Weatherford International PLC (WFRD) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2005 Weatherford International earnings conference call. My name is Candace, and I will be your coordinator for today.

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 conference. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Bernard Duroc-Danner, Chief Executive Officer of Weatherford international. Please proceed, sir.

Good morning and good afternoon. I am going to turn the call over right away to Lisa. She will talk about the quarter, and I will have -- my comments will be essentially forward-looking. Lisa?

This morning we reported record diluted earnings per share from continuing operations of $0.59. That excludes debt restructuring and exit costs. These nonrecurring costs primarily relate to events at Universal, which I will speak more to it in just a moment.

The $0.59 is a 7% improvement over last quarter's $0.55 per share. And it compares to $0.38 per share reported for the same period last year. The increased earnings resulted from improved operating income margins despite a slight decline from record-level revenues posted in the fourth quarter.

On a Companywide basis, revenues decreased 25 million as compared to the prior quarter. North American revenues were up, driven by Canadian activity levels. Eastern Hemisphere revenues declined 19 million, or 6%. The seasonal decline in the North Sea and lower production systems export sales negatively impacted this region. Latin American revenues were also impacted by lower export sales into the region.

Operating income margins increased to 15.1% from 14.2% in the fourth quarter. The higher operating income is due to a combination of factors. The main ones being productivity gains of approximately 2 million, a product mix shift towards drilling and technology, and the continuing positive pricing trend in the Eastern Hemisphere.

The operating income performance was impressive, especially considering we incurred startup expenses on Middle East projects, and did not yet benefit from U.S. pricing during the first quarter.

Now, I will move to a divisional discussion. Drilling Services, revenues declined 2% as compared to the prior quarter. North American revenues were essentially flat. Canada revenues were excellent, whereas U.S. revenues were low (technical difficulty) in the fourth quarter, which was driven essentially by the Rockies, our second-largest core market in the U.S. after the Gulf of Mexico.

Also, and as a reminder, the revenues for Drilling Services typically lag the rig count approximately 90 to 120 days. Therefore, the reason increase in activity in the U.S. is not yet reflected in our results.

International revenues decreased 3%, due primarily to a seasonal decline in the North Sea. In fact, the decline was particularly marked in January, as storms were severe throughout the month. However, February and March recovered with strong month-on-month incrementals. This trend is continuing into April.

On a product line basis and ranked by size, the first-quarter revenues broke down as follows, well construction, 33%; drilling tools, 24%; drilling methods, 23%; and intervention services, 20%.

Operating profit margins improved 110 basis points to 23.1%. Margins improved in all product lines, with the Underbalanced having the most significant improvement. With the decline in revenues fourth quarter to first quarter, sequential incrementals are not meaningful. However, if you look to operating income incrementals by comparing the third quarter of last year to the first quarter, EBIT incrementals were a very strong 39%.

We did incur startup expenses in the quarter in the Eastern Hemisphere for several large upcoming contracts, which makes Q1's operating margin even more impressive.

Production Systems, revenues decreased by 4%. From a geographic perspective, sequential revenue improvements in the United States and Asia were more than offset by the impact of seasonal declines in the North Sea and lower export sales to the Eastern Hemisphere and Latin American.

First quarter revenues by product line were, Artificial Lift, 56%; Completion 32%; and Production Optimization, 12%. Production Systems had operating income margins of 13.8% in the first quarter, an increase of 60 basis points, in spite of the 4% decline in revenues.

EBIT incrementals, again, taking first quarter, comparing it to the third quarter of last year, were a healthy 27%.

Research and development expenses declined sequential as we indicated they would. Although R&D is not necessarily linear, due to prototype expenses, we expect the remainder of the year to continue at the first-quarter levels. That is to say, we expect full year of R&D to be approximately 85 million.

Now, I will turn to non-operating events. First, sequentially lower foreign exchange losses offset the lower equity and earnings of unconsolidated affiliates. These two items are essentially a wash. The lower equity in earnings is as a result of our fourth-quarter sale of 4 million shares of Universal.

Second, I would like to address the nonrecurring charge. Universal restructured their debt, and as a result experienced the onetime charge. We therefore recorded our portion of the loss. Although losses are never welcome, we recognize this was a prudent decision, and one that will enhance earnings on a forward-looking basis.

On the supply chain side, we realized incremental savings of 2 million approximately. The benefits were in changes in the engineering processes, as well as manufacturing.

Now, I will turn to the balance sheet and cash flow items. We continue to provide selected balance sheet information in the press release, but there are a few items I would like to highlight. Capital expenditures, net of loss and whole (ph), were approximately 68 million for the quarter. And we expect capital expenditures to be in the 280 to $300 million range during 2005, based on our current growth expectations.

We continue to focus on working capital. And although days working capital increased approximately eight days this quarter as compared to the fourth quarter, in actuality, year-over-year comparisons provide a better trend of the true nature of working capital, as working capital is severely impacted by seasonal activity. For example, working capital increases in Canada prior to spring break up, and then levels out post break up. Furthermore, collections in the Middle East and North Africa region always peaks in the fourth quarter, which also impacts the ratio.

We have systematically improved working capital over the past two years. And as of March 2005, working capital is seven days better than 2004, and 13 days -- has improved 13 days since March 2003. On net debt to capitalization, it is currently at 24.3%, a decline of 80 basis points.

Before I turn the call over to Bernard, I would like to comment on our expectations for Q2 and the second half of 2005. We put out an 8-K this morning that covers the following. The second quarter should continue to show strong operating results. We will be impacted by spring break up in Canada, and additional startup expenses in the second quarter. On the other hand, we have solid growth forecasted in both the United States and the Eastern Hemisphere.

