Weatherford International PLC (WFRD) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2004 Weatherford International earnings conference call. My name is Carlo, and I will be your coordinator for today's presentation. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's prepared remarks. If at any time during this call you require assistance, feel free to press star 0 and a coordinator will be happy to assist you. It is now my pleasure to turn the presentation over to your host for today's call, Mr. Bernard Duroc-Danner. Please proceed, sir.

Thank you. Good morning, good morning. As we normally organize these things, Lisa's going to talk first, prepared comments, I will afterwards and then Q&A. Lisa?

Good morning. This morning we reported diluted earnings-per-share from continuing operations of $0.90 or $0.55 excluding the gain from the sale of the Universal stock. The $0.55 compares to $0.49 last quarter, and it compares to $0.36 per share for the same period last year. The fourth quarter continued to show strong sequential operating results - - results with regional improvements contributing $0.09. Approximately $0.04 came from the Middle East, Caspian, and $0.03 from Canada and net contribution of $0.02 from the United States. The U.S. region contributed $0.04 per pricing and volume, however, additional accrued expenses lowered the net contribution to $0.02. The accrued expenses were in part compensation related as this region exceeded annual targeted income and return thresholds for incentive compensation purposes during the quarter. Gains in Latin America were offset by a lower contribution from Asia and a moderate seasonal decline in the North Sea.

These regional operating improvements were offset by $0.03 as follows. Higher Research & Development expenses, which came from prototype testing activities, and corporate expenses had a combined negative impact of $0.02. Foreign exchange losses further offset the regional improvement by $0.01. Let me summarize. Middle East Caspian, a positive $0.04; Canada positive $0.03; U.S. net positive $0.02; LAO, Asia, North Sea essentially flat on a combined basis; Corporate and R&D minus $0.02; foreign currency minus $0.01; total $0.06 positive.

Next I will address consolidated revenues and operating income. On a company-wide basis revenues increased 88 million over the prior quarter, international revenues improved 31 million, or 8 percent. This was nearly all volume driven, though pricing continued to move up with new tenders. The growth was led by the Middle East and Latin America. The Middle East revenue increased 27 million, or 31 percent. Latin America revenue increased 14 million. Europe, West Africa was essentially flat as a 7 million seasonal decline in the U.K. was offset by continued growth throughout the rest of Europe and in West Africa. Asia revenues declined 12 percent sequentially from the third-quarter record levels. Canada revenues increased 34 million, or 28 percent. The improvement was across both divisions. The U.S. revenues increased 23 million, or 7.8 percent. The U.S. benefited from a full quarter of the price increase implemented in July and an increase in Gulf of Mexico revenues.

Operating income increased 13 percent sequentially. Our consolidated incremental operating income margin of 16 percent - - was 16 percent, despite the higher corporate expenses, Research & Development, and sequentially higher compensation-related accruals. Return on capital employed increased 57 basis points this quarter. That's for a total of 228 basis points during 2004.

Now I will turn to a divisional discussion. Drilling services. Revenues were 10 percent higher as compared to the prior quarter. Eastern hemisphere revenues increased 15 million, or 8 percent. Latin America increased 6 million, or 13 percent. Canada revenues were 14 million higher than the third quarter, and the U.S. revenues increased 9 million, or 5 percent. On a product line basis, ranked by size, the fourth quarter revenues broke down as follows. Well construction, 36 percent; drilling tools, 24 percent; drilling methods, 22 percent; and intervention services, 18 percent. On an annual basis, drilling methods continues to experience the highest growth rate. For 2004, as compared to 2003, drilling methods revenue increased 24 percent. This was followed by a 20 percent improvement in drilling tools, 19 percent in intervention services, and 15 percent in well construction. Incremental operating profit margin was 24 percent, furthermore, EBIT margins at 22 percent were up 30 basis points sequentially and 340 basis points in 2004.

Production systems. From a geographic perspective, international revenues increased by 8 percent with sequential revenue improvements of 9 million in the Middle East, 8 million in Latin America. These were offset in part by a seasonal decline in the North Sea and lower Asia sales. Canadian revenues improved 22 percent, or 20 million sequentially. U.S. revenues improved 11 percent or $14 million. Fourth quarter revenues by product line were as follows -- lift, 54 percent; completion 32 percent; and production optimization 14 percent. Production optimization led the year in growth, with a 39 percent year-over-year improvement. Artificial lift and completion systems revenues increased 31 percent and 18 percent, respectively. Production systems had incremental operating income margins of 16 percent quarter-on-quarter. Notwithstanding the lower incrementals, EBIT margins in this division improved 40 basis points sequentially and 240 basis points year-to-date. Furthermore, excluding the higher incentive compensation accrual, sequential incrementals were 25 percent. Production systems return on capital employed improved 230 basis points year-to-date.

Now I will turn to non-operating events. The divisional operating improvements were offset in part by a $1 million increase in corporate SG&A, and this was simply a result of the Sarbanes-Oxley 404 project expenses. Corporate SG&A is expected to stay close to this level in the first quarter and then return to the third-quarter levels, or $15.5 million by the second quarter of 2005. Research & Development increased 3.4 million to 23.8 million in the fourth quarter. Incremental prototype expenses contributed to - - 2.2 million of this increase. Of the prototype expenses, 1.5 million related to artificial lift technology and an additional 700,000 related to our proprietary drilling tools - - hazard mitigation tools. We reported other expense this quarter of 2.6 million and this was wholly due to foreign exchange losses.

On the cost savings side this quarter exceeded expectations. We realized incremental savings of 2.6 million which benefited the income statement. Additional savings were realized in the manufacturing of our drilling and completion tools. These tools are capitalized so this resulted in 2.8 million lower capital expenditures. Obviously, these savings will benefit the P&L over the life of the tools.

Now I'll turn to the balance sheet and cash flow items. First, as I mentioned earlier, we sold 4 million shares of the Universal common stock during the fourth quarter. Proceeds from the sale were 142 million resulting in a gain of 52 million. There is no tax due on this transaction.

