Weatherford International PLC (WFRD) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to your Q4 2003 Weatherford International Earnings conference call. [OPERATOR INSTRUCTIONS] Now I'd like to turn the call over to your host, Mr. Bernard Duroc-Danner, Chief Executive Officer. Sir, over to you.

Thank you good morning, everyone. We'll start off with Lisa giving you some financial comments, and I'll give you a prognosis as we normally do.

Good morning. Before I address the quarter, there are two items to cover. The first is purely administrative, and requires to state that our conference call will include discussions of measures that are non-GAAP, a reconciliation of non-GAAP measures to GAAP as provided in the press release and as posted for reference on our website under Investor Relations.

Second, our Board of Directors has decided to adopt an accounting policy to expense the fair value of stock-based employee compensation as outlined in statement of financial accounting standards number 123. This is considered the preferable method of accounting for stock based employee compensation. Based on the transition rules, the company selected the prospective approach.

Using this method, the fair value of stock-based compensation issued during 2003 is recognized as an expense over the vesting period. Because this transition method is effective January 1, 2003, the previously reported quarterly results for the year have been restated to reflect the impact of adoption, and in prospective approach, financial results prior to 2003 are not restated.

Depending on the compensation structure next year, the 2004 earnings impact of adopting this preferred method of accounting is estimated to be approximately 3 to 5 cents per diluted share. Essentially, the board decided to adopt the standard as it's more conservative.

The restatement had the most significant impact on the third quarter results--reducing reported earnings per share, excluding debt restructuring charges--from 35 cents to 34 cents on a restated basis. To avoid confusion, I will provide an overview of the quarterly results with all sequential comparisons to the higher third quarter results--that would be the results before the restatement to include stock-based compensation expense.

Again, all fourth quarter results, which do include compensation expense related to stock-based compensation, will be compared to the third quarter results--which are before restatement and exclude the stock-based compensation expense. This morning, we reported diluted earnings per share of 36 cents as compared to 35 cents last quarter, and 25 cents per share for the same period last year.

The sequential improvement is notable in that the other line contributed 1 cent less in the fourth quarter, and furthermore the fourth quarter was burned by an incremental $2.5 million net of taxes, or slightly less than 2 cents per share from severance and stock-based compensation expenses. All in all, we had very strong operating results.

On a sequential basis, revenues increased 10%-- the strong results were a function of two factors: international growth and high activity levels in Canada. The U.S. was not a factor with revenues essentially flat with the third quarter.

Internationally, the most significant improvement was in the Middle East. Last quarter, as I mentioned on the third quarter conference call, the Middle East revenues of 85 million included 13 million of a low margin non-core sale. This region's fourth quarter revenues were 93 million stemming solely from our core product lines.

Adjusting for last quarter's anomaly, this region's revenues improved 29%. The second most significant factor with respect to revenues was Canada, which posted a 23% sequential improvement. On a divisional basis, drilling services revenues continued to grow, with an increase of 19 million over the prior quarter.

All regions had sequential increases, except the U.S., which declined 5 million. CIS, Middle East, Latin America, and Canada all increased double digits. North sea was weaker.

Operating margins at 18.6% were very healthy. Although they are below the third quarter level, they were higher than the first two quarters of 2003. There is no one answer for the sequential moves, rather the normal quarter on quarter variations.

Production systems from a geographic perspective, North American revenues increased 17% with over two-thirds of the 28 million increase originating in Canada. International markets grew by 14%, with all regions improving except Latin America which remained flat.

Operating margins in this division continued to improve. The cost initiatives both--manufacturing and overhead--drove much of the margin improvement.

A significant part of volume increase did have a depressing affect on margins, as the Canadian artificial lift revenue carried a substantial amount of distribution add-ons. On the cost side, significant progress was made company-wide towards lowering our cost structure in both manufacturing and overhead.

The majority of the incremental savings this quarter are benefiting the production division. This quarter we had the full benefit of the head count reduction that was achieved in the divisional realignment. Furthermore, we increased the volume of lift produces being outsourced from Eastern Europe.

These initiatives benefited the fourth quarter over 7 million, increase in costs--the most significant being insurance--brought the net savings down to just under 5 million. Our equity and earnings of unconsolidated affiliates reflects the strong performance of universal compression in the fourth quarter, offset by the impact of a start-up cost associated with a new JV.

Approximately 600,000 of expenses reflected in equity and earnings is not expected to continue in future quarters. Now, a summery of our cash flow from working capital, capital expenditures and acquisitions. Our days of working capital decreased six days during this quarter.

Progress on working capital was the most notable as it related to accounts receivable, with a decline of five days outstanding. Inventory also improved, albeit not as dramatically. We are continuing to roll out the J.D. Edwards software system, and we are confident this will provide us with a tool to better manage our inventory levels, and reduce spending in this area. We currently have all modules of J.D. Edwards implemented in half of our U.S. operations, all of Canada, a portion of Europe, and we have Asia-Pacific in its entirety on the J.D. Edwards' financial module.

Capital expenditures net of loss in hole were approximately 65 million to the quarter. Our full year, 2003 capital expenditures, were approximately 270 million, net of loss in hole proceeds of $25 million.