Although Bernard will cover the issue of pricing -- price increases in more depth, I will say we do not expect them to be a significant factor in the second quarter, except for the ongoing contractual price increases which are occurring in international markets. We do, however, believe volumes will more than offset the $0.04 to $0.05 impact that we anticipate from Canada and the continued startup expenses in the Eastern Hemisphere.

With the volume increases and international pricing, we are comfortable with the current First Call consensus of $0.61 for the second quarter. We do prefer to be conservative, as the unpredictable can happen.

Now, at the risk of jeopardizing the conservative preference statement that I just made, we would like to increase modestly guidance for the second half of the year. We currently expect that the third and fourth quarter combined will be approximately $1.40. And that is $0.10 higher than the current First Call (technical difficulty).

At this point, I will turn it over to Bernard.

Q1 was a good quarter. Consistent with historical trends, revenues declined Q4 and Q1. Operating income, on the other hand, and operating margins operating income margins grew sequentially. A revenue decline of 2.8% follows historical patterns, a combination of typical seasonal pull back in the North Sea, as well as also typical aftermath of year end export deliveries.

Operating income grew by 4.7 million, while operating income margins rose by 90 basis points to 15.1%. That is actually the point I want to make, which is the highest in Weatherford's history, 15.1%. We crossed the 15% mark. Hopefully, we will cross higher marks later.

The oilfield service industry and Weatherford are in a multiyear expansion phase. When you look at this industry through a cyclical lens, you are missing the underlying engine of growth. Growth in our industry is dependent at this point upon hydrocarbon demand trends in developing countries, and that alone. The historical, classic oilfield boom to bust cyclicality is not relevant anymore. That (technical difficulty) gone. The oilfield activity move is secular and multiyear.

Activity increase will be strong and extended in time. In this environment, Weatherford intends to deliver growth and strong financial results -- that on the back of technology and infrastructure investments.

I will go directly to the outlook. There are two factors that determine our outlook, the direction of the Company, and our assessment of regional markets. Direction has not changed. Committing our resources to technology and the Eastern Hemisphere infrastructure and supply chain management. We doubled R&D over the past four years. We intend to keep an $85 million R&D commitment. We intend to acquire intellectual property, if and when needed. And generally, we will be unrelenting in raising our technology content.

With respect to infrastructure, we have increased the size and the scope of our service footprint in a large cross-section of the Caspian Sea, Middle East, and North Africa. We now have 155 large-scale service locations in the Eastern Hemisphere, and 26 manufacturing facilities in this same Hemisphere to support them. The infrastructure will be the backbone of a substantially larger level of business volume.

Supply chain management, as Lisa mentioned, yielded this quarter $2 million in net measurable margin improvement. We expect more yield as the year unfolds. Our emphasis on technology in the Eastern Hemisphere supply chain remains the essence of our direction in '05.

Geographic markets into '05 and '06 from the base of Q1 from the Weatherford perspective. North America, some growth is left. First, we expect a volume increase in Weatherford's U.S. operations following Q1's rig count rise. We typically trail U.S. rig activity by three to four to five months. That is one thing.

Second, we expect further growth in the North American market, albeit modest as difficult to argue for more than a 40 -- perhaps 50 rig move up in the U.S., in our U.S. land market from Q1, and the equivalent percentage in Canada.

Third, the Gulf. (technical difficulty) years has a positive prognosis -- actually, four years. I do not want to confuse deepwater outlook with the Gulf's shelf prognosis. Deepwater will be strong in '05 and '06. This is well known. It will be very strong for Weatherford. A broad range of projects is scheduled to start throughout the next 24 months.

But aside from deepwater, things are also beginning to move the Gulf's shelf. It isn't the deep zones of the shelf. It is too early to say anything intelligent about the deep zones of the shelf. It is the traditional shelf that the market is showing life -- the barge segment, the jackup (ph) shallow water segment, and the platform segment are showing strength into Q2 and Q3.

The driving forces are small to medium-sized independents, and a few selected majors. And it appears to be as much work-over than it is drilling. Now, the scale and the scope of the recovery -- it is hard to put percentages on it. I am sure (indiscernible) presume your questions, but you may ask that question -- it is just hard. So the prognosis appears constructive.

South America -- further growth in Latin America. Actually the prognosis is better in Latin America than it was a few months ago, with upside for Weatherford specifically in Brazil and Venezuela. Venezuela in particular looks very strong for Weatherford. Mexico is not expected to grow until 2006. The rest of the market should be healthy but flat.

North Sea -- substantial growth. That hasn't changed. First of all, we built the UK and Norway, showing double-digit growth '05 on '04, and actually same '06 on '05. The North Sea, starting with the UK, Norway, and even Holland, appears stronger in '05, and even more so in '06 than we have assumed.

As referenced in Q1, which will end up being -- will be the trough for this year. Weatherford's combined UK/Norway/Holland/Denmark revenues in the North Sea were just about $66 million Companywide, or 8% of the total Company revenues. It is a fraction of the 13% -- 1 3 -- of revenues that North Sea accounted for in 2001.

Strong growth in Eastern Hemisphere X North Sea. Think of it as in Eastern Berlin or something. This'll be a process centered initially in Caspian, Middle East, North Africa, West Africa, spreading later to sub-Saharan Africa, pockets of Asia, and of course, Russia.

In the Eastern Hemisphere, as we speak, Weatherford is in the midst of a number of operating startups, specifically North Africa, Middle East, Caspian, and 3 countries of Asia Pacific. These startups will go on contract late Q2 and throughout Q3 and Q4. There are other startups that will actually be commenced in Q3 and Q4 parallel to that. And those startups will lead to ultimately operations in 2006.

The contract commitments for the most part center on and around Underbalanced, with the entire suite of Drilling Services. Not only that, but it is a big chunk of it. The scope and scale of the startups will in the aggregate be very significant for Weatherford. The Middle East, in particular, that will be inclusive of North Africa, is expected to double in size by 2008.