In the press release we provided selected balance sheet information but I'd like to highlight the following. We continue to focus and improve our working capital. Days operating working capital decreased approximately 4 days this quarter as compared to the third quarter. Furthermore, it has decreased 11 days during 2004. This reduction in days outstanding, it actually equates to additional cash available to us of about 90 million. That is, if we had the same operating working capital days outstanding as we did last year, i.e., if we had no improvement, we would have approximately 90 million more cash tied up in working capital. We have systematically improved working capital over the last 2.5 years. Capital expenditures, net of loss and whole, were approximately 93 million for the quarter or 280 million for the year. We expect capital expenditures to be in the 280 to $300 million range during 2005 based on our current growth expectations. We generated 226 million of cash during the fourth quarter. This is inclusive of the 142 million from the sale of the Universal shares. Net debt-to-capitalization, inclusive of our zero coupon convertibles, declined 550 basis points to 25.2 percent.

Before I turn the call over to Bernard I would like to briefly discuss the change in accounting regarding stock options and the related effects for 2005. And then I'll turn to some comments on our expectations for the first quarter. Many of you will remember that in 2003 we adopted the preferred method of accounting for employee stock options. Weatherford was one of the few in the industry to adopt Financial Accounting Standard 123 early. The recent revision to the standard will, therefore, only impact Weatherford in 1 quarter. Let me explain. By early adopting 123, the fair value of all prospective stock-based compensation granted, prospective from January 1, 2003, was recognized as an expense over the vesting period. In December 2004, the Financial Accounting Standards Board revised the current accounting standard to require the expensing of all employee stock-based compensation effective July 1, 2005. From a Weatherford perspective, the new guidance will only affect unvested options granted to - - prior to 2003. And since all of our pre-2003 grants vest during the third quarter of 2005, we will only have a one-time impact of approximately $0.05 to $0.06 during the third quarter of 2005. There will be no impact to our results after the third quarter as all other grants are already reflected in our results and in our guidance.

The first - - now let me turn to the first quarter. The first quarter should continue to show strong operating results. We do prefer to be conservative because obviously the unpredictable can happen. We estimate earnings in the first quarter to be $0.58 to $0.60 per diluted share. The regional improvements will be primarily from Canada and the eastern hemisphere. These improvements will be offset by the dilutive impacts of the sale of Universal stock. The fourth quarter sale of 4 million shares of Universal is $0.01 dilutive, on a per quarter basis, until such time the cash is redeployed. That concludes my comments. I'll turn it over to Bernard.

Thank you, Lisa. Q4 was a good quarter, obviously. The sequence Q3 on Q4 wasn't quite as spectacular as Q2 on Q3. But as a personal observation, it seldom can the last quarter of the year. Still, progression was strong. Without repeating what Lisa told you, our revenues grew 11 percent sequentially primarily led by Middle East, 31 percent; Canada, 28; Latin America, 18; and U.S., 8 percent. All products and service lines grew in both divisions, no exception.

Our margins grew sequentially by another 20 basis points, our earnings grew sequentially 12 percent, return on capital employed grew - - rose, rather, by 57 basis points, cash generated during the quarter was 226 million which about 85, 86 million, as I recall, is from operations, the rest is UCO. Revenues per employee, a key productivity measurement, grew 7.4 percent quarter-on-quarter to a - - $192,257. This is the 13th consecutive quarter of employee productivity growth I'm told.

The oil field service industry in Weatherford are in a multi-year expansion phase. I mean, I think I've said this before, I'll say it again. Although segments and geographic market will grow faster than others, I'll be looking to 5 or 6 [Indiscernible - accent] differentiation. Look at this industry through a cyclical lens is missing the underlying engine of growth. The cyclicality, if there is one, is a GNP, or macro cyclicality, not historically classic micro, for lack of better term, oil and gas boom to bust cyclicality. Meaning a cyclicality which is engineered by the oil industry itself, absent GNP cyclicality. That cyclicality is gone in our view. The oil field activity move is secular multi-year, activity increase will be strong, extended in time. In this environment Weatherford intends to deliver growth and strong financial results on the back of technology and infrastructure investments.

I'll go directly to the outlook. First actually talks about our direction and then again to specifics. Two factors that [Indiscernible] our outlook. The direction of the Company and our assessment of regional markets. Well, the Company's direction has been organic. I think you know this. We have [indiscernible] our resources to technology, eastern hemisphere infrastructure, Supply Chain Management. Our doubling of R&D over the past 4 years is well known. We intend to keep an 80 to $85 million R&D commitment, acquire intellectual property, if and when needed, and generally be unrelenting in raising our technology content. With respect to 0000infrastructure over the past 24 months, we've increased the size and scope of our service footprint in a large cross-section of the Capsian Sea, Middle East and North Africa. That also is well known. We now have 165 large-scale service locations in the eastern hemisphere. 165 is quite a number, actually. And 26 manufacturing facilities to support them. The infrastructure will be the backbone for substantially large level and business volume over 2005-2008 time frame. I don't why the 2008 number is there because there's no outside limit to that time frame. Could be longer. Eastern hemisphere business volume growth is expected to be, for Weatherford, as much rigless, as traditionally rig - - as traditional rig related.

Supply Chain Management has yielded in '04 about a 100 basis point measurable margin improvements. Some margin improvements we just can't measure that easily. We expect more annual yields over the next 5 years. Our emphasis on technology eastern hemisphere and supply chain remain the essence of our direction in 2005. Our geographic markets in 2005 - - or geographic outlook. One, North America, modest growth in '05 in North America. As much as I try, it is difficult to argue for more than a 70, 70, rig move up in the U.S. and the equivalent percentage in Canada. In the U.S., most all of the incremental 70 rigs should be land projects. What about the Gulf. Don't want to confuse deep-water outlook with the Gulf shelfs - - the Gulf shelf prognosis. Not easy to pronounce. Deep-water will be strong in '05 and '06. That's actually has been known for quite some time and this is not new news. It's, I would almost say, old news. Six months ago it was clear.

A broad range of projects are scheduled to start, are starting, start around the next 24 months. Weatherford's products and services are particularly suited to drilling deep-water activity on the drilling side. This is well known. As discussed in - - on earlier calls, Weatherford has an impressive number of deep-water incremental contracts due to start up in - - now, in '05 and '06, covering a broad range of our drilling offerings, specifically well construction, drilling tools as well as select product lines within drilling methods.