The full year capital expenditures include 40 million related to J.D. Edwards. Capital expenditures will approximate our depreciation in 2004, or approximately 250 million.

This quarter, we closed one acquisition for approximately 11 million. During the fourth quarter, net debt to capitalization declined 80 basis points to 37.2%.

Finally, with respect to 2004 earnings, the 3.3 to 5 cents of stock-based compensation expense has obviously not been included in our previous guidance; however, taking into account what appears to be good traction internationally, we would suggest keeping the same guidance for the year.

Now I will turn it over to Bernard.

Thank you, Lisa. Fourth quarter unfolded close to what we expected, probably a little better. We had unfavorable absorptions that were punitive in the North Sea during the seasonal decline, but our business volume was stronger in the eastern hemisphere--that is ex-North Sea.

All in all, the quarter came in at the high end of our expected range. Specifically for the fourth quarter, the U.S. was flat, North Sea was down sharply, if seasonally. Canada was up, and most importantly, Middle East, CIS, and Africa showed good strong gains.

The most importantly comment with respect to Eastern Hemisphere regions is deserved, because the revenues gains were earned with no underlying increases in activity during the quarter. Revenues for employee rose to $168,000 per annum run rate, continuing in our uninterrupted sequential growth quarter-on-quarter and all-time high in the company's history.

Quarter-on-quarter revenues were up strongly by 9.6% and operating profit was up 5.4%. Incrementals are not as high as usual, primarily because of a shift of consolidated revenues in the quarter from less [inaudible] to more production.

You will remember that the production division runs typically 10 to 12% operating profit, and gritting runs to making 18 to 20% operating profit. There were some start-up expenses and, of course the customary noise quarter-on-quarter. As Lisa mentioned, the other category in the income statement was a smaller factor in Q4 versus Q3. As a result, the net sequential variation Q3 on Q4 from operations adds up to over 2 cents improvement.

As expected, the unfavorable fixed-cost absorption in North Sea were offset by overhead and productivity gains, the average for the quarter a little over 5 million. The manufacturing gains were earned primarily in the production division, about $3.5 million on equal volume. Revenue growth in the quarter occurred in Canada as a function of activity.

The company's broadest service offering and strong infrastructure gained traction in the Middle East, CIS, and Russia and Caspian, West Africa--Chad in particular. Latin America was steady, with the exception of Brazil, which was strong. The highest growth business segments by division were: gritting methods--which is underbalance and drilling with casings; and well construction; tubular running services, liner hangers and cementation in the drilling division. I'll touch on running methods later in my prepared notes.

With respect to our construction, the best example--the strength in our business is the recent award of BP's Mad Dog project for all tubular running services, cementation tools, and liner hangers. BP second [ Inaudible ] will follow. PCP-Progressive Cavity Pumps--in Canada and Chad in particular, production optimization in the Eastern Hemisphere, with the highest growth business in the production division. Pricing - well pricing in the U.S. was flat. Flat at best. Canadian pricing was firm, although the delta was modest as most of our Canadian business is production-related.

Pricing in the international market late in the quarter showed signs of firming in a number of key regional markets. Too early to tell whether that's a real trend or just a [inaudible] phenomenon.

We christened the technology segment two years ago, essentially underbalanced thru with casings, expandables and [ Inaudible ], finished the year with just under $405 million in revenues in the aggregate. [inaudible] represented close to 80% of that number, and had the highest growth rate in the company of any other business segment.

Underbalanced, a few comments on Underbalanced [inaudible] another strong quarter across the board. A number of new contracts were executed. For example, some of you may have seen our announcement of a $40 million contract with PDO in Amman. Underbalanced, and drilling with casing are at this point our core business, that's the drilling method[inaudible] combined with re-entry and multilaterals.

Underbalanced is by far the largest components of drilling methods and that segment which is in of itself about 25% of the drilling services division. Not surprisingly drilling methods is Drilling Services' fastest growing segment. But Underbalanced is not responsible alone for the growth of the drilling methods. Drilling with casings is also growing with to date 388 successful well applications around the world.

Re-entry grouping Weatherford's [inaudible] and multilateral systems is also showing good growth, with the recent introduction of our Quickcut casing exit system technology, and multilateral level 4 junctions. This is an important point in that we expect re-entry to be one of the fastest growing segments in the eastern hemisphere, particularly CIS ,which is play on field rehabilitation and brown fields.

Production optimization, which is showing the most growth in its division other than the Canadian-led PCP, involves a combination of artificial lift system with optimization software and hardware. It is also used in a field of rehabilitation or brown fields, and a natural play also in both the eastern hemisphere and Latin America. There's a common theme there, between the two fastest growing segments in both drilling and production.

The engineering and commercialization of intelligent completion systems-which is a subsegment of production optimization--is very much on plan. We expect this high R&D and commercial [inaudible] segment to cross the break-even EBITDA line by mid-2004. Expandables, by contrast, had a difficult quarter along with a difficult year. They are squarely behind expectations.