All in all, as far as squint (ph), we expect Weatherford to grow in the Eastern Hemisphere by 25 -- that's 2 5 -- percent per annum in '05 through '07.

Incrementals -- as mentioned, current EBIT margin is about 15.1% in Q1. And from operations, that is X corporate overhead but inclusive of R&D, it is about 17%.

Q4 and Q1 should see (ph) rising EBIT and EBIT margins despite of seasonal decline in revenues. So we obviously construe that as the empirical evidence for incrementals -- a bit hard. Q3 on Q1, which is the next sort of thing one could do, incrementals show at 29.6 incremental EBIT. Year-on-year incrementals, Q1 '04 on Q1 '05, shows at 29.1 incremental EBIT -- about the same. The numbers are consistent.

So as a working assumption, and to remain cautious in light of operating challenges that are inherent in large-scale products, would suggest EBIT incrementals on a forward-looking basis should average 25 to 30%. Last quarter, we said 25. So we are shifting a little bit. This is a function of costs, of supply chain gains that we plan on, the change in mix towards higher technology content products and services, etc. It is also based on the existing pricing structure. So to the extent that one changes that, and if it is successful, indeed the incrementals -- should be higher. But then again, pricing is always speculative.

Which -- skipping a couple of paragraphs, which I think many of you have heard already, I will go straight to the pricing section. The prognosis is stronger. In the international market pricing is showing strength. From the UK/North Sea through Asia new contracts are being negotiated, and have been signed, with an average 8 to 10% higher pricing. In some instances actually pricing has been 10 to 20% higher. Across the board, or simultaneous -- it is contract by contract -- it is as the business rolls out. But over time it will build obviously to a higher margin plane.

In addition, existing contracts for the bulk of the business are typically for two to three years worth of work. And it was signed in the past two to three years. In fact, like from one to three years coming back. As time goes by contract issued in prior years with substantially lower pricing and terms will come for renewal. A continuous process, but it is a healthy one. It is powerful.

In the U.S. and Canada, realized pricing for Weatherford products and services is likely to move up further. This will be true for both divisions, so for the whole Company. We expect the range of 5 to 10% increases to be phased in this quarter -- second quarter. (technical difficulty) declare victory quite yet. But if successful, it will impact -- start impacting our P&L in Q3 and Q4. And obviously, we will report on that.

Product line outlook, nothing terribly new. We expect the following segments to outpace market activity and corporatewide growth. The usual suspects, Underbalanced to on a broader sense managed pressure drilling in all of its forms, the new line of (ph) well construction, the emerging solids expandables, a new line proprietary drilling tools, particularly the new tools addressing drilling hazards or mitigations, intelligent well completion, probably the artificial lift new technologies, these sorts of things. Nothing terribly new there.

And I would like to go straight to my sort of overall outlook closing section so that you can have enough time for your questions. I guess to repeat the same point, pricing is likely to strength further across the board in all geographic regions. Technology intensity of products and services will mirror the (technical difficulty) decline rate.

More technology is needed, and conversely technology will be more highly rewarded. Technologies that improve reservoir field (ph) productivity will do increasingly well. Land rig activity will flatten out in North America by year end, or into '06. The Gulf of Mexico, on the other hand, is showing life. The importer is good and secure. Beyond the importer, there are reasons to be more constructive for the shelf in the second half of '05 and into '06.

The international market will blossom in '05 and '07, that period of time, next three years, as our clients make a push to secure productive reservoirs. Within the international market the Eastern Hemisphere should stand out as the strongest market. We expect 25% year-on-year growth in the Eastern hemisphere for the next three years. We are mobilizing people and equipment for a number of incremental contracts in the Eastern Hemisphere as we speak. And within the Eastern Hemisphere there is a different phenomenon, the North Sea is beginning a multiyear recovery phase. And we believe the North Sea may surprise to the upside.

The next several years we at Weatherford see strong growth. In that sense, we remain at our core of growth culture. A couple of capital disciplines, this growth will produce increased returns, increased (technical difficulty) and that, not only on the back of the technology market, but on the back of the technology and footprint investments we have already made.

And I will now -- that includes both Lisa's and mine comments, and I will like to turn the call back to the operator for questions. Operator, if you are listening, could you please take over?

+++ q-and-a bow.

(OPERATOR INSTRUCTIONS) Bill Herbert, Simmons and Company.

I was wondering if you guys could quantify the startup expenses that were a burden in the first quarter? And what do we think the startup expenses will be into the second quarter as well, please?

They impacted us $0.01 in the first quarter. And it will be an incremental $0.01 in the second quarter -- or $0.02 in total in the second quarter.

Okay, and can you give us a sense as to the revenue magnitude of the contracts we are talking about in the Eastern hemisphere that were sort of presently underway, getting ready for?

Oh, gosh, I was hoping you wouldn't ask that. The only number that I have is the one for Middle East/North Africa. It doesn't cover all of it. And why don't I have it all? Well, I will tell you -- off-line, I will get it for you. But let me give you the ones I do know.

And understand what I did to get you that number. Contracts are for three years, for example, right? And contracts will be for 60 million, for example. So it is $20 million a year, right? So I am not going to give you the number in total. I am going to give you the yearly run rate, which is what you want, correct?

Yes.

All right, because otherwise -- and then some of them are on two years, five years, three years. Now once that is defined, the second thing before I sort of give you a number and you hang up -- the number I am going to give you is the number at the end of the year of the various -- (technical difficulty) by then and turned on. And that run rate. Are we clear?

Yes.

Good. The number is on Middle East/North Africa is just about at 200 million. Now in '06, you have -- see in Q3 and Q4 you have other things to be started up.

Okay, so basically, if I understand you correctly, Bernard, that the annualized revenue run rate from the contract in Middle East and North Africa is expected to be $200 million.

At year end. (multiple speakers)

Wow.