Now, aside from deep-water, things become less clear. First, it's too early to say anything intelligent about the deep zones of the shelf. We should - - we may - - we should have better visibility on these segments of the Gulf by Q2 of this year. So I might can say the same thing at the end of Q1, is what I'm trying to say here. Let's wait to the end of Q2, presumably. Second, with respect to the traditional shelf, although meaning the, you know, the traditional shallower zones of the shelf, although we sense a possible strengthening into second half of '05 in both the jack-up and barge segments of the market, it is speculative. It's - - it is unsubstantiated, yet. So essentially, 70 rigs equivalent in Canada and land for the U.S., best we can tell. Deep-water is - - that was clear. It is clear, it was clear a while ago.

Two, Latin America. Modest growth, with upside for Weatherford in Brazil and the ever volatile Venezuela. Three, North Sea. Substantial growth in the North Sea. Across the board with both the U.K. and Norway showing double digit growth. The North Sea, starting with the U.K., Norway and even Holland, could be stronger in '05 and even more so in '06 than we have assumed. Combination of factors is coalescing to help that market, under investments by majors and concurrent production declines, change of operators, un - - yes - - under-utilized and available infrastructure and, yes, encouraging governmental policies. As reference, in Q4, Weatherford's combined U.K., Norway, Holland, Denmark revenues were 72 million, 72, or 8 percent of Weatherford's total company revenues; a fraction of the 13 percent revenues of North Sea accounted for in 2001, 8 versus 13, we've got ways to go. Four, strong growth in eastern hemisphere ex North Sea in '05 and beyond. Best we can tell, the multi-year process, centered initially in Caspian, Middle East and North and West Africa, is going on now spreading later to sub-Sahara, Africa, pockets of Asia and, of course, Russia. Finally, six, we expect Weatherford to grow at a 50 percent, 50, greater rate than the underlying activity as measured by recount. No change there.

Incrementals outlook. Our current operating income, EBIT, EBIT, margin companywide is about 14.2 percent, and from operations, X corporate overhead, it is about 16 percent. X variations in corporate and R&D that can fluctuate either way independently from revenues from quarter to quarter, operating EBIT incrementals were 20.2 percent, Q3 on Q4. As a working assumption EBIT incrementals on incremental revenues should average 25 percent, and reasonably reliably. This is a function of, yes, supply chain gains in '05, et cetera, net of governance overhead inflation, the net of inflation in general actually, more than governance. Two, changes in mix toward higher technology content product service lines, which tend to move that number higher. That's gradual multi-quarter process and, of course, known pricing moves. The higher the pricing, the higher the incrementals. Not the only factor but this is obviously a factor.

A couple of paragraphs on, I think, which I'm going to skip, on supply chain and changes in mix, which I think you know already, and go straight to the pricing outlook. In international markets, recent pricing moves have been contract by contract phenomenon. They always are, with what appears to be a 5 to 10 percent upward trend. It's not across-the-board or simultaneous, but over time it obviously will build a higher margin plane. In the U.S., the initial 6 percent companywide list price increase initiated in July has yielded 4 percent in realized pricing as expected, 2 percent in Q3 and the other 2 percent in Q4. It's possible that pricing in both international and U.S. markets have further upside. In the U.S., we believe there is still some pricing to be had in '05. It's likely to be more differentiated by product and service line as opposed to being an across-the-board move. We cannot accurately calibrate, or probably don't want to accurately - - attempt to accurately calibrate the likely percentage increase to be realized in the U.S. on an overall weighted average but there should be some and we will report it. X past, meaning after. After what? After the quarter's over.

Internationally, we can also see more pricing momentum. In fact, as we pause and we look at the likely outcome, for the first time in our history U.S. pricing recovery may end up being more modest at the end of the rainbow than international pricing moves. This is likely in '05 but almost a certainty in '06. Part [ph] line outlook. In '05 and '06 we expect the following segments to materially outpace both market activity and corporate-wide growth. Under-balanced, in all of its forms, the new line of well construction and later follows expandable. The new line for proprietary drilling tools addressing drilling hazard mitigations, extended reefs, differential sticking, et cetera. Intelligent well completion, the hardware; artificial optimization, the software and the hardware. Fuel optimization, again the software and the hardware.

The drilling division under-balance expected to have the highest growth rate followed by the new line of oil construction and proprietary drilling tools. Don't want to belabor under-balance too much, that is in the past. But in Asia, Middle East, North Africa and Latin America we have strong growth across-the-board well into '06. The new line of proprietary drilling tools should also get strong offshore - - strong growth offshore and in the international market. While construction, which is the drilling division's largest core segment, will also grow strongly into '05. While construction regroups to [Indiscernible] running services, cementation and liner hangers and, of course, solid expandables. At least eventually.

It adds up to 36 percent of the drilling division in Q4, perspectively, the most significant story for this segment through '06 is the incremental gains in deep-water market share in the U.S. and internationally. This is likely to be enhanced in late '05 and most likely in '06 by the emergence of solid expandables, solid should get commercial tractions in late '05 and pull through the well construction line further well into the '06 '08 timeframe. In the production division, production optimization is expected to have the highest growth rate. Production optimization addresses a wide range of fuel applications going from the critical subsea deep-water well to elephant brownfield rehabilitation. Production optimization merges intelligent completion technology, sensing technology, software for download management, software for production facilities management and hardware for lift completion and well intervention. As a business, it is a direct and urgent derivative of aging reservoirs as there are applications all over the world for this. But the largest fields of application should come in Latin American, Russian and Asian markets. They should blossom in the next 5 years and yes, growth in the production division will be overwhelmingly rigless.

The overall outlook. Well, to repeat what I said at the beginning, the outlook for oil field service is strong and this text of entering the secular phase, well it's -- it is in the secular phase, I mean, it's done more than enter, it's in the secular phase. Not the first time market prognosis has been constructive. But it's different this time in how sustainable and longer term the rise in activity needs to be. It's also different this time in the importance of rigless activity component overall growth beyond '05, there's not a '05 issue. We interpret this as a corollary to the growing difficulty to which our clients can secure desired rates of production regrowth - - growth. It is not a short term issue. Reservoir productivity difficulties will get worse in '06 and beyond. In fact, the quest for reservoirs is the number one topic of any offline conversations with our clients.

