Weatherford International PLC (WFRD) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Weatherford conference call. My name is Carolyn. I'll be your coordinator for today. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to your host for today's call, Mr. Bernard Duroc-Danner. Sir, please go ahead.

Thank you, good morning, Lisa will start off and I will close the prepared comments.

Good morning, this morning we reported diluted earnings per share of 38 cents as compared to 36 cents per share last quarter and 27 cents per share for the same period last year. As a reminder, in 2003, we adopted an accounting policy to expense stock options, therefore our reported earnings per share of 38 cents includes approximately one cent of stock-based compensation expense. It is on the old basis, earnings per share would have been approximately - well it would have been 39 cents, so one cent higher if we had not adopted self-123. The breakdown of our sequential earnings per share improvement can be synthesized as follows. We had a two cent decline due to the seasonal lower north fee activity. North America contributed an additional 2 cents to offset the decline in Europe. Our cost initiatives and product mix contributed 1.5 cents. And lastly, lower R&D, higher equity in earnings of unconsolidated affiliates netted against higher corporate SG&A for a net contribution of approximately half a cent. The higher corporate SG&A as a result of stock-based compensation expenses and the Sarbanes-Oxley 404 project that is ongoing.

On a company-wide basis and on a division-by-division basis, we maintain the last quarter's record-setting revenue levels. Revenues were actually marginally up with higher revenues across both divisions in North America, offset by seasonally lower Eastern Hemisphere revenues and lower Latin American revenues. The $20 million decline in Eastern Hemisphere revenues was primarily a function of the seasonal decline in the North Sea. EBITDA margins improved 100 basis points or in absolute terms, 8.3 million on the 2.9 million increase in revenue.

Now let me turn to the divisions -- drilling services. Revenues were slightly higher as compared to the prior quarter. North American revenues increased $10.9 million or 6.5% with over two-thirds of that increase generated from Canada. The Middle East posted a $4.3 million gain, 6.2% improvement over last quarter's record top line. The strong results in all regions were offset by a $13 million decline in Europe from the seasonal weakness in the North Sea. On a product line basis and ranked by size, the revenues broke down as follows-- well construction, 37%, drilling tools, 24%, drilling methods, 21%, and intervention services, 18%.

EBITDA margins at 30.1% were up 90 basis points. The improvement was a function of mix and supply chain initiatives, not a function of pricing. I'll speak to that later. Production systems from a geographic perspective, North American revenues increased 17.4 million with over 80% of the increase coming from the U.S. markets. International markets declined by 11.7%, primarily due to lower, artificial lift sales in Asia. These sales, while high dollar, tend to be non-linear. The first quarter production division revenues by product line were as follows -- lift, 49%, completion, 39%, and production optimization, 12%. EBITDA margins in this division improved 70 basis points driven by the manufacturing cost initiatives.

Pricing stabilized at the fourth quarter exit level, which since the fourth quarter pricing was declining, the exit rate was lower than the average of the fourth quarter. That is to say the way the arithmetic works, the first quarter pricing was slightly lower than the average of the fourth quarter. To be clear, there was no deterioration in pricing during the first quarter, in fact the tone is improving. Bernard will speak to this further.

On the cost side, significant progress continues to be made company-wide towards lowering our cost structure in both manufacturing and procurement. This quarter we had incremental net savings of $1.5 million. This is $500,000 above expectations as we are able to accelerate some of our second quarter activities. Our research and development expenses were 19.4 million. We expect the remainder of the year to average this level, although it may not be linear quarter-to-quarter.

Now, a summary of our cash flow from working capital, capital expenditures, and acquisitions. Days of working capital increased five days this quarter, however, as compared to the same period last year, which there is some seasonality, days working capital has declined 11 days. We're continuing to roll out the J.D. Edwards system and we're confident this will provide us 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 US 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 this quarter net of lost in whole were approximately $55 million for the quarter. Capital expenditures will be approximately 250 million or just below our depreciation level in 2004.We closed two acquisitions during the quarter for approximately $11 million. During the first quarter, net debt capitaLisation declined 70 basis points to36.5%. Now I will turn it over to (inaudible).

Thank you Lisa. Few additional comments on Q1. Q1 was a solid quarter. Canada was strong. The North Sea hit a seasonal low. And in some respects was also a historical low. The US showed good top line growth. The best we can see, there were essentially share gains. Margins raised companywide by over a 100 points EBITDA, primarily as a result of cost savings in our supply chain. There was no key benefit from pricing in the quarter. I'll come back to that little bit later on.

The Drilling Division had severe North Sea volume declines, which is consistent with North Sea low. Canadian top line made up half of the North East in all the clients while the Middle East grew further from already strong Q4, 2003. Year on year growth that is Q1 '03 on Q1 '04 for the drilling division in the Middle East earn 35% in another wise flat recount environment. From product line standpoint in the drilling division, there were no dramatic movements. Drilling methods, which is essentially on the balance and well construction were up quarter on quarter. Drilling tools was also up a bit left and intervention services, which has a strong North Sea application, was down sequentially.

Production division had significant top line growth in the US and West Africa. The US top line benefited from what appears to be share gains and reciprocating lift and completion. West Africa was particularly strong in completion with large shipments. Concurrently, lift shipments, particularly hydraulic lifts were down in the Far East and Middle East reflecting quarter-to-quarter delivery dates, they will be substantially up in Q2. Lisa said this is nonlinear as a business.