Because that -- and that is assuming we are not delayed in startups also. It is not a contractual issue, it is an operating issue.

Okay, and if I heard you correctly, this is principally related to Underbalanced, and --?

I overstated it. I mean it is (indiscernible) comments you squint, and you squint too much. You overstate it. It is predominantly Underbalanced, it is not only Underbalanced. So it is not Underbalanced alone, anyway, no? That would be absurd. It is them with everything else, well construction, drilling tools. You know, even some intervention that goes with that. And so completion sometimes gets pulled in.

Okay, and I have got two quick questions, and then I am done. The $1.40 guidance for the second half of '05, that exclude the $0.06 hit from the (technical difficulty) the third quarter, or that includes it?

We had anticipated a $0.05 charge in the third quarter. That has been delayed. When I look through estimates, very few people actually had that in their numbers.

Okay, fine.

I think the processes that you have to go through each and every one of them and find out what they did and didn't have.

Right.

Okay, so it has been delayed in terms of the recognition of the option expense. When do you are going to end up recognizing that?

Well, we actually won't, because our options were vesting in the third quarter. That is why we were taking that last little bit of expense. But since they have delayed it to 2006, we will not have any options to expense.

Okay, and then last question. No mention of Russia, Bernard. And I know that we have been sort of discussing it, contemplating it in terms of more capital investment there. I think your caution to disappoint has been warranted. Can you give us an update with respect to what Weatherford's outlook is for Russia and increasing its commitment and exposure to the region?

To a degree my caution was self-serving in the sense that I am too busy elsewhere -- that's part of our problem, also. I will take credit for being prophetic on problems in Russia, but actually it was more that we were not as able as in other places, number one. Number two, there is so much to do in other places, and still there is a return on time.

Having said that, to me -- well, Russia is unavoidable. At the end of the day, we don't really work for our clients. We don't even work for the Capital Markets, shame on us. We work for the reservoirs, and they are unavoidable. Whether oil or gas, and whether you are talking western Siberia or eastern Siberia, which is the great new frontier -- unavoidable.

If they are unavoidable, they will be unavoidable for Weatherford, also. The question really is how. And it is not like we don't know how. It is not like we are not working on it, or not that we haven't worked on it. It is also that this is a market in which it pays to learn how to operate organically, which is what we have done very quietly in sort of a humble sort of way to learn how to operate organically, to develop a Russian organization of your own, not just go in and buy one and declare yourself Russian.

There is a mutation process which we have very quietly have been doing. It is not finished, that mutation process. But we learned a lot more than we have been able to share with people. And if we do acquire something in Russia, and I am not saying that we will, but if we do, it will be very focused, very obvious why it makes sense. And we just might be able to run it or to manage it at this point. I don't think we would have done that a year or two years ago, let alone the distractions of other operating issues.

James Jones, UBS.

Would you talk a little bit about how you -- you mentioned how business in the North Sea started coming back mid-February and into March. And Bernard, you are fond of making the comparison of what your revenues are today as a percent versus what they were back in 2001. Perhaps if you could give us a sense of where you think that business would be within your orbit next -- should I say by the end of the year in terms of percentage of revenues or perhaps in 2006, just to give us a sense of the change you are expecting to see?

And also, could you comment on specifically the pricing of new contracts in that market, and how that compares to some of the other international markets where you have been assigning new contracts?

Let me take the last one first, and hopefully I won't forget the other one.

The contracts that were signed, they are incremental, but will come back to the core (technical difficulty) were signed, whether in the UK or in Norway, I would say with a few exceptions in the Middle East, have been amongst the best because of the pricing. The pricing on the service side has been really more 10 and up than 10 and below.

I had mentioned in my comments, I think, of instances of 10 to 20 actually in the North Sea. So pricing has been (indiscernible). And that might actually be more Norway than the UK. I won't say too much. But I will not betray your trust if I told you that it was more robust than other international markets, South America or Asia. Again, the exception being certain areas of the Middle East are very generous. So that is the first thing. I hope that answers your question.

And then, of course, the hope, it is the hope that is not reality. The hope is that as existing contracts, especially like the North Sea, sort of rollout in time, and I don't have a schedule like -- (indiscernible) say what you want. I don't have it. I could obviously produce it, which is -- by quarter, we're certainly going (technical difficulty) start modeling that. I don't have that. I could have that. But the hope is that as the contracts rollout in the latter part of 2005 and 2006, obviously, we hit the same sort of pricing. That would be great. I hope that answers that question.

Now, with respect to the percentage of Weatherford that the North Sea will be at year end, Lisa is making faces, which means that we are not sure what to tell you, because it is a moving target. Of course, we can model. Lisa, I know you can help me out.

Yes, you have got to factor in that there the overall pie is growing.

Yes, the pie is growing, or should be. So do we say 10? Yes, she is writing 10 as I am saying it. But then (technical difficulty) not terribly, it is more theoretic than analytical.

Okay, and then just following up on the price side, it would seem to me because North Sea pricing was probably your most depressed engine over the last five years, could have the biggest gains?

Also in the Gulf, but yes --.

But of the Eastern --?

No doubt.

So perhaps we could then with the increase in pricing in the North Sea, i.e. starting to get back to a profitability level on the new work that is comparable to the rest of the Eastern Hemisphere?

Oh yes, most definitely. And returns are --.

Commensurate as well?

Yes. So you would like them. Yes.

I like them.

And then, my last question is, Bernard, and maybe I missed this, but can you give us a little bit better sense of timing for when your specific piece of the deepwater Gulf really kicks in for you? You have been talking -- I know these contracts have been gestating for a long time.

That's a good point. It's a very good point. And I just sort of sound like one of our prior Presidents, but I feel your pain. One of the problems with deepwater is -- from an engineering standpoint, it is fabulous. It is very interesting. It is compelling. Because it's lumpy, it's always late. It is always manana. And certainly the deep shelf is following the same pattern. You know the drilling that is going on is just terribly late -- deep shelf, not the shelf.