Decline rates are accelerating. They suggest the following. Beyond '05 rig activity will flatten out in North America. Earnings and returns in North America from '05 thereon will be earned by technology and supply chain. The Gulf of Mexico remains a wild card. Deep-water is good and secure. Beyond deep-water there are soft reasons to be more constructive for late '05 and into '06. Albeit they remain, at this time, speculative, another word for soft. The international market will blossom in '05 '07 and beyond as our clients make a push to secure productive reservoirs. The quest for reservoirs.

Within the international market, the eastern hemisphere should stand out as the strongest market. The North Sea is beginning a multi-year recovery phase. The North Sea may surprise to the upside. Technology intensity of products and services will mirror the acceleration of decline rates. More technology is needed, and conversely, technology will be more highly rewarded. Technologies that improve reservoir and fuel productivity will do increasingly well. Rigless volume and earnings growths will become increasingly important but this is '06 '08. For the next several years, we at Weatherford see strong organic top-line growth. In that sense, we remain at our core growth culture. Coupled with capital discipline this growth will produce increased returns and rising financial results. And this is again on the back of the technology and footprint investments already made. This concludes my prepared comments and I will turn it back to the operator to start the Q-and-A process. Please, operator.

Thank you sir. Ladies and gentlemen, at this time if you wish to ask a question please press star 1 on your touchtone telephone. If that question has been answered and you would like to remove yourself from queue you may press star 2. Again star 1at this time for any questions. One moment, please. Sir, our first question is from the line of Jim Crandell with Lehman Brothers.

Good morning.

Good morning, Jim.

Good morning.

Bernard and Lisa, your revenues were up, you know, extremely strong from the third quarter, up some 90 million despite the fact that Asia and North Sea were down. Was there any, let's get it in before year end in the fourth quarter number?

Oh, I don't think so.

No, there was not.

No, I don't think so at all. It might actually be the opposite.

Oh, okay. Question on the incremental margin side. Your drilling services incremental margins were 25 percent quarter-to-quarter, production services 16 percent, you know, somewhat below your target. Can you comment on these and maybe comment to what extent they're limited by the build-up in the eastern hemisphere?

I think Lisa addressed a little bit of that in our comments. Why don't you do it, why don't you do it again.

On the production side, it's simply a matter of some increased accruals that occurred in the fourth quarter. Those were in part related to compensation, bonus plans where we hit target and we hadn't anticipated earlier in the year hitting target but we accelerated at the end of the year. So that - - if you adjust for that, production systems was at 25 percent incremental.

Okay.

If you read the, I mean, if you read the comments of Lisa after the conference call, or insofar as you'll find there's more detail there.

Okay. Bernard, Middle East up 31 percent, you've long talked about the growth there but quarter-to-quarter that's staggering growth. To what extent is that driven by under-balanced and is there any kind of geographic breakdown which would be helpful in understanding the growth there?

Well, I think first of all, from one - - quarter-to-quarter it tends to always be too high or too low, that's the nature of the beast. You have one has - - one - - we have to look at things over at least a 3 or 4 quarter basis. Having said that, you're likely to see throughout '05 and '06 strong numbers coming out of Middle East, North Africa. And, yes, it is led predominantly but not exclusively by under-balanced, no question.

It is when - - in terms of the countries, it is as much North Africa as it is, you know, Middle East as in the Persian Gulf. And it's a smattering of countries, it's not one, it's not - - people tend to look at Middle East and North Africa and typically they say ahh Saudi Arabia. If only because the country is well known. But it is not only Saudi Arabia, it is a smattering of countries and you start from Algeria and Libya and Egypt and move your way up more than just one country. And I suspect you'll be asking me that question again in the quarters ahead and I suspect I'll give you the same answer, which is again it's widespread.

Okay.

Under-balanced and widespread.

Last question. Can you talk about cap, you mentioned CapEx I believe 280 to 300 in '05 versus 280 in '04? Can you talk about where your investing areas of emphasis here and in particular what your plans are in pressure pumping?

Well, why don't you address the CapEx. I'll say something briefly on pressure pumping.

Well, on a regional basis it's really project specific. We have a, as you can imagine with the growth we have in the Middle East, we have a significant amount of that CapEx that's going to the Middle East, North Africa region, but - - and it will vary. It could be slightly higher than that if we exceed our growth targets that we have currently. But those would be definitely project specific.

We tend to have the intensity of CapEx for incremental revenues fluctuate depending on the product or the division and so forth, but it - - on a CapEx standpoint, not working capital. The intensity of CapEx for incremental revenue is somewhere between $0.25 to $0.30 or something like that. And so it depends really where the growth occurs. Pressure pumping, there's not a lot to say.

You know, we've developed the - - our own pressure pumping expertise about 3 years ago inclusive of the chemical R&D capabilities for a very specific reason which is not to spoil other people's fun but to have the ability in-house to use pressure pumping where and when we needed it in a number of applications and it has everything to do with brownfield. I mean, this is a - - the purpose was an industrial one. We'd have kept it very quiet, no need to upset anyone, and we're very content with what we have. The amount of CapEx on a forward-looking basis, which is pressure pumping related, it must be significant.

There are a number of people interested in the pressure pumping business. But, it's not Weatherford, it's not Weatherford's issue. The ones that have an interest in the skill to have it internally, Weatherford has it internally to its heart's content. It was very successful. But, they say small. It's insignificant but it's on the mental list.

Would you think there's any chance that you might expand beyond the U.S. market in that business?

But not expand that business but use that competency beyond the U.S. borders for sure, in particular applications. But it's not that - - just using that, as in bookings of the pressure pumping business in XYZ country, no. It's just part of the oil bundling of what we look at as a brownfield strategy. So, in other words.

Okay, and in terms of the package you provide, you might, if you're viewing it as essential part of the package you provide, you could provide then pressure pumping services in a number of different regions and countries going forward.

That's correct. But I - - our objective is not to just go out and make people's lives miserable in that - - that side of the industry. That's never our, I mean, our objective is just to make money for ourselves. No, our objective is simply to add a skill, which we viewed as useful. Not, it wasn't strategic or critical, but it was useful to have it internally. It wasn't that hard to get and it was successful financially.