For a part line stamp line completion was up quarter on quarter while lift, specifically hydraulic was down sequentially, nothing terribly meaningful. As expected, expandable sand screens had a good down hold success through the quarter, meaning the installations we did were successful. We are cautiously optimistic for the balance of the year for both for volume increase and return our top line margins. The engineering emphasis will now shift back to the solid side of expandables.

Moving on to pricing, U.S. pricing as you were called bottomed in last, in late November 2003. Q-1 unfolded with a full quarter of late November pricing. The realized pricing is therefore down Q4 and Q1, equating to about 330 basis points. This should not be interpreted as a sign of market weakness. Quite, the contrary. As highlighted later, US. pricing prognosis looks encouraging for the first time in quite a while. Canadian pricing was firm, although the delta was modest, as was most of the Canadian business production related.

Pricing in the international market showed signs of strengthening in a number of regional and contractual instances. I still think it's too early to tell how meaningful, the trend this is. But it is encouraging. The outlook, the comment on the underlying markets. We expect the US to gain an another 50 rigs, 50 for the year, ending at 2004 at about 1200 rigs. We do not see any material improvement in the Gulf of Mexico, for the balance of the year, but no further deterioration. (inaudible)in incremental U.S. land rigs is getting and or is likely to get deeper, part on it is the plate towards rocky mountains, part of the US markets. But this is a general phenomenon for the incremental rigs.

For Canada, post breakup, we don't expect a lot of change and the year will be modestly up, quarter-by-quarter over 2003. Internationally, rigitivity should rise 5% or circa 40 rigs, 40 by year-end. Concurrently, we expect our business to grow by over 10% from Q1-2004 levels to year-end or about twice the underlying market rate. Most of the growth will occur in the eastern Hemisphere and Mexico. And when I say Eastern Hemisphere I really mean ex-North Sea, although we are more constructive on the North Sea, I really mean ex North Sea.

We expect, in terms of the revenues for international rigs are well drilled to rise consistently for Weather ford throughout the year, as it has in the past. In effect, we believe, as we did a quarter ago, that the international markets will carry 2004 earnings growth. More detail on park line and the regions. For the balance of the year and the rig division, under-balanced is expected to have the highest growth rate of all other segments. Well construction will do well also. Now, under-balance prognosis is well understood, less often described as the strength of our well-constructed segment, which is the rig division's largest core.

Well construction regroups, three different activities park line and services. A tubular running service was inflation to be in casing, cementation, that's the entire jewelry, and the hangar, which is in my mind, a cecementation. Just to more specific on cecementation to. The well construction group segment adds up to 37%, almost 20% of the rig division in Q1. The biggest story for this segment in '04 and into '05 is incremental gains in deep water markets. In the Gulf of Mexico, for example, BP has awarded Weather ford contracts on Mad Dog, thunder horse as well as Atlantis for well construction segment. As you all aware these are three of BP's crown jewels.

From the tubular rigs services standpoint, we received a award based on proven technology such as mechanization, but also these two are providing innovative engineering to address challenges that are very unique for these projects, such as a running the production rises and the makeup of very high grades stainless tubulars for complex completions. These contracts will also reflect on our cementation park line focus on deep-water markets. For example, for remote control cementing heads are being introduced to the various deep-water markets. Together, with high strength liner hangers, they will provide state of the art remote control plug launching equipment which substantially improves rig safety and efficiency. Those of you seen our rig operations or cementation will know what I am talking about.

A constant scheme is successful in neutral some, continues to change the way our customers cement deep-water wells. Next generation floored equipment down hold mud (inaudible) surged reduction equipment are all recent examples of successful introductions of the particular emphasis on the deep-water market.

We have more plugged initiatives pending for the release of these markets. Now, well construction will not match on the balance growth over the next two years. It's obliviously, much more mature. It will show strong growth in high margin applications and that's what I wanted to underline today. In production division, production optimization or production automation, I should prefer automation optimization, after the terminology, is expected to have the highest growth rate together with the gradual extension of our brown field strategy. That's probably as a subject for a different conference call in terms of details.

In terms of regions, Middle East and Caspian are clearly going be the regions for the highest expected growth rates for the drilling divisions, in fact Weather ford as a whole. Russia and Latin America are the regions with the highest expected growth rates in production division. Pricing and costs, as I mentioned above U.S. pricing has stabilize, stabilize after in our case, nine successive quarters of decline. The tone in the U.S. is definitely much stronger coming into Q2. Pricing appears to be also strengthening in the international markets, particularly the Caspian and the Middle East. Maybe as a function of time we'll grow more cautious, but too early to draw any metrics on this yet. We should have more by the end of Q2.

Raw materials , raw materials inflation is well advertised, I think we are the first one to mention in the conference call last quarter. Now it's quite remarkable. We've seen cost increases in the range of 20% to 60% depending on grade, metallurgy and shape. Now we have, haven't been static, we've systematically canvassed and squeezed (inaudible) supply chain capabilities to minimize the cost-push.

Now withstand these efforts, raw materials cost-push is unavoidable and look at the percentage increase to that level, you can't negotiate your way out of it. You can, -- you can mitigate, you cannot negotiate it away. As a final remedy, though, we have institute the raw material surcharge on all relevant product lines to be phased in throughout Q2.

