say.

And that is -- there's no doubt that they will sell -- not no doubt. I shouldn't say that. I believe, we believe that they will sell, and every indication is that they will. But they're not going to do it now. And it's going to take a while. So you're in for a transition in the North Sea, which will make the turn slow. There will be a turn in the North Sea if only because you really have a number of properties in the hands of smaller players who far more, I would say, prone to activity intervention. And that fuels, feeds the new slice of business. But again, there could be transition out in the North Sea, it's going to take longer than just a few quarters. And that's just the way it is.

The seasonal decline in Q4 is just that, just seasonal decline. Like breakup in Canada, that has nothing to do with that. That's not a structural or secular statement. North Sea in '04 is likely to be equal to be a little better than '03. Notice the word a little, not a lot better. If only because that transition away from the larger players who hang onto properties is happening slowly. But it will be better, again, a little.

Thank you.

Francisco Garcia, J.P. Morgan.

Good morning. It's Michael. Lisa, a couple of quick questions for you. I am trying to get to a free cash flow number for the third quarter. What were the changes in working capital, positive or negative for the quarter?

It was a use of working capital this quarter. Cash flow from operations, all in as it will appear in the 10-Q, is about 170 million for the nine months ended.

Okay. And looking into '04, with CapEx in line with your depreciation and amortization and growth somewhat slower and outsourcing some of the manufacturing year-on-year, would it be too much to assume that you could see a benefit from working in '04?

No, it is not. We have made significant strides in managing working capital this year -- and as improving days sales and starting to see the turn on days inventory, the days inventory outstanding being reduced. Particularly with the rollout of J.D. Edwards, it's been very pleasing, the impact its had on portion of the US business that we have on J.D. Edwards here recently. So that will continue and accelerate throughout the year next year as we have more locations going on J.D. Edwards. It's just simply a matter not of having -- we haven't had a lack of focus, but we have had a lack of tools to effectively manage it. So this will help us.

Great. Bernard, based on your comments about the outlook for the growth businesses and their being pretty much on trend, I suppose that you're pretty safe from the standpoint of FAS 142 here in the fourth quarter and the risk of an impairment on the goodwill on those businesses?

I am not the person to answer that question, but I think the answer is that's a safe statement. I will let Lisa answer it.

We have a lot of cushion under our FAS 142 impairment tests.

Last one. Bernard, this one will be for you. Just getting back to your comments on consolidation in the US, I'm thinking about your business mix moving obviously into the Eastern Hemisphere, a lot more technology oriented than perhaps some of the traditional or legacy company businesses and the fragmentation that you have, for example, in rental and fishing and some of the older products -- collars, stabilizers etc. Does it makes sense to exit those businesses in the US? I think when we think consolidation we tend to think of Weatherford as a buyer or participant on a major scale, but given the relative profitability of overseas work versus domestic work today with the pricing environment what about Weatherford as a seller of some of those businesses?

I suppose I can't blame you for looking at us as being people who would initiate these things. It is what we used to do. We obviously haven't done it in a long time. That's completely fair. It's a fair point of view.

We have to break down what we do on the drilling side -- your question is primarily a drilling question -- and also completions. So a drilling and a completion question. Let's break it down.

We have our biggest business on the drilling side is well construction, which is tubular running services, cementation and liner hangers. I think the question -- I think tubular running services is clear candidate for consolidation. Linear hangers also, but to a lesser extent. Cementation less so. So it would really be tubular running services.

I think on the second point that you make is that the rental and fishing, which is a drilling tools segments, which the nonproprietary drilling tool segment is the one that you alluded to, which is about, roughly speaking, 15 percent or a bit less of the drilling division. It's not as big as one might think. That one also is a clear candidate for consolidation. I do not disagree with you one bit.

So it is tubular running services. So I would say there's roughly 30 percent, give and take, of the drilling services in the United States is a clear candidate for consolidation.

Would we be sellers as well as buyers? Yes, absolutely. Can we initiate things? I think these things happen naturally or they don't. Again, the comment we made is one just of logic. Even if we were a private business manager, what we would be talking about when we have coffee in the morning, which is there is too many of us.