We have our bench, we have our expertise, we have our technical know-how, we are going to use it selectively as part of a bundle of offerings on a - - that circles the issue of brownfield rehabilitation fundamentally and that's all there is. The question of what is going on in the pressure pumping business should be asked to a lot of the smaller players in the U.S. But, as I'm sure they can provide a sort of more we love pressure pumping sort of answer. For us, it was a targeted skill, we have it. We're going to use it.

Okay. Thanks, Bernard.

You're welcome.

Sir, our next question is from the line of Dan Pickering with Pickering Energy Partners.

Good morning. Bernard, you talked about deep-water as something that was fairly visible for you in 2005 because it was project-driven. Can you help us understand what kind of growth you expect in that market either on a percentage or dollars basis?

How many - - how much dollars we're going to get after various contracts that we have in deep water? I might have to go offline for that, Dan, because I don't have the number off the top of my head. We've signed contracts on and around well construction, drilling tools and chunks of both, actually drilling methods and intervention services as far back as 6 to 9 months ago. I've not added up, or at least not recently. I may have, sure it is 4 months ago.

Right.

Prior quarter. I haven't had any of that - - I had not had - - did not add it up to this morning but I can give that to you offline What is the dollar amount of deep-water, you know, incremental contracts? If you'd twisted my arm I'd say $40 million, but that is completely talk about soft. I don't know.

Okay.

Let me, Dan, let me give that to you, the proper number offline. It's just count my beans, that's all.

Okay, and fair to say that those incremental margins are going to be higher than the company average?

That's correct.

Yes, they always are. You know, there are projects in difficult places or deep-water have one thing in common. They're lumpy, they take awhile to come around, lot of start up stuff. But then they have much higher margin and they're stable for a long time. So you're correct.

Okay. Two other quick ones. Gulf of Mexico, storm issues in third quarter. Are we back to full strength in the Gulf of Mexico now?

Lisa can address that. No, we are not.

No, we did not recover all the way in the fourth quarter. We were - - we still had about 4 million of revenues that we did not pick back up.

Okay.

And they're high margin revenues actually, to be fair.

Okay. So still some negative mix associated with that.

That's correct.

Okay. And then Venezuela, help us understand maybe your exposure there, and are you working primarily for Pedevesa or for the western companies or is it a mix?

It's predominantly the western companies. I don't want to say that it's not - - not at all Pedevesa, but I would say that it's about 70, 30 or something like. 70, the westerners and 30 Pedevesa. Although, Dan, you're in Venezuela, you know, it - - yes, there is no - - I mean, you can't shelter yourself.

Sure.

I mean you are in Venezuela, which is a lovely country, but, you know, things happen. And so it has got - - the reason I always like Venezuela, other than the fact I used to work there many years ago, and I liked it immensely, they do have the best reservoirs that I know of in the western hemisphere. And I am a sucker for reservoirs, as you probably know. They have wonderful reservoirs. The problem is that - - problem taking the reservoirs into activity is a long haul.

Okay. And how much would Venezuela be of the total Latin American exposure?

I think it's about 10 percent of the company's, is that right, Lisa?

That's correct.

And those would be about 1 or 2 percent of the 10, no?

2.

2 percent of the 10.

Okay. All right. And --

Of the Company as a whole.

All right, thanks. And Lisa, any currency impacts expected as we move from Q4 into Q1.

No, and, I mean, currently this far in the quarter it's positive as opposed to losing the, you know, 2.6 million that we had to record, but you don't know, you know, until we get to the end of the quarter.

Sure, okay, thank you.

Welcome.

Sir, our next question is from Kurt Hallead with RBC.

Hey, good morning.

Good morning, Kurt.

Just have a couple of - - first follow-up questions for Lisa. On return on capital employed, what would you guys calculate that to be for the quarter specifically?

Everybody calculates it differently so that's really why I go with a trend but I think if I look at it - - the way we get it is slightly over 9 percent.

Okay. Great. And Bernard for you. You talk about some of the speculative, or soft, prospects for the Gulf of Mexico shelf. Could you provide a little bit more color? I mean, is it a sense you're getting from the oil and gas E&P companies, are you getting it from the rate contractors themselves and, secondly, if there's going to be a pickup, is there enough equipment to service whatever increase that may be?

I do like second half of the question. There's only one contractor who would be part of my soft source of information, for respect to the - - to sort of my soft optimism. Most of my comments come from discussions that - - with operators, smaller ones in particular, and I'm not talking about very small ones, about medium sized ones. And, Kurt, it's - - I'm not sure whether I'm desperately trying to, you know, sometimes you try find some evidence to sustain what you would like to see. Is it wishful thinking or is it real. I don't - - I - - it's - - can't trust myself on that issue because we suffered so much from the demise of the Gulf and the traditional shelf. Forget the deep-water. And no complaints on deep-water, but in - - on the shelf we suffered so much as Weatherford, as much as we did in the North Sea, that I sometimes suspect that I am, you know, feverishly into wishful thinking.

So, having said that, I do keep a roster of conversations, particularly when they're interesting, and then I add them up at the end of a few weeks and there appears to be enough clients who talk about an incremental 1 or 2 rigs they would like to put on. Well, an incremental 1 or 2 rigs multiplied by 4 or 5, before you know it is 10 more rigs. Now where they find the jack-ups and stuff is a separate issue. There also is the barge market, which is my former market, which is the one I grew up in, and so that one I always take a lot of interest in and, maybe too much interest because it's a small market and they're also there are inklings of a bit more, a bit more, a bit more. So, for what it's worth, I'm putting it in context.

With respect to the amount of equipment and so forth on the Gulf Coast. Very good question because some of it has been moved to the stronger parts of the market, say for example the Rocky Mountains, for example. But I do think there's still is some equipment, not much, that's left in the Gulf Coast on non - - non-utilized. Put another way, the people shortage and equipment shortage would occur very quickly if you had what used - - would have been called before, a puny move in the market of say 5 or 10 rigs you'd be out of capacity. Which, then, the next step would be oh, well, wouldn't you have a lot of pricing there, and the answer is yes, of course. But, you know, there's - - you've got a few derivatives before you get there.

All right. And then just a follow-up for you on your comment here on the North Sea. I know you talked about, you gave us a sense of perspective as to what kind of revenue generation you had back in 2001 and where you are currently. This move in the North Sea here in 2005 that you expect, you think you might be able to split the difference between where you are now, where you were in 2001?