Now, so far, the prior response has been understanding. It's too early to tell whether the raw materials issue will be managed away. But the early results are very encouraging. Equally encouraging, the most recent trend -- just a few weeks old -- suggests a flattening of raw materials inflation which would have minimize economic strain on our clients. On the cost side, x raw materials, of course, we are on track for a further$18.18 million brand and reduction in our manufacturing and supply chain cost for the balance of the year. These cost cuts are expected to be realized gradually throughout the year.

The reduction in supply chain costs will come in a combination of two ways, manufacturing volume coming out of the U.S. and continental Europe, two, Eastern Europe, South America, and Asia. Specifically, Argentina, Brazil and India, cementation and gas service to Brazil and India, reciprocating products to China and Romania and these are comprehensive examples of the action under way.

Secondly, procurement, which is obviously an ongoing effort, which is not new. The particular emphasis this year are freight and telecommunications. We saw, this brings me to an overall sort of view, of how we see the oil fields for Weather ford. As we said here, the outlook for oil field service is strong, even if it feels it's measured. This is not the first time market prognosis services has been constructive. What is different, what feels different this time is how gradual, even reasonable, the rise in activity is.

We interpret this as a corollary to the tug-of-war between capital discipline and the growing difficulty with which our clients can secure desired rates of production growth. This isn't a short-term issue. Reservoir productivity difficulties will get worse in 2006 and beyond for a number of reasons. This suggests a following, -- to the best of our judgment, the North American market wills do better in 2004, it will peak in the U.S. by year-end, 2004 at or around 1200 rig count levels, essentially driven by land. It should fluctuate around or close to that level in 2005 and 2006. But in our mind, stay flattish beyond that 1200 level. Canada should stay stable at or little better the presence of all the activities.

The international market will blossom. In 2005 through 2007 as our clients make a push to secure production growth rates. And I would also add, more reserves. Clearly the Gulf of Mexico remains a wild card in 2005 and 2006, that's worthy of long discussion. We also think that technologies that make a difference, that improve reservoir, field productivity will do increasingly well as 2005 and 2006 unfold. In summary, for the necked couple of years, we add Weatherford see strong, organic top line growth coupled with increasing returns on the back of the technology and footprint investments already made. On the balance, optimization will be large revenue drivers with strong performance from our core drilling and production segments. That pretty much ends up my comments. I'll turn back to the operator, moderator for the Q&A session.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Your first question comes to you from Kevin Simpson at Miller Tabak (Ph). Please go ahead.

Good morning.

Good morning Kevin.

I wonder if you could go into detail where you see growth coming with specifics possible and timing on -- on the under balance side of the business. And I guess the other question with that kind of going back to an issue we've had before, which is what kind of pull through we should be building in to our models for incremental revenues for that side of the business?

Most - under balanced has good growth prospects in Latin America and in the North Sea and in three markets on Asia. It has the best above and beyond that growth prospects in -- trying to think -- the single country that's not involved. But pretty much every single individual country in the Middle East and North Africa and from Algeria, Libya, Egypt, Oman, the united emirates, to a degree in Qatar, not entirely yet, but it's a work in process. And a few other markets in the region. I'm not going to give you the whole list. These things strike us as being -- start-ups in projects over a period of three or four quarters from now. Very good growth all together and it's a bit early to give you a sort of percentage by what I don't know.

But this is part of your optimism with that acceleration in 2005?

Yeah, I think so. I think it's difficult at this early stage to tell you it's going be 'x' dollars, 'x' percent in this quarter. I rally don't know. What I do know is that the feeling of the work being done -- over the past three or four years, has been on average good. And that the client response now is on creating a greater level of interest in doing more welled, under balanced or what is referred to so often is the at balance or managed pressure drilling, managed pressure drilling being at, a little below on the balance. So when we look at the prospects for us and the other players, of course, in all of those regions, it is primarily North Africa, also Asia and the North Sea, and some of the markets in South America, including Mexico, it strikes us as being a very significant growth. I think it's fair to say probably as strong the growth as we had in that particular product line in the past and given the fact it's kind of sizable because the drilling method segments, which Lisa identified as being, what, 20%, 21% of the Drilling Division --

4 million in the quarter.

Not only under balanced that were not be true but it is primarily under balanced. It's the elephant in that segment that's a re-entry.-- Good but very small. The fact to even continue on the same growth pattern with much bigger numbers is very encouraging. So what I would say is on the actual percentages, I would give it some time, and see how the quarter unfolds. It looks promising through the end of 2005 and suddenly by the end of Q2 and Q3, we'll have things to report. Second of all, a far better sense to how the growth rate is taking place. With respect to the pull-through, I think I let Lisa give an answer to -- my impression is that it's varied greatly depending on the project. But I would say probably maybe one-for-one would be a good compromise.

Some are a little higher some are a little lower. But on average, $1 for every $1 of under balance is just about what the pull through is.

One reason I mention well construction here in the comments is probably because it's so large a segment of what we do, it's understood. The other reason is it is a big favorite in terms of the pull through and under balance. I mean one sells the other. It's not well construction that sells under balance. It's the other way around. Not the only way well construction makes its living not at all, but in terms of increments, it's often the case and not in the bottom of course but non applications on around the world

OK. Thanks and one other question if I may -- on ESS and solid expendables, is that still a red number for the corporation in the first quarter?

Yes, it's break even, is it not?

It was break even.

What all is this R&D -- a process.

Process Break-even

Break even. Close uh enough?

Yes, but not solid.