The last schedule I saw on that particular issue is that you will get some in Q2. You would get some in Q3, and you get some in Q4. So we don't have them in Q2, Q3, Q4. And specifically asking the question then, how much did you get (indiscernible) and you should see through them -- obviously through the P&L, because it will help. Then I don't know what to say.

I may have missed that, but you don't have those in your numbers, or you do have it in your numbers, even though it is on a schedule?

Oh my goodness, Jamie, I am going to tell you we have them in our numbers, of course. Of course I am going to tell you that.

Terry Darling, Goldman Sachs.

Bernard, I was hoping to understand a little bit better the decline in the U.S. revenues. I understand you indicate that there are some seasonality there. But looking back the last two or three years, we didn't actually see your U.S. business decline sequentially.

There was a reason for that, Terry. First of all, the reason I am going to give you is not the whole reason. I don't know what the whole reason is, because stuff happens from quarter to quarter that can't always give you a nice, neat explanation for. But there is one lumpy explanation that actually helps.

It jumps out.

Which is -- it jumps out when you look at the numbers. And it probably covers, I don't know, two-thirds of it, or something like that?

It does, it does.

So two-thirds is not bad. And that is the Rockies. You will say, well, wait a minute? It didn't happen before. No, when the Gulf of Mexico banged us on the head as much as it did two years ago, as you may recall, we didn't just sit idly on our hands. We shifted, moved work in the one regional market in the U.S. that, based on the reservoirs, we thought would have a great future. And that is the Rockies.

The Rockies today is rivaling the Gulf in terms of size for us. And it has become like a second core in the U.S. One of these days it may become our core. So what is the fact that the Gulf obviously needs to move a little bit.

So I am not surprised that it is more of an issue now that it was then, because then, we didn't remotely have the position we have now. If you want to take a historical perspective, that is really why -- the single reason I can give you -- that you could sort of sink your teeth into, that is real.

The other one, you know, I don't really know. It's 1,000 cuts. Who knows? Nothing compelling either way.

And if I am tracking your numbers properly, I looks like within the drilling division well construction was down 10% sequentially, and only up about 9% year-over-year. Can you talk about that a little bit from a sequential standpoint? And is it possible you are losing some marketshare there?

The first thing that comes to my mind is that part of the liner hanger (ph) of product line and part of the solids product line got pulled back, re-engineered and brought back in. And that might put some noise in numbers presumably because share losses -- oh, I am happy to confess to this, that it is true, but not at all. Implementation (ph) in it is rock and rolling in terms of share gain.

So, no, I would instinctively say liner hangers and solids is expandable. It is just at the beginning that they got pulled out and of course now it is going back in the market. But Lisa may have a better explanation.

It is purely liner hanger.

So there you go. We pulled out (multiple speakers)

I thought that was mainly tubular running services, no?

(indiscernible) Well construction is tubular running services, cementation, the whole jewelry (ph), liner hanger systems, and solid expandables.

That's it.

And that's broken down -- we normally give the breakdown beyond that. And the reason for that is, if you think about it, they are all related. I mean, the tubular -- you set the tubing in the casing. After you set the casing, you screw on the cementation jewelry. The liner hanger system is fundamentally a tubular related tool. And solid expandables is fundamentally a tubular related tool.

So all you are setting up the walls of the well. So that is why it is so (ph) well construction. There is an industrial logic to it. It is not TRS (ph) at all, no no. TRS was all Gulf of Mexico. It didn't move.

Okay, and I know that you indicated that you are not really seeing benefits of pricing in the U.S. in the current --.

In Q1.

In Q1, right. And I guess the question is that out of 1,330 or 1,360 rig count, if we are not seeing it now, why do we think we have got confidence we are going to see it in Q3, Q4 as you put the price increases in this quarter?

Wait and see.

Okay, and --.

Bad question, by the way, Terry. Bad question.

Okay, last one, then, I guess, is just -- does your Q3/Q4 $1.40 guidance include benefits of the 5 to 10% increase, or would that be potential upside?

Potential upside.

As is your custom. That's great. Thanks so much.

Kurt Hallead, RBC.

Can you provide a little bit more color, if possible on -- (indiscernible) commentary, yes, deepwater is self-evident. So can you give a little bit more on the shelf -- what you said on the shelf and to the context?

I think -- well, data points -- if you hang around the barge market, which used to be one of my haunts a long time ago, you will find that utilization on -- unless I am mistaken, on the drilling side and on the work load (ph) side, is great. Love it -- a few quarters to go. You will find the rates they are getting is great too. It would have made me proud in my day. That is fact number one.

If you look around at what is going on platforms, try and mobilize as much intervention equipment as they can. Who is they, the client. And then you go to sort of the jackup and so forth. That one, you could really monitor it better than I can. That one is difficult. The (indiscernible) of equipment and then rates.

But there is some huddling for trying to do as much as they possibly can find equipment and people to get done in the shelf. And that wasn't around three or four months ago. And this is where we see it. Because we are called upon on the barges, on the platforms, and on the jackups, to do a broad range of services and deliver products and the like. This has developed of course in Q1. Can you do this? Can you do that? Can you -- you know -- and when you add up what it is, firstly, it is just a pleasant surprise. When you add it up, it looks like a small trend.

Clearly, because of shortages in equipment, I would be hard pressed to say, well, I think it is going to be a gazillion (ph) percentage. Normally when we give a percentage, we actually think it through. We watch it, calibrate it. We think it through, and then we let it out as guidance, hoping that we are not wrong. But there is some substance behind it, not just we thought about it this morning.