Oh, I'm going to get in trouble with that answer, I can tell. Because I don't know what it means from an P&L standpoint, you know, once you crunch your numbers, but presume - - but I have to say the answer's got to be yes.

Mm hmm.

I know I shouldn't have said that.

And you think multi-year recovery. So there's nothing as you said in your very earlier comments, nothing as it relates to the oil and gas business that can cause a slow down, you think, anything that causes a slowdown whether it's in the North Sea or other places is going to be more of a macro economic.

I really believe that. I really believe that. I believe that really because of, you know, for all the reasons that you know. The spare capacity, the reservoir problems. I have - - one of the benefits of maybe going less to conferences and less interaction with Wall Street, other than the fact that I miss it, one of the benefits, that's not a benefit, that's a cost, is that I get to spend more time with the people who are spending the money in the industry. And what I hear, and more than I ever did, is discussions on reservoirs, reservoirs. First the lack of availability of reservoirs, good reservoirs. I mean, the thirst for good reservoirs is almost overwhelming. You used to have to look at the rush - - the gold rush or the - - a little bit like the Oklahoma land rush, in Libya. It's quite extraordinary and the length at which some of our best clients will rush into any prospects for reservoirs. There's - - this tells you something, Kurt.

And the other aspect of it is, of course, the difficulties at the wellhead, the production rates. And the difficulties we see in the field. To be able to not - - let alone - - let alone - - let alone grow, but just keeping the production rates even. It's, you know, the oil and gas industry has a supply squeeze which it needs to relax. That is not the backdrop for a oil and gas, you know, self-inflicted recession.

Mm hmm.

So the oil and gas recession, which will come one day, no doubt in my mind, in GNP later. Of course, we saw the GNP's that matter, the GNPs of the countries that have a real wealth effect, whereupon, you know, reach your sudden threshold of GNP per capita is starting, you know, consuming far more incrementally oil and gas than they did in the past, there's China and so forth. These are the sorts of GNPs where I think the future of our business, on a cyclical basis, will be determined. The supply curve is just - - it needs to be shift up to - - needs to shift up on my graph. On everyone's graph. It needs to go up in terms of capabilities. We just don't have the supply flexibility any more.

Got you. And then, just finally on the R&D, this is always kind of a tricky subject. You know, the Street would like you to keep it constant and harvest whatever you have and you have to balance out your growth opportunities. Is the 80 to 85 million range, is that likely to be fairly static for '05, or do you think halfway in you may have to adjust that a bit?

I've got to say that I'm delighted we overspent R&D this quarter. Do you know why?

No.

Because the prototype tests were excellent.

Went well.

So, you know, I mean I'm not saying that as a well, you know, see if I care. No, not at all. No, I understand the desire to keep things in a predictable range. Of course, I feel the same way. But, my goodness, the prototypes cannot - - you know, when they're ready they're ready. When the - - you can find a well to test them, you can find a well to test them.

It's kind of - - you can't really tell people, oh well, I'm not going to test it down your well bore because it's not in the right quarter and I've got another prototype going on therefore, you know. No, I can't do that and you wouldn't want me to do that either. But the most important question really is, was the money well spent? And there were 3 prototype tests that went on. I can't tell you the details of all 3. But 1 of the 3 was very important. Certainly to Weatherford, to the production division and to me, personally. And it went extremely well, it's important technology, you don't know anything about it.

It's too early to talk about it. But please at least accept the proposition that the prototype expense was well spent. Does it mean we'll have the same prototype stuff in Q1? No we don't. I mean we won't. Because we don't have any that are scheduled. And so, I think the number 80, 85, okay, 85, will - - is probably more reliable than any of the - - than just taking Q4 multiply it by 4. That's not - - we will not spend - - what was R&D in Q4? 23 million?

23.8, 24.

24, what's 4 times 24? 96. It's not going to be that high. I mean, it's simply not going to be that high for the year. So I think, you know, if you think 80 is too optimistic, which I can understand, and I don't want to be optimistic, then pick 85 and you'll be about as close as management will be.

Great. Bernard, thank you very much.

You're welcome.

Sir, our next question is from the line of Mike Urban with Deutsche Bank.

Thanks, good morning.

Good morning, Michael.

Good morning.

I wanted to explore the CapEx question a little bit. You've obviously laid out a great growth cycle environment over the next several years. At what point or do you at all reach a point where you kind of move into more of a harvest mode or you have the infrastructure in place where you - - that you want and that that scales down relative to revenues?

I think real estate-wise we've made a com - - if you can call it real estate in some of the bases we operate in, we made a commitment. It's done. The bricks and mortars, if you will, I mean you're pretty much done. You're not done 100 percent, but you're done 90 percent.

Okay.

As organic growth unfolds, the incremental commitments are people. And the people, you're very productive in the sense that you will constantly bring the intensity of people per dollar revenue down. That's the nature of what we're doing. But you'll still add some people net, net-net because of the, you know, of the growth in top line.

There will be some adding of equipment as the top line grows. But, then again, take a look at the numbers. I'll make it simple for you and then Lisa will correct me. When you add incremental revenues, you're going to have two types of capital that will be required. That's not true always, sometimes you just have some slack equipment, but on average, you have capital number 1 will be basically fixed assets. And capital number 2 would be working capital. Okay. Now, for each dollar of incremental organic revenues, and this is a weighted average and the - - it fluctuates depending on where in the world and what is it that's growing. Some of, you know, some businesses are more capital, others are more people intensive, et cetera, et cetera. But overall, when you crunch all this together, I think that $0.50 to $0.55 of capital, both fixed assets and working capital, or fixed assets and working capital, $0.55 per incremental dollar of organic revenues will be required.

Now how good of a deal is that, if you're talking simplistic terms? If our incrementals are 25 percent at the EBIT line is - - if you look at it historically, and even Q4, if you take a little bit of a look and I've always chuckled at the last quarter of the year because it's invariably a little bit harder, is generically throughout all companies. Not with any malice, it's the nature of the beast. But, if you look at the 25 percent incrementals, and you take that at face value, which I think you can, it's not - - this is not aggressive. $0.25 pretax return on $0.55 of capital versus both fixed asset capital and working capital, right?