Due to a lack of declined interest, we've been slowed down by throughout the year by engineering difficulties--in both the sandscreen and solid applications. This has delayed us significantly--making 2003 a hard year for expandables P&L. As we consider the next twelve months, we are cautiously optimistic--particularly for time control and completion's component of expandables. The keyword is cautious.

We would rather post the numbers on expandables first, before drawing any conclusions. Expandables remain, therefore, a work in process.

Moving to our 2004 prognosis, comments to address perspective volumes by geographic basis, our assessment for '04 has not changed much for the outlook from the prior quarter outlook. We expect the U.S. and Canada to remain sort of flat for the year, with a somewhat stronger Canada in Q1, and a traditional breakup seasonal decline in Q2.

We do not expect a harsh seasonal decline in the U.S., just a mild 50 to 70 rate decline. Conversely, we do not expect the year to average in the U.S. much above the 1100 rig level of Q4 2003. Specifically, we do not see material improvement for the Gulf of Mexico for the balance of the year.

By contrast, we expect our business to grow by about 10 to 15% over Q4, 2003 levels in the eastern hemisphere and selected South American markets. We expect the intensity revenues for international rig per well drilled, we expect it to rise consistently to Weatherford throughout the year in those markets. In effect, the international markets will carry '04's earnings growth.

On the cost side, we are working toward the $20 million per annum reduction in our manufacturing cost for the year. These cost cuts are expected to be realized gradually throughout the year, but average $20 million this fiscal year.

The $20 million number will be hard to realize in so far as it a net number. Net of what? Well, net of cost increases which has to be overcome. The most important cost increases we see are insurance costs, procedural costs,[inaudible] et cetera, and raw materials cost. I think you're probably quite familiar with insurance and [inaudible] related costs. You may not be familiar with raw material cost that are - that are arriving.

The latter category--raw materials cost--is a function of a number of things, but recent growth trends in OECD and Asia, China industrial production, and the euro to dollar exchange rate. But the numbers that are put forth on the distribution side of the business are significant meaning that indications that carbon steel is trading up between 6 to15%.

Nickel which is, of course, an important ally for stainless has increased in price by over 100% from the beginning of the year. These are things we have to overcome. Pricing [inaudible] appears to be firming in the international market. The eastern hemisphere--ex-North Sea in particular. It is too early to draw any conclusions on this yet--but time will tell.

Pricing in the U.S. by contracts remain soft, not deteriorating, but not improving. Conversely, we started moving equipment out of the U.S. market where when possible; albeit--regional markets have different specifications and not all equipment is movable.

We've also taken some payroll reduction in selected U.S. markets, and have streamlined the organization for elimination of a layer of management. At this time we do not intend to reduce U.S. payroll any further accept by natural attrition. We will, though, carefully monitor the market in our margins.

Similarly, in the North Sea, we have reduced payroll further in Q4 and there'll be some in Q1. Albeit small. We are moving some equipment to other growth markets in the Eastern hemisphere. We do not intend to take any further action in the North Sea beyond that. I would add that we feel more encouraged by the prognosis for market activity in the North Sea than in the Gulf of Mexico for 2004.

After the Q1 seasonal trough, we see our business volume gradually increasing throughout the year in the North Sea, above and beyond seasonal factors, that is above 2003 levels. As closing comment, we still believe that Oilfield wealth will be earned by a combination of One: capturing larger market share growth as possible without incurring undo risk.

This is where the value of the strong service structure positioned in country at the well site, is priceless. Two, reducing the U.S. cost structure without disrupting the normal cost of business and losing any share. Absent a significant increase in U.S. market volume, U.S. Oilfield servicing equipment needs to shrink further. By attrition, employment outside the U.S. and oil consolidation, to affect pricing and returns in this market. The two factors that I mentioned are controllable. Weatherford is well positioned to harvest factor one and we are doing our very best to realize factor two. With that I'll return the call back to the operator for questions. Operator?

We'll take questions at this time. Ladies and gentlemen, if you'd like to ask a question, please key star 1 on your touchtone phone. If you'd like to withdraw your question, please key star 2. Questions will be taken in the order they are received.

Please hold for your first question. Thank you for standing by as your questions are collected . You have a question from Jamie of UBS.

Good morning, guys. And ladies. couple of questions I have, can you just a little bit further about the margin outlook on the drilling systems side? You talked about - it was kind of normal stuff quarter to quarter. It looked to us like your EBITDA margins and drawing services dropped by 200 basis points versus the third quarter.

Was it just mix and how should we see that business from a margin perspective adding that into 2004?

It was mix as well as there was severance - in the quarter. Better if -- If you look at the operating income line and we will see it go up as that severance comes out.

How much do you think the severance cost you in a quarter? Just...

The severance in the drilling services side cost us about $750,000.

Okay. And then secondly - so - in the mix, you went through the mix reasonably well. Do you think - does it look like the mix there is going to start going back the other direction here as we head into '04?

Probably so, Jamie. And that number that Lisa gave you was an after tax number.

I apologize, closer to a million to the severance. I do see the mix improving. There was some noise in the quarterly numbers.

Okay. And then secondly, Lisa, from a procedural standpoint in the restated numbers, where exactly are you accounting for the higher stock compensation expense, is that in the general corporate number or does it get allocated to the divisional G&A?