I cannot give that percentage on the shelf. I just -- I don't know how to do it. What I do know is that there has been a change in intensity of work and work interest in the very mature plays. I mean, you know, shallow waters as in swamp market, it is not very young. It is my age. Okay? And the jackup, etc., that market is a little bit younger than me, but it is not so young either.

So these are very, very overwrought plays, and yet there is intense interest in trying to drill and work-over -- that you will not see in your numbers, because some of it is not even captured by the work-over rig count. Whatever intervention can be done, whatever your incremental drilling can be done, some reentry work, which incidently reentry will be an increasingly big business in the industry -- increasingly big business worldwide. That is a separate issue.

So I don't want to belabor the point too much, Kurt. I know you want a percentage. I can't give it to you. I don't know it. I do know it is -- 10%, I don't know. But it's real. I wouldn't mention it otherwise. It is real.

Okay, and then can you -- I understand the nature of you have a number of different projects, startups going on, certainly mentioned in your commentary. So this 25% revenue growth in the Eastern Hemisphere per year over the next three years, all a function -- is it all a function of these new contracts startups? And are they three year terms in length, and can you give us some additional --?

No, they are. And no two contracts are the same, first of all. So I will answer that question. I will come back to the prior one. They go from -- we have some one-year contracts. It is possible. You could have some six-month contracts. I do try to discount that when I give the answer to -- whoever asks me the question first.

But for the most part, they look like two through four years type contracts, two to four years. And weighted average, I don't know we would come out -- probably like three or --.

Probably close to three.

Close to three, okay? And now the 25% number, I think is sort of what we have in the hopper. And we are hoping that we could schedule it out properly. And I think in the few comments -- the few times I was in front of our shareholder base very recently in New Orleans, I tried to convey the sense that we are very focused on operating risk and things like that because this is not easy.

If you think about -- we will give the day -- I don't (indiscernible) but we will end up having another 1,000 people or so, net net, just in the region of Africa. Not tomorrow, over -- between what we are doing now and say Q2 of next year or something like that. That is not easy.

So we are focused very much on that. Not to say that we can't do it. And the fact that we are focused on it doesn't mean that we can't do it. It's just that it has our attention.

And so the 25% number is what is in the hopper. I am being verbose here. Not to say we can get more contracts, Kurt, like as in this quarter, next quarter. But we would have to phase the startups. Because I am not sure we can do a lot more. Does that answer your question?

Yes, that is helpful. And I can probably do the math on this one myself, but I am going to choose to be a little bit lazy, and maybe you can help me. But if Middle East revenues are going to double for you, what percent of (technical difficulty) does the Middle East represent over the time period in which you suggested in total?

You are getting into the issue (indiscernible) how to model -- how the pie. There is only so much you can model or -- what, you can model anything you want. I don't have the value on this. How big the pie is. And today --.

We are at 12% now.

We are 12% now, with North Africa, of course?

Yes.

Caspian Sea is also -- Caspian is a different issue, and areas of Asia, and also, I think that sub-Saharan Africa, which is everything under South of North Africa, basically is another thing where -- another area which will be a very interesting play. And of course, Russia. I mean all of these things will keep people who are interested in the Eastern Hemisphere busy for quite some time. And for good reason -- that is where the reservoirs are.

I don't want to minimize the importance of Venezuela either, because I always talk East. The U.S. and Canada is always needing to get more pricing. And then waiting, waiting perennially for deepwater of the Gulf. And then that's it. I think Venezuela is terribly, terribly, terribly important. If you like reservoirs, Venezuela is terribly important. Yes, I know, Venezuela is not a stable place. I know this. But it is a very, very good reservoir base.

So if we are true to what we believe, which is that we work for the reservoirs -- yes, we also work for the Capital Markets, and we work for our clients. I understand that. We also work for the reservoirs, because all of you work for the reservoirs, ultimately. You have got to work for the reservoirs too. And Brazil is important too. Venezuela is in a class by itself. And I understand that it's politically challenged. I understand that. But still, I don't want to be totally East either. It's not true. There are some places of great focus in the West.

And then just a final follow-up, I guess predicated on your commentary about the growth prospects, both for revenue and then the opportunities on pricing, I would assume that the growth in the Middle East market will be enough to accommodate everybody without any kind of pricing pressures or market share gains. Would that be a fair assessment?

No, there are some market share gains.

Not gains, I mean like -- I am talking about discounting pricing to capture market share.

Oh, God, no.

No.

The one question was asked before as to the North Sea pricing, which, indeed, amongst the best incremental ones. But I did mention then that the North Sea -- the new contracts and so forth were a very good pricing in the North Sea, but also the other place was also Middle East and Africa. Not across the board, but there are -- and I don't want to identify these other countries on the phone. But there are more than one country which from a pricing standpoint -- I actually compare contract to contract. There are many of them it is kind of hard to remember. But I think that they may challenge the North Sea in terms of pricing. You never know. (multiple speakers). The short answer to that question is, no, no, that is not an issue.

They are positive.

Kevin Simpson, Miller Tabak.

I had a question on the Production Systems side. Maybe if you can go into a little more detail there. I was too optimistic on my revenue assumptions, and maybe missed the swing in export sales, and particularly on the production optimization side. So one is --?

(indiscernible) go on.

One is the production optimization, the area where the export sales swung a lot.

Yes, indeed. And it is --.

It was.

And it is purely an issue of delivery, timing -- it is clients, not really -- the clients want everything yesterday. And then operationally, they are behind. That is all it is. Do you understand? Most deliveries --.

When you fire a lot of people it is hard to have the ability to implement it.

No, I would say (multiple speakers) comment, Kevin. So you put your finger on it. Specifically I don't know what percentage Europe represents, but it's a biggie. And you just have to use spot. (multiple speakers) I will give you that offline, but it is a disproportionate jump. So you were not wrong, the client was wrong. Of course, the client is never wrong.