It makes sense to get (indiscernible) domestically. And as you said, longer term that is not where you want to be.

It will remain in market. It is not going to go away. We see it diminishing as a percentage of the worldwide pie. It is 30 percent now and will probably go down further. There are many very important markets. It is our biggest market; let's not forget that. And number the two is just now recently the Europe/CIS market and Canada is a strong number three that rivals be Europe/CIS in terms of size. So we remain very US-centric. Many of us do and we're no exception. And markets will make fools of us in the sense that as we all gear up on the US all of a sudden there will be a pop up in (indiscernible) by 100 rig and (indiscernible) declare victory.

On a secular basis, a structural basis, I think what we said is true. I suspect that you agree with it. And on a structure or secular basis above the spasms of the market that happened. And yes, in a perfect world, one shrinks the amount of equipment, people and also one helps in the consolidation process of a very mature market. I think that is a classic. I am all for it. I endorse it. And we will do everything we can to help it happen. Of course it takes two to tango.

Tom Rinaldi, Deutsche Banc.

Actually it is Michael Urban. A question on the pricing. Clearly you attempted raise prices and it did not take. I'm just wondering if there was actually any business lost out on that you might have otherwise gotten --?

We clearly did and we're responding quickly, as quickly as we found out. So the answer is in completion we did; in drilling tools we did. Those would be the two primary ones. Drilling tools, both proprietary and nonproprietary, primarily nonproprietary which you call rentals. These businesses are not 100 percent of what we do. Of course not. But they are sizable chunks of business in the US, and without a doubt it happened.

In retrospect we were foolish to try to raise prices when we did. We were very anxious to do so. We had baked that in (indiscernible) and that's a judgment mistake. We really thought the market could take it. We also thought the Gulf of Mexico market would have a little activity increase, both barge and jackups, and we were wrong. Plain wrong.

And housekeeping question. The DD&A jump in the production side; what was behind that?

That was two factors -- one was an increase in some intangibles; and the other a small amount of it related to the recent acquisitions.

That was in production.

In production.

Could you tell us a little more about that business briefly?

The production division acquired the assets -- it is actually classic consolidation, if you think about it -- acquired the assets, inventory essentially -- there was no fixed assets -- of a land-based wellhead company called Caverna (ph).

Now why in God's world would the production division acquire the assets of a land-based wellhead company? Well, because the production division has been maintaining wellheads as a matter of course for the past three years and have business which is roughly something on the order of $30 (ph) million of servicing this from the same location they service the artificial lift chain.

If you think about, in a classic well the artificial lift tools is in the wellbore and is attached to a prime mover above ground and in between sits the Christmas tree. So in other words, the wellhead and the Christmas tree are part of the same production chain that needs to be maintained. You cannot afford to maintain those Christmas trees and wellheads with dedicated districts that do nothing but that. So the people who are in the subsea wellhead etc. business -- which we are not and have no intention of being in at all, ever. The people who are in that business have a very hard time surviving in the dry wellhead and the Christmas tree business because just doing that with nothing else (indiscernible) through your district in a very mature market, you can't survive.

So essentially it was a mission of economic necessity for that particular manufacturer of wellheads and Christmas trees to give up and let us take over the maintenance of those tools, which we are now doing as a matter of course. We are eliminating the districts of that particular company that had about seven or eight districts -- well more than that actually. They had over 10 districts in the US and a few in Canada. We are eliminating them, basically to put the business through our existing artificial lift and completion districts. That is what it is.

It's actually a non-spectacular, classic part of the consolidation in the US. In this instance we happened be the one doing it. Again, as I mentioned before, we will taken either roll. It really doesn't matter to us, as long as there is creation of wealth, meaning we will be the one to do it or the ones that are selling. It really doesn't matter. This was very modest but a very healthy move.

That's all for me. Thank you.

Kurt Hallead, RBC.

I think I'm all questioned out. I will catch you guys after the call.

Geoff Kieburtz, Smith Barney.

Good morning. Just coming back to your comment, Bernard, about the opaqueness of the market, are you suggesting that there's been a change?