It goes to the divisional line wherever the employee is accounted for. So if it is someone that is part of our cost of sales, then it will go there. If it's a selling person, it will go in the division SG&A, if it's corporate, it goes to the corporate line.

Okay, so are you going to provide us with clean numbers?

Yes, I do. I have a schedule that I can send out that will give you more detail.

Okay, and lastly, Bernard, strategically, what are your thoughts on the universal position these days?

Not much. They are executing well. The business is healthy. They're doing exactly what we hoped they'd be doing, so we are watching it carefully and haven't decided yet.

Can you just refresh us, what was your original cost basis in the stock before you took the write-down last year?

34, as I remember correctly, Jamie. And we took it, well we had to take it down then which was 20 or something like that.

It was 20. We're slightly over $21 per share on our cost basis on the books at this time.

I believe it's because the earnings that you pick up on the minority position get rolled into the basis from a book standpoint.

Okay. I appreciate it. That's all a I have, thanks.

Now you have a question from James Crandell from Lehman Brothers.

Good morning. Bernard, can you - comment on your expectations for revenue growth now for the businesses you that you have included in your technology segment for 2004?

You know, Jim, the only one that really are sort of in their infancy still, would be the - fiber-optics and expandables. The other one has become so big, and is really -- you'll see it I think as part of a core business in the segmentation and corporate methods.

But even though it's a core business, I still would like your expectations for those businesses either individually or in the aggregate.

Probably 25%, Jim, is the best number.

If you look at our budget for '04 and aggregate those, it's just slightly above 25%, as compared to this year's results.

And where would you expect the strongest relative growth, and would you expect that underbalance would keep up with that overall level?

No, because it gets to a size where it's unreasonable to expect that.

Paradoxically, the highest potential to growth may actually be expandables, it's only because they've had - they've had a difficult year. So on a relative basis, it will look better probably, not certainly, but probably.

Can you expand a little bit on the issues ind expandables, which is penalized profitability here this year, and where you are in terms of addressing them?

Well, the issues are very simple. They have to do with the fact it's harder from and engineering standpoint to do what we wanted to do. What we wanted to do was to design an expandables system that would have very close compliant capability.

What does very close compliant capability mean? It means essentially expanding the tools intimately, if you will, with the well[inaudible]. Why? Because it has great well productivity benefits if you do so. There are complicated issues that have to do with wall thickness and tolerances, when you expand, also the degree of expansion to achieve close compliance.

I actually think that we've had some very, very hard times in terms of engineering trial and error. I actually think that we probably are to the point where we have achieved where we were hoping to get, but then again, I'd be cautious to see - see how the year unfolds.

What I'm trying to say is that I think a lot of our engineering problems are behind us, albeit it took a long time, and that therefore the commercialization prospect for this product line--particularly in completion and sand control--should be materially better in '04. Solids--it will take more time, but the -- what we've learned on the engineering side in sand control and completion will help greatly solids.

But then again, I'd be cautioned to just wait to see how we do in '04 before declaring Victory either way. I am cautiously optimistic just based on engineering. It was never a problem of client perception, it was a problem of being able to deliver what we wanted to deliver.

Okay, last question, Bernard, is universal compression is at an enormous upward move in the market, and how does this affect your view toward owning the stock at the current time?

To the degree -- we -- to the degree I would prefer if universal was private, because then we just look at it from -- just look at the business the way its progressing in healthy years. With the market, we're put in a position where it goes down and all the sudden it's a bad thing, and goes up and all the sudden it's a good thing.

In reality, Compression has always been a good business, it is a well-run company universal, they've been unfolding their plan with a lot of discipline, I give them all the credit in the world, and like what they are doing. In terms of when would we be a seller--if that's your question--I don't think we've decided that quite yet, also do not think the value is necessarily as generous as high as it might be based on the results and the health of the company.

We haven't really decided quite yet. What's important to us is left when we sell, if we sell. The question is more how healthy they are fundamentally.

Okay, that's it for me. Thanks.

Your next question comes from Geoff Kieburtz with Smith Barney. Please proceed.

Good morning.

Good morning.

I think that was my name. I'd like to come back on the overall cost reduction initiatives that you have in place, and if we could just deal with it from what we've got in the fourth quarter, could you walk us through what your objectives are through the course of 2004 on the net cost reduction efforts.

Well, I went a bit fast on it. I talked about 20 million for the whole - on an annual basis.

And Lisa will give you the breakdowns by quarter, because she's actually done that. But philosophically, what we are trying to do is product line by product line--whether it's a product line that's used - whereupon we sell the product line--where it's a product line whereupon we use the product as a tool to deliver a service--we are trying to reduce permanently the cost structure by either consolidating manufacturing, or shifting manufacturing to an outsourcing, or setting up shop ourselves in the place of lower costs.

And there are just so many initiatives that are under way that are slow, but are methodical in that direction, and they deal with places like China, places like eastern Europe, places like south America, Brazil in particular.

The difficulty for us--and difficulty for everyone who does what we try to do--is that we're fighting at the same time two other fronts. One is that the implementation of J.D. Edwards is necessary, a good thing, but it is an expensive thing, and also a big distraction.