Not solid. Solid I think is a commercial proposition for a few more quarters.

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

Thank you sir. Your next question comes to you from the line of Jim Crandall at Lehman Brothers, your question please.

Good morning Bernard and Lisa.

Good morning.

Good morning.

First of all can you give me a sense of expandable sand screens revenues and margins in the most recent quarter. Roughly what percentage of the peak quarter run rate are we looking at for that business, both in terms of revenues and margins and when do you think you could return to the peak?

On the top line, it's about half of what the peak was. The margins is less than half by a long shot. So we're definitely in there introduction phase of all of the different sizes, which has hurt margins from two perspectives. One were the pricing is a little lower. And the other is you don't have the volume, which impacts the absorption.

It's not - it's not the -- in terms of size -- terms of size, this is an important product line, a very profitable one. I think that the swing was essentially less because of its reflection of the size. The reflection that it will be profitable and be burdened by a lot of engineering expenses and positive numbers or negative numbers the swing in that sense was significant.

When do you think, Bernard that you could return to the peak level of revenue and profit about in that segment?

I don't know. It's too early to tell, Jim. I don't know. It really is. I feel very contrite and happy at the same time -- contrite by what happened and happy that we've done technically well over the last six months to nine months. So I'm afraid to say anything.

Could it be late 2004 or do you think it's probably 2005?

Early to tell, Jim, but I would say -- if it was late '04, I will be very pleased, but I would settle for early '05.

OK, second question Bernard, a little bit of a followup on the previous question. But if you look at your percentage of revenues, it comes from a Middle East and North Africa, you're probably right at the high end with maybe the exception of Schlumberger in terms of who gets the most revenue from that region. Ans you would have seen that with under balanced drilling, really taking off in almost every country in the region, we could be looking at a fairly dramatic growth for the Middle East, North Africa region as a whole, for Weatherford by dramatic, I mean at least 25 to 30% a year over the next two to three years. Is that at least in the same general direction that you're thinking?

It is, it is, it is, Jim, it is. I think, those are big numbers, but I think that's the way we think.

And should we think about your under balanced business at the current time as being -- I mean $100 million business in the Middle East at this point?

Not quite as big. You're off -- it's -- it's still in double -- double digits in terms of millions. Got to work a little more to get it to that level.

OK and then final question, Bernard, where, specifically, do you see the most optimism about pricing in the US markets at the present time?

You know, Jim, when -- I -- I can't answer that question except to say when do you starts feeling well? What part of your body tells you, oh, I feel well today. It's systemic. It's the best I could give you. I can't point to any particular product or service line. If I tried, I probably would. But I think its the tone is just much stronger. It certainly is not -- it certainly is not, it is not Gulf coast or Gulf of Mexico tone, no. But it's the tone across the board is better and psychology is better. And it's been that way now for pretty much since the end of the year. And I can't say that where -- where construction or drilling tools or -- I can't say that.

Do you think it's regional in nature and that you see more in the Rockies, for example?

Of course, we do, because that's where the delta is occurring. And also I think, you'll see it in Oklahoma also but even in the classic West Texas Permian basin, East Texas markets, the tone is good. We've been going through Weatherford for the because of the micro dynamics of our own businesses through nine quarters, if I'm not mistaken, of declining pricing since the third quarter of '01. I know what the tone is. I know what a bad tone is. I can recognize a good tone also. I think, we all can. The thing by now is you've been feeling bad every morning for nine quarters in the US. I know when I'm getting up in the morning I don't feel so bad. I can understand that. And let's see if we have -- if we have actually movement that we can report in Q2 and we will at the end of Q2. Im also grateful that I think the raw material sides appears to be manageable and also another element of the tone. Separate and distinct from pricing increases that don't have to do anything with search of raw materials. So, it's encouraging. Let's --I would like to wait another three months to see where it takes us.

OK, that's it. Thank you very much.

Thank you, sir. The next question comes from the line of Rob McKenzie of Freeman Billings Ramsey. Please go ahead.

Good morning Bernard and Lisa.

Good morning.

I was wondering if you could expand on the flow you made Bernard about slow, steady growth that you are starting to see internationally here, and how that relates to capacity in different markets around the world. And in the context of it, if we continue to see service companies spend little or no growth capital, what kind of time frame would you expect to see, you know, strained capacity in several markets, you know, maybe geographically around the world in accounts to scenario.

I see, it's an interesting question. Growth in international markets, you can break it out to two segments, one is a catchup -- what's a catchup? North Sea and Venezuela with different dynamics, obviously. The former is an issue of finding the right people to work the reservoirs, the latter issue of political stability. That's clear. I think you'll -- that kind of a growth, particularly in the North Sea -- and in Venezuela too, actually, you don't have -- first of all, in case the North Sea -- it's not steady. It's not linear. But in both cases, you have capabilities in place to handle extra volume because both markets had been starved of volume. Therefore, you know, you have actually -- some of the infrastructure has been made leaner - certainly ours has. You have the infrastructure in place. You have the capacity in place. No question. And we are constructive on the North Sea -- not -- not deliriously so, but we are constructive on the North Sea. But when you look at the other markets, the market that has been growing steadily -- Caspian, Middle East, land Africa, Russia, Far East, and there's more coming. There's more coming based on client intentions, there's more coming off shore West Africa. And you look at the fact that this business has absorbed much of the increasing activity using infrastructure and you look at what's left in terms of the capacity and - which is a hard thing to define while it's easy -- the equipment is not so easy.