No, I'm just being cautious. I am being cautious in the sense that in prior quarters and prior years I think I would have just given an outlook as if it was sort of biblical. I have realized that we are prone to making mistakes also. And so I'm just being cautious. That's really all it is. So the statement on opaqueness is a reflection of the gray hairs that I'm growing. That's all it is.

Specifically in regards to the Gulf of Mexico, I try to understand this. Not to hang you up too much on prior comments, but I recall that three months ago you had said that you expected the US rig count to remain flat through the year and you had said that you expected the Gulf of Mexico to remain flat into the middle of '04. And admittedly, as you noted, the Gulf of Mexico did weaken a little bit in the third quarter. But in general terms, you're not articulating a tremendously different outlook for the Gulf of Mexico, I don't think, than what you said three months ago. Has there been something other than just the level of activity that has disappointed you?

No. There is really not. At the time three months ago, if you looked at the monthly forecast that we have, which we roll -- always roll a nine months forward forecast that is very detailed. That doesn't make it right incidentally, but very detailed. They're pegged on various regional markets rig assumptions, both mobile and platform. So you have got it to that degree of detail. Again, if you think about, it is remarkable how with all that detail how we can get anything wrong. You would have found that baked into our assumptions you had something on the order of 10 to 15 rig move. That's not spectacular, at least in our book in the Gulf of Mexico. And it was barges, which maybe not be classified as Gulf of Mexico for you. And it was jackups. It wasn't Deepwater. Deepwater is a very easy one to calibrate.

And that made, I suppose, probably pronouncements as a sort of flat market, a little bit up. But I thought it in those terms. But the detailed analysis was one that actually pegged that. And that's why we thought the pricing increase that we had in mind was reasonable and so forth and so on. The rest was just a mistake. So I think if anything you can say that the analytical backup got translated into comments that were sort of not specific enough as to the increase that we anticipated in the Gulf of Mexico. Had it been 15 to 20 or 20, 25 split it would have been more specific about that. That's what we had. And how we project our ability to earn and return over the next nine months, we definitely are more cautious.

Lisa, a question. You had noted that the incremental margins in the third quarter were 28 percent, I believe. Just wondered what your thinking was going forward, taking into account the objectives in terms of cost reductions?

I see them to continue in a 25 percent range, albeit it will be a more evenly split between the two divisions than it was in this quarter.

Okay. Thank you very much.

Pierre Connor, Hibernia South Coast capital.

Lisa, quick mechanical question first. In the other income line, could you tell us is there anything one time in there, "one time or specific" in that?

No, this quarter it was primarily asset sales, as compared to last quarter we did have a large foreign currency gain. Asset sales are very recurring, actually.

We have them all the time, asset sales.

So this would be more typical?

Yes.

Bernard, at the risk of another philosophical type of question, on technology improvements and things that indeed reduce costs, reduce finding costs for the E&P companies, the thesis I would put to you is this, that in the early '90s the new technology that service companies brought to E&P were able to actually increment activity and make more prospects profitable, i.e. horizontal gravel packs and things of that nature. Are we now in an environment where incremental technology only stands to tread water, and therefore really there isn't any ability to create -- now I'm obviously focused now on just the US -- incremental activity from reducing costs?

Yes, it's depressing but I suspect that you're more right than wrong I think on the things that that I know of, because there are things I don't know of -- on the things that I know of. In other words, I can't speak for the seismic market, for example.

Things that I know of, there are -- I think that underbalance there is a real roll to play in increasing productivity for tight sands for gas. That's one thing. I think that expandable sand screens, particularly as they are -- I have to be careful what I say here -- particularly as they are blended with frac packs -- it's more complicated than that -- but have a real impact on well productivity. It's also true across the board. I think that expandable solids, assuming that what we think we can do can be done reliably, I think they will reduced the cost structure. It will help definitely the Deepwater market. It'll help the deep well market in general.

But I think if you put all these things together, they're all good. But you're fighting a reservoir which is really very mature. And I think they will help in and will help substantially. But the treadmill of aging is moving fast here. (multiple speakers) I'm not going to sit here and say that I think it's going to rejuvenate the market to where you sort of remove 20 years of aging of those reservoirs. I don't think that's the case.