That's right. And --.

And if I remember, it was West Africa. And the other location was (indiscernible) in Brazil? (multiple speakers) Of course they are all the same client. The same story, they ran behind in their well completion, and then -- so forth and so on. So they asked if it could be delayed by blah blah blah.

So does that mean we see a disproportionate jump soon?

You will, and you also have -- when you look at your Q2 revenues they will be higher, most definitely in spite of the drop off in Canada.

It is actually interesting. The people who play in Canada are really -- I mean both drilling and production plays in Canada at Weatherford -- the production has traditionally more. So in other words, they go down more. And what she is telling you it will go up most likely in Q2 revenues -- and prior to the breakup. And that will be the evidence.

So do you think we are going to see more lumpiness in that side of the business, if it had a pretty spectacular growth rate?

No, I think -- well, I say no. I don't know, Kevin. It is not lumpy as a business, particularly. So it shouldn't be. In fact, one thing I did not mention that I should have mentioned -- actually, come to think of it, on the whole export thing -- on the whole export sales business is that we do track -- obviously, we track the new (ph) activity week by week, and we track orders when it comes to products in the traditional backlog type of way.

And if you lump all the backlogs on the export side at Weatherford, it is probably double-digit at the end of Q1 versus at the end of Q4. Meaning that the order -- actually the rate of order taking went up throughout the quarter. And so it is there. And it is not like the service business, but it is not lumpy.

So for the full year, certainly that kind of double-digit growth on the top line should be building (multiple speakers)?

Yes, yes, definitely. Certainly, the business is there.

Jim Crandell, Lehman Brothers.

Bernard, you listed different product lines you thought would drive growth in 2005, 2006. Can you talk in a bit more detail about the ones you choose to address the magnitude of growth, what is driving it, and technological developments within those product lines?

You are a hard man.

Well, we are into an hour into the call, and no questions about your product lines or your technology yet.

I know. I actually short -- when I read this, I always have mixed feelings about reading these scrips. It's is not terribly, terribly spontaneous. When I read the stuff, I also shorten it a little bit, because I wanted to go straight to the sort of things that I presume you would be interested in.

All right, -- I have got a list in front of me of what I said. Look, it's quite easy. Underbalanced, that is so easy. Management -- actually, I like to call it more and more managed pressure drilling. So presumably, we will start all calling it managed pressure drilling. That you guys, but eventually, everyone will start calling it that way. Because I think it is much broader in applications just Underbalanced. So managed pressure drilling, which means you are going to drill at balance and at different different RPMs.

It is like measuring your RPMs in a car. At different levels of balance, all the way down to a little underbalanced and very underbalanced and the like. We will be able to monitor that using different technologies, both hardware and software. It is kind of very interesting. Like driving a car when -- except you are driving the level of balance. Very interesting, at least for me.

Managed pressure drilling is going to be -- that I think is the -- you know this already, 25% per annum growth, i.e., '05, '06, '07. I mean, maybe the '07 is academic.

Well construction, the new line of well construction -- there were some questions before as to whether we are losing share on well construction. It is not the case at all. This is really fundamentally a number of different thing. There are -- rejuvenation of some of our traditional product lines, such as liner hanger systems and tubular running services -- rejuvenation of tubular running services I can explain probably the best. It is the core business of Weatherford originally. This is what Weatherford was built on originally. We are more humble now, because it's not even 10% of the Company anymore -- tubular running services. But it is the emotional core of the Company.

Remember people with the tongs? Well, there are still people using tongs. They tend to be specialized for very high alloy material. They cast alloy, for example -- high-chrome, high-nickel, very expensive stuff, unbelievably corrosion-resistant, however, very subject to abrasion. And if you have any kind of abrasion (technical difficulty) pick up the premium connections, which they always have, then you have a corrosion problem.

And where is that stuff used? Qatar, a perfect example. Not only in Qatar, but -- -- and I don't know what it costs these days. When steel was cheap, it used to cost $15,000 a on. So presumably now it is twice that number, which is pretty expensive.

And so first thing, our first new technology is how you install that stuff. And you still are using things that look like tongs, but they are unbelievably more sophisticated in how they handle the material and how they test the integrity of the connection.

More obvious still, how you get people out -- gone from the floor? You should not have people running around making up tubes, whether casing or tubing. The thing about casing or tubing is that it is heavy, it is long, and therefore it is dangerous. And as a result, the less people you have fooling around with that stuff, the happier you should be. You should automate all of that. Easier said than done, but we spent much R&D with a brand-new automation line, which essentially is making what we are doing obsolete. That is a good thing.

And so the tubular running services business, the people who are in it today, who have not invested a lot in automation will essentially be liquidated out of the business in time. We have invested a lot. And the automation side of the business now, stemming (ph) automation, hardware and software, must represent about a third of the tubular running business in the world of today.

And then maybe another one-third is installation of the chrome -- high-chrome material, which is a special specialty, and usually one-third which is gradually being obsoleted. We are gaining share in that product line (technical difficulty) higher when you provide automation.

And then, of course, other examples in our product line would be the cementation side, and you very seldom talk about it. Cementation product line, the biggest in the world. We are number one market share. The number two is Halliburton, who does its own. You may not know this, but cementation jewelry (ph) doesn't get sold by the cementation provider, it gets sold to the client separately, who mixes and matches. The people who pump, as in the cement and the jewelry.

Well, cementation is a mundane application, very much like mud and bits (ph) if you think about it, because it has been around forever, and the same application. However, there has been a broad range of new technology (technical difficulty) they come from deep wells, extended reach wells, deeply, long, long stretch horizontal wells, and of course, deepwater applications.