Right.

There's no question that sometimes, perhaps by year-end, it's too early to tell for us, that there has been an acceleration of capital investments in the off shore business. I think-- I can't make a general judgment on everyone else because I don't know everyone else's situation. But what I see -- when I travel around and realize the infrastructure, there's no doubt that we are approaching a level in which the service industry will have to make capital commitments, expand capabilities in those international markets. Not the North Sea, not Venezuela, not those types of markets, but the ones that are growing on a structural secular basis, meaning North Sea and Venezuela finally a typical play. No doubt about that and when is that going to happen? Don't know. Sometime in the next 12 months, there should be an acceleration of CAPEX, no doubt. That may be why we are seeing some positive on the pricing side internationally. Indication, it's not out of generosity I could --. Through a reflection of the fact that the capacities have to fundamentally you will be locked up by our clients or expanded and therefore encouraged financially.

So then it would also imply, then, significantly more pricing power within that kind of time frame as well. And what kind of pricing power would you all look for --pricing gains would you look for -

Well, the latter question you can't answer that way because it all depends on where and when I mean so it can't go for a, if you have one kind of a process and one kind of a product, you can say, well, we are not going to build an extra plant, unless you give us x, y, z in pricing.

But in the world of broad service and products, you can't reason that way. It will depend on the specifics of the country as the project, but it is true that in order to improve the terms in the industry, it certainly improve the terms of Weather ford and it' true, in terms of providing the service company incentives to increase the capacity in particular markets, in '04 and most probably in '05, you will see some pricing internationally. I hate to give you a numbers, I don't know. But it is given the tone that I see in those markets and given the need for more capacity, I , it's seems reasonable to expect that it would have enough.

You also understand that international markets are very contract-based. As a result, you tend to be in commitments for two years, one years, three years, and the like. And so if things don't move in a linear manner like in the U.S. up or down, that's good and bad. It makes things like raw material issues easy to handle because they are contractually expected. It also makes price increases probably slower to fully realize because you have committed for a bunch of business already. It's on the increment. On the other hand, it tends be better in the down market.

Having said all that, given the momentum in place, you should keep a watchful eye on what happens in Q2, even Q3 or Q4 on the product side in international markets as volumes comes through. The international markets, though, remember, is as important because it's bigger than the North American markets, primarily it is slow. It moves powerfully but slowly. But it is moving.

Great and my last request before I turn it over, Lisa, do you plan on distributing numbers excluding the stock expense charge again this quarter?

Yes, it was one cent per share. Are you looking for a divisional breakdown?

Yes, please.

Yes, I can do that off-line.

Great, Thank you.

The next question comes to you from the line of Aaron Jeiren (ph) of Credit Suisse First Boston. Please go ahead.

Good morning, before you talked about some of the gains that you see in the deep water well with respect to some contract awards with BP, as one and if you can broadly talk about Weather ford deep water services, portfolio services, and may be what type of growth opportunity you saw this as for the next year?

Well, the deep-water portfolio is actually well construction, drilling tools. It doesn't involve at this stage at least under balanced or drill it involves -- no, it doesn't involve it quite yet. It will involve eventually solids, but not quite yet. So it's really, it's really well construction and drilling tools, which represents, and Lisa will correct me, -- just under 40% of one and about 20% of the other. So, it represents a small two-thirds of the drilling division.

There's also segment of production division on both the production optimization which is fiberoptics, in particular and also on the packer side gets involved. So we'll call it something on the other, not the whole packer line, obviously, substance, -- safety valves and the likes we'll call it 25% of production division gets involved in deep-water, this segment completion and a segment of productional optimization. So it's two-third of -- 60% of drilling and 25% of production gets involved means, the others do not. And that's not actually entirely fair, because there are hydraulics and gas applications that once in a while gets used. But it's not worth (inaudible) your intention. That's one. This is not new, by the way. We've been - we had a large deep- water exposure for a long time. The reason I mentioned it this morning is because well construction is done well in picking up incremental market share in what they do with the deep-water market. It's more then sort of declaration of when deep water mark, we've been in it for a very longtime, haven't talked about very much.

Perhaps because the attention has been on things like under-balance and so forth, because of the fastest growing segment. But the truth is, they've been in it and they've made -- they gain a lot of share in that market in what they do, which is, again, you know, running the tubulars and the casing and the risers -- and the like cementation, entire jewelry, cementation line of hangers, packers, safety valves, fiberoptic sensing and the like.

Now, I mentioned the BP contacts. They're not the only ones by any stress of imagination and in terms of incremental, that have been signed up, it just happened to be the Gulf of Mexico, which is next door. People know about the progress so they're visible is what I'm trying to say, more than anything else there are many other instances around the -- around the well and the West Africa in the East in particular where there has been some similar incremental contacts. And actually he was waiting for me to highlight, what has been a, I think it's a big success in how we manage the well construction more than anything else.

You had compete in the deep-water completion arena?

Yes, but I wouldn't say that we are the leaders in that, in deep-water completion arena. The leader in the deep-water completion arena would typically be meca.

Right. Just trying to see how much exposure you takes you know, '05 looks like a good year for deep water.