I think there's a great Brownfield market to be developed in the US, great. And I suspect that a model of alliance of small E&P companies and oilfield service companies that specialize in Brownfield, that's attractive here. And there's a lot of good money to be made there. But it will not rejuvenate it dramatically. It will not make it into what Russia or the Caspian or the Middle East is today. And it will not rejuvenate it even to where the North Sea is, where the Gulf was 20 years ago.

Another one, sort of on the perspective of change relative to consolidation, which you speak of being required. It seems that it is a different consolidation market than it was that you've experienced, whereby there were the mom-and-pops and the overcapitalization in the small company environment. And the perspective would seem to me that that's all been soaked up now, so that the next step has got to be rather major.

I think there is always a lot of little guys, little companies out there. But I suspect that generally what you said is correct, yes. It's never quite black and white. Very little in the worlds is. But I would agree with that, which makes the whole notion of consolidation a hard one because larger entities are harder to move, and to collaborate, and to do things that are -- it is not the people don't want to; it's just harder, per se.

I understand. Very good. I appreciate your perspective, Bernard, Lisa. I will turn it back.

Arun Jahar (ph), CSFB.

I'll be brief. Just wondering if you could talk about -- you noted some particular strength in underbalanced drilling -- if you could just collaborate on that strength and give us a sense of the mix between US and international revenues.

The Delta was I think almost equally impressive on both sides. It's not Canada. This is US. This is one area in the US that shined. It was overwhelmed by all the others. We struggled on pricing and so forth but it shined.

But you also have a number of opportunities that are occurring in the Eastern Hemisphere and in South America. But Eastern Hemisphere would actually be the place predilection. European basins, North Sea basins, Caspian basins, Russian basins, Middle Eastern basins -- I seem to be going through a geography of the world, but probably the only one where I haven't seen anything quite on the same scope or scale would be the African market. Not North African; I meant the West African market. But that may be simply because I have forgotten.

It's still a very young way of -- it is a very young process in the sense that the whole notion of drilling at or underbalance is still very young. It's just is becoming a business. And for us to make it part of -- the drilling techniques fundamentally is three things, but one is puny -- it's underbalanced, drilling with casing and it's re-entry. The puny one is drilling with casing. This is very small. But for us to make it into a segment of drilling services, it should signal -- and that segment is the second-largest in drilling services. Only well construction is bigger. Incidentally, Lisa is going to help everyone with the segmentation numbers after she puts it out in the Q and in the K so that you can look at it on not only regionally but also on a segmentation basis as each division will have essentially three segments of size.

For underbalanced to be the second-largest and drilling services, it should tell you something as to where it's gone. And where can it go? Time will tell. It is definitely tied (indiscernible) drilling, so I think to a degree it benefits and is benefited back and forth (indiscernible) drilling, although jointed pipe drilling on the balance is also a big application. It is what I hoped it would be.

Bernard, the boost in margins, was that all on the cost side in underbalanced? Or did you get any pricing?

It is good question. I'm not sure I can answer it. I think it's true that we've had a number of different contracts that started and the contracts were good contracts, meaning they were large contracts which always is better in terms of margins and they are well priced. But I don't have actually a final analysis of how much of it was -- I always thought it was more absorption (multiple speakers). Let me let Lisa answer it. It's more absorption then. I thought it was absorption from day one because I knew how much we were spending on crews being trained because it was a new process, on engineering, doing so much software work for clients upfront and all that sort of thing that we have to expense. The seating (ph) is expensive. The training and the seating is expensive. I think that is sort of behind us.

Yes.

Finally, in regards to production systems, the top line looked fine. Is this a correct assessment that you had some quarter specific costs that hurt margins and then you would expect that margins in production system would rise in Q4?

Both, I think. Lisa provided two explanations.

We had one sale with very low margins. (multiple speakers) If you take that out, then it was basically US and volumes, etc., in the US. You should see -- we are expecting to see -- a rise in this division's margin due to the cost initiatives being through the disruption that occurred from the combining of the two divisions, etc., in the fourth quarter.

That's all I got. Thanks.

Operator, do we have any other questions?

We have no further questions at this time.

Thank you all for listing. For any questions I think Lisa and anyone else here that you want to talk to is available off-line. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your line. Good day.