Mm-hmm.

Taken after tax of $0.25, that would be about, what, $0..18 or something like that?

Yes.

$0.18 after tax on $0.55, what do you think of those returns?

We'll take them.

Yes, I will too. I mean, it certainly - - it beats acquisitions. So I - - so there you are. So that's how we intend to run our ship, the best we can. And that's why organic growth is so terribly important, both rigless and rig-related. I'll take any kind of organic growth. That's why we, for as long as there is no GNP hiccups, why we, you know, we are happy.

Okay. That's helpful. And a kind of a related housekeeping question. Lisa, do you have any D&A guidance for this year?

D&A will go up, about - - between 0.5 million and 1 million a quarter.

Immaterial.

Yes, not a material change.

Okay. That's great. Thank you.

Sir, our next question is from the line of Terry Darling with Goldman Sachs.

Thanks. Lisa, you had talked about $0.58, $0.60 for the first quarter if we, you know, focus on the high end of that range of $0.05 sequential increase, can you give us a bridge to that number as you did Q3 to Q4 in terms of your expectations?

I mean, as I said it'll come - - the regions that will be generating that will be Canada and then eastern hemisphere. Eastern hemisphere, they'll be slight or seeing a slight improvement in Asia and then the Middle East will continue to be strong.

Not the North Sea yet, no Terry.

Not the - - right.

Not the North Sea. No, Q1 will not do any good in the North Sea yet.

Not the - -

Okay. So the U.S. pretty flat and Latin America pretty flat.

Correct.

As much as we can tell.

Yes, correct.

And then Bernard, I wanted to come back to the incrementals, 25 percent. I think we've obviously have seen them higher in the past and, I guess, a couple points on that. First, what are you assuming in terms of incremental benefit out of your supply chain efforts in '05?

I was afraid you'd ask me that. Some. Also not cooperative.

Well, maybe you can help us with - - I think Lisa made, you know, a comment and maybe you could just reinforce that in terms of absolute dollars and what the impact was in '04 and presumably it's down a little bit from that.

It is. I mean, what we're looking at is about between 15 and 20 million of savings in '05. If you look back at the numbers we've put out there, we're trying to put out, I guess, goals that we can achieve. I mean, obviously internally we have higher targets than that.

That's why I'm not cooperating.

I'll cooperate.

Okay. That's helpful. And then, you know, Bernard, on the pricing front, you've made several helpful comments, but I guess what appeals to me, or occurs to me is that to wonder why you're not trying to push U.S. pricing further. I understand you're looking for [Indiscernible - overlapping speakers] - -

Oh, no, we - - I didn't try to convey. If I conveyed that then I'm wrong. And that's not what I was trying to convey. What I was trying to convey is just the - - the point of the logic, Terry. Of market logic, field logic and, I think, economic logic, I actually believe in economics. The rate of growth in market activity in the U.S. - - the rate of growth is obviously flattening. There is still some growth coming.

But, you know, it's throughout the - - you saw that at the end of your growth it appears. It is hard to move pricing aggressively unless you've got some strong wind blowing in your sails. As in, you know, good rates of demand growth. Unless you are in places that are very hard to work in, high barriers to entry and blah, blah, blah. And so, you know, we don't have, I don't expect 200 rigs or 250 more rigs in the U.S. If that was the case, I'd say we have, you know, strong double-digit growth coming in pricing, et cetera, et cetera, et cetera. Because I expect the increase in volume to be a gradual sort of grinding thing, where I, you know, calibrate it at 70 rigs and wonder how precise we, you know, how precise we can get. You have to fight for your pricing increases.

Yes, but at this point you don't have a, you know, a formal, we're going to increase, you know, we're going to put another 6 percent price [Indiscernible - overlapping speakers] - -

We - - I don't think the time for big, sort of, as broad as our product and service line is, Terry, I don't think the time for a like a, sort of, we're going to move everything up by 5, 10 percent is going to work. In fact, you'll notice that a lot of people who've done that come back and say well I got 20 percent of it or 25 percent of it or more is coming. I think it would be much more shrewd (ph) than that and I think you have to look at it segment by segment, some segments are going to see very strong pricing increases. Others are not.

And you have to be just very, very conscious of the differences of opportunities by service, by product line in the U.S., and also even by subregions. You have to be more an impressionist, if you will, in how you price, than just a blunt, you know, let's paint a coat of paint. In fact, I'd expect that. I do not want to convey there isn't any, that's not what I was trying to say. In fact, if you look at my comments, I specifically say there's more to come. I just am reluctant to give you a we're going to move it up by 5 percent and off you go and you crunch it in your numbers and drive on driver. I'd rather just do it incrementally perhaps make you happier at the end of the rainbow and report specifically what went up and I will.

Okay. Lastly, you know, you're keeping CapEx pretty flat, up a little bit, but your balance sheet has dramatically improved and your free cash generation, you know, is going to continue to be very strong. Where are we in terms of your thoughts on refocusing on acquisitions going forward?

Look at them all the time. The ones that we look at are probably sorts of things that don't cross the desk of people on Wall Street very much, because they tend to be private. I look at them all the time. We have really, nonstop, I never stop looking. We can look and say no. There are things we're interested in. If we can do things we're interested in, the right terms we will do them, Terry. But we - - maybe as a function of time or experience have gotten harder.

Any other things we ought to be thinking about in terms of how you're thinking about your use of free cash? Should we think about just building cash at this point in the cycle or - -

Well, near term you should think about us looking very hard, and we have and we will, looking very hard at using the cash. At the same time, I think it is not a good idea to place any kind of time limit on I have to decide by blah, blah, blah or I'll give it back.

Sure.

We'll give it back when - - gladly, this is - - I'm a shareholder, a big shareholder, actually in my own way of Weatherford. We will give it back just as soon as we come to the conclusion that this is the best thing that we can do for our shareholders and I personally would like to give it back in the form of a stock buy-back. Now my directors may feel differently. But that's my particular viewpoint. Because I still think the oil field service is a good place to invest in. I can't invest it intelligently for you, or perhaps Weatherford is an intelligent way to invest in oil field service. Meaning what we have already. But I do think there are enough things that we are working on looking at that just might, might prove to work that I will just take a little bit more time.