I mean, I think everyone on the conference call would understand that. Albeit, we've been in it now for - implementation wise - for a full year so, we probably are getting the knack of it. The second, or more relevant point is, that there are - I mean this is not a static environment--it's a dynamic environment. There are a lot of other costs that are moving up.

We mentioned the more obvious--which is insurance, and administrative--which is a function of [ Inaudible ], but the other one which I highlighted--which not sure anyone has so far--is the fact there is definitely a raw materials cost push and raw materials cost push. And that raw materials cost push - you see it in things like carbon steel and stainless steel. And it's not a Weatherford issue, it's a global issue.

And so you have to - you have to overcome that. So basically, to end up having $20 million for the year of cost savings--manufacturing wise--you obviously need to get more than that in order to get the net number.

With that sort of preamble, would you give a quarterly - sort of - estimate which is probably what he needs, as you said you can.

The way I'll explain it is the incremental amount each quarter as compared to the previous quarter, ramps up towards the end of the year and this is in particular for the manufacturing.

If we had some initiatives that we've been working through, that we've seen the benefit of in this fourth quarter, the new initiatives - we realize the benefit toward the latter half of this year. The incremental - each quarter, first quarter approximately a little over a million.

The second quarter is a million and a half. The third quarter, 4 million--and that's incremental over the previous two--and then we have 5.5 coming in the fourth quarter.

Okay.

And so if you extrapolate, it comes out to approximately 20 million, taking the first quarter of course you get that benefit for four quarters, et cetera.

Right, okay, I think you've answered the question because one of the things I've been confused about is run rates versus..

I understand that. Actually -- one of the mistakes we make--we made it in the past--is this obsession we're giving - you know- target numbers. Number one, the world of dynamics is not always easy to keep the same target numbers. And, number two, is it a jelly number, run rate number, good intentions but it ends up being confusing.

And those numbers that you've provided, Lisa, those are net of the increase cost?

[inaudible] It's not easy. That's a net number. That's our intent.

No, I understand some difficulty because particularly in the raw materials, it's not obvious what that trend is going to be.

Yeah and it's an interesting debate as to - it's an interesting question as to why this is going on, because you find when you dig into it, once again the role of China--is being disproportionately important.

Right. Separate question in regards to pricing, you made a couple of comments with international beginning to show some signs of improving.

The U.S. basically flat at best, I think you said. Could you elaborate any further in regards to line of business detail on the pricing trends?

Yeah, I can. I think - I think all of it would probably be drilling related at the end of the day. Most of them in production or at least the lift side of production is not as concerned.

The completion side production is. So let's see--my comments pertain to drilling and one-third of production. Okay? What we find is that, yeah, pricing in the U.S. is -- has not improved in the quarter.

I can find areas where it's gone up a little bit, areas where it's gone down--so that net-net, it just has not, pricing, as I said is flat at best. And I don't - I don't see any reason for it to do any better absent demand going up or supply going down. And of course, demand going up is a function of activity and that would have to be a land phenomenon, because it will not, I believe, happen in the Gulf of Mexico.

All supply down, that's a harder one to a degree, because equipment leaving and people leaving the U.S., it's wishful thinking for it to happen to a large degree because they weren't going to hang on to their market shares. This is normal.

Consolidation of course, would help but then again, it's not a simple thing to put in motion. So, I think what you find in the U.S., from our perspective, is that - the best you can do is bring your costs down as well and as far as you can without losing share--which is what we're trying to do. Actually, to a degree we accomplished some of it in Q4.

I tried to be as lean in terms of management structure as we can have as close to the field as you can be--because you have got to be particularly nimble to this market. Philosophically, it's hard for large companies to be nimble. And that's the best you can do. Now, the international is actually a much better story - if only because of the very recent trends. I could see it late in December and I can see it in January, there are - there's a good tone to the market, Jeff.

Again, I'd rather just see it for real as opposed to speculating on it. But, there seems to be--not everywhere, not in all places at all times-- there seems to be some decent opportunities for pricing, but then again I think we should maybe continue this conversation either in a couple of months or at the next conference call because I would rather have facts rather than speculation.

The tone is good.

Thank you.

Your next question comes from Terry Darling of Goldman Sachs. Please proceed.

Thanks and good morning, everyone.

Good morning, Terry.

I wanted to come back to the margin issues again. Lisa, first off, I missed - I think I missed one of your earlier comments.

Did you indicate that the fourth quarter results reflected 5 million of cost savings in the production side of the business?

It was not all in the production side, there was 1 million of that that was on the drilling side.

Okay, so it looks like at least from the operating income line, the EBIT margin perspective, that the - you know - the majority of the improvement there was from cost savings versus anything incremental off the revenue growth, is that correct?

It was due to the cost savings, but you had two other factors. One is you had a product mix. The incremental volume was at a lower margin - a lower product margin - so it's a product mix. Then you also had some severance going through there.

On the production side as well?

On the production side as well. Yes.

About the same.

And why are the savings on the drilling side trailing the savings on the production side at this point?