Just to realize the completion, is a continuation of the jewelry of cementation and liner hangers - I mean if you understand how things are built. And as that you know -- we are obviously pushing from one end, which is -- at this point, I think we are the, we would have to be largest play on cementation in that, you obviously have deep water tubular running services without a doubt. The largest pay in cementation jewelry, with the second largest pay in hanger systems and the largest one being the Bacca. And we are runner up to Hal burton on the completion side. But obviously we're pushing it from the other end, which is, using -- using the Cementation jewelry, etc. We're also using what was a very successful and perhaps will be a successful technology now, which is expandable sand screen, which is obviously the finest application also in deep water. So I think a year from that end the competitive landside.

Second and last question -- you talked about danger seeing in the US and I was primarily does the function of volume without much change in pricing but it resist more of a function may be customer mix? Or are you guys competing, may be more aggressively on price?.

No, I don't bluff. It's very hard to know whether you are sort of pricing above and beyond or below anyone else. I think you have talked to any one on the sales side said we're extracting every cents we can and were not the competitors and I and I never met a salesman that didn't say that. From any company to that list except what may be those who have retired and just have a few more. So that's what number one. Number two, I see no evidence in the share gains, that was, it was pricing with. I think it has to do with breaking into some accounts. And I would give our sales people really about credit for good bundling and good market penetration, not just, you know, I give it to you cheaper because I feel like it. No evidence of that. And I would tell you if I did.

OK Actually, One last followup on Universal compressor, but can you talk about the decision that you register the shares and potential uses of proceeds should you sell that block of stock?

Well, the follow shelf is actually less momentous than it probably came across. We do have the ability to have shells out there fundamentally for three years. We have three different shells -- registration rights. So, number one we have time. Why now? Well, simply because it gives you flexibility, which is if you decide that you want to sell some or all of it, you can. To a degree, it's no different than having the ability to sell on an individual basis, you're free. We have not decided to sell, we have not decided either when we will sell. So we're just watching it carefully. We're very happy with the way the Universal is managed, a very good job, good from the operating standpoint, and the value is being created there, which is really fundamentally what we care about. So, you know, we -- had we not decided to sell and when to sale, as today it's hard for me to answer the questions as suppose to proceed. Because I'm not sure I'm going have any proceeds.

Right, appreciate your comments.

Thank you, sir. Your next question comes from the line of Mark Kelstrom from Brigitte Capital. Please go ahead.

Good morning, everybody. We have covered a lot here. But just a couple sort of followups. One is on US. Pricing, with all of the week ness in the -- in the Gulf of Mexico, just one area you could may be touch on some of the factors that are driving the improvement in pricing environment. Is it, -- is it a more on shore activity capacity rationalization, deeper wells, what are some of the factors that give you optimism?

The fact that give you optimism are the responses, the particular initiatives. I just -- not enough of them, not enough matrix to be able to say, well, we see pricing moving up by 'x' amount. So the first thing that gives me comfort is a specifics. But they are not broad enough, I don't have enough of them to be able to say, OK, things have moved. So we're more cautious than we used to be. With respect to where is it coming from? Obviously the on shore activity yes. I do think on shore is getting deeper.

The move is greater activity in the Rockies, and maybe some place in Oklahoma are --are natural for us. We are -- of course, we're Gulf of Mexico people that has been hurtful for us. We're also deep people. I don't mean this in an intellectual sense, a well sense. We do well in deep wells and deep architecture. This is the nature what we do is such that we have a high multiplier effect when we get deeper and the market is moving deeper.

I think part of it is the need for the services going up --measurably, and that creates immediate uneasy relationship with our clients when comes to pricing. In the end of the day, it's type of activity, which is shifting -- not dramatically, but shifting enough to create incremental demand for what we do that put us in a position that we can have more muscle to turn around the pricing situation and increase it. It may be also simply that, you know, often wars end up out of fatigue, which is that people have been battling in the competitive markets using pricing, which is the dumbest form of competition that you can find, but unfortunately, when it start, everyone is guilty of it.

No one is to blame, sort of, in essence, at some point there is a certain amount of fatigue. People look for an excuse to turn around. The excuse I think the excuse was provided by the shift in the markets toward deeper place, incremented volume on land ultimately began to bite into capacity. Some capacity was pulled out. We certainly did. Some of the people rationalization that happened -- we suddenly did our share -- not anymore, mind you, but we did our share. But I think at some point in time it's a -- I used a silly analogy, but it's the best thing to come up with, with one of your colleagues is that what organ do you credit for feeling better in the morning when you get up? Not sure you do. You just realize things are better.

And all of the reasons I mentioned explain it, but there's not a single one I can point to. But it is, I think, so far, it is -- it looks healthy. As I said before, I've seen it look healthy in that particular market. We've been living off of the international market. It looks healthy like I haven't seen it look healthy in quite sometime. Now, let's see how healthy that means.

OK, great. And second, we heard from Veritas, they're doing quite a number of multi climate size make shoots in the North Sea. We've seen a few incremental rigs going to work there. Are there specific projects or benchmark that is you're looking at that kind of construct your view on the North Sea?

In our case, we have particular contract that are incremental into the balance of 2004. We've been more constructive on the North Sea than anyone else. We're not saying it's going be a great volume increase, but we said that year on year, 2004 and 2003, if you take the seasonality in account obviously, it was going to be positive, also feel that way you have been more so in 2004 or 2005. I trying to see more who sticks to 2005 in academic.