And I am proud to say that the product line that Weatherford has -- I am not going to -- easy to boast on a conference call -- but has the -- dominates the high end of the market completely. And we really do. We don't talk about it too much. It doesn't do us any good, because nobody else can get into that product line. We have such a high margin and such a high market share. It is entirely because of the R&D. 100%,

And then you get into your favorite, solid expandables. Solid expandables has not been your friend. It has not helped your quarters, it is even a burden. That's pretty obvious. However, that is separate from expandable sand squeezer (ph) having to do with it. (indiscernible) systems on the production side has nothing to do with solid expandables. They derive from the same family tree.

Solid expandables are -- that is an application of a technology which will be multifaceted, but the first facet will start occurring in Q4. And there are specific contracts, and they are not small. The first application is with clients who are anxious to get that technology used in their repertory. It is not experimental. It has been tested and tested and tested.

That is the beginning of a new market and the beginning of a new line, and so forth and so on. And hopefully expandables at that point in time, blending both solid and expandable sand screens in one sort of dollar revenue may join on the balances as being a great success. And I want to stop there, Jim, because I don't want to take too much time.

I just have one brief follow-on, Bernard. When you meet with your biggest international clients in your travels overseas, Shell, BP, Exxon and some of the -- even some of the NOCs, what are their major concerns at the present time?

Completely different. The NOCs are the ones that truly are anxious, in a hurry, generous, and they want as much breadth of price and services as you can offer, which incidentally is one area where being big is helpful. But it is true that our bigger bretherns are better off, albeit, we are getting there. It is what it is.

But the NOCs are -- I would say that they are -- they are in a hurry. And they are in a hurry for obvious reasons. They are also in a hurry for maybe less obvious reasons, which is that some of those companies are being opened up to foreign players, whether majors or independents. It is very traumatic to the NOCs, so they react in turn. And the ones whose countries have not been opened up yet, see it happening in the country next door and that is equally traumatic. So they tend to be hyper aggressive.

The majors -- you know, I really don't want to mention company names and things like that, because I just don't want to do that. But I wouldn't say that they are as aggressive. I would say that they continue to -- I mean, I would say they are a bit more -- what is the word you use on Wall Street -- constructive. But aggressive versus constructive, those are different. Don't you think?

Would you say they are more, less, or the same interested in technology than they have been in recent years?

They are more, to be honest.

I would say more.

They are more. I tend to be quite harsh (multiple speakers) when it comes to it. And I talk to them and they are wonderful people, and they are great clients. Our biggest client is BP, for God's state. And so I am -- and the rest of them are not far behind. But I tend to be more subdued, because you work a lot for them, you become a little bit subdued.

But they just aren't aggressive yet. But they are more, and they are more interested -- BP specifically is very interested in technology. I don't want to single them out at all -- very. They have been from day one. And they are sponsoring some of our technology, so that's that. But there are many majors out there. But I think even the ones that have been sort of more late bloomers on technology, to be fair, really volunteer. And I have to be fair.

Take my subdued little comments into consideration. I have been sort of -- years of getting procurement does things to you.

That is true.

I think -- you are sort of looking at the clocks, we probably have to almost close the call, no? Unless you have another question, Jim?

No, that's great. Thank you, Bernard.

Thank you. Can we take a last question or --?

One last question.

We have to be fair. One last question, if there is one.

Arun Jayaram, Credit Suisse First Boston.

Thanks for squeezing me in. Bernard, looking at Canada real quick, it looks like over the next few years, you can see a lot of growth being set by the oil sands projects. I was just trying to get some color from you on how service intensive you think this work will be? I am hearing from ANPs (ph) (technical difficulty) some growth and lift and ESPs in general. Just your general comments on oil sands?

God bless you for that question. It is a good thing I did ask a last question. No one ever asks me that question. You know, we have been building our presence in heavy oil (technical difficulty). It is one of those things we do well. And it's one of the things we do terribly, meaning we are too early. We are always too early. Hang on, you will understand why.

If you look at a Canadian business, it's essentially heavy oil driven, and Venezuela business was. It is now got a whole drilling dimension to it, but it was heavy oil driven. And heavy oil is -- you look at our annual report, for God's sake. We have put in two pages on heavy oil. We don't have any pages on our annual report. I'm referring to the report itself on the 10-K. There is a reason for it -- is that I am huge believer in alternative hydrocarbons, CDM and heavy oil. I really am. I am too early. That is why you shouldn't listen to what I say.

But specifically on your question, they are enormously (inaudible) (technical difficulty)

And what kind of services to you think they will drive to? Is it just lift or -- just give it --.

Lift, completion, underbalanced, believe it or not, reentry, multilaterals. Jesus, it's a dream.

Last question real quick is when do you see (multiple speakers).

Also, forgive me for adding this also -- fabulous and early great result application of hardware, software on the lift side. Not only the plumbling. I mean with excellent results. What's excellent results? You get double-digit, not a high number -- between 5 to 15% more production. And I mean it. This is a real number. It's not just -- it's not much.

But 5 to 15% more production sustainably. It's an enormous number. Bear in mind that when we sell, sadly enough, is just not a very big number for the client ultimately. You know? So the payback is extraordinary. It's very underutilized. But it is catching on because of the performance, and grounds (ph) have been phenomenal. One day, we will be very right on heavy oil.

Okay. And Bernard, is there a type of artificial lift that is best suited to heavy oil?

No, it depends entirely on the -- heavy oil tends to be not that deep. It depends entirely on the volumes you will be lifting. But for the most part, coal rod (ph) will be the driving delivery method, (technical difficulty) and long, long stroke reciprocating pump. Probably more than you wanted to know. Long stroke reciprocating pumps. Not just normal reciprocating pumps, long stroke. (technical difficulty) method above ground would be long stroke. CBM is different.

Okay, there are no follow-ups to long stroke. I will let you go. Thanks.

Actually I could draw it for you. Which I think mercifully for the oil industry concludes our comments. But Lisa and I would be available for questions. Thank you very much.

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