Manufacturing predominantly, Terry--there's more manufacturing in production than there is in drilling. Simple explanation that's what it is.

And then, and maybe I'm just not understanding your communication on the cost-reduction effort. But if you add up a million in the first, 1.5 in the second, 4 in the third, 5.5 in the fourth, I'm coming up with 12, not 20 on that--what am I missing there?

I'm sorry, the first quarter is incremental I will say, first quarter as compared to fourth so you need to take that one times four, the second one times three, et cetera.

Perfect, thank you. And then, if we go back to the drilling side of the business, Bernard, I'm wonder going you can share with us what the sequential degradation or what the sequential negative impact was from the losses - I don't know - the issues on the profit side for the expandables in the drilling margin there?

I don't feel there was any impact, Terry, on the expandables on the drilling margins.

I'm sorry. I thought you indicated that the expandables profitability was weak at this point.

Expandables is a very small product line, and Expandables has a lot of promise and it carries a fair amount of R&D. Expandables doesn't really have an impact on the drilling divisions margins.

I mean, it gets a fair amount of highlight because it's well known, but doesn't really have any bearing on the drilling division. Actually it has mostly a bearing on the R&D line, and there are some revenues expandables in the drilling revision, and revenues of expandables in the production division--but theyre small. It - It's not the core of the company, it's not going to move the needle that much.

The question is, on the margins of the drilling divisions--which is a sequential margins of the drilling divisions--which was a question that was asked I think before by one of your colleagues--I think the - the notion is that the operating income for the drilling division - have gone from 19.8 or something like that, to 18.6 or something like that, right?

Those are not EBIT margins but that's okay.

Those are the EBIT margins, if you prefer, you can look at the EBITA, which is the same thing. The delta is - the delta is sort of similar. Be that as it may, the two comments, or three comments. One is that you've had 750,000 is a number I used early on after taxes, $1 million pre-tax severance,[inaudible] That's fine.

That moves the number up, if you will, in Q4 a little bit. And the second thing, is if you go back historically in the prior quarters, you'll find that the operating margin in Q1 is 18.5 and Q2 is 18.1. It just so happens that Q3 was 19 something.

You know, it does happen, there isn't always quarter on quarter. And there's not a lot of wisdom that we can add to it other than--it depends a little bit on where the business grows and particular margins and in particular quarter for existing businesses, it's just noise, there's not a lot more to it than that. It's not meaningful. From everything we know, there's nothing meaningful or dramatic about it.

Okay, and then you had indicated, I think, in the third quarter, that the margins for the technology businesses you had aggregated them in total were up sequentially.

It's on the balance. Yeah.

And that was Q3 versus Q2. Can you tell us what happened Q4 versus Q3 for the technology business as soon as.

They were flat with the third quarter.

They were flat.

Lisa, when you talk about the raw materials inflation, if you were to aggregate in dollar terms your raw material costs in 2003, or ballpark it for us, what would that number look like?

I usually have a hard time doing, that except doing it offline. I also think that, if you do that for Terry, I want to make sure you pick up the raw materials that are concerned by the carbon and also the nickel of price inflation. She can do that for you offline, Terry.

I'll have to get back with you on that.

Okay, and then, on the J.D. Edwards system implementation, was there any sequentially in the fourth quarter versus third quarter greater impact from cost there at all?

No, actually it was very similar.

Very similar.

Okay, and lastly, Lisa, tax rate and interest expense expectations going forward, can you give us your thoughts on those two items?

Interest expense will continue very similar to the fourth quarter and the first quarter. There's nothing that will move it significantly, brought debt down slightly--but not enough to really move that number. And the tax rate will depend on the mix of earnings as always but it will be between 26 and 27%.

Thank you.

And you have a question from Kevin Simpson of Miller and [inaudible] Please proceed.

Good morning.

Good morning.

I wanted to, if you could get into some depth on underbalance, I wondered where, I guess Oman, PDO, and Shell, are you seeing one of the things I've been looking for--which would be expansion of the customer base to the Apaches and Debbins of the world - who are really the exploiters of these more depleted zones possibly, and ultimately where a lot of the growth might come?

That's a good question and the answer is not particularly the client that you just mentioned. Probably more our fault than anybody anyone else's fault.

What I'm trying to say is that the underbalance or near balanced or reservoir drilling depending on the terminology you use is something that doesn't get sold using the yellow pages approach--which is client wants to do it, looks newspaper the yellow pages, who does it and puts out a tender.

It - because it is a young process, it's been round for a long time but it's a new - a reincarnation, a young process. You have got to go out and communicate with clients, and create an awareness of this particular technology as a solution. Well, to do that, you need engineering manpower and time.

And we are limited in engineering manpower and time--so we target particular areas and we try to create some business and we do--that's been fueling the growth. We can't address, unfortunately, all the cases that we see are good applications for this process.

That's what's going to fuel the growth for the next few years. So, your question is excellent in that you are absolutely right-in depleted fields - this is really, it's sort of an aging type revenue on the balance. One of a few. The depleted fields that those companies might take on, to eke out more production are ideal candidates for underbalance. It's just a question of getting to it.