The reason has to do really with what you described -- what you describe is the fact that, OK, the biggest problem the North Sea has is that the reservoirs are not owned by the right people. The reservoirs -- any infrastructure, pipeline infrastructure, etc., are not owned by the right people. Meaning that the people who own them have their attention elsewhere. And the people who own their reservoirs were whether their attention elsewhere or not have incentive to sell the reservoirs. Because those reservoirs -- and it's kind of a period victory if you think about it those reservoirs have a future. They're not as tired. As other reservoirs in other parts of the world. They have a future. They are mature, but they are not as mature as the other parts of the world -- particularly in the U.S. So that people who own those reservoirs think they will work on them, some years down the road.

And it's an inventory of opportunities, just not the one that is wanted to address now. That's really the case. So it's a bit -- it was stock and a very low level of activity, dreadfully low, actually. What is helping now is the combination of the small-- small transactions, small meaning in economic turns, that took place over there that are bearing fruit in terms of activity, meaning the new owners are more dynamic in terms of commitments. But the second thing, which is helping is that what you're seeing are the beginnings of entrepreneurial farm out projects in the North Sea. Which are taking the form of the size routes, which obviously delays the work because you have to go through and get an interpretation before you act, but sometimes it's out there and it will be taken. And the entrepreneurial move towards farm outs in the early stages, and it's being I think very well received by the same people who are not there right now, the reservoirs.

And that means that simply that you will see incremental activity without changing ownership. And that factor alone is what explains together with the previous change in ownership that took place, explains why we think that certainly 2004, 2003, the North Sea will be better. But obviously even more comfortable 2005 over 2004.-- It gets academic. They move slowly but powerfully. The North Sea --it's easier for us to be constructive specifically on the North Sea than the Gulf of Mexico. Gulf of Mexico remains an unknown in terms of turn -- meaning if and when. North Sea is not an unknown for us.

OK, thank you very much.

Thank you, your next question comes from the line of Janice Regal of Global Partners.

To follow up on the Northern Sea, we've heard from the rig contractor that is the shallow water, meaning jack up market is slower to take off the summer drilling season. One contractor yesterday reported that -- in their opinion, two or three jack ups are not going to be working until the summertime. Are you seeing those types of delays on the parts of the new projects?

Much of what we are going to do incrementally is not mobile rig related. You have to have a lot of visibility on, unfortunately.

OK.

And so I can't really add to what these nice people said. It's not really what was seen. Bear in mind, also, what's, that 2004 and upward 2003 will not be upward 2003 -- it's not a -- not a very high growth for 2004 and 2003. It is a growth, no doubt. Not double digits. It's good, but it's not -- nothing to write home about. But it is positive. So you use the word construction -- I can't think of a better word. I will say also that what I've seen in terms of projects in 2005 will be double dimming its over 2004. Applications on mobile rigs - I don't know. I don't know -- I would have to go through the supply-demand but install my business, really. The bare remainder two markets to address there, the fixed and the mobile. You don't have as much of the ability on the fixed as you do on the mobile. You can, you have to dig further.

Fair enough. Regarding the surcharges that you're trying to implement, the material cost increases -- how is it going? Are you getting any pushback from your customers?

Look, we Touch wood, we are -- they're going well. And, you know, have to -- again, you have to give it sometime. I'm more comfortable as I was talking about it in July, but, so far, so good.

OK.

I think whether I used in my comments I think understanding -- I don't think anyone is jumping with joy when you have a surcharge. Certainly we don't, we get it from our distributors, from our procurement chain, and, with that, I would say that we've had -- we had no problems to report so far.

Thanks and may I ask about the second quarter. If you look at the landscape, it looks like you're constructive, to use your term, on the US, the North Sea should be coming back seasonally. But Canada is going be down. And it looks like -- the breakup is pretty severe. Is there any guidance about the sequential comparison on EPS? Would it be flat? Up a little? Down a little in the second quarter.

I think Lisa can address it the better than I can.

The way I look at it, it's obviously very big picture, but we'll have - Canada will be down, and I would expect it to be 3 cents -- we typically have high maintenance costs in addition to slower activity during the second quarter. Middle East, North Africa, up 1-cent, the procurement and supply chain initiatives will contribute another cent. And then 1 to 2 cents in the North Sea, probably more comfortable with 2 cents. So that -- throw that all together and it looks like it will be up 1 cent on this quarter.

Great, thank you very much.

You are welcome.

The next question comes to you from the line of Kevin Wood of Susquehanna Financial. Please go ahead.

Good morning, Bernard and Lisa.

Good morning.

I'm trying to gain a better understanding of the growth under balanced drilling in it and specifically, I really have two questions like, what is your plan to CAPEX spending in under balanced drilling this year relative to what you spent last year?

It's going be up, Kevin.

Yeah, I assume -- I figured that much. But is your CAPEX greater than your DNA rate in the unit?

For sure, of course, yeah.

Yes, it is.

OK and then secondly, I guess, I'm trying to find out here is obviously, we have a nice uptick in demand for under balanced drilling around the world. Kind to if you're constrained in any way to service that demand. So I guess, one other question will be, how many people are currently dedicated to this unit relative to say the number that you had a year ago? Just trying to get growth and constraints, if any.

Kevin, I don't have those numbers here.

Yeah, I mean -

I mean, I have an intervention as what they would be but this is part that has done off-line but just to try to give you an answer now, maybe perhaps, probably, you have 25% more people, 20% more people, 25% more people. I may be off on that one.

OK. We'll take that particular offline. Do you see any other constraints or obviously, you are just holding it back. How much equipment has been dedicated to this - to this unit?