That's helpful. Thank you.

You're welcome.

Operator, are there any other calls?

Yes, ma'am, you have a question from Michael Lamotte with J.P. Morgan.

Thank you. And good morning, Lisa, good morning, Bernard.

Good morning,

Good morning, Michael. Bernard, a couple general ones for you.

First, getting to this issue of micro and macro cyclicality, with respect to CapEx and being appreciative of the fact that your CapEx growth plans for next year are I think showing a good amount of discipline, there's a large amount of the oil field business in general that can be characterized as commoditized. How - - capital can obviously be a spoiler, just looking at supply demand balances, and there seems to be a lot of concern about the U.S. pumping market right now as sort of a microcosm example of that. As we look at, you know, micro versus macro cyclicality, A, do you think Wall Street's concerns about the U.S. pumping business and capacity expansion there as being a spoiler is overdone? And B, if not, what's to prevent that kind of influx of capital being a spoiler for other product and service lines, particularly the commoditized ones within the industry?

Well, that's a - - I will studiously avoid referring to pressure pumping again. I don't need any more enemies than we have. So let's - - let me just answer the question maybe a little bit differently. It is true that some regional markets are likely to get the liability of excesses in irrational optimism to quote someone who's more important than I am.

And it's absolutely true that you just drive around the oil patch in the U.S. and you've got a gazillion competitors, various entry are low. They're low because we have very good infrastructure, because we're very mature. And so if you're going to see some excessive irrational exuberance, was actually the exact term not optimism, you will see it and maybe you are seeing it in the U.S. I used to have a comment in my notes about the need to consolidate the U.S., I took it out. First of all was I didn't want people to think we were necessarily going to be the ones to do it, it was an academic comment. But the second thing is that I see a little bit of deconsolidation going on in the U.S. in certain markets. I'm not going to tell you which ones, again I need friends, not enemies. And so it is what it is.

I don't think you see that sort of event going to take place in the proud republic of Central Africa. Why? Cause it's a bit harder to - - for you and I, Michael, to run an operation there if we wanted to. In fact, it's a lot harder and we won't do it. So, and fortunately the U.S. is prime, is a prime target for that excess and that's why I think you have to probably moderate a little bit your thoughts as to how far can the U.S. go because there'll be some spoilers, it's true.

Okay. And sort of along those lines, I've been trying to put a more quantitative number on it. As far as the oil field, you know, EBIT margin before corporate, Lisa I think you said you're running around 16 percent right now with incrementals around 25 percent. At what point do we see a convergence of those 2 numbers? In other words, where do you think margins can get to this cycle before capital influx starts to sort of level it out?

I think you need to keep in mind that you're looking at a U.S. comment there that Bernard was discussing, so you're applying that to only a portion of the business. And then you have the factors basically of the mix. I mean, if - - it depends on what your views on the Gulf and the North Sea. And North Sea I think everybody's fairly bullish, but there's a - - there's definitely higher than 25 percent that can be obtained, as incrementals go, with those markets coming back.

Right. I guess I am trying to get a cross-country, you know, a cross sort of looking at the - - it - - there's a lot of mix issues I understand it, it's a lot of different markets behave differently, but if I just look at the Company as a whole and try to get our hands around sort of a peak profitability number.

Oh, my goodness. I don't think we - - well - -

You can take that, take that offline.

You can take that offline.

Okay.

Sure and it'd be more helpful, more helpful. I do think that, see the problem is that we try to be, really try to be not conservative silly, but conservative responsible.

Mm-hmm.

And the conversation on peak and the conservative responsible behavior are sort of an oxymoron, [Indiscernible - overlapping speakers, laughter]. And so, not to be loose at all, but I think that's an offline conversation for sure.

Okay.

Again, everything we try to say is conservative responsible doesn't mean that we won't goat surprised on the downside because one always does when one thinks everything is nicely accounted for. But we try to be conservative. I think that's probably - - should we take one last question, it's been - - Operator, one last question if there is one and then we'll probably let these people alone.

Sir, we have a question from the line of Robin Shoemaker with Bear Stearns.

Oh, yes, thanks. I'll just ask one question that hasn't been asked before. Bernard, I haven't heard you on this call comment on the outlook in Russia. Do you still see it as a primarily an artificial lift pressure pumping type market and has Weatherford gotten any further along in terms of its own strategy vis-a-vis that market?

Thank you, Robin. You're absolutely right. I didn't say very much about Russia; I'm not quite sure why.

First, as an - - when it comes to the opportunities for Weatherford, it is initially or it will be initially and for a long time, let's call it a field rehabilitation market. So it is definitely an artificial lift as an optimization market. It is also a let's go back in and clean up many of the wells type market so it is a brownfield market, if you will, for us of immense, of immense value. It is also a - - will be a drilling market as in let's drill new fields and I view it as a very significant underbalance play but not initially, Robin.

Which leads me to the third point, which is, Russia - - in the - - will ultimately be one of the largest markets there is in oil field service. I actually believe that. I believe Russia may one day be as large of a market for oil field service and equipment as the United States is. Which the United States is very mature, it's a very large market, right?

Mm-hmm.

The only thing though, and immediately before we start, you know, gearing up for the, you know, for - - since I used the word before, for more exuberance, before we get too exuberant, the thing about Russia one has to remember, see too the historical perspective, it is a very, very big country and things take a very, very long time. That one should not be in a hurry in Russia or should not be quick to declare victory or defeat.

One has to operate there very much like a rodent, building things slowly, methodically, systematically which is what we're doing. You can acquire things in Russia. That may or may not be a good idea. If you acquire the right things it's a good idea, but if you don't you can still make it grow your organization, which is what we're doing. You grow your field locations, which is what we are doing. You grow your client contacts, which is what we're doing. And you grow your business very quietly. And you do this over a long period of time because if you try to do it faster, most likely, you're going to break something. But in the long run, if you do this, you wake up one day with a very large market and as I said in the very long run, it probably will be the largest market in the oil field service, in our industry, but that, Robin, is a long time.

Okay. Thanks very much.

You're welcome, Robin. Thank you, everyone, for your - - for listening in on the call. And operator, I just want I guess we'll terminate the call. Thank you.

Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.