Most of the growth has been fueled not only by large companies--Shell is not necessarily the only one of a leader or anything else like that, it's a wide spread. Large companies from Shell to Conoco all the way down - all the way down - Chevron et cetera, but also the NOCs. NOCs have been active also in this business, and are likely to be very active in this business.

So NOCs will be aware of all this track growth?

Indeed, indeed. But it reflects to a degree - to a large degree - reflect where we put in the engineering sales asset, Kevin because those projects tend to be lumpy.

So meaning that they're large in size and from a deployment of equipment standpoint, it's sort of - was more attractive for us. Presumably it's an opportunity over the next couple of years.

So are you going to - in one sense you're in a - more of a - cost-focused mode these days, but are you going to rededicate some of your sales folks and engineers to the word of the exploiters? Or are you going to hire more people? Presumably it's an opportunity over the next couple of years..

Yeah it is - it's not - one of the problems with managing this business is that thought, what you said is exactly what gives us a pause is that, I do get frustrated and frustrating e-mails that have to do with the number of projects that we can or should be involved in or try to lead. And it's not only from the balance, mind you.

But, on the balance like production optimization for lift, tend to be the sort of things that pull a lot of things with them--all of our other calls. And I do get--and recently probably more than I used to--a lot of correspondence frustrated and frustrating because we ought to do more and ought to present more to more clients. And we're not.

And we should. So, why don't we do more? Well, we're going to but - it's the balance. The balance between adding, and adding more in terms of overhead cost of proceeding purposes, and adding more in terms of top line and margins afterwards. It's got to manage the sequence the best you can and we're trying to do that.

There is -- the number of these business offerings we have, I think our ability to manage the growth is probably more key than whether there is more appetite for these things in the marketplace. Brown fields, which is an expression I used in my notes, Brown field is going to be a very big business.

And where? Not in the United States--which you think of immediately. The Brown field terrain..

Russia.

Yeah, absolutely. Bingo. And that's the largest one, but there are others like that in a smaller version.

That's really our focus. But, you know, also I'm trying to make sure we don't run with the cost side too fast before we can deliver revenue on the margin side. If I do that, I'm going to have some hard conference calls.

[inaudible] If you spoke to it already, I'll just do it at some point in the future, did you talk about instrumentation for smart wells, the fiber-optics?

No, that actually is -- it's certainly expensive from an R&D standpoint. It's been that way. It fits very well with the strategy, albeit not all of it, just a segment of it. In terms of commercialization and topline in making a living, it's not going to make or break Weatherford, it's too small.

However, it is true that sometime--Q2 or Q3, I don't exactly know--it appears that we'll be making enough on that product line to be able to report a humble break even operating income. Not something that will make us rich quite yet, but very good progression.

It really has to do with the introduction of product lines to measure the things that we thought we would measure--which is temperature, pressure, sensing, and the of course, the low channel sizing is probably the most exciting because it's the most innovating of all in the world of sensing. And it does carry good pull through of our completion line which I think is enormously helpful and we don't factor that in the - my operating income comment.

Probably if we did do that in the course of the year, it would be rewarding. Lightly, yes. So, it's actually doing well, but, what does doing well mean? It's not in the hundreds of millions of dollars and therefore, is not likely to move your needle quite yet. Albeit, the R&D has been--plainly put--very well managed. That's part of our business. Expensive, but been really unplanned religiously.

Then in the mode of being conservative, shouldn't have anything in there for '04.

Please don't.

Maybe for '05, but probably not even there.

I think the notion is that if we do well we'll report it and numbers will go up. I think it's better to keep it as such.

Great. Thank you.

And your next question comes from Kurt Hallead of RBC. Please proceed.

I was wondering if I can get a little bit more specific about some of the pricing situation here in the U.S. as it relates to maybe certain products or if you don't want to go that far, you could talk about certain regions where you see some positives and talk about some regions that you see some negatives?

Okay, I'll try to help you, Kurt, best I can. I see more on the production side in general. Not completion but lift and optimization. Remember, Kurt, that production is one-third completion, 2/3 lift , and optimization that goes with it. So, I think the pricing is looking more robust in the U.S. for the production side of the business.

With respect to drilling and completion, sadly, the Gulf of Mexico and gulf coast -- gulf coast is not good. The pricing is simply - I'd like to tell you it's firming up but it's not. It is weakening any further? Not really. But - I made comment early on that the tone internationally was good, I would have to reverse myself on the Gulf of Mexico, gulf coast, the tone is not good.

It is not - I don't- it could reverse itself, but it's not--as of today it's not good. I don't see increases there that are possible. God knows we are trying and God knows we tried. Now, when you look around the market place, and on the land market, yeah, there are pockets where pricing will still be better.

Yes, the Rocky Mountains looks a bit better, that's true. That's about it, frankly. The rest is flat. It doesn't - The tone is not as depressing as it is in the gulf coast and Gulf of Mexico. So what have I said, I said that list -- actually, probably could get a bit more pricing in the U.S. market. Lift being two-thirds of the production division.