We are -- if the question is are we running out of equipment -- the balance answer is yes --and, of course, we are. How could we not? The question is that do we have a supply chain in place on accommodating the market? Of course we do. The one thing about our business that it's got visibility. People don't -- because they have visibility, there's a fair amount --there's a long pipeline in a sense that you start by evaluating the reservoir application on the balance of your clients. We have actually a software, which has been very popular for sure, s-u-r-e, which has to do with defining what are the best applications, overbalanced, managed pressure drilling, under balanced, what kind of under balanced? Drilling methods, and we are -- if there's a constraint I can highlight for you, it's one running out of software/reservoir engineering people to go out there and work for our clients on defining what is the optimal application on the balance. I'm running out - I have definitely constraint there. I could use some more people there. Now, it does not translate in business the next quarter. That translates in business -- I would say a year from today. Now, I've been doing this for a while now. And so we have business, which is coming up in the -- in the months ahead -- in the quarters ahead -- which we know of that we can prepare for. We can't exactly -- we don't exactly know whether it turned the key on -- on, you know, in Q2 or Q3. There's plus or minus three months particularly in the international world. It's not always minus incidentally, sometimes it's faster. But -- so we have visibility to prepare for that from the equipment standpoint. And the operating crews, we've trained a lot of people -- a lot of people in '01, '02, and '03, at the detriment of our margins perhaps, but we trained a lot of people operationally -- how? By putting three times as many people as needed on the location. We trained a lot of people. Do we have enough people to carry us through 2005? No. But we need to train more people. But we know thousand do this. We've done this. So the answer is we know what we need, so you know, manufacture, prepare, fabricate, order, and so forth. Looking out two or three quarters, we have a long pipeline in that business in so far as it starts really with reservoir engineering. And you see it's the right way to do it. It's very popular with our clients. The biggest joke I have today is not a CAPEX joke - I don't want to complain for it, it does cost money, that's true. But then presumably there's a return. The biggest stroke is upstream of it, which is the entire soft -- as in software, as in reservoir engineering aspect where I would say I'm short of people there. And they're not easy people to find. And I have quite a few.

Thank you very much.

The next question comes to you from James Stone with UBS. Please go ahead.

Yeah, I just have one quick question, Bernard. If it was flat in the quarter, and yet the margins were up, how did you guys really absorb some of the higher raw material costs that you didn't get the surcharges going to this quarter?

Actually, Jammy, the truth here is that the pricing was mathematically down.

Right, right -- down a little bit.

But to be fair, a small number. How did we get the margins -

You know, where -- what went on that you -- to help you absorb those higher costs since you lie on the starting to get the surcharges passed through?

Well, first of all, I think we didn't get as many of the raw material increases in Q1 as we will in Q2. So may be that problem is deferred. OK?

Mm-hmm.

Second, where we did, we're proactive to put a surcharge. It's like a pass through, if you will. So we're not any worse off, even though the raw materials went up. Bear in mind, we were the first ones to mention it last quarter. We were very much on top of it. This is something that we know. Supply chain, procurement, manufacturing, it's something we know, something we like. Presumably, we're awake. And we acted very early on it. So I didn't see any of it. I didn't -- it didn't impact us. Now, again, we didn't get the full range of raw materials -- no, we're getting it now. But we've got some. And every time we've got some, as I looked into it and Lisa, I think.

I did.

We were sheltered. We didn't make any money off of it. We were sheltered.

OK and just lastly, if you were to -- if you were f look at your first quarter revenue run rate that would equate to about a $2.9 billion annual revenue run rate, could you -- based on what you see, you know, for the industry, can you venture to guess as to what sort of revenue growth rate overall for Weatherford -- an absolute basis well perhaps relative to a rig count growth rate -- you would expect the company for the next couple of years.

In the US, it would be -- we expect to distract the rig count -- perhaps to do better than that, we expect to attract a rig count. We got a bit more to go. Not a lot more, but a bit more to go. In Canada, traditionally, we don't do as well in the rig count, in so far as we -- we're heavy oil people in Canada. And so it is - I think, we underperform in Canada typically. The US -- we perform -- Canada we perform. In the international markets on the other hand, from what we can see, if it is true that there is about 40 more rigs to go on, we don't know, Jammy this is the best count. You're probably better able to do that stuff than we are. But from what we do our mental count to what we know, that's roughly speaking 5% move up, give and take. We do think that we can do, you know, low double digits, call it 10% of volume increase or double the rig count.

Right.

That's probably not a bad one to pull through to the end of '05.

So, you think that's sustainable through that kind of ratio is sustainable through 05?

We believe that Canada under US Act and international double would be sort of our internal our views.

OK. That's what I need to know, thank you.

Your next question comes to you from the line of Terry Darling of Goldman Sachs. Please go ahead.

Thanks, in the interest of time, I'll followup off-line.

Thank you, Terry.

This is from the line of Kurt Hallead of RBC. Please go ahead.

Same here.

Thank you Kurt. There are going to be other call that is will be commencing. We'll go through one last question just to be fair and then we'll close down the conference call, if there is a last question.

Your next question comes to you from the line of Mike Urban of Deutsche Bank. Please go ahead.

Thanks Bernard, I'll go off line as well.

Then very good. Well, thank you very much. Then I think, we will probably close the conference call here. Thanks.

Thank you.

Thanks for your time and we'll take questions off line.