The remaining third completion and, of course, drilling altogether Gulf of Mexico gulf coast no good. Land market is okay, but not up--except pockets, yes, the Rocky Mountains which has been advertised by some of our peers I think, it's true, it's not bad. There are some opportunities there.

All in all, Kurt, if you want to be global, you can always find a positive and a negative in a situation. There are exceptions and there are subsegments that go one way or the other, but overall, when you look at the U.S. market net-net--unless there's a significant demand push, say 100 rigs from 1100--I don't know if it's 100 or 75, or - 125--unless it's a significant demand increase it will soak up the extra supply in all categories of services and products, it's going to be hard to have a big price push. And you can always speculate on people leaving the market, and so forth - a bit wishful thinking because no one will.

Market shares will be kept. People will do what we've done which is clip costs on the U.S. side without harming your operation.

Would you say that you're currently sized both in terms of personnel and equipment for 100 rigs operating in the Gulf of Mexico?

Still have a little bit - we have kept excess capacity, Kurt. We can't help ourselves. Still optimistic for '06.

I have no basis of being that way -- other than wanted to keep a call, a call on the upside. So let's put it to you this way, we sized it as efficiently as we could to be able to have decent margins in the U.S. in the present environment.

Also, the other thing I could mention is there are a couple of things that are a little bit special that are going to happen in the gulf - in and around the gulf that should help us, as I think it through, and some of the deep water plays on and around BP, we have good contracts, big contracts--at least big for us at our size--on or around well construction that will commence now and later in the year depending on which project it is, and that will help absorb some of the cost structure.

This is why we can keep a bit of excess [inaudible], because it's hard - you know - forecasting is hard to do. We could be wrong.

Market could be 100 rigs stronger. I mean, our clients do change every three months in the U.S., they are short-term in their decision. It's not one year, so things could change.

Okay, great. Thanks a lot.

Again, ladies and gentlemen, if you'd like to ask a question, please key star 1.

Another question.

You have a question from Mike Urban of Deutsch Bank.

Thanks, good morning. Haliburton looks like is scaled back there, the stake [inaudible]indicating more synergies with the pipe or the steel companies. One, I guess, do you agree with that--and two, if so, is there anything that you can do to better leverage your efforts there or share costs and/or expertise?

Well, I - first of all, I think Haliburton should, you know, can explain why they do things better than I can. If I can react to what you said, a few things.

One, they appear to have done two things--is to pull out of expandables when it comes to solids; and pull in further expandables when it comes to sand control and completion--from what I can understand, they have gotten a license to use the existing sand control process and technology of expandables and existing sand control, existing completion process and product line that Inventia developed on a license basis.

Meaning it's economically attractive when you don't have to share 50% of the cash flow, just have a license. That's actually their consideration. So the first thing is, your question reads addressed to solid as opposed to sand control and completion. Is that clear to you?

Yeah.

Okay, good. Now, next question becomes what is the future of solids? Well, talk to our clients--they are way ahead of us in that our clients are specking the expansion of solids in many their projects and they're way ahead of us, because new Inventia and [inaudible] aren't able to do quite yet what they want us to do and it's creating and it will create disappointments and tension. So, I think there is a demand pull for what this technology can do.

The real problem is being able to do what our clients want us to do reliably. And that may have been something that Haliburton took too long in delivering, that's a judgment call.

With respect to - I think you made a comment on pipe and steel - that would be I think, more in the realm of public relations than substance in so far as having come myself from the pipe business--which at least I know something about it--it is true that in the process of minimizing the diameter of a well bowl, you're going to be interacting with tubular goods, it's absolutely true, but - you know - that's about the end of the story.

The expansion method is going to be the service that gets paid. It does expand tubular--it will expand and[inaudible]. It will expand packers and things like that. That doesn't mean the process of expansion gets paid and rewarded to the tools that it expands.

It's more - I think it's more a question of presentation than anything else. No, the answer is that the OCTG the manufacturers--bless their heart--are passengers on this train,they're not the ones who are either driving the train or will benefit from that train.

The question is, will the expandables train be big enough soon enough to be commercially attractive? That's a question which evidently Haliburton answered, no, from what I can see. It is a question to what we are still answering, yes. Hopefully we are right.

Also, do understand it is going to be distinct from sand control and completion, I took the answer from our friends at Haliburton appears to have been, no, this is a good product.

Uh huh.

So, I think the real question you have to ask yourself, Mike, is this going to take ten years and cost a bundle so why bother? Or is it going to take less than ten years and start producing something on the solid side?

Albeit we've had the problem across the board, which have been apparently after much effort and pain has been resolved--allowing us to be a bit more effective on the sand control side and the completion side and, of course that will benefit in turn, the solid side.

That's great.

I can tell you more offline, if you like, Mike. It's a fun question for me. Okay, so far as I know about OCTG wells and find it just very interesting.

Alright,that sounds good and that's all for me. Thank you.

And your next question from Robert McKenzie. Please proceed. Please check to make sure your mute button is off. We'll do a reminder that's star 1 for questions, ladies and gentlemen. Folks, I'm showing no questions at this time.

Very good then, thank you very much and we'll just log off.

Ladies and gentlemen thank you very much for joining us on the call. You may now disconnect your lines.